Stocks’ Details

Synlait Milk Limited

Growth in FY20 Revenue & EBITDA: Synlait Milk Limited (ASX: SM1) is a dairy manufacturer, focused on supplying high-value dairy products to leading milk-based health and nutrition companies. In a recent announcement, SM1 stated that it has reached a settlement regarding the historic land covenants at its Pokeno site. The company has recently signed a manufacturing supply agreement which will provide it with a broader market and category exposure in the Asia Pacific. In FY20 (period ending 31 July 2020), the company reported revenue amounting to $1.3 billion, up 27% on the previous year. FY20 EBITDA stood at $171.4 million, up 13% on the previous year. Consumer-packaged infant formula sales went up by 15% to 49,180 MT and lactoferrin sales stood at 30 MT, up 46% on pcp. Underlying operating cash flows (excluding Subsidiaries) for the year stood at $127 million in FY20. During the year, the company completed significant growth projects of $573 million, including Synlait Pokeno, the Advanced Dairy Liquid Packaging Facility, and the acquisitions of Dairyworks and Talbot Forest Cheese.

Revenue Trend (Source: Company Reports)

What to Expect: The new manufacturing supply agreement is expected to positively impact performance from FY23. Capital expenditure with respect to the agreement is expected to be ~$70 million spread across 2 years. Commercial production is projected to start mid-2022. The company expects strong underlying EBITDA and operating cash flows to continue in FY21. NPAT for the year is expected to be flat or slightly up on FY20 NPAT.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of the company has corrected by 14.99% in the last three months. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation and arrived at a target price with low-double digit upside (in percentage terms). For the purpose, we have taken peers such as A2 Milk Company Ltd (ASX: A2M), Bega Cheese Ltd (ASX: BGA), Select Harvests Ltd (ASX: SHV), etc. On a technical analysis front, the stock of SM1 has a support level of ~$4.3 and a resistance level of ~$7.094. Considering the growth in revenue & EBITDA, recent manufacturing supply agreement, and a modest outlook, we give a “Buy” recommendation on the stock at the current market price of $5.100 per share, up 6.471% on 6^th November 2020.

Bubs Australia Limited

Bubs® Infant Formula Sales Growth Across All Key Markets in Q1FY21: Bubs Australia Limited (ASX: BUB) is engaged in the manufacturing of infant milk formula. During Q1FY21 ending 30 September 2020, gross revenue stood at $9.4 million. Bubs® Infant Formula sales went up by 9% on pcp and Bubs® Goat Formula direct export sales to China increased by a whopping 76% on pcp. Notably, Bubs Australia is the fastest growing Infant Formula manufacturer and reported 44% value growth on pcp. At the end of the quarter, the company has robust cash reserves of $42.6 million. In addition, the company finalized an Institutional Share Placement of $28.3 million and Share Purchase Plan of $3.8 million. FY20 gross revenue increased by 32% to $62 million, with an improvement in normalized gross margin to 24% vs 21% in FY19. Net revenue went up by 24% to $54.6 million in FY20.

FY20 Financial Review (Source: Company Reports)

Outlook: The company expects to leverage opportunities for international growth and product extensions through its strategic partners. It expects accelerated profitable growth across all key channels and markets for Bubs® Infant Formula and has set aside a revenue goal of $400 million and gross margin floor of 40 percent by 2025.

Valuation Methodology: Price to Book Value Multiple Based Relative Valuation (Illustrative)

Price to Book Value Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of the company has corrected by 25.28% in the last three months. In FY20, the company continued penetration in emerging international markets and delivered greater than five times growth, mainly driven by Vietnam launch. We have valued the stock using the Price to Book Value multiple based illustrative relative valuation and arrived at a target price with low-double digit upside (in percentage terms). For the purpose, we have taken peers like A2 Milk Company Ltd (ASX: A2M), Synlait Milk Ltd (ASX: SM1), and Bega Cheese Ltd (ASX: BGA), etc. On a technical analysis front, the stock of BUB has a support level of ~$0.41 and a resistance level of ~$1.134. Considering the company’s robust balance sheet, Bubs® Infant Formula  performance, increased international presence, and a decent outlook, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.665 per share, up 1.526% on 6^th November 2020.

Keytone Dairy Corporation Limited

Substantial Increase in Walmart China Sales Forecast: Keytone Dairy Corporation Limited (ASX: KTD) is a manufacturer, packer, and exporter of dairy and nutritional products. In August 2020, the company secured national ranging at Coles Supermarkets and launched an Immunity Booster Powder product under its proprietary brand, KeyDairy. In September 2020, KTD received a significantly increased sales forecast from Walmart (China) Investment Co., Ltd for the manufacture of whole and skim milk powder. The sales forecast stood for CY 2021 stood at NZ$7.2 million, with production to commence in December 2020. Notably, the forecast sales for CY 2021 are 257% of KTD’s 12 months sales (up to September 2020) to Walmart China, which stood at NZ$2.8 million.

Q2FY21 Update: During the quarter ending 30 September 2020, the company recorded a seventh consecutive quarter of record sales growth. Total sales revenue increased by 26% to $14.4 million on the previous quarter. The sales of the company’s proprietary products including Tonik, Super Cubes and Grans exceeded $1.1 million sales for the quarter, up by 167% on the prior quarter. Total customer cash receipts increased significantly to $14.0 million and net cash outflow from operations declined by 83% to $0.7 million.

Quarterly Revenue Growth (Source: Company Reports)

Outlook: Moving into the second half, the company has built strong foundations across all business units and expects to grow and scale up its operation to capitalise on the demand for its products and services. The company has a strong product development pipeline to come through the balance of the FY21 year.

Stock Recommendation: As on 30 September 2020, the company had a cash balance of $9.3 million. Through Q2 FY2021, the company has launched multiple new proprietary products and refreshed/rebranded others. The stock of the company has corrected by 39.99% in the last six months. On a technical analysis front, the stock of BUB has a support level of ~$0.199 and a resistance level of ~$0.322. On TTM basis, the company has an EV/Sales multiple of 2.6x, lower than the industry average (Food & Tobacco) of 8.5x. Considering the company’s decent Q2FY21 performance, modest outlook, and TTM valuation, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.210 on 6^th November 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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