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

Growth in Distribution and Product Base: Wattle Health Australia Limited (ASX: WHA) happens to work for the mission which focuses on extending the high quality as well as 100% Australian made wellness and health products on which its customers can rely on across different life’s stages. Mr. Lazarus Karasavvidis is the Company’s Co-Founder, Executive Chairman as well as CEO (or Chief Executive Officer). The company had earlier released the financial report for FY 2018 which reflected that the company had managed to increase the distribution base on the international and domestic market. As a result, the company had also increased the awareness of the brand and favourable momentum was also witnessed with respect to the sales. The company happens to be in a strong position when it comes to tapping the new markets as well as increase the presence of the brand. In FY 2018, the company had managed to deliver the products to India as well as in Macau. Wattle Health Australia also stated that they have sealed the supply agreement which happens to be of 12 months with respect to the natural baby food range. The company had added that this agreement could support the company in fetching the sales of approximately $1.5 million. Wattle Health Australia also sealed 2 agreements related to the distribution which focuses on selling the infant formula range. These agreements have been sealed with regards to the Chinese market. The company is very optimistic about the Chinese market.  There are expectations that the two agreements which have been referred could support the company in garnering sales amounting to around $134 million. Wattle Health Australia had also managed to witness healthy CAGR growth of 44.74% in the span of previous five years to FY 2018.


FY18 P&L Statement (Source: Company Reports)

Growing Financials Supported WHA in FY 2018: Wattle Health Australia Limited had garnered the revenues amounting to $1.57 million in FY 2018 which reflects 67.7% growth on the YoY basis. Moreover, the company gross profit at the end of FY 2018 was $0.85 million which implies the substantial growth of 532% on the YoY basis.  The company had managed to witness a rise in the products’ margins  on the back of changing business structure and broad range of product mix which happens to possess improved margins.

FY18 Key Metrics (Source: Company Reports)

FY 2018 Saw Increased Expenses: Wattle Health Australia Limited ended FY 2018 by incurring the statutory net loss amounting to $19.8 million and, during the same period, the company’s important expense revolved around non-cash expense related to LFES (or loan funded employee shares) issuance amounting to $9.6 million as well as the loan options issuance amounting to $2.53 million. The company had incurred extra-ordinary expenses amounting to around $1.6 million with regards to ODFA (or Organic Dairy Farmers of Australia) agreement completion, associated raising of the capital as well as Little Innoscents acquisition. In FY 2018, the company had witnessed investments amounting to $6.05 million towards the operating activities which reflects 63% rise on the YoY basis largely due to increase with regards to market expenditure.


WHA’s Statutory Loss (Source: Company Reports)

Latest on Blend and Pack Pty Limited: Recently, Wattle Health Australia Limited had made an announcement related to Blend and Pack Pty Limited which has managed to renew the CNCA. As per the press release dated January 8, 2019, CNCA or (Certification and Accreditation Administration of the Peoples Republic of China) renewal as has been achieved with regards to Infant Formula manufacture. WHA, which happens to be the Blend and Pack Pty Limited’s shareholder, had managed to seal first brand slot with the Blend and Pack for the SAMR (or State Administration of Market Regulation) accreditation. Hence, we expect that this renewal will support the company’s growth prospects in years to come.


Acquisition of Blend and Pack (Source: Company Reports)

Key Transactions Carried Out in FY 2018: As demonstrated in the annual report of FY 2018 of Wattle Health Australia Limited, in June 2018, the term sheet was entered between Wattle Health Australia Limited and Shandong Weihai Port International Trade Co Limited. This has been done with respect to infant formula supply for markets present in China. Also, in June 2018, Wattle Health Australia had managed to wrap up the capital raising program which was done for the transaction of Organic Dairy Farmers of Australia. The capital raising program involves loan facility amounting to $20 million as well as equity raise amounting to $53 million. In January 2018, Wattle Health Australia got the first order with respect to 100% natural baby food range. This first order was given by Vasudevan and Sons Exim Private Limited.

Understanding WHA’s Q1 FY 2019 Results: Wattle Health Australia Limited had earlier reported the results for Q1 FY 2019. As reflected in the company’s quarterly report, it witnessed sales amounting to approximately $3.75 million. With respect to the markets present in India, the sales related to the company’s natural baby food range has also started. Little Innoscents had also witnessed favourable momentum with regards to the sales as well as the distribution network. The company believes that the sales with regards to Little Innoscents would witness a rise of approximately 30% in FY 2019 on the YoY basis.

Also, Corio Bay Dairy Group Pty Limited has cut down the construction expenses by approximately 10% and that too without changing the construction’s quality or scope. The quarterly report of Wattle Health Australia also stated that they believe that more savings can also be found out at the time of the process of construction. Corio Bay Dairy Group Pty Limited happens to be a JV (or joint venture) between ODFA, WHA as well as Niche Dairy Pty Limited.   

What Lies Ahead for Wattle Health Australia: As demonstrated by the annual general meeting or AGM presentation for FY 2018 of Wattle Health Australia Limited, the company plans to work towards activities which would be focused towards new premium organic brand development. Moving forward, the company would also be focusing on increasing the channels of distribution and portfolio of the products. The company’s FY 2018 annual report also demonstrated that the company has been working to tap numerous initiatives. In Q3 FY 2019, there are expectations that the new organic brand would be rollout and it would also expand to the markets which are present in China as well as India. 

Additionally, in the Q1 FY 2019 report, the company had stated that there are expectations that Wattle Health Australia would be cash flow positive by CY2019 end as the company happens to be in the strong position from the financial front on the back of sales pipeline as well as arrangements with the CBDG. The company ended Q1 FY 2019 by posting cash at bank of $52.05 million and the company does not possess any debt. Earlier, the company had cash at the bank of $50.7 million. The accounts of CBDG, as well as Wattle Health Australia, were consolidated which resulted in the rise of cash balance. In Q1 FY 2019, the company had managed to take control of CBDG’s board as well as a shareholder. 

Stock Recommendation: The technical indicator, Exponential Moving Average (or EMA) has been applied on the daily chart of Wattle Health Australia Limited, and default values were considered for the purposes. After careful observation, it was seen that the stock price has crossed the EMA. After the crossover, the stock price had trended in the upward direction which signifies the bullish momentum. Therefore, there are expectations that the company might witness an upward momentum moving forward. On the other hand, the company is expected to be supported by the plans to roll out the new organic brand, strong financial position as well as key transactions which have been entered in FY 2018. Also, as the company stated, the robust distribution alliances with respect to the markets present in Asia as well as in the domestic markets and expansion with regards to the manufacturing capability would also act as tailwinds for the company’s growth moving forward. As of now, the company is having the market capitalization of ~$195.48 million, and the stock price of the company is trading towards the lower levels. From the analysis front, the company has maintained a healthy current ratio at 26.17x in FY18 compared to 8.75x in FY17. Moreover, ROE also improved significantly from -154.1% to -58.1% in FY18 over the prior year, signifying robust performance during the period. Talking about the performance of the company’s stock from the past few months, Wattle Health Australia Limited’s stock had delivered the return of 9.84% in the time frame of the previous one month. However, in the last five days, the stock generated the return of 3.61%. Given the backdrop of the above-mentioned parameters and considering the current trading scenario, we give a “Speculative Buy” recommendation on the stock at the current market price of A$1.010 per share.
 

WHA Daily Chart (Source: Thomson Reuters)

 
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