Valuation Bel

INVESTMENT RESEARCH: FROMAGERIE BEL SATuesday, May 12, 2015

Market Profile

Last Price311

52W Price Range265-314

Share Outstanding (M)6,872

Dividend6,25

Dividend Yield2,01%

5Yr Dividend Growth17,84%

Valuation Profile

EV/EBITDA TTM7.5X

EV/EBITDA 156.8X

P/E17.38X

P/E 1516.8X

5 Yrs Average PE13.26X

5 Yrs High PE25.05X

5 Yrs Low PE6.49X

Share Price YTD (%)

GLANBIA PLC34.50

BONGRAIN13.8

MONDELEZ8.8

FBEL6.2

EMMI SW-9.9

We issue an overweight recommendation on FROMAGERIE Bel (FBEL FP) with a one-year target price of 325 Euros using the Discounted Cash Flow and Multiple Methods. Currently priced at 311 Euros, our analysis suggest 8.5% potential upside. Due to its solid brand loyalty position and its pure player profile FBEL is a solid cheese company on the market with strong competitive advantages. The overall international target strategy of the group will allow investors to benefit from strong organic growth with key exposure on double-digit growth areas.

Relative to its peers, the valuation is attractive with the pure player profile of the group. At 6.80X the EV/EBITDA 15 and a 16.80X P/E 15, the stock seems cheap. We define BONGRAIN (BH FP) as the first competitor of FBEL due to the nationality, and % of sales in the cheese industry (60%).

Exhibit: Relative P/E 15 and EV/EBITDA 15 valuation to peers

Source: Bloomberg and Author Estimates

Contents

Business Description3Industry Overview4Competitive Positioning5Financial Statement Analysis6Valuation7

Appendix 1: Multiple Valuation and Target Price9Appendix 2: Discounted Cash-Flow (Bloomberg Template)10Appendix 3: Milk Price Estimation13Appendix 4: COGS Analysis and Forecast14Appendix 6: Shareholder Structure and Corporate Management15Appendix 7: Historical Income Statement16Appendix 8: Projected Income Statement17Appendix 9: Historical Balance Sheet18Appendix 10: Projected Balance Sheet19Appendix 11: Financial Analysis Ratios20Appendix 12: Graphics (Bloomberg Terminal)21Appendix 13: Industry Valuation22Appendix 14: Inflation and GDP Forecast Charts23Appendix 15: Cheese Consumption by Region24

Exhibit 1: 5 brands generate 70% of sales

Source: FBEL Annual Report

Exhibit 2: % from sales for R&D Expenditures

Source: Bloomberg

Exhibit 3: Geographical Breakdown of Sales (As % of total)


Exhibit 4: Geographical Breakdown of EBIT (As % of total)

Source : Bloomberg

Business Description

FROMAGERIE BEL (FBEL) is a family group headed today by the 5th family generation and is a pure player in the cheese industry. Created in 1922, the group today has strong brand identity and solid values. Based on 3 keys words Audace, Bienveillence, Engagement, the group is a leader in the portion and processed cheese market. The activity of the group is undertaken by the 28 factories around the world. 70% of revenues comes from 5 brand classified among the top cheese brand worldwide (Below called Core 5). FBEL has more than 25 international brands marketed in 130 countries.

Company StrategiesThe companys strategic direction focuses on the following points:

Innovation to boosts mature market demand and improve developed market growth Innovation is a strong spirit among the group. Created with all the team members, it is driven by 5 keys points:

Regularly create and launch new products or new series in order to catch all the demand evolution. FBEL targets specific consumption trend based on lifestyle dynamics Develop the supply and availability of products to the customers Create a unique moment during the consumption through innovative marketing packaging and product taste Follow the nutritional consumer trend with continuous updating of products components Product range growth, three main markets: cheese spread, slices and snacks.

The development and creation of new products benefit the group through revenue sales growth and scale economy through operational leverage. Specific snacks products have higher market price premium than classical cheese. Nevertheless, we flag some inconsistence between the management discussion part from the annual report and the actual level of expenditures for R&D.

Improvement of production process and marketing innovation for the Core 5 FBEL 70% of revenue comes from only 5 brands. The group has for long term strategy the development and the improvement of the strength of Core 5. Classified on the top cheese brand worldwide, this strong brand identity generate pricing power for the group.

Human Capital Development With more than 11 000 team members, FBEL promotes wellness of FBEL contributors. The team spirit and working engagement is in the main strategy for skills development.

