From $4 to $14: The Bellamy’s Australia Ltd turnaround

Taking a 3-year view, the Bellamy’s Australia Ltd (ASX: BAL) share price looks like nothing short of a roaring success.

source: Google Finance

However, the last 18 months make the story look very different.

source: Google Finance

While I’m sure there’s a lesson in there about investing for the long-term, there’s also the remarkable turnaround story of Bellamy’s, which at one point I thought was going bankrupt. Bellamy’s hit troubles when its Chinese sales were slower than expected, which led to a huge inventory blowout as the company was locked into ‘take-or-pay’ arrangements with its suppliers including Fonterra. (Editor’s note: A previous version of this article incorrectly stated Synlait supplied Bellamy’s – it does not).

The take-or-pay arrangements were critical because Bellamy’s was contractually bound to keep buying product from its suppliers on a certain schedule, even though it wasn’t selling nearly as many tins to the Chinese consumer. This could have – and nearly did – send the company to the wall very quickly. Bellamy’s shares hit a low of $3.93 almost a year ago today.

The situation worsened when the Chinese regulator implemented a requirement for all foreign infant formula producers to be licensed. Bellamy’s manufacturer was no longer able to produce Chinese products for Bellamy’s, resulting in the company having to seek out a new manufacturer. Along the way, the CEO was fired, and the chairman resigned.

Disaster became farce when Bellamy’s raised capital to acquire a new manufacturing facility, Camperdown, only for that facility to have its Chinese CNCA license immediately suspended over contamination fears. At that point I was convinced the company was cursed.

Bellamy’s managed to unstuck itself however, with a new CEO, a capital raising, a new manufacturing facility, and it also managed to strike a new arrangement with its suppliers to reduce the take-or-pay contract requirements.

Late yesterday the company even upgraded its guidance to suggest that revenue growth would be between 30% and 35%, compared to 15% to 20% that was previously indicated.

Bellamy’s got lucky in two ways – first, it was basically bailed out by the booming demand for Australian baby formula. Second, it was lucky to be able to renegotiate with its suppliers, find a new manufacturer, and so on. In a different industry, one that was slower moving, Bellamy’s probably wouldn’t have recovered so quickly – but it did, and it’s been quite the ride.

source: Google Finance

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Motley Fool contributor Sean O'Neill has no position in any of the 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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