A2 Milk Company Ltd (ASX: A2M) is a New Zealand company that sells A1 protein-free milk. Its key product categories include infant formula, liquid milk and milk powders.
Recently, there have been significant forces acting upon its share price. In two months, a2 Milk's share price has stooped 26% lower, closing at $12.35 yesterday, although it has since lifted 2.35% in morning trade.
Here's a breakdown of the 3 key factors driving its valuation today.
FY19 results
a2 Milk missed the mark with its FY earnings. While net profit after tax (NPAT) grew 47% higher to NZ$287.7 million, its stock price sunk 11% lower. This was because it fell NZ$9 million short of market expectations for its NPAT result. It also announced that it was halting operations in the UK.
Further to this, investors were not pleased with the company's commitment to increase marketing spend to accelerate brand awareness, which would see a2 Milk's healthy profit margin of 30% drop lower.
Despite the slight blip, the business actually performed well overall. Market penetration increased in its key product segments, with its infant nutrition products rising to 6.4% of market share in China. This helped to boost the bottom-line, as well as bolstered a2 Milk's cash position by 61% to NZ$464.8 million.
Bellamy's acquisition
If you haven't heard already, Bellamy's Australia Ltd (ASX: BAL) has entered into an agreement with China Mengniu Dairy Company for a $1.5 billion takeover bid. This 59% premium saw Bellamy's share price skyrocket 55% on the news, sitting at $12.87 at time of writing. Mengniu Dairy is one of China's leading dairy manufacturers, with a $25 billion valuation.
This saw a2 Milk's share price rise initially, perhaps an indication of strong market demand for infant formula in China, before falling below the $13 mark.
Strategy day
a2 Milk held an Investor Strategy Day in Shanghai a couple days ago, where the company presented its ingredients for ongoing success.
The company is doubling down on its two most lucrative geographical segments by investing in brand awareness and technological infrastructure. This will allow a2 Milk to maximise growth from existing products in core markets – that is, infant milk formula in China, and fresh milk in the US.
After acquiring significant market share in these segments, the company intends to broaden its product portfolio before expanding to new markets.
Time will tell if this company strategy will drive a2 Milk to success. For now, it seems that this 25% share price discount from two months ago could be a good opportunity to buy, though I must admit that a 70x price-to-earnings ratio is still a lofty valuation.
