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GROUP BELCrouching Moat, Hidden Group Bel

Business Description

ConsumerSector

120 countries30 subsidiaries

27 production sites5 core brands, 25 local brands

CateringSector

Bel Foodservice subsidiaryCatering business: serves the

institutional and the commercialcatering segments

PAI (intermediary food business):sells Bel cheese to food industry andfast-food chains

DairyProducts

Nollibel: world leader in itssegment

Key Ratios / Stats

o Company name

o Exchangeo Ticker symbolo Sectoro Industryo Recommendation (buy/sell/hold)o Current price (as of __date)o Target price (% increase/decrease)

Stock Rating:

HOLD

INITIATION

REPORT

Reinout

VanaVana

Prashant

SilviaJoao

TABLE OF CONTENTS

1. Business Overview

2. Key event timeline3. Group Strategy

4. Risk Analysis

5. Financial Highlights

6. Competitive Overview

7. Industry Overview

8. Key Investment Thesis

9. Equity Valuation

10. Conclusion

We initiate coverage of Group Bel at Hold.

We focus on three key investment thesis:

China Growth

Innovation

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Business DescriptionFromageries Bel SA, headquartered in Paris,

France, is a family-owned company that

produces and sells four categories of cheese

(pressed, processed, fresh and spreadable)and is the global leader in cheese portions. It

owns more than 25 international and local

brands, including 5 core brands, is present in

120 countries and owns 30 subsidiaries and

27 production sites, with 10 of them located

in France. Through its subsidiary, Bel

Foodservice, the company is present in the

catering sector and serves fast-food chains,

hospitals, restaurants, vending machine operators, train stations and airports. In addition to that,

Bel also sells dairy proteins to food manufacturers (especially ice cream) under the Nollibel

brand. The company attracted 400 million consumers and hopes to achieve 3 billion "in sales

by 2015.

Bels retail strategy is established either at the national level, through subsidiaries, or at the

international level, with contracts negotiated at the group level. Moreover, Bel uses a network of

wholesalers specialized in food service. On the Supply side, the company has the following

purchasing needs: core raw materials (milk, milk powder, butter), packaging materials and

energy. Bel has contracts with suppliers of milk in France, Netherlands, Poland, Slovakia,

Ukraine and US. Moreover, it controls six dairies in France and 22 in other countries.

The Fievet/Bel Family holds 3.5% of the Fromageries Bel shares directly and 54% through its

80% holding in Unibel SA.

Brand Portfolio5 Core Brands

The Laughing Cow Kiri Boursin MiniBabybel

Leerdammer

National Brands

Cousteron, Gervais, Karicha, Kaukauna, Limiano, Maredsous, Merkts, Prices, Samos,Smetanito, Sylphide, Syrokrem, Syrtos, Terra Nostra, WisPride

International Brands

Apericube, Babybel, Bonbel, Cantadou, Les Enfants, Port Salut, Picon

Group StrategyConstant product innovation

The company is constantly in search of new products and new concepts. For instance, in 2012

and 2013, it developed Apericube Soiree Filles! and On Joue, targeted at young adults. In

addition, in 2013, Bel launched a new brand of cream cheese, Boursin Tartine.

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Strong brand image

Bels products enjoy high recognition. The company was ranked

number three for branded cheese worldwide, while its core brands

The Laughing Cow, Mini Babybel, Leerdammer and Kiri ranked

among the top twelve cheese brands in the world (Bel Global

Cheese 2012, Zenith international study).Niche positioning (portions)

Bel has a niche positioning in the aperitif consumption. In France,

in 2013, it is estimated that 45% of cheese consumption was

outside of meals. Bel is well positioned to take advantage of this

trend with its snack-like products and the increasing marketing of

its products for cooking.

Expansion

Bel is is expanding both through regional expansion by setting up

subsidiaries and production plants worldwide, and through

acquisitions. For instance, in 2012, the company commenced the

construction of a production plant in the US. Regarding

acquisitions, some of the most significant ones were Leerdammer

in 2002 for 190 m", Boursin in 2008 and Tranchettes in 2013.

Key Business RisksGeopolitical events: Special attention needs to be given to the impact of the geopolitical

events worldwide on Bels activities. The unstable situation in some countries in the Middle East

and Africa needs to be taken into consideration, just as the situation in Ukraine needs to be

monitored.

