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Team H – Fundamental Valuation

Industry: Textile Sector: Nonwoven fabrics

Pegas Nonwovens S.A

Date: 18/12/2014 Ticker Symbol: PGSNsp.PR (Reuters)

Current Price: 642 CZK Exchange: PSE, WSE

Recommendation: BUY Target Price: 766 CZK (19% upside)

Highlights Strong Operations and a Promising Competitive Position The company’s business of production of nonwoven materials for technical and hygiene use has very good growth prospects because (1) the demand for the products is growing and fairly non-cyclical, especially in the hygiene sector, as the disposable hygiene products made from nonwovens have become a modern necessity in developed markets and are becoming increasingly so in emerging markets as well; (2) the company’s new production plant in Egypt gives it access to emerging markets in the area which offer space for growth; (3) the company is staying ahead of its competition thanks to technological innovating and an advanced research and development program (Pegas’s side-by-side bicomponent material is unique in the world); (4) the company has successfully commercialized some new technologically advanced materials allowing for charging price premiums and is expected to continue doing so in the future; and (5) the company has well established relationships with customer which is essential in the nonwovens industry, as the customer end of the market is dominated by a small number of strong players.

The company’s main exposure to risk lies within the possible expansion of production in Egypt which is planned for 2016 in case of favorable market conditions. We analyzed some possible developments of the expansion as alternative scenarios to the base case of not expanding further in the next 5 years (for more detail see Appendix 14 and 15). The company will decide about the possible further expansion in the first half of 2015. Even though we consider a downside scenario of the development as well, we find an upside scenario more likely in the case of expansion, as the company is well positioned and will only follow up with the expansion if it considers the prospects very good.

Pegas daily stock prices

Source: pse.cz

Market profile

Closing price 18/12/2014 (CZK)

642

52-week price range (CZK)

588.50 - 659.80

Average daily volume 6,191

As % of shares outstanding

0.0671%

2013 dividend yield 1.1

Shares outstanding 9,229,400

Market capitalization (mil. CZK)

5,999.110

Tangible BV per share 119.96

ROE 1.05

P/E 17.43

P/B 1.59

Business Desciption

PEGAS NONWOVENS SA is currently one of the leading synthetic nonwoven textile producers in the EMEA market, which comprises of Europe (Western, Central and Eastern Europe; Russia; Turkey), Middle East and Africa. Fifty-one percent of its production is sold in Central and Eastern Europe, out of which approximately 3.5% is accounted for by Russia and Ukraine (Figure 1).

The Company focuses mainly on the hygiene sector of the industry, which made up 89% of its sales in 2013. The products of Pegas in this sector are used as raw materials for the production of disposable personal hygiene goods, mainly baby diapers, feminine hygiene and adult incontinence products. The Company’s production for the industrial sector, which made up 11% of its sales in 2013, is used for the production of health care and industrial protective clothes, blanket sheets for agricultural cultivation, as well as roofing cover sheets, heat and sound insulation and protective wind barriers in the construction and furnishing industries (Figure 2).

The Company, founded in 1990, issued its IPO in 2006 and is listed on the Prague and Warsaw Stock Exchange with a 100% free float attribute. It is prevailingly held by institutional investors, with the largest one holding approximately 19% of shares. The Company is fully owned by the parent holding group PEGAS NONWOVENS SA based in Luxembourg. Its Czech subsidiary PEGAS NONWOVENS s.r.o. based in Znojmo carries out the Company’s relations with suppliers and customers and runs the three Czech operating subsidiaries: PEGAS-NT a.s., PEGAS - NW a.s. and PEGAS - NS a.s. In 2010, the parent established PEGAS NONWOVENS International s.r.o. as a special purpose vehicle (SPV) for the realisation of potential international investment opportunities. In 2011, the subsidiary PEGAS NONWOVENS EGYPT LLC was established under the SPV in order to carry out the Group´s investments in Egypt (Figure 3).

Pegas has been enjoying a steady growth in production output and sales (Figure 4), which is illustrated by its adding of a new production line almost biannually since the early 2000s (Table 1). The Company´s production capacity is 110 000 tons, out of which 40 000 tons are produced using the innovative BiCo technology unique in the EMEA region. The company currently operates two facilities with a total of

nine production lines located in the Czech Republic. In 2011, the Company commenced international expansion by investing in the construction of a new production facility in Egypt. Due to political instability in the country, the launch of production was delayed. Standard commercial production at the facility was launched in the third quarter of 2013 and it is fully operational sinceJanuary 2014. The Egyptian production has met the expectations and has contributed to a better-than-anticipated 17.7% yoy increase in revenues in the third quarter of 2014. The Egyptian facility has capacity for an additional production line and the decision about extending the production will be made in the first half of 2015.

The Company’s operating expenses are allocated mainly to the purchase of polymer granules, specifically polypropylene and polyethylene, which made up 75% of its costs (Figure 5). Pegas

purchases its production machinery from the leading global manufacturer Reicofil, which enables the production of high-quality, technologically advanced products. The customer mix is highly concentrated, with the 5 top clients accounting for 75% of the Company’s total revenues in 2013. Business strategies The Company’s strategic direction focuses on 3 key areas: (1) Seizing growth opportunities to strengthen its market position – The Company aims to monitor and investment opportunities outside of the Czech

Republic through both acquisitions and greenfield investment (2) Maintain and extend technological leadership in spunmelt nonwoven textiles for disposable hygiene – The Company will continue investing into superior production capacities. Four of its ten are

currently equipped with the newest Reicofil technology allowing for higher production output and performance of technologically advanced production processes. The Company will also aim to maintain close relations with suppliers and customer which allows for development of high-quality, customer-specific products. It will also continue to focus on technologically advanced products and develop materials with unique properties. Lastly, the company will focus on research and development (3) Provide solid returns to shareholders – The Company strives to maintain high operating margins with respect to competitors. It uses the significant levels of cash generated to support expansion, reduce outstanding debt and enable dividend payments.

Figure 1. Revenue Breakdown by Region (% of sales 2013)

Source: Pegas presentation Figure 2. Revenue Breakdown by Product (% of sales 2013)

Source: Pegas presentation Figure 3. Company structure Source: pegas.cz

Figure 4. Production output coumpound growth (kT)

Source: Company data Table 1. Production lines Source: Company data

Corporate Governance and Social Responsibility The Company complies with the standards of both Prague and Warsaw stock exchanges, apart from cases where the company structure does not allow for it. We looked in detail at the following four areas of corporate governance: Board of Directors – The Board is elected by a General Meeting of Shareholders for a term which may not exceed six years. The shareholders are also in charge of dismissing or reappointing Board members. One of the Company´s non-executive directors, Mr. Jan Sýkora, is one of the controlling persons of WOOD & Company Financial Services, a.s., the subfund of which holds the largest portion of the Company´s shares - approximately 19%. This might potentially represent a conflict of interest. Shareholder Rights – All shares issued by Pegas have one vote and carry equal voting dividend rights without any restrictions. There are no shares with special control rights or limitations on their transfer. Audit and oversight – The Company´s financial statements are subject to examination by an independent external auditor. Compensation – The Company discloses compensation policies and beneficial ownership of board members and management (Table 2). The compensation program is overseen by a remuneration committee.

In addition, the Company has seven sell-side research analysts and cooperates with other commenting analysts from both international investment banks and local Czech financial institutions. It has established an internal control system that continuously works on identifying potential risks faced by the Company and making sure all appropriate actions are being taken. Apart from the mentioned potential conflict of interest with respect to the Board of Directors, our analysis shows that the Company complies with standard requirements in corporate

governance. Social responsibility The company aspires to make a positive contribution to the local communities in which it operates. It contributes to the social, cultural and sports life in the Znojmo and Vyškov regions, where its Czech production facilities are based. Its employees have been providing assistance to the Children‘s Centre in Znojmo,which provides paediatric, neurological, rehabilitation, psychological,educational and social care services to threatened or handicapped children and their families. It provides support to the Zlín Children Film Festival and is the general partner Volleyball Club Znojmo – Přímětice. Last but not least, it supports cultural and social life and educational institutions in the Town of Bučovice. In addition, the Company has a certified Environmental Management System and complies with relevant regulations and standards.

Country/Industry Overview and Competitive Positioning

Stabilization of political situation in Egypt The election of president Abdel Fattah El Sisi in May 2014, following the fall of the Mubarak regime and unsuccessful reign of the Muslim Brotherhood, appears to have stabilized the political situation in Egypt. Polls conducted by the Egyptian Center for Public Opinion Research show that the percentage of those who approve of the President´s performance has risen to 86% at the end of his 6

th

month in office. Sisi has introduced economic reforms program that extend until 2030 and include investment incentives and liberalization. Moreover, International credit rating agencies have recently taken a favourable view of Egypt’s outlook because of the jolt to the economy provided by the inflow of aid funds from the Gulf (United Arab Emirates: USD 8 billion; Saudi Arabia: USD 5 billion; Kuwait: USD 4 billion).

1 As a result, the rating agencies have upgraded their ratings of Egypt. In October, Moody’s changed Egypt’s outlook

from negative to stable and affirmed its Caa1 government bond rating.2 S&P improved Egypt’s sovereign credit rating to CCC+/C with a

stable outlook in July 2013 and upgraded it further to B-/B in November of the same year.3 To summarise, although, we might expect

minor demonstrations resulting from the fact the results of economic and other reforms take some time to have a visible impact, a serious deterioration of Egypt’s economic or political situation is highly improbable.

Czech National Bank interventions in Koruna The Czech National Bank launched its foreign exchange intervention in November 2013 due to the ineffectivity of preceeding monetary policies, such as decreasing the discount rate to technical zero, with respect to revival of the Czech economy from the recession. The focus rate of the CNB is 27 CZK/EUR and it does not plan to discontinue this policz earlier than in 2016.

