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THIS DOCUMENT IS NOT AN INVESTMENT RECOMMENDATION AND SHALL BE USED

EXCLUSIVELY FOR ACADEMIC PURPOSES (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)

See more information at WWW.NOVASBE.PT /34

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Worse Economic Scenario: We have updated our model with the

recent rise of EU Sovereign yields and the revised IMF estimates

for GDP growth and inflation. This impacted the Portuguese

operations much more severely as Biedronka’s weight in JM’s

valuation increased to 81% EV from 74%.

JM is safe even in turbulent periods: In Poland, JM is protected

against aggravated macroeconomic conditions, as the Polish

economy is expected to continue outperforming the EU average. In

Portugal, despite the deteriorating macro outlook, JM has a strong

leading position in both the supermarket and wholesale segments.

Biedronka will continue to drive JM’s growth: According to our

model, by 2020, JM’s Polish operations will represent 73% of total

sales and are expected to grow at a CAGR1 of 12,47%, until 2020.

We address three areas of investor push back: i) Biedronka can

accumulate a total of 3.000 stores by 2015, ii) Biedronka is safe

against any price-driven competition for market share, iii)

Biedronka can sustain a double-digit sales CAGR in the next ten

years and an EBITDA margin of (at least) 8%.

JM is expected to unveil its expansion plans to a 3rd

market

this year, which we expect to be a new trigger to JM’s share.

According to our Sum-of-the-Parts Valuation, our new Price Target

FY11 for JMT is 15,21€, which implies a potential return of

17,72%. Therefore, our investment recommendation does not

change: BUY.

1 In this report, all Compound Annual Growth Rates (CAGR) are denominated in Euros and refer to nominal growth rates.

JERÓNIMO MARTINS, SGPS COMPANY REPORT

FOOD RETAIL 27 MAY 2011

RUI DA SILVA [email protected]

The Euro Zone on shaky ground...

...While Poland escapes from turbulence.

Recommendation: BUY

Vs Previous Recommendation BUY

Price Target FY11: 15,21 €

Vs Previous Price Target 15,54 €

Price (as of 27-May-11) 12,92 €

Reuters: JMT.LS, JMT PL

52-week range (€) 6,61-12,92

Market Cap (€mn) 7.173,94

Outstanding Shares (mn) 629,293

Source: Bloomberg

Source: Bloomberg

(Values in € millions) 2010 2011E 2012E

Revenues 8.691 9.860 11.070

EBITDA 653 751 848

EBITDA Margin (%) 7,5% 7,6% 7,7%

EBIT 462 539 613

EBIT Margin (%) 5,3% 5,5% 5,5%

Net Profit 281 347 400

Capex (€mn) 434,2 644,6 696,2

Source: Company Data and Nova Research

0

2.000

4.000

6.000

8.000

10.000

0

5

10

15

02-01-2009 02-01-2010 02-01-2011

JMT vs PSI 20 (€)

JMT PSI 20

Company description

Jerónimo Martins, SGPS, S.A. is a Portugal-based company that operates in two countries in three main business segments: Food Distribution, Manufacturing and Services. Within Portugal, the Group controls the Pingo Doce (Supermarkets leader) and Recheio (leader in Cash & Carry operation) brands and, moreover, manufactures margarines, cooking oils, detergents and household cleaners. JM’s main source of revenue comes, however, from Poland’s largest and leading food retail chain: Biedronka.

speralta

Rectangle




PAGE 2/34

Table of Contents

Company overview ................................................................................. 3

Company description ......................................................................................... 3

Shareholder and ownership structure ............................................................. 4

Past figures ......................................................................................................... 5

Portugal ................................................................................................... 8

Macroeconomic Environment ........................................................................... 8

The Portuguese Food Retail Market ............................................................... 9

Poland .....................................................................................................10

Macroeconomic Environment ......................................................................... 10

The Polish Food Retail Market ....................................................................... 11

Operational Forecasts ...........................................................................12

Capital Expenditures and Net Working Capital ....................................25

SOTP Valuation ......................................................................................27

Comparables ..........................................................................................31

Financial Ratios .....................................................................................32

Financial Statements .............................................................................33

Disclosures and Disclaimer ..................................................................34




PAGE 3/34

31%

8%

2%

55%

3% 1%

Exhibit 1: Sales breakdown (2010)

Retail Mainland

Recheio

Madeira

Biedronka

Manufacturing

Services

Source: Company Data

Company overview

Company description

Jerónimo Martins, SGPS, S.A. (JM) is a Portuguese Group with international

projection operating in three main business segments: Food Distribution,

Manufacturing and Services. In Portugal, JM has a leading position under the

Pingo Doce (supermarkets) and Recheio (cash & carry and food service

platforms) chains. Moreover, it is the largest industrial Group of Fast Moving

Consumer Goods (FMCG) – where it holds leading positions in several markets

(e.g. ice tea, ice cream, margarine, olive oil, fabric cleaners) through its

association with Unilever2, the Anglo-Dutch multinational, and Gallo Worldwide

3.

Additionally, the company owns a Services business unit that includes the

company Jerónimo Martins Distribuição de Produtos de Consumo (JMD), which

is responsible for the representation and distribution of international brands (e.g.

Kellogg’s, Nestlé, among others) in Portugal. However, JM’s most valuable

asset is in Poland: the hard discount chain Biedronka is the market leader in

food distribution and, in 2010, accounted for 55% of the Group’s total sales.

In Portugal, JM is the second largest Food Retail Group (right behind Sonae,

SGPS, S.A., its main competitor). However, if we consider both national and

foreign operations then, according to Deloitte Touche Tohmatsu Limited (DTTL)

and STORES Magazine, JM is ranked as the 85th

largest retailer around the

world while Sonae occupies the 139th position, based on publicly available data

for the fiscal year of 2009. The top of the same overall ranking that elects the

world’s 250 largest retailers was shared among: the American corporation Wal-

Mart that runs chains of large discount stores, the French hypermarket chain

Carrefour and Metro AG, the German retail and wholesale Group (see Exhibit 2).

Exhibit 2: Top 250 global retailers (FY09)

World Rank

Name of Company

Country of Origin

2009 Retail Sales (U.S. $mn)

# Countries of Operation

Dominant Operational Format

2004-2009 Retail Sales CAGR

1 Wal-Mart Stores, Inc. U.S. 405.046 16 Hypermarket/Superstore 7,3%

2 Carrefour S.A. France 119.887 36 Hypermarket/Superstore 3,4%

3 Metro AG Germany 90.850 33 Cash & Carry/Warehouse Club 3,0%

85 Jerónimo Martins, SGPS, S.A. Portugal 9.932 2 Discount Store 17,1%

139 Sonae, SGPS, S.A. Portugal 6.096 2 Hypermarket/Superstore 4,2%

250 Fuji Co. Ltd. Japan 3.075 1 Hypermarket/Superstore -1,5%

Source: Deloitte Touche Tohmatsu Limited and STORES Magazine

2 In 1949, a joint venture was set up between JM and Unilever and later, in 2007, with the merger of the companies: Fima VG, Lever Elida and

Olá, a new company was established: Unilever Jerónimo Martins. 3 Gallo Worldwide was created in 2009, when Unilever JM decided to separate its olive and seed oils business from the remaining ones.




PAGE 4/34

Soc. Francisco Manuel

dos Santos

56%

Floating and Own

Shares31%

Asteck, S.A.10%

Carmig, Gestion

3%

Exhibit 3: Shareholder Structure


Shareholder and ownership structure

Currently, there are three qualified shareholders composing JM’s shareholder

structure that hold different stakes: Sociedade Francisco Manuel dos Santos

SGPS, S.A. which reinforced its position on February 2009 and now holds 56,1%

of the company’s capital, Switzerland’s Heerema Holding Company Inc which

operates in the oil and gas industries and acquired 10,01% of the Group’s share

capital through its Astek, S.A. investment vehicle4, on late February 2007, and

the French asset management company Carmignac Gestion with a 2,7% share –

the remaining company’s capital (31,2%) is free-floating. Thus, the Soares dos

Santos family is the major shareholder with the highest percentage of voting

rights (56,19%) and, thus, with the last word in any matter.

Additionally, there are differences in what concerns the ownership structure

of JM’s business units. As we can see below in Exhibit 4, in the Food Distribution

segment JM holds 51% of Retail Mainland (which includes Pingo Doce and, until

2010, also included the hypermarket chain Feira Nova) while the remaining 49%

is held by the Dutch supermarket operator Ahold. JM also holds 75,5% of

Madeira operations (where it performs under the Pingo Doce and Recheio

brands), while Recheio and Biedronka are fully owned by the Portuguese retailer.

The Manufacturing business unit is operated under a joint venture between JM

and Unilever, with stakes of 45% and 55%, respectively. Finally, concerning the

Services business unit: JMD is fully owned by JM, the Hussel chocolate chain

was the outcome of a joint venture between JM (51%) and the German specialist

retailer Douglas AG (49%), Caterplus resulted from a partnership between JM

(49%) and the Portuguese family enterprise Sugalidal (51%) and, lastly, JM holds

a 27,5% share in PUIG Portugal, which operates in the wholesale of perfumes

and cosmetics.

Exhibit 4: JM Ownership Structure


4 Asteck, S.A. is 100% controlled by the Heerema Holding Company and, thus, all the respective voting rights are attributed to the latter.

Jerónimo Martins, SGPS, S.A.

Food Distribution

Retail Mainland

(51%)

Recheio

(100%)

Madeira

(75,5%)

Biedronka

(100%)

Manufacturing

Unilever JM

(45%)

Gallo Worldwide

(45%)

Services

JMD

(100%)

Hussel

(51%)

Caterplus

(49%)

PUIG Portugal

(27,5%)




PAGE 5/34

27% 27%

40%

47%

6%

29%

13%

23%

35% 37%

30%

20%

2005 2006 2007 2008 2009 2010

Exhibit 6: Biedronka Sales Growth

€ PLN

4,1

3,2

4,9

2005 2006 2007 2008 2009 2010 2011

Exhibit 6: PLN/EUR Exchange Rate


Past figures

i. Sales and EBITDA

Jerónimo Martins hasn’t been always a growth and successful story. However, in

the past recent years, it has been able to deliver a strong, solid performance. The

results speak for themselves: from 2005 to 2010, total sales grew at a CAGR

of approximately 17,8% and, in 2010, amounted to a total of €8.691mn. In the

same time period, the Group’s EBITDA also grew at a double digit CAGR of

16,2% and reached €653mn in 2010. Such results were only possible because

the management team i) successfully entered in a new and promising market and

ii) rebuilt its business model around its Portuguese supermarket chain.

Exhibit 5: JM Sales and EBITDA breakdown


The weight of Biedronka within JM has been increasing gradually in the past

years. In 2005, the Polish operations represented around 35% of the Group’s

total sales, while Retail Mainland had a bigger weight inside JM (approximately,

39%). From 2005 to 2010, however, Biedronka’s sales grew at an impressive

CAGR of 29% (far greater than any other business unit) making it now the

biggest business unit inside the Group, both in terms of sales (55%) and EBITDA

(60%). Consequently, the other four business units progressively lost weight

inside the Group and, today, they represent around 14% (13%) of JM’s total

sales (EBITDA).

