Bubs Australia Ltd (ASX: BUB) has announced a capital raising for $38 million, should investors buy shares?
Bubs capital raising
Bubs recently revealed its FY20 result which included impressive international growth.
Bubs announced this morning that it has already successfully raised $28.3 million by existing and new institutional investors at a share price of $0.80 per share.
The infant formula business is launching a share purchase plan (SPP) for regular shareholders to buy up to $30,000 of new shares at $0.80 per share. The plan is to raise $10 million, though this could be raised to up to $11.7 million. The raising isn’t underwritten.
What is the money being used for?
The raised cash will be used to support global growth initiatives.
Bubs has earmarked $38.3 million to different causes.
The company said that $12 million will be used to fund the proposed acquisition of an ownership interest in the Beingmate infant formula manufacturing facility in Beihai China, and the SAMR application for China-made Bubs infant formula products. It will also be used for working capital requirements to launch China label products into the ‘general trade channel.’
The biggest allocation is $14.8 million for balance sheet flexibility and growth capital. Some cash will be used to help launch Vita Bubs, its high-margin vitamin and mineral supplement brand. Some money will be used to build its brand power with global brand ambassador Jennifer Hawkins as well as regional influencers. Other money will be spent on new product innovation. Finally, a portion will be used to extend its production capability which will include a production line for single-serve sachets.
The next $10 million be used broadly for global expansion into new key markets including establishing local manufacturing.
Finally, $1.5 million is associated with the costs of the capital raising.
Management quote
Bubs founder and CEO Kristy Carr said: “Our first priority will be to progress our announced strategy to accelerate SAMR registration for China manufacture of Bubs Goat Infant Formula made from 100 percent Australian goat milk. This ‘Created by Bubs’ localisation strategy is capable of replication into other markets with similar barriers to entry.
“We are now well positioned to maintain the operational momentum, strength and agility established during the year, to execute on strategy, and capture new opportunities while ensuring we continue to implement key marketing strategies that respond to the challenges of the current macro environment, including consequences of COVID-19.”
What to make of this
Bearing in mind this is just my own opinion, I think it makes sense to own an interest in the manufacturing facility in China if that’s the only way to ‘go big’ in the Asian superpower market.
Bubs has plenty of growth potential. It’s rapidly growing revenue, its distribution and customer awareness. It is not easy to become a sizeable consumer product player – just look how many years it has taken A2 Milk Company Ltd (ASX: A2M) to become the size it has.
Assuming the Bubs share price doesn’t drop below $0.80, I’d be happy to buy some shares for this capital raising with a long term (3+ years) outlook. Bubs will have multiple products that can generate good profit in the coming years.
However, as ASX growth shares go, Bubs is a high-risk, high-reward type of idea. Pushpay Holdings Ltd (ASX: PPH) could be an easier idea for good returns.