International expansion FBEL, has a strong strategy to catch developing market growth with solid and dynamic international expansion. The last figures revenues breakdown shows that Europe continue to sluggish but FBEL succeeded to revert the overall trend on total sales by being strongly positioned in the driven countries of growth cheese market. Due to the recent expansion in America and Asia, we believe the group will generate strong revenue growth in the medium term by being implanted in developing market. Further, we strongly expect that the group will continue to counterbalance the actual situation in Europe with dynamic growth found elsewhere, especially in The Middle East.

Production process and marketing optimization FBEL is actually working on new production process mainly for developed market such as Western Europe. We expect the group to create new innovative products and production process which will provide higher pricing power from Europe and reduce downside pressure on margin with higher raw products prices.

Exhibit 1: European Cheese Consumption Growth

Source: Bloomberg

Exhibit 2: North America Cheese Consumption Growth

Source: Bloomberg

Exhibit 3: Middle East and Africa Cheese Consumption Growth

Source: Bloomberg

Exhibit 4: South America Cheese Consumption Growth

Source: Bloomberg

Industry Overview

Total cheese consumption worldwide is really contrasted between mature region such as Europe and North America where consumption is stable or decreasing versus Middle East and South America where the consumption increase in YOY Growth measure. Companies are experiencing double digit sales growth in this region. In summary, we expect companies to shift their target or continue to define South America and The Middle East regions as priority for growth in the short and midterm.

Soft cheese drives growth in 2014Accounting for 50% of value growth over 2013-2014, soft cheese is the fastest growing category in cheese. Product innovation, distribution and higher market penetration in rapidly growing regions such as Latin America, the Middle East and Africa are the main drivers of growth.25% of 2014 global cheese volume growth came from just two markets: Brazil and Africa.As the largest global market for cheese, American consumers eat an average 11kg of cheese per year. While volume growth may be low (just 1%), it still contributed to 10% of additional volume sales in 2014. The biggest contribution however, came from Brazil with per capita consumption of 6kg, making it a very interesting market as a further penetration can generate substantial new sales as cheese becomes a more important food item in the Brazilian diet.

European Market: Strong consumption habits shadowed by high competition and political uncertaintiesActual: The economic context is hard in the region and the overall market trend is negative. High advertising and distribution costs are necessary to generate moderate growth where the competition is strong and price wars often occurs. Half of the revenues in this region comes from France and Germany where the consumption per capita is the highest. Margin are under pressure for all majors actors of the sector due to i/price war between brands; 2/ wholesales supply brand taking more market shares and 3/high commodities price volatility. Some areas in Europe, particularly Ukraine and Bulgaria, are not suitable for the consumption growth with high inflation rates.

Inflation, GDP and consumption forecast: Overall the European inflation will increase to 1.50% for 2017 from an actual value of 0.66%. This upward trend is due mainly to above 2% inflation rate forecasted for Nordic European Countries. In average, Western European countries are expected to reach 1.75% inflation rate for 2017.Eastern Europe will have serious inflation rates. For example, Ukraine is forecasted to have 29% inflation rate in 2015 and 12% in 2016. This situation is shared with Russia, obviously lower at 15% for 2015 and 7.25% for 2016. An average 5.50% inflation rate across countries in the Eastern Europe is expected. We believe the overall trend in Europe goes toward the potential increase of consumption. We expect sales of dairy products to remain flat.

USA and South America: Slowing growth in the North counterbalanced by strong Brazilian DemandActual:Our overall analysis reveals that USA cheese consumption is decreasing. Nevertheless, majors actors such as Kraft Food experienced upward growth in US Cheese Sales, which we can interpret that this trend is due to market share gain instead of total growth increase. On the other side, South America experienced positive growth in the cheese consumption.

Inflation, GDP and consumption forecast: Inflation is expected to increase to 1.70% in 2015 and 2.60% in 2016. South America inflation is forecasted at 10% in 2015, but will decrease progressively in 2016-2017 to 6.10%. The GDP on this area is expected to increase to 3% in 2017 from 0.59 forecasted in 2015. We believe that South America is a key area growth driver that exporters need to target. With a lower inflation expected in 2017, the downward dynamic of it and the positive growth trend in GDP, the consumption will increase and dairy product such as cheese will benefit from economic expansion.

Middle East and AfricaActual: The total cheese consumption is increasing after high peak and correction. By analysis the recent dynamics of sales for Majors cheese makers such as FBEL AND BONGRAIN, we define this region of being strongly dynamic with more than 15% average growth in the cheese market.

