Bellamy's Australia (BAL) - Livewire Marketss Australia (BAL) Follow-on growth ... Heinz, Bega. Page...
Transcript of Bellamy's Australia (BAL) - Livewire Marketss Australia (BAL) Follow-on growth ... Heinz, Bega. Page...
24 October 2016
Bellamy's Australia (BAL)
Follow-on growth
Recommendation
Buy (Initiation) Price
$13.20 Target (12 months)
$16.06 (Initiation)
Analyst
Jonathan Snape 613 9235 8706
Authorisation
TS Lim 612 8224 2810
Expected Return
Capital growth 21.7%
Dividend yield 1.4%
Total expected return 23.1%
Company Data & Ratios
Enterprise value $1,244m
Market cap $1,276m
Issued capital 96.7m
Free float 100%
Avg. daily val. (52wk) $13.6m
12 month price range $6.29-16.50
GICS sector
Food Beverage and Tobacco
Price Performance
BELL POTTER SECURITIES LIMITED ACN 25 006 390 7721 AFSL 243480
DISCLAIMER AND DISCLOSURES THIS REPORT MUST BE READ WITH THE DISCLAIMER AND DISCLOSURES ON PAGE 18 THAT FORM PART OF IT.
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(1m) (3m) (12m)
Price (A$) 12.75 11.64 7.98
Absolute (%) 3.76 13.66 65.79
Rel market (%) 1.33 14.22 62.49
Background and investment thesis
Bellamy’s (BAL) is a Tasmanian company which distributes and markets certified
organic infant formula and food products through Australia, China and SE Asia. We
initiate coverage on BAL with a Buy rating and a $16.06ps target price. Our favourable
view on BAL is supported by: (1) Exposure to growing demand for Australian made
infant formula and food products in China and SE Asia; (2) Expansion of the
distribution footprint in Australia with less than half the addressable market currently
serviced; (3) Rising demand for organic products in Australia and Asia; (4) The
potential to expand the infant food products business which to date has been a modest
revenue and earnings contributor; (5) ability to expand the geographical distribution
footprint; and (6) BAL is trading at an undemanding valuation relative to global IMF
and functional food sector on an FY17e EV/EBITDA basis.
China and SE Asia the growth engines for IMF
The global infant nutrition market is worth in excess of US$60Bn annually and
underpinned by growing demand for infant formula products in China and SE Asia.
Rising demand for IMF products in China (+18% pa over the last five years) and a
faster growing premium segment (to which BAL is leveraged) are expected to see
continued strong growth in demand for IMF products in both China and Australia (via
the existence of grey market channels which favour follow-on formula producers such
as BAL).
Growing demand for organic product
Globally the consumption of organic food products reached US$80Bn in 2014 and has
grown at an average rate of 14.4% pa over the last 15 years. In Australia demand for
organic food products has outpaced growth in demand for conventional food products
more than fivefold at 15% pa since 2009. Rising income levels and an increased
awareness of food safety and origins is driving the push to organic and this looks
unlikely to change in the near term. BAL is highly leveraged to this theme.
Absolute Price Earnings Forecast
Year end June 2016 2017e 2018e 2019e
Sales ($m) 244.6 356.0 407.0 452.7
EBITDA ($m) 54.6 82.0 100.9 118.3
NPAT (adjusted) ($m) 38.3 57.4 70.7 83.1
NPAT (reported) ($m) 37.2 57.4 70.7 83.1
EPS (adjusted) (cps) 38.9 57.8 71.2 83.7
EPS growth (%) n.a. 48.5 23.1 17.6
PER (x) 33.9 22.8 18.5 15.8
FCF Yield (%) 0.1 0.5 2.9 4.1
EV/EBITDA (x) 22.8 15.2 12.3 10.5
Dividend (cps) 11.9 19.0 22.2 25.0
Franking (%) 100.0 100.0 100.0 100.0
Yield (%) 0.9 1.4 1.7 1.9
ROE (%) 46.1 46.9 41.2 36.1
SOURCE: IRESS SOURCE: BELL POTTER SECURITIES ESTIMATES
$0.0
$5.0
$10.0
$15.0
$20.0
Oct 14 Apr 15 Oct 15 Apr 16 Oct 16
BAL S&P 300 Rebased
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Bellamy's Australia (BAL) 24 October 2016
Contents
Background and investment view ................................................ 3
Core markets overview .................................................................. 6
Financial overview ....................................................................... 11
Board and management .............................................................. 13
Shareholders and ownership ...................................................... 15
Risks ............................................................................................. 16
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Bellamy's Australia (BAL) 24 October 2016
Background and investment view
COMPANY BACKGROUND
Bellamy’s (BAL) is a Tasmanian company which distributes and markets certified organic
infant formula and food products. BAL commenced operations in Launceston, Tasmania in
2004 as a family owned company before being acquired by Tasmanian Pure Foods in
2007. In 2014 Tasmanian Pure Foods was renamed Bellamy’s Australia Ltd and
subsequently listed on the ASX. Today BAL sells 3 infant formula products and 47 food
products in Australia and Asia. BAL is principally a brand manager, with processing and in
some instances ingredient procurement outsourced to processors (~15 contract packers
and manufacturers engaged). A brief overview of BAL products, markets and supply chain
are summarised in the table below.
Figure 1 - BAL at a glance
SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES
INVESTMENT VIEW
We initiate coverage on BAL with a Buy rating and a $16.06ps target price. Our favourable
view on BAL is predicated on:
Favourable demand growth for infant milk formula (IMF) in Asia: The global infant
nutrition market is worth in excess of US$60Bn annually and underpinned by growing
demand for infant formula products in China and SE Asia. Rising demand for IMF products
in China and the growing premium segment to which BAL is leveraged are expected to see
continued strong growth in demand for IMF products in both China and Australia (via the
existence of grey market channels which favour follow-on producers such as BAL).
Rising demand for organic products: Globally the consumption of organic food products
reached US$80Bn in 2014 and has grown at an average 14.4% pa over the last 15 years.
Rising education levels and income levels should correlate to an increasing demand for
organic food products and IMF is no exception with the category having grown by ~20% pa
over the last two years. As a market leading Australian organic brand we see BAL as
leveraged to this thematic.
Expansion of stockists in Australia: BAL is currently sold via ~4,400 distribution points,
which represents less than half the potential distribution points available for BAL products.
Growth in distribution points could be a material upside opportunity for the domestic
business.
Ability to expand infant food products business: The BAL brand is strong in infant and
follow-on formula products, yet is a smaller player in the infant food market, with an
estimated 9% share largely in dry cereal products. With an identifiable brand which has
risen in recognition in recent years we see prospect for BAL to achieve greater share in the
infant food market.
CountryRevenue
share
Heinz, Rafferty's Garden
China 20%
SE Asia 7%
Major particpantsCAGR
+5.0% pa
Distribution
Product
Infant nutrition
Infant food products
A$750m
A$151m
2014/15 Market size
Australia:Direct Distribution to ~4,400 different
businesses.
China: Agency deal wth SIIC (renewed 2014), T-mall
% JD.com flagship stores, Daigou trade.
Inputs
Organic milk powder sourced from international
certified suppliers
Formulation & Canning
Bega: 6year supply agreement entered Jul'15.
Utilises Bega's Tatura facility.
Fonterra: 5 year strategic manufacturing agreement
entered Nov'15. Utilises Fonterra's Darnum plant.
First deliveries 1Q17.
