The document is a research report recommending a BUY rating for shares of Bel, a French dairy company, with a target price of €399, implying 33% upside potential. The report cites Bel's efficient business model, strong positioning for growth in healthy and on-the-go consuming trends, and ability to pursue acquisitions as reasons to believe the stock is undervalued compared to peers and offers attractive growth and dividend prospects despite some risks relating to currency exchange rates and commodity prices.

1. CFA Institute Research Challenge
Hosted by
Local Challenge CFA France
Université Lille 2/SKEMA

2. 0
50
100
150
200
250
STOXX
600
-­‐
Food
&
Beverage
UNIBEL
Fromageries
Bel
TP:
€399
[Université
Lille
2/SKEMA]
Student
Research
This
report
is
published
for
educational
purposes
only
by
students
competing
in
the
CFA
Institute
Research
Challenge.
Consumer
Staples
BEL
Date:
12th
January
2015
Ticker:
FBEL
Recommendation:
BUY
Exchange:
E.N
Paris
Price:
€300
Target
Price
:
€399
(+33%)
One
Portion
of
Bel,
One
Giant
Return
for
Shareholders
We
issue
a
BUY
recommendation
with
a
target
price
of
€399
based
on
a
weighted
average
of
DCF,
transaction
and
relative
valuations.
Our
TP
implies
an
upside
potential
of
33%.
§ An
EfYicient
Business
Model
Bel
capitalizes
on
a
simple
and
efSicient
business
model:
a
family
business,
pure
player
in
premium
branded
cheese
production
and
products
with
a
strong
identity,
backed
by
an
expertise
in
miniaturization.
§ Well-­‐Positioned
For
Further
Growth
We
believe
Bel
is
well-­‐positioned
for
further
growth
(we
expect
12%
EPS
CAGR
2013-­‐18E),
driven
by
(1)
international
expansion
led
by
the
5
core
brands;
(2)
market
share
gains
over
the
period
2014E-­‐18E;
and
(3)
an
enviable
strategic
positioning,
well
exposed
to
the
growth
trend
of
on-­‐the-­‐go
and
healthy
consuming,
while
enjoying
premium
pricing
power
(reSlected
in
premium
operating
margins).
Besides,
to
seize
potential
external
growth
opportunities,
management
has
fostered
a
strong
Sinancial
discipline.
As
a
result,
Bel’s
leverage
is
low
(net
debt/EBITDA
close
to
zero),
with
acquisition
Sirepower
estimated
at
more
than
€1bn
in
2015E
assuming
leverage
of
3x
EBITDA.
§ A
Defensive
Stock
To
Own
During
Tough
Times
Despite
the
stock’s
growth
potential,
we
believe
the
defensive
nature
of
the
industry
is
a
key
asset:
Bel’s
activity
can
provide
investors
with
an
attractive
counter-­‐cycle
investment.
Besides,
the
group
has
a
constant
dividend
policy,
which
makes
it
attractive
for
investors
looking
for
constant
dividends:
the
dividend
growth
of
21%
CAGR
for
2013-­‐2018E
implies
a
dividend
yield
of
3%
on
average.
§ Despite
An
Attractive
Risk-­‐Reward
ProYile,
We
Flag
Some
Risks
Bel
trades
at
a
discount
to
its
peers
that
exceeds
25%,
even
adjusted
for
liquidity,
providing
strong
support
to
our
BUY
recommendation.
We
believe
the
discount
is
unjustiSied,
as
reSlected
in
our
target
price
which
points
to
33%
upside
potential.
The
main
concerns
we
have
on
the
stock
are
(1)
its
weak
liquidity;
(2)
the
top-­‐line
and
margin
exposure
to
forex
and
volatile
commodity
prices;
and
(3)
its
exposure
to
Europe
(60%
of
sales),
albeit
decreasing.
Catalysts
(1)
A
QE
announcement
by
the
ECB
given
inSlation
data
in
the
Eurozone
and
the
ongoing
decline
in
oil
prices;
(2)
an
acquisition
announcement,
provided
Bel
does
not
pay
too
much;
(3)
the
creation
of
a
futures
market
for
dairy
raw
materials
by
Euronext;
(4)
worldwide
consumption
trends
toward
healthy
eating
(which
includes
cheese);
and
(5)
increased
share
liquidity
through,
for
example,
the
disposal/placing
of
Lactalis’
24%
stake.
Market
ProYile
52-­‐week
Price
Range
€265-­‐314
Average
3M
Daily
Volume
228.4
Shares
Outstanding
(m)
6.82
Market
Capitalization
(€m)
2
062
Free
Float
4.4%
Unibel
Holding
67.4%
Beta
0.41
Sources:
Factset,
Team
estimates
Valuation
DCF
Transac
Mult
Estimated
Prices
€373
€442
€432
Weights
60%
20%
20%
Target
Price
(€)
€399
Financials
2012
2013
2014E
2015E
EPS
(€)
18.7
18.5
13.9
21.4
DPS
(€)
6.25
6.25
6.25
7.91
Sales
(€m)
2
649
2
720
2
828
3
000
EBIT
(€m)
238
240
169
247
Net
proSit
(€m)
129
126
94
146
ROCE
11.4%
9.3%
7.0%
9.7%
Net
debt/
EBITDA
(x)
0.2
0.1
0.2
-­‐0.1
Sources:
Factset,
Team
estimates
Valuation
metrics
2012
2013
2014E
2015E
EV/EBIT
(x)
5.5
7.8
11.7
8.0
EV/Sales
(x)
0.5
0.7
0.8
0.7
Sources:
Factset,
Team
estimates
Source:
Factset
Dec-­‐14
Dec-­‐10
Dec-­‐11
Dec-­‐12
Dec-­‐13
Source:
Team
estimates
Bel
Stock
Price
(100
at
31st
Dec
2010)
Alexandre
RAVERDY
alexandre.raverdy@gmail.com
+33(0)6.19.25.79.26
Manon
RICHARD
manonrichard_2@hotmail.fr
+33(0)6.16.95.32.54
Ran
XU
cindyhit08@gmail.com
+33(0)6.98.13.06.40
Konan
KOUASSI
kkrprive@yahoo.fr
+33(0)6.66.69.25.96
Maxime
PARRA
maxime.parra@newtrading.fr
+33(0)6.47.61.90.40
%

3. 0
50
100
150
200
250
300
Investment
Summary
We
based
our
target
price
on
a
weighted
average
of
three
valuation
models
(DCF,
Transaction
method
and
Relative
valuation).
Despite
its
weak
liquidity
–
taken
into
account
in
each
method
–
we
issue
a
BUY
recommendation
on
Bel
with
a
target
price
of
€399
(33%
upside)
relying
on
its
international
expansion
(attractive
for
investors
given
the
signiSicant
growth
potential),
its
competitive
advantage
in
miniaturization
and
its
acquisition
Sirepower.
From
a
valuation
standpoint,
Bel
is
currently
trading
at
an
undeserved
28%
discount
to
its
peers
on
2015E
EV/EBIT
and
a
25%
discount
to
2015E
EV/Sales,
both
adjusted
for
liquidity,
providing
strong
support
to
our
BUY
recommendation.
International
Expansion
(Figures
1&2)
In
2013,
Bel
sales
accounted
for
c.2.8%
of
world
cheese
market
size
(approximately
€98bn),
of
which
62%
came
from
Europe.
The
trends
in
the
food
industry
provide
attractive
opportunities
for
Bel.
With
the
new
Brookings
production
site
in
the
US
and
further
internationalization,
we
forecast
a
market
share
of
3.1%
by
2018E,
which
implies
a
CAGR
2013-­‐18E
sales
of
6%.
Manufacturing
Know-­‐How
in
Miniaturization
Cheese
portion
format
is
one
of
Bel
strong
designs,
and
miniaturization
stems
from
unique
manufacturing
know-­‐how.
This
is
well-­‐adapted
to
on-­‐the-­‐go
consumption
trend
that
is
driving
demand
worldwide.
A
Sound
Financial
Structure
§ Strong
free
cash
Slow
generation
and
conservative
capital
allocation
has
led
to
a
strong
balance
sheet.
This
should
also
allow
Bel
to
(1)
continue
to
strongly
invest
in
marketing
(around
21%
between
2014E-­‐18E)
and
R&D
(1%);
and
(2)
increase
its
payout
ratio
from
34%
in
2013
to
50%
in
2018E.
§ Since
2009,
Bel’s
Net
Debt/EBITDA
has
decreased,
reaching
0.07x
in
2013.
Due
to
the
internal
operating
improvements,
the
ratio’s
downward
trend
should
continue
and
allow
Bel
to
show
a
net
cash
position
from
2015E
(Figure
3),
which
provides
acquisition
headroom.
Interestingly,
management
has
shown
a
selection
skill
and
a
strong
integration
capacity
with
past
acquisitions
(16
local
and
international
brands
including
Leerdammer
and
Boursin).
Possible
Investment
Risks
Potential
investors
must
be
aware
of
two
main
risks:
corporate
governance
and
market
risks.
§ Corporate
governance
risk
is
due
to
the
family-­‐controlled
structure.
Some
conSlicts
of
interest
might
appear
as
the
positions
of
CEO
and
Chairman
are
Silled
by
the
same
person
(member
of
the
family
shareholder).
§ Illiquidity
may
also
have
a
possible
adverse
impact
on
investors’
returns.
This
market
risk
is
characterized
by
(1)
a
very
low
free
Sloat
(4.4%)
and
(2)
an
historical
average
bid-­‐ask
spread
of
3%.
An
investor
with
a
long-­‐term
investment
horizon
may
be
less
affected
by
this
risk.
In
addition,
Bel
is
subject
to
foreign
exchange
rate
Sluctuations
as
a
result
of
its
international
operations
and
presence.
Other
risks
(political,
strategic,
etc.)
are
explained
in
the
Investment
Risk
section.
Figure
1:
Bel
sales
estimates
and
forecasts
Source:
Team
estimates
CAGR
2013-­‐18E
Europe
2.7%
NME
&
Africa
9.9%
Americas
-­‐
APAC
10.7%
World
5.9%
-­‐200
-­‐150
-­‐100
-­‐50
0
50
100
150
200
250
300
350
400
€m
Figure
3:
Net
debt
/
cash
evolution
Sources:
Bel,
Team
estimates
Figure
2:
Bel
market
share
estimates
and
forecasts
2
Figure
4:
Bel
stock
price
&
key
events
Sources:
FactSet,
Bel
1st
June
2006
Acquisition
of
Gervais
Brand
5th
November
2007
Acquisition
of
Boursin
14th
May
2009
Appointment
of
Antoine
Fievet
as
CEO
&
Chairman
2nd
July
2012
Announcement
of
a
new
production
site
in
the
US
7th
February
2013
Acquisition
of
Tranchettes
18th
June
2012
Appointement
of
Francis
Le
Cam
as
Deputy
General
Manager
2009
2006
2014
2013
2012
2011
2010
2008
2007
CFA
Institute
Research
Challenge
12th
January
2015
Source:
Team
estimates
3.1%
3.7%
9.8%
1.3%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
World
Europe
NME
&
Africa
Americas
-­‐
APAC
2013
2018E

