MASTERS IN FINANCE EQUITY RESEARCH · Executive summary Shoprite Holdings is South Africa’s...

THIS REPORT WAS PREPARED BY JOSÉ MARIA LIMA, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND

ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES. THIS REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE

VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)

See more information at WWW.NOVASBE.PT /39

MASTERS IN FINANCE

EQUITY RESEARCH

We start our coverage of Shoprite Holdings Ltd with a

recommendation of SELL and a price target FY14 of 158.6

ZAR. Each share presently trades at a premium of 3.05% at 163.6

ZAR and yield a -19.4% one year return.

Macroeconomic prospects at home may pressure

sales. Economic growth is expected to slow down to 2.8% given

the decrease in commodity prices and the capital outflow of the

country. Government and trade deficit are long-turn concerns for

us. We expect 2014’s LfL to be pressure and to be the smaller

ones in the last 3 years, 4.18%, nevertheless the company wishes

to trigger growth through the opening of 100 new supermarkets.

Africa sparkles in the horizon. Shoprite desires to

continue its expansion strategy, replicating its business model, in

Sub-Saharan Africa. An acceleration of store openings and

maintenance of two digits growth in sales are expected in the next

decade (24.2% in 2014).

Suppliers pressure Working Capital affecting cash

flow. Working Capital has turned positive in 2013 and we expect it

to be maintained. This is explained by the relative decrease of

Accounts Trade Payables. To control the margin between CPI and

PPI, retailers are paying faster to get discounts.

Strong financial and liquid position. The company

currently has a D/E of 27.1% and a level of cash equivalent to 6%

of sales. We believe that D/E will decrease overtime to reach

national competitors and that cash may be used to financing an

acquisition outside the continent which is a major concern for us.

SHOPRITE HOLDINGS LTD COMPANY REPORT

FOOD RETAIL 6 JANUARY 2013

STUDENT: JOSÉ MARIA LIMA [email protected]

The start of an International Firm

Strong growth profile abroad, solid cash flow generation at home

Recommendation: SELL

Vs. Previous Recommendation

Price Target FY14: 158.6 ZAR

Vs. Previous Price Target

Price (as of 5-Jan-14) 163.6 ZAR

Reuters: SHPJ.J, Bloomberg: SHP SJ

52-week range (ZAR) 158.08-206.37

Market Cap (ZAR m) 94,432.140

Outstanding Shares (m) 535.143

Average Daily Volume (last 3M) (m) 2.663

1-Year Return (%) -19.4

Source: Bloomberg and Company’s Data

Source: Bloomberg

(Values in ZAR millions) 2013 2014F 2015F

Revenues 92,747 105,603 120,877

EBITDA 6,745 7,854 9,023

EBIT 5,359 6,112 7,041

Net Profit 3,615 4,269 4,952

EPS 6.76 7.98 9.25

DPS 3.19 3.99 5.09

ROIC 36.9% 29.2% 29.8%

Working Capital 2,519 2,868 3,283

CAPEX 3,568 3,338 3,99

Source: Company’s Data and Analyst Estimation

Company description

Shoprite is the biggest food retailer in Africa. The company has its main operations in South Africa but it is also present

in other 16 Sub-Saharan countries. The company’s most important brands are Shoprite, Usave and Checkers. Besides Supermarkets, the firm it is also present in Furniture

and other small businesses.

speralta

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PAGE 2/39

Table of Contents

EXECUTIVE SUMMARY ...........................................................................3

COMPANY OVERVIEW ............................................................................4

COMPANY DESCRIPTION ................................................................................... 4 SHAREHOLDER STRUCTURE ............................................................................. 5 DIVIDEND POLICY ............................................................................................. 5

MACROECONOMICS ...............................................................................6

MACROECONOMICS OF AFRICA ........................................................................ 6 MACROECONOMICS OF SOUTH AFRICA ............................................................ 7

THE SECTOR ............................................................................................9

SECTOR DESCRIPTION ..................................................................................... 9 COMPARABLES .............................................................................................. 11

BUSINESS UNITS: DESCRIPTION AND FORECASTS .........................13

SUPERMARKETS IN SOUTH AFRICA ................................................................ 13 SUPERMARKETS OUTSIDE SOUTH AFRICA ...................................................... 18 FURNITURE .................................................................................................... 21 OTHER OPERATING SEGMENTS ..................................................................... 23

OTHER IMPORTANT ITEMS DESCRIPTION AND FORECAST ............24

FINANCIAL DEBT ............................................................................................ 24 EXCESS CASH ............................................................................................... 24

SUM-OF-PARTS VALUATION ................................................................25

WACC........................................................................................................... 25 TERMINAL VALUE ........................................................................................... 27 PRICE TARGET ............................................................................................... 27 SENSITIVITY ANALYSIS ................................................................................... 29 SCENARIO ANALYSIS ...................................................................................... 29 MULTIPLES ANALYSIS .................................................................................... 30

SWOT ANALYSIS ...................................................................................31

APPENDIX ..............................................................................................32

RESEARCH RECOMMENDATIONS .................................................................... 39


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Executive summary

Shoprite Holdings is South Africa’s biggest Food Retailer, having approximately

92 Billion rands in Sales in the year ending in June 2013. Nearly 86% of the

group’s total sales come from the internal market, being the remaining 14%

related with the group’s international expansion in other Sub-Saharan African

countries. Shoprite is a truly African company.

Africa has been able to present a concrete and sustainable growth profile during

the last years, having grown 6.5% in 2012. South Africa is the continent’s most

developed nation and it is considered an emerging economy. Nevertheless

growth has been slowing down and the country is only expected to grow 2.8% in

2013. Moreover South Africa has numerous structural issues like its deformed

labour market, its public and external deficit and its idiosyncratic social and ethnic

problems.

Modern Grocery Distribution penetration rates have hugely increased in the last

10 years, representing 55% of total Food Retail market. This is explained by the

positive evolution of consumption, living standards and urbanization that changed

the way South Africans consume. The market is controlled by 5 major

companies: Shoprite, Pick n’ Pay, Spar, Massmart and Woolworths; being

Shoprite the biggest player with a share of 32.5% last year.

Supermarkets in South Africa are responsible for 83% of EBITDA, but

Supermarkets outside South Africa are the ones that have been presenting

greater evolution, growing always above two digits in the last 5 years (27.9% in

2013). Shoprite’s international expansion is already responsible for 12% of

EBITDA. The company’s EBITDA Margin is of 7.4% which is above industry

average of 5.8%. It is our belief that these margins are not sustainable in the long

run because of the pressure that national suppliers are making to increase prices

(PPI is above CPI), which has already turned Working Capital positive, damaging

the Cash Flow.

Shoprite has a strong financial and cash position. Debt to Equity is of 27.1% and

the debt profile is almost entirely convertible bonds. Shoprite currently has a cash

position above the requirements for Working Capital (6% of Sales). The possible

use of this money for an M&A operation outside Africa is of great concern for us,

since the company does not have market know-how outside Africa.

We start our coverage of Shoprite with a SELL recommendation and a target

price of 158.6 rands. Despite the growth profile of the company, its robust

financial and cash situation and its well planned international expansion, the

market is trading the company at a premium of 3.05%.

Shoprite is South Africa’s major Food Retailer

Africa is passing through a positive period in economic terms. Nevertheless South Africa has been slowing down

The South African Food Retail market has dramatically changed in the last decade

EBITDA Margin of Shoprite is above industry, but it may not be sustainable in the long-run

The possibility of an M&A operation outside the continent is a major threat for the company solid position

We start our coverage with a SELL recommendation and a target price of 158.6 rands


PAGE 4/39

Company overview

Company description

Shoprite Holdings is a South African Food Retailer group. Shoprite was founded

in 1979 and it is nowadays the major player in the food retail market of the

country with 32.5% market share of the Modern Grocery Distribution1 and the

biggest supermarket chain in the African continent. The company currently

operates 2179 stores in all Sub-Saharan Africa (SSA) within several different

businesses and brands. Reaching several target markets and individuals through

its different brands and supermarkets types, Shoprite aims to be a company that

reaches all people from all classes. The company’s vision is to provide low prices

and create a trustful relationship with its customers in an appropriate shopping

atmosphere.

Currently one can subdivide the group’s businesses in three segments:

Supermarkets, Furniture and Other operating segments. The contribution to Total

Sales and EBITDA of each Business Unit has remained stable during the last 5

years as observable in Figures 1, 2 and 3, despite the decrease in the foreign

businesses of the company following the 2008 International crisis, this part of the

group is the one with the highest potential for future revenue and profit growth.

The supermarkets branch includes three different types of brands that are

Shoprite2, Checkers and Usave. The Furniture segment has three different kinds

of stores too, which are OK Furniture, OK Power Express and House&Home.

The other operating segments include several diverse businesses from a food

chain, Hungry Lion, several franchisee operations and Liquor and Pharmacy

Stores.

The company is currently present in other 16 Sub-Saharan countries besides

South Africa, with a main focus on Namibia, Angola, Zambia and Nigeria. The

Sales outside SA represented in June 2013 nearly 14% of Total Sales, which

represents an increase in its contribution of 2.1 percentage points since 2010,

when it represented only 11.9% of Revenues. Operations abroad and its growth

are the crown jewel and future long term drivers of Shoprite Group.

1Modern Grocery Distribution refers to modern retailing that is basically organized trade. It is the opposite of the concept of Traditional Grocery Distribution. 2 The first and main trademark of the group.

0%

20%

40%

60%

80%

100%

2008 2009 2010 2011 2012 2013

Figure 1: Evolution of Each Business Unit Contribution

to Total Sales

Other Operating SegmentsFurnitureSupermarkets Non-SASupermarkets SA

Source: Company Data

0

20

40

60

80

100

2008 2009 2010 2011 2012 2013

Billion Rands

Figure 3: Evolution of Total Sales and Geographical

Contribution

Sales outside South Africa

Sales in South Africa


0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013

Figure 2: Evolution of Each Business Unit Contribution to

EBITDA



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Shareholder structure

Shoprite Holdings currently has 570,579,460 common shares with a nominal value

of 113.4 cents each. The Share Capital of Shoprite remains constant at 650 Million

shares with a nominal value of 113.4 cents each. The division of the company’s

shares can be seen in Figure 4,5 and 6. As it can be seen, Shoprite has a much

diversified base of shareholders both geographically and institutionally. Wiese and

Basson, both founders of the company and Chairman and CEO respectively still

own 15% and 1.8% correspondingly. They are in the company since day one, and

their succession, given their old age, 71 and 67 correspondingly, is one of our

major concerns in the long run. The shareholder structure of Shoprite exhibits

numerous financial investors like Banks, Funds and Pension Funds, both national

and international. This fact is particularly related with the exposure of the company

to not only South Africa but also to the rest of Sub-Saharan Africa (Supermarkets

outside South Africa represents 13.7% of Enterprise Value), being a good stock for

a portfolio that wants an African exposure. The South African Government Pension

Fund is the second bigger shareholder of Shoprite. This is the biggest pension

fund in Africa3 and it is an independent entity responsible for the pensions and

retirement benefits of South African public employees. So the government has no

direct participation in the firm’s equity. Free Float represents 37.9% which is an

indicator of this stock’s great liquidity.

Dividend Policy

Shoprite’s dividend for the fiscal year ended in June 2013 was of 3.19 rands per

stock. This means that total dividends were approximately of 1.7 Billion rands

and represented 47.3% of the company’s earnings. Pay-out ratio advance from

36.8% in 2008 to 47.3% in 2013 (Figure 7), but it is still low considering other

companies in the JSE, since the company is still investing a lot in the expansion

of its business in SA and in their foreign operations. Nevertheless, Pick n’ Pay

has an even lower Pay-out ratio of 21.9%. Dividend yield was of 1.8%, being

decreasing since 2009. Shoprite’s dividend yield is very low considering its main

comparables and the JSE’s companies, Pick N’ Pay has an expected average

dividend yield of 3.9% for 2013, and Spar of 4%. The average dividend yield in

the Johannesburg Stock exchange was of 2.83%. This difference can be

explained as dividends are not growing at the same pace than the price per

share, dividends grew 193% in the last 5 years, while the price per share grew

3 It has more than 1 Trillion rands of assets and 1.2 Million active members.


45,3%

32,0%

3,9%

3,3% 2,6%

12,90%

Figure 5: Geographical Break-down of Beneficial

Shareholders

South Africa USA

Luxembourg UK

Singapore Other


17,37%

6,21%

76,42%

Figure 6: Management Position

Management Own Shares

Public Owners



PAGE 6/39

320%. Consequently Shoprite’s yield is declining in relative terms since the

market is valuing more the firm.

