MG Unit Trust loses Woolworths Limited contract to Bega Cheese Ltd: Time to sell?

Credit: Steel Wool

The share price of MG Unit Trust (ASX: MGC) dropped at the market open following an announcement that Murray Goulburn Co-operative had lost a key Woolworths Limited (ASX: WOW) supply contract.

Murray Goulburn’s management revealed that following a competitive tender process Woolworths has selected a new supplier to manufacture and pack a range of its private label products which include cheese, UHT, adult milk powder, and cream.

The loss of the contract is by no means trivial and it comes as no surprise to see the share price down by over 6% this morning. Management expects the annualised revenue loss to be approximately $108 million.

However it is worth pointing out that it believes the financial impact on FY 2017 will be limited given the timing of existing contracts completing. Management plans to adjust future manufacturing planning to redirect this capacity to other markets, limiting future revenue and earnings impacts.

Still this is not the news that shareholders wanted to hear today with its share price already down over 50% in 2016. With profits likely to fall next year and its shares changing hands at 16x trailing earnings, unfortunately they are lacking a catalyst to take them higher in my opinion. For this reason I would hold off an investment in Murray Goulburn at this point in time.

“One man’s loss is another man’s gain” certainly springs to mind with this news. The winner of the tender process was Bega Cheese Ltd (ASX: BGA) and as a result its share price has been soaring as much as 8% in morning trade.

Finally, investors that have sold their Murray Goulburn shares might want to consider these three fantastic blue chip shares now. Each pays a solid dividend, has a strong business, and could produce share price gains in the months ahead in my view.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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