Shares of organic infant formula producer Bellamy's Australia Ltd (ASX: BAL) have trended significantly lower this year, fetching $11.24 at yesterday's close compared to a high of $16.50 late last year.
A combination of valuation concerns, a tougher regulatory environment in China, competition and heavy short selling have acted as the primary drags on the stock's performance, with some investors likely concerned there could be further declines to come.
But the shares have jumped strongly over the last week or so, up more than 10% in that time. That coincides with the timing of the acquisition by Danone (a French dairy giant) of soy milk maker WhiteWave Foods Co in the United States, with some speculation that Bellamy's could make for a similar target.
To be clear, I am in no way suggesting that any company is running the ruler on Bellamy's right now, but the price Danone paid for WhiteWave could cause a few of Bellamy's short-sellers to reconsider their positions.
WhiteWave Foods acquisition
Danone said it would pay US$56.25 per share to acquire WhiteWave, which represents a premium of roughly 24% over WhiteWave's average closing price over the last 30 days. What's more, according to the Nasdaq, the consensus forecast for WhiteWave's earnings per share (EPS) for the 2016 fiscal year is US$1.39, which equates to roughly 40x earnings. The price tag is also roughly 35x forecast earnings of US$1.62 for FY17.
It's possible that Brexit played a role in Danone's decision to acquire WhiteWave, by reducing some of its reliance on European markets and improving its exposure to the US market. However, there are also plenty of synergies that could be extracted from the deal while enhancing its combined profile.
How much is Bellamy's worth?
Taking another look at Bellamy's, the Tasmania-based business said it expects to generate around $250 million in group revenue in financial year 2016, with similar margins to those achieved in the first half of the year. During the first half, it operated a net profit margin of 13%, which suggests it could achieve net profit after tax (NPAT) of around $32.5 million for the full year, equating to around 33.6 cents in earnings per share.
Applying the 40x multiple paid by Danone for WhiteWave Foods on Bellamy's, that would suggest a share price of $13.44 based on current year earnings. Given that Danone is paying 35x forecast earnings, however, that would suggest a figure closer to $22.40 based on a forecast of 64 cents in EPS for Bellamy's in FY17, according to Yahoo! Finance.
The Australian Financial Review notes that CLSA analysts have a slightly more conservative figure in mind, suggesting a share price of $22 based on a 63 cent EPS forecast and a 35x earnings multiple. That's almost double the price at which the shares are currently trading.
Indeed, this could also bode well for shares of a2 Milk Company Ltd (Australia) (ASX: A2M) and Blackmores Limited (ASX: BKL) which have also struggled since the beginning of the year.
Investor Takeaway
Again, I am not suggesting that Bellamy's is about to get a takeover bid, so it would be naïve to think the shares are suddenly going to shoot up to that price. However, what the WhiteWave acquisition does indicate is the value some businesses are applying to dominant companies that produce health foods. Therefore the market may be applying too great a discount to Bellamy's shares today based on Chinese regulatory concerns.
Whichever way you look at it, Bellamy's shares still aren't cheap, per se, and I don't expect the shares to generate the same kind of returns over the next 18 months as they have done over the last year-and-a-half. Based on the group's growth potential, however, Bellamy's shares are certainly worth a closer look for long-term investors.
