Portfolio Update – Purchase of A2 Milk

By May 5, 2021Portfolio

Within the Australian Equities component of investor portfolios we have bought A2 Milk (ASX: A2M), a global milk company, domiciled in New Zealand, that sells A2 protein type milk, infant formula and related products.

We view A2 as a good-quality high growth business. They are the leading provider of A2 fresh milk in Australia, A2 infant formula in China and an emerging speciality milk provider in the US with the launch of the A2 brand.

Historically their success in building the business was based upon being an early mover in the A2 niche, investment in marketing, and strong management. As a result, A2 enjoys strong brand recognition, good customer retention and premium pricing in both new and mature markets.

Looking forward, we believe that A2 can continue to exhibit strong top line growth through the combination of the US fresh milk business gaining scale and further market share gains in the China infant formula business. In order to maintain the growth, heavy reinvestment back into the business will be required – primarily in marketing and distribution. This reinvestment will have the effect of capping margins at levels slightly below where they currently sit.

Like all investments, A2 is not risk free. There are several priority challenges that management have to work through including increased competition from global and domestic China brands, disruption to their Chinese distribution channels resulting from covid and changing product mix having a negative impact on margins.

At current pricing, we believe that there is an adequate margin for safety that accounts for the risks and should still provide strong returns over the medium to long term.

To fund the purchase of A2 we are removing Seek Limited (ASX: SEK) from the portfolio. Following the partial divestment of Zhaopin and Andrew Basset stepping down as CEO, we believe that longer term earnings growth is insufficient to justify their lofty valuation.

As always, thank you for your ongoing support; it is very much appreciated. If you have any questions or would like more information, please contact your SBB Wealth Representative.

 

WARNINGS AND DISCLOSURES: This material has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in this material is General Advice and does not take into account any person’s individual investment objectives, financial situation or needs. Before making an investment decision based on this advice you should consider whether it is appropriate to your particular circumstances, alternatively seek professional advice. Where the General Advice relates to the acquisition or possible acquisition of a financial product, you should obtain a Product Disclosure Statement (“PDS”) relating to the product and consider the PDS before making any decision about whether to acquire the product. You will find further details of the service we provide and any cost to you within the Financial Services Guide. Any references to past investment performance are not an indication of future investment returns. Prepared by EP Financial Service Pty Ltd ABN 52 130 772 495 AFSL 325 252 (“Elston”). Although every effort has been made to verify the accuracy of the information contained in this material, Elston, its officers, representatives, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this material or any loss or damage suffered by any person directly or indirectly through relying on this information.

Prepared by:
EP Financial Services Pty Ltd
ABN 52 130 772 495 AFSL 325 252 (“ELSTON”)
GPO Box 2220
Brisbane Q 4001