A2 Milk Company – Feeding Frenzy

22 December 2015

The A2 Milk Company produces branded dairy products and infant formula under the 'a2 milk' brand.  A significant increase in demand for protein enriched diets from a growing middle class in the developing world (in particular Asia) is a favoured multi-year theme for .  Australasia is set to directly benefit from this ‘Dining Boom’, with Australia and New Zealand being agricultural exporting nations in close proximity to Asia. We believe A2 will benefit from this thematic over the long term as it supplies its dairy products to a growing audience. The share price has jumped a further 40% since our last update, with the company raising its annual earnings forecast for the 2nd time in 2 months. The stock is now up 179% for the year and is the NZX’s best performing stock for the year thus far. 

On the 18th December A2 Milk’s management advised shareholders that that the company had experienced a significant uplift in sales of its infant formula in the month of November. Management also expects this momentum to continue into December. The company is now forecasting revenue in the range of $300m to $315m, and earnings (EBITDA) in the range of $33 million to $37 million for the 2016 financial year.

This upgrade represent a between 50% to 68% increase on A2’s earnings from the prior month’s projections (previously the company had expected revenue of NZ$285m and earnings of NZ$22m). The jump in profit expectations is being driven by its a2 Platinum infant formula products. China's insatiable thirst for infant formula has quadrupled sales for Australasian dairy company.

"The new supply and distribution arrangements in China are yielding positive results with sales growth for infant formula exceeding expectations," chief executive Geoffrey Babidge said.

"Infant formula is emerging as a more significant growth driver for the company" and now accounts for roughly half of the company’s total revenue.

Consumers have gone into an infant formula frenzy with fears that supermarket shelves are being emptied of milk formula by customers — often Chinese tourists, migrants or students — removing stock by the pallet-load to sell online at home at inflated prices. The company recently said retail stock shortages were continuing despite production volumes increasing, while demand was continuing to exceed supply.

The behaviour has led to supermarkets restricting the number of cans a single customer is able to purchase and lobby groups are calling for action from the government to address the issue.

believes this frenzied behaviour will abate over time with either the government putting restrictions in place to ensure the Australian consumer has ample supply or by new or additional product entering the market. This behaviour does however highlight the strong demand from Asia for Australasian dairy and supports ’s core ‘Dining Boom’ thematic.

remains cautious at the current share price, given how much has already been built into the current price. We continue to believe in the longer term thematic of higher demand for protein rich foods, but with the changing and dynamic nature of the infant formula markets in both Australia and China, valuation is challenging.

On the 18th December A2 Milk’s management advised shareholders that that the company had experienced a significant uplift in sales of its infant formula in the month of November. Management also expects this momentum to continue into December. The company

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