This week I'd buy Bubs (ASX:BUB) at today's share price

At the current Bubs Australia Ltd (ASX:BUB) share price of $0.80 I would want to buy it for a growth-focused ASX share portfolio.

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The Bubs Australia Ltd (ASX: BUB) share price looks like a buy to me this week. Particularly if it falls further. 

A quick overview of Bubs Australia

Bubs was founded in 2006 by current CEO Kristy Carr. Bubs describes itself as Australia's only vertically integrated producer of goat milk formula, with exclusive milk supply from Australia's largest milking goat herd.

It sells a variety of products, with some of those arising after making acquisitions. Goat milk infant formula is the key segment with rapidly rising revenue and a gross profit margin of around 40%. It also sells organic grass-fed cow milk infant formula, food for young children and goat milk based formula for adults.

Products are widely sold in major supermarkets and pharmacies throughout Australia, as well as exported to China, Vietnam, South East Asia and the Middle East. Other ASX shares like Woolworths Group Ltd (ASX: WOW), Coles Group Limited (ASX: COL) and Baby Bunting Group Ltd (ASX: BBN) are among the large Aussie retailers that sell Bubs products. The Bubs share price responded positively when the ASX share announced its extended distribution. 

Bubs recently announced the launch of Vita Bubs, which is a vitamin and mineral supplement which will be ranged nationally across 400 Chemist Warehouse stores from October 2020. This is expected to materially add to Bubs' domestic revenue. More high-margin revenue is obviously good news. 

The ASX share also recently signed Jennifer Hawkins as its global brand ambassador.

What's been happening recently?

The Bubs share price has fallen by 27% since 9 July 2020 despite the company reporting a solid FY20 result.

The FY20 report showed a number of pleasing points.

Bubs' FY20 revenue increased by 32% to $62 million. Most importantly, Bubs infant formula revenue rose by 58% to $30 million – which represented 55% of total revenue. Direct sales to China rose by 32% to $13 million. Export markets outside of China grew five-fold, representing 10% of total revenue.

The normalised gross profit margin increased by three percentage points from 21% to 24%.

Looking at the bottom line, the ASX share reported a statutory loss after tax of $8 million, a big improvement from the $36 million loss in FY19.

After the release of the FY20 result, Bubs announced a $38 million capital raising to fund various initiatives. One of the most important uses of the money is funding its acquisition of a stake in the Beingmate infant formula manufacturing facility in China and the application for China-made infant formula. It will also fund working capital requirements to launch China label products into the general trade channel, fund the lunch of Vita Bubs, extend production capability, expand into new global markets and pay for global and regional influencers to expand the brand.

Why I think the Bubs share price is a buy today  

I'm not sure how low the Bubs share price will go over the next few months. It could go lower. I think it would be even better value if it fell further. It's rapidly growing revenue across a number of markets whilst its gross profit margin rises significantly.

The business has a very good opportunity to greatly increase its export revenue to markets outside of China, which is what I'm focusing on. Vietnam alone could be a very good profit centre for Bubs.

There are lots of risks associated with doing business in China, so I think Bubs' solution to that is probably the best one for the situation. I like that Bubs is launching new products to capture more of a household's overall spending. The high-quality cow milk products could also do well over time.

When the Bubs share price falls I think it's an exciting opportunity because it's a cheaper price to buy a fast-growing business. It's racing towards being cashflow breakeven, which would be a big step on its growth journey.

I'd be comfortable buying a decently sized parcel of Bubs shares today because of its international growth potential and the lower share price.

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 COLESGROUP DEF SET. 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.

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