On the other hand, a greater Biedronka weight in the Group’s operations implies

a greater exposure to the Polish Zloty. As we can see in Exhibits 6 and 7,

between 2005 and 2008, JM did not only benefit from operating in a growing

economy, but also through the Zloty-Euro conversion. However, notice that the

subsequent devaluation of the Zloty (from 3,3 to 4,8) had a huge negative impact

on Biedronka’s growth rate expressed in Euros. From the first quarter of 2009

onwards, the Zloty has progressively appreciated and, consequently, we can see

27%

7%

1%60%

5% 0,2%

EBITDA 2010Retail Mainland

Recheio

Madeira

Biedronka

Manufacturing

Mkt., Repr. and Rest. services

39%

15%3%

35%

6% 2%

Sales 2005Retail Mainland

Recheio

Madeira

Biedronka

Manufacturing


47%

13%3%

23%

14%0,5%

EBITDA 2005Retail Mainland

Recheio

Madeira

Biedronka

Manufacturing


31%

8%

2%

55%

3% 1%

Sales 2010Retail Mainland

Recheio

Madeira

Biedronka

Manufacturing

Services




PAGE 6/34

0

100

200

300

400

500

600

2005 2006 2007 2008 2009 2010

Exhibit 8: Capex Breakdown (€mn)

Retail Mainland Biedronka Others


3,3

4,8

2005 2006 2007 2008 2009 2010 2011

Exhibit 7: PLN/EUR Exchange Rate

Source: Bloomberg

the reflection in terms of the 2010 growth rates. Since we estimated the cash

flows of each business unit according to each local currency, we had to use

some sort of forecasts for the exchange rate in our model. Thus, we decided to

resort to forward exchange rates which means that our model incorporates

current expectations for the future exchange rate. Given its degree of

unpredictability (it’s an exogenous factor that the company does not control),

however, we view the Euro/Zloty exchange rate as JM’s major source of risk in

the future.

ii. Investment and Sales Area

The evolution of Biedronka’s importance within JM reflects not only an

extraordinary sales performance of the Polish stores, but also a substantial

amount of investment that has been directed to Poland, year after year.

In Exhibit 8, we highlight how JM’s investment policy on its main business units

has been evolving since 2005. The Group’s total investment gradually increased

at a CAGR of 73% until 2008 and, in that same year, reached its maximum: a

total of €874mn. Additionally, 37,4% (€327mn) and 58,2% (€509mn) of this total

amount were directed to Retail Mainland and Biedronka, respectively (as one can

see, the investments made in the other four business units, even when

accounted together, are not so relevant). In 2009, there was a substantial

contraction in total investment, which amounted to €312mn (-64% yoy), as a

consequence of a stronger prudence due to the tough economic context felt

at the time. All business units were obviously impacted, but especially Retail

Mainland and Biedronka which saw their Capex amounting to €113mn and

€182mn, respectively. However, after this shock, total investment started

increasing once again and, in 2010, amounted to € 434mn.

Another striking feature of Exhibit 8 is that, Biedronka has been gaining more and

more importance as it gets a higher percentage of total investment. Indeed, while

in 2005 the investment made in Poland represented 43% of total investment, in

2010 this percentage increased to 62%. As a consequence of a higher

investment, the number of Biedronka stores has been increasing at an average

of 169 stores per year, since 2005. More, by the end of 2010 the company had

already 1.649 Biedronka stores5, representing approximately 62% of JM’s

total sales area (sqm).

5 Expansion in Poland has been made both organically as well as through M&A operations. The Portuguese retailer bought 57 Tip stores from

the Metro Group (1998), acquired ex-Edeka stores in Gdansk, purchased some Rema 1000 and Carrefour stores. More recently (2008), JM took over all of Tengelmann’s Plus stores in Poland (210) and in Portugal (75) – an operation that amounted to €320mn.




PAGE 7/34

9,7%

6,6%

8,1%7,6%

5,1%

8,2%

2005 2006 2007 2008 2009 2010 2011E

Exhibit 10: EBITDA Margins

Retail Mainland JM Biedronka


In Portugal, Pingo Doce has been the number one priority in terms of investment

and, by the end of 2010 it counted with 349 stores (see Exhibit 9). Moreover, in

2009, the Group concluded that this was the business unit with the best

positioning in the Portuguese market and, thus, decided to end the Feira Nova

brand and convert the remaining stores into the Pingo Doce format.

Exhibit 9: # Stores and sales area (sqm) by business unit


iii. EBITDA Margins

In the past three years, JM’s consolidated EBITDA Margin has inverted its

negative tendency and started growing year after year (see Exhibit 10). Notice

that this reflects the strategy and performance of the two main business units.

While JM decided to bet on low prices and high volumes (lower margins) in

Portugal, in Poland the EBITDA margin has been increasing year after year,

since 2007. This reflects an ambitious and continuous search for cost efficiency,

but it is also evidence that Biedronka is at a development stage where

benefits of scale impact at all levels. Indeed, the benefits taken were

sufficiently high to compensate the diluting impact of the Plus stores which, in

2009, were still operating at below full maturity. Additionally, as Biedronka grew

inside the Group, consolidated margins have become more and more dependent

on the Polish operations and less reliant on Retail Mainland.

JM’s current operating profitability (overall EBITDA margin of 7,5% in 2010)

compares with 3,98% for Carrefour or 4,96% for Metro AG. On the other hand,

operators with major exposure to Emerging markets, such as the Turkish BIM

retail chain and the Russians X5 and Magnit retail Groups, exhibit higher levels:

5,5%, 8,44% and 7,89%, respectively. This, in turn, suggests that it is Biedronka

that will continue to boost JM’s operational margins in the future.

32 33 33 35 35 38

805 9051.045

1.3591.466

1.649

1515

15

1515

15

208227

256

343343

349

2005 2006 2007 2008 2009 2010

# Stores

107.202 110.005 109.634 115.724 114.410 123.532

394.536 452.952536.729

753.531 814.493938.21813.697

13.69714.626

14.62614.300

14.253

279.842311.468

355.809

433.049434.744

437.317

2005 2006 2007 2008 2009 2010

Sales Area (sqm)

Retail Mainland

Madeira

Biedronka

Recheio




PAGE 8/34

102,

1

11

1,5

107,

4

109,

4

106

,7

2007 2008 2009 2010 2011E

Exhibit 14: Consumer Spending (€bn)

1,4% -0,5% 1,2%

3,5%

-4,1%

2,1% 2,1%

20

06

20

07

20

08

20

09

20

10

20

11

E

20

12

E

20

13

E

20

14

E

20

15

E

20

16

E

Exhibit 11: Real GDP Growth Rates

Portugal European Union

7,8%

8,1%

7,7%

9,6%

11,0%

11,9%

12,4%

11,9%

11,3%

10,6%

9,8%

2006

2007

2008

2009

2010

2011

E

2012

E

2013

E

2014

E

2015

E

2016

E

Exhibit 12: Unemployment(Percent of total labor force)

Source: IMF

Source: Bloomberg

Source: Bloomberg

Source: IGD and Nova Research

4,2%

5,8%

9,6%

30-

03-

200

7

30-

07-

200

7

30-

11-

200

7

31-

03-

200

8

31-

07-

200

8

30-

11-

200

8

31-

03-

200

9

31-

07-

200

9

30-

11-

200

9

31-

03-

201

0

31-

07-

201

0

30-

11-

201

0

31-

03-

201

1

Exhibit 13: Portuguese 10-year Gov. Yield

Portugal

Macroeconomic Environment

Since the beginning of the 21st century, Portugal has been constantly growing

below the EU average (exception to 2009) and, in the future, there is no

evidence suggesting that this tendency will change. Furthermore, according to

IMF’s revised growth estimates, Portugal will be under a recession in both 2011

and 2012, while unemployment is expected to continue increasing until 2012.

The incapacity to increase the country’s competitiveness, combined with

permanent negligible growth rates and a heavy debt repayment burden,

increased the likelihood of Portugal not being able to comply with its obligations.

As financial markets assimilated this information, global rating agencies started

downgrading the Portuguese credit rating (currently at Baa1, according to

Moody’s), as they perceived Portugal as a riskier country with a higher probability

of incurring in default. Consequently, creditors started demanding higher

interest rates (see Exhibit 13) which, ultimately, became unsustainable for

Portugal. Thus, after Greece and Ireland, the Portuguese government, facing a

real threat to the financing of the Republic and to its banking system, had no

option left but to request an emergency bailout from the EU. In exchange for a

€78mn 3-year rescue package, Portugal committed to achieve a reduction of the

Government deficit to 5,9 percent of GDP this year and to 3 percent in 2013.

After the decisions to cut wages in the public sector and to increase the value

added tax (VAT) for 2011, austerity measures are expected to continue after this

agreement (e.g. wages in the government sector will be frozen in nominal terms

in 2012 and 2013, while VAT will increase substantially, especially concerning

electricity and gas).

Conclusion: in the future it is expected a decrease in households’ disposable

income and, inevitably, a contraction of consumption, given this dark

macroeconomic scenario. However, we slightly revised downwards our sales

figures in Portugal, as JM’s business relies deeply on food retail and the

expenses associated with it tend to be the last ones to forgo. Moreover, Pingo

Doce and Recheio are leaders in their segments and should continue to

strengthen their positions. Lastly, we decided to fine-tune our model, so as to

reflect the recent rise of the Portuguese Sovereign yield which, as we further

discuss, impacted JM’s cost of capital negatively.




PAGE 9/34

8% 7%

24%

6% 5%

11%

14%20%

9%10%

2006 2007 2008 2009 2010

Exhibit 16: Sales Growth Rates

Sonae MC Jerónimo Martins

20%

19%

9%7%6%

5%

34%

Exhibit 15: Portuguese Food Retail Market Shares (2010)

Sonae MC

Jerónimo Martins

Intermarché

Auchan

Lidl

Minipreço

Others

0

500

1.000

1.500

2.000

2005 2006 2007 2008 2009

Exhibit 17: Sales Area ('000 sqm)

Modelo e Continente Pingo Doce

Lidl Auchan

Minipreço



Source: APED and Nova Research

The Portuguese Food Retail Market

In 2010, the Top 5 retailers represented, approximately, 61% of the

Portuguese Food Retail market6 – this level of concentration is in line with

other Western European mature markets7. Among these main retailers, Sonae

MC and Jerónimo Martins held the biggest market shares (20% and 19%,

respectively) while Intermarché, the Auchan Group and Lidl, altogether, held

around 22% of market share (see Exhibit 15).

The world’s most recent financial crisis impacted negatively all of these food

retailers8 and, in Exhibit 16, we highlight what happened to JM and its main

competitor. In both cases, it is visible this effect as sales growth rates fell

sharply after 2008. Moreover, according to this graph, JM had not only a

stronger response to the tough macroeconomic scenario, but also a higher

growth (CAGR of 12,64%) than Sonae MC (CAGR of 9,88%), in the past 5 years.

Throughout time, these two main food retailers were able to increase their market

shares (though, in different proportions), through M&A operations9 but especially

via organic growth – the Modern Grocery Distribution (MGD) segment is thus

growing mainly at the expense of traditional retailers which, by 2010,

represented approximately 25% of the Portuguese retail market. In the future, we

expect these two largest Portuguese retailers to continue increasing their market

share, at the expense of small supermarkets and traditional retail, which are the

most penalized by the tough environment in Portugal, according to Nielsen.

Furthermore, recently both leaders adopted a similar strategy, which consisted in

repositioning their food retail business by having a single and their stronger brand

operating10

.

