Bega Cheese Limited

FY19 EBITDA guidance revised: Bega Cheese Limited (ASX: BGA) is involved in dairy and other food-related products, comprising the activities which include receiving, processing, manufacturing and distribution of related products. The Group has two reporting segments- (a) Bega Cheese – manufactures packages and sells natural cheese, processed cheese, powders, butter and branded food products. (b) Tatura Milk – manufactures, packages and sells cream cheese, commodity powders, butter and nutritional powders. The company recently, updated that Ethical Partners Funds Management Pty. Ltd. holds ~6.14% voting rights in it.
 

Market Update: The company as on 02 August 2019, released a market updated with regards to the guidance provided with 1H19 results. Assessing the full year performance, the Management has slightly downgraded the guidance for FY19 normalised EBITDA to be in the range of $113 million to $117 million. Earlier guidance for FY19 normalised EBITDA was in the range of $123 million to $130 million.
 

On the debt front, the Management updated that BGA has been able to reduce its gearing in 2HFY19 and will post net debt in the order of $300 million, with sound leverage cover at the end of FY19.
 

The company experienced a record milk intake in FY19 of 1.06 billion litres, up 41% or 308 million litres on milk intake in FY18. BGA’s market share of the Australian milk pool went up from 8.1% to 12.4%. Rise in milk intake was experienced in a market that had contracted by 7.9% or 733 million litres owing to drought situation and exit of farmers. In the period, the company faced a good amount of competitive pressure from the processor. The pressure intensified in the fourth quarter of FY19 and in setting the milk price for FY20 from 1 July 2019.
 

With the revised guidance as discussed above, the company is in the process of positioning itself to ensure the changes in the milk supply landscape, which are visible in greater production and logistics efficiency and to retain and grow a loyal supplier base in addition to adding quality earnings from non-dairy streams. The cost related to such positioning will be incurred during FY19 and FY20. The impact of positioning cost will be reflected in the guidance ahead of FY19 results, which are likely to be announced in late August 2019.
 

1H19 results Highlights: The company posted revenue of $0.65 billion, which was up 6% on pcp. Normalised PAT (profit after tax) at $18.9 million was down 48% on pcp. Statutory PAT at ~$5 million was much lower than the prior corresponding period. It was majorly impacted by a higher effective tax rate due to corporate activity. With 1H19 results, the company announced an interim dividend of 5.5 cents per share, which was in-line with the prior-year period. The dividend was paid on 16 April 2019.
 

1H19 Summary (Source: Company Reports)
 

During the period, the company acquired Saputo Dairy Australia Limited’s dairy processing facility for $251.2 million, which included a tranche of inventory. BGA on 11 September 2018, completed an Institutional Placement and raised $199.9 million (ex-capital raising costs) with the objective of reducing debt following the purchase of the Koroit Facility.
 

Stock Recommendation: At the current market price of $4.240, the stock is trading towards the lower end of its 52-week range of $4.100 - $8.030. The stock has corrected ~7% and 17% in the last one and three months. Currently, the stock is trading at EV to Sales multiple (TTM basis) of 0.9x as compared to 1.9x of industry median. Company’s current ratio during 1H19 stood at 2.06x, better than the industry median of 1.4x, indication better liquidity position. Hence, considering the recent acquisition for organic growth, satisfactory operational performance on the face of deflationary environment, decent volume growth in products, etc., we recommend a “Hold” rating on the stock at the current market price of $4.240, down 4.289% as on 02 August 2019 from last trading session.