4

Geopolitical tensions between Europe and Russia The political tension between Russia and the EU over Ukraine has led to the introduction of economic sanctions and trade restrictions. These are currently restricted to specific persons and industry sectors, such as energy and military. A further deterioration of the

Figure 5. Cost Composition

Source: Company presentation

Table 2. Compensation of BoD and Key Management

Source: company data

geopolitical situation could lead to a more extensive halt of economic activity between the two regions, thus affecting exports of the Company to Russia and Ukraine which currently constitute 3.5% of revenues. However, we think that deterioration of the situation to such extent is highly unlikely due to political, economic and security reasons. Low risk of decrease in demand as a result of macroeconomic conditions The cyclicality of demand in the nonwovens industry differs among the two sectors. The industrial sector is more prone to suffer from economic cycles due to its exposure to cyclical sectors such as construction and housing or automotive. The hygienic sector is less cyclical due to the non-cyclicality of demand for the end consumer goods such as baby diapers and feminine incontinence products. Neither of the sectors should be negatively affected by macroeconomic conditions in the medium term in the EMEA region. The European Commission´s autumn 2014 forecasts projects a slow but gradual strengthening of European economy from 2015 onward, with all EU countries set to register positive growth. In 2015, the overall GDP growth in the EU area is projected at 1.5%, with a 2.8% in Central and Eastern Europe. Similarly, the World Bank analysis of economic prospects for Middle East and North Africa expects the region to recover from the 2013 contraction caused by domestic and regional turmoil. The region´s GDP should grow steadily, reaching 3.8% in 2016. Population ageing and developing markets as the driver of demand With respect to the hygienic sector, developed markets including Western Europe are already saturated and the demand is rather stable. However, trends such as maturing of the baby-boom generation and longer life-span lead to the phenomenon known as population aging in developed societies. According to Eurostat, the share of those aged 65 years or above in the EU-28’s population is projected to nearly double between 2013 and 2080 from 18.2% to 28.7%. This creates optimistic demand forecasts for the hygienic sector of the nonwovens industry due to a higher need of adult incontinence products. On the other hand, developing markets are experiencing trends such as population growth, increase in living standards and purchasing power and a change in lifestyle leading more women to work outside of home. Thus the demand the demand for baby and feminine products is expected to grow in these less mature, non-saturated markets. Consolidation trends in the nonwovens industry Producers in the nonwoven industry range from large multinationals, for which nonwovens are only a part of the business, companies that operate as a part of large industrial conglomerates, to small privately owned companies. In recent years, there has been a trend of frequent acquisitions and buyouts of the smaller players. For example, Polymer Group Inc. (PGI) has extended its reach to Brazilian markets by acquiring Providencia In June 2014 and Fibertex entered the US market by acquiring Non Woven Solutions in October 2014.

Competitive positioning Superiority in technology and innovation In the nonwovens industry, added value is provided by employment of new, unique technologies and development of technological ly-advanced products. Thus, a lot of emphasis should be put on research and development. Pegas is vertically integrated in this respect, which simplifies the development of specific quality products and decreases the incurred R&D costs. The Company cooperates with polymer suppliers as well as the supplier of production machinery Reicofil. Costs are shared with customers, allowing for development of products fitted to their needs, thus increasing their commercialization potential. The intellectual property of Pegas with respect to the innovative production processes is protected by patents, while its customers hold patents for the end products. It currently generates around 30% of revenues from sales of technologically advanced products, including those using the BiCo technology which is unique within Europe Effective use of production capacity The purchase of the newest Reicofil technology illustrates that the Company has been investing in modernization of its production lines. These do not only increase the production capacity, but also allow for the production of high-end and –quality materials that are an essential competitive advantage in the hygiene sector. The more obsolete and less effective machinery is in turn used for its industrial non-woven production, which is much less quality-demanding. Solid relations with customers Pegas has well-established relations with its core customers as illustrated by its numerous recognition awards from the key client, Proctor&Gamble (P&G), which accounts for 45% of the Company’s revenues. Since 2008, it has annually received the “Excellence award”, which is granted to only 70 to 80 best suppliers from among a total of approximately 75 thousand. In 2010 and 2011 it was designated “Partner of the year” along with 5 and 11 other suppliers, respectively. “Partner of the year” is P&G´s highest external business partner recognition. Advantageous location of production sites The location of production facilities in the Czech Republic and Egypt endows Pegas with the advantage of lower operating costs in terms of labor force and electricity costs. Moreover, both have a central position with resepect to the target region, resulting in lower transportation costs.

Figure 6. Porter´s Five Forces

Source: Team analysis

Investment Summary We issue a BUY recommendation on Pegas Nonwovens with a target price of CZK 766 (EUR 27.75) using a weighted average of the Discounted Cash Flow method and multiples method (the multiples used are EV/EBITDA, Price/Book and Price/Earnings). This offers a 19% upside from the closing price of CZK 642 on December 18, 2014 on the Prague Stock Exchange. Pegas is a company with solid operations and good growth prospects and is expected to capitalize on its technological advantages and competitive and geographical positioning.

The company’s business of production of nonwoven materials for technical and hygiene use has very good prospects because (1) the demand for the products is growing and fairly non-cyclical, especially in the hygiene sector, as the disposable hygiene products made from nonwovens have become a modern necessity in developed markets and are becoming increasingly so in emerging markets as well; (2) the company’s new production plant in Egypt gives it access to emerging markets in the area which offer space for growth; (3) the company is staying ahead of its competition thanks to technological innovating and an advanced research and development program; and (4) the company has successfully commercialized some new technologically advanced materials allowing for charging price premiums and is expected to continue doing so in the future.

A Growing Business with a Largely Non-Cyclical Nature The exposure of hygienic sector of the nonwovens industry, which represents the largest share of the Company´s operations, to market fluctuations is relatively low. The market downturn does not significantly affect the end consumer demand, because the end product is considered a basic necessity in the modern world. On the other hand, in normal market conditions the company can expect a stable demand growth in both developed and developing markets stemming from the increased demand for adult incontinence products and baby and feminine products, respectively. In addition, the Company enters into 1 to 3 year contracts with its customers, which specify the volume ranges, thereby further offsetting the effects of market fluctuations. Healthy Operations and Potential for Expansion The company has been consistently showing EBITDA margins of 15%-20% and is expected to continue doing so in the future; the operations of the company show good results and the production is relatively well protected against raw material cost growth in the long run due to the pass-through mechanism which translates the costs increases to the end customer. Pegas has been expanding by adding new production lines and thus increasing its output capacity every three years or less since 1996. In 2011 it decided to commence international expansion and the production at its Egyptian plant was launched in 2013. In case of favorable market conditions the company has the option of building another production line in the Egyptian plant and thus increase its annual input by a further 20-25,000 tons annually. Strategic Relationships with Key Partners and Location of Production The location of the company’s production facilities in the Czech Republic and in Egypt endows it with low operating costs and allows for efficient distribution to the core customers in a wide area. The company’s production for the following year tends to be constantly presold. The company has very good relationships with its key customers, the biggest of which buys about 40-45% of the company’s total production and enters in multi-year contracts with the company. Solid Cash Flow Generation and a Progressive Dividend Policy The company does not have any official dividend policy but in practice it has a progressive dividend policy with 0.05 EUR per dividend being added every year, apart from 2013 where the dividend yield was not increased in order to create reserves for potential unexpected. We believe the net income and cash flows we expect the company to generate in the next 5 years and the growth displayed in 2014 so far will allow it to adopt an even more progressive policy leading to a dividend of EUR 1.95 per share. Possible Investment Risks The main risks the company faces include foreign exchange fluctuations (mainly in CZK/EUR and EUR/USD), persistence of economic stagnation/new recession in Europe, adverse development of polymer/energy prices, termination of relations with a strategic customer, expansion of competitors, inadequate research and development, changes in fiscal and monetary policy in the Czech Republic and deterioration of political situation in Egypt. The largest real risk stems from the potential deterioration of political situation in Egypt, other scenarios either have a lower probability of happening or would not pose such a significant problem to the company. To illustrate the risks posed by the project in Egypt we project our upside and downside scenarios in accordance with the future of the Egyptian facility. In case the market conditions are favorable and the production is expanded by another line by the beginning of

Figure 7: Annual revenue (EUR thousand)

Source: company data, team foracests

Figure 8: Annual production in tons

Source: company data, team forecasts

Figure 9: Annual sales of light-weight and bicomponent materials for hygiene

Source: company data, team calculations

2017, there is a 29% upside risk with the target price of CZK 827.2. In case the conditions do not allow for expansion and the production facility has to be closed down for political reasons, there is a 13% downside risk yielding a target price of CZK 557.2.

Valuation We used two standard methods to arrive at the target price of CZK 766 (EUR 27.75) – the Discounted Cash Flow to the Firm (DCF) method and price multiples, which we weighed together to arrive at a single target price. The target price offers an upside of 19%, which results in a BUY recommendation.

Discounted Cash Flow We used the DCF method as our main valuation method to arrive at a target price of CZK 749 (EUR 27.1), which was weighted at 70% of the final target price as we consider it more accurate than the multiples method given the nature of the industry. The DCF method is more suitable for the company than the Dividend Discount Model because while the company does pay a regular dividend with relatively stable growth, its earnings per share have been much more volatile in the past years. We used two-stage DCF model with the discrete forecast period of five years as the first stage and a terminal stage with growth till perpetuity of 2.2%. The DCF model is sensitive mostly to the following factors:

Revenue: The forecast of the growth in sales is based on the demographics of the market, growth opportunities in emerging markets and on revenue breakdown into three product categories: standard textiles for hygiene products, technologically advanced (light-weight and bi-component) materials for hygiene products and non-hygiene products. The technologically advanced category is the most important driver of the growth in revenues, as it allows for the highest price premium and its share of revenues increases from 27.9% in 2013to 37.76% in 2014 and is expected to reach 50% by 2018.

