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A2 Milk share price: the $57 billion market opportunity

We examine why UBS remains bullish on a2 Milk.

A2M Source: Bloomberg

Amidst chaos and uncertainty a2 Milk (A2M) has had held up surprisingly well.

Indeed, year-to-date the market darling has seen its share price increase some 20% – far outperforming the ASX 200 benchmark.

Commentary from the company’s first-half results likely contributed to this bullishness, with management noting that sales across the first two months of 2H20 were above expectations.

Prudently, however, because of the still-unfolding Covid-19 situation, it was flagged that:

‘This is a dynamic situation and at this stage we are unable to quantify the impact, either positively or negatively, for the full year.’

Volatility, after all, runs both ways.

A2 Milk share price: the current outlook

Of course, while it often makes sense for management to provide a conservative outlook – analysts have no such mandate. Namely, as UBS analysts posited in a recent note:

'We believe A2M has continued to perform strongly in 2H20, benefiting from a shift to online channels during the COVID-19 outbreak in China, and upwards pricing trends.’

The investment bank is currently forecasting that A2M’s revenue will hit NZ$1,660 million in FY20.

Adding to this view, UBS has found that the Chinese infant formula market continues to experience robust levels of growth – driven by price opposed to volume – as premium products come to dominate the market.

'For A2M specifically, channel checks suggest strength in the corporate daigou/CBEC channel and further penetration in the offline channel with A2M now in >19,000 China MBS's.’

And maybe most bullishly of all, recent research conducted by the Swiss bank 'suggests the addressable market for A2M in China may be much larger than consensus appreciates (~250b RMB) [or approximately AUD$57.72 billion at the current exchange rate], suggesting the sales opportunity is greater.’

Unsurprisingly, UBS currently has a Buy rating and a 12-month price target of NZ$18.50 on a2 Milk.

Other bits and pieces

In other news, on 23 March, a2 Milk announced that it had increased its investment in Synlait milk: from 17.4% to 19.84%. Speaking of this decision – A2M’s chief executive officer (CEO) – Mr Geoffrey Babidge said, ‘following the recent decline in Synlait's share price, we view this as an opportunity to complete our strategic holding. Our shareholding reflects the importance to us of our commercial supply arrangements with Synlait.’

The company flagged that it had no intention to further increase its position in Synlait.

At the time of writing, Synlait Milk (SM1) traded at $6.93 per share; while a2 Milk (A2M) traded at $16.98 per share.

How to trade a2 Milk: long or short

What do you make of this: does a2 Milk still have room to run higher or are declines on the horizon. Wherever you stand, you can use IG’s world-class trading platform to go long or short – on a large range of financial instruments, including equities, currencies and indices.

For example, to buy (long) or sell (short) A2 Milk using CFDs, follow these simple steps:

  • Create an IG trading account or log in to your existing account
  • Enter ‘a2 Milk’ or ‘A2M’ in the search bar and select it
  • Choose your position size
  • Click on ‘buy’ or ‘sell’ in the deal ticket
  • Confirm the trade

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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