We recently researched Bega Cheese (ASX:BGA) in The Dynamic Investor after the Company reported its full-year result. Having previously recommended BGA successfully in mid-May, we consider whether there is scope for a further re-rating. Or is the risk-reward becoming more balanced?

About Bega Cheese

Bega Cheese Limited is engaged in: i) The processing, manufacturing and distribution of dairy and associated products to both Australian and international markets: and ii) The processing and manufacturing of spreads and condiments for consumer markets.

The Company operates processing facilities across Australia with the capacity to process ~1.6-1.7 billion litres of milk annually. BGA has historically focused on dairy processing but has diversified into branded consumer foods through the acquisitions of assets forming the Bega Foods and Bega Dairy and Drinks divisions. In August 2020, BGA changed its business segments to the following:

• Branded: the manufacture of bulk ingredients into value added consumer products for internal or external brands;
• Bulk: the manufacture of bulk dairy ingredients, nutritional and bio-nutrient products, which are sold primarily to food manufacturers.

The Branded segment accounts for ~85% of group revenue and >80% of group EBITDA, with the Bulk segment accounting for the remainder.

Key Fundamental Drivers

Both Segments Performing Strongly

The Branded segment reported solid EBITDA growth (+7.6%) in FY26. This was despite incurring additional costs on marketing its ‘power’ brands. Earnings growth reflected higher volumes, price rises, mix benefits and savings from streamlining and simplifying its network. The result could have been stronger given BGA experienced strong demand but had capacity constraints.

A key driver of earnings growth for the segment is continued portfolio development. In particular, BGA’s higher-margin product offering has been expanded across core categories that have functional health benefits. Examples include, protein added to milk-based drinks and yoghurt, lactose-free products, no sugar benefits and gut health promotion through pre- and probiotics. As consumers continually shift to health-conscious products, in addition to in-home vs out-of-home channels, and seek convenience with “on-the-go” products such as pouch yoghurts, BGA has positioned itself to leverage these customer behaviours.

The Bulk segment reported strong EBITDA growth (+37.5%) on FY25, benefitting from an improved product mix including higher-margin proteins and high-return fat streams. BGA had a successful milk recruitment program and grew its milk supply ~7%, despite flat milk production in Australia. This, along with additional toll manufacturing for third parties, helped with its manufacturing unit economics.

The strength of Bulk’s FY26 result demonstrates how management has successfully transformed this business over recent years from a producer with a strong exposure to dairy commodity prices, to having an improved product mix including higher-value proteins

On Track to Achieve Targets Set Out in New Strategy

At the 2026 Investor Day (29 April), the Company outlined its strategic plan out to FY31. BGA has issued its initial FY31 baseline EBITDA target of $310m+ (EBITDA in FY25 was $202m). In setting its FY31 targets, the Company expect the Branded segment to be the key driver of earnings growth, which is underpinned by two strong themes in the branded business: i) Continued investment in high-growth categories and ii) Continued investment in the Tatura cream cheese capability.

The FY28-31 baseline projections appear highly achievable based on current dynamics in the categories being targeted and requires BGA to execute at a rate not inconsistent with what they have achieved over the FY23-26. If successful in shifting milk supply further into these categories, it would also materially reduce the Company’s exposure to Global Dairy Trade (GDT)-linked commodities, which has already essentially halved over the life of the FY28 plan.

The FY26 results provided an indication of early success in achieving these targets – Return on Funds Employed increased by 160 basis points to 10.0%.

International Expansion Growth Remains a Key Catalyst

BGA’s International business has seen ~45% total growth in revenue between FY23 and FY26, with EBITDA increasing 3.5x. 65% of sales in the channel is from foodservice. Across the International business, management is prioritising the Middle East, North Asia and South-East Asia, given their high potential for dairy growth.

In particular, South-East Asia is the top priority market, given solid real GDP growth and urbanisation/globalisation. Management noted that by 2040, ~120 million (compared to 30 million in 2022) households across South-East Asia will have incomes of >US$15K, which drives a higher propensity to consume non- traditional food products, such as dairy.

Balance Sheet Strength to Pursue Merger & Acquisition Opportunities

Gearing (on a net debt to EBITDA basis) declined to 0.8x, from 1.2x as at 31 December 2025 and is currently below the lower end of the Company’s target gearing range of 1-2x on a ‘through-the-cycle’ basis. In the absence of Merger & Acquisitions (M&A) opportunities, gearing is expected to trend down further to 0.7x in FY27.

The strong balance sheet position supports future growth opportunities and potentially further industry consolidation which may arise. The Company is prepared to increase gearing to ~2.5x for the right acquisition. In terms of potential M&A opportunities, the Company is focused on large, established, mainstream brands with strong adjacency for dairy or non-dairy and opportunities for market expansion/consolidation.

Fundamental View

We remain highly attracted to BGA’s fundamentals. However, we consider that at current levels, the risk-reward is becoming increasingly balanced. The shares are currently trading on a 1-year forward P/E multiple of ~23x, which is below the 5-year average of ~25x.

To this end, the shares have historically presented better value when trading at a wider discount to its 5-year average. We also note that the typical weakness in the share price – after results release and the shares trading ex-dividend – may present a better entry point.

Charting View

When we last looked at the BGA chart on 12 May, we noted that it was at the bottom of the range and a tentative buying opportunity. It managed to rally from that point but after breaking to a new high for the year a few weeks ago, it was heavily sold down. BGA therefore looks toppy up at these levels and is likely to ease back again towards at least the mid $5’s.

 

Michael Gable is managing director of Fairmont Equities.

 

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