One of Australia's best known cheese companies has given investors indigestion this morning. Shares in Bega Cheese Ltd (ASX: BGA) slumped 3.2% to $4.71 in late morning trade after management warned that full year profit will miss expectations.
Bega downgraded its 2014-15 full year normalised net profit to between $21 million and $24 million, compared with management's initial forecast of $25 million to $28 million.
A weaker-than-expected recovery in global dairy commodity prices is to blame. There was some firming in prices in February and March but the price gains could not be maintained and the weaker Australian dollar has done little to ease Bega's pain. Lower dairy prices not only impact on forward sales but have forced management to write down the value of its stock as well.
However, Bega is keeping a brave face and is telling investors that it has a positive outlook for the next financial year.
I am not sure if investors are willing to take that optimistic call on face value. After all, don't profit warnings come in threes?
Further, Bega has already disappointed investors back in February with a poor half-year result and trying to predict soft commodity prices is a mug's game. I suspect the stock is likely to re-test its 16-month low of $4.65 that it hit on March 10 and there's a real danger it could even fall lower given that the stock is trading on a 2014-15 price-earnings (P/E) of around 30x based on the new profit forecast.
Corporate interest in the sector could lend support but I am not sure why anyone would willingly pay such a lofty multiple for the stock in the face of an uncertain, if not challenging, outlook.
Bega tastes a little too rich for my liking and those looking for exposure to the agri-business industry should consider RuralCo Holdings Ltd (ASX: RHL) instead, as the group posted a robust set of numbers and is trading on a P/E of under 14x. If you are looking for another great investment idea, see what the experts at the Motley Fool have uncovered by signing up for free below…
