Yesterday Bellamy's Australia Ltd (ASX: BAL) surprised the market when it requested for the suspension of its shares to be extended until the middle of January, whilst it negotiates with key suppliers.
One of these suppliers is of course Bega Cheese Ltd (ASX: BGA) through its dairy manufacturing subsidiary Tatura.
Investors have been fearing the worst since Bellamy's first shocked the market with its business update on December 2. So much so that up until yesterday Bega's shares had fallen almost 19% since the release of that update.
But thankfully these fears appear to have been for nothing. Following in the footsteps of a2 Milk Company Ltd (Australia) (ASX: A2M), Bega Cheese's management released a statement yesterday to ease investor concerns.
Within the release the company advised that consumer demand for both standard and organic infant formula in China continues to be strong.
As Bega Cheese supplies infant formula to a number of customers, it would appear as though the problems Bellamy's is facing are company specific and not necessarily indicative of the whole industry.
Furthermore Bega Cheese Chairman Barry Irvin stated that:
"At our AGM and in our ASX release on 25 October I spoke about regulation change in China, a global supplier response to demand, the evolution of supplier channels to market, which now sees significant price discounting and signs of short term oversupply of infant formula and growing up milk powders. Whilst infant formula is important to us, Bega is a large multi-product dairy company with a strong ongoing profitable business in multiple categories. The guidance l gave on earnings at the Bega Cheese AGM is still our position."
As Mr Irvin points out, it is worth remembering that Bega Cheese is far more than just infant formula. Unlike Bellamy's it has a number of profitable businesses that diversifies its revenue. So the sell-off of its shares on the back of the Bellamy's business update seems like an overreaction.
Not that I'm a buyer of its shares right now. Whilst at 18x estimated FY 2017's earnings its shares look far more attractive than a month ago, the price depression in global dairy markets continues to hurt the company.
Because of this I expect earnings to be flat this year. The prospect of flat earnings is not something I find appealing, so I would much rather focus on companies with strong growth ahead such as a2 Milk.
