Shares in Bega Cheese took the anticipated whacking on Thursday, falling to levels not seen for more than 8 years after the company released its second weak trading update in two months.
Bega shares slid more than 8% to $3.25 on the news, buried in the update issued at 7.27pm on Wednesday that revealed no growth is expected in earnings for the 2022-23 financial year from the financial year just ended.
Thursday’s close was the lowest the shares have been since September, 2013.
Wednesday night’s weak update followed one on April 20. Since then Bega shares slid 30% because of fears it can’t recover cost rises fast enough in higher selling prices, that demand will weaken and that other negatives are proving to be hard to reverse.
The latest update did nothing to alleviate those concerns about Bega’s ability to manage and protect margins.
From being a ‘star’ of Australian business for buying back icons like Vegemite from overseas (American) owners, not to mention the range of drinks and other dairy products from a Japanese owned company (Lion), Bega’s April update saw it pushed onto a ‘suspicion’ list by investors concerned about the ability of the company to rightsize itself.
In the April update Bega forecast “normalised” EBITDA of $175 to $190 million. In Wednesday night’s update that had been sliced slightly. Bega saying an early forecast for 2022-23 was a range of $160 million to $190 million.
That took investors and analysts by surprise – so much so that Bell Potter on Thursday issued a 2023 estimate for EBITDA of $195 million!
The reason? Higher farm gate milk prices across the industry and especially in Victoria which will mean higher milk and other dairy product prices across the board and lags in recovering operating cost rises.
That means more pressure on retailing margins at Coles, Woolies, Metcash and Aldi. Milk prices are rising and the days of cheap prices are gone unless these companies decide to make milk a loss-leader.
In effect the company is saying it will have 12 more months of marking time in terms of earnings performance while it battles to control and then recover costs in higher product prices.
“Bega Cheese expects that the company’s FY2023 performance will be impacted by the delay in timing of some of these higher product prices and the finalisation of secured milk volumes during July.
“While milk prices vary throughout Australia, the largest supply region Victoria was expected to experience a farm gate milk price increase for FY2023 in the range of 15%-20% based on the stability and strength of global dairy commodity markets and currency relativities.”
“Initial milk price announcements by Bega Cheese and other dairy companies on 1 June reflected this level of expected milk price increases. However, after the release of those initial prices there has been particularly strong competition amongst milk processors during June and July and farm gate prices in Victoria for FY2023 have further increased to a level of approximately 30% higher than FY2022 prices.
Bega said the farm gate price increases will benefit farmer suppliers, impact all Australian dairy companies, “and is already being reflected in higher product prices in the retail and food service markets.”
In its April statement, Bega listed disruptions its business including, the continuing impact of Covid19, floods in various regions around Australia, the war in Ukraine and the impact of Covid19 lockdowns on product deliveries to the China market through the Port of Shanghai.
“A number of the business disruptions referred to in the April Update are resolving and Bega Cheese has now been able to pass through many of the increased business costs it experienced in FY2022 in the form of higher wholesale and retail prices or mitigate the impact through various initiatives.
“Nevertheless, there is the ongoing cost pressures of robust competition amongst dairy processors for milk referred to in the April Update,” Bega said in its Wednesday night statement.
“The company’s strong brand portfolio, extensive chilled distribution network, Australian and international product mix, and customer profile positions it well to recover the higher costs associated with the increase in farm gate milk prices through both the global commodity market and the retail and food service markets.”
