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

Wattle Health Australia Ltd (ASX: WHA), an Australian listed small cap company with a market capitalization of approximately $214 million, based in Melbourne Victoria, is into the development, sourcing, and marketing of nutritional dairy, health, and wellness products. The company provides a wide range of nutritional infant formula dairy products and nutritional dairy products. The company’s focus is to become a major brand for its products in the Australian domestic market with a secondary focus to capture export market opportunities. While the group has reported net loss for FY18, the group has above industry average gross profit with decent cash holding. The group expects to witness a turnaround in fundamentals with better distribution channels while it is working on marketing opportunities. We expect the group to witness the transformation with a diverse product range with better margins. While the group is yet to report better margins, it has improved return on equity for FY18 at -58.1% which was -154.1% in FY17, and this is expected to move in positive zone in the next few years.


Investment Highlights (Source: Company Reports)

Commenced work to build Australia’s first dedicated organic nutritional milk spray dryer: WHA has planned to build Australia’s first dedicated organic nutritional milk spray dryer through its joint venture Corio Bay Dairy Group Pty Ltd. (CBDG), that will provide the market with an ongoing supply of organic nutritional milk powder. CBDG is a joint venture between Organic Dairy Farmers of Australia Ltd (ODFA) with 50% stake in the joint venture, Niche Dairy Pty Ltd (5% stake in in the joint venture) and WHA (holding 45% stake in the joint venture). A critical step in the process was to get the funding for the joint venture, which was possible by a $73 million capital raise through a combination of a $53 million equity raise and the attainment of a $20 million loan facility. The company is also set to become the first vertically integrated Australian organic nutritional dairy company. WHA has started work to build this Australia’s first spray dryer and it will be constructed on purchased land near the existing ODFA facilities in the city of Geelong, Victoria. Through this CBDG will be enabled to take advantage of both the existing infrastructure and human resources, which will ultimately result in cost savings for the initial building of the spray dryer and the ongoing operation after its commissioning. CBDG is on track to complete work in the third quarter of 2019, with commissioning and first product expected to be available ahead of Spring 2019. Moreover, ODFA controls approximately 75% of all fresh organic milk in the Australian market and is the only Australian organic farmers’ co-operative, which will put WHA in a leading position to capture the growing market both domestically and internationally through the strategic joint venture. Furthermore, WHA will have exclusive rights to all products made by CBDG for use in WHA’s nutritional diary range, which will result in WHA to be Australia’s first and only vertically integrated organic nutritional dairy company. In addition, along with access to organic milk powder through the joint venture, WHA will also be able to achieve significant economies of scale.

Extended a 12 month Supply Agreement with Vasudevan and Sons Exim Private Limited in India: WHA has extended a 12 month Supply Agreement with Vasudevan and Sons Exim Private Limited (VSEP) in India, for the supply of WHA’s natural baby food range. VSEP has increased the minimum volumes of WHA’s natural baby food range for the term of the Supply Agreement representing revenue of approximately $3.5 million AUD over the 12-month period, compared to the initial agreement announced on 9 July 2018 of $1.5 million AUD. The agreement with VSEP for the increased volumes will provide WHA with a bank guarantee (BG) to have the minimum volume, under the agreement. The Supply Agreement with VSEP has come up after the successful initial product order in January 2018 and the initial supply agreement in July 2018. Moreover, an extension of the agreement and volumes has to be negotiated before the completion of the 12-month period. WHA is confident that the company will get the extension of the agreement along with increased sales. Moreover, VSEP is confident that further orders above the minimum supply as distribution channels and brand awareness will increase in the lucrative Indian market. This extended agreement with VSEP further increases WHA’s aim to expand its product portfolio and diversify its distribution network in both domestic and international markets, which will reduce the risk profile of the company on the dependence on products and jurisdictions.


