The Bubs Australia Ltd (ASX: BUB) share price has gone near-vertical recently weeks and I’ve bought in.
What Does Bubs Australia Do?
Bubs is a vertically integrated producer of goat milk formula for infants and toddlers. The company was founded by CEO Kristy Carr when she found there was a lack of premium organic baby food available for her own bubs.
Kristy launched Australia’s first commercial range of organic pouch baby food and has led the company to become Australia’s largest producer of goats milk products.
Here are a few reasons I have added Bubs to my portfolio this week.
1. Quality of Products & Management Team
The quality of Bubs’ products has been recognised recently when it announced the establishment of an equity-linked alliance with Australia’s largest pharmacy, Chemist Warehouse.
The deal will see Bub’s products stocked in 450 Chemist Warehouse stores and listed on Chemist Warehouse’s Tmall online webpage. Tmall is one of the largest e-commerce websites in China and is a subsidiary of the Alibaba Group (NYSE: BABA).
Alibaba is one of the world’s largest public companies, having a current market capitalisation of over US$500 billion. A screenshot from my own googling proves that Bub’s products are advertised for sale there.
Bubs’ board was strengthened when they announced Hong Kong-based C2 Capital Partners would acquire 15% of the company, and managing partner Steve Lin will be appointed as Non-Executive Director. Bubs disclosed that Alibaba Group is an anchor investor in C2 Capital Partners. Bubs’ CEO and founder Kristy Carr also owns about 5% of the company.
These factors should ensure the interests of the board are aligned with ordinary shareholders.
2. China Growth Opportunity
Bubs has made it clear that increasing sales of their products into the Chinese market is one of their highest priorities. Bubs recently released their quarterly activity report for the period ending 31 March 2019 with China sales up 884% on the prior comparative period.
This market is obviously many times larger than Australia, with China recording just over 15 million births in 2018. For some comparison, the Australian Bureau of Statistics reported that just over 309,000 births were registered in 2017.
According to Bubs’ ‘Dairy Day’ presentation released to the market in April, the market size for Goat milk formula sales in China is projected to exceed AU$3 billion in 2020.
Are Bubs Shares A Buy?
Although the share price has risen significantly recently, I still believe there is further upside for long-term investors. This is based upon my belief in Bubs’ products and the ability of the management team to capitalise on the growth opportunities discussed to generate high levels of sales growth (and eventually profit).
Although Bubs is currently trading at a very expensive price-to-sales ratio of about 20x, we can gauge how much sales may grow by looking at rival A2 Milk Australia’s (ASX: A2M) recent half-year results.
A2 Milk reported infant nutrition sales of NZ$495.5 million for first half of the 2019 financial year. If we double this and convert to AU$ we get a rough full-year sales figure of AU$937.88 million. This is highly conservative as A2’s infant nutrition sales were up around 45% in the first half of the 2019 year.
If Bubs can grow its sales to anywhere near these levels over the next 5-10 years, its current share price will not appear expensive. However, if high levels of growth do not materialise, the Bubs share price could fall significantly.
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Disclaimer: At the time of writing, William owns shares of Bubs.
