What a difference three months make.
Back on August 24, when Bega Cheese (BGA) announced it’s 2015-16 results, the company did not provide any guidance for the coming financial year.
But executive chairman, Barry Irvin was upbeat, saying:
“We expect continued revenue growth and improved financial performance in FY2017. Bega Cheese continues to maintain a strong balance sheet and the company is well positioned to grow its business both organically and through acquisition.”
At yesterday’s annual meeting it was a very difficult story – write downs, flat earnings and a tanking share price as a result.
“The combination of a regulation change in China, a supply response to the demand signals and the evolution of supply channels to market now sees significant discounting … and signs of short term oversupply," Mr Irvin told shareholders at the meeting.
He said the present supply glut is a reverse of the situation just 12 months ago when “supermarket shelves were empty and customers in Australia and internationally were providing ever increasing orders.” As a result Bega Cheese sees flat earnings for for the year ahead, and warned it will be forced to make a large provision against its infant formula joint venture with Blackmores, which cut its statutory profit.
And whooska, down went the shares dropping by 18.8% to end around $5.27.
The drop accelerated in the afternoon and they will no doubt come under more pressure today as analysts push out revised earnings and other commentaries as a result of yesterday’s news.
And Bega’s bad news infected the rest of the sector, with one time high fliers, Bellamy’s (BAL) down, A2 Milk (A2M) down and Blackmores (BKL) weaker as well.
A2 Milk generates around a third of Bega’s revenues from an infant formula product, A2 Platinum, with investor concerns it may be facing similar competitive pressures to the Bega Cheese/Blackmores venture.
Mr Irvin said trading in its dairy markets will see earnings mark time tin the year to June 2017.
But that’s immaterial as investors consider the shock news of a provision of $5 to $7 million against its share of the inventory held in the venture with Blackmores.
The write-off of Bega Cheese’s exposure to the venture comes less than a year after it was formed, with the initial product launch only taking place in January and then April.
However the severe deterioration in the venture’s fortunes in only a matter of weeks took everyone by surprise and in the period since start up until June, it lost $814,000, indicating annualised losses of $1.6 million.
Mr Irvin told the meeting that:
“The partnership is keeping the business under constant review and will continue to monitor the performance with our partner Blackmores as market evolution and circumstances becomes clearer.”
Bega says the improved outlook for dairy commodities are expected to improve financial performance in 2017 (as we have seen with the slow rise in global prices and higher prices posted by Fonterra in NZ).
But he said this improvement will be offset by the challenging environment for infant formula and growing up milk powders – other words events in China and the rest of Asia.
With no growth now expected in 2016-17 investors sold Bega shares (putting to one side the problems in the Blackmores joint venture), because the shares were overbought. They did have PE of full year earnings of 35.
Even after the fall in the shares, they are still valued at around 30%, so there’s a strong chance of more weakness to come until the interim figures next February.
You only have to look at what has happened to Healthscope since it told the market last Friday that it was now looking at flat earnings in its core hospitals business this year for a variety of reasons. Its shares are down more than 20% as investors have bailed out and gone elsewhere.
