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Bubs Australia Ltd shares sink lower on weak half-year result

After a strong start to the day, the Bubs Australia Ltd (ASX: BUB) share price has sunk into the red following the late morning release of its half-year results.

At the time of writing the goat milk infant formula and baby food company’s shares are down by 7% to 88.5 cents.

For the six months ended December 31, Bubs reported half-year gross sales growth of 92% on the prior corresponding period to $3.72 million. Approximately 70% of these sales were derived from its infant formula business.

Unfortunately, though, Bubs recorded a loss greater than its sales at $3.85 million. Management has blamed increased costs related to the NuLac Foods acquisition, capital raising, and administration for the season for this heavy loss.

Operating cash flows were negative for the half at -$5.6 million, ultimately leaving the company with a cash balance of $8.7 million and a $2 million debt facility. If the company continues to operate like this for the next 12 months, I suspect that it could burn through its cash very quickly and require another capital raising.

Shareholders will therefore be hoping that one of its numerous distribution agreements results in strong sales growth in the second-half and beyond. These agreements have been with companies including NetEase Kaola.com, VIPshop, Kidswant, JD.com, Costco, Woolworths Group Ltd (ASX: WOW), and Sigma Healthcare Ltd (ASX: SIG).

Management advised that it will continue to focus on building sales momentum in China through the daigou community and cross-border e-Commerce channels in the second-half. It has made no financial forecasts for the full-year.

Should you invest?

So far I think progress has been disappointingly slow and I’m yet to be convinced that the company has anywhere near as bright a future as rivals A2 Milk Company Ltd (ASX: A2M) and Bellamy’s Australia Ltd (ASX: BAL).

In light of this weak result and its sizeable market capitalisation, I think investors should resist investing in Bubs and wait for it to grow into its valuation.

In the meantime, I would buy a2 Milk shares or one of these mid cap stars of the future.

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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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