Bellamy's: The upgrade cycle isn't over

About the author:

Belinda Moore
Author name:
By Belinda Moore
Job title:
Senior Analyst
Date posted:
10 September 2015, 10:35 AM
Sectors Covered:
Agriculture, Food & Beverage, Travel and Chemicals

Over coming years, we believe that Bellamy's (BAL) is well positioned to benefit from the increasing demand for organic food and beverage, price rises, increased organic ingredients supply, the launch of new products, entering into new distribution agreements in Australia and overseas and increased ranging with its existing customers.

This will have a twofold impact of driving top line growth and margin expansion driven by increasing scale and greater sales through low cost online channels.

We have made material upgrades to our forecasts and maintain an Add rating with a new price target. Clients should login to view the price target.

Strong brand name and premium status = pricing power

In our view, BAL's growing market share and premium status should allow it to push through price rises. BAL's top line growth should also be well supported as its percentage of Chinese sales rise given their higher than average selling price (A$40/tin through online channels and A$80/tin through the retailers, a significant premium to Australian sales at cA$22/tin).

With scale and a greater penetration of low cost channels eg. online, we believe that BAL's margins will rise driving greater than expected earnings growth.

We make another round of large earnings upgrades

Following a review of our model and the implementation of price rises and the lifting of our margin assumptions, we have increased our FY16/17/18 NPAT forecasts by 17%/29%&33% respectively. Our new FY16 NPAT forecast of A$19.4m represents 109% growth on the pcp.

We highlight that our forecasts do not include BAL entering new markets in South East Asia (eg. Indonesia and/or Thailand), the US, Europe and the Middle East or developing new products outside of the baby category, all of which are targeted by management over coming years.

Investment view

Trading on an FY16 PEG of only 0.3x, we believe that BAL is attractively priced for its growth profile. We continue to rate this company highly and believe that the upgrade cycle is far from over.

We reiterate our Add recommendation with a new price target (login to view price target).

More information

Morgans clients can login to access further analysis on Bellamy's Australia (BAL). If you are interested in becoming a client, please contact your nearest Morgans office.

Disclaimer(s): Analyst owns shares.

The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents ("Morgans") do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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