Wattle Health Australia Limited

Business Transformation on Radar: Wattle Health Australia Limited (ASX: WHA) is an Australian company engaged in the business of infant formula and dried dairy products. WHA keeps high regards as far as standard of purity is concerned and source certified organic inputs that are fertiliser/pesticide residues- free. On the financial front, the company has recorded a revenue of $ 0.36 million in 1HFY19, down 43.25% (yoy) due to the transition to Australian organic nutritional dairy product from a conventional nutritional diary product. Net losses for the same period came in at $ 4.4 million as compared to $ 13.08 million in H1FY18.


1HFY19 Profit and Loss Statement (Source: Company Reports)

Recent Developments: Corio Bay Dairy Group (CBDG), a JV between WHA, Niche Dairy and Organic Dairy Farmers of Australia (ODFA), has signed a variation to the supply agreement with ODFA. This agreement will facilitate the first ever commercial quantity of organic A2 fresh milk to be processed into organic A2 nutritional dairy powder. Moreover, WHA has entered into an agreement with ISDC (International Supplies and Distribution Company) to supply WHA’s conventional cow infant formula for selling purpose in China. As per the agreement, ISDC has fixed a total of 5,200,000 units over a 42-month period resulting in a revenue of circa $100 million for the same period.The development will allow WHA’s infant formula range to be distributed across an extensive retail network within China.

Also, WHA entered into an agreement to purchase a majority interest in leading nutritional manufacturer Blend and Pack Pty Ltd. This vertical integration will open doors for the long-term success of the business.

What to Expect: Being in a nascent stage of business growth, WHA in FY18 was largely focused on mitigating any supply risk and to establish itself with unique features, different from the market. In-line with this, the company has announced various tie-up/agreements to fundamentally transform the business. Going forward, WHA has planned to establish a state-of-the-art facility at North Geelong in Western Victoria with a capacity of 200,000 litres/day fresh organic milk that is expected to be commissioned in late 2019.

On the valuation front, the stock is available at a P/B book multiple of 2.6x vs. industry median P/B multiple of 1.2x. Meanwhile, the stock has fallen 64.81% as on March 29, 2019 and is trading at 52-week lower level. However, the company has witnessed promising developments in the recent past which are awaited to be reflected on accounting books in the upcoming period. Hence, we maintain our “Speculative Buy” recommendation on the stock at the current market price of $0.750 (down 3.226% on April 01, 2019).
 

Bubs Australia Ltd

Visible Vertical Growth with China demand growing 10x:Bubs Australia Ltd (ASX: BUB) is the market leader in producing goat dairy products in Australia. BUB is the only vertically integrated producer of goat milk infant formula. BUB caters its services to domestic as well as export it to China, South East Asia, and the Middle East. On the financial front, BUB has recorded strong gross revenue in H1FY19 at $ 21.03 million as compared to $ 3.72 million in H1FY18, posting an excellent growth of 465% on account of strong domestic presence and activation of the daigou distribution channel. However, normalised EBITDA came in as operating loss of $ 3.5 million due to higher cost, provisions and higher office expenses. BUB enjoys a decent balance sheet with $ 26.71 million in cash reserves in the form of financial assets at $ 7.0 million and inventory at $ 12.47 million as on 31^st December 2018.
 

1HFY19 Financial Results (Source: Company Reports)

Key Recent Developments: Company has entered a JV with Beingmate China for marketing and distribution of its products portfolio. As per the agreement, BUB will supply its products to Beingmate’s distribution network covering 30,000 mother and baby stores throughout China. This synergistic agreement will support overall growth of the company in years to come. Moreover, BUB has entered into market segment i.e., post-infant nutrition and launched eight toddler snacks and fully certified organic by ACO (Australian Certified Organic). This expansion of product will extend the period of potential customer engagement.

On analysis front, the stock is currently available at a P/B multiple of 5.5x vs. industry median P/B multiple of 1.2x, also the EV/Sales multiple of BUB is at 9.4x vs industry median of EV/Sales multiple of 1.9x. It represents overvalued position at the current juncture as compared to its industry median. Although BUB is a market leader in goat dairy products and sustains and enhance the business, it has been on JV/acquisition/tie-ups spree. BUB is focused to maximize its revenues with an improvement on EBITDA. On a YTD basis, the stock has generated a healthy return of 76.92% and is trading below the average of 52 weeks high and low level of ~$0.65. Hence, considering its strong YTD performance, and financials along with current trading level, we maintain our “Speculative Buy” recommendation on the stock at the current market price of $0.795 (down 1.242% on April 01, 2019).
 

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