Skip to main content
Agricultural & FMCGEquities

Bega Cheese Ltd (BGA): Leverage on leverage

ABARE forecasts highlight the leverage

The recent ABARE commodities report highlights the leverage play in BGA’s ingredients business. We see this upside potential as underappreciated by the market.

BGA is most leveraged to SMP prices: Despite the recent pullback in SMP pricing in the last GDT pulse auction, futures prices continue to indicate a higher average selling price in FY25e vs. FY24 by ~A$100/t. This compares to ABARE’s latest forecast ~US$400/t YOY gain in SMP into FY25e. These values would imply a potential $4-20m YOY EBITDA tailwind in FY25e all other things being equal.

Farmgate pricing could be a game changer: The latest ABARE forecast is for a 4.4¢/L YOY fall in FY25e farmgate milk prices. If realised, a fall of this magnitude would represent a $55-60m reduction in milk COGS for BGA. Importantly we factor no material downdraft in farmgate pricing assumptions in our FY25e forecasts.

Self help is underappreciated: BGA highlighted at it’s 1H24 results that it remains on track to deliver >$20m in annualised cost savings, with a likely phasing to 2H24e.

Trading multiple light relative to historical average: While BGA has re-rated materially from its Sep’23 low, it is still trading at a material discount to its historical 1yr FWD EV/EBITDA multiple of 12.3x, trading at 11.4x FY24e and 9.9x FY25e. These also represent a material discount to global dairy (12.7x) and FMCG (12.4x) peers.

In our view, the pathway to BGA achieving its >$250m EBITDA target is becoming clearer, with the realignment of domestic processor capacity to farmgate supply creating a greater degree of contingency in the ingredients business.

Investment view: Buy rating unchanged

Our Buy rating is unchanged. The recent ABARE commodities report highlights the operating leverage BGA has to SMP and farmgate pricing. A realignment in farmgates to commodity markets in our view provides the largest upside risk to near term forecasts and BGA’s 5yr >$250m EBITDA target. Should the market accept BGA’s EBITDA target as achievable, while re-rating it towards its long-run EV/EBITDA multiple, then the upside is compelling.

To read the full report click the button below.

View Detailed Report
Authored by Jonathan Snape – Analyst – at Bell Potter Securities, 14 March 2024
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.