Rising Plant-Based Adoption Will Undermine Core Dairy Fundamentals

Key Takeaways

• Growing preference for plant-based alternatives and escalating climate regulations are eroding traditional dairy demand and raising Bega Cheese's operating costs.
  
• Intensifying competition, commodity price volatility, and private-label dominance are challenging Bega's pricing power, margin expansion, and long-term earnings predictability.
  
• Strong cost control, brand innovation, international expansion, and disciplined investment support Bega's stable growth, improved margins, and enhanced market position.

Catalysts

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

• Rising consumer adoption of plant-based and alt-dairy products continues to erode long-term demand for traditional dairy, placing sustained pressure on Bega's core dairy volumes and revenue growth, particularly as innovation in plant-based alternatives accelerates and global eating preferences shift away from animal-based protein.
  
• Intensifying climate regulations and emissions reduction targets are increasing compliance costs for livestock agriculture, and Bega Cheese faces a future of structurally higher operating expenses as a result, compressing margins and profitability, especially as retail prices remain under pressure from grocer and discount channel trends.
  
• Globalization and increased international competition are threatening Bega Cheese's pricing power and export market share, while the rapid expansion of dairy production capacity in the US and constrained European supply can disrupt commodity price stability, leading to greater volatility in earnings and limiting the company's ability to plan long-term.
  
• Bega's heavy exposure to commodity milk and input price volatility is likely to drive continued swings in gross margins, with second-half and future-year profits increasingly exposed to adverse shifts in global milk, fat, and protein prices, reducing predictability of cash flows and earnings.
  
• Difficulty in differentiating and premiumizing cheese and spread brands in an increasingly commoditized and private-label dominated retail landscape will constrain pricing expansion, putting pressure on revenue and stalling net margin improvement, even as marketing and innovation expenditures rise to maintain relevance.

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 1.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.0% today to 2.2% in 3 years time.
• The bearish analysts expect earnings to reach A$83.8 million (and earnings per share of A$0.27) by about July 2028, up from A$34.2 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 19.9x on those 2028 earnings, down from 46.4x today. This future PE is lower than the current PE for the AU Food industry at 24.5x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.41%, as per the Simply Wall St company report.

Bega Cheese Future Earnings Per Share Growth

Risks

• Bega's ongoing success in driving significant cost savings, operational efficiencies, and site optimizations has not only offset most cost inflation but is expected to continue over coming years, creating the potential for improved net margins and cash flow.
  
• Expansion and innovation in high-growth categories like protein products, better-for-you lactose-free, and no sugar added offerings, as well as strong product launches in core brands, position Bega to tap into secular consumer trends and may result in stable or growing revenue streams.
  
• The focus on international expansion-particularly in Southeast Asia, the Middle East, and China-leverages rising demand for premium and dairy products in these regions, supporting long-term revenue and branded EBITDA growth prospects.
  
• Investment in brand strength, marketing support, and collaborations with other major consumer brands is enhancing Bega's pricing power and market penetration, which can help protect or grow market share and ultimately expand operating earnings.
  
• Bega's disciplined capital allocation, robust balance sheet, declining leverage ratio, and ability to fund growth and efficiency initiatives with a strong payback period positions the company for strengthening return on funds employed and overall earnings growth into 2028.

Valuation

• The assumed bearish price target for Bega Cheese is A$4.53, which represents two standard deviations below the consensus price target of A$6.04. 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$7.0, 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$83.8 million, and it would be trading on a PE ratio of 19.9x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of A$5.2, the bearish analyst price target of A$4.53 is 14.7% 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.