In-depth Valuation Report of Bega Cheese Limited Analysis

This company valuation report provides an in-depth analysis of Bega Cheese Limited, an Australian dairy company, comparing its performance against competitors like A2 Milk, Saputo Inc., and Hormel Foods. The report includes an industry analysis identifying current challenges, a financial analysis revealing lower profit margins compared to peers, and an intrinsic value estimation suggesting the company's shares are overvalued. Technical analysis indicates undervaluation, while relative valuation suggests a buy signal. The report incorporates SWOT and PESTLE analyses to assess the company's strengths, weaknesses, opportunities, and threats, as well as the political, economic, social, technological, legal, and environmental factors affecting its operations. Ultimately, the report recommends buying Bega Cheese Limited stocks based on the overall evaluation.

Company Valuation Report

EXECUTIVE SUMMARY
Company valuation reports are usually prepared to give the insights of how the shares of the
company have been currently valued in the market as compared to the earnings it has been
provided to investors, cash flow generated on each share along with comparing the company’s
performance with that of their competitors. This report has been prepared with reference to Bega
cheese limited a dairy company based in Australia. In this report, the company analysis has been
done to determine performance of the company as compared to its peers like A2 milk, Saputo
Inc. and Hormel foods. Further, the industry analysis has been done to determine the current
issues facing the company. Through financial analysis, it has been determined that the company
is operating at low profit margins as compared to its peers. Further, through estimation of
intrinsic value, it has been determined that the company’s shares are overvalued and suggests
the sell signals while the technical analysis suggests the shares of the company being
undervalued and giving the buy signals. Also, the relative valuation suggests the buy signals for
the shares of Bega limited and accordingly, overall recommendation has been made for buying
the stocks of Bega cheese limited.

Table of Contents
Company Analysis.......................................................................................................................3
Industry Analysis.........................................................................................................................3
a) At the Macroeconomic Level..................................................................................................5
b) At the Microeconomic Level...................................................................................................5
c) SWOT analysis........................................................................................................................5
d) PESTLE analysis.....................................................................................................................7
Intrinsic Value Estimation...........................................................................................................8
Estimation of extrinsic value of the Bega cheese limited share using the dividend discount
model.........................................................................................................................................10
Estimation of intrinsic value of the company’s shares with the help of free cash flow to equity
model.........................................................................................................................................12
Application of relative valuation techniques.............................................................................13
Evaluation of company’s share price performance over the last five years..............................14
50 day and 200 day moving average line and volume analysis.................................................14
Evaluation of the findings..........................................................................................................15
REFERENCES................................................................................................................................1
PESTEL Analysis of Bega Cheese Limited. 2022. [Online]. Available through: APPENDIX.......1

Company Analysis
Bega cheese is a public company operating in the dairy and food processing industry. It was
founded in 1899 and is now a 123 years old company. It has its headquarters in Bega in New
South Wales in Australia. Paul van Heewaarden is one of the key people of the company sitting
on the position of chief executive officer. It has a subsidiary that goes with the name of Bega
Dairy and Drinks. The company was started by the local farmers in the Bega Valley as Bega Co
– operative creamery company.
Bega Cheese in its sustainability reports have been consistently outlining their ethical, social as
well as governance responsibilities. These key responsibilities involve issues including code of
conduct of the company and its managerial personnel, statement of the corporate governance of
the company including its official memorandum, statement of modern slavery, etc. Through
these statements the company acknowledges its responsibility and accountability towards
employees, shareholders and the stakeholders.
Industry Analysis
Evaluation of Relative Financial Performance:
The major competitors of Bega Cheese in the market included in this report are Saputo Inc., A2
Milk company and Hormel Foods. These competitors have been selected as they are operating at
the same level as Bega Cheese and are also global companies which have their operations in
Australia. Also, the processes and operations of all the companies are nearly similar and belong
to the similar industries therefore, such competitors have been selected.
The five financial ratios worked out of the above 4 companies of the past 5 years are:
Gross profit margin – It shows the margin of gross profit of the company which comes after
deducting cost of sales from the revenue. Thus, it is an essential measure of the profitability of
the company. Higher the better.
Debtor collection period – This ratio shows the average number of days the company takes to
collect its debt from the debtors and customers. Lower the better.
Current ratio – It shows the ability of the organisation to be able to meet the financial and
operational obligations to the creditors.
Quick ratio – It measures the ability of the company to meet its short term obligations but
without the need to dispose its stock or even get the additional funding.

