Stocks’ Details
 

Bega Cheese Limited

Significant Increase in PAT: Bega Cheese Limited (ASX: BGA) is engaged in processing, manufacturing, cutting and packaging traditional cheese products, as well as the manufacture of other high value dairy products. As on 8 April 2020, the market capitalization of the company stood at $981.24 million. During 1H20, the company reported an increase of 14% in revenue to $741.2 million and a significant growth of 71% in profit after tax to $8.5 million. This resulted in an increase of 60% in EPS to 4 cents per share. The decent financial and operational performance of the company enabled the Board to declare an interim dividend of 5.0 cents per share.


1H20 Financial Highlights (Source: Company Reports)

What to Expect: The company has continued the transition towards The Great Australian Food Company while responding to the ongoing competitive and supply challenges in the dairy industry. The diversification strategy has positioned the company with an improved capacity, capability and flexibility and is continuing to accelerate the development of new product ranges. It has provided guidance for FY20 and expects normalized EBITDA in the range $95 million to $105 million.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

EV/EBITDA Multiple Based Approach (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of BGA gave a return of 9.95% on YTD basis and a return of 21.17% in the past three months. The supply chain and customer shipments have not been materially impacted by the coronavirus. During 1H20, ROE witnessed a slight improvement over the previous half and stood at 1%, up from 0.8%. In the same time span, current ratio went up to 1.58x from 1.52x in 2H19. Considering the returns, improvement in margins and decent outlook, we have valued the stock using EV/EBITDA based relative valuation approach and have arrived at a target price of lower double-digit (in percentage terms). For the said purpose, we have taken Tassal Group Ltd (ASX: TGR), Freedom Foods Group Ltd (ASX: FNP) etc. as peers. Hence, we recommend a ‘Hold’ rating on the stock at the current market price of $4.550, down by 0.655% on 8 April 2020. 

Graincorp Limited

Implementation of Demerger of United Malt Group: Graincorp Limited (ASX: GNC) is engaged in grain elevation and storage. As on 8 April 2020, the market capitalization of the company stood at $762.09 million. The company has announced the implementation of the demerger of United Malt Group Limited 1 April 2020 onwards. It also stated that United Malt shares will start trading on the ASX on a normal settlement basis on 2 April 2020.

During FY19, the company reported underlying EBITDA of $69 million and an underlying net loss after tax of $82 million. The decline in EBITDA and NPAT from the prior corresponding period was mainly due to drought in eastern Australia and the subsequent impact on grain production.


FY19 Financial Highlights (Source: Company Reports)

Future Expectations and Growth Opportunities: For FY20, the company has received about 3.7 million tones grains into its network and expects minimal grain exports this year. It also expects further importation of grains coming from Western Australia and Victoria. It is likely to witness greater flexibility from the new rail contracts which comprise a substantial reduction in fixed costs. GNC will continue to diversify origination from Canada and Ukraine, which will help them to strengthen customer relationships. 

Stock Recommendation: As per ASX, the stock of GNC gave a negative return of 3.25% on the YTD basis and a negative return of 1.33% in the last one month. The stock is inclined towards its 52-weeks’ low level of $2.810. During FY19, gross margin of the company stood at 13.9% as compared to the industry median of 40%. In the same time span, EBITDA margin of the company was 3%, lower than the industry median of 16.3%.Considering the volatility in returns, lower margins and modest outlook, we recommend our investors to adopt a watch stance on the stock at the current market price of $3.39, up by 1.802%on 8 April 2020.

Freedom Foods Group Limited

Increase in Net Sales and Operating Profit: Freedom Foods Group Limited (ASX: FNP) is engaged in the sourcing, manufacturing, selling, marketing and distribution of specialty cereal and snacks and plant and dairy beverages. As on 8 April 2020, the market capitalization of the company stood at $1.18 billion. During 1H20, net sales of the company witness an increase of 32.6% to $277.1 million and a growth of 55.6% in operating EBITDA to $32.7 million. This resulted in an increase of 42.1% in operating net profit to $9.1 million. The decent financial performance of the company enabled the Board to declare an interim dividend of 2.25 cents per share.


1H20 Financial Performance (Source: Company Reports)

Future Expectations: The company is well positioned to build into a major global food and beverage business with scale. It will focus on driving the dairy business towards specialty and high value-added products by increasing the base of dairy volume. FNP expects a positive impact on sales and earnings from new product revenue streams. 

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

EV/EBITDA Multiple Based Approach (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of FNP is trading close to its 52-weeks low level of $3.810, proffering a decent opportunity for accumulation. Despite the fallout of coronavirus, the company is not facing any constraints for supply of key raw materials or packaging inputs and is experiencing strong demand for key products, including UHT dairy and plant beverages and cereals & snacks. During 1H20, gross margin of the company witnessed an improvement over the previous half and stood at 27.1%, up from 24.9%. In the same time span, Assets/Equity ratio of the company was 1.69x, lower than the industry median of 1.91x, indicating a financially stable balance sheet. Considering the trading levels, improvement in margins and decent outlook, we have valued the stock using EV/EBITDA based relative valuation approach and have arrived at a target price with an upside of lower double-digit (in percentage terms). For the said purpose, we have considered Costa Group Holdings Ltd, Graincrop Limited and Bega Cheese Ltd as peers. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of $4.14, down by 2.817% on 8 April 2020.
 
 
Comparative Price Chart (Source: Thomson Reuters)

Disclaimer

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.