Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

The A2 Milk Company sees formula for success in China

Emma Rapaport  |  21 Sep 2018Text size  Decrease  Increase  |  
Email to Friend

a2 Milk Supermarket

Consumers are flocking to a2 Milk because of its perceived health benefit.

The future for powerhouse dairy play a2 Milk (ASX: A2M) lies in the infant formula market in China, says Morningstar, who have initiated coverage on a stock it tips is set for 20 per cent growth in EPS over the next decade.

In an inaugural analyst note published on Wednesday, Morningstar director of equity research Adam Fleck says the company is looking to China for future growth, where consumer appetite for foreign infant formula brands is driving higher revenue per volume and high-single-digit growth for overall value in the market.

"We think a2 can continue to increase market share in China owing to further acceptance and demand for A1-protein-free milk, alongside average price gains in line with competitors," Fleck says.

"We see A2 growing revenue in this geography at a 20% annual clip through fiscal 2028, with Chinese infant formula climbing to more than 90% of the company’s consolidated EBITDA from about 80% today."

Over the past year the stock price has more than doubled and the company boasts a market capitalisation of $8 billion-plus. Morningstar has established a fair value estimate of $13.30 for a2 Milk. The stock is currently trading at a 13 per cent discount Morningstar's valuation.

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

Fleck has applied a narrow economic moat to the stock based on its strong brand intangible assets including brand and patent protection.

"A2 Milk enjoys solid brand positioning, particularly in the Chinese infant formula market and Australian fresh milk arena, which has led to premium pricing versus local and private-label alternatives," he says.

Infant Formula Supermarket

a2 Milk is looking to the Chinese infant formual market for future growth.

However, there are risks. The stock carries a high uncertainty rating, which factors in a heavy exposure to Chinese infant formula demand, the potential for unfavourable scientific developments, reliance on a small number of suppliers, and intense competition from global dairy majors with vastly deeper pockets.

The a2 Milk Company is a New Zealand-based licensor and marketer of fresh milk, infant formula, and other dairy products which lack the A1 beta-casein protein. Dairy cows naturally produce two beta-casein proteins in their milk: A1 and A2. A2 milk is produced by cows that naturally produce milk only containing the A2 protein. The a2 Milk Company asserts that milk with only the A2 protein is good for digestion.

Consumers have flocked to a2 Milk because of this perceived health benefit, with the firm expanding market share in Australian fresh milk, as well as infant formula in both Australia and China following the launch of A2 Platinum in 2013.

Price chart 21/09/2018 11:41 AM

A2 Milk Price Chart

Source: Morningstar Australia

 

More from Morningstar

• Prem Icon Frenzy in old media, NBN dystopia and a2 milking fantasia

• Global Market Report - 21 September

Make better investment decisions with Morningstar Premium | Free 4-week trial

 

Emma Rapaport is a reporter with Morningstar Australia

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

 

is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend