Bega Cheese Limited

BGA Details

Bega Cheese Limited (ASX: BGA) is a diversified branded foods business company with an integrated value chain from farm to consumer. The company is involved in receiving, processing, manufacturing, and distributing dairy and other food-related products. Its products comprise Cheese, Spreads, Groceries , Bionutrients, and Dairy.

FY21 Result Performance (For the Year Ended 30 June 2021)

• BGA has delivered healthy growth in sales revenue, up by 39% YoY to $2.07 billion in FY21. The acquisition of Lion Dairy and Drinks that was accomplished in January 2021 has resulted in deriving 73% of sales from branded business compared to 59% in FY20.
• The company has generated normalised earnings before interest, depreciation, and tax of $141.7 million in FY21, up by 38% YoY whereas normalized PAT came at $39.6 million, up 24.1% YoY. However, statutory EBITDA in FY21 increased by 108.1% YoY to $182.7 million while statutory PAT increased by 239.0% YoY to $72.2 million.
• It ended the period with net debt of $324.9 million and a decrease in its EBITDA to net debt leverage ratio from 2.35 times to 2.25 times.
• BGA has declared a final fully franked dividend of 5.0 cents per share for FY21 with the payment date on 24 September 2021. This takes the overall dividend for FY21 to 10.0 cents per share amounting to $30.2 million.

Consolidated Comprehensive Income Statement (Source: Company Reports)

Key Risks

Adverse commodity or currency movement  could significantly impact its earnings. The group is also exposed to the risk of significant changes in consumer demand due to government-imposed pandemic restrictions that could adversely  hit sales. Unable to fruitfully integrate acquired businesses would impact synergies, cultural alignment, and long-term value creation.

Outlook

Going forward, the company will continue to focus on realising Bega Dairy and Drinks synergies as well as invest in brands, markets, and new capabilities. It believes that its 26% market share in yoghurt and 48% market share in milk-based beverages has placed the company in a better position to capitalise on megatrends such as the growing appeal of natural, healthy foods and a shift to  convenience. Further, it stated that the ownership of a new portfolio of market-leading brands, along with the benefits of expanded manufacturing and supplier footprint will deliver significant growth opportunities across the branded and bulk segments of the business.

The company will emphasize selling more products to diverse consumers through its expanded networks as well as fast-track its pipeline of product innovation and leverage the advantage of a complementary product range and distribution channels. Meanwhile, it will continue to generate synergies from the Lion Dairy and Drinks acquisition in FY22 that comprises operational efficiencies, procurement, and milk optimisation.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Orange Color Line Reflects RSI (14-Period)

Stock Recommendation

The stock has been valued  using EV/Sales multiple based relative valuation method (on an illustrative basis) and the target price so arrived reflects the potential rise of low double-digit (in % terms). A slight premium has been applied to EV/Sales Multiple (NTM) (Peer Average), considering its robust performance in FY21, growth strategies and stable to a positive outlook on milk supply for FY22.

The company stated that the competitive environment  for milk would sustain  into FY22 with very strong farm gate milk prices. Further, positive market signals at the farm gate along with improved seasonal conditions are driving a better positive outlook from dairy farmers in most supply regions.

For the purposes of relative valuation, peers like Ridley Corporation Ltd (RIC.AX), Elders Ltd (ELD.AX), among others have been considered.

Considering the aforementioned factors, along with its diversified portfolio of market-leading food brands, a globally competitive integrated supply chain, and decent liquidity position, we give a “Buy” recommendation on the stock at the current market price of $5.300 per share, down by 0.563% on 20^th September 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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