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. Here Dushko Bajic, Head of Australian Equities Growth shares why a2 Milk remains one of his 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.

Dushko Bajic is Head of the Australian Equities Growth team at Colonial First State Global Asset Management, where he manages a range of Australian share funds and separately managed accounts.

Important Information

This material has been prepared and issued by First Sentier Investors (Australia) Limited (ABN 89 114 194 311, AFSL 289017) (Author). The Author forms part of First Sentier Investors, a global asset management business. First Sentier Investors is ultimately owned by Mitsubishi UFJ Financial Group, Inc (MUFG), a global financial group. A copy of the Financial Services Guide for the Author is available from First Sentier Investors on its website.

This material contains general information only. It is not intended to provide you with financial product advice and does not take into account your objectives, financial situation or needs. Before making an investment decision you should consider, with a financial advisor, whether this information is appropriate in light of your investment needs, objectives and financial situation. Any opinions expressed in this material are the opinions of the Author only and are subject to change without notice. Such opinions are not a recommendation to hold, purchase or sell a particular financial product and may not include all of the information needed to make an investment decision in relation to such a financial product.

CFSIL is a subsidiary of the Commonwealth Bank of Australia (Bank). First Sentier Investors was acquired by MUFG on 2 August 2019 and is now financially and legally independent from the Bank. The Author, MUFG, the Bank and their respective affiliates do not guarantee the performance of the Fund(s) or the repayment of capital by the Fund(s). Investments in the Fund(s) are not deposits or other liabilities of MUFG, the Bank nor their respective affiliates and investment-type products are subject to investment risk including loss of income and capital invested.

To the extent permitted by law, no liability is accepted by MUFG, the Author, the Bank nor their affiliates for any loss or damage as a result of any reliance on this material. This material contains, or is based upon, information that the Author believes to be accurate and reliable, however neither the Author, MUFG, the Bank nor their respective affiliates offer any warranty that it contains no factual errors. No part of this material may be reproduced or transmitted in any form or by any means without the prior written consent of the Author.

In Australia, ‘Colonial’, ‘CFS’ and ‘Colonial First State’ are trade marks of Colonial Holding Company Limited and ‘Colonial First State Investments’ is a trade mark of the Bank and all of these trade marks are used by First Sentier Investors under licence.