The share price of dairy company Bega Cheese Ltd (ASX: BGA) has fallen heavily in morning trade after the release of its annual general meeting presentation. At the time of writing its shares are lower by over 13% to $5.63.
It certainly hasn't been an easy year for dairy companies. Bega Cheese, Warrnambool Cheese & Butter Factory Co. (ASX: WCB), and Murray Goulburn's MG Unit Trust (ASX: MGC) shares have all dropped lower this year on the back of ultra-low milk prices.
Although Bega Cheese is anticipating prices to improve in FY 2017, it has been experiencing some unexpected and significant headwinds which are likely to offset any gains in prices.
According to the release Bega Cheese is experiencing a challenging business environment for its dairy nutritionals platform, especially in infant formula and milk powders. It has placed the blame on market rebalances and customers being overly cautious around the potential impact of regulation changes in the China market.
As a result it is expecting FY 2017's earnings before interest, tax, depreciation, and amortisation (EBITDA) to be broadly in-line with FY 2016's result.
With no growth now expected in FY 2017, investors have headed to the exits in their droves. I find this to be completely understandable, after all its shares were changing hands at approximately 35x full year earnings until this morning's decline.
For a share to be able to command such a premium over the market average it needs to have exceptional growth prospects. If it doesn't deliver on this it runs the risk of being chopped down very quickly.
You only need to look at the decline in Healthscope Ltd (ASX: HSO) shares this last week to see this. Its shares have dropped by over 22% since it warned that EBITDA in its important hospitals segment could be flat this year.
Even after its sharp drop today Bega Cheese's shares are still priced at 30x full year earnings. For this reason I would approach with caution, as in my opinion they could yet fall further.
