Why A2 Milk Shares (ASX: A2M, NZX: ATM) are poised for Strong Growth

This article was originally published at:  MF & Co. Asset Management.

A2 Milk Shares (ASX A2M) (previously known as A2 Corporation) is an ASX 200 public listed company that commercialises the a2 protein intellectual property. Additionally, the A2M produces milk and related products like infant formula. A2M shares is poised for strong growth with high interest from Chinese consumers.

What Makes A2M Shares Different

In 2000, A2 Milk Company was founded in New Zealand by Dr Corran McLachlan. While studying at Cambridge University, Corran learned that proteins in milk can be separated into 2 types, A1 and A2. He then discovered a safe way to identify cows who produced natural A1 protein-free milk. From there A2 Milk Company was born. Research demonstrates that people uncomfortable with drinking ordinary milk were able to drink a2 Milk without side effects. The underlying reason is that a2 Milk contains only A2 protein.

Today, A2M stock’s mission remains the same: encourage intake of A2 protein so that more people can enjoy nutrition without burden.

Synlait Receives CFDA Approval of A2M shares Infant Formula

Starting from 1st January 2018, manufactures of infant formula are required to register brands and recipes at China Food and Drug Administration(CFDA) in order to export products. Based in New Zealand, Synlait Milk Limited is a dairy processing company focusing on New Zealand, Australia, and China. Synlait and A2M became business partners in 2010. Their business goal is to manufacture the world’s first infant formula containing only A2 beta-casein protein type, without A1 protein type.

Synlait submitted an application of A2M stock’s infant formula to CFDA in May 2017 and was approved recently. With a sustainable Chinese market, the business of Synlait and A2M stock is projected to grow stably.

Chinese Market Tailwind

A2M has gained huge success in China, and there is significant growth expected in the future. As is indicated in the graph below, sales in China and other Asia area has rocketed.

One important reason behind the growth in China’s burgeoning middle class. According to McKinsey Consulting, approximately 76% of China’s urban population will reach middle-class status by 2022. This means Chinese middle class will reach at least 550 million. The one-child policy is withdrawn, it is expected there will be a large number of middle-class families in want of infant formula products.

A2M Shares (ASX A2M) Revenue Segment

A2 Milk Shares Sales Boom in the First Half of 2018

The following three graphs show sales in three different areas including Australia and New Zealand, Asia and UK&USA. Among all of these three areas, sales in the first half-year of 2018 have surpassed that of 2017. Especially in China & Asia market, revenue has tripled compared to the same time last year. ANZ wide, EBITDA in the first half year of 2018 is 143.0 million, twice that of 2017.

A2M Shares (ASX A2M) Sales

Challenges from Farming

A2M shares are different from other dairy product shares. Since the company needs special cows to produce A2 Milk, it will take some time to increase the number and volume to meet the demand. As demand for dairy products increases quickly, A2M has encountered some problems in the supply chain. In Australia, many recent research activities recommend an improved feed efficiency. Simply growing more animals on the farm is no longer sufficient. Farmers need to tackle (1) small amount of forage on farms, (2) limited utilisation (3) low efficient use of supplements. These disadvantages may result in a decrease in DM production.

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Great Financial Performance Last Year

Overall, the financial performance of A2 Milk stock last year is very good. From the table below, we can see a stable growth in total revenue since 2014.

Revenue (‘000) FY2017 FY2016 FY2016 FY2014
Total Revenue 549 352 155 110
COGS 285 201 100 70
Gross Profit 263 151 54 40

Besides a growing revenue, A2 Milk stock ROE is also sound at 53.1%. That is much higher than its competitors Bellamy and Bega Cheese, whose ROE is at 10.71% and 29.63% respectively. Additionally, A2 Milk stock performed very well in terms of profitability last year. Its profit margin is 20.56%, which is almost twice that of Bellamy’s (4.93%) and Bega Cheese’s (10.96%). Currently, A2 Milk stock PE stands at 64.53 and EPS at 0.192. Though not thoroughly satisfying, it has a better performance than Bellamy. Detailed financial indicators are shown below.

ROE PE EPS Profit Margin
A2 Milk 5% 64.53 0.192 20.56%
Bellamy’s 10.71% 154.92 0.132 4.93%
Bega Cheese 29.63% 7.6 0.918 10.96

ASX A2M stock Poised For Strong Growth

Taking into consideration a growing demand, especially from the Chinese market, A2 Milk shares is poised for stronger growth. Combined with a good financial performance, it is never late to buy A2M stock. In terms of supply chain management, A2M indicates that they have enough dairy product stock to satisfy market demand. A2 Milk shares stock is potentially a long-term buy.

Henry Fung is a Partner Managing Director and co-founder of MF & Co. Asset Management. He is a highly experienced equities, derivatives and financial markets professional with over 12 years of experience. Henry specialises in building trading algorithms & systems, quantitative & qualitative analytics across macroeconomic, fundamental and technical disciplines and currently runs the MFAM VPAC AU/US models portfolios. The management Partners and Adviser team have decades of experience between them, with experience from major Investment Banks and Brokers. Their Advisers are highly experienced, having dealt with some of the wealthiest clients in Australia.

Categories: Australian Stocks, New Zealand Stocks

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