'Unprecedented': Bega Cheese shares tumble as drought issues bite

Severe drought and softer demand for its exports have forced Bega Cheese to issue a profit warning over its 2020 earnings, saying its performance would be affected by "unprecedented" competition among processors for milk.

Bega shares closed down 12.8 per cent at $3.95, wiping $124 million off the company's market capitalisation as the drought continues to bite ASX-listed agribusinesses.

The dairy and food manufacturer is now forecasting full-year normalised EBITDA (earnings before interest, tax, depreciation and amortisation) of $95 million to $105 million. This is down from last financial year's $115 million figure, which was a record for the company.

Bega Cheese has issued a profit warning.

Drought was a key reason behind the profit warning because it has severely reduced total milk production. This has forced dairy processors such as Bega to compete harder and pay more for milk to farmers to secure supply for its processing factories.

Australia's milk production has fallen because many dairy farmers have reduced the size of their herds due to soaring feed costs, financial pressures and the ability to gain some revenue from selling cows.

"We have previously advised that conditions impacting financial year 2019 would continue into financial year 2020. This has proven to be the case, but at a faster and deeper rate," said Bega chairman Max Roberts.

We are seeing softening in demand for products destined for certain export markets which will adversely impact earnings.

Bega chief executive Paul van Heerwaarden

"To remain competitive Bega Cheese today announced an increase in its Southern Region milk price and other initiatives to sustain and grow milk supply. This higher milk price will directly impact Bega Cheese's earnings in financial year 2020," he said.

The company released the trading update on the same day as its annual general meeting. Chief executive Paul van Heerwaarden said while Bega's branded food business was growing, "we are seeing softening in demand for products destined for certain export markets which will adversely impact earnings in financial year 2020".

In a note to clients Morgans analyst Belinda Moore said Bega's 2020 earnings estimate was "well below consensus estimates".

"Due to the tough operating conditions, we have been cautious on Bega and highlighted it as a potential AGM downgrade surprise candidate. We have also been concerned about its stretched balance sheet."

Ms Moore said the fierce competition for milk among dairy processors was forcing dairy manufacturers to offer prices to farmers "well in excess of what it should be under more normal circumstances".

Bega's trading update follows a profit warning from metal recycler Sims Metal Management on Monday, which sent its shares down 8.8 per cent on the day and wiped $181 million off its market capitalisation. On Tuesday Sims' shares regained some lost ground, rising 5.3 per cent to close at $9.69.

And late on Monday after the market closed, fruit and vegetable giant Costa Group released its fourth profit warning in 2019, as it also unveiled a $176 million capital raise. Like Bega, a key factor behind Costa's profit downgrade was drought, which has pushed up water costs.