Earnings per share – It shows the earnings of the company being distributed over each ordinary
share i.e., earnings received by each share of the company.
On the analysis of the ratio analysis done of Bega Cheese with its competitors in case of 5
primary financial ratios, it can be observed that gross profit margin of A2 Milk Company is the
highest while of the Bega Cheese is the lowest of all the five financial years i.e., 2017 to 2021.
The debtor collection period calculated of all the 4 companies i.e., Bega Cheese with its 3 peers
of the year 2017, collection period of Bega Cheese is highest with 50.15 or 50 days. Same is the
case in the year 2018 and 2019 which improved to 17 days in 2020 which again increased in the
year 2021. Current ratio of Bega Cheese was highest in the year 2017 i.e., 3.07. After that, in all
the succeeding years, this ratio was consistently low and less than 2 which is the optimum
current ratio. Comparing the peers, A2 Milk Company has performed the best of all with higher
current ratio.
Over the past 5 years, the gross profit margin of the company has increased due to the increase in
sales revenue every year of the company. But, the debtor collection days has been consistently
higher of the company which is a bad indicator. Only in the year 2020 it came down which again
increased significantly. The current ratio of the company was highest in 2017 after which it kept
on falling with the lowest in 2021 reason for which is the drastic increase in the current liabilities
in the year 2021 as compared to the year 2020. For the same reason of drastic increase in the
current liabilities, quick ratio also decreased in the subsequent years from 2017. In the case of
EPS also the 2017 marked the year with highest EPS and then it was at the lower levels due to
lesser profits and increase in the number of ordinary shares.
DuPont Method Estimate:
DuPont ROEs
2017 2018 2019 2020 2021
Bega Cheese limited
0.308
2
0.047
8
0.016
2
0.026
1
0.020
5
A2 Milk
0.484
0
0.490
9
0.428
3
0.401
5
0.072
7
Saputo Inc.
0.174
2
0.186
9
0.147
8
0.097
3
0.096
2
Hormel Foods
0.180
4
0.192
1
0.169
8
0.147
0
0.135
6
ROEs that has been calculated from the 3 – step procedure.

Through the above analysis, it can seen that the ROEs of Bega cheese limited has decline
currently as compared to previous years. However, for its competitors like A2 milk it has
increased and higher than Bega limited. Further, the ROE of Saputo and Hormel foods have
decline from the past but is much higher than Bega cheese limited. Lower ROE means the
profitability of the company is poor than the peers and also the company is not efficient in
generating those profits. Du Pont analysis suggests the reason for lower ROE of Bega cheese
limited as the poor net profit margins of the company as compared to its peers. The net profit
margins of Bega cheese limited is just 1% while that of A2 Milk, Saputo Inc. and Hormel foods,
the net profit margins have been identified as 7%, 4.3% and 8% respectively (Yilmaz, 2022).
Analysing the company's current issues
a) At the Macroeconomic Level
There are various kinds of the external factors which tend to influence the functioning of
the organization in turn accomplishing the objectives of company does not become possible in
specific organization. In order to become successful and effective it is important for the
organizations operating in this industry to pay attention on adopting certain courses of the actions
so that higher profitability and stability can be derived. This involves generic background,
climate, diseases, year and season of calving, availability of resources, demands of products,
increased costs, lack of access and reduction in water allocation. Risk management is the another
issue in this industry. Reusing waste and other political, environmental and technological other
types of the factors can influence such form of aspects. On the basis of this, it can be identified
that at the macro level the particular industry can face such form of the issues.
b) At the Microeconomic Level
In order to become successful in this specific industry the organizations require focusing
on certain factors so that accomplishing the objectives of higher profitability & stability can be
influenced. This involves the aspects like operations type, size of the organization, forms of the
objectives, competitors overcoming capacity, etc. For the purpose of becoming successful and
effective it is important for the company to focus on developing the courses of actions that can
benefit in having higher profitability and stability. This includes particular pricing strategy,
relationship with distributors, etc. On the basis of this, it can be identified that there are various
form of the internal factors which influences the processing of particular dairy industry.

