Bubs investors make an extra $130m in four weeks, following US infant formula deal

US president Joe Biden catapulted goat milk infant formula maker Bubs to rockstar status when he tweeted about the company.

US President Joe Biden speaks with Kristy Carr, managing director of Bubs Australia, during a virtual meeting with baby formula manufacturers last month. Picture: Getty Images

A fund backed by Chinese eCommerce titan Alibaba, media mogul Kerry Stokes and the founders of discount pharmacy chain Chemist Warehouse is among the beneficiaries from a 35 per cent surge in Bubs’ share price last month.

The goat milk-based infant nutrition company’s market value has gained an extra $130m since the start of June after it landed on US president Joe Biden’s social media account.

Mr Biden wrote: “I‘ve got more good news: 27.5 million bottles of safe infant formula manufactured by Bubs Australia are coming to the United States”. The operative word was “safe”.

The Food and Drug Administration granted Bubs temporary approval to import its infant formula in an effort to ease a chronic shortage in the American market after bacterial contamination concerns forced the shutdown of major US manufacturer Abbott.

It reflected a similar crisis 14 years ago when Chinese infant formula was contaminated with melamine, killing six babies and putting another 54,000 in hospital. The scandal triggered the so-called ‘‘white gold rush’’ as Chinese parents turned to foreign brands, enriching A2 Milk and Bellamy’s and paving the way for Bubs’ ASX listing in 2017.

It is not known whether the Abbott contamination concerns will spark a similar shift in the US, and while Bubs shares surged on the company’s prospects of potentially smashing the oligopoly that has dominated the market for decades, one investor believes the market is undervaluing the ‘‘halo effect” of Mr Biden’s tweet.

Geoff Wilson’s Wilson Asset Management began investing in Bubs earlier this year when it signed an equity-linked sales deal with Chinese corporate daigou distributor Willis Trading. Bubs will issue more than 4.8 per cent of its shares to Willis if it meets certain sales targets, including selling up to $120m of Bubs’ products in the next 12 months.

“The market didn’t really react to that initially … in the Chinese channel, at least initially, having an alignment of interest and profitability … because it’s a very complicated channel, is super-important in driving demand and growth,” said Wilson Asset Management portfolio manager Tobias Yao. “If everyone from the distributors to sub-distributors to daigous, to whoever, if they are still making a profit they will continue to push the brand. We thought that was underestimated by the market, so that’s when we first initiated a position.”

While the US represents a significant opportunity for Bubs, Mr Yao believes it will not come at the expense of Bubs’ Chinese business – a concept yet to be grasped by the broader market.

“The US opportunity really came from left field. We think that’s potentially quite synergistic because it is a very big deal if the President of the United States tweets about you. I don’t know any other brands that were tweeted by the President of the United States in Australia. That creates a halo effect, which gives comfort to mothers in China as well. There are a lot of prominent brands – which one do you pick, which one you choose? But if POTUS tweets about this brand, I better buy that one … I think that’s probably underestimated by the market.”

With a 12.5 per cent stake, Bubs biggest shareholder is C2 Capital – a fund linked to Alibaba, registered in the same four-storey building as Deloitte’s operations in the Cayman Islands at One Capital Place in George Town.

Anthony Gualdi, who founded Bubs with chief executive Kristy Carr, is the next biggest shareholder with an 8.2 per cent stake. Mr Gualdi said while he no longer had an operational role at the company, he continued to support it as an investor. “I wouldn’t go anywhere. It’s been such a rollercoaster ride,” he said.

“But we just kept doing the right things. We’ve got such great people, Dennis Lin, the chairman, and some of the backers that have never given up on us.”

Among those investors is Kerry Stokes, who holds a 1 per cent stake, behind Ms Carr’s 2.2 per cent. Mr Stokes has been an investor in Bubs since it floated on the ASX five years ago.

Mr Gualdi said “people thought we were mad” when the company bought its own infant formula factory in Melbourne from Deloraine Dairy in a $50m deal. It is thanks to this facility that the company has been able to load jet-loads of infant formula to the US. “Here we are going 24/7 in this facility to supply. It’s wonderful,” Mr Gualdi said.

Chemist Warehouse invested in Bubs in April 2019 when its signed a sale-linked equity agreement to buy up to 49.4 million shares. It now holds a 4 per cent stake in the company.