Cash Flow Scenario (Source: Company Reports)

Decent gross profit while statutory net loss was reported: WHA for FY 18 has delivered the Statutory Net Loss of $19.8 million. This is on back of a rise in share based payments of $12.15 million (2017: Nil), which reflects additional employee-related costs along with the primary cost being a non-cash expense with regard to the issuance of loan funded employee shares (LFES) of $9.6 million and the issue of loan options (Options) of $2.53 million. WHA had incurred one-off expenses of approximately $1.6 million related to the completion of the agreement with Organic Dairy Farmers of Australia (ODFA) that also comprises of the associated capital raise and the acquisition of organic skincare range, Little Innoscents. However, the company for FY 18 has reported 67.7% growth in the revenue to $1.575 million and 532% increase in the gross profit to $857,000 compared to FY17. The company has above industry average gross profit margin of circa 55%, which reflects the changing structure of the business based on direct relationships with retailers and an increasingly diverse product range with improved margins. At the end of FY 18, the company has cash holding at $55.8 million compared to $5.7 million at end of FY17. The company is also holding a loan facility of $20 million which, at the time of writing, the company has not drawn down. The company’s Net Tangible Assets per Ordinary Security is up 413% in FY 18 to $0.31 per share. Further, the company has deployed net cash of $6 million, due to an increase in marketing to drive brand awareness and distribution opportunities both domestically and internationally. Marketing expenses for FY18 increased by 259% to $3.7 million compared to $1.03 million for the corresponding period. Overall, WHA’s net asset position at the end of FY18 was $61.5 million compared to $6.9 million at the end of FY17, which is a growth of 791%. The company’s working capital increased by $48,409,000 to $55,353,000 (30 June 2017:$6,944,000), largely due to successful capital raisings carried out during the year 2018.


FY 18 Financial Performance (Source: Company Reports)

Developments subsequent to the end of the FY 18: WHA had appointed Georgia Sotiropoulos as the Executive Director. The company has recently received approval from the Chinese authorities for its whole and skim milk powder for general trade. The company has also received approval from the Chinese authorities for its 100% Australian Natural Baby Food range for general trade.

Outlook: WHA has planned launch of a new organic brand set by the third quarter of FY19, and has planned further expansion into key offshore markets including India and China (pending SAMR approval). The company is also gearing up for the planned international launch of the Little Innoscents organic baby skincare range, which is currently available in the domestic market through Chemist Warehouse and other major pharmacy chains. Additionally, WHA is well placed to enter new markets and expand its brand presence through a range of product offerings that comprise baby food, a nutritional dairy range and skin care.

Stock Analysis and Recommendation: Meanwhile, WHA stock has fallen 7.56% in three months as on October 08, 2018 but geared up momentum again by moving up 1.85% in one last month. The stock ended lower by about 4% on October 09, 2018 like other infant formula stocks as bond yields were seen to get broadened impacting the rate of return. The company’s stock is trading at $1.055, and has support at $0.9 and resistance at around $1.3. The moving average convergence divergence level for 20 days and Volume Weighted Moving Average (20) indicate for a buy signal. The stock has crossed above its 20 day moving average. The company’s recently finalized distribution deals with several Chinese companies for the supply to the China market of the company’s conventional cow infant formula are expected to generate significant revenues in future periods. However, they are subject to the completion by the Company of applicable accreditations and completion of formal supply agreements. The company has recently-finalised supply agreement with Vasudevan and Sons Exim Private Limited in India for supply of WHA’s natural baby food range into the Indian market for an initial 12 month period and this will enable WHA to establish a presence in India and provide opportunities for future sales growth in that area. Further, the company is expected to become the only vertically integrated Australian organic nutritional dairy company dryer through its joint venture Corio Bay Dairy Group Pty Ltd. WHA is now expected to improve its fundamentals from the prevailing loss position at the back of its revenue generation streams and other strategic moves. Therefore, we give a “Speculative Buy” recommendation on the stock at the current price of $ 1.055.
 

WHA Daily Chart (Source: Thomson Reuters)

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