What is the stock?
Dairy based producer Bega Cheese Limited (BGA) is a major cheese and dairy products supplier to large Australian supermarket chains, with a growing exports business. In the past year Bega has sought to diversify its business through the acquisition of Vegemite from Mondelez.
How long have you held the stock?
We have held Bega for approximately five years. We did not participate in Bega’s initial public offering.
What do you like about it?
Bega has been forward looking. We have seen Bega move through three distinct phases: First, improve the returns of its assets by increasing the utilisation of its production facilities. Second, improve the profitability of its products by increasing the value-add of its dairy based products. Third, improve the resilience of its earnings by diversifying its earnings base.
How is it better than its competitors?
One measure of a company’s strength against its competitors is how a company emerges from a difficult period. In the last few years, the Australian dairy sector has endured low commodity prices that has been compounded by aggressive competition for milk supply – in effect, lower revenues and higher costs.
Bega has emerged from that environment much better that peers such as Murray Goulburn. It’s quite telling that management’s decision to maintain milk prices paid to farmers, while resulting in higher short term costs, will be positive for Bega’s milk supply in the next two years.
What do you like about its management?
We have found management to be excellent in making long-term strategic decisions – these include a move to higher value added products and diversifying its revenue base. They have led to investments that have, and will, support earnings growth in the future.
What is your target price?
Bega’s share price of $7.13 (20 Sep 2017) puts the stock on just under 24x FY18’s earnings and approximately 20x FY19. We believe Bega should trade on a PER premium to its peers on account of its industry position and growth profile.
At what point would you sell it?
20-25% of revenues exposed to commodity markets and a further 15-20% exposed to exports. Therefore, Bega is exposed to fluctuations in both commodity prices and the Australian Dollar. Severe movements in dairy prices has a strong likelihood of affecting Bega’s earnings.
How much has it added (subtracted) to your overall portfolio over the last 12 months?
Bega’s share price has risen approximately 9% in the past year but it belies quite a volatile period for its share price. Whilst Bega has been a net contributor to fund performance over the past 12 months, its contribution to performance has been much more significant over a period of three to five years with the share price more than tripling.
Where do you see the value?
We typically start our assessment from a company’s balance sheet. Bega is well financed (with an estimated gearing ratio of 20% in FY18) and is positioned to take advantage of industry change or weaker competitors in the dairy and food sector.
Source: ASX
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