It has been a volatile time of late for the Australian share market. Last month the ASX rebounded strongly, rising over 4% after a near 11% fall across the previous two months. While this volatility may result in investor uncertainty, there are still pockets of opportunities.
Companies that will be less affected by market movements are ones that operate in industries with underlying structural growth. These companies may tend to not do as poorly in times of market weakness which may in turn lead to market outperformance.
An example of this is structural growth is the increasing demand seen in the health supplements and health food space. Company’s operating in this sector weathered the last few month’s particularly well.
Recently listed Vitaco, which owns the Nutra-Life and Healtheries brands in Australasia, has done particularly well since listing in September 2015. It listed at $2.10 and is now trading at $3.00, a 43% return. This is when the ASX Accumulation Index has returned just under 3% for the same period.
Organic baby food producer, Bellamy’s Organic and vitamin and supplement company, Blackmores, have also both experienced exponential growth in their share price. Both share prices have increased over 500% since Dec 2014.
These share price movements are on the back of particularly strong earnings growth. Vitaco, Blackmores and Bellamy’s have all experienced over double digit growth in EBITDA for the year ended 30 June 2015.
So what is driving this earnings growth?
Consumers are becoming increasingly concerned about their health and wellbeing. In particular, (and the majority of growth) is the increasing amount of offshore consumers, particularly Chinese, purchasing these products. These companies have stated consumers are willing to pay sometimes up to four times the price of a domestic product due to it being manufactured by a trustworthy brand in this part of the world. However, it is hard for these companies’ to actually pinpoint how much of their product goes offshore, as many overseas consumers get relatives/friends to purchase it locally and ship it to them directly. There’s no doubt the broad market dynamics are running absolutely the right way for all three companies and investors see vast potential for both as they capitalise on strong demand from China.
This high growth is not without risk though. Supply can soon become an issue as these companies attempt to keep up with such high levels of demand for their products. Dealing with overseas markets can also lead to counterfeit risk and regulation risk. However, we expect this continued demand of health food products and offshore consumers purchasing increasing amounts from reputable brands, to continue to play out and provide solid underlying growth for this industry.
Disclosure of interest: Milford Funds Ltd. holds shares of Vitaco on behalf of clients.
Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.