Bellamy’s Australia (BAL) has been an extremely popular stock since its IPO in August 2014. However, there are several key risks that are being overlooked by most analysts:
Bellamy’s is essentially a company that produces and/or acquires organic milk, and uses the services of companies such as Tatura (a wholly owned subsidiary of Bega) to turn it into baby formula, which is then sold under the Bellamy’s Organic brand. A decent amount of the milk solids used in BAL products are imported from Germany, as well as the feed for the cows during winter - this means that the product is much more like a commodity with a "made in australia" brand than anything else, and means that potentially, a cheaper and more effective competitor could arise in another country or state.
Bellamy’s Organic baby formula has emerged as the premium, and most popular Australian baby formula in the Chinese market. Analysts and investors have paid attention to this, especially due to the high level of media coverage. Incidents such as the emergence of the “
Daigou” (personal shoppers that buy baby formula in Australia and ship it to China) have led market sentiment to focus on the demand side of this company.
Thought must however be given to the supply side of the company. In our opinion Bellamy’s faces serious challenges in sustaining current growth for the following reasons:
- Tasmania is facing a serious drought, which the government is hesitant to label as a drought due to the “emotional impact”
- Tasmania’s “Basslink” cable which allows the state to import water and electricity from the mainland of Australia, is broken, and it still hasn’t been fixed.
- This is of special importance as most of the electricity in Tasmania is generated by a hydroelectrical scheme. This means the government has to prioritise electricity generation over agricultural irrigation.
- The Basslink cable generally supplies approximately 35-40% of the electricity in Tasmania.
- The Basslink cable won’t be fixed until March or April.
- Dairy farming requires large amounts of water. Generally speaking, dairy cows will consume over 100 litres of water per day.
- The Tasmanian government is already providing assistance to smaller dairy producers,
- When cows produce less milk, it becomes less economic to collect the milk from the farms.
- One of Tasmania’s main water reservoirs has hit the lowest level on record.
These factors cumulatively represent a substantial fundamental risk to Bellamy’s. They require large amounts of water, and Tasmania is experiencing a severe shortage of water. Unlike other parts of Australia, or the world at large, a water shortage also implies an electricity shortage is imminent. If there is poor rainfall through winter these conditions will be exacerbated, and Bellamy’s will struggle to grow supply.
The other major issue Bellamy’s has is a supply issue. Bellamy’s makes approximately 85% of its revenue from selling organic baby formula. The product is branded as Australian and Organic. It simply cannot extract enough organic dairy product from the Australian dairy industry to supply forecast demand.
http://www.examiner.com.au/story/3665247/declaration-could-have-emotional-impact/?cs=134
http://www.abc.net.au/news/2016-01-...ir-to-take-weeks-longer-than-expected/7088332
http://www.abc.net.au/pm/content/2015/s4392514.htm
http://www.delaval.com.au/-/Dairy-knowledge-and-advice/Cow-comfort/Drinking-areas/
http://www.examiner.com.au/story/3676796/100000-relief-package-for-milk-producers/?cs=134
http://www.examiner.com.au/story/3671911/supplier-on-hold-as-milk-drops-off/?cs=134
http://www.examiner.com.au/story/3660696/federal-help-on-hand-as-big-dry-hits-hard/?cs=134
