The Bellamy's Australia Ltd (ASX: BAL) share price will be in focus today after the fallen baby formula business reported its much anticipated for results for the six-month period ending December 31 2016. Below is a summary of the results, with comparisons to the prior period.
- Net profit of $7.2m
- Revenue of $117m, higher than 1H 2016
- Operating cash outflow of $23.6m
- Inventory of $102.7m, versus $67.m in prior half period
- Cash on balance sheet of $15.6m
- Debt of $14.6m
- No dividend declared
- Significant cost reduction plan implemented
- Growth in Chine e-commerce share
- Guidance for reported EBIT revised down to $19m – $23m from $22m – $26m
The last six-month period has been a textbook disaster for the company with boardroom battles, legal battles, profit downgrades, own goals and strategic blunders that scuttled its own sales growth.
Looking at the above numbers it seems the company's core challenge is to shift the growing inventory pile it has to start delivering positive operating cash outflows to strengthen its balance sheet. If the company can re-set and solve its boardroom power struggle it's not impossible that demand for its product could return with it now having a better understanding of how to grow sales to Asian shoppers.
The company also has onerous take or pay agreements with its supplier Fonterra, which leverages the risks around whether it can start to shift its inventory at healthy rates again. In today's report it also blamed legal costs for contributing to its full year EBIT downgrade, which comes as no surprise given it had to spend more than a month suspended trade while took advice from lawyers likely to be racking up the astronomical fees they specialise in.
Notably, others baby formula businesses like the a2 Milk Company Ltd (ASX: A2M) continue to post strong sales growth on the back of growing demand in Asia. Elsewhere, giant U.S. baby formula business Mead Johnson has been lobbed a takeover bid at an estimated 17x FY 2017 earnings in a move that goes to show this sector is still lukewarm at least.
Outlook
Given the balance sheet, cash flows and slowing sales rates the short-term outlook for Bellamy's is still challenging, although over the medium-to-long term it's possible this business could return to financial health and steady profit growth.
I am not a buyer of its shares given the valuation and considerable risks, as I would prefer to focus on other opportunities.
