It has been another rough year for Australia’s dairy industry as the Covid-19 border closures and supply chain disruption continued to put severe pressure on some parts of the agricultural sector, driving 8,296 farmers to abandon the dairy industry altogether.

And while we’re beginning to see a relative share price recovery across the sector, most prices are still lower than they were a year ago. Some dramatically so.

If the relative success of Bubs Australia (ASX:BUB) climbing off the mat over the last five months is anything to go by, now could be a potentially lucrative opportunity for investors who are still on the sidelines to buy in, while prices are still low.

Every cow has a silver lining

Bubs Australia has attracted praise as one of the few dairy companies to start showing some improvement in its fortunes since September 2021 amidst the ongoing tumult and uncertainty wrought by the pandemic, doubling its Q1 sales to $18.5 million on last year, supported by infant formula sales in China, including cross-border sales.

Its success is also bolstered by a diversification strategy which saw it expand into international markets outside of China, which makes up more than a fifth of group revenue. Bubs has been on a downward slide since Covid hit in February 2020, and to date its share price is still 29.9% lower than it was a year ago, down to 45c at 2.51pm from 64.20c in February 2021.

On the first of this month, analysts for Citibank said that Bubs’ gross sales contribution continued to increase, contributing 64% of the group’s 2Q22 gross sales, a significant improvement relative to FY21 (55% to 61%, 2Q20: 66%). 

“We see gross margins improving over 1H22 noting Bubs brand is a leading margin driver for the group,” the analyst said. “We would like to see Bubs reinvesting some of the margin gains into marketing/promotions, particularly in China, noting Feihe’s – (one of China’s largest powdered milk producers) – recent launch into the goat IMF category, shifting consumer preferences and declining birth rate earnings revisions.”  

Citibank has upgraded its FY22e to FY23e EPS by +6% to +9%, driven by stronger than expected gross sales momentum. Its new target price is $0.68 (+8%), driven by earnings changes and better than expected operating cash flow.

Bub’s share price opened at 45.0c and was unchanged at 11.33am.

Here’s looking to A2, kid

Meanwhile, A2 Milk (ASX: A2M) was up by around 3.98% yesterday to $5.51 from $5.27 on open. Relative to a year ago, its share price is still almost half of what it was 12 months ago, still rocked by Covid disruptions and the mass sell-offs that it triggered.

The company reported a 30% revenue decline and a loss of NZ$250 million in sales during an October 2021 investor update.

Only six months prior it had dumped almost $90 million in unsold nutritional powder stocks, once it became obvious that its previously thriving trade in China was not going to improve.

Its share price closed at $5.51 yesterday, a 72.5% decline in price relative to just 18 months ago when its stock was fetching $20 a share. At 11.33am its share price was up to $5.57, a 1.00% increase from $5.53 at open.

The Australian Dairy Nutritionals Group (ASX: AHF) was also in the green this week, enjoying an increase of 5.17% to 6.2c from 5.8c at open.

The spike follows its reporting of a material increase of 22-24% in the value of the Group’s farm portfolio over the seven months from 30 June 2021, taking the total value of the portfolio to just over $20.4 million, an increase of $3.8 million.

But relative to a year ago, its share price is down by around 2.16% from 6.00c on February 8th 2021 to 5.87c on February 7th 2022.

The comparative stability of its share price, relative to its competitors, can potentially relate to its completion of a three-year program to convert its farms to certified organic in October of last year, along with the establishment of A2 herds to secure consistent supplies of A2 milk used in its organic A2 infant formula range.

By 11.30am AHF’s share price was up to 6.3c , a 1.61% increase from 6.1c at open.

 

ASX dairy and milk stocks — monthly and yearly performance

Code Company Price %Wk %Mth %Yr MktCap
WNX Wellnex Life Ltd 0.15 30.4% 36.4% -70.0% $42,462,814
AHF Aust Dairy Group 0.063 10.5% 5.0% 5.0% $31,374,998
MBH Maggie Beer Holdings 0.59 9.3% 7.3% 52.6% $203,777,154
AUK Aumake Limited 0.017 6.3% 13.3% -69.1% $12,167,151
BXN Bioxyne Ltd 0.021 5.0% -16.0% 75.0% $13,443,053
A2M The A2 Milk Company 5.52 3.6% 0.7% -46.8% $4,097,547,469
FSF Fonterra Share Fund 3.38 3.4% -4.0% -21.2% $363,070,548
BFC Beston Global Ltd 0.071 2.9% -2.7% 1.4% $62,193,557
HLF Halo Food Co. Ltd 0.1275 2.0% 15.9% -45.7% $35,632,543
HVM Happy Valley 0.056 1.8% 0.0% -70.5% $11,901,655
HRL Hrlholding 0.1 1.0% -4.8% -28.6% $49,438,131
JAT Jatcorp Limited 0.021 0.0% 31.3% -8.7% $38,249,211
BUB Bubs Aust Ltd 0.455 -1.1% -4.2% -31.1% $275,749,011
NUC Nuchev Limited 0.5 -2.0% -4.8% -61.5% $25,872,199
SM1 Synlait Milk Ltd 3.16 -2.5% -3.1% -23.3% $699,461,315
CLV Clover Corporation 1.54 -3.1% -9.9% 5.1% $256,316,539

 

Daigou trade done and dusted Down Under

So, have border closures and supply chain issues been the final nail in the coffin of the daigou ‘market’? BRIC and China expert, David Thomas of Think Global Consulting, says the real bubble burst before the pandemic hit. 

“I do not expect a return of the daigou trade in Australia, at least not any time soon,” he said. 

Daigou, which translates literally to ‘surrogate shopping’ in Mandarin, refers to an informal ‘grey market’ where individual retail customers in Australia purchases commodities like infant milk formulas to either send to family and friends in China for personal use, or sell them into the country at considerable markups. 

Thomas says the daigou trade which started seven or eight years ago “reflected the euphoric nature of the Australia-China relationship at a political and a trade investment level,” a euphoria he says that was short lived. 

“Three years ago both Australia and China implemented urgently needed regulation ensuring proper taxation and customs enforcement,” he said.  “And then the Australia-China relationship broke down.

“I think that market to a great extent has been ruined. Or at least it’s a typical boom and bust.”

However, Thomas says Australia’s dairy industry has already accepted that daigou is not coming back, and have instead established direct distribution leads into China.

“I suspect they’ll just continue with business as usual, as they no doubt have for the last two years,” he said. “There’s still plenty of Australian milk being shipped to China. I don’t see any change there.

“But the daigou trade has disappeared. Will it come back anywhere close to where it was before? I would say, probably not.”