A2 Milk shares soft but off session low after Nestle news

A2 Milk is popular in China. Photo / Bloomberg.

A2 Milk's share price remains under pressure but is off its lows for the day after news that international food group Nestle has introduced an A2 beta casein infant formula product in China.

By 2.40 pm the stock was down 57c, or 4.4 per cent, from yesterday's close, at $12.37. The day's low was $12.01.

Meanwhile, a Nestle spokeswoman added more details to the company's plans in China, where the new A2 product was launched last month.

"Nestle launched the new Illuma Atwo Stage 3 formula in China at the end of February 2018, in response to a rapidly growing and constantly changing consumer market," said Margaret Stuart, head of corporate and external relations at Nestle Oceania in Sydney.

"Nestle has always been committed to continuously innovate its science-based products," she said.

Illuma Atwo is the first infant formula in the industry to combine palmitic acid, the major saturated fatty acid in human milk and A2 type beta-casein. The recipe has been designed to help support babies' digestive comfort.

"We've launched the product in China due to the expanding market and consumer demand for products with A2 protein – for the time being, China is the primary location where it will be available.

"Illuma Atwo is available across China in stages 1-4 and enriches the already comprehensive and diverse choice Nestle offers in China. It has received very positive market feedback so far," she said.

Illuma is one of Nestle's super-premium infant formula brands under the Wyeth Nutrition umbrella. Nestle has seven brands in China, including Illuma, S-26 Ultima and Nan, Stuart said, adding the milk for Illuma Atwo was sourced globally.

Stuart said Nestle did try to source milk A2 milk from New Zealand, "but what was needed was not available".

Craigs Investment Partners head of private wealth Mark Lister said the A2 Milk company's share price was being pared back on the threat of competition.

He pointed out the share price had had an explosive run higher but that investors who bought shares last month would still be ahead. On February 20, the stock traded at $9.29.

"I guess it's just the threat of competition," Lister said. "They (a2 Milk) have been lucky enough to enjoy a lucrative market in infant formula in China for a while now and they have benefited significantly," he said. "Competition was always going to be something that would be there," Lister said.

"Obviously that opportunity and that dynamic has not been lost on other players around the world," he said.

"Now you have got a larger player [Nestle] with very deep pockets that has chosen to enter the market, so I guess investors are taking a second look at a2," he said.

"They have had first mover advantage and we are about to find out just how strong their brand is," he said.

Mark Brown, chief investments officer at Devon Funds Management, said new competitors in the A2 beta protein space were "probably the tip of the iceberg as others move to extract margins far higher than is normal for an industry beset by poor profitability".

Brown said the Chinese dairy giant Mengniu was already selling A1-free children's UHT milk and Freedom Foods, under the Australia's Own label, was about to produce a range of A1-free products including UHT milk.

In February, a company called Happy Valley Milk was granted resource consent to build a factory near Otorohanga that will focus on making A1-free formula.

"It seems that many are eyeing the mouth-watering margins that a2 Milk has managed to achieve without competition, and are desperate to claim some for themselves," he said.
"The list of similar products seems to be growing daily."