Volatility of commodity prices: The price of raw materials used by Bel (milk, milk powder,

butter, cream) is likely to fluctuate due to changes in supply and demand and weatherconditions. It is unlikely that Bel will be able to translate an increase in raw materials into

increased prices of its products. Moreover, there is no financial hedging market in the dairy

industry, except in the US (see appendix for commodity price chart).

Competition: Bel faces intense competition from major international food players, as well as

local producers. In addition to this, there is increased competition coming from retail chains that

have developed house brands (also known as private label/control label in North America).

Regardless, consumers react to pricing aggressively, like any other product in the food industry

product.

Economic climate: Bels sales are likely to be influenced by the economic activity in the

markets where it operates. With slowed economic growth in Europe and uncertainty regardingeconomic recovery, caution needs to be taken when predicting the level of sales in this region,

which currently accounts for 40% of Bels revenues.

Exchange rate risk: Due to the geographical spread of its operations, Bel is exposed to FX

risk, since it receives revenues and faces expenses in multiple currencies apart from the euro.

The Treasury Department of Bel implements a central currency hedge strategy using derivative

instruments with a time horizon of 18 months. However, because of the high volatility nature of

some currencies where Bel operates, there is a material downside risk due to this.

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Regulatory risk: Due to the geographical reach of its activities, as well as the nature of its

business, Bel faces regulatory threats. These include hygiene standards, environmental controls

and competition laws. Changing regulations will have a direct impact on Bels activities and may

impede the company to sell its products in some markets. For example, changing food

regulation will require the company to adjust its products, which will take a considerable amount

of time.

Financial HighlightsKey Financials

table...xxx

Competitive PositionThe Bel Group faces three main types of competitors: major international food groups that

produce cheese among other types of products (Kraft), major international dairy producers

(Bongrain, Hochland, Lactalis, Friesland Campina) and regional food producers (Almarai inSaudi Arabia).

In 2013, Bel ranked 11 in the packaged food sector in France, with a 1% value market share.

Especially Leerdammer, The Laughing Cow and Boursin performed well, while Mini Babybel

faced a decline. Within the cheese category, the company ranked second, behind Groupe

Lactalis, with a 10% value share. In terms of reconstituted cheese, The Laughing Cow and

Apericube dominate the market.

Fromageries Bel SA: Competitive Position 2013

Segment Retail value share Rank

Packaged Food 1.2% 11

Dairy 5.1% 4

Cheese 10.0% 2

Industry OverviewMature dairy markets can no longer count on growth through higher volume gains as per capita

consumption is expected to continue to decline in North America (down by a CAGR of 1%)

(Euromonitor) and remain static in Western Europe over 2014-2019. But consumers continue to

respond well to innovative ideas. Todays consumer expects not only immediacy and

convenience from products and services but also simplicity, healthy choices, environmental

piece of mind, taste novelty and a greater level of customization.

The consumption of raw milk is slightly decreasing in most countries. Nevertheless, in the EU-

12 the dairy industry is growing in importance in the total food industry, mainly due to theincreased consumption of cheese and yoghurts.

The EU dairy industry is very dominant in the world market. The EU-25 exports amount "21 bn

worth to other countries, while Oceania exports amount to "3.8 bn and NAFTA to "1.1 bn

(Euromonitor).

Nowadays, product innovations are mostly done on varieties, but innovations on new

ingredients (in functional foods) are also very important. SMEs as well as large companies,

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including the packaging and ingredients industry, all contribute to innovation.In North-Western

Europe, large firms dominate the dairy industry. This has been a result of previous waves of

consolidation. France and Germany, however, have a small number of large firms and quite a

large number of medium and small firms. The EU dairy industry can be characterized as an

innovative and a global player, but with a losing market share. Bels competitive position is just

below average, mainly due to the loss in world market share. In fact, across most of the keyplayers in the EU market growth has stagnated. According to Euromonitor, global CAGR of the

dairy industry for 2014-2019 is expected to be 2.8%, with growth being highest in Asia Pacific

and Middle East and Africa (Euromonitor).

Industry Consolidation

The worlds top 10 dairy giants capture 24% of the market in 2014, up from 17% in 2009. In

existing and mature markets such as the US, France and Italy, multinationals are buying in

innovation through acquiring smaller, more innovative firms in niche markets. More M&A activity

is expected to occur with multinationals buying more niche organic or lactose-free brands in

order to widen their portfolio and tap into smaller but faster growing markets. Another health

food category, which is being eyed up by multinationals, is non-dairy milk alternatives.

