1 March 2020
|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|Date of Report|
|Sector: Consumer Staples||52-Week Range: A$7.33 – 23.07|
|Industry: Food Products||Market Cap: A$1,205.7m|
We rate BAL as a Buy due to the following drivers:
- Targeted and distinctive product portfolio, with a solid brand.
- Strong consumer demand especially growth in China for infant formula product.
- BAL has a solid balance sheet with net cash position.
- BAL has limited requirements for investments in fixed assets.
- Moving into new emerging markets, such as Vietnam.
We see the following key risks to our investment thesis:
- Chinese demand underperforming market expectations.
- Disruption to BAL’s milk supply.
- Increased competition, including private labels & competitors developing products or branding that erode the differentiation of BAL’s branded products from other dairy products.
- China regulatory risk that will impact short term margins or if BAL fails to attain appropriate approvals.
- Increased competition, including private labels & competitors developing products or branding.
- Disruption to BAL supply chain as BAL relies on third party contract manufacturers for processing, production, and distribution.
- Execution risk surrounding the entry into a new market (losses could drag on impacting group performance).
BAL reported solid FY18 results which signalled that operations are turning around fortunes (achieving strong growth in revenue, earnings and cashflow).
Key highlights include:
1. Sales increased +37% to $329m driven by mainly volume with +48% Australian label growth. As the market expects, 2H18 revenues were impacted by no sales of Chinese label formula given delays in SAMR registration. Management also disappointingly highlighted difficult market conditions in recent months with slower China cross-border growth and increased product availability from Australian and NZ competitors.
2. Normalised EBITDA increased +65% to $71m (excluding the $6.0m one-off for regulatory transition and versus $43m in FY17 which excludes one-off items such as $27.5m Fonterra supply-chain reset payment).
3. Gross margin improved 5.8% points versus 2H17 to 42.5% in 2H18.
4. Balance sheet remains solid with no debt, $88m in debt and $39m in FY18 supply chain investments.
We upgrade our recommendation to Buy on valuation grounds (based on our conservative numbers at the lower end consensus).
- FY19 guidance – short term weakness but medium and longer-term fundamentals remain intact. Management expects Australia Label to see “up to 10% year on year growth” in revenue as FY19 group EBITDA margin continue at 2H18 normalised levels of 22-25%. Management has seen “more competitive trading environment for [their] Australian-label business in recent months and expect more moderate sales growth in FY19 as a result”. BAL continues to execute its ‘premium brand strategy’ which in FY19 will “include the roll-out of a brand refresh, including nutritional enhancements, product line extensions and regulatory labelling transition across food and formula”. Separately, in terms of medium term guidance, according to management, BAL has laid the foundations to build a “+$500m revenue business by FY21” which will be further detailed at the upcoming investor day after the AGM.
- SAMR registration on track. BAL submitted its SAMR (previously CFDA) application in December 2017. Note that the CFDA was part of a restructuring process and a new regulatory body, SAMR was established. Registration relates to Chinese label formula sold in the China offline channel (6% of FY18 revenue). SAMR registration of Chinese-label formula continues to progress and management “remain confident that registration will be achieved”.
- Forays into Vietnam in 1H19. BAL highlighted the positive demographics and thematic of Vietnam and its baby formula and food market noting:
1. Large population of 96m;
2. Vietnam apparently has the fastest growing upper and middle class in South East Asia from 25m in 2015 to 33m in 2020 with 1.6m annual births (versus 300k in Australia and ~17m in China).
3. In terms of the Vietnamese baby formula and food market, Global Data estimates the size to be ~$1bn and growing at 15-20% per annum (versus China at ~$30bn).
4. Vietnam has similar concerns about food safety, quality and nutrition.
FY18 RESULTS SUMMARY
Figure 1: BAL Financial Summary
Source: Company, BTIG, Bloomberg
Bellamy’s Australia Ltd (BAL) is a Tasmanian company which distributes, and markets certified organic infant formula and food products across Australia, China, and SE Asia.