Overvaluation Will Face Regulatory Risks Amid China Expansion

Key Takeaways

• Growth expectations may be overstated due to regulatory, demographic, and execution risks in the China market and increasing consumer shift away from dairy.
  
• Heavy reliance on a narrow product portfolio and the Chinese market exposes the company to elevated regulatory, geopolitical, and competitive threats.
  
• Strategic global expansion, product diversification, and supply chain initiatives drive growth, earnings stability, and margin strength despite share price weakness.

Catalysts

Sells A2-type protein type branded milk and related products in Australia, New Zealand, China, rest of Asia, and the United States.

• The company's strong FY25 results and bullish supply chain transformation strategy-including significant investment in vertical integration, new China label product registrations, and expanded portfolio innovation-appear to be driving market expectations of sustained high double-digit revenue growth and robust future EBITDA margin expansion, potentially overlooking rising execution and regulatory risks that may constrain actual operating leverage and profit delivery.
  
• Current valuation may be attributing a "growth premium" to a2 Milk's expanded access to the China infant formula market, despite well-flagged long-term demographic headwinds in China (declining birth rates) that structurally limit category volume growth, heightening risk that incremental new products will cannibalize existing lines or fail to materially expand the consumer base, thereby impacting future topline growth and earnings quality.
  
• The premium ascribed to a2 Milk's differentiated, health-focused dairy model does not fully reflect building consumer skepticism of animal-based products and the accelerating shift to plant-based and alternative dairy-long-term forces that threaten both core category growth and brand pricing power and could compress margins and revenue as consumer preferences evolve.
  
• Structural risks from increasing regulatory scrutiny, especially regarding health claims and e-commerce cross-border trade in China, are underappreciated. These could lead to higher compliance costs, delayed product launches (notably for new China label products), or even potential regulatory setbacks, which would negatively impact forecasted revenue, net margins, and overall future earnings.
  
• The company's greater operational concentration and ongoing reliance on China for infant formula revenue, coupled with a relatively narrow core portfolio and intensifying multinational competition, make the business model increasingly exposed to geopolitical, regulatory, and competitive shocks-which increases the risk profile versus the level of future revenue and margin growth currently embedded in the share price.

a2 Milk Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming a2 Milk's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.7% today to 12.6% in 3 years time.
• Analysts expect earnings to reach NZ$280.4 million (and earnings per share of NZ$0.38) by about August 2028, up from NZ$202.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NZ$322.7 million in earnings, and the most bearish expecting NZ$251.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.0x on those 2028 earnings, down from 36.8x today. This future PE is greater than the current PE for the AU Food industry at 11.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.9%, as per the Simply Wall St company report.

a2 Milk Future Earnings Per Share Growth

Risks

• Strong revenue and earnings growth, coupled with record sales and double-digit revenue, EBITDA, and net profit growth, demonstrate robust momentum and potential for continued topline expansion and margin resilience, directly contradicting a sustained share price decline.
  
• Strategic expansion and investment in China (including the acquisition of a2 Pokeno and additional China label product registrations) create opportunities for greater market penetration, innovation, and vertical margin capture, which can drive incremental sales, brand contribution, and long-term earnings growth.
  
• Growing success in diversifying the product portfolio across infants, kids, and seniors nutrition, as well as expanding into emerging markets (e.g., recent launch in Vietnam, growth in U.S. and South Korea) provides multiple revenue streams and reduces over-reliance on any single segment, supporting earnings stability and future growth.
  
• Execution of an ambitious supply chain transformation (greater control, efficiency, and resilience; new long-term milk supply agreement with Fonterra; focus on sustainability) offers long-term margin expansion, cost optimization, and risk mitigation, boosting profitability and cash flow.
  
• Demonstrated ability to generate high cash conversion, maintain a strong balance sheet with over $1 billion net cash, implement significant capital management (dividends and special dividend), and commit to shareholder returns-all foundational for supporting or increasing share price over the long term.

Valuation

• The analysts have a consensus price target of NZ$8.863 for a2 Milk based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NZ$10.0, and the most bearish reporting a price target of just NZ$7.8.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NZ$2.2 billion, earnings will come to NZ$280.4 million, and it would be trading on a PE ratio of 28.0x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of NZ$10.3, the analyst price target of NZ$8.86 is 16.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.