Why Bubs Australia Ltd shares are in a trading halt

The Bubs Australia Ltd (ASX: BUB) share price won’t be going anywhere today after the goats milk infant formula and baby food company requested a trading halt.

Why are its shares in a trading halt?

According to the release, the company has requested the trading halt pending an announcement in relation to a proposed acquisition and an associated capital raising.

Its shares are expected to remain in the trading halt until Friday November 3.

While no details were provided to the market about the acquisition target or the price at which it intends to raise capital, details have emerged in the media.

According to The Australian, Bubs plans to raise $20 million at 60 cents per share via a placement and share purchase plan in order to acquire Victoria-based dairy producer NuLac Foods.

NuLac Foods is a family owned Australian company which has been operating since the mid-2000’s and specialises in goats milk and dairy free products.

It is believed that Bubs sees this acquisition as a way to gain control over its supply chain and the local sourcing of key ingredients in order to capitalise on the rapid growth of specialty milks and the formula sector both at home and in China.

Foolish takeaway

Overall I think this is a smart move by Bubs and should add value to the company. However, I would still caution against an investment at this stage due to its lofty valuation.

While it could well grow into this valuation and challenge a2 Milk Company Ltd (Australia) (ASX: A2M) in the China market, if its sales growth does not accelerate in the next few quarters I believe its shares could come under pressure.

In light of this, I plan to hold off an investment until either its shares trade on a more reasonable valuation or its sales justify the premium.

In the meantime, I would sooner invest in these top growth shares which are generating a lot of revenue.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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