Why this expert acquired a thirst for A2 Milk shares following the company’s latest results

A man in a business suit holds a mobile phone to his ear while he drinks a large glass of milk.A man in a business suit holds a mobile phone to his ear while he drinks a large glass of milk.

The A2 Milk Company Ltd (ASX: A2M) share price looked good value enough for a fund manager to jump on after the company’s FY22 result.

A2 Milk is a large infant formula and liquid milk business. It also has a sizeable presence in international markets like China and the United States.

It has gone through a difficult period during the COVID pandemic as daigou buyers stopped purchasing in the same volumes as pre-COVID times. The business also saw its profit margins drop, including the earnings before interest, tax, depreciation and amortisation (EBITDA) margin.

Vote of confidence

Wilson Asset Management likes to find undervalued growth companies where there’s a catalyst that could help drive the valuation higher.

Talking on a recent investment webinar, senior equity analyst Shaun Weick said this about A2 Milk shares:

A2 Milk is always a very topical one. Yeah, we actually have bought some shares coming out of the FY22 result. Yeah, we thought it was a very, I guess, clean set of numbers in the context of them taking their medicine around inventory, which they needed to do.

So going forward, they’ve guided to high single-digit revenue growth and a bit of operating leverage, we think that looks very achievable. And the balance sheet is very strong. They’ve got a billion dollars in net cash on the balance sheet. They’ve initiated a $150 million buyback, which starts in a couple of weeks. So that’s sort of the next catalyst we’re looking for there. And, short interest still remains reasonably elevated on this one at 4%.

So there’s still scope for incremental buying to move in. So yeah, we’re actually positive on that one from here.

What has A2 Milk guided?

The guidance can have a positive effect on the A2 Milk share price if it’s signalling growth.

In the FY22 result, A2 Milk outlined its outlook.

Management said that Chinese label infant formula sales are expected to be up in FY23 with “significant growth” in sales in the first half of FY23 year over year. English label infant formula sales are also expected to be up in FY23.

Australian liquid milk sales are expected to remain “broadly in line with FY22”, with reduced in-home consumption as lockdowns finish.

US liquid sales are expected to be up in FY23, driven by continued growth in core liquid milk. A “significant improvement” in EBITDA losses is expected as well.

Overall, the business is expecting “high single digit” revenue growth in FY23, with a lot of the growth coming in the first half. The FY23 gross profit margin is expected to be “broadly in line” with FY22. Cost of goods increases relating to increasing milk, ingredient and packaging costs will be offset by price increases, mix benefits, and cost mitigation initiatives.

A2 Milk share price snapshot

Over the past month, A2 Milk shares have risen by 16%.

The post Why this expert acquired a thirst for A2 Milk shares following the company’s latest results appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended A2 Milk. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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