4. 0
1
000
2
000
3
000
2010
2011
2012
2013
Americas
-­‐
APAC
Africa
-­‐
Middle
East
Europe
Unibel
Fiévet/Bel
Family
SoSil
SA
(Lactalis
Group)
Other
public
Treasury
Stock
CFA
Institute
Research
Challenge
12th
January
2015
Business
Description
Bel
is
the
3rd
largest
branded
cheese
manufacturer
worldwide.
Operations
started
in
1865
for
this
French
family-­‐held
group
when
Jules
Bel
created
a
cheese
ripening
and
trading
business.
After
he
died,
Léon
Bel,
his
son,
took
over
the
business
and
set
out
for
an
industrial
adventure
by
creating
Fromageries
Bel
in
1922,
which
produced
the
well-­‐known
Laughing
Cow
brand.
The
company
then
grew
Sirst
through
the
construction
of
modern
plants
both
domestically
and
internationally,
and
secondly
by
broadening
its
range
of
products.
In
particular,
it
launched
the
Sirst
fat-­‐free
cheese
in
the
early
1930s,
leading
the
way
in
healthy
products.
Since
then,
the
company
has
developed
throughout
the
world.
Today,
the
company
is
active
in
5
continents
with
28
production
plants
and
30
subsidiaries
(Appendix
9).
Its
portfolio
comprises
5
core
brands
(The
Laughing
Cow,
Mini
Babybel,
Leerdammer,
Kiri,
Boursin)
and
25
local
brands.
In
2013,
the
company
employed
10,830
people.
Its
easy-­‐to-­‐carry
and
easy-­‐to-­‐keep
cheeses
also
make
Bel
a
leading
company
in
on-­‐the-­‐go
consumption
with
three
segments
(3
“S“):
Spread
(soft
spreadable
cheese
and
product
containing
cheese),
Snacks,
and
Slices
(hard
cheese)
(Figure
6).
To
achieve
its
goals,
Bel
manufactures
three
types
of
cheese,
distributed
in
120
countries:
Processed
cheese
for
which
the
group
is
a
leader
thanks
to
The
Laughing
Cow
(Bel’s
oldest
brand),
Pressed
cheese
(e.g.
Mini
Babybel
and
Leerdammer)
and
Fresh
&
Spreadable
cheese
(e.g.
Kiri,
Boursin).
Current
strategy
of
the
company
can
be
described
with
the
following
3
pillars:
§ Industrial
Expertise
and
Innovation
Leadership
(Appendix
10).
With
two
R&D
centers
in
Europe
and
R&D
expenses
(1%
of
sales)
two
times
higher
than
its
closest
peers,
industrial
expertise
and
innovation
are
the
cornerstone
of
Bel
and
ensure
it
keeps
a
strong
competitive
advantage.
Since
the
industry
is
mature,
the
group
is
changing
its
product
mix
(e.g.
co-­‐
branding).
This
is
why
it
aims
at
broadening
the
range
of
its
brands
as
well
as
renewing
its
recipes
(a
dedicated
team
is
in
charge
of
understanding
the
consumers’
needs).
Besides,
the
company
aims
at
conquering
Asia
by
developing
new
Slavors
while
respecting
their
culture
and
habits.
Its
industrial
expertise
will
enable
the
group
to
increase
its
footprint
in
countries
like
Vietnam,
Japan,
China
and
South
Korea.
§ Internationalization
And
Strengthening
of
The
5
Core
Brands
In
2013,
the
core
brands
accounted
for
70%
of
total
sales
(vs.
32%
in
2008),
4
of
them
among
the
world’s
12
leading
cheese
brands
(Appendix
11).
The
group
aims
at
increasing
its
sales
by
building
new
production
plants
in
high
potential
regions.
For
instance,
the
new
plant
in
Brookings
(USA)
will
produce
10
thousand
tons
of
cheese
each
year
to
meet
the
growing
demand
for
Mini
Babybel.
The
group
thus
plans
to
reach
$1bn
of
sales
in
N.
America
by
2025
(x3
in
10
years).
§ Acquisition-­‐Led
Growth
Focus
On
Premium
Branded
Cheeses
Acquisition-­‐led
growth
gradually
complements
innovation-­‐led
growth.
Indeed,
since
1985,
the
company
has
already
acquired
16
brands
(Figure
8
&
Appendix
12)
and
puts
a
particular
emphasis
on
the
quality
of
the
brands
it
acquires.
Bel’s
Management,
A
Well-­‐Functioned
Network
of
Experts
Fitting
The
Group’
Strategy
Antoine
Fiévet,
representing
the
5th
generation
of
the
shareholding
family,
became
CEO
and
Chairman
of
the
group
in
2009.
In
the
executive
committee,
the
other
three
deputy
general
managers
all
have
extensive
experience:
Bruno
Schoch
(Finance,
Legal
and
IT)
has
a
strong
knowledge
in
M&A
transactions
perfectly
Sitting
the
group
strategy;
Francis
le
Cam
(Operations)
has
substantial
background
in
International
Management;
and
Hubert
Mayet
is
an
expert
in
manufacturing
and
technology
(Appendix
13).
Shareholder
Structure
Though
Bel
has
been
listed
on
the
Paris
Stock
Exchange
since
1946,
it
remains
controlled
by
the
founding
family.
It
is
the
major
shareholder
today
with
71%
of
the
shares
(of
which
67.4%
is
held
by
Unibel,
its
listed
family
holding
company).
Lactalis,
one
of
Bel’s
competitors,
holds
24%
of
the
shares
(Figure
9).
Free
Sloat
is
therefore
very
low
(4.4%)
but
the
stable
shareholder
structure
allows
an
effective
long-­‐term
strategy.
Free
Sloat
could
increase
should
Lactalis
dispose
of
its
shares:
it
would
boost
liquidity
and
attract
interest
from
institutional
and
retail
shareholders
in
the
stock.
A
move
toward
more
visibility
is
witnessed
by
the
availability
of
the
annual
report
in
English
since
2013.
60%
25%
15%
Spread
Snacks
Slices
Figure
6:
Bel
production
3
“S”
Brand
Creation
Acquisition
Leerdammer
(€190m)
(2002)
Kiri
(1966)
Boursin
(€400m)
(2008)
The
Laughing
Cow
(1921)
Mini
Babybel
(1977)
Figure
8.
Core
brands
development
Figure
7:
Sales
breakdown
by
region
(€m)
Figure
9:
Shareholder
structure
0.7%
67.4%
3.5%
4.4%
24.1%
Figure
5:
Breakdown
of
activities
B
E
L
Consumers
(Core
market)
Catering
(Bel
Foodservices)
Industry
(Bel
Industries)
Source:
Bel
Source:
Bel
Source:
Bel
Source:
Bel
NB:
Bel
does
not
provide
the
%
of
each
activity
Sources:
Bel,
FactSet
3

