Bega Cheese: A year of challenge, opportunity, and transformation

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
30 August 2021, 12:00 PM
Sectors Covered:
Agriculture, Food & Beverage, Travel and Chemicals

  • BGA reported a solid FY21 result which beat expectations. 
  • While further earnings growth is targeted in FY22 given a full year of the Lion Dairy & Drinks (LD&D) acquisition, some challenges remain around competition for milk, record high farmgate milk prices and COVID lockdowns are impacting the higher margin convenience and food service channels. 
  • We maintain an Add rating with a new price target of (login to view). 

Event: Solid FY21 result which beat our forecast on a number of key metrics  

FY21 sales rose 38%, underlying EBITDA increased 38% and NPAT was up 24%. EBITDA beat our forecast by 3.4% and NPAT was 7.0% higher than expected.  

Analysis: cost out; growth project; LD&D beats expectations; solid CF/Bal Sh

Strong earnings growth reflected self-help measures (cost out), a new growth project  (high  margin  lactoferrin)  and  the  LD&D  acquisition.  Included  in  the underlying result was about A$10m of one-off redundancy costs. While LD&D’s contribution was expected to be modest given BGA owned the business for only five months and its earnings are materially skewed to 1H (1H/2H split: ~80%/20%) and synergy benefits are weighted to FY22, it performed better than expected.  

Branded sales are now over 73% of group sales (FY20 was 59%). With a full year of LD&D, branded sales will represent over 80% of group sales in FY22. BGA’s spreads business reported solid growth and won market share in FY21.  

BGA’s balance sheet was materially stronger than expected following improved working capital management, contract termination fees and a legal settlement. 

Outlook: targeting earnings growth given a full year of LD&D and synergies

In FY22 BGA is targeting further earnings growth and to realise the synergies from the LD&D acquisition. The synergies are well progressed in areas such as milk and ingredients  management,  manufacturing  efficiencies  and  procurement.  BGA reiterated its FY22 synergy target of A$36m, with the full A$41m of benefits in FY23. There are additional synergies beyond its base case from better utilising its chilled distribution network, plant rationalisation and new product development (NPD).

BGA said that it will be launching new products in FY22 across a number of  categories.  Additionally,  LD&D  provides  a  platform  for  future  growth  in international markets, particularly in South East Asia.  LD&D’s product and channel (convenience and food service) mix has been impacted by COVID lock downs. However, BGA said that grocery sales have been strong.  

Milk supply in FY22 will remain competitive, there is excess manufacturing capacity and BGA has paid a record farm gate milk price. BGA said that the milk price increases are above market on some product streams.  Therefore, BGA is focused on producing higher margin products. Despite some recent weakness, USD global dairy prices are higher than FY21 levels. The fall in the AUD is a positive.  

The Nutritionals (IF) market will remain challenging in FY22 due to travel bans hurting the daigou, lower birth rates in China and stronger support for Chinese owned brands. BGA consequently intends to right size its business.

Forecast implications: we make no material changes 

Following the result, we have made only minor changes to our forecasts. Strong earnings growth in FY22 reflects a full year of LD&D and the associated synergy benefits and growth from new products.  

Investment view: Add recommendation

Reflecting BGA’s lower than expected net debt position, our blended valuation has risen to (login to view). Our positive investment view on BGA is centered on its highly accretive acquisition of LD&D and the possibility of further upside from additional synergies beyond the base case and non-core asset sales. We also believe that a stronger skew to more stable branded sales should eventually lead to a PE re-rating.

However in the short term, we recognise that the stock may not materially re-rate until the competitive landscape becomes more rational. The biggest risk to our forecasts and view is if global dairy prices fall materially or the AUD rises.  

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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