Bubs Australia Limited

Roll Out of New product: Bubs Australia limited (ASX: BUB) is a small-cap company with the market capitalisation of $789.86 Mn as of 8 May 2019. The company is in operations since 2006 and it has become Australia’s leading producer of Goat milk product. Recently, the company entered into the supply agreement with Fonterra Australia, who will supply organic milk powder, sourced from its organic milk pool in New Zealand under the conditional agreement that will initially run until the end of July 2021.

Inking of New Agreement: The company entered into a Joint Venture with Beingmate Baby & Child Food Co., Ltd, which is one of the leading Chinese enterprise in the infant nutrition industry. This joint venture allows Bubs to distribute and promote goat and organic cow milk infant formula and organic baby food products in Shanghai. Beingmate network covers 30,000 Mother and Baby stores throughout China. BUB also entered a strategic partnership agreement with Alibaba’s Tmall. Alibaba Group’s top management stated that mother and baby category continues to be one of the best performing for exports from Australia to China via Alibaba’s Tmall Market place.  

BUB also announced the formalisation of equity-linked alliance with Chemist Warehouse Retail Pty Ltd., CW Management Pty Ltd and CW Retail Services Pty Ltd. The Bubs Organic new range of infant formula would be available in Chemist Warehouse pharmacies within the span of 3 months. We believe that all three signings and product roll out will help the company to grow more in the aspect of business and revenue generations and promotes the company towards growth in the industry.

Improving Financials: There has been a rise in the key ratios of BUB in 1H FY 2019 on the YoY basis which reflects an improvement in its financial position. The current ratio stood at 3.17x in 1H2019 which is higher than the industry median of 1.66x, reflecting that the company is having a better liquidity position to meet the short-term obligations. Average inventory days of BUB was 75.5 days in 1H FY 2019 reflecting a fall from 168.3 days in 1H FY 2018 indicating that the company quite efficient in managing its inventory.

Substantial Increase in Revenue: BUB’s 1H FY 2019 net revenue improved to $19.56 Mn from $3.25 Mn in 1H FY18. The company’s gross margin stood at $3.75 Mn in 1H19 which got improved from $0.65 Mn, reflecting YoY growth of 477%. There are expectations that group margin might improve in 2H FY 2019. The company is making investments toward building scale and sales momentum.


Key Metrics 1H FY 2019 (Source: Company Reports)
 
Outlook and Challenges: BUB is expecting exclusive milk supply agreement with Central Dairy Goats in New Zealand for 6.2M Lt by 2020. It is also looking to optimise channel and product mix for margin improvement to drive profitability and to drive strong and sustainable revenue growth. The company is planning to continue to grow the milk pool to ensure supply meets forecasted growth demand.

Stock Recommendations: Bubs Australia Limited is trading at A$1.505 per share on 8 May 2019 with the return of 210% and 98.72% on 6 months and 1-year basis, respectively. The company’s net revenue witnessed the growth of 502% in 1H FY 2019 on a YoY basis. Hence, considering the above parameters and decent outlook, we maintain our “Hold” rating on the stock at the current market price of $1.505 per share (down 2.903% on 8 May 2019).
 

Retail Food Group Limited

Consumers Safety and Shareholders Interest: Retail Food Group Limited (ASX: RFG) is a global food and beverage company, headquartered in Queensland, Australia with the market capitalization of ~A$38.38 million. RFG stated by a press release that they follow strict standards regarding food quality and any product date extension was granted following the written approval from the supplier. RFG is in process of withdrawing any product which had received approved date extension from suppliers.

RFG works closely with the preferred supplier network to ensure high quality products are delivered ready for sale to the franchise stores. In the last financial year, RFG worked with more than 1000 suppliers to deliver over 15,000 products through its vast distribution network.

RFG stated by their press release dated 03 April 2019 that it will consider shareholders interest while accepting the sale price of Donut King and QSR brands.Both these assets provide strong earnings, thus, benefiting the company’s underlying profit.

Significant Steps to Improve Operations and Financials: In FY18, RFG posted statutory net loss after tax of $111.1 million. Moving forward, the company is targeting approximately $20 million in the annualised cost savings. Asset turnover ratio of the company increased from 0.20x in 1H18 to 0.31x in 1H19 which reflects that its assets performed well with respect to its top line. The company’s average inventory days stands at 31.7 days in 1H19 which is lesser than the industry median that is 57.7 days which states that the company takes lesser time to sell its inventory.


1H FY 2019 Group Performance (Source: Company Reports)

What to Expect From RFG: RFG will refocus on its core retail food franchise and coffee supply operations. The company also plans to strengthen its balance sheet to improve financial stability. The company is planning to improve the health of the domestic franchise network with the help of a significant increase in product category extension and new product campaigns.

Stock Recommendation: The share has fallen 8.89% in the last one month and is trading close to a 52-week lower level of $0.150. The company is actively working on reducing its debt level via various options such as considering of asset sales, major restructuring programs, and cost reduction initiatives, etc. Additionally, for FY19, the group expects underlying EBITDA in the ambit of $43Mn-$48Mn. The company plans to drive growth in the franchise business by leveraging a healthy network as a platform for new store sale and increased renewals. Base on the foregoing, we, therefore, maintain our “Hold” recommendation on the stock at the current market price of $0.200 (down 4.762% on 8 May 2019). 

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