5. Philadelphia
Boursin
Kiri
Tartare
The
Laughing
Cow
Cœur
de
Lion
Mini
Babybel
Leerdammer
Ptit
Louis
0
100
200
300
400
500
600
700
800
900
15
20
25
30
35
40
Calcium
(mg)
Fat
(g)
NRV*
Industry
Overview
and
Competitive
Positioning
The
cheese
industry
offers
attractive
market
dynamics
while
offering
good
resilience
to
economic
cycles.
Product
innovation,
new
social
trends
and
increased
penetration
in
rapidly
growing
regions
such
as
Latin
America,
the
Middle
East
and
Africa
are
the
main
drivers
of
growth.
A
Defensive
Industry
BeneYitting
From
A
Positive
Macro
Backdrop
The
cheese
industry
is
characterized
by
its
defensive
nature:
it
provides
upside
potential
during
expansions
and
protection
during
downturns.
For
instance,
over
the
period
2008-­‐2009,
while
global
GDP
growth
fell
by
2.9%,
cheese
production
growth
remained
positive
and
went
from
0.8%
in
2008
to
0.3%
in
2009
(Figure
10).
As
for
Bel,
its
output
increased
by
0.2%
in
2009.
Cheese
consumption
varies
signiYicantly
from
one
region
to
another
(Figure
11).
The
global
cheese
market
is
valued
at
around
€100bn,
dominated
by
Europe
followed
by
North
America
and
Latin
America.
However,
the
global
cheese
market
is
expected
to
grow
strongly
going
forward,
spurred
by
emerging
countries,
especially
in
Asia-­‐PaciSic
(China,
Indonesia,
Vietnam).
The
global
cheese
output
reached
19m
tons
last
year
(+19%
2005-­‐13)
and
global
demand
is
likely
to
continue
to
be
strong.
Europe:
Steady
As
It
Goes
The
EU-­‐28
accounted
for
48%
of
global
output
in
2013.
With
approximately
48%
of
the
EU
output
derived
from
Germany
(27%)
and
France
(21%),
those
countries
are
the
two
largest
cheese
producers
in
Europe
(Appendix
14).
In
Western
Europe,
cheese
market
is
very
mature,
with
annual
per
capita
consumption
of
€85.
We
thus
expect
a
limited
but
steady
value-­‐led
growth
(0.5%
growth
pa,
as
reSlected
in
our
estimates).
Americas:
A
Growing
Appetite
In
2013,
a
quarter
of
global
total
volume
growth
in
cheese
came
from
just
Brazil
and
the
US.
American
consumers
eat
an
average
15.4kg
(Appendix
15),
and
sales
of
cheese
are
expected
to
increase
as
additional
cheese
varieties
are
continuously
introduced
in
the
market.
Brazil,
with
per
capita
consumption
of
just
6kg,
is
a
very
interesting
market:
further
penetration
should
generate
substantial
new
sales
as
cheese
becomes
a
more
important
food
item
in
the
Brazilian
diet.
Emerging
Markets:
The
New
Eldorado
Emerging
markets
offer
higher
growth
potential
as
consumption
levels
are
still
low
while
the
potential
consumer
base
is
large.
The
two
main
growth
drivers
of
consumption
are
(1)
rising
disposable
incomes
and
(2)
urban
population
growth.
Asia-­‐PaciYic
has
the
highest
potential
as
cheese
is
still
a
very
nascent
market.
This
goes
hand-­‐in-­‐hand
with
demographic
change
and
growth
of
middle
classes
(whose
global
spending
share
should
represent
59%
in
2030E
from
23%
in
2009
(Figure
12),
and
reSlects
a
more
general
trend
of
rising
demand.
In
China
for
instance,
where
Bel
has
been
active
since
2007,
per
capita
consumption
is
still
low
(40g)
due
to
the
sheer
size
of
its
population.
The
bright
outlook
is
reSlected
by
an
expected
CAGR
consumption
of
12%
for
the
period
2014E-­‐18E
according
to
Euromonitor.
In
Near
Middle
East
(NME)
and
Africa,
while
there
is
a
high-­‐growth
potential,
the
region
is
constrained
by
an
underdeveloped
environment:
the
lack
of
a
developed
retail
environment
with
a
limited
cold
chain
infrastructure
in
place
as
an
important
factor
holding
back
cheese
sales.
Key
Industry
Trends
§ Product
Innovation
With
penetration
of
cheese
nearing
saturation
in
developed
regions
such
as
Western
Europe
or
North
America,
value
creation
is
key.
Different
usages
of
cheese
thus
offer
opportunities,
e.g.
cheese
being
promoted
as
a
cooking
product
in
addition
to
its
conventional
use.
In
emerging
countries,
the
product
mix
will
change
from
the
traditional
types
of
cheese
to
new
cheeses
that
suit
the
demand
(e.g.
sweet
cheese
for
Asia).
§ On-­‐The-­‐Go
Consumption
Is
Likely
To
Strengthen
Cheese
is
gradually
positioned
as
an
on-­‐the-­‐go
snack
both
for
children
and
adults.
This
goes
together
with
the
trend
of
new
cheese
eating
occasions,
where
frequency
of
use
is
increasing
(e.g.
breakfast
+
snacking
or
snacking
+
dinner).
§ Rising
Interest
in
Healthier
Products
Given
mounting
obesity
concerns,
people
tend
to
move
to
reduced
or
fat-­‐free
products
–
low
fat
and
salt
but
high
calcium
and
vitamin
D
-­‐
following
the
inclination
towards
a
healthier
lifestyle.
Bel
has
been
a
pioneer
in
healthy
products
and
keeps
its
advantage
over
its
peers
(Figure
13).
§ French
Cheese
Going
Mainstream
As
one
of
the
largest
cheese
exporters
worldwide,
France
has
an
outstanding
reputation
in
cheese.
French
cheese
might
thus
be
sold
as
a
premium
product,
just
like
wine
in
some
countries.
In
addition,
in
many
countries,
there
tends
to
be
growing
awareness
of
Western
cuisine,
including
French
cuisine.
-­‐3%
-­‐2%
-­‐1%
1%
2%
3%
4%
5%
6%
2007
2008
2009
2010
2011
2012
2013
2014E
World
GDP
growth
Cheese
production
growth
Figure
12:
Share
of
spending
by
the
Global
Middle
Class
(2009
to
2030
forecasts)
0%
20%
40%
60%
80%
100%
2009
2020
2030
APAC
Africa
-­‐
Middle
East
Americas
Europe
Figure
10:
Cheese
versus
GDP
growth
Figure
11:
Market
size
and
per
capita
cheese
consumption
Sources:
World
Bank,
OECD
Sources:
Euromonitor,
IDF
Source:
World
Bank
Figure
13:
Nutrition
Mapping
(per
100g)
Sources:
Team
research
CFA
Institute
Research
Challenge
*Nutrient
Reference
Value
12th
January
2015
0
5
10
15
20
25
30
0
5
10
15
20
25
30
Retail
Value
Sales
2014
(lhs)
Per
Capita
Total
Consumption
(rhs)
kg
€bn
Bel
Competitors
4

