Panic buying took retail sales to roof; A2M, BUB, & JAT

Australian Bureau of Statistics (ABS) has reported preliminary retail turnover for March 2020, indicating an increase of 8.2% in seasonally adjusted terms.

It was the strongest ever surge in retail sales publication, breaking the record of 8.1% in June 2000 – when Australians households preponed purchases in the wake of GST implementation.

Although the preliminary reading is subject to the final release of the retail trade data on 6 May 2020, it suggests that food retailing, supermarkets, liquor retailing and specialised food witnessed strong demand.

Strong demand was noticed in home and office products as well. However, there were large falls in footwear, clothing, personal accessories, as well as in cafes, restaurant and takeaway food services.

At the backdrop of panic buying, the dairy and infant formula businesses have been witnessing strong demand, such that small companies are forced to access more funding to meet burgeoning demand.

While panic buying would not last forever, the consequences for companies could be idiosyncratic as supply chain may get stressed or high cash burn etc. In addition, the higher level of stocking by the households may suppress some of the demand over the next few months, as households would have secured supplies for months.

Businesses would need to manage their inventory levels efficiently, and then optimise the working capital needs accordingly. At the same time, it may lead to large receivables/payables sitting on the balance sheet.

Let’s discuss three dairy and infant formula businesses:

The a2 Milk Company Limited (ASX:A2M)

A2M has recently noted that the business has continued to experience strong demand across all regions since releasing results in February 2020, especially for the infant formula products in Australia & China.

It has confirmed that the performance of the business has exceeded expectations for the 3Q ended in March, showing the aggressive purchasing behaviour adopted by the customers as coronavirus infection and public health measures intensified.

The Company experienced stocking of its products, particularly in the reseller and online channels. Chinese revenue was transacted in USD, therefore a fall in NZD vs USD translated to favourable implications for the business.

It was noted that the overhead costs were tracking lower than expectations due to travel restrictions, and delays in planned recruitments. The Company’s partners had extended support to manage the supply chain disruptions, which translated to benefits for the business.

On FY20 Outlook, a2 Milk stated that the uncertainty presented by the COVID-19 crisis makes it challenging to forecast revenue and earnings. It asserts that uncertainty also persists with the impact on consumer demand and supply chains in the core markets, thus on its financials and balance sheet.

A2M expects consistent revenue growth in the key markets (USA & China) due to increased marketing investments. And, it continues to anticipate an increase in capacity to support growth - to the extent possible in current circumstances.

The company has a forecast of NZD 1.7 billion to NZD 1.75 billion in revenues for the full-year. It has upgraded full-year EBITDA margin to 31-32%, assuming NZD 200 million marketing spend.

A higher margin is expected due to the increasing revenues of higher margin products, favourable foreign exchange impact, and lower than the expected expense for the year.

However, A2M believes that these favourable impacts would not last longer – once the conditions return to normal – the trend would return to previously recorded metrics.

Moreover, the Management continues to target an EBITDA margin of 30% over the medium term, assuming the performance of products continues to be in line with the expectations. They also intend to strike a balance in growth and investments.

On 23 April 2020, A2M was trading at $0.18.645, up by 0.134% (at AEST 1:50 PM).

Bubs Australia Limited (ASX:BUB)

Earlier this month, the Company reported third-quarter updates. In 3Q, the revenue of $19.7 million was up by 67% over the previous corresponding period and 36% compared to the previous quarter.

Sales of “The Bubs^®” infant formula product range recorded an increase of 137% over the pcp and 33% sequentially. With strong revenues, the company delivered positive operating cashflow of $2.3 million.

By the end of the quarter, BUB was having a cash of $36.4 million, providing headroom to take benefit of the current environment. Its vertical integration of goat milk supply and product facilities added to the success during the period.

Considering the current market environment, the Company continues to review the product launch dates. During the period, it prioritised the production of goat formula powder, which delayed CapriLac^® refresh, affecting the adult goat dairy products.

BUB’s year to date revenues were $48.5 million, surpassing the total FY19 revenues of $46.8 million. Organic baby food sales were up 17% over the pcp, constituting 4% of the Q3 gross sales.

Australian sales equated to 64% for the Q3 sales, Chinese sales constituted 24% of the mix, and the rest of the sales were with other markets. Domestically, its brands continue to trade in leading online & retail stores.

On 23 April 2020, BUB was trading at $0.87, down by 0.571% (at AEST 1:52 PM).

Jatenergy Limited (ASX:JAT)

Australia-China trade specialist, Jatenergy Limited reported that it recorded a revenue of $8.3 million in March 2020 after recording a revenue of $8.1 million in the previous month.

Management expects that the revenue would continue to grow over the next three months, primarily due to:

• higher orders received for the Company’s dairy products when compared to previous two months.
• Sales of Green Forest had been increasing since the beginning of the calendar year with new products in the pipeline over the next few months, the management expects a consistent level of sales.
• Starting this month, ANMA manufacturing facility has returned to full capacity after construction activities over the previous months.
• The Company continues to receive orders under Ocker contract.

Its ANMA manufacturing facility has completed the commissioning of new manufacturing equipment, the business has recruited necessary specialists to ensure operational excellence.

At ANMA, the Company is operating two shifts at full capacity, with orders to utilise full capacity until June 2020. Management also determined that two additional machines would be required to meet the growing demand.

On 22 April 2020, JAT reported that it secured additional funding of $5 million via convertible loan and note. Two facilities were secured for capital expenditure and working capital purposes.

A $4 million convertible note facility is being sourced from Obsidian Global GP, LLC. Post shareholder approval, the Company would be able to drawdown the funds from the facility.

The note facility does not bear interest and has a tenure of 18 months. There are various conditions attached to the facility, including clauses related to the conversion into shares.

In addition, JAT has entered an agreement with Ms Wen Huang, who has subscribed for $1 million in cash for the issue of the convertible note. It has a maturity in three months from the date of issue, which was 21 April 2020.

The convertible note must be redeemed or converted to ordinary shares at an issue price of 5 cents per share. Also, the conversion would need shareholder approval. JAT is organising a shareholder meeting in late May, and details would be made available.

On 23 April 2020, JAT was trading at $0.05, up by 4.167% (at AEST 1:56 PM).