Australian dairy producer Bega Cheese Limited [ASX:BGA] share price has shed over 12% this morning, down 72 cents, at $4.96 per share, at time of writing. The nosedive comes as the company provided an update on overall business performance following the effects of severe drought currently gripping Australian farmers.
BGA engages in the processing, manufacturing and distribution of dairy and associated products to both Australian and international markets. Its products include natural cheese, processed cheese, powders and butter, packages cheese, cream cheese, powders and nutritionals.
Drought driving up costs
In this morning’s announcement, Bega acknowledged the impact the current drought is having on the Australian dairy industry and subsequent business performance.
According to Barry Irvin, Bega’s executive chairman, drought conditions and significantly increased farming costs are expected to cut the overall milk supply for the industry by more than 5%.
The company expects its overall milk intake in FY2019 will be with the range of 1.0 to 1.1 billion litres of milk, up from 750 million litres in FY2018.
Irvin said the overall reduction in the milk supply pool has created significant competitive pressure on pricing, with Bega’s financial performance in FY2019 expected to be impacted by this pricing pressure.
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Despite the pressure, Bega Cheese is forecasting a normalised EBITDA between $123 and $130 million for FY2019. This would be an increase from the FY2018 normalised EBITDA of $109.6 million.
What’s next for Bega Cheese?
While today’s sour news has clearly left a bad taste in the mouth of investors, Bega is positioned to weather the effects of the drought relatively well.
Along with this morning’s performance update, Bega also announced the successful completion of the acquisition of the Koroit dairy plant or $250 million, purchased earlier in the year.
The Koroit Facility, located in one of Australia’s largest dairy regions, has provided Bega access to a milk pool of around two billion litres.
The company believes the seasonal inventory build associated with the Koroit acquisition and strong milk procurement will mean a more balanced H1 and H2 in FY2019 compared with FY2018 where approximately 65% of earnings were received in H1.
The Bega Cheese share price is down more than 32% for the past 12 months.
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