INITIATION REPORT

GROUP BEL
Stock Rating:
HOLD
We initiate coverage of Group Bel at Hold with a
price target of 330 which implies EV/EBITDA at
7.5x(2014E) and EV/EBIT at 10.4x(2014E). We focus
on three key investment debates in this report:
China Growth
Chinese consumers are just discovering cheese in a
variety of ways. They are also moving away from the
idea of cheese being just a pungent ingredient. This
will prove to be a significant catalyst in the future.
Innovation
Group Bel has a history of innovation through
packaging and new product development. We believe
that this will continue to be a catalyst for the company.
Economic Moat via Branding
Group Bel has a strong portfolio of brands that it
continues to strengthen. Multiple global marketing
initiatives continue to provide the company a wide
economic moat.

Company name: Fromageries Bel

Exchange: Paris
Ticker symbol: FBEL.PA
Industry: Dairy
Current price: 300 (as of Jan 9,2014)
Target price: 330 (10% upside)
TABLE
OF Billion
CONTENTS
Market Cap:
2.03
1.
Business
52 Week Range: 265Overview
- 314
2. Group Strategy
3. Key
Business
Risks 2015E
2013A
2014E
4.
Financial
Highlights
Revenue
2.7%
2.0%
2.0%
growth (%) 5. Competitive Overview
6. Industry
Gross margin
33.1% Overview
33.1%
33.1%
7.
Key
Investment Thesis
(%)
8. Valuation
EBITDA
12.1%
10.6%
10.6%
margin (%) 9. Conclusion
EBITA margin
(%)
EBIT margin
(%)
Adjusted
profit margin
(%)

9.9%

8.3%

8.3%

9.3%

7.7%

7.7%

6.0%

5.3%

5.3%

Source: Factset, Group Estimates

GROUP BEL HEC PARIS 1

Business Overview
Source: Company
Documents

Fromageries Bel SA, headquartered in Paris,

France, is a family-owned company that produces
and sells four categories of cheese (pressed,
processed, fresh and spreadable) and is the global
leader in cheese portions. It owns more than 25
international and local brands, including 5 core
brands, is present in 120 countries and owns 30
subsidiaries and 27 production sites, with 10 of
them located in France. Through its subsidiary, Bel
Foodservice, the company is present in the
catering sector and serves fast-food chains,
hospitals, restaurants, vending machine operators,
train stations and airports. In addition to that, Bel
Business
Consumer
Sector

Catering
Sector

Description
120 countries

30 subsidiaries
27 production sites
5 core brands, 25 local brands

also sells dairy proteins to food

manufacturers (especially ice cream) under
the Nollibel brand. The company attracted
400 million consumers and hopes to achieve
3 billion in sales by 2015.

Bel Foodservice subsidiary

Bels retail strategy is established either at

the national level, through subsidiaries, or at
the international level, with contracts
negotiated at the group level. Moreover, Bel

uses a network of wholesalers specialized in

food service. On the Supply side, the
Dairy

company has the following purchasing

Products
needs: core raw materials (milk, milk

powder, butter), packaging materials and

energy. Bel has contracts with suppliers of
60% of the production exported
milk in France, Netherlands, Poland,
Slovakia, Ukraine and US. Moreover, it controls six dairies in France and 22 in other countries.
The Fievet/Bel Family holds 3.5% of the Fromageries Bel shares directly and 54% through its
80% holding in Unibel SA.
Catering business: serves the
institutional and the commercial
catering segments
PAI (intermediary food business):
sells Bel cheese to food industry
and fast-food chains
Nollibel: world leader in its
segment
50 countries

Brand Portfolio
5 Core Brands
The Laughing Cow

Kiri

Boursin

Mini
Babybel

Leerda
mmer

National Brands
Cousteron, Gervais, Karicha, Kaukauna, Limiano, Maredsous, Merkts, Prices, Samos,