Macroeconomics

Macroeconomics of Africa

Unlike the developed world and most of the emerging nations, Africa has been

able to present a solid and sustainable growth profile during the last years, in an

adverse world economic context. Africa’s future is very optimistic according to

several international institutions, nevertheless a change in the economic profile of

the continent and the stabilization of institutions is imperative for the

concretization of those prospects4.

The continent’s economy grew more than 6.5% in real terms during the last year

with projections assuming a slower growth during 2013 and 2014. This economic

slowdown is due to the lower growth in countries that have a stronger relationship

with the global economy or are facing social and political unrest. Nevertheless we

must take into account that the 2012’s growth was positively influenced by the

restoration of the Libyan oil production sector. However the forecasts are still one

of the highest in the world (Figure 8). This economic evolution originates from a

diverse variety of factors: exports, private consumption, public spending and

private investment are all increasing.

The main aspect that is influencing African economic prosperity is the evolution

of the price of commodities in recent years (Figure 9). Countries that have plenty

of resources have been taking advantage by increasing exports and receiving

significant private investment from developed countries and even China. Oil, gas

and mineral production are at maximums and there is an additional boost in the

production of agricultural goods, given good harvest years.

This money flow has been a challenge for governments and society in general.

Government spending and private consumption are increasing. Nevertheless

government’s fiscal balance does not present a problem giving the increase in

revenues from this new economic era. Governments should take this opportunity

4 According to the African Economic Outlook 2013.

Source: Company Data and Analyst Estimation

-2,00%

0,00%

2,00%

4,00%

6,00%

8,00%

2010 2011 2012 2013

Figure 8: Real Economic Growth Evolution

Europe North America

Latin America Asia & Oceania

Africa

Source: United Nations Data

50

70

90

110

130

150

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190

210

230

250

20

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2005=100 in US$

Figure 9: Commodities' Prices evolution

Agricultural Goods Metals Oil

Source: IMF Data


PAGE 7/39

-8,0%

-6,0%

-4,0%

-2,0%

0,0%

2,0%

4,0%

6,0%

8,0%

20

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F

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F

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F

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F

Figure 11: SA Macroeconomics Indicators

Economic Growth

Fiscal Balance

External Balance

Source: IMF Macroeconomic Forecasts

to develop other sectors in the economy besides the primary. The so call Natural-

resource base structural transformation must occur in the continent in the near

future, especially in the countries that are benefiting the most from the money

inflows. The development of a strong manufacturing sector and the investment in

education and human development has to be a priority. Furthermore, both

political and administrative structures are still lacking and without a serious

investment, which might compromise economic growth in the long run.

Monetary policy has also been a great challenge. Influenced by the price of

commodities, the moneys inflows and the stabilization of the external balance,

Africa has had high inflation rates around 8% (Figure 10). These prices increases

that are especially problematic in oil and agricultural goods have been pressuring

the poor urban population, which can be of great concern as it fuels tensions

within and lead to political unrest. In addition the interest rate mechanism in most

African countries is still very weak. Thus monetary authorities must be careful

when weighting its main goals: low inflation and economic growth.

Macroeconomics of South Africa

South Africa (SA) is currently Africa’s main economy and the most developed

nation in the continent and it is one of the emerging economies that grew

significantly in the last decade. Despite considerable growth in the past, the

economy has slowed down. Moreover the country still has a considerable

number of structural problems such has social inequality that has been a

continuous source of social and political tension.

Economic growth is expected to be 2.8% in 2013 which means a slowdown in

relation to 2012 and a very low growth when compared to pre-crisis figures

(Figure 11). Several factors are affecting the economy performance, from where

we can highlight: Slowdown of commodity prices; Capital outflow from the

country that is triggering a great depreciation of the rand; External and fiscal

deficit are not controlled; Population challenges and structural problems in the

labour market; Problems with the EU, the main trade partner.

The South African economy has a strong primary sector, with mining and the

great conglomerates responsible for that sector a very important part of the

country’s GDP, total natural resources rents were above 11% of GDP in 20125.

Given the slowdown of commodity prices since 2011, the exports of the country

are slowing down in this industry.

5 Natural Resources Rents refers to the revenues deducted from the costs of extraction. IMF data.

-5,0%

-2,5%

0,0%

2,5%

5,0%

7,5%

10,0%

2011 2012 2013F 2014F

Figure 10: African Macroeconomic Indicators

Economic Growth

Inflation

Fiscal Balance

External Balance

Source: United Nations: African Economic Outlook 2013

0

2

4

6

8

10

12

14

Figure 12: Rand/US$ Evolution

Source: Bloomberg


PAGE 8/39

42

44

46

48

50

52

54

56

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

20

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09

20

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20

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F

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14

F

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F

20

16

F

Figure 14: Population Evolution

Population Population Growth

Source: FMI

Millions

Moreover the country is suffering from an outflow of capitals, which is a tendency

that is affecting other emerging countries like Brazil and India. The huge flow of

money from developed nations to emerging ones after the financial crisis of 2008,

giving the low interest rates in the US and Europe, are starting to going back for

those countries, especially with the possibility of an increase in the FED interest

rate. This has severely affected the rand, which depreciated more than 15% in

the last 12 months (Figure 12). The currency depreciation has a direct effect in

inflation, which is forecast to remain high during the next three years (Figure 13).

Additionally the country’s external and fiscal balances are in the red and are

expected to remain so for the next years. There are some concerns in the short-

term financing of the external deficit giving the outflow of capital that SA is

suffering. So one of the country’s goals should be to reduce its external deficit

through a boost in exports or a decrease in imports. Nevertheless exports are

being affected by the restrictions in the labour market and the volatility of the

rand, while imports are being powered by the government investment plans.

Budget deficit is another problem. The government of Mr. Zuma has been caring

out a policy of continuity in relation to high public investment, especially in the

transports sector, both rail and road. The infrastructure investment plans and the

cut in the corporate tax rate for 28% are pressuring an already negative fiscal

balance.

Population has been slowly increasing in the past few years, reaching 51 Million

in 2012 as it can be seen in Figure 14. This slow growth is associated with the

increase in the mortality rate because of the high incidence of HIV, which is one

of the country’s greatest challenges, more than 12% of South Africans have HIV6.

Urban population has been also constantly increasing, reaching 63% in 2013,

which bring significant social and way of life changes in the country.

Other issue of concern is the labour market. The country has been passing

through a great period of strikes and labour unrest, particularly in the mining

sector. This year and until October, a total of 5.4 Million man-days of strike have

already occurred, the same than all the year of 2012. It is estimated that this cuts

economic growth by 0.5% of GDP7. These situations together with a deformed

and restricted labour law, where there are radical unions like the National Union

of Metal Workers and even quotas regarding a person’s colour, are responsible

for a great pressure to increase wages, which affects the already huge

6 According to UNAIDS. 7 According to the National Treasury of South Africa.

0,0%

5,0%

10,0%

15,0%

20,0%

20

08

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09

20

10

20

11

20

12

20

13

F

20

14

F

20

15

F

20

16

F

Figure 13: CPI and CPI Food Evolution

CPI CPI Food

Source: IMF Data and Forecasts, Analyst Estimation

20%

21%

22%

23%

24%

25%

26%

27%

28%

20

05

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F

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F2

01

5F

20

16

F

Figure 15: Unemployment Rate

Source: Statistics South Africa (STATSSA)


PAGE 9/39

-4%

-2%

0%

2%

4%

6%

8%

10%

57%

58%

59%

60%

61%

62%

63%

64%

in % of GDP

Figure 17: Household Consumption Evolution

Household Consumption Expenditure

Growth in Household Consumption

unemployment rate8 (Figure 15). Risks of large scale strikes are still very high

and of great concern for us.

Furthermore the government unilaterally ended the Bilateral Investment Treaties

with EU countries. South Africa wanted only one agreement with the entire bloc

but there has been a lot of confusion between both parties in the matter.

Although the possible small effect of this decision in terms of exports and FDI, it

is an additional problem with the country’s main trade partner.

Notwithstanding all the negative aspects mentioned above, the country has a

decent FDI flow (expected of 1% of GDP in 2013), a low external debt (under

45% for 2013) and a respectable value of foreign reserves, which can cover

imports. Regarding the country’s most important stock exchange, the

Johannesburg Stock Exchange (JSE), for the investors that hedged against

exchange rate risk, it has been the best emerging market performance during the

previous 3 years, having a real return of 4.1% in 3 years. For investors that did

not hedge against the rand, the JSE has been a terrible disappointment.

The Sector

Sector Description

The South African food retail market has been an industry with huge growth

during the last decade. Penetration rates of modern grocery distribution (MGD)

exploded; South African retail companies grew and started its internationalization

process; competition increased in urban areas and consumer’s pattern changed.

Basically the industry followed the prosperity period that the country has been

enjoying in the last decade and change in a positive way, starting to become

more and more like a developed country retail industry.

The grocery distribution industry grew during the last 10 years about 10% per

year, and it represented in 2012 about 360 Billion rands in sales. Modern grocery

distribution had a tremendous increase, from approximately 40% to more than

55% of the total food distribution market in 2012 (Figure 16). This growth in the

industry is directly influenced by the evolution of the industry main drivers and by

the change in consumer behaviour.

The evolution of sales in the retail sector is influenced by the price and quantity of

goods sold. Price can increase in nominal or in real terms. So price depends on

inflation and real factors. These include: household consumption expenditure and

8 In economic theory, if you do not have flexibility in wages, the labor market will adjust through unemployment.

0%

20%

40%

60%

80%

2002 2012

Figure 16: The Food Retail Market

Modern Distribution

Traditional Distribution

Source: STATSSA Data

Source: World Bank Data


PAGE 10/39

consumer’s patterns. If the costs of producing a good increases, its price must

follows the same tendency. If a household is wealthier it can purchase further

goods and pay more for their grocery products.

Household consumption expenditure has been constantly increasing (Figure 17),

besides 2009, a year influenced by the global recession. From 2010 onwards it

has been growing faster than GDP. Moreover, looking for government

expenditure we can see that it has been constantly increasing, reaching 22.4% of

GDP in 2012 (Figure 18). This can be explained by the increase in government

social grants for the poor part of the population. Consequently all households

including the low income families are spending more each year. This trend is

responsible for the increase in the number of stores and sales of major retailers

and the increase in the penetration rates of modern grocery distribution.

In addition consumption patterns are changing. Looking to the Living Standards

Measure9 (LSM), there is a clear trend of people moving from the lower LSMs to

higher ones (Figure 19). This trend influences the type of consumption of each

customer, since a population with higher income, different lifestyle and more

concentrated around urban centers (Figure 20) consumes differently. An example

is the increase in the sales of pre-prepared food due to home cooking declining,

given the inclusion of women in the workforce. Or some individuals that had a

wrong and poor diet in the past, which are now eating more protein products.

Thus, individuals are migrating from the traditional distribution to the modern one

when reaching LSM levels 3 and 4. In here there is an opportunity for hard

discount chains like Usave in the case of Shoprite and some Pick n’ Pay brands.

On the other hand the higher LSM categories are also increasing, which means

that consumers desire higher value brands, giving a great opportunity to

companies like Massmart or chains like Checkers.

Regarding the margins of the sector, they can be evaluated through the evolution

of the consumer’s price in relation to the producer’s price . This is, retailers gain

through the gap between the price that sell the goods and the price at which they

purchase them, so this difference can be seen as a proxy for the sector’s

margins. Looking to Figure 21 it can be seen that in the previous months,

margins are being pressure by the increase in the producers’ price and in the

control of the consumers’ price by the retailers. The increase in PPI is reflecting

the increase of electricity, labour and fuel in the country. The control in CPIs and

the low reflection on the sector margins have been achieve at the cost of Working

Capital that I will explain further ahead.

9 LSM is a measure of poverty calculated by SAARF (South African Audience Research Foundation). It divides people by its living standards in 10 groups, taking into account degree of urbanization, ownership of cars among other factors.

LSM1 is the poorest group while LSM10 is the richest one.

