Why this ASX infant formula share is sinking lower today

The Clover Corporation Limited (ASX:CLV) share price is pushing higher on Wednesday after the release of its half year results…

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The Clover Corporation Limited (ASX: CLV) share price is trading lower on Wednesday.

This follows the release of the infant formula ingredients manufacturer's half year results after the market close on Tuesday.

At the time of writing the Clover share price is down almost 6% to $1.76.

How did Clover perform in the first half?

For the six months ended January 31, Clover reported net sales revenue of $37.6 million. This was a 9.8% increase on the prior corresponding period.

However, on the bottom line the company recorded a net profit after tax of $4.6 million. This represents a modest 3.4% lift over the same period last year.

Despite its profit growth and in light of the unprecedented market conditions created by the COVID-19 outbreak, the company is not declaring an interim dividend.

What were the drivers of this result?

Management advised that Clover has grown revenue in the USA by 57% and Europe by 31%, with new customers in infant formula and food applications.

It notes that European infant formula manufacturers are required to fortify their product for European sales with a minimum of 20mgDHA/100Kcal from February 2020. As such, they have spent the last six months transitioning their stocks to the higher DHA loading.

This is a positive for Clover as its unique Driphorm microencapsulated powder allows customers to achieve a higher loading without any sensory issues.

China update.

The Chinese infant formula market is reviewing draft legislation which, if introduced, would require infant formula sold in the country to contain a minimum of 15mgDHA/100Kcal.

While this is a potential positive for the company, the uncertainty about such future requirements means that manufacturers are cautious about building inventory levels.

In addition to this, China has stated its intention to increase local brands' share of the market, and there has also been a slow down in issuing of licenses to non-Chinese manufacturers supplying Chinese retail outlets. This is what the market has seen with Bubs Australia Ltd (ASX: BUB) and Bellamy's.

While it acknowledges that this might have a dampening effect on demand for Clover's products, it has been offset by the opening of additional bonded warehouses which facilitate the Cross Border E-commerce (CBEC) market for infant formula. This allows imported brands to access the Chinese market indirectly, without a retail license.

Outlook.

Pleasingly, management advised that the COVID-19 outbreak has had no impact on results in the first half of FY 2020 and is yet to have any impact on forward orders for the second half. At present, third quarter order rates are consistent with second half FY 2019 sales.

Assuming stability of the Chinese market, the company expects demand patterns from customers to continue in the second half of the year.

James Mickleboro 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 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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