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.