Bellamy's Australia (BAL) - Livewire Marketss Australia (BAL) Follow-on growth ... Heinz, Bega. Page...

24 October 2016

Bellamy's Australia (BAL)

Follow-on growth

Recommendation

Buy (Initiation) Price

$13.20 Target (12 months)

$16.06 (Initiation)

Analyst

Jonathan Snape 613 9235 8706

Authorisation

TS Lim 612 8224 2810

Expected Return

Capital growth 21.7%

Dividend yield 1.4%

Total expected return 23.1%

Company Data & Ratios

Enterprise value $1,244m

Market cap $1,276m

Issued capital 96.7m

Free float 100%

Avg. daily val. (52wk) $13.6m

12 month price range $6.29-16.50

GICS sector

Food Beverage and Tobacco

Price Performance

BELL POTTER SECURITIES LIMITED ACN 25 006 390 7721 AFSL 243480

DISCLAIMER AND DISCLOSURES THIS REPORT MUST BE READ WITH THE DISCLAIMER AND DISCLOSURES ON PAGE 18 THAT FORM PART OF IT.

Page 1

(1m) (3m) (12m)

Price (A$) 12.75 11.64 7.98

Absolute (%) 3.76 13.66 65.79

Rel market (%) 1.33 14.22 62.49

Background and investment thesis

Bellamy’s (BAL) is a Tasmanian company which distributes and markets certified

organic infant formula and food products through Australia, China and SE Asia. We

initiate coverage on BAL with a Buy rating and a $16.06ps target price. Our favourable

view on BAL is supported by: (1) Exposure to growing demand for Australian made

infant formula and food products in China and SE Asia; (2) Expansion of the

distribution footprint in Australia with less than half the addressable market currently

serviced; (3) Rising demand for organic products in Australia and Asia; (4) The

potential to expand the infant food products business which to date has been a modest

revenue and earnings contributor; (5) ability to expand the geographical distribution

footprint; and (6) BAL is trading at an undemanding valuation relative to global IMF

and functional food sector on an FY17e EV/EBITDA basis.

China and SE Asia the growth engines for IMF

The global infant nutrition market is worth in excess of US$60Bn annually and

underpinned by growing demand for infant formula products in China and SE Asia.

Rising demand for IMF products in China (+18% pa over the last five years) and a

faster growing premium segment (to which BAL is leveraged) are expected to see

continued strong growth in demand for IMF products in both China and Australia (via

the existence of grey market channels which favour follow-on formula producers such

as BAL).

Growing demand for organic product

Globally the consumption of organic food products reached US$80Bn in 2014 and has

grown at an average rate of 14.4% pa over the last 15 years. In Australia demand for

organic food products has outpaced growth in demand for conventional food products

more than fivefold at 15% pa since 2009. Rising income levels and an increased

awareness of food safety and origins is driving the push to organic and this looks

unlikely to change in the near term. BAL is highly leveraged to this theme.

Absolute Price Earnings Forecast

Year end June 2016 2017e 2018e 2019e

Sales ($m) 244.6 356.0 407.0 452.7

EBITDA ($m) 54.6 82.0 100.9 118.3

NPAT (adjusted) ($m) 38.3 57.4 70.7 83.1

NPAT (reported) ($m) 37.2 57.4 70.7 83.1

EPS (adjusted) (cps) 38.9 57.8 71.2 83.7

EPS growth (%) n.a. 48.5 23.1 17.6

PER (x) 33.9 22.8 18.5 15.8

FCF Yield (%) 0.1 0.5 2.9 4.1

EV/EBITDA (x) 22.8 15.2 12.3 10.5

Dividend (cps) 11.9 19.0 22.2 25.0

Franking (%) 100.0 100.0 100.0 100.0

Yield (%) 0.9 1.4 1.7 1.9

ROE (%) 46.1 46.9 41.2 36.1

SOURCE: IRESS SOURCE: BELL POTTER SECURITIES ESTIMATES

$0.0

$5.0

$10.0

$15.0

$20.0

Oct 14 Apr 15 Oct 15 Apr 16 Oct 16

BAL S&P 300 Rebased

Page 2

Bellamy's Australia (BAL) 24 October 2016

Contents

Background and investment view ................................................ 3

Core markets overview .................................................................. 6

Financial overview ....................................................................... 11

Board and management .............................................................. 13

Shareholders and ownership ...................................................... 15

Risks ............................................................................................. 16

Page 3


Background and investment view

COMPANY BACKGROUND

Bellamy’s (BAL) is a Tasmanian company which distributes and markets certified organic

infant formula and food products. BAL commenced operations in Launceston, Tasmania in

2004 as a family owned company before being acquired by Tasmanian Pure Foods in

2007. In 2014 Tasmanian Pure Foods was renamed Bellamy’s Australia Ltd and

subsequently listed on the ASX. Today BAL sells 3 infant formula products and 47 food

products in Australia and Asia. BAL is principally a brand manager, with processing and in

some instances ingredient procurement outsourced to processors (~15 contract packers

and manufacturers engaged). A brief overview of BAL products, markets and supply chain

are summarised in the table below.

Figure 1 - BAL at a glance

SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES

INVESTMENT VIEW

We initiate coverage on BAL with a Buy rating and a $16.06ps target price. Our favourable

view on BAL is predicated on:

Favourable demand growth for infant milk formula (IMF) in Asia: The global infant

nutrition market is worth in excess of US$60Bn annually and underpinned by growing

demand for infant formula products in China and SE Asia. Rising demand for IMF products

in China and the growing premium segment to which BAL is leveraged are expected to see

continued strong growth in demand for IMF products in both China and Australia (via the

existence of grey market channels which favour follow-on producers such as BAL).

Rising demand for organic products: Globally the consumption of organic food products

reached US$80Bn in 2014 and has grown at an average 14.4% pa over the last 15 years.

Rising education levels and income levels should correlate to an increasing demand for

organic food products and IMF is no exception with the category having grown by ~20% pa

over the last two years. As a market leading Australian organic brand we see BAL as

leveraged to this thematic.

Expansion of stockists in Australia: BAL is currently sold via ~4,400 distribution points,

which represents less than half the potential distribution points available for BAL products.

Growth in distribution points could be a material upside opportunity for the domestic

business.

Ability to expand infant food products business: The BAL brand is strong in infant and

follow-on formula products, yet is a smaller player in the infant food market, with an

estimated 9% share largely in dry cereal products. With an identifiable brand which has

risen in recognition in recent years we see prospect for BAL to achieve greater share in the

infant food market.

CountryRevenue

share

Heinz, Rafferty's Garden

China 20%

SE Asia 7%

Major particpantsCAGR

+5.0% pa

Distribution

Product

Infant nutrition

Infant food products

A$750m

A$151m

2014/15 Market size

Australia:Direct Distribution to ~4,400 different

businesses.

China: Agency deal wth SIIC (renewed 2014), T-mall

% JD.com flagship stores, Daigou trade.

Inputs

Organic milk powder sourced from international

certified suppliers

Formulation & Canning

Bega: 6year supply agreement entered Jul'15.

Utilises Bega's Tatura facility.

Fonterra: 5 year strategic manufacturing agreement

entered Nov'15. Utilises Fonterra's Darnum plant.

First deliveries 1Q17.

