The Motley Fool

Could Bubs Australia Ltd be the next The A2 Milk Company Ltd?

Looking at the share price performance chart of Australian organic baby foods manufacturer Bubs Australia Ltd (ASX: BUB) over the last 12 months is sort of like looking at someone’s heartbeat on an echocardiogram. Every few months there is a big spike in the share price, which is followed by an equally rapid drop-off.

The first big spike came back in November 2017, when Bubs announced that it had acquired Nulac Foods, a company specialising in the manufacture of nutritional products made primarily from goats’ milk.

At the time, Bubs CEO Nicholas Simms stated that Nulac’s CapriLac-branded range of goat dairy products had high appeal with Chinese consumers and the acquisition provided an opportunity for Bubs to accelerate its growth into South East Asian markets.

This announcement coincided with a rapid surge in Bubs’ share price. Over a period of about a month from mid-October to mid-November, Bubs’ share price rocketed almost 130% to $1.07.

Bubs took advantage of the increased demand for its shares, launching a capital raising at a significant discount to its November share price, which subsequently closed oversubscribed. The dilutive effects of this caused Bubs’ share price to trend lower over the next few months, and by February shares were trading back down at close to 65 cents.

In February of this year Bubs released strong first half FY18 sales numbers, with total sales up 92% on first half FY17 to $3.7 million. In the days leading up to and including the date of the results announcement, Bubs’ share price surged over 50% to be touching $1. But with no further news out of the company over the next few months, the share price again slid lower, heading back down towards 70 cents by late May.

The most recent spike in Bubs’ share price occurred in early June, after a flurry of announcements. First, Bubs announced that it was partnering with QianJiaWanPu, China’s largest distributor of infant nutritional products.

Then around the same time, Bubs announced a separate partnership with New Times Asia, which specialises in e-commerce sales in China, in a deal it expected would double its total revenues for FY19. Significantly, the deal also locked in minimum sales commitments of $24 million for FY20 and $37 million in FY21.

A few days later, Bubs announced that it had entered into a binding manufacturing agreement with Australia’s Deloraine Dairy Pty Ltd. This represented a further step in its Chinese market expansion, as Australia Deloraine Dairy is one of only 15 licensed facilities in Australia with the appropriate approvals and accreditations from Chinese regulators to import its infant formula products directly into China.

At the same time, Bubs announced it had signed a merchant service agreement to open its flagship online store on Chinese e-commerce giant Alibaba.

Again, Bubs took advantage of the boost in its share price to conduct another capital raising, which diluted the share price and saw it trend lower over the next few months. As of Friday afternoon, Bubs’ shares were trading at 67.5 cents per share.

In its quarterly update at the end of July, Bubs announced record quarterly gross sales, up 531% versus fourth quarter FY17 to $8.9 million, with export sales to China accounting for 22% of gross revenues.

Foolish takeaway

Bubs is following a similar trajectory to New Zealand-based infant formula producer and long-time market darling The A2 Milk Company Ltd (ASX:A2M). Both are aggressively pursuing growth strategies in the lucrative Chinese market.

They even offer a similar point of difference – A2 supplies infant formula derived from dairy containing only the A2 beta-casein protein which many people find easier to digest. Bubs specialises in organic and “superfood” products – and now goats’ milk formulas – which are intended to cater to consumers with allergies or sensitivities to certain dairy products.

Despite the risk of investing in a small cap like Bubs, its growth strategy is exciting. The way Bubs has timed its capital raisings might frustrate existing shareholders who really want to see its share price take off. But the company has been putting the money raised to good use through acquisitions and expansions.

I’d say definitely add this one to your watch lists for FY19.

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Motley Fool contributor Rhys Brock 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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