27-Feb-2020: Wilsons: Bubs Australia (BUB) MARKET WEIGHT: Some value emerging
Bubs confirmed a mixed 1H20 result. Group sales +39% on pcp, but core IF sales remained flat sequentially. Both NPAT loss and cash burn were larger than our previous expectation. We now expect positive EBITDA from 2H21 (previously 2H20). We forecast 2H20 growth to accelerate with pull-forward demand from the virus outbreak and open orders for new products. We note there is more value emerging now after recent share price performance, but opt to sit on the sidelines until we get more confidence on the growth trajectory of IF and clarity on expected ROI from its multi-product strategy.
Key points
1H20 result in line with pre-release. Group sales of $27M increased 39% on pcp. IF sales remained flat sequentially on 2H19, with increased activity level in Corporate Daigou offset by a deterioration in small Daigous due to regulatory changes. NPAT loss of $5.5M was higher than expectation from lower GPM and higher marketing spend. Period-end net cash was $13M lower than expected, driven an inventory build ahead of new product launches and timing of receivables.
COVID-19 drives demand. Management confirmed no material impact from the virus at group level despite continued logistical challenges. Encouragingly, management called out the corporate Daigou channel has experienced increased activity level since the outbreak.
Wilsons view. After a full 12-mth impact of regulatory changes around CBEC in China, we expect revenue growth to accelerate in 2H20, driven by a) pull-forward demand from COVID-19, and b) new product launches (ie. Deloraine, grass-fed cow IF and junior nutrition). Beyond FY20, IF sales grwoth trajectory remains key. Our forecasts assume BUB to follow a similar trajectory to BAL’s in its early years. We expect a 50bps GP margin improvement p.a. for IF over the forecast years from the scale benefit associated with one-step conversion manufacturing. We forecast marketing spend at 11-17% of group sales over the forecast years.
B/S a modest concern. Lowest point for net cash is now expected at the end of FY21 at ~$22M. This presents a modest concern given the potential working capital requirements for new products and expansion into new markets.
Forecasts. Sales down 12-16%, largely driven by Adult dairy. NPAT down significantly, with lower GPM and higher D&A partly offset by lower opex in the outer years due to AASB16. We now expect BUB to generate positive EBITDA from 2H21 (vs previously 2H20).
Valuation. We set 12-mth target for Bubs at $0.76 p/sh using a blended valuation based on sum of the parts ($1.04 p/sh based on a 12-mth fwd EV/Revenue multiple of 7.5x for IF and 5.5x for non-IF) and DCF ($0.47 p/sh).
Risks and catalysts
Risks. Product quality, supply constraints, market access, intellectual property, key customer / supplier risk. Catalyst. Takeover, registration approval.
--- click on link above for the rest of Wilsons' report ---