Should you buy these 2 ASX dairy shares instead of A2 Milk?

Could you replace Kiwi giant A2 Milk Company Ltd (ASX: A2M) with these 2 ASX dairy shares?

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The A2 Milk Company Ltd (ASX: A2M) has been the gift that keeps on giving. However, the company's hefty share price may make it difficult for A2 Milk to continue its exponential growth and capital returns.

Could these 2 ASX dairy shares be suitable A2 Milk replacements? 

1. Bubs Australia Ltd (ASX: BUB

ASX dairy share Bubs has a mere $524m market capitalisation compared to the $14 billion A2 giant. However, its products often neighbour A2's on the shelves of many supermarkets and international sales channels.

Looking at the company's growth figures, its Q4 FY20 quarterly activities highlighted a 32% increase in FY20 gross revenue and $26m in cash reserves as at 30 June 2020.

I expect Bub's full year reporting to be consistent with its Q4 commentary, with Bubs Infant Formula driving performance and an expected strong growth trajectory. The company has achieved significant domestic retail distribution gains for a variety of its goat and grass-fed infant formula products across major retailers Coles, Woolworths, Chemist Warehouse, Big W and Baby Bunting

The coronavirus pandemic has surfaced as a consistent challenge across most infant formula stocks. A reduction in Chinese tourists and students, increasing costs and longer delivery times for international logistics and pantry stocking in Q3 has curbed the earnings potential of outbound Daigou channels.

These challenges remain a wildcard for the upcoming earnings season as domestic growth may be subdued in this volatile environment. With that said, China consumer demand has remained strong and supported via increased marketing investment across online channels. Bubs has also focused more on emerging markets outside of China to de-risk and meet new consumer demand. 

Bubs is well-capitalised and expects to achieve profitability at normalised EBITDA level in FY21. I believe the risks associated with Bubs applies to all ASX dairy shares in today's volatile environment. This represents a high risk/high reward play instead of the A2 Milk share price. 

2. Nuchev Ltd (ASX: NUC

Nuchev listed on the ASX on 13 December 2019 and sells premium goat nutritional products. Its flagship product is its Oli6 branded goat infant formula.

Despite its initial public offering (IPO) late last year, on 29 July the ASX dairy share initiated a $15m capital raising at an offer price of $2.33 per share. This is quite a significant raise given its ~$100m market capitalisation. The capital will ensure Nuchev can operate effectively in an uncertain environment while leaving it well-placed to capitalise on opportunities and remain nimble in adapting efficiently in these unusual times. 

In Nuchev's Q4 trading update, its net revenue of $17.8m came slightly below prospectus expectations, achieving 99% of prospectus forecasts. This revenue represents a 98% increase on FY19. It expects a material revenue increase in Fy21, particularly in key CBEC channels. However, the rate of growth is expected to moderate relative to FY20. It believes travel restrictions are likely to impact on the speed the company can develop new business and markets. 

I think Nuchev is too speculative and unpredictable right now. The ASX dairy share does not yet have a roadmap to profitability and still pending the approval of its SAMR brand registration which will enable it to sell products in China.

More time is needed to evaluate whether or not Nuchev can successfully penetate the Chinese market and if new markets can be realised. While the ASX dairy share and its products are niche, I would rather have my money in the A2 Milk share price. 

Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended BUBS AUST FPO. The Motley Fool Australia owns shares of A2 Milk, COLESGROUP DEF SET, and Woolworths Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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