GROUP BEL HEC PARIS 2

Smetanito, Sylphide, Syrokrem, Syrtos, Terra Nostra, WisPride

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

Group Strategy
Constant product innovation
The company is constantly in search of new products and new
concepts. For instance, in 2012 and 2013, it developed
Apericube Soiree Filles! and On Joue, targeted at young
adults. In addition, in 2013, Bel launched a new brand of
cream cheese, Boursin Tartine.
Strong brand image
Bels products enjoy high recognition. The company was
ranked number three for branded cheese worldwide, while its
core brands The Laughing Cow, Mini Babybel, Leerdammer
and Kiri ranked among the top twelve cheese brands in the
world (Bel Global Cheese 2012, Zenith international study).
Niche positioning (portions)
Bel has a niche positioning in the aperitif consumption. In France, in 2013, it is estimated that
45% of cheese consumption was outside of meals. Bel is well positioned to take advantage of
this trend with its snack-like products and the increasing marketing of its products for cooking.
Expansion
Bel is is expanding both through regional expansion by setting up subsidiaries and production
plants worldwide, and through acquisitions. For instance, in 2012, the company commenced the
construction of a production plant in the US. Regarding acquisitions, some of the most
significant ones were Leerdammer in 2002 for 190 m, Boursin in 2008 and Tranchettes in
2013.

Key Business Risks

Geopolitical events: Special attention needs to be given to the impact of the geopolitical
events worldwide on Bels activities. The unstable situation in some countries in the Middle East
and Africa needs to be taken into consideration, just as the situation in Ukraine needs to be
monitored.
Volatility of commodity prices: The price of raw materials used by Bel (milk, milk powder,
butter, cream) is likely to fluctuate due to changes in supply and demand and weather
conditions. It is unlikely that Bel will be able to translate an increase in raw materials into

GROUP BEL HEC PARIS 3

increased prices of its products. Moreover, there is no financial hedging market in the dairy
industry, except in the US (see appendix for commodity price chart).
Competition: Bel faces intense competition from major international food players, as well as
local producers. In addition to this, there is increased competition coming from retail chains that
have developed house brands (also known as private label/control label in North America).
Regardless, consumers react to pricing aggressively, like any other product in the food industry
product.
Economic climate: Bels sales are likely to be influenced by the economic activity in the
markets where it operates. With slowed economic growth in Europe and uncertainty regarding
economic recovery, caution needs to be taken when predicting the level of sales in this region,
which currently accounts for 40% of Bels revenues.
Exchange rate risk: Due to the geographical spread of its operations, Bel is exposed to FX
risk, since it receives revenues and faces expenses in multiple currencies apart from the euro.
The Treasury Department of Bel implements a central currency hedge strategy using derivative
instruments with a time horizon of 18 months. However, because of the high volatility nature of
some currencies where Bel operates, there is a material downside risk due to this.
Regulatory risk: Due to the geographical reach of its activities, as well as the nature of its
business, Bel faces regulatory threats. These include hygiene standards, environmental controls
and competition laws. Changing regulations will have a direct impact on Bels activities and may
impede the company to sell its products in some markets. For example, changing food
regulation will require the company to adjust its products, which will take a considerable amount
of time.

Financial Highlights
Operating margin
8.1%
5.9%

6.7%

6.7% 6.6%
5.7%

5.5%

5.7% 5.7% 5.7%

4.5%

Group Bel has been able to maintain steady operating margins regardless of volatile gross
margin levels. As we can see in the graph on the right, even in times of distress and economic
crisis in 2008 and 2010 subsequently, the company was able to realize healthy margins and

GROUP BEL HEC PARIS 4

was able to adjust SG&A levels in order to avoid net margin compression.

EBITDA-margin
12.1%
10.4%

9.7%

11.8%

11.9%
10.3%

11.7%

7.8%

The EBITDA margin trend follows that of operating margin and has been over the 10% level for
the past few years. We believe that these levels are healthy by industry standards and will
continue to be observed over the long term.
The Return on Invested Capital in years 2009 and 2012/13 was high because of acquisitions
made by the Bel Group, which proved to be accretive in terms of earnings. We surmise that the
price paid was

ROIC with and without goodwill

20.0%

19.5%
19.2%
17.4%
17.3%
17.2%
17.1%
15.2%

8.3%
7.9% 7.6%
13.8%
6.9%
7.6% 7.4% 7.2%
12.0%
10.9%
3.0%
6.0%
2.6%

4.4%
10.8%9.3%

11.7%
11.6%
10.3%9.2%11.6%
9.8% 9.9% 9.9%
6.5%

The Bel Group has an excellent balance sheet and faces no solvency / liquidity risk. As can be
seen in the table below, the debt/equity ratio (gearing) is at ~0.5x, which is very low and poses
no risk in the immediate future. The interest coverage ratio is also extremely strong, thus there
is no risk of not being able to meet short-term interest obligations.

