a2 Milk strong despite Bellamy's woes
Pioneering milk business, The a2 Milk Company (ASX:A2M), performed well during the quarter despite being down 14.3% for the month of December on the back of concerns around the current predicament of its listed peer, Bellamy’s Australia (ASX:BAL) (-45.7% for the month of December).
BAL issued a profit warning in early December cutting its earnings forecast by 40-50% and citing lower volumes and margins through its Chinese sales channels.
In mid-December, Bellamy’s moved to suspend its ASX listing as it attempted to come to grips with its rapidly changing earnings profile. This had an unsettling impact on the A2M share price although the company subsequently confirmed that it “continues to trade very strongly, in particular, (with) significant year-on-year growth in its infant formula business”.
We believe A2M is well positioned and distinguishes itself from BAL on many levels including:
• supply chain – A2M has a supply chain built on contracted strategic arrangements where it can access guaranteed levels of production capacity without any ‘take or pay’ obligations
• flexible active sales channel management – allowing for optimal volume and margin performance, and
• inventory management – allowing for ongoing and active monitoring of inventory levels through various distribution channels.
Prior to the market jitters caused by BAL, A2M had released a strong AGM update with sales for the first four months of FY17 up 96%, which we believe provides further evidence the company is continuing to build a substantial premium milk business.
December 2016 fund updates