Bellamy's Australia Limited (ASX:BAL)

Andrew Cohen
CEO
Market Cap (AUD): 1.01B
Sector: Consumer Staples
Last Trade (AUD): 8.93 +0.02 (+0.22%)
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1. About

Bellamy’s was founded by a Tasmanian family in 2004 wanting to provide a convenient nutritious organic choice for their children. The Group offers a range of organic food and formula products for babies, toddlers, and young children, with over 30 products in our range from birth to early childhood.

2. Business model

 

The Company operates the following divisions:[1]

 

Divisions

Revenue  ($’000)

% of Revenue

% Profit (before Int & Tax, Dep. & Amt.)

Profit drivers[2]

Australia

$248,252

75.5%

95.58%

Growth was predominantly driven by volume and a contribution from Camperdown. Price realisation has improved, with promotional discounts minimised to support the brand and its premium position.

Gross profit margin for FY18 was 39.6% (FY17: 38.1%). This increased to 42.5% in 2H18. The margin increase was driven mostly by lower cost of goods sold from improved ingredient purchasing and manufacturing arrangements. Stronger revenue management disciplines also contributed, including reduced promotional discounts and minor price increases

Overseas

$95,887

29.2%

40.09%

Australia
Manufacturing

$13,090

4.0%

(1.80%)

Elims

($28,525)

(8.7%)

(33.87%)

N/A

3. Strategy

 

Key strategy includes:[3]

 

Bellamy’s continues to pursue a long-term premium brand strategy, targeting a balanced scorecard of volume growth and margin expansion over five years. Focus remains on developing the core business to its full potential in Australia, China, and Southeast Asia, in the product categories of organic infant and toddler formula and food. China, through both formal and informal channels, has particular significance to this growth strategy.

 

Key Strategic Investment Themes:

BRAND MARKETING AND PRODUCT

  • Brand Assets, Brand Premium & Packaging
  • Local Milk Pools and Sourcing
  • NPD, Upgrades, IP and licences
  • Food as an Incubated Business

 

TRADE PARTNERSHIPS AND DISTRIBUTION

  • SAMR Registration & China Offline
  • Asian Rising Middle Class Markets
  • Daigou Relations & Organic Education
  • Strategic Trade Partnerships

 

STRATEGIC CAPABILITY (INCL. SUPPLY-CHAIN)

  • Strategic, Flexible Manufacturing
  • Quality, Traceability, and Blockchain
  • Government and Regulatory Affairs
  • Capability & Performance Culture

4. Markets

 

The Company operates in markets including:[4]

 

Industry (Australia)

Industry Revenue (2017)

Growth Rate (annual 13-18)

Baby Food Manufacturing

$177 million

4.7%

5. Competition

 

Major competitors include:[5]

 

  • A2 Milk Company Ltd (Australia) (ASX: A2M)
  • Blackmores Limited (ASX: BKL)

6. History

 

2003[6]   

Established in Launceston, Australia. Producing Australia’s first organically certified baby food

 

2007   

Acquired by Tasmanian Pure Foods Ltd

 

2011   

Sales & distribution teams established in China & Singapore

 

2012   

Established distribution partnerships in Malaysia & Vietnam

 

2014   

Bellamy’s formula manufacturer (Tatura Milk - TMI) receives China accreditation

Bellamy’s Australia Limited (BAL) listed on the Australian Securities Exchange

 

2015   

Long-term infant formula supply agreement signed with Bega Cheese subsidiary, Tatura Milk

Bellamy’s enters strategic manufacturing arrangements with Fonterra Australia

 

2016   

Admission to S&P/ASX 200 Index

 

2017   

Bellamy completed acquisition of canning facility and $60.4 million capital raising

  

2018   

Completed the acquisition of a 90% beneficial interest in Camperdown, a CNCA licensed powder products blending and canning line in Braeside

7. Team

 

Board of Directors[7]

 

John Ho – Non-Executive Director Chairman

John Murphy – Independent Non-Executive Director Deputy Chairman

Rodd Peters – Non-Executive Director

Wai-Chan Chan – Independent Non-Executive Director

Shirley Liew – Independent Non-Executive Director Chair of Audit & Risk

 

