Welcome to FY17 BAL’ers, FY16 was a tale of two halves, and we start FY17 in a bit of a rut.
What are the main concerns?
Short Selling - Now at 9.81% of total capital, that’s almost 10 million shares sold on the short side in 6 months. We are all asking the question, what do they know or believe is highly likely to happen to be so bold and relentless?
China Regulation - This caused a scare in April as according to the AFR, Chinese mothers apparently stopped wanting safe, clean, trusted food overnight. Inexperienced Chinese regulators threw the market into a spin and caused mass confusion. What was the end result? A new 11.9% tax, which has done nothing to slow demand for A2. Has there been an impact on BAL? H2 results will help us judge the impact here.
Competition - Several new (non-organic) brands launched into the domestic market, all aimed at the Chinese consumer. None seem to have had strong initial success. Blackmores formula seems to be stuck to supermarket shelves with glue and Devoldale’s Natrastart only moving a few tins on deep discount. The story of the last 12 months has been to rapid growth of A2 platinum, investors are asking the question, “has A2 taken market share away from Bellamy’s & is the best horse to back in the IF space”. We will have to wait for H2 results to get a clear picture here.
Supply - The availability of organic ingredients, or lack thereof, has been a worry for some investors. BAL management have so far proven to be highly skilled at sourcing organic produce to feed the demand for BAL products. Unfortunately much of this is imported from Europe, however, BAL are actively seeking to convert farms and aim for significant percentages of ingredients to be sourced from Australia & Tasmanian over the medium to long term (3-5 years). In terms of production capacity, their forward planning means that Darnum is producing and FY17 will see significantly increased quantities available to chase growth opportunities that have been parked due to lack of product to sell. Hopefully we won’t see empty shelves this singles day.
Overvalued - Consensus FY16 PE of 27, FY17 15.5. For a company growing revenue 100%+ p.a and EBIT 300%+, this seems like reasonable value. But the SP has had a huge run from $1 in Aug 2014 to $10 today, investors may think it was gone too far too fast and is surly a bubble about to burst. It is interesting to think that Bellamy’s has always been a fast growing company, as CEO Laura McBain mentioned in an interview with The Australian, “It’s what we do”. They have a commanding first mover advantage in the organic space and have built trust in the brand from the ground up. In 2010 BAL had revenue of approx. $7mill, in FY16 it’s likely to be $260mill 9all while spending about 2% of revenue on marketing). That is no accident; they are riding some very big and strong macro waves, on a small board, I’ll admit, so it can be a little scary. BAL has only started their expansion and growth in Asia, and many new markets are as yet untouched. Organic food is not going away, there will be significant opportunities for BAL to continue growing over the coming years. But yes, it would be nice to hear about some new markets or products soon.
BAL has a short and volatile history on the ASX, I’m looking forward to judging management on their performance during H2 FY16 in August and really quite excited about H1 FY17. If they can maintain the growth momentum nd capitalise on the growth opportunities , then the SP will be a lot higher in 12 months time and should outperform the ASX200 by a good margin.
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