6. 0
1
2
3
4
5
0
500
1
000
1
500
2
000
2
500
3
000
3
500
4
000
0%
2%
4%
6%
8%
10%
12%
Sales
(rhs)
EBIT
margin
Net
proSit
margin
€m
A
Fragmented
Industry
The
global
branded
cheese
production
is
divided
in
four
main
types
of
cheese
manufacturers
(Figure
14):
§ Major
diversiYied
competitors
(e.g.
Kraft,
Mondelez)
which
hold
competitive
advantages
through
better
economies
of
scale
and
beneSit
from
a
lower
vulnerability
to
the
cheese
market
thanks
to
product
diversiSication
and
strong
bargaining
power
towards
customers
and
suppliers.
§ Dairy
specialized
family-­‐held
businesses
(e.g.
Bongrain,
Lactalis,
Bel)
with
a
portfolio
of
core
brands;
§ Small
regional
competitors
(e.g.
Arla
Food,
Dairy
Crest)
that
control
different
stages
of
the
supply
chain
and
beneSit
from
a
strong
presence,
identity
and
substantial
knowledge
of
their
market;
§ Retail
labels
(e.g.
ReSlets
de
France
for
Carrefour,
Tesco
brand),
which
are
cheaper
and
belong
to
retailers.
They
are
the
only
direct
substitutes
to
branded
cheese.
Regulation:
What
Will
Be
The
Impact
of
The
Quota
Abolition
in
Europe?
The
EU
introduced
a
national
quota
regime
for
milk
production
in
1984
to
limit
excess
supply
and
maintain
farmer
proSitability.
This
regime
will
come
to
an
end
in
April
2015
as
the
EU
moves
the
dairy
sector
towards
a
more
market-­‐orientated
future,
but
one
that
protects
producer
interests.
We
therefore
expect
(1)
an
overall
increase
in
production
coupled
with
declining
prices
which
would
be
favorable
to
Bel,
albeit
a
modest
impact
due
to
the
“soft
landing”
provided
by
the
EU;
and
(2)
no
reduction
in
current
price
volatility
after
the
end
of
quotas.
For
further
information,
please
refer
to
Appendices
16
&
17.
Porter’s
5
Forces
NB:
Since
Bel
derives
100%
of
its
revenue
from
industrial
cheese,
we
will
exclusively
focus
on
it
(Figure
15).
§ Rivalry:
as
more
than
20%
of
the
market
is
held
by
six
companies
competing
Siercely,
we
consider
the
branded
cheese
market
as
rather
fragmented.
§ Bargaining
power
of
customers:
in
most
countries,
the
main
customers
are
the
retailers
or
supermarket
chains,
which
are
likely
to
offer
alternatives,
such
as
retail
labels.
They
thus
have
signiSicant
bargaining
power.
§ Bargaining
power
of
suppliers:
suppliers
have
a
low
bargaining
power
since
most
inputs
(milk,
butter,
cream,
cheddar)
are
commodities.
§ Threat
of
substitutes:
the
direct
substitutes
to
industrial
cheese
are
craft
cheeses.
There
are
also
indirect
substitutes,
such
as
yogurts.
§ Threat
of
new
entrants:
barriers
to
entry
are
high
because
of
(1)
substantial
capital
requirements;
and
(2)
the
strength
of
the
existing
brands.
Those
features
could
deter
potential
competitors
from
challenging
the
incumbents.
Bel’s
competitive
advantage
relies
on
(Appendix
18):
§ A
Long-­‐Standing
Expertise
In
Portion
Format
Meeting
Industry
Trends
Cheese
becomes
more
and
more
commoditized.
Yet
Bel
offers
differentiated
products
that
are
small-­‐
sized
and
easy
to
carry
thanks
to
its
expertise
in
miniaturization
technology,
backed
by
a
strong
R&D
(at
1%
of
sales,
2x
higher
than
its
closest
peers).
This
historic
know-­‐how
is
in
line
with
the
new
social
trends
(on-­‐the-­‐go
consumption,
healthy
diet,
etc.).
§ A
Pure
Player
Status
Bel
is
one
of
the
few
companies
whose
business
is
100%
focused
on
cheese.
As
such,
Bel
can
achieve
better
economies
of
scale
on
operating
costs
than
its
closest
peers:
Bel’s
focused
strategy
and
concentrated
core
brand
portfolio
management
allows
leverage
on
R&D
investment,
product
innovation
expenses
and
other
marketing
and
promotional
expenses.
Financial
Analysis
Growing
Sales
Bel
has
delivered
revenue
growth
every
year
over
the
past
5
years,
even
in
2009
in
the
recession
though
partly
thanks
to
the
acquisition
of
Boursin.
In
2013,
sales
grew
by
2.7%
(+5.3%
on
a
like-­‐for-­‐
like
basis,
i.e.
excluding
the
impact
of
forex
Sluctuations,
Figure
17).
Besides,
Bel's
revenues
are
more
and
more
geographically
diversiSied,
in
line
with
the
internationalization
strategy
of
the
core
brands.
We
analyzed
and
estimated
Bel
sales
based
on
the
cheese
market
size
(per
capita
consumption
and
population
size)
and
the
expected
market
share
of
Bel
(Appendix
19).
§ In
Europe,
the
Sive
core
brands
allowed
Bel
to
expend
its
market
share
(estimated
at
3.3%
in
2013)
and
sustain
its
growth,
particularly
in
Eastern
Europe
with
an
effective
marketing
strategy.
We
forecast
a
2014E-­‐18E
CAGR
of
2.8%,
reSlecting
continued
market
share
gains
in
Eastern
Europe
and
a
more
limited
value-­‐led
growth
in
Western
Europe.
Figure
15:
Porter’s
5
Forces
Rivalry
(4.5)
Bargaining
Power
of
Customers
(4)
Bargaining
Power
of
Suppliers
(1.5)
Threat
of
New
Entrants
(1)
Threat
of
Substitutes
(3)
Source:
Team
estimates
Figure
14:
Company
ranking*
*in
terms
of
branded
cheese
sales
Source:
Bel
Lactalis
Kraft
Fromageries
Bel
Bongrain
Arla
Food
Mondelez
1
2
3
4
5
6
CFA
Institute
Research
Challenge
12th
January
2015
Figure
16:
Sales
and
margins
trends
Sources:
Bel,
Team
estimates
5

7. § In
the
Americas,
Mini
Babybel
(+23%
in
the
US
last
year)
and
the
Laughing
Cow
drove
revenue
growth.
In
Asia-­‐PaciYic
(APAC),
the
solid
revenue
growth
driven
by
Mini
Babybel
and
Belcube
has
been
offset
by
quality
issues
at
Kiri
in
Japan.
The
expected
2014E-­‐18E
CAGR
of
13.3%
for
the
whole
region
reSlects
both
the
high
growth
potential
of
Mini
Babybel
in
the
US
with
the
new
production
plant
in
Brookings
and
the
huge
growth
potential
in
APAC.
§ In
Middle
East
and
Africa,
forex
Sluctuations
and
political
uncertainties
hit
revenues,
despite
a
favorable
macro
environment
and
a
strong
growth
driven
by
Kiri
and
The
Laughing
Cow.
The
2014E-­‐18E
CAGR
of
9.9%
will
be
led
by
the
development
of
modern
distribution
channels.
Uneven
Margins
To
Stabilize
Bel
achieves
better
EBIT
margins
(9%
in
2013
and
an
historical
average
of
8.5%)
compared
to
its
closest
peers
(7.4%
on
average).
It
is
a
pure
player
in
the
premium
cheese
industry
which
allows
the
company
to
achieve
superior
economies
of
scale
(with
premium
pricing).
However,
the
major
diversiSied
Sirms
achieve
even
better
economies
of
scales
than
Bel
due
to
their
size
(and
the
implied
bargaining
power)
and
the
broadness
of
their
brand
portfolio.
Though
Bel
has
a
strong
internal
control
to
reduce
costs,
three
external
factors
regularly
hit
operating
and
net
proSit
margins:
(1)
raw
materials
prices
volatility,
(2)
one-­‐offs
linked
to
political
instabilities
mainly
in
Near
and
Middle
East
and
(3)
the
currency
exchange
rate
(Appendix
21).
More
precisely,
an
analysis
of
EBIT
margins
by
region
(Figure
18)
leads
to
the
following
conclusion:
stability
in
Western
Europe
has
been
offset
by
risks
in
the
Near
and
Middle
East.
Between
2010
and
2013,
EBIT
margin
in
Western
Europe
averaged
10%
(ranging
from
8.1%
to
11.2%)
while
that
of
Near
and
Middle
East
averaged
7.3%
(ranging
from
2.8%
to
9.8%).
Moreover,
the
peak
of
commodity
prices
reached
in
2011
impacted
all
regions
except
Americas
-­‐
APAC
thanks
to
the
US
entities’
hedging
policy.
The
exchange
rate
largely
explains
the
decrease
in
EBIT
margin
in
2013
in
Americas
–
APAC
(due
to
the
fading
off
of
the
hedging
effect).
In
Greater
Africa,
the
operating
margin
is
stable
and
reached
11%
in
2013.
In
the
short-­‐run,
given
the
high
volatility
of
raw
materials
and
the
unfavorable
forex,
we
estimate
an
operating
margin
of
6%
in
2014E.
However,
in
the
midterm,
we
expect
EBIT
margin
to
recover
from
2015E
to
reach
9.9%
in
2018E,
thanks
to
operating
leverage
(volume
growth)
and
favorable
input
pricing
effects
from
(1)
the
end
of
quotas
in
Europe
in
2015;
(2)
the
increase
of
milk
output
worldwide;
and
(3)
the
introduction
of
European
dairy
futures
for
skimmed
milk
powder,
butter,
etc.
by
Euronext
in
early
2015.
Concerns
about
the
exit
of
Greece
from
the
Eurozone
following
the
coming
legislative
elections,
the
slowdown
in
inSlation
mainly
in
Europe
due
to
the
ongoing
decline
in
oil
prices
(versus
superior
growth
and
imported
inSlation
in
the
US
leading
to
an
interest
rate
differential)
and
the
likely
response
from
the
ECB
(QE
announcement)
are
the
cause
of
the
substantial
depreciation
of
the
euro
against
the
dollar
(from
1.39
EUR/USD
in
March
2014
to
1.18
at
January
2015).
We
believe
this
situation
should
be
favorable
on
Bel’s
margins.
0%
2%
4%
6%
8%
10%
12%
Western
Europe
Americas
APAC
Near
and
Middle
East
Greater
Africa
2010
2011
2012
2013
Figure
18:
YoY
EBIT
margin
by
region
CFA
Institute
Research
Challenge
12th
January
2015
Source:
Bel
1.60%
(2.50%)
1.40%
(2.60%)
8.90%
4.50%
4.80%
2.70%
7.30%
7.00%
3.40%
5.30%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Source:
Bel
Figure
17:
Sales
growth
bridge
6