73%Australia

BAL supply chain

Infant nutritionUS$5.5Bn High single digit

Mead Johnson, Nestle, Beingmate, Biostime, Yilli,

Abbott, Fiehe, Danone, Yashilim synutra, Friesland

US$19.9Bn

+2.7% pa

+24.0% pa

A2M, Nutricia, Nestle, Bayer, Heinz, Bega

Page 4


Geographic expansion: Asia made up ~27% of sales in FY16, with China making up the

majority of this. Distribution is now established in China, Singapore, Malaysia and Vietnam

and the market opportunity in SE Asia (i.e. excluding China ) is material with an estimated

value of ~US$5.5Bn and growing at high single digit rates (i.e. 7%+).

TARGET PRICE

BAL is a business at the commencement of its competitive advantage period with a market

leading band in Australia that lends itself to SKU expansion and regional growth

opportunities. In deriving our $16.06ps target price we have utilised an ROIC based

approached cross checked with a global peer group comparison. Major assumptions in our

ROIC based model include:

WACC Drivers: We have utilised an asset beta of 0.75x in line with what we would employ

for other listed dairy processors and consistent with the average for listed FMCG

companies. Incorporating this with an MRP of 5.5% and risk free rate of 5.0% (with a

borrowing margin of 2.5%) derives a pre-tax WACC of 9.1%.

Growth rate: BAL looks to be at the commencement of its competitive advantage period

and as such we expect near term earnings growth rates to exceed sector averages. As

such we have utilised a long-term growth rate assumption of 3.5%, in line with what we

have adopted for other listed IMF exposure A2M but above the 3% rate we would typically

adopt for a FMCG business.

Net Debt: BAL had net cash of $32.2m as at FY16 and this is projected to grow with an

improving operating cash realisation in outward years.

Time weighting: With four months complete in FY17e we have weighted our valuation

model 67% to FY17e and 33% to FY18e.

A summary of our valuation model is summarised below, noting that the combination of an

exceptionally high ROIC, limited investment in fixed assets (and hence low levels of capital

turn) derive an EV/EBITDA multiple of 17.3x in FY17-18e.

Figure 2 - BAL ROIC based valuation model


As a cross check we have also looked at BAL relative to its peer group, which we define as

being infant formula stocks, functional food exposures and the broader FMCG sector.

While we note the Australian agricultural and FMCG sector is trading at 11.9x FY17e

EBITDA, we note global dairy stocks are trading at 11.2x and global infant nutrition and

function food exposures are trading at an average of 17.1x.

Effective Tax Rate 30.0% Equity Beta 0.73 Current Share Price 12.97$

Risk Free Rate 5.00% Terminal Growth Rate 3.5% Diluted market capitilisation ($m) 1287.7

Borrowing Margin 2.50% Cost of Debt 7.5% Net Int Bearing Debt - option adj. -35.6

Mkt Risk Premium 5.50% Cost Of Equity 9.0% Diluted shares on issue 99.3

Asset Beta 0.75 WACC 9.1% Target Net debt/(net debt+equity) -2.8%

ROIC based methodolgy 2015 2016 2017 2018 2019

EBIT 12.3 54.3 81.7 100.4 117.7

Invested Capital 17.1 51.1 84.2 97.0 104.6

ROIC (% ) 71.8% 106.4% 97.0% 103.5% 112.6%

Long-term growth rate 3.5% 3.5% 3.5% 3.5% 3.5%

Pre-tax WACC (%) 9.1% 9.1% 9.1% 9.1% 9.1%

Depreciation 0.4 0.3 0.4 0.5 0.5

EBITDA 12.7 54.6 82.0 100.9 118.3

Derived EV/EBITDA 16.5 17.3 17.3 17.3 17.4

Implied Enterprise Value 210.4 945.6 1417.3 1746.5 2054.1

Net Debt 31.8 32.2 38.0 74.5 125.8

Cash from Option conversion 4.6 3.4 3.4 3.4 3.4

Surplus franking credits 4.6 14.1 14.1 14.1 14.1

Implied market value 251.4 995.3 1472.8 1838.5 2197.4

Shares on issue (m) 95.0 96.7 96.7 96.7 96.7

In the money options (m) 3.6 2.6 2.6 2.6 2.6

Diluted capital (m shares) 98.6 99.3 99.3 99.3 99.3

Valuation per share (A$ps) 2.55 10.02 14.83 18.52 22.13

Weighting 67% 33%

Target price ($ps) 16.06

Page 5


Figure 3 - BAL peer group comparison (as of close 21/10/16)

SOURCE: BELL POTTER SECURITIES, BLOOMBERG AND IBESS

Bell Potter Net Debt /

Rating EBITDA 2016 2017e 2018e 2016 2017e 2018e

The a2 Milk Co** A2M Buy 2.52 2.09 715.9 1,496.2 (66.5) 1,429.7 (1.22) 54.6 94.2 115.7 26.2 15.2 12.4

Apiam Animal Health AHX Buy 1.79 1.59 100.7 159.6 23.2 182.8 4.22 5.5 12.4 14.1 33.2 14.7 13.0

Australian Agricultural Co AAC Buy 2.20 1.955 532.8 1,041.6 354.7 1,396.3 23.97 14.8 30.7 47.4 94.3 45.5 29.5

Australian Dairy Farms Group AHF Hold 0.19 0.18 181.0 32.6 10.6 43.2 (12.18) -0.9 3.2 3.8 (49.6) 13.4 11.4

Bega Cheese BGA Hold 6.32 6.47 152.6 987.3 58.7 1,046.0 0.91 64.4 77.8 86.2 16.2 13.4 12.1

Bellamy's Australia Ltd BAL Buy 16.06 13.20 96.7 1,276.3 (32.2) 1,244.1 (0.59) 54.6 82.1 100.9 22.8 15.2 12.3

Capillano Honey CZZ 18.75 9.5 177.3 9.6 186.9 0.59 16.2 19.3 22.5 11.5 9.7 8.3

Elders Ltd ELD Buy 4.65 3.96 113.9 451.0 134.5 585.5 2.28 58.9 63.6 62.4 9.9 9.2 9.4

Farm Pride Foods FRM Buy 2.59 1.75 55.2 96.6 2.3 98.9 0.14 16.0 16.8 18.3 6.2 5.9 5.4

Freedom Foods FNP 4.86 181.9 884.1 106.0 990.1 4.27 24.8 36.0 52.7 39.9 27.5 18.8

Fonterra Shareholders Fund FSF 5.58 1,599.1 8,922.9 6,132.4 15,055.3 3.17 1,932.8 1,974.6 2,101.4 7.8 7.6 7.2

GrainCorp GNC Sell 7.17 8.34 228.9 1,909.0 1,368.6 3,277.6 5.29 258.6 352.4 389.6 12.7 9.3 8.4

Huon Acquaculture HUO Buy 4.30 3.7 87.3 323.1 62.1 385.2 2.49 24.9 54.2 65.0 15.5 7.1 5.9

Incitec Pivot IPL 2.83 1,687.2 4,774.7 1,889.9 6,664.6 2.77 682.4 843.9 950.1 9.8 7.9 7.0

MG Unit Trust MGC Hold 1.23 1.1 554.8 610.3 634.9 1,245.2 4.71 134.8 145.5 177.4 9.2 8.6 7.0

Nufarm NUF Buy 10.18 8.93 265.1 2,367.3 986.2 3,353.5 2.65 371.7 427.6 454.1 9.0 7.8 7.4

