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Treasure Chest: Bega Cheese

Treasure Chest | Oct 18 2022

This story features BEGA CHEESE LIMITED. For more info SHARE ANALYSIS: BGA

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts.

By Rudi Filapek-Vandyck

Whose Idea Is It?

Analysts at CLSA.

It's a rather rare occurrence, and certainly not in line with general market perception that has stockbrokers preferring Buy ratings over alternatives, but analysts at CLSA did it on Monday this week.

CLSA initiated coverage on Bega Cheese ((BGA)) with an Underperform rating (i.e. don't go there, Avoid, Sell) and $3.60 price target.

The subject:

At face value, CLSA's valuation and rating/view seem extremely harsh given the share price has approximately halved since early 2021. Yesterday, the shares closed at $3.32.

Digging deeper into the views and projections from other brokers who cover the company quickly reveals CLSA's assessment is simply a reflection of general sentiment towards the company.

Of the five other brokers that to our knowledge cover Bega Cheese, three have a Neutral/Hold rating and the two remaining rate the stock a Sell (or equivalent).

Target prices range between $3.25 and $4.04.

However, current consensus forecasts paint a company on the recovery with EPS in both FY23 and FY24 projected to grow in excess of 50%. Forward-looking dividend projections are promising yields of 3.5% and 3.8% respectively.

Looking underneath the bonnet, however, and reading in between the lines of broker commentaries, it would appear nobody is confident there isn't another profit warning or negative announcement lurking on the horizon. Times are tough with businesses in general being impacted by cost inflation, operational interruptions and bad weather.

In the case of Bega Cheese, there's currently strong competition between milk processors, which means Bega has had to increase its price offering to farmers three times last year so they would not sell their milk elsewhere.

Part of the reason why the FY22 result in August had been preceded by yet another profit warning in July is because clawing back such cost increases from the end consumer is not an easy feat, plus it takes time.

CLSA's negative view is simply a reflection of general scepticism about how well this company can withstand the pressures from the farmers whose benefit, simply put, acts to the detriment of shareholders' interests.

More info:

Bega Cheese IPO-ed in August 2011 as a third party dairy processor. Only a few years later management embarked on an acquisition strategy that would build a grander vision of becoming the leading consumer branded food producer in Australia.

That strategy hasn't exactly worked to the benefit of loyal shareholders. In CLSA's words: that strategy "has come at the cost of large capital raisings and diluted shareholder returns".

To be fair to management, Bega did bring back Aussie icon Vegemite under local ownership through the acquisition of the Mondelez grocery operations in mid-2017. Other products that came along included peanut butter, salad dressings, dips, sauces and cheese.

In January 2018 the company acquired the Peanut Company of Australia. In early 2021 followed Lion Dairy & Drinks. Bega's consumer brands now include Dairy farmers, Pura, Dare, Big M, Yoplait, Farmers Union, Berri and Vitasoy.

In total, Bega spent nearly $1bn to fulfill its long term, strategic, company-transformational vision, but for shareholders, the share price today has wiped out all returns since 2013 – that's nearly a "lost" decade, if we forget about the dividends over that period.

On the positive side, Bega Cheese is seen as better placed in an overall tough industry. The company is successfully de-leveraging the balance sheet and FY22 results showed branded products, which now make up 82% of group revenues, performing well which also assists management's guidance for normalised EBITDA of $160m-190m for the year ahead.

Also, Goldman Sachs recently pointed out, in case of any supply disruptions (think: weather) Bega Cheese stands to benefit through higher prices and margin improvement for its Bulk division.

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