15%16%17%18%19%20%21%22%23%

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in % of GDP

Figure 18: General Government Final Consumption Expenditure

Source: World Bank Data

0%

10%

20%

30%

40%

50%

60%

2008 2009 2010 2011 2012

Figure 19: LSM Evolution in % of Total Population

LSM 1-5 LSM 6-7 LSM 8-10

Source: SAARF Data

0%

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120%

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Figure 20: Urbanization Evolution

Urban Population Rural Population

Source: United Nations Data

4,0%

5,0%

6,0%

7,0%

jan

-13

fev-

13

mar

-13

abr-

13

mai

-13

jun

-13

jul-

13

ago

-13

set-

13

Figure 21: Prices Evolution

PPI CPI

Source: STATSSA Data


PAGE 11/39

It is our expectation that although there is a short-term pressure in margins

especially in the low income target supermarkets which have consumers that are

more price sensitive (retailers cannot reflect the increase in PPI in price in this

case because sales might decrease), the retail sector still has good growth

prospects in the country. The penetration rates are still low if compared to other

developed markets (80 to 90% of total distribution) and even lower than other

emerging markets like Brazil, where the MGD accounts for 60% of the market or

some eastern Europe countries (Figures 23 and 24). With the continuation of the

increase of urbanization and a change in the consumer patterns of South

Africans it is our expectation that although growth will likely slow down, estimates

give us a penetration rate of 66.2% in 2016 (Figure 22). Moreover each company

can continue to have an organic growth strategy, unlike many markets where

M&A is the only way to further develop a retailer.

Comparables

Currently the food retail sector in the country is controlled by 5 major companies

that together control over 93% of the market (Figure 25), which are: Shoprite,

Pick n’ Pay, Spar, Massmart and Woolworths. The concentration in the South

African market is different from other emerging countries where the market

shares of top retailers are still very low. This is evidence that in the case of

industry segmentation SA is a very mature market. These retailers are

characterized by a high growth profile (sales CAGR of 12.07% in the last 3

years), low CAPEX needs (due to the use of leasing in relation to stores),

respectable margins (industry EBITDA margin in the last 3 years was of 5.8%)

and low leverage ratios (comparables median of 8.6% debt to equity). Moreover

all are expanding its model to other Sub-Saharan countries despite the still huge

development that the SA market offers.

The company that is more similar to Shoprite is Pick n’ Pay (Figure 26 presents

the firm’s main financials), which is one of the oldest modern retailers and is

listed since 1968. It used to be the number one retailer and is has been going

53% 40% 19%

3%

47% 60% 81%

97%

0%

50%

100%

Russia Brazil Romania Poland

Figure 23: Other Emerging Countries Distribution in 2012

Traditional Grocery Distribution Modern Grocery Distribution

Source: Planet Retail

19% 12% 13%

81% 88% 87%

0%

50%

100%

Portugal UK Germany

Figure 24: Developed Countries Distribution in 2012

Traditional Grocery Distribution Modern Grocery Distribution

Source: Planet Retail

0%

20%

40%

60%

80%

100%

120%

2012 2013F 2014F 2015F 2016F

Figure 22: Distribution Forecast Evolution

Modern Grocery Distribution

Traditional Grocery Distribution

Source: Analyst Estimation

32,5%

27,8%

21,7%

7,6% 4,0% 6,4%

Figure 25: Market Share of the Food Retail Industry in

2012

Shoprite Pick n Pay

Spar Massmart

Woolworths Others

Source: Companies Data and Analyst calculus


PAGE 12/39

through a great process of restructuring. Nowadays it has the second highest

market share and operates through the Pick n´ Pay and the Boxers brands. The

company shifted its business profile in 2012, selling its poor operations in

Australia and focusing on the internal market and in neighbouring countries.

Moreover the company changed its management recently in order to become

more efficient. These changes are not yet reflected in company’s financials,

nevertheless we believe that EBITDA margin and sales growth should recover in

the medium run. Pick n’ Pay is exposed to all type of customers, from the lowest

LSM to the highest one. Nevertheless the firm is still very concentrated in low

middle income consumers (LSM 3 to 6), which can be problematic in the short

term.

Spar (Figure 27 summarizes the company’s core data) is the third largest

company of the industry and has a different business model being a typical

wholesaler, being responsible for the purchase of groceries and to sell them for

independent supermarkets than operates with its name and brand. Nevertheless

this business model has major risks since independent supermarkets that

constitute the bulk of the company’s clients are not obliged to buy from the firm.

For that reason the company has low CAPEX needs and a high cash flow

generation, nevertheless Spar does not control its growth.

The fourth player in the industry is Massmart (Figure 28 presents its key

statistics). The company had a strong investment plan during the last 4 years that

was accelerated with the entrance of its now major shareholder, Walmart10

. The

plan consisted on diversifying its retail offer, enhance the supply chain and

expand to other African countries. Currently, the company operates in all LSM

segments through its different 10 brands (Game, Dion Wired, Makro, Builders

Warehouse, Builders Express, Builders Trade Depot, CBW, Jumbo Cash &

Carry, Cambridge Food and the Shield buying group).

Finally, the last large retail company is Woolworths (Figure 29 summarizes the

firm’s financials). The firm operates through two different retail chains that are

food and clothing11

. Food accounts for more than 50% of total sales. This firm is

the one with the highest ROIC and ROE of the industry because its business

model is very different than the previous retailers since it targets only high

income consumers that are in the higher LSM categories (8 to 10). The company

is geographically present in SA and in Australia.

10 In 2011 Walmart acquired 51% of the company. 11 In the clothing business it has an agreement with the British Marks & Spencer.

Figure 26-29 source: Companies Data and Analyst calculus


PAGE 13/39

Business Units: Description and

Forecasts

Supermarkets in South Africa

This business unit of the group comprises all the supermarkets stores in the

country. For the year ended in June 2013 Shoprite had approximately 71Billion

rands in Sales from its 810 supermarkets in the country. EBITDA Margin was of

8.1% (Figure 31). This represents approximately 76.5% of the group’s Total

Sales and 83.1% of its EBITDA in 2013. As it was previously mentioned, Shoprite

has three types of Supermarkets that are Shoprite, Checkers and Usave. There

is also one sort of hypermarket that is Checkers Hyper (the three Shoprite Hyper

were shutdown in 2011). As it was beforehand stated each supermarkets aims to

target different food retail customers (look to Figure 30). It is important to mention

that it is company’s policy not to own its stores, but leasing it in order to reduce

the PP&E investment demand to open new ones and the CAPEX demands

during its life. Moreover leasing has the advantage to provide a greater flexibility

and make it easier to open and close stores.

Usave is a hard discount supermarket that is focused on low income people. In

2008 there were only 91 Usave’s stores in the country, nevertheless by 2013

there were 243 stores, this represents a cumulative growth of 167% in just 5

years. This store is usually smaller and concentrated in poor urban areas and

smaller cities. It is estimated that each Usave Store as 600 sqm and given the

location of the store, the CAPEX needs of this supermarket are expected to be

very low. Being concentrated on low income customers, Usave is the perfect

vehicle of growth in South Africa, given the country’s population income profile.

Shoprite is the group main brand and supermarket chain. It was the group’s first

brand and serves and targets the middle income class. Despite not being a hard

discount supermarket like Usave, Shoprite attempts to serve its clients with the

lowest prices as possible, since middle class customers are still very price

sensitive. There are currently 361 stores in South Africa. The increase in the

number of stores has been stable and between 10 to 20 shops per year (roughly

2 to 6% YoY). These stores are typically larger than Usave’s having an average

of 4000 sqm. They are usually located in shopping malls and great metropolitan

areas of country, especially in Cape Town, which increase the price of sqm of

each store. CAPEX demands are usually higher in a Shoprite store than in a

Usave one.

0

1

2

3

4

5

6

7

8

9

10

0 5000 10000

Store size in sqm

Figure 30: Supermarkets Target, Size and Relative Store Number

Usave Shoprite Checkers Chekers Hyper

LSM


Usave is a supermarket focused on low income consumers

Shoprite is a supermarket focused on middle income customers


PAGE 14/39

Checkers is the group brand for upper middle class and upper class customers. It

is a supermarket focused on prime quality products, from meat to cheese and

wines, having a greater attention to the quality of the products and its brand. At

present there are 168 stores in SA, opening an average of 10 supermarkets each

year. Checkers are usually smaller stores than Shoprite, being estimated to have

around 1500 sqm each, nevertheless they are located in shopping centers and

prime zones of SA’s urban areas, being subject at a higher price per sqm than

both Usave or Shoprite stores. CAPEX demands are higher in these shops, but

so are the margins of this market segment.

Besides the three supermarket chains there is still one hypermarket chain that is

Checkers Hyper. At the time, there are 29 Checkers Hyper within the country,

having opened on average one hyper per year in the last five years. These stores

have around 5500 sqm per store and are located in road intersections in the main

South Africa Urban zones. They have the same concept as Checkers, but with a

wider and higher variety of products. They are the stores that have the great

CAPEX expenditures and that need the biggest investment of all according to our

estimates.

Total Stores reach 801 in 2013, coming from a base of 536 stores in 2008

(Figure 32). This represents a growth of 53 per year or an average growth of

8.3% YoY (Figure 33). The development and expansion of Usave was the main

responsible for such increase and penetration in the country’s food retail market.

Total sqm of the supermarkets increased from 1573100 sqm to 2001300 sqm.

This represents an average YoY growth of 4.9% since 2008. One may see that

the sqm grown less than the number of stores, which is associated with the fact

that the small Usave shops where the main driver of growth in SA. Average

space per store decreased from 2935 sqm to 2499 sqm. It is estimated an

opening of 100 new stores in 2014, especially from the Shoprite and Usave

brands. It is our belief that from 2014 onwards the firm will continue to invest in

the South African market, with a notable emphasis in the Usave brand, which has

a great possibility of growing in peripheral urban areas which are increasing in

the country. There is also still growth possibility for the Shoprite and Checkers

brand, mainly because of the tendency of improvement of the living standards of

South Africans (seen through the LSM categories) and the change in consumer

behaviour in developed urban areas.

Sales and its drivers are the most important variables in a Food Retail Business,

like Shoprite Holdings. Posing as a growth company during last years, the

division between the Sales performed in mature supermarkets and the new ones

must be performed. So Total Sales depend of the Sales per sqm of the existent

stores and the total sqm space of those stores, and the Sales per sqm of the new

Source: Company Data, Analyst Estimation


-20,0%

-10,0%

0,0%

10,0%

20,0%

30,0%

40,0%

50,0%

Figure 33: Stores Growth Supermarkets SA

Usave Shoprite

Checkers Checkers Hyper


Checkers is a supermarket that targets the upper classes


PAGE 15/39

shops and its total space. In order to perform this division, we had to assume that

the ramp-up of a new supermarket is of 1 year12

. We have also assumed an

average percentage of Sales for the new stores during its first year of 33% of the

existing ones, which is a value based on market know-how.

As one can see Sales have been increasing at an average of 13.5% per year

since 2008, which is a very attractive rate (Figure 34). If we break-down the sales

growth profile between Like for Likes13

and New Space contribution, it can be

seen that Like for Likes is the main contributor for the evolution of Total Sales

(Figure 35), despite the opening of several supermarkets per year. Like for Likes

may be influenced by the growth in quantity of a supermarket or the growth of the

price per item of that store. Taking into account that we are talking about mature

stores and that quantity has a restriction that is space, we may look to LfL to a

proxy of the internal inflation of a supermarket. In Figure 36 we can look for the

evolution of South Africa CPI Food and a two years CPI Food Average. It is very

evident the relationship and the same tendency that LfL has with these variables

which is a proof of what I previously alleged. Consequently we can conclude that

not only the opening of new stores have been contributing to the company’s

sales growth in South Africa, but also its ability to increase the Sales in the

existing supermarkets. It is important to notice that in 2013 LfL (4.8%) was

smaller than Food CPI (6.1%), which means that Shoprite is not passing to

consumers all the increase in prices, maintaining its policy of affordable and

competitive prices in comparison with other industry players. Sales per sqm in

the existing stores and in the new ones have been also increasing. Total sales

per sqm are now of 35.4 thousand rands, and total sales per store of 88.5 Million

rands per year.

Comparing Shoprite’s sales evolution against its main comparables it can be

seen that the company is not having a bad performance (Figure 37). Shoprite has

been growing during the last 3 years at a faster rate than Pick n Pay and Spar,

which are the most similar ones in terms of market share with the company.

Massmart and Woolworths have been presenting an astonishing growth but they

still have a low sales base.

Our sales prospects are much in line with the store ones. Given the lower

investment from 2014 onwards the main contribution for the increase in sales in

the long-run is LfL and not the opening of new stores. We estimate that LfL will

trend and follow the path of the country’s Food CPI. Sales per sqm will constantly

12 Means that a supermarket takes 12 months in order to be considered mature and for its sales growth and path to be

normalized. 13 Like for Likes is a terminology used in the Retail Sector to denominate the growth of Sales that does not take into

account the opening of new stores, so it is the growth of an already mature and existing supermarket.

