Company Overview: Wattle Health Australia Limited is an Australia-based company, which is engaged in developing, sourcing and marketing Australian made dairy, health and wellness food products. The Company operates in the fast moving consumer goods industry (FMCG), focusing on infant formula and dried dairy products. The Company has commercialized and sells various products, such as Full Cream dried milk powder, Three Domestic Infant Formulas for the Australian domestic market (Stage one, infants from birth to six months; Stage two, infants from 6 to 12 months, and Stage three, infants from 12 months plus), and Three Export Infant Formulas for the export markets (Stage one, infants from birth to six months; Stage two, infants from 6 to 12 months, and Stage three, infants from 12 months plus). The Company also focuses on offering various products, such as nutritional diary range, health and therapeutic range, and natural baby food.

WHA Details

Significant Reduction in Losses, Penetration in Chinese Market: Wattle Health Australia Limited (ASX: WHA), which has a market capitalisation of ~$145.88 million as on April 16, 2019, targets to be a company globally recognised for the offering of superior quality, organic and sustainable products that promote health and wellness at all the life stages. The company reported results for six months to December 2018 in which its loss after income tax got reduced to $4,417,000 from $13,081,000 incurred in the same period of the previous year. In the half-year ended December 2018, the company’s revenues amounted to $363,000 as compared to $639,000 in the same period of the previous year and the fall was because of discontinuation of the conventional nutritional dairy product range in advance of the launch of the first truly Australian organic product offering. The company has been growing distribution channels both domestically and internationally and, in the half-year ended December 2018, there was an importation of WHA’s natural baby food range in Indian market and registration and importation of same product in the lucrative Chinese market was also successful. In six months ended December 2018, the company signed 8 supply agreements for the supply of natural baby food for the Chinese market and specific packaging had been developed in order to facilitate these orders. In November 2018, the company launched organic nutritional dairy range utilising 100% organic milk from the partners in Organic Dairy Farmers of Australia (or ODFA). The company stated that Uganic will be launched domestically and internationally in the month of April 2019 and will replace the current WHA’s conventional nutritional dairy range.

The company is expected to be aided by a decent balance sheet position and by the increasing penetration into the Chinese markets. The company’s top line has witnessed the CAGR of 44.74% in the span of five years to (FY 2018 i.e. FY 2014- FY 2018) which highlights the company’s revenue-generating capabilities. Also, the company has a decent outlook at the back of organic and inorganic approach towards its business objectives.


1H FY 2019 Income Statement (Source: Company Reports)

Improvement in Liquidity Position and Return Ratio in 1H FY19: The key margins of Wattle Health Australia have witnessed a significant improvement in the six months ended December 2018 on the YoY basis which further builds the confidence in the company’s strategic objectives and execution capabilities. From the liquidity standpoint, the current ratio and quick ratio of the company stood at 12.94x and 12.71x, respectively as at 31 December 2018, representing high liquidity of the firm as compared to the peer group where the same was 1.43x and 1.01x, respectively. The strong liquidity levels suggest that the company has sufficient room to make investments towards its business activities which might position it well to target the long-term growth opportunities. RoE also improved from -117.4% to –7.5% in 1HFY19 over the prior corresponding period. This improved performance display that the company is refining its performance with its objectives and potential for further growth being intact.


Current and Quick Ratio Trend (Source: Company Reports)

Finalisation of Supply Agreement for China - Supports Topline Growth: Recently, the company had made an announcement that they have finalised legally binding supply agreement with the International Supplies and Distribution Company (or ISDC) to supply WHA’s conventional cow infant formula for sale in traditional retail/general trade in China. Under the agreement, ISDC guaranteed total 5,200,000 units of products over 42- month period leading to a revenue of approximately A$100 million for the relevant period. After the conclusion of the initial 42-month period, WHA and ISDC would be setting new volumes annually by mutual consent but would not be lower than the previous 12-month period.

As per the agreement, ISDC would be providing WHA a bank guarantee of 25% of production cost in order to support minimum orders and can be drawn upon the event that ISDC fails to procure required volumes for the relevant period. We expect that this agreement has the potential to support WHA’s top-line growth and can also increase the market presence in the Chinese market which might be beneficial for the company in the long run.

