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Why Bubs Australia Ltd (ASX:BUB) shares are in a trading halt

The Bubs Australia Ltd (ASX: BUB) share price won’t be going anywhere on Thursday after it was placed in a trading halt this morning.

According to the release, the goat milk infant formula and baby food company has requested the trading halt while it prepares an announcement in relation to a capital raising.

Bubs has requested that the trading halt continues until the earlier of the commencement of trade on Monday June 18 or the release of the announcement to the market.

Why is Bubs raising capital?

This capital raising shouldn’t come as a surprise to shareholders given the state of its balance sheet at the end of the last quarter.

Bubs finished the quarter with a cash balance of approximately $5.6 million, down from $8.7 million in the prior quarter.

In addition to this, its share price has rallied 20% over the last 30 days following a series of potentially positive announcements, making it an opportune time to raise capital.

One such announcement that sent its shares hurtling higher was a long-term supply agreement with China based supply chain and service provider New Times Asia.

Though very little is known about the company, it has committed to purchase $17 million worth of product in FY 2019. This will rise to $24 million in FY 2020 and $37 million in FY 2021.

How much is Bubs looking to raise?

According to the AFR, Bubs will attempt to raise a total of $40 million at 75 cents per share through a capital raising which is being handled by Bell Potter and Morgans.

This will increase the number of shares on issue to approximately 438 million from the current total of 384.5 million.

It is worth noting also that there is believed to be an opportunity for Bubs to raise more funds should demand be there.

What now?

Clearly this will have a dilutive effect on existing shareholders, but it will also give the company a sizeable cash balance to support its attempt to crack the China market.

But only time will tell whether Bubs can compete with the likes of A2 Milk Company Ltd (ASX: A2M) and Bellamy’s Australia Ltd (ASX: BAL) in China.

Given its lofty valuation I’m not prepared to put any money in just yet. Instead, I intend to wait to see how its sales grow in FY 2019 and would suggest fellow investors do likewise.

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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 Scott Phillips.

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