PGG Wrightson PGW 0.52 754.8 392.5 127.0 519.5 1.82 69.7 71.0 74.9 7.5 7.3 6.9

RuralCo Holdings Limited* RHL Hold 2.88 3.18 79.3 252.2 85.2 337.4 2.06 41.4 45.9 50.4 8.1 7.4 6.7

Scales Corp SCL 3.07 139.8 429.1 13.6 442.7 0.22 61.7 58.1 61.6 7.2 7.6 7.2

Select Harvests SHV Hold 6.26 6.47 73.2 473.6 67.3 540.9 1.25 53.9 53.9 56.9 10.0 10.0 9.5

Ridley Corporation RIC Buy 1.55 1.275 307.8 392.4 41.0 433.4 0.72 57.1 57.1 61.7 7.6 7.6 7.0

Rural Funds Management RFF Buy 1.81 1.62 206.7 334.9 132.8 467.7 6.67 19.9 32.5 36.2 23.5 14.4 12.9

Tassal Group TGR 3.97 150.3 596.6 148.7 745.3 1.81 82.2 90.8 100.6 9.1 8.2 7.4

Tegal Group Holdings TGH 1.45 355.9 516.1 97.2 613.3 1.37 70.8 85.8 91.2 8.7 7.1 6.7

Treasury Wine Estates TWE 11.48 738.1 8,473.8 330.8 8,804.6 0.75 440.1 555.2 638.3 20.0 15.9 13.8

TFS Corporation TFC 1.5 388.1 582.1 223.3 805.5 3.61 61.8 84.8 87.2 13.0 9.5 9.2

Webster Ltd WBA Buy 1.46 1.18 350.7 412.1 184.5 596.6 6.21 29.7 43.7 52.1 20.1 13.7 11.5

Wellard WLD 0.25 400.0 100.0 168.3 268.3 4.35 38.7 38.1 52.5 6.9 7.0 5.1

Australian Agricultural and FMCG Average 14.9 11.9 10.0

The a2 Milk Co** A2M NZ Buy 2.52 2.09 715.9 1,496.2 (66.5) 1,429.7 (1.22) 54.6 94.2 115.7 26.2 15.2 12.4

Abbott Laboratories ABT US 40.50 1,470.0 59,534.8 4,367.0 63,901.8 0.84 5,191.1 5,575.3 6,014.0 12.3 11.5 10.6

Bega Cheese BGA AU Hold 6.32 6.47 152.6 987.3 44.8 1,032.1 0.67 66.7 78.3 89.0 15.5 13.2 11.6

Beingmate Baby & Child Food Co 002570 CH 11.92 1,022.5 12,188.4 (645.0) 11,543.4 (3.75) 172.2 285.2 254.0 67.0 40.5 45.4

Biostime International Holdings 1112 HK 19.52 630.4 12,305.6 4,353.2 16,658.8 2.76 1,579.0 1,672.8 1,778.6 10.6 10.0 9.4

China Mengnui Dairy Co 2319 HK 15.04 3,922.8 58,998.3 939.9 59,938.3 0.21 4,501.9 5,077.0 5,469.4 13.3 11.8 11.0

Danone SA BN FP 63.47 655.9 41,629.5 7,219.0 48,848.5 1.90 3,804.7 4,229.2 4,560.2 12.8 11.6 10.7

Mead Johnson Nutrition Co MJN US 79.85 184.7 14,745.0 1,426.0 16,171.0 1.38 1,033.3 1,110.6 1,172.4 15.7 14.6 13.8

Nestle SA NESN VX 73.15 3,112.2 227,654.5 14,092.5 241,747.0 0.82 17,224.7 18,183.7 19,271.7 14.0 13.3 12.5

Yashili International Holdings 1230 HK 1.62 4,745.6 7,687.8 (2,078.8) 5,609.1 (16.41) 126.6 258.6 328.1 44.3 21.7 17.1

Global Infant nutrition exposures 23.2 16.3 15.4

Freedom Foods FNP AU 4.86 181.9 884.1 106.0 990.1 4.27 24.8 36.0 52.7 39.9 27.5 18.8

Mead Johnson Nutrition Co MJN US 79.85 184.7 14,745.0 1,426.0 16,171.0 1.38 1,033.3 1,110.6 1,172.4 15.7 14.6 13.8

WhiteWave Foods Co WWAV US 54.52 177.2 9,662.3 1,990.0 11,652.3 3.38 588.7 661.6 744.4 19.8 17.6 15.7

Global functional Food exposures 25.1 19.9 16.1

EBITDA ($m) EV/EBITDA (x)Target

price ($ps)

Share

Price ($ps)

Shares

Out (m)

Market

Cap ($m)

Net

Debt/(Cash

Enterprise

Value ($m)

Page 6


Core markets overview

BAL provides investors exposure to two growing trends in the FMCG sector, being: (1)

rising demand for organic food products and increased awareness of food origins; and (2)

rising demand for IMF products through declining breastfeeding rates in Australia and

rising demand for imported IMF products in China.

Organic food production

Globally the consumption of organic food products reached US$80Bn in 2014 and have

been growing at an average 14.4% pa over the last 15 years. Consumption of organic food

products is generally highest in western economies where there are established organic

supply chains. While rising income levels are typically associated with the consumption of

organic food products, academic studies tend to demonstrate a greater correlation to

higher levels of education than income, with concerns around the use of chemicals and

pesticides in the food chain cited as the major reason for the initial switch to organic.

Figure 4 – Global retail sales data 2014 (US$Bn) Figure 5 – Estimated sales value of organic food -Globally ($m)

SOURCE: FIBL SOURCE: ORGANIC MONITOR

In 2014 the Australian organic market was worth ~$1.7Bn and had been growing at a

compound rate of ~15% pa since 2009 (vs. growth in conventional food markets which has

been growing at 3-4% pa over the same time frame). Dairy and beef products make up

~38% of Australian organic food production at the farmgate level and account for ~48% of

Australian exports (which have more than doubled in the last two years to ~$320m). At

current levels Australian consumption of organic food represents ~1% of food consumption

well below established markets (US & Europe) at 5-8%

Figure 6 – Estimated sales value of organic food - Australia ($m) Figure 7 – Australian organic market by category - 2014

SOURCE: AUSTORGANIC, BIS SHRAPNEL AND BELL POTTER ESTIMATES SOURCE: AUSTORGANIC

0

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2009 2010 2011 2012 2013 2014 2015e

Page 7


The consumption of organic food products in China has tripled since 2007 and currently

accounts for ~1% of total food consumption, well below the 5-8% share in established

markets such as Europe and the US. One of the issues facing importers is that Chinese

certification systems and foreign organic certification systems are not mutually recognised.

Organic products that have not been certified by China or products that have only been

certified by an overseas organic certifying body cannot be labelled as ‘organic’ or ‘in-

conversion to organic’ or other labelling terms claiming to be organic As such only a small

portion of organic food is imported into China, less than 1%.

Infant Milk Formula (IMF)

Infant milk formula (IMF) is a substitute for human breast milk. Generally, IMF has four

main components: (1) protein from cow’s milk that is processed to have an amino acid

profile similar to human milk (a mix of SMP & SWP); (2) a blend of vegetable fats (including

DHA/ARA) to replace bovine milk fat in order to better resemble the composition of human

milk; (3) a carbohydrate, lactose from cow’s milk; and (4) a micronutrient pre-mix that is

blended into the product to meet the specific vitamin and mineral needs of the infant at a

given age. The ingredients in IMF are highly regulated with regulations specifying a range

for each permitted ingredient, as well as rules for contaminants.

