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.
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