Bellamy’s becoming a more attractive asset

Weimin Xie

MX Capital

We have followed the Bellamy’s Organics (BAL) story since the IPO in 2014, including its rise to prominence in 2015 - 2016 and its downfall in late 2016 - early 2017. Here we outline why it may become an attractive asset for a corporate buyer.


Back in early 2017 the Company was facing three main issues:


  1. A strong balance sheet was needed to stabilise the Daigou channel and excess inventory;
  2. A decisive and experienced management team was needed to execute a turn-around;
  3. The regulation uncertainty about its Chinese recipe registration, due to lack of control of its supply chain, posed a significant risk on the brand equity in the future.


While the share price declined significantly and we saw value in the brand, we considered the risk too high for our liking. In our experience, most turnarounds fall short of expectations.


A hedge fund came in and took control of the Company, injected additional capital, stabilised the management team and allowed the Company to acquire part of its supply chain. While share price responded positively to these actions, the risk in the turnaround was still high, as evidenced by the CNCA license suspension of the newly acquired facility in July 2017.


Signs of stabilisation appeared


We closely monitored the turnaround. In September 2017, we first saw a clear signal of stabilisation in the channel, and in October 2017 the Company reported an earnings upgrade. Over the next two months, we saw a continued strengthening of external trading data and concluded that a large earnings upgrade was very possible. The Company was included in the inception portfolio on January 1st. Pleasingly, the Company reported a significant earnings upgrade in January 2018.


The key highlights at the half-yearly result were a rapid stabilisation of the inventory position, strong cash flow generation, and most importantly, the management’s plan to upgrade the product’s formulation to become a premium product. We consider this a significant step toward closing the large profit margin gap compared that of A2 Milk.


The emerging strategic asset?


Once the Company obtains its Chinese formula recipe approval (CFDA registration) and launches its new premium product, with its fully integrated supply chain and modest market capitalisation relative to A2 Milk, Bellamy could potentially become an attractive asset for a corporate buyer.

Weimin Xie
Chief Visionary Officer, Portfolio Manager
MX Capital

Weimin has more than 10 years direct experience in the Australian small to mid-cap equity market honed over 3 years with Ophir Asset Management as a portfolio manager, and 7 years with Kosmos Asset Management as an analyst.

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