The a2 Milk Company’s fiscal 2025 EBITDA grew 17% on last year to NZD 274 million thanks to strong market share growth in Chinese infant formula.

The company also says it will buy a manufacturing facility in Pokeno and sell its 75% stake in Mataura Valley Milk.

Profits stronger than forecast

EBITDA was about 3% better than our forecast. A2 eyes further growth in Chinese infant formula with new products from the Pokeno acquisition. The company also intends to in-source production of English labelled A2 Platinum to capture manufacturing margin.

Through Synlait, a2 (ASX:A2M) only has one Chinese-language labelled infant formula product registration. The Pokeno facility comes with two registrations, with the potential for a third in the medium term. This allows for broader segmentation, notably targeting lower-tier cities.

We think infant formula is noncore for Pokeno’s seller, Mengniu. The Chinese market is consolidating as smaller brands struggle and bigger brands take share. The top five brands (including a2) are now 58% of the market, up 3 percentage points on last year, per Kantar.

We maintain our NZD 8.00 (AUD 7.40) fair value estimate for narrow-moat a2 Milk. Shares screen slightly expensive amid a challenged Chinese infant formula market.

Market share gains key in China

After a small bump, we expect the number of births in China to resume declines from calendar 2026 due to demographics. We think the bulk of a2’s opportunity in China stems from increasing market share.

A2 is now the 4th largest infant formula brand in China, with Kantar data suggesting value share of about 8%. We forecast a2’s market share growing above 9% by fiscal 2029.

Special dividend on the way

The transactions are well supported by a2’s balance sheet, which currently sits at about NZD 1 billion in net cash.

Pokeno will cost NZD 282 million, with a further NZD 220 million in capital expenditure and working capital investment flagged over the next few years. This is offset by NZD 100 million from the Mataura Valley divestment.

The final dividend of NZD 11.5 cents per share brings full-year dividends to NZD 20 cents per share, fully franked and partially imputed. We expect dividends to continue at about 70% of underlying net profit.

Despite the Pokeno acquisition and a near-term uptick in capital expenditure, a2 is still set to maintain a massive cash balance.

Once the transactions are complete, including regulatory approvals related to the Chinese label registrations at Pokeno, the company intends to declare a NZD 300 million special dividend, about NZD 41 cents per share.

The a2Milk Co Ltd (ASX:A2M)

  • Moat Rating: Narrow
  • Fair Value: NZD 8.00 (AUD 7.40) per share
  • Star Rating: ★★★

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.