A2 Milk share price rises 8.14% off the back of a positive UBS research report

A2 Milk saw strong gains throughout the day after banking giant UBS upgraded its rating from neutral to buy.

China Source: Bloomberg

Shares in a2 Milk Co Ltd rose as much as 8.14% today, following the release of a positive broker report from UBS. The company closed out today's session near a record high of A$15.66 per share.

Here’s everything you need to know from the latest UBS Group AG broker report on a2 Milk:

International expansion in focus

Centrally, UBS contends that a2 Milk is in a strong position to substantially grow its share of the Chinese infant formula market in the years ahead. While a2 Milk only commands around 1% of the offline infant formula market in China currently, UBS believes the company’s focus on quality and its reputation as a premium brand are likely to help it gain deeper market penetration in China going forward.

Specifically, with a2 Milk already quickly gaining ground in China, UBS projects that the company’s share of the infant formula market in China could potentially reach 11% by the 2025 financial year.

Moreover, UBS believes that investors are currently over-looking the potential impact of a2 Milk’s expansion into the US. All up, the investment bank thinks this market could strongly contribute to the company’s earnings by the 2025 financial year.

Additional growth opportunities from this market may also come from a2 Milk’s expansion into a number of different categories, including adult nutritional products and coffee creamers.

Risks to consider

Even though there’s a lot to like about a2 Milk, there remains some key risks that investors should pay attention to.

In particular, UBS notes that a changing regulatory environment and ‘greater daigou disruption from China e-commerce law changes’ may negatively impact the company going forward. Although a2 Milk has yet to run into much regulatory trouble, other prominent Australian infant formula producers – such as Bellamy's Australia Ltd have yet to gain the required regulatory approval to sell their products directly in China.

Regardless of the risks outlined above, UBS shifted its rating of a2 Milk from neutral to buy and placed a 12-month price target of NZ$17.50 (A$16.70) on the now A$10.66 billion infant formula maker.

Year-to-date a2 Milk’s share price is up 39.4%.


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