Fromagerie Bel Analyse

CFA Institute Research Challenge Hosted by

Local Challenge CFA France Universit Lille 2/SKEMA

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STOXX 600 - Food & Beverage UNIBEL Fromageries Bel

TP: 399

[Universit Lille 2/SKEMA] Student Research This report is published for educational purposes only by students competing in the CFA Institute Research Challenge. Consumer Staples BEL Date: 12th January 2015 Ticker: FBEL Recommendation: BUY Exchange: E.N Paris Price: 300 Target Price : 399 (+33%) One Portion of Bel, One Giant Return for Shareholders We issue a BUY recommendation with a target price of 399 based on a weighted average of DCF, transaction and relative valuations. Our TP implies an upside potential of 33%. An EfYicient Business Model Bel capitalizes on a simple and efSicient business model: a family business, pure player in premium branded cheese production and products with a strong identity, backed by an expertise in miniaturization. Well-Positioned For Further Growth We believe Bel is well-positioned for further growth (we expect 12% EPS CAGR 2013-18E), driven by (1) international expansion led by the 5 core brands; (2) market share gains over the period 2014E-18E; and (3) an enviable strategic positioning, well exposed to the growth trend of on-the-go and healthy consuming, while enjoying premium pricing power (reSlected in premium operating margins). Besides, to seize potential external growth opportunities, management has fostered a strong Sinancial discipline. As a result, Bels leverage is low (net debt/EBITDA close to zero), with acquisition Sirepower estimated at more than 1bn in 2015E assuming leverage of 3x EBITDA. A Defensive Stock To Own During Tough Times Despite the stocks growth potential, we believe the defensive nature of the industry is a key asset: Bels activity can provide investors with an attractive counter-cycle investment. Besides, the group has a constant dividend policy, which makes it attractive for investors looking for constant dividends: the dividend growth of 21% CAGR for 2013-2018E implies a dividend yield of 3% on average. Despite An Attractive Risk-Reward ProYile, We Flag Some Risks Bel trades at a discount to its peers that exceeds 25%, even adjusted for liquidity, providing strong support to our BUY recommendation. We believe the discount is unjustiSied, as reSlected in our target price which points to 33% upside potential. The main concerns we have on the stock are (1) its weak liquidity; (2) the top-line and margin exposure to forex and volatile commodity prices; and (3) its exposure to Europe (60% of sales), albeit decreasing. Catalysts (1) A QE announcement by the ECB given inSlation data in the Eurozone and the ongoing decline in oil prices; (2) an acquisition announcement, provided Bel does not pay too much; (3) the creation of a futures market for dairy raw materials by Euronext; (4) worldwide consumption trends toward healthy eating (which includes cheese); and (5) increased share liquidity through, for example, the disposal/placing of Lactalis 24% stake.

Market ProYile 52-week Price Range 265-314 Average 3M Daily Volume 228.4 Shares Outstanding (m) 6.82 Market Capitalization (m) 2 062 Free Float 4.4% Unibel Holding 67.4% Beta 0.41 Sources: Factset, Team estimates

Valuation DCF Transac Mult Estimated Prices 373 442 432 Weights 60% 20% 20% Target Price () 399

Financials 2012 2013 2014E 2015E EPS () 18.7 18.5 13.9 21.4 DPS () 6.25 6.25 6.25 7.91 Sales (m) 2 649 2 720 2 828 3 000 EBIT (m) 238 240 169 247 Net proSit (m) 129 126 94 146 ROCE 11.4% 9.3% 7.0% 9.7% Net debt/EBITDA (x) 0.2 0.1 0.2 -0.1 Sources: Factset, Team estimates

Valuation metrics 2012 2013 2014E 2015E EV/EBIT (x) 5.5 7.8 11.7 8.0 EV/Sales (x) 0.5 0.7 0.8 0.7

Sources: Factset, Team estimates

Source: Factset

Dec-14 Dec-10 Dec-11 Dec-12 Dec-13

Source: Team estimates

Bel Stock Price (100 at 31st Dec 2010) Alexandre RAVERDY [email protected] +33(0)6.19.25.79.26 Manon RICHARD [email protected] +33(0)6.16.95.32.54 Ran XU [email protected] +33(0)6.98.13.06.40 Konan KOUASSI [email protected] +33(0)6.66.69.25.96 Maxime PARRA [email protected] +33(0)6.47.61.90.40

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Investment Summary We based our target price on a weighted average of three valuation models (DCF, Transaction method and Relative valuation). Despite its weak liquidity taken into account in each method we issue a BUY recommendation on Bel with a target price of 399 (33% upside) relying on its international expansion (attractive for investors given the signiSicant growth potential), its competitive advantage in miniaturization and its acquisition Sirepower. From a valuation standpoint, Bel is currently trading at an undeserved 28% discount to its peers on 2015E EV/EBIT and a 25% discount to 2015E EV/Sales, both adjusted for liquidity, providing strong support to our BUY recommendation. International Expansion (Figures 1&2) In 2013, Bel sales accounted for c.2.8% of world cheese market size (approximately 98bn), of which 62% came from Europe. The trends in the food industry provide attractive opportunities for Bel. With the new Brookings production site in the US and further internationalization, we forecast a market share of 3.1% by 2018E, which implies a CAGR 2013-18E sales of 6%. Manufacturing Know-How in Miniaturization Cheese portion format is one of Bel strong designs, and miniaturization stems from unique manufacturing know-how. This is well-adapted to on-the-go consumption trend that is driving demand worldwide. A Sound Financial Structure Strong free cash Slow generation and conservative capital allocation has led to a strong balance sheet. This should also allow Bel to (1) continue to strongly invest in marketing (around 21% between 2014E-18E) and R&D (1%); and (2) increase its payout ratio from 34% in 2013 to 50% in 2018E. Since 2009, Bels Net Debt/EBITDA has decreased, reaching 0.07x in 2013. Due to the internal operating improvements, the ratios downward trend should continue and allow Bel to show a net cash position from 2015E (Figure 3), which provides acquisition headroom. Interestingly, management has shown a selection skill and a strong integration capacity with past acquisitions (16 local and international brands including Leerdammer and Boursin). Possible Investment Risks Potential investors must be aware of two main risks: corporate governance and market risks. Corporate governance risk is due to the family-controlled structure. Some conSlicts of interest might appear as the positions of CEO and Chairman are Silled by the same person (member of the family shareholder). Illiquidity may also have a possible adverse impact on investors returns. This market risk is characterized by (1) a very low free Sloat (4.4%) and (2) an historical average bid-ask spread of 3%. An investor with a long-term investment horizon may be less affected by this risk. In addition, Bel is subject to foreign exchange rate Sluctuations as a result of its international operations and presence. Other risks (political, strategic, etc.) are explained in the Investment Risk section.

Figure 1: Bel sales estimates and forecasts


CAGR 2013-18E Europe 2.7% NME & Africa 9.9% Americas - APAC 10.7% World 5.9%

-200 -150 -100 -50 0 50 100 150 200 250 300 350 400 m Figure 3: Net debt / cash evolution

