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Should you buy, hold or sell A2 Milk shares? | Money magazine
By JunBei LiuJune 14,2023
A2 Milk Company is a New Zealand-based dairycompany that specialises in producing and marketing A2 Milk and relatedproducts.
The company was founded in 2000 by Dr CorranMcLachlan who discovered the connection between A1 beta casein protein anddigestive discomfort. The company has developed partnerships with dairy farmersin different countries to ensure a consistent supply of A2 Milk with stringentstandards of milk sourced from cows that naturally produce the A2 protein.
A2 Milk today is now better known for its infantformula as it expanded into the Asian market. Their A2 Platinum infant formulais available in different stages tailored to the specific nutritional needs ofinfants as they grow.
A2 Milk Company (A2M) has experiencedsignificant growth over the years as it captured the hearts and minds of theAsian consumer. Its infant formula products have been purchased through mostchannels including direct online, daigou (where Chinese students and tourists purchase theproduct from Australia or New Zealand and sending back to China) as well as in physical shops in China. A2M is one of very few international companies that holds a license to produce infant formula in a Chinese label.
The opportunity
After a period ofrapid expansion and growth, like many companies A2M was severely impacted bythe pandemic.
Hard lockdowns inChina and border closures meant that most of A2M's distribution channels wereshut, and consumers were unable to purchase its products. Blessed with a strongbalance sheet, A2M was able to work through this difficult time and continue toinvest in its business.
Now with headwindssuch as COVID and its restrictions unwinding, we believe that soon we will seemeaningful improvement in its earnings underpinned by the border reopening inChina and the return of the daigou channel (driven by students and tourists) aswell as significant improvements in the mother and baby stores as the Chineseeconomy reopens.
In addition, we expectbetter birth rates in China as its economy reopens and significant governmentstimulus for births. This should lead to meaningful uplift in demand for infantformula in the coming years.
Further, our channelchecks indicate that A2M continues to take share in China, which has allowedfor growth despite a falling birth rate. At the current share price, A2M isextremely cheap, trading 15x adjusted FY24 earnings (adjusting for cash), givena material growth runway with forecasted earnings compounding at 25%/21% inFY24/25.
This value is furtherevident when observing A2M relative to the ASX200 consumer staples, where ittrades at a premium of less than 10% versus its historical premium of more than40%, near all-time lows relative to the index, despite a materially bettergrowth profile.
Recommendation
A2 Milk Company is a strong buy.
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