Why A2 Milk is a strong buy for your portfolio

A2 Milk (ASX: A2M) has quietly been one of the best-performing large caps on the ASX this year, up over 30% year-to-date and yet it still feels like many investors are underestimating the turnaround that's underway.

After years of volatility, the company is entering a new phase of growth, margin stability, and global expansion. In our view, it remains a buy.

A business that's maturing and delivering

In its latest results, A2 reported strong performance, with revenue rising 10.1% to NZ$894 million.

The company also saw a 5% increase in underlying earnings before interest, taxes, depreciation and amortisation (EBITDA), while net profit rose up to 7%. A2 declared a maiden dividend, signaling clear confidence in the strength of its balance sheet and cash flows.

Management also upgraded full-year guidance to low-to-mid double-digit revenue growth, a strong message against this macro environment backdrop.

This isn't just a short-term rebound story. It's a business that has rebuilt its core operations, sharpened its distribution model, and now has clear visibility on earnings growth.

China still matters, but the risk is overstated

China's falling birth rate is real, but what gets lost in the headlines is that A2 is still taking share in a shrinking market.

Its premium position, brand trust, and presence across both cross-border e-commerce and offline channels make it one of the few international players still growing in China.

The short-term dynamics continue to be supportive. 2024 was the Year of the Dragon, which saw higher birth rates that year. Longer term, we think A2's core consumer, the urban, affluent Chinese mother, remains resilient.

Diversification is taking hold

A2 isn't just an infant formula company anymore.

It's pushing into adult nutrition, fresh milk, powders and growing rapidly in Southeast Asia and the Middle East. The US business, while still loss-making, is expected to reach break-even by FY27.

That multi-pronged strategy means it's no longer a one-country, one-product story and that's a big positive.

Margins holding firm

Despite increased marketing and freight costs, A2 has maintained solid margins (EBITDA margin around 16%).

Operating leverage is coming back, and the company is spending to build capability, not patch holes.

That's exactly what we want to see in a business returning to growth.

Why is it a buy?

A2 remains a compelling buy for several reasons. Its valuation is still undemanding, with the market still not fully pricing in the upgraded growth outlook.

The balance sheet is clean, with over NZ$700 million in cash, providing financial stability and flexibility. With the recent initiation of a dividend, there is potential for future growth.

Additionally, strategic merger and acquisition opportunities offer further upside potential for the company.

A2 Milk is a high-quality, globally relevant brand that's back in control of its destiny.

With growth returning, margins stable, and expansion underway across Asia and the US, we see further upside ahead.

It's not the speculative momentum play it once was, but it's a far better business now.

We think it's a buy.

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