Are Bega (ASX:BGA) shares a bargain right now?

The dairy food manufacturer’s stocks tumbled in May, so is this the perfect buying opportunity? One expert gives his take.
The post Are Bega (ASX:BGA) shares a bargain right now? appeared first on The Motley Fool Australia. –

This year Bega Cheese Ltd (ASX: BGA) shares had been on fire… until last month.

Starting the year off at $5.21, the food manufacturer completed its acquisition of Lion Dairy & Drinks in January then climbed 25% to be as high as $6.51 in April.

But the stock tumbled in May to end up as low as $5.75 to start this month.

So is the current dip a time to buy, or are there long-term issues with the company?

Fairmont Equities managing director Michael Gable thinks the former.

He said in his blog this week that Bega shares were currently selling on a 1-year forward price-to-earnings ratio of 20, which wasn’t any higher than when the business faced more margin pressure.

“The current multiple is not demanding in the context of a 3-year EPS growth of ~35% on a CAGR basis over the medium term (FY21-24),” said Gable.

“The strong overall EPS growth profile underpinned by a near-doubling of EPS in FY22 to reflect the full-year earnings contribution (and synergies) from the LD&D acquisition. The latter is expected to improve Bega’s earnings visibility and growth profile over the medium term.”

Bega’s financial outlook looks good

Despite it falling out of favour with investors, Gables reckons Bega is in better financial shape than ever.

“Results for the six months to 31 December 2021 showed evidence of operating leverage, with group EBITDA margin improving from 6.5% in 1H20 to 10.3%,” Gables wrote on his blog.

He added that operating leverage will be further boosted with “attractive returns” from a new lactoferrin facility. 

“The rationale for expansion into lactoferrin is supported by the fact that lactoferrin prices are strengthening on the back of higher levels of demand for Infant Milk Formula from new and existing nutritionals customers.”

Lion acquisition improves the business

According to Gable, the buyout of Lion Dairy & Drinks has “the potential to improve overall margin” in the medium term. 

“LD&D is considered a good strategic fit for Bega, as it diversifies Bega’s dairy exposure, increases scale, and accelerates the shift towards branded products. 

“The significance here is that branded products offer stronger organic growth rates, higher margins and higher returns.”

Already the new arm is a big contributor.

“Including the first full year of contribution from the LD&D acquisition, LD&D is expected to account for ~47% of overall sales and ~39% of overall EBITDA in FY22.”

Bega’s gearing expected to reduce

The food business’ debts are forecast to decrease in proportion to its earnings.

This had occurred even before Bega completed a $400 million equity raising to fund the Lion acquisition, according to Gable.

“Gearing — on a net debt to EBITDA basis — had reduced from 2.9x to 2.0x, despite the seasonal working capital build, which is typical of the 1st half,” he said.

“Given that part of the purchase price for the LD&D acquisition was funded by debt, the gearing level is expected to increase above ~2.0x in FY21, but remain below the leverage covenant of 3.0x. Importantly, gearing is expected to fall in FY22/23 to reflect the contribution from the LD&D acquisition and the potential divestment of some non-core LD&D operations.”

Bega shares were up 2.48% at Friday’s close, trading at $6.19.

The post Are Bega (ASX:BGA) shares a bargain right now? appeared first on The Motley Fool Australia.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of May 24th 2021

More reading

What ASX shares might be affected by the UK-Australia trade deal?

Kraft to cough up $9.25m to Bega Cheese (ASX: BGA) over peanut label
2 compelling ASX shares rated as buys by brokers

Tony Yoo 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.

Trade The World Anywhere & Anytime!

Mobile app platform with over 50,000 global listed securities across 12 markets (over 70% global market capitalisation), right from your Android or iOS device.

Integrated with exclusive trading idea and investment analysis tools to help you find actionable insight on virtually every financial instrument across our 12 global markets, to help you optimise your trading strategies.

Refer Your Friends

Tell your friends about Monex and gift them FREE access to our trading tools.

We respect your privacy and will only send this one email notification to your friends. 

Share With Your Friends

Share on facebook
Share on twitter
Share on linkedin

Monex Trading Tools Access and Usage Terms

The Monex Trading Tools (referred to as ‘tools’ hereafter) are available to you inside your client portal;

To activate access to the tools, you must have a verified and approved trading account and have made a deposit of at least AUD $1000.

An active and funded account with a positive trading balance is required to continue to have access to the tools;

Although the tools are available to you indefinitely, Monex Securities may at it’s discretion disable access to the tools in the future;

Monex securities reserves the right to change these terms and conditions from time to time, as it sees fit, without notice.

Important Notice
iOS & Android App - 12 International Markets & Over 70% Global Market Cap. $0 Brokerage On US Trades. Click Here!