A2 Milk Earnings: Market Share Soars, but Near-Term Outlook Sours

We think the precipitous slide in the a2 Milk share price—down more than 20% during intraday trading—misses the forest for the trees. A2’s fiscal 2024 result itself was strong with underlying net profit up 8% to NZD 234 million—about 4% ahead of our prior forecast. Its share of the crucial Chinese infant formula market is also climbing and already healthy brand metrics continue to improve. Consumers are willing to pay up for the a2 brand, in fresh milk in Australia and infant formula in China. This pricing power has afforded market share growth despite difficult conditions—underpinning the firm’s narrow economic moat. But we think the market was overly concerned about a weaker near-term outlook statement. Temporary, operational supply constraints—ostensibly with manufacturing partner Synlait—are set to weigh on sales in the first half of fiscal 2025 and gross margins are set to suffer amid a short-term reliance on air freight. The supply constraints are transient, likely abating by the end of the first half of fiscal 2025. We think the share price fall presents an attractive entry point for investors.