With per capita dairy consumption in mature markets dropping, companies are seeking for

growth in emerging markets that have a far lower level of consumption but, conversely, are

growing.

Investment SummaryINVESTMENT THESIS (1):MOAT-ZARELLA

Value-added innovation in dairy is evolving and becoming of greater importance in a

highly competitive and, above all, mature market space, where consumption is

declining. The evolution of dairy is dependent on the commoditization of the categoryand demonstrates the need for value

where private label share is high.

Pack-types have been a successful

marketing tool for brands since times

immemorial. Bel has been a pioneer in

this field with the early launch of the

iconic La Vache Qui Rit, Babybel and

Kiri products.

Products ranged from the single servesalad cheese launched in

Switzerland to the tiramisu-to-go bar

launched in Austria. Given tiramisu is

typically seen as a dessert eaten with

a spoon or fork at the dinner table, the uniqueness of this product is that the packaging

allows it to be eaten as a snack on-the-go, without the use of cutlery.

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Innovations that have caught the eye recently are pesto and tomato Gouda, tiramisu

on-the-go as well as butter with seaweed cheese to name a few. If Bel can continue

to revolutionize the cheese industry by launching new products that especially differ in

terms of packaging, there will be a catalyst for future growth.

INVESTMENT THESIS (2):NUTRITIONALLY NAUGHTY TREND

In mature dairy regions such as North America, Western Europe and Australasia, there

is a strong need for value creation in dairy in order to counteract declining per capita

consumption of dairy overall. Combining naturally good-for-you products with

indulgence offers value innovation in terms of nutritionally naughty eating occasions.

A successful example promoted at SIAL was the Sweet Quark Bar by Vilvi, a Lithuanian

company active in dairy products. The product is made from cottage cheese covered in

a thick layer of chocolate. In fact, chilled snacks, under which Vilvi would be classified,

has seen a CAGR of 4%, whilst dairy overall grew by a CAGR of just 3%. Innovation

both in terms of packaging and combinations of ingredients will be essential to drive

value creation in the dairy sector.

INVESTMENT THESIS (3):CROUCHING BEL HIDDEN CHINA

Cheese remains something of a niche category in China, not

being part of the countrys traditional cuisine and widely

regarded as having a pungent smell. However, cheese is

gaining popularity among children, reflecting a rising

consumer awareness of its nutritious value. Cheese posted

a 25% rise in $ value sales in 2014, which can be attributed to

a number of key factors:

The growing exposure to Western lifestyles, particularly in tier-one

cities where fast food outlets are prevalent, is contributing to the

evolution of Chinese consumers tastes

Manufacturers made notable efforts to boost consumer

awareness of cheese, including the purported health benefits such as their inclusion of

various vitamins, minerals, amino acids and omega-3 fatty acids, which all help to

support healthy bones, brain and heart

Soft cheese is more popular than hard cheese in China as it is considered to have a

less unpleasant smell and Chinese consumers prefer its soft texture.While cheese is

not a traditional element of Chinese cuisine, Western exporters are competing for a

foothold in the Chinese market by promoting packaged cheese.Most of the cheese in

China is imported from Australia, Europe and New Zealand, a fact that leaves cheese

prices vulnerable to global price fluctuations.Chained pizza restaurants have seen their

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presence expand over the review period, with major international brands such as Pizza

Hut and Dominos Pizza being notable examples. The extensive presence of pizza,

which generally features mozzarella, has led to some Chinese consumers seeking out

this cheese type in retail outlets.

Bongrain (Tianjin) Foods Co Ltd remained the leading player in cheese, with a 21%

retail value share in 2014, up slightly from 2013.Bel China currently holds a 6.6%

market share in China and this market share has been increasing over the past years. It

is the 4th player in the Chinese market (Euromonitor). However, Bel China recorded the

most dynamic value growth and the strongest rise in share in 2014, up by 35% and one

percentage point respectively. La Vache qui Rit (also known as Laughing Cow), has a

global presence which was achieved through two key initiatives:

We believe that Bel Groups ability to project an image of being French is what gives it

an economic moat or sustainable competitive advantage vs. other rivals who primarily

focus on the health benefits of the product.

