Bubs share price avoids market selloff thanks to guidance upgrade

Bubs has upgraded its guidance…

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Key points

  • Bubs has unsurprisingly upgraded its guidance for FY 2022 due to its deal with the US government
  • It is expecting to more than double its revenue in FY 2022
  • However, this isn't going to have much of an impact on its earnings due to a lack of operating leverage

The Bubs Australia Ltd (ASX: BUB) share price has avoided the market selloff so far on Friday.

In early trade, the infant formula company’s shares are up 2.5% to 62 cents.

Why is the Bubs share price rising?

The Bubs share price is rising today in response to the release of an announcement relating to its guidance for FY 2022.

According to the release, Bubs has unsurprisingly revealed that its deal with the US government means it is going to outperform the FY 2022 guidance it provided to the market with its half year results.

At that point, the company was expecting “modest” half on half growth from the $38.5 million gross revenue it recorded during the first half.

Bubs now expects gross revenue to be over $100 million for FY 2022, subject to scheduled operations occurring without disruption. This will be more than double the gross revenue of $46.8 million it reported in FY 2021.

What about earnings?

While the upgrade to its revenue was unsurprising, the company’s distinct lack of operating leverage could be a surprise to the market. In fact, its margins appear to be narrowing rather than expanding despite the higher volumes.

Management is guiding to underlying EBITDA of at least $2.4 million for FY 2022. This is despite the company recording underlying EBITDA of $1.2 million during the first half on much lower revenue.

This could be an indication that the margin on these US-bound products is very small.

Management commentary

Bubs Founder and CEO, Kristy Carr, commented:

Due to a strong momentum in China and the unanticipated volume of sales in the USA, complemented by Bubs’ demonstrated agility and speed to respond to the call for action with first mover advantage, Fourth Quarter turnover is likely to be higher than originally anticipated.

And while there are concerns that Bubs could be a one-hit wonder in the US, Carr doesn’t see it that way. She appears confident that the company will not be ousted out of the key market when supply shortages end and the big players start restocking.

It has been an extraordinary journey for Bubs to have had over 12 months of in-market experience to provide the first response to USA’s infant formula shortage, which is likely to change the industry landscape in the USA.

This has significantly accelerated our entry to one of the largest infant formula markets in the world, and we look forward to introducing more American families to Bubs’ full range of products.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. 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 Scott Phillips.

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