As we further discuss, there are not very ambitious plans in terms of new store

openings for the near future, something that reflects the negative

consequences that the current and future austerity measures are expected

to originate, but also, the advanced stage of the Portuguese Food Retail

market. Moreover, we argue that Pingo Doce should be able to continue

increasing its market share as it developed an adequate strategy that best suits

the Portuguese consumers’ needs.

6 In our definition we do not include Cash & Carry operations (thus, Recheio is not accounted in JM’s market share). 7 In France, for example, the 5-firm concentration ratio is equal to 65% (see the Biedronka chapter for further details). 8 According to APED, both Lidl and Minipreço posted negative growth rates from 2008 to 2009 (-2,02% and -0,77%, respectively). 9 As we’ve mentioned earlier, JM acquired the Plus operations, while Sonae bought the Carrefour hypermarket operations in 2007. 10 JM changed the brand Feira Nova into Pingo Doce, while Sonae decided to have a single brand by merging both Modelo and Continente.




PAGE 10/34

6,2%

1,7%

3,6% 3,9%

3,5%

-4,1%

2,1% 2,1%

20

06

20

07

20

08

20

09

20

10

20

11

E

20

12

E

20

13

E

20

14

E

20

15

E

20

16

EExhibit 18: Real GDP Growth Rates

Poland European Union

187,

2

221

,9

188

,2

210

,4 222

,4

2007 2008 2009 2010 2011E

Exhibit 20: Consumer Spending (€bn)

Source: IMF

13,8%

9,6%7,1%

8,2%

9,0%

9,0%

8,7%

8,5%

8,2%

8,0%

8,0%

200

6

200

7

200

8

200

9

201

0

20

11E

20

12E

20

13E

20

14E

20

15E

20

16E

Exhibit 19: Unemployment (Percent of total labor force)


Source: IMF

Poland

Macroeconomic Environment

From the 27 countries that compose the European Union, Poland was the only

one that stood out during the most recent global financial crisis, registering a

positive growth in 2009 (1,7%). As we can see in Exhibit 18, despite the

considerable drop on its real GDP growth rate, this country was able to remain

above the EU average – a tendency that should not change in the next 5 years,

according to the International Monetary Fund. To a large extent, Poland’s stout

domestic demand11

, its flexible currency (the Zloty) and its less fragile banking

sector, all together, allowed a better performance. Furthermore, the 2012 UEFA

European Football Championship – hosted by Poland and Ukraine – was also

important for this behavior of the Polish economy, since some infrastructure

investments, backed by an inflow of EU funds, have already begun.

Additionally, throughout time, Poland has been able to substantially decrease its

unemployment rate, even though it increased in 2009 as a consequence of the

international financial crisis (see Exhibit 19). For instance, in 2004, 18,9 percent

of total labor force were unemployed and, by 2008, this number had been

reduced by more than half.

Additionally, Poland has been able to escape the turbulence that has

impacted the Euro Zone in the past recent months. Contrarily to Portugal,

Poland has not seen its credit rating being downgraded and, according to

Moody’s, it preserves its A2 rating which has been constant since 2003.

Conclusion: contrarily to Portugal, Poland’s current macroeconomic context

creates good prospects for the future. Even though consumer spending fell

sharply in 2009, as a consequence of a slower GDP growth, we can see in

Exhibit 20 that it recovered in 2010 and is expected to go beyond the level

recorded in 2008 throughout the current year. This will help to boost the food

retail market which, in 2011, is expected to grow at 5%, according to PMR

Corporate. This, in turn, makes us believe that Poland will be able to sail through

the storm that has been affecting Europe. Therefore, we conclude that

Biedronka will continue to be JM’s main source of profitability and growth

driver, which explains the aggressive expansion plan to be implemented

there in the next triennium.

11 Contrarily to its neighbors, Poland relies much less on its exports due to its solid internal market, which has seen a middle class rising in the

last 10 years.

The Polish economy is expected to continue outperforming the EU

average...




PAGE 11/34

12%

7%

7%

6%

6%

6%

4%

52%

2010

Biedronka

Schwarz Group

Tesco

Carrefour

Auchan

Spolem

9%5%

6%

5%

4%

5%

4%

62%

2008 Biedronka

Schwarz Group

Tesco

Carrefour

Auchan

Spolem

Real

Other

The Polish Food Retail Market

With a population size over 38 million people, Poland is the 6th most populous

member of the EU and, consequently, not only one of the leading economies in

Central and Eastern Europe, but also the 9th largest Grocery Retail market

across Europe (see Exhibit 21). According to IGD Retail Analysis, the number

one spot in the Polish Food Retail industry12

belonged to Biedronka, with a

market share of 12% in 2010, clearly above major retailers such as the Schwarz

Group (operating under the Kaufland hypermarkets and the Lidl hard discount

chain), Tesco or Carrefour (see Exhibit 22). Moreover, notice that the Top 5

retailers accounted for, approximately, 38% of the Polish Food Retail

market (against 61% in Portugal). Indeed, this is an evidence that the Polish

market is much more fragmented and, thus, subject to a fiercer competition.

Another striking feature of Exhibit 22 is that, most of the retailers we highlight

have been able to increase their respective market shares since 2008. This

growth has essentially been made at the expense of the traditional retail

segment which, by 2010, had a 50% share in Poland13

(versus 20-25% in

Portugal) – an indicator of a less developed market. However, we also highlight

that some of this growth was boosted by M&A operations, since the Polish retail

market is moving fast towards consolidation with main players purchasing

small retailers14

. In the future, all retail formats have room for further growth.

This, in turn, will continue to occur especially at the expense of the traditional

retail segment as it share converges to Western European standards (by 2020, it

should account for 25-30% market share).

Exhibit 22: Polish Food Retail market shares


12 IGD defines the Food Retail market as: “all food, drink and non-food products sold through all retail outlets selling predominantly food in a

given country”. It includes both modern and traditional formats (and excludes Cash & Carry operations). 13 Around 7.000 small grocery stores were closed in 2008. 14 The last deal was made by Mid Europa Partners (UK-based private equity firm), which acquired Zabka Polska SA (Poland’s largest

convenience-store chain), last February.

Exhibit 21: Europe’s 2009 Top 10 Grocery Retail Markets (€bn)

1. France 208,16

2. Russia 166,70

3. UK 164,23

4. Germany 161,82

5. Italy 129,52

6. Spain 99,63

7. Turkey 54,78

8. Switzerland 35,93

9. Poland 34,58

10. Netherlands 34,48





PAGE 12/34

Operational Forecasts

The departure point consisted in estimating JM’s number of stores, sales area

(sqm) and the evolution of sales per sqm, for each business unit. For this, we

relied on the company’s guidelines15

, on the different macroeconomic scenarios

(Poland and Portugal) and on our perception of each market’s competitive and

saturation levels. Furthermore, in order to estimate the sales area, we relied on

the latest available information (2010) concerning the average size of each store.

We believe this is reasonable since we do not expect the company to present

major changes relative to each store format and size. Finally, even though we

fully incorporated the company’s expansion guidelines for Biedronka, we were a

bit more cautious with the Retail Mainland business unit.

Retail Mainland

In the last five years, the sales area concerning the Retail Mainland business unit

grew at a CAGR of 9,34%, being this growth mainly driven by Pingo Doce (PD)

openings16

. During the same period, sales grew at a CAGR of 12,64%. In terms

of the EBITDA margin, there was a slight decrease in 2010, which reflected

several factors that occurred throughout the year: i) the management decision to

strengthen the brand’s awareness by increasing the investment in advertising, ii)

the deflation in the PD basket, especially, during the first half of the year and iii)

the integration of the Plus and Feira Nova stores under the PD brand. Below, in

Exhibit 7, we present our operational forecasts for Retail Mainland.

Exhibit 23: Retail Mainland Operational Forecasts

2010 2011E 2012E 2013E 2014E 2015E 2020E

Total # Stores 349 352 355 358 360 362 366

Total Sales Area ('000 sqm) 437 440 444 447 449 451 455

Growth (%) 0,59% 0,72% 0,72% 0,71% 0,47% 0,47% 0,00%

Sales (€ mn) 2.695 2.824 2.960 3.140 3.322 3.524 4.126

Growth (%) 10,13% 4,80% 4,80% 6,09% 5,80% 6,06% 3,01%

Sales/sqm (€ tho.) 6,2 6,4 6,7 7,0 7,4 7,8 9,1

Growth (%) 9,49% 4,05% 4,05% 5,33% 5,30% 5,57% 3,01%

Capex (€mn) 115,5 102,5 107,2 97,1 93,1 95,4 98,9


According to our forecasts, there will be a decrease in PD new openings. Thus,

total sales area is expected to grow at a CAGR of 0,40% until 2020, clearly below

past figures, as we don’t see many opportunities for further organic growth

in a market that we already deem mature. Meanwhile, sales are expected to

15 JM investor’s day, 2010. 16 In 2010, JM opened seven PD stores.

We relied on the latest available information concerning the average size of each store...




PAGE 13/34

6,2%

6,4%

6,6%

6,8%

7,0%

7,2%

0

1.000

2.000

3.000

4.000

5.000

201

0

201

1E

201

2E

201

3E

201

4E

201

5E

201

6E

201

7E

201

8E

201

9E

202

0E

Exhibit 24: Retail Mainland

Sales (€ mn) EBITDA Margin (%)

grow at a CAGR of 4,35%, until 2020, being the following two years more

penalized in terms of growth due to the tough austerity measures that already

have and will continue to impact negatively consumption. Despite this dark

economic scenario, we remain particularly optimistic on the Retail Mainland’s

operations due to four specific reasons:

i. PD has a strong competitive position and is increasing its market share: PD

has today, together with Sonae MC, a leading position in the Portuguese Food

Retail market. In 2010, while the food retail segment grew 1,6% yoy, PD total

sales grew by approximately 10%, meaning that PD is increasing its market

share, even under a tough economic environment. Furthermore, according to

Nielsen, traditional retail and small supermarkets are the most affected ones in

tough economic environments, which should leave room for larger retailers to

gain further market share in the future. At the same time, the competitive

pressure coming both from Lidl and Minipreço has eased in recent years, even

though the latter revealed its intentions to reformulate its business strategy17

.

ii. Investment on differentiating pillars: Throughout time, JM has not only

maintained its stable and low price policy, but also kept its investment strategy on

important differentiating pillars of the PD banner, such as: Private Brand18

,

Perishables19

and, more recently, Meal Solutions (Take Away and

Restaurants)20

. At the same time, during last year, there was a strong effort to

diffuse the banner’s awareness through an increased investment in advertising to

levels in line with the sector’s average. These efforts to build up a differentiating

commercial proposition allowed PD to receive increasing customer preference,

while strengthening its position with a like-for-like sales growth equal to 8,4%

in the supermarkets (7,2% in the whole store network), in 2010. In the future,

the company intends to build stronger partnerships with suppliers of both

Perishables and Private Brand, while maintaining its competitive price policy with

the main objective of growing and reinforcing market share.

iii. Efforts concentrated on a stronger brand: We believe JM made a good move

when decided to extinguish Feira Nova as a brand and to convert the respective

hypermarkets under the PD banner. In this way, the Group will be able to

concentrate its efforts and resources on a stronger brand (recall that Feira Nova

was the 3rd

hypermarket player in Portugal).

