Stocks’ Details

Bubs Australia Limited

 
New Supply Agreement with Coles: Bubs Australia Limited (ASX: BUB) is a manufacturer of infant milk formula. Market capitalisation of the company stood at $554.69 Mn as on 23^rd June 2020.  Recently, the company announced that it has reached a new supply agreement with Coles Supermarkets Australia under which Bubs Organic® Grass Fed Infant Formula would be distributed to 482 Coles supermarkets. This agreement establishes Bubs as a significant participant in the super-premium organic infant formula category. In addition, Woolworths Limited has increased the store ranging for Bubs Organic® Grass Fed Infant Formula from 700 stores to 800 stores, and Bubs Goat Milk Infant Formula from 400 stores to 654 stores. These new supply agreements are likely to increase domestic revenues from Q4 FY20.
 
During Q3 FY20, the company reported revenue amounting to $19.7 million, reflecting a rise of 67%. Bubs reported positive operating cashflow of $2.3 million. The quarter marked the strength of the company’s business model.
 

Key Financials (Source: Company Reports)
News Launches: The company is expecting to launch a new product during Q4 FY20. The company remains on track to focus on operational and capital management, along with improving its gross margins. In particular, the company focused on becoming a profit-making business for its shareholders.
 
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months
Key Risk: The group largely deals with customer credit risk, which arises mainly due to the inability of payment by customers. The company is also exposed to material risk, and financial risk, to name a few.
 
Stock Recommendation:  During Q3 FY20, the company experienced a decent increase in demand through all channels. BUB managed to close the quarter with a cash balance of $36.4 million.We have valued the stock using the EV/Sales multiple based illustrative relative valuation method. For the purpose, we have taken peers such as Freedom Foods Group Ltd (ASX: FNP), A2 Milk Company Ltd (ASX: A2M) and Baby Bunting Group Ltd (ASX: BBN) and arrived at a target price with an upside of low double-digit (in percentage terms). Therefore, considering a new supply agreement, positive operating cash flow and decent performance in Q3 FY20, we give a “Hold” recommendation on the stock at the current market price of $0.980 per share, down by 1.01% on 23^rd June 2020.
 

Elders Limited

 
Solid Performance from Rural Products: Elders Limited (ASX: ELD) is mainly in the provisioning of retail products and associated services to the rural sector. The market capitalisation of the company stood at ~$1.52 Bn as on 23^rd June 2020. The company recently announced that Michael Carroll, a director of the company, has acquired 230 fully paid ordinary shares at the consideration of $9.93460 per share. During 1H FY20, the company reported underlying earnings before interest and tax amounting to $52.8 million, which reflected solid performance from Rural Product.  Gross margins for the period were boosted by recent winter crop confidence, high prices for both cattle and sheep, as well as steady earnings in Real Estate and Financial Services. The company added that Real Estate gross margin compared favourably year over year due to increased broadacre turnover.
 

Key Metrics (Source: Company Reports)

Guidance: For FY20, the company expects EBIT in the range of $96.5 million and $112.9 million and NPAT of between $85.8 million and $102.9 million, subject to any future negative impacts arising from global volatility. 

Valuation Methodology:Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
 
Key Risks: The company’s business is sensitive to global COVID-19 implications, which will continue to create some ongoing uncertainty in market demand and agricultural supply chains. ELD is exposed to material business risk, which can affect its business objectives.
 
Stock Recommendation: ELD entered an agreement with existing financiers to refinance its debt facilities, with its objective to maximise the efficacy of debt facilities, in order to support its business strategy and growth. The refinancing package mainly includes a new $50 million working capital facilities with the commitment for 2-years. The stock of ELD has moved up by 33.93% and 49.24% within the time span of three months and six months, respectively. As a result, the stock of ELD is inclined towards its 52-week high level of $10.430. We have valued the stock using a P/CF multiple based illustrative relative valuation methodand arrived at a target price with the correction of low single-digit (in percentage terms).  For the purpose, we have taken peers like Blackmores Ltd (ASX: BKL), Costa Group Holdings Ltd (ASX: CGC), and GrainCorp Ltd (ASX: GNC). Thus, it can be said that the stock of ELD is overvalued at current trading levels. Hence, considering the current trading levels and valuation, we have a watch stance on the stock at the current market price of $9.670, down by 1.226% on 23^rd June 2020.
 

