Strong start to FY18 underpins a material earnings upgrade
Bellamy's Australia (BAL) has announced a strong start to trading in FY18, highlighting continued improvement in the momentum of its core business across all products, customers and geographies. Management now expects FY18 revenue growth of 15-20% (from 5-10%) and a 17-20% EBITDA margin (from 15-20%). We note guidance is for BAL's core business only and excludes the recently acquired Camperdown business. Management's expectations for Camperdown remain unchanged and it is expected to report a loss in its first year of A$1-2m due to further investment in the business. The Camperdown business is expected to be profitable in FY19. Guidance (excluding Camperdown) implies FY18 revenue in the range of A$276.2m-288.2m (A$240.2m in FY17A) and EBITDA of A$47.0-57.6m. When the Camperdown loss is included, the FY18 EBITDA guidance range is A$45.0-56.6m (A$42.8m in FY17A).
Consistent with its previous guidance, 1H18 revenue is expected to be higher than 2H18 due to the impact of seasonality and a delay in CFDA registration which will see all Chinese label sales occurring in 1H18. We understand that BAL is on track to lodge its CFDA application before Christmas.
We set our FY18 forecasts at the top end of guidance
We have upgraded our EBITDA forecasts by 24.6% in FY18, 26.7% in FY19 and 28.0% in FY20. We believe new management's track record of surprising on the upside supports our forecast, and our numbers could still prove conservative if momentum in the core business continues to exceed expectations.
The recent trading update is consistent with our industry feedback that demand for BAL's product is strong. Management is doing a good job implementing its turnaround plan and the robust recovery in sales highlights the strength of the Bellamy's brand. In our view, to upgrade FY18 guidance this early in the financial year suggests the company is performing strongly, particularly when FY18 is expected to be a transition year and 2H18 trading will likely be impacted from regulatory changes in China. However, we believe that the upgrade is already factored into its share price.
We recognise that management's track record could suggest that the upgraded guidance may prove to be conservative, but with Bellamy's trading on an FY18F PE of 29.6x, we see BAL as fairly valued in the short term.
We retain our Hold recommendation.
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Disclaimer(s): Analyst owns shares.
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