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Treasure Chest: More Pain For Bellamy’s?

Treasure Chest | Jan 19 2017

This story features A2 MILK COMPANY LIMITED. For more info SHARE ANALYSIS: A2M

-Amongst mostly negative views on Bellamy's, Bell Potter remains relatively optimistic
-Goldman Sachs has returned with most negative view of all
-Buy rating reiterated for competitor a2 Milk

By Rudi Filapek-Vandyck

Citi analysts cut their price target to $3.75 while retaining a Sell rating. Ord Minnett analysts cut their target to $3.72 while downgrading the rating to Sell. Stockbroker Morgans is still prepared to keep a little faith and only cut its target to $4.75, accompanied by a Hold rating.

The failures and misses at former market darling and Tasmania's corporate pride, Bellamy's ((BAL)), have been widely reported and commented upon this month. The CEO is gone. The CFO has been demoted. A recalcitrant group of shareholders (read: Jan Cameron and friends) wants to drink the blood of the remaining independent directors on the board. And New Zealand partner Fonterra now has the ability to boycott a change in ownership, if it were to occur.

It wasn't that long ago, 2015 to be precise, when Bellamy's was among the undisputed champions in the Australian share market, but things have darkened swiftly. There has been very little joy, if any, for loyal shareholders in 2016. A resumption of trading in the shares in January, after a suspension of about one month, has seen the share price tank by close to 38%, from $6.50 to near $4.00.

Things can only get better from here, right?

Current shareholders might take heart from the fact that not all stockbroking analysts have turned downright negative on Bellamy's future. Morgans is not as pessimistic as Citi and Ord Minnett. Bell Potter is even prepared to see some positives: stabilising sales, new management and "issues" that are addressable, or so it appears. Bell Potter has retained its Hold rating and only reduced its price target to $5.63.

Not so the analysts at Goldman Sachs. While everyone else was busy responding to the company's market update, analysts at Goldman Sachs needed a bit more time to digest all the finer, and not so subtle, details of what exactly has been going awry at the embattled organic milk marketer.

Having taken more time to assess and re-assess, Goldman Sachs has now returned with the most bearish assessment in the local market, even beating Citi analysts who never had anything but a Sell rating on this stock since initiating coverage in 2016. Goldman Sachs analysts are of the view that investors should expect more negative news flow in the short to medium term. Rather than assuming sales are stabilising, as Bell Potter does, the analysts have positioned themselves no less than 40% below the company's downgraded earnings (ebit) guidance for this year.

Goldman Sachs sees further negatives from Bellamy's trying to clear excessive inventories, while it is noticeably losing market share to a2 Milk ((A2M)) and to Danone (Aptamil). Most of all, the analysts expect investors to take a negative view on the likelihood of a capital raising later in the year.

All in all, Goldman Sachs's new price target of … drum roll… $3.40 suggests a lot more pain could be in store for shareholders hoping for the best. The rating has been cut to Sell from Neutral.

Note: the analysts at Goldman Sachs have grabbed the opportunity to reiterate their Buy rating for a2 Milk which, they note, doesn't have take-or-pay arrangements and continues to win market share.

Goldman Sachs's view on a2 Milk is not shared by everyone. In the FNArena database, only Credit Suisse agrees wholeheartedly, whereas Citi (Sell) and UBS, Deutsche Bank (Neutral) currently have a different view. CLSA also has turned ultra-negative on Bellamy's while staying positive on a2 Milk.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

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