GROUP BEL HEC PARIS 5

Competitive Overview
The Bel Group faces three main types of competitors: major international food groups that
produce cheese among other types of products (Kraft), major international dairy producers
(Bongrain, Hochland, Lactalis, Friesland Campina) and regional food producers (Almarai in
Saudi Arabia).
In 2013, Bel ranked 11 in the packaged food sector in France, with a 1% value market share.
Especially Leerdammer, The Laughing Cow and Boursin performed well, while Mini Babybel
faced a decline. Within the cheese category, the company ranked second, behind Groupe
Lactalis, with a 10% value share. In terms of reconstituted cheese, The Laughing Cow and
Apericube dominate the market.
Fromageries Bel SA: Competitive Position 2013
Segment
Retail value share
Rank
Packaged Food
1.2%
11
Dairy
5.1%
4
Cheese
10.0%
2

Industry Overview
Mature dairy markets can no longer count on growth through higher volume gains as per capita
consumption is expected to continue to decline in North America (down by a CAGR of 1%)
(Euromonitor) and remain static in Western Europe over 2014-2019. But consumers continue to
respond well to innovative ideas. Todays consumer expects not only immediacy and
convenience from products and services but also simplicity, healthy choices, environmental
piece of mind, taste novelty and a greater level of customization.
The consumption of raw milk is slightly decreasing in most countries. Nevertheless, in the EU12 the dairy industry is growing in importance in the total food industry, mainly due to the
increased consumption of cheese and yoghurts.
The EU dairy industry is very dominant in the world market. The EU-25 exports amount 21 bn
worth to other countries, while Oceania exports amount to 3.8 bn and NAFTA to 1.1 bn
(Euromonitor).
Nowadays, product innovations are mostly done on varieties, but innovations on new
ingredients (in functional foods) are also very important. SMEs as well as large companies,
including the packaging and ingredients industry, all contribute to innovation. In North-Western
Europe, large firms dominate the dairy industry. This has been a result of previous waves of
consolidation. France and Germany, however, have a small number of large firms and quite a
large number of medium and small firms. The EU dairy industry can be characterized as an
innovative and a global player, but with a losing market share. Bels competitive position is just
below average, mainly due to the loss in world market share. In fact, across most of the key
players in the EU market growth has stagnated. According to Euromonitor, global CAGR of the
dairy industry for 2014-2019 is expected to be 2.8%, with growth being highest in Asia Pacific
and Middle East and Africa (Euromonitor).
Industry Consolidation

GROUP BEL HEC PARIS 6

The worlds top 10 dairy giants capture 24% of the market in 2014, up from 17% in 2009. In
existing and mature markets such as the US, France and Italy, multinationals are buying in
innovation through acquiring smaller, more innovative firms in niche markets. More M&A activity
is expected to occur with multinationals buying more niche organic or lactose-free brands in
order to widen their portfolio and tap into smaller but faster growing markets. Another health
food category, which is being eyed up by multinationals, is non-dairy milk alternatives.
With per capita dairy consumption in mature markets dropping, companies are seeking for
growth in emerging markets that have a far lower level of consumption but, conversely, are
growing.

