INDEPENDENT RESEARCH Top Picks 12th January 2017 Top Picks 1Q2017 Top Picks

ACCORHOTELS BUY EUR42 This is the first volume of our quarterly ‘Top Picks’ for 2017. The list is not Last Price EUR37.885 Market Cap. EUR10,786m intended to be a model portfolio, but simply reflects a pure stock-picking

AHOLD DELHAIZE BUY EUR24 exercise in our coverage universe. It reflects a bias towards themes that Last Price EUR19.615 Market Cap. EUR25,133m we believe fit best with the current environment: self-helped businesses, AXA BUY EUR29 robust organic growth, limited outside interference, earnings momentum Last Price EUR25 Market Cap. EUR60,582m and/or secure shareholders’ returns. CAMPARI BUY EUR10.7 Last Price EUR9.31 Market Cap. EUR5,407m  Our Q4 2016 list produced an unsatisfactory performance of 2.7%, which CAPGEMINI BUY EUR95 Last Price EUR80.16 Market Cap. EUR13,753m compares unfavourably to the DJ Stoxx600 (5.4%). This was our 2nd

FAURECIA BUY EUR47 worst quarterly performance vs. market since the creation of our list in Q1 Last Price EUR37.99 Market Cap. EUR5,238m 2012. We suffered a few setbacks and were penalised by our

FRESENIUS SE BUY EUR82 underweighting in sectors that performed best (financials, basic resources). Last Price EUR74.88 Market Cap. EUR40,975m For the full year, our performance stood at 1.6% vs. -1.2% for the GENMAB BUY DKK1900 Last Price DKK1300 Market Cap. DKK78,455m Stoxx600. Our cumulative performance since the creation of the list is

ILIAD BUY EUR220 now 119.3% vs. 47.8% for the Stoxx600. Last Price EUR187.8 Market Cap. EUR11,030m  We have ended 2016 and entered 2017 with hopes of potential pro-

INDITEX BUY EUR38 business measures from the future Trump administration and the prospect Last Price EUR31.675 Market Cap. EUR98,720m of a start to normalisation for some central banks’ policies. But we also INFINEON BUY EUR19 Last Price EUR16.22 Market Cap. EUR18,391m face a high level of political risk, including the first steps of the Trump

LVMH BUY EUR194 administration, the start of EU/UK discussions on Brexit and some Last Price EUR179.25 Market Cap. EUR90,911m critical elections in France and Germany. The Chinese risk (corporate

QIAGEN BUY EUR34 debt, real estate, shadow banking…) is currently off the radar but may Last Price EUR27.18 Market Cap. EUR6,515m return anytime. SGS SA BUY CHF2300 Last Price CHF2101 Market Cap. CHF16,434m  So when determining our Q1 Top Pick list, we have decided to remain

WIRECARD BUY EUR58 selective inside our ongoing growing coverage (15 Top Picks out of 151 Last Price EUR41.875 Market Cap. EUR5,174m stocks), and continue to focus on companies that offer better-than-

average, short-term visibility: self-helped drivers, robust organic growth, limited outside interference, earnings momentum and/or secure shareholders' returns. This document is a compilation of the notes written to update our Top Pick list

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BG Top Picks STOXX EUROPE STOXX EUROPE 50

Analyst: Olivier Pauchaut 33(0) 1 56 68 75 49 [email protected]

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Table of contents

Top Picks ...... 1

Our top picks for 1Q 2017 are ...... 3 Top picks for 4Q 2016 performances ...... 4 Auto Parts : Q1 2017 Auto & Parts Top Pick list: we remove Plastic Omnium and enter Faurecia ...... 5 Hotels : Top picks: …Switch on AccorHotels ...... 6 Consumer Goods : Q1 2017 Top Picks: Ahold Delhaize (FV: EUR24), Campari (FV: EUR10.7), Inditex (FV: EUR38), LVMH (FV: EUR194) ...... 8 Healthcare : We continue to overweight Medtech in Q1 with FRE and QIA. Ipsen replaced by Genmab ...... 11 TMT : Q1 2017 Top Picks Capgemini, Infineon, Wirecard, Iliad. : ...... 13 Utilities : Top Picks Q1 2017 visibility too weak to have strong convictions ...... 17 Business Services : Top picks: Review of TIC sector with SGS ...... 19 Insurance : Top Pick Q1 2017: AXA ...... 20 Construction & Materials : Why we have no Top Picks for Q1 2017 in the construction sector...... 22 Bryan Garnier stock rating system ...... 23

