Elevated Milk Prices and Pandemic-Induced Cost Pressures Bite Into Bega Cheese

We maintain our AUD 5.20 fair value estimate for shares in no-moat Bega Cheese following its reported earnings for the first half of fiscal 2022. Underlying EBITDA, which excludes one-off items including transaction costs related to the Lion Dairy and Drinks acquisition, lifted 46% on the prior corresponding period to AUD 106 million. The sizable increase in EBITDA represents the inclusion of earnings from the Lion Dairy and Drinks business--now Bega Dairy and Drinks--from January 2021. Bega declared an interim dividend of AUD 5.5 cents per share, up 10% on the prior corresponding period, and we continue to forecast full-year dividends of AUD 11 cents per share, an increase of 10% on fiscal 2021. We expect Bega can comfortably continue to pay out 50% of EPS without compromising its organic expansion plans while continuing to partake in industry rationalization via acquisitions.