Stocks’ Details

Bubs Australia Limited

Growth of 154% in Gross Revenue:Bubs Australia Limited (ASX: BUB), formerly known as Hillcrest Litigation Services Limited, is the manufacturer of infant milk formula. The market capitalisation of the company stood at ~A$629.34 Mn as on 2^nd September 2019. Recently, the company has published its financial results for the full year 2019, wherein, it was mentioned that the company has enhanced vertical integration and increased milk pool to meet growing demand. The company also advanced its China expansion strategy through channel development and key partnerships. The company’s gross margin in 2H FY19 stood at 23% as compared to 19% in 1H FY19. This improvement was resulted by the optimisation of product and channel mix, engaging new suppliers and improvements in allocating the milk pool.


Quarterly Gross Sales Revenue (Source: Company Reports)

What to Expect:The management of the company believes that the cash flow forecast is expected to meet all operational requirements for FY20 considering the strong balance sheet and cash position. The group is now well-placed to meet the continued and growing future demand considering its new partnership in supply chain and distribution channels.

Stock Recommendation:The product range of the company has been gaining strong traction in the domestic and Chinese market following the deployment of the marketing resources and sales channel contract wins in all the distribution channels. The company has strong cash reserves of $23.3 Mn in FY19, which is adequate to support the operations of FY20. The company reported a statutory net loss of $35.5 Mn in FY19 as compared to $64.7 Mn in FY18. The figure of FY 2019 includes a non-cash one-off expense amounting to $20.4 Mn under the Chemist Warehouse equity agreement and $5.9 Mn payable to the NuLac Foods Vendors. Currently, the stock is trading above the average of 52 weeks high and low levels of $1.615 and $0.355, respectively. Hence, considering the above-stated facts and current trading levels, we maintain our “Hold” recommendation on the stock at the current market price of A$1.180 per share (down 4.453% on 2^nd September 2019).
 
 

The A2 Milk Company Limited

A Robust Rise in Gross Margin:The A2 Milk Company Limited (ASX: A2M) is engaged in producing, marketing and selling of branded dairy and infant formula products in the targeted global markets. Recently, the company via a release announced that UBS Group AG and its related bodies corporate have become a substantial holder in the company with the voting power of 5.02%.In another update, the company has recently published its financial results for FY19. It stated that these results reflect strong growth throughout core markets and product categories. The company added that its gross margin was strong and improved to 54.7%. The improvement was because of the price increase and was partially offset by the currency movements (most notably a weaker Australian dollar).


Financial Summary (Source: Company Reports)

Future Prospects:The company stated that the macro factors are shaping consumer demand and creating opportunity. A2M is increasing focus on food safety, naturalness and provenance. The company expects continued growth in revenue throughout its key regions, which is being supported by increasing brand and marketing investment in China and the US.

Stock Recommendation:The A2 Milk Company Limited delivered a net margin of 22.1% in FY19 as compared to the industry median of 5.5%, which reflects that the company is effectively converting its top-line into the bottom-line when compared to the broader industry. It posted a current ratio of 3.29x in FY19 against the industry median of 1.40x. This implies that A2M is in a decent position to address its short-term obligations in comparison to the broader industry.

Currently, the stock is trading slightly above the average of 52 weeks high and low level of $17.30 and $8.140, respectively with PE multiple of 36.11x. Hence, in view of aforesaid facts and current trading levels, we give an “Expensive” recommendation on the stock at the current market price of A$13.400 per share (down 1.107% on 2^nd September 2019).
 

Bellamy's Australia Limited

A Quick Look on FY19 Results:Bellamy's Australia Limited (ASX: BAL) offers a broad range of organic food and formula products for babies and toddlers. It has a market capitalisation of ~A$850.26 Mn as on 2^nd September 2019. Recently, the company has released its results for the financial year 2019, wherein it mentioned that the financial year 2019 was a challenging one for the company, and the impact of regulation was difficult. It added that the changes made during the past year have set a new foundation for the long-term success of the brand.

In FY19, the company reported net revenue amounting to $266 Mn, which was impacted by the loss of $18 Mn in China label sales, CBEC regulation, declining birth rate and increased competition and Rebrand transition.The company is investing heavily in social e-commerce partnerships and expect to be a material source of incremental growth.


Group Revenue (Source: Company Reports)

Future Guidance:For FY20, the company is expecting growth to be between 10%-15% in net revenue at EBITDA margin consistent with last year, with revenue growth expected to accelerate in 2H FY20 with new product launches. The company remains confident in its growth strategy and medium-term target of $500 Mn revenue but has deferred this target beyond FY21 given the ongoing SAMR registration process.

Stock Recommendation:The company is building a winning capability in China to activate the brand as well as engage consumers. It has a strong balance sheet and cash conversion that supports the growth agenda with $112.4 Mn in net cash. In FY19, the company has increased investment in marketing, China capability and a breakthrough new product pipeline. The stock has witnessed a decline of 27.54% and 13.69% in the time span of one month and three months, respectively. Currently, the stock is trading towards its 52-week lower levels of $6.710 with PE multiple of 38.44x. Hence, considering the above-stated facts and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of A$7.770 per share (up 3.6% on 2^nd September 2019).

 
Daily Comparative Chart (Source: Thomson Reuters)

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