Chart Update, page-4365

Morningstar's comment on A2M.

We have removed narrow-moat-rated a2 Milk from our Best Ideas list due to the stock's outperformance since it was added in October 2018. Over this period, a2's shares have risen roughly 18%, compared with about a 5% decline in the S&P/ASX 200. While our rating has fallen to 3 stars as a result of this strong performance, we remain confident in the long-run growth potential for the firm in Chinese infant formula.

Despite the company reporting only 23% of revenue from the geography, we estimate that adding indirect sales leads to more than 70% of revenue and nearly 80% of underlying EBITDA stemming from the country. With our forecast for high-single-digit end-market growth and substantial market sharegains, we expect a2’s earnings per share to grow at a 25% compound annual growth rate through fiscal2023, justifying the lofty 41.5 forward price/earnings ratio implied by our fair value estimate.

Moreover, we expect a2 Milk’s solid brand positioning, an intangible asset underpinning the company’s narrow economic moat rating, to support premium pricing for its products. 

We forecast its capital-light business model should generate triple-digit returns on invested capital.