iberian pulp & paper

Iberian Pulp & Paper

Steadier cyclical businesses

18 Sep. 2017 (06:00)

Are pulp prices peaking?

Pulp players have been noticing that the recent pulp price increase to USD910/tonne (spot prices stand at USD883/tonne) has been passed through and that another hike could be in the pipeline. This could add some S/T momentum to pulp prices (and pulp names) but we continue to expect some imbalances ahead. Why? Fibria has just kicked off production at its new 1.95mn tonne facility in Brazil while several non-recurrent factors that justify the fact that pulp prices have been moving ahead of expectations, should revert, namely: CMPC production issues (600k tonnes lost); limited production from APP new capacity (2.8mn nominal capacity) and; a stronger than expected re-stocking (Chinese demand grew by c1.4mn tonnes until Jun’17 vs. +400k tonnes in FY16).

Still, Mid-term prospects remain solid for pulp

Post Fibria’s new capacity (Aug’17), there is no major capacity increase expected until 2020. A green-field pulp project takes at least 2 years to set up and there are no major plans in the S/T. This should lend support to pulp prices from mid-2018 to 2020. Historically, high pulp prices attract new investments and therefore we expect new entries post 2020.

Paper momentum to improve

Paper prices have been lagging and we expect an acceleration in H2. The gap between pulp and paper and the solid demand for the latter should continue to support the ongoing price initiatives. The 4 th price hike was set in September and further increases may be considered.

The USD has a greater impact on the pure pulp players

The USD has a harsher impact on pulp players (vs. paper). A weaker USD (10%) impacts Altri and Ence’s EBITDA by c26% and 10% in the case of Navigator.

Play on the cycle, play on paper

We have been more positive on paper vs. pulp but the latter has been outperforming triggered by the aforementioned one-offs. The gap in the cycle (pulp prices at a peak, paper still lagging), S/T imbalances expected in pulp and the lower impact of a weaker USD lead us to maintain our bet on paper. We have upgraded our recommendation on NVG to Buy and Altri to Neutral and maintained our Neutral recommendation on Ence. Between the two pulp names, we prefer

Ence as despite the similar valuation, it could benefit from accretive new energy projects and the sale of non-core assets (€120mn).

Summary of Recommendations

Portugal/Spain Stocks Performance

Source: Bloomberg.

Last Price YE18 Price Target Risk Simple Recommendation

Company Sept. 13th New Old Rating Upside1 New Old

Altri 3.81 4.35 4.60 High 14% Neutral Underp.

Ence 3.95 4.30 3.90 High 19% Neutral Neutral

Navigator 3.73 4.45 4.35 Medium 19% Buy Neutral

(1) Excludes Dividend. Source: BPI Equity Research. Available on our website:

www.bpiequity.bpi.pt, BPI Online,

and Bloomberg at NH BPD.

Analysts

José Rito Bruno Bessa [email protected] [email protected]

Phone 351 22 607 3142 Phone 351 22 607 3183

0% 50% 100%

Ence

Altri

Navigator

YTD 12M

mailto:[email protected]


2

CONTENTS: 3. Pulp: St Risks; Steady Mid-Term Outlook

3. The reversion of the one offs? 4. Mid-term outlook seems compelling

5. UWF Paper: Improving Outlook

7. Company notes

7. Altri: USD burden?! 11. Ence: Delivering on the business plan 15. Navigator: Improving paper momentum

3

Equity Research Pulp & Paper September 2017

PULP: ST RISKS; STEADY MID-TERM OUTLOOK Pulp prices have been moving ahead of expectations in part due to some one-offs that have triggered the industry’s utilisation rates. In

the meantime some of these one-offs should revert, creating some S/T imbalances while Fibria has just started 1.95mn of new pulp capacity. Still, mid-term prospects seem sustainable as no new planned capacity should enter the market before 2020.

THE REVERSION OF THE ONE OFFS? Significant supply constraints have impacted the industry balance over the last 12M, namely: 1. CMPC – the boiler issue

CMPC has been dealing with a boiler issue and stopped production throughout 2017. This should represent a 600k tonne production loss until November (since February) or 40% of total demand growth or 100% of the normalised demand growth in the period. We think this may require some additional capex but this facility should return to production sooner rather than later. The company has already reported an USD200mn loss o.w. USD60mn related to repair costs. 2. APP – 2.8mn of no production

APP set up two production facilities (each having 1.4mn tonnes capacity), the first of which was earmarked to come on stream in 4Q16 and the other in Apr’17. The company a lso mentioned that it was planning to sell 1.2mn to the market in 2017. Surprisingly, the company was also reported to have closed for several weeks in July for maintenance. This reveals that the ramp up has been taking longer than expected and the impact on the market has been quite limited, if any. Several players have pointed out the lack of wood as the main reason for this limited pulp production but we believe that the industrial park being supplied by Chinese contractors was the main reason for this soft ramp up. Overall, visibility on when the production issues are finally overcome is limited but after the huge investment undertaken by the company, i t should be a matter of time before this capacity reaches the market. 3. Re-stocking in China

We deem the strong re-stocking in China as one key contributor for the recent pulp price evolution. Chinese demand was atypically low in 2016 (+400k tonnes). We believe local traders have delayed some volumes ahead of the expected new capacity from APP. This created a buying spree in 2017 (+1.4mn until Jun’17) while APP’s soft ramp up triggered a fast increase in the industry’s utilisation rates. Historically, pulp demand in China grows at c1mn tonnes per year and we therefore expect some normalisation over the next 18 months.

Chinese Pulp Imports (tonnes)

BSK pulp BHK pulp Total pulp

YTD JUN'17 4,151,087 5,319,858 12,068,896

YTD JUN'16 3,863,751 3,878,895 9,945,238

Variation 287,336 1,440,963 2,123,658

% change 7.4% 37.1% 21.4%

Source: RISI..

BEKP price evolution

Source: FOEX.

World Pulp Stocks (days of supply)

Source: RISI.

300

475

650

825

1000

Jan

-00

Nov-0

5

Oct-

11

Se

p-1

7

BHKP (€/tonne)

BHKP (USD/tonne)

20

38

55

Jan-05 Apr-11 Jul-17

4


Accordingly, pulp prices have been increasing since Jan’17 and reached levels that stand just 4% (USD35/tonne) below the peak level reached in Jul’10. We recall that the last peak level was reached following the earthquake in Chile which affected 3.0mn tonnes of installed capacity for several months (c1.0mn tonnes of hardwood were removed from the market). Some/all of these factors may normalise ahead

Pulp players have noticed that the recent pulp price increase to USD910/tonne (spot stands at USD883/tonne) has been successfully passed through and that another increase could be in the pipeline. This could add some S/T momentum to pulp prices (and pulp names) but we continue to expect some imbalances ahead and some price correction.

MID-TERM OUTLOOK SEEMS COMPELLING A green-field project takes up to 2 years before it comes on stream. Considering that no new announcements have been made, it would be difficult to envisage new capacity until 2020. This should allow the industry to work with good utilisation rates from mid-2018 to 2020 and therefore pulp prices to remain high (above USD800/tonne) in the period.

