For watchers of newish ASX entrants with tiny revenues, large market capitalisations and a penchant for equity issuance, infant formula brand Wattle Health Australia sits high on the list.
The $220 million company has been swept up with the demand for infant formula – a sector just as hot as lithium or tech – and in the past 12 months its shares have soared from 20¢ to $2.41, or more than 12 times.
That means it has even outpaced the remarkable rise of other infant formula producers, both big and small, such as Bubs Australia, which has risen more than four times to 83¢ in the same period, Bellamy's which has rallied from $3.81 to $18.30 and The A2 Milk Company, which has flown from $2.44 to $12.11. (On A2, it's worth noting that post-result, Geoff Babidge, Peter Hinton and David Hearn all lodged notices disclosing they had sold shares.)
Last week after posting its interim results Wattle's shares fell about 7 per cent, a move which some of the doubters took as a signal the market was finally tiring of the company's big valuations and slim revenues.
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But when taken in the context of the past year, it's barely a spill. Wattle still has a market capitalisation of $220 million, and a number of believers in its potential, including some who have owned the stock from 35¢ a share. Related Quotes
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There's no doubt that revenue remains lean for a company of its size.
For the half-year, Wattle posted revenue of $661,21 and a $13.1 million net loss. That compares to revenue of $802,085 and a net loss of $2.5 million in the previous corresponding period.
And, on first glance, that would appear to be just one of a number of red flags for this stock. Red flags
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Bellamy's Australia is also enjoy strong returns this year. Its shares have rallied from $3.81 to $18.30. Kate Geraghty
Perhaps next on the list is the fact executive chairman and co-founder Lazarus Karasavvidis will receive $602,250, including cash bonuses for 2017. That's not far off the group's total revenue for the half, and Karasavvidis, whose background, among other things, is in vocational training sector – a hot sector a few years ago ago which came spectacularly unstuck – also owns shares, including most recently, loan-funded shares issued at $2.15 a share in November and expiring in 2020.
Karasavvidis is also relatively unusual in that while he has a reasonably high media profile compared to the company's size, he doesn't do investor roadshows, preferring instead to be accessible to a group of investors that hold the stock. He's said he'd prefer to focus on running the company than briefing brokers, and presumably the media profile helps to build the brand.
Another area of concern for investors is the regular and "puffy" announcements, that aren't likely to impact revenues – or at least yet.
Most recently, ASX statements about the group's first order for its range of milk powders from Macau issued on February 1 and days before, its first order from India for its baby food range fell into that category, though no revenue forecasts were attached to either.
Unusually, the company's enthusiasm for disclosure goes both ways.
For instance, it's surprisingly open in admitting it may not be able to hit targets, or profitability.
In the latest replacement prospectus, among a sea of other disclaimers was this: "no assurance as to future profitability or dividends can be given ..." Wattle also emphasised its growth strategy was reliant on raising further capital.
While there may be other drivers for this frank approach, it's worth remembering that Wattle, which listed in March 2017, was finalising its prospectus about the time when Murray Goulburn and then Bellamy's were running into difficulties. Perhaps the company was put through the wringer more than most.
Since it listed in March, Wattle has undertaken two capital raisings, leaving it with $9.6 million cash on its balance sheet.
Wattle is also drifting from its original infant formula and baby food products range, having just acquired 80 per cent of organic baby skin care company Little Innoscents for $300,000 cash and $400,000 scrip. Little Innoscents' revenue is not so different to Wattle's: it generates revenue of about $900,000 and earnings before interest, tax, depreciation and amortisation of $250,000 and is also a fit with the company strategy of building out products in the wellness space. Priced to perfection
But the reality is that since Wattle listed in March 2017 with shares at 20¢ it has delivered on a number of fronts and particularly in relation to achieving the highly-fashionable "vertical integrated model".
But with such a high valuation and a heavy reliance on raising capital to grow, there's no room for disappointment.
And there are at least three key milestones that Wattle must now meet.
First of those is finalising Chinese regulatory approval, for which it received pre-approval in November. This China Food and Drug Authority approval (CFDA) , expected within weeks, is significant for any number of reasons – not least being that the company has flagged it expects to land take-or-pay contracts, backed by bank guarantees, from Chinese counter-parties (the second milestone).
Wattle Health has also released a January statement about securing a second brand slot for CFDA accreditation in relation to its goat infant formula, though that's another announcement that some investors are putting in the over-enthusiastic basket, including the projections that in 2018 the Chinese market for goats' based infant formula will be about $1.9 billion, representing a 43 per cent increase on the previous year.
Given the light-on statements on other markets, the Chinese markets, in which Wattle already has a presence, are key. As the most progressed offshore market, it's also the one that has potential to ramp up revenues quickly. And the capacity to do so is there.
Wattle's share price took off in July when Wattle was part of a consortium with Hong Kong financial firm Masons, part of the broader Genius Link Asset Management group which acquired 80 per cent of Melbourne infant formula manufacturing facility Blend and Pack.
Wattle has a 5 per cent stake in Blend and Pack which has the capacity to produce 20 million tins of infant formula annually, based on a five-day week with daytime shifts only.
Masons, which owns less than 5 per cent of Wattle, has been a critical partner so far in China, and is also a partner in the mooted tie-up with Organic Dairy Farmers of Australia, which will deliver another step in the vertically-integrated process with the joint acquisition of a spray dryer to produce powder.
Organic dairy is a relatively sleepy sector in Australia, probably best illustrated by the fact that diary giant Fonterra doesn't have any organic herds in Australia, though they do in New Zealand. Wattle notified the market it had signed a heads of agreement with ODFA in July, and the expectation is it will update the market about a finalised transaction soon.
ODFA chief executive Stewart Price says a joint venture to fund a dryer would meet the co-op's objective of growing while managing prices around the excess spring supply.
Despite the deal not yet being inked, Price says the co-op has begun actively recruiting for another 50 million litres of organic milk. Price estimates it will take up to 18 months to import and build a dryer once the deal is sealed. At the moment, ODFA, which has about 35 million litres of milk out of the 8.4 billion litres of fresh milk in Australia, supplies organic milk to companies for products including Lemnos Cheese, Pepe Saya, 5am yoghurt and others. ODFA accounts for an estimated 78 per cent of the local organic milk pool, which can trade at up to a 40 per cent premium to non-organic.
Delivering on these milestones would go a long way to backfilling Wattle's valuation. Whether or not it's enough to keep the infant formula brand ahead of the pack, let's see.
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