8. ROCE
vs.
WACC
A
comparison
between
the
WACC
and
the
ROCE
shows
the
company
employs
its
capital
effectively
and
generates
shareholder
value.
Our
estimated
WACC
is
5.5%
and
is
based
on
no
debt
capital
structure.
Over
the
period
2009-­‐2018E,
ROCE
is
always
higher
than
the
company’s
cost
of
capital.
The
ROCE
of
7%
in
2014E
is
justiSied
by
the
lower
NOPAT
margin
due
to
high
raw
material
costs
and
an
unfavorable
forex
(Figure
19).
Returns
To
Reach
Low
Teens
The
decrease
in
ROE
between
2013
and
2014E
(from
11%
to
7%)
reSlects
the
expected
decrease
in
net
income,
which
is
not
compensated
by
leverage
(constant
between
2013
and
2014E).
With
the
growth
trends
in
ROA,
thanks
to
a
rising
net
proSit
margin,
the
ROE
should
move
towards
the
low
teens.
The
recovery
should
start
at
the
end
of
2014E
and
ROE
is
expected
to
be
13.5%
in
2018E
(Appendix
22).
Strong
Credit
Metrics
Bel’s
Sinancial
leverage
expressed
as
Net
Debt/EBITDA
is
very
low
and
has
been
declining
for
5
years,
driven
both
by
operating
improvement
and
a
huge
amount
of
cash
(€510m
in
2013)
with
the
issuance
of
two
bonds
in
2012
and
“Schuldschein”
loans
in
2013.
The
ratio
has
dropped
from
1.3x
in
2009
to
reach
0.07x
in
2013.
From
2015E,
Bel
should
have
a
net
cash
position
of
€23m,
implying
a
Net
Debt/
EBITDA
ratio
of
-­‐0.07x,
which
reaches
-­‐0.4x
in
2018E.
Therefore
(1)
Bel
can
easily
comply
with
its
debt
covenants
(Net
Debt/EBITDA
≤
3.5x);
and
(2)
it
leaves
signiSicant
room
for
external
growth
(leverage
of
3x
Net
Debt/EBITDA
should
provide
an
M&A
treasury
chest
of
close
to
€1bn
on
top
of
the
company’s
existing
cash
position,
which
should
reach
€509m
in
2018E)
without
resorting
to
a
capital
increase.
Cash
on
the
balance
sheet
(€510m)
is
more
than
sufSicient
to
cover
short-­‐term
debt
(€106m)
as
well
as
debt
maturing
in
2018
and
2019
(Figure
20).
Cash
Flows
Operating
cash
Slows
have
always
been
close
to
€200m
pa,
except
in
2011
due
to
weak
earnings
and
an
increase
in
NWC.
We
expect
the
OCF
to
reach
a
trough
in
2014E
due
to
the
weak
operating
proSit,
but
it
should
recover
from
2015E
(Figure
21).
Investing
cash
Slows
increased
year-­‐on-­‐year
to
reach
€146m
in
2013.
We
expect
this
trend
to
continue,
linked
to
strong
capital
expenditures.
Capital
expenditures
reached
a
peak
in
2013
at
€149m
due
to
the
construction
of
the
Brookings
production
site
(€113m).
Since
Bel
does
not
plan
to
build
any
new
factory,
we
expect
growth
CapEx
to
go
back
slowly
toward
a
lower
normalized
level
while
maintenance
CapEx
should
be
slightly
higher
compared
to
2012.
From
2016,
Bel
should
have
achieved
its
investment
plan,
hence
a
steady
CapEx/Sales
ratio
of
4%.
Valuation
Bel
currently
trades
at
8.8x
EV/EBIT
2015E,
which
is
a
9.5%
discount
to
its
historical
average.
The
stock
also
trades
on
a
28%
discount
to
its
peers,
despite
showing
stronger
EBIT
CAGR
2013-­‐15E
(8.2%
vs.
5.6%
for
its
closest
peers).
We
valued
Bel
using
a
blend
of
DCF
(60%),
relative
(20%)
and
transaction
(20%)
valuation.
We
took
liquidity
into
account
in
each
method
by
applying
a
discount
of
11%
based
on
Damodaran’
synthetic
bid-­‐ask
spread
method
(Appendix
23).
We
derived
a
target
price
of
€399,
which
points
to
33%
upside
potential,
in
full
support
of
our
BUY
recommendation.
By
incorporating
the
company’
strategy
over
a
longer
period
and
giving
an
intrinsic
value,
the
DCF
method
appears
quite
appropriate
for
Bel,
we
thus
gave
it
a
60%
weighting.
The
transaction
method
was
given
a
weight
of
20%
because
it
represents
the
M&A
trend
in
the
Food
&
Beverages
(F&B)
industry.
Finally,
we
used
relative
valuation
with
a
blend
of
peers
multiples
and
a
multiple
factor
regression.
We
decided
to
give
a
weight
of
20%
to
this
method
since
this
reSlects
the
market’s
current
value
assessment
of
sector
peer’s
and,
hence,
of
Bel
itself.
I.
Discounted
Cash
Flows
The
DCF
model
captures
the
long-­‐term
potential
of
gaining
market
share
in
the
smaller,
but
faster
growing
emerging
markets,
which
embodies
Bel’
strategy.
The
DCF
analysis
gave
us
a
target
value
of
€373
(+24%)
assuming
a
WACC
of
5.5%
(derived
entirely
from
the
cost
of
equity,
which
itself
is
impacted
by
the
stock’s
low
beta
of
0.4)
and
a
liquidity
discount
of
11%.
A
6%
Sales
Growth
Driven
By
Americas
–
APAC
Bel’
strategy
of
further
expansion
of
its
core
brands
and
an
appropriate
product
mix
should
allow
the
group
to
capture
more
market
share
in
APAC.
In
the
US,
the
new
production
plant
will
allow
Bel
to
gain
more
market
share
thanks
to
growing
and
sustainable
demand.
We
therefore
expect
a
2013-­‐18E
CAGR
of
11%
for
the
region
(to
19%
of
group
sales
in
2018E).
Source:
Team
estimates
0%
5%
10%
0
2
000
4
000
2014E
2015E
2016E
2017E
2018E
Americas
-­‐
APAC
Africa
-­‐
Middle
East
Europe
Sales
growth
Figure
22:
Sales
forecasts
CFA
Institute
Research
Challenge
12th
January
2015
(
400)
(
300)
(
200)
(
100)
0
100
200
300
400
Net
Operating
Cash
Flow
Net
Investing
Cash
Flow
Net
Financing
Cash
Flow
Figure
21:
Evolution
of
cash
Slows
Source:
Bel
0
100
200
300
400
500
600
Cash
on
hand
2014
2015
2016
2017
2018
2019
2020
2023
Loans
&
Borrowings
Bonds
Schuldschein
Figure
20:
Debt
maturity
proSile
Source:
Bel
ROCE
11%
2012
ROCE
7%
2014E
ROCE
11%
2016E
NOPAT
Margin
Capital
Turnover
Source:
Team
estimates
Figure
19:
ROCE
decomposition
€m
7

