Will supply agreement boost up Wattle Health’s scenario?

Introduction

Businesses with lesser sensitivity to economic cycles consist of stocks from consumer staples sector. These stocks are into manufacturing and distribution of food, beverages and tobacco and produce non-durable household goods and personal items. Also, these products mentioned above are important and vital in our lives.

Since 2012, the worldwide requirement for organic goods has doubled up. Also, it is being anticipated that the organic infant milk formula market would rise at a CAGR of ~12.6 percent across the next 5 years period. In order to fulfill the rising demand of the organic dairy items space, Wattle Health Australia Limited is placing its business as a leader of organic dairy product supplier space.

Source: Company’s Investor Presentation

Let’s go through the consumer staples sector stock WHA and its recent updates:

Wattle Health Australia Limited (ASX: WHA)

An Australian listed company, Wattle Health Australia Limited forms part of the fast-moving consumer goods industry (FMCG) is into the development and marketing of nutritional dairy products, organic baby formula, health and therapeutic range, etc.

In order to become one of the leading organic product suppliers, the company has signed an exclusive supply agreement with Organic Dairy Farmers of Australia (ODFA), through which the company can have access to the largest pool of certified organic milk in Australia.

Ten Year Supply Agreement Signed with Chemist Warehouse for Uganic and Little Innoscents Ranges:

Wattle Health Australia Limited has signed supply agreement with Chemist Warehouse (CW) for ten years to sell the company’s full certified organic nutritional dairy range, that comprise of nine product SKUs of the premium range of Uganic infant formula and the Little Innoscents organic skin care range. As per the agreement, all the product range of Uganic infant formula and the Little Innoscents will be sold in more than 450 CW retail stores that are present in Australia, New Zealand and China.

Chemist Warehouse is the largest number of retail stores of pharmacy in Australia, has the largest reach for online sales in China through Tmall (a subsidiary of Alibaba), and is also the largest infant formula retailer in Australia. The products of WHA’s Uganic infant formula and the Little Innoscents organic skin care range is planned to be sold in both domestic and Tmall online stores, where the global consumers can also buy. Chemist Warehouse delivers total sales of more than $5 billion annually and infant formula sales contributes to more than $200 million in total sales. Further, CW Tmall Global store is considered to be the largest in the world in term of gross merchandise volume.

Meanwhile, Uganic Infant formula range was launched in September 2019. The company under this brand had planned to launch Australian certified organic nutritional dairy range and the first commercial quantity of organic A2 protein dairy products was planned to be available in Q4 2020.

The company had received positive reviews from the consumers at the trade shows and from direct sales. This was an early reception and therefore after partnering with Chemist Warehouse, Uganic may become one of Australia’s biggest infant formula brand. The consumers around the world prefer for infant formula products that are certified organic and are of the highest standards, especially from Australia and through CW, WHA will able to meet their demand.

Equity Share issuance:

Under the supply agreement with CW, WHA will be issuing equity after attaining specific milestones, which is however subject to getting the shareholders’ approval. WHA will issue 3,000,000 fully paid ordinary shares (FPO) after both the parties signs the long-term supply agreement. Next 5,000,000 FPO will be issued by WHA when CW provides the equivalent value of the shares in supporting the marketing and the ranging of the Uganic infant formula range in all the CW’s retail network.

Similarly, WHA will issue 10,869,792 FPO if CW provides the equivalent value in supporting the marketing and the ranging of the proposed ultra-premium certified organic A2 protein based infant formula range in all the CW’s retail network. Lastly, WHA will issue 1,130,208 FPO for providing professional services. For the first five years, the company will be spending to the tune of circa $1.2 million annually for marketing support in order to build brand awareness, sales and brand loyalty.

Other Important Requirements of the Sales Agreement with CW:

The sales agreement between WHA & Chemist Warehouse (CW) will be executed after finalisation of the proposed acquisition of Blend and Pack, which includes getting the approval of shareholder for the acquisition, through the current Rights Issue.

Moreover, the sales agreement will be executed after WHA raises a minimum of $A62 million through the rights issue by 31 December 2019 and if the company issues any securities under this agreement, it will be done after getting the approval of the shareholder under ASX Listing Rule 7.1 at an EGM. WHA is required to raise a minimum of $55 million and a maximum of about $62.2 million through a non-renounceable pro-rata rights issue to eligible shareholders.

This will be up to 155,602,512 new shares and according to the rights issue based on the 4 new shares will be given for every 5 shares held by shareholders at the record date at an issue price of $0.40 per new share (Rights Issue Offer). The company is raising fund through the right issue to complete the acquisition of 75% of Blend & Pack for US$55M, which WHA considers to be transformative and an important part of its vertical integrated organic strategy. The company will seek approval from the shareholders related with the Blend & Pack acquisition at the shareholder meeting scheduled on 16 December 2019.

Meanwhile, WHA stock has risen 1.92% in the last three months as on December 6th, 2019. WHA stock was suspended from trading on ASX, at its request due to pending update related to proposed acquisition of the majority interest in Blend and Pack, as announced on 2 October 2019. Also, on 19 November 2019, WHA updated the market that it has further requested the ASX that the WHA stock’s suspension from trading would continue until immediately after the WHA shareholder meeting, which is supposed to be conducted on 16 December 2019.

WHA last traded on ASX at a price of $0.472, on 27 September 2019.

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