73%Australia
BAL supply chain
Infant nutritionUS$5.5Bn High single digit
Mead Johnson, Nestle, Beingmate, Biostime, Yilli,
Abbott, Fiehe, Danone, Yashilim synutra, Friesland
US$19.9Bn
+2.7% pa
+24.0% pa
A2M, Nutricia, Nestle, Bayer, Heinz, Bega
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Bellamy's Australia (BAL) 24 October 2016
Geographic expansion: Asia made up ~27% of sales in FY16, with China making up the
majority of this. Distribution is now established in China, Singapore, Malaysia and Vietnam
and the market opportunity in SE Asia (i.e. excluding China ) is material with an estimated
value of ~US$5.5Bn and growing at high single digit rates (i.e. 7%+).
TARGET PRICE
BAL is a business at the commencement of its competitive advantage period with a market
leading band in Australia that lends itself to SKU expansion and regional growth
opportunities. In deriving our $16.06ps target price we have utilised an ROIC based
approached cross checked with a global peer group comparison. Major assumptions in our
ROIC based model include:
WACC Drivers: We have utilised an asset beta of 0.75x in line with what we would employ
for other listed dairy processors and consistent with the average for listed FMCG
companies. Incorporating this with an MRP of 5.5% and risk free rate of 5.0% (with a
borrowing margin of 2.5%) derives a pre-tax WACC of 9.1%.
Growth rate: BAL looks to be at the commencement of its competitive advantage period
and as such we expect near term earnings growth rates to exceed sector averages. As
such we have utilised a long-term growth rate assumption of 3.5%, in line with what we
have adopted for other listed IMF exposure A2M but above the 3% rate we would typically
adopt for a FMCG business.
Net Debt: BAL had net cash of $32.2m as at FY16 and this is projected to grow with an
improving operating cash realisation in outward years.
Time weighting: With four months complete in FY17e we have weighted our valuation
model 67% to FY17e and 33% to FY18e.
A summary of our valuation model is summarised below, noting that the combination of an
exceptionally high ROIC, limited investment in fixed assets (and hence low levels of capital
turn) derive an EV/EBITDA multiple of 17.3x in FY17-18e.
Figure 2 - BAL ROIC based valuation model
SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES
As a cross check we have also looked at BAL relative to its peer group, which we define as
being infant formula stocks, functional food exposures and the broader FMCG sector.
While we note the Australian agricultural and FMCG sector is trading at 11.9x FY17e
EBITDA, we note global dairy stocks are trading at 11.2x and global infant nutrition and
function food exposures are trading at an average of 17.1x.
Effective Tax Rate 30.0% Equity Beta 0.73 Current Share Price 12.97$
Risk Free Rate 5.00% Terminal Growth Rate 3.5% Diluted market capitilisation ($m) 1287.7
Borrowing Margin 2.50% Cost of Debt 7.5% Net Int Bearing Debt - option adj. -35.6
Mkt Risk Premium 5.50% Cost Of Equity 9.0% Diluted shares on issue 99.3
Asset Beta 0.75 WACC 9.1% Target Net debt/(net debt+equity) -2.8%
ROIC based methodolgy 2015 2016 2017 2018 2019
EBIT 12.3 54.3 81.7 100.4 117.7
Invested Capital 17.1 51.1 84.2 97.0 104.6
ROIC (% ) 71.8% 106.4% 97.0% 103.5% 112.6%
Long-term growth rate 3.5% 3.5% 3.5% 3.5% 3.5%
Pre-tax WACC (%) 9.1% 9.1% 9.1% 9.1% 9.1%
Depreciation 0.4 0.3 0.4 0.5 0.5
EBITDA 12.7 54.6 82.0 100.9 118.3
Derived EV/EBITDA 16.5 17.3 17.3 17.3 17.4
Implied Enterprise Value 210.4 945.6 1417.3 1746.5 2054.1
Net Debt 31.8 32.2 38.0 74.5 125.8
Cash from Option conversion 4.6 3.4 3.4 3.4 3.4
Surplus franking credits 4.6 14.1 14.1 14.1 14.1
Implied market value 251.4 995.3 1472.8 1838.5 2197.4
Shares on issue (m) 95.0 96.7 96.7 96.7 96.7
In the money options (m) 3.6 2.6 2.6 2.6 2.6
Diluted capital (m shares) 98.6 99.3 99.3 99.3 99.3
Valuation per share (A$ps) 2.55 10.02 14.83 18.52 22.13
Weighting 67% 33%
Target price ($ps) 16.06
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Bellamy's Australia (BAL) 24 October 2016
Figure 3 - BAL peer group comparison (as of close 21/10/16)
SOURCE: BELL POTTER SECURITIES, BLOOMBERG AND IBESS
Bell Potter Net Debt /
Rating EBITDA 2016 2017e 2018e 2016 2017e 2018e
The a2 Milk Co** A2M Buy 2.52 2.09 715.9 1,496.2 (66.5) 1,429.7 (1.22) 54.6 94.2 115.7 26.2 15.2 12.4
Apiam Animal Health AHX Buy 1.79 1.59 100.7 159.6 23.2 182.8 4.22 5.5 12.4 14.1 33.2 14.7 13.0
Australian Agricultural Co AAC Buy 2.20 1.955 532.8 1,041.6 354.7 1,396.3 23.97 14.8 30.7 47.4 94.3 45.5 29.5
Australian Dairy Farms Group AHF Hold 0.19 0.18 181.0 32.6 10.6 43.2 (12.18) -0.9 3.2 3.8 (49.6) 13.4 11.4
Bega Cheese BGA Hold 6.32 6.47 152.6 987.3 58.7 1,046.0 0.91 64.4 77.8 86.2 16.2 13.4 12.1
Bellamy's Australia Ltd BAL Buy 16.06 13.20 96.7 1,276.3 (32.2) 1,244.1 (0.59) 54.6 82.1 100.9 22.8 15.2 12.3
Capillano Honey CZZ 18.75 9.5 177.3 9.6 186.9 0.59 16.2 19.3 22.5 11.5 9.7 8.3
Elders Ltd ELD Buy 4.65 3.96 113.9 451.0 134.5 585.5 2.28 58.9 63.6 62.4 9.9 9.2 9.4
Farm Pride Foods FRM Buy 2.59 1.75 55.2 96.6 2.3 98.9 0.14 16.0 16.8 18.3 6.2 5.9 5.4
Freedom Foods FNP 4.86 181.9 884.1 106.0 990.1 4.27 24.8 36.0 52.7 39.9 27.5 18.8
Fonterra Shareholders Fund FSF 5.58 1,599.1 8,922.9 6,132.4 15,055.3 3.17 1,932.8 1,974.6 2,101.4 7.8 7.6 7.2
GrainCorp GNC Sell 7.17 8.34 228.9 1,909.0 1,368.6 3,277.6 5.29 258.6 352.4 389.6 12.7 9.3 8.4
Huon Acquaculture HUO Buy 4.30 3.7 87.3 323.1 62.1 385.2 2.49 24.9 54.2 65.0 15.5 7.1 5.9
Incitec Pivot IPL 2.83 1,687.2 4,774.7 1,889.9 6,664.6 2.77 682.4 843.9 950.1 9.8 7.9 7.0
