The Clover Corporation Limited (ASX: CLV) share price has increased by over 50% since the start of 2019. Clover currently trades at a share price of $2.20 and, I think, is likely to continue increasing.
Clover specialises in the production of DHA, a form of omega 3. As the human body is unable to naturally synthesise omega 3, we must rely on external sources such as diet, to obtain this important fatty acid.
Clover encapsulates and sells DHA to both infant formula and food and beverage companies that include it in its products. The encapsulation process is licensed by the CSIRO until 2027.
Clover has strong tailwinds
By February 2020, Europe has set a minimum DHA requirement to be included in infant formula. China is following Europe's footsteps and currently conducting talks regarding a minimum DHA requirement into infant formula too.
Additionally, Chinese consumers continue to favour imported infant formula, leading to an increased demand for Clover's products.
Critically, Clover has received confirmation from Chinese authorities that the Cross Border Economic Channel (CBEC) market remains open with no end date set. Additionally, 22 warehouses have been developed specifically to assist with the availability of western made infant formula. As the CBEC market allows Clover to access most of its customers, this confirmation provides much assurance to its investors.
Clover appears to be financially healthy which protects it against any unforeseeable short-term issues. Sales revenue showed an increase of 10% from the previous half-year to $34.3 million. The income statement shows a 40% increase in net profit and the cashflow statement experienced impressive organic growth from operations. Clover currently holds a $6.2 million cash reserve which is consistent with the previous half-year.
Based on the FY2018 annual report, a trailing PE ratio of roughly 46 is calculated. This appears expensive until the 108% growth in EPS is factored in, giving Clover a PEG ratio that reflects a more accurate valuation.
Foolish takeaway
Unlike traditional companies such as A2 Milk Company Ltd (ASX: A2M), Clover provides investors with strong exposure to the infant formula market through alternate methods with strong tailwinds. Given the confirmations from Chinese authorities and the macro trends in the near future, the Clover share price could continue pushing all-time highs for many years to come.
