Bubs Australia Limited

BUB Details

Business Update: Bubs Australia Limited (ASX: BUB) manufactures infant nutritional products and offer organic baby food, goat milk, infant formula children's vitamin and mineral supplement products globally.

Q4FY21 and FY21 Financial Performance:

• The company has recorded gross revenue of $12.8 million, up by 8% on a previous quarter, supported by gross revenue of Australian major grocery and pharmacy chains up 67% QoQ.
• The company has reported a decline in gross revenue by 24% to $46.8 million in FY21, compared on a pcp basis. This has been impacted due to COVID-19 disruption.
• During the quarter, BUB has an impact on total export sales to China and it decreased by 4% on a pcp basis but reflected an increase of 10% over pcp in the CBEC Channel.
• The cash position of the company stood strongly at $27.9 million as of 30 June 2021.

Cash and Cash Equivalent (Source: Analysis by Kalkine Group)

Key Risks:

• Impact of COVID-19 Pandemic- The company has faced challenges on its retail supply chain and export sales during the pandemic that have affected its financials.
• Demand Risk- The company has a significant impact on its demand, as the volatility provides the group with gross margin pressure. Therefore, the company should have a marketing strategy to stimulate the demand.

Outlook:

• The Chinese authorities have granted an import license to Bubs (Shanghai) Trading Co Ltd to trade in China, which could expand the company's sales. It also commenced its sales in the Singapore market and is expected to begin by Q1FY22 on Redmart.com.
• With the COVID-19 recovery, the company is expecting to accelerate topline revenue growth in FY22.
• Further in the US, FDA label compliant Goat and Cow Toddler Formula were produced in June, which is planned to be launched on Walmart.com and Amazon.com in September FY21.

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

Source: 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: As per a recent update, the company's international markets were up by 224% in Q4FY21 on a pcp basis and up 48% QoQ. The stock of BUB is trading below its average 52-weeks' levels of $0.315-$0.980. The stock of BUB gave a positive return of ~30.76% in the past three months and a negative return of ~55.26% in the past one year. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount to its peers’ average EV/Sales (NTM trading multiple), considering the uncertainty over COVID-19 impact and lower asset turnover ratio. For the purpose of valuation, peers such as Australian Agricultural Company Ltd (ASX: AAC), Murray Cod Australia Ltd (ASX: MCA), A2 Milk Company Ltd (ASX: A2M), have been considered. Considering the current trading levels, indicative upside in valuation, healthy balance sheet, grant of import license to operate in China and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the market price of $0.425, as on 17 August 2021, 11:14 AM (GMT+10), Sydney, Eastern Australia.

BUB Daily Technical Chart, Data Source: REFINITIV

Keytone Dairy Corporation Limited

KTD Details

Increase in Debt Financing: Keytone Dairy Corporation Limited (ASX: KTD) engages in the manufacturing and commercialisation of dairy, health, and nutritional products include milk powders, snack solutions, functional beverages in Australia. The company has a total of available debt financing ~$9.8 million to fund the strategic initiatives and accelerate growth.

• An increase in trade finance facility within New Zealand dairy of NZ$1 million provided by ANZ Bank and now total available debt financing in New Zealand was NZ$3 million with an interest rate of 2.29% per annum.
• The debt finance from Moneytech in the Australian Contract Manufacturing and Brands business facilitate $7 million with an interest rate of 5.98% per annum.

Q1FY22 Financial Performance:

• The company has recorded improved sales by 17% to $13.4 million in Q1FY22, compared to $11.3 million in Q1FY21. This is reflected in the continued delivery of strong business performance in the Australian Contract Manufacturing and Proprietary Brands division.
• KTD reported an improved cash receipts received from customers at $12.8 million in Q1FY22 reflecting a 56% hike from $8.2 million on a pcp basis.
• During the quarter, the company recorded a capital expenditure of $408,000 incurred on establishing and expanding Keytone's Sydney protein bar/snacking plant.
• The cash position of the company stood at $3.8 million as of 30 June 2021

Revenue Trend (Source: Analysis by Kalkine Group)

Key Risks:

Impact of COVID-19 pandemic- Due to the COVID-19 pandemic, the company got delayed in global logistics, which impacted its financials, and still, the uncertainty prevails.

Outlook:

• The company is expecting scalable growth in FY22 and undertake several strategic and tactical decisions.
• The commencement of protein bar production and the full impact of the Coles sales in New Zealand will be realised through Q2 FY21.
• The company is strategically expanding its footprint with new international sales to China.

Stock Recommendation:

The stock of KTD is trading below its average 52-weeks' levels of $0.110-$0.300. The stock of KTD gave a positive return of ~4.0% in the past one weak and a negative return of ~47.99% in the past one year. On a TTM basis, the stock of KTD is trading at an EV/Sales multiple of 0.9x, lower than the industry average (Food & Tobacco) of 8.4x, indicating undervaluation. Considering the current trading levels, valuation on TTM basis, decent balance sheet, expanding its footprint, economic recovery, easing of global logistics delays and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.130, as on 17 August 2021.

KTD Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decisions 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. 

Technical Indicators Defined:  

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest. 

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.

Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.

There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.

You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.

The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.

Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.

Please also read our Terms & Conditions and Financial Services Guide for further information.

On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine and its related entities do not hold interests in any of the securities or other financial products covered on the Kalkine website.

Kalkine Media Pty Ltd, an affiliate of Kalkine Pty Ltd, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.