Sources: Bel, Team estimates

Figure 2: Bel market share estimates and forecasts

2

Figure 4: Bel stock price & key events

Sources: FactSet, Bel

1st June 2006 Acquisition of Gervais Brand

5th November 2007 Acquisition of

Boursin

14th May 2009 Appointment of Antoine Fievet as

CEO & Chairman

2nd July 2012 Announcement of a new production site in the US

7th February 2013 Acquisition of Tranchettes

18th June 2012 Appointement of Francis Le Cam as

Deputy General Manager

2009

2006

2014

2013

2012

2011

2010

2008

2007

CFA Institute Research Challenge 12th January 2015


3.1% 3.7%

9.8%

1.3% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%

12.0%

World Europe NME & Africa Americas - APAC 2013 2018E

0 1 000 2 000 3 000

2010 2011 2012 2013 Americas - APAC Africa - Middle East Europe

Unibel Fivet/Bel Family SoSil SA (Lactalis Group) Other public Treasury Stock

CFA Institute Research Challenge 12th January 2015 Business Description Bel is the 3rd largest branded cheese manufacturer worldwide. Operations started in 1865 for this French family-held group when Jules Bel created a cheese ripening and trading business. After he died, Lon Bel, his son, took over the business and set out for an industrial adventure by creating Fromageries Bel in 1922, which produced the well-known Laughing Cow brand. The company then grew Sirst through the construction of modern plants both domestically and internationally, and secondly by broadening its range of products. In particular, it launched the Sirst fat-free cheese in the early 1930s, leading the way in healthy products. Since then, the company has developed throughout the world. Today, the company is active in 5 continents with 28 production plants and 30 subsidiaries (Appendix 9). Its portfolio comprises 5 core brands (The Laughing Cow, Mini Babybel, Leerdammer, Kiri, Boursin) and 25 local brands. In 2013, the company employed 10,830 people. Its easy-to-carry and easy-to-keep cheeses also make Bel a leading company in on-the-go consumption with three segments (3 S): Spread (soft spreadable cheese and product containing cheese), Snacks, and Slices (hard cheese) (Figure 6). To achieve its goals, Bel manufactures three types of cheese, distributed in 120 countries: Processed cheese for which the group is a leader thanks to The Laughing Cow (Bels oldest brand), Pressed cheese (e.g. Mini Babybel and Leerdammer) and Fresh & Spreadable cheese (e.g. Kiri, Boursin). Current strategy of the company can be described with the following 3 pillars: Industrial Expertise and Innovation Leadership (Appendix 10). With two R&D centers in Europe and R&D expenses (1% of sales) two times higher than its closest peers, industrial expertise and innovation are the cornerstone of Bel and ensure it keeps a strong competitive advantage. Since the industry is mature, the group is changing its product mix (e.g. co-branding). This is why it aims at broadening the range of its brands as well as renewing its recipes (a dedicated team is in charge of understanding the consumers needs). Besides, the company aims at conquering Asia by developing new Slavors while respecting their culture and habits. Its industrial expertise will enable the group to increase its footprint in countries like Vietnam, Japan, China and South Korea. Internationalization And Strengthening of The 5 Core Brands In 2013, the core brands accounted for 70% of total sales (vs. 32% in 2008), 4 of them among the worlds 12 leading cheese brands (Appendix 11). The group aims at increasing its sales by building new production plants in high potential regions. For instance, the new plant in Brookings (USA) will produce 10 thousand tons of cheese each year to meet the growing demand for Mini Babybel. The group thus plans to reach $1bn of sales in N. America by 2025 (x3 in 10 years). Acquisition-Led Growth Focus On Premium Branded Cheeses Acquisition-led growth gradually complements innovation-led growth. Indeed, since 1985, the company has already acquired 16 brands (Figure 8 & Appendix 12) and puts a particular emphasis on the quality of the brands it acquires. Bels Management, A Well-Functioned Network of Experts Fitting The Group Strategy Antoine Fivet, representing the 5th generation of the shareholding family, became CEO and Chairman of the group in 2009. In the executive committee, the other three deputy general managers all have extensive experience: Bruno Schoch (Finance, Legal and IT) has a strong knowledge in M&A transactions perfectly Sitting the group strategy; Francis le Cam (Operations) has substantial background in International Management; and Hubert Mayet is an expert in manufacturing and technology (Appendix 13). Shareholder Structure Though Bel has been listed on the Paris Stock Exchange since 1946, it remains controlled by the founding family. It is the major shareholder today with 71% of the shares (of which 67.4% is held by Unibel, its listed family holding company). Lactalis, one of Bels competitors, holds 24% of the shares (Figure 9). Free Sloat is therefore very low (4.4%) but the stable shareholder structure allows an effective long-term strategy. Free Sloat could increase should Lactalis dispose of its shares: it would boost liquidity and attract interest from institutional and retail shareholders in the stock. A move toward more visibility is witnessed by the availability of the annual report in English since 2013.

60% 25% 15%

Spread Snacks Slices

Figure 6: Bel production 3 S

Brand Creation Acquisition Leerdammer (190m) (2002)

Kiri (1966)

Boursin (400m) (2008)

The Laughing Cow (1921)

Mini Babybel (1977)

Figure 8. Core brands development

Figure 7: Sales breakdown by region (m)

Figure 9: Shareholder structure 0.7%

67.4% 3.5%

4.4% 24.1%

Figure 5: Breakdown of activities B E L

Consumers (Core market)

Catering (Bel Foodservices)

Industry (Bel Industries)

Source: Bel

Source: Bel

Source: Bel

Source: Bel

NB: Bel does not provide the % of each activity

Sources: Bel, FactSet

3

Philadelphia Boursin Kiri

Tartare

The Laughing Cow Cur de Lion Mini Babybel

Leerdammer

Ptit Louis 0 100 200 300 400 500 600 700 800 900

15 20 25 30 35 40

Calcium (m

g)

Fat (g)

NRV*

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

-3% -2% -1% 1% 2% 3% 4% 5% 6%

2007 2008 2009 2010 2011 2012 2013 2014E World GDP growth Cheese production growth

Figure 12: Share of spending by the Global Middle Class (2009 to 2030 forecasts)

0% 20% 40% 60% 80%

100%

2009 2020 2030 APAC Africa - Middle East Americas Europe

Figure 10: Cheese versus GDP growth

Figure 11: Market size and per capita cheese consumption Sources: World Bank, OECD

Sources: Euromonitor, IDF

Source: World Bank

Figure 13: Nutrition Mapping (per 100g)

Sources: Team research

CFA Institute Research Challenge

*Nutrient Reference Value

12th January 2015

0 5 10 15 20 25 30

0 5 10 15 20 25 30

Retail Value Sales 2014 (lhs) Per Capita Total Consumption (rhs)

kg bn

Bel Competitors

4

0

1

2

3

4

5

0 500 1 000 1 500 2 000 2 500 3 000 3 500 4 000

0% 2% 4% 6% 8% 10%

12%

Sales (rhs) EBIT margin Net proSit margin

m

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

Figure 15: Porters 5 Forces Rivalry (4.5) Bargaining Power of Customers (4)

Bargaining Power of Suppliers (1.5)

Threat of New Entrants (1)

Threat of Substitutes (3) Source: Team estimates

Figure 14: Company ranking*

*in terms of branded cheese sales Source: Bel

Lactalis Kraft Fromageries Bel Bongrain Arla Food Mondelez

1

2

3

4

5

6


Figure 16: Sales and margins trends

Sources: Bel, Team estimates

5

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

0% 2% 4% 6% 8%

10% 12%

Western Europe Americas APAC Near and Middle East Greater Africa 2010 2011 2012 2013

Figure 18: YoY EBIT margin by region


Source: Bel

1.60% (2.50%)