Growth rate till perpetuity: The growth rate is based on the long term GDP growth prospects of the industry and the regions the company operates in which include both mature and emerging markets, taking into account the possibilities the company has in terms of expansion in emerging markets in cooperation with key customers, should the market conditions be favorable. Based on these considerations, we have set the growth rate in the model to 2.2%, which is a relatively conservative estimate

5. For the analysis of the impact of the long term growth rate value on the

target price, see Table 3 and Table 4.

Weighted Average Cost of Capital: We calculated the cost of equity using the Capital Asset Pricing Model. We chose the risk free rate of 4% based on the long term development of yields on 30-year US Treasury bonds

6. The market and country risk premium based on A. Damodaran’s estimations is

6.18%.7 The beta of 0.65 was estimated based on A. Damodaran’s estimates for healthcare and

household products8 to better reflect the company’s business and area of operations, as the

company specific beta given in other sources seems unreasonably low (it is even lower than that for utilities and water). The after-tax cost of debt of 3.24% was calculated using the 19% Czech corporate tax rate. The cost of debt was calculated based on the 3Q 2014 financial statements and thus disregarding the newly issued bonds. The reason is it is not possible to estimate the current debt structure without more information from the company. Additionally, an error term was added to the calculation to compensate for the irregularities in the current nature of the market with very low interest rates and cost of debt.

Capital expenditures: We expect the company to conclude the first stage of its investment in Egypt in 2015 and to continue reinvesting up to EUR 10 million annually into its PP&E. This is a higher number than what the company indicates but we believe the company will have to increase its investments in new equipment in order to stay at the forefront of technological development and innovation, which is one of the key growth drivers at the moment. We believe this to be the case especially for the older production facilities. The expected capital expenditures are thus closer to the level of depreciation.

Dividend policy: At the moment Pegas does not have any official dividend policy in place. We assume that given the company’s projected growth and the strategy to provide good return to its shareholders, the company will assume a more progressive dividend policy, with the dividend per share earnings per share growing at a faster pace than in the past, which is based on growth in revenues and net income. We expect the company to sustain the dividend payout ratio of 45-70% depending on the results of the year, as consistent with the past development.

Please refer to Appendix 10 and 11 for more detailed information about the DCF calculation and its assumptions.

Table 3: Components of WACC

Components of WACC

Risk-free rate 4%

Market risk premium 6.18%

Beta 0.65

Error term 0.0598

Cost of equity 13.99%

Cost of debt 3.24%

Corporate tax rate 19%

WACC 10.04%

Source: A. Damodaran, team estimates Table 4: Target price breakdown

Target price breakdown

DCF Weight 70%

DCF price 27.10

EV/EBITDA weight 10%

EV/EBITDA price 28.17

P/E weight 10%

P/E price 32.23

P/B weight 10%

P/B price 27.66

Target price EUR 27.75

Target price CZK 766.33

Current price CZK 642

Upside 19%

Source: team calculations

Figure 10: Annual dividend per share (EUR)

Source: company data, team estimates

Price Multiples The peer group for Pegas Nonwovens selected for comparison includes two companies closest in their nature to Pegas, Avgol Industries based in Israel and Comphania Providencia based in Brasil. These companies are very similar to Pegas in terms of products, technology and customers. However, they operate in different geographic locations, which has great implication in the industry, as production and distribution costs only allow the companies to service a limited geographic area (in the case of Pegas a perimeter of about 1,000km). The companies are also not comparable in size and structure and are affected by different legislation etc., which makes the comparison somewhat difficult and less meaningful. For this reason we have decided to allocate each of the three used multiples a weight of only 10% of the target price. The multiples used are EV/EBITDA (the measure considered the most important by the company), Price/Earnings and Price/Book value, and the target values are EUR 28.17, EUR 32.2 and EUR 27.7 respectively. All the three multiples are treated equally in their contribution to the final weighted target price (which is then translated from EUR to CZK). Alternative Scenarios Two alternative scenarios were developed in order to assess the impact of different possible future developments on the target price. The downside scenario works with the risks created by the operations in Egypt and tests the impact of any events that would lead to the production facility in Egypt being closed down, such as political turmoil or the unlikely but plausible larger expansion of the Islamic state (the production facility is supplied from outside the country). The upside scenario, on the other hand, presumes increasing demand, positive developments and stability in Egypt and the interest of the company’s biggest customer in building the second production line. As these requirements are not as certain as it might seem, the scenario with the further investment in Egypt is not used as the base case. The downside scenario brings the target price to CZK 557.2, a 13% downside which would result in a SELL recommendation. The upside scenario leads to a target price of CZK 827.2, an upside of 29% which would strengthen the BUY recommendation. It is important to note that neither of these scenarios in an extreme case – problems in Egypt starting during or after the second phase of investment would have much more severe consequences. Conversely, the company could do very well, increase both its production capacity and revenue per ton and deliver even higher returns. For more details on the upside and downside scenario, see Appendix 14 and 15.

Financial Analysis 2013 contained some significant events that negatively affected the financial position of Pegas Nonwovens. The company suffered substantial realized and unrealized foreign exchange losses that adversely impacted net income, and a significant change in translation reserves that lead to a total comprehensive loss of almost EUR 6.2 million. These events were not related to operations and we believe they were not a reflection of a lack of proper hedging or risk management in regards to foreign exchange. Operations remained strong and the expansion into Egypt appears successful to this point. We expect a strong increase in revenue as the expansion into the Middle Eastern market continues and demand for Pegas's innovative fabrics continues to grow. We expect a significant increase in cash position and therefore an improvement in liquidity ratios. We expect the net profit margin to revert back to its 2012 levels near 10% and remain near that figure moving forward. We foresee stability in the operating profit margin at a level of 12-14%. Positive Debt Restructuring Pegas Nonwovens recently restructured its debt with the issuance of bonds in the amount of 2.5 Billion CZK at an annual rate of 2.85%. This should allow the company to repay its previous variable rate medium term loans, therefore reducing its exposure to rate increases while also reducing its overall interest payments. We believe this move improves the company’s capital structure and will promote financial stability in the company going forward. Long term debt levels are projected in our model to fall below 300% of EBITDA by 2017 from the current level of 416%.

FX Losses of 2013 Are Not a Long Term Concern Historical financial analysis lends support to our strong belief that the events that occurred in 2013 were an abnormality. The unrealized FX losses occurred due to balance sheet items being revaluated in EUR after the significant devaluation of the CZK in 2013. Financial exchange risk exposure will always be present for Pegas but we believe the company is utilizing tools to limit this risk

Table 5: Alternative scenarios

Alternative scenarios

Upside scenario


Upside 29%

Downside scenario


Downside -13%

Figure 11: Key operating ratios

Source: team forecasts and caltulations

effectively (the company mostly relies on natural hedging). Pegas historically has utilized a structure of monthly forwards from EUR to CZK and we expect this practice to continue. Cash flows have remained strong and the necessity of maintaining a higher inventory due to the initial expansion in Egypt removed our initial concerns regarding the steep increase in that figure in 2013. The recent Third Quarter 2014 results further confirm our belief that 2013 was a one off year as net profit was up 283.5% YOY, due to a FX gains and sales in Egypt. Historical Efficient Growth Signifies Effective Long Term Strategy It is common for companies to lose efficiency when they experience significant growth. With revenues growing 61.4% since 2009 and the addition of two new high capacity production lines (2011 and 2013) Pegas has demonstrated that it knows how to grow without letting costs increase disproportionately. Increases in staff costs are consistent with the growth of the company and appear well managed. Increases in polymer and electricity costs also are proportional to the increase in production. It is vital that Pegas is able to maintain efficiency in operations through effective management as it grows and the company has demonstrated the capability to achieve that. Strong Partnerships Provide Stable Sources of Revenue The primary customers of Pegas Nonwovens are large, multi-national manufactures of hygienic products. The five primary customers represented 78% of total revenues in 2013. The largest customer, Procter and Gamble, presented Pegas with an excellence award for the sixth year in a row. We believe this indicated that all customers are likely very satisfied with Pegas and that these strong relationships are likely to continue in the future. This provides Pegas with outstanding stability in its revenue stream which reduces risk to investors. These large multi-nationals are established stable companies that serve as excellent customers for Pegas. This stability in revenue stream is demonstrated by an average revenue growth rate of 15.3% since 2009. Furthermore, the expansion into Egypt was due to an agreement with one of the primary five customers that wanted to expand their footprint in the region. This says a lot about the value Pegas provides to that partner and the strength of their relationship.

