Bellamy’s Australia Ltd (ASX:BAL) shares sink lower on disappointing AGM update

In morning trade the Bellamy’s Australia Ltd (ASX: BAL) share price has sunk lower following the release of a trading update ahead of its annual general meeting.

At the time of writing the infant formula company’s shares are down 6% to $7.99.

What was in the update?

According to the release, Bellamy’s has been operating in a challenging trading environment and has seen slower China cross-border growth across the infant formula category and increased competition from both local and global competitors.

The good news is that management believes that these are only short-term challenges and are likely to relate to lower birth rates in Tier 1 and 2 cities. In China. It expects to overcome these challenges with greater Tier 3 and Tier 4 ecommerce penetration and continued investment in its brand and product portfolio.

Based on recent trading, management expects Australian label full year revenue growth at the low end of its 0% to 10% range. This is due to a soft first half where sales are expected to be down 10% to 15% on the prior corresponding period because of a $10 million to $15 million run-down of trade inventory prior to rollout of its brand upgrade.

As you may have noticed, the guidance above is purely for its Australian label products as Bellamy’s has still not been given its SAMR (formerly known as CFDA) accreditation to sell Chinese label products.

Management provided an update on its application. It stated:

“As outlined in August, our SAMR registration for Chinese-label product was submitted in December and is in progress. We remain confident in our technical application but do not yet have transparency of timing for approval. We continue to plan for successful registration and are building out a detailed China offline strategy in parallel for speedy and successful execution on approval.”

I’m very surprised at how long it has taken, but I am optimistic that it will occur before the end of the first half. If this does happen then it is likely to give its second half performance a major lift.

Should you invest?

While I think that Bellamy’s and A2 Milk Company Ltd (ASX: A2M) will be a great long-term investments, I suspect Bellamy’s shares will remain under pressure until it announces its SAMR registration.

This may mean that better entry points will present themselves in the coming weeks or months, depending on how long it takes for this to be granted.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. 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 Scott Phillips.

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