1.40% (2.60%) 8.90%

4.50% 4.80% 2.70%

7.30% 7.00% 3.40%

5.30%

0% 1% 2% 3% 4% 5% 6% 7% 8% 9%

10%

Source: Bel

Figure 17: Sales growth bridge

6

ROCE vs. WACC A comparison between the WACC and the ROCE shows the company employs its capital effectively and generates shareholder value. Our estimated WACC is 5.5% and is based on no debt capital structure. Over the period 2009-2018E, ROCE is always higher than the companys cost of capital. The ROCE of 7% in 2014E is justiSied by the lower NOPAT margin due to high raw material costs and an unfavorable forex (Figure 19). Returns To Reach Low Teens The decrease in ROE between 2013 and 2014E (from 11% to 7%) reSlects the expected decrease in net income, which is not compensated by leverage (constant between 2013 and 2014E). With the growth trends in ROA, thanks to a rising net proSit margin, the ROE should move towards the low teens. The recovery should start at the end of 2014E and ROE is expected to be 13.5% in 2018E (Appendix 22). Strong Credit Metrics Bels Sinancial leverage expressed as Net Debt/EBITDA is very low and has been declining for 5 years, driven both by operating improvement and a huge amount of cash (510m in 2013) with the issuance of two bonds in 2012 and Schuldschein loans in 2013. The ratio has dropped from 1.3x in 2009 to reach 0.07x in 2013. From 2015E, Bel should have a net cash position of 23m, implying a Net Debt/EBITDA ratio of -0.07x, which reaches -0.4x in 2018E. Therefore (1) Bel can easily comply with its debt covenants (Net Debt/EBITDA 3.5x); and (2) it leaves signiSicant room for external growth (leverage of 3x Net Debt/EBITDA should provide an M&A treasury chest of close to 1bn on top of the companys existing cash position, which should reach 509m in 2018E) without resorting to a capital increase. Cash on the balance sheet (510m) is more than sufSicient to cover short-term debt (106m) as well as debt maturing in 2018 and 2019 (Figure 20). Cash Flows Operating cash Slows have always been close to 200m pa, except in 2011 due to weak earnings and an increase in NWC. We expect the OCF to reach a trough in 2014E due to the weak operating proSit, but it should recover from 2015E (Figure 21). Investing cash Slows increased year-on-year to reach 146m in 2013. We expect this trend to continue, linked to strong capital expenditures. Capital expenditures reached a peak in 2013 at 149m due to the construction of the Brookings production site (113m). Since Bel does not plan to build any new factory, we expect growth CapEx to go back slowly toward a lower normalized level while maintenance CapEx should be slightly higher compared to 2012. From 2016, Bel should have achieved its investment plan, hence a steady CapEx/Sales ratio of 4%.

Valuation Bel currently trades at 8.8x EV/EBIT 2015E, which is a 9.5% discount to its historical average. The stock also trades on a 28% discount to its peers, despite showing stronger EBIT CAGR 2013-15E (8.2% vs. 5.6% for its closest peers). We valued Bel using a blend of DCF (60%), relative (20%) and transaction (20%) valuation. We took liquidity into account in each method by applying a discount of 11% based on Damodaran synthetic bid-ask spread method (Appendix 23). We derived a target price of 399, which points to 33% upside potential, in full support of our BUY recommendation. By incorporating the company strategy over a longer period and giving an intrinsic value, the DCF method appears quite appropriate for Bel, we thus gave it a 60% weighting. The transaction method was given a weight of 20% because it represents the M&A trend in the Food & Beverages (F&B) industry. Finally, we used relative valuation with a blend of peers multiples and a multiple factor regression. We decided to give a weight of 20% to this method since this reSlects the markets current value assessment of sector peers and, hence, of Bel itself.

I. Discounted Cash Flows The DCF model captures the long-term potential of gaining market share in the smaller, but faster growing emerging markets, which embodies Bel strategy. The DCF analysis gave us a target value of 373 (+24%) assuming a WACC of 5.5% (derived entirely from the cost of equity, which itself is impacted by the stocks low beta of 0.4) and a liquidity discount of 11%. A 6% Sales Growth Driven By Americas APAC Bel strategy of further expansion of its core brands and an appropriate product mix should allow the group to capture more market share in APAC. In the US, the new production plant will allow Bel to gain more market share thanks to growing and sustainable demand. We therefore expect a 2013-18E CAGR of 11% for the region (to 19% of group sales in 2018E). Source: Team estimates

0%

5%

10%

0

2 000

4 000

2014E 2015E 2016E 2017E 2018E Americas - APAC Africa - Middle East Europe Sales growth

Figure 22: Sales forecasts


( 400) ( 300) ( 200) ( 100)

0 100 200 300 400

Net Operating Cash Flow Net Investing Cash Flow Net Financing Cash Flow

Figure 21: Evolution of cash Slows

Source: Bel

0 100 200 300 400 500 600

Cash on hand 2014 2015 2016 2017 2018 2019 2020 2023 Loans & Borrowings Bonds Schuldschein

Figure 20: Debt maturity proSile

Source: Bel

ROCE 11% 2012 ROCE 7% 2014E ROCE 11% 2016E

NOPAT Margin

Capital

Turnov

er


Figure 19: ROCE decomposition

m

7

Western Europe: The Largest Region Though it is a mature market, Western Europe should remain the core market for Bel with the highest per capita consumption (86 per capita in 2013). We estimate a 2013-18E CAGR of 3% sales growth in Europe (including Western, Northern and Eastern), which should represent approximately 53% of Bel sales in 2018E. Africa & Middle East: High Potential Future Engine But Underdeveloped Environment We expect growth in Africa and Middle East to reach a CAGR 2013-18E of 10%, driven by the development of modern distribution channels (especially in Egypt and Iran), strong population growth (2% CAGR to 2018E) and an increase in per capita consumption of cheese (from 5 in 2013 to 7 per capita in 2018E). Except for some countries in Asia, cheese is already part of the daily diet, but the growth rate should strengthen as refrigeration becomes more widespread. DeYining the WACC We calculated the cost of equity based on the Fama-French multifactor model (FFM) using European data since 2000. In fact, since Bel is a small-cap, the FFM appears more appropriate than the CAPM. The beta of 0.4 was derived using Dimson-Scholes methodologies to take into account infrequent trading. The current Frances 10-Year OAT was used as the risk-free rate (0.8% at 9th January 2015). Current yield, reaching high-time lows, drives our WACC to very low levels. This is why we ran sensitivity analyses as well as Monte Carlo simulation to study the impact of several inputs on the target price, of which liquidity (Figure 24). Please see Appendices 23 to 29 for further information. II. Transaction-based Valuation We analyzed M&A deals (Appendices 30 to 32) executed over the last two years (except for Boursin which took place in 2007-08) within the Food & Beverages sector (we did not identify any relevant transaction in the Cheese sector). Only full ownership acquisitions were retained, and we deemed relevant to include Bels acquisition of Boursin as it perfectly Sits the business proSile (international brands) and reSlects transactions in the cheese sector. We used the Adj. Deal Value/Sales multiple to compute the estimated price from which we subtracted a takeover premium of 29% (average premium since 2011). We obtained a target value of 442 (pointing to 47% upside). III. Relative Valuation 1. Peers Multiples We derived a target price of 450 (50% upside) using EV/Sales and EV/EBIT multiples, both based on 12-month forward means and adjusted for liquidity (Appendix 33). Why We Chose These Two Multiples We favored using EV/Sales and EV/EBIT over other multiples because the relationship is more signiSicant and seems more useful in predicting future performance (Figures 24 & 25). We treat both multiples equally in our valuation as there is no evidence of predominance of one over the other. Choice of Peers Closest peers, with a core business as similar as possible to Bels (Bongrain, Parmalat, Glanbia). High-growth small caps in the F&B sector, to reSlect Bels growth model (Saputo, Diamond Foods, Synders-Lance, TreeHouse Foods). Large diversiYied groups, as they are similar in terms of international strategy with their core brands (Kraft Foods, Danone, Mondelez Int.). Given the varying features of the three peer groups, we applied a different liquidity discount as well as a different weight to compute liquidity-adjusted weighted average multiples (details provided in Appendix 33). 2. Multiple Factor Regression A broad sample of 200 Sirms was used to regress forward P/E against 7 variables: leverage (LT Debt/Total Assets), EPS long-term growth rate (g), payout, beta, market capitalization (logarithm), return on equity, illiquidity ratio (based on Amihuds research). The 5 last variables are dummies corresponding to sub-sectors. (Figure 26 & Appendix 34). With an expected EPS 2015E of 21.4, we derived a target value of 415 (38% upside). Combining both target prices with a 50-50 weighting, we obtained a target value of 432 (44% upside) for relative valuation.

