Is the a2 Milk (A2M) share price rally set to continue?

Posted: 12 September 2022 3:30 pm
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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.

By comparison, shares in rival dairy firms Bega Cheese (ASX: BGA) and Bubs Australia (ASX: BUB) were up around 2% each.

Why is the A2M stock price lifting higher today?

The latest lift in a2 Milk shares comes on positive news out of China.

The dual-listed dairy producer has announced that partner Synlait (ASX: SM1) has received approvals in China to continue manufacturing its infant formula.

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.

Improved prospects

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.

Considering buying A2M shares?

If you are keen to buy shares in a2 Milk, consider investing through an online share trading platform.

Do keep in mind that not all platforms offer the same set of stocks. Some only offer US stocks, so make sure to select a platform that offers NZX-listed and ASX-listed stocks.

Looking for a low-cost online broker to invest in the stock market? Compare share trading platforms to start investing in stocks and ETFs.

Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

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