This small cap ASX dairy share is up 50% in 1 month, could it be the next A2 Milk?

Lina Lim | April 10, 2020 12:00pm | More on: A2M KTD

The Keytone Dairy Corporation Ltd (ASX: KTD) share price is up almost 50% in the space of a month, following announcements of new clients and orders. The small cap ASX dairy company is still in its early days, but could it one day grow to become the next A2 Milk Company Ltd (ASX: A2M)?

Significant wins

On Wednesday, Keytone announced that it had signed a manufacturing agreement with a substantial international client in the health and wellness sector, Iovate Health Sciences. It confirmed that opening orders total in excess of $3,600,000. This order represents 143% of Keytone’s total audited revenue of its FY19 year. The company confirms that the contract is indefinite and the volumes to be manufactured are to be confirmed on an ongoing purchase order basis, in line with client forecasts for China and Australia.

On Thursday, it announced the receipt of confirmed purchase orders from Walmart (China) and Nouriz (Shanghai) for a combined total of $1,688,000, commenting that, “following the outbreak of COVID-19, the increased uplift and global demand Keytone is experiencing for clean, green, pristine food staples and a range of health and wellness products is significant”.

This strong demand for healthy products could have broader implications for other health products, including A2 Milk.

Keytone also has 2 acquisitions under its belt – OmniBlend and Super Cubes, both growing and revenue-generating companies. For FY19, OmniBlend was forecast to generate a pro-forma revenue of $29.7 million and earnings before interest, tax, depreciation and amortisation of $2.24 million. In its first full 12 months of trading, Super Cubes realised sales of approximately $650,000.

Foolish takeaway

Keytone is still in its infancy and despite surging revenues, it may not necessarily turn a profit. However, the company has leveraged the Chinese opportunity by securing multiple contracts with the likes of Walmart and Nouriz. Its acquisitions are also expected to make a strong contribution to its growing revenues.

This goes to show that its products and manufacturing capabilities are highly relevant and that the Chinese economy is slowly coming back online. Keytone also has a strong balance sheet position – as at 30 September 2019, the company had a combined cash balance of approximately $10 million.

The bottom line is that Keytone is a speculative opportunity, but is showing early signs of momentum and ability to scale its capabilities.