Okay, I get it.
Despite the woes currently being experienced by Bellamy's Australia Ltd (ASX: BAL), baby infant formula is the 'in-thing' at the moment.
After all, a2 Milk Company Ltd (Australia) (ASX: A2M) recently announced to the market that its business… "continues to trade very strongly reflecting, in particular, significant year-on-year growth in its infant formula business".
(Just to ensure there's no confusion with the Bellamy's situation of course).
Now, with Bubs Australia Ltd (ASX: BUB) on the scene, shareholders are going crazy over this stock sending it up above 45 cents in early-morning Friday trade (up from its float price of 10 cents last Tuesday!)
However, shareholders need a reality check:
- What you're buying is Hillcrest Litigation Services Limited (a litigation funder) that recently bought The Infant Food Holding Co. Pty Limited, an Australian 'superfood' specialist in the baby food category. This entity was then subsequently listed on the ASX as Bubs Australia Ltd
- The Infant Food Holding Co. Pty Limited's financial history * over the last few years looks underwhelming at best:
| 2013-14 | 2014-15 | 2015-16 | |
| Net profit | (1,408,678) | (363,054) | (1,289,249) |
| Net cash from operating activities | (827,175) | (304,576) | (2,999,805) |
* Source: annual reports
- Hillcrest's earnings-per-share have been negative for 8 of the last 10 years and, inclusive of this week's price spike, long-term per annum returns have averaged -22.3% per year over the last decade
It's certainly possible Bubs will have a bright future, and the negative operating cash flow looks to be due to expenses incurred in growing the business to get the company to a point where it will make money, but that's for the future …
… a future that's being keenly bought up right now by shareholders who can see only blue sky.
Even the Bubs prospectus states clearly:
"[Directors] … do not have a reasonable basis to forecast future earnings on the basis that the operations of BUBS are inherently uncertain. Any forecast or projection information would contain such a broad range of potential outcomes and possibilities that it is not possible to prepare a reliable best estimate forecast or projection."
Foolish takeaway
My main concerns with this company (not necessarily the original Infant Food Holding Co) is that its business model and strategy has comprehensively changed from that of litigation funding to infant baby formula, and I couldn't find an explanation anywhere on why.
There's a further precedent for this when back in 1996 the company was known as Aurifex Mining NL, before changing to Hillcrest Resources NL, before changing its strategy to that of litigation funding in 2004.
Although the Chairman and Executive Director, Mr Alan van Noort, has been on the entity's board since 1998, he hasn't proven he's capable of growing wealth for shareholders (except maybe for this week).
With him owning 22.5% of the company though, here's hoping he'll be focused on it from this point on.
The price can definitely head much higher, but this company is an unproven beast that smells of 'me-tooism' in trying to latch on to the baby-formula wave.
There are no dividends to speak of and, if this is your game, I'd avoid this and consider examining below our number one dividend pick for 2017 instead.
I sincerely hope Bubs is a success, but in the meantime, if you're buying shares, you're playing a high-risk game here. If you must buy these shares at all, keep your exposure to 1% or less of your portfolio and definitely keep your expectations low to avoid disappointment!
