Investing in organic baby food maker Bellamy's Australia is not for the faint-hearted. While the company recently came up with a restructuring strategy having pushed its chief executive out, it is grappling with high inventory levels, a possible board spill and increasing pressure on its balance sheet.
It was only 2014 when this small Tasmanian clean green company made its debut on the ASX at $1 per share, rising to become the market darling – a true homegrown success. Last August it said profits had tripled in one year following a surge in demand in China.
More than $1.1 billion has been wiped off its market capitalisation since its shares peaked at $15.48 on December 29, 2015. Its shares have slumped to Friday's close of $3.93.
The fall from grace was fast and furious. Bellamy's first flagged on December 2 that sales fell short of expectations in its key Chinese export market amid changing regulations for baby formula, and it was holding too much stock.
After a five week suspension, Bellamy's came back on the boards on January 11 after it renegotiated a key "take or pay" contract with supplier Fonterra, fired its CEO Laura McBain and halved its profit outlook.
It said it would reduce discounting, improve visibility of Chinese stock as it focuses on Chinese resellers and Daigou (personal shoppers) and improve disclosure – something that it has been highly criticised for in the past.
Citi analyst Sam Teeger has long had a "sell" on the stock, expecting the company to face choppy and uncertain trading until the end of the fiscal year given the price competition to clear the inventory overhang of competing formula brands that will not qualify for registration under a more strict regulatory environment.
"While Bellamy's restructuring strategy has its merits, we see no quick fix for Bellamy's issues," he said in a note to clients.
Not only could it take up to two years to clear inventory, but a further slow down in sales in the second half could result in the company needing to raise fresh equity and lead to further inventory write-downs. He was also concerned that the brand was damaged by hefty discounting.
On the upside, market watchers see Bellamy's organic brand as strong. Partner Fonterra has amended the supply agreement to apportion the minimum volume commitments over a longer period and the company intends to reduce discounting going forward.
Morgans analyst Belinda Moore believes the brand is strong with consumers and has a solid market position, while management know the changes that need to be made to get the company back on track. However, she said a turnaround could take up to 18 months and China's regulatory changes as well as board politics could be an overhang on the stock. She recently maintained her "hold" rating.
While the company tries to reposition itself, Bellamy's largest shareholder Black Prince Private Foundation, which controls 14.5 per cent of the company, is looking to dump four independent directors – Patria Mann, Launa Inman, Michael Wadley and Charles Sitch.
Black Prince is linked to Kathmandu founder and Bellamy's shareholder, Jan Cameron, through her Elsie Cameron Foundation. She has proposed that she join the board, along with her long-time lawyer Rodd Peters, Vaughan Webber, and Chan Wai-Chan. Ms Cameron claims she represents about 35 per cent of shareholders. However, Bellamy's has asked ASIC to investigate Ms Cameron over her relationship with Black Prince.
Ms Cameron holds a 2 per cent stake. The company believes Ms Cameron should have filed a substantial shareholder notice given she and Mr Peters, are directors and shareholders of the trustee of her Elsie Cameron Foundation. Curacao-registered Black Prince stated in a tracing notice released in January by Bellamy's it would act in accordance of the wishes of ECF. A shareholder meeting has been set for February 28.
Another headache the board is facing is up to three possible class actions. Two litigation funders said earlier in January they would back separate class actions against Bellamy's over disclosure obligations to the market. While these cases are some way off from being filed, there could be possible material costs down the track, Ms Moore said.
While takeover activity could send the stock higher, a "poison pill" clause added into the new manufacturing contract with Fonterra around change of control of Bellamy's reduces the possibility of a takeover, said Mr Teeger.
Bellamy's stumble in China comes on top of missteps by other companies that have suffered setbacks such as the Bega Cheese and Blackmores joint venture. Rival formula maker A2 Milk appears to have sidestepped the issues Bellamy's has confronted in China, according to Milford Asset Management investment director Brooke Bone.
Mr Bone is an investor in A2 and said it has been taking market share from Bellamy's over the past six-to-nine months.
"We were very comfortable with the A2 management team and its governance. We felt that they were consistently executing on their plan and our investment provided very good exposure to the Chinese infant formula market and therefore we didn't need significant additional exposure via Bellamy's.
"The key selling points are different on each stock. Under the A2 proposition, they have to know their supply chain intimately and that fits well within the framework of the Chinese government regulation changes in the formula market. It wants the brand owners to have control over the supply chain from the cow to the consumer."
