Better-than-expected 2H17 trading update
Bellamy's Australia (BAL) recently said that its sales and profitability has improved. 2H17 revenue is now expected to be A$121m, taking full-year FY17 revenue to approximately A$239m. This is 2.3% above our previous revenue forecast.
New guidance implies that FY17 revenue has fallen only 2.3% on the record FY16 result, which is a credible outcome given the challenges this financial year. 2H17 EBIT is now expected to be at the upper end of previous guidance of between A$16.5-A$20.5m. This number also includes A$2.5m of Fonterra shortfall payments, which will no longer exist going forward. This implies a 4.1% upgrade versus our previous forecast. Based on new guidance, FY17 underlying EBIT will be down approximately 28% on FY16.
Pleasingly, 2H17 sales and EBIT are stronger than 1H17. This is a solid result considering the first half benefited from China's Singles Day and the second half is somewhat adversely impacted by Chinese New Year.
BAL has been cashflow positive since March 2017 due to increased sales and an improving inventory position. Prior to impacts of the acquisition and entitlement offer, BAL was net cash positive as at 30 June 2017.
We upgrade our forecasts but also note the downside risks
We have increased our NPAT forecasts by 4.2% in FY17, 5.0% in FY18 and 4.8% in FY19. We now forecast underlying FY17 NPAT to fall 29% on the previous corresponding period. We expect earnings growth to resume in FY18 but see this year as somewhat of a transition year. Assuming the CNCA suspension is removed and BAL receives CFDA registration, FY19 should be a particularly strong year for earnings growth as Camperdown scales and the turnaround initiatives are complete. Additionally, BAL should be a beneficiary of regulatory change in China which will substantially reduce the number of brands trading in China.
Worst case, if Camperdown's license is cancelled indefinitely, it would impact the strategic rationale of the acquisition and its likely valuation. It could also impact c16% of sales from FY19 and an additional c$2.5m of EBITDA (Morgans' forecast for Camperdown).
In the short term, Bellamy's (BAL) share price is likely to be volatile until there is greater certainty over the Camperdown CNCA licence. The suspension highlights the sovereign risk and uncertainty involved in conducting business in China. It also raises concerns about BAL's due diligence, despite management reiterating that they went through a rigorous process with the Camperdown acquisition. However, it is pleasing to see that earnings are heading in the right direction and management has clearly made solid progress on turning the business around.
Post forecast changes, we have increased our share price target but retain our Hold recommendation.
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Disclaimer(s): Analyst owns shares.
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