A2 milk soars by $735 million: What's driving the share price?

Shares in a2 Mik have rallied sharply the back of broker upgrades. Photo / NZ Herald.

The market value of a2 Milk rocketed by almost three quarters of a billion dollars on the back of a series of upgrades from brokers.

Shares in the alternative milk and infant formula company closed at $16.25, up $1.00 or 6.6 per cent from Tuesday's close, and lifting its market capitalisation by $735 million to $11.94 billion.

Analysts said the move followed favourable reports from brokers UBS, Goldman Sachs and Forsyth Barr over the last few days.

UBS New Zealand head of research Marcus Curley, who co-authored the brokers' latest report, said UBS had upgraded a2 Milk's recommendation from "neutral" to "buy" and lifted its valuation from $14.0 a share to $17.50.

Curley told the Herald there were three main themes supporting the favourable outlook.

The first was that a strong second half profit was expected for the period just ended June 30, driven by better-than-expected infant formula margins and volumes.

The second was higher wholesale prices being put through the market by a2 Milk.

"And thirdly, brand strength indicators in China for both online and offline are trending upwards for a2 Milk," he said.

But Curley said the key risk for a2 Milk was the possibility of smaller grey market or "daigou" sellers exiting the market as a result of stricter e-commerce rules introduced early this year, partly dampening the outlook.

"That last risk is not insignificant so it's something that we are watching pretty closely," he said.

UBS has upgraded its earnings forecast for a2 Milk for the year 2018/19 year just finished.

It now expects revenue to come in at $1.3 billion, which would be a 40.8 per cent improvement on last year's revenue of $922.7 million.

UBS also expects a net profit after tax of $308 million, which would be a 57.5 per cent lift on last year's number of $195.7 million.

For the current financial year to June 30, 2020, UBS sees a revenue of $1.6 billion, and a net profit of $367 million.

"Clearly, if it can hit those numbers it speaks well for them," Curley said.

Harbour Asset Management senior research analyst Oyvinn Rimer said analysts were waking up to what looks likely to be an improved outlook for a2 Milk.

"More and more analysts are starting to see that trading is very strong and that it probably costs a2 Milk less than it does other companies to create brand awareness," he said.

Analysts were starting to be less nervous about regulation in China, he said.

"Previous concerns about grey channels have been significantly scaled back," he said.

"It has a good position in the China market that is getting harder and harder for others to enter."

Harbour Asset Management has a holding in A2 Milk.

A2 Milk, which focuses on milk containing just the a2 beta protein and not a combination of a1 and a2 beta protein found in standard milk, is expected to report its annual result in August.