Euromonitor estimates that cheese is a highly import-dependent category in China, with 80-90%

of sales being accounted for by imported brands. It has been estimated that by 2030 over two

thirds of Chinas population will reside in cities. This widespread urbanization will further ensure

the extensive exposure to Western- style quick-service restaurants, which function as a bridge

between Chinese people and the culture of cheese consumption. This will not only give Chinese

people a basic understanding of the product, but also help overcome the longstanding

perception of cheese as a product with a pungent smell and unpleasant taste. We surmise that

China will learn to appreciate that stinky cheese is good cheese. The rising number of

expatriates and the growing interest in Western lifestyles are set to boost the overall demand for

cheese.

Other Investment Considerations:

Average unit price is set to continue to rise over the forecast period, at a CAGR of 1% at

constant 2014 prices. Global milk prices are rising, a situation that is driving up the unit price of

cheese, an import-dependent product. Given the volatility of milk prices and the gradually

increasing penetration of cheese, the unit price of cheese is unlikely to drop short term.

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Valuation

261

339

380

341

587

645

500

438

502

469

498

486

420

376

485

493

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P/E 2012

P/E 2013

P/E 2014

P/E 2015

EV/EBIT

EV/EBIT

EV/EBIT

EV/EBIT

EV/EBITDA

EV/EBITDA

EV/EBITDA

EV/EBITDA

EV/Sales

EV/Sales

EV/Sales

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APPENDIX

Company Business Description Geography Revenues(FY 2013)

Bongrain Bongrain SA is a milk processingcompany, which engages in the

manufacturing and distribution ofcheese and other dairy products. Thecompany operates its businessthrough two segments: CheeseProducts and Dairy Products.Thecompany was founded in 1956 and isheadquartered Viroflay, France.

France 32.5%,Europe 40%, Rest of

World 27.5%

4.4bn EUR

Saputo Saputo, Inc. produces, markets, anddistributes dairy and grocery products.It produces mozzarella, cheddar,specialty and fine cheeses, fluid milk

and dairy products, including cream,yogurt, butter, powdered milk,evaporated milk, ice cream mixes andvalue-added dairy ingredients, suchas whey powder, lactose and wheyprotein. The company was founded in1954 and is headquartered in Saint-Lonard, Canada.

Canada 39.6%,United States 48.6%,Rest of World 11.8%

9.2bn CAD

Emmi Emmi AG is a milk processingcompany, which engages in thedevelopment, production, and

marketing of dairy and fresh products.It also focuses on the production,ageing, and trade of cheeses. Emmiwas founded in 1907 and isheadquartered in Lucerne,Switzerland.

Switzerland 56.5%,Europe withoutSwitzerland 27.2%,

North & SouthAmerica 11.6%,Africa /Middle East3.7%, Asia Pacific0.9%

3.3bn CHF

Glanbia Glanbia Plc is an internationalnutritional solutions and dairy productsgroup. The company engages inproducing cheese, performancenutrition, dairy ingredients, whey

proteins and other micronutrients. Thecompany was founded in 1997 and isheadquartered in Kilkenny, Ireland.

Ireland 23.6%,United States 50.3%,Rest of the World12.8%, Rest ofEurope 7.3%, United

Kingdom 5.9%

2.4bn EUR

DairyCrestGroup

Dairy Crest Group Plc is engaged inthe business of manufacturing,processing and distribution of milk anddairy products. Dairy Crest Group wasfounded in 1933 and is headquartered

United Kingdom95.7%, Rest of World4.3%

1.4bn GBP

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in Esher, the United Kingdom.

Milkiland Milkiland NV is a holding companythat engages in the production of dairyproducts. It operates through thefollowing segments: Cheese & Butter,

Whole-milk, and Ingredients. Thecompany was founded in 1994 and isheadquartered in Amsterdam,Netherlands.

Ukraine 54.2%,Russia 41.6%,Poland 4.2%

1.4bn PLN

Key historical dates:

SWOT Analysis:

Strengths Weaknesses

Strong brandsOperational performance

Product qualityGlobal leader in cheese portions

Not enough expansionary activityLimited product expansion potential

Exchange rate exposure

Opportunities Threats

Rising demand for healthy productsRising demand for dairy products in

untraditional marketsEmphasis on convenience

Untraditional consumption of cheese (outsidemeals)

Increasing raw material costsExpansion of competitors

Political instability (Middle East, Russia)Weak economic growth in Europe