With the speculation that Chinese regulations on infant formula brands are gradually setting-in to play a role in reducing the number of infant formula brands in China from about 2500 to about 300, many Australian brands might fall prey to these regulations under China Food and Drug Administration approval for importing China-labelled product from January 1, 2018. Under the new rules, a maximum of three infant formula brands can originate from any one approved manufacturing facility. Further, weakening economic conditions for China in 2018 might add to the woes. With this, the key infant formula stocks will be worth a watch.
 

The A2 Milk Company Limited (ASX: A2M)

A2M Details

Diversification into new markets: The a2 Milk Company had reached a settlement in respect of the legal dispute with Lion-Dairy & Drinks Limited and the parties have mutually agreed not to proceed with their cases against each other. Both the parties are very much satisfied with the outcome and will remain focussed on building and maintaining the strength of their individual brands. End of the last year, A2M was admitted to the S&P/ASX Index effectively from 14 December 2017 and it started trading on the S&P/NZX Index from 18 December 2017. Further, Ms Jayne Hrdlicka has been appointed as the Managing Director and CEO of the Company to ensure that the current momentum of the business continues. Meanwhile, A2M has broadened its product portfolio and launched a2 Platinum infant formula. It successfully transmitted from its IP licensing to operating business model. It has also diversified its market in China, UK and USA. A2M already captures a significant market share in Australia. It is worth noting that A2M is the creator and pioneer of the A1 protein-free category and the Company expects broader interest in the A1 protein free category over time and is well positioned to respond to its unique business model which is focussed solely on products free of the A1 protein.
 
Performance Milestones (Source: Company Reports)
 
In last fiscal year, infant formula accounted for 72% of the group revenue which accounted for NZ$394.0 million and cash on hand reflected continued earnings momentum. Inventory was also reduced which reflected strong infant formula demand which exceeded stock availability. In UK, the group performed well and achieved its first annual operating profit. A2M is also assessing its opportunities in Europe and Middle East. It is expecting to build a strong inventory system in FY18 and is also targeting greater flexibility and lower cost procurement arrangements throughout the supply chain. While the stock has witnessed a good run-up, we believe it is “Expensive” at the current price of $7.50


A2M Daily Chart (Source: Thomson Reuters)
 

Bellamy’s Australia Limited (ASX: BAL)

BAL Details

Improved stability of the Business: Many shareholders were seen to have increased their interests in the group lately. For instance, Mitsubishi UFJ Financial Group, Inc increased their holding from 5.40% to 6.40%. BAL has also got Ms Shirley Liew as its non-executive Director who will also be the Chair of the Audit & Risk Committee. Meanwhile, early results of FY18 year to date were out and the group has upgraded its revenue growth to 15-20% from 5-10% growth and also upgraded its EIDTA margin to 17-20% from15-20%.
 

2018 Outlook (Source: Company Reports)
 
On the other hand, the overall sales in year 2017 decreased as compared to last year but the decline was partially off-set by increase in sales in China/ Hong Kong. Operating cost base also was reset and now they are well-positioned to reinvest. Operating cash -flow has been positive since March 17 (excluding the one-off Fonterra payment) and now currently they are in a net cash position. The Camperdown acquisition and CNCA license have provided a path to CFDA registration in China, while the group has successfully finished its trial of China ‘KOL’ marketing model and of Daigou trade marketing model. With some improvement witnessed by the group, we recommend to “Hold” this stock at the current price of $10.35


BAL Daily Chart (Source: Thomson Reuters)

Bubs Australia Limited (ASX: BUB)

BUB Details
Integrated Supply chain: BUB announced its acquisition of Nulac Foods and Interests for a consideration of 76,802,684 shares equivalent to 19.9% of the company’s issued share capital. All the conditions precedent to its acquisition were met. The consideration shares have been put in the voluntary escrow, with 50% of the consideration shares to be released 12 months after the date of completion and the remaining 50% to be released 24 months after the date of completion. Bubs has become the Australian’s only vertically integrated producer of goat infant formula which is a major step in their strategic ambitions. Recently, Johannes Gommans also became the substantial holder of the company by holding 19,200,671 ordinary shares of the company. On the other hand, the shares of BUB already generated over 692.6% in this year to date placing them at an unreasonable level. It also gained ownership in the CNCA certified processing plant. It has enhanced a provincial appeal with Australian and Chinese customer with traceability of quality key ingredients back to farm gate. It also expanded its warehousing and distribution facilities.
 

Financial Performance (Source: Company Reports)
 
BUB also secured a critical ingredient which has increased its influence over key ingredient and registration process. Bubs quarterly revenue growth CAGR continued to grow at +20% since Q1 FY17 which reflected continued growth and revenue momentum. Domestic sales also grew by 106% as compared to last year and sales to China grew by 274%. Further, 5 Australian plants were approved by CNCA which increased the number of Australian facilities up to thirteen with CNCA certification and Bubs is currently in active discussions with at least 4 of these plants. Additional funding may be required in the event if the cost exceeds the company’s estimates and for the effective implementation of its business and operational plans in the future. We think the stock is trading at high levels and looks “Expensive” at the current price of $0.77
 

BUB Daily Chart (Source: Thomson Reuters)

 
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