0%

5%

10%

15%

20%

Figure 35: Sales Growth Break-Down

Like for Likes New Space Contribution


0%

5%

10%

15%

20%

25%

0

20

40

60

80

100

120

20

08

20

09

20

10

20

11

20

12

20

13

20

14

F

20

15

F

20

16

F

Billion Rands

Figure 34: Sales Evolution

Sales Sales Growth


0,0%

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%Figure 36: Relation between

CPI and LFL

CPI Food CPI Food Average

LFL

Source: STATSSA Data, Analyst Estimation


PAGE 16/39

continue to increase with the effect of internal inflation and the investment in

smaller supermarkets like Usave.

Regarding margins, SA supermarkets have been presenting a stable slightly

increase in its business margins as one can see in Figure 38.

EBITDA margin has been increasing, reaching 8.1% of Sales in 2013. This fact

was due to the small decrease in the Cost of Goods Sold, the increase of Other

Operating Income within the group and the ability of the group to hold Salaries

when it is even hiring more staff. The increased of EBIT Margin takes not only all

these effects into account but also the constant decrease in depreciation from

13.9% of Sales in 2008 to 11.6% in 2013 and the smaller losses in Items of

Capital Nature. The firm’s EBITDA Margin is in very good shape comparing with

its main peers as one can see in Figures 39A and 39B. Pick n’ Pay, which is the

most comparable one, only had an EBITDA Margin of 3% in 2013. The only one

with higher margin is Woolworths given its specialization in the premium and high

worth clients segment. Furthermore it is important to mention that these players

also use leasing contracts which makes the EBITDA a measure comparable

between them. It is our belief that Shoprite’s higher margins are related with a

very efficient management of costs and the strong brand value of its

supermarkets.

Margins are too high to be maintained in the long run given the huge pressure in

wages and some external costs like electricity in SA. Nevertheless the company’s

management could increase the business margins in the last 5 years, so we

believe that it would hold them in the next 3 years. Our estimations indicate a

slow decrease in margins starting in 2017 and continuing in the following years.

PP&E and Intangible Assets, according to our estimates, represent about 14.8%

of Sales in 2013 when they only represented 10.3% in 2008. One may think that

this value is really low for a company that should have stores, warehouses, great

distribution channels in terms of PP&E and a great value in trademarks, costumer

relationship and software in terms of Intangible Assets, nevertheless it should be

0%

5%

10%

15%

20%

25%

30%

2011 2012 2013

Figure 37: Comparables Sales Growth

Shoprite Pick n Pay

Spar Massmart

Woolworths

Source: Companies Data 0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

8,0%

9,0%

0

2

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F

20

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F

20

16

F

20

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F

20

18

F

20

19

F

20

20

F

Billion Rands Figure 38: EBITDA and EBIT evolution

EBITDA

EBIT

EBITDA Margin

EBIT Margin


2%

4%

6%

8%

10%

12%

2011 2012 2013

Figure 39A: Comparables EBITDA Margin

Shoprite Pick n Pay

Spar Massmart

Woolworths

Source: Companies Data

0%2%4%6%8%

10%12%14%

Figure 39B: Comparables Margin in 2013

EBITDA Margin EBIT Margin



PAGE 17/39

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

Figure 40: Capex Break - Down

Investment in New Stores, Equipmentsand Others

Depreciation

Billion rands

-20

-15

-10

-5

0

5

10

15

20 Billion Rands

Figure 41: Working Capital break-down

Cash and Cash Equivalents

Provisions

Trade & Other Payables

Inventories

Trade & Other Receivables

Working Capital


0%

5%

10%

15%

20%

2008 2009 2010 2011 2012 2013

Figure 42: Working Capital Items in percentage of Sales


Inventories


Provisions

Cash and Cash Equivalents


taken into account that the group’s supermarkets in South Africa are based on

lease contracts, not entering in the PP&E account, being out of the Balance

Sheet. The use of these contracts give the company greater flexibility and it

spreads the payment of the investment over a larger time frame. Thus the

evolution of PP&E during the last years is not only related with the increase in the

number of supermarkets, but likewise to the investment in distribution channels

that the company is performing. During 2013 the distribution space in South

Africa increased 21% mainly in Centurion, Durban, Port Elizabeth and

Brackenfell. The investment in the company master-data and merchandizing is

also significant. In relation to CAPEX, it has been growing at an average of 20%

YoY. As one can see in Figure 40, approximately 58% is related with new

investments and 42% is depreciation of already existing investments in 2013.

This is another indicator of the firm strategy and growth profile. In the future,

given the lower investment in new stores and the one already performed in new

distribution channels, CAPEX growth will be more constant. Its break-down will

also be different, being depreciation the majority of capital expenditures in 2016

and the following years.

Considering Working Capital, a very important measure in a retailer, we can see

that Shoprite has managed to maintain it mostly negative from 2008 to 2012.

Nevertheless there is a shift in 2013, where NWC turns positive. Intuitively it is

better for a company to have a negative working Capital, since it means that you

can manage your day to day operations with others people money, this was what

happened with Shoprite until 2013. As one can see in Figures 41 and 42 the

main responsible for the change in the working capital was the relative reduction

of Trade Payables, which is the amount in debt by the company to its suppliers.

This situation is a clear response to the price pressure that occurred regarding

producers, making retailers paying quicker in order to control the prices at a

reasonable level. This is also happening with the firm’s main comparables: Pick

n’ Pay and Spar. Working Capital will remain positive in the future and it is going

to increase in absolute terms, given the increase in operations. We consider that

this situation will continue to occur in the next decade if Shoprite does not alter its

supplier base. Including more foreign suppliers would give the company the

possibility of gaining bargain power with the national ones. Nevertheless this is a

very difficult modification in the retail business and would take significant time

and effort. So we estimate that Working Capital will continue to be positive in the

years to come.

As it can be seen in Figure 43 the Cash Flow has been changing almost each

year, reflecting that the business in South Africa is not yet stabilized. Most of the

changes in the Cash Flow during the last years are related with the instability of



PAGE 18/39


Working Capital. In 2013 the Cash Flow was negative since it is reflecting the

pressure of high investment through the CAPEX and a great change from

negative to positive in Working Capital in comparison with 2012. In the future the

Cash Flow will be positive and with a constant growth, influenced by the

stabilization of CAPEX and Working Capital and the continuing growth of

Operations.

Supermarkets outside South Africa

Even though the main operations of Shoprite are in South Africa, the company is

present in many Sub-Saharan countries, especially West Coast countries, where

it tries to replicate the model and the success the firm has in the national front. In

Figure 44 one can see the presence of the company in terms of Supermarkets

outside South Africa em 2013. Namibia, Zambia, Angola and Nigeria are the

principal markets, the first three because of the already established presence and

Nigeria because of the incredible reception and growth the group is having.

Supermarket operations outside South Africa have been considered the golden

star of Shoprite giving the growth profile of the business and its potential, derived

by the competitive advantages that an African well-known company has and

specially the first mover advantage that the company has in these new markets.

The supermarket models in these countries are the same as in South Africa, only

Checkers Hyper is not replicable outside the country giving it’s developed and

target market characteristics. This Business Unit is responsible for 12.6% of the

group’s Total Sales and 11.9% of EBITDA in 2013. Looking to the numbers,

Shoprite and Usave are the main drivers of expansion, having in 2013, 92 and 56

stores respectively. Figure 45 give us the main statistics of these Operations.

Total Stores have been growing at an average of 9% YoY since 2008. The

growth in Usave shops is relatively important. Being all these countries in a

development position below South Africa but having achieved a great growth

during the last decade, the profile of stores opening is accordingly to the group

strategy. Shoprite decided to especially expand Usave that targets low income

consumers, and Shoprite stores that targets middle income customers. Checkers

expansion was smaller, opening just one store during this period. In that way the

group aims to reach not only the people that are starting to use Modern Grocery,

as it is pointing to the new middle classes that are emerging in those countries.

For that, Shoprite is increasing the perception of the brand and consumers loyalty

using platforms like social media and press. Assuming the same sizes in the type

-1

-1

0

1

1

2

2

3

3

4

Figure 43: Operational Cash Flow SA Supermarkets Billion

Rands


Figure 44: Company’s Operations Abroad



PAGE 19/39


-10%

0%

10%

20%

30%

Figure 49: Growth of Sales Break-down

Like for Likes Space Contribution

Figure 47-49 Source: Company Data, Analyst Estimation

of stores than in South Africa, total space increased approximately 34% in the

last 5 years.

We estimate that the low penetration rates of MGD, the first mover advantage of

the firm, the great adaptation of its model to these markets and the reception of

the population to the brand would allow the company to increase the number of

stores in the coming years (Figure 46). Usave and Shoprite will continue its

strategy, while Checkers can focus on the fastest growing countries like

Nigeria14

. We believe that 320 stores will be operating by 2020.

One may think that Sales had a mixed pattern in the last years as it can be seen

in Figure 47. Nevertheless this is a misleading idea. During 2010 there was a

slight decrease in sales in rands but not in local currency, where the turnover

achieved 18%. The great valuation of the rand during both 2010 and 2011 may

lead to wrong conclusions when looking at these numbers. In fact the

supermarkets operation outside South Africa has been always growing. The lack

of information regarding each country does not allow a very detail analysis, but

we know that Shoprite uses not only local suppliers in these countries but also

South African producers, therefore the price of imports giving a higher rand also

affected prices. Notwithstanding and doing an analysis in rands, it can be seen

that overall sales increase more than 124% in the last 5 years and 18.6% YoY

average, which is an impressive growth (Figure 48). The profile of this growth can

be seen in Figure 49. Space contribution is increasing every year and has a great

contribution to the growth than in the case of Supermarkets in South Africa. LfL

has been extremely positive during the last two years, being the double of the

CPI of all Sub-Saharan Africa15

(Figure 50). This means that the company is

managing to increase prices in real terms and not only nominally, besides the

influence that the rand path had. Sales per sqm reached 30.4 thousand rands in

2013 which is about 86% of the value in SA, nevertheless it has been increasing

constantly even in relation to the same measure in SA. It is important to mention

that the break-down of the Sales was performed in the same way as in the South

African case.

Sales will continue to exhibit two figures growth in the near future according to

our estimations. LfL and space contribution will both increase and will almost

have the same contribution for overall growth. We estimate that LfL will trend to

the Food CPI of the region in the long-run, while space contribution will take

14 Shoprite has been adopting social media marketing especially through Facebook in Nigeria, which increased its brand

awareness in the country. 15 Sub-Saharan CPI takes into account the CPI of all countries of Sub-Saharan Africa. This value is from the African

Outlook for 2013 of ONU.

-10%

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Billion Rands

Figure 47: Sales evolution in Supermarkets Non-SA's Sales

Total Sales Sales Growth

-20%

0%

20%

40%

2010 2011 2012 2013

Figure 48: Sales Growth in Different Currencies

Sales growth - Rand

Sales growth - Local Currency


PAGE 20/39

0

100

200

300

400

500

600

700

800

Million of Rands

CAPEX break-down

Depreciation Investments

advantage of the opening of new stores. According to our estimations Sales will

reach 32 Billion rands in 2020 with a CARG of 17.8%.

Regarding Margins, they have marginally increased in 2013, presenting a stable

path during the last 3 years (Figure 51A). EBITDA Margin was of 7% in 2013 and

EBIT Margin of 5.2%. Looking for the comparison between the margins in

international operations with the South Africa ones, it may be seen that SA

margins are presently better than the previous ones (Figure 51B). There are

several factors that explain this difference. For starting the Costs and General

expenses outside SA are greater than in SA in relation to sales, given that as we

mention most suppliers in the external front are South African. Moreover in

relation to EBIT there are losses regarding exchange rates that affect margins

calculated in rands. We estimate that margins will slowly decrease in 2016 and

the coming years. As in the case of SA, there is a lot of pressure regarding labour

costs and electricity. Even thinking that with local suppliers COGS may decrease,

we must take into consideration the increase in competition that will occur in the

long-run and the superior maturity of these markets.