9. Western
Europe:
The
Largest
Region
Though
it
is
a
mature
market,
Western
Europe
should
remain
the
core
market
for
Bel
with
the
highest
per
capita
consumption
(€86
per
capita
in
2013).
We
estimate
a
2013-­‐18E
CAGR
of
3%
sales
growth
in
Europe
(including
Western,
Northern
and
Eastern),
which
should
represent
approximately
53%
of
Bel
sales
in
2018E.
Africa
&
Middle
East:
High
Potential
Future
Engine
But
Underdeveloped
Environment
We
expect
growth
in
Africa
and
Middle
East
to
reach
a
CAGR
2013-­‐18E
of
10%,
driven
by
the
development
of
modern
distribution
channels
(especially
in
Egypt
and
Iran),
strong
population
growth
(2%
CAGR
to
2018E)
and
an
increase
in
per
capita
consumption
of
cheese
(from
€5
in
2013
to
€7
per
capita
in
2018E).
Except
for
some
countries
in
Asia,
cheese
is
already
part
of
the
daily
diet,
but
the
growth
rate
should
strengthen
as
refrigeration
becomes
more
widespread.
DeYining
the
WACC
We
calculated
the
cost
of
equity
based
on
the
Fama-­‐French
multifactor
model
(FFM)
using
European
data
since
2000.
In
fact,
since
Bel
is
a
small-­‐cap,
the
FFM
appears
more
appropriate
than
the
CAPM.
The
beta
of
0.4
was
derived
using
Dimson-­‐Scholes
methodologies
to
take
into
account
infrequent
trading.
The
current
France’s
10-­‐Year
OAT
was
used
as
the
risk-­‐free
rate
(0.8%
at
9th
January
2015).
Current
yield,
reaching
high-­‐time
lows,
drives
our
WACC
to
very
low
levels.
This
is
why
we
ran
sensitivity
analyses
as
well
as
Monte
Carlo
simulation
to
study
the
impact
of
several
inputs
on
the
target
price,
of
which
liquidity
(Figure
24).
Please
see
Appendices
23
to
29
for
further
information.
II.
Transaction-­‐based
Valuation
We
analyzed
M&A
deals
(Appendices
30
to
32)
executed
over
the
last
two
years
(except
for
Boursin
which
took
place
in
2007-­‐08)
within
the
Food
&
Beverages
sector
(we
did
not
identify
any
relevant
transaction
in
the
Cheese
sector).
Only
full
ownership
acquisitions
were
retained,
and
we
deemed
relevant
to
include
Bel’s
acquisition
of
Boursin
as
it
perfectly
Sits
the
business
proSile
(international
brands)
and
reSlects
transactions
in
the
cheese
sector.
We
used
the
Adj.
Deal
Value/Sales
multiple
to
compute
the
estimated
price
from
which
we
subtracted
a
takeover
premium
of
29%
(average
premium
since
2011).
We
obtained
a
target
value
of
€442
(pointing
to
47%
upside).
III.
Relative
Valuation
1.
Peers
Multiples
We
derived
a
target
price
of
€450
(50%
upside)
using
EV/Sales
and
EV/EBIT
multiples,
both
based
on
12-­‐month
forward
means
and
adjusted
for
liquidity
(Appendix
33).
Why
We
Chose
These
Two
Multiples
We
favored
using
EV/Sales
and
EV/EBIT
over
other
multiples
because
the
relationship
is
more
signiSicant
and
seems
more
useful
in
predicting
future
performance
(Figures
24
&
25).
We
treat
both
multiples
equally
in
our
valuation
as
there
is
no
evidence
of
predominance
of
one
over
the
other.
Choice
of
Peers
§ Closest
peers,
with
a
core
business
as
similar
as
possible
to
Bel’s
(Bongrain,
Parmalat,
Glanbia).
§ High-­‐growth
small
caps
in
the
F&B
sector,
to
reSlect
Bel’s
growth
model
(Saputo,
Diamond
Foods,
Synder’s-­‐Lance,
TreeHouse
Foods).
§ Large
diversiYied
groups,
as
they
are
similar
in
terms
of
international
strategy
with
their
core
brands
(Kraft
Foods,
Danone,
Mondelez
Int.).
Given
the
varying
features
of
the
three
peer
groups,
we
applied
a
different
liquidity
discount
as
well
as
a
different
weight
to
compute
liquidity-­‐adjusted
weighted
average
multiples
(details
provided
in
Appendix
33).
2.
Multiple
Factor
Regression
A
broad
sample
of
200
Sirms
was
used
to
regress
forward
P/E
against
7
variables:
leverage
(LT
Debt/
Total
Assets),
EPS
long-­‐term
growth
rate
(g),
payout,
beta,
market
capitalization
(logarithm),
return
on
equity,
illiquidity
ratio
(based
on
Amihud’s
research).
The
5
last
variables
are
dummies
corresponding
to
sub-­‐sectors.
(Figure
26
&
Appendix
34).
With
an
expected
EPS
2015E
of
€21.4,
we
derived
a
target
value
of
€415
(38%
upside).
Combining
both
target
prices
with
a
50-­‐50
weighting,
we
obtained
a
target
value
of
€432
(44%
upside)
for
relative
valuation.
Figure
26:
Regression
inputs
(2015E)
CFA
Institute
Research
Challenge
12th
January
2015
Figure
25:
EV/Sales
15E
vs.
EBIT
margin
15E
Sources:
FactSet,
Team
estimates
Sources:
Thomson
Reuters,
Team
estimates
FBEL
BH
PLT
GL9
KRFT
BN
MDLZ
SAP
DMND
LNCE
THS
R²
=
0.81098
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0%
5%
10%
15%
20%
EV/Sales
15E
EBIT
Margin
15E
Figure
23:
WACC
assumptions
Sources:
FactSet,
Damodaran,
Team
estimates
Figure
24:
Sensitivity
analysis
Source:
Team
estimates
WACC
Liquidity
Discount
4%
5.5%
7%
6%
465
393
341
11%
440
373
323
16%
415
352
305
Rf
0.8%
Beta
0.41
Market
risk
Premium
(RMRF)
5.9%
SMB
Premium
3.4%
HML
Premium
-­‐1.1%
Cost
of
equity
5.5%
Equity
as
a
%
of
target
capital
structure
100%
WACC
5.5%
fP / E = α0 +α1(
LTDebt
TotalAssets
)+α2g+α3payout +α4beta +α5 ln(marketcap)+α6ROE+α7Amihud
Intercept
1.0
Leverage
0.1
EPS
growth
rate
0.2
Payout
0.4
Beta
0.4
ln(Market
Cap)
21.7
ROE
0.1
Amihud
0.0007
S50
1
fP/E
18
8

10. 0%
2%
4%
6%
8%
10%
Investment
Risks
(Appendix
35)
Governance
Risk
|
Family-­‐Held
Business
The
Bel/Fievet
family
directly
and
indirectly
owns
70.9%
of
the
shares.
Besides,
Antoine
Fievet
is
Chairman
and
CEO
and
thus
has
the
decisive
power
both
at
the
board
level
and
at
the
management
level.
In
such
a
structure,
conSlicts
of
interest
between
the
family
and
other
shareholders
might
arise.
This
could
compromise
the
interest
of
minority
shareholders.
Governance
Risk
|
Lactalis
Lactalis
(Besnier
family)
was
a
Unibel
shareholder
until
2005.
In
2005,
the
Bel/Fievet
family
chose
to
reshape
the
group
shareholder
structure
with
a
complex
share
repurchasing
transaction.
Lactalis
withdrew
its
28.5%
stake
in
Unibel
but
remained
a
shareholder
of
Fromageries
Bel
(24%).
Market
Risk
|
Liquidity
Bel
is
a
small-­‐cap.
Free
Sloat
is
very
low
(4.4%)
and
its
shares
are
characterized
by
an
unusually
wide
bid-­‐ask
spread
(3%
on
average
over
the
last
10
years).
Such
a
proSile
is
likely
to
keep
institutional
investors
away
from
buying
the
shares
(Figure
27).
Clearly,
raising
free-­‐Sloat
by,
for
example,
selling
Lactalis’
stake
to
the
market,
would
have
a
positive
impact
on
liquidity
and,
potentially,
valuation
(narrowing
of
the
liquidity
discount).
Market
Risk
|
Fluctuation
of
Raw
Materials
Prices
Volatility
in
raw
materials
prices
(milk,
powder,
butter
and
cream)
can
be
driven
by
supply
and
demand
Sluctuations,
but
also
by
weather
conditions.
Currently,
there
is
a
rise
in
dairy
raw
material
costs,
which
is
driven
by
a
robust
demand
in
emerging
countries
(China
particularly).
Future
prices
are
not
expected
to
reach
2007-­‐08
peaks
as
well
as
those
of
2011
and
2013
(Figure
28).
On
the
contrary,
the
abolition
of
dairy
quotas
in
Europe
in
2015
should
drive
milk
production
upward
and
put
downward
pressure
on
prices.
Despite
this,
we
expect
no
signiSicant
reduction
in
current
price
volatility
especially
due
to
a
reduction
of
price
intervention
in
the
EU.
Market
Risk
|
Forex
Headwinds
As
the
consolidated
Sinancial
statements
are
presented
in
euro,
Bel
is
exposed
to
translation
effect
from
forex
Sluctuations.
This
concerns
more
than
40
%
of
Bel
total
sales.
Bel
is
also
exposed
to
transactional
exchange
rate
risks,
mainly
due
to
commercial
commitments
carried
out
in
currencies
other
than
the
euro
by
its
subsidiaries.
Even
if
Bel
aims
at
hedging
the
annual
budgetary
currency
risk
through
derivatives,
it
currently
remains
exposed
to
currency
volatility.
Besides,
investments
abroad,
such
as
the
Brookings
production
plant,
should
act
as
a
natural
FX
hedge.
Economic
Risk
|
World
GDP
Growth
Slowdown
While
European
growth
forecasts
remain
weak,
deSlation
haunts
Bel’s
core
market
(62%
of
2013
sales)
and
may
trigger
a
vicious
circle
driving
household
consumption
down.
The
FED
progressive
withdrawal
also
sows
the
seeds
of
doubt
on
dollar-­‐addicted
emerging
markets.
Economic
Risk
|
DeYlation
Risk
Euro
area
inSlation
has
been
falling
steadily
for
three
years,
and
slipped
into
negative
territory
in
December
(-­‐0.2%
y/y)
for
the
Sirst
time
since
2009
(Figure
29).
If
the
situation
lasts,
there
may
be
«
demand-­‐deSicient
deSlation
»,
also
known
as
«
bad
deSlation
»
in
the
Eurozone
because
consumers
may
delay
the
purchase
of
goods
and
services
in
the
expectation
that
prices
will
fall.
However,
this
situation
might
lead
to
the
intervention
of
the
ECB
(QE
announcement),
offsetting
this
risk.
Political
Risk
|
Threats
of
Geopolitical
Events
Bel’s
activities
are
subject
to
geopolitical
events
such
as
an
embargo
and
political
crisis.
Depending
on
the
market
importance
for
Bel,
those
may
hit
Bel’s
operating
margin.
In
some
cases
like
in
Middle
East,
Bel
has
been
forced
to
reconsider
its
distribution
channel.
Strategic
Risk
|
Lack
of
Aggressiveness
Bel’
strategy
is
to
innovate
through
prudent
acquisition
of
new
brands.
The
lack
of
aggressiveness
is
reinforced
by
a
family
member
as
CEO
and
may
deter
potential
investors
from
buying
the
shares.
Operating
Risk
|
Unplanned
Breakdown
of
Production
Site
Due
to
the
group
strategy,
some
of
the
products
are
manufactured
in
a
limited
number
of
sites
or
even
in
a
single
site.
If
an
important
site
is
totally
or
partially
damaged,
it
may
have
a
signiSicant
impact
on
the
manufactured
products.
Though
the
group
has
set
up
prevention
plans
and
business
continuity
plans,
the
group’s
operating
proSit
could
be
signiSicantly
affected.
0
1
000
2
000
3
000
4
000
5
000
Butter
Skim
milk
in
pouder
Whole
milk
in
pouder
$/t
Figure
28:
Raw
materials
prices
Figure
27:
3-­‐month
bid-­‐ask
spread
Source:
OECD
CFA
Institute
Research
Challenge
Source:
FactSet
12th
January
2015
9
-­‐
1.0
0.0
1.0
2.0
3.0
4.0
5.0
Dec-­‐05
Dec-­‐06
Dec-­‐07
Dec-­‐08
Dec-­‐09
Dec-­‐10
Dec-­‐11
Dec-­‐12
Dec-­‐13
Dec-­‐14
Figure
29:
Eurozone
HICP
(%
y/y)
Source:
Eurostat
Oct.
14
Nov.
14
Dec.
14
LT
Average:
3%