Inflation, GDP and Consumption forecast:With REAL GDP growth forecasted slightly above 3% for 2015 and 2016 and near 4% in 2017, inflation rate of 4% in 2015 and 2016 decreasing to 3% in 2017, the consumption is expected to be strong due to the economic positive dynamism and the purchase power (which is not totally erased by inflation)

Exhibit 1: Q4 14 % cheese sales for major peers

Source: Bloomberg

Exhibit 2: Revenue and Organic Growth (%)

Source: Bloomberg

Exhibit 3: Porters 5 forces model

Source: Author Estimates

Competitive Positioning

The cheese industry is include into dairy industry products. The high number of small companies makes this market very fragmented. We defined our major peers for FBEL as MONDELEZ, KRAFT, AND BONGRAIN, (GLANBIA and EMMI SG are used in our relative valuation due to the recent event with Kraft, merger with Heinz)

FBEL appears to be the only pure player listed company in the processed cheese market.

Total cheese sales account for 100% of FBEL and except for Bongrain, total cheese sales account for less than 25% in other groups. Because the market is fragmented by a high number of private companies, we did not have access to official market shares data. Instead we built our peer market share, and compared each company sales in the cheese segment. We discover that KRAFT take up some market share from the 3 others members of the group. BONGRAIN attracts our attention and we define it as a serious competitor for FBEL. A recent press release revealed that BONGRAIN is seriously engaged in internationalisation with its name modification in order to gain foreign market shares. The total sales growth show a cyclical and very volatile sector.

Porters 5 Forces

Threat of new entrants: barriers to entry are high in order to compete with worldwide cheese makers Bargaining power of suppliers: with approximatively 3500 different suppliers, their influence in bargain power is relatively low Competition in the industry: On our peer group, we noticed strong evidence that companies tend to shift their key strategy for international growth. M&A activity is strong and acquisition of small firms can transform a harmless peers into serious competitor Threat of substitute products: Very high, each of Core5 brand is available into low cost similar products Bargaining power of buyers: Most of Bel clients are wholesale distribution companies and have strong bargaining power with their high volume of purchases

Exhibit 1: FBEL Earnings Per Share since 2009

Source: Company Data

Exhibit 2: Gross margin evolution and forecast


Exhibit 3: EBITDA margin evolution and forecast


Exhibit 4: ROE evolution and forecast


Financial Statement Analysis

Profitability:

Above Industry Norm EBITDA margin and Return On Equity marginFBEL generates above industry average EBITDA margin. In comparison with gross profit margin, the EBITDA margin decreased in a slower rhythm and thus could be a sign that some improvement are effective in controlling operating costs, such as administrative and labor force.

We expect the group to increase its EBITDA margin with better cost management. Nevertheless, the gross profit margin will remain under pressure due to highly volatile raw price and political uncertainties especially in Middle East and East Europe.

Activity Efficiency:

Slowing cash collection but efficient cash outflow managementFBEL is experiencing since 2009 a decrease of its inventory and receivables turnover. The management of cash outflow follows this trend and payables turnover decreased as well. The impact of inventory turnover downtrend alone is negative in our view, for the performance of the firm. In overall, with the decreasing payables turnover, the impact on cash collection cycle is attenuated.

Solvency and Valuation ratios:

FBEL appears to be more independent that its peers, Leverage used is less riskySolvency ratios are under or in line with the industry trend. FBEL financial leverage of 2.17 published in the last annual results is reasonable compared to BONGRAIN at 3.14.

We expect the group to decrease the financial leverage due to high cash flow generation and only two bonds actually outstanding. The first matures in December 2018 with total amount of 20 Million and actually offers 2.75% coupon. The second matures in December 2019, total amount of 140 Million and actually offers 3% coupon rate. Actually both bonds are trading at premium, the 2.75% 2018 trades at 106.68% to par and the 3% 2019 at 108.03%. This premium price exchange reflects the financial strength and credit quality of the group.

Exhibit 1: Average 5Yrs Revenue Growth by Geo Areas

Source: Bloomberg

Exhibit 2: CAPEX evolution and forecast


Exhibit 3: WACC evolution and leverage, FBEL and BH FP


2015e2016e2017e

EV/EBITDA peers11,2x10,3x9,4x

Discount-40%-37%-35%

EV/EBITDA6,7x6,5x6,1x

EBITDA378309392

Cash And ST Inv607561887

Debt545,15612,92644,86

Value of Equity260419552626

Target Price377283381

Valuation

We used the DCF (Discounted Cash Flow) Method to evaluate the fair value of BEL stocks. We used the Bloomberg DCF Model available with the Bloomberg Terminal which we believe will increase the correct price estimation. Relative to our inputs and assumptions, the DCF model and Multiples models reveal a target price of EUR324, equivalent to a 7% upside from the last current price of EUR300.

