Bubs share price: Citi says ‘buy’ and a capital raise is announced

Capital raise announced

Bubs’ (ASX: BUB) shares have today been put in a trading halt, as the fast-growing infant formula company revealed that it was planning on pursuing a capital raise.

Bubs now joins a raft of ASX-listed companies – including Afterpay, Zip, Westpac and the Bank of Queensland – tapping the markets for fresh capital.

While no specific details of the Bubs capital raise have been announced just yet – one can speculate that Bubs would likely used any funds derived from a potential capital raise to further ramp up its growth plans.

Indeed, FY19 already proved to be a record growth year for the young company: with gross revenue rising 154% to $46.8m. In step with this, and maybe even more impressively, Bubs China Net revenue grew 209% in FY19.

In line with this explosive growth profile, the Bubs share price has more than doubled in CY19 – rising 135% since January.

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Bubs share price: Citi says ‘buy’

The announcement of a planned cap raise comes just one day after investment giant Citibank initiated coverage on the infant formula player: hitting Bubs (ASX: BUB) with a buy rating and a 12-month share price target of $1.40.

At Bubs’ (ASX: BUB) last traded price, this would imply potential upside of a little over 30%.

Centrally, Citi posits that Bubs is well-positioned to capitalise on the premiumisation trend sweeping the Chinese infant formula market (IMF) – and as a result of this – sees substantial top and bottom-line growth opportunities for the company in the coming years. Funds derived from the planned capital raise would likely help further any such plans.

In saying that, the investment bank has flagged a number of risks to their investment thesis, noting that an investment in Bubs remains 'high risk.' Fundamentally, these risks include the fact that Bubs remains loss-making, competition remains intense and the possibility that Bubs will be unable to adequately capitalise on the significant opportunities at hand.

Citi further points out that Bubs’ current valuation suggests that the market is expecting big things from the young company.

Ultimately, Citi believes that the prospect of Bubs’ fundamentals catching up with the market's current growth expectations by FY22 is not ‘unrealistic’ – as the company potentially transitions to profitability. On this front, the investment bank expects Bubs to achieve profitability in FY21 – with forecasted profits (core NPAT) of $10.4m.