Bega Cheese Limited

BGA’s Share Tumbled ~12% on FY20 EBITDA Guidance Below FY19:Bega Cheese Limited (ASX: BGA) is involved in receiving, processing, manufacturing and distributing dairy and other food-related products. On October 29, 2019, over tightening market conditions,the company has advised that its normalised EBITDA for FY20 is expected to be in the range of $95 – 105 Mn, as compared to $115 Mn in FY19.The reason for decrease can be attributed to the effects of continuing drought and decrease in total Australian milk production, which has escalated the competition for milk in the first quarter of FY20. To remain competitive, the company announced an increase in its Southern Region milk price and other initiatives to sustain and grow milk supply. This higher milk price will directly impact Bega Cheese’s earnings in FY20.

In another update, the company informed the market that its longstanding director Max Roberts did not seek re-election at the 2019 Annual General Meeting, at his own right. Mr Roberts will remain on the Board in his capacity as the Alternate Director for Barry Irvin, who is currently on leave of absence for health reasons.


FY19 Key Metrics (Source: Company Reports)

FY19 Key Highlights for the period ended June 30, 2019:Normalised revenue for the period increased by 13% to $1,420 Mn. Normalised earnings before interest, depreciation and tax (EBITDA) for the period was reported at $115.4 Mn, an increase of 5% on the previous year.On statutory basis, EBITDA decreased by 3% to $89.5 Mn, reflecting primarily one-off acquisition costs related to the Koroit facility and Coburg closure costs. Company’s net profit after tax decreased by 59% to $11.8 Mn, mainly due to higher D&A from recent capital investments, interest from higher borrowings throughout the year to fund acquisition costs, working capital, and higher effective tax rate from the tax treatment for acquisition costs.

Stock Recommendation:BGA’s share generated a negative YTD return of 8.30%. Currently, the stock is trading close to its 52-week low level of $3.760. Its gross margin, EBITDA margin and net margin for FY19 stood at 20.4%, 7.4% and 0.8%, lower than the industry median of 38.7%, 12.5% and 5.5%, respectively. BGA’s branded consumer food business is continuing to grow but softening in demand for products destined for certain export markets that are expected to adversely impact earnings in FY20. Hence, considering the aforesaid facts and current trading levels, we have a wait and watch stance on the stock at the current market price of $3.950, down 12.804% on October 29, 2019 on account of the latest release of FY20 EBITDA guidance range below FY19.
 

Elders Limited

Court Approves AIRR Holdings Acquisition by ELD:Elders Limited (ASX: ELD) is involved inthe provision of livestock, real estate and wool agency services; provision of services and farm inputs to the rural sectors; provision of financial products and services to rural and regional customers; real estate operations in both rural and residential markets, including property management services; feedlotting of cattle; grain marketing; and red meat supply chains in Indonesia and China.

Recently, the company announced that the Federal Court of Australia has approved the scheme of arrangement for the proposed acquisition of AIRR Holdings Limited. An office copy of court’s order is expected to be lodged with the Australian Securities and Investments Commission on October 30, 2019.

On October 25, 2019, the company informed the market that shareholders approved the necessary resolutions by the requisite majorities to give effect to the scheme of arrangement for the proposed acquisition of AIRR.


Expected Timetable for Implementation of Scheme (Source: Company Reports)

H1FY19 Key Highlights for the period ended March 31, 2019:Statutory net profit after tax for the period was reported at $27.4 Mn, as compared to $41.4 Mn profit in the prior corresponding period. Underlying net profit for the period decreased by $13.3 Mn to $26.4 Mn, as compared to the previous corresponding period. Underlying earnings before interest and tax for the period was reported at $33.5 Mn, reflecting lower wool volumes, increases in costs associated with footprint growth, and continued investment in digital and technology areas.


H1FY19 Operating Cash Flow Data (Source: Company Reports)

What to Expect:Underlying EBIT for FY19 is expected to be in the range of $72-75 Mn, as compared to EBIT of $74.6 Mn in FY18. Underlying net profit after tax (NPAT) for FY19 is expected to be in the range of $61-65 Mn, as compared to $63.7 Mn in FY18.

Stock Recommendation:ELD’s share generated a negative YTD return of 8.30%. Its gross margin, EBITDA margin and net margin for H1FY19 stood at 23.1%, 4.4% and 3.8%, lower than the industry median of 41.9%, 15.3% and 7.2%, respectively. Currently, the stock is trading close to its 52-week low level of $5.314. Hence, considering court approval of AIRR acquisition, decrease in profitability margins, estimated earnings guidance and current trading levels, we have a wait and watch stance on the stock at the current market price of $5.950, up 0.168% on October 29, 2019.

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