A2 Milk (ASX: A2M) rose today, bucking the trend of heavy declines across the index before closing slightly lower. The market’s action today signalled that investors believed larger broker cuts were on the horizon. Macquarie also recently expressed positive sentiment about the stock, which may drive more capital into the business. Institutional investors can collectively increase demand for a stock to a level which moves the price but moving it slightly will not deter an investor targeting a large upside in the stock.
A2 Milk staged a surprising rally that bucked the market trend (Credit: The Capital Club)
Regulation of Chinese infant formula imports are a major driver of the company’s share price, since the ban on advertising to infants severely hurts A2 Milk. Any relaxation in restrictions would lift the performance of A2 Milk. Increasing Trust in Chinese domestic producers could hurt A2 Milk’s business model, which is reliant on premium pricing from a safe, Australian brand image.
Nevertheless, the way in which the A2 protein is viewed by consumers will impact the share price, since this is a key driver of sales for the company. If a Chinese company scales up on the back of copying A2’s business model, a substantial amount of shareholder value would be destroyed.
Potential M&A activity could have an outsized impact on the share price and is likely in light of China’s stated intention of ensuring domestic producers control 60% of infant formula supply. It is our view that the Chinese Government imposed regulation on Australian infant formula imports to drive share prices down and make them cheap acquisition targets for domestic producers. This makes a wave of cross boarder M&A the logical next step. China Mengniu Dairy recently put in a takeover bid for Bellamy’s, and this could be a sign of more to follow.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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