17 In 2010, there was some speculation that Carrefour wanted to sell their 524 Minipreço stores and, consequently, leave Portugal. However,

more recently, the Group revealed its intentions to reformulate its strategy and to have 600 operating stores until 2016. 18 At the end of 2010, there were 2.011 references in the Private Brand assortment (representing around 38% of the Company’s total sales). 19 Perishables represent 34,3% of the Banner’s sales. 20 Out of the company’s 349 stores, take away sales are already present in 214 of them and there are 33 restaurants already operating.


While PD is increasing its market share, traditional retail and small supermarkets are being impacted negatively...




PAGE 14/34

iv. Improvement of the EBITDA margin: After a small decrease in 2010, we

expect the EBITDA margin to gradually recover until it stabilizes at 7%, in 2020.

This will be mainly driven by the logistics improvement that the company is

expected to undertake, between 2011 and 2013, and a larger scale with the

integration of the Plus and Feira Nova stores totally assimilated. Currently there

are seven distribution centers (DCs), but the company set the target of having

four to five over the next three years. The purpose is to improve cost efficiency

through a more rational geographical distribution of its DCs. Furthermore, the

costs concerning the integration of the former Plus stores are being diluted and

the benefits arising from private brand scale are still to come.

Exhibit 25: Retail Mainland Forecasts (€ mn) 2010 2011E 2012E 2013E 2014E 2015E 2020E

Sales 2.695 2.824 2.960 3.140 3.322 3.524 4.126

EBITDA 174 186 195 210 223 236 289

EBITDA margin (%) 6,5% 6,6% 6,6% 6,7% 6,7% 6,7% 7,0%

Depreciation (90) (91) (93) (94) (94) (94) (102)

EBIT 84 95 102 117 129 142 186

EBIT margin (%) 3,1% 3,4% 3,5% 3,7% 3,9% 4,0% 4,5%


Recheio

During the last five years, the Recheio business unit has been able to expand its

sales area at a CAGR of 2,88%, while sales grew at a CAGR of 4,52%. At the

same time, the EBITDA margin, which had stabilized around 6% in the past few

years, increased to 6,2% in 2010, reflecting the success of the overall strategy to

increase sales.

In the future, we expect the number of openings to gradually decrease and, by

the end of 2020, JM should count with 43 Recheio stores (which, in terms of

sales area, corresponds to a CAGR of 1,24% in the following ten years). Despite

its leading position, Recheio operates in a highly mature market and, thus, we do

not foresee plenty of expansion opportunities. Until 2020, we expect sales to

grow at a CAGR of 3,72%, which is below past performance, while the EBITDA

margin is expected to evolve according to past figures and stabilize around 6,1%.

In 2010, Recheio continued to operate in a difficult environment as its two main

target markets posted negative growth - according to Nielsen, the Portuguese

Traditional Retail segment posted a contraction of 9,7% yoy, which confirms the

negative trajectory of the past few years that is expected to continue. At the same

time, Recheio will continue facing a tough environment in the near future, as then

the HoReCa channel’s turnover is expected to fall again in 2011.

The Group set the target of reducing its number of DCs to four or five...

Recheio operates in a highly mature market...




PAGE 15/34

6,0%

6,1%

6,2%

6,3%

0

200

400

600

800

1.000

1.200

20

10

20

11E

20

12E

20

13E

20

14E

20

15E

20

16E

20

17E

20

18E

20

19E

20

20E

Exhibit 27: Recheio

Sales (€ mn) EBITDA Margin (%)

Exhibit 26: Recheio Operational Forecasts

2010 2011E 2012E 2013E 2014E 2015E 2020E

Total # Stores 38 39 40 41 41 42 43


Growth (%) 7,97% 2,63% 2,56% 2,50% 0,00% 2,44% 0,00%

Sales (€ mn) 721 746 772 810 830 874 1.039

Growth (%) 4,64% 3,46% 3,52% 4,90% 2,45% 5,37% 3,01%

Sales/sqm (€ tho.) 5,8 5,9 5,9 6,1 6,2 6,4 7,4

Growth (%) (3,08%) 0,80% 0,93% 2,34% 2,45% 2,86% 3,01%

Capex (€mn) 29,1 16,6 17,1 17,6 11,0 18,5 13,2


However, we have reasons to believe that Recheio will be able to overcome

these adversities, as it did in the past, due to the following three reasons:

i. Market leader and market share growth: Considering the two main players

acting in the Portuguese Wholesale Market, Recheio is the one with a clear

leading position. According to JM, in 2010, Recheio had a 37,5% market share

while Makro held 21,7%. This is even more important if we consider that, in 2005,

Recheio (Makro) held 24,5% (22%) market share. Concluding, Recheio is not

only the market leader, but has also been able to reinforce its leading position

throughout time. Furthermore, even with both the HoReCa channel and the

Traditional Retail segments posting negative growth, Recheio has delivered solid

and positive sales growth in both target markets (4,5% and 2,1%, respectively).

In this way, it strengthened its market share and ended 2010 with a 3,2% like-

for-like sales growth.

ii. Adequate strategy: A great percentage of Recheio success in 2010 was, in our

view, due to a rigorous planning. Anticipating a year of difficulties and aware that

today’s consumers attribute greater value to the Banners’ value proposition, the

Group decided to invest in strong promotional campaigns targeted at its

customers (consolidating its differentiation in key areas, such as Perishables21

)

and increased its proximity to clients through a series of events that allowed the

above-mentioned sales growth. At the same time, in order to strengthen the

Banner’s presence in crucial locations for the HoReCa market, Recheio opened

three more stores which reinforced the proximity with its customers. This ability to

redefine strategies according to new market circumstances is, in our view, a key

element that will allow Recheio to continue strengthening its market leadership.

21 In 2010, Perishables represented 14,9% of Recheio’s sales and posted a growth of 20,5% yoy.


Recheio is the leader of the Portuguese Wholesale Market...




PAGE 16/34

iii. Private Brands – The Amanhecer project: Private Brands have also seen their

importance growing within Recheio22

and, in 2010, priority was given to the

Amanhecer brand which ended the year with a total of 129 products. In 2011, this

project is expected to continue and, on February, two Amanhecer stores were

opened (Lisbon and North of Portugal). According to JM, the purpose of this

recent initiative is to revitalize the Portuguese Traditional Retail segment, which

has been subject to a huge pressure in the past years. In essence, this results in

a commercial cooperation agreement between two parties, whereby Recheio is

responsible for the entire logistical operation. The traditional retailer that owns

the space, in turn, commits to purchase 75%-80% of its products to Recheio and

to offer a majority of Amanhecer products. JM has received many requests by

traditional retailers to convert their stores into this new concept and, until the end

of the year, the company expects to have a total of 20-25 Amanhecer stores

operating. We believe Recheio will be able to boost sales associated with the

Amanhecer brand, thus benefiting from an increasing scale in the wholesale

segment.

Exhibit 28: Recheio Forecasts (€ mn) 2010 2011E 2012E 2013E 2014E 2015E 2020E

Sales 721 746 772 810 830 874 1.039

EBITDA 44 46 47 49 51 54 63

EBITDA margin (%) 6,2% 6,1% 6,1% 6,1% 6,2% 6,2% 6,1%

Depreciation (9) (9) (10) (10) (10) (10) (11)

EBIT 35 36 37 39 41 44 52

EBIT margin (%) 4,9% 4,8% 4,8% 4,9% 5,0% 5,0% 5,0%


Madeira

In the last five years, operations in Madeira have been pretty stable from a sales

area point of view (the number of stores remains constant and equal to 15, at

least since 2005). Meanwhile, sales grew at a CAGR of 6,22%, during the same

time period. In 2010, as expected, the EBITDA margin fell 10 bps relative to the

previous year (4,8%) due to the storm that hit the island and led to the closure of

PD two biggest stores in that region, until the 7th of June.

Also worth mentioning is the fact that, despite the temporary closure of the two

main stores, PD sales in Madeira grew approximately 9,8% yoy, which was only

possible due to its capacity to retain clients.

22 In 2010, the sales referring to the Private Brands with which Recheio works – Gourmês, Masterchef and Amanhecer – represented 17,1% of

Recheio’s sales and increased 11,6% yoy.

The purpose of the Amanhecer project is to revitalize the Portuguese Traditional Retail segment...




PAGE 17/34

4,5%

4,6%

4,7%

4,8%

4,9%

5,0%

0

50

100

150

200

2010

2011

E

2012

E

2013

E

2014

E

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

Exhibit 30: Madeira

Sales (€ mn) EBITDA Margin

Exhibit 29: Madeira Operational Forecasts

2010 2011E 2012E 2013E 2014E 2015E 2020E

Total # Stores 15 15 15 15 15 15 15


Growth (%) (0,33%) 0,00% 0,00% 0,00% 0,00% 0,00% 0,00%

Sales (€ mn) 142 145 147 149 152 154 170

Growth (%) 7,58% 2,35% 1,42% 1,42% 1,44% 1,64% 1,79%

Sales/sqm (€ tho.) 10,0 10,2 10,3 10,5 10,6 10,8 12,0

Growth (%) 7,93% 2,35% 1,42% 1,42% 1,44% 1,64% 1,79%

Capex (€mn) 12,6 2,4 2,5 2,5 2,6 2,6 2,9


Similarly, despite all the negative impacts on tourism (with effects being felt

through the HoReCa channel), Recheio was still able to post an annual growth of

2,3%, benefiting from a redesigned distribution strategy at the hotel and

restaurant levels. For the future, we expect the number of stores to remain

constant and, thus, there should be no significant changes in the total sales area.

Nevertheless, we believe that both Pingo Doce and Recheio will continue

strengthening their market leadership, as long as they keep applying the recipe

that has proven successful in Portugal Mainland: investment on differentiating

pillars and a very competitive price policy. Sales should, therefore, grow at a

CAGR of 1,84% until 2020, while the EBITDA margin, after a slight decrease in

2010, should recover in the following years and stabilize at 4,9%.

Exhibit 31: Madeira Forecasts (€ mn) 2010 2011E 2012E 2013E 2014E 2015E 2020E

Net Sales & Services 142 145 147 149 152 154 170

EBITDA 6,7 7,0 7,1 7,3 7,4 7,6 8,4

EBITDA margin (%) 4,7% 4,8% 4,8% 4,9% 4,9% 4,9% 4,9%

Depreciation (1,0) (1,0) (1,1) (1,1) (1,1) (1,2) (1,3)

EBIT 5,7 5,9 6,0 6,2 6,3 6,4 7,0

EBIT margin (%) 4,0% 4,1% 4,1% 4,2% 4,2% 4,1% 4,1%


Biedronka

During the last five years, JM has been executing an aggressive store opening

plan in Poland and, consequently, sales area have been increasing at a CAGR of

18,92%. Sales, in turn, have also been increasing at a fast pace (a CAGR of

28,95%, during the same time period), while the EBITDA margin has been

improving year after year (increasing from 7,2%, in 2009, to 8,1% in 2010).

These results derive from Biedronka’s impressive performance which has been

strengthened exactly by its growing operational scale, but also by the fact that

they are cost leaders in the Polish food distribution segment, allowing them to





PAGE 18/34

maintain the market price leadership. Below, in Exhibit 32, we present our

operational forecasts for JM’s Polish operations.

