Weak First Half and a Downgrade for Bega Group

That Bega’s BGA first-half fiscal 2023 result was weak is not particularly surprising given the impact of cost inflation on the business. However, it was weaker than expected, particularly in the branded segment. Partly this reflects the pricing cycle and the impact of rising raw materials costs on Bega. But it is also a reflection of Bega’s inability to timely renegotiate prices and the importance of powerful supermarket customers to Bega’s profitability. Adjusted net profit after tax for the first half of fiscal 2023 declined 74% to AUD 10 million or 2.7 cents per share compared with the same half in fiscal 2022.

Bega has lowered full-year EBITDA guidance toward the bottom of the unchanged AUD 160-190 million range as a result. We lower our fiscal 2023 EBITDA forecast by 12% to AUD 162 million. However, we retain our AUD 5.20 per share fair value estimate given that the scale of the downgrade has a relatively small impact on our longer-term forecasts. The second-half outlook is much stronger, which is set to benefit from the full year impact of higher branded prices and some relief on costs. We expect this to flow into improved profitability from fiscal 2024. The company will pay an AUD 4.5 cent fully franked interim dividend, down only 18% on last year, which reflects in part management’s confidence in the outlook and the margin improvement already embedded. Bega continues to focus on cost control, exemplified by the recent decision to close the Canberra fresh dairy products operations.

Shares remain undervalued. We believe margins are likely to recover as cost pressures abate, cost efficiencies are won, and lagged price increases take effect. While Bega’s brands don’t warrant an economic moat for the company, we believe they are strong enough to underpin acceptable returns on invested capital in the long run. And that’s enough to see material improvement in Bega’s profitability.