Why this big-name broker is telling us to hold onto these baby formula shares

Morgans has placed a hold recommendation on infant formula and organic baby food company Bubs Australia Ltd (ASX: BUB) as its shares take a dive down 7.2% to 83c at the time of writing.

Bubs operates in the highly-competitive baby formula space – dominated by peers like Bellamy’s Australia Ltd (ASX: BAL) and A2 Milk Company Ltd (ASX: A2M).

Bubs has recently logged a number of new supply agreements with distributors in China’s off-line and online sales channels, most notably a partnership with QianJiaWanPu Co – a licensed manufacturer which will allow it to commence its CFDA application for its China-labelled infant formula products.

Bubs shares were placed in a voluntary trading halt on June 14 pending a company announcement and today reported a successful capital raising of $40 million at 75c per share.

Morgans has an 82c per share price target on the stock with an upgrade to its FY19/20 forecasts by 3.2% and 12.5% respectively off the back of new contract activity with the comment that Bubs management is making “solid progress” and “building a sustainable business”.

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Motley Fool contributor Carin Pickworth 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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