Bell Potter

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.

Background and investment thesis

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.

Recommendation: Buy

Previous close: $13.20

Price target: $16.06



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