Still, we do not believe that at those price levels (above USD800/tonne), the main industry players (or others) will not consider new projects. Where? Probably in Uruguay, Russia and Asia

while new debottlenecks should be unveiled across the world. This should only be a matter of time and the higher the price the greater the probability of new capacity increases. In the meantime, following APP’s acquisition of Eldorado’s pulp facility in Brazil, the Asian company could decide to reactivate this company’s new pulp line project (2.3-2.5mn tonnes). We recall that Eldorado had plans to get this facility on stream by YE18 (initial works started in 2015) but this was delayed due to its high leverage, Brazilian macro issues and litigation against Eldorado’s main shareholders (J&F Group) which actually triggered the sale of this asset. Eldorado has 240k ha of eucalyptus forests in Mato Grosso do Sul and 140k ha are currently being consumed for the Três Lagoas’ pulp line n.1 while the excess could be used to feed the line n.2.

BEKP Main Assumptions

2017F 2018F 2019F 2020F

BEKP prices (USD) New estimate 806 762 823 823

Old estimate 748 711 736 751

% revision 8% 7% 12% 10%

BEKP prices (EUR) New estimate 707 640 686 686

Old estimate 680 629 646 653

% revision 4% 2% 6% 5%

EUR/USD New estimate 1.14 1.19 1.20 1.20

Old estimate 1.10 1.13 1.14 1.15

% revision 4% 5% 5% 4%

Source: Bloomberg and BPI Equity Research.

5


UWF PAPER: IMPROVING OUTLOOK The UWF paper industry faces a bright outlook supported by: 1. High raw material costs. Pulp prices are close to peak levels while

paper prices have been lagging. This led the gap between pulp and pap er prices to stand close to a minimal level of €83/tonne (historical average stands at €300/tonne). This should continue to pressure non -integrated players which account for c25% of the market.

UWF Paper Industry Integration Profile (K tonnes)

Gap Price UWF – BEKP (€/tonne)

Source: Navigator and FOEX.

2. European paper demand has been strong. The industry has been

working with the largest order book since 1999. Demand went up by 1.6% yoy until Jul’17 while there were some small capacity decreases (-103k tonnes; -2.3% yoy). Consequently, operating rates reached 94% in 2017 (YTD Jul’17) which compares to the 90 -91% average since 2009. Imports are estimated to stand above 2016 levels to face the rising demand.

Utilisation Rates of the European UWF Paper Industry

Source: FOEX.

UWF Paper Price Evolution

Source: FOEX.

0 500 1000 1500 2000

Clairefontaine

Zicuñaga

Sappi

Double A

Arctic Paper

UPM

Stora Enso

IP

Mondi

Navigator

Integrated Non-integrated

0

200

400

600

Jan-00 Nov-05 Oct-11 Sep-17

80%

82%

84%

86%

88%

90%

92%

94%

96%

0

2

4

6

8

10

2009 2010 2011 2012 2013 2014 2015 2016 FY17F

Capacity (LHS) Apparent Consumption (LHS) Op. Rate (RHS)

750

800

850

900

Jan

-10

Ap

r-11

Jul-1

2

Nov-1

3

Fe

b-1

5

May-1

6

Se

p-1

7

6


Against this backdrop, the main players have implemented the third price increase in July and a fourth in September. Considering that the

key contracts are revised every 6 months, we expect paper prices to materially start to increase from October onwards.

UWF Paper Main Assumptions

2017F 2018F 2019F 2020F

UWF Paper Price New Estimate 819 836 836 844

Old Estimate 816 816 824 832

% revision 0.4% 2.4% 1.4% 1.4%

Discounts

New Estimate 7.5% 8.0% 8.0% 8.0%

Old Estimate 6.0% 6.0% 6.5% 8.0%

Net Price

New Estimate 758 769 769 776

Old Estimate 767 767 770 765

% revision -1.2% 0.2% -0.2% 1.4%

Source: BPI Equity Research.

7

Altri Pulp

USD burden?! Neutral (Price Target cut from €4.60 to €4.35; Recommendation upgraded from Underperform to Neutral)

High-Risk

18 Sep. 2017 (06:00)

The USD burden: Altri is the Iberian player with the highest exposure to

the USD volatility. The company has recently announced a new hedging that should cover USD10mn/month (c15% of its exposure). This still stands below its closest Iberian peer (Ence) which has been covering c50% of its USD exposure over the last 18 months. In the meantime, the company’s capex effort has been surpassing expec tations while costs were also a negative surprise in Q2.

Pulp prices could suffer in Q4; mid-term outlook is supportive.

Earnings momentum should remain solid over the coming years even if 2018 is a tougher year due to lower pulp prices and a weaker USD. In the meantime, the company’s new capacity in Celtejo (+35%) and consecutive debottlenecks in Celbi (+10% until 2020) should add to the company’s mid-cycle EBITDA c€20mn. This, combined with above mid-cycle prices in 2019 and 2020 should allow the company to post a strong CF in the period.

Upgrading our recommendation: Altri has been a laggard in the

industry YTD (+4% vs. 26% for the average of LatAm peers and 60% for Ence). We link this to the fact that the company has been a strong outperformer over the last 5Y, it has a higher exposure to the USD volatility and recently it has delivered a soft operating performance. We have adjusted our YE18 Price Target to €4.35 (-6%) with our improved

view related to pulp prices being offset by the weaker USD while we have also incorporated higher capex and cash costs which negatively impacted our valuation by 6%. Following the recent underperformance, we have upgraded our recommendation to Neutral.

Portugal ALTR vs. PSI20 vs. MSCI SC

Source: Bloomberg.

Valuation Summary (€ mn)

EV 1252

- Adj. Net Debt YE18 (1) 399

+ Fin. Investments 11

+ Biomass (DCF) (2) 26

Equity Value 891

# shares (mn) 205.1

YE18 Price Target (€) 4.35

(1) Adj. for tax credits.

(2) Equity Target.


Historical Recommendation Date Recommendation

06-Sep-16 Reduce 16-May-17 Underperform


Stock Data

Price (13th Sep.): 3.81 Price Target (YE18): 4.35

# shares (mn): 205.1 M. Cap (€ mn) / F. Float: 781 / 34%

Reuters/Bloomberg: ALTR.LS/ALTR PL Avg. Daily Vol. [€'000]: 1 610

Major Shareholders:

Ms. Ana Fernandes (21.1%); Mr. João Borges de Oliveira (14.6%);

Mr. Domingos Matos (11.8%); Mr. Paulo Fernandes (11.7%); Mr. Pedro Borges Oliveira (7.0%)

(1) EV is fixed with current market cap and MV of remaining items.