Figure 26: Regression inputs (2015E)


Figure 25: EV/Sales 15E vs. EBIT margin 15E

Sources: FactSet, Team estimates

Sources: Thomson Reuters, Team estimates

FBEL BH PLT

GL9 KRFT BN

MDLZ SAP DMND LNCE THS

R = 0.81098

0.0 0.5 1.0 1.5 2.0 2.5 3.0

0% 5% 10% 15% 20%

EV/Sales 15E

EBIT Margin 15E

Figure 23: WACC assumptions

Sources: FactSet, Damodaran, Team estimates

Figure 24: Sensitivity analysis


WACC

Liquidity Discount

4% 5.5% 7% 6% 465 393 341 11% 440 373 323 16% 415 352 305

Rf 0.8% Beta 0.41 Market risk Premium (RMRF) 5.9% SMB Premium 3.4% HML Premium -1.1% Cost of equity 5.5% Equity as a % of target capital structure 100% WACC 5.5%

fP / E = 0 +1(LTDebt

TotalAssets)+2g+3payout +4beta +5 ln(marketcap)+6ROE +7Amihud

Intercept 1.0 Leverage 0.1 EPS growth rate 0.2 Payout 0.4 Beta 0.4 ln(Market Cap) 21.7 ROE 0.1 Amihud 0.0007 S50 1 fP/E 18

8

0% 2% 4% 6% 8% 10%

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

0 1 000 2 000 3 000 4 000 5 000

Butter Skim milk in pouder Whole milk in pouder

$/t Figure 28: Raw materials prices

Figure 27: 3-month bid-ask spread

Source: OECD


Source: FactSet

12th January 2015

9

- 1.0 0.0 1.0 2.0 3.0 4.0 5.0

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Figure 29: Eurozone HICP (% y/y)

Source: Eurostat

Oct. 14 Nov. 14 Dec. 14

LT Average: 3%

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

Suppliers 70/100

Subcontractors 43/100

Bel (Gold Status) 65/100

Source: EcoVadis

Figure 30: 2013 EcoVadis rating


BUY Forecast 12-month absolute total return greater than 6% HOLD Forecast 12-month absolute total return of +6% to -6% SELL Forecast 12-month absolute total return less than -6%

Rating deYinitions:

10

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

12th January 2015 CFA Institute Research Challenge

11

Appendix 1. Income Statement


NB: Forecasts calculations are explained in Appendix 20.

CFA Institute Research Challenge 12th January 2015 Back to content

Income Statement (m) 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Sales 2 221 2 418 2 527 2 649 2 720 2 828 3 000 3 187 3 392 3 619

Growth 0.2% 8.9% 4.5% 4.8% 2.7% 4.0% 6.1% 6.2% 6.4% 6.7%

Europe 1 472 1 517 1 597 1 612 1 670 1 711 1 759 1 809 1 859 1 911 Africa - Middle East -- 561 549 618 633 696 766 841 924 1 014 Americas - APAC -- 340 381 419 417 421 475 537 609 693 Cost of Goods Sold (1 445) (1 577) (1 727) (1 741) (1 821) (1 960) (2 010) (2 119) (2 239) (2 370) Gross Income 776 841 800 908 899 868 990 1 068 1 153 1 248

Gross Income Margin 34.9% 34.8% 31.7% 34.3% 33.1% 30.7% 33.0% 33.5% 34.0% 34.5% SG&A Expense (509) (544) (531) (581) (582) (608) (645) (685) (729) (778) EBITDA 267 297 269 327 317 260 345 382 424 470

EBITDA margin 12.0% 12.3% 10.6% 12.4% 11.7% 9.2% 11.5% 12.0% 12.5% 13.0% Depreciation & Amortization Expense (72) (86) (82) (89) (77) (91) (98) (102) (106) (110) EBIT 195 211 187 238 240 169 247 281 318 360

EBIT margin 8.8% 8.7% 7.4% 9.0% 8.8% 6.0% 8.2% 8.8% 9.4% 9.9% Nonoperating Income - Net (4) (6) (6) (2) 4 4 4 4 4 4 Interest Expense (24) (19) (21) (17) (20) (9) (9) (9) (9) (9) Unusual Expense - Net (42) (11) (16) (26) (5) (20) (20) (20) (20) (20) EBT 125 175 144 193 220 145 222 256 293 335 Income Taxes (37) (57) (47) (63) (88) (48) (74) (85) (98) (112) Consolidated Net Income 88 118 97 130 131 96 148 171 196 223 Minority Interest (3) (1) (1) (2) (6) (2) (2) (2) (2) (2) Net Income 85 117 96 129 126 94 146 169 194 221 EPS (basic) 12.40 16.98 14.07 18.65 18.45 13.85 21.37 24.70 28.38 32.46 EPS (diluted) 12.40 16.98 14.07 18.65 18.45 13.85 21.37 24.70 28.38 32.46 Total Shares Outstanding 6.86 6.86 6.84 6.89 6.82 6.82 6.82 6.82 6.82 6.82 DPS 6.00 5.00 6.25 6.25 6.25 6.25 7.91 10.00 12.65 16.00 Payout Ratio (%) 48.4% 29.4% 44.4% 33.5% 33.9% 45.1% 37.0% 40.5% 44.6% 49.3%

12

Appendix 2. Balance Sheet




Balance Sheet (m) 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E Cash & ST Investments 117 140 143 451 510 379 464 504 584 509 Short-Term Receivables 414 444 455 458 491 508 528 560 595 631 Inventories 179 224 244 237 259 239 249 264 280 308 Current Assets 709 809 841 1 146 1 260 1 126 1 240 1 328 1 460 1 447

Net PP&E 549 540 530 524 588 639 661 686 716 752 Net Goodwill 383 389 388 385 381 381 381 381 381 381 Net Other Intangible Assets 311 306 303 296 288 288 288 288 288 288 LT Investments 48 63 64 85 116 116 116 116 116 116 Other Assets 12 11 11 11 10 15 15 15 11 8 Non Current Assets 1 303 1 309 1 296 1 301 1 384 1 439 1 461 1 486 1 512 1 545 Total Assets 2 012 2 118 2 137 2 447 2 644 2 566 2 701 2 814 2 972 2 992 ST Debt & Current Portion LT Debt 63 56 78 144 153 47 47 47 47 47 Accounts Payable 275 333 359 368 413 404 442 454 479 508 Other Current Liabilities 143 158 158 156 182 182 199 205 216 236 Current Liabilities 482 547 595 669 748 633 688 706 742 792

Long-Term Debt 410 324 258 363 378 378 378 361 361 198 Provisions 45 49 51 52 78 78 78 78 78 78 Other Liabilities 154 169 172 197 213 198 186 196 210 226 Non Current Liabilities 609 543 481 612 668 654 642 635 649 502

Total Liabilities 1 090 1 090 1 076 1 281 1 417 1 287 1 330 1 341 1 391 1 293 Common Stock Par/Carry Value 10 10 10 10 10 10 10 10 10 10 Additional Paid-In Capital 22 22 22 22 22 22 22 22 22 22 Retained Earnings 106 135 113 145 1 248 1 300 1 392 1 492 1 599 1 716 Cumulative Translation Adjustment/Unrealized For. Exch. Gain (27) (10) (17) (28) (59) (59) (59) (59) (59) (59) Other Appropriated Reserves 789 852 923 1 018 -- -- -- -- -- -- Treasury Stock (7) (7) (6) (11) (8) (8) (8) (8) (8) (8) Total Shareholders' Equity 892 1 002 1 045 1 155 1 213 1 264 1 356 1 457 1 564 1 680 Accumulated Minority Interest 31 26 16 11 14 15 16 17 18 19 Total Equity 923 1 027 1 061 1 166 1 227 1279 1372 1473 1581 1699 Total Liabilities & Shareholders' Equity 2 013 2 118 2 137 2 447 2 644 2566 2701 2814 2972 2992

13

Appendix 3. Cash Flow Statement




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

14

Appendix 4. Vertical Common Size Income Statement



Appendix 5. Horizontal Common Size Income Statement


Vertical Common Size Income Statement 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of Goods Sold 65.1% 65.2% 68.3% 65.7% 66.9% 69.3% 67.0% 66.5% 66.0% 65.5% Gross Income 34.9% 34.8% 31.7% 34.3% 33.1% 30.7% 33.0% 33.5% 34.0% 34.5% SG&A Expense 22.9% 22.5% 21.1% 21.9% 21.4% 19.8% 22.4% 22.4% 22.0% 22.0% EBITDA 12.0% 12.3% 10.6% 12.4% 11.7% 9.2% 11.5% 12.0% 12.5% 13.0% Depreciation and Amortization 3.2% 3.6% 3.2% 3.4% 2.8% 3.2% 3.3% 3.2% 3.1% 3.1% EBIT 8.8% 8.7% 7.4% 9.0% 8.8% 6.0% 8.2% 8.8% 9.4% 9.9%

