Bellamy’s (BAL) premium organic brand not likely to be impacted by recent volatility

Post FY16 results, markets reacted positively to BAL’s surprise results announcement and the share price gained more than 10% in two days. The management of BAL assured analysts during results conference call that BAL is fully prepared to meet the requirements of China’s new infant formula regulations and reiterated that they will prove beneficial to the company. However since the Blackmores’s (BKL) results announcement on 24th August, market sentiment has turned negative towards dairy and infant formula stocks, on warning of a volatile Australian wholesale market and retailers de-stocking. We believe these concerns have been overblown, and will have no effect on BAL’s business. BAL’s organic infant formula is among the top 10, on leading Chinese e-commerce website Tmall. BAL multichannel strategy of selling online and through retailers in China is progressing as planned. We believe these regulatory changes are a step by the Chinese government to control the grey market. They are aimed at protecting the consumer. We believe that BAL is a Buy, and our 12month price target is $20 based on a FY17e PE multiple of 30x.