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Bell Potter upgrades a2 Milk to a buy, shares gain

Tom Richardson

Shares in a2 Milk are up 4.3 per cent to $8.25 at lunchtime after Bell Potter said there’s “early signs of life” in the moribund daigou trade market between Australia and China.

The broker said it’s seen two consecutive monthly gains in infant milk formula (IMF) exports to China to also suggest inventory infill levels may be receding.

“While an early lead indicator, the emergence of sequentially stronger Australian exports of finished IMF to China at a time of softer inventory refill by A2M is a positive signal in our view. It was notable that the opposite was happening in 1HCY20 and preceded weaker A2M sales trends by 3-6 months,” the broker said.

“Looking at similar past destocking events, we would seem to be 6-9 months into a 9-12 month destocking event and as such transition from selling peaks to buying dips.”

Bell Potter forecasts the baby formula merchant to report a full year profit of $NZ225.1 million on sales of $NZ1.367 billon in FY 2021.

As a result of its more optimistic view the broker hiked its valuation on a2 Milk from $8.65 to $9.50 per share, with a buy rating.