Executive Team

 

Andrew Cohen – Chief Executive Officer

Nigel Underwood – Chief Financial Officer

Melinda Harrison – General Counsel and Company Secretary

David Jedynak – Director of Sales and Marketing

Peter Fridell – Director of Operations

Shona Ollington – Director of Finance and People

Jiong Ou (Henry) Hong – Country General Manager, Hong Kong

Rod Lyon – General Manager Operations


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8. Financials

 

2018 Full Year Results Presentation

 

Financial Year 2017/2018 (ended 30 June):[8]

 

Divisions

Revenue ($’000)

% Change

Profit (before Int & Tax, Dep. Amt.) ($’000)

% Change

Australia

$248,252

23.52%

$74,669

169.88%

Overseas

$95,887

18.96%

$31,315

88.24%

Australia
Manufacturing

$13,090

100.00%

($1,408)

N/A

Elims

($28,525)

(4.00%)

($26,458)

(1654.51%)

Total

$328,704

26.93%

$78,118

82.54%

9. Risk

 

Major risks include:[9]

 

Regulatory Risks

 

Chinese label’ product regulatory risk

Government policy and regulation may change and restrict or limit the ability to sell existing product into key markets. This risk is most pronounced in China’s infant formula market. Currently, the Chinese government requires a manufacturing facility to be registered with the CNCA and ‘Chinese label’ products imported and sold in retail channels in China require SAMR (formerly CFDA) registration after 1 January 2018.

 

Australian label product regulatory risk

Bellamy’s currently sells 'Australian label' formula through cross border e-commerce (CBEC) platforms in China. Although the majority of ‘Australian label’ product consumed in China is ‘direct mailed’ and not distributed through the CBEC channel, if the Group is unable to comply with any future change in regulation relating to the CBEC channel this may negatively impact financial performance. There is also a risk of future change to regulations governing the ‘direct mail’ channel. This could include the imposition of taxes and/or prohibitions or measures taken to constrain the ability to undertake direct mail activity.

 

Import testing

All food product imported into China is subjected to a sample-based quality testing, known as China Inspection and Quarantine (CIQ) tests governed by SAMR. Should a product in a shipment fail a CIQ test, Chinese law prevents the entire shipment from entering China, even if the affected product forms only part of the shipment. If the Group's products, or third-party products produced by Camperdown, fail a CIQ test, this could have a material adverse impact on the Group's business, financial performance, and operations.

 

Brand damage, product quality issues

Any actual or perceived contamination, spoilage or other adulteration, product misbranding, failed product testing or tampering may lead to a material erosion of the Group's brand reputation in China, regardless of its merits. The Group's failure to detect counterfeiting and imitation of its products and trademarks or a failure to mitigate their impact could result in a material adverse impact to the Group's sales in China. Publication of reports of contaminated or tainted dairy products by other non-Chinese manufacturers that supply the Chinese market could negatively impact the Group’s business even if there is no direct connection with Bellamy’s products. Regardless of merit, such reports could also lead to additional scrutiny and testing by regulators which could impact the Group's business, financial performance, and operations.

 

Complex distribution  channels

Sales of the Group’s Australian label’ products to persons in Australia who on-sell to Chinese consumers via e-commerce and social media platforms cannot reliably be estimated by the Group but is thought to be substantial and the Group is highly reliant on this channel. Directors’ Report Bellamy’s Australia Limited 17 Accordingly, Bellamy’s has an exposure to changes in consumer demand for its products in China. A failure by Bellamy's to predict or respond to changes in consumer preferences in China or a decrease in demand for the Group's products in China could materially adversely impact the Group's financial and operating performance.

 

Market concentration risk

A material proportion of the Company revenue is derived from sales in China. With any international market, potential geo-political risks should be considered. To mitigate this risk, Bellamy’s continues to invest into the local market and enter into other appropriate South East Asian markets, for example, most recently Vietnam.

