The A2 Milk Company Ltd (ASX: A2M) share price looks like a buy to me with it currently sitting at around $14.
What has been happening recently?
A2 Milk shares have fallen 18% since 25 September 2020. That decline has been because of a FY21 trading update by the dairy business.
There is still significant uncertainty and volatility in market conditions because of COVID-19.
As a result, in the first half of FY21 the company is now expecting revenue of $725 million to $775 million (all figures are in NZ dollars). In the first half of FY20, the company generated revenue of $806.7 million – this means A2 Milk is expecting revenue to fall by 4% to 10.1%.
A2 Milk also said that group revenue for FY21 is expected to be in the range of $1.8 billion to $1.9 billion. In FY20 A2 Milk made $1.73 billion – which means over the whole year management are expecting revenue growth of 4% to 9.8%. A2 Milk is expecting a strong second half.
The FY21 group EBITDA margin is expected to be 31% (click here to learn what EBITDA is). That’s a small reduction from the EBITDA margin of 31.7% in FY20.
There is the flow on effect on pantry destocking after the strong sales in the third quarter of FY20 and there is lower than anticipated sales to retail daigous in Australia due to reduced tourism from China and international student numbers.
Why I think the A2 Milk share price is a buy
A2 Milk is clearly suffering at the moment, but I don’t think the issues are going to last forever. I believe that the lifting of Melbourne’s stage 4 restrictions will give the company a significant boost.
The ASX share continues to expand its distribution network in stores across Asia and North America, giving it more potential earnings growth over the next few years.
Revenue is being hurt in the short term, but I think that the company can recover strongly in the 2021 calendar year. It continues to gain market share in China, particularly through mother and baby stores.
There are few businesses like A2 Milk with global growth potential, a very strong balance sheet and yet are valued at just 21 times the estimated earnings for the 2023 financial year (according to CommSec estimates).
Revenue growth of 4% to 9.8% for the whole year wouldn’t be bad at all, unless the company ends up downgrading expectations further.
But there are one or two ASX growth shares I’d prefer to buy first such as Pushpay Holdings Ltd (ASX: PPH) which has strong operating leverage.
