A2 Milk’s (ASX.A2M) fiscal 2026 EBITDA was NZD 284 million, 2% lower than last year. Revenue grew 12%, and English-label and fresh milk earnings grew. But operating losses at the newly acquired and underutilized Pokeno facility, in addition to Chinese-label infant formula supply constraints, offset this.

Why it matters: The EBITDA result was in line with our forecast. But we cut our fiscal 2027 EBITDA forecast by 14% to NZD 313 million, broadly in line with management’s guidance for mid-single-digit revenue growth and EBITDA margin of about 15%.

  • Freight constraints, production backlogs at Synlait, and strong demand in the third quarter meant A2 struggled to get infant formula supply to market in the fourth quarter. While we view this as a supply issue, not a demand issue, winning back lost share is set to take longer than we anticipated.
  • Management expects infant formula sales to be broadly flat next year as it wins back market share lost in the fourth quarter. We had assumed a quicker rebound. Nevertheless, brand health in China is still strong, and we expect market share gains to resume from fiscal 2028.

The bottom line: We maintain our NZD 9.50 (AUD 8) fair value estimate. The reduction to our near-term forecasts is offset by time value of money. Shares screen as undervalued. We think the market is overly concerned about near-term share headwinds and long-term demographic challenges in China.

  • Consumers are willing to pay up for the a2 brand in fresh milk in Australia and infant formula in China, underpinning a2’s narrow economic moat. We think a2 can offset fewer births through pricing and further market share gains. We think a weaker fiscal 2027 changes the path, not the destination.

Between the lines: The company expects Pokeno to break even next year as production ramps up. We expect this to be the bulk of EBITDA growth next year, given flat infant formula. Excluding losses from Pokeno, EBITDA would’ve been NZD 308 million this year, about 5% higher than last year.

Strong brand health in China underpins A2’s narrow economic moat

A2 Milk has built a brand that we expect to generate economic profits for years to come. China is the key battleground. A2’s future growth relies heavily on further market share gains in 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 containing only 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 Milk brand in China, which underpins the firm’s narrow economic moat.

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.

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 Nestlé 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.

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