The A2 Milk Company Ltd (ASX: A2M) share price is trading at nearly a 50% discount to where they were six months ago.
However, this company still stands out to me as a high-quality business with some temporary headwinds ahead of it.
A2M share price chart
The success story behind a2 Milk is truly interesting to me. Milk products are a fairly homogenous commodity and in theory, it might be challenging to bring a differentiated brand of milk to the market which is perceived as superior to its competitors.
Still, under pre-COVID trading conditions, a2 Milk is a company that’s managed to achieve a whopping net profit margin of 22% in FY20. The success here partly lies within the marketing strategy, which has changed the public’s perception of a product that has typically been seen in the past as… well… milk.
There are supposedly health benefits associated with milk that only contains the A2 protein. For this reason, the company is able to charge a premium price for a product that looks and tastes very similar to its competitors.
Is now a buying opportunity?
I think so, but while COVID-19 still affects international travel within Australia, I’d expect a fairly drawn-out recovery as a2 Milk’s daigou channel slowly returns to normal.
This channel relies on a significant number of international students and tourists to act as resellers.
For this reason, guessing when this segment will recover would be similar to predicting when the pandemic/vaccine situation improves to the point where Australia begins letting in tourists and international students.
An easier prediction to me would be: Is it likely at all that this channel will make a recovery at some point post-COVID? I’d be willing to say so, partly given by the popularity of the brand within the Chinese market.
I think it’s also important to note the growth trajectory of a2 Milk’s products (specifically infant formula) directly available in China through over 19,100 mother and baby stores (MBS) within the country and on domestic e-commerce sites.
While this segment alone will likely not be enough to offset some losses from the daigou channel, the company anticipates MBS revenue in 1H21 to be up 40% on the prior corresponding period.
It appears milk products have avoided being caught up in any trade wars for now, and a2 Milk might be further shielded being a New Zealand company.
Summary
In cases such as these, I try my best to identify whether the share price drop is an indication of structural, long-term factors at play; or perhaps headwinds in the short to medium term that the company may face.
My own opinion is that it might be the latter for a2 Milk and as such, I think shares seem to represent good value for a high-quality company.
If you’re looking for other ASX growth share ideas, click here to read: 3 ASX tech shares to add to your 2021 watchlist.
