Bega Cheese shares were marked lower yet again on Wednesday as a new wave of selling hit the shares, with investors continuing the sell-off prompted by the dairy company's announcement on Tuesday that it will book writedowns against a new venture targeting the China market for infant milk formula.
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In mid-afternoon trading the shares were down another 4.6 per cent at $5.15, adding to their steep 17 per cent dive on Tuesday before climbing back at the end of the day to finish 2.9 per cent down.
The continued selling came as stockbrokers have slashed their estimates of fair value for Bega Cheese shares.
Bell Potter has slashed its 12-month price target for the company's shares to $5.19 from $6.32, and JPMorgan had cut its target to $4.90 from $6.20 before Bega Cheese's annual general meeting on Tuesday, where the processor warned of problems with the entry into the infant milk formula market.
"In fiscal 2016 the [Blackmores joint venture] contributed a loss to Bega of $800,000 on proportional sales revenue of $3.3 million, while also generating $13.4 million in revenue for Bega in the form of high margin nutritional sales to the joint venture," Bell Potter's analyst Jonathan Snape told clients.
"We interpret the impairment against the carrying value of Bega's investment as an indication that the Blackmores product has failed to gain material market traction in its short life. As such we see the double whammy of a lower joint venture contribution and lower product sales to the joint venture occurring in fiscal 2017."
Morgans also raised the fact that the venture has been discounting product "heavily in what is an already overcrowded category".
Both of the analysts were also cautious over milk production volumes across south east Australia, which are down 11 per cent so far this year.
"Bega will not be immune to this, despite its milk supply growth initiatives and recent market outperformance," the Bell Potter analyst told clients.
"The loss of the Coles private label contract from January 2017 to Murray Goulburn will impact FY17, despite the win of the much smaller Woolworths contract," Morgans told its clients.
Morningstar's Chris Kallos expects it may take time for the venture to gain traction in the infant milk formula market.
"While [Blackmores] is well established in the Australian vitamin and supplement market given its long history, Blackmores is a relative newcomer to the infant formula space," Morningstar's Kallos told clients.
"Notwithstanding the general competitive and regulatory risks associated with building a business in China, we remain positive on the commercial opportunity."
