Why I’m watching the a2 Milk share price

Nikhil Gangaram | July 8, 2020 2:22pm | More on: A2M

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The a2 Milk Company Ltd (ASX:A2M) share price has been a bellwether during the coronavirus pandemic. Whilst many companies on the ASX 200 have seen their share prices hammered, a2 Milk has remained largely immune to the widespread volatility and continued its positive upward trend. Here’s why I’m still watching it.

Why watch the a2 Milk share price?

The essential nature of products like infant formula has seen demand for a2 Milk products surge during the pandemic. In a trading update in late April, a2 Milk confirmed its revenue for the 3 months to 31 March were above expectations. According to the company, demand was fuelled by changing consumer behaviour with many consumers looking to stockpile essential products during the height of lockdowns.

The company reported strong revenue growth across all key regions, especially for its infant nutrition products in China and Australia. Revenue from China was also favourably impacted by a depreciation of the New Zealand dollar relative to the US dollar.

Reinforcing the company’s resilience during the pandemic, a2 Milk was recently added to the prominent S&P/ASX 50 Index during the June rebalance.

What is the outlook for the a2 Milk share price?

In the trading update, the company revealed it is expecting revenue for FY20 to be in the range of N$1,700 to NZ$1,750 million. In addition, a2 Milk anticipates full-year EBITDA margins to be above prior expectations at around 31% to 32%. Although a2 Milk expects exceptional revenue growth, the company also flagged the potential for COVID-19 to impact its supply chains and consumer demand in the future.

Citibank analysts have advised a $21.50 target for the a2 Milk share price, suggesting the potential for further upside. According to analysts, a2 Milk is well placed to deliver strong results for the second half of 2020 and could be an indirect beneficiary of the coronavirus pandemic. With consumers continuing to stockpile essential items such as infant formula, the company could see a further surge in revenue.

Should you buy?

In my opinion, any company that performs strongly in current market conditions is one to watch. Not long ago, many analysts had a sell rating on a2 Milk based on the thesis that the company could not sustain its high margins in a more competitive market.

a2 Milk has proven not only that it can sustain growth during these testing times, but that it is also poised to continue delivering in 2020 and beyond. Having said that, the a2 Milk share price is currently trading close to all-time highs at $19.52. Therefore, I think a prudent strategy would be to wait until the August reporting season to ensure that the results have not already been priced in.