Investors in Graincorp Ltd (ASX: GNC) or Bega Cheese Limited (ASX: BGA) might have started the week with a smile, after news dropped on Monday that the food and grocery manufacturing sector is booming in northern Victoria.
Given this is a location both companies call home, will the news result in an uptick in the Graincorp and Bega share prices? Let's take a closer look at the region and the recent performance of both companies.
What's the news out of regional Victoria?
The Australian Food and Grocery Council has released research showing that food and grocery manufacturing in northern Victoria is positively booming. Not only does this translate to thousands of jobs on the ground, but also a $9.2 billion contribution to the economy and $1.76 billion in exports from this region alone.
Along with Graincorp and Bega, the region plays host to a range of food manufacturers including multi-nationals like Unilever and Nestlé, right down to small family-owned businesses. The Australian Food and Grocery Council CEO, Tanya Barden, said "as the population continues to increase in Northern Victoria, food and grocery manufacturing will continue to provide important jobs growth and investment in the region."
Spotlight on Graincorp
Graincorp announced last week that it expected an underlying net loss after tax in the range of $70–90 million. The ongoing drought in key parts of Australia, disruptions in the global grain market and another predicted below average production year in 2019–2020 highlight Graincorp's current predicament.
Historically, Graincorp has had positive year-on-year earnings and continues to pay out a modest fully franked dividend at 2.81% yield. In this context, now might be the time to write this year off as an outlier and look at buying the usually reliable Graincorp at a lower price. Graincorp is currently trading for $8.02 at the time of writing.
Spotlight on Bega Cheese
Bega Cheese has long been one of my favourite Australian companies. It's got great products, great promotions and it was Bega that brought Vegemite back under Australian ownership in 2017. But it hasn't been a great year for Bega. The company share price is down 46% over the past 12 months and it has underperformed against both its sector (-52.6%) and its stablemates in the ASX 200 (-50%) over the same time period.
Like Graincorp, some of Bega's troubles lie in the ongoing drought conditions in some parts of Australia. Additionally, Bega announced last week that the predicted earnings before interest, tax, depreciation and amortisation (EBITDA) stated at the 1H FY19 update would be adjusted down to between $113–$117 million from $123–$130 million. There were also several positives to come out of the announcement including a significant 41% increase on milk intake from FY18 and an increase in market share from 8.1% to 12.4% of the Australian milk pool.
Bega shares opened this morning at $3.98 which reflects a 10% drop in value since the August 2 market update, and are now trading up slightly at $4.03. The current price is also sitting around the lowest it has been since 2013, and it may stay on the lower side while management navigate a difficult period. I'd put Bega on my watch list and seriously consider purchasing shares at the current price. You may have to hang on to them longer to reap the benefits, but in the meantime, there's a solid 3.95% gross dividend yield and good businesses like Bega are resilient and bounce back.
Foolish takeaway
The new research out of the Food and Grocery Council won't change the world for GrainCorp or Bega, but a return to more favourable weather conditions certainly will. What the research does show is that both have footprints right in the thick of a booming food and grocery manufacturing region and can take advantage of hub-style supply and distribution networks. Industry clusters are also good for potential cooperation in research and local vocational education. The upside of combining these factors is that they can increase productivity and add value over the long term.
