Global markets were mixed overnight. There was a broad surge in global stocks overnight that sent Chinese, Japanese and US stocks to record highs as optimism over corporate earnings turbocharged the equity bull market. However, at the time of writing the US market has retraced and is slightly lower. Base metals retreated as the US dollar found some support which will likely weigh on the ASX today.
One of our top multi-year investment themes is that there will be a “dining boom”, as we believe demand for a higher quality diet from a growing middle class in the developing world (in particular Asia) is set to be a multi-year tailwind for AU/NZ agricultural businesses. A sector which has been in the spotlight of late is milk powder/infant formula with stocks such as A2 Milk and Bellamy’s experiencing huge price runs.
Stock in Focus: Bellamy's Australia (BAL:AX)
BAL shares jumped +25% yesterday after it upgraded its full year revenue growth guidance for its core business to 30% to 35%, from 15% to 20% citing better than expected sales to China. It looks as if the booming demand for AU/NZ baby formula has helped the company deal with a number of issues which we discuss below.
It has been a wild ride for BAL’s shareholders and a remarkable turnaround story, given BAL's at one point looked likely to go bankrupt. Bellamy’s hit troubles when its Chinese sales were slower than expected, which led to a huge inventory blowout as the company was locked into ‘take-or-pay’ arrangements with its supplier Synlait Milk (this has now been renegotiated).
The situation worsened when the Chinese regulator implemented a requirement for all foreign infant formula producers to be licensed. Bellamy’s manufacturer was no longer able to produce Chinese products for Bellamy’s, resulting in the company having to seek out a new manufacturer. Along the way, the CEO was fired, and the chairman resigned. The company was also forced to raise capital and continued to face regulatory issues in China. In saying that, somewhat surprisingly the company appears to have survived and come out on top.
We do not currently have full research coverage on BAL, and have had a preference for A2 Milk (:NZ / A2M:AX) which we do cover.
We currently have a HOLD rating on A2 Milk.
Australia & New Zealand Market Movers
The Australian share market was weaker yesterday (ASX 200 index -0.47%) with the ASX's heavy exposure to banks and commodity firms underscored by a pullback in both sectors, while infant formula company Bellamy's bucked the lower trend with a 24% surge.
The New Zealand market bounced back on Tuesday (NZX 50 index +0.48%) once again amidst light trading, led higher by A2 Milk Co on a rival's earnings upgrade and Auckland International Airport gaining. Auckland Airport announced It will sell its quarter-stake in the Cairns and Mackay airports in North Queensland to its fellow investors for A$370 million, almost three times what it paid eight years ago.
3 Things Markets Will be Watching this Week
1. We head into the US earnings season – with a particular focus on company comments around the impact of US tax cuts
2. Australian employment data is released on Thursday.
3. Chinese growth (GDP) figures are also released Thursday.
Have a Great Day,
Team