Shares in baby formula flop Bellamy's Australia Ltd (ASX: BAL) have fallen another 6% today as investors continue to sell the stock after the company revealed a giant downgrade to its profit forecasts this week.
The company now expects full year revenue to be between $220 million to $240 million with earnings before interest and tax (EBIT) forecast to be $24 million at the midpoint of guidance. This compares to the $54.3 million in EBIT delivered in FY16 and goes to show why the shares have been slammed from above $12 in November to just $4.14 this morning.
The company blamed its problems on an unexpected sales slowdown, rising costs, and the mismanagement of forward agreements it struck with suppliers to take a certain amount of stock it now no longer requires. As a consequence of the 'take or pay' supply contracts it now has to make penalty payments to the likes of Fonterra FSF (ASX: FSF) that are likely to put a dent in the bottom line going forward.
It's also worth noting that the board has moved to replace the chief executive that oversaw a short period where the company appears to have shot itself in the foot. I don't think the full story as to how its problems came about has been revealed and expect that a new chief executive may be able to make a fresh start with the company's key customers, distributors and suppliers.
The big strategic blunder appears to be the decision to restructure its China route-to-market via direct sellers, rather than indirectly via Australian retailers. Now the architect of that decision is leaving the company its brutal fallout may clear up and a new chief executive may be able to repair potentially damaged relationships.
For investors it's a tough call as to what to do with the stock, as it still does not appear cheap on conventional valuation metrics. If you are looking for exposure to the China growth thematic I would prefer the more competently managed Blackmores Limited (ASX: BKL) or a2 Milk Company Ltd (ASX: A2M).
