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Why infant formula hopeful Jatenergy Ltd (ASX:JAT) rocketed higher today

The Jatenergy Ltd (ASX: JAT) share price spent most of the day in the red today until an announcement was released just before the closing bell.

This led to the energy-cum-infant formula company’s shares closing the day almost 12% higher at 8.5 cents.

Why did Jatenergy’s shares rocket higher?

Late this afternoon the company released an announcement relating to its 51% owned Golden Koala business.

According to the release, Golden Koala has entered into a supply agreement with AustAgri Pty Limited for its Golden Koala Premium Range Infant Formulas.

The five-year agreement will allow AustAgri to sell the product in mainland China, Hong Kong, Macau, and Taiwan, as well as through e-commerce platforms. Though, it is dependent on the company receiving CFDA accreditation for its infant formula.

AustAgri will have the exclusive right to distribute and sell the products in mainland China, but only non-exclusive rights in the other territories and e-commerce channels.

What is this worth to Jatenergy?

Potentially quite a lot. According to the agreement, over the five-year period AustAgri must order a minimum amount of its 900g tins. Based on this minimum order quantity, the sales over the period are expected to be approximately $98 million.

This will be guaranteed with a $1 million deposit, half of which is due with 7 days of the agreement being signed and the other half within 7 days of CFDA accreditation being granted.

Should you invest?

While this seems to be a great deal for the company, it doesn’t necessarily guarantee that AustAgri will purchase $98 million worth of product over the five years. If the product simply doesn’t sell, it appears that AustAgri can just walk away at the cost of its deposit.

Furthermore, AustAgri has a limited track record (if any), was only setup in March of this year, and according to the Australian Business Register, it isn’t even registered for GST yet.

Because of this, I think investors should keep their powder dry and wait to see how the agreement impacts its sales in the future.

In the meantime, I would stick with A2 Milk Company Ltd (ASX: A2M) and Bellamy’s Australia Ltd (ASX: BAL).

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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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