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

Building an Exciting Future on the back of Organic and Inorganic Approach: Wattle Health Australia Limited (ASX: WHA) has been maintaining its primary focus on two areas. First, the company has been trying to mitigate the risks related to the supplies across the business and, secondly, it has been working to create the compelling as well as clear point of difference in the market. In FY 2018, the company managed to garner revenues amounting to $1.57 million which reflects the YoY growth of 67.7%. During the same period, the company has been enhancing the distribution base internationally as well as domestically which helps in improving the sales as well as brand awareness.

Moreover, the company is well-positioned to make an entry into the fresh and new markets and improve the presence of the brand with the help of broader product offering including nutritional dairy range, baby food as well as skin care. As per the company’s presentation, the global organic dairy products market is expected to witness ~11.45% CAGR between the time frame of 2016- 2021F. In FY 2018, the company managed the delivery of the products to the Indian market as well as to Macau. The strong response from the Indian market has helped the company in fetching 12-month supply agreement with respect to the natural baby food range the sales of which has been valued at approximately $1.5 million. In our view, the company has taken great strides towards its growth momentum on the back of its organic and inorganic approach that have laid the strong foundation for a strong and vibrant future.

 

The Global Organic Dairy Market Opportunity (Source: Company Reports)

Healthy Balance Sheet: WHA is a cash-rich company with cash and cash equivalent of $55.84 Mn (as at FY18) and enjoying a virtual debt-free status which will support to execute growth plans without affecting the financial performance of the company. Current ratio and Quick ratio substantially increased from 8.75x and 7.73x to 26.17x and 25.78x, respectively in FY18 over the prior year.  Debt to equity ratio stood at 0.02x at the end FY18. On the working capital front, the cash conversion cycle was significantly reduced from 7408 days to 28 days in FY18 from FY15 because of continuous reduction in account receivable days. This represents that the management is doing well towards its collection policy.


Heathy Cash Position (Source: Company Reports)

Strategic Joint Venture, Growing Distribution Network to Support Growth Momentum: As a step forward towards the vertical integration strategy, Wattle Health Australia has signed a conditional JV or joint venture with the Organic Dairy Farmers of Australia or ODFA as well as Niche Dairy Pty Limited or ND for the creation of Corio Bay Dairy Group or CBDG which has plans of coming up with the dedicated organic spray drying facility for the fresh organic milk which will provide the market with an ongoing supply of organic nutritional milk powder. As of now, CBDG is on track to refine the construction budget and has managed to reduce the construction cost by around 10% in Q1FY19 without changing the scope or quality of the construction. In our view, the joint venture would help Wattle Health in terms of enhanced supply chain control with respect to the organic dairy product range.

Moreover, the company plans to make deployments amounting to around $63 million in CBDG through secured loans. The company also enjoys growing as well as established distribution network as it has retail and wholesale distributors in Asia as well as Australia. Some of the crucial supply agreements include Australian Pharmaceutical Industries, Metcash, Tesco Lotus (China), JR Duty Free (Australia), Aiyingdao as well as China Duty Free (China).
 

Vertical Integration Strategy – Organic Product (Source: Company Reports)

How Joint Venture Would Help WHA: Wattle Health stated that if it purchases 100% supply from CBDG and the company uses for the production of organic nutritional products, the economics would be quite attractive. The gross profit margins are approximately 35% with respect to the organic infant formula. The company (Wattle Health) is having the first right to refuse the purchase of all organic dried milk powder from Corio Bay Dairy Group. CBDG spray dryer is capable of producing up to approximately 10,000 tonnes of the dried milk powder if it is operated at the full production. The CBDG spray dryer is also capable of producing pre-blended products and pure dried milk powder. 


CBDG Dried Milk Production Forecast (Source: Company Reports)

How WHA Performed in September 2018 Quarter: At the end of June 30, 2018, the net assets of Wattle Health stood at $61.5 million and the company’s working capital amounted to $55.3 million. These figures were mainly aided by the activities which were carried out in the year and which were focused on the capital raising. The company’s cash at bank at the end of the September 2018 quarter stood at $52.05 million and the company had no debt. The cash at bank figure was on the bank of consolidation of CBDG as well as WHA accounts as Wattle Health obtained the control of the CBDG’s board as well as of the shareholders.
 
Further, during the quarter, Wattle Health Australia managed to enter into a sales contract amounting to approximately $3.75 million. The company also made progress with respect to its initiatives which were focused on the Chinese region. In the September 2018 quarter, the company managed to achieve first sales in China with respect to the natural baby food range, whole as well as skim milk powder and the company is expecting a delivery in the month of November 2018.

The company also stated that in the September 2018 quarter, Little Innoscents witnessed favourable momentum in the sales as well as distribution network and the top management expects that its sales is expected to witness a robust momentum. 

Future Drivers:  The management of WHA is having an optimistic outlook about the future prospects of the company. The company plans to tap numerous initiatives moving forward. The company has plans to roll out the new organic brand in Q3 of FY 2019, and it is also targeting further expansion in the markets like China as well as in India. In addition, the management of the company stated that it is also working towards international launch with respect to Little Innoscents.

Additionally, the company is expected to witness robust growth momentum in its sales in FY 2019, and this momentum is expected to be underpinned by the distribution channels, growth of Little Innoscents as well as because of SAMR accreditation. The company is also having an optimistic outlook on India as it stated that the supply contract with Vasudevan and Sons Exim Private Limited would support WHA in establishing the footprint in India as well as in providing growth opportunities in regard to the future sales.

Stock Recommendation and Outlook: WHA stock has fallen 25.0% in the past three months and traded close to lower level. On the technical analysis front, two technical indicators, Exponential Moving Average or EMA as well as Moving Average Convergence Divergence or MACD, have been applied on the daily chart of Wattle Health Limited and the default values have been considered. After careful observation, it was noticed that the MACD line has touched the signal line. Therefore, there is a possibility that the stock might move upwards. However, when seen using the EMA, it was observed that the stock price has crossed the EMA and might see some volatility. Fundamentally, ROE showed significant improvement, recorded at negative 58.1% for FY18 in comparison to negative ROE for FY17 at 154.1%. Based on its strong growth momentum in years ahead on the back of synergistic acquisitions and increasing its distribution network across the domestic and international market, we presume that the company will deliver sustainable shareholder returns in the future. Going forward, the company is expected to witness favourable momentum in the business and would be helped by the joint venture as well as by the acquisition of Little Innoscents. Moreover, the growth in the distribution would help in driving the sales as well as in the brand awareness which could positively impact the company. Based on the positive outlook and current trading level, we give a “Speculative Buy” recommendation on the stock at the current market price of A$0.985 per share (down 3.431% on November 20, 2018).  
 

WHA Daily Chart (Source: Thomson Reuters)

 
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