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Would you buy a2 Milk at these prices?

Maureen Jordan
7 October 2020

Now two decades old, a2 Milk is a New Zealand company that produces liquid milk and infant nutrition (powder and toddler milk drink) from cows that only contain the A2 beta-casein protein, which is apparently more easy to digest.

In our recent Switzer Report webinar held on the first Friday of the month, Peter Switzer, Paul Rickard and James Dunn, who all contribute to the Report each week, gave their views on this company.

“A2 Milk has been such a good performer,” said James without hesitation. “This is a stock that obviously caught the attention of the market. With no dividend, the stock has been up 80% a year for five years. It's done extremely well. It's come off quite a bit this year. And that’s symptomatic of those stocks that sell to China. It’s highly leveraged to success in the Chinese market. From time to time, there's been regulatory shocks to those companies, where the Chinese authorities have said, “We're going to cut the number of companies authorized to sell infant milk formula into China”, James added.

“Analysts are pretty bullish on where this stock goes from here. It's at $13.99 at the moment. And if you look at the consensus valuation (on Thomson Reuters) of analysts who follow this, they're talking $16.53 as the average analyst's consensus target price. Good product, good business. And according to the analysts that follow it, at a fairly reasonable price,” James said.

The Australian sales success story for a2 Milk was in part due to purchases by retail daigou (Chinese travellers and students) who took the products back to China to use/on-sell.

“This has been impacted because there are a lot less Chinese tourists in Australia right now, and probably in New Zealand. A lot of the analysts didn't think that was going to be a significant issue for a2. But apparently it has been. Apparently there's also been a bit of WeChat anti-PR type stuff that's gone on, which has hurt a2 as well. But it's a great company and a buying opportunity. And the analysts think it's got at least 15% upside. If you don't hold a2, this is probably an opportunity to get in,” Peter maintained.

Paul Rickard commented that the ban on inbound international travel and international students could certainly have some impact on sales if these continue well into FY21. “a2M says that corporate daigou are replacing retail daigou and the MBS (mother and baby store) channel is becoming more important. There are also expansion opportunities into other Asian markets, in particular, South Korea,” Paul said.

“It's probably an opportunity to get in. You can be a little patient because there are a few governance issues. The downgrade came 40 calendar days after their full year results, which was a bit disappointing. You can invest now but it's going to take a little while for the market to get back on the a2 Milk train. They've let a few people down with their recent corporate performance but for growth investors, it’s a buy,” Paul concluded.

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