EBT 5.6% 7.2% 5.7% 7.3% 8.1% 5.1% 7.4% 8.0% 8.6% 9.3%

Net Income 3.8% 4.8% 3.8% 4.9% 4.6% 3.3% 4.9% 5.3% 5.7% 6.1%

Horizontal Common Size Income Statement 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Sales 100.0% 108.9% 113.8% 119.3% 122.5% 127.3% 135.1% 143.5% 152.8% 163.0% Cost of Goods Sold 100.0% 109.1% 119.5% 120.5% 126.0% 135.6% 139.1% 146.7% 154.9% 164.0% Gross Income 100.0% 108.4% 103.2% 117.0% 115.9% 111.9% 127.6% 137.6% 148.7% 160.9% SG&A Expense 100.0% 107.0% 104.5% 114.2% 114.5% 119.5% 126.8% 134.7% 143.4% 153.0% EBITDA 100.0% 111.1% 100.7% 122.5% 118.8% 97.4% 129.2% 143.2% 158.7% 176.1% Depreciation and Amortization 100.0% 119.6% 113.3% 123.6% 107.0% 125.8% 136.6% 141.2% 146.7% 153.1% EBIT 100.0% 107.9% 96.0% 122.2% 123.1% 86.9% 126.3% 143.8% 163.1% 184.5%

EBT 100.0% 140.4% 115.8% 155.1% 176.4% 116.2% 178.1% 205.4% 235.6% 269.2%

Net Income 100.0% 136.9% 113.1% 151.1% 148.0% 111.0% 171.4% 198.1% 227.6% 260.3%

15

Appendix 6. Vertical Common Size Balance Sheet



Appendix 7. Horizontal Common Size Balance Sheet


Vertical Common Size Balance Sheet 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E Current Assets 35.2% 38.2% 39.4% 46.8% 47.6% 43.9% 45.9% 47.2% 49.1% 48.4% Non Current Assets 64.8% 61.8% 60.6% 53.2% 52.4% 56.1% 54.1% 52.8% 50.9% 51.6%

Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Current Liabilities 44.2% 50.2% 55.3% 52.2% 52.8% 49.2% 51.7% 52.7% 53.4% 61.2% Non Current Liabilities 55.8% 49.8% 44.7% 47.8% 47.2% 50.8% 48.3% 47.3% 46.6% 38.8%

Total Liabilities 54.2% 51.5% 50.3% 52.4% 53.6% 50.2% 49.2% 47.7% 46.8% 43.2% Shareholders Equity 44.3% 47.3% 48.9% 47.2% 45.9% 49.3% 50.2% 51.8% 52.6% 56.2% Total Equity 45.8% 48.5% 49.7% 47.6% 46.4% 49.8% 50.8% 52.3% 53.2% 56.8%

Liabilities and Equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Horizontal Common Size Balance Sheet 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E Current Assets 100.0% 114.1% 118.6% 161.6% 177.7% 158.9% 175.0% 187.3% 205.9% 204.2% Non Current Assets 100.0% 100.4% 99.4% 99.8% 106.2% 110.4% 112.1% 114.1% 116.0% 118.5%

Total Assets 100.0% 105.2% 106.2% 121.6% 131.4% 127.5% 134.2% 139.9% 147.7% 148.7%

Current Liabilities 100.0% 113.6% 123.5% 138.8% 155.3% 131.5% 142.8% 146.6% 154.1% 164.3% Non Current Liabilities 100.0% 89.2% 79.0% 100.6% 109.9% 107.4% 105.4% 104.3% 106.6% 82.4%

Total Liabilities 100.0% 100.0% 98.7% 117.5% 129.9% 118.0% 122.0% 123.0% 127.6% 118.6% Shareholders Equity 100.0% 112.3% 117.2% 129.5% 136.0% 141.7% 152.0% 163.3% 175.3% 188.4% Total Equity 100.0% 111.4% 115.0% 126.4% 133.0% 138.6% 148.7% 159.7% 171.4% 184.2%

Liabilities and Equity 100.0% 105.2% 106.2% 121.6% 131.4% 127.5% 134.2% 139.8% 147.7% 148.7%

16

Appendix 8. Key Ratios



Key Ratios 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E Activity Ratios 1. Receivables Turnover 5.1 5.6 5.6 5.8 5.7 5.7 5.8 5.9 5.9 5.9 2. Days of Sales Outstanding (DSO) 71.2 64.8 64.9 62.9 63.7 64.4 63.0 62.3 62.1 61.8 3. Inventory Turnover 7.6 7.8 7.4 7.2 7.3 7.9 8.2 8.3 8.2 8.1 4. Days of Inventory on Hand (DOH) 47.8 46.6 49.4 50.4 49.7 46.4 44.3 44.2 44.4 45.3 5. Payables Turnover 5.8 6.5 6.3 6.1 5.9 6.0 5.9 5.9 6.0 6.0 6. Number of Days of Payables 62.7 56.1 57.6 59.8 61.5 60.7 61.8 62.1 61.2 60.9 7. Total Asset Turnover 1.0 1.2 1.2 1.2 1.1 1.1 1.1 1.2 1.2 1.2 8. Fixed Asset Turnover 4.0 4.4 4.7 5.0 4.9 4.6 4.6 4.7 4.8 4.9 9. Working Capital Turnover 12.6 13.8 14.1 15.1 16.7 17.9 20.2 21.2 19.6 19.3 10. WC/Sales 7.8% 7.3% 7.2% 6.4% 5.7% 5.7% 4.5% 5.2% 5.3% 5.4% 11. WCR/Sales 14.3% 13.8% 13.4% 12.3% 12.4% 12.1% 11.2% 11.6% 11.7% 11.9% 12. CapEx/Sales 3.6% 2.6% 3.0% 3.1% 5.5% 5.0% 4.0% 4.0% 4.0% 4.0% Liquidity ratios 1. Current Ratio 1.5 1.5 1.4 1.7 1.7 1.8 1.8 1.9 2.0 1.8 2. Quick Ratio 1.1 1.1 1.0 1.4 1.3 1.4 1.4 1.5 1.6 1.4 3. Cash Ratio 0.2 0.3 0.2 0.7 0.7 0.6 0.7 0.7 0.8 0.6 4. Cash Conversion Cycle 56.3 55.2 56.7 53.5 51.8 50.2 45.5 44.3 45.3 46.2 5. ST Debt/Cash 0.5 0.4 0.5 0.3 0.3 0.1 0.1 0.1 0.1 0.1 6. CFO/Sales 10.2% 9.2% 6.4% 9.7% 7.9% 5.5% 8.5% 7.8% 8.8% 9.4% Solvency ratios 1. Net Debt 356.6 239.7 193.3 56.7 20.7 60.0 -23.4 -62.7 -142.4 -65.6 2. Net Debt/Equity 0.4 0.3 0.2 0.1 0.0 0.0 0.0 0.0 -0.1 0.0 3. Net Debt/EBITDA 1.3 0.8 0.7 0.2 0.1 0.2 -0.1 -0.2 -0.3 -0.1 4. Net Debt/EBITDA Minus CapEx 1.9 1.0 1.0 0.2 0.1 0.5 -0.1 -0.2 -0.5 -0.2 5. Total Debt/Total Assets 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.1 0.1 6. Total Debt/EBITDA 1.8 1.3 1.2 1.5 1.7 1.7 1.3 1.2 1.0 0.9 7. LT Debt/EBITDA 1.5 1.1 1.0 1.1 1.2 1.5 1.1 1.0 0.9 0.8 8. Asset/Equity 2.4 2.1 2.0 2.1 2.1 2.1 2.0 1.9 1.9 1.8 9. Interest Coverage 8.0 11.0 8.8 13.7 12.3 19.3 28.0 31.8 36.0 40.6 10. CFO/Interest Expense 9.3 11.7 7.6 14.7 11.0 17.8 29.0 28.3 33.9 38.2 11. EBITDA/Interest Expense 10.9 15.5 12.6 18.8 16.2 29.6 39.2 43.4 48.0 53.1 ProYitability ratios 1. Net ProSit Margin 3.8% 4.8% 3.8% 4.9% 4.6% 3.3% 4.9% 5.3% 5.7% 6.1% 2. Gross ProSit 34.9% 34.8% 31.7% 34.3% 33.1% 30.7% 33.0% 33.5% 34.0% 34.5% 3. EBITDA Margin 12.0% 12.3% 10.6% 12.4% 11.7% 9.2% 11.5% 12.0% 12.5% 13.0% 4. EBIT Margin 8.8% 8.7% 7.4% 9.0% 8.8% 6.0% 8.2% 8.8% 9.4% 9.9% 5. EBT Margin 5.6% 7.2% 5.7% 7.3% 8.1% 5.1% 7.4% 8.0% 8.6% 9.3% 6. ROA 4.0% 5.6% 4.5% 5.6% 4.9% 3.6% 5.5% 6.1% 6.7% 7.4% 7. Operating ROA 9.1% 10.2% 8.8% 10.4% 9.4% 6.5% 9.4% 10.2% 11.0% 12.1% 8. Return on Total Capital 6.3% 8.5% 7.0% 8.4% 7.4% 5.5% 8.3% 9.1% 9.9% 10.7% 9. ROE (Shareholder Equity) 9.5% 11.9% 9.2% 11.5% 10.5% 7.5% 11.0% 11.8% 12.7% 13.5% 10. ROCE (SH Equity + LT Debt) 10.0% 10.8% 9.6% 11.4% 9.3% 7.0% 9.7% 10.5% 11.3% 12.6% DOL 0.9 -2.4 5.7 0.3 -7.4 7.5 2.2 2.1 2.0 DFL 1.1 1.1 1.1 1.1 1.1 1.1 1.0 1.0 1.0 1.0 DTL 1.0 -2.8 6.1 0.3 -7.8 7.7 2.3 2.1 2.0

