CLV.AX - Clover

[Libs]

This one is from Spekulatis' thread on multi-baggers (the link to that study seems to be broken). Of all those stocks, this one strikes me as 1) pretty understandable, 2) with a long runway, and 3) not really expensive.

 

Clover turns Omega 3 + 6 oils (technically called DHA, from tuna), into powders sold to producers of infant milk and other food products. Infant milk is their biggest niche. The powders make the milk, etc. palatable from a taste and smell standpoint. The study says these powders are difficult and expensive to make, and Clover only faces smaller, fragmented competition.

 

From what I can tell, DHA is considered helpful to a variety of health issues, including heart, vision, etc. I haven't found any studies contradicting the benefits of DHA.

 

So while there is already wide acceptance of the need for DHA, recent developments are increasing the demand. Europe has, and China may soon, boost the required minimum DHA in infant formula. In China's case, from 5 mg/ 100Kcal to 15 mg/ 100kcal.

 

Needless to say, tripling demand in a huge market like the Chinese baby market is enticing!

 

The company has expanded margins over time; and they invest heavily in new products. Clover has the earmarks of a well-run company.

 

All that said, you don't know what you don't know....does  anyone have any insight to this company / industry? For instance, why does it take 3 years to develop / test / bring to market new products? This difficulty seems to constitute much of their moat.

 

In terms of valuation, market cap is $295 MM and they made $12.5 MM this year (calendar year ends June 30). So 23.6 X earnings. The stock has dropped ~40% since Covid-19, which seems over-done. I don't see any permanent damage to Clover from Covid-119.

 

They have noted, 2021 comparisons will be flattish for about half the year due to 2020 Covid stocking, so maybe the stock is in -wait-and see- mode.

 

Thoughts? Hopefully this doesn't disappear into the ether like my RUTH post ( up 90% BTW ;D)

 

 

 

 

 

 

 

 

 

 

 

[kab60]

Looks very interesting yet a bit difficult to get a grasp for future growth. They're not exactly putting a lot of guidance out there. And they have some very large competitors. But it's an extremely interesting space. DSM, one of their competitors, bought a Danish Company called Glycom earlier this year for a pretty insane sales multiple. Glycom makes HMO and sells it to Nestlé which uses it for infant formula. But DSM also makes DHA themselves. Any idea as to whether or not Clover has longterm volume contracts or anything like that with their customers? And what's the status on DHA in China?

 

Just came across this study which projects some pretty massive growth:

 

https://www.globenewswire.com/news-release/2020/06/24/2052939/0/en/Global-EPA-DHA-market-is-projected-to-grow-at-the-CAGR-of-9-7-during-the-forecast-period-2020-2025.html

[Scunny Bunny]

Post up some research tomorrow. Bit of a growth stock gone wrong, but obvious global corporate target once relations with China normalise. Ozstraya a bit on the nose in Beijing at present (probs because of the rotting lobsters at the airport)

[Libs]

<But DSM also makes DHA themselves.>

 

In powdered form?

 

This is what DSM had to say on the topic in their AR. Are you sure they compete with Clover?

 

<We also made significant progress in Veramaris, our joint

venture with Evonik to produce the omega-3 fatty acids EPA

and DHA from natural marine algae as an alternative to fish

oil. This innovation helps to reduce the pressure on wild fish

stocks, helps the aquaculture industry to sustainably meet

the rapidly growing global demand for seafood, and enables

the production of healthier fish for the consume>

[kab60]

No, not sure, really not into the details. Sorry for that. Just got the impression they were competing with some of the larger ingredient players, like DSM, but I don't know their patents or tech nor if they'vd carved out a niche for themselves. Looks very interesting.

[Scunny Bunny]

Report from niche Australian broker attached

CLV_Petra_6_Nov.pdf

[AndreG]

Looks interesting.

In my research I found that BASF also sells "Microencapsulated fish oil rich in EPA and DHA" (i.e. DHA-powder) under their "Dry n-3" brand.

Does anyone have additional information about the potential competitive advantage of CLV?

[Libs]

Report from niche Australian broker attached

 

Thanks Scunny. The China info was helpful. I think at the end of the day, you can only know so much about these small, foreign companies who report every 6 months, don't have CC's, etc. Some of them will blow up. That's what sizing is all about. But I like the risk / reward here from these levels.

[Libs]

Found the multi-bagger report. Clover is on page 112.

 

https://static1.squarespace.com/static/5aaacb57506fbe4636414126/t/5f85c428b4bac16b20450df0/1602602051503/Conclusion+Deck-+Makings+of+a+MultiBagger+-+FINAL-compressed.pdf

[kab60]

I just dipped my toes into this one. Company "warned" during the fall that customers stocked up due to covid, and that there'll be headwinds due to de-stocking.

