Bega sounds warning on increasing demand for milk

Bega was able to increase its milk supply by 25 per cent in the first half of fiscal 2018 when it processed 465 million litres, but executive director Barry Irvin knows the honeymoon is over.

Canadian dairy company Saputo has flagged increasing milk intake by 600 million ­litres a year once it has finalised the $1.3 billion acquisition of Murray Goulburn.

Saputo’s target of 2.5 million litres is based on boosting capacity at Murray Goulburn’s seven processing facilities, but subject to change depending on the findings of an Australian Competition and Consumer Commission review of the deal, which is due tomorrow..

Mr Irvin said now the Murray Goulburn deal was reasonably well understood, less milk was moving among the big players in processing.

“It has become highly competitive with some of smaller players looking to acquire milk wherever they can,” he said.

“The environment has quickly changed from one where we have had the luxury of being able to acquire milk rather smoothly to one where we are back to something we have been very used to over recent years where it is highly competitive.”

Bega revealed on Wednesday its first-half net profit jumped by more than 30 per cent to $20.6 million as the additional milk supply increased manufacturing efficiencies.

The acquisition of the Mondelez grocery business, completed in July, increased revenue by $136.6 million to $705.2 million.

Bega’s share price fell by more than 6 per cent per cent to $6.86.

Select Equities analyst Mark Topy said it appeared there was a harsh reaction by the market to Bega’s full-year forecast for normalised earnings before interest tax, depreciation and amortisation of $105 million to $115 million. This came after normalised EBITDA growth of 65 per cent to $70.1 million in the first half.

Mr Topy said Bega had taken advantage of customer demand to sell product in the first half and full-year guidance had increased.

The competition is hotting up in Australia as dairy analysts predict additional global supply for 2018 and an oversupply of commodities likely to result in lower farm gate milk prices.

Bega raised the spectre of farmers being paid unstainable prices as happened with Murray Goulburn in 2016.

Mr Irvin said farm gate prices in Australia were now more aligned with global dairy markets and Bega wanted to them to remain at sustainable levels.

Bega is also digging in for a fight to protect its share of the domestic peanut butter market after last year’s acquisition of the Mondelez grocery business.

It has increased spending on brand transition and promotion in the face of competition and a legal battle launched by Kraft Heinz in the Federal Court and in the United States over peanut butter packaging and advertising.

Bega is also battling Fonterra in the Supreme Court of Victoria over the use of Bega trademarks, but does not expect either dispute to have a material impact on financial performance.

By: Brad Thompson

Source: The Australian Financial Review


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