Hard time for big Aussie dairy producer

BEGA Cheese, Australia’s third largest dairy producer, has had its financial forecasts trimmed by an analyst as fierce competition forces processors to “overpay” for milk.

In a research report prepared for investors, Morgans analyst Belinda Moore said that operating conditions in the sector were very challenging.

“Falling milk supply and excess manufacturing capacity is leading to fierce competition for milk and causing dairy manufacturers to once again offer a farmgate milk price in excess of what it should be under more normal circumstances,” Ms Moore said.

Ms Moore said that the reduction in milk supply had resulted in fierce competition between dairy processors to secure enough volume, and they had effectively been overpaying for milk.

Ms Moore has cut her target price for Bega shares from $5.12 to $4.60.

Shares in the dairy group fell 3.6 per cent, or 17c, yesterday to $4.56.

“Despite the downgrades, we forecast strong earnings growth in fiscal 2020 due to higher global dairy prices, savings from shutting the Coburg site, growth in nutritionals, further improvement from Bega Foods and the scaling of the Koroit facility,” Ms Moore said.

“Bega should benefit from improved global dairy prices and its many growth projects.

“However, the breaking of the drought is needed to increase future milk supply, lessen competition issues and limit the need to overpay for milk.”

Ms Moore also added that Bega’s balance sheet would likely be stretched and needed to be very carefully managed with another tough year ahead.

In recent weeks record opening milk prices have been announced for the 2020 financial year amid strengthening competition.

Ms Moore said the relatively high local prices had conversely come at a time when global prices had weakened — although they were up materially from the year earlier.