Leading broker Macquarie has tipped 20% upside for S&P/ASX All Ordinaries Index (ASX: XAO) consumer staples stock Bega Cheese Ltd (ASX: BGA).

On 10 June, Macquarie initiated coverage of Bega Cheese with an outperform rating and a price target of $6.40. At the time of writing, Bega Cheese shares are changing hands for $5.50, suggesting a 20% upside from here.

What is Bega Cheese?

Bega Cheese has been around since 1899 and listed on the ASX in 2011. It operates in the consumer staples sector. 

Bega is a high-volume food and beverage manufacturer that focuses on dairy products. It operates in two business segments: Branded and Bulk. 

The branded segment manufactures and sells consumer products for owned and externally owned brands. This segment processes ~800m litres of milk annually. It operates more than 30 consumer names, many of which are household names. These include Iced Coffee, Masters, Dairy Farmers, Big M, Farmers Union, Yoplait, Bega, B honey, B, Vegemite, Pura, and other brand names. The company sells its products through grocery, route trade, foodservice, petrol, convenience channels, and food manufacturers.

The Bulk business processes milk into its various components, which are mainly used to provide milk products to its Branded business. This segment processes ~550m litres of milk annually.

Why does Macquarie expect it to outperform?

Bega Cheese shares have risen 21% over the past five years. That substantially trails the S&P/ASX All Ordinaries Index (ASX: XAO), which is up 47% over the same period. However, broker Macquarie is predicting that the ASX All Ords consumer staples stock is posited to outperform in the year ahead.

In its 10 June initiation report, Macquarie cited the company's track record of successful execution, effective cost management, and ability to reduce its manufacturing footprint in recent years.

The broker also commented on the company's 10-year transformation:

Bega has conducted multiple brand-building acquisitions in the last decade, with the most notable being its acquisitions 1) of the Mondelez Grocery Business in 2017; and 2) Lion Dairy & Drinks in 2020. Over this time, Bega has reduced its reliance on the commodity-price driven Bulk business, and shifted its focus toward being a consumer-facing, branded business.

Macquarie also referenced Bega's potential to reduce costs through site rationalisation and operational efficiencies. Macquarie expects this will improve the company's gross margin.

Looking forward, the broker also said:

Bega is progressing well on its FY28 Strategy, with momentum in its cost-out initiatives as well as key top-line growth opportunities. We forecast a 4-year EPS CAGR of 33% to FY28.

What other outcomes are possible?

In its initiation report, Macquarie also provided its bull case (most optimistic outcome) and bear case (most pessimistic outcome) for Bega Cheese shares.

A $7.30 price target was assigned for the bull case:

In this scenario, we incorporate further EBITDA margin expansion in the Branded business, equating to a ~0.5ppt increase annually from FY26-28, driven by accelerated cost-out, including site closures.

A $5.00 price target was assigned for the bear case:

In this scenario, we keep the Branded business' margin profile flat from FY26-28, assuming that cost-out achieved only covers cost inflation. In addition, we incorporate a loss in the Bulk business in one year (FY30) out of six, which reflects the outcome of the last six years (since Bega created the Branded and Bulk segments), at the same negative EBITDA margin rate as FY24, when the Bulk business last lost money.

Foolish Takeaway

Macquarie expects Bega Cheese to deliver solid returns over the next 12 months. During heightened market volatility, investors often flock to defensive sectors such as consumer staples. Given what has transpired so far in 2025, Bega Cheese may be of particular interest to ASX investors.