Presented on November 12th, 2015

Analysts Team: Aditi Das

Xuan (Lucy) Liang

Zhi Cheng (Nicole) Low

Jordan Peasel

Yue (Benjamin) Xu

(NASDAQ: WBA)

AGENDA

Business Overview

Industry Overview

Financial Analysis

DCF Valuation

Comparable Valuation

Stock Analysis

Recommendation

CURRENT HOLDING

Yahoo! Finance Investment Holding

Capital Gain: $17,046

Date Action

October 6, 1999 Purchased 1000 shares @$25/share (Cost Basis: $25,000)

September 20, 2006

Sold 500 shares @ 49.94

November 22, 2013

Sold 200 Shares @ 60.35

TODAY Current Position: 300 shares trading at $81.82/share (Cost Basis: $24,546)

BUSINESS SEGMENTATION

• Continues the Legacy of Walgreens• Operation of Retail Drugstores• Convenient Care Clinics• Specialty Pharmacy Services

• Continues the legacy of Alliance Boots• Beauty Retail Operations Comprised of Retail

Drugstores• Optician Stores• Contract Manufacturing Operations

• Continues the Legacy of Alliance Boots• Pharmaceutical Wholesaling and Distribution

Business

Retail Pharmacy USA

Retail Pharmacy

International

Pharmaceutical Wholesale

2015 WBA 10-K Pages 2-3

FUTURE GOALS

WBA April Annual Report, http://www2.deloitte.com/global/en/pages/life-sciences-and-healthcare/articles/global-health-care-sector-outlook.html,http://www.eiu.com/industry/Healthcare

Seek and Seize

further synergy

opportunities

Boost Organic Growth

Seek to generate and seize relevant M&A and strategic

investment opportunitie

s

Latin America Asia Western Europe North America0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

FORECASTED HEALTH CARE SPENDING AS % OF GDP UP TO FY18

2015 Healthcare Spending Forecasted Growth in Healthcare Spending

FOOD AND DRUGS STORE

http://clients1.ibisworld.com/reports/us/industry/default.aspx?entid=1054

58.10%

31.00%

10.30%Market Share

CVS

Walgreens Boots Alliance

Rite Aid

4% 2%5%

54%5%

10%

10%

10%

Product BreakdownGroceries and Food ItemsDietary SupplementsPersonal Health SuppliesBranded Prescription DrugsNonprescription MedicinesGeneric DrugsBranded Generic DrugsOther

Industry Statistics

Revenue 263 Billion

Profit 10.3 Billion

Past Growth 1.3%

Expected Growth

2.9%

MACROECONOMIC FACTORS

IBIS WORLD

Unemployment Rate Disposable Income

Federal Healthcare SpendingAdults Aged 65 and Older

ACQUISITION OF RITE AID

WBA 2015 Investor Roadshow

Rite Aid Overview• Perfect Pharmacy

Comparable to WBA• Distributor-McKesson

• 62.2% of COGS• Heavy store concentration

in the New England Area

Transaction Overview• WBA is offering $9 per share

cash• Closing of 1,000 stores if

approved by regulators • Over $1BN of expected

synergies:• Cost Savings• Operational Synergies• Expected to be realize

within 3-4 years of store closures

~4600 Stores

~8200 Stores

SWOT ANALYSIS

2015 WBA 10-K Part A

• Mail order• CVS looking to expand its

footprint• Lower reimbursement

rate• Federal Trade

Commission regulation

• Synergies of strategic acquisition

• Patent cliff• Increasing aging

population• Health care reform

• High reliance on the third party player

• Simple business model

• 2rd marketplace • Footprint • Strong CRM

initiative • Bargain power

Strength Weakness

ThreatsOpportunity

KEY RISKS

2015 WBA 10-K Pages 7-22

Product

Third Party

Strategy

Financial

Regulation

• Increasing Outstanding Debt

• Changes in Healthcare Regulatory Environments

• Relationship with pharmacy benefit management companies

• Consolidation and strategic alliances in the healthcare industry

• Uncertainty of the realization of anticipated benefits from the acquisitions

• Private Brand

• A shift in pharmacy mix toward lower margin plans and programs

• Decrease in the introduction of new brand name and generic prescription drugs

• Generic drug inflation

FINANCIAL ANALYSIS

2011 2012 2013 2014 20150.00%2.00%4.00%6.00%8.00%

10.00%12.00%14.00%16.00%18.00%20.00%

10.10%

6.98% 7.39%5.58%

8.07%

18.56%

12.86% 13.52%

10.14%

16.48%

PROFITABLITY ANALYSIS

Operating Margin Net Margin

Return on Assets Return on Equity

• Profitability improved after the acquisition of AB.

• WBA consistently beat earnings estimates by more than 8% in the past four quarters.

• Long term debts increased by approximately $11BN. This includes assuming AB’s outstanding debts and notes issuance to finance the Second Step Transactions.