Estimates 2014 2015 2016 2017F 2018F 2019F 2020F

PE Adj. 20.9 6.6 10.1 8.0 14.2 9.9 9.0

Dividend yield 1.1% 8.7% 6.6% 6.6% 6.6% 6.6% 6.6%

FCFE Yield 6.7% 19.2% 6.6% 9.9% 10.2% 12.4% 12.9%

FCFF Yield 7.4% 12.1% 10.9% 8.5% 8.5% 9.2% 9.7%

PBV 2.9 2.4 2.3 2.0 2.0 1.9 1.7

EV/EBITDA (1) 10.4 5.4 7.1 6.0 8.0 6.5 6.1

EV/Sales (1) 2.1 1.8 1.9 1.8 1.9 1.8 1.7

Available on our website:



Analysts


Phone 351 22 607 3142 Phone 351 22 607 3183

80

100

120

140

160

Sep-15 May-16 Jan-17 Sep-17

MSCI SC

ALTR

PSI20


148792

Link Site

https://www.bpiequity.bpi.pt/others/fileHistoricRec.aspx?emp=00151279

8

Equity Research Altri September 2017

Consensus and Stock Momentum

BPI estimates/Consensus EBITDA Consensus (€ mn) EPS Consensus (€/sh.)

2017 2018 2019

Revenues -4% -4% 1%

EBITDA -15% -21% -12%

EBIT -23% -33% -19%

Net Profit -25% -41% -27%

Net Debt 2% 5% 5%

Market Price Rating (€/sh.) Fair Value Comparison (€) Market Recommendations


Main Assumptions

2011 2012 2013 2014 2015 2016

2017F 2018F 2019F 2020F

Pulp

Sales (€ mn) 408 453 470 449 565 516 557 513 570 602

Price (USD/Ton) 810 751 791 745 784 696 806 762 823 823

Average EUR/USD 1.39 1.28 1.33 1.34 1.11 1.11 1.14 1.19 1.20 1.20

Discount 15.2% 16.9% 19.4% 21.1% 21.7% 22.2% 26.0% 26.5% 27.0% 27.5%

Tonnes Sold (Th) 826 922 964 998 1 012 1 032 1 046 1 071 1 118 1 190

Celbi Sales (€ mn) 288 309 316 307 391 349 379 349 382 394

Tonnes (Th) 584 634 658 692 700 714 724 743 762 792

Celtejo Sales (€ mn) 68 95 103 98 120 101 109 102 122 142

Tonnes (Th) 137 196 215 221 216 207 209 216 243 285

Caima Sales (€ mn) 51 48 49 44 57 65 69 62 66 66

Tonnes (Th) 104 92 88 84 88 111 113 113 113 113

% of Dissolving 0% 13% 50% 75% 100% 100% 100% 100% 100% 100%

Price (€/Ton) n.a. 743 632 537 591 591 608 551 590 590

Energy & Others Sales (€ mn) 79 90 104 104 96 97 99 99 99 99

Cash Cost (€/ton) 356 336 340 336 343 337 345 341 346 343


120

160

200

Sep-15 Sep-16 Aug-17

FY18

FY17

FY19

0.2

0.4

0.6

Nov-15 Oct-16 Aug-17

FY17

FY19

FY18

2.4

3.9

5.4


Price

Price Target Consensus 4.36

2.20

4.28 4.35

0.0

3.0

6.0

P/E PBV Consensus BPI

Current Market Price

Positive17%

Neutral83%

9


Altri at a Glance

FY16 Sales Breakdown (€612mn) FY16 Sales Geographic Breakdown (€612mn)

Source: Altri. Source: Altri.

BEKP Price Evolution World Top BHKP Producers, 2017 (38mn tonnes)

Source: FOEX. (1) inc. 900k ton from Klabin. Source: Companies.

BEKP Price Assumptions Cash Costs Evolution (€/tonne)

Source: FOEX and BPI Equity Research. Source: Altri and BPI Equity Research.

FY16 Refinancing Needs (€mn) Altri's Geographic Presence

(1) €59mn commercial paper. Source: Altri. Source: Altri.

Tissue49%

Printing & Writing

22%

Packing2%

Specialities15%

Dissolving10%

Others2%

Portugal7%

Europe (ex-

Portugal)68%

Others13%

China12%

300

475

650

825

1000

Jan-00 Jun-04 Nov-08 Apr-13 Sep-17

BHKP (€/tonne)

BHKP (USD/tonne)

0 2000 4000 6000 8000 10000

Fibria (Brazil) (1)APP (Indonesia)Suzano (Brazil)

APRIL (Indonesia)CMPC (Chile)UPM (Finland)

Eldorado (Brazil)Stora Enso (Finland)

Arauco (Chile)Cenibra (Brazil)

Ence (Spain)Altri (Portugal)

Mondi (S.Africa)Portucel (Portugal)

400

650

900

2010 2012 2014 2016 2018F 2020F

BEKP USD/Tonne BEKP Eur/tonne

340 336343

337345 341

346 343

250

310

370

2013 2014 2015 2016F 2017F 2018F 2019F 2020F

162 149

81 90

274

0

175

350

2017 (1) 2018 2019 2020 >2020

10


P&L (€ mn) CAGR 2014 2015 2016 2017F 2018F 2019F 2020F 16-20F

Revenues 553 665 612 656 612 668 700 3%

EBITDA 114 221 167 196 148 183 194 4%

EBITDA adj. 114 221 167 196 148 183 194 4%

EBITDA adj. mg. 20.5% 33.3% 27.3% 29.9% 24.2% 27.4% 27.7%

Depreciation & others 49 53 51 55 55 54 53 1%

EBIT 65 168 116 141 93 129 141 5%

EBIT adj. 65 168 116 141 93 129 141 5%

Net financial results -24 -21 -16 -16 -17 -20 -21 8%

Income tax 3 30 24 28 21 30 33 9%

Others 0 0 0 0 0 0 0 n.s.

Minority Interests 0 0 0 0 0 0 0 n.s.

Net Profit reported 37 118 77 98 55 79 87 3%

Net Profit adj. 37 118 77 98 55 79 87 3%

Price Target Sensitivity to BEKP prices and €/USD "Base-case" (€)

BEKP Price ($/tonne)

-20.00 0.00 20.00

Avg. €/USD

1.09 4.58 5.31 6.05

1.14 4.09 4.81 5.54

1.19 3.64 4.35 5.07

1.24 3.23 3.93 4.63

1.29 2.85 3.55 4.24


Sensitivity Analysis (€/sh)

-0.5% Δ g +0.5%

-0.5% 4.41 4.78 5.20

Δ WACC 4.04 4.35 4.72

+0.5% 3.71 3.98 4.29


DCF Assumptions

Celbi

Re 11.4%

Rf 3.25%

CRP 1.85%

Beta Equity 1.1

Mkt Premium 6.0%

Rd 6.3%

D/EV 40.0%

Tax rate 27.5%

WACC 8.7%

g 2.0%


Market Multiples

PE EV/EBITDA

17F 18F 17F 18F

Altri 8.0 14.2 6.0 8.0

Ence 11.4 18.0 6.5 8.0

Fibria 20.4 14.2 8.1 6.7

Suzano 11.6 11.9 7.0 6.9

CMPC 47.3 33.0 9.5 9.0

Average 22.7 19.7 8.2 7.5

Source: BPI Equity Research (Altri, Ence), Bloomberg.

