The Motley Fool

Can the Bubs Australia share price climb even higher?

Bubs Australia Ltd (ASX:BUB) has had a fantastic 2019 so far. Shares in the Australian organic baby foods manufacturer have surged 169% so far this year, even briefly hitting an all-time of $1.615 back in May. After coming off the boil a little, the share price looks to be heading back upwards again, buoyed by record quarterly revenues and a new key strategic partnership with one of China’s leading retailers of mother and baby products.  

A closer look at Bubs

Bubs generated $18.46 million in revenues for the fourth quarter of FY19, more than it had brought in over the entirety of FY18. Full-year revenues came in at $51.3 million, which represented an enormous 179% increase on the prior year. The full-year result was primarily driven by domestic infant formula sales growth, but it was also notable that a sizeable 12% of gross sales over the most recent quarter came from China.

Commenting on the result, Bubs founder and CEO Kristy Carr also called out growth in its corporate daigou segment as a key contributor to the positive domestic sales result. Daigou refers to the practice of Chinese personal shoppers purchasing goods for customers back in China as a way to avoid stiff import tariffs.

This demonstrates the strategic importance that Bubs has placed on cracking the Chinese market. But its focus on China is beginning open up new channels for strong future growth.

The most recent example of this is from June, when Bubs entered into a strategic partnership with leading Chinese mother and baby products retailer Kidswant. The agreement will ensure that Bubs brand organic infant food products are stocked by 275 Kidswant stores in 123 cities across China. Bubs expects that sales worth $6 million will be generated through the partnership within the first year – that’s almost 12% of total FY19 revenues.

The Kidswant partnership adds to an impressive list of friends Bubs has made in China. In April, Hong Kong-based private equity firm C2 Capital Partners injected $31.4 million into the company through a share placement. Then in May, Bubs entered into a joint venture with food manufacturer Beingmate – a venture which led directly to the Kidswant partnership. On top of all that, Bubs is now also selling its products through Chinese ecommerce giant Alibaba’s online marketplace.

So, should you invest?

For those investors with a healthy appetite for risk, Bubs offers significant growth potential. In the recent quarterly results announcement, Kristy Carr stated that as the partnerships with Kidswant and Alibaba were initiated late in the quarter, they “were expected to drive future growth in B2B export sales to China.” This signals that even more significant revenue growth could be just around the corner.

In my mind, this puts Bubs ahead of other companies operating in the dairy and infant formula space like Bellamy’s Australia Ltd (ASX:BAL), A2 Milk Company Ltd (ASX:A2M) or Synlait Milk Ltd (ASX:SM1). So far, the strategic decision to focus so much of its resources on expanding its presence in China has proved to have been very savvy, and it could mean Bubs may outperform many of its more established rivals.

If Bubs feels a little too risky for you, don't miss these five cheap ASX growth shares instead.

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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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