• Efficiency of WBA in collecting its credit sales has declined due to shift in management focus.

2011 2012 2013 2014 20150.00%5.00%

10.00%15.00%20.00%25.00%30.00%35.00%40.00%45.00%

0.00x

10.00x

20.00x

30.00x

40.00x

50.00x

60.00x

70.00x

16.19% 22.38%

23.02% 21.91%

42.55%61.48x

39.36x

25.53x23.80x

9.78x

LEVERAGE ANALYSIS

Total Debt/Total Assets LT Debt/EquityEBIT Interest Coverage Fixed Asset Turnover

2011 2012 2013 2014 2015 $-

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$2.94

$2.42 $2.67

$2.00

$4.00

EPS (DILUTED)

2015 WBA 10-K Pages 49-53

GREENBLATT & DUPONT ANALYSIS

2015 WBA 10-K Pages 49-53

2011 2012 2013 2014 20150.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

25.29%

20.55%

24.80%

21.54%

28.85%

13.57%

9.16% 8.69%6.24% 5.57%

GREENBLATT RATIOS

EBIT/Tangible Asset (ROIC) EBIT/EV (Earnings Yield)

• Patent cliff II is expected to continue through FY15

• This will lead to the replacement of branded drugs by generic versions.

• Adopted the conservative method

• This industry is anticipated to grow at an annualized rate of 3.4% from FY15-20.

• Based on the organic growth rate of WBA

• Factor in store closures by reducing the revenue streams by ~5% from FY15-18.

• Boots UK Sales Comps grew 3.5% yoy in FY15.

IBIS WORLD, WBA 4Q & FY2015 Earnings Conference Call

REVENUE PROJECTIONS

WACC (STANDALONE)

Bloomberg

Up to 11/11/2015pp.348 10K

Yield of US 10-year Treasury BillBloomberg

Risk-Free Rate 2.34%Market Risk Premium 5.81%Beta (5-year) 1.18927

CAPM Cost of Equity 9.25%ROE on past 5 years 14.31%Adjusted Cost of Equity 11.78%

Current Share Price $81.82Average shares outstanding (mil) 1053.9Market Value of Equity $86,230.10

Market value of Debt (mil) $14,383

Equity Weight 85.70%Debt Weight 14.30%

Cost of Debt 4.21%Cost of Equity 11.78%

Tax rate 30.00%

WACC 10.52%

CAPM

Weighted Average Cost of Capital

DCF VALUATION (STANDALONE)

  Key Rates Assumption

Bussiness Risk Premium 0.50%WACC 10.52%Discount Rate 11.02%Terminal Grow th Rate 3.00%

Value Per Share

(Millions, Excepts Share Price)Enterprise Value 105,754Less: Debt 14,383Market Capitalization 91,371

Share Price $86.70

Upside (dow nside) potential 5.96%

(Millions) 2016E 2017E 2018E 2019E 2020E Terminal

EBIT 9,057 10,640 12,235 13,688 15,476Less: Taxes (2,523) (2,989) (3,460) (3,892) (4,420)Plus: Depreciation 1,674 1,752 1,817 1,851 1,921Less: Capital Expenditures (1,560) (1,865) (2,174) (2,460) (2,807)

Changes in Net Working CapitalLess: Increses in A/R 1,175 (279) (215) (75) (227)Less: Increases in Inventories 657 (394) (303) (106) (321)Plus: Increases in A/P (1,731) 411 316 110 334

Free Cash Flow 6,749 7,276 8,216 9,117 9,957 127,925

Present Value 6,079 5,904 6,005 6,002 5,904 75,860

Sum of Present Value of FCF $105,754

$86.70 2.00% 2.50% 3.00% 3.50% 4.00%

10.02% 90.08$ 95.43$ 101.54$ 108.60$ 116.82$ 10.52% 83.73$ 88.37$ 93.63$ 99.63$ 106.55$ 11.02% 78.09$ 82.14$ 86.70$ 91.86$ 97.76$ 11.52% 73.05$ 76.61$ 80.59$ 85.06$ 90.13$

12.02% 68.52$ 71.66$ 75.16$ 79.07$ 83.46$

Terminal Growth Rate

Sensitivity Analysis

Discount Rate

  

Yield of US 10-year Treasury BillBloomberg

Up to 11/11/2015

pp.348 10K

Bloomberg

Bloomberg

Risk-Free Rate 2.34%Market Risk Premium 5.81%Beta (5-year) 1.18927

CAPM Cost of Equity 9.25%ROE on past 5 years 14.31%Adjusted Cost of Equity 11.78%

Current Share Price $81.82Average shares outstanding (mil) 1053.9Market Value of Equity $86,230.10

Market value of Debt in Total (mil) $27,157Market value of Debt of WBA (mil) $14,357Market value of Debt of Rite Aid (mil) $12,800

