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  • Writer's pictureMarcus Bogdan

Selling Bega Group (BGA) | Adding Metcash (MTS)

Updated: Jul 7, 2023

Blended Australian Equities Portfolio

We have exited our position in Bega Group (BGA) post its recent trading update. While we welcome the sale and leaseback of the Port Melbourne site, there has been increasing evidence of a structural deterioration in the milk processing industry in Australia. This relates to the lower international dairy commodity prices not translating to lower Australian domestic farm gate milk price.

Australian milk production has seen a continued decline with 9% reduction over the last two years and relatively minor industry capacity rationalisation. As a milk processor, Bega Group has been relatively successful in passing through the higher Farm Gate Milk Price to the Australian domestic retail market, albeit with a lag, and have indicated a more stable path going forward. The increase in milk price, however, has not been met with a corresponding increase in supply from dairy farmers. A key challenge for BGA’s Bulk business is it remains exposed to depressed international selling prices while relying on domestic milk production, which is characterised by structural decline in supply causing high prices. The persistence of the disconnection between the global dairy commodity price and Australian Farm Gate Milk price would mean a significant deterioration for the Bulk business and increasing level of uncertainty for the domestic market and future earnings growth for Bega Group.

We have subsequently used the funds from the sale of Bega Group to top up our existing position in Metcash (MTS). Metcash has recently reported their FY23 result with solid growth in all 3 pillars, Food, Hardware, and Liquor. Group revenue increased 6.2% to $15.8bn, EBIT up 8.1% to $500.8m, and underling earnings per share up 6.4% to 31.8 cents. The result is underpinned by the improving competitiveness of the independent retail network and the success of the strategic acquisition of Total Tools.


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