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  • Writer's pictureMarcus Bogdan

Portfolio Change - Reduce Westpac (WBC) & Buy Bega Cheese (BGA)

Blackmore Capital Blended Australian Equities Portfolio

Bega Cheese (BGA) is an Australian-based dairy and food company that has been producing cheese products since 1900.

We have seen significant expansion of BGA’s branded foods portfolio in the past 4 years. Post the acquisition of Vegemite and peanut butter from Mondelez International in 2017 and the transformational acquisition of Lion Dairy and Drinks (LDD) on 25 January 2021, Bega has become one of Australia’s largest food companies. BGA increased its sales from branded products, which are typically higher margin, from 59% in FY20 to 73% in FY21, and this trend is expected to continue into FY22.

The acquisition of LDD is a key driver to BGA’s longer-term returns and margin growth. It not only expands BGA’s branded foods portfolio by bringing in many well-known brands including Dairy Farmers, Daily Juice, Farmers Union, Big M, Dare, Pura, Masters, The Juice Brothers and Berri, but it also significantly strengthens BGA’s consumer goods supply chain. In addition, BGA’s cold chain distribution network is now one of Australia’s largest and we expect it to realise further optimisation. BGA is on track to achieve the $36 million cost-out synergy target, and that's flowing into $41 million of annualized synergy savings. We expect to see double-digit EPS accretion in FY22.

Signs of an improvement in global dairy commodity prices and favourable seasonal conditions are supportive of a more positive outlook.

BGA has maintained a robust balance sheet by reducing its debt and improving its leverage ratio from 2.35x in FY20 to 2.25x in FY21, well within its 3x net debt covenants. Leverage will reduce to <1x in FY22 as LDD earnings annualise.

We funded the buying of Bega by taking some profits in Westpac. The bank has returned around 50% since we initiated the position 11 months ago, compared to ~ 27% return for the ASX200. It has made substantial progress in its strategy to Fix, Simplify and Perform, much of which is now reflected in its share price. With the impact of extended lockdowns in Australia’s most populace states there is a risk that momentum in mortgage growth will further slow and credit quality in loan books deteriorate. The portfolio retains a position in Westpac as there remains considerable scope for ongoing improvement in the bank’s execution and with excess capital to fund future buybacks.


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