Plant-Based Shift Will Challenge Dairy Profits Despite Efficiency Moves

Key Takeaways

• Shifting consumer preferences and regulatory pressures threaten revenue and margin growth for Bega's core dairy offerings, despite new product launches and portfolio expansion.
  
• Supply chain volatility, integration challenges, and retailer consolidation could further erode profitability and disrupt long-term earnings stability.
  
• Strategic investments in automation, product innovation, and international expansion enhance profitability, drive premium segment growth, and support long-term financial strength despite industry volatility.

Catalysts

Bega Cheese Limited receives, processes, manufactures, and distributes dairy and other food-related products in Australia.

• The accelerating adoption of plant-based and alternative protein products is expected to reduce long-term demand for traditional dairy, raising the risk that Bega Cheese's planned portfolio expansion and investments in protein-centric dairy offerings will fail to deliver the anticipated revenue growth.
  
• Increasing health consciousness and regulatory scrutiny around high-fat and processed foods could cause a sustained erosion in sales volumes for the core branded dairy portfolio, leading to downward pressure on both revenue and net margins even as new value-added products are launched.
  
• Persistently high reliance on the fresh milk supply chain leaves Bega vulnerable to input cost volatility, such as ongoing inflation in feed, utilities, and raw milk, which risks compressing gross margins and undermining forecasted long-term earnings growth.
  
• Execution risks remain elevated from recent site closures, supply chain transformations, and integration of acquired businesses, making it likely that operational disruptions and inefficiencies will erode expected cost savings and depress future net earnings.
  
• Intensifying consolidation among major food retailers is likely to further increase their bargaining power, resulting in greater downward pressure on supplier pricing and branded product margins, which threatens to stall or reverse the anticipated improvements in company profitability over the coming years.

Bega Cheese Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Bega Cheese compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Bega Cheese's revenue will grow by 2.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -0.2% today to 2.5% in 3 years time.
• The bearish analysts expect earnings to reach A$93.9 million (and earnings per share of A$0.31) by about August 2028, up from A$-8.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 17.7x on those 2028 earnings, up from -202.9x today. This future PE is greater than the current PE for the AU Food industry at 16.3x.
• Analysts expect the number of shares outstanding to grow by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.48%, as per the Simply Wall St company report.

Bega Cheese Future Earnings Per Share Growth

Risks

• Bega Cheese's investment in automation, site consolidation, and process efficiencies is expected to lower cost of goods sold and drive sustainable improvements in net margins and earnings, directly supporting long-term profit growth.
  
• The company's strong focus on value-added, high-protein, and functional dairy innovation aligns with ongoing consumer trends toward health and wellness, suggesting revenue acceleration in premium and differentiated product segments.
  
• Expansion of international branded business and targeted investments in fast-growing Asian and Middle Eastern markets give Bega access to significant new revenue streams and diversification away from the mature domestic market, supporting multi-year top-line and earnings growth.
  
• Significant deleveraging and a balance sheet now positioned for further organic and inorganic growth provide strategic flexibility for acquisitions or investment in high-return projects, supporting potential increases in return on equity and shareholder value over the long term.
  
• The company's ability to maintain and grow milk supply despite regional industry decline, and its improved mix of higher-margin products within bulk operations, demonstrates a resilient supply chain and pricing power, supporting stable or improving gross margin and normalized EBITDA even amid volatile commodity prices.

Valuation

• The assumed bearish price target for Bega Cheese is A$4.5, which represents two standard deviations below the consensus price target of A$6.1. This valuation is based on what can be assumed as the expectations of Bega Cheese's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$7.2, and the most bearish reporting a price target of just A$4.4.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$3.8 billion, earnings will come to A$93.9 million, and it would be trading on a PE ratio of 17.7x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of A$5.65, the bearish analyst price target of A$4.5 is 25.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.