MG Unit Trust MGC Hold 1.23 1.1 554.8 610.3 634.9 1,245.2 4.71 134.8 145.5 177.4 9.2 8.6 7.0
Nufarm NUF Buy 10.18 8.93 265.1 2,367.3 986.2 3,353.5 2.65 371.7 427.6 454.1 9.0 7.8 7.4
PGG Wrightson PGW 0.52 754.8 392.5 127.0 519.5 1.82 69.7 71.0 74.9 7.5 7.3 6.9
RuralCo Holdings Limited* RHL Hold 2.88 3.18 79.3 252.2 85.2 337.4 2.06 41.4 45.9 50.4 8.1 7.4 6.7
Scales Corp SCL 3.07 139.8 429.1 13.6 442.7 0.22 61.7 58.1 61.6 7.2 7.6 7.2
Select Harvests SHV Hold 6.26 6.47 73.2 473.6 67.3 540.9 1.25 53.9 53.9 56.9 10.0 10.0 9.5
Ridley Corporation RIC Buy 1.55 1.275 307.8 392.4 41.0 433.4 0.72 57.1 57.1 61.7 7.6 7.6 7.0
Rural Funds Management RFF Buy 1.81 1.62 206.7 334.9 132.8 467.7 6.67 19.9 32.5 36.2 23.5 14.4 12.9
Tassal Group TGR 3.97 150.3 596.6 148.7 745.3 1.81 82.2 90.8 100.6 9.1 8.2 7.4
Tegal Group Holdings TGH 1.45 355.9 516.1 97.2 613.3 1.37 70.8 85.8 91.2 8.7 7.1 6.7
Treasury Wine Estates TWE 11.48 738.1 8,473.8 330.8 8,804.6 0.75 440.1 555.2 638.3 20.0 15.9 13.8
TFS Corporation TFC 1.5 388.1 582.1 223.3 805.5 3.61 61.8 84.8 87.2 13.0 9.5 9.2
Webster Ltd WBA Buy 1.46 1.18 350.7 412.1 184.5 596.6 6.21 29.7 43.7 52.1 20.1 13.7 11.5
Wellard WLD 0.25 400.0 100.0 168.3 268.3 4.35 38.7 38.1 52.5 6.9 7.0 5.1
Australian Agricultural and FMCG Average 14.9 11.9 10.0
The a2 Milk Co** A2M NZ Buy 2.52 2.09 715.9 1,496.2 (66.5) 1,429.7 (1.22) 54.6 94.2 115.7 26.2 15.2 12.4
Abbott Laboratories ABT US 40.50 1,470.0 59,534.8 4,367.0 63,901.8 0.84 5,191.1 5,575.3 6,014.0 12.3 11.5 10.6
Bega Cheese BGA AU Hold 6.32 6.47 152.6 987.3 44.8 1,032.1 0.67 66.7 78.3 89.0 15.5 13.2 11.6
Beingmate Baby & Child Food Co 002570 CH 11.92 1,022.5 12,188.4 (645.0) 11,543.4 (3.75) 172.2 285.2 254.0 67.0 40.5 45.4
Biostime International Holdings 1112 HK 19.52 630.4 12,305.6 4,353.2 16,658.8 2.76 1,579.0 1,672.8 1,778.6 10.6 10.0 9.4
China Mengnui Dairy Co 2319 HK 15.04 3,922.8 58,998.3 939.9 59,938.3 0.21 4,501.9 5,077.0 5,469.4 13.3 11.8 11.0
Danone SA BN FP 63.47 655.9 41,629.5 7,219.0 48,848.5 1.90 3,804.7 4,229.2 4,560.2 12.8 11.6 10.7
Mead Johnson Nutrition Co MJN US 79.85 184.7 14,745.0 1,426.0 16,171.0 1.38 1,033.3 1,110.6 1,172.4 15.7 14.6 13.8
Nestle SA NESN VX 73.15 3,112.2 227,654.5 14,092.5 241,747.0 0.82 17,224.7 18,183.7 19,271.7 14.0 13.3 12.5
Yashili International Holdings 1230 HK 1.62 4,745.6 7,687.8 (2,078.8) 5,609.1 (16.41) 126.6 258.6 328.1 44.3 21.7 17.1
Global Infant nutrition exposures 23.2 16.3 15.4
Freedom Foods FNP AU 4.86 181.9 884.1 106.0 990.1 4.27 24.8 36.0 52.7 39.9 27.5 18.8
Mead Johnson Nutrition Co MJN US 79.85 184.7 14,745.0 1,426.0 16,171.0 1.38 1,033.3 1,110.6 1,172.4 15.7 14.6 13.8
WhiteWave Foods Co WWAV US 54.52 177.2 9,662.3 1,990.0 11,652.3 3.38 588.7 661.6 744.4 19.8 17.6 15.7
Global functional Food exposures 25.1 19.9 16.1
EBITDA ($m) EV/EBITDA (x)Target
price ($ps)
Share
Price ($ps)
Shares
Out (m)
Market
Cap ($m)
Net
Debt/(Cash
Enterprise
Value ($m)
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Bellamy's Australia (BAL) 24 October 2016
Core markets overview
BAL provides investors exposure to two growing trends in the FMCG sector, being: (1)
rising demand for organic food products and increased awareness of food origins; and (2)
rising demand for IMF products through declining breastfeeding rates in Australia and
rising demand for imported IMF products in China.
Organic food production
Globally the consumption of organic food products reached US$80Bn in 2014 and have
been growing at an average 14.4% pa over the last 15 years. Consumption of organic food
products is generally highest in western economies where there are established organic
supply chains. While rising income levels are typically associated with the consumption of
organic food products, academic studies tend to demonstrate a greater correlation to
higher levels of education than income, with concerns around the use of chemicals and
pesticides in the food chain cited as the major reason for the initial switch to organic.
Figure 4 – Global retail sales data 2014 (US$Bn) Figure 5 – Estimated sales value of organic food -Globally ($m)
SOURCE: FIBL SOURCE: ORGANIC MONITOR
In 2014 the Australian organic market was worth ~$1.7Bn and had been growing at a
compound rate of ~15% pa since 2009 (vs. growth in conventional food markets which has
been growing at 3-4% pa over the same time frame). Dairy and beef products make up
~38% of Australian organic food production at the farmgate level and account for ~48% of
Australian exports (which have more than doubled in the last two years to ~$320m). At
current levels Australian consumption of organic food represents ~1% of food consumption
well below established markets (US & Europe) at 5-8%
Figure 6 – Estimated sales value of organic food - Australia ($m) Figure 7 – Australian organic market by category - 2014
SOURCE: AUSTORGANIC, BIS SHRAPNEL AND BELL POTTER ESTIMATES SOURCE: AUSTORGANIC
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Bellamy's Australia (BAL) 24 October 2016
The consumption of organic food products in China has tripled since 2007 and currently
accounts for ~1% of total food consumption, well below the 5-8% share in established
markets such as Europe and the US. One of the issues facing importers is that Chinese
certification systems and foreign organic certification systems are not mutually recognised.
Organic products that have not been certified by China or products that have only been
certified by an overseas organic certifying body cannot be labelled as ‘organic’ or ‘in-
conversion to organic’ or other labelling terms claiming to be organic As such only a small
portion of organic food is imported into China, less than 1%.
