What Does Bellamy’s Australia’s Turnaround Plan Mean For Their Share Price?

Investing in growth stocks is one way to huge profits. These stocks are usually small, new companies with huge potential to growth revenues and earnings. Bellamy’s [ASX:BAL] was — and maybe still is — a growth stock.

In 2015, Bellamy’s rose to success on the back of Chinese demand for infant formula. The stock climbed more than 715% that year.

In December of 2016, the stock quickly fell over when the company was affected by regulatory changes in China, and had temporary troubles with supply chain management.

But this morning, Bellamy’s announced they had a turnaround plan.

Managing supply

The plan is to focus on supply.

First, the company is planning to acquire 90% of a dairy production and processing business, Camperdown Powder Pty.

Bellamy’s CEO, Andrew Cohen said:

The acquisition of Camperdown Powder strengthens Bellamy’s strategic position by increasing control of our supply-chain and the CFDA [Certification and Accreditation Administration of the People’s Republic of China] registration process.

The acquisition will help build our brand credibility with trade partners and consumers.

Bellamy’s has also renegotiated their supply agreement with dairy producer, Fonterra.

However, as a result of the plan, Bellamy’s expects to make a loss instead of a profit for the second half of 2017. As reported by The Australian:

Bellamy’s expects of an earnings before interest and tax loss of $9.5-$14 million, instead of the previously forecast EBIT profit of $9-$13 million for the second half.

But “normalised” EBIT guidance, which excludes the one-off costs, has been increased from $11-$15 million, to between $16.5 million and $20.5 million. The increase in normalised EBIT is due to the removal of a $5.5 million shortfall payment to Fonterra which is no longer payable under the revised agreement.

What now for Bellamy’s?

Bellamy’s shares are still in trading halt. We won’t know what investors think of the plan until Thursday, when shares resume trading. I’d suspect they won’t like the loss in the second half of 2017.

Yet, the company doesn’t look all that bad, based on their balance sheet. As of their first half report, Bellamy’s had $169.2 million in current assets. It’s more than enough to cover short-term and long-term liabilities.

You wouldn’t want to jump in on that fact alone. But it tells you that Bellamy’s isn’t on the verge of going bust. And since the stock is trading at far lower levels, considering it as an investment might not be the worst idea.

Regards,

Härje Ronngard,

Junior Analyst, Money Morning

PS: If you’re interested in investing in smaller growth stocks, check out Sam Volkering’s new report, ‘Top Three Aussie Small-Cap Stocks’.

Sam is a small-cap guru. He’s managed to find growth in a market where many investment professionals simply can’t find any.

To get your free copy of Sam’s report, click here.


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