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Forget a2 Milk! Why these 3 ASX baby formula stocks could soar in 2020

The A2 Milk Company Ltd (ASX: A2M) finished the year strongly after a market update in its November annual general meeting. a2 Milk’s share price has remained largely stagnant following the announcement, which could be an opportunity for investors to explore alternative dairy and infant formula shares. 

There aren’t many other large cap players in this space besides Blackmores Limited (ASX: BKL) and the recently acquired Bellamy’s Australia Ltd. However, there are plenty of smaller names that have a market capitalisation of less than $500 million. These smaller players are more volatile and inherently risky as their businesses are still in their early days, but I think they are worth a closer look in 2020. 

Nuchev Ltd (ASX: NUC)

Nuchev hit the ASX on 11 December 2019. The company had an IPO offer price of $2.60 per share with a $117 million market capitalisation at the offer price. The company is an Australian-based business with a dedicated focus on developing, marketing and selling a range of premium Australian-made goat nutritional products. It sells premium goat infant formula and goat full cream milk powder under the Oli6 brand in Australia, China and Hong Kong.

Nuchev’s statutory FY19 report highlights $9.5 million in revenue and an earnings before interest, tax, depreciation and amortisation (EBITDA) loss of $9.2 million. For FY20, the company forecasts $18 million in revenue, with EBITDA losses improving to $7.9 million. This would place the company at roughly 17 times FY19 revenue, or 9 times FY20 revenue.

The company is in its early days and only has a market capitalisation of $166 million at today’s prices. An expansion in the company’s distribution network overseas, increasing its production capacity and/or an improved outlook for the business could easily rally the shares. However, there are inherent risks around regulations in China and a crowded baby formula space.

Keytone Dairy Corporation Ltd (ASX: KTD)

Keytone Dairy is a New Zealand-based manufacturer, packer and exporter of dairy and nutrition blended products with a current focus on powdered dairy products. Its business model is aimed at generating revenues from the sales of high-margin, value-added products under its own brand, as well as manufacturing and packaging products for leading supermarkets, retail chains, dairy producers and other consumers under the customer’s private label brands.

Keytone made 2 acquisitions in 2019 – Omniblend, a profitable Australia-based product developer and contract manufacturer of high value, formulated, blended power products and long-life drinks, and Super Cubes, a producer of smoothie ‘cubes’ that are available in Woolworths, 400 independent supermarkets and online.

In the company’s half-year report it highlighted $7.4 million in revenue, a 441% increase on the prior corresponding period and an EBITDA loss of $3.1 million. Surprisingly, Keytone could deliver higher revenue and a better EBITDA loss than Nuchev for FY19. I believe Keytone is a speculative buy at today’s prices as it only has a market capitalisation of $81 million. 

Clover Corporation Limited (ASX: CLV)

Clover is involved in the sale of omega-3 oils and encapsulated bioactive ingredients for infant formula, children’s foods, supplements and medical foods. In FY19, the company delivered a 21.8% increase in revenue and 33.1% increase in NPAT while trading at a current price-to-earnings ratio of approximately 45.

The company derives 50% of its revenues from the ANZ region, however, other geographies such as the Americas, Europe and Asia are slowly playing an increasingly larger role in the group’s revenue. Clover has enhanced its business development capabilities in Europe and China and continues to focus on products developed to address customer requirements, legislative changes and market trends.

Foolish takeaway

Clover presents a diversified health and wellness portfolio at a relatively higher valuation. However, the company has numerous growth avenues with growing revenues in its fish oil and formula business in Europe and USA, while China remains a relatively new market for its baby formula and supplements. Alternatively, Nuchev and Keytone represent more speculative investments as both companies are still loss making. Keytone trades at a cheaper valuation, but both have their own unique value propositions and growth stories.

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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.