Bellamy's Australia Limited

Received Inorganic SAMR Approval: Bellamy's Australia Limited (ASX: BAL) is engaged in the business of production and distribution of branded food product with the market capitalisation of A$1.08Bn as on 21 May 2019. Recently, the company, by the release, updated the market about the SAMR approval wherein it stated that the group has received SAMR approval of a new Bellamy’s branded formulation-series to be produced at the ViPlus Dairy (ViPlus) facility in Toora, Victoria. Prior to producing, the parties might make further amendments to the approved artwork through the SAMR process, which could take a few months. Bellamy's Australia Limited mentioned in a release dated 24^th April 2019 that the conventional cost structure would also support the required trade economicsand consumer pricing to effectively compete in Tier 3 and 4 cities and better position Bellamy’s to benefit from the significant brand rationalisation due to recent regulatory changes. Bellamy's will invest $4-$6Mn to transition the product and to secure long-term production capacity with ViPlus.     
     
The company by the release dated 1^st May 2019 clarified that the label and artwork change approved the inclusion of Bellamy’s owned trademarks, artwork and brand. However, the release mentioned that ViPlus Dairy’s formula-series registration amendment had been approved by SAMR, but Bellamy’s organic formula-series application is pending.

Impact of SAMR Registration Delay on Financials: The company reported revenue of $130Mn and EBITDA of $26Mn on a normalised basis in 1H19. The company mentioned that revenues have been affected by SAMR registration delay and normalised result excludes a one-off $12Mn inventory provision for the rebrand transition.

Gross margin witnessed an improvement of 5.7% as compared to 1H18. BAL pointed out that direct costs have affected by scale and supply-chain changes. With respect to Camperdown, the company mentioned that it has been impacted by external 3^rd party revenue timing.

 

Profit &Loss Statement (Source: Company Reports)

Future Expectations of BAL: The company is anticipating the full year group revenue in the range of $275-$300Mn.BAL is expecting FY19 group EBITDA margin in the range of 18-22% (revised) on a normalised basis. This reflects increased investment in marketing and the China team.

Recommendation:On May 21, 2019, BAL got closed at A$9.385 per share with PE multiple of 38.15x. With respect to stock’s past performance, it offered the return of -42.42% in the span of one-year. The company also stated that the medium-term outlook is compelling, which is supported by the category fundamentals, differentiated position as well as an aggressive three-year growth strategy targeting +$500 million revenue by FY 2021. Hence, considering the aforesaid facts and decent outlook, we give a “Speculative Buy” recommendation on the stock at the current market price of A$9.390 per share (down 1.158% on 21 May 2019).
 

Bubs Australia Limited

Synergistic Agreements with Beingmate, Tmall, and Chemist Warehouse: Bubs Australia Limited (ASX: BUB) is a small-cap Australia-based organic infant food producer with the market capitalisation of circa $665.02 Mn as of 21 May 2019. It officially got listed in the year 1993. BUB, in the release dated 6th May 2019, announced that it has formalised its key China and domestic channel strategic partnerships with a joint venture with Beingmate Baby & Child Food Co, a partnership with Alibaba’s Tmall, and the equity linked alliance with Chemist Warehouse.  We believe that the group will drive the growth momentum ahead with help of synergistic deals with Beingmate, Tmall, and Chemist Warehouse thereby supporting topline growth in years to come. In another update, Bubs Australia announced their partnership with Fonterra Australia to produceAustralia’s first organic grass-fed cow milk infant formula.

A look at Financial and Strategic Highlights of Q3FY19: The company reported YTD gross revenue of $32.87Mn. The company pointed out that Bubs Organic® baby food gross sales witnessed a rise of 22% pcp, which is representing 6% of Q3 revenue.The company reported that CapriLac® goat milk powder gross sales witnessed a rise of 119% pcp, which represents 40% of Q3 revenue. The company also pointed out that domestic and China sales reported a growth of 71% and 884%, respectively on the pcp basis. BUB reported gross revenue of $21.03Mn in 1HFY19, which reflects a rise of more than 465% (6x) on pcp.


Quarterly Gross Sales (Source: Company Reports)

A Look at Future Priorities: The company plans to explore opportunities to further enhance the vertical integration of business operations, specifically infant formula manufacturing and key dairy ingredients. For China channel development, BUB is planning to expand Mother & Baby store distribution footprint and trade sales program for baby food products. The company stated that it is planning to extend nutritional portfolio, which is the most profitable sector of the business.

Stock Recommendation: The company is planning to continue to adapt Bubs full portfolio of products to be suitable for China. With respect to FY19 strategic priorities, the company plans to work towards product pipeline for key retail partners. Meanwhile, the stock has risen 161% in the past three months as of 20 May 2019. Hence, considering the long-term strategic fit with decent outlook and current trading level, we maintain our “Hold” rating on the stock at the current market price of A$1.260 per share (down 3.448% on 21 May 2019).

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