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Appendix 9. Factories and R&D Centers Worldwide

Source: Bel

Legend:


Factories R&D Centers Bel Headquarters

12th January 2015 Back to content

18

Appendix 10. Industrial Expertise

Source: Bel

CFA Institute Research Challenge Mini Babybel

Kiri

The curd grains are molded and will then be pressed. After an average resting period of 15 hours, the Mini Babybel cheeses will be wrapped in a wax coating designed to protect and conserve them.

The milk and cream are mixed and then pasteurized. Lactic ferments, dairy proteins, emulsifying salts, and a pinch of salt and milk calcium are added to the mix. Kiri is cooked then hot molded in aluminum shells.


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Appendix 11. Five Core Brands

Source: Bel

Brand Year Type of Cheese Creation Acquisition Ranking Worldwide # Countries

1921 Processed Cheese #4 136 1966 Fresh & Spreadable Cheese #12 N/A 1977 Pressed Cheese #6 76 2002 Pressed Cheese #11 27 2008 Fresh & Spreadable Cheese N/A 8

Appendix 12. Acquisitions

Source: Thomson Reuters

Date of Completion Target Name Target Nation % Acquired November-85 Nestle Foods - Wispride Brand United States 100% January-91 Maredsous Belgium 100% July-94 Cademartori Introbio Italy 75% November-94 Queserias Ibericas Spain 83% February-96 Kaukauna Cheese Wisconsin United States 100% April-96 Grupo Lacto Portugal 100% May-00 Zeletavska Syrarna Czech Republic 100% June-00 Zempmilk Slovak Rep 51.1% December-02 Leerdammer Co Netherlands 100% February-06 Kars Karper Peynir ve Gida Turkey - January-07 Groupe Danone SA - Gervais Brand Czech Republic 100% April-07 Shostka City Milk Factory Ukraine 100% January-08 Boursin France 100% April-08 Jaromericka Mlekarna Czech Republic 100% April-08 J & R Czech Republic 71.5% October-14 Granja La Luz Spain 100%


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Management Committee

Joe Tayard Vice-President Bel Near and Middle East Chakib Seddiki Vice-President Bel Greater Africa Frdric Nalis Vice-President Bel America

Guillaume Jouet Vice-President Human Resources, Communications and Corporate Social Responsibility Chantal Layuela Vice-President Research and Innovation Etienne Lecomte Vice-President Bel Western Europe Eric de Poncins Executive Vice-President Group Strategy, Development and Transformation

Robert Schlingensiepen Vice-President Bel North East Europe Jennifer Marquet Vice-President Marketing

Philippe Champlong Vice-President Bel Asia-PaciSic

Francis Le Cam Deputy General Manager in charge of Operations Hubert Mayet General Manager in charge of Group Manufacturing and Technical Division Bruno Schoch Deputy General Manager in charge of Finance, Legal affairs and IT systems

Executive Committee

Philippe Deloffre

Pascal Vinot (UNIBEL) Florian Sauvin

Luc Luyten James Lightburn

Michel Arnaud Fatine Layt

Board of Directors

Antoine Fivet CEO & Chairman

Appendix 13. Corporate Structure

Source: Bel


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Appendix 14. EU-27 Cheese Production (thousand tons)

Source: Eurostat


2182 1936 1158 793

732 349 325 315

187 158 118 113 102 89 79 70 70 68 68 44

33 33 20 16

0 500 1000 1500 2000 2500

Germany France Italy Netherlands Poland United Kingdom

Denmark Spain Greece Austria Czech Rep. Lithuania Finland Sweden Belgium

Romania Portugal Hungary Bulgaria Estonia Slovakia

Latvia Cyprus Slovenia

2013 2007

Appendix 15. Cheese Consumption Worldwide (kg per capita)

25.9 25.2 24.7 24.3

21.7 21.3 20.7 20.1

19.9 19.8 15.4 11.6

2.2 1.7 0

0 5 10 15 20 25 30

France Iceland Finaland Germany Estonia Switzerland

Italy Lithuania Austria Sweden

U.S. U.K. South Korea South Africa

China

Source: International Dairy Foundation


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Appendix 16. EU Quota Regime


CFA Institute Research Challenge The EU introduced a national quota regime for milk production in 1984 to limit excess supply and maintain farmer proSitability. This regime will come to an end in April 2015 as the EU moves the dairy sector towards a more market-orientated future, but one that protects producer interests. It is worth noting that the vast majority of European countries have produced materially below quota in recent years (except Germany and the Netherlands), because the EU has been attempting a soft landing through the gradual increase of quota levels (+1% per year from 2009 through 2013) and reduction of support levels. Here is a summary of the main academic papers on the abolition of EU milk quotas (actual vs. baseline scenario in 2020):

We therefore expect: 1. An overall increase in production coupled with declining prices. We expect the impacts to be modest due to the soft landing provided by the EU. 2. No reduction in current price volatility after the end of quotas.

Date Source Conclusions 2012 Prospects for agricultural markets and income in the EU 2012-2022, European Commission, Agriculture and Rural Development, December 2012

The end of quotas will have a very limited impact. Market forces rather than regulatory changes will drive production and pricing 2011 M. Kempen, H.P. Witzke, I. Prez Dominguez, T. Jansson, P.Sckokai, Economic and environmental impacts of milk quota reform in Europe, Journal of policy modeling, Volume 33: 29-52, 2011 Increase in milk production of 4.4%, drop in raw milk prices of 10% 2008 H.P. Witzke, A. Tonini, Dairy reform scenarios with CAPSIM acknowledging quota rent uncertainty, 12th Congress of the European Association of the Agricultural Economics - EAAE, 2008 Increase in milk production of 2.8%, drop in raw milk prices of 7.5%. 2008 2008 V. Rquillart, Z. Bouamra-Mechemache, R. Jongeneel C. Penel, Economic analysis of the effects of the expiry of the EU milk quota system, Institut dconomie industrielle, March 2008 Increase in milk production of 5.2%, drop in raw milk prices of 11%. 2008 F. Chantreuil, T. Donnellan, M. van Leeuwen, P. Salamon, A. Tabeau, L. Bartova, EU Dairy Quota Reform - AGMEMOD Scenario Analysis, 12th Congress of the European Association of the Agricultural Economics - EAAE, 2008

Increase in milk production of 4.8%, drop in raw milk prices of 7%.


