Bubs Australia Limited

Substantial Quarterly Revenue Growth: Australia’s organic infant food producer, Bubs Australia Limited (ASX: BUB) released its quarterly activities report wherein it stated that the company had established numerous important strategic developments, and partnerships during the third quarter and post balance date in April, to strengthen the supply chain, expand channel capacity, increase profitability. Continued strong sales momentum provides foundation for Deloraine acquisition (100%) and new strategic JV alliances with Beingmate, C2 Capital Partners and Chemist Warehouse.


Quarterly Gross Sales Revenue Q2 2019 (Source: Company Reports)

The company continued its strong growth momentum in revenues from the previous quarter Q2. The Q3 gross revenue stood at $11.83 million, up by 103% from the prior corresponding period (pcp). The Year-to-date gross revenue stood at $32.87 million. The strong revenue performance for the quarter was driven primarily by the company’s goat milk infant formula gross sales, which is up 302% pcp (contributed 41% sales to total Q3 revenue). CapriLac® goat milk powder gross sales up 119% pcp, representing 40% of the Q3 revenue.

Moreover, domestic sales (up 71% pcp), representing 79% of Q3 revenue and sales in China (up 884% pcp), representing 20% of Q3 revenue remained a catalyst for the sales growth.

The gross margin for 1H19 improved to 19%, compared to 12% in 2H FY18, due to the optimisation of product and channel mix, engaging new suppliers. However, the reported net loss of $8.8 million, for 1HFY19 as compared to $3.92 million in the prior corresponding period exhibits expenses incurred outside of normal business operations, including fair value movement of contingent consideration, written off inventories and share based payments for options issued.

The company reported the statutory cash reserves position at 31 March 2019 to be $13.00 million and normalised cash position of $21.12 million.The quarterly normalised cash outflow position for operating activitiesremained in line with the cash outflow position in the previous quarters and allowed the company for increased marketing expenditure and additional administration costs to support the M&A developments for the enlarged business. It has strategically utilised its growing sales and cash flows to invest in milk supplies and productions to drive sustainable growth and further optimize long-term returns.

What To Expect Going Forward: Looking ahead, with the transition of the business from being largely a marketing enterprise to a full-fledged manufacturing and distribution business, it is investing in building organisational capacity. The management is seeking to build a robust platform for the long-term.

On the stock performance front, Bubs yielded substantial YTD return of 161.54%, with 49.69% return over the past one month. We believe the stock might continue its momentum underpinned by robust fundamentals discussed above. With its strategic priorities in place including vertical integration & supply chain, channel development in China and optimization of channel and product mix for margin improvement to drive profitability, the company is poised for a decent growth going forward. Hence, we give a “Hold” recommendation on the stock at the current market price of $1.195 per share (up, 0.42% as on 02 May 2019).
 

Wattle Health Australia Limited

Trading Halt: Wattle Health Australia Limited (ASX: WHA) is a well-known, high-quality infant formula producer that broadly focuses on 100% Australian made health and wellness products. The group has many products already in a commercialized phase.
 
In the recent past, the company has entered into a conditional purchase agreement with a wholly owned subsidiary of Mason Holdings Limited to add a further stake of 46% of Australia’s largest independent nutritional dairy manufacturer, Blend and Pack, for AUD 46 million. The shares of the company is currently at a trading halt on ASX, due to a pending announcement by the company related to an update about the proposed acquisition of the majority stake in Blend and Pack.
 
The company in its quarterly activities report finalised the supply agreement with International Supplies and Distribution Co. for the supply of dried dairy baby formula into Chinese market, however this is subject to the approval of the State Administration of Markets Regulations (SAMR). WHA had a contract for the supply of Australia’s first commercial quantity of Organic A2 Fresh Milk to CBDG for processing into dried organic base dairy product.
 

Statement of P&L 1HFY19 (Source: Company Reports)
 
The group in its 1HFY19 results reported revenue which was down by ~43.2percent to $0.363 million as against $0.639 million in the prior corresponding period. It was mainly impacted by the discontinuation of the conventional nutritional dairy product range to the first truly Australian organic product offering. The working capital of the company is up 350% to circa $45 million for HY19 as compared to HY18. After the completion of the half year, the company announced the proposed acquisition of Australia’s largest independent (by volume) and CNCA accredited nutritional manufacturing plant, Blend and Pack.
 
Brand Launch Going Forward: Going forward, the company proposed the launch of a new organic brand set to be available in the market in the third quarter of FY19, and further expansion into key off-shore markets including India and China (pending SAMR approval). Further, the business is also gearing up for the international launch of 'Little Innoscents' organic baby skincare range, currently available in the domestic market via chemist warehouse and other major pharmacy chains.
 
The stock remained volatile with returns of 0.67% and -21.35% over the past one-month and three months period respectively. The group has a positive outlook in the long run owing to continuation of growth in distribution channels both domestically and internationally. We note the resilient growth in working capital and sufficient performance in key financials, and look forward to the pending update (expected around May 03, 2019) while the stock last traded at the market price of $0.755 per share. 

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