 

Shortfall payments

Bellamy’s has two material manufacturing agreements that guarantee long-term access to high-quality production facilities in Australia. The two manufacturing arrangements have minimum annual volume commitments which run for a number of years. Where the Group is not able to fulfill minimum annual volume commitments, it is required to make production shortfall payments. Some contracts provide rebates for exceeding specified volumes.

Bellamy’s also enters ingredient supply contracts with minimum volume commitments. Beyond FY19, shortfall payments may continue over the term of the contacts and could increase or decrease depending on the level of production.

 

Workplace health & safety

Actual or potential harm to all workers and other persons in the workplace could have a reputational and financial impact on the Group including increase in insurances, penalties, and decrease in staff morale and productivity.

 

Loss of key people

Loss of key management personnel could have a material impact on the Group’s operating and financial performance during the period until suitable replacements are found.

 

Other risks

Production facility licensing

The Camperdown Powder manufacturing facility must maintain a licence with by the CNCA to enable its products to be exported to China. Should the licence be cancelled, the investment in this subsidiary would need to be assessed and potential some or all of its valued impaired.  

 

Australia made labelling laws

The Australian Government introduced new country of origin labelling laws that commenced on 23 February 2017 to provide additional transparency and certainty in relation to the country of origin of ingredients used in consumer products to be sold in Australia. From 1 July 2018, food to be sold in Australia must be labelled according to the requirements set out in the Country of Origin Food Labelling Information Standard 2016. As Australia is not a major producer of organic milk, Bellamy’s sources the majority of its organic milk powders from Europe. The new labelling requirements mean that Bellamy’s will need to provide consumers with further transparency about the source of key ingredients. This may affect consumer demand for the Group's products as consumers look to purchase those products which use Australian ingredients. Changes in consumer demand for the Group's products in Australia could adversely affect the operating and financial performance of the Group.

 

Change in regulations

There is a risk that laws or regulations may be introduced or amended in Australia, or in foreign jurisdictions in which the Group sells, or sources its ingredients and/or products. Changes to the regulatory environment could have a material effect in a number of ways. For example, the financial and production effects resulting from changing requirements to:

  • Product packaging and/or labelling requirements as a requirement of increases to mandatory dietary content disclosures;
  • The introduction of taxation measures that reference food content
  • Restrictions that prevent or restrict access to markets by amendments to regulations governing the export or importation of products (ie free trade agreements).

While the Group is not aware of any current issues other than the China regulatory change noted above, the Australian made labelling changes highlighted, or any impending regulatory change in relevant markets, there is the potential for any such measures to reduce Bellamy’s revenues and/or increase its costs.

 

Product contamination, recall, and food safety

As a producer of food products, Bellamy’s is subject to a general risk that any product contamination or product recall issue (however caused) could have a material adverse effect on the Company’s brand and thus its financial performance. The Company employs a number of measures to minimise the risk in this area.

 

Financial risk

Interest rate risk

The Group’s main interest rate risk arises from borrowings, which expose the Group to cash flow interest rate risk.

Liquidity risk

Liquidity risk is managed by maintaining sufficient cash and monitoring forecast cash flows.

Credit risk

Credit risk arises from exposure to customers and deposits with financial institutions.

 

Foreign exchange risk

The Group has exposure to movements in foreign currency exchange rates through:

  • Sales to distributors and customers in foreign currency
  • Purchases of inventory
  • Translations of net investments in foreign subsidiaries denominated in foreign currencies

Bellamy’s Australia Limited’s functional currency is Australian dollars. For the internal operations of the entities in Singapore, Hong Kong, and China, all income and expenses are conducted in local currency. The Group imports ingredients to meet production requirements and has exposure to USD and EUR movements directly where it purchases ingredients on its own behalf and indirectly through purchases of finished products where the Group’s product manufacturers purchase ingredients on its behalf. In order to hedge against the exposure to fluctuations in exchange rates associated with the highly probable purchase of ingredients, the Group enters into forward exchange contracts, which are designated as cash flow hedges. Exposure of overseas debtors to foreign exchange risk is minimal as these transactions in Australia are primarily denominated in AUD while local offices are in their functional currency.