11 March 2018

    The a2 Milk success story

    How did A2 become New Zealand’s largest company overnight?

    Sam Dickie (CFA)

    Head of International Equities, Property & Infrastructure

    Email Sam
    Sam Dickie (CFA)

    Head of International Equities, Property & Infrastructure

    Email Sam

    The a2 Milk Company cracked another major milestone in February, eclipsing a range of well-known businesses to become the largest listed company in New Zealand by value.

    The result announcement that catapulted it to the top of the heap contained just about everything a shareholder could want — revenue and earnings beating expectations, strong growth in market share in the lucrative US$20 billion Chinese infant milk formula market, and progress in newly-entered markets.

    The cherry on top was a brand new agreement with dairy heavyweight Fonterra, allowing a2 to accelerate entry into new global markets and launch new products. On the back of the result and the Fonterra deal announcement alone, the share price jumped, almost 40%, from $9.29 to over $13 at the time of writing.

    But what exactly is the a2 Milk Company and how has it grown so quickly?

    In a nutshell, the company currently sells 'a2'-branded fresh milk and infant milk formula internationally. Its products contain only A2 beta-casein protein. This is believed to be more comfortably digested than normal milk (which contains a mix of both A1 and A2 proteins). The company has developed and patented a range of IP which tests whether cows produce A1-free milk. More importantly the science behind a2 the company has developed a leading, highly trusted brand in Australia and China in particular.

    Despite the recent success, it has been a long rags-to-riches story for early shareholders. The company has been listed since 2004 and with limited ability to commercialise its IP made losses until 2011. From there, the company started gaining traction selling fresh milk through the supermarket and food service channels in Australia, with brand strength and awareness growing from a small base. Over the next few years a2 Milk grew share and became the leading branded fresh milk in Australia. This in itself was not highly profitable — the company only made $9 million in operating profit before tax on $94 million of sales in fiscal 2013.

    Where the company grew in leaps and bounds was infant formula. It launched its a2 Platinum brand in Australia in late 2013 and quickly gained share, courtesy of its strong position in fresh milk.

    From there, growth exploded as 'daigou' (personal shoppers) latched on to this new desirable brand and began re-exporting it for consumption in China.

    a2's management have done an excellent job of managing the nuances of this channel, where others, like Australian firm Bellamys, have failed. They have also successfully grown Chinese distribution into conventional channels including key eCommerce websites and 6700 physical stores.

    This move to grow distribution and a2 growing brand strength in China have led to the latest step-up in market share and earnings. Annual sales are now approaching $1 billion. This is an incredible story of recognising opportunity and having the strategic vision and operational smarts to take advantage of it.

    The Fonterra deal is the first step in the next phase of a2's global growth story — New Zealand's global dairy giant has acknowledged a2's global potential and is now on board. As Kiwis, it also means we can expect to see local supermarket shelves well stocked with a2 milk in the future!

    The a2 Milk Company is owned in all Fisher Funds NZ based portfolios.