A2M: A Tale of Two Proteins

It would be wrong of me not to start this off with Dairy. Here at Blue Lake Invest we love Dairy. Just like Tony Abbot loves onions, or board office workers love Facebook, we just love dairy. So much so we introduced the White Gold Rush to our early readers. A2 Milk (Unfortunately, we could not get stock quote ASX:A2M this time.) operate in this space and have a focus on global expansion. Well known already for their premium milk stocked in supermarkets around Australia A2M are already looking to  follow in Blue Lake Invest favourite Bellamy’s (which you can read more about here and here) by promoting an infant formula blend.

A strong operator in the Australian and New Zealand markets give a solid grounding for global expansion. Key markets to date include China, UK and USA. And it is the USA that we want to focus in on. The focus to date has been in Southern California where the brand has found itself onto the shelves of most major supermarkets while the next step is moving into Northern California to reach more speciality customers. Now you might wonder how they get fresh milk to our friends in the US, but it’s actually the intellectual property which drives this expansion.

A2 Milk are working with local dairy farmers and processors to create the local product. While opportunity may exist down the track to export the infant formula from the New Zealand base (also included in TPP negotiations) they are currently focused on exporting the brand.

For those out of tune with A2 Milk and the apparent benefits, here is a very quick explanation. Normal milk is made up of A1 and A2 proteins, and those that have difficulty digesting milk generally have issue with the A1 protein. These guys have a non-invasive DNA test to find cows with pure A2 Milk proteins to make their milk.

Back to the opportunity here, A2 Milk are not exporting a product, rather the brand and intellectual property. Fans of the product can attest that there is little else out there in the market which can cater to their needs (despite some milk’s claims of high A2 milk content). So that leads to the question, what can the TPP actually do for A2 Milk.

As I have hinted several times above, they stand to benefit from renewed confidence around intellectual property. The special value here is that they are the only company in the world with a test which can find A2 dairy producing cows exclusively. The agreement will lay out a better system for protecting the innovation, and steps to prosecute should other operators attempt to violate the rights. This removes some of the ambiguity which currently exists, and should protect the first mover’s advantage they currently enjoy.

The next part is improved investment conditions. The new framework should allow easier access to invest in the US market in terms of opening offices, and having staff visit and move across the two markets. Further still we expect that the rights of ‘foreign’ businesses will be better held up in dispute resolution should that occur.

The two above points aim to mitigate the risk involved in global expansion. With sales already booming and a presence being built in the market closer trade ties should only seek to strengthen the expansion. With its close proximity to another TPP negotiator in Canada and its cultural similarities between NZ, Australia and USA A2 Milk will likely expand and enjoy further growth into these markets.

Having only chipped away at the surface of the 300 million people living in the USA via Southern California we see significant opportunity in the market. A2 Milk claims that research suggests that intolerance to A1 cows’ milk likely affects up to 25% of the general population. Marry that to the market share 9% in Australia (recorded in 2014) the opportunity is significant. Boasting a relative monopoly of pure A2 Milk the sales will be exciting to watch.

Some Investor specific information now. The company is dual listed, meaning it trades on both the ASX here in Australia and NZX across the ditch in New Zealand. The company listed on the ASX in March this year and closed its first day of trade at $0.565. Having reached peaks of $0.785 in July it closed last week at $0.65, a discount of 17%.

The business is young and reported a loss in its first financial report since listing. This was largely due to one off costs. The upside here is significant revenue growth driven by both business in the ANZ region and globally in China, UK and of course the USA. But yet to declare a dividend this business sis still geared for growth and will likely be a medium term investment. I take inspiration from Bellamy’s when I see this company set for strong growth into the remainder of this financial year.