 

Still, the Company has signalled there's years of growth ahead, and they're looking forward to getting access to a new production facility in NZ, where they've taken their ownership stake from 35 to 42 pct. since announcing the investment.

 

This is from their Q3:

 

- The Melody Dairies dryer adds much needed capacity and risk reduction which will supplement existing manufacturing in Australia

 

- Clover’s concentrated DHA powders have won additional business in a range of new applications covering bread, yoghurt, health bars and sport nutrition

 

- Research & Development has a range of new products that have been created to fulfil customer requirements that will continue to deliver growth in the future

 

After warning on de-stocking, the share price has continued to drift ever lower and has been basically cut in half. I think investors have been spooked by the share price, and the Company has never done much external communication. Probably didn't help that the CEO sold some shares in December.

 

I was planning to buy just before earnings next week, as the stock hasn't been able to catch a bid for months, but then a major shareholder (and one of early stage investors) flagged that they've been buying shares as recently as last week.

 

It's not optically cheap at around 16xLTM earnings, but ingredient businesses like Chr Hansen trade at like 40x with less growth, and they're fabolous businesses as the cost is usually small, and customers get locked in.

 

Clover is obviously a lot more vulnerable that something like Chr. Hansen and DSM due to their dependancy on DHA powders and not least China, but they've also shown much higher growth, and despite their lack of scale they have high margins and returns on invested capital.

 

It seems like an interesting secular grower that's about to hit a speed bump, but being close to a one-trick pony and reliance on China I'm not betting the farm here.

 

 

 

 

[Libs]

I added some last week.

[Arski]

I owned a small stake in this company some time ago, but could explain to myself why Clover should grow in the future at 15% or higher.

 

I don't remember exactly which reasons I sold out for, but the outlook wasn't compelling for me. I think it also fits better into my too hard pile

[kab60]

I think it's pretty easy to argue for plus 15 pct. growth, but it's difficult to put odds on that scenario playing out. Increases of DHA content in IF in China and Europe, a growing Chinese middle class moving to premium brands with high DHA content, other segments than IF starting to contribute meaningfully. But it's also still a small Company, so there might be room for margin expansion. Clover has 20 pct. ebitda margins, Chr. Hansen is at 40 pct. Eventually I think it'll be gobbled by one of the bigger players.

 

If all the stars align you get revenue growth, margin expansion and multiple expansion. But it's difficult to figure out how the Chinese IF market will develop and whether covid19 will permanently alter daigou trade. I added a bit more and made it a 3 pct. position, which is small for me and comes down to the wide range of outcomes.

 

I think it's a good bet with SOL buying and what I assume are technical factors for the selloff (CEO selling shares in December, no communication from the Company despite weak share price, people fearing a disaster in the next Q). But perhaps the better opportunity is after the earnings release, if people get spooked by de-stocking.

 

 

[kab60]

Earnings report out, basically as expected/hoped. Long term case very much intact, it's pretty easy to see how the narrative might flip back to this being a secular grower in an attractive industry with very nice economics.

 

I think these are the import points in the report:

 

- Clover has retained and grown its customer base, but the ongoing COVID‐19 pandemic has negatively impacted customer demand

 

- A highly concentrated Omega 3 powder released during the first half is in product application trials in food & nutraceutical products

 

- Sales across food & beverage products increased in the half

 

- New product pipeline has several new products for release in the 2H21 targeted at the health food market

 

- New infant formula customers added in the half year in the EU with others requiring audit of our facilities before progressing

 

- Key customers impacted by reduced demand from China due to COVID-19 restrictions, reduced Daigou channel, reduced travel and increased competition within China

 

- Working through qualification with several China infant formula manufacturers

 

- China’s DRAFT legislation requiring a minimum 15mg/100Kcal of DHA in infant formula is expected in 2H21 with a 2-year introduction

[Libs]

-<China’s DRAFT legislation requiring a minimum 15mg/100Kcal of DHA in infant formula is expected in 2H21 with a 2-year introduction>

 

This was good news. That aside, it's pretty tough (IMO) to get a handle on how much of their problems are one-off Covid issues, and how much might be other stuff that's being masked. Things have definitely gone worse than I thought when I bought in. But, the SP has plunged as well. I still like the risk / reward.

[kab60]

From Twitter: Chinese dairy companies stage a strong rally, after the PBOC said in a paper released Wed that China should remove all birth control and encourage people to have more children.
https://t.co/vVS0O9qEIi https://t.co/iCoAvupVkV

Wouldn't hold by breath, but a Chinese baby boom would be good for business I'm sure ^^ Up more than 50 pct in a month or so, funny how quickly sentiment change in these smallcaps