background image background image background image

Clover outpaces rivals using niche expertise

Strats-Eleanor-88x88
Eleanor Creagh

Australian Market Strategist

Clover, the Australia-based health and nutrition group, is set to benefit from a booming baby formula market in China and the EU, although the  gains will not come from  supplying formula into this heavily competitive space. Clover's niche expertise is supplying an essential proprietary ingredient to several brands, for which it holds patented rights under licence from CSIRO (Commonwealth Scientific and Industrial Research Organisation), until 2027. If the experience of companies like Bellamy’s Australia Ltd (ASX: BAL) and A2 Milk Company Ltd (ASX: A2M) is taken as an example, this niche could prove profitable for Clover and in fact on a relative basis, it has outperformed these bigger rivals in the past year.

Clover Corporation supplies DHA (docosahexaenoic acid), a key ingredient in infant formula. This is an omega-3 fatty acid that occurs naturally in breast milk and is scientifically proven to support brain development, is critical for optimal brain health, benefits eye health and may guard against heart disease. 

Clover Corporation is a leading supplier of DHA in an encapsulated tuna oil or powdered form. Baby formulas use a number oils to maintain fatty acid content, and of these DHA is by far the most important as its replicates natural milk properties most efficiently. Clover maintains a strong position versus rivals in supplying DHA both due to the high quality of its product and its proprietary encapsulation process. This process means the end product doesn’t smell of or taste like fish, but still retains the nutritional benefits, and has a longer two-year shelf life. 

Demand

Euromonitor estimates that the global infant formula market is worth around $47bn USD and will continue to grow at around 5% per year for the next 5 years. Similarly, Zenith, global food and drink experts, estimates the market is worth over $50bn and will grow at 7% per year for the next 5 years. Of this growth, the most compelling is China, as our head of Equity Strategy Peter Garnry notes, Chinese infant formula demand is driving revenue for key infant formula suppliers. 

This growth story is not the only reason that makes Clover a compelling investment, the company is not an end supplier, but provides a key ingredient, and has more than 50 clients so brand specific risks are diversified. Clover supplies a large proportion of baby formulas makers globally, and retains its own intellectual property through the licensed encapsulation process, giving it a competitive edge against rivals. 

Regulatory benefits

Clover is also set to benefit from EU regulations that set minimum DHA levels at twice current levels by 2020. This will increase demand for Clover’s product from European clients, but should also spur a knock on as other countries follow Europe’s regulatory lead. Europe only makes up a small portion of Clover’s sales at present, but it is a key focus area for the company going forward. 

Clover is growing very quickly with half year revenue up 60% on HY17 due to increasing demand, earnings also grew very quickly, rising by 200%. Increased Chinese demand and regulatory stability has driven increased demand across key clients for Clover. This is expected to continue as three more key customers have secured CFDA approval to market and sell their infant formula brands in China. Another key factor driving earnings growth was the decision to invest in their own production machinery, rather than renting, this lowered the cost of goods and as a result boosted margins for Clover.

The current 12-month trailing EV/EBITDA ratio of 29.5 tells us Clover is expensive compared to 11.7x for global equities. This high valuation premium is naturally a key risk.

Clover chart
Source: Clover Corporation

Management and risk description

There are several key risks to be aware of before investing in Clover Corporation:

The benefits of DHA oils may be overstated and could lead to brand damage if findings show no evidence of health effects. 
Increasing competition from other DHA suppliers.
Slowdown in Chinese expansion where key clients source a lot of their sales.
High valuation is a key risk as lower-than-expected growth could quickly lead to a sharp revaluation of the company’s shares.
The market capitalisation is small ($0.2bn USD), small cap stocks tend to be more risky than large cap stocks, however, can offer more growth potential.

Clover chart
Source: Bloomberg

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • 350x200 peter

    Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • 350x200 althea

    Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • 350x200 peter

    Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • 350x200 charu (1)

    FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • 350x200 ole

    Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.