BUB Details

H1FY21 Results Performance: Bubs Australia Limited (ASX: BUB) is engaged in the business of manufacturing a range of premium infant nutrition and wellbeing products. As of 20 April 2021, the market capitalisation of the company stood at ~A$297.19 million. The company’s gross revenue during the six months ended 31 December 2020 was marred by the Covid-19 led channel disruption. Further, along with the impact of higher trade co-op investment, revenue declined by 33% YoY to $18.3 million. However, the company witnessed 36% YoY growth in its overall goat formula direct sales to China during the period. Further, its gross margin was mainly impacted due to inventory provision of $3.1 million and also due to loss associated with the sale of surplus bulk powder inventory. Resultantly, the company has reported an increase in loss after tax to $12.90 million from a loss of $7.56 million in H1FY20.

H1FY21 Consolidated Income Statement (Source: Company Reports)

Key Risks: Covid-led channel disruption along with softening of demand could impact the company’s performance. The company is also exposed to foreign currency risk owing to its cross-border transactions.

Outlook: The company continues to sustain its balance sheet strength with a cash balance of $40.21 million as of 31 December 2020. Besides, the company is witnessing a recovery in sales momentum across its core product segments. To drive earnings in the long run, the company sustained its focus on optimizing channel and product mix and enhance efficiencies in its supply chain cost. Additionally, the company expects that its continued emphasis on its core goat dairy business will also aid in driving profitable growth.

Valuation Methodology: Price/Sales Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: BUB has delivered a 3-months return of ~-19.13%, while in 9-months and 1-year the stock fell by ~-53.03% and ~-46.24%, respectively. The stock is trading lower than the average of the 52-week high price of $1.190 and 52-week low price of $0.455, which indicates a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$0.439 and resistance of ~$0.573. We have valued the stock using Price/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We have applied a slight premium to Price/Sales Multiple (NTM) (Peer Average) considering, its sustained investments towards brand building, acquisition of new customer, and boost channel capacity as well as its strategies towards driving efficiencies and improving product margin. For this purpose, we have taken peers like Select Harvests Ltd (ASX: SHV), Australian Agricultural Company Ltd (ASX: AAC) and Tassal Group Ltd (ASX: TGR), all of which belongs to the category of food products. With a strong balance sheet coupled with a robust cash equivalent inventory position which will aid to cater future demand, the company anticipates delivering profitable and scalable sustaining growth. Resultantly, we give a “Speculative Buy” recommendation on the stock at the current market price of A$0.465 per share, down by 2.106% as on 21^st April 2021.

BUB Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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