Optimistic about A2 Milk

The A2 Milk Company continues to re-rate on the back of a very strong trading performance driven by ongoing gross margin expansion and continued rapid growth in sales of its A2 Platinum infant formula, especially in the large Chinese market.

Management continues to exceed the financial expectations of both the overall market and our internal modelling and we have good reason to remain optimistic about the future.

Management is doing an exceptional job of building a premium dairy business, leveraging its intellectual property associated with the production and marketing of ‘A2 protein’ based products. A2 Platinum infant formula has grown rapidly to 3.1% market share in China according to market research firm, Kantar, and we see no reason why this will not continue to accelerate, especially given the regulatory crackdown in China which ought to see brand rationalisation among competitors.

The recent news that A2M’s infant formula manufacturer, Synlait Milk, had received Chinese Food and Drug Administration (CFDA) approval well ahead of the deadline removes a key risk for the stock. Going forward, we see significant potential for management to grow the product portfolio and gain traction in new geographies including the US and UK markets where A2M is already investing heavily to grow its fresh milk business.