The New Criterion: the real stock tapping the infant formula boom

Tim Boreham

Independent Investment Research

Clover Corp has been a big winner from the China-led boom in infant formula, but by supplying a key ingredient rather than the end product. Meanwhile, other dairy suppliers have refused to follow the herd and are diversifying into goat’s milk.

Clover Corp (CLV) 1.05

The maker of a key baby formula ingredient has ridden the boom in the commodity, led by demand from a Chinese populace freed from the shackles of the abolished one child policy.

But Clover is now set for a leg-up from further afield: a European dictate that will mandate increased minimum levels of its encapsulated form of tuna oil containing docosahexaenoic acid (DHA).

That chemical moniker doesn’t sound like the sort of substance mums should be feeding their little ones.

In reality, it’s an omega-3 fatty acid that occurs in breast milk and is linked to improving kids’ brain development and preventing heart disease.

It’s also prevalent in fish oil and thus a crucial additive in baby infant formulas.

Happily for Clover holders, the company is a leading supplier of DHA in the form of encapsulated or powdered tuna oil additives for the food and pharmaceutical industries.

The process, licensed from the CSIRO until 2027, means the product doesn’t pong like a rotting fish and it has a longer, two-year shelf life.

“We are a little business very focused on doing one thing well,” CEO Peter Davey says.

“We are in a great industry that’s running to keep up with itself at the moment.”

Europe is the biggest single infant formula market and by January 2020, any baby formula sold there must contain double the current requirement (as measured by calorific content).

Despite Australia’s ‘clean and green’ hype The Netherlands is the biggest single exporter to China, followed by New Zealand, Ireland, France and Germany.

While formula sold outside of Europe won’t require the supersized DHA dose, Davey says Europe tends to drive global regulations and other countries are likely to follow the lead.

“There’s a perception if the Europeans can get together and make it work, then others will follow.”


Currently, the global DHA market is equally shared by encapsulated powder and processed tuna oil (the latter is injected into the milk, which is then spray dried).

Currently most European and US producers use the older oil injection method, while Asian producers use powders because their milk is imported in powdered form in the first place.

Davey expects DHA powder to fill at least half of the increased requirement, with Clover enjoying the benefit.

In the meantime, Clover supplies about half of the world’s global powdered DHA demand and it only has three competitors (Dutch groups DSM and FrieslandCampina and Germany’s BASF).

Clover also supplies most of the world’s infant formula makers with its niche product. Management has expanded the company’s client base from five to 50, so it doesn’t have to pick winners.

Having said that, one customer still accounts for 30 percent of revenue and four other customers speak for another 40 percent.

Ahead of the European changes, Clover’s fortunes have been buoyed by signs of a more stable Chinese regulatory climate after the recent importation crackdown that resulted in Bellamy’s Australia shares tumbling.

Over the last six months, the Chinese regulator CBEC has granted seven new canning licences in Australia, taking the number of licensed exporters to 15. One more permit has been issued in New Zealand, taking the total to 14.

The proliferation of suppliers means more intense competition for the manufacturers, which include Bega Cheese and A2 Milk.

But for raw materials supplier Clover, the opposite is true.

“The new licensed facilities and continued dairy investment in Australia and New Zealand provide Clover with opportunities to diversify its customer base and increase demand from China,” Select Equities says.

Clover recently reported a 208 percent surge in half year net profit to $3.2m, on revenue of $31m (60 per cent higher).

Clover derives 70 percent of its revenue from encapsulated tuna oil, with 62 percent of its sales from Australia/NZ and 28 percent from Asia.

Bear in mind though that the local component goes into mainly exported product.

Margins were helped by management renegotiating unfavourable terms with two customers, with more of this benefited expected to flow through in the current half.

Select Equities forecasts full-year earnings of $7m, rising to $8.7m in 2018-2019.

Clover, meanwhile is working on variant products such as a DHA-infused ‘gummy bear’ lolly for the US sports market (omega-3 is claimed to help cardio-vascular recovery, visual acuity and hand-to-eye co-ordination).

But infant formula will continue to drive the fortunes of Clover investors, which include the value-sniffing listed investment company Washington H Soul Pattinson.

The infant formula game is seen as politically incorrect in some circles, insofar as it replaces free and perfectly good breast milk (which naturally contains DHA).

But Clover itself is eco-friendly because the oil used is a waste by-product of tuna canning.

Bubs Australia (BUB) 80c and others

With the Chinese food regulator declining to tinker further with the rules over the last six months, there’s a heightened confidence on the part of the local infant formula producers.

While the Asian (mainly Chinese) demand remains resilient, the market is becoming increasingly crowded as dairy producers seek to avoid the depressed market for commoditised milk.

But infant formula itself is a commodity (despite the marketing gloss) and any board that relies on a simple ‘build it and ship it’ business model is a herd of goats.

Speaking of which, at least two players are eyeing the market for goat’s milk infant formula, which is a much smaller market than for cow’s milk formula but less heavily competed.

In November last year Bub’s Australia acquired Nulac Foods, the country’s biggest producer of goat’s milk products, for up to $38.4m plus a 19.9 percent Bubs stake.

The deal includes Caprilac brand and – crucially – a five year exclusive supply deal with 8500 goat farms here and in NZ.

These farms can supply 6.2m litres, but the cow cockies shouldn’t be worried given our conventional milk output is around nine billion litres a year.

Bub’s is in “advanced discussions” with the CNCA to get a goat’s infant formula certified.

Rather than bleating about dairy conditions, food manufacturer Wattle Health (WHA, $2.26) has won a Chinese ‘brand slot’ for its goat milk based product, via Blend and Pack Pty Ltd.

Wattle Health estimates the Chinese goat’s milk market at $1.9bn.

Goat’s milk is the preferred nutrient for the lactose-intolerant and has other claimed health benefits such as being lower in cholesterol and allergens.

At the time of writing, Wattle Health shares were suspended pending a potential capital raising and finalisation of a joint venture with the country’s biggest organic milk producer, the Organic Dairy Farmers of Australia co-op.

The J.V. plans to build a dedicated organic spray drying facility in Geelong.

Victorian land owner Australian Dairy Farms (AHF, 20c) recently said it would convert its farms to organic production and build a compliant plant (including a spray dryer) to produce infant formula.

Tim Boreham edits The New Criterion


Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.


Tim Boreham
Editor of New Criterion
Independent Investment Research

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

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