Get Eager for a Little Bega

Last week investors of Bega (ASX:BGA), well known for the block of cheese sitting in the door of your fridge would have noticed a sharp rise in the share price. There were some well publicised reasons for this which we will touch on shortly but Unfortunately, we could not get stock quote ASX: BGA this time. has been a stock on my watch list for a while.

The stock has been tracking along a steady growth trend, having gained 230% (27% annualised) since it listed late 2011. During that period the group has reported modest dividend yields ranging from 2.14% to 5.63%, although the latter was recorded way back in 2012. Getting to the all-important profit the group has reported a normalised figure of $22m, which was down 26% from the same period last year.

Now why is a company with those digits getting all that buzz? Well Blackmores (ASX: BKL), which has been discussed here previously announced they were not content with just flogging magic vitamins and where going to have a crack at the lucrative milk formula market in China. This is a big deal for BKL, as they hope to mirror the growth of another Blue Lake Invest favourite Bellamy’s (Unfortunately, we could not get stock quote ASX: BAL this time.). Now, this article is about Bega, I can hear you all screaming “Mick, get back to Bega”. Well okay.

When Unfortunately, we could not get stock quote ASX: BKL this time. announced they were going down this path, they slipped in that they have reached an agreement with Bega to produce it. BKL join BAL as key customers for Bega, making Bega quite prominent in the China milk formula trade. It was this announcement that saw the price jump a sharp 19% jump in just three days of trading.

The excitement and buzz around this announcement is speculation, we have no vision to the actual numbers, forecasted volume of trade, average revenue per unit etc. But looking a little deeper we can see why there is value in this. BKL have demonstrated having strong networks in the formula hungry China, networks which should be leveraged to introduce the product to the shelves of that booming middle class China. And if they can replicate some of the BAL success, BGA will stand to benefit.

Having a look at the profit you’d probably call out FY15 saw them move backwards. This is attributed to volatile commodity prices in the dairy industry. Most exposed to the record low prices in products with low to no value add processing. Clearly a product that is getting exported to a country where you can’t get enough of said product will improve the yield of the group’s operations. And for those still concerned, the dairy prices are expected to rise, albeit short of the optimum price levels our hard working dairy farmers would like.

I suspect some investors in companies like BKL, BAL and now BGA are banking on a takeover offer. Australia’s food producing companies are expected to be in high demand from both consumers and investors worldwide. Dairy, a staple source of protein and calcium is central to the touted Food Bowl that we live in, and stands to benefit from increasing demand. And maybe at some point, those Overseas investors will go up the value chain from the massive dairy farms they are buying to get a piece of the processing plants.

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