Bega Cheese Ltd: Building muscle

Research evidence excerpt

Bega Cheese Ltd: Building muscle

FoundationM

Investment thesis

We initiate coverage on Bega Cheese (BGA) with an Overweight rating and A$6.70 price

target. BGA is a producer of packaged foods, beverages and ingredients. It operates two

segments: Branded, which sells consumer and food service products; and Bulk, which

primarily manufactures dairy ingredients and supplies certain products to Branded on an

arms-length basis. We initiate on BGA to build out our Australian Consumer industry

coverage.

Our OW rating is premised on: (1) a step-up in Branded earnings quality, supported by

increasing pricing power and structural growth in protein and functional foods; (2) a

lower-beta Bulk earnings base, as commodity exposure declines; (3) visible supply chain

initiatives supporting margin expansion and ROFE improvement; (4) M&A optionality with

significant balance sheet headroom; and (5) an undemanding valuation relative to ~20%+

earnings growth over FY25-28e.

In this report we explore five key investment debates:

Debate 1: Will structural protein and GLP-1 consumption trends benefit BGA?

Debate 2: Is Bulk earnings quality improving?

Debate 3: How could supply chain rationalisation impact earnings?

Debate 4: Could the International business become a meaningful share of earnings?

Debate 5: Should BGA be valued as a branded food company or a dairy processor?

Investment positives

A branded business with growing pricing power and seeing structural growth: BGA is

increasingly a branded food business rather than a dairy processor, with Branded EBITDA

growth of HSD/LDD% across key categories including milk-based beverages (MBB),

yoghurt, and spreads. A key shift vs history is the emergence of Brand-led pricing power in

these categories, supported by structural demand tailwinds.