- BAL's FY18 result was in line with guidance, although slightly ahead of consensus. The strength in cashflow and the balance sheet was the highlight of the result.
- Guidance was more conservative than expected due to the delay in receiving SAMR approval. However, management provided a solid FY21 revenue target to exceed A$500m (positive indication of its outlook). The new premium brand refresh and NPD will underpin growth from the 2H19 and beyond.
- We see achieving SAMR approval as the next key catalysts for the stock and are encouraged by the signs China's regulatory body is back to business.
- We maintain an Add rating with a new price target (Morgans clients only).
2H18 demonstrates strong margin expansion
BAL's FY18 underlying EBITDA rose 65% to A$70.6m, which was in line with the top end of its guidance range (A$60.4-73.6m) and above our forecast and consensus. The result included a A$1.4m loss from Camperdown (breakeven in 2H18). Underlying NPAT rose 67% to A$47.0m, ~4% above our forecast and consensus. Sales rose 37% and revenue from the core business was at the upper end of guidance. The gross profit margin rose to 39.6% (vs. 38.1% the pcp) and was 42.5% in the 2H18 largely due to renegotiated organic ingredient costs and manufacturing arrangements.
BAL remained disciplined in managing its cost base which enabled the EBITDA margin to increase by 370bps to 21.5% (was 23.3% in 2H18). Operating cashflow improved to +A$68.2m compared to an outflow of -A$45.7m in FY17, which was well above our forecast and was the highlight of the result. The strong cash generation saw the company end June18 in a net cash position of A$87.6m (or 76cps), a material improvement on the pcp.
Guidance disappoints but is understandable with SAMR delay
BAL provided FY19 guidance for revenue growth in its Australia label products of up to 10% and an EBITDA margin of 22-25%. Guidance implies FY19 Australian label revenue of up to A$332.2m and EBITDA of A$73.1-83.1m, +7.6-22.2% growth on pcp. Guidance excludes any China label sales.
We have downgraded our FY19/20/21 NPAT forecasts by 11.1%/14.9%/8.5% due to the softer guidance. However, we still expect strong growth over the forecast period from a full year benefit of lower ingredient costs (expansion in GP margins), the benefit of the brand refresh and reformulated infant formula products (higher selling prices), an expansion into China MBS, Camperdown achieving profitability and entering new regions (e.g. Vietnam).
Our FY21 revenue forecast is line with management’s target of greater than A$500m and we view the willingness to provide long-term guidance as a positive indication of the group’s outlook.
Investment view — Add recommendation
BAL's FY18 result highlights the commendable job management is doing in executing its turnaround strategy. With the foundations now in place, it is clear management is focused on leveraging its premium brand (point of differentiation) and building a sustainable business that can deliver solid growth over the longer-term. Its brand fresh and NPD is evidence of this. We see achieving SAMR approval as the next key catalyst for the stock and are encouraged by the signs that China’s regulatory body is back to business.
We maintain an Add rating and have increased our price target (Morgans clients can log in to view). This is in line with our revised DCF valuation which has benefited from BAL’s materially stronger net cash position and forecast FCF. The greatest risk to our view is that BAL does not receive SAMR approval. BAL said that it is confident in receiving approval.
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Disclaimer(s): Analyst owns shares.
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