Table 6: Key financial ratios

2012A 2013A 2014E 2015E 2016E 2017E 2018E

Profitability

EBITDA margin 20.30% 19.35% 20.54% 19.59% 18.11% 16.61% 15.48% EBIT (operating profit) margin 14.14% 12.79% 14.72% 14.55% 13.47% 12.49% 11.65%

Net profit margin 11.14% 0.71% 9.57% 9.58% 8.96% 8.38% 7.87%

Return on assets 5.59% 0.40% 6.02% 6.52% 6.59% 6.53% 6.48%

Return on equity 14.79% 1.12% 16.33% 16.42% 15.62% 15.00% 14.49%

Return on invested capital 6.81% 3.88% 10.42% 11.65% 12.34% 12.85% 13.86%

Liquidity

Current ratio 1.317 1.253 1.798 1.948 2.111 2.135 2.134

Quick ratio 1.018 0.799 1.237 1.354 1.478 1.499 1.496

Cash ratio 0.377 0.182 0.407 0.441 0.457 0.475 0.469

Efficiency ratios

Total asset turnover 0.502 0.558 0.629 0.681 0.735 0.779 0.824

Fixed asset turnover 1.045 1.182 1.436 1.593 1.767 1.940 2.123

Financial leverage

Long-term debt to assets 0.405384 0.40982 0.430865 0.407389 0.389389 0.368376 0.348452

Long-term debt to equity 1.072159 1.163707 1.169698 1.025948 0.923581 0.846551 0.778885

Debt to equity 1.644798 1.839556 1.714765 1.518352 1.371875 1.298061 1.23527

Interest coverage 5.752492 3.936785 5.067479 5.333003 5.598097 5.823817 6.022971

Debt service coverage 4.84714 0.975494 3.12047 3.340094 3.547436 3.723884 3.87945

Shareholder ratios

Earnings per share 2.267 0.153 1.846 3.505 4.457 5.376 5.348

Dividend payout ratio 0.463 7.000 0.596 0.328 0.269 0.233 0.243

Investment Risks Analysis Market risk l Foreign exchange fluctuations (MR1) The functional currency for the Company´s Czech entities is the Czech crown (CZK), while in Egypt it is the US Dollar. Wages and energy costs are paid in CZK and Egyptian pounds, respectively. An appreciation in these two currencies would thus increase the Company´s operating expenses.

Market risk l Persistence of stagnant economic situation or a new recession (MR2) Although the nonwovens industry is seen as a non-cyclical sector, it does not mean it is completely immune to market cycles. The European economy is still stagnating and forecasts predict only a very

Figure 12: Risk matrix


slow GDP growth. A further stagnation or another recession might have a negative impact on the Company. In general, the hygienic end products are a relatively costly consumer item. Thus users might switch to traditional, reusable materials such as textiles, with a detrimental effect on the price and volume of sales of Pegas. Table 9 illustrates the sensitivity of the target price to long term growth. Operational risk l Adverse development of polymer prices (OR1) Polymer granules represent the major input for the production process (about 75%). As a result, operational (EBITDA) margins are strongly influenced by the price of the polymer input. As the main operational expense, its fluctuations might have a negative effect on the generated cash flow and thus our set target price. Overall, polyethylene prices are expected to grow by 1.3% per annum till 2018 and polypropylene prices are estimated to rise by 1.6% per annum till 2018, which we included in our base-case scenario. In the long-term the effect of polymer price fluctuations are offset by the pass through mechanism, which allows the fluctuations in polymer prices to be imparted on customers. However, the mechanism involves an adjustment delay of up to three months, thus posing a significant risk to the short-term financial results. The price of polymer granules trails the price of oil and is thus susceptible to volatility in its price. Oil price has experienced a drop of 40% since June 2014, illustrating oil market developments, some of which might be long-term – such as the lower demand due to increased efficiency and switch to alternative fuels, lower susceptibility of prices to geopolitical turmoil and the decrease in global demand stimulated by America´s newly-acquired ability to produce its own oil.

9 This represents a potential

upside risk for the Company and its operational costs.

Operational risk l Adverse development of energy prices (OR2) After polymer granules, energy is the second most important production input, because production process is highly demanding on electricity. Pegas belongs to one of the largest consumers of energy in the Czech Republic (the company’s annual consumption is over 120 GWh). The consumption of energy is driven by the number of tons produced, majority of power consumption is directly related to production. The meltblown production process has more than 50% higher demand on power consumption than the spunbond production process.

Strategic risks l Relations with strategic customers (SR1) Pegas is heavily dependent on sales to a small number of large customers. This scenario is rather standard in the nonwovens industry and relative stability is assured by the mutual dependency of nonwoven producers and their customers. The probability of a downside risk stemming from the Company´s relations with customers is low. We judge this from the constant stream of partnership awards from its largest customer, P&G, as well as the fact that its production is regularly fully presold (80% of 2015 production presold at this point). However, the termination of relationship with one of its main clients should be taken into account. The largest customer accounts for 40-45% of sales and in case of occurrence of such an event and the absence of an alternative customer, the impact on revenue and cash flow generation ability of Pegas would be detrimental. The maintenance of good relations with customers is also essential because the Group is a price taker and has no pricing power. Strategic risks l Expansion of competitors (SR2) None of the Company´s regional competitors currently invests in expanding production. Introduction of a new plant is time-consuming and takes about 18 months, thus the expansion of a competitor´s production is not likely to affect the company in the medium term. However, Pegas has relatively very high EBITDA margins as compared to peers such as Fibertex, Fiberweb or PGI, due to the generally lower-cost environment of the market it operates in. If one of the peers decided to leverage the advantages of lower utility and labor costs and more advantageous terms of raw material procurement, it would pose a challenge to the company´s competitive advantage and revenue-generating ability. Another possible risk connected with competitors is the acquisition of the Company by one of the large multinational peers such as Freudenberg of PGI. However, such scenarios are very difficult to predict. It is even more challenging to determine what the potential outcome would be, depending on the intentions of the acquirer. Strategic risks l Research and Development (SR3) Technologically advanced materials provide added value for the Company and their share of revenues has been constantly increasing (Figure 13). Thus, innovation and acquisition of new patents is an essential determinant of its revenue growth. The sales of light-weight and BiCO materials, the production processes of which the Company has patented and which are unique within Europe, are currently driving the revenue growth. Their sales growth is expected to decrease after 2014, which we

Table 7: Risk categoriaztion

Variable Investment Risk

Revenues MR2,SR1,SR2

Sales of BiCo and light-weight SR3

Polymer prices OR1

Energy prices

MR1, OR2, PR2

Staff costs MR1, PR2

Source: team analysis

Table 8: Recommendation sensitivity

buy hold sell

Polymer prices

3.1% 4.50% > 4.5%

Sales -

13.60% -

16.6% < -

16.6%

Light-weight & BiCO sales

-5.12% -

7.25% < -

7.25%


Rating guide

buy hold sell

5% ROIC

flat returns

negative returns


Figure 13: Growth in sales of light-weight and BiCo materials for hygiene

Source: Company data

included in our base-case scenario. However, the Company will eventually need to implement new production processes and update its product portfolio to sustain its EBITDA. Political risks l Egyptian production (PR1) The political situation in Egypt appears to have stabilized after the election of president Abdel Fattah El Sisi in May 2014. However, the unpredictable deterioration of the political situation would shoot up inflation in the country, thus driving up the Company´s operating expenses. In addition, it would have an adverse impact on interest rates and the risk free rate used available to the Company and used in our calculations. The Company entered into an insurance contract with a state-owned company that covers risks such as prevention of the transfer of returns, expropriation or politically motivated violent damage. However, it most likely would not protect the Company against the abovementioned implications. Political risks l Changes in fiscal and monetary policy of the Czech Republic (PR2) The Czech income tax reform valid that will come into force on January 1, 2015 will not affect the Company´s tax rate. However, it cannot be predicted whether such event will not occur further in the future. Moreover, in case the Czech Republic would finally be forced to adopt the euro by the EU, the Company´s operating expenses would increase (although the earliest time horizon for this is 3 years, since the country has to spend 2 years in the European Exchange Rate Mechanism first). Drivers of volatility in earnings We performed a sensitivity analysis in order to determine the impact of the identified investment risks on the value of Pegas. Each of the identified risks affects one of the following variables: revenues, sales of technologically advanced materials (light-weight and BiCO), polymer prices, energy prices and staff costs (Table 7). Thus, the sensitivity analysis was performed on these variables. First, we determined how much divergence in the variable from our base case scenario would prompt a shift in our recommendation (Table 8). To supplement this analysis, we evaluated the impact of a change in the two correlated variables – energy prices and staff costs - on the target price of Pegas (Table 10). We evaluated separately the impact of PR1 – the development of production in Egypt, due to the fact that the possible expansion or termination of the facility would have broad implications for the future growth of the business. We created an upside scenario, forecasting that Egyptian production will continue smoothly and another production line will be added, and a downside scenario, predicting that adverse developments of the political situation in Egypt will force Pegas to close down its operations in the country. A detailed discussion can be found in Appendix 14 and 15.

