At time of writing, Bellamy’s Australia Ltd [ASX:BAL] shares are trading at $7.43, marking a 6.89% decrease from yesterday’s market price, which was already down 6% from the day before.
These drops seem to be the aftermath of the AGM 2018 CEO presentation held yesterday — the details of which were released on the ASX.
While there was evidence of strong FY18 financial performance — including a debt-free $88 million in cash, 37% sales increase and EBITDA growth of 65% — it seems the inevitable FY19 drop, foreshadowed back in August, is causing investors to hold off.
The future plan looks tough
CEO Andrew Cohen admitted in his public address that ‘we do see a more challenging FY19 trading environment’.
The ongoing US-China trade war makes consumer-focused goods trade at a much slower rate, which Cohen also noted. The global trade tension is also creating competition ‘in terms of trade pricing for both local and global competitors’.
However, Cohen insists that these are only ‘short-term challenges’, which Bellamy’s has already endeavoured to combat.
The presentation was geared towards advocating a three-year growth strategy that focuses on the serious potential of the Asian market to up revenue by over $500 million by 2021, based on their interest in organic infant nutrition.
And this is not just an assumption. The report also revealed ‘74% of Chinese mothers aged 25–35 years old consider DHA [a probiotic in the formula] a “must have” for infant formula’.
But this plan comes at a cost. In order to set up the ‘right conditions for success’, Bellamy’s will have to run-down distributor trade inventory prior to its 2H19 launch, which will affect sales by up to $15 million. They will also set aside $6 million write-down provision in FY18 to ‘ensure a clean changeover’.
Where this leaves Bellamy’s
In spite of these necessary costs, Bellamy’s still have a positive outlook on the FY19 EBITDA margin. They estimate 2H18 levels of 22–25% growth, excluding any future write-downs that could be made for the upgrade.
Of course, that last sentiment leaves the final cost for this initiative open to negotiation, which may be leaving investors panicked.
Furthermore, with no sign of the trade war easing up any time soon, it looks as though FY19 will be a difficult year for Bellamy’s. Perhaps it’s the end of this three-year strategy which will show us the promise we’re looking for.
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