Moving parts warrant a more cautious outlook

We have reviewed commodity drivers, milk flows and farmgate pricing (FMP) below:

Commodity returns: Commodity returns stabilised and lifted after weakening in May. Implied SMP returns have lifted to ~A101¢/L in Jun’22, up +39% YOY. Considering forward rates, 1Q23e SMP returns are averaging ~A99¢/L, up +27% YOY and broadly comparable to 2H22 averages of A100¢/L.

Local milk production: SE Australia milk production YTD has contracted -1% YOY to Apr’22, with Murray catchment milk production was down -6.3% YOY. Domestic milk flows YTD have been biased towards cheese production (up +30% YOY) and more recently SMP (from down -7% YOY in 1H22 to down -4% through to Mar’22).

Global trade flows: Production in Mar’22 across the top 5 exporters (EU, US, NZ, Australia and Argentina) was down -1% YOY and YTD is down -1% YOY. Production declines have been observed in all regions outside of Argentina. Imports of SMP into China were up down -32% YOY in Dec’21 and down -20% YOY on a R3M basis.

Farmgate pricing: Southern FMP’s have lifted materially and while we had allowed for an additional step-up from the $8.40/KgMS open (to $8.60/KgMS), however, the uplift has been more material to ~$8.96/KgMS (vs. peers at $8.80-9.50/KgMS).

We have increased our FMP assumption, with modest price recovery in the branded portfolio. The net effect is NPAT downgrades of -30% in FY23e and -26% in FY24e. Our target price falls to $4.20ps (prev. $5.90ps) following these changes and a modestly higher WACC assumption, reflecting global the peer group de-rating (~10%).

Investment view: Downgrade to Hold

We downgrade our rating from Buy to Hold. The opening FMP was high but manageable in the context of global commodity returns, however, subsequent step-ups look difficult to make up in the absence of further retail shelf price gains, which given recent retailer private label price freeze announcements is less certain. Outside of corporate activity, the catalyst for a re-rating is becoming less clear.

To read the full report click the button below.

View Detailed Report
Authored by Jonathan Snape – Analyst – at Bell Potter Securities, 20 June 2022
Important Disclaimer—This may affect your legal rights: Because this document has been prepared without consideration of any specific client’s financial situation, particular needs and investment objectives, a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the proper authority of such licensee, who has provided you with this report by arrangement with Bell Potter Securities Limited) should be consulted before any investment decision is made. While this document is based on the information from sources which are considered reliable, Bell Potter Securities Limited, its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility to inform you of any matter that subsequently comes to its notice, which may affect any of the information contained in this document. This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. In the USA and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified countries. This is general investment advice only and does not constitute advice to any person.
Disclosure of Interest: Bell Potter Securities Limited receives commission from dealing in securities and its authorised representatives, or introducers of business, may directly share in this commission. Bell Potter Securities and its associates may hold shares in the companies recommended.