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Top Picks

Our top picks for 1Q 2017 are

Changes : Fig. 1: Valuation ratios: 1Q 2017 Top Picks

Market Cap. EV/EBIT(x) PER (x) RDT (%) +ACCORHOTELS (EUR) 2016e 2017e 2016e 2017e 2016e 2017e +AHOLD DELHAIZE +AXA ACCORHOTELS 10 929 17.3 14.1 23.0 18.7 2.6% 2.9% +CAMPARI AHOLD DELHAIZE 25 094 12.7 10.5 17.6 14.7 2.5% 3.2% +CAPGEMINI AXA 59 028 - - 10.1 10.1 4.7% 4.9% +FAURECIA CAMPARI 5 445 19.0 16.0 26.4 20.6 1.0% 1.1% +GENMAB +ILIAD CAPGEMINI 13 746 10.5 9.0 14.3 13.1 1.9% 2.0% +INDITEX FAURECIA 5 532 6.8 6.0 7.9 10.3 2.5% 2.7% +INFINEON FRESENIUS SE 40 023 12.5 12.1 24.0 20.9 2.7% 3.1%

+LVMH GENMAB 77 912 - - 83.7 66.3 0.0% 0.0% +SGS SA ILIAD 10 924 17.6 14.1 31.2 24.5 0.2% 0.2% -CARREFOUR INDITEX 97 801 22.3 19.5 30.6 27.0 2.1% 2.4% -ELIOR INFINEON 18 675 18.5 15.9 21.8 20.0 1.2% 1.2%

-HERMES Intl LVMH 92 939 13.8 12.5 22.4 20.2 2.1% 2.3% -IPSEN QIAGEN 6 464 24.4 20.0 27.7 23.8 0.0% 0.0% -MELIA HOTELS -MONCLER SGS SA 16 551 18.1 17.1 24.8 22.6 3.2% 3.3% -PLASTIC OMNIUM WIRECARD 5 170 17.2 12.7 22.9 17.5 0.3% 0.4% -REMY COINTREAU Source: Company Data; Bryan, Garnier & Co ests. -SUEZ

Fig. 2: Dividend payments: 1Q 2017 Top Picks

Top Picks Ex-Dividend date Amount

INFINEON 17th Feb. 2017 €0.22

Source: THOMSON REUTERS

Our Top Picks are updated and published every quarter.

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Top Picks

Top picks for 4Q 2016 performances

4Q 2016 perf. incl. Div.

Euro Local Ccy Euro Local Ccy CARREFOUR -0.8% -0.8% -0.8% -0.8% ELIOR GROUP 6.6% 6.6% 6.6% 6.6% FRESENIUS (XET) 4.6% 4.6% 4.6% 4.6% HERMES INTL. 7.7% 7.7% 7.7% 7.7% IMERYS 7.3% 9.3% 9.3% 12.1% IPSEN 9.9% 9.9% 9.9% 9.9% LAFARGEHOLCIM 8.3% 3.5% 3.5% 2.2% MELIA HOTELS INTL. -0.2% -0.2% -0.2% -0.2% MONCLER 8.8% 8.8% 8.8% 8.8% PLASTIC OMNIUM 2.7% 2.7% 2.7% 2.7% QIAGEN (XET) 8.88% 8.9% 8.9% 8.9% REMY COINTREAU 6.65% 6.6% 6.6% 6.6% SHIRE -14.49% -11.3% -11.3% -6.3% SUEZ -4.63% -4.6% -4.6% -4.6%

4Q 2016* Top picks average Perf. 2.66% 3.70% 2.66% 3.70%

STOXX EUROPE 600 5.40 5.76 STOXX EUROPE 50 5.89 6.36

Shire : Out 2nd November Lafarge Holcim : Out 16th November Imerys : Out 8th December

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Top Picks

Auto Parts : Q1 2017 Auto & Parts Top Pick list we remove Plastic Omnium and enter Faurecia

1 M 3 M 6 M 31/12/16 LOOKING BACK ON Q4 2016 Auto & Parts 12.4% 13.5% 25.4% 1.4% As in Q3 2016 the automotive sector (SXAP) strongly outperformed the Stoxx 600, helped by DJ Stoxx 600 7.0% 5.9% 9.3% 0.5% reassuring indicators from Europe and China leading to an acceleration in automotive demand *Stoxx Sector Indices compared with the first semester. In all, the SXAP index surged by 13% during the last quarter vs. only +5% for the Stoxx 600 index. This compares with respectively +13% and +4% observed in Q3 Companies covered 2016. Most of the strong performance came from carmakers, and more specifically from carmakers FAURECIA BUY EUR47 exposed to the US market and to the USD. During the quarter, FCA stock was up 55%, followed by Last Price EUR37 Market Cap. EUR5,102m Ferrari (+20%) and BMW (+20%), while investors also played Renault (+16%) for its impressive HELLA BUY EUR45 commercial efforts in Europe and for its deal with Mitsubishi through Nissan. Within our universe, Last Price EUR36,46 Market Cap. EUR4,051m Faurecia posted the best quarterly performance (+5.5%) ahead of Valeo (+5.2%), Plastic Omnium PLASTIC OMNIUM BUY EUR36 (+2.7%) and Hella (+0.4%). Last Price EUR30,485 Market Cap. EUR4,648m VALEO NEUTRAL EUR49 WHAT WE SEE FOR Q1 2017 Last Price EUR55,02 Market Cap. EUR13,158m Despite reassuring comments by professionals regarding the European and Chinese markets, we continue to anticipate a slowdown in global growth this year compared with 2016. We now expect the global automotive market to only grow by 1.4% in 2017 vs. +3.5% in 2016 as we forecast a volume decline in the US, and more limited growth in Europe and in China compared with last year.

