Bega Cheese lifts on strength in dairy prices; UBS upbeat on stock

Shares in Bega Cheese have risen 5 per cent in a week, as UBS said better commodity prices had proved a strong tailwind for one of the country’s major milk processors.

Bega Cheese executive chairman Barry Irvin. Picture: Robert Hayson

Shares in Bega Cheese have jumped more than 5 per cent in a week amid market optimism over potential for stronger revenue from rising dairy commodity prices.

Analysts from UBS said better recent commodity prices had proved a strong tailwind for Bega, one of the country’s major milk processors, with the Australian Commodity Milk Value index improving by about 30 per cent over the past quarter.

The CMV index factors in dairy products such as milk powders, butter, whey and cheese as well as shifts in foreign exchange values.

As of this week, it was 20 per cent higher than its average level for the 2024 financial year.

“We highlight Bega in its guidance assumes broadly flat dairy commodity prices,” the analysts said in a note to clients.

“We believe this clearly indicates that if current favourable commodity prices remain, or in fact strengthen further, there is upside risk to current earnings expectations.”

Bega’s latest earnings guidance, delivered at its annual shareholder meeting in October, reiterated expectations for ­EBITDA in the current financial year of $190m-$200m.

UBS analysts expect strong dairy prices will lift this to the upper end of Bega’s target range, with a forecast of $199m.

Bega executive chairman Barry Irvin. Picture: Glenn Hunt

However, gains from raw commodity revenues would be slightly offset by a recent step-up of 2 per cent in farmgate milk ­prices Bega pays to farmers in the 2025 financial year, UBS said. “We think the company has done a solid recent job of improving its business quality, with leverage below 1x, branded margins improving to its highest ever and now the improvement in the commodity price environment,” its analysts said.

UBS has retained a neutral rating on Bega, but boosted its forecast earnings per share for the 2026 and 2027 financial years by 13 per cent.

The processor’s return on funds employed – a key measure of profitability – is sitting at 6 per cent, lower than the minimum 10 per cent UBS would like to see in order to review its rating.

Meanwhile, UBS analysts said poorer dairy production in Europe and the US and recovering demand in Southeast Asia had helped bolster the CMV index. “More importantly for processors, the CMV has moved above the domestic farmgate milk price paid to suppliers (farmers),” they wrote.

Bega shares closed up 0.7 per cent on Friday at $5.78. They have risen 5.1 per cent this week.