Figure 8 - Infant formula stages


Skim milk is the base commodity ingredient in most IMF products. Skim milk is pasteurised

and combined with the majority of other ingredients and then dried to create a base IMF

powder. Typically the base powder can be developed into a range of products through the

addition of different fats, oils, vitamins and minerals and is typically done through dry

mixing at a blending and canning facility. There is a large availability of bulk IMF base

products which has led to a number of specialised dry blending operators being

established in Australia and overseas. The table below looks at the Australian supply chain

and BAL’s positioning.

Figure 9 - Australian IMF supply chain


Pregnant mothers Stage 1 Stage 2 Stage 3

Products Vitamin & dairy based suppliments Infant formula

Regulation Moderately regulated Highly regulated

FMCG and pharmacy channels Traditional FMCG marketing channels

Healthcare Hospital product placement, healthcare workers

Target age Pregnant & lactating women Birth to 6 months 6-12 months 1-3 years

ASX participants BKL, VIT BGA, BKL, MGC, A2M, BAL BGA, BKL, MGC, A2M, BAL BGA, BKL, MGC, A2M, BAL

Traditional FMCG marketing channels

Less Regulated

Follow on formula

Typically brand loyalty to Stage 1 IMFPath to market

Apitmal, Karicare

Blackmores

a2Platinum

Oli-6 (Goat)

Bellamy's

Skim Milk Powder

Whole Milk Powder

Whey Powder

Lactoferrin

Multinational Leaders

Niche Products

Distribution

Pharmacy (5,400 outlets)

API 425 storesSigma 700 stores

Chemmart 274 storesChemist warehouse 260 stores

Aspen (under lisence from Nestle)

Danone Nutricia

S-26

NAN, SMA

Babies R Us 13 stores

Bulk Formula

Dairy Ingredients

Multiple suppliers - local & global

Non Dairy Ingredients

Canola Oil - GrainCorp

Aldi 320 stores

Brands and MarketingContract Canning & packing

Terry white 160 storesMy Chemist 32 stores

Supermarkets (3,700+ outlets)

Woolworths 960 storesColes 783 storesIGA 1678 stores

Regional Brands

Bega: 6year supply agreement entered Jul'15. Utilises Bega's Tatura facility.

Fonterra: 5 year strategic manufacturing agreements entered Nov'15. Utilises Fonterra's

Darnum plant. First deliveries 1Q17.

Bellamy's Organic Direct distribution to ~4,400 outlets

Ingredients

Dairy ingredients from European

certified organic suppliers. Oils from

global suppliers.

Fish oil (DHA/ARA) - Clover Corp

Other retailersBig W 186 stores

Murray Goulburn

Bega Cheese Ltd

Fonterra

Camperdown Dairy Int.

Synlait

Burra Foods

Viplus

Blend & Pack

Australian Dairy Pack

Murray Goulburn

Bega Cheese Ltd

Fonterra

Camperdown Dairy Int.

Synlait

Burra Foods

Viplus

Nestle Wyeth

Bellamy's (Oragnic)

Baby Bunting 33 StoresMother & Baby Stores (86 outlets)

My Baby Warehouse 21 storesThe a2Milk company

Bellamy's Australia

Nuchev

Bega Cheese - Blackmores JV

Murray GoulburnDevondale Natra-start

Page 8


In 2014 the global baby food and formula market was estimated to be worth US$61.8Bn

with IMF the largest contributor at US$44.8Bn, having experienced compound growth of

~7% pa over the last five years. The Top 4 global companies control around 57% of the

market and the Top 10 control ~73% of the market. One of the fastest growing sectors

within the market is organic infant formula which has been growing strongly (+9% in FY15

and +16% in FY14) with a growing prevalence for cleaner and less refined and processed

food products.

THE AUSTRALIAN FORMULA AND FOOD MARKET

The Australian IMF market is estimated to be worth ~$780m in retail sales value annually

and has been growing at a compound rate of +17.5% pa since 2008. The market can be

classified as having a fair degree of market concentration with a high level of brand loyalty

meaning barriers to entry in creating a successful brand are high. The market is dominated

by two large multinationals in Nestle and Nutricia which combined have in excess of 80%

of the market, though the growth rates achieved by regional participants such as BAL and

a2Platinum have outgrown the broader category.

Demand for IMF is influenced largely by the birth rate and declining breastfeeding rates. In

recent years growth rates have been distorted by an expanding grey market for infant

formula (i.e product being acquired in Australia for consumption in Asia). We estimate the

size of this grey market was worth ~$200m in FY15 as indicated by market growth of

+17.5% pa well in advance of the underlying growth rate in demand as dictated by the

combination of: the birth rate (+0.7% pa); inflation (+2.5% pa) and declining breast feeding

rates (~6% decline between the 2008-10 breastfeeding surveys). Businesses that have

typically benefited from this growing grey market have been those with a higher exposure

to follow on formulas (i.e. BAL & A2M).

Figure 10 – Australian infant formula sales vs. the birth rate Figure 11 – BAL Australian sales history and forecasts ($m)

SOURCE: DAIRY AUSTRALIA SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES

The Infant food market is worth ~$151m annually and has been growing at 2.7% pa for the

last five years. Infant food can be broadly categorised into ‘wet’ and ‘dry’, accounting for

approximately 75% and 25% respectively of the value of infant food products. This

categorisation is based on the consistency of the product:

Wet infant food comprises products such as purees, custards, gels and jellies in sweet

and savoury varieties.

Dry infant food includes a range of products, which can be categorised as snacks (such

as rusks, fruit bars and rice cakes) and cereals (such as muesli and porridge). Snacks and

cereals account for approximately 75% and 25% respectively of the value of the dry infant

food category

The two major brands in the market are Heinz and Rafferty’s Garden which combined

account for ~70% of the market. With other brands including BAL, Farex, Woolworths Baby

Macro and Ella’s Kitchen. In 2013 Rafferty’s Garden, the number one brand in the market,

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2008 2009 2010 2011 2012 2013 2014 2015

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2012 2013 2014 2015 2016 2017 2018 2019

IMF Revenue Infant Food Revenue

2012-18e CAGR: +47% pa

Page 9


was acquired by PCZ Cussons for $70m at a time when it was generating revenues of

~$41m. In the same year that NASDAQ listed Hain Celestial acquired UK based Ella’s

Kitchen which generated US$70m in revenue. These transactions indicate an increasing

level of interest from global FMCG companies in both organic and infant food products,

and given the relative scale of the BAL business (we estimate ~$15m in revenue in FY16)

a potential value comparison for the food operations.

CHINA AND SE ASIA INFANT FORMULA

In the case of BAL it is worth noting that the China operating segment not only incorporates

the direct China sales channels (SIC and T-mall) but also the direct trade with Daigo’s that

the company undertakes as part of its supply chain trade. We estimate the latter accounted

for ~60-65% of the revenues reported by the China operations in 2H16.

China is the largest consumer of IMF products, accounting for US$19.9Bn in retail sales

value in 2015 and having grown at +12% YOY. Over the last five years demand has been

growing at a compound rate of 24% pa and is expected to remain strong with 18% pa

growth projected through to 2020e. The premium IMF segment accounts for 17-18% of the

market and is made up of higher end local and imported products. In 2015 ~180kt (+46%

YOY) with a value of US$2.5Bn of IMF products were imported into China via authorised

channels.

