Growing Confidence in Bega Cheese

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Macquarie has initiated coverage of Bega Cheese with an Outperform rating, suggesting cost-outs are key to achieving FY28 targets.

-Bega Cheese posted a strong first half beat
-Farmgate milk prices are higher for FY26, but manageable
-Cost-outs key to achieving targets
-Acquisitions on the cards

By Greg Peel

Back in February, Bega Cheese ((BGA)) reported a first half FY25 result which resoundingly beat consensus expectations, both in earnings and balance sheet strength.

Strong earnings growth was led by the Bulk segment returning to strong profitability, while pleasingly, as Morgans noted at the time, the Branded segment proved resilient despite a more difficult operating environment.

Bega’s iconic household brands include its eponymously branded cheese products, Dairy Farmers milk, Dare flavoured milk, Yoplait yoghurt and a bit out of context Vegemite. The company also owns several other brands, including producers of juice, nuts and peanut butter.

Strong earnings growth was underpinned by Bulk swinging to positive earnings of $24.4m compared to a loss of -$5.6m the year before, given higher global dairy prices, greater volumes, improved mix toward higher-margin products, and materially lower cost of goods sold, reflected in a farmgate milk price (FMP) of $8.05-8.35 versus $9.20 last year.

Bega also delivered manufacturing efficiencies and further cost savings across its footprint. Branded growth was more modest at 8%, Morgans noted, but better than expected given the company was cycling 122.5% growth last year, it was difficult to raise prices, and out-of-home channels were challenging due to cost of living pressures.

Its core brands saw modest volume growth driven by innovation and promotional campaigns. Branded also benefited from productivity and efficiency improvements.

Management reiterated FY25 earnings guidance, but suggested a result at the higher end of the range. Bega also reiterated its targets for FY28 of greater than $250m earnings and a return on funds employed (ROFE) of 12%.

While management noted it was not expecting to increase its FMP again this financial year, Morgans suggested if its competitors increase their prices, there will be pressure on Bega to follow. Management did say the FY26 opening FMP is likely to be higher.

Post the result, all of Morgans, UBS and Ord Minnett retained Hold or equivalent ratings on Bega Cheese due to the stock being well-priced. Bell Potter retained Buy.

At the Farmgate

In line with regulatory requirements, earlier this month Australian Dairy processors announced FY26 FMP opening offers. Bega provided an opening FMP of $8.95/kg reflecting a 7% increase on FY25’s $8.40/kg and industry average of $8.90/kg. In UBS’ view, this was modestly better than market expectations of more than $9/kg.

UBS noted this will lead to a circa -$60m cost of goods sold increase for Bega in FY26, but more than offsetting this increase is the fact the commodity export selling price Bega prices against is 30% higher than this time last year. Overall, UBS viewed this as a positive for Bega most simply because the commodity export price remains above the farmgate milk price, which supports the Bulk segment earnings.

Bell Potter did not see opening FMPs as particularly misaligned with expected channel returns. Both brokers retained their prior ratings.

Cost-Out is Key

Last week Macquarie initiated coverage of Bega Cheese with an Outperform rating.

Bega has a runway to deliver cost-out in its business, Macquarie suggests, through site rationalisation and operational efficiencies which will drive gross margin improvement. The company has a track record of executing on its strategy, effectively managing costs, and reducing its manufacturing footprint in the last few years.

ROFE will be the key determinant in Macquarie’s view. The broker is forecasting 11.5% by FY28 compared to management’s 10-12% range, and compared to 7.9% in the first half FY25.

In Bega’s consumer-facing segment, Macquarie sees category growth in high-margin categories such as yoghurt and milk-based beverages to be outpacing lower-margin categories such as regular milk, which will deliver mix benefits to Bega over the medium term.

In addition, the international export business will continue to deliver high-single digit sales growth supported by tailwinds such as population growth, higher GDP per capita, and increased penetration of modern grocery channels.

Management commentary and media reports suggest Bega is also open to acquisitions. This is an opportunity for further industry consolidation, Macquarie suggests, and would support improved capacity utilisation across Bega’s asset base, seeing synergy benefits in a transaction within the Food & Beverage space through procurement and logistics, as well as improved bargaining power with major retail customers.

In its base case, Macquarie estimates Bega has the debt capacity to conduct an acquisition in excess of $150m.

Bega is progressing well on its FY28 Strategy, Macquarie believes, with momentum in its cost-out initiatives as well as key top-line growth opportunities. The broker forecasts a four-year compound annual earnings growth rate of 33% to FY28.

Macquarie has set a target of $6.40, which brings the average targets of the now five brokers monitored daily by FNArena covering Bega Cheese to $6.13, up from $6.06 previously, on a rather wide range from $5.20 (Ord Minnett) to $7.00 (Bell Potter).

Among the five there are now two Buy or equivalent ratings and three Holds.

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