Company Overview: Bubs Australia Limited (ASX: BUB) is engaged in the business of providing organic baby food, goat milk infant formula products, etc., to its consumers. It also provides canning services of nutritional dairy products. It has its operations in the regions of Australia, China and few other international markets. In FY20, revenue contribution from Australia stood at ~67% of the total sales, and China made a contribution of ~23% to total revenue.

BUB Details

Increased Traction in Sales & Channel Activity: Bubs Australia Limited (ASX: BUB) manufactures organic baby food products and includes goat milk infant formula products and adult goat milk powder products. The market capitalisation of the company as on 15 June 2021, stood at ~$245.11 million. As per a recent announcement, the company has updated that its focus on revenue growth in China channel routes seems to be progressing well with China online sales within the CBEC channel and Corporate Daigou is on track.

The company continues to witness recovery in the Daigou Channel under its new Daigou 2.0 model and has reported an acceleration in its social e-commerce sales.

During Q3FY21, the company reported gross revenue of $11.8 million, with infant nutrition contributing ~62% of the quarter sales. It witnessed increased traction in sales on q-o-q basis, with Bubs Total Infant Formula up by over 4%. The export sales from China grew by over 28%, and Infant Formula CBEC sales increased by over ~47% on the prior quarter. Sales through Daigou channel increased by over 19% in the same period. It also posted rapid consumer offtake sales in the China CBEC channel. It ended the period with a decent cash position of $36.3 million as of 31 March 2021.

Cash Position of BUB (Source: Analysis by Kalkine Group)

Continued Growth in Brand Presence: The company has been growing its presence in the Australian and Chinese markets and has added on its market share in FY21, since the peak levels of the pandemic. In the Australian region, it remains one of the fastest-growing infant formula manufacturers across Woolworths, Coles and Chemist Warehouse, with combined brand retail scan sales up by over 37% in Q3FY21, when compared to the previous corresponding period. It has also witnessed increased sales traction in the Chinese market, with Bubs CBEC offtake sales increasing by ~60% on the pcp. Its brand, CapriLac, remains one of the top-selling brands with ~80% market share on Tmall Global.

Appointment of Chief Operating Officer: BUB has appointed leading dairy industry expert Fabrizio Jorge as its Chief Operating Officer (COO). The experience of Mr. Jorge in business development and export experience across global dairy markets will help to drive market diversification initiatives of BUB.

Response to ASX Query: As per a recent response to an ASX query regarding the recent trading in its securities, the company has updated that it is not aware of any information concerning the company that has not been announced to the market. However, the company believes that the probable reason might be due to publicly-reported news that the Chinese government has announced it is scrapping a policy that limits couples to two children. It now plans to permit families to have three children, with the formal introduction of a third-child policy.

Top 10 Shareholders: The top 10 shareholders together form around 26.75% of the total shareholding, while the top 4 constitute the maximum holding. C2 Capital Global Export-To-China Fund, L.P. and Cw Retail Services Pty. Ltd. are holding a maximum stake in the company at 12.45% and 4.03%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: BUB reported a gross margin at 8.8% in H1FY21. It posted an improvement in the liquidity of the company with the current ratio at 4.47x in H1FY21, compared to 3.03x in the prior corresponding period. The debt to equity ratio stood at 0.03x in H1FY21.

Growth Profile and Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks: The company derives a major part of its revenue from China, and market access to its trade channels remains a key focus for its strategic growth. However, it remains exposed to prudent regulatory measures and is also prone to macro-economic risks like the frequent geopolitical tensions across the countries. The COVID-19 pandemic has also led to major supply chain disruptions across its channels, and the uncertainty still prevails with the onset of the second wave of the pandemic.

Outlook: The company expects to achieve half-on-half revenue growth in H2FY21, on the back of increased traction in sales across key channels and products. It will look to improve on product margins and deliver profitable growth through optimising channel and product mix and implementing supply chain cost efficiencies. As a part of its China strategy, it plans the unwinding of the China JV and retain greater control and flexibility.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:  In Q3FY21, the company has increased its footprint with a new supply agreement with Good Price Pharmacy to range 28 Bubs products in their network of pharmacies. As per ASX, the stock of BUB is trading below its average 52-weeks’ levels of $0.315-$1.115. The stock of BUB gave a positive return of ~18.18% in the past one month and a negative return of ~24.99% in the past three months. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade some discount to its peer average EV/Sales (NTM trading multiple), considering the decline in performance when compared to the pcp, presence of trade tensions with China and ongoing COVID volatility. For this purpose, we have taken peers such as A2 Milk Company Ltd (ASX: A2M), Synlait Milk Ltd (ASX: SM1), Bega Cheese Ltd (ASX: BGA), to name a few. Considering the expected upside in valuation and current trading levels, increased traction in sales across key strategic channels, the appointment of COO to drive growth and decent cash levels, we recommend a ‘Buy’ rating on the stock at the current market price of $0.390, down by 2.501% as on June 15, 2021.

BUB Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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