Media Updates, page-11202

Bubs Australia is better placed over larger rival The a2 Milk Company to capitalise on the shortfall in baby formula in the United States following a plant contamination scare and disruptions to global supply chains, according to Citi.

A2 Milk jumped nearly 4 per cent in morning trade on Monday following an upgrade to “neutral” from “sell” by Citi analyst Sam Teeger, who said though he still had reservations over the core business, there was potential to develop a credible US formula strategy in response to the shortage.

There is a baby formula crisis in the United States, which could mean opportunity for local players The a2 Milk Co and Bubs.

“We also upgrade a2 to neutral, noting it has underperformed the ASX 200 by 12 per cent since 4 April,” he said in a note.

“While we continue to see downside risk to a2’s IMF earnings, not helped by the unexpected CFO departure, a potential development of a credible US IMF strategy may drive a re-rating.”

A US military plane filled with more than 70,000 pounds (32,000 kilograms) of baby formula arrived in Indianapolis on Sunday from Germany, part of Operation Fly Formula, under President Joe Biden’s initiative that aims to quickly increase supply.

A White House statement overnight said the Biden administration also announced it would use the Defence Production Act to give two companies, Abbott Nutrition and Reckitt, priority on ingredients or equipment necessary to manufacture formula.

American multinational Abbott Laboratories closed its Michigan plant in February after four babies fell ill – two died – after having formula made in that plant.

The US Food and Drug Administration (FDA) has now permitted Abbott to resume production at its plant.

Mr Teeger said goat milk formula player Bubs was relatively better placed than larger a2 to capitalise on this opportunity over the short to medium term given it entered the $US4.3 billion ($6.1 billion) market last year.

The Aussie Bubs toddler formula is now selling on three of the largest online marketplaces: Walmart, Amazon and Thrive Market. Bubs has also been in talks with the FDA for its infant formula products.

Bubs shares initially rose but by lunchtime were down 1.15 per cent to 43¢ each.

The US formula market is highly concentrated, with top four players accounting for about 90 per cent of the market.

Mr Teeger said should Bubs secure just 1 per cent share, assuming regulatory approvals were obtained, it could result in a three to four times lift to the company’s full year 2023 earnings before interest, taxes, depreciation and amortisation.

Disruption in China

He raised the possibility that if US consumers began to distrust domestic brands – similar to what happened in China with the melamine scare in 2008 – they could favour foreign brands.

“Should Bubs not obtain market access, then at the very least the current publicity may assist Bubs with sell-through and distribution growth for its toddler formula in the US,” he said.

Looking to the world’s biggest baby formula market, China, Bubs infant formula pricing has continued to strengthen in the cross-border e-commerce channel.

But Mr Teeger flagged a key risk remained the COVID-19 disruption in key cities such as Beijing and Shanghai, which resulted in shipping lead times increasing significantly.

“Bubs’ corporate daigou partner appears to be helping the company navigate these supply chain challenges by using more ports and warehouses,” he said.

He said New Zealand port data indicated export volumes to China remained well down in April compared with a year ago, but increased compared to the month before, which indicated restrictions might be easing.

Carrie LaFrenz has more than 10 years' experience as a business journalist having previously covered healthcare, retail/consumer goods, industrials and agribusiness. She is based in our Sydney newsroom. Connect with Carrie on Twitter. Email Carrie at carrie.lafrenz@copyright link

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• Baby formula
• Bubs Australia
• The A2 Milk Company
• Cost of living
• USA
• Coronavirus pandemic
• Health