Historical & Valuation References

2010-

16 10Y 2023F

Pulp Prices (USD/ton)

774 747 790

€/USD 1.26 1.30 1.22

Pulp Prices (€/ton) 614 575 647

Net Pulp Prices (€/ton)

502 476 478

EBITDA (mn €) 151 128 163


Balance Sheet (€ mn) CAGR 2014 2015 2016 2017F 2018F 2019F 2020F 16-20F

Net Intangibles 266 266 266 266 266 266 266 0%

Net Fixed Assets 490 466 462 469 445 426 411 -3%

Net Financials 26 26 30 29 29 29 29 -1%

Inventories 55 56 59 65 66 69 72 5%

ST Receivables 142 138 168 160 154 163 168 0%

Other Assets 0 0 0 0 0 0 0 n.s.

Cash & Equivalents 261 243 300 200 200 200 200 -10%

Total Assets 1239 1195 1285 1190 1160 1152 1145 -3%

Equity & Minorities 272 322 344 390 394 422 458 7%

MLT Liabilities 426 614 625 583 443 302 229 -22%

o.w. Debt 394 585 595 553 413 273 200 -24%

ST Liabilities 541 258 316 217 323 428 459 10%

o.w. Debt 408 117 163 79 190 285 309 17%

o.w. Payables 81 104 102 83 82 87 91 -3%

Equity+Min. + Liabilities 1239 1195 1285 1190 1160 1152 1145 -3%

Cash flow (€ mn)

2014 2015 2016 2017F 2018F 2019F 2020F

+ EBITDA 114 221 167 196 148 183 194

- Chg in Net W.C. -2 19 -22 18 -3 4 3

- Income Taxes -5 0 67 24 22 28 32

= Operating Cash Flow 120 203 123 154 128 151 159

- Growth Capex 18 4 15 15 7 0 0

- Replacement Capex 22 25 33 46 25 35 38

- Net Fin. Inv. -1 0 4 0 0 0 0

= Cash Flow after Inv. 80 174 72 93 97 117 122

- Net Fin. Exp. 24 21 16 16 17 20 21

- Dividends Paid 9 68 51 51 51 51 51

+/- Equity 0 0 0 0 0 0 0

Other -3 -3 -4 0 0 0 0

=Change in Net Debt -44 -82 0 -26 -29 -45 -49

Net Debt (+)/Net Cash (-) 541 458 458 432 404 358 309

Growth, per share data and ratios

2014 2015 2016 2017F 2018F 2019F 2020F

Sales growth -3% 20% -8% 7% -7% 9% 5%

EBITDA Adj. growth -20% 95% -24% 17% -24% 24% 6%

EPS Adj. growth -32% n.s. -35% 27% -44% 43% 10%

Avg. # sh (mn) 205.1 205.1 205.1 205.1 205.1 205.1 205.1

Basic EPS 0.18 0.57 0.38 0.48 0.27 0.38 0.42

EPS Adj. Fully diluted 0.18 0.57 0.38 0.48 0.27 0.38 0.42

DPS 0.04 0.33 0.25 0.25 0.25 0.25 0.25

Payout 181.1% 43.6% 66.6% 52.4% 93.1% 65.0% 58.9%

ROCE (after tax) 7.2% 16.7% 11.2% 13.6% 8.3% 11.8% 13.2%

ROE 14.6% 39.6% 23.1% 26.7% 14.0% 19.3% 19.8%

Gearing (ND/EV) 45.7% 38.7% 38.7% 36.5% 34.1% 30.3% 26.1%

Net Debt/EBITDA 4.8x 2.1x 2.7x 2.2x 2.7x 2.0x 1.6x

Source: Company data and BPI Equity Research (F).

11

Ence Pulp

Delivering on the business plan Neutral (Price Target raised from €3.90 to €4.30; Neutral Recommendation maintained) High-Risk

18 Sep. 2017 (06:00)

Chasing the business plan: The company has been committed to

delivering the business plan and the cash cost evolution has maintained a downward trend. It has also been working to increase its Energy EBITDA from €40mn to €80mn until 2020. The EBITDA run-rate of this division based on the projects and recent acquisitions (in Spain) announcements stands at c€65mn. We think that the company should be on the verge of concluding further acquisitions to tap the gap to the target provided in the business plan. In a second stage the company may acquire assets outside Spain and lastly it might develop some green-field operations in EM countries but this should take a while to take off (post 2020?).

A new plan around the corner? Ence has been improving its track record

and a positive pulp price combined with the recent acquisition in the Energy division should put the company’s EBITDA ahead of its main competitor over the coming years. We expect 2018 to be a more challenging year due to the expected correction of pulp prices but 2019-20 should be a strong CF period with pulp prices soaring above 2017 levels in USD backed by the absence of new capacities while a new business plan could be unveiled by YE18.

Maintaining our stance: Ence has been a strong performer with the

share price accumulating a 60% YTD gain. Apart from the strong pulp momentum, we believe part of this performance has been backed by a material improvement in its track record since 2015. We have set our YE18 Price Target at 4.30 (+10%) mainly due to the incorporation of the

new acquisitions/projects in energy (+70MW) given that the higher prospects in terms of pulp prices were offset by the weaker USD. We have not assumed the NPV of the sale of non-core assets in our valuation which could add c€0.40/sh (+11%).

Spain ENC vs. IBEX35 vs. MSCI SC

Source: Bloomberg.


Business EV

Attrib. %

EV

Energy (DCF) 455 33%

Pulp (DCF) 938 67%

EV 1 393



Equity Value 1 053

# shares (mn) 246


(1) Adj. for factoring and confirming, tax credits and treasury stock.



23-Jan-17 Reduce 16-May-17 Underperform 14-Jun-17 Neutral


Stock Data


# shares (mn): 246.3 M. Cap (€ mn) / F. Float: 973 / 74%

Reuters/Bloomberg: ENC MC/ENC SM Avg. Daily Vol. [€'000]: 3 280

Major Shareholders:

Mar. Arregui (26.7%); Alcor (5.9%); Victor Urrutia (6.2%);

Jose Ignacio Comenge (5.6%); Treasury Stock (0.6%)


