Bellamy’s Chinese burn causes more financial pain

It will be a difficult Christmas for Bellamy’s managing director, Laura McBain. Photo: Mark Jesser Bega’s chairman, Barry Irvin, warned of oversupply in the marketplace. Photo: Brendon Thorne

Shareholders are right to be increasingly worried about just how financially painful Bellamy’s Chinese burn is going to be.

At its worst, the organic baby formula producer is experiencing an existential moment as the crisis it’s having with suppliers and customers drags on.

The saga of Bellamy’s demonstrates just how rapidly a company can move from being a sharemarket darling with seemingly limitless growth prospects to a sharemarket pariah with a questionable business model.

Following a trading halt and a two-week trading suspension of its shares in early December, the company has now requested its shares remain suspended from trading on the Australian Securities Exchange until January 13.

Such a delay does not not augur well for the future of the company, which is in the sights of at least one class action law firm and whose chief executive, Laura McBain, is the subject of calls for a scalping.

In the meantime, shareholders are stuck holding the stock they can be almost certain will drop precipitously when trading eventually resumes.

And such an outcome would be more favourable than the other possibility that the stock never comes back onto the market.

The suspension in the shares came after the stock was heavily sold down, wiping $544 million from the company’s market capitalisation following its 40 per cent downgrade to earnings earlier this month. The stock last traded at $6.68, compared with a high of $16.50 reached earlier in the year.

Up until the downgrade, investors and most analysts had growth expectations so high they were in nose-bleed territory and accordingly the share price had been priced around complete success.

This was despite the fact that the Tasmanian-based company had only been listed since 2014 and was riding the fashionable yet risky China export story.

It is only over the past few weeks that experts have started to dissect the Bellamy’s story and take a closer look at the pitfalls in the business, including the lack of experience of management, the supply chain shortcomings and the fickle nature of the Chinese customer.

More particularly, they have homed in on the fact that Bellamy’s misread the importance and power of the ‘Daigou’ trade – which involves intermediaries buying baby formula from Australian supermarket shelves to re-sell it into the Chinese market.

The theory is that when Bellamy’s started to discount its product earlier this year, it cut the margin for the intermediaries which in turn switched to other brands.

On the other side of the ledger, the company is now clearly attempting to renegotiate its own supply contracts with producers such as Bega and Fonterra.

Thus Bellamy’s is caught in a pincer from falling volumes and shrinking margins.

The most positive aspect to Bellamy’s financial position is that it was virtually debt free with $32 million in cash.

But the June 2016 balance sheet shows a worrying and massive increase in inventory levels from $17 million the year before to around $68 million – half of which was finished goods and half ingredients.

Still, in the October presentation to shareholders the company made no mention of any difficulties it could have been experiencing in the first three months of the 2017 financial year. Bega’s warning

This was in sharp contrast to Bega’s chairman, Barry Irvin,  who in the same month warned of oversupply and pressure on prices in the Chinese market, telling shareholders the company had a watch brief on its infant formula partnership with Blackmores.

In a frank review, he told his investors that “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 demand signals and the evolution of supply channels to market now sees significant discounting in the marketplace and signs of short term oversupply”.

The potential lack of disclosure and transparency will be at the heart of any class action legal claims.

But the more immediate problem for Bellamy’s will be a potential cash flow crisis if sales and prices remain depressed and it cannot renegotiate supply contracts.

It will be a difficult Christmas for its management and board – and a nervous period for investors, who are waiting to see if the company has a future.