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Could The A2 Milk Company Ltd (ASX:A2M) Share Price Strike $15?

A2 Milk Company Ltd (ASX: A2M) shares moved higher today after it released an investor presentation to the ASX.

The New Zealand based milk and infant formula company has had exceptional growth over the last few years, with an insatiable demand for its infant formula in China and from the locally based diagou.

Investor Presentation

A2 Milk’s presentation didn’t highlight anything new, with A2 having recently released their half-year results and commentary in February. Today’s presentation did again highlight their strong first half-year result, which was revenue growth of 41% compared to 1H18 to $NZ 613 million.

EBITDA was $NZ 218 million, which provided for a healthy EBITDA margin of 35%. This translated into a profit of $NZ 152 million for the half. Cash on hand at 31 December was a lofty $NZ 287 million.

A2 Milk’s management reiterated that they expect the “Group revenue growth rate in the second half to continue broadly in line with the first half“.

They also said they are “in a position to reinvest the benefits of scale into increased marketing activities in the second half. This is intended to drive brand awareness, predominantly in China, and in the US“.

We can expect a slightly lower EBITDA margin of around 31 to 32% in the second half, compared to the first half EBITDA margin of 35%. Obviously you would prefer a higher margin, however, I think A2 is doing the right thing by sacrificing some profit margin now and further investing in the business, which should lead to further strong growth.

a2 Milk Shares: Buy, Hold or Sell?

I don’t expect today’s presentation to have a material impact on the share price, either up or down. At yesterday’s closing price of around $14 per share, A2 has a market capitalisation of just over $10 billion. The latest analyst forecast I saw had a profit expectation of $280 million for FY19.  This puts the company on a forward PE of around 35 times.

While this may be considered high by some, in light of the strong balance sheet, and expected strong growth in profits over the next few years, A2 looks like a HOLD to me.

Other infant formula companies investors could consider include Bellamy’s Australia Ltd (ASX: BAL), Bubs Australia Ltd (ASX: BUB), or Wattle Health Australia Ltd (ASX: WHA).

If you’re looking for fast-growth ASX shares consider accessing our analysts’ free investing report below…

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At the time of writing, David owns shares in A2 Milk.

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