Since the Melamine incident of 2008, imported IMF products have been one of the fastest

growing categories (+32% pa excluding the impact of Fonterra contamination issues in

2014) and now account for 17-18% of the total market. When grey market volumes and

IMF products made from imported materials are incorporated into these numbers, this lifts

closer to an estimated 30% of the market, a number more closely linked to the total value

of IMF and milk powder imports into China.

Figure 12 – China IMF market shares – 2014 Figure 13 – China demand growth in IMF (US$Bn)

SOURCE: NIELSON SOURCE: EUROMONITOR

There has been a period of consolidation among Chinese and multi-national producers

which now sees the top four producers accounting for 48% of the market (2014) and the

top 10 accounting for 80%. Consolidation is likely to remain a key feature of the market in

the near term with new regulations around product formulation and sourcing (limited to

three brands per manufacturer) likely to see ~80% of the 2,000-2,500 brands exit the

market. In the longer-term these changes will create an opportunity for market leading

brands to capture a larger share of the market while also providing a large barrier to entry

for the creation of new brands. Large domestic brands such as BAL should be a

beneficiary of these changes.

Distribution of IMF product is by three main sources with baby stores and e-commerce the

fastest growing source of product (at the expense of traditional retailers).

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Stage 1 Stage 2 Stage 3 Stage 4

Page 10


Figure 14 – China IMF sales by distribution channel Figure 15 – Sales mix through baby stores

SOURCE: NIELSON SOURCE: SYNUTRA

Other large markets outside of China include Indonesia ($2.3Bn), Vietnam ($0.9Bn),

Thailand ($0.8Bn) and the Philippines ($0.8Bn). Like China growth in these markets has

been high single digit to low double digit. BAL currently has a growing presence in Vietnam

and Malaysia.

CHANGES TO CHINESE REGULATIONS

Following a number of quality and contamination issues in 2008 there have been a number

of changes to the landscape for IMF product in China, with the aim to forcing consolidation

in both the number of participants and brands in China. These changes include:

Product Quality: Under Chinese regulations all imported IMF products must receive

approval from both the CNCA and CIQ. The CNCA tests the quality and operating

efficiency of the blending and canning facilities and the CIQ administers the quarantine and

inspection testing of the final products shipped to China. There are seven CNCA approved

facilities in Australia and all of BAL’s suppliers are accredited.

Three brands per manufacturer: Each manufacturer (domestic and foreign) is limited to

only three brands and three SKU’s of each brand. The aim of this is to consolidate the

number of brands in the Chinese market, with Synutra suggesting that ~80% of the 2,000-

2,500 brands will exit the market. The result of this is a rapid destocking event occurring in

the Chinese market, causing issues for local producers which were highlighted in the

recent results of China centric IMF producers such as Biostime.

In addition there have been new regulations introduced for cross border and e-commerce

trade, including:

Formulation registration: By January 2018 all infant formula brands in China sold

through cross boarder or e-commerce channels will be required to register their

formulations with the CFDA.

Chinese labelling: By May 2018 all cross border e-commerce trade will be required to

have Chinese labelling. BAL already has Chinese labelled, GB compliant product for sale

in China.

In our view the changes emerging in the Chinese market will see significant consolidation

in the number of foreign brands sold in China, with a number of small trader brands likely

to exit. This should create opportunities for market leading regional producers such as BAL

to capture a greater share of the market.

Baby stores42%

e-commerce24%

Traditional retail34%

Super premium18%

Premium21%

Upper-mid51%

Mid-Low10%

Page 11


Financial overview

PROFIT AND LOSS STATEMENT

BAL remains a high growth business, with the benefit of the annualised 2H16 run rate in

IMF sales the key growth driver in FY17e. Our forecasts project compound revenue growth

of +22% pa over FY16-19e fuelling compound EBITDA growth of +29% pa over the same

time frame. A summary of our forecasts and drivers are detailed below.

Figure 16 - BAL summary profit & loss ($m)


Revenue growth: BAL is a company in the midst of transitioning its distribution from lower

margin Australian retail and pharmacy channels towards higher margin Daigou and China

direct channels. The channel change is expected to see sales shifting from the reported

Australia division to that of Asia. As a consequence of this we are projecting negative YOY

volume growth in Australia with stronger growth in China. At the group level we project

volume growth of +19% pa over FY16-19e. On the back of strong group volume growth,

the annualised benefit of Dec’15 price increases and continued growth in infant food sales

we are projecting +46% YOY revenue growth in FY17e (+28% relative to annualised 2H16

levels) and compound revenue growth of +22% pa through to FY19e.

Figure 17 - Revenue mix profile of BAL ($m) Figure 18 - China imports of IMF

SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES

2012 2013 2014 2015 1H16 2H16 2016 2017e 2018e 2019e

Australia 41.33 106.11 89.75 88.88 178.63 179.96 190.64 202.12

Asia 7.57 19.19 15.59 50.36 65.95 176.01 216.39 250.55

Total Revenue 17.40 28.80 48.90 125.30 105.34 139.24 244.58 355.96 407.03 452.67

Gross profit ($m) 6.30 10.50 16.39 41.21 43.74 67.99 111.73 179.83 207.16 231.39

Gross margin (% ) 36.2% 36.5% 33.5% 32.9% 41.5% 48.8% 45.7% 50.5% 50.9% 51.1%

Australia 2.00 13.45 35.88 35.67 39.50 43.69

Asia 0.32 1.11 21.25 49.00 64.13 77.39

Corporate (1.82) (2.54) (2.63) (2.72) (2.81)

EBITDA ($m) 0.10 1.20 2.31 12.73 19.27 35.32 54.59 82.05 100.92 118.26

EBITDA margin (%) 0.6% 4.2% 4.7% 10.2% 18.3% 25.4% 22.3% 23.0% 24.8% 26.1%

Depreication & amortisation ($m) (0.10) (0.10) (0.27) (0.45) (0.12) (0.17) (0.29) (0.39) (0.52) (0.52)

EBIT 0.00 1.10 2.06 12.29 19.16 35.15 54.30 81.66 100.40 117.74

...EBIT Margin (% ) 0.0% 3.8% 4.2% 9.8% 18.2% 25.2% 22.2% 22.9% 24.7% 26.0%

Net Interest Income 0.00 (0.10) (0.18) 0.70 0.31 0.28 0.59 0.33 0.54 0.98

Pre-tax profit 0.00 1.00 1.88 12.98 19.46 35.43 54.89 81.99 100.93 118.72

Tax 0.40 0.40 (0.61) (3.99) (5.80) (10.76) (16.57) (24.60) (30.28) (35.62)

Tax rate (% ) 0.00 (0.40) 0.33 0.31 0.30 0.30 0.30 0.30 0.30 0.30

Minorities 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Underlying NPAT ($m) 0.40 1.40 1.27 8.99 13.66 24.67 38.33 57.39 70.65 83.10

Post tax NRI's 0.00 0.00 (0.01) (0.33) (0.39) (0.77) (1.16) 0.00 0.00 0.00

Reported NPAT ($m) 0.40 1.40 1.25 8.66 13.26 23.90 37.16 57.39 70.65 83.10

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2012 2013 2014 2015 2016 2017 2018 2019

Australia IMF Australia infant food China IMF

2012-19e CAGR: +66% pa2016-19e CAGR: +22% pa

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Page 12


Our baseline market growth forecasts are projected at +5% pa in the Australian IMF

market, a level broadly consistent with average 10 year growth rates (albeit well below

recent growth rates) and +10% YOY growth in China demand. While there has been

considerable noise around slowing IMF demand in China recently and competitive market

pricing, we note that Chinese imports of IMF product (the segment Australian producers

are exposed) have continued to demonstrate strong levels of volumes growth, up +35%

YOY in Aug’16 and up +35% YOY on a rolling 12 month basis.