Infant Milk Formula (IMF)
Infant milk formula (IMF) is a substitute for human breast milk. Generally, IMF has four
main components: (1) protein from cow’s milk that is processed to have an amino acid
profile similar to human milk (a mix of SMP & SWP); (2) a blend of vegetable fats (including
DHA/ARA) to replace bovine milk fat in order to better resemble the composition of human
milk; (3) a carbohydrate, lactose from cow’s milk; and (4) a micronutrient pre-mix that is
blended into the product to meet the specific vitamin and mineral needs of the infant at a
given age. The ingredients in IMF are highly regulated with regulations specifying a range
for each permitted ingredient, as well as rules for contaminants.
Figure 8 - Infant formula stages
SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES
Skim milk is the base commodity ingredient in most IMF products. Skim milk is pasteurised
and combined with the majority of other ingredients and then dried to create a base IMF
powder. Typically the base powder can be developed into a range of products through the
addition of different fats, oils, vitamins and minerals and is typically done through dry
mixing at a blending and canning facility. There is a large availability of bulk IMF base
products which has led to a number of specialised dry blending operators being
established in Australia and overseas. The table below looks at the Australian supply chain
and BAL’s positioning.
Figure 9 - Australian IMF supply chain
SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES
Pregnant mothers Stage 1 Stage 2 Stage 3
Products Vitamin & dairy based suppliments Infant formula
Regulation Moderately regulated Highly regulated
FMCG and pharmacy channels Traditional FMCG marketing channels
Healthcare Hospital product placement, healthcare workers
Target age Pregnant & lactating women Birth to 6 months 6-12 months 1-3 years
ASX participants BKL, VIT BGA, BKL, MGC, A2M, BAL BGA, BKL, MGC, A2M, BAL BGA, BKL, MGC, A2M, BAL
Traditional FMCG marketing channels
Less Regulated
Follow on formula
Typically brand loyalty to Stage 1 IMFPath to market
Apitmal, Karicare
Blackmores
a2Platinum
Oli-6 (Goat)
Bellamy's
Skim Milk Powder
Whole Milk Powder
Whey Powder
Lactoferrin
Multinational Leaders
Niche Products
Distribution
Pharmacy (5,400 outlets)
API 425 storesSigma 700 stores
Chemmart 274 storesChemist warehouse 260 stores
Aspen (under lisence from Nestle)
Danone Nutricia
S-26
NAN, SMA
Babies R Us 13 stores
Bulk Formula
Dairy Ingredients
Multiple suppliers - local & global
Non Dairy Ingredients
Canola Oil - GrainCorp
Aldi 320 stores
Brands and MarketingContract Canning & packing
Terry white 160 storesMy Chemist 32 stores
Supermarkets (3,700+ outlets)
Woolworths 960 storesColes 783 storesIGA 1678 stores
Regional Brands
Bega: 6year supply agreement entered Jul'15. Utilises Bega's Tatura facility.
Fonterra: 5 year strategic manufacturing agreements entered Nov'15. Utilises Fonterra's
Darnum plant. First deliveries 1Q17.
Bellamy's Organic Direct distribution to ~4,400 outlets
Ingredients
Dairy ingredients from European
certified organic suppliers. Oils from
global suppliers.
Fish oil (DHA/ARA) - Clover Corp
Other retailersBig W 186 stores
Murray Goulburn
Bega Cheese Ltd
Fonterra
Camperdown Dairy Int.
Synlait
Burra Foods
Viplus
Blend & Pack
Australian Dairy Pack
Murray Goulburn
Bega Cheese Ltd
Fonterra
Camperdown Dairy Int.
Synlait
Burra Foods
Viplus
Nestle Wyeth
Bellamy's (Oragnic)
Baby Bunting 33 StoresMother & Baby Stores (86 outlets)
My Baby Warehouse 21 storesThe a2Milk company
Bellamy's Australia
Nuchev
Bega Cheese - Blackmores JV
Murray GoulburnDevondale Natra-start
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Bellamy's Australia (BAL) 24 October 2016
In 2014 the global baby food and formula market was estimated to be worth US$61.8Bn
with IMF the largest contributor at US$44.8Bn, having experienced compound growth of
~7% pa over the last five years. The Top 4 global companies control around 57% of the
market and the Top 10 control ~73% of the market. One of the fastest growing sectors
within the market is organic infant formula which has been growing strongly (+9% in FY15
and +16% in FY14) with a growing prevalence for cleaner and less refined and processed
food products.
THE AUSTRALIAN FORMULA AND FOOD MARKET
The Australian IMF market is estimated to be worth ~$780m in retail sales value annually
and has been growing at a compound rate of +17.5% pa since 2008. The market can be
classified as having a fair degree of market concentration with a high level of brand loyalty
meaning barriers to entry in creating a successful brand are high. The market is dominated
by two large multinationals in Nestle and Nutricia which combined have in excess of 80%
of the market, though the growth rates achieved by regional participants such as BAL and
a2Platinum have outgrown the broader category.
Demand for IMF is influenced largely by the birth rate and declining breastfeeding rates. In
recent years growth rates have been distorted by an expanding grey market for infant
formula (i.e product being acquired in Australia for consumption in Asia). We estimate the
size of this grey market was worth ~$200m in FY15 as indicated by market growth of
+17.5% pa well in advance of the underlying growth rate in demand as dictated by the
combination of: the birth rate (+0.7% pa); inflation (+2.5% pa) and declining breast feeding
rates (~6% decline between the 2008-10 breastfeeding surveys). Businesses that have
typically benefited from this growing grey market have been those with a higher exposure
to follow on formulas (i.e. BAL & A2M).
Figure 10 – Australian infant formula sales vs. the birth rate Figure 11 – BAL Australian sales history and forecasts ($m)
SOURCE: DAIRY AUSTRALIA SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES
The Infant food market is worth ~$151m annually and has been growing at 2.7% pa for the
last five years. Infant food can be broadly categorised into ‘wet’ and ‘dry’, accounting for
approximately 75% and 25% respectively of the value of infant food products. This
categorisation is based on the consistency of the product:
Wet infant food comprises products such as purees, custards, gels and jellies in sweet
and savoury varieties.
Dry infant food includes a range of products, which can be categorised as snacks (such
as rusks, fruit bars and rice cakes) and cereals (such as muesli and porridge). Snacks and
cereals account for approximately 75% and 25% respectively of the value of the dry infant
food category
The two major brands in the market are Heinz and Rafferty’s Garden which combined
account for ~70% of the market. With other brands including BAL, Farex, Woolworths Baby
Macro and Ella’s Kitchen. In 2013 Rafferty’s Garden, the number one brand in the market,
0
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2008 2009 2010 2011 2012 2013 2014 2015
Australian births ('000) - LHS Australian IMF sales ($m) - RHS
0.0
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2012 2013 2014 2015 2016 2017 2018 2019
IMF Revenue Infant Food Revenue
2012-18e CAGR: +47% pa
Page 9
Bellamy's Australia (BAL) 24 October 2016
was acquired by PCZ Cussons for $70m at a time when it was generating revenues of
~$41m. In the same year that NASDAQ listed Hain Celestial acquired UK based Ella’s
Kitchen which generated US$70m in revenue. These transactions indicate an increasing
level of interest from global FMCG companies in both organic and infant food products,
and given the relative scale of the BAL business (we estimate ~$15m in revenue in FY16)
a potential value comparison for the food operations.
CHINA AND SE ASIA INFANT FORMULA
In the case of BAL it is worth noting that the China operating segment not only incorporates
the direct China sales channels (SIC and T-mall) but also the direct trade with Daigo’s that
the company undertakes as part of its supply chain trade. We estimate the latter accounted
for ~60-65% of the revenues reported by the China operations in 2H16.
