Roy Davidson, 1 November 2018


The a2 Milk Company (ATM) is a niche dairy operator, deriving revenues primarily in Australia and China. The company differentiates itself from the wider dairy industry through its ‘a2’ brand premium products, which are based around the use of the A2 beta-casein protein.


A2 is a beta-casein which is a type of cow’s milk protein. The two major types of beta-casein are A1 and A2. The difference in the protein structure of A1 and A2 can result in differences in breakdown during digestion. There has been some scientific research suggesting that milk high in A2 has fewer intolerance-type reactions and reduces the risk of serious health conditions. The most notable and publicised study was in a book by Dr Keith Woodford titled “The Devil in the Milk”. We note that while some studies have been conducted with regard to the health benefits of A2, much of the evidence remains anecdotal from consumers of the a2 brand products.

The global dairy market is of significant size. The total value of the fresh milk market is estimated to be around US$90bn. Adding to that the value of the global UHT (ultra-high temperature or long life) milk market and the total milk market is in excess of US$120bn. ATM is a very small contributor to the global market but its Australian business has shown that ATM has the ability to build meaningful positions in the premium milk market. ATM currently has over 10% of the Australian milk market. There is plenty of scope for the company to grow, both into new geographies and new product categories (such as cheese and yoghurt).

We are positive on the growth prospects of the company and believe the A2 proposition, supported by the company’s substantial suite of intellectual property and patents, has the potential to gain share in the premium milk market (which includes the likes of organic, soy and goat milk). A key market is China, where ATM has made significant inroads to date and should continue to leverage its first mover advantage into the future. The company has shown it has the ability to grow at attractive rates, as evidenced by its earnings over recent years. The company has gone from delivering operating earnings of under $5m just three years ago, to be on track to do almost $300m this year.

ATM has made excellent progress in recent years, particularly with its infant formula products, resulting in strong earnings growth and share price appreciation. We are positive on the company’s long-term prospects driven by large growth opportunities, however, after such a strong run, and with risks ever-present, especially in relation to Chinese sales channels, investors should be aware of the potential regulatory and competitive risks which the company is exposed to. As a result, despite ATM being one of our largest listed companies and having multiple growth options, it remains a higher-risk proposition which may not suit all investors.

Potential risks to ATM include:

  1. regulatory change
  2. food safety scare
  3. increased competition