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a2 Milk Co Ltd (A2M) $5.44

A2M enjoyed a rare return to the winner’s enclosure yesterday closing up +1.9% but it did surrender around 75% of its early morning gains following the news that its NZ-based manufacturing partner Synlait Milk had received approval from Chinese authorities to sell its China-label baby formula. Production should start later this month generating a solid boost for A2M’s earnings next FY. This news out of China will afford A2M ongoing access to China’s huge formula market which is pivotal to the company’s growth strategy and will potentially finally offer some hope to the loyal shareholders who’ve seen the stock plunge -80% from its 2020 high.

The question we pose today is whether A2M is finally a turnaround story worth consideration, we know human psychology is to buy “cheap” stocks but the ASX has been in no mood to reward underperformers over the last 12 months i.e. the weak keep getting weaker. Hence in today’s cautious market, we need a compelling valuation story or catalyst to justify bucking an entrenched neutral/bearish trend. The stock is trading on 30x Est. 2023 earnings hence a recovery of sorts is already being factored into the share price however, the company has a strong balance sheet with over $850mn cash and we believe the business will indeed grow over the coming years hence this might be a case of letting the market tell us when it’s ready to rally.

  • We believe A2M is looking for a low but we aren’t convinced it’s time to take a contrarian stance.
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a2 Milk Co Ltd (A2M)
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