Thursday, July 16, 2020

My ASX share for the week

baby, milk, formula, bellamy's, bubs

My ASX share for the week (and the long-term) at today’s price is Bubs Australia Ltd (ASX: BUB).

I think it has a very exciting future. At a share price of $0.93 it has a market capitalisation of around half a billion dollars.

Overview of Bubs

Bubs describes itself as Australia’s only vertically integrated producer of goat milk formula, with an exclusive milk supply from Australia’s largest milking goat herd.

In December 2017, Bubs Australia acquired NuLac Foods, Australia’s largest producer of goat milk products, including CapriLac, a leader in goat milk, powder and yoghurt, and Coach House Dairy, a premium range of Jersey milk products. The acquisition guaranteed exclusive sustainable supply of locally sourced goat milk from Australia’s largest herd of milking goats, with existing capacity to produce over six million litres of milk annually.

Bubs can be described as vertically integrated because last year it acquired Deloraine. At the time it was one of only 15 licensed canning facilities in Australia that was allowed to import into China under regulatory requirements administered by State Administration for Market Regulation (SAMR).

Why I think Bubs is a strong pick for the next 5+ years

There are several reasons why I think Bubs is one of the best ASX growth shares right now:

Control of supply chain

Having control of your supply chain can be important for consumer goods businesses. The more steps and businesses there are between production and the end customer, the more margin that is lost by the company.

Customers can have full confidence in Bubs’ products because they know Bubs is responsible from the farm all the way to the finished product.

International expansion

I think international growth is one of the most important factors for many ASX shares to beat the market over the long-term.

Australia can support very large businesses. Just look at Commonwealth Bank of Australia (ASX: CBA), Wesfarmers Ltd (ASX: WES) and Telstra Corporation Ltd (ASX: TLS).

But Australia only has a population of just over 25 million people. Asia has a much larger population and therefore a much bigger total addressable market. ASX shares that can tap that market successfully can do very well. 

Bubs is targeting Asian growth right now. Bubs may expand to other countries in the future such as the US like A2 Milk Company Ltd (ASX: A2M) has done, but China and Vietnam alone are producing good results for Bubs.

Revenue growth and growing gross profit margin

Chinese revenue rose by 104% in the last quarter. ‘Other market’ revenue rose almost 20 times compared to the prior corresponding period and represented 12% of gross sales in the quarter. Asia is very important for the company’s medium-term growth plans. But Australian revenue actually grew by 34%, so domestic sales are going very well too.

The quarter to 31 March 2020 showed overall quarterly revenue of $19.7 million for the ASX share. This was a 67% uplift from the prior corresponding period and 36% growth on the previous quarter. Infant formula sales increased by 137%. These are impressive numbers.

In the FY20 half-year result Bubs revealed that its gross margin improved from 19% to 24%. This is a significant improvement and shows that Bubs is very scalable as it generates more revenue.

Capable management

I think Bubs’ management has done a really good job to grow the ASX share into what it is today. It has made a number of smart strategic decisions which improve the quality of the businesses.

The focus on growing its distribution footprint will help grow revenue further in the coming years. It’s sold across a variety of different retailers like Alibaba’s Tmall and Beingmate, Woolworths Group Ltd (ASX: WOW), Coles Group Limited (ASX: COL), Baby Bunting Group Ltd (ASX: BBN) and Chemist Warehouse.

Foolish takeaway

I’m not sure how big Bubs can become. But I think it has plenty of room for growth. The rising profit margin and rocketing revenue growth tells me it can become a very profitable business over the next few years. I’d be very happy to load up on shares for the next five years (or more) at the current share price.

More reading

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 and has recommended Telstra Limited. The Motley Fool Australia owns shares of A2 Milk, COLESGROUP DEF SET, and Wesfarmers 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.

The post My ASX share for the week appeared first on Motley Fool Australia.

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