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Why A2 Milk Was Close To Flat In One Of The Worst Days For The ASX This Year?

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

A2 Milk (ASX: A2Mrose 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 -  Flat Results

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.

 


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)

(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

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