Bega Cheese (BGA) shares were again sold off yesterday, joined this time by shares in Blackmores (BKL), (its milk joint venture partner) ahead of its AGM in Sydney today.
Bega Cheese shares dropped 17% on Tuesday and took another yesterday as again took fright at Tuesday’s news that company’s announcement on Tuesday that it will book up to $7 million of write downs against the Blackmore’s joint venture which is venture targeting the China market for infant milk formula.
The shares ended at $5.24, down 2.2% after being down well over 4.7% during trading. Blackmores shares lost 5.8% to end at $104.26 ahead of the meeting at the company’s Sydney HQ from 11 am today.
Investors are looking to what Blackmores says about the performance of the joint venture with Bega and the latter company’s decision to provide up to $7 million for probable losses.
Bega chairman, Barry Irvin told the company’s annual meeting on Tuesday that in addition to the problems in the joint venture, the dairy group was looking at a flat year.
That news saw analysts cut price estimates for Bega Cheese shares.
Bell Potter has slashed its 12-month price target for the company’s shares to $5.19 from $6.32, and JPMorgan had cut its target to $4.90 from $6.20 before Bega Cheese’s annual general meeting on Tuesday.
“In fiscal 2016 the [Blackmores joint venture] contributed a loss to Bega of $800,000 on proportional sales revenue of $3.3 million, while also generating $13.4 million in revenue for Bega in the form of high margin nutritional sales to the joint venture,” Bell Potter’s analyst Jonathan Snape told clients in a note yesterday.
"We interpret the impairment against the carrying value of Bega’s investment as an indication that the Blackmores product has failed to gain material market traction in its short life. As such we see the double whammy of a lower joint venture contribution and lower product sales to the joint venture occurring in fiscal 2017."
Morgans also raised the fact that the venture has been discounting product "heavily in what is an already overcrowded category".
Both of the analysts were also cautious over milk production volumes across south east Australia, which are down 11% so far this year.
"Bega will not be immune to this, despite its milk supply growth initiatives and recent market outperformance," the Bell Potter analyst told clients.
"The loss of the Coles private label contract from January 2017 to Murray Goulburn will impact FY17, despite the win of the much smaller Woolworths contract," Morgans told its clients.
Morningstar’s Chris Kallos was a bit more confident, say expects it may take time for the venture to gain traction in the infant milk formula market.
“Notwithstanding the general competitive and regulatory risks associated with building a business in China, we remain positive on the commercial opportunity,” he said.
Saxo Bank was the most bullish of all, saying the sell off had been overdone. Kay Van – Petersen, Saxo’s Singapore based strategist wrote yesterday:
"The market has overreacted on the lower guidance that the company gave. Bega Cheese is in a class of one in the Australian market and one of the few pure plays on the Asia protein trade – i.e. feeding the emerging middle classes of the Asian economies. As people make more money they buy more dairy and meat.”
