Are these 2 ASX baby formula shares the next a2 Milk?

Can Clover Corporation (ASX: CLV) and Keytone Dairy Ltd (ASX: KTD) become the next A2 Milk Company Ltd (ASX: A2M)?

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If there was a model company for consumer staples or the food and beverage sector, it would be the A2 Milk Company Ltd (ASX: A2M). But even a2 Milk had humble beginnings with a market cap of less than $300 million. Could these 2 small-cap ASX baby formula shares have the potential to be the next a2 Milk?

1. Keytone Dairy Corporation Ltd (ASX: KTD)

Keytone Dairy is a manufacturer and exporter of formulated dairy products in Australia and New Zealand. The company floated on the ASX in July 2018 at an offer price of $0.20 and currently has a market capitalisation of less than $100 million.

Keytone is in its early days and developing sales momentum both organically and through acquisitions. In its FY19 full-year results, the company saw its total sales revenue increase by 366% to $1.5 million. Furthermore, there has been a significant interest in the company's products from the likes of Walmart China, which has made two orders totalling approximately NZD$1,000,000 within a matter of weeks of each other. 

The company has been busy on the acquisition front. On 17 June 2019, Keytone acquired health and wellness powdered and UHT (Ultra-high temperature) drinks producer, Omniblend. Omniblend serves top health and wellness companies including brands such as Tony Ferguson, Muscle Milk, Aldi and Bellamy's Organic. It holds numerous accreditations, including from the Certification and Accreditation Administration of the People's Republic of China. 

On 17 October 2019, Keytone also acquired Super Cubes. Super Cubes is a premium Australian consumer health and wellness brand that produces a range of all natural frozen cubes of fruits, vegetables, plant-based protein and highly nutritious ingredients for an enriched smoothie. In FY19 it delivered $650,00 in sales.

As at 30 June 2019, Keytone had $7.6 million cash in the bank. The company is in a good position to continue to leverage its complementary acquisitions and economies of scale on its road to profitability.

2. Clover Corporation Limited (ASX: CLV)

Clover is engaged in the production and sales of omega-3 oils, children's foods, infant formula, supplements and medical foods.  

The company delivered 21.8% revenue growth and 33.1% net profit growth in FY19 while trading at a price-to-earnings ratio of approximately 50. Clover has a diversified global footprint with 50% revenue coming from the ANZ region, 37% from Asia, 8% from Europe and 5% from the Americas. All regions are experiencing strong year-on-year growth, while Asia is a key growth area for infant formula products. The USA also represents a key growth channel for non-infant formula goods.

Foolish takeaway

Of these 2 small-caps, Keytone represents a higher risk/reward investment. The company is still operating at a small loss, but has plenty of a cash in the bank and recent acquisitions to fuel triple digit year-on-year growth. Clover is a more established business with a diversified product mix and global footprint. It does come with a premium valuation, but is in its early days of growth.

Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Clover Limited. 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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