Sales mix and gross margin: As mentioned we are projecting a material shift in sales mix

away from the Australian supermarket segment, towards Daigou, China direct and SE

Asian sales with an expectation that Asia will shift from 27% to 54% of group revenues by

FY19e. This shift in sales mix is expected to see a continued trend of underlying gross

margin expansion, with Asia direct sales and Daigou trade generating a higher gross

margin higher than sales through the Australian supermarket and pharmacy channels.

Market support: As highlighted in the FY16 result, there is expected to be material uplift in

marketing support of $15-20m in FY17e as the business pushes further into Asia. As a

consequence not all of the expansion in gross margins is expected to flow through at the

EBITDA level. Beyond FY17e, we project marketing support to normalise back towards

~6% of net sales revenue by FY19e, which is broadly consistent with what we assume for

other dairy based FMCG businesses. As a result of increased marketing support EBIT

margins are forecast to only modestly improve in FY17e, but at a level 448bp below that

achieved in 2H16. We see the investment in sales and marketing as key to securing future

volume growth.

Selling prices: We have assumed the annualised benefit of 20% price increases pursued

in Dec’15, resulting in revenue growth in excess of volume growth in Australia in FY17e.

We have made no material assumption around further pricing gains in FY18-19e, though

would see any pressure on input prices as likely to be recovered in pricing.

BALANCE SHEET AND CASHFLOW

BAL operates a conservative balance sheet with net cash of $32.2m at the FY16 result. As

a marketing entity, BAL has very limited investment in fixed assets and as such the major

investment is in working capital funding for the business which grew from 15% in FY15 to

22% in FY16. Rising inventory levels, reflecting ingredient inventory positions coming on

balance sheet, was the main driver of the uplift in working capital in FY16. As BAL expands

its presence in China direct sales (mother & baby stores etc.) which have longer working

capital lead times, we expect a further uplift working capital funding in FY17-19e, with a

more pronounced uplift in FY17e as finished stock levels rise. As a result of the investment

in working capital operating cash realisation is expected to remain at levels close to

historical averages (~40% over FY14-16) in FY17e before lifting towards 80-90% in FY18-

19e.

Figure 19 - Balance sheet and cash flow summary ($m unless stated)


There is no formal dividend payout policy other than to align returns to shareholders with

the working capital requirements of the business. We have assumed a payout ratio in line

with the historical average of ~31%. Based on this assumption we see BAL accumulating

significant surplus capital (particularly in FY18-19e), which in our view is likely to be either

diverted to creating new products, opening new markets or being returned to shareholders.

2012 2013 2014 2015 2016 2017e 2018e 2019e

Operating cahsflow (0.40) (3.90) 0.77 4.74 8.90 21.72 58.59 74.10

Operating cash realisation (%) -80.0% -260.0% 50.3% 50.2% 23.0% 37.6% 82.3% 88.6%

Free cashflow (0.60) (4.30) 0.63 4.47 1.46 5.87 36.42 51.34

Free cash realisation (% ) -150.0% -307.1% 49.6% 49.7% 3.8% 10.2% 51.5% 61.8%

Working capital / Sales (% ) 15.7% 15.1% 21.8% 26.2% 26.7% 26.7%

Net debt (Cash) (4.04) (31.80) (32.16) (38.03) (74.45) (125.79)

Page 13


Board and management

Rob Woolley - Non-executive Chair

Rob was appointed as Chair on the formation of the Company in 2007. Rob’s expertise has

been instrumental in the growth of the Company to date. Rob is presently a director of

Freycinet Coast Financial Services Ltd and a board member of Forestry Tasmania and the

not-for-profit, Tasmanian Leaders Inc. Previously Rob was Chairman of Tandou Ltd and

Managing Director of Websters Limited following twenty years as a partner at Deloitte. Rob

holds a Bachelor of Economics and is a Fellow of the Institute of Chartered Accountants.

Laura McBain - Managing Director and CEO

Laura has overseen significant change, innovation and business growth since her

appointment as General Manager of BAL in 2006 and subsequent appointment as Chief

Executive Officer (“CEO”) in 2011 and Managing Director and CEO in 2014. Prior to joining

BAL, Laura practised as an accountant and specialised in the areas of providing business

advisory and taxation services. Laura holds a Bachelor of Commerce and in 2013

completed the IMD Leadership Challenge. In 2013, Laura was named as the Telstra

Tasmanian Business Woman of Year 2013 and she went on to be named the Telstra

Australian Business Woman of Year for 2013 (Private and Corporate).

Ian Urquhart - Independent Non-executive Director

Ian was appointed as a non-executive director and the company secretary on the formation

of the Company in 2007. He resigned as Company Secretary in June 2014. Ian brings a

wealth of financial expertise and business experience to the Board, having previously been

a Chief Financial Officer and director of the PGA Group Pty Ltd for over thirty years and

teaching finance and accounting at Monash University. Ian has a Bachelor of Commerce, a

Masters in Administration and is a certified practising accountant (CPA).

Launa Inman - Independent Non-executive Director

Launa was appointed as a Non-executive director of the company in February 2015. Launa

brings to the board extensive experience in retailing, marketing (including digital

technology and social media), finance and logistics. Launa is a director of the

Commonwealth Bank of Australia and Precint Properties New Zealancd Limited and a

member of the boards of the Alannah and Madeline Foundation and Virgin Australia

Melbourne Fashion Festival. Her diverse experience includes terms as Managing Director

and CEO of Billabong International (May 2012 to August 2013), Managing Director of

Target Australia Pty Ltd (2005 to 2011) and Managing Director of Office Works (2004 to

2005). Launa’s qualifications include: MCom, University of South Africa (UNISA), BCom

(Hons) (UNISA), BCom (Economics & Accounting) (UNISA). She is a member of the

Australian Institute of Company Directors and has completed the Wharton Business School

executive program.

Michael Wadley - Independent Non-executive Director

Michael was appointed as a Non-executive Director in 2014. Some 12 years ago Michael

relocated to Shanghai where he now resides with his family. Michael has extensive

experience over the past 20 years providing corporate advisory and legal services to

foreign investors throughout China and to Chinese groups investing offshore. Michael is a

principal at Wadley Consulting Shanghai Co. Ltd, a Senior China Consultant for Hopgood

Gamin, on the Board of Directors of the Australian Chamber of Commerce in Shanghai and

is a Co-Chair of the Chamber’s Financial Services Industry Working Group, a committee

member of the Australian China Business Council, Queensland, and a member of the

Australian Institute of Company Directors. Michael holds a Bachelor of Laws from

Queensland University, and is admitted to practice in the Supreme Court of Queensland,

Page 14


the High and Federal Courts of Australia, and is registered as a foreign lawyer in China

and Hong Kong.

