Does the Biden order justify a $140 million valuation jump for Bubs?

Bubs Australia Limited is one of Australia’s larger baby formula manufacturers with revenue of AUD60 million in 2022¹ and a valuation of AUD417 million – up 42% in a day.

Three questions come to mind:

1. Is an order of 1.25 million tins to the US worth the extra $100 million plus valuation?
2. Will this make the company profitable?
3. What is the share price going to do?

Let’s start with the order of 1.25 million tins (500,000 immediately and another 750,000 to come).

Does the order value justify a 40% jump in Bubs shares?

The 40% rise — over $100 million in value – would suggest a long-term impact of this order.

On its own, however, the order seems far smaller than the valuation seems to imply.

Bubs’ tins of baby formula retail for between $22 (normal) and $33 (goat milk) on Amazon.com.au. Clearly, an export order of 1.25 million tins is going to be well below the retail price point. In addition, given that Bubs’ gross profit margin over the past four years has averaged only about 20%, the contribution to gross profit will likely be no more than $2-4 per tin – around A$2.5-5 million in total.

An additional $5 million of gross profit seems unlikely to justify a $100 million extra valuation.

Will Biden’s big order make Bubs profitable long term?

Bubs has been growing rapidly, with revenue in the six months to 31 December up a massive 83.9% over the previous year.
However, the engine for this growth was China. This is potentially a problem given the extensive lockdowns in the country and high likelihood of disruptions from the ongoing trade war.

Even with the rapid China-led sales growth, Bubs was unable to make ends meet, recording a modest loss of $602k.

At the moment, it looks like Bubs is maintaining its sales with $17.6 million revenue in the most recent quarter (compared to $33.6 million in the previous six months).

So far so good. An extra $2.5-5 million of gross profit could make it profitable, all else being equal.

However, costs are soaring.

In its most recent filing with the Australian Stock Exchange, the company recorded manufacturing and operating costs of $22.6 million – $5 million MORE than its revenue for the period. Add in the $6.1 million in staff, corporate, and advertising costs and there appears to be $11 million in red ink on the horizon.

The US market probably won’t be the solution either.

The US market continues to be dominated by just a few players with significant economies of scale. Breaking into this market when there isn’t a shortage would usually result in razor thin margins.

If Bubs can turn this one-off deal into a regular pipeline, then it could possibly turn a long-term profit. However, established brands with their long-term relationships with established supply chains may just nudge Bubs back off the shelves.

Where to next for Bubs shares?

After the market’s initial exuberance and a 42% price spike to 69c, Bubs shares have trended gradually down to 60.5c now. This is still a hefty 25% above the pre-announcement level of 48.5c. Put another way, that’s still a $73 million valuation gain based on the announcement.

Given that this is most likely a once-off deal and that recent filings suggest costs will continue to exceed revenue, it looks like this trend back to 45c could continue.

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Footnotes:

1. Bubs presentation to investors on 22 February 2022.