Bellamy's Australia Limited

Approval by SAMR: Bellamy's Australia Limited (ASX: BAL) is a provider of organic food and formula products for babies and toddlers. The market capitalisation of the company stood at ~$963.63 Mn as on 3^rd July 2019. Recently, the company, via a release dated 24^th April 2019, stated that SAMR had released a series of approvals wherein it stated that, three of which is related to the approval of a new Bellamy’s branded formulation-series which is to be produced at the ViPlus Dairy facility. The company further stated that there are strong initial interest and feedback from sub-distributors.
 
Key Takeaways from Half Yearly Presentation: The company is taking control of sub-distributor relationships, and it is optimizing networks. Also, it is taking control of key accounts, trade marketing, and pricing. The group’s inventory stood at $61.0 Mn at the end of 31^st Dec 2018 as compared to $90.5Mn at the end of 30^th June 2018. There was an increase in raw ingredients due to direct sourcing model. The finished goods cover is towards the low end of the target inventory. Later on, according to the release dated May 1, 2019, the company clarified that ViPlus Dairy’s formula-series registration amendment had been approved by the SAMR but, however, Bellamy’s organic formula-series application is pending.
 

Group’s Inventory (Source: Company Reports)
 
What to Expect: Bellamy’s Australia Limited anticipates the total group revenue in the range of $275 Mn -$300 Mn for FY19. It also provided the guidance for EBITDA margin which is in the range of 18-22% for FY19.
 
Stock Recommendation: The current ratio of the Bellamy’s Australia Limited stood at 4.84x in 1H FY19 as compared to the industry median of 1.42x. This represents BAL’s decent position for meeting its short-term obligations. With respect to stock’s past performance, it had yielded a return of 2.53% and 11.99% in the time span of one month and six months, respectively. On the other hand, it produced a negative return of 24.51% in the time period of three months. Currently, the stock is trading closer to its 52-week lower level of $6.710 with the PE ratio of 34.140x. Hence, in the view of above-stated facts and current trading level, we give a “Speculative Buy” recommendation on the stock at the current market price of A$8.420 per share (down 0.941% on 3^rd July 2019).
 

Challenger Limited

US Dollar Annuity Reinsurance: Challenger Limited (ASX: CGF) is involved in the financial services like fund management, annuities and administration platforms. The market capitalisation of the company stood at A$4.1Bn as on 3^rd July 2019. Recently, the company, via a release dated 28^th June 2019, made an announcement that it had got all the necessary regulatory approvals and implemented operational requirements to commence reinsurance of the US dollar denominated annuities from 1 July 2019.
 
Challenger Limited would begin a quota share reinsurance of US dollar denominated annuities which are issued in the Japanese market by Mitsui Sumitomo Primary Life Insurance Company Limited (or MS Primary), which is a subsidiary of MS&AD. MS Primary would provide to Challenger Life an annual amount of reinsurance, throughout both Australian and US dollar annuities, of at least ¥50 billion per year for a minimum of 5 years.
 
The company witnessed annuity sales of $662Mn in Q3 FY19 in comparison to $761Mn in Q3 FY18, which was negatively affected by lower adviser productivity.
 

Quarterly Annuity Sales (Source: Company Reports)
 
With respect to a lifetime annuity, the company stated that it provides protection from retirement risks such as longevity risk, market risk, sequencing risk and inflation risk.The company is well placed, and the long terms fundamentals remain strong.
 
CGF stated that it has strong systemic tailwinds, which includes ageing demographics and super system growth and two complementary businesses with leading market positions. CGF is a leading retirement incomes brand and identified as industry thought leader with a strong track record for developing high quality products throughout both businesses.
 
The company updated the market about a change of substantial holding in G8 Education Limited with voting power to 6.06% from 5.01% on 25^th June 2019. Furthermore, the company also changed substantial holding in Australis Oil & Gas Limited with voting power to 7.71% from 6.69% on 25^th June 2019.
 
  
What to Expect: In order to drive long term growth, the company’s priorities include engaging, educating and deepening customer connections, improving adviser experience, strengthening relationships with profit-for-member funds and continue leading operating and people practices. It has continued its focus on strategic initiatives, which includes maintaining thought leadership. With respect to short-term priorities, the company plans to mitigate advice market disruption and support move to new means test rules.
 
The company reported total assets under management amounting to $81 Bn in Q3 FY19, reflecting the growth of 4%.The Australian annuity sales witnessed a decline of 7% on the previous comparison period. The company mentioned that MS Primary sales represented 8% of the total third quarter annuity sales, reflecting a fall from 14% in the pcp.
 
Funds Management FUM stood at $78.1 Bn at the end of the quarter with an increase of $3.1 billion or 4% for the quarter. The company also added that Fidante Partners’ FUM amounted to $59.3 billion, which reflects an increase of 5% (or $3.0 billion) for the quarter.
 
Stock Recommendation: The company is expecting no significant change to major asset class allocations in FY20. It is implementing targeted initiatives to mitigate advice disruption. With respect to the property, the company mentioned that FY19 sale process of lower ROE properties have been concluded. The gross margin of the CGF stood at 87.6% in 1H FY19 against the industry median of 74.1%.
 
By looking at its long-term growth strategy and current trading level, we give a “Buy” recommendation on the stock at the current market price of A$6.800 per share (up 1.493% on 3^rd July 2019).   

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