Why is the a2 Milk (A2M) share price on a high?

Posted: 14 October 2021 12:21 pm
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Shares in the trans-Tasman dairy company are down 55% over the last 12 months.

Shares in a2 Milk (ASX: A2M) are running hot for a second straight session, in direct contrast to their recent performance. The trans-Tasman dairy company has lost more than 50% of its value in the last year. On Thursday, the stock was among the top traded on the ASX, rising another 8.4% at $7.13, on top of the 12% surge in the previous session.

Why is the A2M stock price taking off?

The specialty milk company has suffered setbacks over the last year as COVID-19 border closures prevented tourists and students from shipping its premium infant formula back to China through what is known as the "daigou" trade.

However, investors now seem to be optimistic that this disruption to the company’s key sales channel to China may be over.

They are taking heart from an update by smaller rival Bubs Australia (ASX: BUB), which on Wednesday reported a 96% jump in revenue for the 3 months ending 30 September. Bubs attributed the surge to sales through ​​the daigou channel jumping 6.5 times over the previous year.

In fact, Bubs CEO Kristy Carr said the company had largely put the disruption and challenges of COVID-19 behind it, after posting disappointing numbers for several quarters.

The astounding numbers have sparked hopes that the tough times may be over for the infant formula market, which will likely mean a strong rebound for a2 Milk, when it provides a trading update at its annual general meeting on 17 November.

Key market

China is the world’s largest infant formula market and the a2 Milk’s infant milk powder – which contains the A2 protein type that is seen as easier to digest than the more common A1 protein – has helped the company achieve great success there.

But the collapse of the very effective daigou trade, where students and tourists in Australia acted like social media influencers for a2 Milk’s products, had badly affected the company’s sales channels.

Fears about the potential impact of COVID on pregnancy caused some people in China to delay having children, shrinking the market for infant formula further as competition from local Chinese producers has risen.

As a result, a2 Milk reported an 80% dive in full year profit in August, after cutting its forecasts multiple times over the past year. At the time, it had warned that the coming year would continue to be challenging.

It prompted law firm Slater and Gordon to file a class action lawsuit in Victoria against a2 Milk, alleging misleading or deceptive conduct by the company. The dairy company’s share price is still down 55% over the last 12 months.

Investors are counting on good news at the AGM next month to reverse that poor performance.

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