Bega Cheese shares fell under $5 on Wednesday for the first time in two years after the drought brought its expansion up short.
The company has spent hundreds of millions of dollars in the past two years buying non-dairy consumer products such as Vegemite and peanut butter, dabbling in honey with the thought of buying Capilano, and expanding deeper into dairying with the purchase of a big dairy factor in western Victoria.
Bega paid $460 million for the assets, which include vegemite. Bega bought the rights the right to produce Kraft-branded products in Australia and NZ under licence, from processed cheese to peanut butter and mayonnaise, are part of the sale, but Philadelphia cheese products were not included.
Bega paid $250 million for the factor in Koroit. It bought the facility from Saputo after the Canadian dairy group grabbed control of Murray Goulburn.
Bega also raised close to $400 million in two separate issues in 2017 and 2018 to help finance the Mondelez and Koroit purchases. the company sold a dairy processing plant to US group, Mead Johnson for $200 million
All that came to naught as Bega revealed it is looking at weaker than expected profits.
Bega Cheese shares fell 12.3% to $4.98 after the company downgraded its 2018-19 earnings forecast.
The company said it expected normalised earnings before interest, taxes, depreciation, and amortisation to be in the range of $123 million to $130 million in the 2019 financial year.
The market had been expecting earnings of $135.3 million.
Bega said the drought would see overall milk supply for the industry being down in excess of 5% in the current financial year.
Bega Cheese milk acquisition program has been successful and the Company continues to forecast that its overall milk intake in FY2019 will be between 1.0 and 1.1 billion litres of milk compared to a total intake of 750 million litres in FY2018.
“The overall reduction in the Australian milk supply pool has created significant competitive farm gate milk pricing pressure.
“The outlook for Bega Cheese’s financial performance in FY2019 is expected to be impacted by this competitive pressure. Bega Cheese is forecasting a normalised EBITDA in the range of $123 to $130 million for FY2019, this compares to the FY2018 normalised EBITDA of $109.6 million.
“The integration of the Koroit manufacturing facilities and the successful milk acquisition program, particularly in the Western Region, has resulted in a seasonal build of inventory with associated funding costs.
“In addition, increased depreciation charges on the Koroit infrastructure have been reflected in the forecast normalised profit after tax. Current forecasts indicate a normalised profit after tax range of $44 and $48 million,” Bega said.
“While the current decrease in milk supply in the Australian dairy industry is creating significant competitive pressure across our entire dairy business, we are very pleased with the integration of Koroit and the forecast performance of that acquisition.
“The seasonal inventory build associated with the Koroit acquisition and strong milk procurement will mean a more balanced H1 and H2 in FY2019 compared with the prior year where approximately 65% of earnings were received in H1,” Bega added.
Interesting there was no mention in the update on how the former Mondelez food assets are performing.
Bega will update the market next February when its interim results are released.
