Consumer Staples

Bega guides to lower FY23 earnings on back of rising costs

Thu 14 Jul 22, 11:02am (AEST)
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Key Points

  • Farm gate prices in Victoria for FY23 have soared to around 30% higher than FY22 prices
  • The company believes it’s well positioned to recover the higher costs associated with the increase in farm gate milk prices
  • Brokers expect significant price rises going forward

Bega Cheese’s (ASX: BGA) share price was down -6% open after the dairy company’s warning that rising milk prices over June and July have negatively impacted previous FY23 guidance.

Management now expects normalised earnings (EBITDA) to come in between $160m and $190m, versus previous guidance provided back in April of between $175m and $190m in FY22.

What happened

While Bega along with other dairy companies were able to pass through many of the higher input costs to retail and wholesale markets, farm gate prices in Victoria for FY23 have soared to around 30% higher than FY22 prices.

In summary, management now expects the company’s FY23 performance to be impacted by the delay in timing of some of these higher product prices and the finalisation of secured milk volumes during July.

Further price increases

While the company believes it’s well positioned to recover the higher costs associated with the increase in farm gate milk prices, brokers aren’t convinced.

The ongoing escalation of farmgate milk prices, against a backdrop of softening global ingredient prices suggests to Bell Potter that further price increases will be required in the branded portfolio in FY23.

While Bell Potter maintains a Hold rating, the broker’s target price has been lowered to $3.80 from $4.20.

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Bega Cheese share price.

 

What other brokers think

Echoing similar sentiment, Ord Minnett believes the cost pressure associated with strong competition at the farm gate – resulting in record opening milk prices for the 2022/23 season – will require significant price rises going forward.

While Ord Minnett recently (21/06/22) maintained its Hold rating on Bega, the broker further reduced estimates for FY23 and FY24 earnings (EBITDA) by -8% and -10% respectively. 

Target price was reduced to $4.10 from $4.80.

With higher input costs expected to weigh on the FY23 recovery – due to increased milk supply costs, packaging, freight, labour and electricity – UBS recently (20/06/22) downgraded Bega to Neutral from Buy, while the target price is reduced to $4.75 from $5.40.

The broker now sits -7% below consensus forecasts for FY23 earnings (EBITDA) at $214m.

While Goldman Sachs is Sell rated on Bega, the broker’s target price of $5.15 represents 35% upside to the current price.

Consensus on Bega is Hold.

Based on Morningstar’s fair value of $4.89 the stock appears to be undervalued.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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