PP&E and Intangible Assets, according to our estimates, represent about 15% of

Sales in 2013 when they only represented 8.6% in 2008. As in the South African

case most of the International Stores are leased, nevertheless the group in

Angola and Nigeria owned its stores, which is a factor of why PP&E and

Intangibles has been increasing and is relatively bigger than in SA. CAPEX has

been growing at an average rate of 53% YoY (look to Figure 52). The

Investment part of CAPEX accounts for 70% of total CAPEX in 2013. This is a

higher value than in the case of SA, indicating the strategy of the group to invest

abroad. We estimate CAPEX to increase around 15% a year in the future except

in 2014, when it will decrease because of the reduction in new openings of Usave

supermarkets. Unlike SA, the break-down of the CAPEX will be almost equal

between new investments and depreciation given the estimated opening of new

stores in these geographies.

The Working Capital of the international supermarkets has trailed the same path

than the ones at home, evolving from a negative situation to a positive one

-5%

0%

5%

10%

15%

20%

2011 2012 2013 2014F 2015F 2016F

Figure 50: Relation between SSA CPI and LFL

CPI LFL


0

1

2

3

0%

5%

10%

Billion of Rands

Figure 51A: EBITDA and EBIT evolution

EBITDA EBIT EBITDA Margin EBIT Margin


3%

4%

5%

6%

7%

8%

9%

20

09

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Figure 51B: Comparing Margins

SA EBITDA Margin

SA EBIT Margin

Non-SA EBITDAMargin

Non-SA EBIT Margin


0,0

0,1

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0,4

0,5

0,6

0,7

0,8Billion rands

Figure 52: Capex break-down

Investments in New Stores, Equipmentand Other

Depreciation



PAGE 21/39

(Figure 53). Working Capital in 2013 was of approximately 320 thousand rands.

This was one more time caused by the decrease of Trade Payables in relation to

Sales, which was a strategy used by the firm to control the pressure in producers

prices. We must take into account that most of the goods sold in foreign

supermarkets are supplied by domestic producers, so the same effect that

affected the national supermarkets, affected foreign operations. We estimate that

Working Capital will continue to be positive in the following years and even higher

in absolute value given the huge increases of the operations abroad. There could

be some attempt of start using more local suppliers than national ones,

nevertheless suppliers are still very unprofessional and with a low scale in those

countries, making it difficult for a retail company to heavily depend on them.

Lastly the Operational Cash Flow of the business unit has been very instable

during the last years and was in the red in 2013 as it can be seen in Figure 54.

This value represents a switch from positive to negative in relation to 2012, and

as in the case of the national supermarkets reflects the switch from negative to

positive in Working Capital and the acceleration of investment seen during the

year through a higher Capital Expenditure. Nevertheless, we estimate a positive

Cash Flow from 2014 onwards, given the stabilization of CAPEX and the lower

change in Working Capital.

Furniture

In addition to the Supermarkets Business in South Africa and in other SSA

countries, the firm has a Furniture section that includes three brands: OK

Furniture, OK Power Express and House&Home. This area of the company was

responsible for 3.8% of the Sales and 2.6% of the EBITDA of the group. Besides

the opening of new stores and the growth of sales, this part of the group has

been losing relative importance for Shoprite. Figure 55 presents the unit most

important statistics.

OK Furniture is focused on selling cheap quality Furniture and electrical

applicants and currently has 268 stores; of these 233 are in South Africa and 35

in other SSA Countries. OK Power Express is specialized in home entertainment

and carpeting goods, being present in very dense urban areas, currently it has 19

stores, of which 18 are in South Africa and 1 in Lesotho. And finally,

House&Home is a store focused on quality and sells a large number of furniture

and home entertainment products; it has 49 stores open, including 3 abroad.

Therefore the Furniture business has 336 stores in 2013. From 2008 until today,

100 new stores opened, presenting a YoY growth of 7.3% on average. We

-4.000

-2.000

0

2.000

4.000

Million of Rands

Figure 53: Working Capital Break-down

Cash and Cash Equivalents Operational

Provisions


Inventories


Working Capital


-400

-200

0

200

400

600

20

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Figure 54: Operational Cash Flow Non-SA Supermarkets




PAGE 22/39

estimate each one to have an average of 247sqm. Space has increase in the

same proportion than the number of stores through the last 5 years. It is

expected an opening of 25 new stores in 2014 and we estimate that from than

onwards an additional 10 net new stores per year given the opening profile of the

previous years.

Sales have been growing at an average YoY rate of 9.7%, reaching 3.56 Billion

rands in 2013 (Figure 56). Nevertheless great part of this growth came from the

opening of new stores than of Like for Likes. LfL is presenting very low values

that are cause by the continuing pressure of household expenditure in durable

goods in South Africa, influencing the sales of home entertainment and furniture.

This underperformance affected the Sales per sqm, which decrease last year and

only had an average YoY growth of 2.1% during the last 4 years. Given this

situation that affects LfL together with the decrease in new stores, we believe that

the future evolution of the business sales is going to be through a lot of pressure.

In relation to the business Margins, as we can see in the Figure 57, both the

EBITDA and EBIT has been decreasing, being of 5% and 3.6% respectively in

2013. Pressure from cogs and general costs like electricity and labour costs were

the main responsible for the shrink of Margins. This pressure is going to continue

in the near future according to our estimations. We believe that EBITDA Margin is

going to stabilized at 5%. EBIT is particularly worrying since depreciation is

growing at a faster rate than EBITDA.

In relation to PP&E and Intangibles they have been following the same tendency

than sales, representing 11.9% of sales in 2013. Despite the management

argument that it is performing an aggressive investment in the segment, the

reality is that the percentage of new investments has been decreasing,

representing only 38% of Total CAPEX in 2013 and even declining in absolute

terms from 2012 to 2013. Estimations give us the same proportion of CAPEX

coming from investments and from depreciation (Figure 58). Working Capital in

the Furniture sector, according to our estimates, has been following the same

path than the rest of the group, with a shift to positive in 2013 caused by a faster

payment to suppliers. As in the rest of the group we believe that this value will

continue to be positive in the future.

Therefore the Operational Cash Flow of this segment, pressure by the decline in

margins and the change in the working capital profile, was negative in 2013. For

the future we estimate a stabilization of a positive Operational Cash Flow.

-10%

-5%

0%

5%

10%

15%

20%Figure 56: Evolution of Sales

Sales Growth

Like For Likes

New Space Contribution


0%

2%

4%

6%

8%

10%

Figure 57: Margins evolution Furniture sector

EBITDA Margin EBIT Margin


020406080

100120140

Mill

ion

of

Ran

ds

Figure 58: CAPEX Break-Down



PAGE 23/39

Other Operating Segments

And finally there are other operating segments within the group that are neither

supermarkets or related with furniture. These include several and varied

businesses: Hungry Lion: a fast - food Chain with 150 restaurants; several

franchisee stores: OK Foods, OK Grocer, OK Minimark, OK Value, Megasave,

Sentra, Friendly Stores, OK Enjoy, Friendly Liquor that accounts for 398 stores;

Liquor Stores: Shoprite Liquor Shop ad Checkers Liquor Shop, which sum up to

195 stores; Pharmacies: Shoprite MediRite and Checkers MediRite, which have

a total of 146 stores. Key indicators of these operations can be seen in Figure 59.

All these different businesses accounted for 7% of the group’s total Sales and

2.5% of EBITDA. Total stores reached 889 in 2013 when in 2009 we only had

390. One should look carefully to these numbers because at the time the group

Liquor Stores and Pharmacies where not counted as a store. Nevertheless

franchisee stores increased from 252 in 2008 to 398 in 2013. This growth is

especially related with the creation of the OK Enjoy and Friendly Stores brands.

The group desires to create another 17 stores in 2014.

In relation to sales they have been growing at an average rate of 23.6% during

the last 4 years, mainly due to the increase of the number of stores and

businesses and not from Like for Likes (Figure 60). According to our estimations,

this growth profile will change to the opposite one from 2015 forwards. Sales

growth will stabilize around 4% a year. Margins are shrinking since 2010, being

the EBITDA Margin of 2.6% and EBIT Margin of 2.2%. This was due to the great

increase of costs; nevertheless EBIT Margin has been able to decrease less due

to the smaller evolution of Depreciation in relation to sales. We consider that

these margins are going to be maintained in the future.

PP&E and Intangibles represent 2.8% of sales in 2013. In 2011 they have

represented around 4.3% which was related with the accounting of the Liquor

and Pharmacies Business that year. Without that effect PP&E and Intangibles

would have remained stable and around 3%. CAPEX was equally divided

between investments and depreciation in 2013 (Figure 61). From 2014 forward,

depreciation will be the larger part of CAPEX. Working Capital of these

operations has followed the same path and tendency than the rest of the group,

being positive in the previous fiscal year and will continue to be in the

forthcoming years. Operational Cash Flow was also in the red; nevertheless with

the stabilization of CAPEX and Working Capital, it will be positive from 2014

ahead.


-50

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Figure 61: Capex Break-Down


-20%

-10%

0%

10%

20%

30%

40%

Figure 60: Sales Evolution in Other Operating Segments

Sales Growth

Like For Likes

New Space Contribution



PAGE 24/39

Other Important Items Description and

Forecast

There are some matters than one should analyse not at each business unit but at

a group level in order to perform a better investigation and scrutiny. These

include Financial Debt and Excess Cash.

Financial Debt

Shoprite’s interest bearing debt size radically changed in 2010 (Figure 62).

Before that year the firm only had a bank loan with the First National Bank of

Namibia in order to finance its operations in Namibia. To better finance its

operations activities and the store expansion plan, the company decided to issue

4.5 Million rands in convertible bonds that year which it will expire in 2015. This

new debt profile significantly changed financial ratios. In 2013 D/E was of 27.1%,

with the company moving away from its national comparables median of 8.6%.

We estimate that in the long run, D/E will tend for the median value of the

national comparables of Shoprite (Figure 63) and for that to happen, Interest

Bearing Debt will remain almost constant during the next decade. Given the

cessation of the convertible bonds in 2015, we have assumed that this debt will

be roll-over in the expiration date. It is important to refer that the D/E ratio in

South Africa is very low in comparison with same industry companies in

developed countries (world comparables used for the calculation of the firm’s

beta have a median D/E of 33%). This is related with the fact that SA is an

emerging economy, not being a mature market in relation to financial loans and

capital markets financing.

Excess Cash

One of the great mysteries of the company is its level of excess cash in balance

(see Figure 64). Considering that a retail company needs operational cash

equivalent to 2% of its Total Sales16

, Shoprite has more cash than it needs to

operate. This money can be used in several ways: to repay financial debt,

continue its investment strategy or for an M&A operation outside the African

continent. It’s our belief that this money should be used to continue its expansion

in SA and in the SSA market, since it’s in these markets that the company has a

16 According to the Mckinsey Valuation Book.


0%

5%

10%

15%

20%

25%

30%

35%

Figure 63: D/E Evolution

D/E Long-term D/E


0%

2%

4%

6%

8%

10%

12%

2008 2009 2010 2011 2012 2013

Figure 64: Cash and Cash Equivalents in % of Sales

Total Cash Operational Cash



PAGE 25/39

competitive advantage and can replicate its South African supermarket model.

Nevertheless management decision is very blur and uncertainty, making the use

of this money one of the greatest risks of Shoprite.

Sum-of-parts Valuation

In order to performed a valuation a Sum-of-Parts approach was decided taking

into account a Discounted Cash Flow Model (DCF Model) for each business unit

of the company and some variables at a group level in a base case scenario

(90%) and in a pessimistic scenario (10%). Therefore a DCF model was done

with our forecasts already mentioned for each of the 4 business units:

Supermarkets SA, Supermarkets Non-SA, Furniture and Other Operating

Segments. Adding them and taking into account some tax adjustments at a group

level and the Non-Operational Cash Flow we arrived at the Enterprise Value. The

Equity value of the firm is then computed taking into account the Interest Bearing

Debt (IBD), the Excess Cash and the Non-controlling Interests. We have used an

explicit period until 2020 for all BUs and then we have computed a Terminal

Value for each one.

WACC

In order to correctly discount the Firm’s Cash Flow one has to compute a

Weighted Average Cost of Capital17

. In order to correctly estimate this discount

rate, one must calculate the Cost of Equity, Cost of Debt and the long-term

capital structure of the firm properly. Since Shoprite has a great variety of

businesses in several geographies, one should not compute the WACC for the

entire group directly, but should calculate a WACC for every Business Unit in

order to better discount every BU’s Cash Flow. So we computed 4 different

WACCs for: Supermarkets SA, Supermarkets Non-SA, Furniture and Other

Operating Segments. A corporate tax rate of 28%18

was used in the calculations.

