Shares in dairy group Bega Cheese have plunged almost 13 per cent after the company said its partnership to sell infant formula and nutritional powders with vitamin maker and market darling Blackmores has not met sales forecasts.
Bega shares fell 13.7 per cent to $5.59 at 12.05pm AEDST. Blackmores shares were down 0.1 per cent to $112.61. Shares in rival infant formula group Bellamy's fell 2.5 per cent in afternoon trade to $12.94.
Bega executive chairman Barry Irvin told shareholders at the company's annual general meeting on Tuesday that regulatory change in China and new channels to market had resulted in significant price discounting and signs of short-term oversupply.
"While this time last year supermarket shelves were empty and customers in Australia and internationally were providing ever increasing orders, the combination of a regulation change in China, a supply response to the demand signals and the evolution of supply channels to market now sees significant discounting in the market place and signs of short term oversupply," Mr Irvin told the meeting.
"This change in market circumstances has seen our expected sales not materialise at levels that were initially forecast and some strong head winds for the partnership particularly in the Australian market."
Mr Irvin announced a $5 million to $7 million provision on the value of its stake in its Blackmores joint venture.
"The partnership is keeping the business under constant review and will continue to monitor the performance with our partner Blackmores as market evolution and circumstances becomes clearer," he said.
The market situation is similar to that described by Blackmores itself when it delivered a surprise profit warning in August.
Blackmores said that big retailers such as large pharmacy chains and the supermarkets bought large amounts of stock towards the end of the 2015-16 year in anticipation of the boom in vitamins continuing.
But Blackmores and the retailers were caught out by a change in approach from the Chinese businesses in Australia that have been raiding the shelves of these retailers for years to send product back to China. These businesses, known as daigou, are looking to buy directly from the manufacturer to avoid the retail mark-ups.
Mr Irvin said Bega's expects earnings before interest, tax, deprecation and amortisation to be broadly in 207 to be broadly in line with the 2016 result of $66 million, excluding the provision on the Blackmores venture.
However, he was able to provide farmers with a more upbeat update on the outlook for dairy commodity prices, which are expected to improve throughout the next 12 months. Mr Ivrin said farm gate milk prices are likely to be "more reflective" of market returns.
"The ongoing growth in dairy foods and the improved outlook for dairy commodities are expected to improve our financial performance in FY2017, however this improvement will be offset by a very challenging business environment for our dairy nutritionals platform particularly in infant formula and growing up milk powders."
The Bega writedowns come after a horror year for the Australian dairy sector. Murray Goulburn's decision to inflate - and later slash - the price it paid farmers for milk against a backdrop of falling global dairy prices has sent shockwaves through the sector and pushed farm gates prices down across the industry.
