The Bega Cheese Ltd (ASX: BGA) share price is among the top performers today but the stock could have further upside.
The BGA share price surged 6.7% to $5.40 in late afternoon trade after it came out of a trading halt.
This makes the stock the best performer on the S&P/ASX 200 Index (Index:^AXJO) with the Fisher & Paykel Healthcare Corp Ltd (ASX: FPH) share price and Perseus Mining Limited (ASX: PRU) share price taking the second and third spots, respectively.
Bega share price jumps on new growth options
Investors are excited about the Bega share price after management confirmed it was buying Lion Dairy and Drinks from Japan's Kirin for $534 million.
The takeover will give Bega highly valued growth options. But if you are worried that you may have missed the boat, Morgans reckons there's still room for the BGA share price to climb before hitting fair value.
Broker upgrades Bega's share price to "buy"
Incidentally, the broker upgraded the Bega share price to "add" from "hold" in the wake of the acquisition.
Morgans pointed out that Lion owns some of some of the most iconic brands in Australia that are either number one or two in their category. These brands include Dairy Farmers, Pura, Dare, Big M, Yoplait, Farmers Union, Berri and Vitasoy.
The acquisition is done at an enterprise value-to-earnings before interest, tax, depreciation and amortisation (EV/EBITDA) multiple of 10.9 times. This is in line with similar transactions.
It's all in the synergies
But there's upside from the synergies. Bega is expecting base case synergies of $41 million that can be achieved reasonably quickly. It can get these savings from reducing non-manufacturing overheads, optimising milk supply and buying power.
"Further synergies are likely beyond BGA's base case," said Morgans.
"Given LD&D margins are low (3.5% EBITDA margin pre-synergies) vs industry (BGA branded is 8.7%), we see a substantial opportunity to increase them overtime.
"LD&D will diversify BGA's earnings by brand, category, route to market and geography. The combined BGA and LD&D business will derive 80% of revenue from more stable branded product sales (vs. 59% at present), reducing the group's exposure to volatile commodity driven bulk earnings."
Cream rising to the top
The broker estimates that the acquisition lifts Bega's FY22 earnings per share (EPS) by 12.5% and FY23 EPS by 15.4%.
This prompted it to lift its 12-month price target on the Bega share price to $6.10 from $5.13 a share.
Even with today's big rally, there is still a 13% upside to fair value if Morgans is on the money. Let's also not forget that Bega is forecast to pay an 11 cents a share dividend this financial year.