Table 9: Sensitivity of the target price to long term growth and WACC

WACC

Lon

g te

rm c

ash

flo

w

gro

wth

rat

e g

8.5 9 9.5 10.036 10.5 11 11.5

0.7 28.8 26.3 24 21.8 20.1 18.5 17

1.2 31.2 28.3 25.8 23.4 21.5 19.7 18.1

1.7 33.9 30.6 27.8 25.1 23 21.1 19.3

2.2 37 33.3 30 27.1 24.8 22.6 20.6

2.7 40.7 36.3 32.7 29.3 26.7 24.3 22.1

3.2 45 33.9 35.7 31.8 29 26.2 23.8

3.7 50.2 44.2 39.3 34.8 31.5 28.4 25.7

4.2 56.7 49.4 43.5 38.3 34.5 30.9 27.9

Table 10: Sensitivity of the target price to energy and staff costs

Staf

f co

sts

Energy costs

1% 2% 3% 3.5% 4% 5% 6%

2% 810.91 803.22 795.32 791.3 787.22 778.91 770.38

3% 803.57 795.88 787.98 783.96 779.88 771.57 763.04

4% 796.04 788.35 780.45 776.42 772.35 764.03 755.51

5% 788.31 780.62 772.72 768.7 764.62 756.31 747.78

6% 780.39 772.96 764.8 760.77 756.59 748.38 739.85

7% 772.26 764.56 756.67 752.64 748.56 740.25 731.72

8% 763.92 756.23 748.33 744.31 740.23 731.92 723.39 Source: team calculations


Appendix 1: Statement of Financial Position

2012A 2013A 2014E 2015E 2016E 2017E 2018E

ASSETS

Non-current assets

Property, plant and equipment 191,226 181,584 177,821 174,551 171,299 168,664 165,939

Intangible assets 700 586 586 586 586 586 586

Goodwill 92,288 84,599 84,599 84,599 84,599 84,599 84,599

Total non-current assets 284,214 266,769 263,006 259,736 256,484 253,849 251,124

Current assets

Inventories 20,448 32,618 34,802 36,157 37,254 40,260 43,152

Trade and other receivables 43,739 43,250 50,474 54,486 59,008 63,770 68,351

Income tax receivables 64 1,042 1,042 1,042 1,042 1,042 1,042

Cash and cash equivalents 25,758 13,036 25,292 26,801 26,873 30,054 31,740

Total current assets 90,009 89,973 111,610 118,485 124,177 135,126 144,285

Total assets 374,223 356,742 374,616 378,221 380,661 388,975 395,409

SHAREHOLDERS' EQUITY

Share Capital and reserves

Share capital 11,444 11,444 11,444 11,444 11,444 11,444 11,444

Share premium -- -- 0 0 0 0 0

Legal reserves 7,896 8,733 8,733 8,733 8,733 8,733 8,733

Translation reserves 6,424 -2,306 -2,333 -2,333 -2,333 -2,333 -2,333

Cash flow hedging -4,060 -2,911 -2,911 -2,911 -2,911 -2,911 -2,911

Retained Earnings 119,790 110,673 123,059 135,253 145,556 154,329 161,962

Total share capital and reserves 141,494 125,633 137,992 150,186 160,489 169,262 176,895

LIABILITIES

Non-current liabilities

Bank loans 151,704 146,200 161,409 154,083 148,225 143,289 137,781

Other liabilities 0 0 0 0 0 0 0

Deferred tax liabilities 12,672 13,126 13,126 13,126 13,126 13,126 13,126

Total non-current liabilities 164,376 159,326 174,535 167,209 161,351 156,415 150,907

Current liabilities

Trade and other payables 66,693 56,489 46,795 45,532 43,526 48,004 52,312

Tax liabilities 1,658 1,094 1,094 1,094 1,094 1,094 1,094

Bank current liabilities 0 14,200 14,200 14,200 14,200 14,200 14,200

Provisions 2 0 0 0 0 0 0

Total current liabilities 68,353 71,783 62,089 60,826 58,820 63,298 67,606

Total liabilities 232,729 231,109 236,624 228,035 220,171 219,713 218,513

Total equity and liabilities 374,223 356,742 374,616 378,221 380,661 388,975 395,409

Appendix 2: Statement of Comprehensive Income

2012A 2013A 2014E 2015E 2016E 2017E 2018E

Revenue 187,745 199,210 235,579 257,395 279,741 302,973 325,746

Raw materials and consumables used -138,180 -148,335 -173,107 -192,825 -214,095 -236,768 -258,534 Staff cost -8,351 -10,179 -10,057 -10,560 -11,088 -11,642 -12,224 Depreciation and amortization expense -11,570 -13,079 -13,733 -12,970 -12,972 -12,485 -12,475 Research expense -2,784 -2,224 -3,416 -3,732 -4,056 -4,393 -4,723 Other operating income / (expense) net -318 78 -600 153 153 153 153

Profit from operations EBIT 26,542 25,471 34,666 37,461 37,683 37,837 37,942

Foreign exchange gains and other financial income 12,875 13,338 0 0 0 0 0 Foreign exchange losses and other financial expense -10,238 -28,205 0 0 0 0 0 Interest income 3 3 0 0 0 0 0 Interest expense -4,614 -6,470 -6,841 -7,024 -6,731 -6,497 -6,300

Profit before income tax 24,568 4,137 27,825 30,437 30,951 31,340 31,643

Income tax (expense) / income -3,644 -2,726 -5,287 -5,783 -5,881 -5,955 -6,012

Net profit for the year = net income 20,924 1,411 22,538 24,654 25,071 25,386 25,630

Other comprehensive income

Net value gain on cash flow hedges -2,638 1,149 -573 -573 -573 -573 -573

Changes in translation reserves 2,180 -8,730 -618 -618 -618 -618 -618

Total comprehensive income for the year 20,421 -6,170 21,347 23,462 23,879 24,194 24,439

Net profit attributable to:

Equity holders of the Company 20,924 1,411 22,538 24,654 25,071 25,386 25,630

Minority interest -- -- -- -- -- -- --

20,924 1,411 22,538 24,654 25,071 25,386 25,630

Total comprehensive income attributable to:

Equity holders of the Company 20,421 -6,170 21,347 23,462 23,879 24,194 24,439


20,421 -6,170 21,347 23,462 23,879 24,194 24,439

Earnings per share

Basic earnings per share (EUR) 2.27 0.15 2.44 2.67 2.72 2.75 2.78 Diluted earnings per share (EUR) 2.27 0.15 2.44 2.67 2.72 2.75 2.78

Appendix 3: Statement of Cash Flows

2013A 2014E 2015E 2016E 2017E 2018E

Net income 1,411 22,538 24,654 25,071 25,386 25,630

Depreciation addback 13,079 13,733 12,970 12,972 12,485 12,475

Interest expense addback 6,470 6,841 7,024 6,731 6,497 6,300

Other financial expense 4,824 0 0 0 0 0

Fair value of interest rate swaps 1,149 0 0 0 0 0

Change in working capital -2,837 -19,102 -6,630 -7,625 -3,291 -3,164

Inventories -10,730 -2,184 -1,355 -1,097 -3,006 -2,892

Trade and other receivables -8,650 -7,224 -4,012 -4,522 -4,762 -4,581

Income tax receivables -978 0 0 0 0 0

Trade and other payables -10,204 -9,694 -1,263 -2,006 4,477 4,309

Tax liabilities -564 0 0 0 0 0

Bank current liabilities (short term) 28,291 0 0 0 0 0

Provisisons -2 0 0 0 0 0

Operating cash flows 24,096 24,010 38,018 37,149 41,077 41,241

Purchase of property, plant and equipment -38,301 -9,970 -9,700 -9,720 -9,850 -9,750

Investing cash flows -38,301 -9,970 -9,700 -9,720 -9,850 -9,750

Free cash flows 14,040 28,318 27,429 31,227 31,491

Bank loans (long term debt) 22,540 15,209 -7,326 -5,858 -4,936 -5,508

Other liabilities 0 0 0 0 0 0

Deferred tax liabilities 454 0 0 0 0 0

Interest payment -6,473 -6,841 -7,024 -6,731 -6,497 -6,300

Dividend payment -9,691 -10,152 -12,460 -14,767 -16,613 -17,997

Financing cash flows 6,830 -1,784 -26,810 -27,356 -28,046 -29,805

Net cash flows -7,375 12,256 1,508 73 3,181 1,686

Appendix 4: Key Financial Ratios

2012A 2013A 2014E 2015E 2016E 2017E 2018E

Profitability

EBITDA margin 20.30% 19.35% 20.54% 19.59% 18.11% 16.61% 15.48%

EBIT (operating profit) margin 14.14% 12.79% 14.72% 14.55% 13.47% 12.49% 11.65%

Net profit margin 11.14% 0.71% 9.57% 9.58% 8.96% 8.38% 7.87%

Return on assets 5.59% 0.40% 6.02% 6.52% 6.59% 6.53% 6.48%

Return on equity 14.79% 1.12% 16.33% 16.42% 15.62% 15.00% 14.49%

Return on invested capital 6.81% 3.88% 10.42% 11.65% 12.34% 12.85% 13.86%

Liquidity

Current ratio 1.317 1.253 1.798 1.948 2.111 2.135 2.134

Quick ratio 1.018 0.799 1.237 1.354 1.478 1.499 1.496

Cash ratio 0.377 0.182 0.407 0.441 0.457 0.475 0.469

Efficiency ratios

Total asset turnover 0.502 0.558 0.629 0.681 0.735 0.779 0.824

Fixed asset turnover 1.045 1.182 1.436 1.593 1.767 1.940 2.123

Financial leverage

Long-term debt to assets 0.405384 0.40982 0.430865 0.407389 0.389389 0.368376 0.348452

Long-term debt to equity 1.072159 1.163707 1.169698 1.025948 0.923581 0.846551 0.778885

Debt to equity 1.644798 1.839556 1.714765 1.518352 1.371875 1.298061 1.23527

Interest coverage 5.752492 3.936785 5.067479 5.333003 5.598097 5.823817 6.022971

Debt service coverage 4.84714 0.975494 3.12047 3.340094 3.547436 3.723884 3.87945

Shareholder ratios

Earnings per share 2.267 0.153 1.846 3.505 4.457 5.376 5.348

Dividend payout ratio 0.463 7.000 0.596 0.328 0.269 0.233 0.243

Appendix 5: Methodology for selecting peers

Selection of peers in the nonwovens industry is complicated for two reasons. Firstly, the market consists of companies of different sizes and structures. It includes small privately owned firms, which remain unlisted and thus could not be used for comparison due to the lack of access to public data. It also contains large multinational companies, which cannot reasonably be compared to Pegas due to their much broader scope of operations and market position. It also includes nonwoven businesses that have been integrated as a part of larger industrial conglomerates, in which case the access to information is also limited and comparison is difficult due to the different factors that impact such businesses. Secondly, the nonwovens market is divided into two segments – hygiene and industrial – which do not compete directly with each other. Since Pegas operates mainly in the hygiene sector, comparison with an industrial nonwoven business is less indicative.

