Competition heats up for a2 Milk Company, page-149

1 A2 Milk (A2M) $10.07

A2M is arguably the markets success story of recent years, even after their recent 29% correction it boasts a market cap. of over $7bn, larger than many household names like Seek (SEK), Flight Centre (FLT), Domino’s Pizza (DMP) and CSR Limited (CSR).

The shares of the NZ based business dived last week following their market update guiding that full year revenue would only increase by ~67% - a dream for almost every business but it was about 4% below analysts’ expectations and the stock had clearly been priced for “perfection”. The company has increased its marketing spend which surprised many analysts but we like the aggressive stance to capture market share early, especially as the population looks set to “pop” even higher and rivals like Nestle eye the profits being generated in the sector.

The business is not just the milk we see on the shelves in Woolworths (WOW), but a major player in the infant formula business, especially into China. Mos have probably read about the shelves being emptied in Australian supermarkets and the baby formula being shipped straight to China with a healthy mark-up for the initial purchaser – what a great indication of current demand.

MM likes A2M around the $10 area and expect a retest of $14 moving forward. However we do believe the almost vertical returns of previous years are behind us and a valuation of 40x earnings brings with it risks which were demonstrated last week – clearly any future bumps in the road are likely to be painful.

• We’re bullish A2M targeting $14, but a break back below $8 would concern us technically.

A2 Milk (A2M) Chart