Bellamy's Australia
About the author:
- Author name:
- By Belinda Moore
- Job title:
- Senior Analyst
- Date posted:
- 22 August 2016, 11:28 AM
- Sectors Covered:
- Agriculture, Food & Beverage, Travel and Chemicals
Despite regulatory change in China in the 2H16 and further investment in the business, Bellamy's (BAL) FY16 result was materially ahead of expectations, BAL reported 95% sales growth, 333% underlying EBIT growth and 314% underlying NPAT growth. Strong earnings growth reflected strong demand, increased points of distribution, more higher margin online sales, seven months of +20% price rises and material margin expansion. The step up in BAL's supply of organic ingredients helped it achieve this outcome.
Revenue growth in Australia was 67%, while China was up 331%. BAL's flagship store on Tmall is now one of the top 10 baby formula stores. The balance sheet is strong with a net cash position of A$32.2. ROE increased to 46.1% from 18.9%.
Outlook – building a long term growth story
As expected, BAL hasn't provided formal FY17 earnings guidance. However, management did say with strong demand, a further step up in BAL's supply of organic ingredient supply and the additional infant formula volumes now being delivered from Fonterra which will allow it to supply a substantial uplift in volumes from FY17 onwards. BAL is well placed to continue its growth trajectory while investing in the business.
In FY17 BAL will also benefit from a full year of price rises compared to seven months in FY16. In FY17 BAL will spend an additional A$15-20m across product, people, marketing and promotional activities to build a stronger business over the medium term. Following the result, we have made only minor changes to our forecasts. Our new FY17 NPAT forecast is A$60.9m which equates to 59% growth on FY16A.
Investment view
Notwithstanding further investment in FY17, we believe BAL is capable of reporting strong earnings growth. The investment is important for BAL to deliver on its ambition to become a global brand.
Despite a strong growth profile, BAL is on an FY17PE of 21.4x, and is trading at a discount to both its domestic (FY17 PE of 25.4x) and international peers (FY17 PE of 27.5x). Its Price/Earnings to Growth Ratio (PEG) is only 0.4x. We consequently believe that BAL is undervalued for its growth profile and reiterate our price target and Add recommendation.
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Disclaimer(s): Analyst owns shares.
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