The Rise and Fall of Bellamy's Australia
Bellamy’s Australia (BAL) was mentioned in a post on this blog late last year that took a look at the risks of investing in high P/E stocks like BAL. Things have not improved for BAL since this time and it is worth taking a more detailed look at what has come unstuck for BAL.
BAL started as a small food and beverage company in Tasmania that sold various organic food products. In the mid 2000’s the company was in financial trouble and they had a serious cash-flow problem. The immediate danger was stemmed in 2007 when the company was bought by a group of wealthy investors which provided a fresh infusion of capital. With the company now on a firmer financial footing, the general manager, Laura McBain, realised that expanding into China could be a way to boost sales. She quickly realised that Chinese demand for organic baby formula would provide all the growth the company could possibly need. The business model was further strengthened when melamine was discovered in some of the local Chinese baby formula products. This further stimulated demand for organic, high quality product from companies like BAL.
The growth of the company was such that it was ready to list on the ASX as a public company by 2014. The listing was extremely successful with the stock closing 30% above the $1 offer price after the first day of trading. The stock price trajectory from this point on would be best described as exponential. By the end of 2015 the stock had reached a price of $14 per share. This is a 1,400% increase over 1.5 years. Although the exponential growth stopped during 2016, the share price was still maintaining a range between $10 and $14. The company and its management were praised as being a model of success.
Things unravelled extremely quickly for the company after a business update on 2 December that indicated revenue for the full year would be 40% lower than consensus estimates as a result of weaker sales out of China and a build-up of inventory. The stock price reaction was savage. The stock dropped 43% on the day and there was no real bounce. The price continued to track sideways at this lower level for the next week until it was suspended from trading.
Although the specific reason for the suspension isn’t known, it is certainly not good news and the rumours support that claim. There are a few reasons for the problems BAL is facing although in defence of the company it should be remembered that hindsight is 20/20. The company got a little overzealous in stocking its product that it wound up with a surplus in inventory. In order to correct this, the company discounted its prices to move more product. In any other business, this wouldn’t have been a problem, but in the case of BAL, it caused serious problems. First, Chinese buyers considered BAL’s baby formula to be a premium (high quality) product that justified such a high price. When the discounted formula started to hit the shelves, this illusion was shattered and caused customers to switch to other products. Second, a large portion of BAL’s sales came from Chinese shoppers (known as ‘daigou’) who would buy the product here and sell it in China at a mark-up. This was possible because of the price differential between Australian and Chinese prices. The discounting in China destroyed this business model and BAL lost a significant amount of sales as a result. Third, regulations out of China are constantly a threat for the company with recent announcements suggesting they might act to reduce the number of baby formula brands sold in China.
The total effect of all of this still isn’t know although
BAL is due to come out of its trading suspension by 13 January. Assuming the
company survives it will at the very least have lost its status as market
darling. The company has very few actual
assets that might have provided a floor to the share price. As at 30 June
2016 the company reported just $143m in total assets with half of this being
inventories and most of the rest cash and receivables. Tangible assets
(property, plant and equipment) total just $1.1m. With very few actual assets
(the company doesn’t even manufacture the baby formula it is known for, it
simply buys it from Bega Cheese and Fonterra and badges it Bellamy’s), the company’s
value essentially comes from its marketing and distribution network but if
questions start to be raised about this then there is really nothing left. There is therefore scope for significant
further price decreases if the problems can’t be resolved. BAL is not a
stock recommended by Rivkin currently nor has it ever been part of a Rivkin
This article was written by William O'Loughlin - Local Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via firstname.lastname@example.org or by phoning +612 8302 3600.