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Bega Cheese With Further Potential Downgrades?

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

Bega Cheese (ASX: BGA) issued a market update today, saying they would not be able to achieve their previous EBITDA guidance of $123-130m. EBITDA stands for earnings before interest, tax, depreciation and amortisation and the measure is often used by institutional investors alongside other metrics to value businesses. The company is now projecting FY19 EBTIDA to be in a narrow range of $113-117m, blaming new initiatives aimed at increasing market share. The company was largely successful in these initiatives, increasing Australian market share from 8.1% to 12.4%, despite a downturn due to drought and farmers exiting the industry.

The company trades on 15.4 times forward earnings and sold off more than 6% shortly after the announcement. This has been a common feature of companies with agricultural exposure who miss estimates on margin compression. Costa Group is the most famous announcement this year, with a 40% selloff on the back of disappointing results and an investor conference call that several shareholders believe reflected poorly on management. In the case of Bega Cheese, investors are particularly worried about margin compression, given management cited increased competitive pressure in the update.

Margins are a key measure of earnings quality, which is highly valued by investors. Shareholders would typically pay a higher PE multiple for a business with higher margins, all other things being equal. Mutually destructive competition can make it much harder to make a profit in an industry, potentially leading to further downgrades as competitors try to undercut each other and gain margin share. The fact that Bega Cheese has cited margin compression in it’s market update has concerned investors enough to overlook very attractive revenue and market share growth, as seen in the price action this morning.




This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978) (“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.


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