Initiating Coverage of Bega Cheese With a AUD 4.60 Fair Value Estimate and No-Moat Rating

We initiate coverage of Bega Cheese, an Australian dairy processor and food manufacturer of well-known brands including Bega Cheese and Vegemite, with a fair value estimate of AUD 4.60. Bega generates approximately 70% of its sales from the Australian market, with the remainder from exports, primarily to Asia. Despite a strategic shift in focus towards becoming a diversified branded consumer packaged food business, we expect most of Bega's sales over the next decade to continue to come from the dairy category. In our view, Bega has not carved an economic moat required to sustainably earn economic profits, and we expect the firm's powerful supermarket customers to limit margin growth. Fiscal 2020 is likely to be disappointing as increased input costs and lower production volumes, largely stemming from drought in the Tatura region, weigh on near-term margins. We forecast underlying earnings to fall 33% to AUD 26 million.