Australian Agricultural Company Limited

 
Decent Growth in Beef Sales:Australian Agricultural Company Limited (ASX: AAC) is primarily engaged in the sales and marketing of high-quality branded beef into global markets. The market capitalisation of the company stood at $614.82 Mn as on 23^rd June 2020. The company has scheduled to conduct its 2020 Annual General Meeting on 29^th July 2020. During FY20, the company managed to deliver positive operating profit and operating cash flow despite adverse seasonal conditions. The company reported an underlying operating profit amounting to $15.2 million. AAC experienced a growth of 20% in Wagyu beef sales, which was supported by price and volume growth. 
 

Financial Performance (Source: Company Reports)
 
COVID-19 Impact During FY21:As of now, the company is unable to predict the impact of COVID-19 during FY21 considering the dynamic nature of circumstances.
 
Key Risk:  In the current scenario, the company’s business is likely to be impacted by COVID-19 pandemic. Moreover, the business is exposed to key financial risks such as interest rate risk, foreign currency risk and commodity risk. Notably, the company entered into interest rate swaps in order to manage interest rate risk.
 
Stock Recommendation: During FY20, the company experienced a rise in net assets of over 8% to around $913 million. Gearing ratio for the period stood at 28.8% against 30.0% of pcp, in-line with the targeted range of 20-35%. Current ratio of the company stood at 5.84x in FY20 as compared to the industry median of 1.64x. This indicates that the company is in a decent position to address its short-term obligations against the broader industry.  The stock of AAC is trading at a price to book value multiple of 0.7x as compared to the industry average (Consumer Non-Cyclicals) of 4.9x on TTM basis. The stock of AAC is also inclined towards its 52-week low levels of $0.945, offering a decent opportunity for accumulation. Hence, considering the decent liquidity position, positive operating profit and operating cash flow along with key risks, we give a “Speculative Buy” recommendation on the stock at the current market price of $1.040 per share, up by 1.961% on 23^rd June 2020.
 

The Food Revolution Group Limited

 
Decent Sales Growth:The Food Revolution Group Limited (ASX: FOD) is in the production of food and beverage. The market capitalisation of the company stood at ~$39.86 Mn as on 23^rd June 2020. Recently, the company announced that CEO Tony Rowlinson and Director Matt Bailey have raised their exposure to FOD through on-market share purchases. Mr Rowlinson and Mr Bailey have acquired 500,000 shares each at 6c per share. In another update, the company announced that it achieved decent sales of its Original Juice Company brand in recent months, and the brand continues to generate double-digit growth. The company added that the new variants launched into Coles supermarkets have performed above expectations. The following picture gives an overview of the income statement of 1H FY20:

Key Metrics (Source: Company Reports)
 
Key Risk: The company is exposed to credit risk, which arises from the ordinary course of business due to its relatively smaller customer base.
 
Stock Recommendation:  FOD is on track to achieve revenue guidance of $40 million for FY20. FOD is planning to launch high volume, high margin Wellness Range featuring natural immunity-boosting ingredients, collagen, marine proteins and lactoferrin. EBITDA margin of the company stood at 0.8% in 1H FY20, reflecting YoY growth of 23%. The stock of FOD has corrected 22.54% and 30.38% within the last one and six months, respectively. As a result, it is trading close to its 52-week low of $0.051. The stock of FOD is trading at a price to book value multiple of 2.3x as compared to the industry average (Consumer Non-Cyclicals) of 4.9x on TTM basis. Therefore, considering the decent sales of juice brand, plans to launch new products and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.055 per share on 23^rd June 2020.

 
Comparative Price Chart (Source: Refinitiv,Thomson Reuters)

Disclaimer

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.