The Bellamy's Australia Ltd (ASX: BAL) share price has fallen from $22.52 on 23 March, to as low as $7.18 in recent weeks, representing a 68% decline in the share price since its all-time high. Bellamy's falling share price follows weak year-on-year sales growth from the company. Two factors impacting on revenue growth are:
- the unexpected delay in gaining Chinese export accreditation; and
- China-United States trade war concerns.
SAMR accreditation
The State Administration for Market Regulation (SAMR) is China's new market regulator. It is designed to eliminate the duplication of work and streamline regulation. Bellamy's requires accreditation in order to export Chinese-labelled products directly into China. The past share price appreciation of Bellamy's and competitor A2 Milk Company Ltd (ASX: A2M) was strongly linked to the ability of the companies to target the large and growing Chinese market. Given that the SAMR aims to streamline regulation, Bellamy's should receive accreditation and revenue growth should return.
Management expects to grow revenue from $329 million in FY18 to $500 million by FY21.
China-United States trade war
One of the few things economists can agree on is that protection and trade barriers have a negative impact on an economy. As a result, the ongoing trade war between the United States and China has negatively impacted the share price of Australian companies that make money in China. The current truce between President Trump and President Xi is promising, but there will continue to be volatility in the market.
Over the long term, I expect the countries will come to a mutually beneficial agreement.
Should you invest?
Bellamy's shares currently trade at 20x earnings, which is above the market average of 16/17x earnings. This is rather modest when compared to A2 Milk, whose shares currently trade at 42x earnings. The company expects FY19 EBITDA margins of 22-25%, in line with FY18.
The Chinese organic baby formula market has grown formal retail sales at a compound annual growth rate of 35% between FY13 and FY17. This tailwind should support Bellamy's business going forward.
Given the relatively modest valuation and strong growth prospects of the company, long-term investors should see Bellamy's as a strong candidate for their portfolio.
