The Bega Cheese (ASX: BGA) share price is down 11% in early trading after the dairy business gave a trading update.
Bega is one of Australia’s largest dairy businesses and 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, ZoOSh and Dairymont. It also owns Tatura, a producer of infant formula and cream cheese.
Why Bega Cheese Shares Are Hurting
The dairy company warned that unprecedented competitive milk supply conditions and easing demand from third party branded businesses have changed the profit outlook for this year.
That’s why management has provided guidance that its normalised EBITDA (click here to learn what EBITDA means) is expected to be in the range of $95 million to $105 million compared to $115 million in FY19. This would be a decrease of 8.7% to 17.4%.
What Has Caused This Profit Downgrade?
Bega said that the effects of the continuing drought and further decreases in total Australian milk production has increased competition for milk in the first quarter of FY20, with this higher level of competition flowing to a higher ongoing cost of milk across the industry.
Max Roberts, Chairman of Bega Cheese, said: “We have previously advised that conditions impacting FY19 would continue into FY20. This has proven to be the case, but at a faster and deeper rate. To remain competitive Bega Cheese today announced an increase in its Southern Region milk price and other initiatives to sustain and grow milk supply. This higher milk price will directly impact Bega Cheese’s earnings in FY20.
Not only is Bega suffering from a competitive milk supply, but it has also seen a slowdown of growth of export market categories which will further hurt earnings in FY20.
What is Bega Cheese Doing?
Bega Cheese said it is well advanced in its plans to restructure its manufacturing capacity to meet the changing supply environment including the development of toll and third party manufacturing relationships.
Is The Bega Cheese Share Price A Buy?
Some people say the best time to buy shares is when the price is low. The Bega share price is certainly a lot lower than it has been in the past four years, but I’m not sure how long this is going to go on. Can it rebound? Or will Bega languish if drought conditions continue – perhaps for quite a while longer.
I don’t know the answer to these issues, which is why I’d prefer to buy the shares in the free report below for reliability over Bega Cheese, despite the discounted price.
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