c) SWOT analysis
It is one of the significant technique that is helpful in accomplishing the objective of
analyzing the organizational performance by looking at its strengths, weaknesses,
opportunities and threats. It can provide the assistance in analyzing the lacking areas so
that making the strategy can become possible.
Strengths
There are various form of the strengths which
is possessed by the firm which are as follows:
 It possesses the good return on capital
expenditure which is helpful in
building good financial position (Bega
Cheese Limited SWOT Analysis, 2022).
 Highly skilled labor is possessed by
firm which providing assistance in
optimization of resources.
 Highly distributed network is helping
in covering the greater market share.
 Strongly brand portfolio can show the
quality of work of the firm.
Weaknesses
 Days in inventory is higher compared
to the other participants.
 It has the ineffective level of demand
forecasting leading does not allow to
have effective compliance with market
forces.
 It is important to give emphasis on
having investment in research &
development as there is lack of market
research.
Opportunities
There are distinct patterns of the opportunities
which can help the particular form of the
growth can be derived.
 it Is important to emphasize on having
the relevant taxation policy so that firm
can increase its profitability and
stability.
 Decreasing the cost of transportation
can help in having approach of
inclining its overall profitability in
specific industry.
Threats
 There are few treating aspects which is
needed to be involved into the
consideration so that proper level of
action for the purpose of improving
can be done.
 There is new environment regulation
so that taking the action become
crucial as it can adversely influence
the processing.
 It is articulated to focus on legal
actions as lawsuits in market has

 With help of the online platform it can
derive the new customers from the
online platform which can benefit in
having good organizational growth.
inclined due to the continuous
fluctuations.
d) PESTLE analysis
There re varied course of the actions which is needed to be taken into the consideration
so that formulation of strategy in respect to have effective functioning. It is articulated to focus
on sanalyzing the external aspects of particular sector so that significant courses in order to get
the success.
Political factor There are distinct form of the factors which is needed to be
emphasized in order to get the understanding about the particular
influencing factor which involves anti trust laws related with food,
beverages & tobacco, taxation, wages, pricing regulation, etc. Bega
Cheese Limited focuses on complying with these in turn better
operating in sector can be done.
Economical factor Exchange rate & stability, efficiency of financial markets, economic
growth, interest, unemployment, labor rate, etc. The particular
enterprise focuses on having relevant aspect like these in its policy
formulation so that proper functioning in smooth pattern has
become possible for Bega Cheese Limited.
Social factor Changing taste & preferences, belief, cultural trends, attitude,
leisure, etc can influence the operational practices of the company. It
is important to focus on developing relevant strategies & approaches
so that relevant level of growth in market by accomplishing the
objective of coordinating with changing trends has become possible.
Technological factor There are different form of the technologies which can be taken into
the consideration so that proper cope up with requiring efficiency &
effectiveness can be done. Bega Cheese Limited has focused on
having the recent technological development in turn meeting the

objective of higher profitability & stability can be attained PESTEL
Analysis of Bega Cheese Limited, 2022). It uses the recent
technologies and have emergence on digital platform so that meeting
the organizational objectives in effectual manner has become
possible.
Legal factor In order to get the relevant functioning it becomes important for the
form to emphasize on implementing such practices which can help
in coordinating with rules and regulations regarding industrial
aspects such as accessing resources, consumer protection & e-
commerce, data protection, employment law, intellectual property,
etc. the firm is having relevant adherence with this regulations.
Environmental factor There are certain environmental aspects which influence the
processing of the organization such as having proper waste
management, recycling, endangered specie, attitude towards
&supporting for renewable energy.
On the basis of this it can be specified that these are the factors at macro level which can
influence the functioning of the company.
Intrinsic Value Estimation
1. Estimate of the company’s beta

