Bellamy's shares are on a tear

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Shares in troubled infant formula maker Bellamy’s jumped in afternoon trade.

At one stage they were up 12% to $5.18. At the close they were $4.90, up 6.5%. The shares have gained almost $1 over the last week but are still a long way from the year high of $15.38.

Analysts have been marking the sector higher after the Reckitt Benckiser Group in the US confirmed it is in talks to buy baby-food maker Mead Johnson Nutrition.

Analysts at Citi say that deal would imply a higher valuation of both Bellamy’s and a2 Milk.

However, Citi still has a sell recommendation on Bellamy’s.

“We expect the next 6-12 months in China to be challenging due to concerns around distributor destocking and price competition to clear the inventory overhang of those infant formula products not qualified for registration under the new regulation,” Citi says in a note to clients.

“Bellamy’s is also facing a number of company-specific issues and, while the restructuring strategy has merits, we consider short-term risks to be skewed to the downside.”

Sales of the Tasmanian-based organic infant formula hit a wall in China after changes in regulations.

The company now faces a class action by disgruntled shareholders and a motion to spill the board of directors.

The company last month pushed out its CEO, Laura McBain, and cut its profit guidance again.

Bellamy’s now expects full year revenue to be in the range of $220 million to $240 million, at best flat on 2015 and well below previous analyst expectations of about $330 million.

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