Giving Bellamy's a miss for now

Emanuel Datt

Datt Capital

Bellamy's latest report has brought to light a number of key issues that we feel require resolution before the company becomes lower risk and an investable proposition. We outline these here and explain why we hold a negative view for Bellamy’s over the next 12 months.

Key issues to resolve

  1. Certainty around SAMR registration for Chinese language label sales for the Chinese market
  2. Validation of the new product range by consumers
  3. Further maturity in Mainland Chinese distribution networks
  4. Revenue growth will be a consequence of a successful resolution of the points above

Independent of our outlook, we do consider Bellamy’s food division to hold significant growth potential into the Mainland Chinese market. 

With all eyes on the core and higher value infant milk formula (IMF) products and markets, we would encourage readers to keep an eye on the more niche spaces where Bellamys operate.

We do believe the company can turn around its present woes but recognise that this process of renewal will take time.

A large fall in top-line revenue by 19%

The fall in revenue has been the single largest detrimental factor to Bellamy’s result. The market consensus was clearly higher and very few market participants were expecting such a significant fall. 

We believe that a large part of the fall can be explained by changes to the existing product range and formulations. Whilst we can understand the rationale, the company should have probably assumed or guided towards a decline in the brand’s demand in the transition period.

Large fall in NPAT of 49% - higher spend in marketing and distributor discounts

A much higher spend in the marketing and distributor discount categories does not appear to have had much effect on consumers' underlying demand for Bellamy’s products. Whilst we consider the marketing strategy appropriate for the target market, it is fairly evident that larger discounts provided to distributors have not led to a greater volume product being sold.

We consider this to be worrying from a number of angles and consider that it may be difficult to recover this margin from the said distributors at a date in the future. 

In addition, we note the lagging effects of marketing spend where it takes time to gain visibility to the end customer. Bellamy’s China Sales Director is a proven and quality operator in the Mainland Chinese market; we note the ongoing recruitment of sales managers is still ongoing reflecting further maturity is required in their distribution networks in Mainland China.

SAMR registration still uncertain

The company mentioned that there is still no visibility regarding Bellamy’s SAMR (Chinese language labels specifically for Mainland Chinese retailing) registration applications. Whilst we believe that achieving this registration is important, we are cognisant that a failure to achieve this particular certification will impede the capacity of the company to grow further in the core Mainland Chinese retail market.

We do note that Bellamy’s Camperdown facility produces IMF for a Chinese brand that has successfully achieved SAMR registration status. As such, we anticipate that the company will achieve the registration eventually, without being able to accurately project an appropriate timeframe.

Risks to revamp of the product range

One of the risks that have been overlooked by the market was the risk of the new product range not resonating as strongly with end consumers as expected. We note that the new products are reasonably distinct relative to the company’s older formulations, meaning that existing customers will have to be converted ‘from scratch’.

We also note that the company has disclosed that they will be releasing a couple of key products in H2/2020: an ultra-premium organic formula and an organic goat formula. Our market analysis indicates that these products are not especially unique in their niche and will still be subject to strong competition. It is to be seen if Bellamy’s new product range will be sought out by end consumers.

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Disclaimer: This article does not take into account your investment objectives, particular needs or financial situation; and should not be construed as advice in any way

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Principal
Datt Capital

Emanuel is the Principal of Datt Capital, a boutique Melbourne-based investment manager focused on identifying high growth and special situation opportunities.

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