The dramatic rise in demand from China has been transformational. The premiumisation trend is a key driver of demand for Australia and New Zealand (ANZ) product, with its ANZ provenance and usage resulting in market share gains by selected ANZ-sourced infant formula companies. We see the outlook for the China infant formula market as robust, but less attractive than the 10% growth rate seen in 2017 and 2018.
Ord Minnett recently initiated coverage of a2 Milk Company with an Accumulate recommendation and a $17.23 target price. The company develops and markets a differentiated, premium and branded portfolio of dairy and infant formula products sourced from naturally occurring cows’ milk free of A1 beta-casein protein.
A2M has trading activities in Australia, New Zealand, China, the US, the UK, and several emerging markets in Asia. It was founded in 2000 by Dr Corran McLachlan and Howard Paterson to license intellectual property for determining the type of protein a cow produces in its milk. The business model changed in 2007 from licensing to a fully fledged operating company engaged in sourcing and selling branded A2 (or A1-protein-free) milk products.
Key drivers of the business include the brand being perceived as associated with health and wellness, its level of usage, and the company’s deep engagement with core consumers. a2 Milk has a nimble route to market that is able to adjust to changing points of purchase, while its understanding of daigou (personal shopper) channel economics gives it a competitive advantage.
We see some increasing industry risks, but we are confident further market share gains will be achieved assisted by expanding its addressable market geographically, with greater mother and baby store presence. The brand has continued to perform well when competitors have entered the a2 category. Despite the recent share price outperformance we see valuation support, while its premium P/E multiple appears justified given the strong forecast revenue, operating earnings and EPS growth (based on our forecast three-year compound annual growth rate of 23.2%).