Morningstars article in full
The A2 Milk Company sees formula for success in China
Emma Rapaport | 21 Sep 2018Text size
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Consumers are flocking to a2 Milk because of its perceived health benefit.
The future for powerhouse dairy play a2 Milk (
ASX: A2M) lies in the infant formula market in China, says Morningstar, who have initiated coverage on a stock it tips is set for 20 per cent growth in EPS over the next decade.
In an inaugural analyst note published on Wednesday, Morningstar director of equity research Adam Fleck says the company is looking to China for future growth, where consumer appetite for foreign infant formula brands is driving higher revenue per volume and high-single-digit growth for overall value in the market.
"We think a2 can continue to increase market share in China owing to further acceptance and demand for A1-protein-free milk, alongside average price gains in line with competitors," Fleck says.
"We see A2 growing revenue in this geography at a 20% annual clip through fiscal 2028, with Chinese infant formula climbing to more than 90% of the company’s consolidated EBITDA from about 80% today."
Over the past year the stock price has more than doubled and the company boasts a market capitalisation of $8 billion-plus. Morningstar has established a fair value estimate of $13.30 for a2 Milk. The stock is currently trading at a 13 per cent discount Morningstar's valuation.
Fleck has applied a narrow economic moat to the stock based on its strong brand intangible assets including brand and patent protection.
"A2 Milk enjoys solid brand positioning, particularly in the Chinese infant formula market and Australian fresh milk arena, which has led to premium pricing versus local and private-label alternatives," he says.
a2 Milk is looking to the Chinese infant formual market for future growth.
However, there are risks. The stock carries a high uncertainty rating, which factors in a heavy exposure to Chinese infant formula demand, the potential for unfavourable scientific developments, reliance on a small number of suppliers, and intense competition from global dairy majors with vastly deeper pockets.
The a2 Milk Company is a New Zealand-based licensor and marketer of fresh milk, infant formula, and other dairy products which lack the A1 beta-casein protein. Dairy cows naturally produce two beta-casein proteins in their milk: A1 and A2. A2 milk is produced by cows that naturally produce milk only containing the A2 protein. The a2 Milk Company asserts that milk with only the A2 protein is good for digestion.
Consumers have flocked to a2 Milk because of this perceived health benefit, with the firm expanding market share in Australian fresh milk, as well as infant formula in both Australia and China following the launch of A2 Platinum in 2013.
Price chart 21/09/2018 11:41 AM
Source: Morningstar Australia
(20min delay)