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Bellamy’s Australia to get creamed following update

Credit: Bellamy's

It’s more anxious waiting for shareholders in Bellamy’s Australia Ltd (ASX: BAL). At least they can take some comfort from this morning’s company update, although it’s unlikely to save the stock from an ugly sell-off when it does resume trading on 24 July. The recent trading halt will allow management time to assess the shock license suspension for its Chinese plant, Camperdown Powder, on its recent capital raise.

The Chinese authorities suspended Camperdown’s Certification and Accreditation of the People’s Republic of China (CNCA) license last Friday in response to a “third party” complaint relating to “historical filings and records”, and previous quality issues relating to Camperdown’s processing facility.

As Bellamy’s only bought the facility three days before the license suspension, it’s safe to assume that the complaint isn’t directly related to the quality of Bellamy’s products. Also, CNCA has not made any adverse findings against Camperdown and the agency is only making enquires at this stage.

This development certainly won’t send Bellamy’s to the wall and should have a fairly limited impact on its profits, as the suspension of Camperdown won’t impact on the production of the company’s Australia and Chinese label products. It will only impact on the manufacture of third party products at that facility.

Bellamy’s only intends to start producing its own products at Camperdown from the second half of FY18 and this means it should have sufficient time to seek a satisfactory outcome with CNCA.

While all of that is good news, investors are still likely to flee when the stock resumes trading later today. The license suspension may not be due to mismanagement on Bellamy’s part, but it certainly brings into question its due diligence process when it was undertaking the $28.5 million acquisition.

Management had also just completed a 5-for38 entitlement offer and will need time to assess the impact of Camperdown’s suspension on the capital raise as I am sure there will be a few angry investors who would be asking for their money back.

Indeed, acquisitions can be deadly. Look at law firm Slater & Gordon Limited (ASX: SGH) if you need a reference. Ironically, I have a feeling lawyers from Slater & Gordon (and its rivals) will be circling Bellamy’s for a potential class action.

As I said, Camperdown isn’t in the same category as Slater & Gordon’s Quindell acquisition (at least it doesn’t seem to be at this stage), but given that Bellamy’s has suffered a string of high profile setbacks, this latest debacle is a very bad look for the company.

The incident also highlights the complexities of operating in China with other ASX-listed companies, such as casino operator Crown Resorts Ltd (ASX: CWN), running foul of its relatively opaque laws.

The other important question investors will be asking is whether Bellamy’s will need to do a write-down of its brand-new acquisition. We won’t know that answer until later as it really depends on when Camperdown can return to normal operations and if the suspension will have any lingering impact on customer confidence.

This may prove to be a good buying opportunity for Bellamy’s stock for those with a long-term view, but I think the stock belongs in the “too hard” basket for now. The fact is, there are better opportunities elsewhere and you only need to look below for some ideas from our experts at The Motley Fool.

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Motley Fool contributor Brendon Lau has no position in any stocks mentioned. The Motley Fool Australia owns shares of Crown Resorts Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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