11. Operating
Risk
|
Contamination
Risk
As
a
food
manufacturing
company,
food
safety
is
always
a
key
concern.
The
risk
exists
at
every
stage
of
the
production
cycle:
upstream
risks
(chemical
and
physical)
may
inSluence
raw
materials
and
input
packaging;
downstream
risks
(bacteriological)
for
cheese.
Any
claimed
or
proven
contamination
of
Bel
products
may
harm
its
reputation,
business
activity
and
results.
Responsible
Corporate
Citizen
In
2013,
Bel
issued
publicly
its
CSR
report
for
the
Sirst
time.
It
shows
high
performance
results
in
using
the
Ecovadis
Rating
tools.
Bel
is
rated
with
65/100
in
2013
which
has
achieved
the
Gold
Status
(Figure
30
and
Appendix
36).
Environmental
Bel
has
been
striving
to
improve
its
environmental
performance.
As
a
partner
of
WWF,
Bel
has
developed
and
complied
with
many
internal
and
external
reference
standards
(for
both
their
production
sites
and
their
suppliers)
aimed
at
reducing
water
and
energy
production,
reducing
the
waste
disposal
and
limiting
greenhouse
gas
emissions.
As
a
result,
Bel
has
reduced
its
water
consumption
by
11%
with
a
sales
growth
of
23%
from
2008-­‐13.
Social
As
a
signatory
to
the
United
Nations
Global
Compact
since
2003,
Bel
has
always
focused
on
respecting
human
rights.
Since
its
establishment
in
2008,
“Bel
Foundation”
has
not
only
taken
action
in
the
interest
of
children,
their
well-­‐being,
but
has
also
supported
associations
and
other
philanthropic
projects.
Furthermore,
training
programs
are
taken
to
develop
the
skills
and
promote
internal
mobility,
as
well
as
other
measures
to
improve
the
working
conditions.
Governance
Bel
keeps
an
ongoing
governance
dialogue
within
the
family,
in
pursuit
of
the
most
efSicient
balance
between
family
and
business
forces.
In
accordance
with
AFEP/MEDEF
and
Middlenext
Codes,
Bel
meets
the
independence
requirement
of
board
of
directors.
We
do
however
highlight
a
conSlict
of
interest
as
the
CEO,
Antoine
Fievet
(member
of
the
family
shareholder),
is
also
the
Chairman
of
the
Board
of
Directors.
The
establishment
of
different
committees
and
existence
of
Internal
Audit
Department
ensures
the
continuous
good
functioning
of
the
company.
The
compensation
and
beneSits
are
publicly
released
and
all
their
decisions
are
taken
in
the
shareholders’
interest
(Appendix
37).
Suppliers
70/100
Subcontractors
43/100
Bel
(Gold
Status)
65/100
Source:
EcoVadis
Figure
30:
2013
EcoVadis
rating
CFA
Institute
Research
Challenge
12th
January
2015
BUY
Forecast
12-­‐month
absolute
total
return
greater
than
6%
HOLD
Forecast
12-­‐month
absolute
total
return
of
+6%
to
-­‐6%
SELL
Forecast
12-­‐month
absolute
total
return
less
than
-­‐6%
Rating
deYinitions:
10

12.
Appendix
–
Table
of
Contents
Appendix
1.
Income
Statement
Appendix
2.
Balance
Sheet
Appendix
3.
Cash
Flow
Statement
Appendix
4.
Vertical
Common
Size
Income
Statement
Appendix
5.
Horizontal
Common
Size
Income
Statement
Appendix
6.
Vertical
Common
Size
Balance
Sheet
Appendix
7.
Horizontal
Common
Size
Balance
Sheet
Appendix
8.
Key
Ratios
Business
Description
Appendix
9.
Factories
and
R&D
Centers
Worldwide
Appendix
10.
Industrial
Expertise
Appendix
11.
Five
Core
Brands
Appendix
12.
Acquisitions
Appendix
13.
Corporate
Structure
Industry
Overview
Appendix
14.
EU-­‐27
Cheese
Production
Appendix
15.
Cheese
Consumption
Worldwide
Appendix
16.
EU
Quota
Regime
Appendix
17.
PESTLE
Appendix
18.
SWOT
Analysis
Financial
Analysis
Appendix
19.
Sales
Forecasts
Appendix
20.
Financial
Statements
Forecasts
Explanations
Appendix
21.
Non
Recurring
Income
and
Expense
Appendix
22.
DuPont
Analysis
Valuation
Discounted
Cash
Flows
Appendix
23.
Liquidity
Discount
Calculation
Appendix
24.
Free
Cash
Flows
Appendix
25.
Target
Price
Calculation
Appendix
26.
Fama-­‐French
Model
Appendix
27.
WACC
Components
Appendix
28.
Sensitivity
Analyses
Appendix
29.
Monte
Carlo
Simulation
Transactions
Appendix
30.
Comparable
Deals
Appendix
31.
Deal
Value/Sales
Ratio
of
Comparable
Deals
Appendix
32.
Transaction-­‐based
Valuation
Target
Price
Relative
Valuation
Appendix
33.
Peers
Multiples
Appendix
34.
P/E
Ratio
Regression
Model
Investment
Risks
Appendix
35.
Risk
Matrix
Other
Headings
Appendix
36.
ESG
Appendix
37.
Management
Board
12th
January
2015
CFA
Institute
Research
Challenge
11

13. Appendix
1.
Income
Statement
Sources:
FactSet,
Team
estimates
NB:
Forecasts
calculations
are
explained
in
Appendix
20.
CFA
Institute
Research
Challenge
12th
January
2015
Back
to
content
Income
Statement
(€m)
2009
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
Sales
2
221
2
418
2
527
2
649
2
720
2
828
3
000
3
187
3
392
3
619
Growth
0.2%
8.9%
4.5%
4.8%
2.7%
4.0%
6.1%
6.2%
6.4%
6.7%
Europe
1
472
1
517
1
597
1
612
1
670
1
711
1
759
1
809
1
859
1
911
Africa
-­‐
Middle
East
-­‐-­‐
561
549
618
633
696
766
841
924
1
014
Americas
-­‐
APAC
-­‐-­‐
340
381
419
417
421
475
537
609
693
Cost
of
Goods
Sold
(1
445)
(1
577)
(1
727)
(1
741)
(1
821)
(1
960)
(2
010)
(2
119)
(2
239)
(2
370)
Gross
Income
776
841
800
908
899
868
990
1
068
1
153
1
248
Gross
Income
Margin
34.9%
34.8%
31.7%
34.3%
33.1%
30.7%
33.0%
33.5%
34.0%
34.5%
SG&A
Expense
(509)
(544)
(531)
(581)
(582)
(608)
(645)
(685)
(729)
(778)
EBITDA
267
297
269
327
317
260
345
382
424
470
EBITDA
margin
12.0%
12.3%
10.6%
12.4%
11.7%
9.2%
11.5%
12.0%
12.5%
13.0%
Depreciation
&
Amortization
Expense
(72)
(86)
(82)
(89)
(77)
(91)
(98)
(102)
(106)
(110)
EBIT
195
211
187
238
240
169
247
281
318
360
EBIT
margin
8.8%
8.7%
7.4%
9.0%
8.8%
6.0%
8.2%
8.8%
9.4%
9.9%
Nonoperating
Income
-­‐
Net
(4)
(6)
(6)
(2)
4
4
4
4
4
4
Interest
Expense
(24)
(19)
(21)
(17)
(20)
(9)
(9)
(9)
(9)
(9)
Unusual
Expense
-­‐
Net
(42)
(11)
(16)
(26)
(5)
(20)
(20)
(20)
(20)
(20)
EBT
125
175
144
193
220
145
222
256
293
335
Income
Taxes
(37)
(57)
(47)
(63)
(88)
(48)
(74)
(85)
(98)
(112)
Consolidated
Net
Income
88
118
97
130
131
96
148
171
196
223
Minority
Interest
(3)
(1)
(1)
(2)
(6)
(2)
(2)
(2)
(2)
(2)
Net
Income
85
117
96
129
126
94
146
169
194
221
EPS
(basic)
12.40
16.98
14.07
18.65
18.45
13.85
21.37
24.70
28.38
32.46
EPS
(diluted)
12.40
16.98
14.07
18.65
18.45
13.85
21.37
24.70
28.38
32.46
Total
Shares
Outstanding
6.86
6.86
6.84
6.89
6.82
6.82
6.82
6.82
6.82
6.82
DPS
6.00
5.00
6.25
6.25
6.25
6.25
7.91
10.00
12.65
16.00
Payout
Ratio
(%)
48.4%
29.4%
44.4%
33.5%
33.9%
45.1%
37.0%
40.5%
44.6%
49.3%
12