CBDG Seals Organic A2 Fresh Milk Supply: Wattle Health Australia made an announcement that Corio Bay Dairy Group (or CBDG), which is a joint venture between WHA, Niche Dairy and ODFA, signed a variation to supply agreement with ODFA to provide for first ever commercial quantity of organic A2 fresh milk to be processed into organic A2 nutritional dairy powder. CBDG happens to be well advanced in constructing Australia’s first dedicated organic nutritional spray dryer. After the completion, the facility would be processing existing organic fresh milk from ODFA, and the newly sourced, organic A2 fresh milk supplied.

The exclusive-supply contractual arrangements are struck between CBDG and WHA, and Wattle Health is 45% equity holder in CBDG which gives WHA ‘first rights’ on all the products produced by the CBDG, which would be a major ingredient of WHA’s nutritional dairy range.

Vertical Integration To Drive Organic Growth: In the recent presentation about Wattle Health Australia, it was mentioned that dairy happens to be the largest organic category with respect to packaged foods and there are expectations that Dairy sales in China would witness growth by US$1.8 billion by 2021 on the back of infant formula. The presentation also stated that FY 2018 was mainly focused towards laying the foundations and FY 2019 would be more inclined towards designing the consumer experience. The company’s equity stake in Blend and Pack and CBDG joint venture implies the strategy to achieve vertical integration. As per the management, the company can achieve the benefits of vertically integrated strength which mainly includes guaranteed supply chain, diverse revenue streams and increases in WHA’s product and services offering.


Vertical Integrated Strength (Source: Company Reports)

Announcement of Company Secretary Appointment: Wattle Health Australia had made an announcement that they have appointed Mr. Kobe Li as Company Secretary. He got appointed to WHA’s board as an independent non-executive director on January 16, 2019. However, Mr. George Karafotias had resigned from the designation of Company Secretary, but he remains Chief Financial Officer of the company.

Also, S&P Dow Jones Indices had made an announcement about the changes in the S&P/ASX indices which became effective at the open of trading on March 18, 2019. As per the release, Wattle Health Australia had been added to All Ordinaries.

Recent Update About Blend and Pack Acquisition: Wattle Health Australia provided an update that it has entered into a conditional purchase agreement with a wholly owned subsidiary of Mason Holdings Limited which revolves around purchasing additional 46% of Blend and Pack (or B&P) for the consideration amounting to A$46 million. WHA had confirmed that the funding for purchase agreement would be raised with the help of private placement debt issue to be managed by Exotix Capital.

The management presentations and investor site tours would be commencing on April 19, 2019. There are expectations that Wattle Health Australia would dispatch the notice of meeting to all the shareholders latest by May 10, 2019, with a planned meeting date on June 13, 2019.

What Might Support WHA Moving Forward: In the AGM presentation of Wattle Health Australia, it was mentioned that demand for the organic products is growing exponentially and the company’s objective revolves around expanding the product range rapidly in order to meet the increasing consumer demand for the organic products in other categories.  In addition to Uganic, the company would be expanding distribution of its other product ranges globally and capitalise on the current distribution channels in India, Vietnam, and China.

Additionally, the decent standing of the company’s balance sheet is expected to support the company moving forward. Its net assets at December 2018 amounted to $57.3 million as compared to $15 million in the same period of the previous year. Also, WHA’s working capital witnessed a rise of 350% and stood at around $45 million for HY 2019 as compared to HY 2018. During HY 2019, the company pre-purchased product from B&P and CBDG of approximately $8.3 million that will derive benefits and cost savings moving forward.

Stock Recommendation: The stock of Wattle Health Australia had delivered the return of -27.18% in the span of previous six months, while, in the time frame of previous three months, the returns stood at -25.74%. There are expectations that the company would be supported by its growing distribution channels and by the signed supply agreements. A rise in the penetration in the Chinese market can also act as the key catalyst for growth moving forward. Additionally, the decent balance sheet position coupled with the improvement in return ratio might also attract the market players’ attention.

From the past five years to FY 2018 (i.e., FY 2014- FY 2018), the company’s cash-generating capabilities have witnessed a significant improvement which might help it building sustainable cash levels. This might help it in making deployments towards the business activities to tap the growth opportunities over the long-term. Also, the company’s stock price is trading towards its 52-week low price and, thus, is offering a decent opportunity for accumulation at the current level. Hence  considering the aforesaid facts and current trading level, we give a “Speculative Buy” recommendation on the stock at the current market price of A$0.760 per share (up 1.333% on 16 April 2019).
 

WHA Daily Chart (Source: Thomson Reuters)

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