Key Points
- Bega Cheese shares have been downgraded to a hold rating by Morgans
- The food company’s recent trading update disappointed
- But that wasn’t the main reason for the downgrade
The Bega Cheese Ltd (ASX: BGA) share price is finishing the week in the red.
In afternoon trade, the diversified food company’s shares are down 2% to $5.22.
Why is the Bega Cheese share price sliding?
The weakness in the Bega Cheese share price today appears to have been caused by a broker note out of Morgans.
According to the note, the broker has downgraded the company’s shares from an add rating to a hold rating.
This was driven partly by a trading update at the end of last year which fell short of Morgans’ expectations.
What did the broker say?
Morgans commented: “BGA has provided FY22 underlying EBITDA guidance of A$195-215m. This was 2-11% below Factset consensus of A$219.3m and Morgans previous forecast of A$217.0m.”
This weaker guidance reflects significant COVID costs, supply chain disruption, and a highly competitive milk procurement environment.
But it isn’t the guidance that has been the main driver of the broker’s downgrade. The biggest impact was the need for Bega Cheese to pay improved returns back to farmers. And until this changes, the broker doesn’t expect the Bega Cheese share price to rerate to higher multiples.
Morgans explained: “While we can look through short-term COVID impacts, we remain concerned about the industry structure which has resulted in the continual need to pay improved returns back to farmers at the expense of shareholders.”
“Until Australian processing capacity rationalises or the Australian milk pool materially grows, the competitive environment for milk is likely to remain fierce and result in dairy processors effectively overpaying for milk. This means that upside from favourable operating conditions is likely to be partially paid away to the dairy farmers as opposed to shareholders benefiting from the earnings upside. For this reason, despite its growing branded business (~80% of sales), BGA is likely to trade at a discount to its FMCG peers,” it concluded.
The post This needs to change before the Bega Cheese (ASX:BGA) share price rerates appeared first on The Motley Fool Australia.
Should you invest $1,000 in Bega Cheese right now?
Before you consider Bega Cheese, you’ll want to hear this.
Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now… and Bega Cheese wasn’t one of them.
The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.
*Returns as of January 13th 2022
More reading
- Why analysts slapped buy ratings on these ASX shares
- Would you like cheese with that? A look at some of Twiggy’s highest profile ASX investments of 2021
- These were the best performing ASX 200 shares last week
- ASX 200 falls on Friday but records 13% gain in 2021
- ASX 200 (ASX:XJO) midday update: Big four banks fall, Bega Cheese jumps again
Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
from The Motley Fool Australia https://ift.tt/34Pz7dj
Leave a Reply