Bellamy's Australia
About the author:
- Author name:
- By Belinda Moore
- Job title:
- Senior Analyst
- Date posted:
- 01 December 2015, 1:09 PM
- Sectors Covered:
- Agriculture, Food & Beverage, Travel and Chemicals
Key points
- Bellamy's Australia (BAL) has signed a new manufacturing contract with Fonterra. We view this as a sign of strong trading and that its supply constraints are being dealt with.
- On average, BAL has implemented price rises of +20% across its infant formula range in Australia. This will have a twofold impact of driving top line growth and margin expansion.
New manufacturing capacity
BAL has entered a five year manufacturing contract with Fonterra for the supply/manufacture of a new range of nutritional powders. Manufacturing will begin in mid-2016. The contract with Fonterra is in addition to BAL's current arrangement with Tatura Milk Industries (TMI), a subsidiary of Bega Cheese (BGA). The new contract with Fonterra will significantly increase BAL's volumes.
In our view, this new arrangement is a sign of strong trading, the company's future prospects and the fact that it is sourcing additional organic ingredients (key constraint).
Price rises (+20%) for domestic customers
BAL is in the process of implementing large price rises across its infant formula range in Australia. Effective from 27 November 2015, the recommended retail pricing of its Step 1 & 2 900g products will be A$28 (previously A$22.95) and its step 3 900g product will be A$26 (previously A$17.50).
As a premium product, and the only Australian organic infant formula brand on the market, these price rises are justified. We note that A2 Platinum Permium Stage 1 Infant Formula 900g currently sells for A$32.95 and Aptami Profuture Infant Formula 2 900g sells for A$29.99 at Coles.
We make another round of large earnings upgrades
Following strong trading and the implementation of large price rises, we have increased our NPAT forecasts for FY16 (26.5%), FY17 (47.9%) and FY18 (50.4%). Our new FY16 NPAT forecast of A$24.5m represents 165% growth on the pcp. We highlight that our forecasts do not include BAL entering new markets in South East Asia, the US, Europe and the Middle East or developing new products outside of the baby category, all of which are targeted by management over the coming years.
Investment view
Trading on an FY16 PEG of only 0.3x, we believe that BAL is attractively priced for its growth profile. The main risks to our view are raw material supply, competitive environment, brand damage and regulatory changes to the grey market trade in China.
We continue to rate this company highly and reiterate our Add recommendation.
More information
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Disclaimer(s): Analyst owns shares.
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