A2 eyes NZX step as Aussie sales grow

A2's milk had held steady at just under A$5 for two litres. Photo / Thinkstock

Kiwi milk company A2 Corporation is eyeing a listing on the NZX main board as it starts building its first processing plant, bucks an Australian price war and hunts for its next international market.

The NZAX-listed company has started construction of a facility in Sydney at an estimated cost of about A$7.5 million ($9.5 million), with initial production of about 10 million litres of milk a year expected to begin in January.

Chairman Cliff Cook said the business in Australia continued to grow rapidly and the development of the processing facility would allow for expansion.

Sales growth has exceeded expectations in the six months to June 30.

Managing director Geoffrey Babidge said the company now held more than 4 per cent of the Australian fresh-milk grocery market by value.

"Clearly the momentum of our sales continuing to grow has been maintained," he said.

An Australian supermarket price war during the past six months had driven the price of home-brand milk down from about A$2.90 to A$2, while A2's milk had held steady at just under A$5 for two litres, he said.

"Possibly that price reduction ... further focused consumers on the differential and the product offer that we provide."

There are two types of milk, A1 and A2, which are usually mixed together. A2 Corporation owns and commercialises intellectual property, with its milk and yoghurt products coming from cows selected to produce the A2 beta-casein protein.

The A1 beta-casein protein has been linked by some people to conditions including heart disease and diabetes.

However, a European Food Safety Authority report in 2009 said a cause-and-effect relationship could not be established between the dietary intake of BCM7 (a peptide sequence present in milk protein beta-casein) related peptides or their possible protein precursors and non-communicable diseases.

Babidge said consumers had told of problems with standard milk relating to eczema, asthma and autism that they appeared not to have with A2 milk.

"Clearly we have a growing band of consumers that see the benefits of our product for a number of reasons," he said.

The company fully owns its Australian business after a deal last year to buy the half-share it did not already hold, while in New Zealand it has a licence agreement with Fresha
Valley.

Babidge said A2 had focused on developing the fresh-milk business in Australia as a priority for the past two to three years.

"I think the board and management saw it [as] important to focus to achieve critical mass and success in one particular market first," he said.

A2 posted a maiden profit after tax of $893,517 for the six months ended December.

Babidge said the company had three key growth initiatives:

* To support development in Australia;

* To identify another international market to launch A2 milk;

* To develop an infant formula business with product sourced out of Australia or New Zealand into Asian markets. The strategy had moved from a focus on developing and licensing intellectual property to being a hands-on, fast-moving consumer goods dairy company.

Babidge spoke to the Weekend Herald from Britain, where he was on a trip with A2 chairman Cliff Cook.

"I'm not over here holidaying."

The company was investigating a number of market opportunities in North America and Europe.

"The UK is one market that we are investigating in respect of a shortlist of markets and potential partners that we're talking with."

The major activities and core management team were based in Sydney but Babidge said New Zealand was the company's home.

The board had asked management to consider moving to the main NZX board as the next evolutionary step.

"I think that gives a clear indication that the focus of the company is in a number of international markets but the home of A2 is New Zealand."

What is A2?

* There are two types of milk, A1 and A2, which are usually mixed together.

* A2 milk comes from cows selected to produce the A2 beta-casein protein.

* A1 beta-casein protein has been linked by some people to conditions including heart disease and diabetes.A2 has focused on developing the fresh-milk business in Australia during the past two to three years.