Why Bega Cheese Ltd shares are soaring

Credit: Steel Wool

Shares in cheese and dairy producer Bega Cheese Ltd (ASX: BGA) are up nearly 60% in just four months as the company continues to benefit from soaring demand for dairy-based products it is involved in manufacturing for Australia and overseas markets like China.

The company manufactures the popular Bega cheese brand in Australia, although like others suffered from weak dairy and milk powder prices throughout much of 2014 and 2015 due to oversupply issues as global inventories built on general dairy markets.

However, what has triggered the sharp share price rise in the second half of 2015 is the group’s potential to help distribute infant formula products to the likes of Bellamy’s Australia Ltd (ASX: BAL), Blackmores Limited (ASX: BKL) and US operator Mead Johnson Nutrition.

Through its wholly owned Tartura business, Bega has supplied Bellamy’s Organic with its infant formula product for the past 10 years and currently has a further six-year supply agreement that is likely to ensure strong revenue streams in the years ahead plus the funds to invest in additional capacity as necessary.

The business also recently announced an agreement with entrepreneurial vitamins manufacturer Blackmores to supply premium quality infant formula also destined for a booming Chinese market likely to fire up due to China’s ending of the one-child family policy.

Today Bega shares sell for $7.05 and are up 36% over 2015, although shareholders may look on green with envy at Bellamy’s shareholders who have enjoyed a staggering 743% share price rise in 2015, despite the fact that Bega manufactures a lot of Bellamy’s products.

There may be some disappointment at Bega over failing to really leverage the baby formula boom like Bellamy’s has done, although it would still appear to be sitting in something of an infant-formula sweet spot and appears to have learned lessons from the Bellamy’s agreement as it has negotiated an “equal share partnership” to develop nutritional foods for Blackmores.

Presumably an “equal share partnership” may give Bega some profit-sharing interest in the commercial results of its supply agreement with Blackmores, as Bellamy’s has shown the rocketing potential of baby formula products, while pocketing the sales profits itself.

In the future Bega itself could also potentially look to manufacture and sell its own baby formula brands if not inhibited by its current commercial agreements with the businesses it supplies, or other constraints.

For those looking for exposure to the infant formula market then Bega may be on a more attractive valuation than Bellamy’s or Blackmores, both of which may come under heavy profit-taking (selling) pressure leading into the reality of half-year results in February 2016.

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Motley Fool contributor Tom Richardson owns shares of Bellamy's Australia.

You can find Tom on Twitter @tommyr345

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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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