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Date : 29/09/2020

The a2 Milk Company



Market Cap : $12.70 Billion


52 Week Range : $11.28 - $20.05

Share Price : $14.59

A strong business and brand with stellar performances and strong financial health. A "Buy" from us for the long-term.

Company Analysis


The a2 Milk Company (ASX: A2M) is a producer of milk contains just the A2 protein by using cows that naturally produce just the said protein. A2M’s milk is said to have certain benefits to consumers who experience challenges when they drink the normal cow’s milk. The firm has two types of products – a2 fresh milk, and a2 Platinum, that is aimed at infants.

A2M operates in Australia & New Zealand, China & other parts of Asia, and the United States & Canada. Australia contributes the highest percentage of its revenues with expanding market penetration.

The firm was founded in 2000 and has had quite a remarkable journey as it continues to grow bigger by gaining more market share. A2M has benefitted from favourable external macro factors such as rise of the middle class in Asia and a shift in consumer behaviour towards health and wellness products.

The below chart shows us the segmented revenues based on product & geography as of FY2020. This goes to show that a2 Platinum is its most important product in the market and China & Asia is what is driving the growth rates of A2M. The firm has employed a strategy to change the language on the labels of its products to better target the Asian market, and it looks like it is working.

Company Updates


The a2 Milk Company is on the back of another strong financial performance in FY2020. Covid19 has affected the firm due to supply chain issues and demand uncertainty. However, not to the extent that investors thought it may have been. The firm did report a 33% growth rate during a slow pandemic year.

A2M has made an offer to acquire 75% of Mataura Valley Milk, NZ for $270m so that it can use its facilities for manufacturing a2m products.

The share price chart paints a similar picture with the stock regaining its March loses very quickly. The stock however has been volatile due to the uncertainty that still exists in global stock markets. China’s business has shifted to online from offline in Q3 of FY2020. The firm has not sought any government funding or support during the pandemic.

The recent slump in share price is due to A2M announcing that its business has been impacted by the Melbourne restrictions, and it is said to forecasted lower revenues in the first half of FY2021.The shares have tumbled 14% since the announcement.

Industry Analysis

The consumer staples sector has been hit by supply chain issues due to the restrictions that come with managing the pandemic. The demand has not changed much for non-discretionary products. A2M thus, has not and probably will not feel the brunt force of Covid19.

Firms across all sectors have moved to an online-based model to drive sales. We will see brands offering their products to a wider market and reach more customers by making that shift and taking advantage of the boom in e-commerce.

Australia, New Zealand, and China look like countries that will recover from the pandemic the quickest. These are the biggest markets from A2M.

Consumer behaviour will continue to promote health and wellness. A2M’s product for infants is their best and we forecast it to continue to grow with industry forecasts high for the emerging markets of Asia.

Investment Thesis

Revenues reported was $1.73 billion – up 32.8% from the previous year. Most of this growth came out of China & other parts of Asia as it grew by 65%, while ANZ grew by a stable 14%. Revenue from USA was $66.1m – 91.2% growth.

A2M has maintained its stable EBITDA margins of around 31% in the year with a strong earnings performance. Net income increased by 25% with $385m being reported.

The past performance has been solid for a2 Milk. Over the past 5 years, revenue growth has been 65%. Our forecasts for FY2021 and beyond is high as A2M is positioned to drive sales in key markets.

A2M’s balance sheet is a sign of strength. The cash position has been increased to $854m. The firm increased working capital due to the timing of supplier payments. The below chart shows us just how the firm has managed to increase its cash position in FY2020.

Source: The a2 Milk Company

This is a very stable company. The short-term and long-term financial health is strong. A2M just has $16.8m in debt, which it raised in FY2020. Long-term leases for its assets sit at $13m, with $3.4m payable in the short-term.

Total current assets exceed total current liabilities by 3.69x. This metric measures the short-term financial health. While total assets exceed total liabilities by 4.5x. The firm is quite literally not exposed to credit default risk. We expect A2M to be in a position to mitigate any unforeseen challenges the pandemic may throw at it with a balance sheet as strong as this one.

The firm had no debt prior to this year. The capital structure of the firm is financed 98.5% by equity and just 1.5% by debt. With over $800m in cash and just $16m in debt, the net debt position of A2M is ($837m).

The earnings per share has a similar trend to the revenues as the performance of A2M’s assets, capital, and equity have been stellar. We expect this to continue in the post-pandemic world.

*Note : All company financials reported in NZD*


The a2 Milk Company has an exceptionally strong business and brand. It is backed with stellar performances and strong financial health. We expect the firm to continue to grow in the Asian market as it takes advantage of high consumer numbers and increased demand. The shares have tumbled recently, and it is trading below the intrinsic value we estimate. We issue investors a “Buy” recommendation.

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