I'd buy this ASX share this week

If I could only buy one ASX share this week it would be infant formula stock Bubs Australia Ltd (ASX:BUB). It has lots of growth potential.

| More on:
piggy bank wearing crown representing asx share dividend king

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If I had to pick which ASX share I'd buy this week, other than last week's pick, it would be Bubs Australia Ltd (ASX: BUB).

A quick overview of Bubs

Bubs is best known as an infant formula business. The company was set up in 2006 by current-CEO Kristy Carr.

The ASX share's main range of products is a goat milk derived infant formula. Three years ago Bubs acquired NuLac Foods, Australia's largest producer of goat milk products, including CapriLac, a leader in goat milk, powder and yoghurt, and Coach House Dairy, a premium range of Jersey milk products. That acquisition guaranteed exclusive supply of locally sourced fresh goat milk from Australia's largest herd of milking goats.

Bubs also owns its a Chinese-approved manufacturing facility called Deloraine.

I think Bubs is a great buy for a number of reasons:

International growth

Entering the global market can turn a consumer business from being a decent opportunity to one with much larger potential. Look how much further A2 Milk Company Ltd (ASX: A2M) has grown because it is servicing the Asian and USA markets.

Bubs is doing a really good job of getting its foot into the door of international markets. We can see the growth in the ASX share's June 2020 update a few weeks ago.

In the quarter ending 30 June 2020 we saw Bubs' China direct sales increase by 37% – this now represents around a fifth of total sales. Its 'other export' sales were up 71% in the fourth quarter of FY20, largely helped by the launch into Vietnam. Other international sales accounted for 9% of total sales in FY20.

Asia is a much larger total addressable market for Bubs compared to Australia. This region alone could be enough for the company to be a long-term market outperformer.

I like the ASX share's recent moves of launching grass-fed organic cow infant formula as well as a range of vitamin and mineral supplements. Both of these segments could become material for Bubs in the next few years as their distribution grows across various stores.

Defensive, essential product

I think this COVID-19 period has shown us how important Bubs' products are to families. Nutrition is essential, it's not a discretionary item. I think Bubs' existing revenue base is more defensive than some investors may give it credit for.

We saw in the FY20 third quarter how much demand there was for Bubs' products when households were stocking up. The ASX share's revenue grew by 67% compared to the prior corresponding period and it went up 36% on the previous quarter.

Rising profit margins

An ASX share can generate strong returns when there is a combination of strong revenue growth and rising profit margins.

In FY20 the total revenue rose by 32% to $62 million and the 'normalised' gross profit margin improved by 3 basis points, according to Bubs.

What's most exciting is that infant formula, which has a gross profit margin of around 40%, is becoming a bigger part of Bubs' total sales. In FY19 it made up 43% of total revenue, in FY20 it was 55% of total revenue. In FY20 infant formula revenue increased by 69%.

Margins could rise further as Bubs grows into Singapore, Hong Kong and Malaysia.

Near-term profitability

Reaching profitability is one of the most important things for a business to convince investors that it's on the right path.

In FY21, excluding any residual COVID-19 adverse impacts, The ASX share expects to achieve profitability at the normalised earnings before interest, tax, depreciation and amortisation (EBITDA) level. That would be a very promising step. 

Bubs thinks the group margin will be further enhanced by optimised product mix, the highest and best use of the milk pool allocation and enhanced value chain.

Foolish takeaway

Bubs could see growth in every segment and every geographic region in FY21. I think there's a lot of promise for Bubs over the next 12 months and particularly the next five to ten years. I think Bubs is a very exciting business which is worth owning for the long-term, I'd be happy to buy it this week.

Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of BUBS AUST FPO. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended BUBS AUST FPO. 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.

More on Growth Shares

A happy boy with his dad dabs like a hero while his father checks his phone.
Growth Shares

2 ASX growth shares to buy in June: experts

These businesses have strong growth potential.

Read more »

Rocket powering up and symbolising a rising share price.
Growth Shares

Buy these stellar ASX growth shares with $1,000

Analysts think these shares would be top buys right now.

Read more »

Overjoyed man celebrating success with yes gesture after getting some good news on mobile.
Growth Shares

These ASX growth shares could rise 18% to 30%

Let's see which shares are being tipped to rocket.

Read more »

Ecstatic woman looking at her phone outside with her fist pumped.
Growth Shares

Goldman Sachs tips this ASX 200 growth stock to rise 35%

Let's see what the broker is saying about this growing company.

Read more »

Two players on a field pump their fists in the air, indicating two of the best
Growth Shares

The ultimate ASX growth shares to buy with $5,000

Brokers are very bullish on these names. But why? Let's find out.

Read more »

Australian dollar notes in the pocket of a man's jeans, symbolising dividends.
Growth Shares

Where to invest $1,000 into ASX shares in June

These shares could be buys according to analysts.

Read more »

Young female investor smiling and speaking on mobile phone while sitting in front of laptop
Growth Shares

Looking for ASX growth shares? I rate these 2 as top buys for June

I’m very excited about the growth potential of these stocks…

Read more »

Two smiling work colleagues discuss an investment or business plan at their office.
Growth Shares

3 high-conviction ASX growth shares to buy

Analysts have good things to say about these stocks.

Read more »