Bega Cheese battered as baby formula venture curdles

Listed dairy company Bega Cheese has suffered a disastrous 17 per cent slump in its share value.

Bega Cheese chairman Barry Irvin. Picture: Stuart McEvoy

Listed dairy company Bega Cheese has suffered a disastrous 17 per cent slump in its share value after yesterday revealing its high-profile infant formula milk powder joint venture with vitamins maker Blackmores had gone backwards.

Nearly $200 million was written off the value of Bega Cheese in just six hours of ASX trading, as its share price fell 20 per cent from $6.48 to $5.20, before recovering slightly to $5.40, giving the NSW South Coast-based dairy business a capitalisation of $990m.

Chairman Barry Irvin told the company’s annual meeting the year-old joint venture was struggling to achieve predicted sales in China and its inventory value had to be written down by as much as $7m on Bega’s books.

Mr Irvin said conditions had changed dramatically since the joint venture was announced, from a situation where prices for Australian-made infant formula were sky high, there was not enough product to meet demand, and Chinese residents in Australia were stripping the shelves of Coles and Woolworths of every tin of local infant formula to post to China in a “grey market” trade.

“While this time last year supermarket shelves were empty and customers in Australia and internationally were providing ever-increasing orders, the combination of a regulation change in China, a supply response to the demand signals and the evolution of (new) supply channels to market now sees significant discounting in the marketplace and signs of short-term oversupply.

“This change in market circumstances has seen our expected sales not materialise at levels that were initially forecast and some strong headwinds for the partnership, particularly in the Australian market.”

It was the company’s worst day of trading since the former farmers’ co-operative listed on the ASX in August 2011, as investors fled the company.

Mr Irvin told the AGM the “headwinds” facing Bega’s fledgling infant formula business in a “very challenging business environment” would offset the early signs of a price recovery in global dairy markets.

Despite its joint venture writedown — and its payment of high milk returns to farmer suppliers throughout financial 2015-16 — Bega Cheese reported revenue growth of 7.5 per cent with sales of $1.2bn and a 56 per cent rise in EBITDA compared with the previous year of $65.4m.

Mr Irvin said he was proud Bega had managed to offer its farmers a dairy price of $5 a kilogram of milk solids from July this year, well above the milk prices being offered by the two biggest processors, Murray Goulburn and Fonterra. He forecast the global price improvement over the next 12-18 months would enable to company to maintain that farmgate milk price.

Mr Irvin stopped short of calling the 20 per cent share battering an over-reaction, but said there were positives in the growth of Bega’s dairy foods business that did not appear to have been recognised by investors.

“You can’t always deliver (great results). From my perspective, the nutritionals joint venture situation was something we needed to recognise and announce because we thought it was material, and people can make their own assessment.

“But there were a lot of things we spoke about in the business that we think are really positive and important strategically.”

A2 Milk and Blackmores were both caught in the crossfire of Mr Irvin’s comments about the lack of Chinese infant formula sales and oversupply of inventory, with their shares down 2.5 per cent and 1.2 per cent respectively.

Murray Goulburn will hold its AGM in Melbourne on Friday, with expectations of a fiery meeting attended by hundreds of angry dairy farmers.