They were doing so well. Bega Cheese [ASX:BGA] reached a mile stone of 1 billion in market capitalisation last year. Shareholders couldn’t be happier with Bega boss, Barry Irvin. But it just took two months for the company to be hit with its first hurdle in 2016.
Coles Supermarket told Bega it intends to change suppliers. Instead of renewing Bega’s cheese contract Coles has decided to go with Murray Goulburn. The cheese contract will add $130 million to Murray Goulburn’s already successful milk business.
The change in suppliers was definitely a blow to Bega. And as soon as markets opened, Bega’s shares started to drop. Shares have traded down more than 11%. But Bega isn’t all too worried about the change. They are excited about their new venture which could see share soar.
Source: Google finance
Waste not, want not
After five years of supplying Coles with its ‘own brand’ cheese, Bega has stored up large quantities of milk. This milk was intended to supply their renewed contract with Coles in 2017. However now it seems Bega will have to use their excess inventories for something else. And that’s exactly what Bega intend to do.
Bega see this as an opportunity. They recently teamed up with Blackmores [ASX:BKL] to try and move into emerging markets. Bega is hoping to capitalise on the growing Asian markets. Specifically baby formula.
Both companies are excited to grow their market presence in baby formula. And now Bega can devote their full attention to the project. Companies such as Bellamy’s Australia [ASX:BAL] and A2 Milk [ASX:A2M] have already profited off growing Asian demand. And now Bega, with Blackmores, wants in.
‘We’re very excited about the partnership with Bega, ‘said Blackmores CEO, Christine Holgate. Both Bega and Blackmores believe they can beat the young start-ups with experience.
‘Together Bega and Blackmores brings almost 200 years of experience. We’ve got 83 years of experience in nutrition and they’ve got almost 120 years’ experience in milk processing, so we think (a deal between) these two iconic Australian companies is really powerful and really exciting,’ said Holgate.
And she could be right. Asian demand for dairy products and baby formula has skyrocketed in recent years. And new companies are popping up to profit from this trend. But if they can do it, why couldn’t veterans like Bega and Blackmores do it better?
From the graph below we can see Asia’s growth in demand for milk related products.
The figures seem to rapidly increase after 2008. This coincides with the 2008 milk scandal in China. The scandal involved tainted baby formula which killed six infants and hospitalised thousands. A few years before a similar incident occurred with watered down Milk. The resulting milk killed 13 infants due to malnutrition.
Ever since then the Chinese have steered clear of domestic milk related products. But they’ve still had to get their milk products from somewhere. Australia seemed like the logical option. It was close, clean and had a good reputation. But if we look at the figures, it’s even more convincing.
The amount of babies born has stayed constant but infant formula sales have exploded. And there is one logical answer. China.
Source: IRI-Azte, ABS
There no question that Bega are getting into a bull market. Infant formula will continue to see high growth in future. But how successful they will be is still uncertain.
Junior Analyst, Money Morning
PS: Bega could be a great performing stock for 2016. But why leave your money up to chance. Money Morning’s Kris Sayce has already done the hard work for you. Kris has sifted through the Australian market so you don’t have to. In his findings, Kris has come up with the five best stocks on the ASX for 2016.
Kris has close to 20 years’ experience in analysing stocks. His experience ranges from brokerage houses to leading wealth management firm. But Kris has found his home at Port Philip Publishing. Kris understands that investing your money isn’t easy, especially in a declining market.
In Kris’s report he will show you a sneaky way to play the Australian property market. And he’ll also tell you why 2016 will be the ‘retail revival’. To get your free report today, click here.