Cost of Equity: Since we are valuing a company in an emerging market, our

approach differs from the normal method of calculation for a firm in a developed

country, nevertheless we have used the Capital Asset Pricing Model adjusting

some variables and adding a Country Risk Premium:

17 The WACC represents the rate of return that investors presumes to receive when investing in the company, it can be

also seen as the opportunity cost of investors to invest or finance the company with its funds, taking into account the market and idiosyncratic risks associated with it and the type of investment, equity or debt. 18 Source: KPMG world corporate taxes table.

Enterprise Value

Supermarkets Non-

SA

Furniture


Supermarkets in SA

Figure 65: Valuation Break-Down

A different WACC was computed for each different Business Unit


PAGE 26/39

The risk free rate does not come from the Bond Market of South Africa since

South African Government Bonds are not a risk-free security. So we have used

the 10 year US Government Bond and have adjusted it to inflation taking into

account the long-term inflation of US and South Africa. For the Foreign

Operations, Supermarkets Non-SA, the inflation differential took in consideration

the long-term inflation for the Sub-Saharan region and not the South African one.

The Market Risk Premium used was 5.5% for historical reasons in developed and

mature markets plus a country risk premium. Nevertheless a sector beta was

computed in order to transfer the MRP of each business to the company. An

unlevered beta was computed taking into account the average of the unlevered

betas of the main comparables of each business, which was than relevered with

the South African Corporate Tax Rate and the firm’s target D/E. In the case of

Supermarkets SA, Supermarkets Non-SA and Other Operating Segments, it was

used comparables in the Food Retail business worldwide; for Furniture, it was

used comparables in the Equipment and Durable goods Retail industry. Finally,

since the firm operates only in emerging countries, a country risk premium was

computed. To simplify the process the country risk premium of South Africa was

assumed for all the business units. This premium was calculated through the

difference in the yield between the US and the SA international bond, which is

denominated in the same currency (dollars) and that it is traded worldwide. In

order to adjust this bond premium for a stock, we have performed a volatility

differential between the South African Bond and Stock Market (JSE) with monthly

data from the previous 4 years. Figures 66 to 69 summarize the computation of

the cost of equity for each Business Unit.

Cost of Debt: The computation of the Cost of Debt also differs from normal

method and approaches, as the company is not rated from one of the main rating

companies in the world and it does not have liquid bonds to use as a proxy. Also

the company does not segregate its Debt across its operations, so only one cost

of debt was calculated and assumed for all business units.

Since Shoprite is a very healthy company, we have assumed the 10-year

government bond yield of the South African Government as a proxy for the yield

of a fictitious bond of the firm. We have also assumed that the company has the

same rate of the Republic, being Baa19

. With this rating we could estimate the

probability of default of the company and its recovery rate, achieving a cost of

debt of 8.11% (Figure 70).

19 According to Moody’s.

Figure 67-71 Source: Company Data, Bloomberg, Analyst Estimation


PAGE 27/39

Capital Structure: Finally to compute the WACC, one should forecast the long-

term Capital Structure of the Firm (Debt to Equity Ratio). Shoprite does not have

an official Debt to Equity Ratio target, so we have assumed that the capital

structure of the firm was going to be equal to its national peers in the long-run.

Taking the median of Pick n’ Pay, Spar, Massmart and Woolworths we get a long

term debt to equity of 8.6%, which is consistent with the debt to equity the

company tends in the forecast balance sheet.

Terminal Value

A terminal value was computed for each Business unit, which represents the

future cash flows of each one after 2020. In order to compute it we have to

assume a growth rate (G). In order to know which best G described the

company’s growth profile in the future a set of variables had to be analysed and

taken into consideration.

First of all the Reinvestment rate of Shoprite will stabilize in 2020 around 25%

according to our estimations and its ROIC will be of 25.7% (see Figure 72). It is

important to mention that this ROIC is consistent with the company’s main

comparables and the industry average (Figure 73). The ability to have a high

ROIC is related with the still great capacity of the company to grow at home and

abroad. Moreover the fact that most of the stores in the industry are leased and

not owned decreases significantly the amount of invested capital needed to

generate cash, increasing ROIC.

This would give us a group growth of nearly 6.5%. Moreover one must think in

the evolution of the markets where the company is present and look at its CPI.

We have assumed a CPI of 4.0% for SA and of 6% to SSA. We believe that

Shoprite will grow in real terms so a growth rate has to be bigger than 4.0% and

6% to SA and SSA operations respectively. Moreover we believe in a possible

great growth in the foreign operations, where the company is competitive and still

has a great possibility of evolution and improvement. Assessing all the things

mention above we estimated the growth rates present in Figure 74. This gives us

a group’s growth rate of 6.1% which is below 6.5% for conservative reasons.

Price Target

Knowing the Enterprise Value, the Equity Value was computed taking into

account the Interest Bearing Debt, Excess Cash and Non-controlling interest of

the firm in 2013. It is important to mention that the marker value of IBD was

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

20

09

20

10

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F

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F

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F

20

17

F

20

18

F

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F

20

20

F

Figure 72: Variables affecting Growth

Reinvestment Rate ROIC


0%

10%

20%

30%

40%

50%

60%

70%

2011 2012 2013

Figure 73: Industry ROIC Evolution

Shoprite Pick n Pay

Spar Massmart

Woolworths




PAGE 28/39

assumed to be equal to its book value. Dividing the Equity Value for the number

of total shares of the company we finally arrive at a price target of 145.3 rands

per share for June 2013 in the base scenario. This value is equivalent with a

recommendation price of 167.1 rands for December 2014 (capitalization through

the WACC) in the base scenario. Nevertheless we must take into account our

pessimistic scenario, described below, in order to know the correct price. Taking

a probability average of 90:10 we get a price of 158.6 rands per share.

When looking to these numbers, it is important to highlight some aspects. Firstly

the supermarket operation in SA is the most important component for the firm’s

value (Figure 77). It represents approximately 88% of the future cash flows of the

firm. Foreign operations are responsible for 14% which is a higher value than its

current weight in sales or margins of the company, showing the growing

importance of the segment in the future. It can be also seen the irrelevance of the

company’s Furniture and Other Operating Segments operations in the next

years. Furthermore Non-Operational Assets and Liabilities are creating a

negative Cash Flow, nevertheless these include mostly deferred taxes of all

group’s operations and are not a major threat. Moreover the weight in the

Enterprise Value of the Terminal Value is very high, indicating that most of the

cash flow generation ability is present in the long and not in the short run. Other

important indicator is that Net Debt is negative, this means that Excess Cash is

higher that IBD, which is a good indicator of financial health.

Comparing this share value with the close value of 04.01.2014, which was of

163.6 rands, it can be concluded that the company is trading at a premium of

3.05%.

Figure 75: Sum-of-Parts Valuation Base Case Scenario

Sum-of-Parts 2014F 2015F 2016F 2017F 2018F 2019F 2020F TV

DCF Supermarkets SA 1,889,779 1,848,032 2,444,387 2,560,602 2,518,905 2,399,301 2,276,301 52,451,389

DCF Supermarkets Non-SA 209,354 257,716 274,553 274,163 266,946 253,223 233,766 8,174,123

DCF Furniture 39,362 35,670 29,818 22,531 15,660 9,197 3,133 38,225

DCF Other Operating Segments 82,194 84,291 81,256 78,316 75,484 71,787 68,163 1,460,154

DCF Other Group -43,303 -93,033 -75,488 -64,182 -56,169 -50,877 -46,066 -2,419,176

Group DCF 2,177,386 2,132,675 2,754,526 2,871,431 2,820,827 2682631 2,535,297 59,704,715

87,9% 13,7% 0,1% 2,4%

4,1%

100,0%

Supermarkets SA Supermarkets Non-SA Furniture Other OperatingSegments

Non-Operational EV

Figure 77: Enterprise Value Decompositon - Base Case

Taking into account the base and the pessimistic scenario we estimate a price target of 158.6 rands


PAGE 29/39

Sensitivity Analysis

In order to measure the sensitivity of the price to the WACC and the growth rate,

which are two very significant variables, two sensitivity analyses were computed.

As we can see through the tables presented above, the equity value per share of

the company is very sensitive to these variables. Obviously, comparing each

other, the company’s value is much more sensible to the variation of the WACC

and the growth rate in the South African market, since it is where the company

has its major operations.

Looking to the numbers, it is possible to determine that with a simple decrease of

the WACC by 1% in South Africa our recommendation would change from SELL

to BUY. The same would happen with an increase of the growth rate by 1%. In

the case of the Operations outside South Africa, only a decrease of the WACC by

1% together with an increase of the growth rate by 0.5% would change our

recommendation. This analysis let us conclude that a correct computation of the

WACC and the growth rate is essential to truly capture the value of the firm.

Scenario Analysis

When thinking about a pessimist scenario one must consider about risks. And

when referring to risks in South Africa one has to talk about ethnic groups and its

implications in the social atmosphere of the country.

In this pessimistic case scenario we have assumed a radicalization from President

Zuma and its government following the death of Mandela. Afrikaners and British

descents are persecuted and the government does nothing to stop it. Following

this climate of social tension aggravation, a mass emigration of upper and middle

classes occurs to Western countries in the following months, including key

employees of Shoprite.

The pessimistic scenario represents the major risk of South Africa – Social tensions between different ethnic groups


PAGE 30/39

This scenario is dramatic for the company operations. Its upper and middle

classes markets disappear, dramatically reducing sales of Checkers and Shoprite

supermarkets. Total Sales are reduced in 50%. Moreover the run of key top

employees is reflected in the lack of control and adaptation of costs to this new

reality and in the freeze of the expansion plans both in SA and in other SSA

countries for two years. The low value of the debt in the firm’s balance sheet is

crucial to avoid financial problems.

With this scenario the enterprise value is reduce to 39,832.70 Million rands (a

decrease of more than 52%). The Equity value per share decreases to 81.9 rands.

Multiples Analysis

In order to complement the valuation of the company, a Multiples analysis was

performed. The world comparables of the company that were used to accomplish

the beta sector unlevered were used and also the South African industry peers.

EV/SALES and EV/EBITDA were the multiples used. In order to have a better

analysis, estimations on the evolution of the multiples are also presented.

As it can be seen Shoprite is trading at a premium when compared to developed

markets. In 2013 EV/SALES and EV/EBITDA were trading at a premium of 32%

and 17% respectively. This premium reflects the different between the industry in

a developed and an emerging market. Looking to the multiples of other South

African retailers, it can be seen that they are all trading at a premium comparing

with more mature markets. This is significantly influenced by the expectation of

investors in the growth opportunities that exist in the country and in the continent.

Basically the market is incorporating the future capacity of generating cash flow

in the enterprise value of these companies.

In relation to its South African comparables the company is also trading at a

premium of 14% and 13%, nevertheless this is a much smaller premium than in

2012 and 2011. This reflects the confidence in Shoprite’s strategy and

management and the appetite of investors in a geographically diversified

company in South Saharan Africa.

Figure 80: World Food Retail Multiples

EV/SALES EV/EBITDA

Name 2011 2012 2013F 2014F 2011 2012 2013F 2014F

Mature Markets 0,5x 0,5x 0,6x 0,5x 7,4x 7,9x 8,0x 7,4x

Emerging Markets 0,7x 0,9x 0,9x 0,8x 11,8x 14,6x 14,1x 12,9x

South African Market 0,5x 0,7x 0,7x 0,6x 10,6x 12,5x 11,3x 10,1x

Shoprite 0,9x 1,0x 0,7x 0,6x 13,1x 14,2x 9,9x 8,6x

Shoprite is trading at a premium compared with mature, emerging and national industry comparables’ average


PAGE 31/39

SWOT Analysis

To summarize the most important characteristics of Shoprite, we have

performed a SWOT (Strengths, Weaknesses, Opportunities and Threats)

analysis.

