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Is the a2 Milk share price a buy in December?

Lina Lim
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The A2 Milk Company Ltd (ASX: A2M) share price was a standout S&P/ASX 200 (INDEXASX: XJO) performer in November. Its shares have soared by more than 20% in the past 3 weeks following its annual general meeting (AGM) update, global equity tailwinds and M&A activity in the dairy sector.

An AGM that ticked all boxes

The a2 AGM provided enough detail to ignite sentiment and send the a2 Milk share price soaring. So far, it appears as though the company’s significant investment into marketing and distribution efforts have paid off. The company highlighted that for 1H20 it anticipates:

  • China label infant nutrition sales forecast to be approximately $135 million representing a growth rate of 84%
  • Cross-border e-commerce infant nutrition sales forecast to be approximately $155 million representing a growth rate of 54%
  • ANZ English label infant nutrition sales forecast to be approximately $350 million representing a growth rate of 9%
  • US sales forecast to be approximately $27 million representing a growth rate of 110%
  • Australia fresh milk sales forecast to be approximately $75 million representing a growth rate of 12%
  • 1H20 revenue to be in the range of $780–800 million

The first half is typically the weaker half, but if we make the assumption that 1H and 2H revenue are consistent, a2 would be delivering a minimum year-on-year revenue growth of approximately 23%. This is an extremely conservative estimate and does not reflect the company’s improvement in margins, currency tailwinds and stronger second-half performance.

M&A in the baby formula and dairy sector

Bellamy’s Australia Ltd (ASX: BAL) will soon be acquired by China’s Mengniu Dairy at a significant 59% premium to its last closing price of $8.32. The offer of $12.65 per share also included a $0.60 dividend per share.

Mengniu has been on a shopping spree as it has also acquired Lion Dairy & Drinks for $600 million. The sale will see Mengniu control classic Australian brands such as Pura, Dairy Farmers, Vitasoy and Yoplait.

While such M&A is not directly tied to a2’s soaring share price, it does paint the picture that a2’s neighbours are being bought at a significant premium, which may or may not affect its own share price and perceived value.

Foolish takeaway

a2 has shaken off the negative sentiment associated with its previous earnings miss, increase in marketing expenses and withdrawal from the UK. The company is back on track with marketing and distribution efforts paying dividends.

While the a2 share price does appear to be quite extended, its growth capabilities and positive guidance make it a strong long-term investment.

The post Is the a2 Milk share price a buy in December? appeared first on Motley Fool Australia.

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Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. 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.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019