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Is the Bubs Australia share price in the buy zone?

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The Bubs Australia Ltd (ASX: BUB) share price is currently trading more than 30% lower for the year. Despite the poor price action, a strong half-year performance and bullish outlook could make the Bubs Australia share price a buy for 2020 and beyond.

What does Bubs Australia do?

Bubs is the market leader in goat dairy, providing more than 65% of goat milk products in Australia. The company’s product portfolio is primarily targeted to infants and children with products including organic toddler snacks and infant milk formula made from goat milk. 

Following the acquisition of Deloraine last year, Bubs now has an internalised canning and blending production facility that is CNCA-certified.

In addition to being an emerging brand in China, Bubs has a strong domestic presence with the company recently signing a new supply agreement with Woolworths Group Ltd (ASX: WOW). Bubs also has a key strategic partnership with Chemist Warehouse and continues to invest in expanding new export markets.

How has Bubs performed?

Late last month, Bubs posted record revenue and gross margin improvements. The company’s half-year report was highlighted by a 37% increase in group gross revenue to $28.8 million which was driven by strong demand for its infant formula.

Demand for Bub’s Goat Infant formula remained the key driver with sales improving 77% since the prior corresponding period (pcp) and doubling in China. Other highlights of the company’s first-half report included a 24% improvement in gross margin and new distribution partnerships.

Overall, Bubs reported a statutory earnings before interest, tax, depreciation and amortisation (EBITDA) loss of $5.25 million for the first half, in comparison to a loss of $8.52 million in the pcp.

Coronavirus and Bubs

As mentioned previously, Bubs has a CNCA-certified manufacturing site. This allows the company to source its goat milk and packaging for infant formula from domestic suppliers in Australia and New Zealand As a result, Bubs’ supply chain and manufacturing have not been severely impacted by the coronavirus outbreak.

On the contrary, coronavirus could potentially serve as a catalyst for milk and infant formula companies like Bubs. In February, the Chinese government issued a report that recommended consuming 300 grams of dairy as part of their nutrition guidelines. Companies like Bubs could be well poised for a surge in demand as Chinese consumers look to stockpile in lieu of the coronavirus outbreak.

Are Bubs shares a buy?

In the short term, the coronavirus outbreak could give infant formula companies like Bubs a boost. Bubs’ management confirmed that its corporate Daigou channel has experienced an increased level of activity since the outbreak.

In my opinion, the long term outlook for Bubs looks promising. However, as Bubs grows its sales and revenues, the company’s overheads will increase.

Therefore, I think it’s important that investors appreciate the growth trajectory of infant formula and wait for Bubs to give clarity on the expected return of its multi-product strategy before making an investment decision.

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Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia has recommended 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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