Company Overview: Bubs Australia Limited (ASX: BUB) produces Australian premium infant formula products, organic baby food, children’s vitamins and goat dairy products. The Group also provides canning services of nutritional dairy products. Geography-wise it is present in Australia, China and other international regions. During FY20, sales from Australia were at ~67% of total revenues, whereas sales from China were at ~23%. The company is diversifying its income stream across different geographies.
BUB Details
Balanced Product Mix & E-Commerce Platforms Aiding Growth: Bubs Australia Limited (ASX: BUB) provides organic baby food products, goat milk infant formula products, adult goat milk powder products, and fresh dairy products. The market capitalisation of the company as on 05 January 2021, stood at ~$364.60 million. During FY20, the company maintained a balanced mix of products, thereby maximising productivity. Infant formula products continued to increase its share in the product basket, with a 55% mix during FY20, from 30% in FY18. In FY20, the company’s operations were impacted by the disruption in the Daigou channel. However, it made a channel shift from the Daigou Channel to China’s e-commerce online platforms and witnessed decent consumer demand for its products.
Balanced Product Mix (Source: Company Reports)
FY20 performance was driven by the decent sale of Bubs Infant Formula in all retail channels and regions. There was an increase of 32% in the gross revenue to $62 million, compared to the previous corresponding period. Revenues increased by 24% to $54.6 million in FY20, from $43.9 million in FY19. Normalised gross margins also improved to 24% from 21%, in the same period over pcp. Marketing spend during the year was high at $9.9 million, but it went into brand awareness and brand equity building and BUB expects to realise its benefits in the next few years. The company registered direct sales growth of 32% in China, when compared to FY19.
FY20 Financial Performance (Source: Company Reports)
Q1FY21 Performance Driven by Online Sales: The company delivered a resilient performance during Q1FY21. The Bubs infant formula sales continued to grow in its key markets, with material sales uplifts of 29% across major Australian retailers. BUB reported an increase of 76% in the direct export sales of its goat formula products to China, when compared to the previous corresponding period. There is a demand for the products amongst Chinese consumers, with BUB ranked as the top brand for its goat formula products on JD.com. It also doubled its market share for goat products to ~12% on Tmall Global.
Decent Revenue Growth from Exports to China: The company has been reporting decent growth in export revenue from China over the past few years. It reported an increase of 37% in sales to $13.2 million in FY20, from $9.6 million in FY19. Contribution from China was at ~23% of the total sales in FY20. Going ahead, China will remain the primary export market for the company with high growth potential for goat infant formula products. China is expected to be the fastest-growing infant formula market in the world, according to a study by Euromonitor. There is huge potential for goat formula products, and BUB is well placed to capitalise on the demand. As per the company, it is the only Instant Formula product in the world sourced from Australian goat milk.
China Revenue Growth (Source: Company Reports)
Details of Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 27.45% of the total shareholding. C2 Capital Global Export-To-China Fund, L.P. is the largest shareholder in the company, with a percentage holding of 12.45%. Cw Retail Services Pty. Ltd. holds the second maximum interest in the company at 4.03%.
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
Key Metrics: During FY20, there was a marginal increase in gross margins to 22% from 21.4% in FY19. There was an improvement in the net margin to negative 14.2% from negative 80.9%, during the same period. Current ratio increased to 3.37x in FY20 from 2.03x in FY19. The company reported assets to equity ratio of 1.22x in FY20, down from 1.46x in FY19. The cash cycle during the period increased to 222.8 days from 143.1 days in FY19. BUB has reported negative ROE of 6.5% in FY20, but it is an improvement from negative 39.9% in FY19 and negative 161.6% in FY18. This shows that the company has been able to narrow down its losses over the past three years. It has maintained a comfortable debt-equity ratio of 0.02 – 0.03x over the past few years.
Key Margins (Source: Refinitiv, Thomson Reuters)
Key Investments Risks: The company derives a major part of its revenues from exports, and as such, is exposed to currency risks. The Group is also exposed to credit risk, given a substantial amount of sales are concentrated to a select few customers. However, these customers are major retailers with decent creditworthiness, and as such, the probability of default by them is very low. There is also the probability of interest risk arising from the outstanding borrowings of BUB. The business model of the company is dependent on its supply chains, and any disruption to it can lead to financial loss for the company. The COVID-19 pandemic has made an impact on the company's operations, however, the company has delivered resilient performance, aided by strong underlying consumer demand for its products.
Outlook: BUB has been able to report decent top-line growth in FY20 despite the impact of COVID-19 pandemic on the business environment. The management is confident of navigating the present business challenges and leverage opportunities for international growth and product expansion. The company has well managed the change in product demand during the pandemic, and as such there was no disruption in its production as it is an essential service. The company anticipates continued benefit from its integrated business model and premium infant nutrition products. It expects Bubs Infant Formula to be the catalyst for growth across all key channels and markets, and as such is expecting a revenue of $400 million and a gross margin of 40% by 2025.
Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
Valuation Methodology: Price to Sales Based Market Multiple Valuation (Illustrative)
Price to Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months
Stock Recommendation: The company has been reporting decent top-line growth in the past few years. BUB’s unique business model, augmented by its supply chain security positions it well for further expansion in its key markets. As per ASX, the stock of BUB is currently trading below its average 52-weeks’ levels of $0.400-$1.190, proffering a decent opportunity for the investors to enter the stock. The stock of BUB gave a negative return of 20.13% in the past three months and a negative return of 9.84% in the last one month. On a technical analysis front, the stock of BUB has a support level of ~$0.559 and a resistance level of ~$0.734. We have valued the stock using 1-year forward Price to Sales market multiple (discounted 2x from the five years’ average considering quantitative earning scenarios related to business disruption due to COVID-19 pandemic to the Daigou channel, ongoing trade tensions between Australia and China) to FY21E consensus sales of $64.56 million and have arrived at an indicative target price of lower double-digit growth (in % terms). Considering the current trading levels, decent top-line performance over the years and premium product offerings, we recommend a ‘Buy’ rating on the stock at the current market price of $0.595 as on January 05, 2021.
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BUB Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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