Why the A2 milk share price gained 38% in the first half of 2020

Daniel Ewing | July 15, 2020 6:07pm | More on: A2M

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The A2 Milk Company Ltd (ASX: A2M) share price is synonymous with growth investing. It has gained a remarkable 3436% since listing in early 2015. A2 Milk’s share price has been largely unaffected by the COVID-19 pandemic this year, with the New Zealand based company benefitting from some serious tailwinds.

As the All Ordinaries (INDEXASX: XAO) has lost ground, dropping over 9% since the start of the year, the A2 Milk share price gain of 38% can be seen as all the more impressive.

What tailwinds have caused A2 Milk to rise?

The A2 Milk share price has seen consistent growth over the year, pushing aside worries surrounding COVID-19 and embracing the tailwinds resulting from the pandemic.

With the fear of impending lockdown restrictions in early March, consumers rushed to supermarkets to strip shelves bare and stockpile necessities. As a result of this rapidly changing consumer purchase behaviour, A2 Milk saw revenue soar for Q3.

Furthermore, the company’s China segment delivered some strong revenue figures in Q3. Transacting in US dollars, this segment benefitted from a sharply depreciating New Zealand dollar through March which saw revenue favourably impacted.

The coronavirus crisis also helped reduce A2 Milk’s overhead costs. These tracked lower than expected due to travel restrictions and planned recruitment, particularly in China, being delayed. Despite the uncertainty surrounding the pandemic, the company still managed to announce further, upcoming expansion into the Canadian market.

A2 Milk share price rising on strong financial results

In February, A2 Milk’s share price posted gains of more than 6% with the company announcing strong, half year results. Some of the highlights of this release were as follows:

• Total revenue increased to NZD$806.7 million which was an increase of 32%
• EBITDA also increased up 21%

These results showed the company had made substantial gains in both revenue and earnings. Strong performances were reported in the key product segments of infant nutrition and liquid milk across core markets.

Later in April, the company provided the market with another positive trading update in which it noted continued strong revenue growth across all key regions, particularly with respect to infant nutrition products sold in China and Australia. The company also increased its predicted full year EBITDA margins up to 31-32%.

What now for A2 Milk?

Despite its recent strong, share price growth, I believe investors in A2 Milk still have cause for optimism. Short term, a level of panic buying has returned, thanks to the recent COVID-19 outbreaks in Melbourne, which is likely to benefit the company’s revenue and share price. Longer term, there is growing, global demand for premium dairy products, particularly infant formula in Asia, and A2 Milk is continuing to cement its international presence. Since the end of June, the A2 Milk share price has continued its impressive run to currently trade at $19.80.