A2 Milk Company Ltd (ASX: A2M) may have been one of the best-performing shares on the ASX over the past 10 years. Not only that, going forward, I think there are at least three reasons to like it.
What is A2 Milk?
A2 Milk Company Ltd is one of Australia and New Zealand’s largest infant formula producers and the leader in a2-only protein based dairy products. It has operations in New Zealand, Australia, USA and China thanks to key supply and distribution agreements.
Why I really like A2 Milk shares
1. Debt free
In this COVID-19 era, I think it’s pleasing to see businesses with no debt and a big cash balance. In the FY20 half year result, A2 Milk said that it had $0 debt and finished with a closing cash balance of NZ$618.4 million.
The company continues to generate good profit, so its cash balance keeps building.
A large cash balance means that the company is in a much safer position. There aren’t any lenders breathing down A2 Milk’s neck. There is no danger of breaking any debt covenants. It doesn’t need to do a dilutive capital raising at a low share price.
The growing cash balance could be used for shareholder returns or even an acquisition.
2. International growth
A2 Milk is being sold in a number of different countries. It’s the international market that will determine how large A2 Milk can become in the future. It’s the US and China markets in-particular that are important to conquer.
In its HY20 report, there was strong growth of China labelled infant nutrition with sales doubling to $146.7 million and the distribution has expanded to 18,300 stores. USA milk revenue more than doubled and distribution expanded to 17,500 stores.
A2 Milk can keep growing its market penetration in those two large markets for a long time to come.
Excitingly, the company will soon start generating earnings from China after entering into an exclusive licensing agreement with Agrifoods Cooperative for the production, distribution, sale and marketing of A2 Milk branded milk for the Canadian market.
3. Defensive earnings
In a global pandemic and a global recession, there aren’t many ASX shares where you’d think that earnings would increase. But A2 Milk is one of them. Revenue is now expected to be in the range of NZ$1.7 billion to NZ$1.75 billion. In FY19 it generated revenue of NZ$1.3 billion. Management are expecting growth of more than 30%.
If there hadn’t been any stimulus I still think that A2 Milk would have seen higher profit as consumers stocked up on essentials.
Feeding your family is a necessity. You want them to have the best nutrition they can get.
Using Commsec’s earnings estimates, A2 Milk is valued at 34 times the projected earnings for the 2021 financial year. It doesn’t seem cheap on the face of it, but don’t forget that interest rates are incredibly low and A2 Milk still has lots of potential growth left. I’d be happy to buy shares at under $20.