We have followed the Bellamy’s Organics (BAL) story since the IPO in 2014, including its rise to prominence in 2015 - 2016 and its downfall in late 2016 - early 2017. Here we outline why it may become an attractive asset for a corporate buyer.
Back in early 2017 the Company was facing three main issues:
- A strong balance sheet was needed to stabilise the Daigou channel and excess inventory;
- A decisive and experienced management team was needed to execute a turn-around;
- The regulation uncertainty about its Chinese recipe registration, due to lack of control of its supply chain, posed a significant risk on the brand equity in the future.
While the share price declined significantly and we saw value in the brand, we considered the risk too high for our liking. In our experience, most turnarounds fall short of expectations.
A hedge fund came in and took control of the Company, injected additional capital, stabilised the management team and allowed the Company to acquire part of its supply chain. While share price responded positively to these actions, the risk in the turnaround was still high, as evidenced by the CNCA license suspension of the newly acquired facility in July 2017.
Signs of stabilisation appeared
We closely monitored the turnaround. In September 2017, we first saw a clear signal of stabilisation in the channel, and in October 2017 the Company reported an earnings upgrade. Over the next two months, we saw a continued strengthening of external trading data and concluded that a large earnings upgrade was very possible. The Company was included in the inception portfolio on January 1st. Pleasingly, the Company reported a significant earnings upgrade in January 2018.
The key highlights at the half-yearly result were a rapid stabilisation of the inventory position, strong cash flow generation, and most importantly, the management’s plan to upgrade the product’s formulation to become a premium product. We consider this a significant step toward closing the large profit margin gap compared that of A2 Milk.
The emerging strategic asset?
Once the Company obtains its Chinese formula recipe approval (CFDA registration) and launches its new premium product, with its fully integrated supply chain and modest market capitalisation relative to A2 Milk, Bellamy could potentially become an attractive asset for a corporate buyer.
How is BAL progressing with it's CFDA registration? This seems to be the greatest risk to the business (not getting it), and it feels like the process has been abnormally drawn-out?
CFDA registry slowed down significantly after chinese NY. No new registry list released for two months now. So it’s not just Ballemy. iLLuma Atwo has not got registered either. I look forward to Ballemy premium series release and apparently they will include DHA ARA in it. About time I would say. As the criticism among Chinese consumers on BAL lacking key nutrition ingredients such as DHa has been increasing. That could very likely be another customer win for Clover Corp. :) they have certified organic DHA ingredient ready to go and already supply most big ANZ brands.
Btw CFDA is in process of merging with another couple of Chinese mkt supervision bureaus so it’s not a big surprise the registry slows down significantly but not forever. :)