The Bega Cheese Ltd (ASX: BGA) share price could come under pressure today as it downgraded its profit expectations for FY19.
Bega is one of Australia’s largest dairy businesses, it has been producing dairy products since 1900. These days it usually sells more than 1 million packs of cheese a day across a variety of brands. Its brands includes Bega, Vegemite, Bega Peanut Butter and ZoOSH. It also owns Tatura, which is a producer of infant formula and cream cheese.
Bega’s Lower FY19 Profit Guidance
Six months ago Bega Cheese provided full year guidance of normalised EBITDA for FY19 at the half year result to be at the lower end of the range between $123 million to $130 million.
However, after looking at the numbers produced so far in the full year result, Bega decided it was necessary to update its guidance of normalised EBITDA. The new guidance is a range of $113 million to $117 million, subject to the final statutory audit.
Were There Any Positives For Bega?
Although the earnings announcement is clearly disappointing, Bega Cheese was pleased to disclose that it has reduced its gearing / level of borrowing in the second half of FY19 and will report net debt of around $300 million with “sound” leverage cover at June 2019.
Bega Cheese also boasted that it achieved a record milk intake in FY19 of 1.06 billion litres. This is an increase of 41% of milk intake, or 308 million litres, compared to FY18. The company also said that it has increased its market share of the Australian milk pool from 8.1% to 12.4%.
The above milk intake achievement was done in a market that has contracted by 733 million litres, or 7.9%, because of drought and the exit of farmers.
However, there has been more competitive pressure from processors, and was very prevalent in the final quarter of FY19, whilst also setting the starting FY20 milk price.
But, with Bega retaining and growing its supplier base and adding non-dairy earnings streams, this positioning comes at a cost in FY19 and FY20. The full cost is reflected in today’s guidance.
Is Bega A Buy?
If the competitive pressures continue for the rest of FY20 then Bega could be in for a bit of a painful year. Dealing with commodity products like dairy can be tough sometimes, which is why I’m not jumping to buy shares even if it falls today.
I’d much rather buy shares of the reliable businesses in the free report below instead.
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