Strengths

Sector’s Leader in the South African market – 32.5% Market Share

in 2012

Higher Margins than its competitors – 8.1% EBITDA Margin

against 3% of Pick n’ Pay (main comparable)

Growth profile in SA and abroad – 9.8% and 27.9% of Sales

growth in 2013 respectively

Segmentation of all type of customers, from the lowest to the

highest LSM Category, avoiding cannibalization

Strong Brand awareness in SA and all SSA

Low Financial Debt and a high value of Excess Cash – D/E of

27.1% in 2013)

Efficient and competent Management that are within the company

for years

Weaknesses Great dependence of the Internal market – 86% of Sales are in

SA

Low bargain power with suppliers

High dependence on leasing contracts which are basically

hidden debt – no information about the amounts

Higher competition from a restructured Pick n’ Pay and a very

efficient Woolworth

Pressure in Labor costs coming from an inefficient labor market

and wrong public policies – strong unions and high strike levels

Opportunities First mover advantage in high growth markets with a still very low

penetration rate – Especially West Coast Sub-Saharan African

countries like Nigeria

Ability to introduce foreign suppliers in the company’s supply chain

Decrease in the corporate tax rate in SA – 28% in 2013

Enough distribution channels to enter into other types of Retail like

Clothes – Strategy already done by Woolworths

Threats

Macroeconomic outlook is negative in the short-term for SA –

economic growth slowdown to 2.8% in 2013

Substitution of the management given its average old age –

Wiese and Basson have 71 and 67 years old respectively

Greater pressure from suppliers, increasing PPI and

pressuring COGS and Working Capital

The associate risks of having a business in Africa, lack of solid

institutions and stability in some countries may threat the

company’s cash flow in the long-run


PAGE 32/39

Appendix

Appendix 1 - Shoprite Consolidated Balance Sheet (Thousands of Rands)

2011 2012 2013 2014F 2015F 2016F 2017F

Property, Equipment & Intangible Assets 8,887,854 10,666,741 12,883,388 14,578,464 16,646,994 18,205,896 19,624,327

Trade & Other Receivables 2,305,924 2,721,934 3,457,018 3,936,174 4,505,514 4,927,978 5,313,395

Inventories 7,055,867 8,680,109 10,317,417 11,745,536 13,440,494 14,703,631 15,868,106

Cash and Cash Equivalents Operational 1,445,956 1,654,612 1,854,946 2,111,705 2,416,438 2,642820 2,849,537

Trade & Other Payables 10,071,198 12,733,582 12,723,408 14,484,560 16,574,777 18,132,474 19,568,502

Total Provisions 443,317 477,425 387,394 441,088 504,889 552,230 595,420

Net Working Capital 293,232 -154,352 2,518,579 2,867,767 3,282,779 3,589,725 3,867,117

Other Operating Assets 47,789 91,763 186749 212,633 243389 266211 287031

Other Operating Liabilities 920,103 671,231 763937 869,822 995635 1088992 1174162

Other Operating Assets - Other Operating Liabilities -872,314 -579,468 -577188 -657,189 -752246 -822781 -887131

Operating Invested Capital 8,308,772 9,932,921 14,824,779 16,789,043 19,177,528 20,972,839 22,604,312

Available-for-sale Investments 59,656 0 0 0 0 0 0

Assets held for sale 58,659 391,993 57,071 0 0 0 0

Deferred Income Tax Assets 326,457 413,645 425,381 485,157 558,919 609,850 648,376

Non-Operational Assets 444,772 805,638 482,452 485,157 558,919 609,850 648,376

Deferred Income Tax Liabilities 25,377 152,085 197,135 224,837 259,021 282,624 300,478

Non-Operational Liabilities 25,377 152,085 197,135 224,837 259,021 282,624 300,478

Non-Operating Invested Capital 419,395 653,553 285,317 260,320 299,898 327,226 347,898

Total Invested Capital 8,728,167 10,586,474 15,110,096 17,049,362 19,477,426 21,300,066 22,952,210

Share Capital 616,583 647,314 647,328 647,328 647,328 647,328 647,328

Share Premium 293,072 3,672,069 3,672,069 3,672,069 3,672,069 3,672,069 3,672,069

Own Shares -337,406 -320,146 -320,146 -320,146 -320,146 -320,146 -320,146

Total Retained Earnings 6,512,451 8,745,805 11,184,825 13,319,505 15,548,050 17,707,661 19,728,662

Capital and Shares 7,084,700 12,745,042 15,184,076 17,318,756 19,547,301 21,706,912 23,727,913

Non-Controlling Interest 58,750 62,675 68,194 68,194 68,194 68,194 68,194

Total Equity 7,143,450 12,807,717 15,252,270 17,386,950 19,615,495 21,775,106 23,796,107

Total Borrowings 49,755 4,035,434 4,151,126 3,969,713 4,169,231 3,832,260 3463,404

Net Financial Instruments Position 3,606 231 -23576 -23576 -23576 -23576 -23576

Bank Overdrafts 2,042,100 22,858 7,567 0 0 0 0

Interest Bearing Debt 2,095,461 4,058,523 4,135,117 3,946,137 4,145,655 3,808,684 3,439,828

Shareholders for Dividends 4,851 4,955 6,434 0 0 0 0

Excess Cash and Cash Equivalents -515,595 -6,284,721 -4,283,725 -4,283,725 -4,283,725 -4,283,725 -4,283,725

Total Funds 8,728,167 10,586,474 15,110,096 17,049,362 19,477,426 21,300,066 22,952,210


PAGE 33/39

Appendix 2 - Income Statement of the Group and its different Business Units (Thousands of Rands)

Group 2011 2012 2013 2014 2015 2016 2017

Sale of Merchandise 72,297,777 82,730,587 92,747,314 923,150 975,512 1,028,665 1,082,261

EBITDA 2,039 2,039 2,041 176,000 181,500 187,000 192,500

Depreciation & Amortization -933,592 -1090,295 -1,350,915 -1,685,780 -1,924,974 -2,105,238 -2,269,258

Trading Profit 3,986,697 4,665,134 5,394,229 6,168,315 7,098,022 7,739,883 8,225,130

Exchange Rate Losses & Items of Capital Nature -78,979 -102,030 -35,193 -5,620,981 -56,649,.84 -5,686,986 -56,759

Operating Profit EBIT 3,907,718 4,563,104 5,359,036 6,112,106 7,041,372 7,683,013 8,168,370

Interest Received 94,614 142,166 259,050 259,050 259,050 259,050 259,050

Finance Costs -125,964 -223,563 -429,185 -441,489 -422,195 -443,414 -407,576

Share of Profit of Associate 0 0 4,952 0 0 0 0

Pre-Tax Profit (EBT) 3,876,368 4,481,707 5,193,853 5,929,666 6,878,227 7,498,649 8,019,843

Income Tax Expense -1,346,826 -1,438,889 -1,578,545 -1,660,307 -1,925,904 -2,099,622 -2,245,556

Net Income 2,529,542 3,042,818 3,615,308 4,269,360 4,952,323 5,399,027 5,774,287

Dividends 1,189,411 1,421,598 1,708,496 2,134,680 2,723,778 3,239,416 3,753,286

Supermarkets SA

Sales 57,213,793 64,584,215 70,925,545 80,150,132 91,608,218 99,278,614 105,600,074

Sales Growth 7.2% 12.9% 9.8% 13.0% 14.3% 8.4% 6.4%

Like For Likes 2.0% 8.3% 4.9% 4.2% 4.2% 4.2% 4.0%

New Space Contribution 5.2% 4.6% 5.0% 8.8% 10.1% 4.1% 2.4%

COGS & General Expenses 53,080,222 59,703,883 65,205,872 73,686,557 84,220,625 91,272,455 97,152,068

COGS & General Expenses Growth 6.5% 12.5% 9.2% 13.0% 14.3% 8.4% 6.4%

% of Sales 92.8% 92.4% 91.9% 91.9% 91.9% 91.9% 92.0%

EBITDA 4,133,571 4,880,332 5,719,673 6,463,575 7,387,593 8,006,159 8,448,006

EBITDA Margin 7.2% 7.6% 8.1% 8.1% 8.1% 8.1% 8.0%

Depreciation 831,309 992,998 1,216,234 1,374,418 1,570,901 1,702,434 1,810,834

Trading Profit 3,302,262 3,887,334 4,503,439 5,089,157 5,816,692 6,303,726 6,637,171

Trading Profit Margin 5.8% 6.0% 6.3% 6.3% 6.3% 6.3% 6.3%

EBIT 3,236,842 3,802,315 4,474,058 5,041,756 5,769,291 6,256,325 6,589,771

EBIT Margin 5.7% 5.9% 6.3% 6.3% 6.3% 6.3% 6.2%

Supermarkets Non-SA

Sales 7,316,698 9,174,147 11,729,237 14,571,700 17,747,063 20,886,086 24,388,349

Sales Growth 2.1% 25.4% 27.9% 24.2% 21.8% 17.7% 16.8%

Like For Likes -1.9% 18.4% 16.1% 12.7% 9.2% 6.0% 6.0%




% of Sales 92.8% 93.3% 93.0% 93.0% 93.0% 93.2% 93.4%

EBITDA 526,798 610,827 816,160 1,0139,48 1,234,901 1,420,254 1,609,631

EBITDA Margin 7.2% 6.7% 7.0% 7.0% 7.0% 6.8% 6.6%

Depreciation 111,274 144,550 203,532 234,074 269,200 309,597 356,056

Trading Profit 415,524 466,277 612628 779873.5 965700.1 1,110,656 1,253,574



PAGE 34/39

Appendix 3 - Supermarket Sales Analysis (Thousands of Rands)

2008 2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F

Supermarkets SA

Sales per Store 70,686 78,501 81,601 81,734 86,807 88,546 88,957 96,735 101,512 1057,06

Sales per Sqm 24.08 28.31 30.78 31.59 34.32 35.44 35.60 38.88 41.05 42.97

Supermarkets Non-SA

Sales per Store 52,288 71,717 66,333 63,075 68,464 76,662 84,229 91,011 94,937 99,544

Sales per Sqm 17.14 23.37 21.92 21.62 24.54 28.67 31.88 34.88 37.14 39.60

EBIT 407,292 456,079 608,631 773,759 959,585 1,104,542 1,247,459

EBIT Margin 5.6% 5.0% 5.2% 5.3% 5.4% 5.3% 5.1%

Furniture

Sales 3,059,648 3,400,185 3,561,555 3,889,298 4,189,275 4,378,637 4,570,056

Sales Growth 1.9% 11.1% 4.7% 9.2% 7.7% 4.5% 4.4%

Like For Likes -4.3% 4.6% -0.7% 1.9% 1.8% 1.7% 1.7%




% of Sales 94.4% 93.5% 95.0% 95.0% 95.0% 95.0% 95.0%

EBITDA 172,509 219,644 179,493 196,010 211,128 220,672 230,319

EBITDA Margin 5.6% 6.5% 5.0% 5.0% 5.0% 5.0% 5.0%

Depreciation 41,025 44,152 48,841 54,633 61,112 68,360 76,467

Trading Profit 131,484 175,492 130,652 141,377 150,016 152,312 153,852


EBIT 128,879 171,654 129,800 140,525 149,164 151,460 153,000

EBIT Margin 4.2% 5.0% 3.6% 3.6% 3.6% 3.5% 3.3%

Other Operational Segments

Sales 4,707,638 5,572,040 6,530,977 6,991,329 7,332,534 7,667,922 7,993,013

Sales Growth 21.7% 18.4% 17.2% 7.0% 4.9% 4.6% 4.2%

Like For Likes -8.8% 1.4% -3.1% 3.2% 3.0% 2.9% 2.8%




% of Sales 96.6% 97.2% 97.4% 97.4% 97.4% 97.4% 97.4%

EBITDA 160,261 154,437 168,673 180,562 189,375 198,036 206,432

EBITDA Margin 3.4% 2.8% 2.6% 2.6% 2.6% 2.6% 2.6%

Depreciation 22,834 18,406 21,163 22,655 23,760 24,847 25,901

Trading Profit 137,427 136,031 147,510 157,908 165,614 173,189 180,532


EBIT 134,704 133,056 146,548 156,065 163,332 170,687 178,139

EBIT Margin 2.9% 2.4% 2.2% 2.2% 2.2% 2.2% 2.2%


PAGE 35/39

Appendix 4 - Decomposition of the Cash Flow Statement of the Firm (Thousands of Rands)

Supermarkets SA 2011 2012 2013 2014F 2015F 2016F 2017F

NOPLAT 2,118,513 2,488,615 3,221,322 3,630,065 4,153,890 4,504,554 4,744,635

Depreciation & Amortization 831,309 992,998 1,216,234 1,374,418 1,570,901 1,702,434 1,810,834

Capex 2,082,468 2,477,668 2,908,178 2,742,374 3,270,074 2,839,912 2,748,273

Changes in Net Working Capital 1,054,798 -347,385 2,040,009 250,876 311,620 208,608 170,018

Other Operational Cash Flow 303,583 -237,951 -10,980 57,407 71,306 47,735 39,340

Operational Free Cash Flow 116,140 1,113,378 -521,612 2,068,639 2,214,404 3,206,203 3,676,519

Supermarkets Non-SA

NOPLAT 266,573 298,504 438,214 557,107 690,902 795,270 898,171

Depreciation & Amortization 111,274 144,550 203,532 234,075 269,201 309,598 356,057

