Eco Investor March 2017

Pre-Dividend Securities

Downgrade for Bellamy's Australia

Eco Investor has downgraded Bellamy's Australia to a pre-dividend security as the company will not pay a dividend for the December half year.

The company said its cash position was materially impacted by an increase in inventory, so that may be the reason for the lack of a dividend. It anticipates returning to positive free cash-flow by the middle of this half.

The company was able to maintain its profitability and made a net profit of $7.2 million, down from $13.6 million in for the December 2015 half. Earnings per share were 7.5 cents.

Despite its high profile issues, Bellamy's was able to grow its interim revenue from $105 million to $118 million. But this was nowhere near enough to meet the very high growth expectations that investors had expected before Bellamy's recent and very public fall as a growth stock. Its consecutive half on half revenue fell by 15 per cent.

The company expects to meet its full year revenue guidance of $220 million to $240 million. Net profit for the second half and for 2016-17 is expected to be between 4 and 6 per cent of revenue - between $8.8 million and $14.4 million.

Bellamy's said it needs 18 months to return to sustained profitable growth. As part of its turnaround it has significant cost reductions underway, a new production schedule after amending its manufacturing contract with Fonterra, it has consolidated its distribution to a smaller number of key resellers in China and Australia, and it has a new leadership team, management structure and improved reporting systems. The new distribution plan includes increasing the number of stores that sell its products in China by 1,600.

It will now be seen whether the company's strategy changes following the mostly successful plan to replace the board. This was led by entrepreneur Jan Cameron and fellow unhappy shareholders. Just before the extraordinary meeting chairman Rob Woolley resigned as a director and chairman with immediate effect. So did director Launa Inman. Directors Michael Wadley and Charles Sitch lost their positions in the vote. Only director Patria Mann survived.

Ms Cameron was not elected to the board, but her fellow nominees Chan Wai-Chan and Rodd Peters were, and Mr Peters is the new chairman. With three members, the composition of the board is incomplete so more changes may follow.

After the vote, Bellamy's share price opened higher on large volume when trading recommenced, suggesting the old board had lost investors' confidence. (ASX: BAL)

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