Exhibit 32: Biedronka Operational Forecasts

2010 2011E 2012E 2013E 2014E 2015E 2020E

Total # Stores 1.649 1.854 2.089 2.300 2.650 3.000 3.375

Total Sales Area ('000 sqm) 938 1.055 1.189 1.309 1.508 1.707 1.920

Growth (%) 15,19% 12,43% 12,68% 10,10% 15,22% 13,21% 1,05%

Sales (€ mn) 4.807 5.813 6.856 7.778 9.185 10.833 15.573

Growth (%) 29,05% 20,94% 17,94% 13,45% 18,08% 17,94% 6,51%

Sales/sqm (€ tho.) 5,1 5,5 5,8 5,9 6,1 6,3 8,1

Growth (%) 12,03% 7,56% 4,67% 3,04% 2,49% 4,18% 5,40%

Sales/sqm (tho. PLN) 20,5 22,1 23,6 25,1 26,7 28,4 38,8

Growth (%) 3,71% 8,04% 6,61% 6,47% 6,25% 6,48% 6,46%

Capex (€mn) 270,9 516,9 563,8 549,2 773,9 823,6 342,5


We’ve incorporated JM’s aggressive expansion plans in Poland and, therefore,

we expect it to accumulate a total of 3.000 Biedronka stores by 2015, which

corresponds to an increase in total sales area from 938.218sqm to 1.706.890sqm

(or, a CAGR of 12,71%). After 2015, we expect a substantial slowdown in the

networking expansion pace and the total sales area is expected to grow at a

CAGR of just 2,38%. In terms of sales, we expect them to grow at a CAGR of

12,47%, from 2010 to 2020, while the EBITDA margin is forecasted to stabilize at

8% from 2017 onwards.

As before, we now present the arguments behind our assumptions and forecasts

which are in line with the company’s projections. This is one of the most

important aspects of our valuation since Biedronka is JM’s most valuable asset

and, consequently, all estimates concerning this business unit have a huge

impact in the final price target. We develop our discussion around three topics

that are crucial for most investors: i) the likelihood of JM’s medium-term

expansion plans in Poland, ii) the Polish competitive environment and

iii) Biedronka’s capacity to sustain a double-digit sales CAGR for the next ten

years and an EBITDA margin of 8%.

i. A total of 3.000 Biedronka stores by 2015. Just how reasonable is that?

As stated before, we’ve assimilated in our model the Group’s medium-term

Polish expansion plans, thus incorporating an average of 270 net additions per

year until 2015. To support our view, we first argue that a sales area CAGR of

18,92%, in the past five years, is evidence of the Group’s commitment and

capacity to execute pretty ambitious expansion plans. Thus, there is a

successful and solid track record, which provides us confidence for the future.

We have incorporated JM’s aggressive expansion plans in

Poland...

Biedronka is JM’s most valuable asset...




PAGE 19/34

28% 30%

50%

65% 70% 72% 74%

92% 93%

Turk

ey

Ru

ssia

Po

lan

d

Cz.

Rep

ub

lic

Net

her

lan

ds

Spai

n

Fran

ce

Ger

man

y

UK

Exhibit 33: Modern Retail Share

15% 20%

38%50% 51%

63% 65% 65%

83%

Ru

ssia

Turk

ey

Po

lan

d

Cz.

Rep

ub

lic

Net

her

lan

ds

Ger

man

y

Fran

ce

Spai

n

UK

Exhibit 34: Top-5 Retailers Share

Furthermore, the Polish retail market is still far from being considered a mature

market. For instance, organized modern retail accounts just for 50% of the

Polish market, which is still considerably low once compared to Western

European standards (where modern channels account for 70-90% of the Food

Retail segment). At the same time, the Top-5 retailers account for a 38%

market share which is also evidence of a developing market that has not

reached maturity yet. These contrasts are illustrated in both Exhibits 33 and 34,

where we can observe how Poland compares with both mature European retail

markets (e.g. Germany or France) and other fragmented and less developed

markets such as the Turkish or the Russian ones. Therefore, this scenario

represents a major occasion for modern retail chains to strengthen their position

in this market, especially for the leader Biedronka which should see its market

share increasing up to 15-16% by 2015, according to our estimates. This

increase is expected to be mainly driven at the expense of the traditional retail

segment, rather than from Biedronka’s direct competitors.

Additionally we’d like to emphasize that, according to our assessment, there is

margin for further store density growth within the Polish HD segment. Today,

Biedronka accounts for about 72% of the Polish discount stores which amounted

to a total of 2.300, in 2010 – substantially less when compared to Germany

(16.000), for example. Looking at both markets, this means that there is one

discount Polish (German) store per 16.500 (5.100) citizens.

Assuming that Biedronka will indeed achieve its medium term goal and,

moreover, that the other HD competitors will maintain their expansion plans

according to the average of the last two years, we estimated a total of 4.069

Polish HD stores by the end of 2015. This, in turn, would represent about one

discount Polish store per 9.360, which is still above Europe’s major discount

markets (e.g. Germany, Austria or Denmark), with store densities of one per

2.500-7.000. Moreover, notice that we’ve assumed that Aldi will be opening an

average of 17 new stores each year, when it actually seems that they have taken

a step back in what concerns expansion plans in Poland.

Exhibit 35: # Stores in Polish HD Segment (Actual & Forecasts)

2008 2009 2010 2015E

Stores % Stores % Stores % Stores %

Biedronka 1.359 74% 1.466 72% 1.649 72% 3.000 74%

Lidl 308 17% 335 17% 400 17% 630 15%

Netto 157 9% 184 9% 200 9% 308 8%

Aldi 12 1% 40 2% 46 2% 131 3%

Total 1.836 100% 2.025 100% 2.295 100% 4.069 100%


There is margin for further store density growth in the Polish HD segment...

The Polish retail market is still far from being considered a mature market...

Source: Planet Retail and Nova Research

Source: Planet Retail and Nova Research




PAGE 20/34

1.649

530

400

385

336

210

83

48

JM

Schwarz Group

Lidl

Tesco

Carrefour

Netto

Metro Group

Auchan

Exhibit 36: # Stores (Poland, 2011)

Thus, our analysis suggests that Biedronka faces a major opportunity to

consolidate its position in the Polish retail market. When put in the right

context, it turns out that JM’s expansion plans in Poland are far from being

utopian. Indeed, there is a solid track record, while Polish discount saturation

levels indicate that there is margin for further growth in terms of the number of

stores and we expect a convergence to modern store density standards only

after 2015. This process should be mainly driven by Biedronka, which was not

only the HD chain with the most ambitious expansion policy in the past recent

years, but also the one with the most clear and ambitious plans for the future.

ii. Assessing the competitive environment in Poland.

Biedronka’s profitable business and solid performance (ROIC estimated at 15%,

while the EBITDA margin at 8% and gradually increasing) often raises the

following question: how long will Biedronka be able to sustain its leading position

in the Polish Food Retail?

While this remains a valid point, first recall that the Polish Food Retail market is

already a very competitive and fragmented market. As previously shown,

Biedronka is the current leader in the Polish food-retail market (12%), above

some of the world’s retail giants such as: the Schwarz Group (7%), Tesco (7%)

or Carrefour (6%). Thus, there are major competitors already in Poland and, in

fact, they have been operating there for a long time, just like Biedronka23

.

As we’ve argued before, all retail formats have considerable margin for further

growth in the Polish market. Thus, it’s not easy to argue what is Biedronka’s main

threat. If we take into account size and geographical spread, then Tesco and

Carrefour are clearly the main perils. Since its first entrance in the Polish market,

Tesco started developing a leading position in the hypermarket format (with both

organic growth and M&A operations). Currently, it operates over 380 stores

(including different formats: discount, hypermarket and supermarket) and

intends to boost its pace of growth by opening about 100 new

supermarkets between this year and the following24

. Similarly, Carrefour also

started operating in Poland through its hypermarket chain, even though its

operations also comprise supermarkets and convenience stores (together, they

sum over 300 stores). Currently, its number one priority is to focus on its smaller

formats: the 5 Minut convenience stores and the Carrefour Express outlets. In

23 The Portuguese retailer decided to bet on the expansion of the Polish market in 1997, with the acquisition of 243 Biedronka stores; the

Schwarz Group decided to enter the Polish market under the Kaufland chain (2001) and then with Lidl (2002); Tesco entered Poland in 1995 through the acquisition of the Savisa SA chain; Carrefour in 1997; Auchan in 1996 via organic growth and the Metro Group also entered the Polish market first via organic growth under the Makro cash & carry chain (1994) and, later, under the Real hypermarket chain (1997).

24 A total investment of more than PLN0,5bn which should add to around PLN10bn that the company has already invested in Poland.


JM’s expansion plans in Poland are far from being utopian...




PAGE 21/34

40%

36%

24%

17%

8%

7%

5%

5%

4%

3%

7%

Biedronka

Real

Tesco

Carrefour

Auchan

Spolem

Lidl

Kaufland

Netto

Makro

Other

Exhibit 37: What is the name of the shop you visit more frequently?

(September, 2009)

fact this strategy is already under way and, in 2010, Carrefour opened 50 new

outlets, while it also unveiled its intentions to open 200 new Carrefour Express

outlets each year, from 2011 onwards.

On the other hand, if we consider similar business strategies then, looking at the

discount chains established in Poland, we argue that Lidl is Biedronka’s main

competitor since it has been increasing its pace of growth accumulating 400

stores in 2010 (+19% yoy), while Aldi ended last year with just 48 stores, when it

seems that its strategy failed in Poland, and Netto has been decelerating its pace

of growth in terms of new store openings (210 stores by the end of 2010).

Concerning the last deal that was made in Poland, we regard it as a positive

development since the Zabka stores now belong to a UK-based PE firm, rather

than a direct trade competitor. Even though Zabka operates more than 2.000

stores in Poland, we don’t perceive as a threat to Biedronka (recall that this is

Poland’s largest convenience chain with smaller average size stores than

Biedronka: 60sqm vs 550sqm).

From this first analysis, we conclude that Poland’s competitive environment is

one of the most demanding in Europe, especially when we consider the

myriad of international players that have been and will continue struggling to

consolidate their position in the (yet to be mature) Polish retail market.

It is often argued that Biedronka might have benefited from the fact that both Lidl

and Aldi postponed expansion to Poland as they wanted a supermarket culture to

set up itself first. According to this view, it would be a matter of time before these

giants, with enormous economies of scale, decided to crush Biedronka profit

margins. However, we argue the “party” has been open for the past 15 years and

if Biedronka has had a huge success in the past recent years is not because

they allowed, but rather because they couldn’t prevent it. Moreover, if we

recall how large Casino, Tengelmann, Ahold and others once were in Poland, we

realize that scale is not everything. Indeed, this tells us that, throughout time,

Biedronka was the one that not only grew in size, but also, better understood

the needs of the Polish consumers and aligned its strategy in the Polish retail

market accordingly.

Polish consumers enjoy proximity/convenience as they prefer to go shopping,

mostly on foot, four-to-five times per week day and, even though they do value

quality, they are known to be extremely price conscious – recall that the Polish

per capita GDP is still well below the EU average. Thus, Biedronka’s high quality

products combined with its “every day low prices” policy – selling at a discount in

relation to Lidl (3-4%), supermarkets (8%), hypermarkets (15%) and traditional

Source: PMR Research

In the HD segment, Lidl is Biedronka’s main competitor and...

...we do not perceive the Zabka stores as a threat to Biedronka.




PAGE 22/34

7,8%

7,9%

8,0%

8,1%

8,2%

8,3%

8,4%

0

5.000

10.000

15.000

20.000

20

10

20

11E

20

12E

20

13E

20

14E

20

15E

20

16E

20

17E

20

18E

20

19E

20

20E

Exhibit 38: Biedronka

Sales (€ mn) EBITDA Margin

retail (20%) – and a strong presence in more than 600 Polish towns and cities,

seems to be the strategy that best suits Polish customers’ needs. Indeed,

the proof that this is the adequate strategy, given the current economic and social

context, is the format diversification strategies that both Tesco and Carrefour

have been more recently adopting (after having failed with their hypermarket

chains), in line with Biedronka’s proximity strategy.

