It was a positive day for the Bega Cheese Ltd (ASX: BGA) share price, with shares finishing more than 6% higher on the back of the company’s first-half results.
Bega Cheese made headlines earlier in the year after announcing a major acquisition of Lion Dairy & Drinks (LD&L) from Japanese heavyweight Kirin.
As a result, Bega now has a vast and diverse range of well-known brands under its banner, as illustrated below.
Margin improvement boosts profits
According to Bega, its half-year result demonstrates the successful execution of a number of key strategic initiatives, improvement in product mix and the ongoing transformation of the company.
Bega’s revenue took a backwards step during the half, falling 5% to $708 million. The company cited various factors, including the conclusion of the milk supply guarantee arrangements at Koroit, ongoing competition for milk which resulted in lower volumes, and a decrease in global dairy commodity prices.
Nonetheless, the company’s gross profit margin showed marked improvement, increasing from 17% in HY20 to 20%, driven by a shift in product mix.
This, combined with reduced marketing expenses, helped Bega more than double its net profit after tax (NPAT) to $21.7 million.
Following a $400 million capital raising at the end of last year, Bega is well-capitalised, finishing the period with $251 million cash and $99 million debt.
The company declared a fully franked interim dividend of 5 cents per share, consistent with the most recent half. Bega said this reflects prudent cash management as it integrates the LD&L acquisition.
Spreads lead the way
Bega maintained its leading position in spreads, now commanding a 30.9% value share, up 13.6% on the prior corresponding period (pcp).
This was driven by strong performance in the Simply Nuts brand, which grew to a 21.2% share of the natural peanut butter segment, along with further growth in the Vegemite brand.
Now what?
The LD&L acquisition was completed on 25 January 2021, and extends the company’s capability into new branded dairy categories such as yoghurt, white milk and flavoured milk. It also expands Bega’s portfolio into juice.
Commenting on the acquisition, executive chair Barry Irvin said: “The acquisition delivers important industry consolidation and value creation with synergies across the entire supply chain. The expanded product range, manufacturing and distribution infrastructure and brand portfolio realises our ambition of creating a truly great Australian food company”.
Moving forward, the company’s priorities include the integration of the LD&L business, focused investment in leading brands and market development, and continued focus on cash generation and cost management.
Bega’s business can be cyclical due to the peaks and troughs in dairy prices and seasonal conditions. The company probably sits on the border of my circle of competence, but the LD&L acquisition is certainly exciting and could lead to transformative growth in the years to come.
For more reading on Bega and LD&L, check out this article: Is the Bega share price a buy after its Lion Dairy acquisition?.
