Why the Bellamy’s Australia Ltd share price soared today

Credit: Bellamy's

Bellamy’s Australia Ltd (ASX: BAL) has inked a manufacturing deal with dairy group FONTERRA ORD UNIT (ASX: FSF) (“Fonterra”) which Bellamy’s believes will add “significant additional capacity” to its current capabilities.

Indeed, demand for Bellamy’s organic products has skyrocketed recently, both locally and internationally. It is even predicted that up to 40% of product purchased locally is then sold online to foreign customers, many of whom feel more comfortable feeding their children formula that was produced in Australia or New Zealand (and that have the ‘organic’ status, like Bellamy’s).

In fact, demand has been so hot that parents have struggled to find any available stock at pharmacies or local supermarkets. Both Woolworths Limited (ASX: WOW) and Coles, owned by Wesfarmers Ltd (ASX: WES), were even required to enforce limits on how many infant-formula products could be purchased per transaction to better ensure formula was available for everyone.

Excess demand is a great problem for any business to have, and it has resulted in Bellamy’s shares soaring 570% over the last 12 months. However, it is a problem nonetheless which could see parents switch to other brands they can more confidently purchase at their local stores.

Bellamy’s recently signed a six-year agreement with Tatura Milk Industries Ltd, a wholly owned subsidiary of Bega Cheese Ltd (ASX: BGA), for the supply of infant formula, and backed that up today by signing another agreement with Fonterra.

Although details on the deal were scant, the “multi-million dollar strategic manufacturing agreement” is good news for Bellamy’s and will seamlessly add capacity “so that we can meet the growing demand for our certified organic formulas from Australian parents and our export markets.”

Fonterra’s premier infant formula manufacturing plant is located at Darnum, Victoria. While the agreement lasts five years, Bellamy’s said that manufacturing will commence mid-2016.

Should you buy?

Bellamy’s share price rose 5.5% early in today’s session to record a new all-time high of $11.39. At that price, the shares are by no means cheap, however, that’s not necessarily a reason to avoid them today.

Indeed, demand for the company’s products is skyrocketing and that trend should continue, especially in light of China’s recent scrapping of its controversial ‘one child’ policy. That should generate plenty of growth for Bellamy’s in the coming years which could see the share price rise even higher.

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Motley Fool contributor Ryan Newman owns shares of Bellamy's Australia. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia owns shares of Bellamy's Australia. 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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