The billion-dollar cheese: Should Bega be in investors’ shopping basket?

Cheese stringers, Vegemite, Dare iced coffee, Dairy Farmers milk, and Daily Juice orange juice – staples in Aussie shopping baskets and lunch boxes for decades, and all made and owned by ASX-listed food giant Bega.

Best known for its range of cheese products, Bega is a $1.1 billion business, and as one of the biggest players in the Australian stock market’s food manufacturing sector, the 123-year-old company has cemented itself as a household name.

Bega CEO Pete Findlay

But the business has contended with a few changes lately – namely a new chief executive, the reluctant sale of a soy milk brand, and some floods thrown into the mix – that have put the cheese maker in the spotlight.

While it’s popular with consumers, Bega has some ways to go to prove it should be in stock pickers’ shopping baskets too.

Industry: Consumer staples; food, beverage.

Main products: Cheese, milk and dairy products, spreads, juice.

Key figures: Chief executive Pete Findlay, executive chairman Barry Irvin, and until recently, former CEO Paul van Heerwaarden.

How it started: Dairy farmers in the Bega Valley in the late 1800s decided to group together for efficiencies in production and marketing, forming The Bega Co-operative Creamery Company in 1899. The original factory on Lagoon Street opened in 1900 and still exists, producing mozzarella and cheddar.

It made a number of acquisitions, including Tatura Milk in 2007, De Cicco in 2008, and Kraft Foods in 2009, which broadened its portfolio and cheese manufacturing capabilities over the years. Bega Cheese was listed on the ASX in 2011 at $1.81.

How it’s going: Bega kept acquiring key assets and brands, bringing Vegemite, Pura Milk and Yoplait back home when it acquired Kraft’s food business and Lion’s dairy and drinks portfolio in 2017 and 2020 respectively. Bega Cheese renamed itself as Bega Group in November 2022 to reflect the company’s diverse portfolio, and its share price currently hovers around $3.52.

The bull case: Australian shoppers saw the price of dairy products soar the most of any food category – more than 15 per cent – across 2022, and experts don’t expect this to ease up any time soon. In the December quarter alone, the price of cheese, butter, white milk, and flavoured milk all rose by double digits.

“This is clearly a positive for dairy processors such as Bega, as they are successfully passing through the substantial increase in farmgate milk prices,” UBS analysts said in a note. Bell Potter’s Jonathan Snape held a similar view: “If the inflationary gains in the dairy cabinet can be sustained into [the 2024 financial year] ... then this would be a material tailwind for Bega at the group level,” he wrote.

Morningstar analyst Angus Hewitt believes profits will really take off in about three years’ time. “We think the market has become too pessimistic on near-term earnings pressure, and shares in Bega are undervalued,” he wrote in December.

“Longer term, we forecast underlying margin improvement from fiscal 2024, supported by Bega’s disciplined focus on profitability and mix-shift as the product portfolio gets rationalised toward higher-margin products.”

The bear case: As a major dairy, food and beverages producer, demand for Bega products remains fairly steady; similarly, analysts don’t seem to be expecting a huge spike in its share price any time soon. Analysts from Bell Potter, UBS, Barrenjoey and E&P Financial Group have assigned either a “hold” or “neutral” rating to the company.

The broader decline in dairy farmers has exacerbated competition for milk. Food market analysis firm Freshagenda predicts milk production will fall 6-7 per cent in the 2023 financial year, and then another 3-4 per cent in the 2024 financial year of 7.7 billion litres. “This will likely further intensify an already highly competitive milk procurement market, which has had a negative impact on processors such as Bega for multiple years now,” UBS analysts said in a note.

Meanwhile, as much as Bega is a major manufacturer and a household name, they don’t have the final say over pricing at the check-out counter, notes Morningstar analyst Angus Hewitt. “We think the balance of power lies with the supermarkets, keeping a lid on margins,” he wrote in a December note.

And then there’s the weather, an external factor no one can control: the intense floods that hit central Victoria last year saw power cut off from Bega’s Tatura facility, putting 2 million litres of milk at risk of going sour.

Bega has also been forced to give up its foothold in the growing plant-based beverage sector after it was forced to sell its 49 per cent stake in Vitasoy Australia to Hong Kong-listed Vita International. It wasn’t a huge revenue driver, however, contributing about $5 million to Bega’s annual net earnings according to estimations by E&P Financial, but still leaves Bega hunting for another product to fill that gap.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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