Bellamy’s Australia Limited

BAL Details
 
Scheme Implementation Deed with Mengniu: Bellamy’s Australia Limited (ASX: BAL) happens to be a leading infant nutrition and food brand in Australia and China. It offers approximately 40 products, tailored to the requirements of babies and toddlers. Recently, the company informed the market that it has entered into a Scheme Implementation Deed (SID), according to which, China Mengniu Dairy Company Limited (SEHK:2319 Mengniu) has proposed to acquire all the issued shares of BAL through a scheme of arrangement. If the Scheme takes place, the shareholders of BAL will be entitled to receive a cash of $13.25 per share which will comprise – (a) cash amount of $12.65 per share from Mengniu under the Scheme; and (b) a fully franked special dividend of $0.60 per share, paid by BAL before the implementation of the scheme. With the proposed offer, BAL’s equity comes in at $1.5 billion, representing an enterprise value of 30x of reported normalised EBITDA for FY19.

With the development, stock of BAL gained 54.928% as on 16 September 2019, taking cues from the proposed cash amount for the deal which represents a hefty premium of 59% to $8.32, closing price on 13 September 2019.On 3-month volume weighted average price of $8.59 to 13 September 2019, the proposed cash amount represented a premium of 54%. The Management of BAL recommended the shareholders to vote for the Scheme, concluding that the Scheme is in the best interests of shareholders.

Mengniu is a leading dairy product manufacturer in China and is listed on the Hong Kong Stock Exchange (stock code: 2319). The company was named in the list of “Global Dairy Top 20”, published by Rabobank in both 2017 and 2018. HSBC and Norton Rose Fulbright are the advisors for the company in relation to the transaction.

Indicative Timetable and Next Steps:IntheScheme Implementation Deed, BAL has provided the indicative timetable with this regard. Moving further, a Scheme Booklet will be provided to ASIC (Australian Securities and Investments Commission) for review and subsequently will be sent to the shareholders of BAL. The booklet will contain the information with regards to the proposed acquisition, reasons for the Directors’ recommendation, an Independent Expert’s Report and details of the Scheme meeting. Following this, BAL’s shareholders will vote on the Scheme at a court-convened shareholder meeting and subject to the approval of shareholders, the Scheme is expected to be implemented prior to the end of 2019.


Timetable (Source: Company Reports)
 
FY19 Results Highlights: BAL posted a de-growth of 19% in net revenue to $266 million in FY19. Normalised EBITDA for the period saw a decline of 33.6% to $46.9 million. Normalised net profit after tax (NPAT) also witnessed a de-growth of 36% to 30.1 million on NPAT of $47.0 million in FY18. However, gross margin expanded to 43.5% in FY19 as compared to 39.2% in FY18 beyond functional product upgrades including the addition of DHA and GOS across formula range. The results in FY19 were negatively impacted by several factors such as regulatory change, a lower birth rate and increased competition in China.
 

FY19 Results Snapshot (Source: Company Reports)
 
Stock Recommendation:At the current market price (CMP) of $12.890, the stock is available at a price to earnings multiple of 42.640x, which is higher than the industry median of 6.9x. EV to EBITDA multiple at 17.0x is above the industry median of 8.9x, which signifies the expensive valuation at the current levels. ROE for BAL at 10% in FY19 was below the industry median of 12.8%.

The proposed offer by China Mengniu Dairy Company Limited is set at a steep premium of 59% to the closing price on 13 September 2019, or $13.2288. The stock rose 54.928% as on 16 September 2019 to $12.890 and adding the proposed special dividend of $0.60 to the CMP, the price comes in at $13.49 per share, which is broadly in-line with the proposed cash amount of $13.25 per share. The proposed arrangement is in the early stage and subject to cross the hurdle of approvals from shareholders, the Court and FIRB (Foreign Investment Review Board).We are of the view that at the current price, the premium has already been adjusted, leaving a less room for further appreciation in terms of stock price. We suggest investors to keep a close eye on the development in relation to the proposed deal. On the face of expensive valuations, and substantial price movement in very recent times, we suggest investors to book profit at the current levels and recommend a “Sell” rating on the stock at the current market price of $12.890, up 54.928% as on 16 September 2019.
 
 
 BAL Daily Technical Chart (Source: Thomson Reuters)

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