The Motley Fool

Is it too late to invest in Bubs Australia Ltd shares?

The Bubs Australia Ltd (ASX: BUB) share price has jumped 5.12% higher in early trade on Monday, continuing its trend of going absolutely gangbusters recently. Since the beginning of April, shares in the Australian organic baby foods manufacturer have skyrocketed over 30% higher, with most of those gains coming in just the last fortnight.

The company’s shares even briefly touched on a new 52-week high of $1.08 during Friday trading before closing slightly lower at $1.075. That capped off an incredible period for Bubs either side of the Easter and ANZAC day holidays: out of the last 5 trading days, Bubs’ shares have posted daily gains of over 10% on three separate occasions!

If you haven’t heard much about Bubs before, it might be because the company has been growing up in the shadow of larger and more established players in the infant formula industry like Bellamy’s Australia Ltd (ASX: BAL), A2 Milk Company Ltd (ASX: A2M) and Synlait Milk Ltd (ASX: SM1). However, over the last year or so Bubs has been setting itself up as a real challenger to these industry heavyweights in the most lucrative of overseas markets: China.

Bubs made a number of positive announcements to the market just prior to Easter, but the most significant related to its successful acquisition of Australia Deloraine Dairy Pty Limited and its strategic partnership with private equity fund C2. Deloraine Dairy is one of only 15 licensed canning facilities in Australia with the appropriate approvals and accreditations from Chinese regulators to import its infant formula products directly into China.

C2 is a Hong Kong-based private equity fund, backed by Chinese e-commerce giant Alibaba, with a focus on adding value for companies seeking to capitalise on the growth potential created by the expanding Chinese middle class. As part of the partnership deal C2 will hold a 15% stake in Bubs and one of its Managing Partners, Steve Lin, will sit on Bubs’ board as a Non-Executive Director.

These two developments give Bubs a significant foothold in the Chinese market and might even allow it to leapfrog over some of its bigger competitors. Bellamy’s, for instance, is still waiting on a new license to sell its Chinese-labelled products in China. And no doubt management at all the Australian infant formula companies will be getting jealous of the cosy relationship Bubs seems to be fostering with Alibaba.

Foolish takeaway

At the moment the market seems to be struggling to price in these latest announcements, as can be seen from Bubs’ surging share price. And while I’m excited by this recent news, and bullish on Bubs’ overall future prospects – I’m a shareholder myself – I would encourage new investors to show a little short-term restraint.

For one thing, despite delivering astronomical growth in its gross revenues for first half FY19, Bubs still posted a statutory loss of $8.8 million for the half, more than twice that of the prior comparative period. So it could be some time before the company reaches profitability – which means that despite all this current good news, it remains a risky (and possibly volatile) investment.

Bubs has also made a habit of taking advantage of positive business developments by launching capital raisings just as its share price starts to really take off. It did it a number of times last year: once following its acquisition of nutritional company Nulac Foods, and again shortly after announcing it had opened its flagship store on Alibaba’s online marketplace. In both cases, these actions diluted the Bubs share price and dampened its potential growth.

So despite the cash injection the company received from C2, I personally still wouldn’t be surprised if more capital raisings were just around the corner. If that happens soon, and there is a subsequent dip in its share price, that’s when I would think about pulling the trigger and investing.

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Motley Fool contributor Rhys Brock owns shares of BUBS AUST FPO. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended Bellamy's Australia and BUBS AUST FPO. 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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