China is the largest consumer of IMF products, accounting for US$19.9Bn in retail sales
value in 2015 and having grown at +12% YOY. Over the last five years demand has been
growing at a compound rate of 24% pa and is expected to remain strong with 18% pa
growth projected through to 2020e. The premium IMF segment accounts for 17-18% of the
market and is made up of higher end local and imported products. In 2015 ~180kt (+46%
YOY) with a value of US$2.5Bn of IMF products were imported into China via authorised
channels.
Since the Melamine incident of 2008, imported IMF products have been one of the fastest
growing categories (+32% pa excluding the impact of Fonterra contamination issues in
2014) and now account for 17-18% of the total market. When grey market volumes and
IMF products made from imported materials are incorporated into these numbers, this lifts
closer to an estimated 30% of the market, a number more closely linked to the total value
of IMF and milk powder imports into China.
Figure 12 – China IMF market shares – 2014 Figure 13 – China demand growth in IMF (US$Bn)
SOURCE: NIELSON SOURCE: EUROMONITOR
There has been a period of consolidation among Chinese and multi-national producers
which now sees the top four producers accounting for 48% of the market (2014) and the
top 10 accounting for 80%. Consolidation is likely to remain a key feature of the market in
the near term with new regulations around product formulation and sourcing (limited to
three brands per manufacturer) likely to see ~80% of the 2,000-2,500 brands exit the
market. In the longer-term these changes will create an opportunity for market leading
brands to capture a larger share of the market while also providing a large barrier to entry
for the creation of new brands. Large domestic brands such as BAL should be a
beneficiary of these changes.
Distribution of IMF product is by three main sources with baby stores and e-commerce the
fastest growing source of product (at the expense of traditional retailers).
0.0
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25.0
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35.0
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2009 2010 2011 2012 2013 2014 2015e 2016e 2017e 2018e 2019e
Stage 1 Stage 2 Stage 3 Stage 4
Page 10
Bellamy's Australia (BAL) 24 October 2016
Figure 14 – China IMF sales by distribution channel Figure 15 – Sales mix through baby stores
SOURCE: NIELSON SOURCE: SYNUTRA
Other large markets outside of China include Indonesia ($2.3Bn), Vietnam ($0.9Bn),
Thailand ($0.8Bn) and the Philippines ($0.8Bn). Like China growth in these markets has
been high single digit to low double digit. BAL currently has a growing presence in Vietnam
and Malaysia.
CHANGES TO CHINESE REGULATIONS
Following a number of quality and contamination issues in 2008 there have been a number
of changes to the landscape for IMF product in China, with the aim to forcing consolidation
in both the number of participants and brands in China. These changes include:
Product Quality: Under Chinese regulations all imported IMF products must receive
approval from both the CNCA and CIQ. The CNCA tests the quality and operating
efficiency of the blending and canning facilities and the CIQ administers the quarantine and
inspection testing of the final products shipped to China. There are seven CNCA approved
facilities in Australia and all of BAL’s suppliers are accredited.
Three brands per manufacturer: Each manufacturer (domestic and foreign) is limited to
only three brands and three SKU’s of each brand. The aim of this is to consolidate the
number of brands in the Chinese market, with Synutra suggesting that ~80% of the 2,000-
2,500 brands will exit the market. The result of this is a rapid destocking event occurring in
the Chinese market, causing issues for local producers which were highlighted in the
recent results of China centric IMF producers such as Biostime.
In addition there have been new regulations introduced for cross border and e-commerce
trade, including:
Formulation registration: By January 2018 all infant formula brands in China sold
through cross boarder or e-commerce channels will be required to register their
formulations with the CFDA.
Chinese labelling: By May 2018 all cross border e-commerce trade will be required to
have Chinese labelling. BAL already has Chinese labelled, GB compliant product for sale
in China.
In our view the changes emerging in the Chinese market will see significant consolidation
in the number of foreign brands sold in China, with a number of small trader brands likely
to exit. This should create opportunities for market leading regional producers such as BAL
to capture a greater share of the market.
Baby stores42%
e-commerce24%
Traditional retail34%
Super premium18%
Premium21%
Upper-mid51%
Mid-Low10%
Page 11
Bellamy's Australia (BAL) 24 October 2016
Financial overview
PROFIT AND LOSS STATEMENT
BAL remains a high growth business, with the benefit of the annualised 2H16 run rate in
IMF sales the key growth driver in FY17e. Our forecasts project compound revenue growth
of +22% pa over FY16-19e fuelling compound EBITDA growth of +29% pa over the same
time frame. A summary of our forecasts and drivers are detailed below.
Figure 16 - BAL summary profit & loss ($m)
SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES
Revenue growth: BAL is a company in the midst of transitioning its distribution from lower
margin Australian retail and pharmacy channels towards higher margin Daigou and China
direct channels. The channel change is expected to see sales shifting from the reported
Australia division to that of Asia. As a consequence of this we are projecting negative YOY
volume growth in Australia with stronger growth in China. At the group level we project
volume growth of +19% pa over FY16-19e. On the back of strong group volume growth,
the annualised benefit of Dec’15 price increases and continued growth in infant food sales
we are projecting +46% YOY revenue growth in FY17e (+28% relative to annualised 2H16
levels) and compound revenue growth of +22% pa through to FY19e.
Figure 17 - Revenue mix profile of BAL ($m) Figure 18 - China imports of IMF
SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES
2012 2013 2014 2015 1H16 2H16 2016 2017e 2018e 2019e
Australia 41.33 106.11 89.75 88.88 178.63 179.96 190.64 202.12
Asia 7.57 19.19 15.59 50.36 65.95 176.01 216.39 250.55
Total Revenue 17.40 28.80 48.90 125.30 105.34 139.24 244.58 355.96 407.03 452.67
Gross profit ($m) 6.30 10.50 16.39 41.21 43.74 67.99 111.73 179.83 207.16 231.39
Gross margin (% ) 36.2% 36.5% 33.5% 32.9% 41.5% 48.8% 45.7% 50.5% 50.9% 51.1%
Australia 2.00 13.45 35.88 35.67 39.50 43.69
Asia 0.32 1.11 21.25 49.00 64.13 77.39
Corporate (1.82) (2.54) (2.63) (2.72) (2.81)
EBITDA ($m) 0.10 1.20 2.31 12.73 19.27 35.32 54.59 82.05 100.92 118.26
EBITDA margin (%) 0.6% 4.2% 4.7% 10.2% 18.3% 25.4% 22.3% 23.0% 24.8% 26.1%
Depreication & amortisation ($m) (0.10) (0.10) (0.27) (0.45) (0.12) (0.17) (0.29) (0.39) (0.52) (0.52)
EBIT 0.00 1.10 2.06 12.29 19.16 35.15 54.30 81.66 100.40 117.74
...EBIT Margin (% ) 0.0% 3.8% 4.2% 9.8% 18.2% 25.2% 22.2% 22.9% 24.7% 26.0%
Net Interest Income 0.00 (0.10) (0.18) 0.70 0.31 0.28 0.59 0.33 0.54 0.98
Pre-tax profit 0.00 1.00 1.88 12.98 19.46 35.43 54.89 81.99 100.93 118.72
Tax 0.40 0.40 (0.61) (3.99) (5.80) (10.76) (16.57) (24.60) (30.28) (35.62)
Tax rate (% ) 0.00 (0.40) 0.33 0.31 0.30 0.30 0.30 0.30 0.30 0.30
Minorities 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Underlying NPAT ($m) 0.40 1.40 1.27 8.99 13.66 24.67 38.33 57.39 70.65 83.10
Post tax NRI's 0.00 0.00 (0.01) (0.33) (0.39) (0.77) (1.16) 0.00 0.00 0.00
Reported NPAT ($m) 0.40 1.40 1.25 8.66 13.26 23.90 37.16 57.39 70.65 83.10
0.0
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2012 2013 2014 2015 2016 2017 2018 2019
Australia IMF Australia infant food China IMF
2012-19e CAGR: +66% pa2016-19e CAGR: +22% pa
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Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16
IMF imports (t) - LHS Avg. price (US/t) - RHS
Page 12
Bellamy's Australia (BAL) 24 October 2016
Our baseline market growth forecasts are projected at +5% pa in the Australian IMF
market, a level broadly consistent with average 10 year growth rates (albeit well below
recent growth rates) and +10% YOY growth in China demand. While there has been
considerable noise around slowing IMF demand in China recently and competitive market
pricing, we note that Chinese imports of IMF product (the segment Australian producers
are exposed) have continued to demonstrate strong levels of volumes growth, up +35%
YOY in Aug’16 and up +35% YOY on a rolling 12 month basis.
