How are the ASX Baby Formula Stocks Trending – A look through Bellamy’s (ASX: BAL)

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Australian Economy, Macro Economics

A few days back and following a2 milk’s trading updates, the infant formula producer Bellamy’s Australia Limited (ASX: BAL) witnessed a fall in its shares. Lately, Bellamy’s Australia was seen to be trading at a market price of around $17.930, but on June 22, 2018, the same fell around 6% on June 22, 2018 to $16.815 after a 5-day rise of about 5%. It seems short selling is on the rise with this ASX listed stock.

BAL otherwise witnessed sales momentum through 2H17, as the price realization increased while there has been a slow recovery in market pricing across retailers and platforms. The operating cost base was reset with a 23% reduction in overheads versus 1H17 and the group was seen to be in a position to reinvest. The supply chain restructure was yielding reductions in future input costs. The inventory declined since March 2017 while operating cashflow stayed positive since March 2017. BAL was also seen to be in a net cash and debt free position.

BAL’s 1H18 result depicted a new bar set for full year revenue and EBITDA with core business witnessing 30-35% revenue growth and 20-23% EBITDA margin (excluding Camperdown business). BAL reported for a gross profit of A$63.0 million for 1H18 and group revenue of $174.9 million with group EBITDA of $34.9 million for the half year. The group achieved a revenue of $240.2 million in FY17 with a loss after tax of $0.8 million, and the normalized profit after tax of 28.2 million. The profitability was affected by significant items of $41.4 million before tax.

During the first half of 2018, the baby-food maker’s revenue was said to be higher than the second half of the year, driven by the winter consumption in China and Chinese New Year-driven demand. However, the Camperdown business has been a drag and forecasted to record a loss of A$1-2 million now. The group has now inked new arrangements for Australian organic milk supply with Fonterra, Australian Consolidated Milk and Tatura Milk Industries but the initiatives are expected to be yielding returns in long term only.

Likewise, the so called growth stock, a2 Milk Company Limited (ASX: A2M) also has fallen about 15% in last three months despite its optimistic outlook.

Bubs Australia Limited (ASX: BUB) is another consumer staples baby formula stock, that plunged about 5% on June 22, 2018. Lately, the group’s Bubs Baby Cereals was accepted by Australia’s key supermarket chain, Woolworths. It continues to leverage its existing capabilities and commercial competencies and is continuously progressing to meet China’s infant formula regulatory requirements. Net Sales in Q3 of FY18 were up by 422 per cent and amounted to $5.178 million as compared to the same period in the last year and quarterly growth was driven by additional revenues from its core businesses. After the NuLac Foods’ acquisition, the Group tried to strengthen its balance sheet and cash reserves were being indicated at A$5.570 million.

Overall, the infant formula stocks seem to be falling in the red zone with many to the likes of ASX: BAL being trading on a sinusoidal path and adding to be a drag on ASX every now and then. The regulatory risks seem to be hovering around many of these players.


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