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A Broker's PreView - The a2 Milk Company gets A+ From Market

Overview: The a2 Milk Company, patent owner and marketer of the premium differentiated milk product a2 Milk, has been pushing hard for expansion over the past few years. Recently, talk of takeovers and favourable updates has helped pushed the share price up. The Company has taken advantage of this uptick to raise $40 million in new capital in a Private Placement to eligible investors and institutions at 68 cents per share ($3 million more will be raised through a Share Purchase Plan).

Pros: The funds raised will provide a2 with a sizable war chest as they continue their expansion. Their recent foray into the lucrative US market is currently on track, with milk on the shelves of Wholefoods in California. The Company aims to reach approximately 65 percent of grocery stores in California.

The update provided this week noted that the Australia, New Zealand and China businesses were ahead of recent guidance. The market will be particularly interested in the Chinese update, as this is an obvious area of growth for their milk formula brand.

The Company’s intellectual property enables the identification of cattle that don’t produce the a1 protein (the a2 protein remains). Although the science is still not settled, there is evidence supporting claims regarding the digestive benefits of a2 milk. This is something that might particularly appeal to Chinese people who are reportedly more likely to suffer from intolerance to milk.

Cons: Competition in all markets they operate in will be fierce. They have fended off negative campaigns in Australia, questioning the science behind their product. The fact that the science is not settled has not stopped a2 from reaching 9.3 percent market share in Australia.

If they can reach anywhere close to that market share in other markets, investors will be very pleased. The $40 million raised from the Private Placement to institutions will help. Retail investors will also have a chance take part in the capital raising, although they will have to scrap over a relatively small $3 million offering made available to ‘mum & dad’.

The Company will have to use their cash wisely, avoiding the distribution issues that plagued their initial forays into China and the UK.

Price performance: The share price traded up slightly after the capital raising, and is up 25 percent for the year.

Investment outlook: This stock is not for everyone, but those prepared to take the risk will likely be rewarded if a2 can achieve their lofty ambitions.

*A Broker's View is written by Grant Davies, Investment Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.

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