Sales mix and gross margin: As mentioned we are projecting a material shift in sales mix
away from the Australian supermarket segment, towards Daigou, China direct and SE
Asian sales with an expectation that Asia will shift from 27% to 54% of group revenues by
FY19e. This shift in sales mix is expected to see a continued trend of underlying gross
margin expansion, with Asia direct sales and Daigou trade generating a higher gross
margin higher than sales through the Australian supermarket and pharmacy channels.
Market support: As highlighted in the FY16 result, there is expected to be material uplift in
marketing support of $15-20m in FY17e as the business pushes further into Asia. As a
consequence not all of the expansion in gross margins is expected to flow through at the
EBITDA level. Beyond FY17e, we project marketing support to normalise back towards
~6% of net sales revenue by FY19e, which is broadly consistent with what we assume for
other dairy based FMCG businesses. As a result of increased marketing support EBIT
margins are forecast to only modestly improve in FY17e, but at a level 448bp below that
achieved in 2H16. We see the investment in sales and marketing as key to securing future
volume growth.
Selling prices: We have assumed the annualised benefit of 20% price increases pursued
in Dec’15, resulting in revenue growth in excess of volume growth in Australia in FY17e.
We have made no material assumption around further pricing gains in FY18-19e, though
would see any pressure on input prices as likely to be recovered in pricing.
BALANCE SHEET AND CASHFLOW
BAL operates a conservative balance sheet with net cash of $32.2m at the FY16 result. As
a marketing entity, BAL has very limited investment in fixed assets and as such the major
investment is in working capital funding for the business which grew from 15% in FY15 to
22% in FY16. Rising inventory levels, reflecting ingredient inventory positions coming on
balance sheet, was the main driver of the uplift in working capital in FY16. As BAL expands
its presence in China direct sales (mother & baby stores etc.) which have longer working
capital lead times, we expect a further uplift working capital funding in FY17-19e, with a
more pronounced uplift in FY17e as finished stock levels rise. As a result of the investment
in working capital operating cash realisation is expected to remain at levels close to
historical averages (~40% over FY14-16) in FY17e before lifting towards 80-90% in FY18-
19e.
Figure 19 - Balance sheet and cash flow summary ($m unless stated)
SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES
There is no formal dividend payout policy other than to align returns to shareholders with
the working capital requirements of the business. We have assumed a payout ratio in line
with the historical average of ~31%. Based on this assumption we see BAL accumulating
significant surplus capital (particularly in FY18-19e), which in our view is likely to be either
diverted to creating new products, opening new markets or being returned to shareholders.
2012 2013 2014 2015 2016 2017e 2018e 2019e
Operating cahsflow (0.40) (3.90) 0.77 4.74 8.90 21.72 58.59 74.10
Operating cash realisation (%) -80.0% -260.0% 50.3% 50.2% 23.0% 37.6% 82.3% 88.6%
Free cashflow (0.60) (4.30) 0.63 4.47 1.46 5.87 36.42 51.34
Free cash realisation (% ) -150.0% -307.1% 49.6% 49.7% 3.8% 10.2% 51.5% 61.8%
Working capital / Sales (% ) 15.7% 15.1% 21.8% 26.2% 26.7% 26.7%
Net debt (Cash) (4.04) (31.80) (32.16) (38.03) (74.45) (125.79)
Page 13
Bellamy's Australia (BAL) 24 October 2016
Board and management
Rob Woolley - Non-executive Chair
Rob was appointed as Chair on the formation of the Company in 2007. Rob’s expertise has
been instrumental in the growth of the Company to date. Rob is presently a director of
Freycinet Coast Financial Services Ltd and a board member of Forestry Tasmania and the
not-for-profit, Tasmanian Leaders Inc. Previously Rob was Chairman of Tandou Ltd and
Managing Director of Websters Limited following twenty years as a partner at Deloitte. Rob
holds a Bachelor of Economics and is a Fellow of the Institute of Chartered Accountants.
Laura McBain - Managing Director and CEO
Laura has overseen significant change, innovation and business growth since her
appointment as General Manager of BAL in 2006 and subsequent appointment as Chief
Executive Officer (“CEO”) in 2011 and Managing Director and CEO in 2014. Prior to joining
BAL, Laura practised as an accountant and specialised in the areas of providing business
advisory and taxation services. Laura holds a Bachelor of Commerce and in 2013
completed the IMD Leadership Challenge. In 2013, Laura was named as the Telstra
Tasmanian Business Woman of Year 2013 and she went on to be named the Telstra
Australian Business Woman of Year for 2013 (Private and Corporate).
Ian Urquhart - Independent Non-executive Director
Ian was appointed as a non-executive director and the company secretary on the formation
of the Company in 2007. He resigned as Company Secretary in June 2014. Ian brings a
wealth of financial expertise and business experience to the Board, having previously been
a Chief Financial Officer and director of the PGA Group Pty Ltd for over thirty years and
teaching finance and accounting at Monash University. Ian has a Bachelor of Commerce, a
Masters in Administration and is a certified practising accountant (CPA).
Launa Inman - Independent Non-executive Director
Launa was appointed as a Non-executive director of the company in February 2015. Launa
brings to the board extensive experience in retailing, marketing (including digital
technology and social media), finance and logistics. Launa is a director of the
Commonwealth Bank of Australia and Precint Properties New Zealancd Limited and a
member of the boards of the Alannah and Madeline Foundation and Virgin Australia
Melbourne Fashion Festival. Her diverse experience includes terms as Managing Director
and CEO of Billabong International (May 2012 to August 2013), Managing Director of
Target Australia Pty Ltd (2005 to 2011) and Managing Director of Office Works (2004 to
2005). Launa’s qualifications include: MCom, University of South Africa (UNISA), BCom
(Hons) (UNISA), BCom (Economics & Accounting) (UNISA). She is a member of the
Australian Institute of Company Directors and has completed the Wharton Business School
executive program.
