Conditions Whey on Beston
We review Beston Foods (ASX:BFC) market update released on the 30th March 2023 and the 1H-23 results released to market 4 weeks prior on the 28th February 2023.
The Daily view of BFC shows the clear breakdown of price below the $0.02 level to set a new low. Price movements remain below the 20 day and 200 day moving average.
First we look at earlier events in late November, A Placement and Non-Renounceable Entitlement offer undertaken by BFC raised a total of $28.2 million in equity funds this enabled the company to reduce its gearing to around 38%, as forecasted. An amount of $16.0 million was paid to the company’s banks to reduce debt and plans were actioned to implement a number of objectives. Some of them were, investing in a third Lactoferrin extraction column and implementing a number of low risk, high returning initiatives to unlock cost savings, deliver a number of environmentally sustainable outcomes and accelerate profits.
Within the same statement CEO of Beston, Mr Fabrizio Jorge, said that the solid results achieved in H1, along with the completion of the balance sheet reset, are very pleasing, particularly as they “clear the way” to facilitate the implementation of the company’s various objectives in 2023. When Beston Foods (ASX:BFC) released the 1H-23 results on the 28th of February, the company announced revenue had grown 33% to A$91m with EBITDA of A$3.0m. We viewed this outcome as acceptable given the restructure underway.
Source Beston (ASX:BFC)
A further breakdown of the results show the revenue has increased A$22.3m over the 1H-22 period with cost of sales increasing from A$63.9 to A$74.9 over the same period. Gross margin increased from A$4.4m to A$15.7m in percentage terms 6.4% to 17.3%. Operating costs decreased from A$14m to A$12.7m again we note the key metrics are heading in the right direction.
Source Beston (ASX:BFC)
The company re-affirmed guidance for FY-23 and provided forward guidance against the 1H-23 progress. Of particular note is the group sales increasing 18% and revenue per litre of milk increasing 28% again price momentum moving in the right direction. Sales have remained robust with all FY23 Lactoferrin production committed. Also expanding market footprint with Beston Foods Mediferrin now being sold in China, South Korea, India and Europe.
The lactoferrin global market is estimated to be US$234.5m with an annual compound growth rate of 8%, with the product used in baby formula and other semi medical applications as an anti-inflammatory ingredient in dietary supplements and skin care products.
The company also retained strong partnerships with domestic Australian infant formula producers that are also exporting. Spot pricing now for the product is US$ 650 or circa AU$ 920/kg indicating strong demand in the market. The business also achieved a 70% sales revenue increase across the cream cheese range in 1H-23 with further capital plans in place to maintain costing performance in all cheese products including the core Mozzarella product now being marketed throughout Asia, Japan and China.
The turnaround story within the 1H-23 update realised EBITDA of A$3.0m, when measured against the 1H-22 result of (A$9.6m) shows a significant improvement.
Beston Foods (ASX:BFC) informed the market they have emerged stronger from the covid period and have the foundations in place to deliver sustainable and profitable growth for the years ahead. Fat Prophets have maintained a Hold recommendation for members with exposure.
Four weeks later on the 30th March, Beston Foods (ASX:BFC) released a trading update advising of unprecedented inflationary cost pressures brought about by external factors, especially with utilities of gas, electricity, also chemicals and insurance are impacting on EBITDA performance in H2 FY23. The company also blamed a rapid decline in the price of Whey protein. Whey protein prices have declined 25% in the past 30 days. We note the contract price for Whey has returned to Q4 2020 levels, declining from the €1420 level obtained during Q2-2022 rising from the start of the Russian Ukraine conflict.
As a result of these pressures, BFC is updating its trading results guidance with a downward revision in EBITDA guidance, down to A$0-2m, a very disappointing outcome for all investors.
Beston (ASX:BFC) have advised underlying performance of the business remains strong, as shown in the revenue, milk supply and revenue per litre measures in the revised guidance. Group sales guidance has been increased from $150 – $180 million to a new range of $170 – 190 million, although with current inflation pressures this looks to be a natural inflation adjustment.
Other key issues cited in the down grade is the rapidly rising cost of insurance. Unprecedented increases in gas prices of around 300% per annum as the company came out of contract with its energy supplier, we view this as poor management of this vital supply component. Currently management is pressing ahead with negotiations with the monopoly natural gas supplier on contract terms in the light of recent falls in the spot prices of natural gas.
The company also expects a lower milk intake and a further decrease in Whey product prices as competition from Europe and the USA create a sales headwind for the product.
The Monthly view of indicates price has remained within the historic down trend and current price movements remain below the 12 month moving average.
Summary
The equity raise and balance sheet reset has better equipped the company to deal effectively with any changing market conditions and has positioned it to take advantage of any new opportunities as they arise. Strong sales and cash flows look set to continue to improve the balance sheet position over time, only should costs be contained.
Fat Prophets are extremely disappointed with the market update and subsequent price movements as the stock remains within our core portfolio. Beston Foods (ASX:BFC) have placed themselves in a vulnerable operating position and remain at risk of corporate action by another player.
We maintain a Hold recommendation for members with exposure. Fat Prophets will keep members updated as the company progresses through this difficult period.