For segments of our analysis which required the choice of particular peers, such as the DuPont analysis, we selected the Brazilian Compañhia Providencia and Israeli Avgol. The reason for this is that the former operates in the same nonwovens segment, while the latter does business in the same geographical area as Pegas. In addition, both companies have a market capital of about 209 million EUR, which is comparable to the 211 million EUR market capital of Pegas. For segments of our analysis which did not require the choice of particular peers, we attempted to attain information about as many nonwoven businesses as possible and use the aggregate outcome as the benchmark for comparison.

Sources: Bloomberg

Appendix 6: Porter´s Five Forces Analysis

Threat of New Entrants l INSIGNIFICANT Barriers to entry in the nonwovens industry and particularly in the hygiene market, which is Pegases focus market sector representing 89% of revenues in 2013, are very high. Producers must comply with quality standards and product legislation and obtain certification for their production processes, which is both time- and capital-consuming. In addition, the industry is pronounced in terms of product differentiation and the use of specific types of web formations and bonding processes. The needed technical and innovation capabilities require substantial investment. Due to the high barriers of entry we asses the threat of new entrants to be INSIGNIFICANT with respect to the Company. Threat of Substitute Products l LOW THREAT TO THE BUSINESS The threat of other materials being used as a substitute for nonwovens is very low. The trend is rather the opposite and the use of nonwoven fibres is increasing at the expense of other materials. Hovewer, the threat arises from within the market and the possibility of a competitor developing a more technologically advanced, quality alternative. Combining the effect of these two opposing forces, we asses the threat of substitute products to be a LOW THREAT TO THE BUSINESS. Bargaining Power of Customers l MODERATE THREAT TO THE BUSINESS The top five customers of Pegas represented a 78% share of total revenues in 2013 (75% in 2012). This customer mix concentration of the Company reflects the situation in the final consumer market, which is divided among a small number of end producers, each having a substantial market share. As a result, these large corporate customers have high purchasing leverage and muscle. Commodity prices among nonwoven producers are nearly identical and Pegas must maintain high production quality and invest into product differentiation to maintain its customer base. So far, the Company has been successful at doing so which is illustrated by the numerous excellence-in-partnership awards from its most important customer, P&G. Thus we asses the bargaining power of customers to be a MODERATE THREAT TO THE BUSINESS. Bargaining Power of Suppliers l INSIGNIFICANT Similarly as its customers, Pegases suppliers of polymer granules are relatively large refineries. However, the fact that Pegas had sourced polymer raw materials from a total of 7 suppliers over the past three years illustrates that it is not so overly dependent on particular suppliers. In addition, the price of raw material inputs trails the price of petrochemicals and cannot be artificially manipulated by the suppliers. Last but not least, Pegas is able to belatedly impart the effects of raw material price changes onto its customers through the price pass through mechanism. We asses the threat of bargaining power of suppliers to be INSIGNIFICANT.

Competitive Rivalry within the industry l MODERATE THREAT TO THE BUSINESS With respect to commodity products, competition is restricted by geographic factors, which make it uneconomical for nonwovens´ production to be distributed in a radius larger than 1 000 kilometers from the production facility due to transportation costs. Moreover, the competition is fragmented between the two nonwoven market segments: hygiene and industrial. This provides some degree of insulation from competition, because unlike Pegas, its regional competitors such as Fibertex and Ahlstrom focus on the industrial sector. On the other hand, the distribution of technologically advanced products is not geographically restricted.The company must maintain a high range and quality of products, the ability to satisfy specific customer needs through innovation and excellent client relationships to be able to compete against its global peers. Another threat is the trend of horizontal integration within the market. Thus we asses the threat of competitive rivalry within the industry as a MODERATE THREAT TO THE BUSINESS. Source: Team analysis

Appendix 7: Production plants

Production Lines

Machine Year of installation

Technology configuration Plant location

Line width in metres

Annual production capacity in tonnes

Reicofil 2 1992 S Bučovice 3.2 2,600

Reicofil 2 1996 SMS Bučovice 3.2 4,700

Reicofil meltblown 1996 M Přímětice 1.6 700

Reicofil 3 1998 SMS Bučovice 3.2 6,900

Reicofil 3 BiCo 2000 SSMMS Přímětice 3.2 10,400

Reicofil 3 BiCo 2001 SSS Přímětice 3.2 9,700

Reicofil 4 2004 SSS Přímětice 4.2 20,000

Reicofil 4 Special 2007 SSMMMS Přímětice 3.2 15,000

Reicofil 4S Advanced BiCo 2011 SSMMS Přímětice 4.2 20,000

Reicofil 4S 2013 SSMMXS 6th of October City 4.2 20,000

Total Production Capacity 110,000

Source:Company data

Appendix 8: Share price development

Source: pse.cz

Appendix 9: Discounted Cash Flow Analysis

In EUR thousands 2014E 2015E 2016E 2017E 2018E

Cash Flow from Operations 24,010 38,018 37,149 41,077 41,241

Cash Flow from Investing (9,970) (9,700) (9,720) (9,850) (9,750)

Free Cash Flow to Firm 14,040 28,318 27,429 31,227 31,491

WACC 10.036% 10.036% 10.036% 10.036% 10.036%

Present Value of FCFF 14,040 25,736 22,654 23,438 21,480

Target Price

Long-term Cash Flow Growth g 2.2%

Terminal Value 410,700

PV of Terminal Value 280,144

PV of FCF over Discrete Period 107,348

Enterprise Value 387,492

less: Debt Outstanding 137,781

Present Value of Equity 249,711

Number of shares outstanding 9,229,400

One-year Target Price per Share (EUR) 27.1

Appendix 10: Discounted Cash Flow Assumptions – WACC

Variable Value Basis

Risk-Free Rate 4% Long-term estimate of 30y US Treasury bond

Market Risk Premium 6.18% A. Damodaran’s Jan 2014 country estimates

Beta 0.65 A. Damodaran’s Jan 2014 industry estimates

Error term 0.0597 Team estimate

Cost of Equity 13.99% Team calculations

Pre-tax Cost of Debt 4% Company presentation

Marginal Tax Rate 19% Company annual reports

Ater-tax cost of debt 3.24% Team calculations

Capital Structure

65.2% Equity 34.8% Debt

Market values of the book value of debt and equity as calculated by the team

WACC 10.036% Team calculations

1. Risk-Free Rate

The risk-free rate is based on a long-term estimate of 30-year US Treasury bond yields. The 30-year bond is chosen because the company

is valued in a two stage model with growth into perpetuity, so the longest available risk free investment is used. US bonds were chosen

for their higher liquidity and returns compared to other options. It is presumed that in this day investors are not limited to a single

country in their investments do they can choose to go for a more higly liquid security with a higher yield.

2. Market Risk Premium

The market risk premium was selected based on latest A. Damodaran’s data on country risk premium and was weighed according to the

company’s regions of operations.

3. Beta

The value of the beta was selected based on A. Damodaran’s January 2014 data on beta by industy in Europe and is a combination of

household and healthcare products. The reason the team did not use the widely available beta value for Pegas is that the value was given

at 0.38 at the time, a very low value even for a non-cyclical business. The value of 0.38 is significantly lower than that even of water and

utility companies, which suggests a very stable and risk-free business. However, we must bear in mind that Pegas is a company that

operates not only in mature markets but also in emerging markets where the demand for disposable hygiene products, although growing,

is much lower and the products are not considered as such a necessity as in more mature markets. This can potentially make the stock

more volatile, which the beta needs to reflect.

4. Error Term

Altough not a standard part of the CAPM, an error term was included in the calculation of the cost of equity. The team believes the

market conditions are not standard at the moment with low risk-free rates and market premiums. The cost of debt of the company is also

very low at this point and it is likely that it will increase in the future. The error term is compensating a part of these irregularities in the

calculation.

5. Cost of Debt

The cost of debt was calculated using the 3Q 2014 book value and the November bond issue was disregarded for the purpose of the

calculation. The reason for omitting the bonds is the fact that we do not have sufficient information on how exactly and in what time

frame the company is going to use the funds generated by the bond issue. It is likely that the money is going to be used for refinancing

the current long term debt, yet we cannot accurately estimate the debt structure at any given point.

6. Marginal Tax Rate

The marginal tax rate is derived from the information given by the company, which pays 100% of its corporate taxes in the Czech

Republic with a tax rate of 19%, despite its complicated structure with headquarter is Luxembourg. This information is given in the annual

reports of the company and was confirmed to us during the analyst call. It is consistent with the Czech law.

7. Market Value of Debt

The market value of debt is calculated as an annuity with a coupon of 4%. Since the debt is in the form of a non-traded loan, the actual

market value is not available, so it is estimated based on a team calculation

Appendix 11: Other Key Discounted Cash Flow Assumptions

1. Revenue Growth

The revenue for the forecast period was forecasted based on the following assumptions: (1) The growth of the nonwovens industry as a

whole – the overall industry is expected to grow at a compound annual growth rate of 5.6%-6.7% from 2014 to 202010

(2) The main

drivers of growth in the industry are increasing sales of adult incontinence products in mature markets (related to demographic

characteristics with the population ageing and also to increasing social acceptance of the use of these products) and increasing overall

consumption of disposable hygiene products in the emerging markets (3) The company is expected to grow at a higher rate than the

industry as it is able to capitalize on both of the major trends in the industry thanks to its production facility in Egypt, selling its products

to Central and Eastern Europe (where markets are less saturated than in Western Europe) and being at the forefront of technological

development and innovation, which allows it to produce sophisticated materials with superior characteristics, suitable to use in the adult

incontinence products, whose users are more demanding in terms of functionality and comfort of the final product (4) Based on the

revenue breakdown of 2013 and 3Q 2014, the company is expected to further increase the share of advanced materials in the total

revenue, which will lead to higher prices per ton since the advanced materials can be sold with a higher premium. In the base case we do

not expect the company to invest in the new production line in Egypt within the discrete forecast period, so the main driver of growth has

to be not increased volumes of production but being able to charge a higher premium on the products.

