Craigs Investment Partners broker Chris Timms said the company still had a lot of work to do to clear its inventory stockpile. However, he retained his neutral recommendation on the company.
Bellamy’s chief executive Laura McBain has left the company but the ASX-listed company’s shares dropped to $A4.46 ($NZ4.69), the lowest since August 2015. On the NZX, A2 Milk shares fell 1.3% to $2.25 and Fonterra Shareholders Fund rose 1.8% to $2.72.
Mr Timms said Ms McBain had been replaced in an acting capacity by Andrew Cohen, previous chief operating officer. Chief financial office Shona Ollington had been demoted.
"Bellamy’s continues to have a strong brand and is exposed to a compelling long-term opportunity with Chinese infant formula demand and organic food more broadly.
"While we expect the Chinese market to continue to be a struggle in the near-term as non-compliant product is sold at large discounts, the regulatory change should ultimately favour established brands like Bellamy’s."
The Australian infant formula maker ran into trouble after China moved to tighten regulations in a bid to crack down on the grey market, or "daigou", and allay concerns about food safety. Under the changes, each legal entity would only be allowed to have three brands with three recipes for infant formula, something that was expected to reduce the number of brands and labels on supermarket shelves in China from more than 2000 currently to 200.
Mr Timms said Bellamy’s new management team had a lot of work to do. The company had increased stocks ahead of an expected ramp-up in sales. But, with revenue now expected to be on a par with or below last year, the company had been left with a large stockpile of inventory — between $A105million and $A110million and 40% up on 2016.
With the increase in inventories, Bellamy’s would have experienced cash outflows and was likely to further utilise its borrowing facilities, he said.
"Should this inventory not be readily cleared — while retaining the premium brand image — and production reduced, the company could face a cash crunch and be forced to raise equity."
Also, Chinese market uncertainty, management changes, potential further inventory write-downs, the possibility of a board shake-up and talk of a class action would weigh on sentiment towards the company, Mr Timms said.
Despite the share price selling off strongly since the end of November, Bellamy’s was still trading on a premium price to earnings (PE) ratio of 28 times. The market had a lot of information to digest and a number of questions remained unanswered.
"We suggest investors wait before considering purchasing shares."