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Appendix 18. SWOT Analysis

OPPORTUNITIES SWOT

STRENGTHS WEAKNESSES

Strong product identity: 5 core brands Portion format: Expertise in miniaturization Room for acquisition (sound Sinancial structure)

Presence of Lactalis in shareholding structure Lack of presence in South America Outsourcing of the packaging production.

Commodities and forex headwinds Sanitary issues and reputation risks Competition of retail label Geopolitical risks in Middle East

Consumption trends (on-the-go, healthy and gourmet snacking) Quotas abolition in Europe Distribution channel development

OPPORTUNITIES THREATS


P E S T L E

POLITICAL Rise of protection barriers against consumption and manufactured goods Geopolitical crisis

ECONOMIC High volatility of forex and commodities exchange markets Substantial growth in urbanization and Middle Class in emerging markets

SOCIAL Current trends in consumption industry: (1) On-the-go consumption (2) Healthy food (3) Gourmet snacking

TECHNOLOGICAL Development of the product mix particularly focusing on the higher value added products in order to be less reliant on low margin commodity product (miniaturization and new formula) Involvement of genomic technology

LEGAL Legal requirements relative to consumer staples End of quota in Europe

ENVIRONMENTAL Climate change adaptation Ecological footprint

Appendix 17. PESTLE


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Appendix 19. Sales Forecasts

Source: Euromonitor

To forecast Bel sales, we used a model based on the cheese market size (per capita consumption of cheese and population size) and Bel market share. Due to the various degrees in the maturity of the cheese market, we based our model on the market size by region. Since Bel changed its geographical breakdown in 2010, we lacked historical sales before that year. To obtain the market size for the period 2014E-18E, we multiplied the population of each region (source: United Nations) by per capita consumption in USD (source: Euromonitor). Then, we translated it in EUR with EUR/USD of 1.3391 at 1st August 2014 (release date of the Euromonitor report). The biggest growth comes from Asia-PaciSic, followed by Near Middle East & Greater Africa and Latin America, which has pushed up the sales of soft cheese in 2014 and should have a high potential in the future.

We estimate that Bel global market share should reach 3.1% in 2018E from 2.8% in 2013. In Europe, the market share should grow steadily to reach 3.7% in 2018E. In the rest of the world, the market share should grow more rapidly, and in 2018E, the market share outside of Europe should reach 2.6%.

Sources: Team estimates, United Nations


Table 1: Estimates of per capita cheese consumption

Table 2: Estimates of Bel market share

Table 3: Estimates of Bel sales

12th January 2015

NB: Estimates are mid-point of a wider range of possible outcomes.

2014E 2018E CAGR 2014E-18E Europe 86 88 0.5% Africa - Middle East 5 7 6.0% APAC 1 3 18.5% Northern America 55 58 1.0% Latin America 30 36 5.0%

bn 2014E 2018E CAGR 2014E-18E World 2 828 3 619 6.4% Europe 1 711 1 911 2.8% Africa - Middle East 696 1 014 9.9% Americas - APAC 421 693 13.3%

% 2014E 2018E World 2.8% 3.1% Europe 3.4% 3.7% Africa - Middle East 9.3% 9.8% Americas - APAC 1% 1.3%

CFA Institute Research Challenge Back to content

25


Appendix 20. Financial Statements Forecasts Explanations


Income Statement Explanations Sales / Revenue Based on our Sales forecasts (Appendix 19) COGS Diminishing proportion of sales SG&A Expense Historical trend Depreciation & Amortization Expense Historical median of DAn / PPE n-1 Non-Operating Income - Net Constant Interest Expense Interest Expense = Total Debtn * interest rate Other Financial Income and Expense Constant Unusual Expense - Net Constant Income Taxes Income Taxes = EBTn * effective tax rate Minority Interest Historical average Balance Sheet Explanations Cash & ST Investments Cash & ST Inv.n = Cashn-1 + Net change in Cash Short-Term Receivables Historical median of Receivablesn / Salesn+1 Inventories Historical median of Inventoriesn/ Salesn+1 Net PP&E Net PPEn = Net PPEn-1 - DAn + CapExn Net Goodwill Constant Net Other Intangible Assets Constant LT Investments Constant Other Non Current Assets Historical trend ST Debt & Current Portion LT Debt ST Debtn = ST Debtn-1 + Issuance or Reduction of ST Debtn Accounts Payable Historical median of ACC Payablen / (COGSn-1 + Inventoriesn) Other Current Liabilities Historical median of Other Current Liabsn / (COGSn-1 + Inventoriesn) LT Debt Bond reductions: 17m in 2016, 163m in 2018 / Constant the other years Provision for Risks & Charges Constant Other Liabilities Historical trend Common Stock Par/Carry Value Constant Additional paid-in capital/Capital Surplus Constant Retained Earnings Retained earningsn= Retained earningsn-1 + NIn -Dividend paidn Cumulative Translation Adj/Unrealized For. Exch. Gain None Other Appropriated Reserves None Treasury Stock Constant Minority Interest Constant percentage of sales

Cash Flow Statement Explanations Consolidated Net Income Depreciation, Depletion & Amortization Historical median of DAn / PPE n-1 Others Funds Constant Changes in Working Capital WC=Inventories+Receivables-Payables Capital Expenditures Maintenance Capex Depreciation Growth Capex Total CapEx Maintenance CapEx Purchase/Sale of Inv. Purchase/Sales of Inv.=LT Debtn-LT Debtn-1 Cash Dividends Paid Team estimates Change in Capital Stock None Issuance/Reduction of LT Debt, Net Issuance or Reduction of LT Debt = LT debtn - LT Debt n-1 Issuance/Reduction of ST Debt, Net None Other Funds None Exchange Rate Effect None 26

Source: Bel


0 5 000 10 000 15 000 20 000 25 000 30 000 35 000 40 000 45 000 50 000

2009 2010 2011 2012 2013 Gains (losses) on the sales of Sixed assets Gains (losses) on the sales of activities Restructuring costs Other non recurring income and expense

Year Explanations

2009 Write-downs of goodwill in Ukraine, Turkey and the Czech Republic for 20.9m. 2010 Economic conditions in Ukraine led to a further depreciation of 9m of tangible assets. Loss of 2.5m for the disposal of the Czech entity. 2011 The group wrote down a further 9m on its Iranian entity based on impairment testing. Additionally, in Syria, the group suspended its manufacturing activity in mid-July 2012 for safety reasons, and recorded a non-recurring expense of 13.9m, including net provision charges. 2012 The group suspended its manufacturing activity in mid-July 2012 in Syria for safety reasons, and recorded a non-recurring expense of 13.9m, including net provision charges. The group wrote down a further 7.5m on its Iranian entity based on impairment testing. 2013 4.5m impairment loss write-down on local US brands. The write-down was offset by the reversal of provisions totaling 4.2m for tangible and intangible assets and current assets belonging to the Syrian and Iranian entities.

Appendix 21. Non Recurring Income and Expense

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CFA Institute Research Challenge 12th January 2015 Appendix 22. DuPont Analysis


0.0 0.5 1.0 1.5 2.0 2.5 3.0

0% 2% 4% 6% 8%

10% 12% 14%

ROE ROA Leverage


ROE 11.9% 9.2% 11.5% 10.5% 7.5% 11.0% 11.8% 12.7% 13.5%

Legend 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

ROA 5.6% 4.5% 5.6% 4.9% 3.6% 5.5% 6.1% 6.7% 7.4% Leverage 211.8% 203.7% 205.8% 212.7% 207.7% 198.3% 193.5% 189.3% 182.0%

Net ProYit Margin 4.8% 3.8% 4.9% 4.6% 3.3% 4.9% 5.3% 5.7% 6.1% Asset Turnover 117.1% 118.8% 115.6% 212.7% 207.7% 198.3% 193.5% 189.3% 182.0%

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CFA Institute Research Challenge 12th January 2015 1. Methodology: Synthetic bid-ask spread method We used 11% as the liquidity discount for Bel, which is based on the synthetic bid-ask spread developed by Damodaran. To calculate the illiquidity discount, A. Damodaran developed the synthetic bid-ask spread method, regressing the bid-ask spread against annual revenues, a dummy variable for positive earnings (DERN), cash as a percent of Sirm value and trading volume, using data from the end of 2000. The synthetic bid-ask spread is given by the following equation: Table 1. Liquidity discount of Bel 1 DERN = 1 if earnings are positive ; O if earnings are negative 2The Monthly trading volume of Bel is based on the company data in 2013. 2. Liquidity of peers Each peer group has a different liquidity proSile. This is why we analyzed the liquidity of each company, looking at the daily average volume in 2014. Since the Large DiversiSied F&B peer group is highly liquid, we applied the 11% liquidity discount to adjust the multiples. However, we did not apply any liquidity discount to the other two peer groups as they also have weak liquidity.