Estimates 2014 2015 2016 2017F 2018F 2019F 2020F

PE Adj. n.s. 19.8 25.5 11.4 18.0 11.8 10.9

Dividend yield 4.0% 3.6% 2.5% 2.6% 2.5% 2.5% 2.5%

FCFE Yield -6.3% 8.1% 5.0% 0.9% -1.3% 3.2% 11.9%

FCFF Yield -12.6% 14.2% 15.1% 6.5% 7.7% 9.6% 9.8%

PBV 1.8 1.7 1.8 1.6 1.5 1.4 1.3

EV/EBITDA (1) n.s. 7.1 10.8 6.5 8.0 6.4 6.2

EV/Sales (1) 2.0 2.0 2.2 1.9 2.0 1.8 1.7




Analysts


Phone 351 22 607 3142 Phone 351 22 607 3183

60

80

100

120

140

160


MSCI SC

ENC

IBEX35


148792

Link Site


12

Equity Research Ence September 2017



2017 2018 2019

Revenues -12% -12% -10%

EBITDA -33% -40% -33%

EBIT -52% -66% -49%

Net Profit -66% -83% -63%

Net Debt 23% 27% 21%



Main Assumptions

2015 2016 2017F 2018F 2019F 2020F

Pulp Energy

Pulp

Re 10.3% 9.1%

Sales (€ mn) 483 429 491 452 521 524

Rf + CRP 4.00% 4.00%

BEKP (USD/Ton) 784 696 806 762 823 823 Beta Equity 1.1 0.9

Average EUR/USD 1.11 1.11 1.14 1.19 1.20 1.20 Market Premium 6.0% 6.0%

Discount 22.7% 26.1% 27.0% 27.5% 28.0% 28.5% Rd 6.3% 6.3%

Tonnes Sold (Th) 885 923 950 974 1 055 1 069

Tax Rate 25.0% 25.0%

EBITDA mg 32.4% 22.2% 33.6% 26.0% 30.4% 29.9% D/EV 30.0% 60.0%

Energy WACC 8.6% 6.4%

Sales (€ mn) 95 96 132 144 148 174 g 2.0% 0.0%

Production (Th MW) 615 628 690 690 690 690 Perpetuity EBITDA mg

Price (€/MW) 0.15 0.15 0.19 0.21 0.21 0.25 26.4% 0.0%

EBITDA mg 36.8% 31.5% 35.0% 37.5% 37.5% 37.5% Forest

Sales (€ mn) 12 14 14 14 14 14 Volume (Th m3) 113 116 118 121 124 128 Price (€/000m3) 45.0 45.0 45.0 45.0 45.0 45.0

EBITDA mg 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Cash Cost (€/ton) 329 328 294 288 291 283


120

170

220

Aug-15 Aug-16 Aug-17

FY17

FY19

FY18

0.0

0.2

0.4

Oct-15 Sep-16 Aug-17

FY17

FY19

FY18

1.6

2.6

3.6

4.6


Price

Price Target Consensus

3.00

3.523.73

4.30

0.0

2.5

5.0



Positive62%

Neutral38%

13

Pon teved ra

Navia

Me rida

Hu elva

BEKPPo nte vedra 415k tonne sNa via 500k tonne s

E ner gy (co -ge ner ation)Ponteve dr a 35M WNavia 77M W

Ene rgy (Ind epe nd ent pla nts)Huelva (1) 91M WMér ida (2) 20M WCiudad Rea l+Ja én 32M WCordoba 27M W

Ciud ad Rea l

J aénCor dob a


Ence at a Glance

1H17 Sales Breakdown (€342mn) 1H17 Sales Geographic Breakdown (€342mn)

Source: Ence. Source: Ence.

BEKP Price Evolution World Top BHKP Producers, 2017 (38mn tonnes)

Source: FOEX. (1) inc. 900k ton from Klabin. Source: Companies.

BEKP Price Assumptions Cash Costs Evolution (€/tonne)

Source: FOEX and BPI Equity Research. Source: Ence and BPI Equity Research.

1H17 Refinancing Needs (€mn) Ence's Geographic Presence

Source: Ence. Source: Ence.

BEKP69%

Energy28%

Forest3%

Iberia19%

Germany22%

Italy13%

France6%

Other W. Europe

15%

E. Europe13%

Others12%

300

475

650

825

1000


BHKP (€/tonne)

BHKP (USD/tonne)

0 2000 4000 6000 8000 10000

Fibria (Brazil) (1)APP (Indonesia)Suzano (Brazil)

APRIL (Indonesia)CMPC (Chile)UPM (Finland)

Eldorado (Brazil)Stora Enso (Finland)

Arauco (Chile)Cenibra (Brazil)

Ence (Spain)Altri (Portugal)

Mondi (S.Africa)Portucel (Portugal)

400

650

900

2010 2012 2014 2016F 2018F 2020F

BEKP USD/Tonne BEKP Eur/tonne

329 328

294288 291

283

250

310

370

2015 2016 2017F 2018F 2019F 2020F

10 20 37 25 25

317

0

175

350

2017 2018 2019 2020 2021 >2021

14


P&L (€ mn) CAGR 2014 2015 2016 2017F 2018F 2019F 2020F 16-20F

Revenues 688 664 605 715 685 774 804 7%

EBITDA 43 192 126 210 170 212 221 15%

EBITDA adj. 61 192 126 210 170 212 221 15%

EBITDA adj. mg. 8.9% 28.9% 20.7% 29.4% 24.8% 27.4% 27.5%

Depreciation & others 103 59 53 66 67 68 67 6%

EBIT -60 133 73 144 103 145 154 21%

EBIT adj. -42 133 73 144 103 145 154 21%


Income tax -27 17 12 32 23 34 37 32%

Others -82 0 0 0 0 0 0 n.s.


Net Profit reported -142 50 39 85 54 82 89 23%

Net Profit adj. -44 50 39 85 54 82 89 23%

Price Target Sensitivity to BEKP prices and €/USD "Base-case" (€)


-20.00 0.00 20.00

Avg. €/USD

1.09 4.50 5.20 5.80

1.14 4.10 4.70 5.30

1.19 3.70 4.30 4.90

1.24 3.30 3.90 4.50

1.29 3.00 3.50 4.10



-0.5% Δ g +0.5%

-0.5% 4.30 4.50 4.80

Δ WACC 4.10 4.30 4.50

+0.5% 3.90 4.10 4.30


DCF Assumptions

Energy Pulp

Re 9.1% 10.3%

Rf 3.25% 3.25%

CRP 0.75% 0.75%

Beta Equity 0.9 1.1

Mkt Premium 6.0% 6.0%

Rd 6.3% 6.3%

D/EV 60.0% 30.0%

Tax rate 25.0% 25.0%

WACC 6.4% 8.6%

g 0.0% 2.0%


Historical & Valuation References

2010-16 10Y 2023F

Pulp Prices (USD/ton)

774 747 790

€/USD 1.26 1.29 1.22

Pulp Prices (€/ton) 613 578 647

Net Pulp Prices (€/ton)

492 470 463

EBITDA (mn €) 137 123 195


Market Multiples

PE EV/EBITDA

17F 18F 17F 18F

Ence 11.4 18.0 6.5 8.0

Altri 8.0 14.2 6.0 8.0

Fibria 20.4 14.2 8.1 6.7

Suzano 11.6 11.9 7.0 6.9

CMPC 47.3 33.0 9.5 9.0

Average 21.8 18.3 7.7 7.6

Source: BPI Equity Research (Ence, Altri), Bloomberg.


