Good results which the market has reacted well to [ASX announcement]. Key takeaway from this and investor presentation, for me, is the unexpected reduction in net debt. Prudent management in uncertain times.
Of course, if I owned the lot I reckon I’d have taken the $30 million in dividends and just rounded up that yearly debt repayment to $90 million. But, we all know Australians love their fully franked dividends — especially in this sort of space.
Meanwhile, Bega also appears to be transitioning nicely into a branded products company. This is especially good to see the potential for some resilient pricing power in such a low-margin industry — particularly because of the remaining debt on the books. It also shows Bega achieving some diversification away from the cyclical dairy/milk market.
This will present its own challenges of course. I mean how long can we really expect Australians to tolerate our ‘Master-of-the-Universe’ style domination of the supermarket lolly-ice water market? Surely, soon enough the man is going to have to come after us with anti-trust suits like we are Bill Gates in the late 1990s.
** Edit 8th of April 2020 **
Bega is one of the few companies I own whose levels of debt going into the current public health crisis I find unconcerning. On most future outcomes I foresee Bega’s revenue remaining at levels sufficient to service this debt as it continues to sell milk, cheese, peanut butter, and vegemite through Australian supermarkets.
I am also predicting a short-term tailwind in Bega’s share price following a ‘flight to safety’ of capital as the full economic impact of the current crisis takes its toll on the balance sheets of the remainder of most of the ASX for the rest of 2020.
I am overweight on this company in both my Strawman and personal portfolios. I will not be purchasing more and if my thesis plays out I plan to re-deploy any realised capital gains to other opportunities that present themselves.
A methodical valuation of Bega should account for both Bega’s gross margin with respect to milk products (how much Bega is paying for milk at the farm gate) and it’s growing share of the retail peanut butter market. I am still across neither. And both have been affected by drought, bushfires and the current international trade environment making any degree of certainty even more elusive.
My less than methodical valuation is that I see an upside of 20% from today’s share price. This is more than hope but is admittedly far less than the precise estimate of intrinsic value that every investment deserves. Nevertheless, my valuation for Bega is now $5.50.
-------------------------------------------
Chasing cheese down a steep hill
Cooper’s Hill, located on the outskirts of a small village outside of Gloucester, comes to life once a year in late May. It is the home of that famous annual race whereby a small group of people (mainly young men in T-shirts or rugby jerseys) chase a wheel of cheese down a sheer drop with a larger group watching on the sidelines – the spectators themselves having to hold on to guide ropes for balance. At the bottom awaiting one them – in addition to the cheese – is a small (relative to the risk) amount of prize money and the likelihood of not buying their own pints of beer that night. Waiting for many of the rest of them is St John Ambulance. Probably not the worst metaphor for the stock market in general.
Only I did swear off that particular dream a bit earlier than the one of finding riches on the ASX. My early internet research of the festival, using a dial-up modem, returned images of X-rays depicting ankles with upwards of 15 metal pins inserted. Apparently Doctor Foster was going to Gloucester to check in with his booming Radiology Clinic. So the Cheese Roll and Wake may just be another dream that did not come to fruition, but honestly my regrets about this are few and the skeletal structures of my feet are intact.
Following a different prize cheese, Bega, down the hill feels far less dangerous however. Today I double down on this company. This is despite the current price being well below their current attempts at raising capital from retail investors to pay off debt used for the recent acquisition of the Koroit Facility (the bulk of it – $200 million of the $250 million – has already come from institutional investors) [1]. It remains a very long play for me. Despite the concerns of others about this situation [2], I am thoroughly unworried about whether they can find the money to pay off that debt immediately.
I mean, it’s the cheese and dairy business, it’s far from an extreme sport. These guys have been doing it for a long time and I don’t think impulsive and unresearched decisions form part of managing that business. I have confidence in their ability to deal with a temporary capital management issue. I’m also buying in again in the full knowledge that I have not won this race to the bottom. Let the average returns eventually start to roll up a gentle slope. It’s all just part of the ageing process.
