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New Zealand Core Stock Update - The a2 Milk Company

Last Price: $14.73

Sector: Consumer Staples

Market Cap: $10,832M

Fair Value: $15.30

The A2 Milk Company Ltd is engaged in the commercialisation of intellectual property relating to a2 brand milk, infant formula and related products in New Zealand, Australia and the USA.

What’s been going on?

As you can see from the chart below, the a2 Milk share price has been on a pretty wild ride lately (even for its own volatile standards). After touching an all time high of $18.02 on 31st July, it came into its FY19 result announcement on the 21st August trading at $16.85. Unfortunately for investors who had bought in around this time, this was a classic example of market expectations getting a bit ahead of themselves and the numbers failed to hit the lofty targets analysts had set. Of particular disappointment, was the shrinking EBITDA to sales margin (i.e. less profit per unit of sales) as the company was now choosing to invest heavily in marketing to continue their huge growth (even the disappointing result had revenue growth of 41.4% and NPAT growth of 47%). They also announced they were pulling out of the UK market, which was the company’s first real failure on an otherwise exemplary record. This miss caused a big drop over the coming days and, coupled with a couple of negative articles regarding competition over the next couple of months, the stock continued to drift to a low of $12.30 early November.

The good news for a2 holders, especially those that bought some from mid-September onwards, is that most of these worries were put to bed at a positive trading update at the company’s AGM on November 19. Not only did the company forecast continuing strong growth in all categories, the EBITDA margin was no longer decreasing, it had actually increased due to the company being able to lift their prices with some favourable FX conditions. Another positive was the early extension of their Synlait Milk supply agreement.

While a2 will remain one of the more volatile shares on the NZ market, we also see it as one of its most exciting growth prospects. For long term investors who are prepared to ride out the ups and downs, it could be a great addition to a diversified portfolio. Speak to your adviser if you think it could be right for you.

Filed under Mark Hampton \ Newsletter

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