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Why Wattle Health Australia Ltd shares have been smashed today

baby food

Bubs Australia Ltd (ASX: BUB) isn’t the only infant formula hopeful that has seen its shares sink lower during trade today.

The Wattle Health Australia Ltd (ASX: WHA) share price has tumbled 7% to $2.58 on Wednesday following the release of its half-year results.

Like Bubs, Wattle Health unfortunately delivered a result that offered little by way of justification for its sizeable market capitalisation.

For the six months ended December 31, Wattle Health achieved sales of $661,261, down 17.5% on the prior corresponding half.

On the bottom line things were even worse, with the company’s half-year loss widening to a massive $13.1 million. Though it is worth pointing out that $9.6 million of this loss was attributable to share based payments.

Wattle Health finished the period with negative operating cash flow of -$2.8 million, leaving it with a cash balance of $9.6 million. This cash balance won’t last that long unless there is a serious ramp up in sales growth over the next 12 months.

Which admittedly is something that could potentially occur. Like Bubs, Wattle Health has signed numerous distribution agreements with the hope of making in-roads into the lucrative China market.

In addition to this, it has also recently received its first orders from the Indian and Macau markets. Whether these orders will lead to something significant in the future, only time will tell, but the response to the announcements was very positive and played a role in taking its shares to an all-time high this month.

Which leads us onto its market capitalisation. With 125 million shares outstanding, Wattle Health currently has a market capitalisation of $322.5 million.

Given these results, I think that valuation is hard to justify. While Wattle Health could strike it rich if its products are a success in the China market, there is no evidence as of yet that this will be the case and I think investors are playing a risky game here.

I hope that Wattle Health does become the next A2 Milk Company Ltd (ASX: A2M), but until its sales demonstrate this as being a possibility, I think investors ought to watch on from the safety of the sidelines.

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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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