Is Blackmores headed for $300? End of China's one-child policy a long-term plus
Hitting the $200 mark was an eye-popping event for shares in vitamins maker Blackmores, but there is one stockbroking analyst who thinks it could be well on the way to $300 by this time next year.
A decision by China to end its one-child policy which has been in place since 1979 was fortuitous timing for Blackmores and ASX-listed Bega Cheese which announced a joint venture to make infant formula for the Chinese market on Thursday morning. This was about 12 hours before Communist Party officials revealed in Beijing they would overturn the one-child policy and allow families to have two children.
The new policy adds long-term demand for infant formula in a market in China currently worth an estimated $20 billion a year where locals are increasingly seeking out trusted international brands after contamination scares from local formula manufacturers.
Blackmores shares briefly went through the $200 mark on Thursday after the Sydney-based company revealed that profits had jumped 161 per cent to $22.6 million in the three months ended September 30, 2015 compared with a year earlier, because of fast-growing vitamins sales to China. The shares also gained extra zip from the infant formula joint venture announcement.
Blackmores shares softened on Friday, losing about 4.5 per cent, or $7.80, to close at $167.67 - as some investors sold out at a handsome profit. The shares were trading at $25 in August, 2014.
Asia Pacific Prudential Securities analyst Gordon Anderson says if the first-quarter profits are extrapolated over the full year then annual profits are likely to be up to 40 per cent higher than the market was expecting.
"This is an extremely strong return on invested capital story," he says. APP Securities, which is essentially the core operations of BBY after a rebadging several months ago, has a 12-month price target of $282 on Blackmores, meaning it predicts the stock is likely to be at that level in late 2016. The price target has been calculated without the impact of the longer-term benefits of increased infant formula demand from the scrapping in China of the one-child policy.
The decision by Chinese officials fuelled a jump in shares of big baby formula companies across the world on Thursday night on European and United States stock exchanges, including Danone, Nestle and Mead Johnson.
Blackmores chief executive Christine Holgate says while the infant formula opportunity has substantial upside, there are also plans to make a range of nutritional formulas to help older people. She says the joint venture is in its infancy and a chief executive is still to be appointed but the companies wanted to announce it so they could on with the detailed processes needed to become a strong player in infant formula, with Blackmores the lead brand on the tins.
"It was just getting too cloak and dagger," she says of the secrecy surrounding the early negotiations. Now that it is public knowledge, the infrastructure and supply arrangements with Bega would quickly be cemented ready for the first products to hit the market in early 2016.
Tasmanian-based baby formula company Bellamy's has also been a beneficiary of the strong demand from China. It listed on the ASX in mid-2014 with an issue price of $1 saw its shares rise more than 2 per cent to $8.15 on Friday. Bega Cheese already has a supply deal with Bellamy's.
(20min delay)