Table 1. Revenue breakdown and production volumes, 2009-2018

2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E

Sales of standard textiles for hygiene products

85,252 99,477 112,788 127,291 121,717 117,457 114,462 112,974 111,731 111,508

Yoy growth in standard textiles -4.00% 16.69% 13.38% 12.86% -4.38% -3.50% -2.55% -1.30% -1.10% -0.20%

Share of total revenues 69.06% 67.15% 68.01% 67.80% 61.10% 49.86% 44.47% 40.39% 36.88% 34.23%

Sales of special materials for hygiene

24,573 30,606 32,371 37,174 55,580 88,955 111,550 132,967 154,907 174,270

Yoy growth in special materials -30.08% 24.55% 5.77% 14.84% 49.51% 60.05% 25.40% 19.20% 16.50% 12.50%


Sales of non-hygiene products 13,622 18,168 20,689 23,280 21,913 29,166 31,383 33,799 36,334 39,968

Yoy growth in non-hygiene -27.65% 33.37% 13.88% 12.53% -5.87% 33.10% 7.60% 7.70% 7.50% 10.00%


Revenue 123,447 148,150 165,848 187,745 199,210 235,579 257,395 279,741 302,973 325,746

Revenue growth -13.53% 20.01% 11.95% 13.20% 6.11% 18.26% 9.26% 8.68% 8.30% 7.52%

Production in tons 69,462 70,182 73,412 86,056 90,961 101,876 108,876 109,876 109,976 109,990

Production growth 4.69% 1.04% 4.60% 17.22% 5.70% 12.00% 6.87% 0.92% 0.09% 0.01%

Revenue per ton (EUR thousands) 1.78 2.11 2.26 2.18 2.19 2.31 2.36 2.55 2.75 2.96

2. Capital Expenditures

Capital expenditures for the forecast period are based on the company’s need to reinvest into production facilities and sophisticated

production equipment even if it is not expanding and building new production lines. Since the growth has been based on the technologically

advanced materials which form a gradually increasing share of the revenue and require more advanced means of production, we expect the

company to reinvest up to EUR 10 million annually into the production facilities despite the lower CapEx expectations originally stated by the

company. The increased capital expenditures match the depreciation more closely and will be necessary especially for the older production

lines configured for standard textiles production.

3. Staff Costs

The staff costs are predicted to grow at an annual rate of 5% including inflation based on the predictions of wage and inflation in the EMEA

area. Wages in Europe are predicted to grow at a lower rate of about 3.1%11

with weighed inflation of about 1.85%12

while both inflation and

wages in Egypt can be expected to grow at a higher rate. We expect the number of employees in the Czech Republic and Egypt to remain

roughly the same, around 570 employees. The staff costs are denominated in the local currencies of the Czech Republic and Egypt, Czech

Crowns and Egyptian Pounds respectively. Any weakening of these currencies against the Euro will have a positive impact on decreasing the

staff costs.

4. Depreciation and Amortization

Depreciation and amortization was predicted based on the expected depreciation of the existing production lines, especially the new plant in

Egypt, which we expect to decrease gradually, and the depreciation of newly purchased assets stemming from capital expenditures and

reinvestment into the plants and equipment. Annual depreciation of for the discrete forecast period corresponds to 7.4-7.45% of PP&E.

Appendix 12: Relative Valuation

We used 3 multiple valuation methods: enterprise value to EBITDA (EV/EBITDA), price per share to earnings per share (P/E) and price per share to book value (P/B).

EV/EBITDA

2014 EBITDA 48,399

EV/EBITDA Multiple 9

Enterprise Value 435,590.88 435,590.88175 Less: Debt 175,609.00

Equity value 259,981.88

Value per share (EUR) 28.17

P/E

2014 Earnings per share 2.44 2.44 P/E Multiple 13.5

Price per share 32.23 32.23

32.23

Due to the low comparability of peers in the nonwovens industry as well as difficulty of access to congregate industry information, we used all available sources to arrive at the values of multiples.

EV/EBITDA P/E P/B

Avgol 7.94 12.6 2.33

Suominen 8.78 16.82 1.75

Ahlstrom 11.2 n.a. 1.45

Providencia 9.33 9.6 1.42

Schouw CO 8.07 15.1 1.84

Industry average 9.06 13.53 1.76

Sources: Bloomberg, WSJ, Cyrrus

Appendix 13: Target Price

We calculated the target price as a weighted average of the applied valuation methods: DCF, EV/EBITD multiple, P/E multiple and P/B multiple. Due to the low comparability of peers in the nonwovens industry and ensuing guess factor included in the calculation of multiples, we assigned 10% weight to each of the multiple valuation methods. The DCF valuation accounted for 70% in the determination of our target price.

Target price

DCF Weight 70%

EV/EBITDA weight 10%

P/E weight 10%

P/B weight 10%

Target price EUR 27.75

Target price CZK 766.33 766.33 Current price CZK 642

Upside 19%

P/B

Total Assets 374,616

Total Liabilities 236,624

Book Value 137,992

P/B Multiple 1.76

Value per share (EUR) 27.66

Appendix 14: Upside scenario The upside scenario works with the expansion opportunity the company has in its production facility in Egypt. The facility was built so that it can be expanded by a second production line should the conditions in the market and the situation in the country be favorable. The decision about the project will be taken in the first half of 2015 and in case the company decides to go on with further expansion, the construction can start in 2016. With the expected building time of 18 months, the scenario expects the second production line to start operating in the second half of 2017 and produce some 7,000 tons already by the end of the year. The total capacity of the line is expected at 20-25,000 tons annually and should cost about EUR 45-50 million. Our model uses the amount of EUR 50 million to work as a conservative estimate in case any problems arise in the construction, as was the case with the first phase. We expect the second line to start fully producing in 2018.

The revenue per ton is expected to be lower in this scenario (EUR 2,700 in 2018 compared to EUR 2,900 in the base case), as we expect the Egyptian production plant to focus more on standard material than the technologically advanced and more expensive ones. The reason is that the plant supplies the materials mainly to emerging markets interested mainly in baby diapers while the advanced materials are more used for the mature markets and products for adults. Even with the lower average revenue per ton, we expect the new production line to improve revenue growth and significantly increase the total revenue.

There are several reasons the investment in the second phase of the Egypt project is considered as an alternative scenario. Firstly, while the political situation in the country has now stabilized, it is still highly unpredictable and less stable in nature than the situation in Europe. Both the country and the region are potentially problematic. Even when the company was starting the project in Egypt and assessed the situation as stable enough for a major investment, it experienced issues that delayed the construction works and start of operations of the line. Secondly, the further investment is conditioned by the company securing a multi-year contract on majority of the line’s production by one of its major customers, most likely Procter & Gamble. The company stated it was not going to invest in the second line unless this condition was met because otherwise the investment would mean a large risk. However, Procter & Gamble, Pegas’s main partner, is more focused on expansion in the mature markets through adult incontinence products

13 and is reconsidering its

involvement in emerging markets, which typically have larger inflation and allow for lower margins than the more developed markets14

. Therefore it cannot be automatically assumed that Pegas will follow through with the second line in 2016 as originally planes just because the political situation is relatively stable in the moment. The strategy of sustaining the current levels and lines of production brings potentially lower returns but is much less risky and the returns provided are still very good.

Table 2. Upside Scenario: Statement of Financial Position

Statement of Financial Position

2012A 2013A 2014E 2015E 2016E 2017E 2018E

ASSETS

Non-current assets



Goodwill 92,288 84,599 84,599 84,599 84,599 84,599 84,599


Current assets

Inventories 20,448 32,618 34,852 36,060 36,203 49,279 53,751





Total assets 374,223 356,742 374,882 385,411 417,278 434,429 439,515



Share capital 11,444 11,444 11,444 11,444 11,444 11,444 11,444


Legal reserves 7,896 8,733 8,733 8,733 8,733 8,733 8,733





LIABILITIES


Bank loans 151,704 146,200 161,404 154,083 168,225 163,289 149,781




Current liabilities


Tax liabilities 1,658 1,094 1,094 1,094 1,094 1,094 1,094






Table 3. Upside Scenario: Statement of Comprehensive Income

Statement of Comprehensive Income

2012A 2013A 2014E 2015E 2016E 2017E 2018E

Sales of standard textiles for hygiene products 127,291 121,717 117,457 114,462 111,600 109,592 109,044

Sales of light-weight + bico materials for hygiene 37,174 55,580 89,205 115,967 138,580 169,294 195,874

Sales of non-hygiene products 23,280 21,913 29,254 31,741 34,121 36,680 40,348

Revenue 187,745 199,210 235,916 262,169 284,302 315,566 345,266

Raw materials and consumables used -

138,180 -

148,335 -

173,107 -

192,149 -

213,191 -

241,508 -

268,392

Staff cost -8,351 -10,179 -10,057 -10,560 -11,088 -12,323 -14,369

Depreciation and amortization expense -11,570 -13,079 -13,733 -12,760 -12,362 -11,344 -13,744