In the future, however, it is expected a significant increase in the Polish per

capita GDP, which means an improvement in life standards with rising consumer

spending and increased car ownership. In face of such scenario, there is often

the idea that Biedronka will no longer suit Polish needs as they will move away

from discount formats. Once again, we disagree with such view because, first of

all, discount chains have been quite successful in some countries with high

consumer purchasing power (e.g. Germany where Aldi and Lidl hold a 40%

share in the grocery food segment). Secondly, we focus the Group’s ability to

shape its strategy according to the environment where it operates. Recall that

Soares do Santos first arrived at Poland operating under the Eurocash stores in

1994. However, after analyzing the needs of the Polish consumers, the Group

realized that the discount format was the one that better suited that market.

iii. A sales CAGR of 12,5% and an EBITDA margin stabilizing at 8%. Is that

really sustainable?

If we look into past data, we observe that Biedronka has been clearly

outperforming the Polish Food Retail market. For instance, between 2005-2009

the former grew at a CAGR 28,9%, while the market posted a 9,6% CAGR. In the

future, we expect this tendency to be preserved: according to Datamonitor, the

Polish grocery/FMCG market is expected to grow at a 7-8% CAGR over

2009-2014E, while Biedronka is expected to grow at a 19,78% CAGR over the

same period. To support our view, we argue that Biedronka will take full

advantage of the Polish positive economic prospects, by continuing to execute

the most ambitious expansion plans of the Polish food retail market.

Even if Biedronka is able to grow at a double-digit CAGR until 2020, the major

suspicion among investors is Biedronka’s capacity to sustain an EBITDA margin

of 8% in the medium/long term. However, we’d like to recall that the EBITDA

margin of JM’s Polish operations improved gradually from 5,1% (2005) to 8,1%

(2010). This performance reflects Biedronka’s growing scale of operation but,

more importantly, its cost leadership in the Polish food distribution sector and

continuous search to improve efficiency, which allows it to preserve its price

leadership and to strengthen the operational margins. Furthermore, recall that


Biedronka understood the Polish customers and developed a strategy that best suits their needs...




PAGE 23/34

last year’s operational results were achieved even with a price advantage over

Lidl in particular, but also supermarkets, hypermarkets and traditional retail.

Thus, we argue that Biedronka is safe against any attempt to increase

competition through prices. Additionally, we highlight the fact that, currently,

around 60% of Biedronka’s total sales refer to Private Label goods. Similarly to

Portugal, the perception concerning these types of products is changing and,

thus, we expect them to remain growing and increasing its share within

Biedronka, which will help strengthening both sales and the EBITDA margin.

Exhibit 39: Biedronka Forecasts (€ mn) 2010 2011E 2012E 2013E 2014E 2015E 2020E

Net Sales & Services 4.807 5.813 6.856 7.778 9.185 10.833 15.573

EBITDA 392 477 562 646 762 899 1.246

EBITDA margin (%) 8,1% 8,2% 8,2% 8,3% 8,3% 8,3% 8,0%

Depreciation (86) (106) (127) (146) (174) (204) (248)

EBIT 305 371 435 500 588 695 998

EBIT margin (%) 6,3% 6,4% 6,3% 6,4% 6,4% 6,4% 6,4%


Conclusion: Biedronka owns a 70% share in the HD segment and is the current

leader of the Polish Food Retail market. In the future, we believe that Biedronka

will continue outperforming its competitors since it is the most popular and

the largest network of retail stores in Poland, with over 1.600 stores very well

positioned in both large cities and small towns, has an adequate strategy that

evolves according to the needs of the Polish consumers and, ultimately, has the

most ambitious (but feasible) investment plan for the future. High margins in

Poland could attract increased competition, but as we’ve argued, Biedronka is

already operating in one of the toughest European environments.

Expansion Plans: a brief note

We draw attention to the fact that JM is expected to unveil its expansion plans

to a 3rd

market this year. There has been much speculation on the matter and

we expect that this will be a value trigger for JM’s share. Even though there is no

certainty yet about the third location, the Group has already excluded the African

continent. The three main criteria set by JM consider: i) population size, ii)

political stability and iii) low corruption standards.

Apart from the location, there is no information of what kind of format will be

exported. Indeed, according to the company’s Investor Relations Office, the

concept will depend on the destination and, thus, it’s not clear whether JM will

export the Biedronka concept. Even though JM has spent time and energy with

the Ukrainian market, an eventual return to Brazil is not ruled out.

JM spend a lot of time studying the Ukrainian market, but an eventual return to Brazil is not ruled out...




PAGE 24/34

Manufacturing

With the erosion of the Portuguese customers’ purchasing power, we expect

them to become even more price sensitive in the near future. Moreover, since the

perception concerning Private Label goods is changing25

, we forecast an overall

increase in the expenses associated with them, which should occur at the

expense of premium products and, thus, increase the competition faced by this

business unit. Therefore, we were very precautious in our forecasts, with sales

growing at a CAGR of 2,44% until 2020 (slightly above long-term inflation) while

the EBITDA margin should gradually decrease to 14%.

Exhibit 40: Manufacturing Forecasts (€ mn) 2010 2011E 2012E 2013E 2014E 2015E 2020E


EBITDA 34 34 34 35 36 37 42

EBITDA margin (%) 14,4% 14,3% 14,3% 14,2% 14,2% 14,2% 14,0%

Depreciation (3,1) (3,2) (3,3) (3,4) (3,5) (3,6) (4,1)

EBIT 31 31 31 32 32 33 38

EBIT margin (%) 13,1% 13,0% 12,9% 12,8% 12,8% 12,8% 12,7%

Capex 5,5 5,6 5,7 5,8 5,8 5,9 6,5


Services

These last two business units are the ones more exposed to economic

volatilities. Therefore, given the increasing difficulties to sell branded products

that we forecast, the Services business unit intends to enter alternative growth

channels/businesses and, simultaneously, to build leadership positions in the

Portuguese market for the represented brands. Thus, we also remain prudent

and, consequently, sales are expected to grow at a CAGR of just 2,66% until

2010, while the EBITDA margin is expected to remain constant at 1,7%.

Exhibit 41: Services Forecasts (€ mn) 2010 2011E 2012E 2013E 2014E 2015E 2020E


EBITDA 1,5 1,5 1,6 1,6 1,6 1,7 2,0

EBITDA margin (%) 1,7% 1,7% 1,7% 1,7% 1,7% 1,7% 1,7%

Depreciation (1,0) (0,9) (0,9) (0,9) (0,9) (0,9) (0,9)

EBIT 0,5 0,6 0,6 0,7 0,7 0,8 1,0

EBIT margin (%) 0,6% 0,6% 0,7% 0,7% 0,7% 0,7% 0,9%

Capex 0,6 0,6 0,6 0,6 0,6 0,7 0,7


25 Nowadays, the view that private labels are a low-cost alternative for national brands, normally with a low-quality associated to it, has

changed. Indeed, according to TNS Worldpanel data, private brands are in 100% of homes, while 95% of the Portuguese people that were questioned admitted that they will continue to purchase these brands.

Manufacturing and Services are JM’s business units most exposed to economic volatilities..




PAGE 25/34

0

100

200

300

400

500

600

700

20

10

20

11E

20

12E

20

13E

20

14E

20

15E

20

16E

20

17E

20

18E

20

19E

20

20E

Exhibit 43: Capex Forecasts (€ mn)

Expansion Revamping Others

Capex and NWC

According to our model, Capital Expenditures (Capex) are divided in three main

categories: i) the expenses associated with new store openings, ii) the costs

related to the maintenance and refurbishment of all stores and iii) a third group

where we include other kind of costs relative to logistics, unexpected events and,

also, the conversion of the remaining Plus stores26

(see Exhibit 42).

Exhibit 42: Capex Forecasts (€ mn) 2010 2011E 2012E 2013E 2014E 2015E 2020E

Expansion 201,5 382,4 436,1 388,7 603,6 613,9 93,6

Revamping 149,4 177,8 193,5 204,1 224,3 245,7 286,1

Others 83,4 84,4 67,4 80,0 59,0 87,1 84,9

Total 434,2 644,6 696,9 672,8 887,0 946,8 464,6


Even though we fully incorporated JM’s Polish expansion plans in our model, we

were a bit more cautious in what concerned Portugal. Not only because the

Portuguese Food Retail market is at a more advanced stage, but also due to the

recessionary environment that will impact negatively consumption in the following

years. Thus, in our expansion forecasts, we integrated JM’s aggressive target

of 3.000 Biedronka stores, by the end of 2015. In addition, we assumed that

the total number of revamped stores will converge to a value that represents 7%

(9%) of JM’s Biedronka (Pingo Doce) stores. Apart from that, we’ve also

considered other capital expenditures associated with unexpected events that

represent 0,20% of sales, for each business unit. We also incorporate in our

model JM’s intentions to restructure its Portuguese logistics network in the next

three years, assuming a 30% cost reduction with its DCs after 201327

. In Poland,

we relied on current figures which show that each Distribution Center (DC)

serves a target of 150-180 stores. We assume that this proportion will remain

valid in the future and since we expect JM to have a total of 3.375 Biedronka

stores by 2020, it should also have around 20 DCs.

After 2015, we expect a considerable deceleration of JM’s expansion plans,

especially in what concerns the Polish operations. However, since revamping

expenditures are expected to grow in proportion with the number of stores then,

according to our model, they will ultimately exceed expansion expenditures by

2016 (see Exhibit 43).

26 According to JM, out of the 18 former Plus stores left to be converted in Portugal, 8 are expected to be converted this year and the rest in

2012 – each store has an average conversion cost of €1,2mn. In Poland, the process of converting the former Plus stores was completed was already completed and took approximately 3 months due to the physical similarities between them and the standard Biedronka stores.

27 Recall that the company set the target of having four to five DCs, over the next three years (instead of the current seven).





PAGE 26/34

15%3%

81%

Exhibit 44: Capex (2011-2013)

Retail Mainland

Recheio

Madeira

Biedronka

Manufacturing

Services

According to JM, the aggressive capex plan declared by the company for the

triennium 2011-2013 should amount to €1,7bn, of which more than ¾ to be

invested in Poland. Nevertheless, this seems an overly optimistic guideline once

compared to our own estimate – approximately, €2bn for the same time period.

In any case, our forecast concerning the Capex percentage assigned to

Biedronka (81%), throughout the same time period, is in line with JM’s forecasts.

Thus, clearly, this is the business unit that will canalize the biggest portion of the

company’s investment in the following years, while Retail Mainland and Recheio

should be allocated with substantially less (15% and 3%, respectively), during the

same triennium. Despite the aggressive expansion plan in Poland, we highlight

Biedronka’s sufficiently high scale and consolidated position that allows it to

totally finance the respective capital expenditures via Cash Flow generation.

