Bega shares slump on struggles of infant formula tie up with Blackmores

Bega shares sank 16.8pc after the dairy group warned its infant formula tie-up with Blackmores is underperforming.

Bega CEO Barry Irvin is facing a $5m-$7m writedown on its Blackmores joint venture. Pic: Stuart McEvoy

Shares in Bega Cheese plunged more than 16 per cent on Tuesday, after the dairy group warned its high-profile tie-up with vitamins maker Blackmores was underperforming.

The struggles for the JV, which was developed in October last year to capitalise on growing infant formula demand, has forced a $5 million to $7m writedown on Bega’s books.

Speaking at the group’s AGM on NSW’s Sapphire Coast today, chairman Barry Irvin said conditions had changed dramatically since the JV was announced, to the detriment of the Australian companies.

“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 supply channels to market now sees significant discounting in the marketplace and signs of short term oversupply,” he said.

“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.”

The $5m-$7m provision resulting from the lacklustre conditions relates to inventory representing Bega’s share of the “Bemore” joint venture.

“The partnership is keeping the business under constant review and will continue to monitor the performance with our partner Blackmores as market evolution and circumstances becomes clearer,” Mr Irvin said.

Bega (BGA) performed strongly through fiscal 2016 despite turbulence in the dairy industry and while its dairy operations are expected to benefit from signs of a recovery in commodity prices, the infant formula operations are expected to cap earnings in the coming year.

“The ongoing growth in dairy foods and the improved outlook for dairy commodities are expected to improve our financial performance in FY2017, however this improvement will be offset by a very challenging business environment for our dairy nutritionals platform particularly in infant formula and growing up milk powders,” Mr Irvin said.

The dairy company does not provide formal guidance, but indicated it expected flat earnings before interest, tax, depreciation and amortisation (EBITDA) without factoring in the writedowns to the Bemore JV.

The news forced its shares down 16.8 per cent to $5.62 at to $5.40 by the close of trade, while Blackmores was comparatively sedate as its shares edged down 1.14 per cent to $111.44.

Mr Irvin again took a veiled swipe at rival Murray Goulburn for its decision to retroactively cut farmgate milk prices in April, saying both that it would always “honour milk price commitments” and decrying “overly optimistic forecasts” from the market leader (Murray Goulburn).

“It is well documented that in Australia, with its exposure to global dairy commodity prices and a highly competitive domestic market, the farmgate milk prices that were being offered or in some cases projected were for a number of companies not a reflection of the returns that could be extracted from the marketplace,” he said.

Global dairy prices have bounced in recent months, offering hope for beaten-down farmers, many of whom are currently struggling to break-even.

Mr Irvin tipped the recovery to continue, although farmers may not reap the benefits until next year.

“Farmgate milk pricing around the world is now generally below the cost of production, consequently we are beginning to see a rebalancing of supply and demand, we are seeing an improvement in global commodity prices with analysts predicting further improvement over the next 12-18 months,” he said.