Shanghai’s lockdown, Ukraine and floods wipe $40m off Bega Cheese’s cream
Bega Cheese has warned of a $40m earnings hit – in part from China President’s Xi Jinping’s obsession to eradicate Covid-19.
Shanghai’s strict Covid-19 lockdown has hit Vegemite maker Bega Cheese, with the ASX-listed dairy and food group warning its annual earnings will dive more than $40m.
The lockdown imposed by China’s communist party as part of President Xi Jinping’s hard line ‘Covid zero’ policy, combined with rising input costs from Russia’s invasion of Ukraine and devastating floods in northern NSW and Queensland sparked the profit downgrade on Wednesday.
It comes as Bega announced a record average opening farm gate price of $8.40 a kilogram milk solids for the 2022/23 season as competition to source milk from farmers intensifies.
In a statement to the ASX, Bega said it foresaw many of the “one-off” Covid-related costs, but the floods, Shanghai lockdown and Ukraine war were unexpected.
“The business is now additionally managing the costs and supply chain disruption impact of flooding in recent weeks and months in Central Australia, northern NSW and Queensland, including the suspension of rail services into these regions,” Bega said.
“There have been increases in input costs associated with the outbreak of war in Ukraine and now also concern on the certainty of deliveries of products destined to the China market scheduled through the port of Shanghai due to lockdowns in that city.”
But the Paul van Heerwaarden-led company expects that disruption to be confined to this financial year and said there has already been “some recovery in the market and easing of Covid-19 associated costs”.
Meanwhile, it said international dairy prices continued to strengthen in the past six months, putting pressure on farm gate prices.
“The improvement in international commodity markets and decreases in 2H FY2022 national milk production have further increased competition for milk with the majority of dairy companies including Bega Cheese increasing farm gate milk prices.”
As a result it expects more than $40m to be wiped off full year earnings before interest, tax and amortisation, which is forecast to be $175m to $190m on a normalised basis. That compares with consensus estimates of $187.6m.
Shaw and Partners senior investment manager James Nicolaou said while Bega had downgraded earnings, the “market might actually like” the company stating that Covid-related costs had begun to ease.
Bega shares closed 1 per cent higher at $5.19 in a flat market.
Executive chairman Barry Irvin said depending on supplier size, farmers across Victoria, southeast South Australia and the Riverina, would receive an opening price of $8.20 to $8.60 a kilogram.
“As is always the case when setting milk price, it was important that we considered the returns in both the Australian and international markets, the milk requirements for our significantly expanded portfolio of products and the competitive circumstances in each of our regions,” Mr Irvin said.
It comes as the company finalises the integration of Lion Dairy & Drinks, which it bought in late 2020 for $534m to create a giant $1.5bn Australian food company.
Bega executive general manager of beverage operations, Mark McDonald, said the addition of Lion’s brands, which include Pura, Dairy Farmers and Dare flavoured milk, helped underpin the record farm gate price.
“The 2022/2023 opening milk prices reflects the strength of Bega’s broader and diversified branded domestic and international dairy business,” Mr McDonald said.
“Bega is supporting its exclusive suppliers with record average prices and incentives for productivity, quality, new milk and growth and encourages growth from our current suppliers and also welcomes new suppliers.”
The company said its balance sheet “remains strong”, and it “continues to execute its capital program focused on site and supply chain efficiencies, capacity increases and product innovation in high growth categories”.
“Bega Cheese expects its leverage ratio to further reduce in FY2022 to approximately 2.0.”
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