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3 strong growth areas that may mean the Bubs (ASX:BUB) share price is a buy

Bubs share price
Source: Bubs

The Bubs Australia Ltd (ASX: BUB) share price could be worth looking at after reporting its FY21 half-year results to the market.

What is Bubs?

Bubs is a business that sells a number of different dairy products. A key division is the goat milk infant formula. It also has a growing organic cow milk infant formula range. It sells adult goat dairy products as well as a vitamins and minerals range for children.

FY21 half-year result

Bubs reported that its total revenue declined by 33% to $18.3 million, whilst statutory earnings before interest, tax, depreciation and amortisation (EBITDA) fell by 174% to a steeper loss of $14.4 million.

There was an inventory provision of $3.1 million and the need to sell excess bulk powder inventory at a loss due to COVID-19 driven softening demand and the prioritisation to conserve cash.

Bubs said that the Bubs goat infant formula product gross margin was 34%, which was consistent with FY20.

The infant formula business said that there was significant COVID-19 disruption to the daigou channel caused by international border closures and increased air freight costs. However, it said that the corporate daigou sales momentum continues to recover.

How is Bubs trying to grow the share price and profit?

Whilst Bubs is seeing a decline in sales with daigou, there are other areas that are growing strongly:

1: Local sales in supermarkets and pharmacies

Bubs highlighted that it’s the clear lead challenger in domestic supermarkets and pharmacies. Total infant formula category scan sales in the Australian grocery and pharmacy retailers have been heavily impacted by the demand shock in the daigou channel. Despite that contraction for the entire industry, Bubs is still achieving high scan sales growth itself.

Looking at scan value sales data, the sales across Coles Group Ltd (ASX: COL), Woolworths Group Ltd (ASX: WOW) and Chemist Warehouse were up 55% for the 26 weeks to 3 January 2021.

The company tripled its market share compared to the prior corresponding period, rising to 3.5% of the total infant milk formula category for the period. It has a 28.6% market share of the total goat infant formula segment.

2: Direct Chinese sales

Whilst daigou channel sales were lower, the Bubs goat formula total direct sales to China rose 36% in gross revenue terms.

Management said that this demonstrated there was strong Chinese demand for Bubs premium products.

Bubs said that integrated social marketing campaigns were successfully driving consumer engagement, e-commerce traffic and user acquisition on cross-border e-commerce marketplaces. One example of this success is the Bubs goat milk formula gross merchandise value (GMV) on Tmall, operated by Alibaba. There was a 121% increase in offtake sales on Tmall Global year on year.

The was a 24% year on year increase of Bubs goat infant formula gross revenue to the Chinese CBEC channel.

Bubs said it plans to enter more than 1,000 online-to-offline stores in the second half of FY21.

3: Non-Chinese exports

The infant formula business said that there is significant sales momentum across new Asian markets, with export gross revenue outside of China increasing 44% year on year.

Countries where it’s now being sold include Hong Kong, Vietnam, Malaysia and Singapore. It’s planning to launch in South Korea in the second half of FY21.

South Korea is an important market because it’s the world’s second largest goat infant formula market. It has selected YP Corporation as the nominated distribution partner. It has deep experience in the mother and baby category. It also has a high market penetration in major online e-commerce platforms as well as offline stores.

Bubs share price movement

The Bubs share price has more than halved since the 52-week high in May 2020.

Bubs has a number of strategies to drive growth further in the second half of FY21 and it is targeting a return to a more aggressive growth profile in FY22.

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Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of BUBS AUST FPO. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Woolworths Limited. The Motley Fool Australia has recommended BUBS AUST FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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