The dairy and baby formula industry has undergone something of a renaissance recently – at least if you're counting the number of listed companies that have invested in those areas. The most recent baby formula/China hopeful listed just last month.
Personally speaking, I think that horse has already bolted. Yet I do still own shares in one infant formula/ milk producer – A2 Milk Company Ltd (Australia) (ASX: A2M). Here's why:
- Health claims and scientific evidence to support it
A2's main thing is that its suppliers produce milk that contains a2/a2 proteins only, instead of regular milk which is a1/a2. A2-only milk reportedly causes no digestive distress. Early results from some scientific investigations suggest that there could be some substance to these claims and further, more meaningful investigations are currently underway.
If proven, that would underpin the value of the company's products for years into the future.
- Growing brand power
As A2 grows its presence on supermarket shelves, an increasing number of customers (and probably not a few investors) will notice it, try it, and maybe become regular drinkers and/or recommend it to their friends. A similar phenomenon will hopefully occur with baby formula, given how collegial mothers with young children can be.
Much like Freedom Foods Group Ltd (ASX: FNP) which produces gluten-free food and can command above-average prices and margins, growing brand power should see A2 both grow its sales and be able to maintain higher than usual levels of profitability.
A corollary of point #1 is necessary here – if the claims of improved health were proven absolutely false, that would significantly undermine the value of a2's products, in my opinion.
- Enticing overseas expansion opportunities
To date, most of a2's success has come from sales in New Zealand and Australia. Chinese demand for baby formula has been the main driver of company growth over the past 18 months, yes, but earnings from the Chinese segment were less than one-fifth of sales in the ANZ region at the most recent half year.
Flip this around, and we could say that A2 has a long runway for growth ahead of it in China, as well as the US and UK which are not even profitable yet.
