Here’s why I’d buy The a2 Milk Company Ltd (ASX: A2M) shares before Bellamy’s Australia Ltd (ASX: BAL) or Bubs Australia Ltd (ASX: BUB) shares.
About These Infant Formula Competitors
Infant formula is a huge growth area, particularly in China, and there are a few companies offering investors the chance to take advantage.
a2 Milk, Bellamy’s and Bubs are three competitors in the organic infant formula space, competing for market share and Chinese contracts. a2 Milk is the largest of the three with a market capitalisation of more than $11 billion.
Bubs announced a new contract yesterday with Fonterra Australia
(ASX: FSF) for the production and distribution of organic grass-fed infant formula. The announcement sent the Bubs share price 11% higher while Bellamy’s share price took a tumble.
Here’s why I would consider buying a2 Milk over the competitors.
1. Size and Market Share
Bellamy’s and Bubs are both significantly smaller companies than a2 Milk. Bellamy’s has a market cap of $1.2 billion while the Bubs market cap is around $600 million. They are like the younger siblings of a2 Milk (except Bubs is actually the oldest company, Bellamy’s was only founded in 2003 and a2 Milk in 2000).
Despite being a relatively “young” company, a2 Milk has significantly higher sales and revenue than its two competitors. For example, Bellamy’s has an FY21 target revenue of $500 million. a2 Milk achieved revenue of $613 million in just the first half of FY19. In the same period, Bubs achieved revenue of $21 million.
While Bubs is yet to make a profit, Bellamy’s had a 1H19 net profit after tax (NPAT) of $16.5 million. a2 Milk’s NPAT for the same period was $152.7 million.
2. Consistent Growth
a2 Milk grew revenue by 41% in 1H19 and grew NPAT by 55.1%. Bellamy’s revenue actually declined 24.9% compared to 1H18 and NPAT fell 26.3%, revealing a falling profit margin as well.
Bubs delivered explosive growth in 1H19, with revenue up 502% and gross margin up 477%. However, EBITDA fell 127% to -$8.83 million.
While all three companies have had strong growth in recent times, a2 Milk has experienced the most consistent growth and continually grow both revenue and profit.
3. SAMR (un)Approval
The State Administration for Market Regulation (SAMR) is a governmental authority that regulates things such as market competition, monopolies, and intellectual property in China. Without SAMR approval, these three companies are unable to sell their products directly in China.
a2 Milk has been active in China for some time, capturing 5.7% of the infant formula market and growing China label revenue by 82.6% in 1H19. Bellamy’s has been waiting since last year for SAMR approval and finally had an application approved two weeks ago, but only for one line of products.
Bellamy’s is still awaiting approval for the remainder of their products and recorded no Chinese-label formula sales in 1H19. The impact of this was the 25% reduction in revenue mentioned above.
Bubs is currently selling its products in China, but their market share is negligible compared to a2 Milk. However, a 901% increase in sales to China in 1H19 is a positive sign.
Summary
Infant formula is currently a popular industry to invest in, and it could be argued that all of these businesses are overvalued.
For a long-term investment though, I think a2 Milk would be the best choice for their significant market share, brand power and revenue/profit leagues ahead of their competitors. The longer it takes for Bellamy’s to fully enter China, the further a2 Milk will get ahead.
For other growth shares, check out the companies in the free report below.
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Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.
