Got Milk: The infant formula industry faces challenges, but a few stocks bucked the trend
Food & Agriculture
Food & Agriculture
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Infant formula stocks (or as we sometimes call them “the baby bottle crew”) have still had a solid 2019 – up 9 per cent. But in May, the industry was down 6 per cent and only 4 out of 14 stocks gained.
However, the stocks that gained had positive news in a market that has for months been in a state of pure competition but now faces increasing competition from Chinese companies and larger Western firms keen to enter the market.
The biggest gainer was Victorian-based Australian Dairy Nutritional (ASX: AHF) up nearly 20 per cent in May and 50 per cent this year. This month it completed due diligence investigations on a plant it announced it was going to buy in April.
It now anticipates completing the buy in August and declare it will “become one of Australia’s vertically integrated manufacturers of organic infant formula”.
A 6 per cent drop yesterday cost New Zealand based Keytone Dairy (ASX: KTD). This came a week after it announced its full year results (a $3.3m loss) but that it will supply its milk to Walmart-owned Sam’s Club in China.
Sam’s Club isn’t your conventional Walmart, it’s a high-end membership-only retail warehouse. While it’s retreating in America, the Arkansas retailer is expanding heavily in China.
Also up were HRL Holdings (ASX: HRL) and Longtable Group (ASX: LON), which recently bought Maggie Beer. But by its own admission in a response to an ASX price query, it had no news to attribute to the price rise. Neither did HRL.
Some stocks declined despite announcing similarly positive news. Wattle Health (ASX: WHA) declined 26 per cent despite progressing its new nutritional spray drier at Corio Bay.
Bubs Australia (ASX: BUB) fell even though it signed distribution deals with Beingmate, Tmall & Chemist Warehouse. It also announced it would be the first company to offer certified organic grass-fed infant formula.
Much of May’s decline happened since Bubs announced its CEO sold $5.9 million in shares – to buy a house.
But there is a broader industry issue brewing which may be playing on investor sentiment. In recent days Chinese regulators want to increase domestic supplies to more than 60 per cent of the market – at least. At the moment it is only 43 per cent and domestic suppliers only make up 35 per cent of sales.
How will this be done? By subsidising eligible companies, including those with manufacturing facilities overseas.
But it is not only Chinese companies that are a threat. Despite the trade war, larger Western firms have seen how lucrative this sector is and they want enter the market. One was Nestle which revealed to Reuters it will launch baby formula for China this year.
While this news may explain the decliners it does not explain that a few stocks have bucked the trend, especially Keytone after its Sam’s Club distribution deal.
While there are signs the infant formula market will get more difficult for smaller, foreign firms, there is a critical difference between being difficult and impossible.