Patria Mann - Independent Non-executive Director

Patria was appointed a non-Executive Director on 10 March 2016. Patria is an

experienced non-executive Director who is currently on the boards of Event Hospitality and

Entertainment (formerly Amalgamated Holdings), Ridley Corporation, Allianz Australia and

Perpetual Superannuation. Patria was formerly a Partner at KPMG. She holds a Bachelor

of Economics (University of Sydney), is an associate of the Institute of Chartered

Accountants and a Fellow of the AICD

Charles Sitch - Independent Non-executive Director

Charles was appointed a non-Executive Director on 10 March 2016. Charles is a Director

of Spark (formerly Telecom New Zealand) and Apiam Animal Health. He is also Chairman

of the Robin Boyd Foundation and Board Member of Trinity College (Melbourne). Charles

was previously a Director of the global management consulting firm McKinsey & Co for 24

years. Charles has a Bachelor of Law / Commerce from the University of Melbourne, an

MBA from Columbia Business School, and is a Graduate of the AICD.

Shona Ollington - Chief Financial Officer

Shona was appointed as Chief Financial Officer (“CFO”) in August 2014. Prior to joining

BAL Shona enjoyed a 16 year career at KPMG (Director since 2011) specialising in

business advisory, taxation, business restructuring and business valuation. Shona is also

an advisor to the Board of the University of Tasmania Academy Gallery. Shona holds a

Master of Applied Finance (Kaplan Professional), is a Fellow of The Taxation Institute of

Australia (TIA), has a Graduate Diploma of Financial Planning (Securities Institute of

Australia), and is a Member of the Institute of Chartered Accountants in Australia (ICAA).

Shona holds a Bachelor of Commerce with majors in Accounting & Human Resource

Management

Page 15


Shareholders and ownership

The top four shareholders account for ~36% of the issued capital of BAL. In addition

management and the board have a direct equity interest of 5.4m shares (5.6% of the

issued capital) and a further 3.36m options with an average stock price of $1.30ps.

Figure 20 - BAL major shareholders

SOURCE: BLOOMBERG

Holder Shares (m)

Black Prince Private Foundation 14.0

Fidelity Investments 8.4

Quality Life (Bevin Neil Family trust) 7.2

AMP Capital 5.2

Page 16


Risks

BAL is a high growth FMCG business with exposures to an agricultural supply chain. Risks

associated in an investment in BAL include but are not isolated to:

China regulatory risk: At this stage we are projecting no material change in China C2C

law. Any change which would likely have a detrimental impact on the level of sales in the

Australian IMF business, but following a transition would be more than mitigated by faster

growth in the China business where gross margins are higher than those achieved in

Australia. As such while we are cognisant that a change in Chinese C2C trading

regulations can impact near term earnings, we don’t necessarily view this as detrimental to

the company’s longer-term growth trajectory.

Organic certification: A key factor to BAL’s success and consumer’s identification with

the BAL organic brand is the certification of BAL’s products as organic. This relies upon the

raw materials and product ingredients meeting the requirements specified by the certifying

bodies. Quality control issues in respect of raw materials and ingredients that result in the

finished products not being certified as organic could have a material adverse impact on

the Bellamy’s brand and consequently BAL’s financial performance and the Share price.

Emergence of new competition: BAL participates in a highly competitive FMCG global

business against materially larger, globally focussed competitors with significantly more

access to capital and resources. Should any of BAL’s competitors participate more

aggressively on price, product, innovation or other means then this could have a material

adverse impact on Bellamy’s financial performance and future prospects of the business.

Supply chain disruption: BAL’s business model and supply chain are dependent on

contractual arrangements with third parties which provide essential processing, production

or distribution functions for BAL branded products globally. There is the risk that the

operations of one or more third parties change in a material and adverse way or that one or

more third parties could reduce their support for the BAL brand. This could reduce BAL’s

ability to maintain supply to its customers in the short to medium term and reduce its ability

to maintain its position in existing markets or enter new markets. This may also necessitate

the need for BAL to invest in manufacturing capacity that would likely be returns

dilutionary.

Brand risk: In common with many other food companies, there is a risk that raw materials

may deteriorate or that products may become contaminated, tampered with, adulterated or

otherwise unsafe or unfit for sale or consumption within the supply chain due to various

factors, including human error and equipment failure. Potential adverse consequences for

BAL include regulatory penalties, termination of distribution arrangements, liability

associated with adverse health effects on consumers, product recall and disposal costs,

loss of stock, delay in supply and financial costs.

Regulatory risk: BAL and its strategic suppliers and contractors require certain licences,

approvals and consents in order to conduct their businesses. There is a risk that any such

licences, approvals or consents that are material to BAL in operating its business will not

be renewed or will be renewed on more restrictive or onerous terms, or in limited

circumstances, revoked.

Key personnel risk: BAL’s performance is dependent on the ability of its senior

executives and key personnel to manage and grow its business. Continuity and retention of

senior executives and key personnel are important for the ongoing implementation of

BAL’s strategy.

Page 17


Bellamy's Australia as at 24 October 2016

Recommendation Buy

Price $13.20

Target (12 months) $16.06

Table 1 - Financial summary

SOURCE: BELL POTTER SECURITIES ESTIMATES

Year end June 2013 2014 2015 2016 2017e 2018e 2019e Rating Buy

Profit & Loss (A$m) Share price (A$ps) $13.20

Sales revenue 28.8 48.9 125.3 244.6 356.0 407.0 452.7 Target price (A$ps) $16.06

. . . Change 69.8% 156.3% 95.2% 45.5% 14.3% 11.2% Shares on issue (m) 96.7

EBITDA 1.2 2.3 12.7 54.6 82.0 100.9 118.3 Market cap (A$m) 1275.9

Deprec. & amort. (0.1) (0.3) (0.4) (0.3) (0.4) (0.5) (0.5) Enterprise Value (A$m) 1243.7

EBIT 1.1 2.1 12.3 54.3 81.7 100.4 117.7

Interest expense (0.1) (0.2) 0.7 0.6 0.3 0.5 1.0 Year end June 2013 2014 2015 2016 2017e 2018e 2019e

Pre-tax profit 1.0 1.9 13.0 54.9 82.0 100.9 118.7 Valuation Ratios

Tax expense 0.4 (0.6) (4.0) (16.6) (24.6) (30.3) (35.6) Adjusted EPS (¢ps) 9.32 38.93 57.80 71.16 83.70

. . . tax rate -40% 33% 31% 30% 30% 30% 30% Change (% ) 317.5% 48.5% 23.1% 17.6%

Minorities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Adjusted PE (x) 141.6 33.9 22.8 18.5 15.8

Net Profit 1.4 1.3 9.0 38.3 57.4 70.7 83.1 EV/EBITDA (x) 97.7 22.8 15.2 12.3 10.5

Abs. & extras. 0.0 (0.0) (0.3) (1.2) 0.0 0.0 0.0 EV/EBIT (x) 101.2 22.9 15.2 12.4 10.6

Reported Profit 1.4 1.3 8.7 37.2 57.4 70.7 83.1

NTA ($ps) 0.50 0.84 1.23 1.73 2.32

Cashflow (A$m) P/NTA (x) 26.6 15.7 10.7 7.6 5.7

EBITDA 2.3 12.7 54.6 82.0 100.9 118.3 Book Value ($ps) 0.51 0.86 1.26 1.77 2.38

Net Interest Expense (0.2) 0.7 0.6 0.3 0.5 1.0 Price/Book (x) 31.2 18.7 12.7 9.1 6.7

Tax Paid (0.7) (0.2) (8.4) (20.6) (27.4) (32.9) DPS (¢) 2.9 11.9 19.0 22.2 25.0

Change in Wkg Capital (7.7) (11.2) (34.4) (40.1) (15.4) (12.2) Payout (% ) 30.7% 30.6% 32.9% 31.2% 29.9%

