Bega Cheese Ltd (ASX: BGA) had entered into six year infant formula product agreement with Bellamy’s organic, through its subsidiary Tatura Milk industries. The group had extended its long term relationship with Bellamy’s to leverage the demand for its infant formula products. Bega Cheese also got $5 million grants from the federal government, as a part of its dairy bio nutrient project worth $22 million installed at Lagoon Street. The project’s development activities are estimated to start by the end of this year or early 2016.

First half of 2015 highlights 
        
Bega Cheese revenues grew 8% on a year over year basis to $552.5 million in the first half of 2015, driven by the nutritional sales contributed from the Derrimut infant nutritional canning and blending plant. However, the normalized EBITDA decreased to $31.3m from $41.8 million in the corresponding period of last year, impacted by the commodity cycle and spending on nutritionals infrastructure.  Subsequently, the profit after tax reduced to $13.5m from $20 million in pcp. The decrease was partly due to $10.6 million expenses for milk sustainability and growth program. Moreover the falling dairy commodity prices also affected the selling price and inventory value of the company’s products. Meanwhile, the group declared an Interim dividend of 4.0 cents per share.  BGA has a dividend yield of 1.82%. 



Falling dairy commodity prices (Source: Company Reports)
 
On the other hand, the Bega cheese segment reported a solid performance, with the PAT increasing 45% to $10.4 million, as compared to the $7.2 million in 1H14, driven by the growing cheese products demand and improving product mix. Domestic as well as international expansion drove consumer packaged goods volumes, with Asia generating over 18% growth in export volumes and the food services. However, the Tatura segment’s PAT plunged $3.1 million during the period against $12.9 million in the first half of 2014, as falling commodity prices hammered the group’s selling prices. Moreover, costs associated with Derrimut plant also increased the costs. Meanwhile, the Tatura segment has been focusing on value added and nutritional products to improve the segment’s margins. 



Bega Cheese and Tatura Milk segments performance (Source: Company Reports)

Bega Cheese intends to achieve a cumulative sales growth of 18% for the next three years for export consumer goods and food service segment, driven by the improving distribution & sales capabilities as well as growing product portfolio and manufacturing partnerships. The group took product initiatives for UHT, mozzarella, cream cheese and processed cheese. With regards to the Nutrition segment, the company estimates a three year cumulative sales growth of 21%, due to ramp up volumes from Derrimut Blending and canning facility and improving volumes of value added retail ready products. The group estimates to achieve commercialization for its Lactoferrin research project under the bio nutrient segment during 2017 fiscal year. Moreover, the company believes that its free trade agreement would improve its competitiveness, improve partnership opportunities and supply chain.


BEGA Daily Chart (Source - Thomson Reuters)

With regards to the balance sheet highlights, inventories increased to $131 million, as compared to $106.7 million in second half of 2014, due to seasonality impact. The net debt stood at $54.9 million during the quarter impacted by sustainability and growth Programs. The net cash outflow from operating activities was $50.5 million during the first half, against $6 million operating cash flow generated during the second half of 2014. Meanwhile, the normalized net cash outflow from operating activities stood at $31.9 million, post the Milk Sustainability and Growth impact.
 
 
 
Outlook

Bega Cheese decreased its full year PAT earnings forecast to the range of $21-$24 million as compared to its earlier guidance PAT range of $25 to $28 million. This decrease in guidance is partly attributed to the slower than estimated recovery of the dairy commodity prices as the group’s skim powder returns is directly related to the present pricing, impacting the sales as well as stock valuations. However, the February and March months showed some improvements in pricings. Meanwhile, the management forecasts a better growth for the 2016 fiscal year driven by the nutritional and consumer goods and food services platforms. The Derrimut canning and blending plant is on track and building volumes.

The group reported a lower than estimated first half of 2015 performance, and also decreased its second half forecasts. As a result, Bega Cheese shares have been correcting during this year, wherein the stock delivered a negative year to date returns of 9.3% and corrected over 3.9% in the last three months. The group’s investments to increase its capacities as well as value added projects might start delivering results post fiscal year 2016. However, the dairy commodity prices looks challenging at the current scenario. Despite the recent correction, we still believe that the stock is trading at higher levels, and this decreasing trend is expected to continue in the coming months as there are no immediate triggers to drive the stock.

Based on the foregoing, we give an “Expensive” recommendation to the stock at the current price levels of $4.67, and would review the stock at a later date. 

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