0.00 0.00 0.30 0.68 2.65 1.64

7.92

0.47 0.34 0.16 0.28 0 1 2 3 4 5 6 7 8 9

m

Bel CoefYicient Intercept 0.145 Annual Revenue (2013, m) 2 720 -0.0022 Cash / Firm Value 0.23 -0.016 DERN1 1 -0.015 Monthly Trading Volume2/ FV 0.0 -0.11 Liquidity Discount 11% Sources: Factset, Bel, Damodaran

Source: Bel

Figure: Daily average volume in 2014 (m)

Appendix 23. Liquidity Discount Calculation Back to content

Spread =0.145-0.0022ln(AnnualRevenues)-0.015(DERN)-0.016 CashFirmValue -0.11MonthlyTradingVolumeFirmValue

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Appendix 24. Free Cash Flows


Sources: Team estimates

12th January 2015 CFA Institute Research Challenge Back to content

To estimate terminal value in 2018E, we used a residual income model (Ohlson). This model suggests that g2018E (deSined as ROE x Rentention Rate, RR) converges on a value implying a gradual decrease between ROCE and the WACC, using a persistence factor (). Terminal value is therefore equal to the following: where: EBIT2019E = EBIT2018E x (1+g2018E) g2018E = ROE2018E x RR2018E = 7% =1- ke= 0.945

TV2018E = (NetPPE2018E +NWC2018E) 1/1+WACC/ + EBIT2019E(1/ t)WACC WACC1+WACC/

1 Implied Equity (2014E) x(1+ ke)

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Appendix 25. Target Value Calculation

Year 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E EBIT 195 211 187 238 240 169 247 281 318 360 as a % of sales 8.8% 8.7% 7.4% 9.0% 8.8% 6.0% 8.2% 8.8% 9.4% 9.9% Tax 37 57 47 63 88 48 74 85 98 112 Tax rate 29.5% 32.6% 32.7% 32.6% 40.1% 33.3% 33.3% 33.3% 33.3% 33.3%

EBIT (1-t) 158 154 140 175 152 121 173 195 220 248 as a % of sales 7.1% 6.4% 5.5% 6.6% 5.6% 4.3% 5.8% 6.1% 6.5% 6.9%

Depreciation 72 86 82 89 77 91 98 102 106 110 as a % of sales 3.2% 3.6% 3.2% 3.4% 2.8% 3.2% 3.3% 3.2% 3.1% 3.1%

Change in NWC -4 -4 -20 12 -8 -6 8 -35 -27 -34

Capex 79 64 75 81 149 141 120 127 136 145 as a % of sales 3.6% 2.6% 3.0% 3.1% 5.5% 5.0% 4.0% 4.0% 4.0% 4.0%

Free Cash Flow (FCF) 156 180 167 172 88 77 143 204 217 248 Discounted FCF 135 184 185 200 TV 2 578

Discounted Cash Flows 704 25% Discounted Terminal Value 2 080 75% Implied EV (2014E) 2 783 Net Debt (2014E) 60 Minorities (2014E) 15 Implied Equity (2014E) 2 709 Implied Equity (2015E)1 2 858 Number of Shares (2015E) 6.8 Implied Share Price (EUR) 419 Liquidity Discount 11% Target Value (EUR) 373

Appendix 26. Fama-French Model

Sources: Team estimates

12th January 2015 CFA Institute Research Challenge Back to content Since Bel is a small-cap, we decided to use the Fama-French three-factor model (FFM) to compute the cost of equity, which appears to be a better measure of market returns compared to the CAPM. In fact, research shows that two classes of stocks have tended to do better than the market as a whole: (1) small-caps and (2) stocks with a low Price-to-Book ratio. The three factors are:

RMRF, which is the equity risk premium as in the CAPM. SMB (Small Minus Big), a size factor. It is the difference between small-cap and large-cap returns. It is thus a small-cap return premium. HML (High Minus Low), a value factor. It is the difference in returns between value and growth stocks. The FFM estimate of the required rate of return is: We regressed the excess return of Bel monthly stocks (since 2000) and Rf (Fama-French data) against the three FF factors (RMRF, SMB, HML based on FF European data since 2000). The linear regression gives us an R-Squared of 21%. We applied Dimson (1979) and Scholes (1977) methodology to obtain the beta. In fact, the true systematic risk (market beta) can be obtained from security price data subject to infrequent trading. We thus ran a multiple regressions of security returns against lagged, matching and leading market terms. A consistent estimate of beta is obtained by aggregating the slope coefSicients from this regression (here, from variables RMRFT-2 to RMRFT+2). The same methodology has been used to obtain an estimate of SMB and HML coefSicients. Below is a summary of the results of the regression:

ke = rf +mktRMRF+sizeSMB+valueHML

Regression Statistics Multiple R 0.45 R-Squared 0.21 Adjusted R-Squared 0.13 Standard Error 6.06 Observations 174 ANOVA df SS MSS F SigniYicance F Regression 15 1512.48 100.83 2.74 8.9338E-04 Residual 158 5808.13 36.76 Total 173 7320.61

CoefYicients Standard Error t-Statistic Betas Intercept 0.50 0.51 0.99 RMRF T-2 0.23 0.10 2.34 0.41 RMRF T-1 0.13 0.10 1.37 RMRF T 0.04 0.09 0.43 RMRF T+1 0.17 0.10 1.67 RMRF T+2 -0.15 0.09 -1.66 SMB T-2 -0.09 0.25 -0.36 0.94 SMB T-1 0.32 0.24 1.34 SMB T 0.13 0.22 0.60 SMB T+1 0.42 0.25 1.68 SMB T+2 0.15 0.26 0.58 HML T-2 0.24 0.22 1.09 -0.29 HML T-1 -0.47 0.22 -2.13 HML T -0.05 0.20 -0.22 HML T+1 -0.05 0.23 -0.21 HML T+2 0.02 0.21 0.12 31

Appendix 27. WACC Assumptions


Appendix 28. Sensitivity Analyses

12th January 2015


CFA Institute Research Challenge Back to content

Analysis 1: Impact of liquidity discount and WACC on target price

Analysis 2: Impact of French 10-year yield on the WACC

WACC Assumptions Explanations Current Risk-free Rate 0.8% France's 10-Year OAT (9 January 2015) Beta 0.41 Fama-French (FF) and Dimson models Market risk Premium (RMRF) 5.9% A.Damodaran: Total equity risk premium of France Premium for stock 2.4% - Size beta 0.94 Fama-French and Dimson-Scholes models Size Premium (SMB) 3.6% Median over the last 20 years in Europe (FF) Premium for stock 3.4% - Value beta -0.29 Fama-French and Dimson-Scholes models Value Premium (HML) 3.7% Median over the last 20 years in Europe (FF) Premium for stock -1.1% - Cost of equity 5.5% Fama-French model Equity as a % of target capital structure 100% Team estimates WACC 5.5% Team estimates

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Date Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

Rf 3.6% 3.3% 3.3% 2.1% 2.4% 0.8% WACC 8.3% 8.1% 8.0% 6.8% 7.1% 5.5%

WACC 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% Liquidity discount

9.5% 447 423 400 379 361 344 329 10.0% 445 420 398 377 359 342 327 10.5% 442 418 396 375 357 340 325 11.0% 440 416 394 373 355 339 323 11.5% 438 413 392 371 353 337 321 12.0% 435 411 389 369 351 335 319 12.5% 433 409 387 367 349 333 318

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