MENU

Could this forgotten small cap be the next A2 Milk Company Ltd?

The share price of Clover Corporation Limited (ASX: CLV) has hit a record high as it rides the boom in demand for infant formula in China, but most investors probably wouldn’t have noticed or even heard of the emerging company.

But it’s climb is pretty stellar with the stock surging 165% over the past year to hit $1.27 during lunch time trade today compared to the 3% gain by the All Ordinaries (Index:^AORD) (ASX:XAO) index.

Clover’s performance isn’t quite as good as the sector “gods” A2 Milk Company Ltd (ASX: A2M) or Bellamy s Australia Ltd (ASX: BAL), with their 200% plus surge over the same period, but some might argue that Clover has more growth levers it can pull.

Ord Minnett initiated coverage on the stock and described Clover’s business as “selling shovels to the gold miners”, as the company has developed a way to encapsulate Docosahexaenoic acid (DHA), an omega-3 fatty acid, so it can be added into a range of products like infant formula.

This also reminds me of the opportunity for Nufarm Limited (ASX: NUF) with its new range of omega-3 enriched seed products (click here to read more about this).

Clover, which has a chequered past, has contracts with many of the leading infant formula manufacturers around the world and that gives the company exposure to the booming Chinese market.

This diverse client base also provides Clover with some protection against the event that a brand loses favour with Chinese consumers – an issue that nearly brought Bellamy’s to its knees in 2016.

But it isn’t only the bullish outlook for the Chinese market that is providing a tailwind for Clover. There are a number of “easy wins” that could propel the stock higher, according to Ord Minnett. This includes an expected increase in Clover’s gross margin from contract renegotiations, cost of goods sold (COGS) savings and an improved product mix.

The company has also invested in a spray dryer, which will help pad margins and provide Clover with the flexibility to ease price pressure with customers.

Changing regulations in the European market are another potential windfall for Clover as EU regulators require manufacturers to double the DHA content in EU-sold infant formula from 2020.

These factors are the reasons why Ord Minnett is forecasting Clover’s earnings per share (EPS) to grow at a compound annual growth rate (CAGR) of 28% from FY18 to FY21.

What’s more, the broker has not factored in the upside from Clover’s potential expansion into sports nutrition, acquisitions that the company may undertake and changes to DHA levels in other jurisdictions to follow the lead of the EU.

Ord Minnett has a “buy” rating on the stock with a price target of $1.40 a share.

Infant formula and the Chinese boom aren’t the only big investment themes to hit our market. The experts at the Motley Fool believe there is another boom that is just starting to take off.

Click on the link below to get your free report on what this boom is all about and the stocks that are best placed to ride this wave.

The Richest Man Alive Invests in This

The richest man in the world has just launched a $100 million investment fund and investors who don't take note could miss out on a massive opportunity.

And it isn't by sheer luck. He did it by looking to the future and investing in the big ideas of tomorrow.

This could be your chance to get in on the ground floor!

Click here to discover more!

Motley Fool contributor Brendon Lau 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 Scott Phillips.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…

Including:

The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!