Is the a2 Milk (A2M) share price rally set to continue?
Shares in the ASX- and NZX-listed formula maker have climbed 14% over the last one month.
Shares in infant formula producer a2 Milk (ASX: A2M) are among the best performers on the ASX, jumping more than 5% in early trade on Monday to AU$5.88, their best level since February.
Why is the A2M stock price lifting higher today?
The latest lift in a2 Milk shares comes on positive news out of China.
Synlait’s State Administration for Market Regulation (SAMR) licence, which was due to expire this month, has been renewed, meaning it can continue to manufacture a2 Milk’s Chinese-labelled infant formula under the previous food safety standard.
That removes a key short-term risk weighing on a2 Milk’s future in the Asian country but it will still need to be granted a registration under SAMR’s new safety standards when they are put in place. Both a2 Milk and Synlait are now working towards gaining this registration.
“We remain focused on the China market and are looking forward to the opportunity to make our newly formulated infant milk product available to parents and infants in China,” A2 Milk CEO David Bortolussi said in a statement.
A2Milk’s fortunes are closely tied to Synlait’s, because it owns 19.8% of the NZ-based milk processor and is its biggest buyer of packaged infant formula and base powder.
A2 Milk shares have been under pressure over the last two years but the stock has rebounded in recent weeks, climbing nearly 14% since late-August.
The company had hoped to gain a foothold in the US but those hopes were dashed last month after the US FDA put on hold all applications from 160-odd producers to enter the world’s second-biggest infant formula market.
That has meant the Chinese market remains the key growth driver for the dairy producer. It had been hit hard as the COVID-19 pandemic fuelled a collapse of the daigou trade to China, heavily affecting their revenue growth. But the licence renewal means that growth prospects have improved.
Morningstar analyst Angus Hewitt expects the company to capture more market share in China due to the strength of the a2 Milk brand, and has said its “shares are trading at an attractive valuation based on the Chinese opportunity alone.”
In its full year results last month, a2Milk said full year revenue from its China and other Asia segment vaulted 24.5% to $726.5 million, while earnings almost doubled to $141 million.
Investors will also benefit from a $150 million share buyback that a2Milk announced instead of paying a maiden dividend.
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