Equity Weight 76.05%Debt Weight 23.95%

Cost of Debt 4.21%Cost of Equity 11.78%

Tax rate 30.00%

WACC 9.66%

CAPM

Weighted Average Cost of Capital

WACC (WITH RAD)

  

(Millions) 2016E 2017E 2018E 2019E 2020E Terminal

EBIT 9,764 10,708 13,359 15,909 18,906Less: Taxes (2,687) (2,959) (3,745) (4,505) (5,394)Plus: Depreciation 1,785 1,984 2,178 2,341 2,556Less: Capital Expenditures (1,560) (1,865) (2,174) (2,460) (2,807)

Changes in Net Working CapitalLess: Increses in A/R (2,290) (425) (353) (184) (379)Less: Increases in Inventories (2,902) (538) (447) (233) (480)Plus: Increases in A/P 3,373 626 519 271 558

Free Cash Flow 5,482 7,531 9,337 11,139 12,960 163,520Present Value 4,932 6,094 6,797 7,294 7,635 96,329

Sum of Present Value of FCF $129,081

Key Rates AssumptionBussiness Risk Premium 1.50%WACC 9.66%Discount Rate 11.16%Terminal Growth Rate 3.00%Value Per Share(Millions, Excepts Share Price)Enterprise Value 129,107Less: Debt 27,183Market Capitalization 101,924

Share Price $96.71

Upside (downside) potential 18.20%

DCF VALUATION (WITH RAD)

Investopedia: What is the Pharmacy Benefit Management Industry, CVS 2014 10-k, WBA 2015 10-k

CVS Health Corporation

Walgreens Boots Alliance

Segments• Pharmacy Services (56.6%)• Retail Pharmacy (44.4%)• Corporate – Loss AdjustmentDistributors• Cardinal Health (27.0%)• McKesson (22.87%)

Segments• Retail Pharmacy USA (76.3%)• Retail Pharmacy Int’l (13.4%)• Pharmaceutical Wholesale (8.4%)Distributors• AmerisourceBergen (61.07%)• Seat on BoD

CVS vs WBA

CVS 10K, RAD 10K and Bloomberg

• Rite Aid has negative equity

• CVS has higher tax burden

• CVS – highest ROE in 5 years

• CVS is generating more cash

flow from assets

• RAD & WBA – similar cash flow

Comps Ratios

WBA CVS RAD

Tax Burden 80.57% 60.24% 494.16%Interest Burden 89.77% 87.26% 50.63%Operating Profit Margin 4.51% 6.31% 3.18%Asset Turnover 1.95x 1.91x 3.36xLeverage 2.04x 1.92x N/AROE 13.01% 12.16% N/A

WBA CVS RAD

EBIT/Tangible Asset 28.85% 36.80% 17.49%EBIT/EV 5.57% 7.29% 6.35%

Greenblatt Analysis

DuPont Analysis

COMPARABLES ANALYSIS

CVS 10K, RAD 10K and Bloomberg

Comps Valuation

WBA CVS RADTTM P/E 18.09 21.46 40.67 Forward P/E 18.71 18.94 46.99 Price/Sales 0.81 0.66 0.28 Price/Book Value 2.95 2.92 18.98

Applying CVS WeightTTM P/E 85.93 25.0%Forward P/E 105.79 25.0%Price/Sales 64.37 25.0%Price/Book Value 85.51 25.0%

Weight Average Price 85.40$

Applying CVS WeightTTM P/E 85.93 25.0%Forward P/E 112.67 25.0%Price/Sales 64.37 25.0%Price/Book Value 85.51 25.0%

Weight Average Price 87.12$

Applying Comps Ratios

Valuation (without Rite Aid)

Valuation (with Rite Aid)

COMPARABLES ANALYSIS

STOCK ANALYSIS

Yahoo! Finance Interactive Graph

WBA Stock Performance to Date

Yahoo! Finance Interactive Graph

WBA vs. CVS Comparable Performance to Date

Capitalization of Rite Aid: 8.14 B (.1)Capitalization of Walgreens: 89.08B (.9)Price increased on the day of announcement: 6.6%Price increased from Oct 26th 2015 till Nov 11th 2015: -8.2%

STOCK ANALYSIS

Comparable Value of: $85.40

DCF Value of: 86.70

Final WBA Value of: $86.31

Comparable Value of: $87.12

DCF Value of: 96.71

Final WBA Value of:

93.83

Current Holding: 300 Shares trading at $81.82 (20% of portfolio); Dividend Yield of 17%; Last Paid Dividend of $0.36 on Aug 17th, 2015

Without Rite Aid With Rite AidFinal ValuationWithout Rite Aid Estimate WeightDCF 86.70$ 70%Comps 85.40$ 30%

Target 86.31$ 15%

With Rite Aid Estimate WeightDCF 96.71$ 70%Comps 87.12$ 30%

Target 93.83$ 85%

Final Target 92.70$

Upside Potential 13.30%

BUY 100 shares at market price

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