Adjusted Beta = (0.67) x Raw Beta + 0.33
= (0.67) x 0.802 + 0.33
Beta = 0.867
2. The Risk-Free Rate of Return
Current bid yield = 3.874%
3. The Market Return
Market return E(RM): 8.90% (Source: Refinitiv Eikon. 2022)
Current Yield on 10-year Australian Government bond yield = 3.874%
Market Return E(Rm) = 8.90%
Beta = 0.867
CAPM
Expected return = Rf + (E(Rm) x Beta)
= 3.874 +(8.9 x 0.867)
= 11.59%

Estimation of extrinsic value of the Bega cheese limited share using the dividend discount model
While using multistage DDM, there would be three stages showing sustainable growth period of
two year while the second stage would be of high growth period of three years and the last that is
the stage 3 of stable growth period over the long run also, known as the perpetuity.
Growth rate for stage 1 will be calculated on the basis of retention ratio and return on equity
which provides for sustainable growth rate for the stage 1.
The number of years that would be taken for the stage 1 would be two years based on the Du
Pont analysis which shows the total asset turnover ratio of greater than one means the company’s
assets are efficient in generating high sales which could facilitate sustainable growth for the
company at least for the next two years.
The stage 2 would be of high growth stage where there would be the need for making more
investment and adoption of new or unique strategy is done to ensure business stability in the long
run. Accordingly, the period of three years would be there to indicate the high growth rate which
is sufficient for the management in forming the positive impacts of new strategy.
The third stage assumed for Bega cheese limited is stable growth period which would be taken as
perpetuity. The number of years here would be taken as the entire life time of the company based
on the assumption that the company will operate at a constant rate forever.
Stage 1
Growth rate = Retention ratio * Return on Equity (Multi-stage dividend discount model. 2022.)
Retention ratio = (Earning per share – dividend per share) / Earnings per share
Earnings per share = 0.15 (Source: Refinitiv Eikon)
Most recent declared dividend = 0.08 (Source: Refinitiv Eikon)
Retention ratio = (0.15 – 0.08) / 0.08 = 0.467
Return on equity = 0.019
Growth rate = 0.019 * 0.467 = 0.89%
Period Growth rate Dividend PV of T0
0 0.08
1 0.89% (1+0.0089) * 0.08 =
0.081
0.081 / (1 + 11.59%)
= 0.073
2 0.89% (1 + 0.0089) * 0.081 = 0.082 / (1 + 11.59%)

0.082 = 0.066
Stage 2
High growth phase
Period Growth rate Dividend PV of T0
3 0.75% 0.082 * (1 + 0.0075) =
0.0826
0.0826 / (1 +
11.59%) = 0.059
4 0.7% 0.0826 * (1 + 0.007) =
0.083
0.083 / (1 + 11.59%)
= 0.054
5 0.6% 0.083 * (1 + 0.006) =
0.0835
0.0835 / (1 +
11.59%) = 0.048
Sum of stage 1 and 2 0.3
Stage 3
Stable growth period or perpetual growth period
Period Growth rate Dividend
6 0.6% 0.0835 * (1 + 0.006) = 0.084
With the help of Gordon growth model, the present value of perpetual dividends can be obtained
at the beginning of the stable growth phase which is known as the terminal value.
Terminal value = Present value of perpetual dividends 6 years onwards = 0.084 / (11.59% -
0.6%) = 0.084 / 10.99% = 0.764
This terminal value is associated with the end of 5th year or the beginning of stable growth period
which must be discounted to get the value at the time 0 or 5 years back, that is,
PV at time 0 = 0.764 / (1 + 11.59%) ^5 = 0.442
Intrinsic value of Bega limited share = Present value of dividends in sustainable growth period
and high growth period + present value of dividends in stable growth period = 0.3 + 0.442 =
0.742.
As the current market price of Bega limited share is 3.5 while the intrinsic value of share is 0.742
and this means the stock is overvalued (Gálvez, 2022). Accordingly, it is not the right time to go
for investing in it.