Forget about following the floundering fortunes of Fonterra – a2 Milk is the NZX’s fast-rising star

New Zealand  eyes  have been so  focussed  this  week  on  an event  20,000kms distant   that they  might  not have  noticed here  at  home another  extraordinary  event, taking  place  on the  NZX.

The market capitalisation of a company  which listed   as recently  as  2012  on the local sharemarket soared  past the  $12bn  mark and is hard on the heels of  Meridian Energy,  which has the  highest   valuation  of  NZ-based companies on the NZX  at $12.3bn.

The  challenger is a2 Milk,  which sells a  specialised  type of  milk  with what  it claims are health benefits.

A2 has had  a  chequered  history  but  its  market  valuation  keeps  climbing,  racing  ahead   of  blue chips  like  Auckland International  Airport  and  Fisher  & Paykel  Healthcare  and  leaving  in its dust some one-time  market  darlings  like Fletcher  Buildings  (market cap  $4.3bn)  and   Spark  ($7.2bn).

Farmer-shareholders    in the giant  Fonterra  co-op  might  well  envy a2 Milk’s  sharemarket   performance,  particularly when they contrast  it  with the listed  Fonterra   shares  which   slumped  last  week as low  as  $3.51c – 30%  lower  than at  this time last year.   The fall took its  market  cap  to  $5.6bn.

Fonterra shares  have  since bounced back,  but  nevertheless   are    hardly  as  alluring as  those of  a2 Milk,   which  jumped 6%  on  Wednesday   on   brokers’   enthusiasm   for the stock,  with  UBS raising  its  recommendation  from  “neutral”  and putting a  $17.50 price on it, up 25% from their previous forecast.  Investors will now be awaiting the company’s annual result in August.

Another  dairy  company, Synlait Milk, which supplies A2,   also had a good  week.

The  performance  of   these  companies   is  important,  because   the  dairy  industry   is under attack  and needs    champions  to  reassure  the  nation    that it has a future.

On  one side,  climate change fanatics believe  that if  global  warming is  not halted  the human race is heading for  extinction.  They are calling for  dairy herds  to be culled to  reduce  emissions  (never  mind that   no  other    country  is   doing  anything  of the kind).

From another perspective  the  dairy  industry  is under pressure from  its  financiers.  Bank  lending to the agricultural  sector  has risen from $12bn  in 2000  to  $63bn  now.

Many  dairy farmers  are  so heavily  indebted  that bankers   are   beginning to  put the squeeze on them, partly   because   they  see  co-ops   like Fonterra  and   Westland   Milk  struggling  to  keep  payouts    high  enough,  and partly  because  farming land  values  are   no  longer  rising.

If  the  dairy industry  went into  decline,  so  too would the NZ export   economy. Dairy products  earned  27%  of  NZ’s  goods export income in the   year ended  May.

Fonterra   is  by  far  the  largest  unit  in the industry,  but  it  has  not  succeeded  in  becoming  the  “national champion”  its founders  in 2001 envisaged   simply  because   it  is  obliged    to take all the  milk  its farmers  as members of the  co-op  supply.  That entails   having  huge amounts  of capital  tied up  in processing  facilities   which at the height of the season  are very busy  but  once  the peak  has  passed  are gradually  left idle.

By  comparison  a2  Milk  relies   heavily  on   others  for  processing, particularly its infant  formula, which finds a   steadily  growing market  in China.  First consignments of infant formula – a2 Platinum– were sent to China in 2013  and exports to China have increased dramatically since then.

a2 Milk  holds a worldwide suite of intellectual property, including trademarks, trade secrets, and patents covering products, the genetic test and methods to develop A1 protein-free producing herds, as well as methods to check the protein content and fatty acid content of milk, dietary supplements with A2 beta-casein, and even therapeutic uses of A1 protein-free products. It continues to develop a portfolio of intellectual property, including trademarks and patents.

In  its  2018  financial   year  a2 Milk’s revenue   reached  $923M,  up  68%,  and   many of   its   investors   believe  its  growth  trajectory justifies   its  spectacular  share price.

More   significantly, it  demonstrates   the   NZ  dairy  industry, or  units within  it,  can  still be   a  world  leader.


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