Bega Cheese (ASX: BGA): We see strong long-term upside after some short-term downside in 2022

Marc Kennis Marc Kennis, September 1, 2022

Bega Cheese (ASX: BGA) produces and distributes a range of dairy and other food-related products predominantly in Australia. The company operates in two segments, branded and bulk. The bulk segment manufactures bulk dairy ingredients, nutritional and bio-nutrient products for health and nutrition markets. 


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The branded segment includes a category of iconic Australian brands, such as Bega, Vegemite and Dairy Farmers. The branded business’s share of company’s total revenue has consistently increased in the last several years, from 20% pre-FY17 to 82% in FY22, through organic and acquisitive sales growth including the major acquisition of Lion Dairy and Drinks in FY21 for $534m. 


Let’s start with BGA’s chart and see what moved its share price since the peak of $6.60 in April 2021. 


Bega Cheese

Bega Cheese, Daily Chart in Semi-log Scale (Source: Metastock)


NSW government announces a lockdown because of emerging COVID-19 cases. (Read here) 

Bega warns of significant COVID-19 costs and supply chain disruptions and robust competition for milk procurement. (Trading Update FY2022) 

1HY22 report mentions COVID-related costs in excess of $20m in the reporting period and a challenging operating environment. (1HFY2022 Results Presentation) 

Continuing disruptions to Bega’s business from floods in various regions around Australia and the impact of COVID lockdowns on product deliveries to China lead to an FY23 EBITDA downgrade by the company. (Trading Update FY2023) 

FY22 results show a slight increase in profitability on PCP (Prior Comparable Period) and mention increasing consumer prices across all product categories to pass on farm gate milk prices and other costs increases. (Presentation – FY2022 Full Year Result) 


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COVID-related costs and increasing farm gate milk prices drove down the share price 

COVID disruptions impacted Bega’s business in many ways, including plant shutdowns, difficulties in product deliveries to the China market, restricted travel movement and workforce availability. 

In addition, recurring floods across Australia and supply chain issues increased farm gate milk prices and other costs associated with packaging and shipping of products which increased Bega’s operating costs. The decline in Bega’s share price was further intensified by the spiking interest rates in CY22 that impacted the stock’s valuation.  


Bega’s profit margins are to recover 

According to Bega’s CEO, the increased farm gate milk prices have started to be reflected in white milk retail prices in FY23 and the full impact of increased dairy commodities and consumer prices for milk products is to be felt in FY24.  

Economists expect the rising interest rates to curtail consumers’ demand for discretionary goods in the following months, which can ease the pressure on supply chains and somewhat reduce Bega’s operating costs and improve its sales to the China market. 


The current valuation is not very attractive 

Bega made 15.2 cents earnings per share (EPS) in FY22 that was a slight improvement to FY21 EPS of 15 cents while reducing its debt by $60m using cash from operations, which we think is an important achievement in the current increasing interest rates environment. 

The company further announced a final fully franked dividend of 5.5 cents per share for FY22 to be paid on 23 September 2022. This brings the total dividend for FY22 to 11 cents, which gives Bega a dividend yield of 2.7% at the current share price of $4.01.  

1-year term deposits are now paying over 3% interest, which makes Bega’s current dividend yield of 2.7% not too attractive. Even based on the more generous normalised earnings per share, Bega Cheese is trading with a P/E multiple of 26.4x, which isn’t cheap. 


How to play Bega Cheese? 

Consensus analysts’ estimates forecast a flat earnings growth for FY23, but a 17% growth for FY24. With the interest rates expected to continue to increase for the foreseeable future, we think there will be chances for buying Bega shares at more attractive prices closer to the low of $3.13 in July 2022, where Andrew “Twiggy” Forrest of Fortescue Metals fame upped his stake in Bega cheese.   

We think Bega Cheese is a quality business with an established share in Australia’s food market and its share price can see its high of April 2021 at $6.60 in the next two years after global supply chains return to normal and COVID-related costs are eliminated.  


Where to put stop loss? 

A share price break below the all-time low of $3.13 is an indication of possible significant problems with the underlying business and it can be used as a stop loss level.  


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