Michael Wadley - Independent Non-executive Director
Michael was appointed as a Non-executive Director in 2014. Some 12 years ago Michael
relocated to Shanghai where he now resides with his family. Michael has extensive
experience over the past 20 years providing corporate advisory and legal services to
foreign investors throughout China and to Chinese groups investing offshore. Michael is a
principal at Wadley Consulting Shanghai Co. Ltd, a Senior China Consultant for Hopgood
Gamin, on the Board of Directors of the Australian Chamber of Commerce in Shanghai and
is a Co-Chair of the Chamber’s Financial Services Industry Working Group, a committee
member of the Australian China Business Council, Queensland, and a member of the
Australian Institute of Company Directors. Michael holds a Bachelor of Laws from
Queensland University, and is admitted to practice in the Supreme Court of Queensland,
Page 14
Bellamy's Australia (BAL) 24 October 2016
the High and Federal Courts of Australia, and is registered as a foreign lawyer in China
and Hong Kong.
Patria Mann - Independent Non-executive Director
Patria was appointed a non-Executive Director on 10 March 2016. Patria is an
experienced non-executive Director who is currently on the boards of Event Hospitality and
Entertainment (formerly Amalgamated Holdings), Ridley Corporation, Allianz Australia and
Perpetual Superannuation. Patria was formerly a Partner at KPMG. She holds a Bachelor
of Economics (University of Sydney), is an associate of the Institute of Chartered
Accountants and a Fellow of the AICD
Charles Sitch - Independent Non-executive Director
Charles was appointed a non-Executive Director on 10 March 2016. Charles is a Director
of Spark (formerly Telecom New Zealand) and Apiam Animal Health. He is also Chairman
of the Robin Boyd Foundation and Board Member of Trinity College (Melbourne). Charles
was previously a Director of the global management consulting firm McKinsey & Co for 24
years. Charles has a Bachelor of Law / Commerce from the University of Melbourne, an
MBA from Columbia Business School, and is a Graduate of the AICD.
Shona Ollington - Chief Financial Officer
Shona was appointed as Chief Financial Officer (“CFO”) in August 2014. Prior to joining
BAL Shona enjoyed a 16 year career at KPMG (Director since 2011) specialising in
business advisory, taxation, business restructuring and business valuation. Shona is also
an advisor to the Board of the University of Tasmania Academy Gallery. Shona holds a
Master of Applied Finance (Kaplan Professional), is a Fellow of The Taxation Institute of
Australia (TIA), has a Graduate Diploma of Financial Planning (Securities Institute of
Australia), and is a Member of the Institute of Chartered Accountants in Australia (ICAA).
Shona holds a Bachelor of Commerce with majors in Accounting & Human Resource
Management
Page 15
Bellamy's Australia (BAL) 24 October 2016
Shareholders and ownership
The top four shareholders account for ~36% of the issued capital of BAL. In addition
management and the board have a direct equity interest of 5.4m shares (5.6% of the
issued capital) and a further 3.36m options with an average stock price of $1.30ps.
Figure 20 - BAL major shareholders
SOURCE: BLOOMBERG
Holder Shares (m)
Black Prince Private Foundation 14.0
Fidelity Investments 8.4
Quality Life (Bevin Neil Family trust) 7.2
AMP Capital 5.2
Page 16
Bellamy's Australia (BAL) 24 October 2016
Risks
BAL is a high growth FMCG business with exposures to an agricultural supply chain. Risks
associated in an investment in BAL include but are not isolated to:
China regulatory risk: At this stage we are projecting no material change in China C2C
law. Any change which would likely have a detrimental impact on the level of sales in the
Australian IMF business, but following a transition would be more than mitigated by faster
growth in the China business where gross margins are higher than those achieved in
Australia. As such while we are cognisant that a change in Chinese C2C trading
regulations can impact near term earnings, we don’t necessarily view this as detrimental to
the company’s longer-term growth trajectory.
Organic certification: A key factor to BAL’s success and consumer’s identification with
the BAL organic brand is the certification of BAL’s products as organic. This relies upon the
raw materials and product ingredients meeting the requirements specified by the certifying
bodies. Quality control issues in respect of raw materials and ingredients that result in the
finished products not being certified as organic could have a material adverse impact on
the Bellamy’s brand and consequently BAL’s financial performance and the Share price.
Emergence of new competition: BAL participates in a highly competitive FMCG global
business against materially larger, globally focussed competitors with significantly more
access to capital and resources. Should any of BAL’s competitors participate more
aggressively on price, product, innovation or other means then this could have a material
adverse impact on Bellamy’s financial performance and future prospects of the business.
Supply chain disruption: BAL’s business model and supply chain are dependent on
contractual arrangements with third parties which provide essential processing, production
or distribution functions for BAL branded products globally. There is the risk that the
operations of one or more third parties change in a material and adverse way or that one or
more third parties could reduce their support for the BAL brand. This could reduce BAL’s
ability to maintain supply to its customers in the short to medium term and reduce its ability
to maintain its position in existing markets or enter new markets. This may also necessitate
the need for BAL to invest in manufacturing capacity that would likely be returns
dilutionary.
Brand risk: In common with many other food companies, there is a risk that raw materials
may deteriorate or that products may become contaminated, tampered with, adulterated or
otherwise unsafe or unfit for sale or consumption within the supply chain due to various
factors, including human error and equipment failure. Potential adverse consequences for
BAL include regulatory penalties, termination of distribution arrangements, liability
associated with adverse health effects on consumers, product recall and disposal costs,
loss of stock, delay in supply and financial costs.
Regulatory risk: BAL and its strategic suppliers and contractors require certain licences,
approvals and consents in order to conduct their businesses. There is a risk that any such
licences, approvals or consents that are material to BAL in operating its business will not
be renewed or will be renewed on more restrictive or onerous terms, or in limited
circumstances, revoked.
Key personnel risk: BAL’s performance is dependent on the ability of its senior
executives and key personnel to manage and grow its business. Continuity and retention of
senior executives and key personnel are important for the ongoing implementation of
BAL’s strategy.
