The Motley Fool

Should you buy a2 Milk and Bellamy’s Australia shares?

The A2 Milk Company Ltd (ASX: A2M) share price performance over the last five years has been one of the biggest highlights on the Australian share market.

During this time the infant formula and dairy company’s shares have put on a gain of 562%. This means that if you’d invested $25,000 in a2 Milk shares five years ago, that investment would be worth over $165,000 today.

It is a similar story for those that invested in Bellamy’s Australia Ltd (ASX: BAL) shares when it listed on the ASX around four and half years ago. It listed at $1.00 on August 4 2014 and is now 640% higher at $7.40. This would have turned a $25,000 investment into $185,000.

Will the next five years be just as good?

Whilst I believe that both these companies have bright futures ahead of them, I wouldn’t be expecting returns of this level again over the next five years.

Though, I do feel both have the potential to be market beaters if demand from China continues to strengthen.

Thanks partly to the insatiable demand for a2 Milk’s infant formula products in China, it recently reported a 64.5% jump in net profit to NZ$86 million during the first four months of FY 2019.

What are the risks?

One major risk for Bellamy’s is its SAMR accreditation application. This accreditation is required to sell its products on the China mainland.

It applied for its accreditation over a year ago and has still not been approved. As a result, sales are expected to be flat in FY 2019 unless it comes through in the coming months.

While I doubt that Bellamy’s will be denied this accreditation, if it were to happen then its future growth prospects would suddenly become very weak.

In addition to this, a note out of Citi this morning has voiced concerns over the China market.

According to the note, the broker believes that the changing regulatory environment for infant formula in China is benefiting local producers over international producers such as a2 Milk.

So much so, Citi believes that Chinese producers will increase their share of the market to 53% by FY 2022. This could result in slower growth for international producers and limited market share gains.

While this is certainly food for thought, I’d still be a buyer of their shares until there are signs that Citi’s concerns are being realised.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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