DCF Forecast Assumptions

Revenue Growth BELs core and only business deals with manufacturing and marketing of processed cheese. Geographical exposition is well diversified accounting for 25% from Middle East and Africa and 15% for America, we believe the exposure to geographical driver areas growth will remain valid in the long term strategy due to the European fragmented and mature market.

The group will generate higher sales percentage at total in the short term from emerging markets and America. The recent factory investment and development in South Dakota is a strong sign that the group will switch Europe stagnation growth for North America high volume and South America dynamic cheese sales (Industry Overview). We used the 5 years average growth by region in order to forecast our total sales growth.

With our analysis, we expect the group to generate revenue growth geographical exposure as follow:

With the revenue average growth, and with our forecast of future revenue source structure, we find an average growth rate of 6.85%. Over the 2009-2014 periods, the computed CAGR (Compound Annual Growth Rate) reach 4.85%. The differential coming from the higher exposition in the double digit growth areas, such as America and The Middle East and Africa (Rest of the World above).

Cost of Goods sold

On average and relative to our milk price forecast and analysis, BEL will generate 30.22% gross profit margin for the period 2015-2020. We believe that the recent collapse of milk price is a short term trend and a strong rebound will be effective this year.

Capital Expenditures

For our analysis we used for the capital expenditures the average of the ratio CAPEX/SALES of 3%. Nevertheless, due to our assumption for growth capture in the developing countries, we expect the group to build new factories, especially in south America where we believe the demand will be high in the coming years. We expect the CAPEX in 2016 and 2020 to be sensibly higher than 3% of Sales at 6%.

WACC

We used the published WACC from the annual report of 7%. The Bloomberg WACC is in our view too low relative to the risk of the company at 3.7%.

Price Multiples

We used both EV/EBITDA and PE ratio for FBEL relative valuation. Our peer list include BONGRAIN, MONDELEZ, GLANBIA and EMMI. We purposely excluded KRAFT from our universe due to the recent merging events. The inclusion of the last would create upward effect on our multiples and distort the correct valuation of FBEL

Analysis of historical PE relative to STOXX 600 FOOD AND BEVERAGE and to our peer list clearly shows that FBEL trades at discount on both PE and EV/EBITDA. We noticed strong valuation similarities between our peer group and the SX3P index. Expectation on earnings with FBEL was in line with the publication as show the P/E evolution on BEL for 2014. EV/EBITDA historical profile appears flat relative to its peers and the benchmark.

Radar chart analysis of PE and EV/EBITDA valuation indicates that FBEL trades at discount and growth potential, is in our view, not integrated in the stock valuation. With the pure player we believe the stock will be better valuated in the medium term.

Our method suggests a target price of 329EUR, computed from 50% EV/EBITDA multiples and 50% from P/E multiples.

Exhibit 4: Historical PE Band, with peers and benchmark

Exhibit 5: Historical EV/EBITDA valuation, with peers and benchmark

Exhibit 6: PE and EV/EBITDA, average and forward 15 radar chart


Appendix 1: Multiple Valuation and Target Price

Appendix 2: Discounted Cash-Flow (Bloomberg Template)

Appendix 3: Milk Price EstimationRelative to the last annual report of the group, we noticed strong similarities between WAP and MILKCL1M INDEX. Under this assumption, we used the last in order to predict the FBEL COGS relative to milk price variation.We used Bloomberg data in order to draw milk price trend relative to global USDA demand and offer. We added a RSI analysis which reflects that milk spot index is clearly oversold.Exhibit 1: Technical analysis for Milk commodity

Source: Bloomberg The chart clearly shows that MILKCL1M is oversold and will rebound quickly. Further analysis of the milk market cycle reflects that a typical trend has an average length period of 3 years and never remains low during more than a year. Classical correction of price never remains low for a long period. We performed the technical analysis of MILKCL1M INDEX and extract the following conclusions: Resistance at 24.62 often reached at RSI level above 70 Several supports appears, most recently at 18.05 (reminder actual price 18.39) Long term strong growth demand and production Actual oversold position Rebound usually occurs in a year and is approximatively equal to 30% upside

Appendix 4: COGS Analysis and ForecastWith the previous analysis of milk price situation, we built a simple regression model with the following data from average yearly milk price and FBEL COGS sold. The results are presented below.2009201020112012201320142015e2016e2017e2018e2019e2020E