Page 17
Bellamy's Australia (BAL) 24 October 2016
Bellamy's Australia as at 24 October 2016
Recommendation Buy
Price $13.20
Target (12 months) $16.06
Table 1 - Financial summary
SOURCE: BELL POTTER SECURITIES ESTIMATES
Year end June 2013 2014 2015 2016 2017e 2018e 2019e Rating Buy
Profit & Loss (A$m) Share price (A$ps) $13.20
Sales revenue 28.8 48.9 125.3 244.6 356.0 407.0 452.7 Target price (A$ps) $16.06
. . . Change 69.8% 156.3% 95.2% 45.5% 14.3% 11.2% Shares on issue (m) 96.7
EBITDA 1.2 2.3 12.7 54.6 82.0 100.9 118.3 Market cap (A$m) 1275.9
Deprec. & amort. (0.1) (0.3) (0.4) (0.3) (0.4) (0.5) (0.5) Enterprise Value (A$m) 1243.7
EBIT 1.1 2.1 12.3 54.3 81.7 100.4 117.7
Interest expense (0.1) (0.2) 0.7 0.6 0.3 0.5 1.0 Year end June 2013 2014 2015 2016 2017e 2018e 2019e
Pre-tax profit 1.0 1.9 13.0 54.9 82.0 100.9 118.7 Valuation Ratios
Tax expense 0.4 (0.6) (4.0) (16.6) (24.6) (30.3) (35.6) Adjusted EPS (¢ps) 9.32 38.93 57.80 71.16 83.70
. . . tax rate -40% 33% 31% 30% 30% 30% 30% Change (% ) 317.5% 48.5% 23.1% 17.6%
Minorities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Adjusted PE (x) 141.6 33.9 22.8 18.5 15.8
Net Profit 1.4 1.3 9.0 38.3 57.4 70.7 83.1 EV/EBITDA (x) 97.7 22.8 15.2 12.3 10.5
Abs. & extras. 0.0 (0.0) (0.3) (1.2) 0.0 0.0 0.0 EV/EBIT (x) 101.2 22.9 15.2 12.4 10.6
Reported Profit 1.4 1.3 8.7 37.2 57.4 70.7 83.1
NTA ($ps) 0.50 0.84 1.23 1.73 2.32
Cashflow (A$m) P/NTA (x) 26.6 15.7 10.7 7.6 5.7
EBITDA 2.3 12.7 54.6 82.0 100.9 118.3 Book Value ($ps) 0.51 0.86 1.26 1.77 2.38
Net Interest Expense (0.2) 0.7 0.6 0.3 0.5 1.0 Price/Book (x) 31.2 18.7 12.7 9.1 6.7
Tax Paid (0.7) (0.2) (8.4) (20.6) (27.4) (32.9) DPS (¢) 2.9 11.9 19.0 22.2 25.0
Change in Wkg Capital (7.7) (11.2) (34.4) (40.1) (15.4) (12.2) Payout (% ) 30.7% 30.6% 32.9% 31.2% 29.9%
Other 7.0 2.8 (3.5) 0.0 0.0 0.0 Yield (% ) 0.2% 0.9% 1.4% 1.7% 1.9%
Operating Cash Flow 0.8 4.7 8.9 21.7 58.6 74.1 Franking (% ) 100% 100% 100% 100% 100%
Capex 0.0 0.0 (6.7) (15.1) (21.7) (22.2)
Div Paid (gross of DRP) (0.1) (0.3) (0.8) (0.8) (0.5) (0.5) Performance Ratios
Free Cash Flow 0.6 4.5 1.5 5.9 36.4 51.3 EBITDA/sales (% ) 10.2% 22.3% 23.0% 24.8% 26.1%
Acquisitions (0.2) (0.1) 0.8 0.0 0.0 0.0 EBIT/sales (% ) 9.8% 22.2% 22.9% 24.7% 26.0%
Disposals 0.0 0.0 0.0 0.0 0.0 0.0 OCF Realisation (%) 50% 23% 38% 82% 89%
Share issues 4.8 23.4 0.6 0.0 0.0 0.0 FCF Realisation (% ) 50% 4% 10% 52% 62%
Other 0.0 (0.0) (2.4) 0.0 0.0 0.0 ROE (% ) 18.4% 46.1% 46.9% 41.2% 36.1%
(Inc.) /dec. in net debt 5.2 27.8 0.4 5.9 36.4 51.3 ROIC (%) 71.8% 106.4% 97.0% 103.5% 112.6%
Asset turn (years) 28.49 188.26 212.15 193.29 226.51
Balance Sheet (A$m) Capex/Depn (x) 0.00 23.05 38.99 41.47 42.58
Cash & near cash 4.4 32.0 32.3 38.2 74.6 125.9 Interest cover (x) (17.68) (92.35) (250.39) (186.76) (120.59)
Receivables 6.4 20.9 33.9 48.1 57.0 63.4 Net Debt/EBITDA (x) (2.50) (0.59) (0.46) (0.74) (1.06)
Inventories 7.7 17.1 67.8 115.7 132.3 147.1 Net debt/equity (%) -65% -39% -31% -43% -55%
Other 3.1 0.6 5.3 7.5 8.6 9.5
Current assets 21.7 70.7 139.2 209.4 272.4 345.9 Segmentals (A$m)
Fixed assets 0.6 0.6 1.1 1.5 1.5 1.5 Australia/NZ 28.8 41.3 106.1 178.6 180.0 190.6 202.1
Intangibles 0.2 0.1 1.7 1.7 1.7 1.7 Asia 0.0 7.6 19.2 66.0 176.0 216.4 250.6
Other 0.3 1.0 1.5 1.5 1.5 1.5 Revenue 28.8 48.9 125.3 244.6 356.0 407.0 452.7
Non current assets 1.1 1.7 4.3 4.7 4.7 4.7
Total assets 22.8 72.4 143.5 214.1 277.1 350.6 Australia/NZ 2.0 13.4 35.9 35.7 39.5 43.7
Creditors 6.5 19.1 48.4 70.4 80.5 89.5 Asia 0.3 1.1 21.3 49.0 64.1 77.4
Borrowings 0.2 0.1 0.1 0.1 0.1 0.1 Corporate & Other 0.0 (1.8) (2.5) (2.6) (2.7) (2.8)
Other 0.1 3.8 11.6 18.9 21.6 26.2 EBITDA 2.3 12.7 54.6 82.0 100.9 118.3
Current liabilities 6.8 23.1 60.1 89.4 102.2 115.8
Borrowings 0.2 0.1 0.0 0.0 0.0 0.0
Other 0.2 0.3 0.1 2.4 3.4 4.4
Non current liabilities 0.4 0.4 0.2 2.4 3.5 4.4
Total liabilities 7.2 23.5 60.3 91.9 105.7 120.2
Net assets 15.6 48.9 83.2 122.2 171.4 230.4
Share capital 15.8 39.7 40.2 40.2 40.2 40.2
Reserves (0.0) 0.3 2.8 2.8 2.8 2.8
Retained earnings (0.2) 8.9 40.2 79.2 128.4 187.3
Outside equity Interests 0.0 0.0 0.0 0.0 0.0 0.0
S/holders' funds 15.6 48.9 83.2 122.2 171.4 230.4
Net Debt (Cash) (4.0) (31.8) (32.2) (38.0) (74.5) (125.8)
Page 18
Bellamy's Australia (BAL) 24 October 2016
Bell Potter Securities Limited ACN 25 006 390 7721
Level 38, Aurora Place 88 Phillip Street, Sydney 2000
Telephone +61 2 9255 7200 www.bellpotter.com.au
Recommendation structure
Buy: Expect >15% total return on a
12 month view. For stocks regarded
as ‘Speculative’ a return of >30% is
expected.
Hold: Expect total return between -5%
and 15% on a 12 month view
Sell: Expect <-5% total return on a
12 month view
Speculative Investments are either start-up
enterprises with nil or only prospective
operations or recently commenced
operations with only forecast cash flows, or
companies that have commenced
operations or have been in operation for
some time but have only forecast cash
flows and/or a stressed balance sheet.
Such investments may carry an
exceptionally high level of capital risk and
volatility of returns.
Research Team
Staff Member
TS Lim
Industrials
Sam Haddad
John O’Shea
Chris Savage
Jonathan Snape
John Hester
Tanushree Jain
Financials
TS Lim
Lafitani Sotiriou
Resources
Peter Arden
David Coates
Associates
Hamish Murray
Tim Piper
Title/Sector
Head of Research
Industrials
Industrials
Industrials
Industrials
Healthcare
Healthcare/Biotech
Banks/Regionals
Diversified
Resources
Resources
Associate Analyst
Associate Analyst
Phone
612 8224 2810
612 8224 2819
613 9235 1633
612 8224 2835
613 9235 1601
612 8224 2871
612 8224 2849
612 8224 2810
613 9235 1668
613 9235 1833
612 8224 2887
613 9256 8761
612 8224 2825
@bellpotter.com.au
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shaddad
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