Healthy Margins Underpin Bega’s FY31 Targets

Small Caps | 11:00 AM

Management at Bega Cheese has introduced a new five-year plan designed to benefit from supportive industry trends.

• Bega Cheese outlines five-year growth strategy
• Double-digit EPS growth targeted to FY31
• Capacity expansion and product mix to drive growth
• FY26 earnings guidance reaffirmed, FY28 target raised

By Mark Woodruff

As global dairy demand accelerates amid a growing focus on protein consumption, Australia’s second-largest dairy producer Bega Cheese ((BGA)) is well positioned to benefit from favourable industry tailwinds.

Against this backdrop, management last week unveiled its next five-year FY31 strategy (S31) at an Investor Day held at the Morwell yoghurt facility in Victoria, focused on simplifying the business and sharpening its growth agenda.

The Morwell site produces dairy desserts and is the company’s sole yoghurt manufacturing facility, supplying both domestic and international markets.

Management also highlighted progress in technology initiatives aimed at enhancing supply chain efficiency.

Bell Potter identifies two key highlights from the investor day: the re-iteration of FY26 earnings guidance and an upgrade to management's FY28 target, implying double-digit EPS growth across FY25-FY28, and a clear blueprint to sustain double-digit EPS growth through to FY31.

As part of S31, Bega will continue to develop higher-margin products with functional health benefits. These include protein-enriched milk and yoghurt, lactose-free options, low- or no-sugar offerings, and products targeting gut health through pre- and probiotics. 

New product launches featuring ingredients such as collagen, creatine and meal replacements are expected in the coming month.

Management pointed to “compelling opportunities” for existing protein products such as yoghurt and flavoured milk, driven by three key consumer trends: health and wellbeing, value amid cost-of-living pressures, and convenience as time constraints and changing consumption habits reshape demand.

Macquarie believes the re-sizing of Bega’s cost base in recent years positions the company to accelerate these growth opportunities while realising operating leverage.

Since the S28 strategy in 2023, Bega has structurally lowered its cost base through site consolidation (to 15 from 22) and supply chain efficiencies, including a -25% reduction in warehouses.

The Bega business

Bega engages in the processing, manufacturing, and distribution of dairy and associated products across both Australian and international markets, while also processing and manufacturing spreads and condiments for consumer markets.

The Branded segment, (cheese, milk, yogurts, spreads, and other packaged foods) contributes most of the company’s revenue and earnings, while the much smaller Bulk ingredients segment (commodities like milk powder and bulk cheese) has lower margins and greater exposure to global price swings.

Foodservice is where the company supplies cafes, restaurants, caterers, and institutional clients.

Management is targeting $320m-$340m in earnings for the Branded segment by FY31, supported by its leading brand positions, further gains in foodservice and international expansion. 

The Bulk segment, which Ord Minnett notes recovered from an earnings loss of -$18m in FY24, is expected to achieve earnings of between $50m-$55m in FY26.

Long-term earnings are expected to normalise to around $30m-$50m per annum.

The new strategy 

The S31 strategy focuses on five key priorities.

Management aims to grow core brands, Dairy Farmers, Bega, Dare, Farmers Union, and Vegemite while strengthening its position in core categories such as milk-based beverages, yoghurt, and cream cheese.

There will also be a focus on expanding presence in high-growth channels, including convenience, foodservice, and independent grocery.

International expansion will also be accelerated, particularly across the Middle East, North Asia, and Southeast Asia.

The manufacturing network is being streamlined to reduce the overall cost to serve, and, to support strong demand, the company is investing in capacity expansion. 

Cream cheese production will increase to 50,000 tonnes from 39,000 tonnes, milk-based beverages will see investment in longer shelf-life capabilities (UHT and ESL), and yoghurt capacity will expand by a further 25,000 tonnes to 125,000 tonnes. 

These initiatives are expected to drive a step-up in capital expenditure over FY26-FY28.

Despite additional cost pressures stemming from the conflict in the Middle East, Morgans notes Bega has implemented new surcharges to help offset these impacts. 

The company is also benefiting from stronger-than-expected global dairy prices, an improved product mix, and cost savings following the closure of the Peanut Company.

Guidance and FY31 targets

UBS considers the re-iteration of current earnings guidance of between $222m-$227m credible, despite recent cost inflation across diesel and resin, with the company effectively offsetting pressures through cost-out initiatives and price increases.

FY28 normalised earnings guidance was tightened to $260m–$265m from more than $250m, with most of the uplift from FY26 to FY28 driven by previously announced initiatives, primarily the closure of Strathmerton, Bell Potter notes.

Compared to FY26 guidance, the company is targeting a 3%-4% revenue compound annual growth rate (CAGR) and low double-digit EPS growth.

Management also outlined an initial FY31 baseline normalised earnings target of $310m, underpinned by two key growth drivers in the Branded segment.

Firstly, ongoing investment in high-growth categories such as milk-based beverages and yoghurt, where category growth is running at 8–10% per annum alongside a planned 25% increase in yoghurt capacity.

Expansion of Tatura cream cheese is also planned, where volumes have grown at 14% per annum and a 28% capacity uplift is targeted.

The FY28-FY31 baseline projections appear highly achievable to the analysts at Bell Potter given current category dynamics, requiring execution broadly consistent with that delivered over FY23–FY26.

Potential negatives

Ord Minnett highlights several near-term headwinds likely to weigh on margins.

Farmgate milk prices are expected to rise as farmers face ongoing cost pressures.

At the same time, processors are contending with higher energy, fuel, and transport costs, as well as increased packaging costs and potential resin shortages.

UBS adds FY28 profit guidance of $80m-$90m sits below consensus at $96m, driven by higher depreciation and amortisation associated with ongoing capex to support yoghurt capacity expansion.

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