Investment Summary
I NVESTMENT THESIS (1): MOAT-ZARELLA
Value-added innovation in dairy is evolving and becoming of greater importance in a highly
competitive and, above all, mature market space, where consumption is declining. The evolution
of dairy is dependent on the commoditization of the category and demonstrates the need for
value where private label share is high.
Pack-types have been a successful marketing tool for brands since times immemorial. Bel has
been a pioneer in this field with the early launch of the iconic La Vache Qui Rit, Babybel and
Kiri products.
Products ranged from the single serve salad cheese launched in Switzerland to the tiramisuto-go bar launched in Austria. Given tiramisu is typically seen as a dessert eaten with a spoon or
fork at the dinner table, the uniqueness of this product is that the packaging allows it to be eaten
as a snack on-the-go, without the use of cutlery.
Innovations that have caught the eye recently are pesto and tomato Gouda, tiramisu on-the-go
as well as butter with seaweed cheese to name a few. If Bel can continue to revolutionize the
cheese industry by launching new products that especially differ in terms of packaging, there will
be a catalyst for future growth.
I NVESTMENT THESIS (2): NUTRITIONALLY
NAUGHTY TREND

In mature dairy regions such as North

America, Western Europe and Australasia,
there is a strong need for value creation in
dairy in order to counteract declining per
capita consumption of dairy overall.
Combining naturally good-for-you
products with indulgence offers value
innovation in terms of nutritionally
naughty eating occasions.
A successful example promoted at SIAL
was the Sweet Quark Bar by Vilvi, a
Lithuanian company active in dairy products. The
product is made from cottage cheese covered in a

Hard
Cheese
CAGR:
25.8%

Soft
Cheese
CAGR:
27.6%
Processe
d
Cheese
&
others:
24.5%

GROUP BEL HEC PARIS 7

Overall China Cheese

Market Growth

thick layer of chocolate. In fact, chilled snacks, under which Vilvi would be classified, has seen a
CAGR of 4%, whilst dairy overall grew by a CAGR of just 3%. Innovation both in terms of
packaging and combinations of ingredients will be essential to drive value creation in the dairy
sector.
I NVESTMENT THESIS (3): CROUCHING BEL HIDDEN CHINA
Cheese remains something of a niche category in China, not being part of the countrys
traditional cuisine and widely regarded as having a pungent smell. However, cheese is gaining
popularity among children, reflecting a rising consumer awareness of its nutritious value.
Cheese posted a 25% rise in $ value sales in 2014, which can be attributed to a number of key
factors:
The growing exposure to Western lifestyles, particularly in tier-one cities where fast food outlets
are prevalent, is contributing to the evolution of Chinese consumers tastes
Manufacturers made notable efforts to boost consumer awareness of cheese, including the
purported health benefits such as their inclusion of various vitamins, minerals, amino acids and
omega-3 fatty acids, which all help to support healthy bones, brain and heart
Soft cheese is more popular than hard cheese in China as it is considered to have a less
unpleasant smell and Chinese consumers prefer its soft texture. While cheese is not a
traditional element of Chinese cuisine, Western exporters are competing for a foothold in the
Chinese market by promoting packaged cheese. Most of the cheese in China is imported from
Australia, Europe and New Zealand, a fact that leaves cheese prices vulnerable to global price
fluctuations. Chained pizza restaurants have seen their presence expand over the review
period, with major international brands such as Pizza Hut and Dominos Pizza being notable
examples. The extensive presence of pizza, which generally features mozzarella, has led to
some Chinese consumers seeking out this cheese type in retail outlets.
Bongrain (Tianjin) Foods Co Ltd remained the
leading player in cheese, with a 21% retail value
share in 2014, up slightly from 2013. Bel China
currently holds a 6.6% market share in China and
this market share has been increasing over the
past years. It is the 4th player in the Chinese
market (Euromonitor). However, Bel China
recorded the most dynamic value growth and the
strongest rise in share in 2014, up by 35% and
one percentage point respectively. La Vache qui
Rit (also known as Laughing Cow), has a global
presence, which was achieved through two key
initiatives: Bite sized cubes and Television.