14. Appendix
2.
Balance
Sheet
Sources:
FactSet,
Team
estimates
NB:
Forecasts
calculations
are
explained
in
Appendix
20.
CFA
Institute
Research
Challenge
12th
January
2015
Back
to
content
Balance
Sheet
(€m)
2009
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
Cash
&
ST
Investments
117
140
143
451
510
379
464
504
584
509
Short-­‐Term
Receivables
414
444
455
458
491
508
528
560
595
631
Inventories
179
224
244
237
259
239
249
264
280
308
Current
Assets
709
809
841
1
146
1
260
1
126
1
240
1
328
1
460
1
447
Net
PP&E
549
540
530
524
588
639
661
686
716
752
Net
Goodwill
383
389
388
385
381
381
381
381
381
381
Net
Other
Intangible
Assets
311
306
303
296
288
288
288
288
288
288
LT
Investments
48
63
64
85
116
116
116
116
116
116
Other
Assets
12
11
11
11
10
15
15
15
11
8
Non
Current
Assets
1
303
1
309
1
296
1
301
1
384
1
439
1
461
1
486
1
512
1
545
Total
Assets
2
012
2
118
2
137
2
447
2
644
2
566
2
701
2
814
2
972
2
992
ST
Debt
&
Current
Portion
LT
Debt
63
56
78
144
153
47
47
47
47
47
Accounts
Payable
275
333
359
368
413
404
442
454
479
508
Other
Current
Liabilities
143
158
158
156
182
182
199
205
216
236
Current
Liabilities
482
547
595
669
748
633
688
706
742
792
Long-­‐Term
Debt
410
324
258
363
378
378
378
361
361
198
Provisions
45
49
51
52
78
78
78
78
78
78
Other
Liabilities
154
169
172
197
213
198
186
196
210
226
Non
Current
Liabilities
609
543
481
612
668
654
642
635
649
502
Total
Liabilities
1
090
1
090
1
076
1
281
1
417
1
287
1
330
1
341
1
391
1
293
Common
Stock
Par/Carry
Value
10
10
10
10
10
10
10
10
10
10
Additional
Paid-­‐In
Capital
22
22
22
22
22
22
22
22
22
22
Retained
Earnings
106
135
113
145
1
248
1
300
1
392
1
492
1
599
1
716
Cumulative
Translation
Adjustment/
Unrealized
For.
Exch.
Gain
(27)
(10)
(17)
(28)
(59)
(59)
(59)
(59)
(59)
(59)
Other
Appropriated
Reserves
789
852
923
1
018
-­‐-­‐
-­‐-­‐
-­‐-­‐
-­‐-­‐
-­‐-­‐
-­‐-­‐
Treasury
Stock
(7)
(7)
(6)
(11)
(8)
(8)
(8)
(8)
(8)
(8)
Total
Shareholders'
Equity
892
1
002
1
045
1
155
1
213
1
264
1
356
1
457
1
564
1
680
Accumulated
Minority
Interest
31
26
16
11
14
15
16
17
18
19
Total
Equity
923
1
027
1
061
1
166
1
227
1279
1372
1473
1581
1699
Total
Liabilities
&
Shareholders'
Equity
2
013
2
118
2
137
2
447
2
644
2566
2701
2814
2972
2992
13

15. Appendix
3.
Cash
Flow
Statement
Sources:
FactSet,
Team
estimates
NB:
Forecasts
calculations
are
explained
in
Appendix
20.
CFA
Institute
Research
Challenge
12th
January
2015
Back
to
content
Cash
Flow
Statement
(€m)
2009
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
Earnings
Before
Taxes
125
175
144
193
220
145
222
256
293
335
Depreciation,
Depletion
&
Amortization
122
92
79
93
77
91
98
102
106
110
Other
Funds
(15)
(40)
(41)
(41)
(73)
(73)
(73)
(73)
(73)
(73)
Funds
from
Operations
231
227
182
245
224
162
247
285
326
373
Changes
in
Working
Capital
(4)
(4)
(20)
12
(8)
(6)
8
(35)
(27)
(34)
Net
Operating
Cash
Flow
227
223
162
257
216
156
255
250
300
338
Capital
Expenditures
(79)
(64)
(75)
(81)
(149)
(141)
(120)
(127)
(136)
(145)
Maintenance
CapEx
(122)
(92)
(79)
(93)
(77)
(91)
(98)
(102)
(106)
(110)
Growth
CapEx
43
28
4
11
(72)
(51)
(22)
(26)
(30)
(34)
Net
Assets
from
Acquisitions
(1)
(3)
0
(0)
(0)
0
0
0
0
0
Sale
of
Fixed
Assets
&
Businesses
1
3
1
2
3
3
3
3
3
3
Purchase/Sale
of
Investments
(0)
(1)
(1)
(0)
0
0
0
0
0
0
Other
Funds
13
0
(0)
0
0
0
0
0
0
0
Net
Investing
Cash
Flow
(66)
(65)
(74)
(80)
(146)
(138)
(117)
(124)
(133)
(142)
Cash
Dividends
Paid
(24)
(40)
(48)
(41)
(52)
(43)
(54)
(68)
(86)
(109)
Change
in
Capital
Stock
0
0
0
(7)
0
0
0
0
0
0
Issuance/Reduction
of
LT
Debt,
Net
(263)
(84)
(52)
178
26
0
0
(17)
0
(163)
Issuance/Reduction
of
ST
Debt,
Net
0
0
0
0
0
(106)
0
0
0
0
Other
Funds
0
(7)
10
(2)
14
0
0
0
0
0
Net
Financing
Cash
Flow
(286)
(131)
(91)
127
(12)
(148)
(54)
(85)
(86)
(272)
Exchange
Rate
Effect
(2)
(0)
2
0
(8)
0
0
0
0
0
Net
Change
in
Cash
(127)
26
(1)
304
50
(131)
84
40
81
(76)
14

16. Appendix
4.
Vertical
Common
Size
Income
Statement
Sources:
FactSet,
Team
estimates
Sources:
FactSet,
Team
estimates
Appendix
5.
Horizontal
Common
Size
Income
Statement
CFA
Institute
Research
Challenge
12th
January
2015
Back
to
content
Vertical
Common
Size
Income
Statement
2009
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
Sales
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Cost
of
Goods
Sold
65.1%
65.2%
68.3%
65.7%
66.9%
69.3%
67.0%
66.5%
66.0%
65.5%
Gross
Income
34.9%
34.8%
31.7%
34.3%
33.1%
30.7%
33.0%
33.5%
34.0%
34.5%
SG&A
Expense
22.9%
22.5%
21.1%
21.9%
21.4%
19.8%
22.4%
22.4%
22.0%
22.0%
EBITDA
12.0%
12.3%
10.6%
12.4%
11.7%
9.2%
11.5%
12.0%
12.5%
13.0%
Depreciation
and
Amortization
3.2%
3.6%
3.2%
3.4%
2.8%
3.2%
3.3%
3.2%
3.1%
3.1%
EBIT
8.8%
8.7%
7.4%
9.0%
8.8%
6.0%
8.2%
8.8%
9.4%
9.9%
EBT
5.6%
7.2%
5.7%
7.3%
8.1%
5.1%
7.4%
8.0%
8.6%
9.3%
Net
Income
3.8%
4.8%
3.8%
4.9%
4.6%
3.3%
4.9%
5.3%
5.7%
6.1%
Horizontal
Common
Size
Income
Statement
2009
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
Sales
100.0%
108.9%
113.8%
119.3%
122.5%
127.3%
135.1%
143.5%
152.8%
163.0%
Cost
of
Goods
Sold
100.0%
109.1%
119.5%
120.5%
126.0%
135.6%
139.1%
146.7%
154.9%
164.0%
Gross
Income
100.0%
108.4%
103.2%
117.0%
115.9%
111.9%
127.6%
137.6%
148.7%
160.9%
SG&A
Expense
100.0%
107.0%
104.5%
114.2%
114.5%
119.5%
126.8%
134.7%
143.4%
153.0%
EBITDA
100.0%
111.1%
100.7%
122.5%
118.8%
97.4%
129.2%
143.2%
158.7%
176.1%
Depreciation
and
Amortization
100.0%
119.6%
113.3%
123.6%
107.0%
125.8%
136.6%
141.2%
146.7%
153.1%
EBIT
100.0%
107.9%
96.0%
122.2%
123.1%
86.9%
126.3%
143.8%
163.1%
184.5%
EBT
100.0%
140.4%
115.8%
155.1%
176.4%
116.2%
178.1%
205.4%
235.6%
269.2%
Net
Income
100.0%
136.9%
113.1%
151.1%
148.0%
111.0%
171.4%
198.1%
227.6%
260.3%
15