Research expense -2,784 -2,224 -3,421 -3,801 -4,122 -4,576 -5,006

Other operating income / (expense) net -318 78 -600 153 153 153 153


Foreign exchange gains and other financial income 12,875 13,338 0 0 0 0 0

Foreign exchange losses and other financial expense -10,238 -28,205 0 0 0 0 0

Interest income 3 3 0 0 0 0 0

Interest expense -4,614 -6,470 -6,841 -7,024 -6,731 -7,297 -7,100



Net profit for the year 20,924 1,411 22,808 29,183 29,938 31,324 29,815








20,924 1,411 22,808 29,183 29,938 31,324 29,815




20,421 -6,170 21,616 27,991 28,746 30,132 28,624

Earnings per share

Basic earnings per share (EUR) 2.27 0.15 2.47 3.16 3.24 3.39 3.23

Diluted earnings per share (EUR) 2.27 0.15 2.47 3.16 3.24 3.39 3.23

Table 4. Upside Scenario: Statement of Cash Flows

Statement of Cash Flows

2013A 2014E 2015E 2016E 2017E 2018E

Net income 1,411 22,808 29,183 29,938 31,324 29,815




Change in fair value of interest rate swaps 1,149 0 0 0 0 0

Change in working capital -2,837 -19,223 -5,493 -2,986 -16,134 -4,460

Inventories -10,730 -2,234 -1,208 -143 -13,076 -4,471

Trade and other receivables -8,650 -7,296 -4,950 -4,473 -9,511 -6,304


Trade and other payables -10,204 -9,693 666 1,630 6,454 6,315



Provisisons -2 0 0 0 0 0




Free cash flows 14,189 33,974 16,525 4,531 36,898

Bank loans (long term debt) 22,540 15,204 -7,321 14,142 -4,936 -13,508






Net cash flows -7,375 12,400 7,631 10,091 -23,392 -1,245

Table 5. Upside Scenario: Target price

Value per share

DCF valuation 30.095 EUR

EV/EBITDA multiple valuation 28.49 EUR

P/E multiple valuation 32.62 EUR

P/B multiple valuation 27.714 EUR

Weighted target price 29.95 EUR

Weighted target price 827.19 CZK

Current price 642 CZK

Upside 29%

Appendix 15: Downside scenario The downside scenario is based on the unlikely but plausible possibility that for some reason the first production line in Egypt will have to be closed and the production will be stopped for at least two years. This can happen due to political or security reasons and such a situation would be largely difficult to predict over a longer period of time. This scenario assumes the situation is managed well on the side of the company which is able to foresee the problems in the region in some advance. After the loss of the Egyptian production, all other production lines are expected to produce at their maximum capacity to compensate for the loss to at least a small extent.

This scenario is not necessarily very probable but it is important to consider in order to illustrate the company’s newly created dependency on the Egypt project. Should the company decide to continue with the second phase of the expansion there and the problems appear only during or after the completion of the second phase, the problems would be much more severe and could endanger the existence of the company.

Table 6. Downside Scenario: Statement of Financial Position

Statement of Financial Position

2012A 2013A 2014E 2015E 2016E 2017E 2018E

ASSETS

Non-current assets



Goodwill 92,288 84,599 84,599 84,599 84,599 84,599 84,599


Current assets

Inventories 20,448 32,618 34,852 34,777 34,246 30,876 30,781





Total assets 374,223 356,742 375,261 378,503 382,413 373,660 370,063



Share capital 11,444 11,444 11,444 11,444 11,444 11,444 11,444


Legal reserves 7,896 8,733 8,733 8,733 8,733 8,733 8,733





LIABILITIES


Bank loans 151,704 146,200 161,404 154,083 148,225 142,289 136,781




Current liabilities


Tax liabilities 1,658 1,094 1,094 1,094 1,094 1,094 1,094






Table 7. Downside Scenario: Statement of Comprehensive Income

Statement of Comprehensive Income

2012A 2013A 2014E 2015E 2016E 2017E 2018E

Sales of standard textiles for hygiene products 127,291 121,717 117,457 114,345 111,486 100,794 100,290

Sales of light-weight + bico materials for hygiene 37,174 55,580 89,205 107,046 123,638 111,272 112,395

Sales of non-hygiene products 23,280 21,913 29,254 31,448 33,807 30,933 30,314

Revenue 187,745 199,210 235,916 252,839 268,931 243,000 243,000

Raw materials and consumables used -

138,180 -

148,335 -

173,107 -

192,149 -

213,191 -

197,472 -

199,747

Staff cost -8,351 -10,179 -10,057 -10,560 -11,088 -10,086 -10,590

Depreciation and amortization expense -11,570 -13,079 -13,733 -12,680 -10,602 -9,876 -9,876

Research expense -2,784 -2,224 -3,421 -3,666 -3,900 -3,038 -3,038

Other operating income / (expense) net -318 78 78 78 78 78 78


Foreign exchange gains and other financial income 12,875 13,338 0 0 0 0 0

Foreign exchange losses and other financial expense -10,238 -28,205 0 0 0 0 0

Interest income 3 3 0 0 0 0 0

Interest expense -4,614 -6,470 -6,841 -7,024 -6,731 -6,497 -6,260



Net profit for the year 20,924 1,411 23,357 21,739 19,033 13,050 10,991








20,924 1,411 23,357 21,739 19,033 13,050 10,991




20,421 -6,170 22,166 20,547 17,841 11,858 9,799

Earnings per share

Basic earnings per share (EUR) 2.27 0.15 2.53 2.36 2.06 1.41 1.19

Diluted earnings per share (EUR) 2.27 0.15 2.53 2.36 2.06 1.41 1.19

Table 8. Downside Scenario: Cash Flow Statement

Cash Flow Statement

2013A 2014E 2015E 2016E 2017E 2018E

Net income 1,411 23,357 21,739 19,033 13,050 10,991




Change in fair value of interest rate swaps 1,149 0 0 0 0 0

Change in working capital -2,837 -19,392 -352 162 -1,462 2,055

Inventories -10,730 -2,234 75 531 3,369 96

Trade and other receivables -8,650 -7,296 -1,249 -3,103 -963 1,348


Trade and other payables -10,204 -9,862 822 2,734 -3,868 611



Provisions -2 0 0 0 0 0




Free cash flows 14,569 32,591 29,008 20,766 21,986

Bank loans (long term debt) 22,540 15,204 -7,321 -5,858 -5,936 -5,508






Net cash flows -7,375 12,780 6,248 4,420 -3,665 528

Table 9. Downside Scenario: Target price

Value per share

DCF valuation 17.069 EUR

EV/EBITDA multiple valuation 21.12 EUR

P/E multiple valuation 33.41 EUR

P/B multiple valuation 27.714 EUR

Weighted target price 20.17 EUR

Weighted target price 557.18 CZK

Current price 642 CZK

Upside -13%

Appendix 16: DuPont Analysis

Profit Sales Assets Equity Net income

Pegas (eur) 19500 171800 358220 137357 19458

Avgol (usd) 13600 273100 573074 128740 13614

Providencia (reais) -54995 377564 914029 610199 -55605

PM AU EM ROA ROE (EM*ROA) ROE (PM*AU*EM)

Pegas (eur) 0.114 0.480 2.608 0.054 0.142 0.142

Avgol (usd) 0.050 0.477 4.451 0.024 0.106 0.106

Providencia (reais) -0.146 0.413 1.498 -0.061 -0.091 -0.090

We executed a DuPont Analysis of Pegas Nonwovens compared with two other major Nonwoven fabric producers to determine how their return on assets and equity compared. We determined that Pegas has the highest Return on Equity of the compared companies. Pegas also possessed the 2nd highest equity multiple at 2.06. This would be concerning if the company with the lower equity multiple possessed an equal or higher ROE, but that company is an extremely poor performer with a negative ROE. Pegas is the strongest company in this lineup as it generates the highest ROA and ROE. It is worth noting that Pegas generates 64% of its returns from debt, however because of it's strength compared to competitors we believe this DuPont analysis simply bolsteres Pegas Nonwovens place as a peak performer in the nonwoven industry.

Appendix 17: Risk Matrix

1 http://www.bloomberg.com/news/2013-07-10/kuwait-egypt-aid-pushes-gulf-pledges-to-12-billion-in-24-hours.html

2 https://www.moodys.com/research/Moodys-changes-Egypts-outlook-to-stable-from-negative-affirms-Caa1--PR_310221

3 http://www.reuters.com/article/2013/11/15/ratings-egypt-idUSL5N0J02HL20131115

4 https://www.cnb.cz/en/monetary_policy/weakening_koruna/index.html

5 http://www.oecd.org/eco/growth/Growth-prospects-and-fiscal-requirements-over-the-long-term.pdf

6 http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-Yield-Data-Visualization.aspx

7 http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html

8 http://www.stern.nyu.edu/~adamodar/pc/datasets/betaEurope.xls

9 http://www.economist.com/blogs/economist-explains/2014/12/economist-explains-

10 http://globenewswire.com/news-release/2014/11/17/683770/10108538/en/Global-Nonwoven-Fabrics-Market-Is-Expecting-

Growth-In-Revenue-To-42-1-Billion-By-2020-New-Report-By-Grand-View-Research-Inc.html https://www.smithersapex.com/news/2014/september/nonwovens-for-filtration-market-to-grow-to-2019 11

http://www.souvisime.cz/zpravy/svet/velky-obrat-v-odmenovani-eurozona-se-zotavuje-rozvojove-trhy-budou-v-roce-2015-stagnovat.html 12

http://www.pwc.com/gx/en/issues/economy/global-economy-watch/projections.jhtml 13

http://blog.caregiverpartnership.com/2014/04/theyre-back-is-p-reentering.html 14

http://www.ft.com/intl/cms/s/0/90e9eedc-cadc-11e3-ba95-00144feabdc0.html#axzz3MM91Hf6I

Disclosures: Ownership and material conflicts of interest:

The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation:

Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director:

The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making:

The author(s) does not act as a market maker in the subject company’s securities. Disclaimer:

The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society Czech Republic, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

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