Other 7.0 2.8 (3.5) 0.0 0.0 0.0 Yield (% ) 0.2% 0.9% 1.4% 1.7% 1.9%

Operating Cash Flow 0.8 4.7 8.9 21.7 58.6 74.1 Franking (% ) 100% 100% 100% 100% 100%

Capex 0.0 0.0 (6.7) (15.1) (21.7) (22.2)

Div Paid (gross of DRP) (0.1) (0.3) (0.8) (0.8) (0.5) (0.5) Performance Ratios

Free Cash Flow 0.6 4.5 1.5 5.9 36.4 51.3 EBITDA/sales (% ) 10.2% 22.3% 23.0% 24.8% 26.1%

Acquisitions (0.2) (0.1) 0.8 0.0 0.0 0.0 EBIT/sales (% ) 9.8% 22.2% 22.9% 24.7% 26.0%

Disposals 0.0 0.0 0.0 0.0 0.0 0.0 OCF Realisation (%) 50% 23% 38% 82% 89%

Share issues 4.8 23.4 0.6 0.0 0.0 0.0 FCF Realisation (% ) 50% 4% 10% 52% 62%

Other 0.0 (0.0) (2.4) 0.0 0.0 0.0 ROE (% ) 18.4% 46.1% 46.9% 41.2% 36.1%

(Inc.) /dec. in net debt 5.2 27.8 0.4 5.9 36.4 51.3 ROIC (%) 71.8% 106.4% 97.0% 103.5% 112.6%

Asset turn (years) 28.49 188.26 212.15 193.29 226.51

Balance Sheet (A$m) Capex/Depn (x) 0.00 23.05 38.99 41.47 42.58

Cash & near cash 4.4 32.0 32.3 38.2 74.6 125.9 Interest cover (x) (17.68) (92.35) (250.39) (186.76) (120.59)

Receivables 6.4 20.9 33.9 48.1 57.0 63.4 Net Debt/EBITDA (x) (2.50) (0.59) (0.46) (0.74) (1.06)

Inventories 7.7 17.1 67.8 115.7 132.3 147.1 Net debt/equity (%) -65% -39% -31% -43% -55%

Other 3.1 0.6 5.3 7.5 8.6 9.5

Current assets 21.7 70.7 139.2 209.4 272.4 345.9 Segmentals (A$m)

Fixed assets 0.6 0.6 1.1 1.5 1.5 1.5 Australia/NZ 28.8 41.3 106.1 178.6 180.0 190.6 202.1

Intangibles 0.2 0.1 1.7 1.7 1.7 1.7 Asia 0.0 7.6 19.2 66.0 176.0 216.4 250.6

Other 0.3 1.0 1.5 1.5 1.5 1.5 Revenue 28.8 48.9 125.3 244.6 356.0 407.0 452.7

Non current assets 1.1 1.7 4.3 4.7 4.7 4.7

Total assets 22.8 72.4 143.5 214.1 277.1 350.6 Australia/NZ 2.0 13.4 35.9 35.7 39.5 43.7

Creditors 6.5 19.1 48.4 70.4 80.5 89.5 Asia 0.3 1.1 21.3 49.0 64.1 77.4

Borrowings 0.2 0.1 0.1 0.1 0.1 0.1 Corporate & Other 0.0 (1.8) (2.5) (2.6) (2.7) (2.8)

Other 0.1 3.8 11.6 18.9 21.6 26.2 EBITDA 2.3 12.7 54.6 82.0 100.9 118.3

Current liabilities 6.8 23.1 60.1 89.4 102.2 115.8

Borrowings 0.2 0.1 0.0 0.0 0.0 0.0

Other 0.2 0.3 0.1 2.4 3.4 4.4

Non current liabilities 0.4 0.4 0.2 2.4 3.5 4.4

Total liabilities 7.2 23.5 60.3 91.9 105.7 120.2

Net assets 15.6 48.9 83.2 122.2 171.4 230.4

Share capital 15.8 39.7 40.2 40.2 40.2 40.2

Reserves (0.0) 0.3 2.8 2.8 2.8 2.8

Retained earnings (0.2) 8.9 40.2 79.2 128.4 187.3

Outside equity Interests 0.0 0.0 0.0 0.0 0.0 0.0

S/holders' funds 15.6 48.9 83.2 122.2 171.4 230.4

Net Debt (Cash) (4.0) (31.8) (32.2) (38.0) (74.5) (125.8)

Page 18


Bell Potter Securities Limited ACN 25 006 390 7721

Level 38, Aurora Place 88 Phillip Street, Sydney 2000

Telephone +61 2 9255 7200 www.bellpotter.com.au

Recommendation structure

Buy: Expect >15% total return on a

12 month view. For stocks regarded

as ‘Speculative’ a return of >30% is

expected.

Hold: Expect total return between -5%

and 15% on a 12 month view

Sell: Expect <-5% total return on a

12 month view

Speculative Investments are either start-up

enterprises with nil or only prospective

operations or recently commenced

operations with only forecast cash flows, or

companies that have commenced

operations or have been in operation for

some time but have only forecast cash

flows and/or a stressed balance sheet.

Such investments may carry an

exceptionally high level of capital risk and

volatility of returns.

Research Team

Staff Member

TS Lim

Industrials

Sam Haddad

John O’Shea

Chris Savage

Jonathan Snape

John Hester

Tanushree Jain

Financials

TS Lim

Lafitani Sotiriou

Resources

Peter Arden

David Coates

Associates

Hamish Murray

Tim Piper

Title/Sector

Head of Research

Industrials

Industrials

Industrials

Industrials

Healthcare

Healthcare/Biotech

Banks/Regionals

Diversified

Resources

Resources

Associate Analyst

Associate Analyst

Phone

612 8224 2810

612 8224 2819

613 9235 1633

612 8224 2835

613 9235 1601

612 8224 2871

612 8224 2849

612 8224 2810

613 9235 1668

613 9235 1833

612 8224 2887

613 9256 8761

612 8224 2825

@bellpotter.com.au

tslim

shaddad

joshea

csavage

jsnape

jhester

tnjain

tslim

lsotiriou

parden

dcoates

hmurray

tpiper

The following may affect your legal rights. Important Disclaimer:

This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. In the USA and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified countries. In Hong Kong this research is being distributed by Bell Potter Securities (HK) Limited which is licensed and regulated by the Securities and Futures Commission, Hong Kong. This is general investment advice only and does not constitute personal advice to any person. Because this document has been prepared without consideration of any specific client’s financial situation, particular needs and investment objectives (‘relevant personal circumstances’), a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the representative of such licensee, who has provided you with this report by arraignment with Bell Potter Securities Limited) should be made aware of your relevant personal circumstances and consulted before any investment decision is made on the basis of this document.

While this document is based on information from sources which are considered reliable, Bell Potter Securities Limited has not verified independently the information contained in the document and Bell Potter Securities Limited and its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility for updating any advice, views opinions, or recommendations contained in this document or for correcting any error or omission which may become apparent after the document has been issued.

Except insofar as liability under any statute cannot be excluded. Bell Potter Limited and its directors, employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person.

Disclosure of interest:

Bell Potter Securities Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting and management fees from transactions involving securities referred to in this document (which its representatives may directly share) and may from time to time hold interests in the securities referred to in this document.

ANALYST CERTIFICATION Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.

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