Bite-size cubes

These packs facilitate consumption among

Chinese shoppers who tend to be unsure about the
quantity of cheese to use in a serving

Television
Bel China sponsored a, Niuniu Tour of France,
that showed a family trip to France and embedded
introduction of La Vache qui Rit about origin and
production

GROUP BEL HEC PARIS 8

We believe that Bel Groups ability to project an image of being French is what gives it an
economic moat or sustainable competitive advantage vs. other rivals who primarily focus on the
health benefits of the product.
Euromonitor estimates that cheese is a highly import-dependent category in China, with 80-90%
of sales being accounted for by imported brands. It has been estimated that by 2030 over two
thirds of Chinas population will reside in cities. This widespread urbanization will further ensure
the extensive exposure to Western- style quick-service restaurants, which function as a bridge
between Chinese people and the culture of cheese consumption. This will not only give Chinese
people a basic understanding of the product, but also help overcome the longstanding
perception of cheese as a product with a pungent smell and unpleasant taste. We surmise that
China will learn to appreciate that stinky cheese is good cheese. The rising number of
expatriates and the growing interest in Western lifestyles are set to boost the overall demand for
cheese.
Other Investment Considerations
Average unit price is set to continue to rise over the forecast period, at a CAGR of 1% at
constant 2014 prices. Global milk prices are rising, a situation that is driving up the unit price of
cheese, an import-dependent product. Given the volatility of milk prices and the gradually
increasing penetration of cheese, the unit price of cheese is unlikely to drop short term.

Valuation
Comparable Company Analysis
We selected several peers for Group Bel(More details can be found in the appendix), and
observed that on EV/EBITDA(2013A) basis, FBEL trades at 6.24x, below the median of 9.3x.
We surmise that on a trading comps basis, FBEL is not trading more aggressive than its peers.
We observe a similar story on P/E basis.
EV / EBITDA
Company Name

2013A

Bongrain
4.71 x
Saputo
10.70 x
Emmi
7.48 x
Glanbia
17.72 x
Dairy Crest Group
10.51 x
Milkiland
8.09 x
Fromageries Bel
6.24 x
Maximum
17.72 x
Minimum
4.71 x
Mean
9.87 x
Median
9.30 x
Sources: FactSet, Group Estimates

EV / EBIT

P/E

2014E

2013A

2014E

2013A

2014E

4.73 x
13.48 x
8.12 x
17.73 x
8.40 x
4.55 x
17.73 x
4.55 x
9.50 x
8.26 x

8.19 x
12.54 x
12.66 x
22.83 x
15.26 x
19.81 x
8.24 x
22.83 x
8.19 x
15.22 x
13.96 x

9.27 x
15.54 x
17.16 x
21.95 x
12.37 x
12.67 x
21.95 x
9.27 x
14.83 x
14.11 x

16.13 x
17.15 x
14.07 x
22.07 x
32.44 x
8.69 x
14.70 x
32.44 x
8.69 x
18.43 x
16.64 x

12.80 x
21.75 x
20.96 x
21.16 x
13.58 x
21.75 x
12.80 x
18.05 x
20.96 x

The chart below shows the valuation range for Group Bel based on EV/EBITDA, EV/EBIT and
P/E basis (2014E, 2015E).

GROUP BEL HEC PARIS 9

Discounted Cashflow Analysis

With the assumptions associated with cost of
capital(as seen in table on right), and and
prepetuity growth rate of 0.5%, we arrive at a
implied share price of 330. This implies an
upside of ~10%(as of Jan 9,2014). We believe
that this price target is higher than the current
market price, but does not justify a BUY
recommendation at this point. Even though we
observe innovation and growth in China as
catalysts over the long-term, we do not observe
them as short-term catalyts.

WACC
Risk-free rate
Market risk premium
Beta equity
Illiquidity premium
Cost of equity
Pre-tax cost of debt
Tax rate
After-tax cost of debt
Gearing
WACC

0.9%
7.0%
.8
2.0%
8.52%
3.6%
38.0%
2.3%
.080
8.06%

Bull BearCaseAnalysis
Scenario Analysis
450
We created a few scenarios for
400
72
the stock price(as seen in chart
350
10
on right) with Flat Sales (23
300
91
250
downside) and Increased Raw
23
200
Material Costs (91 downside);
332
150
218
and increase in sales volume
100
50
(10 upside) and higher margins
(72 upside). Details about
Bear
Flat sales
Increased raw
Base
Increase in sales Higher margins
material cost
volume
scenario assumptions can be
seen in the appendix. Quintessentially, the stock price could change dramatically under some
scenarios.

