A2 Milk A2M reported interim 2025 EBITDA of NZD 119 million, up 5% on last year. All segments' sales grew, including the core Chinese infant formula business. Management upgraded fiscal 2025 guidance, now expecting low to mid-double-digit revenue growth and slightly higher EBITDA margins than last year.

Why it matters: We lift our fiscal 2025 EBITDA forecast by 6% to NZD 265 million, 13% higher than fiscal 2024. English-label infant formula demand is particularly strong, with first-half sales up 13% on the previous year. Chinese-labeled infant formula sales rose 2% versus market declines of 8%.

  • Increased reliance on air freight amid temporary supply constraints with manufacturing partner Synlait compressed EBITDA margins in the first half. Excluding additional freight costs, EBITDA would've grown about 12% on the previous year. These headwinds are now behind a2.
  • Market share is growing. Value share in Chinese-labeled infant formula is 5.3%, from 4.4% the prior year, per Kantar. English-label cross-border e-commerce share stabilized at about 20%. The once-crucial daigou channel continues to decline, now less than 5% of a2's infant formula sales.

The bottom line: We raise our near-term estimates, but our long-term view remains broadly intact. Shares in a2 Milk are now fairly valued compared with our unchanged NZD 8.00 (AUD 7.20) fair value estimate.

  • Consumers are willing to pay up for the a2 brand, in fresh milk in Australia and infant formula in China. This pricing power has driven market share growth despite difficult conditions, underpinning the firm's narrow economic moat.
  • We forecast a2 Milk continuing to expand its Chinese infant formula share, combined across Chinese and English labels, to about 9% by fiscal 2028 from about 7% in fiscal 2024.

Key stats: A2 declared its inaugural dividend of NZD 8.5 cents per share, paying out about 67% of net profit, fully imputed and franked. The company is highly cash-generative and already has a massive net cash balance.

A2 Milk commands pricing power in Chinese infant formula

A2 Milk has built a brand that we expect to protect economic profits for years to come. China is the key battleground. A2's future growth relies heavily on further successful penetration of the Chinese infant formula market, which we estimate makes up the vast majority of earnings.

A2 is a licensor and marketer of fresh milk, infant formula, and other dairy products that lack the A1 beta-casein protein. Dairy cows naturally produce two beta-casein proteins in their milk: A1 and A2, which differ by one amino acid. A2 milk is produced by cows that naturally produce milk only containing the A2 protein; genetic testing is done to build herds of supply. Some studies have suggested the A1 protein may be associated with serious health issues, although a2 Milk only asserts that milk with only the A2 protein may positively affect digestive function.

Consumers have flocked to a2 Milk as a result of these perceived health benefits, helping to expand market share in Australian fresh milk, as well as infant formula in Australia and China following the launch of a2 Platinum in 2013. These gains have occurred alongside premium price points. In Australia, a2 Milk is typically more than double the price of private-label offerings, while a2 Platinum has higher pricing in Australia and China versus other leading brands.

Continued success in the Chinese-label business is crucial for a2. While the English-label business has stabilized, we think the Chinese-label business will more durably drive market share growth without the same reliance on resellers. Indeed, a2's marketing and distribution investment has shifted to focus on the Chinese label business. This appears to be reaping rewards with brand awareness and loyalty improving across the board, boding well for the long-term health of the a2 brand in China, which underpins the firm's narrow economic moat.

A2 bulls say

  • China remains a major long-term growth opportunity for a2 and should help to drive continued margin improvement.
  • While the science is currently uncertain, further studies on the benefits of A1-protein-free dairy products could support positive health claims for a2 Milk.
  • A2 generates solid free cash flow, which could be used to make accretive acquisitions or vertically integrate, or returned to shareholders.

A2 bears say

  • A2 relies heavily on only two major suppliers, which risks price hikes, supply challenges, or future competition.
  • The company fights against strong competition in China and elsewhere. In the longer term, a2 may be undercapitalized to take on the marketing arms of dairy behemoths such as Nestle and Danone.
  • China could further alter the regulatory environment for infant formula, which may lead to supply disruptions for a2 or a greater ability for local manufacturers to compete.

Get more insights from Morningstar in your inbox

Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.