Stocks’ Details
 
The shares of infant formula companies, the a2 Milk Company Ltd (ASX: A2M), Bellamy’s Australia Ltd (ASX: BAL), and Bubs Australia Ltd (ASX: BUB) are affected after Woolworths decided to change its policy again. From next week, the baby formula limit will revert to only two tins per transaction. In August, Woolworths had increased its limit fourfold to eight tins per shopper. As a result, stockpiling of infant formula at a Melbourne Woolworths supermarket was noted. In an attempt to curb this, Woolworths has taken a stern step, which however has impacted the infant formula stocks.
 

Wattle Health Australia Ltd

Commenced work to build Australia’s first dedicated organic nutritional milk spray dryer: Wattle Health Australia Ltd (ASX: WHA) is an Australian listed small cap company that has planned to build Australia’s first dedicated organic nutritional milk spray dryer through its joint venture Corio Bay Dairy Group Pty Ltd (CBDG), that will provide the market with an ongoing supply of organic nutritional milk powder. CBDG is a joint venture between Organic Dairy Farmers of Australia Ltd (ODFA) with 50% stake in the joint venture, Niche Dairy Pty Ltd (5% stake in in the joint venture) and WHA (holding 45% stake in the joint venture). A critical step in the process was to get the funding for the joint venture, which was possible by a $73 million capital raise. CBDG is on track to complete work in the third quarter of 2019, with commissioning and first product expected to be available ahead of Spring 2019. Meanwhile, WHA stock has fallen 2.94% in three months as on October 23, 2018, and was further down 4% on October 24, 2018. However, the stock finds support around $0.92 and has already been in an oversold territory. Based on the foregoing, we give a “Speculative Buy” recommendation on the stock at the current price of $ 0.950.
 

Bellamy's Australia Ltd

Sales downgrade in FY 19 due to setbacks in China: Bellamy's Australia Ltd.’s (ASX: BAL) stock fell 6.01% on October 24, 2018 after the company announced about 1H FY19 sales to be 10-15% below 1H18 due to an expected $10-15M run down in its existing inventory at lower prices prior to rollout of the brand upgrade. There are number of setbacks in China like slowing birth rate, fierce competition and regulatory delays etc. There is a challenge for a strategy that depends almost entirely on Chinese sales via Chinese shoppers in Australia who re-sell products at home, while getting Beijing’s approval to export through formal channels. Therefore, the company for FY 19 expects Australian label revenue growth to be at the low end of the stated 0-10% range. However, the company expects better performance in the second half of 2019 as the company will return to normal trading with the implementation of key revenue initiatives including the brand upgrade launch. As a result, BAL stock has fallen 26.30% in three months as on October 23, 2018  and is trading at a P/E of 21.66x. Based on the foregoing, we recommend to avoid the stock at the current price of $ 7.980.
 

The a2 Milk Company Ltd

In line Expectation for FY 19: The a2 Milk Company Ltd.’s (ASX: A2M) stock fell 1.80% on October 24, 2018. The company for the first quarter of FY19 has posted revenue as per the company’s expectation. For FY 19, the company expects further revenue growth related with nutritional products in ANZ and China, and liquid milk in the US. In FY 19, marketing expenditure per sales and overhead costs will be higher than FY 18. The EBITDA to sales ratio in FY19 is expected to be broadly consistent with FY18. Meanwhile, A2M stock has fallen 1.15% in three months as on October 23, 2018  and is trading at a high P/E. The group has also projected for higher expenses going forward. Therefore, we recommend to avoid the stock at the current price of $ 9.300.
 

Bubs Australia Ltd

Bubs Australia Trade Policy: Bubs Australia Ltd.’s (ASX: BUB) stock fell 3.06% on October 24, 2018 after the company provided a copy of its trading policy on their website. In FY 18, the company had delivered 330% growth in net revenue. However, its gross margins were affected in FY 18 due to the change in product mix and also due to the acquisition of Nulac Foods. Nonetheless, the group has huge reliance on the domestic presence, and this is evident by the contribution from the Australian region in the gross sales revenues. 84% of the total gross sales revenues has been garnered from the domestic markets in FY18 and BUB expects this to continue going forward. Meanwhile, BUB stock has fallen 32.88% in three months as on October 23, 2018, and we give a “Speculative Buy” recommendation on the stock at the current price of $ 0.475, with support around $0.46.
 

Comparative Stock Price Movement (Source: Thomson Reuters)
 
 
 

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