Wattle Health Australia Limited

Strategic Acquisition to Support Long-Term Growth: Wattle Health Australia Limited (ASX: WHA) operates in organic nutritional spray dryer and is the first dedicated player in the segment in Australia. The company commenced its production and distribution of Organic Milk Products and has an exclusive supply agreement with Organic Dairy Farmers of Australia (ODFA). Recently, Wattle Health Australia (WHA) informed that it is in final stages of finalization of negotiations on a debt funding facility for its proposed acquisition of Blend & Pack, one of the largest independent  (by volume) CNCA (Certification and Accreditation of the Peoples Republic of China) accredited dairy manufacturing facility in Australia.

FY19 Financial Highlights: Wattle Health Australia Limited announced its FY19 full year results wherein, the company reported a revenue of $1.095 million, down 30.5% on y-o-y. Loss in FY19 reduced to $10.34 million from the loss of $19.84 million during FY18. Revenue during the year was impacted by the discontinuation of the conventional dairy business while net loss was impacted due to the consolidation of the Corio Bay Dairy Group (CBDG) accounts and additional expenses associated with the proposed acquisition of Blend and Pack. FY19 remained a challenging year for the company due to its transformative plan to become one of the few vertically integrated organic nutritional dairy companies in the world. The company reported a cash balance at $18.32 million, total assets at $58.379 million while net assets came in at $51.438 million at the end of FY19.


FY19 Financial Highlights (Source: Company Reports)

Stock Recommendation: The stock of WHA is trading at $0.710 with a market capitalization of ~$106 million. The 52-week trading range of the stock stands at $0.355 to $1.175. The stock has delivered 2.83% and -34.34% returns during the last three-months and six-months, respectively. The stock price gained 47.30% in the last 5 trading sessions, excluding the gain of 30.275% on 23 September 2019. The stock is available at a price to book of 1.9x on trailing twelve-month basis (TTM) as compared to the industry median of 3.6x. WHA deals with the products related to pure organic nutrition and produces natural-bases products which are good for consumption. The business aspires to become a globally recognized company which supplies superior quality, organic and sustainable products, offering health and wellness to the consumers. During FY19, the company successfully constructed Australia’s first dedicated organic nutritional spray dryer.

ASX raised a query regarding the change in the price of WHA’s stock from $0.57 to a high of $0.74 and a significant increase in the volume of the stock as on 23 September 2019. In response to the query, WHA highlighted the latest news related to the 100% acquisition of Bellamy’s Australia Limited (ASX: BAL) by China Mengniu Dairy Company Limited, leading a positive momentum to the overall sector, and so to the stock of WHA. The company also mentioned the ongoing developments related to the debt funding facility for its proposed acquisition of Blend & Pack.Considering the aforesaid factors along with decent business prospects, we recommend a “Speculative Buy” rating on the stock at the current market price of $0.710, up 30.275% as on 23 September 2019.
 

Keytone Dairy Corporation Limited

Repeat Order from Walmart China: Keytone Dairy Corporation Limited (ASX: KTD) is an established manufacturer and exporter of formulated dairy products, and health and wellness products with both dry powder and ready to drink health and wellness-based product capability. The production facilities are located across Australia and New Zealand while the business caters to domestic and global consumers.
Recently, the company informed that it has received second order from Walmart China for private label whole and skim milk powders to Walmart’s Sam’s Club, China. KTD also highlighted that second order magnitudes higher in terms of value as compared to first order. The company received the first two orders at a price consideration of approximately NZD1,000,000. The value of multiple orders received during September 2019 from Walmart China represented about 40% of Keytone’s FY19 revenue.
Q1FY20 Financial Highlights:KTD posted its first quarterly numbers for the period ended 30 June 2019 wherein top-line grew by 366% to approximately $A1.5 million for the quarter compared with $A0.32 million in Q1FY19. The company reported net cash used in operating activities at $1.364 million, while cash outflows from the investing activities during the quarter stood at $0.7 million. During the quarter, revenue from Keytone Dairy proprietary branded powder products grew at 87% compared with the previous quarter, while sales of private label brands across the entire product range increased 11% compared with the previous quarter. Repeat sale orders of the recently launched Keytone Dairy’s AMF product and the private label Kobe Beef Milk Calf Replacer, an animal nutritional product targeted specifically at Kobe Beef calves in Japan, was achieved during the quarter. The company also shared the estimated cash outflows for the next quarter at $A2.5 million.
 
 

Highlights of Estimated Cash outflow for Q2FY20 (Source: Company Reports)

Outlook: The estimated cash flow of $2.527 million for Q2FY20 includes manufacturing and operating costs of $0.805 million and staff costs at $0.5 million. The company expects administrative costs and advertising and marketing expenses at $1.170 million and $0.051 million, respectively.

Stock Recommendation: The stock of KTD is quoting at $0.530 with a market capitalization of ~$95.73 million. Trading range for 52-week stands at $0.320 and $0.825. Currently, the stock is trading slightly below the average of its 52-week high and low. The stock has generated a return of -11% and 17.11% in the last three-months and six-months, respectively. Penetration in the Chinese market validates Keytone’s quality, product and manufacturing credentials within the market while the Management expects growth in demand from the above market. Considering the 1QFY20 numbers, repeat orders from Walmart China, acquisition of Omniblend Pty Ltd, etc., we put our wait and watch stance on stock at the current market price of $0.530, up 19.101% as on 23 September 2019 on account of receiving repeat order from Walmart China.

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