Bubs share price: why one top broker sees 47% upside from here

The Bubs $35 million capital raise – which has yet to be fully completed – looks to have sparked a new wave of interest from some of Australia’s top brokers.

In early December we wrote that Citibank had slapped a BUY rating and a bullish $1.40 price target on the young IMF stock.

Since then, the Bubs (ASX: BUB) share price has mostly range-traded around the capital raise issue price of $0.95 per share. Yet the share price got a slight boost today – rising around 1% at the time of writing – after Bell Potter released their own bullish research note on the company.

In a bout of déjà vu, Bell Potter initiated coverage on the fast-growing IMF company, slapping it with a BUY rating, a speculative warning and a Citi-inspired price target of $1.40 per share.

At Bell Potter's initiation price of $0.95 per share, this would imply potential upside of 47.5% for investors.

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Bubs share price: bull thesis & risks in focus

Bell Potter is under no illusions that an investment in Bubs is ‘speculative’ in nature – given that the company remains early-stage, with a limited operating history.

Regulatory risk, particularly as it relates to Chinese regulation, the potential requirements to raise more capital in the coming years, the fact that Bubs remains loss making, supply chain disruption and brand impairment are all risks that contribute to the ‘speculative’ outlook.

This hasn’t stopped the brokerage firm from recognising the significant opportunity entailed by Australia’s, but mostly China’s all-important IMF market.

On this front, the broker sees much to like about Bubs (ASX: BUB), including: a leading position in the Australian/New Zealand goat milk pool, strong recent revenue growth that looks set to continue and solid distribution agreements that appear well placed to support the just mentioned top-line growth.

Taking a more granular view, Bell Potter expects sales to ramp up in the years ahead; with FY20 revenues expected to hit $70m, before running up to as much as $139.6m in FY22.

Earnings are estimated to grow in-step, with the broker expecting Bub’s earnings (EBITDA) will hit $0.3m in FY20, before ramping up to $14.8m in FY22.

Looking broadly at the valuation approach used to reach the $1.40 price target, given that Bubs (ASX: BUB) is not yet profitable, Bell Potter focused on an enterprise value-to-sales (EV/Sales) valuation method. Looking at comparable company’s in the space, companies such as a2 Milk (ASX: A2M), Bellamy’s (now de-listed) and just-listed Nuchev (ASX: NUC) have floated around a 3.5x to 7.3x EV/Sales multiple in recent years.

On this basis, and using a 5-6x EV/Sales multiple, Bell Potter reached a price target of $1.40 for Bubs.

A $51bn opportunity

Ultimately, such lofty growth expectations may be well supported by a significant market opportunity – with the brokerage estimating the value of the IMF market as a whole – encompassing China and Australia to be valued at $51bn (FY18) – with 70-75% of that market value being attributable to the offline-Chinese retail IMF market.

Importantly, Bubs' (ASX: BUB) current revenue growth is reliant upon Cross-Border E-Commerce and the somewhat fragile Daigou market – with the young company lacking the relevant SAMR approval required to sell their products directly in China’s retail stores.

Were the company to obtain SAMR approval, it would rank as a key positive and a potentially significant share price catalyst for already fast-growing company.

Watch this space.