Net Intangibles 14 13 18 17 18 19 19 2%

Net Fixed Assets 734 730 770 796 865 917 891 4%

Net Financials 3 3 12 12 11 11 11 -1%

Inventories 38 40 44 42 43 47 49 3%

ST Receivables 284 263 179 200 199 214 221 5%


Cash & Equivalents 82 160 210 173 135 142 232 3%

Total Assets 1154 1208 1232 1240 1272 1350 1424 4%

Equity & Minorities 541 568 562 624 655 715 782 9%

MLT Liabilities 425 428 448 440 440 440 440 0%

o.w. Debt 349 387 408 408 408 408 408 0%

ST Liabilities 188 212 222 177 177 195 203 -2%

o.w. Debt 18 15 20 0 0 0 0 n.s.

o.w. Payables 145 190 185 167 168 184 191 1%

Equity+Min. + Liabilities 1154 1208 1232 1240 1272 1350 1424 4%

Cash flow (€ mn)

2014 2015 2016 2017F 2018F 2019F 2020F

+ EBITDA 43 192 126 210 170 212 221

- Chg in Net W.C. 151 -56 -103 45 -1 4 1

- Income Taxes 0 19 7 35 27 33 38

= Operating Cash Flow -108 228 222 129 145 175 181

- Growth Capex 42 32 92 54 100 84 0


- Net Fin. Inv. 0 0 9 0 0 0 0

= Cash Flow after Inv. -189 167 91 42 11 57 141

- Net Fin. Exp. 27 66 22 24 24 26 26

- Dividends Paid 20 36 25 25 25 25 25

+/- Equity 0 -39 0 0 0 0 0

Other 154 17 -21 -9 0 0 0

=Change in Net Debt 81 -43 -24 16 38 -6 -91

Net Debt (+)/Net Cash (-) 284 242 218 235 272 266 175


2014 2015 2016 2017F 2018F 2019F 2020F

Sales growth -19% -3% -9% 18% -4% 13% 4%

EBITDA Adj. growth -58% n.s. -35% 67% -19% 25% 4%

EPS Adj. growth n.s. n.s. -22% n.s. -37% 52% 8%

Avg. # sh (mn) 246.3 246.3 246.3 246.3 246.3 246.3 246.3

Basic EPS -0.57 0.20 0.15 0.35 0.22 0.33 0.36

EPS Adj. Fully diluted -0.18 0.20 0.15 0.35 0.22 0.33 0.36

DPS 0.16 0.14 0.10 0.10 0.10 0.10 0.10

Payout n.s. 50.2% 64.7% 28.8% 45.5% 29.9% 38.7%

ROCE (after tax) -5.4% 11.3% 6.6% 12.5% 8.0% 10.5% 11.0%

ROE -22.7% 9.0% 6.9% 14.6% 8.6% 12.2% 12.1%

Gearing (ND/EV) 20.9% 17.8% 16.0% 17.2% 20.0% 19.6% 12.9%



15

The Navigator Company Pulp & Paper

Improving paper momentum Buy (Price Target raised from €4.35 to €4.45; Recommendation upgraded from Neutral to Buy)

Medium-Risk

18 Sep. 2017 (06:00)

Paper prices are on the way up: the UWF paper industry has been facing

strong trends in Europe backed by rising demand which has triggered the improvement of utilization rates to 94% (91% average over the last 8Y). This, combined with higher pulp prices (main raw material for non-integrated players; c25% of the market) has led the main industry players to set 4 price increases until Sep’17. Accordingly, paper prices have been recovering but the full effect of these increases should only be felt in 2018.

Paper momentum complemented by new investments. Navigator has

two major investments ongoing: the increase of pulp capacity in F.Foz (+70k tonnes; €80mn capex) and the tissue plant in Cacia (70k tonnes; €120mn). These projects are expected to be concluded by mid -2018 which together with an improving operational delivery from the new pellets company in the US (ramp up in 2017) should add to the company’s mid-cycle EBITDA c€40-45mn. On top of this, UWF paper prices should maintain a positive trend (+2% in 2018; flat in 2019; +1% in 2020), more than offsetting the USD burden and help the company’s EBITDA and CF to improve.

Upgraded view: NVG accumulates a 25% YTD gain (in line with peers)

and trades at a 2% discount (vs. 7% premium over the last 2Y years). Our improved stance in terms of pulp and paper prices estimates triggered our earnings estimates for NVG, clearly above peers. Recent execution has been eye-catching, dividend yield remains a positive in the IC (7.5% on a sustainable base) and the UWF paper price momentum has just started. We have increased our YE18 Price Target to €4.45 to incorporate higher

P&P prices which more than offset the weaker USD (c25% of sales) and improved our recommendation to Buy.

Portugal NVG vs. PSI20 vs. MSCI SC

Source: Bloomberg.


EV 3 907



- Minorities

9

Equity Value 3 183

# shares (mn) 717.5


(1) Adj. for Treasury Stock.



13-Sep-16 Neutral


Stock Data


# shares (mn): 717.5 M. Cap (€ mn) / F. Float: 2 676 / 31%

Reuters/Bloomberg: NVG.LS / NVG PL Avg. Daily Vol. [€'000]: 2 545

Major Shareholders:

Semapa (69%); BPI (4%); Norges Bank (2%)