MILK PRICES (USD)151822202226232527323034

COGS Estimated (MEUR)154216881843177418312013188619692053226321792347

COGS Publicated (MEUR)151716631808183018981974192320092094230822232394

Revenue Growth DCF 6,9%6,9%4,9%4,9%3,5%2,0%

Adjustement Value-1,59%-1,48%-1,85%3,14%3,66%-1,94%201521042153237322552394

Average Adjustment Value-1,54%

Source: Author EstimatesWe estimated the COGS by making a regression from COGS to Revenue for the period 2009-2014. Then we found than in average, the COGS released by the group were 1.54% lower than our prevision. With our analysis of milk price presented on the previous page, we estimated the milk price for the forecast period (2015-2020).Then we applied our regression values to the estimated milk price, with an adjustment for our DCF revenue growth assumption and with our error of -1.54%.

Appendix 6: Shareholder Structure and Corporate Management

Shareholder StructureThe shareholder structure is represented mainly by UNIBEL, the holding of the company. With 67.44% of shares, UNIBEL is the major shareholder in FBEL followed by SOFIL SAS with 24.06% of shares. FIEVET BEL represents 3.45% of shares outstanding. The company FBEL is locked with its holding UNIBEL and a control of 67.44% of shares. Deeper analysis shows that FIEVET family owns 80% of UNIBEL shares. The graph below reveals the recent decrease in participation along with its potential negative insider message. The free float of FBEL is only at 4.39% of total shares outstanding. Takeover is in this case absolutely impossible for the moment. By comparison, the free float of BONGRAIN is 13.23%. Exhibit 1: Historical position of FIEVET FAMILLY in the capital structure of UNIBEL

Source: Bloomberg

Corporate ManagementClearly, the coming back of Antoine Fievet in the management (replacing Gerard Boivin) gave dynamism and strong upward trend in the stock price of the group. The stock price increased by 230% since 2009 when Sir FIEVET took his functions as CEO and Chairman of the Board.

Exhibit 2: Stock price performance since Sir Fievet integrates top management

The board is composed by the following team: Luc Luyten James Lightburn Michel Arnaud Florian Sauvin Fatine LaytThe composition of the board reflect the turning point of FBEL since 2009. The actual composition did not change since 2009 reflecting good performance and strategy.Appendix 7: Historical Income Statement

Source: Bloomberg and Author estimates

Appendix 8: Projected Income Statement


Author Assumptions and Comments:Revenues We used the CAGR of revenue for the period 2009-2014.

Cost of Goods SoldWe carried out a milk price analysis and forecast in order to establish this income statement item. We realized a simple linear regression between milk price and COGS and adjusted it with the past annual statement by a % of error. (Appendix 4)

Appendix 9: Historical Balance Sheet

Source: Bloomberg

Appendix 10: Projected Balance Sheet


Author Assumptions and Comments:Inventories We used the inventories geometrical mean growth during the last 5 years in order to forecast this balance sheet item. We differentiate two-growth rates, the first during expansion activity of 9% and the second during contraction time of -2%.

Accounts and Notes Receivables and PayableDuring the period 2009-2014, FBEL made sales on credit for 14.65% of its total annual revenue and used facility of payment for 25% of COGS. By analyzing this credit policy and considered it as being a stable trend for the group, we used 14.65% of projected sales for receivables and 25% of projected COGS for payables in order to derive these projected balance sheet account

Short Term InvestmentThe short-term investment policy of the firm was volatile year over year. The last three years of activity nevertheless gave an upward trend from EUR87Millions to EUR388Millions. We used the last 3 years average of short-term investments value of EUR345Millions

Cash and Near Cash EquivalentWe used the historical retention rate in order to adjust the net earnings from the previous year. Our forecast suggests strong cash generation since 2018 to 2020.

Next Fixed AssetsWe adjusted our projection of next fixed assets in order to minimize the inflation impact on the ROA due to stagnant level of assets. We used the average growth over the last 5 years of 2% and forecasted a hypothetic investment on fixed assets.

Retained Earnings and Other EquityWe used the retention rate in order to derive this item.Appendix 11: Financial Analysis Ratios


Appendix 12: Graphics (Bloomberg Terminal)

Appendix 13: Industry Valuation


Appendix 14: Inflation and GDP Forecast Charts

Inflation Forecast by Region

GDP Forecast by Region

Source: Bloomberg

Appendix 15: Cheese Consumption by Region

North America cheese consumption, YoY growth

Asia and Oceania cheese consumption, YoY growth

European cheese consumption, YoY growth

South America cheese consumption, YoY growth

Source: Bloomberg

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