Why the Bega Cheese share price was slammed today

Credit: Steel Wool

The Bega Cheese Ltd (ASX: BGA) share price has tumbled 11.5% to $6.25 in lunchtime trading on the ASX today after the company announced that it had lost a major contract with supermarket giant Coles.

In an announcement to the ASX today, the dairy company reported that Coles Supermarkets intends to change suppliers for its private label branded cheese manufacturing and packaging from January 2017.

Bega had signed the five-year agreement with Coles – owned by Wesfarmers Ltd (ASX: WES) in January 2012, but Coles will instead use Murray Goulburn to produce its ‘home’ brand cheese products. Murray Goulburn already has a 10-year agreement to supply milk for Coles’ private label in Victoria and NSW signed in 2014.

Murray Goulburn managing director Gary Helou, “We are delighted to extend our existing relationship with Coles and its customers to deliver the quality, taste and freshness of cheese made by Australia’s largest dairy farmer co-operative“. It helps the deal is also likely to be worth around $130 million in additional sales each year to Murray Goulburn.

The MG Unit Trust (ASX: MGC) share price was up 3.4% at $2.46. The trust gives investors access to Murray Goulburn’s profit on farm gate milk sales plus dividends equivalent to those paid to Murray Goulburn shareholders.

Bega says the change means the company will redirect milk supply to other value-added dairy products and markets including the ‘rapidly growing infant formula and nutritionals platform’. In 2015, Bega subsidiary Tatura Milk Industries signed a six-year deal with Bellamy’s Australia Ltd (ASX: BAL) to produce the latter’s highly-sought after organic baby and infant formula.

The company also announced an equal share partnership with vitamins and supplements king Blackmores Limited (ASX: BKL) to develop and manufacture a range of nutritional foods including high-quality infant formula through Tatura.

Foolish takeaway

Bega had revenues of more than $1.1 billion in the 2015 financial year, so the Coles contract is worth around 8.5% of total revenues. But given the company’s skinny margins, it is likely to make a big hole in Bega’s net profit from 2017 – unless the company can ramp up its other products such as infant formula before then.

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Motley Fool contributor Mike King owns shares of Wesfarmers Limited. You can follow Mike on Twitter @TMFKinga

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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