Company Reports

Despite Bega Group's strategic shift toward a more diverse product offering, we expect dairy products to continue to represent the majority of sales over the next decade, exposing the company to commodity pricing and volatile input costs. We do not think Bega has carved an economic moat required to consistently generate economic profits, and we expect its powerful customers to limit margin growth potential.

Bega's fiscal 2026 underlying EBITDA was AUD 226 million, 12% higher than last year, with improved profitability in both branded and bulk processing segments. The company guided toward underlying EBITDA of AUD 240 million-AUD 245 million next year.

Southern Australian farmgate milk prices for the fiscal 2027 season are broadly similar to the closing prices of the prior season, per the Australian Dairy Products Federation. The commodity milk value, a proxy for Bega's bulk business' selling price, is about 15% lower than this time last year.

Despite Bega Group's strategic shift toward a more diverse product offering, we expect dairy products to continue to represent the majority of sales over the next decade, exposing the company to commodity pricing and volatile input costs. We do not think Bega has carved an economic moat required to consistently generate economic profits, and we expect its powerful customers to limit margin growth potential.

Bega reported interim 2025 underlying EBITDA of AUD 133 million, up 21% on last year. Full-year underlying EBITDA guidance was upgraded by 3% at the midpoint to AUD 222 million-AUD 227 million, and the target to exceed AUD 250 million by fiscal 2028 was reaffirmed.

Bega released a minor trading update at its annual meeting, with no change to guidance provided at the release of annual results in August. The company expects fiscal 2026 underlying EBITDA of AUD 215 million to AUD 220 million and is on track to exceed fiscal 2028 EBITDA target of AUD 250 million.

Despite Bega Group's strategic shift toward a more diverse product offering, we expect dairy products to continue to represent the majority of sales over the next decade, exposing the firm to commodity pricing and volatile input costs. We do not think Bega has carved an economic moat required to consistently generate economic profits, and we expect its powerful customers to limit margin growth potential.

Bega's adjusted fiscal 2025 NPAT grew 74% to AUD 51 million while EBITDA rose 23% to AUD 202 million, modestly beating guidance. Bega guidance is for further EBITDA growth to AUD 215 million to AUD 220 million in fiscal 2026, and reiterated its target for more than AUD 250 million by fiscal 2028.

Southern Australian farmgate milk prices for the fiscal 2026 season are up about 10% on average compared with last year, per the Australian Dairy Products Federation. The Australian commodity milk value, effectively Bega's bulk business selling price, is 29% higher than this time last year.

Bega's fiscal 2025 first-half adjusted EBITDA grew 44% to AUD 110 million. A turnaround in profitability in the bulk segment was the key driver. Bega now expects fiscal 2025 EBITDA near the top end of its AUD 190 million-AUD 200 million guidance.

Despite Bega Group's strategic shift toward a more diverse product offering, we expect dairy products to continue to represent the majority of sales over the next decade, exposing the firm to commodity pricing and volatile input costs. In our view, Bega has not carved an economic moat required to consistently generate economic profits, and we expect its powerful customers to limit margin growth potential.

Bega's opening farmgate milk prices for the 2025 season are about 14% lower than in 2024 as competition for milk eases. Demand for milk has lowered, with reductions in processing capacity. Milk supply has also increased. The national milk pool was up 1% year on year in October 2024.

We lift our fair value estimate for shares in Bega by 5% to AUD 4.40 per share, mostly due to the time value of money and a quicker return to profitability for the bulk business. Fiscal 2024 underlying EBITDA lifted 2% to AUD 164 million—about 3% below our forecast. The branded business continues to perform strongly, with top-line growth of about 6% and EBITDA margin expansion. This was offset by losses in the bulk business, which processes commodity milk. There has been a disconnect between global dairy commodity prices, into which the bulk business sells, and the Australian farmgate milk prices Bega pays. While commodity prices have been falling since late-2022, Australian milk prices have been elevated.

Despite Bega Group's strategic shift toward a more diverse product offering, we expect dairy products to continue to represent the majority of sales over the next decade, exposing the firm to commodity pricing and volatile input costs. In our view, Bega has not carved an economic moat required to consistently generate economic profits, and we expect its powerful customers to limit margin growth potential.

Australians are still dining out. As a share of wallet, consumers are spending less at supermarkets than before the pandemic. We think this provides an opportunity for supermarkets over the medium term as spending between eating out and eating at home normalizes. But we expect this reallocation to have a negative downstream effect on suppliers like Bega. We think the balance of power between suppliers and the major supermarkets lies firmly with the supermarkets, making it a relatively less lucrative channel. Indeed, Bega has been increasing sales to nonsupermarket channels, like convenience stores and chain restaurants.

We raise our fair value estimate for shares in no-moat-rated Bega by 5% to AUD 4.20, given the buoyant first-half fiscal 2024 profit in the core branded business. Adjusted EBITDA of AUD 77 million was 11% lower than in the first half of fiscal 2023. But considering hostile conditions in the bulk segment, the result is impressive. Profitability in the bulk division, which processes milk, was weighed down by high Australian farm gate milk prices and low global prices squeezing margins. The bulk division lost AUD 6 million versus a AUD 50 million EBITDA profit a year ago. The shares appear roughly fairly valued at current prices.

Despite Bega Group's strategic shift toward a more diverse product offering, we expect dairy products to continue to represent the majority of sales over the next decade, exposing the firm to commodity pricing and volatile input costs. In our view, Bega has not carved an economic moat required to consistently generate economic profits, and we expect its powerful customers to limit margin growth potential.

While Bega Group shares have recovered strongly from lows of less than AUD 2.50 in October 2023, they still screen as undervalued compared with our unchanged AUD 4 fair value estimate. While profitability in Bega’s bulk segment has collapsed, the branded segment remains resilient.

On a consolidated basis, no-moat Bega's fiscal 2023 result appeared to meet expectations. Underlying EBITDA slid 11% to AUD 160 million, in line with our forecast and company guidance. But the segmental breakdown was concerning, with the bulk business significantly more challenged than we appreciated—turning loss-making in the second half. Our prior thesis, for the elevated milk price to drive an increase in supply, supporting profitability in bulk is unlikely to play out, particularly now that the business is going to be materially smaller. We lower our fair value estimate for Bega by 18% to AUD 4.00 per share. We lower our fiscal 2024 EBITDA forecast to AUD 160 million, from AUD 182 million previously—at the bottom of Bega's guidance range of AUD 160 million to AUD 170 million. We cut our prior fiscal 2028 EBITDA forecast by 17% but expect Bega can reach its new medium-term EBITDA target of AUD 250 million by fiscal 2028, with earnings almost entirely driven by the branded business. We had previously expected bulk to be about one third of earnings by fiscal 2028, now it accounts for just 10%. Despite the cut to our valuation, shares still screen undervalued. We estimate the strength of the branded segment alone can justify Bega's current stock price, with bulk offering potential upside should the business turn around faster than we expect.

Despite Bega Group's strategic shift toward a more diverse product offering, we expect dairy products to continue to represent the majority of Bega's sales over the next decade, exposing the firm to commodity pricing and volatile input costs. In our view, Bega has not carved an economic moat required to consistently generate economic profits, and we expect the firm's powerful customers to limit margin growth potential.