Conclusion
We restate our price target of 330 as discussed in the peer analysis and discounted cashflow
analysis. Based on our investment thesis, there is a significant upside for a long-term horizon
investor, but we would need to observe Group Bels actions over the short-term to decide.

GROUP BEL HEC PARIS 1

0

414

Bull

What would make us change to

PriceProjec on
BUY?
450
We upgrade the company stock to a
400
buy if:
350
300
Two or more innovative
294
250
products are released over
200
the next 6-12 months at trade 150
100
shows and industry events
50
The company decides to
01-04-19
04-01-14
06-10-10
09-07-06
12-04-01
14-12-27
deploy its cash for a buy
back. Although unlikely to be executed upon by FBEL, this would create significant
shareholder value

APPENDIX
Companies used for peer analysis:

Company

Business Description

Geography

Bongrain

Bongrain SA is a milk processing

company, which engages in the
manufacturing and distribution of
cheese and other dairy products. The
company operates its business
through two segments: Cheese
Products and Dairy Products.The
company was founded in 1956 and is
headquartered Viroflay, France.
Saputo, Inc. produces, markets, and
distributes dairy and grocery
products. It produces mozzarella,
cheddar, specialty and fine cheeses,
fluid milk and dairy products,
including cream, yogurt, butter,
powdered milk, evaporated milk, ice
cream mixes and value-added dairy
ingredients, such as whey powder,
lactose and whey protein. The
company was founded in 1954 and is
headquartered in Saint-Lonard,
Canada.
Emmi AG is a milk processing
company, which engages in the

France 32.5%,
Europe 40%, Rest of
World 27.5%

Saputo

Emmi

Revenues
(FY 2013)
4.4bn
EUR

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

9.2bn
CAD

Switzerland 56.5%,
Europe without

3.3bn
CHF

GROUP BEL HEC PARIS 1

1

414
332
218

Glanbia

Dairy
Crest
Group

Milkiland

development, production, and

marketing of dairy and fresh
products. It also focuses on the
production, ageing, and trade of
cheeses. Emmi was founded in 1907
and is headquartered in Lucerne,
Switzerland.
Glanbia Plc. is an international
nutritional solutions and dairy
products group. The company
engages in producing cheese,
performance nutrition, dairy
ingredients, whey proteins and other
micronutrients. The company was
founded in 1997 and is
headquartered in Kilkenny, Ireland.
Dairy Crest Group Plc. is engaged in
the business of manufacturing,
processing and distribution of milk
and dairy products. Dairy Crest
Group was founded in 1933 and is
headquartered in Esher, the United
Kingdom.
Milkiland NV is a holding company
that engages in the production of
dairy products. It operates through
the following segments: Cheese &
Butter, Whole milk, and Ingredients.
The company was founded in 1994
and is headquartered in Amsterdam,
Netherlands.

Switzerland 27.2%,
North & South
America 11.6%,
Africa /Middle East
3.7%, Asia Pacific
0.9%
Ireland 23.6%,
United States
50.3%, Rest of the
World 12.8%, Rest
of Europe 7.3%,
United Kingdom
5.9%

2.4bn
EUR

United Kingdom
95.7%, Rest of
World 4.3%

1.4bn
GBP

Ukraine 54.2%,
Russia 41.6%,
Poland 4.2%

1.4bn PLN

SWOT Analysis:
Strengths
Strong brands
Operational performance
Product quality
Global leader in cheese portions
Opportunities

Weaknesses
Not enough expansionary activity
Limited product expansion potential
Exchange rate exposure
Threats

GROUP BEL HEC PARIS 1

2

Rising demand for healthy products

Rising demand for dairy products in
untraditional markets
Emphasis on convenience
Untraditional consumption of cheese (outside
meals)

Increasing raw material costs

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

Financial Statements:

GROUP BEL HEC PARIS 1

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GROUP BEL HEC PARIS 2

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SCENARIO ANALYSIS ASSUMPTIONS

GROUP BEL HEC PARIS 2

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GROUP BEL HEC PARIS 2

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