Bubs to raise $63m to support rebounding Chinese demand and US growth

Bubs (ASX: BUB) is seeking to raise $63m to scale up its activities and inventory to fast-track its position as a leading Australian supplier amid the ongoing infant formula shortage in the US. 

Capital raise in a nutshell

• $63m shares at an offer price of 52 cents per new share

  • Split into a $32.4m placement and $30.6m rights issue

• New shares represent a 18.8% discount to last close price of Bubs shares of 64 cents on Monday, 4 July

• Raise represents 19.8% of existing shares on issue

Use of funds

Proceeds will be used to support working capital, inventory and growth initiatives, notably:

• Expansion in the US

• Accelerate manufacturing capabilities

Its worth noting the current FDA guidance about the temporary enforcement discretion is in effect until November 14, 2022. Bubs was not able to comment about what the situation will be beyond that date.

Does the raise make sense?

Bubs had $24m in cash as at 31 March 2022. A decent cash position relative to the company’s $390m market cap. 

The capital raise makes sense in the context that companies typically want to raise cash when their share price is high. The US FDA approval for Bubs infant formula products on 30 May and subsequent supply agreements has helped boost the company’ stock by around 32%, to levels not seen since February 2021. 

Fundamentally, Bubs expects revenue to more than double in FY22 compared to FY21 due to strong momentum in China and the unanticipated volume of sales in the US.

The new funds will support additional scale and inventory to capitalise on rebounding Chinese sales and ongoing shipments to the US.

After all, the Chinese infant formula market is worth an outsized $26bn, the US $5.6bn while the local market is worth just $307m, according to Bubs' capital raise investor presentation. With market conditions somewhat improving, Bubs wants a capital injection to make hay while the sun shines.

Profitability remains an issue

Even with the doubling of revenue and US tailwinds, Bubs said it expects to achieve $2.4m in earnings for FY22 - marking the company’s first year of EBITDA profitability.

Whether or not the company turns a net profit - we’ll find out soon enough. 

Bubs share price chart