Capex 403,858 446,678 678,873 498,204 572,966 658,948 757,831

Changes in Net Working Capital 135,742 -48,528 336,513 77,103 86,133 84,221 93,478

Other Operational Cash Flow 36,365 -24,022 8,735 17,689 19,761 19,535 21,795

Operational Free Cash Flow -125,388 20,883 -364,904 233,563 320,764 381,234 424,714

Furniture

NOPLAT 84,351 112,347 93,456 101,178 107,398 109,051 110,160


Capex 71,860 74,292 78,783 104,723 117,143 131,035 146,574


Other Operational Cash Flow 15,158 -13,101 -1,651 2,040 1,867 1,178 1,191

Operational Free Cash Flow 10,033 87,624 -41,320 44,278 45,134 42,441 36,075


NOPLAT 88,164 870,85 105,514 112,367 117,599 122,894 128,260


Capex 147,396 -196,45 40,583 35,555 33,322 34,246 35,011


Other Operational Cash Flow 28,765 -177,72 1,616 2,865 2,123 2,087 2,023

Operational Free Cash Flow -87,684 1405,17 -105,517 89,973 101,001 106,580 112,447

Group Level

Tax Adjustment -40,230 604,22 -198,187 -72,534 -72,534 -72,534 -72,534

Non Operational Cash Flow -65,910 -2341,58 368,236 24,997 -39,578 -27,328 -20,672

Free Cash Flow to the Firm -193,039 1,188,667 -863,303 2,388,916 2,569,191 3,636,596 4,156,548

Interest Received 94,614 142,166 259,050 259,050 259,050 259050 259050

Share of Profit of Associate 0 0 4,952 0 0 0 0

Finance Costs -125,964 -223,563 -429,185 -441,489 -422,195 -443,415 -407,577

Tax Shield From Finance Costs 43,521 77,241 120,172 123,617 118,215 124,156 114,121

Change in Equity -1,358,108 2,621,449 -1,170,755 -2,134,680 -2,723,778 -3,239,416 -3,753,287

Change in Interest Bearing Debt 1,182,232 1,963,062 76,594 -188,980 199,518 -336,971 -368,856

Excess Cash & Cash Equivalents 355,222 -5,769,126 2,000,997 0 0 0 0

Shareholder for Dividend 1,523 104 1,479 -6,434 0 0 0

FCF from Financing 193,039 -1,188,667 863,303 -2,388,916 -2,569,191 -3,636,596 -4,156,548


PAGE 36/39

Appendix 6 - Historical Liquidity Analysis

Liquidity Ratios 2008 2009 2010 2011 2012 2013

Current Ratio 1.05 0.98 0.95 0.91 1.49 1.50

Quick Ratio 0.53 0.42 0.39 0.35 0.82 0.73

Cash Ratio 0.34 0.26 0.20 0.16 0.61 0.46

Appendix 7 - ROIC Analysis

2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F

Group

ROIC 83% 72% 44% 37% 37% 29% 30% 28% 28% 27% 26% 26%

Average ROIC 70% 51% 36% 33% 30% 27% 28% 27% 27% 26% 25% 25%

Supermarkets SA

ROIC 58% 63% 43% 36% 39% 30% 31% 29% 28% 28% 27% 27%

Average ROIC 50% 46% 36% 33% 32% 28% 29% 28% 27% 27% 26% 26%

Supermarkets Non-SA

ROIC 87% 99% 50% 32% 36% 28% 30% 29% 29% 28% 27% 25%

Average ROIC 70% 73% 37% 28% 27% 26% 27% 27% 27% 26% 25% 24%

Furniture

ROIC 112% 61% 32% 33% 26% 20% 19% 18% 16% 15% 13% 12%

Average ROIC 96% 42% 28% 32% 22% 19% 18% 17% 15% 14% 12% 11%


ROIC - - - 55% 82% 33% 33% 33% 33% 33% 33% 33%

Average ROIC - - - 66% 41% 32% 32% 32% 32% 32% 32% 32%

Appendix 5 - Key Ratios Forecast

2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F 2020F

Financial Debt to Equity

0.9% 15.3% 29.3% 31.7% 27.1% 22.7% 21.1% 17.5% 14.5% 12.1% 11.1% 11.0%

Total Liabilities/Total Assets

70.0% 66.8% 65.5% 58.6% 54.5% 53.5% 53.4% 52.3% 51.3% 50.6% 50.3% 50.4%

Interest Cover Ratio

33.8 36.2 31.0 20.4 12.5 13.8 16.7 17.3 20.0 23.3 26.9 28.5

Debt to Assets Ratio

0.70 0.67 0.65 0.59 0.54 0.53 0.53 0.52 0.51 0.51 0.50 0.50

Total Assets Turnover

3.54 3.75 3.49 2.68 2.77 2.83 2.87 2.90 2.92 2.93 2.94 2.95

EBITDA Margin

6.2% 6.4% 6.8% 7.0% 7.3% 7.4% 7.5% 7.4% 7.4% 7.2% 7.1% 7.0%

Operating Profit Margin

4.9% 5.0% 5.4% 5.5% 5.8% 5.8% 5.8% 5.8% 5.7% 5.6% 5.5% 5.4%

Net Profit Margin

3.4% 3.4% 3.5% 3.7% 3.9% 4.0% 4.1% 4.1% 4.1% 4.0% 3.9% 3.8%

Return on Assets

12.1% 12.7% 12.2% 9.8% 10.8% 11.4% 11.8% 11.8% 11.8% 11.7% 11.5% 11.3%

Return on Equity

40.1% 38.3% 35.4% 23.8% 23.7% 24.6% 25.2% 24.8% 24.3% 23.7% 23.2% 22.9%

Earnings per Share

4.00 4.54 5.00 5.93 6.76 7.98 9.25 10.09 10.79 11.38 11.95 12.46

Dividend Payout

44% 46% 47% 47% 47% 50% 55% 60% 65% 68% 73% 75%

Dividends per Share

1.8 2.1 2.3 2.8 3.2 4.0 5.1 6.1 7.0 7.7 8.7 9.3

Cash Flow per Share

2.2 -0.7 -0.4 2.3 -1.6 4.5 4.8 6.8 7.8 8.4 8.7 9.0


PAGE 37/39

Appendix 8 - Historical Activity Analysis

2008 2009 2010 2011 2012 2013

Group

Inventory Turnover 10.1 9.8 11.0 10.2 9.5 9.0

PPE & Intangibles Turnover 9.9 10.4 9.4 8.1 7.8 7.2

Total Assets Turnover 3.2 3.5 3.7 3.5 2.7 2.8

Average Collection Period 13.3 10.9 11.1 11.6 12.0 13.6

Supermarkets SA




Supermarkets Non-SA




Furniture








Appendix 9 - Number of Stores Evolution per Business Unit

Business Unit 2008 2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F

Supermarkets SA

Shoprite 302 310 319 331 339 361 411 431 441 446

Checkers 119 130 141 154 162 168 174 179 184 189

Checkers Hyper 24 24 22 26 28 29 32 33 34 35

Usave 91 129 169 189 215 243 284 304 319 329

Supermarkets Non-SA

Shoprite 71 73 76 78 85 92 101 111 121 131

Checkers 4 4 4 4 5 5 11 16 21 26

Usave 25 25 28 34 44 56 61 68 78 88

Furniture 236 264 280 300 314 336 361 371 381 391

Other Operating Segments 368 390 594 645 849 889 906 921 936 946

Total Stores 1240 1349 1633 1761 2041 2179 2341 2003 2074 2135


PAGE 38/39

Appendix 10 - World Comparables – Supermarkets (Thousands of US Dollars)

Name Beta Levered MV Equity BV Debt D/E Country Tax Rate Beta Unlevered

Casino Guichard Perrachon 0.73 130,506,863 167,382,983 128.3% France 33.3% 0.39

Jeronimo Martins 0.90 124,691,517 10,181,136 8.2% Portugal 25.0% 0.85

Sainsbury 0.57 123,291,804 38,652,717 31.4% United Kingdom 23.0% 0.46

Tesco 0.48 47,318,037 16,691,520 35.3% United Kingdom 23.0% 0.38

Dia -0.24 5,709,531 16,135,668 282.6% Spain 30.0% -0.08

Metro 1.33 156,762,249 110,223,724 70.3% Germany 29.6% 0.89

WM Morrison 0.25 107,188,475 42,109,416 39.3% United Kingdom 23.0% 0.19

Colruyt 0.02 96,255,566 381,463 0.4% Belgium 34.0% 0.02

Koninklijke Ahold 0.71 197,789,162 46,399,110 23.5% Netherlands 25.0% 0.60

Whole Foods 0.91 243,132,107 274,830 0.1% United States 40.0% 0.91

Kroger 0.51 226,045,071 79,419,562 35.1% United States 40.0% 0.42

BIM Birlesik 0.75 62,150,646 77,152 0.1% Turkey 20.0% 0.75

Magnit 1.87 257,694,205 17,687,810 6.9% Russia 20.0% 1.77

Appendix 11- World Comparables – Furniture (Thousands of US Dollars)

Name Beta Levered MV Equity BV Debt D/E Country Tax Rate Beta Unlevered

Stanley Furniture 0.75 54,409 0 0.0% United States 40.0% 0.75

Leggett & Platt 1.07 4,179,851 957,500 23.0% United States 40.0% 0.94

Herman Miller 1.16 1,758,211 250,000 14.0% United States 40.0% 1.07

Appendix 12 - National Comparables 2013 Data (Thousands of Rands)

Company Name Pick n Pay Spar Massmart Woolworths

Ticker PIK SJ Equity SPP SJ Equity MSM SJ Equity WHL SJ Equity

Total Assets 132,237,998 96,594,995 227,702,006 121,880,003

Total Debt 1601,900 0 3,309,900 8,320,000

D/E 7.1% 0.0% 10.1% 15.2%

Market Capitalization 22,674,754 102,978,180 32,820,168 54,772,176

Book Value of Equity 23,075,999 28,833,999 48,021,002 59,040,000

Enterprise Value 23,186,160 21,693,821 35,620,127 53,988,143

Total Sales 61,032,899 45,637,200 61,209,100 35,227,001

Gross Profit 10,971,200 4,013,100 11,252,000 13,553,000

EBITDA 1,828,800 1,650,000 2,948,500 4,209,000

EBIT 894,200 1,563,100 2,337,800 3,454,000

Net Income 561,800 1,124,300 1,215,900 2,597,000


PAGE 39/39

Disclosures and Disclaimer

Research Recommendations

Buy Expected total return (including dividends) of more than 15% over a 12-month period.

Hold Expected total return (including dividends) between 0% and 15% over a 12-month period.

Sell Expected negative total return (including dividends) over a 12-month period.

This report was prepared by “José Maria Costa Macedo Nóbrega de Lima”, a student of the NOVA School of Business and Economics, following the Masters in Finance Equity Research – Field Lab Work Project, exclusively for academic purposes. Thus, the author, which is a Masters in Finance student, is the sole responsible for the information and estimates contained herein and for the opinions expressed, which reflect exclusively his own personal judgement. This report was supervised by professor Rosário André (registered with Comissão do Mercado de Valores Mobiliários as financial analyst) who revised the valuation methodology and the financial model. All opinions and estimates are subject to change without notice. NOVA SBE or its faculty accepts no responsibility whatsoever for the content of this report nor for any consequences of its use. The information contained herein has been compiled by students from public sources believed to be reliable, but NOVA SBE or the students make no representation that it is accurate or complete, and accept no liability whatsoever for any direct or indirect loss resulting from the use of this report or its content. The author hereby certifies that the views expressed in this report accurately reflect his personal opinion about the subject company and its securities. He has not received or been promised any direct or indirect compensation for expressing the opinions or recommendation included in this report. The author of this report may have a position, or otherwise be interested, in transactions in securities which are directly or indirectly the subject of this report. NOVA SBE may have received compensation from the subject company during the last 12 months related to its fund raising program. Nevertheless, no compensation eventually received by NOVA SBE is in any way related to or dependent on the opinions expressed in this report. The Nova School of Business and Economics, though registered with Comissão do Mercado de Valores Mobiliários, does not deal for or otherwise offers any investment or intermediation services to market counterparties, private or intermediate customers. This report may not be reproduced, distributed or published without the explicit previous consent of its author, unless when used by NOVA SBE for academic purposes only. At any time, NOVA SBE may decide to suspend this report reproduction or distribution without further notice.

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