Kloak and Dagger Tradekraft
This has been a bizarre story of disguises and supermarket intrigue [1]. If you shop at Woolies or Coles then you, like me, started buying Bega peanut butter without realizing it. If you are the office manager of a mid-sized business located at an industrial park – or you can only get out of the house between 6pm and 9pm on a Sunday night – then you may buy your peanut butter at either Officeworks or an IGA and will thus still be eating Kraft peanut butter. If you shop at Aldi then you are neutral like Switzerland (the likely provenance of your peanut butter) on this issue, and you can just watch the whole circus from the sidelines as you slather that organic stuff on your non-GM modified vegetable garden-grown celery.
Today [Wed 01/05/2019] Bega has announced the Federal Court has confirmed Bega’s right to dress its peanut butter in the fashion once dominated by Kraft [2][3]. Furthermore, it has determined that Kraft’s attempts to sneak back into our pantries, in its own old clothes, through the odd back channels of Officeworks and IGA, was fundamentally not cool.
This appears to be confirmation that Bega’ purchase of the Kraft production line of peanut butter and Vegemite from Kraft’s Mondelez was something of a coup d’état for condiments in Australia. However, before today it looked like Bega had clearly pushed the envelope too far – in fact they had rolled the envelope up, sprayed it with starch and then poked the sleeping North American Kodiak bear with it – in modeling their peanut butter (a business that globally Kraft is still very much engaged in) so closely on that of Kraft’s.
It is hard to know exactly how the market will react in the coming days, suffice to say it will be an over-reaction. To my mind, given that there appeared to be nothing wrong with the overall sale to Bega, and that Kraft was effectively out of peanut butter in Australia, I thought any damages awarded against Bega in the event of an adverse judgment would have been minimal. In any event, this is the welcome departure of a wasteful distraction, and to that I offer my toast to Bega.
I just continue to wait for Bega to start trending in the upward direction that I think Bega should be heading anyway.
Staples – An illusion of safety?
I am well behind in my planned reading on valuation techniques [Overdue homework from September 2018]. When I finally get there Bega will be the first company I attempt a comprehensive valuation on. I expect it will be one of the easiest of my holdings for a first try, at least in part because it is actually profitable.
I suspect that if there is any value to be had in Bega’s present market price that it may be some time away in coming to fruition. Last week Bega announced an earnings downgrade for this financial year [link to ASX announcement]. Even on the subsequently depressed market sentiment Bega’s P/E sits at a lofty 25 for a low-margin staple business. This is also with a debt that appears to be around the $300 million mark. Furthermore, the announcement also flags greater costs for this financial year as Bega expands their milk business.
The past couple of days I had been thinking there could be something of a macro tailwind coming for Bega as spooked investors from WAAX try to find refuge in staples. Any safety to be found in Bega even at current prices may be very relative indeed. Whether Bega presents an opportunity or something of a trap at current prices is a question of valuation for which I hope to soon have at least my own answer.
This is an admittedly lazy investment for me. My research is minimal and completely secondhand - in much the same way as one might submit an English essay/critique based on watching ‘the Crucible’ rather than reading the play...or more accurately still, knowing the plot of a famous movie one hasn’t seen but has memorised multiple clips from ‘The Simpsons’ which reference it.
I like Bega cheese (but again, full disclosure, I like most cheeses and am not brand loyal with it) and I like vegemite (which I am loyal too). I think millions of Australians are in the same boat. I bought a couple of months following media coverage of Bega’s aquistion of the company which owned the vegemite brand. I thought “that’s sounds like a good idea and apparently they had the money to do it. I mean, I’m pretty sure I couldn’t afford the ‘Vegemite’ brand, that must have cost them thousands. Vegemite & cheese is a match made in heaven and these guys are going to take on the world like they’re Holmes & Watson.”
I’m interested in hearing about both the Bear and the Bull case from people who have actually read the primary source financials. Tell me the reasons why or why not this fool and his money may be quickly (or slowly) parted.
