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Is A2 Milk Company Ltd the best growth share on the ASX?

Tom Richardson
baby, milk, formula, bellamy's, bubs

Probably the ASX’s best growth stock over the last 2 years in the A2 Milk Company Ltd (ASX: A2M) this morning announced a distribution agreement with South Korea’s Yuhan Corporation to sell its a2-only-protein infant formula products in South Korea.

No sales forecasts were provided other than to note “initial sales are expected to commence during the second half of calendar year 2018” in a fast-growing economy that (like China) has a rising middle-class keen to buy the best for its newborn babies.

a2 Milk also revealed that it’s developing a new “premium product” that also contains premium New Zealand Manuka honey. I expect it won’t be for bargain hunters when released to shoppers, although may find buyers among cashed-up parents.

When it comes to The a2 Milk Company I must admit to an amateur investing mistake in labelling the stock a sell in September of 2017 and selling my own holdings for around $5.80 at a 225% profit in just over a year.

I thought the a2 Milk Company’s sales growth wouldn’t keep up with its valuation, but I was wrong about that.

For the six months ending December 31 2017 the retailer grew its revenues 70% to NZ$434.7 million and net profit lifted 150% to NZ$98.5 million.

As a result the share price shot up to above $13 in February 2018, which means the stock was up more than 500% in around 18 months.

Fortunately, after November 2017’s AGM update I recognised my mistake and bought back into the a2 Milk Company at $7.42 a share to book a return of more than 50% in just a few months.

Still this goes to show how taking profits too early (after holding a stock for just 1 year or less) is one of the commonest investing mistakes to avoid.

As the best growth companies can deliver over 5 or 10-year horizons as a minimum.

On the basis that it appears to have a moat (or competitive advantage) as an a2-only-protein dairy product producer a2 could still have a long way to climb given the large addressable markets it operates in.

a2’s potential is no secret now though, with an $8.5 billion valuation this infant formula business could bomb if its blockbuster growth slows down for any number of reasons.

At the end of the day infant formula is just a commodity like beer or nappies so only those companies with a competitive advantage have potential to deliver sustained growth over the medium term via strong demand, margins and premium pricing.

Others in the space with differentiated infant formula products include organic baby formula business Bellamy’s Australia Ltd (ASX: BAL) and goat-milk-based infant formula business Bubs Australia Ltd (ASX: BUB).

I still favour a2 Milk as the pick to keep on delivering for investors and I’d happily take a small position in it at today’s price of $11.70.

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Motley Fool contributor Tom Richardson owns shares of A2 Milk.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.