Why the Wattle Health Australia Ltd (ASX:WHA) share price is on fire today

One of the best performers on the market on Friday has been the Wattle Health Australia Ltd (ASX: WHA) share price.

In afternoon trade the infant formula and baby food company’s shares are up a massive 28% to $1.14.

Why are Wattle Health’s shares on fire today?

Investors have reacted positively to an announcement out of Wattle Health in relation to a new supply agreement.

According to the release, Wattle Health has signed a non-exclusive term sheet with Shandong Weihai Port International Trade Co for the supply of its infant formula range.

Under the agreement Shandong Weihai Port International Trade Co has committed to minimum order volumes worth $34.5 million over the space of a three-year period.

This is broken down as $6.6 million in year one, $11.5 million in year two, and $16.5 million in year three.

After the three years the agreement and volumes will be negotiated again, however management will only do so if the guaranteed volumes are greater than the previous 12 months.

The deal is subject to Wattle Health receiving formal accreditation from State Administration for Market Regulation (formerly known as CFDA) for its infant formula and the signing of the formal supply agreement.

What now?

If this and its previous agreement with International Supplies and Distribution Company goes ahead as planned then Wattle Health is expected to generate revenues of over $100 million during the next three years.

If this proves to be the case then perhaps Wattle Health really can be the next A2 Milk Company Ltd (ASX: A2M) or Bellamy’s Australia Ltd (ASX: BAL). Though, I would suggest investors keep their powder dry until both these agreements have been formally signed.

After all, the selloff of the shares of infant formula hopeful Jatenergy Ltd (ASX: JAT) today should be a reminder of how risky this side of the market can be.

Looking for the next A2 Milk or Bellamy's? Try these three small cap growth shares.

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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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