Exhibit 45: Capex Breakdown by Business Unit (€ mn) 2010 2011E 2012E 2013E 2014E 2015E 2020E

Retail Mainland 115,5 102,5 107,2 97,1 93,1 95,4 98,9

Recheio 29,1 16,6 17,1 17,6 11,0 18,5 13,2

Madeira 12,6 2,4 2,5 2,5 2,6 2,6 2,9

Biedronka 270,9 516,9 563,8 549,2 773,9 823,6 342,5

Manufacturing 5,5 5,6 5,7 5,8 5,8 5,9 6,5

Services 0,6 0,6 0,6 0,6 0,6 0,7 0,7

Total 434,2 644,6 696,9 672,8 887,0 946,8 464,6

Capex/Sales 5,00% 6,54% 6,30% 5,51% 6,41% 6,01% 2,18%


We would still like to emphasize the improvements that have been made in some

of JM’s activity ratios, throughout time. This past performance associated with a

growing operational scale which should empower the company in its relations

with both suppliers and customers, gives us confidence for the future. Thus, we

are optimistic on a continuous improvement as we expect the Group to receive

from customers in 7 days, while paying to its suppliers in 97 days, by 2020.

Simultaneously, the inventory period should continue to fall (until 17 days) as the

percentage of perishables in total sales gradually increases.

Exhibit 46: Net Working Capital Breakdown 2006 2007 2008 2009 2010 2020

Average Inventory Period 25,6 23,8 22,6 22,2 18,2 17,0

Average Collection Period 11,7 10,4 8,6 9,1 7,8 7,0

Average Payment Period 107,1 107,4 100,4 102,4 97,6 97,0






PAGE 27/34

3,0%

3,3% 3,3%3,3%

3,4%

Ger

man

y

Net

her

lan

ds

Fin

lan

d

Fran

ce

Au

stri

a

Exhibit 47: 10-year Gov. Yields

SOTP Valuation

In order to obtain a price target that reflects JM’s fundamental value, we decided

to use a Sum-of-the-Parts (SOTP) Valuation. We believe that this is the most

accurate approach since JM is not only present in different regions (Poland,

Portugal mainland and Madeira) – thus, being subject to different economic

environments, market conditions and corporate tax rates – but also operates in

different segments (hard discount, cash & carry, supermarket, industry and

Services) and holds different stakes in each of its business units.

Therefore, we have evaluated the fundamental value of each of JM’s six

business units using the Discounted Cash Flow (DCF) method. Moreover, we

decided to compute the Free Cash Flows for the Firm (FCFF) for each of JM’s

business units, according to each local currency. Consequently, since FCFF

represents the Cash Flows available to all the firm’s investors (bondholders and

shareholders), we had to discount them to the present using a Weighted

Average Cost of Capital (WACC)28

, i.e. a cost of capital that takes into account

both sides of financing (equity and debt).

i. Cost of Equity ( )

In order to estimate the cost of equity, we relied on the Beta Approach29

. In this

way, we’re assuming that JM’s exposure to country risk is proportional to its

exposure to all other market risk, measured by beta.

Given the impossibility of finding a riskfree investment, we resorted to the most

common proxy: ten-year government bonds. Furthermore, recall that the

currency in which cash flows are estimated has to be consistent with the riskfree

rate we choose. Bearing this in mind, we computed a riskfree rate in Euros

(Portugal) and another one in Zlotys (Poland). For the first case, we considered

the entire set of Aaa rated countries in the Euro zone (the standard for a default

free country) and, our final decision was based on the one with the lowest ten-

year Government yield – on May 27, 2011, that was Germany. We couldn’t,

however, use the ten-year yield on the Polish government bonds directly, since

this rate has a default spread incorporated30

. Consequently, we estimated a

default spread for Poland, through the difference between the yield of the Polish

28

(1 ).

29 . 30 According to Moody’s, Poland has an A2 rating since November 2002, which suggests a higher risk of default than an Aaa rating.

Source: Bloomberg

We decided to use a Sum-of-the-

Parts (SOTP) Valuation...




PAGE 28/34

ten-year Government bonds denominated in Euros31

and the (default free)

German ten-year yield, to arrive at a riskfree rate in Zlotys32

.

In order to estimate a Mature Market Equity Risk Premium, we opted for the

standard Historical Premium Approach, i.e. we decided to look into historical

returns of stocks and compare it with the returns earned by bonds, and use this

historical premium as a forecast for the future risk premium. For this, we decided

to compute the risk premium for the U.S., because it’s an equity market we deem

mature and there is more information available, once compared to Emerging

economies or, even, Western European countries. Thus, using the S&P 500 as a

proxy for the market return and the ten-year U.S. Government Bonds as the

riskfree rate, we computed the historical risk premium in the U.S. from 1928-

201033

. Afterwards, we proceeded with the estimation of both the Portuguese

and Polish Additional Risk Premiums34

by considering each country default

spread (the computation of the Portuguese default spread was similar to the

Polish one) adjusted for the volatilities of both the Equity Index and the country’s

ten-year bonds, using two years of daily data.

In what concerns the company’s Beta, we first selected a sample of eighteen

firms35

that we perceived to capture best some of JM’s most important features.

Besides operating in the Food Retail industry, all of these companies are also

present in either Western or Central/Eastern Europe (some in both). We then

regressed the returns of each stock against the returns of local indices, using

three years of weekly data. After unlevering all betas36

, according to each

company’s marginal tax rate and debt to equity ratio, we finally took a simple

average of all the unlevered betas and adjusted it to our target of JM’s long-term

debt to equity ratio (60%) – in this way, by estimating a Bottom-Up Beta for JM,

we were able overcome the large standard errors associated with simple

regression betas37

and, thus, to compute a more precise estimate.

ii. Cost of Debt ( )

We’ve updated our initial estimate for JM’s Cost of Debt. Given that JM is not

rated and has no widely traded bonds outstanding, we decided to estimate its

31 We cannot compare interest rates on bonds denominated in different currencies. 32 . 33 We preferred to use a wider time period to avoid larger standard errors associated with our risk premium (even though we recognize that

by using shorter time periods we obtain a more updated estimate, as the levels of risk aversion are likely to change over time). 34 . 35 Some of these companies are further analyzed in this report (see the Comparables chapter). 36 1 (1 ) ( ) . 37 The SE from JM’s regression Beta yielded 10,81%, while the SE of the average Beta yielded substantially less: 2,29%. The latter was

approximated as follows: , where is the number of firms in our sample.

We resorted to the standard Historical Premium Approach, in order to compute a Mature Market Risk Premium...

Additional Risk Premiums reflect each Country Default Spread, adjusted for the volatilities in both the Equity Index and the 10-year Government Bonds...




PAGE 29/34

Cost of Debt in such a way that it could reflect the recent rise of the EU

Sovereign yields but, at the same time, JM’s strong balance sheet. Thus, we

selected a first group composed by the main Portuguese companies with

sufficiently liquid bonds, to capture the Portuguese economic reality. However,

we perceived this first group’s average cost of debt as being too penalizing for

JM taking into account that, from 2008 onwards, the firm has been consistently

reducing its level of debt (see Exhibit 48) and, moreover, considering its past

Average Cost of Debt set at 4,32% (2005-2009).

Exhibit 48: Leverage Position Breakdown 2005 2006 2007 2008 2009 2010

Net Debt (€mn) 497,4 506,2 579,3 845,9 692,0 577,5

Gearing 74,2% 66,0% 67,0% 90,8% 64,9% 51,0%

Average Cost of Debt 3,3% 3,8% 4,8% 5,7% 4,0% -

Interest Coverage Ratio 4,50 5,00 3,79 3,70 5,11 6,80


Thus, we also have incorporated in our analysis some of the major European

companies operating in the same industry as JM that are not (as much) affected

by the Portuguese market volatilities and, as well, benefit from a strong financial

position. In the end, we weighted both estimates in order to achieve an estimate

that, in our view, better reflected JM’s current situation, within a negative

macroeconomic outlook38

. We summarize all of our DCF assumptions below.

Exhibit 49: DCF Assumptions Portugal Madeira Poland

Riskfree Rate 2,99% 2,99% 4,4%

Mature Market Premium 4,31% 4,31% 4,31%

Country Risk Premium 6,44% 6,44% 4,15%

Beta Unlevered 0,531 0,531 0,531

Target D/E 60% 60% 60%

Tax 26,50% 25% 19%

Beta Levered 0,765 0,770 0,789

Cost of Equity 11,21% 11,26% 11,10%

Pre-tax Cost of Debt 7,10% 7,10% 7,20%

After-tax Cost of Debt 5,22% 5,33% 5,83%

D/(D+E) 37,50% 37,50% 37,50%

WACC 8,96% 9,03% 9,1%

Source: Nova Research

We’d still like to emphasize that we have assumed that the Terminal Growth

Rates concerning all the Portuguese business units are in line with the expected

annual long-term inflation rate of 2%. On the other hand, we were a bit more

38 As of 2010, 11,9% of the Group’s Net Debt were denominated in Zlotys – after discussing with the company’s Investor Relations Office, we

assumed JM’s Cost of Debt in Poland to be 10 bps higher.

We have updated our initial Pre-tax Cost of Debt (5,77%) to 7,1%, reflecting Portugal’s deteriorating macroeconomic environment...




PAGE 30/34

optimistic in what concerned the Polish operations due to the country’s growth

potential and the retail market’s embryonic stage (as compared to the

Portuguese one). Thus, we assume a 0,5% real perpetuity growth rate.

The final results of our SOTP Valuation are shown below. As we can see, our

price target FY11 was revised downwards to €15,21 from €15,54, as a

consequence of our updated figures that incorporate the current Portuguese

macroeconomic scenario. Nevertheless, we keep the Buy recommendation,

with a 17,7% upside vs current price.

We also highlight the fact that Biedronka increased its weight in our SOTP

Valuation to 81% EV from 74%, as a consequence of a much better

macroeconomic environment and higher growth prospects in the retail sector.

Indeed, the reason why our new WACC for the Portuguese operations didn’t

impact more severely our Price Target has to do with the fact that JM is getting

increasingly more levered to the Polish economic reality.

Exhibit 51: Sum-of-the-Parts Valuation39

Sum of the Parts (€ mn)

EV Stake Attributable to JMT % Total WACC ROIC

Retail Mainland 1.301 51% 663 12,16% 8,96% 10,42%

Recheio 361 100% 361 3,38% 8,96% 8,58%

Madeira 39 75,5% 30 0,37% 9,03% 6,66%

Biedronka 8.713 100% 8.713 81,44% 9,12% 14,63%

Manufacturing 276 100% 276 2,58% 8,96% 12,04%

Services 9 100% 9 0,08% 8,96% 3,29%

Enterprise Value

10.053

Consolidated Net Debt

(616)

Debt Attributable To Minorities

135

Equity Value

9.571

# Shares

629

Price Target (€)

15,21


According to our assessment, most of JM’s business units are creating value for

the Portuguese retailer (i.e. ROICs exceed WACCs). Even with the aggravated

conditions in Portugal, there are three Portuguese business units with a

sufficiently large ROIC that compensate our new WACC estimate. The

exceptions are the Madeira and Services business units which are not creating

value for JM (however, we argue that this does not represent a major concern for

the Group, as they account for just 0,45% of JM’s EV).

39 The results reported by JM, concerning the Manufacturing business unit, already take into account the Group’s 45% stake.

