The worst performer on the ASX 200 on Wednesday has been the Bega Cheese Ltd (ASX: BGA) share price.
In morning trade the food company's shares were down a sizeable 11% to $5.05.
Why is the Bega Cheese share price crashing lower today?
This morning Bega Cheese released a disappointing business update to the market.
According to the release, the impact of the drought on the Australian dairy industry has led to a significant increase in farming costs.
As a result, overall milk supply for the industry is expected to be down in excess of 5% in the current financial year.
While Bega Cheese's milk acquisition program has been successful and it continues to forecast overall milk intake of between 1 billion and 1.1 billion litres of milk in FY 2019, significant competitive farm gate milk pricing pressure is expected to impact profits.
Management advised that the "outlook for Bega Cheese's financial performance in FY2019 is expected to be impacted by this competitive pressure. Bega Cheese is forecasting a normalised EBITDA in the range of $123 to $130 million for FY2019, this compares to the FY2018 normalised EBITDA of $109.6 million."
In addition to this, the company warned that the integration of the Koroit manufacturing facilities and the successful milk acquisition program has resulted in a seasonal build of inventory with associated funding costs.
Together with increased depreciation charges on the Koroit infrastructure, management has forecast a normalised profit after tax in the range of $44 million and $48 million. This compares to FY 2018's normalised net profit after tax of $44 million
Should you invest?
Based on Bega Cheese's profit guidance for FY 2019, it expects earnings growth in the range of 0% to 9% this year.
While the reasons for this are largely out of the company's control, it is certainly disappointing and makes its shares look expensive at 21x earnings.
In light of this, I would suggest investors stay clear of the company's shares for the time being and focus on other options that arguably offer better value for money such as A2 Milk Company Ltd (ASX: A2M) or Costa Group Holdings Ltd (ASX: CGC).