Estimates 2014 2015 2016 2017F 2018F 2019F 2020F

PE Adj. 14.7 13.6 12.3 14.0 13.5 13.6 13.3

Dividend yield 7.5% 16.5% 6.4% 9.4% 7.5% 7.5% 7.5%

FCFE Yield 8.8% 2.2% 6.9% 7.1% 6.8% 10.9% 11.4%

FCFF Yield 10.2% 8.2% 11.1% 8.9% 9.5% 9.4% 9.8%

PBV 1.8 2.2 2.2 2.3 2.3 2.3 2.3

EV/EBITDA (1) 10.3 8.7 8.5 8.3 8.0 7.6 7.4

EV/Sales (1) 2.2 2.1 2.1 2.1 2.0 1.9 1.9




Analysts


Phone 351 22 607 3142 Phone 351 22 607 3183

80

90

100

110

120

130

140

150

160


MSCI SC

NVG

PSI20


148792

Link Site


16

Equity Research The Navigator Company September 2017



2017 2018 2019

Revenues 1% 1% 1%

EBITDA -6% -6% -2%

EBIT -7% -6% -1%

Net Profit -4% -8% -9%

Net Debt -4% 2% 6%



Main Assumptions

2011 2012 2013 2014 2015 2016

2017F 2018F 2019F 2020F

Paper

Sales (€ mn) 1171 1193 1148 1171 1216 1211 1203 1227 1233 1245

EBITDA mg 23.3% 26.4% 24.3% 23.3% 26.6% 24.2% 25.3% 26.5% 26.9% 28.0%

UWF Paper Price (€/Ton) 827 869 847 827 822 824 819 836 836 844

Discount 9.5% 9.3% 10.8% 9.5% 4.8% 7.4% 7.5% 8.0% 8.0% 8.0%

Pulp Sales (€ mn) 114 138 137 114 140 138 171 148 142 138

EBITDA mg 16.3% 20.5% 25.4% 16.3% 17.7% 30.5% 36.3% 29.2% 33.4% 32.8%

BEKP Price (USD/Ton) 745 810 791 745 784 696 806 762 823 823

Average EUR/USD 1.33 1.39 1.33 1.33 1.11 1.11 1.14 1.19 1.20 1.20

Discount 20.9% 13.4% 18.7% 20.9% 21.6% 24.6% 25.0% 25.5% 26.0% 26.7%

Tissue Sales (€ mn) n.a. n.a. n.a. n.a. 56 68 79 113 156 165

EBITDA mg n.a. n.a. n.a. n.a. 13.7% 13.9% 15.0% 18.0% 20.0% 20.0%

Average Price (€/Ton) n.a. n.a. n.a. n.a. 1 288 1 191 1 167 1 167 1 167 1 167

Pellets Sales (€ mn) n.a. n.a. n.a. n.a. n.a. n.a. 31 58 61 61

EBITDA mg n.a. n.a. n.a. n.a. n.a. n.a. 1.0% 10.0% 17.0% 25.0%

Average Price (€/Ton) n.a. n.a. n.a. n.a. n.a. n.a. 143 146 149 149

Energy Sales (€ mn) 236 167 238 236 198 148 155 155 156 156

EBITDA mg 15.5% 24.8% 15.6% 15.5% 17.5% 34.8% 17.1% 17.1% 17.0% 10.5%


350

390

430


FY18

FY17

FY19

0.23

0.26

0.29


FY17

FY19

FY18

2.0

3.0

4.0

5.0


Price

Price Target Consensus 4.27

5.11

4.42 4.45

0.0

3.0

6.0



Positive83%

Negative17%

17


The Navigator Company at a Glance

1H17 Sales Breakdown (€813mn) 1H17 Sales Breakdown (€813mn)

Source: NVG. Source: NVG.

UWF Paper Price Evolution (€/tonne) BEKP Price Evolution

Source: FOEX. Source: FOEX.

UWF Paper Deliveries (yoy) European UWF paper market shares

Source: Cepifine. Source: NVG.

1H17 Refinancing Needs (€mn) UWF Paper Prices Assumptions (€/tonne)

Source: NVG. Source: FOEX and BPI Equity Research.

UWF72%

BEKP11%

Energy10%

Tissue5%

Others2%

Europe52%

Portugal18%

US8%

Others22%

700

800

900

1000

1100

Jan-00 Nov-08 Sep-17

300

475

650

825

1000


BHKP (€/tonne)

BHKP (USD/tonne)

-15%

0%

15%

Jan-13 Jun-14 Dec-15 Jun-17

NVG (Portugal),

19%

Mondi (S.Africa),

16%

Stora Enso

(Finland), 13%

IP (US), 14%

UPM (Sweden),

11%

Other, 27%

66

20 12

238 227

10

210

38

2 017 2 018 2 019 2 020 2 021 2 022 2023 2024-2028

827 822 824 819 836 836 844

2014 2015 2016 2017F 2018F 2019F 2020F

18


P&L (€ mn) CAGR 2014 2015 2016 2017F 2018F 2019F 2020F 16-20F

Revenues 1542 1628 1577 1647 1709 1768 1785 3%

EBITDA 328 390 397 405 421 447 459 4%

EBITDA adj. 328 390 397 405 421 447 459 4%

EBITDA adj. mg. 21.3% 24.0% 25.2% 24.6% 24.6% 25.3% 25.7%

Depreciation & others 110 107 167 149 151 150 149 -3%

EBIT 218 283 230 257 270 297 310 8%

EBIT adj. 218 283 230 257 270 297 310 8%


Income tax 3 36 -7 48 50 75 76 n.s.

Others 0 0 0 0 0 0 0 n.s.


Net Profit reported 181 196 217 192 199 197 202 -2%

Net Profit adj. 181 196 217 192 199 197 202 -2%

DCF Assumptions

Re 10.7%

Rf 3.25%

CRP 1.77%

Beta Equity 1.0

Mkt Premium 6.0%

Rd 5.4%

D/EV 30.0%

Tax rate 29.5%

WACC 8.7%

g 2.0%


Sens. Analysis to UWF and BEKP Prices


-20.00 0.00 20.00

UWF Paper Price

(€/tonne)

-20.00 3.90 3.98 4.06

0.00 4.37 4.45 4.53

20.00 4.83 4.91 4.99



-0.5% Δ g +0.5%

-0.5% 4.54 4.87 5.25

Δ WACC 4.17 4.45 4.77

+0.5% 3.85 4.08 4.36


Market Multiples

PE EV/EBITDA

17F 18F 17F 18F

NVG 14.0 13.5 8.3 8.0

Stora Enso 14.4 13.0 8.2 7.7

UPM 13.2 13.3 8.1 8.2

Metsa 14.4 11.6 8.7 7.5

Mondi 15.0 14.1 8.8 8.4

IP 16.3 13.2 8.8 7.8

Average 14.6 13.0 8.5 7.9

Source: BPI Equity Research, Bloomberg.


Net Intangibles 380 382 382 381 380 380 379 0%

Net Fixed Assets 1364 1438 1421 1417 1431 1334 1229 -4%

Net Financials 0 0 0 0 0 0 0 1%

Inventories 189 213 209 220 228 234 235 3%

ST Receivables 275 324 330 340 350 359 363 2%


Cash & Equivalents 500 73 68 100 100 100 100 10%

Total Assets 2708 2430 2409 2458 2489 2407 2306 -1%

Equity & Minorities 1454 1214 1233 1175 1173 1169 1169 -1%

MLT Liabilities 548 784 709 689 669 669 668 -1%

o.w. Debt 468 687 639 619 599 599 599 -2%

ST Liabilities 706 431 466 594 648 569 468 0%

o.w. Debt 305 41 70 183 221 131 27 -21%

o.w. Payables 306 302 337 349 362 372 374 3%

Equity+Min. + Liabilities 2708 2430 2409 2458 2489 2407 2306 -1%

Cash flow (€ mn)

