A Look at Two Dairy Stocks Amidst Coronavirus Outbreak – KTD and BUB

One of the most important agricultural industries, the Australian dairy industry generates substantial revenue across the whole supply chain, producing a range of dairy products like yoghurt, butter, milk powder and cheese. In addition to supplying major dairy products in the domestic market, Australia has been ranked as the third largest dairy exporter across the world, which exports 50 per cent of its production internationally.

Australian supermarkets have been providing a stable market for the dairy industry, wherein value growth has been reported for all major dairy products. However, the recent coronavirus outbreak might disrupt the growth trajectory of the dairy industry, which exports a substantial portion of its production to China.

Given this backdrop, let us discuss two such dairy stocks listed on the ASX which have recently updated on the impact of coronavirus on their businesses:

Keytone Expects an Immaterial Impact of Coronavirus on its Business

Australia-based dairy product manufacturer, Keytone Dairy Corporation Limited (ASX:KTD) does not expect coronavirus to result in any material impact on the Company’s financial performance, anticipating a strong run rate and current quarter leading into its new financial year commencing on 1 April 2020.

The Company notified that though coronavirus has disturbed the shipping and general supply chain logistics from and to China across the globe and postponed a few numbers of Chinese orders received by the Company, it is likely to have an immaterial impact on its business.

The coronavirus outbreak has benefited the Company in a way that:

• Sales of staple food products in China have increased substantially.
• It has received in-bound interest in nutritional based, immunity style products for Chinese markets.

Keytone highlighted that a major Chinese online retailer JD.com has recorded a significant rise in health and food-related product sales, including products like the Australian and New Zealand made products produced by the Company.

Recently, the Company has also received a new order from Walmart (China) Investment Co. Ltd for about $350,000 in product for wholly owned subsidiary of Walmart, Inc, Sam’s Club West, Inc. (China). The Company is confident in the pipeline of future orders from Walmart China.

Keytone has continued to experience demand for clean, green, pristine food staples/general health and wellness products. The Company is ideally placed to meet the increased demand for these immunity-boosting health products from China via its operational and production structure, designed to respond to customer requirements promptly.

In order to satisfy the inbound wholesale customer requirements for the China market, the Company’s product development team is currently working on a roll-out of immunity boosting nutritional SKUs.

Key Financial Highlights (Q3 FY20)

In addition to performing strongly on an operational front, the Company delivered robust financial results for the quarter ended 31^st December 2019. The key highlights of the quarter results include:

• Total sales revenue rose to ~$6.6 million.
• Total customer cash receipts improved to ~$7.6 million.
• Sales of the Company’s formulated dairy powders retail offering from New Zealand, rose 87 per cent.
• Net cash outflow from operating activities of $2.3 million surged over the previous quarter’s result.

As at 1:34 PM AEDT on 27^th February 2020, KTD is trading at $0.330 on the ASX.

Coronavirus Caused Minimal Disruption to Business, Says Bubs Australia

Australian-headquartered infant nutrition products manufacturer, Bubs Australia Limited (ASX:BUB) has recently notified that coronavirus outbreak led to minimal disruption to the business and no diminution of demand, while the Company is unable to assess any future impact from the deadly virus.

Bubs® is ideally positioned to satisfy Chinese parents’ heightened focus on their children’s health and immunity and food security. As per the Company, after the Chinese government has recommended the consumption of 300g of dairy per day, the long-life dairy powder is becoming an important nutrition source and pantry item.

Though some retail channels fuelled by Chinese students and tourists have been obstructed from mid-Feb, Bubs® products are increasingly produced in the Corporate Daigou Channel.

During the half-year period ended 31^st December 2019, the Company observed a 19 per cent rise in direct sales to China, supported by infant formula sales which nearly doubled (improving 99 per cent) to China over the period. The figures suggest robust traction with Chinese consumers subsequent to the establishment of new partnerships with Beingmate and Alibaba Tmall, and deployment of enhanced marketing resources.

The Company is focussed on becoming a leading specialist brand in the super-premium infant formula market in China and Australia.

ALSO READ: Bubs®’ Major New Supply Agreement with Woolworths

Key Highlights of 1H FY20 Results

The Company has recently reported record financial results for the six months ended 31^st December 2019, observing a solid growth trajectory. The key highlights of the results include:

• Gross revenue increased by 37 per cent on pcp, to $28.75 million.
• Gross sales revenue from Baby Food and Bubs® Infant Formula was 23 per cent up and 77 per cent up on pcp.
• Revenue of adult goat milk powder also rose 30 per cent.
• Bubs® products accounted for 53 per cent of total net revenue in 1H FY20 vs 43 per cent in 1H FY19.
• Gross margins increased steadily to 24 per cent across the group.
• Normalised EBITDA loss of $3.74 million was observed over the period.

The improvement in gross revenue over the period indicates that the Company has seen consistent half-year growth trend since listing in 2017. The stronger projected demand for infant formula is anticipated throughout all distribution channels in 2H FY20. Moreover, new markets and new product launches are expected to build on existing foundations to drive incremental revenue streams.

The Company believes that new distribution partnerships for Bubs® products in Vietnam and Hong Kong will contribute further growth from Southeast Asian markets in 2H FY20. In addition, 2H FY20 ranging of Bubs Organic® Grass Fed Infant Formula and Bubs® Junior Nutrition new products in Woolworths will further strengthen domestic penetration.

As at 1:34 PM AEDT on 27^th February 2020, BUB is trading at $0.710 on the ASX, with a rise of 0.71 per cent.

ALSO READ: How has Coronavirus impacted infant formula stocks?

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