Key Points
- Bega Cheese shares have been downgraded to a hold rating by Morgans
- The food company's recent trading update disappointed
- But that wasn't the main reason for the downgrade
The Bega Cheese Ltd (ASX: BGA) share price is finishing the week in the red.
In afternoon trade, the diversified food company's shares are down 2% to $5.22.
Why is the Bega Cheese share price sliding?
The weakness in the Bega Cheese share price today appears to have been caused by a broker note out of Morgans.
According to the note, the broker has downgraded the company's shares from an add rating to a hold rating.
This was driven partly by a trading update at the end of last year which fell short of Morgans' expectations.
What did the broker say?
Morgans commented: "BGA has provided FY22 underlying EBITDA guidance of A$195-215m. This was 2-11% below Factset consensus of A$219.3m and Morgans previous forecast of A$217.0m."
This weaker guidance reflects significant COVID costs, supply chain disruption, and a highly competitive milk procurement environment.
But it isn't the guidance that has been the main driver of the broker's downgrade. The biggest impact was the need for Bega Cheese to pay improved returns back to farmers. And until this changes, the broker doesn't expect the Bega Cheese share price to rerate to higher multiples.
Morgans explained: "While we can look through short-term COVID impacts, we remain concerned about the industry structure which has resulted in the continual need to pay improved returns back to farmers at the expense of shareholders."
"Until Australian processing capacity rationalises or the Australian milk pool materially grows, the competitive environment for milk is likely to remain fierce and result in dairy processors effectively overpaying for milk. This means that upside from favourable operating conditions is likely to be partially paid away to the dairy farmers as opposed to shareholders benefiting from the earnings upside. For this reason, despite its growing branded business (~80% of sales), BGA is likely to trade at a discount to its FMCG peers," it concluded.
