LA Private

Bega warns of potential $180 million impairment due to rising dairy prices

Bega Group (ASX: BGA), Australia’s largest locally owned food group, has issued a warning stating that escalating dairy prices could result in a substantial non-cash impairment of up to $180 million. This impairment is expected to push the company into a statutory loss for the year ending on June 30.

In an announcement made to the ASX, Bega Group also disclosed that it had successfully raised $114 million through the sale and leaseback arrangement of its Vegemite factory in Melbourne. This transaction is part of a broader restructuring initiative announced on Tuesday, along with the news of potential impairments and the company’s financial performance.

Bega Group confirmed in the statement that its previously projected normalized earnings before interest, taxes, depreciation, and amortization (EBITDA) for FY2023 fall within the lower range of $160 to $190 million.

The company further highlighted the possibility of a non-cash impairment affecting its bulk dairy ingredients assets due to surging prices both globally and in Australia. Bega explained, “The precise impairment amount will be impacted by the finalization of milk procurement and farm gate milk pricing program for FY2024. Our current anticipated non-cash impairment is in the range of $180 to $280 million. We would expect to conclude the calculation as we finalize our audited result for FY2023 and will update the market when we have more clarity.”

The rationale behind the impairment is attributed to the ongoing decline in Australian milk production, which has decreased by 700 million liters over the past two years, accounting for a 9% reduction. Additionally, the industry’s limited capacity rationalization has resulted in intense competition for raw milk, expected to persist beyond the current year. Bega Group emphasized the high quality of its commodity asset portfolio and the benefits derived from specific nutritional and ingredient streams within this business segment.

The company’s directors assured stakeholders that the non-cash impairment would not compromise Bega’s financial strength. However, it is evident from the statement and remarks by the directors that the financial results for the 2022-23 fiscal year will be adversely impacted.

“While Bega Group remains confident in its previously provided normalized EBITDA guidance ranging from $160 to $190 million, the statutory profit after tax for FY2023 will be affected by the significant items and actions outlined above. The FY2023 results will include several notable one-off items, such as the sale and leaseback of the Port Melbourne property, restructuring and business simplification costs, and any non-cash impairments.”

Bega Group’s outlook for the year ahead remains uncertain as it navigates the challenges posed by rising dairy prices and strives to mitigate the potential impact on its financial performance.