Two-child policy a tailwind for a2 Milk

With great growth prospects and a share price increase of 272% over the past 12 months, a2 Milk Company (A2M) shareholders won’t be crying over spilt milk any time soon. Below, we outline some of the reasons why a2 Milk remains one of our highest conviction stock picks.

A differentiated formula appetising for more consumers

In a crowded market, A2M made fast success with a product marketed as easier to digest than normal milk products, broadening its appeal to the consumers who limit their dairy intake. Today, the company has 9% share of the fresh milk market and >30% share of the infant formula market in Australia. Its product messaging of ‘feel the difference’, as well as the ‘clean and green’ perception of Australia and New Zealand, has resonated well with both domestic and global consumers.

One of few to successfully expand into the world’s biggest infant formula market

A major market that the company is targeting with its infant formula is China, the biggest infant formula market in the world.

China sells more than $20bn of infant formula each year, more than 20x the size of this market in Australia.

In 2008, China experienced a widespread milk and infant formula scandal which has caused a shift in consumer demand towards higher-quality and premium products. With more than 15 million babies born in China each year, the infant formula market continues to grow strongly, further accelerated by the extension to a 2-child policy introduced in 2015.

As a result of the 2008 melamine scandal, the Chinese government realised the importance of quality infant formula and heavily implemented regulations in January 2018 to protect consumers. Production factories and brands must now be fully audited by government officials and registered before products can be sold in stores. A2M has developed strong partnerships with Synlait and Fonterra who have achieved these registrations, allowing A2M products to continue being sold in China. As a result of the change in regulation, many other brands are still waiting to become fully registered.

Growth propelled by tapping into established global distribution networks

The success that A2M has achieved in China has allowed the company to expand globally as it builds its presence in the US, UK, South Korea and Singapore. With the support of the recent partnership with Fonterra, one of the world’s largest dairy exporters out of New Zealand, A2M has developed plans to expand further into South East Asia and the Middle East. Large groups such as Fonterra and Nestle have now started to launch A2 products, which shows that the brand has had a major impact on the global market. This development will likely drive higher the exposure and benefits of A2 around the world.

Where to next for A2M? With potential product extensions into adult nutrition, cheese, butter and other dairy products, this may be the beginning of a new global trend in dairy consumption.

For further insights from CFSGAM's Australian Equity Growth team, please visit our website