The A2M Milk Company Limited [ASX:A2M] share price climbed 8% yesterday thanks in large part to an upgraded buy rating. At time of writing, the stock is valued at $15.77.
UBS analyst Ben Gilbert said of the upgrade:
‘A2 Milk has a unique brand with a material long term growth opportunity by penetrating the Chinese market and expanding into the US.’
While it’s clear that a2 Milk is likely to continue to flourish, how long will it be before other dairy and formula producers follow suit?
Broker confidence continues to grow for A2
According to the updated broker note, UBS upgraded shares in the dairy from a neutral to a clear buy, increasing the target price to AU$16.68. Goldman Sachs rated the company similarly at AU$17.40.
Analysts are confident that the dairy company will easily reach ‘more than 10%’ of the Chinese market share by 2025, with UBS also suggesting that shareholders shouldn’t reject the possibility of a2 Milk making a splash in the US.
A2 on top…but for how long?
A2 Milk shot to the top of China’s demand for important formula a decade ago, with the country now said to account for an estimated 50% of all revenue.
A2 Milk could make for a robust long-term investment based on its previous track record and future financial health, with A2’s expected annual growth in earnings to grow 21% in the next five years — exceeding the Australian market average.
As the Chinese market slowly evolves, it’s clear that producers like A2M are well-positioned to meet the demand…even if that means greater competition between producers to hold the biggest share of the market.
But as the demand for milk powder continues, the domestic dairy industry in China is set to mature, meaning that A2 Milk would be wise in taking UBS’s advice and looking to alternative markets in the long term if they plan to remain a dominant player.
In an already crowded market, A2 Milk may quickly turn toward other market avenues in the South East Asian region to solidify their position.
For Money Morning
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