Bega Cheese Earnings: Significant Deterioration in Bulk, but Brands Are Better

On a consolidated basis, no-moat Bega's fiscal 2023 result appeared to meet expectations. Underlying EBITDA slid 11% to AUD 160 million, in line with our forecast and company guidance. But the segmental breakdown was concerning, with the bulk business significantly more challenged than we appreciated—turning loss-making in the second half. Our prior thesis, for the elevated milk price to drive an increase in supply, supporting profitability in bulk is unlikely to play out, particularly now that the business is going to be materially smaller. We lower our fair value estimate for Bega by 18% to AUD 4.00 per share. We lower our fiscal 2024 EBITDA forecast to AUD 160 million, from AUD 182 million previously—at the bottom of Bega's guidance range of AUD 160 million to AUD 170 million. We cut our prior fiscal 2028 EBITDA forecast by 17% but expect Bega can reach its new medium-term EBITDA target of AUD 250 million by fiscal 2028, with earnings almost entirely driven by the branded business. We had previously expected bulk to be about one third of earnings by fiscal 2028, now it accounts for just 10%. Despite the cut to our valuation, shares still screen undervalued. We estimate the strength of the branded segment alone can justify Bega's current stock price, with bulk offering potential upside should the business turn around faster than we expect.