Exhibit 50: Terminal Growth Rates

Portugal

Perpetuity Growth Rates 2,0%

Real Perpetuity Growth Rates 0,0%

LT Inflation 2,0%

Poland

Perpetuity Growth Rates 3,0%

Real Perpetuity Growth Rates 0,5%

LT Inflation 2,5%

Source: Nova Research




PAGE 31/34

Comparables

We decided to check if our Sum-of-the-Parts Valuation was in line with a

comparison valuation based on Multiples. Given JM’s unique profile in the retail

sector, we decided to obtain information regarding comparable companies

operating in i) Western Europe (exposed mainly to mature markets that resemble

the Portuguese and, thus, subject to limited growth rates) and in ii) Central and

Eastern Europe (which are exposed to retail markets that exhibit significant and

greater growth prospects that resemble Poland). We proceeded with the

analysis, using the same weights we had estimated before (see Exhibit 51).

Exhibit 52: Food Retail Comparables

Market Cap (€mn) Sales (€mn) EV/Sales EV/EBITDA

2010 2010 2010 2011E 2012E 2010 2011E 2012E

Colruyt SA (COLR) 6.108,27 6.752,60 0,77 0,90 0,84 8,72 9,96 9,28

Delhaize Group SA (DELB) 5.612,96 20.850,00 0,36 0,35 0,34 4,71 4,63 4,38

Carrefour SA (CA) 21.746,25 90.099,00 0,36 0,33 0,32 6,22 6,00 5,43

Casino Guichard Perrachon SA (CO) 8.054,65 29.078,00 0,50 0,44 0,41 7,91 6,41 5,81

Metro AG (MEO) 17.559,67 67.258,00 0,32 0,32 0,30 6,37 5,54 5,03

Koninklijke Ahold NV (AH) 11.771,08 29.530,00 0,42 0,41 0,39 5,71 5,43 5,17

WM Morrison Supermarkets PLC (MRW) 8.166,36 16.479,00 0,56 0,47 0,50 7,12 6,39 6,67

J Sainsbury PLC (SBRY) 6.852,46 22.528,50 0,39 0,40 0,37 6,74 6,36 6,33

Tesco PLC (TSCO) 37.384,42 64.173,38 0,75 0,67 0,64 9,57 8,52 7,45

Mature Markets AVG 13.695,12 38.527,61 0,49 0,48 0,46 7,01 6,58 6,17

Magnit OJSC (MGNT) 8.828,41 5.874,54 1,51 1,14 0,83 20,65 15,12 10,74

X5 Retail Group NV (FIVE) 6.045,06 6.268,48 1,42 0,84 0,66 18,92 11,46 8,78

BIM Birlesik Magazalar AS (BIMAS) 3.861,23 3.293,37 1,17 0,93 0,77 21,66 17,52 14,62

Migros Ticaret AS (MGROS) 2.535,92 3.188,75 1,06 0,74 0,65 18,96 14,45 11,67

Emergent Markets AVG 5.317,66 4.656,29 1,29 0,91 0,73 20,05 14,64 11,45

Weighted AVG - - 1,14 0,83 0,68 17,63 13,14 10,47

Jeronimo Martins SGPS SA (JMT) 7.173,94 8.691,00 0,92 1,02 0,91 12,45 13,38 11,86

Source: Bloomberg and Nova Research

As we can see in Exhibit 52, looking at the EV/EBITDA multiple, JM is trading at

a premium once compared to its Western European peers which we believe

to be justifiable given Biedronka’s strong growth potential and a business plan

that has been consistently implemented throughout time (greater focus on its

strongest assets). On the other hand, we may also observe that the exact

opposite occurs once we consider JM’s Emerging peers, which is explained by

the fact that these retailers are operating almost exclusively in Emerging markets,

thus being subject to a much greater growth potential.

We emphasize the fact that, had we use the EV/EBITDA multiple and we would

have obtained a Price Target of €14,8 (2,69% less compared to our target),

which is in line with our Sum-of-the-Parts Valuation.

JM is trading at a premium with

its Western European peers...

http://www.bloomberg.com/apps/quote?ticker=DELB:BB

http://www.bloomberg.com/apps/quote?ticker=CA:FP

http://www.bloomberg.com/apps/quote?ticker=CO:FP

http://www.bloomberg.com/apps/quote?ticker=MEO:GR

http://www.bloomberg.com/apps/quote?ticker=AH:NA

http://www.bloomberg.com/apps/quote?ticker=MRW:LN

http://www.bloomberg.com/apps/quote?ticker=SBRY:LN

http://www.bloomberg.com/apps/quote?ticker=TSCO:LN

http://www.bloomberg.com/apps/quote?ticker=MGNT*:RU

http://www.bloomberg.com/apps/quote?ticker=FIVE:LI

http://www.bloomberg.com/apps/quote?ticker=BIMAS:TI

http://www.bloomberg.com/apps/quote?ticker=MGROS:TI




PAGE 32/34

Financial Ratios 2010 2011E 2012E 2013E 2014E 2020E

Growth & Margins

Sales 18,8% 13,4% 12,3% 10,4% 13,2% 5,5%

EBITDA 23,6% 15,1% 12,8% 12,0% 13,9% 5,6%

EBITDA Margin 7,5% 7,6% 7,7% 7,8% 7,8% 7,7%

Net Profit 34,3% 25,0% 14,6% 13,5% 15,2% 6,3%

Liquidity

Current Ratio 0,41 0,46 0,46 0,48 0,48 0,70

Quick Ratio 0,24 0,29 0,29 0,32 0,32 0,55

Cash Ratio 9,5% 11,4% 11,4% 12,9% 13,1% 25,8%

Working Capital (1.314) (1.429) (1.611) (1.729) (1.976) (2.558)

Leverage

Debt/Assets 20,5% 18,5% 18,7% 19,1% 19,1% 19,5%

ST Debt/Total Debt 25,7% 15,0% 15,0% 15,0% 15,0% 15,0%

LT Debt/Total Debt 74,3% 85,0% 85,0% 85,0% 85,0% 85,0%

Debt/Equity 75,4% 60,0% 60,0% 60,0% 60,0% 60,0%

Financial Leverage Ratio 3,67 3,24 3,21 3,14 3,13 3,07

Interest Coverage Ratio 6,80 8,46 8,83 8,81 8,91 8,85

Activity

Total Asset Turnover 2,09 2,06 2,06 2,04 2,04 2,04

Average Inventory Period 18,19 18,00 18,00 17,50 17,50 17,00

Average Payment Period 97,56 97,50 97,50 97,50 97,50 97,00

Average Collection Period 7,82 7,50 7,50 7,50 7,20 7,00

Capex/Sales 5,0% 6,5% 6,3% 5,5% 6,4% 2,2%

Capex/Assets 10,4% 13,5% 12,9% 11,2% 13,1% 4,4%

Profitability

Return on Sales 5,3% 5,5% 5,5% 5,7% 5,8% 6,0%

ROA 6,8% 7,3% 7,4% 7,6% 7,7% 8,2%

ROE 24,8% 23,5% 23,8% 23,8% 24,2% 25,0%

Pre-tax ROIC 23,8% 25,6% 25,5% 25,8% 26,4% 30,5%

Valuation

EV/EBITDA

13,38 11,86 10,59 9,30 6,09

EV/Sales

1,02 0,91 0,82 0,73 0,47

EV/EBIT

18,65 16,41 14,47 12,60 7,83

P/E

27,56 23,94 21,11 18,26 11,21

Dividend Yield (%)

50% 50% 50% 50% 75%




PAGE 33/34

Financial Statements (€ mn) BALANCE SHEET 2010 2011E 2012E 2013E 2014E 2020E

Tangible assets 2.193 2.591 3.016 3.400 3.955 5.247

Intangible assets 863 867 872 862 864 1.139

Other non-current assets 199 234 271 304 353 465

Total non-current assets 3.256 3.692 4.158 4.567 5.172 6.851

Inventories 369 395 440 477 539 797

Trade debtors, accrued income and deferred costs 182 209 231 249 281 404

Cash and cash equivalents 212 271 307 379 440 1.330

Other current assets 141 222 251 310 360 1.088

Total current assets 903 1.097 1.228 1.416 1.620 3.620

Total assets 4.159 4.789 5.387 5.983 6.792 10.471

Share capital 629 629 629 629 629 629

Retained earnings 136 483 683 910 1.172 2.413

Others 80 80 80 80 80 80

Minority interests 287 287 287 287 287 287

Total Shareholders’ equity 1.132 1.479 1.679 1.906 2.168 3.409

Borrowings 634 754 856 972 1.106 1.739

Other non-current liabilities 168 168 168 168 168 168

Total non-current liabilities 802 923 1.025 1.140 1.274 1.907

Trade creditors, acrued costs and deferred income 1.895 2.130 2.393 2.613 2.982 4.579

Borrowings 219 133 151 172 195 307

Other current liabilitites 110 124 139 152 173 268

Total current liabilities 2.225 2.387 2.683 2.937 3.350 5.155

Total liabilities 3.027 3.310 3.708 4.077 4.624 7.062

Total Shareholders’ equity and liabilities 4.159 4.789 5.387 5.983 6.792 10.471

INCOME STATEMENT 2010 2011E 2012E 2013E 2014E 2020E

Net Sales & Services 8.691 9.860 11.070 12.220 13.839 21.325

EBITDA 653 751 848 949 1.081 1.651

EBITDA margin 7,5% 7,6% 7,7% 7,8% 7,8% 7,7%

Depreciation (191) (212) (235) (255) (284) (367)

EBIT 462 539 613 695 798 1.283

EBIT margin 5,3% 5,5% 5,5% 5,7% 5,8% 6,0%

Financial Results (68) (64) (69) (79) (90) (145)

Non Recurrent Items (15) 0 0 0 0 0

EBT 379 475 543 616 708 1.138

Income Tax (79) (101) (114) (129) (147) (233)

Net Income 300 375 429 487 561 905

Minority interests (19) (27) (29) (33) (37) (51)

Net Income attributable to JM 281 347 400 453 524 854

Dividends (222) 0 (200) (227) (262) (640)

Additions to Retained Earnings 59 347 200 227 262 213

CASH FLOW STATEMENT 2010 2011E 2012E 2013E 2014E 2020E

Operating Profit 462 539 613 695 798 1.283

Depreciation 191 212 235 255 284 367

Net Interest Expenses (83) (64) (69) (79) (90) (145)

Income Tax (80) (101) (114) (129) (147) (233)

△ NWC 239 115 182 118 247 57

Cash Flow from Operations 728 701 846 860 1.091 1.330

Net Capex (387) (645) (697) (673) (887) (465)

Other Changes in Investments (28) (4) (4) 9 (2) (127)

Minorities (19) (27) (29) (33) (37) (51)

Cash Flow from Investment (434) (676) (731) (697) (926) (643)

Dividends paid (222) 0 (200) (227) (262) (640)

Increase/Decrease in Loans (27) 34 120 136 157 128

Others 0 0 0 0 0 0

Cash Flow from Financing (249) 34 (80) (91) (105) (512)

Initial Cash 167 212 271 307 379 1.155

△ Cash 45 60 36 72 61 175

Ending Cash 212 271 307 379 440 1.330




PAGE 34/34

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 a Masters of Finance student, following the 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/her own personal judgement. 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/her personal opinion about the subject company and its securities. He/she 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 does not deal for or otherwise offers any investment or intermediation Services to market counterparties, private or intermediate customers. This report is not an investment recommendation as defined by Article 12.º-A of the Código do Mercado de Valores Mobiliários. The students of NOVA School of Business and Economics are not registered with Comissão do Mercado de Valores Mobiliários as financial analysts, financial intermediaries or entities or persons offering any Services of financial intermediation, to which Regulamento 3.º/2010 of CMVM would be applicable. 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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