2014 2015 2016 2017F 2018F 2019F 2020F

+ EBITDA 328 390 397 405 421 447 459

- Chg in Net W.C. -34 45 -5 15 5 5 2

- Income Taxes 24 75 -6 40 47 73 77

= Operating Cash Flow 338 271 409 350 369 370 381

- Growth Capex 33 158 112 104 123 10 0


- Net Fin. Inv. 0 0 0 0 0 0 0

= Cash Flow after Inv. 291 88 259 207 205 317 337

- Net Fin. Exp. 34 50 21 17 22 25 32

- Dividends Paid 201 440 170 250 201 201 201

+/- Equity 0 0 -50 0 0 0 0

Other -23 22 -5 0 0 0 0

=Change in Net Debt -33 381 -13 61 19 -91 -104

Net Debt (+)/Net Cash (-) 274 654 641 702 720 629 525


2014 2015 2016 2017F 2018F 2019F 2020F

Sales growth 1% 6% -3% 4% 4% 3% 1%

EBITDA Adj. growth -6% 19% 2% 2% 4% 6% 3%

EPS Adj. growth -14% 8% 10% -12% 4% -1% 2%

Avg. # sh (mn) 767.5 767.5 717.5 717.5 717.5 717.5 717.5

Basic EPS 0.25 0.27 0.30 0.27 0.28 0.28 0.28

EPS Adj. Fully diluted 0.25 0.27 0.30 0.27 0.28 0.28 0.28

DPS 0.28 0.61 0.24 0.35 0.28 0.28 0.28

Payout 242.7% 86.6% 115.4% 104.8% 101.2% 101.8% 60.0%

ROCE (after tax) 11.7% 12.7% 12.2% 10.6% 11.1% 11.2% 12.4%

ROE 12.4% 14.8% 17.8% 16.0% 17.0% 16.9% 17.3%

Gearing (ND/EV) 8.1% 19.4% 18.9% 20.7% 21.3% 18.6% 15.5%



19

This research report is only for private circulation and only partial reproduction is allowed, subject to mentioning the source. This research report is based on information obtained from sources which we believe to be credible and reliable, but is not guaranteed as to accuracy or completeness. This research report does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive it. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this research report and should understand that the statements regarding future prospects may not be realized. Unless otherwise stated, all views (including estimates, forecasts, assumptions or perspectives) herein contained are solely expression of BPI's Equity Research department and are subject to change without notice. Recommendations and opinions expressed are our current opinions as of the date referred on this research report and they may change in the period of time between the dates on which the said opinion or recommendation were formulated and made public. Current recommendations or opinions are subject to change as they depend on the evolution of the company and subsequent alterations to our estimates, forecasts, assumptions, perspectives or valuation method used. The valuation models are systematically reviewed and validated, particularly with regard to the method of valuation and assumptions used. Investors should also note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Accordingly, investors may receive back less than initially invested. There are no pre-established policies regarding frequency, update or change in recommendations issued by BPI Equity Research. The same applies to our coverage policy. Past performance is not a guarantee for future performance. BPI Group accepts no liability of any type for any indirect or direct loss arising from the use of this research report. For further information concerning BPI Research recommendations and valuations, please visit www.bpi.pt/equity. This research report did not have any specific recipient. The company subject of the recommendation was unaware of the recommendation or did not validate the assumptions used, before its public disclosure. Each Research Analyst responsible for the content of this research report certifies that, with respect to each security or issuer covered in this report: (1) all of the views expressed accurately reflect his/her personal views about those securities/issuers; and (2) no part of his/her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. There are no conflicts of interests between BPI or its Analysts and the issuer covered, except when mentioned in the Report. The Research Analysts do not hold any shares representing the capital of the companies of which they are responsible for compiling the Research Report, except when mentioned in the Report. BPI Analysts may participate in meetings to prepare BPI's involvement in placing or assisting in public offers of securities issued by the company that is the subject of the recommendation, which will be disclosed in the research report. BPI has compiled policies and procedures applicable to the investment recommendations activity. Such document is available for consultation on request. In November 2007, Banco BPI has celebrated an "Equity Swap" contract with Sonae Investments with strictly financial settlements (Cash Settled Share Swap Transaction), to cover the inherent risk in the acquisition of 6.64% of Sonae's share capital, at a price of E2.06 per share. In this contract, the periodic repercussion over Sonae Investments of the amounts corresponding to Sonae share price changes relative to the above-mentioned price was agreed as well as the amounts equivalent to the proceeds to be received by Banco BPI under the exercise of rights inherent to these shares. The contract had a maximum maturity of 3 years, and it was successively extended on October 2010, November 2013, November 2014, and November 2015, over currently a total of 110,398,710 SONAE shares, corresponding to 5,52% of its share capital. In November 2016, this contract has been extended for an additional 12 month period, up until November 2017, and it may subsequently be automatically extended for successive 12 (twelve) month period if neither party notifies to the non-renewal. Banco BPI and/or Banco Português de Investimento have participated, as a syndicate member and/or providing assistance services to the issuer/ offeror, in the capital market operation of Mota Engil. Banco Português de Investimento has participated providing assistance services to Ibersol on the acquisition of the entire share capital of Eat-Out Group. In November 2016, Banco Português de Investimento acted as a Joint Bookrunner in the private sale performed by “Amorim International Participations, BV” and “Investmark Holdings, BV” of 13.300.000 shares of Corticeira Amorim, representing at such date 10% of Corticeira Amorim's share capital, through an Accelerated Bookbuilding process. BPI Group may provide corporate finance and other investment banking services to the companies referred to in this report. Amongst the companies covered by BPI Equity Research, BPI Group has qualified stakes in Ibersol, Impresa, NOS SGPS, The Navigator Company and Sonae SGPS. BPI Group, members of the board, or BPI Group employees, may hold a position or any other financial interest in issuer's covered by BPI Equity Research, subject to change, which shall be disclosed when relevant for assessing the objectivity of the recommendation. BPI's activity is supervised by both Banco de Portugal (the Portuguese Central Bank) and by the CMVM (Stock Exchange Regulator). Within the framework of a contractual joint venture agreement entered into on May 3rd 2017 between BPI and CaixaBank, S.A. (which holds 84,5% of Banco BPI, that fully owns BPI’s share capital), (1) BPI authorized CaixaBank, S.A. to distribute this report to CaixaBank’s clients, and (2) strictly for the referred distribution purpose, BPI and CaixaBank agreed on CaixaBank’s logo being inserted in this report’s heather. This research report has been prepared and is issued exclusively by BPI under its sole responsibility. CaixaBank, S.A. has not been involved in the preparation and issuance of this report, not being therefore responsible for its content. INVESTMENT RATINGS AND RISK CLASSIFICATION (12 MONTH TOTAL RETURN): INVESTMENT RATINGS STATISTICS : Low Risk Medium Risk High Risk Buy >15% >20% >30% Neutral >5% x < 15% >10% x <20% >15% x < 30% Underperform x < 5% x < 10% x < 15%

These investment ratings are not strict and should be taken as a general rule. Risk rating (“Low”, “Medium”, “High”) is defined based on two criteria: Blended cost of equity (relative approach within coverage) and a Qualitative assessment (analyst evaluation of the factors affecting the investment risk, which are not captured by the valuation methodology).

BANCO PORTUGUÊS DE INVESTIMENTO, S.A.

Oporto Office Madrid Office

Rua Tenente Valadim, 284 Pº de la Castellana, 40-bis-3ª

4100-476 Porto 28046 Madrid

Phone: (351) 22 607 3100 Phone: (34) 91 328 9800

As of 31st August BPI Equity Research investment ratings were distributed as follows: Buy 26% Neutral 48% Underperform 22% Accept the Bid 1% Under Revision/Restricted 3% Total 100%

iberian pulp & paper

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