Infant Nutrition Space: Bellamy’s Australia Reported $18 million loss in China label sales

Many times, Government policies and regulation changes restrict the ability of food and beverage companies to sell existing product into key markets. Last year, China made some regulation changes in relation to e-commerce and cross border trade, as a consequence of which, the operations and businesses of many foods and beverages companies were impacted.

Today (i.e., 28 August 2019), Bellamy’s Australia has unveiled its FY19 results wherein it reported that the demand for its products in china was impacted by the regulatory change. Let’s take a look at the FY19 results of Bellamy’s Australia and few other infant nutrition stocks:

Bellamy’s Australia Limited (ASX: BAL)

Australia’s leading infant nutrition and food company, Bellamy’s Australia Limited’s (ASX: BAL) achieved a revenue of $251.0 million in FY19, down by 21.6 per cent on the previous corresponding period (pcp). The revenue was impacted by the loss of $18 million in China label sales; CBEC regulation, declining birth rate and increased competition; and rebrand transition.

Despite the decrease in revenue, the gross profit margin improved by 5 points driven by price and input costs.

BAL’s Profit and loss Statement (Source: Company Reports)

During the year, the demand for the company’s products in China was impacted by regulatory change, a lower birth rate and increased competition. Overall, it was a busy year for the company with significant progress made on a full Bellamy’s brand relaunch of its formula and food portfolios, a substantial step change in its China sales and marketing capability including channel and economics reset, and a concerted effort in rolling out the new culture program at all levels of the business.

The company’s transformational rebrand is representing the most significant investment in the company’s history and includes several important changes:

  • Premium branding, reinforced by a premium price position in Australia and China;
  • Australian organic milk to support the provenance of our brand and the local industry;
  • A superior formulation, including a world leading level of DHA for an organic formula;
  • Compelling trade economics to drive grassroots recruitment and advocacy; and
  • An extended range for formula (Step 4 and pregnancy) and food (cereals, custards and exotic fruit pouches)

During FY19, the company doubled its investment in both marketing and China capability to activate the brand. The marketing investment was focussed on the relaunch of all digital assets, introduction of an A-grade Chinese ambassador in Stefanie Sun, outdoor media presence and higher impact selling points. On the other hand, the capability investment was focussed on China sales and marketing leadership and talent to engage consumers, expand distribution and drive ambitious joint-business-plans with the trade.

As at 30 June 2019, the company had cash balance of $112.4 million, reflecting strong overall cash conversion.

In FY20, the company is expecting 10-15% group net revenue growth at an EBITDA margin consistent with last year. In FY2020, the company expects the revenue growth in the second half and also expects to achieve strong gross margin and investment in marketing and China capability.

On the stock performance front, the stock of BAL has provided a negative return of 0.49% as on 27 August 2019. BAL has a 52 weeks high price of $12.570 and 52 weeks low price of 6.710 with an average volume of 1,060,813. At market close on 28 August 2019, BAL’s stock was trading at a price of $7.940, down by 1.366% intraday, with a market capitalization of circa $912.61 million.

The a2 Milk Company Limited (ASX: A2M)

Leading infant nutrition company, The a2 Milk Company Limited (ASX: A2M) was able to sustain its strong growth trajectory in FY19 by delivering impressive results for the period which are reflecting the strength of the company’s brand, a highly disciplined focus on growth, and the talent and commitment of the company’s people.

The a2 Milk Company Limited’s FY19 Key Financial Highlights (Source: Company Reports)

The company’s gross margin remained strong during the year and has improved to 54.7% in FY19, driven by a price increase.

The net operating cash flow for FY19 was $289.1 million, with cash on hand at 30 June 2019 of $464.8 million, reflecting growth in revenue and earnings, partially offset by increased working capital, and our increased equity investment in Synlait Milk in August 2018.

In FY2020, the company’s EBITDA as a percentage of sales is expected to be broadly consistent with 2H19 EBITDA margin (28.2%) reflecting increased full year marketing investment to ~12 per cent of sales and continued investment in organisational capability to support future growth.

As per the company, the Macro factors which are shaping consumer demand and creating opportunity include:

  • Growing consumer demand for health and wellness products
  • Growing focus on food safety, naturalness and provenance
  • Rise of the middle class in Asia
  • Rapid pace of digitalization

On the stock performance front, the stock of A2M has provided a negative return of 3.72% as on 27 August 2019. A2M has a 52 weeks high price of $17.300 and 52 weeks low price of $8.140 with an average volume of 3,680,488. At market close on 28 August 2019, A2M’s stock was trading at a price of $13.450, down by 0.074% intraday, with a market capitalization of circa $9.9 Billion.

Wattle Health Australia Limited (ASX: WHA)

Wattle Health Australia Limited (ASX: WHA) is currently in the process of acquiring 75% interest in Blend & Pack (B&P) from Mason Holdings Pte Ltd.  This acquisition has already been approved by WHA shareholders.

The company is of the view that acquisition will strengthen WHA’s position to sell product into China and will add significant value and additional revenue streams to WHA.

On the stock performance front, the stock of WHA has provided a negative return of 55.93% as on 27 August 2019. WHA has a 52 weeks high price of $1.345 and 52 weeks low price of $0.380 with an average volume of ~293,021. At market close on 28 August 2019, WHA’s stock was trading at a price of $0.390 with a market capitalization of circa $75.86 Billion. It is to be noted that WHA’s stock is trading near to its 52 weeks low price.

WHA’s Six Months price chart (Source: Company Reports)

Bubs Australia Limited (ASX: BUB)

Producer of Australian-made premium infant formula, Bubs Australia Limited (ASX: BUB) witnessed 6 per cent uplift in group sales in Q4 FY19, as compared to the previous quarter.

Financial highlights for Q4 FY19 are as follows:

  • Q4 finished at $18.46 million – highest quarterly revenue on record
  • FY19 Q4 revenue exceeded the full year FY18 revenue
  • Q4 is 56% up compared to previous quarter, and up 108% pcp (prior corresponding period)
  • FY19 finished at $51.3 million, a 179% increase pcp
  • $23.3 million in cash reserves as at 30 June 2019
  • Positive cashflow was achieved in operating activities through fourth quarter.

In the fourth quarter of FY19, the company established a Joint Venture in China by partnering with Beingmate, a leading producer of infant nutrition products in China.

Recently, the company has also announced a strategic channel partnership with Kidswant, an innovative data and consumer relations based omni-channel family service provider, as the first major project of the Bubs/Beingmate Joint Venture.

On the stock performance front, the stock of BUB has provided a return of 106.78% as on 27 August 2019. BUB has a 52 weeks high price of $1.615 and 52 weeks low price of $0.355 with an average volume of ~4,461,027. At market close on 28 August 2019, BUB’s stock was trading at a price of $1.280 with a market capitalisation of circa $621.7 million.


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