At this stage we nevertheless remain positive on the sector as the comparison basis is set to remain more favourable during the first quarters and as the valuation remains quite impressive despite the short-term rally. We continue to believe suppliers well exposed to long-term mega trends (EV and hybrid vehicles, self-driving vehicles) should easily outperform global demand over the mid to long terms.

CONCLUSIONS AND TOP PICKS We remain positive on the sector for Q1 2017. 2016 earnings publications within our universe should be quite solid (8% sales growth on average leading to 21% EBIT growth and 25% EPS growth compared with last year) while the outlook for 2017 is very reassuring (we anticipate average 9% YoY growth in our coverage for 2017). Valeo (Neutral, FV @ EUR49) is organising a one day Road Show in London (February 28th) during which 2020 financial targets should certainly be updated following recent acquisitions (Peiker, Spheros, FTE, Ichikoh), at least on the sales level (between EUR22-23bn vs. current guidance at EUR20bn). However, as for margin target (8-9%) we do not expect any positive update especially following the recent acquisition of Ichikoh (dilutive impact on margin) leading potentially to market deception. We decided to enter Faurecia (Buy, FV @ EUR47) to the BG Q1 2017 Top Pick list to play the solid 2016 publication and also to play the positive consensus adjustment to the 2017-18 margin, closer to the group's 5.5-6% target (the consensus is respectively at 5.2% and 5.3% for 2017 and 2018) following the positive message we expect from management on February 9th. We have removed Plastic Omnium (Buy, FV @ EUR36) as the FAE integration is now well appreciated by investors and as execution risk is now becoming a potential negative catalyst over the short-mid term.

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Top Picks

Hotels : Top picks: …Switch on AccorHotels

1 M 3 M 6 M 31/12/15 LOOKING BACK ON Q4 2016 Travel&Leisure 7.1% 4.8% 8.3% 0.2% Again in Q4, the hoteliers most exposed to the US market outperformed compared with those most DJ Stoxx 600 7.0% 5.9% 9.3% 0.5% present in European countries. Despite a slowdown in RevPAR growth in the US, absolute numbers *Stoxx Sector Indices are actually still higher than for European RevPAR growth, which remains volatile month after month (during the first two months of Q4, US RevPAR was up 5.9% in November after 1.6% in Companies covered October compared respectively with 4.9% and -1.8%). ACCORHOTELS BUY EUR42 In this environment, IHG reported the best performance in euro terms, up 15.9% in absolute terms Market Last Price EUR35,715 EUR10,168m and 10% compared with the DJ Stoxx, vs. respectively 0.3% and -4.8% for AccorHotels and -0.2% and

InterContinental Hotels SELL 2950p -5.3% for Melia Hotels. In all, IHG gained 17.7% in euros and in absolute terms during 2016 while Last Price 3638p Market GBP7,186m Melia Hotels was down 9% despite the group's exposure to Spain having reported the best RevPAR MELIA HOTELS BUY EUR15 growth in Europe, and AccorHotels down 11.4%. Between these three hoteliers, the performance Last Price EUR11,17 Market EUR2,566m difference can also be explained by the share of the portfolio in full ownership or lease contracts the valuation of which suffers from a rise in interest rates (full ownership hotels and lease contracts KORIAN NEUTRAL EUR28 represent 27.7% of AccorHotels portfolio, 32.2% for Melia Hotels and only 0.3% for IHG). Last Price EUR28,175 Market EUR2,259m In dependence care, Orpea and Korian reported nearly the same performance in Q4, down ORPEA BUY EUR86 respectively 2.7% and 2.8% in absolute terms and c.-8% relative to the DJ Stoxx. In fact, both of Last Price EUR78 Market EUR4,685m them suffered from the impact of interest rate rises on asset valuations (Orpea’s asset valuation is

currently c.EUR3.7bn representing a cap rate of 6.3% and c.EUR1.0bn for Korian representing a cap rate of 5.7%).

WHAT WE SEE FOR Q1 2017 During Q1, FY results will be released but no major surprises are expected with the consensus well guided by companies, even for AccorHotels, whose management cautiously provided a wide forecast range for EBIT of EUR670-690m after Q3 revenue to reflect the uncertainties in France (our forecast is EUR684m compared with the consensus from the company of EUR678m and EUR654m from IBES). Ahead of FY results, the hotel sector consolidation will remain one of the main drivers as it was in 2016, notably with Chinese hoteliers or investors (HNA, a Chinese conglomerate, purchased a 25% interest in Hilton from Blackstone, completed in early December its purchase of Carlson Hotels, Jin Jiang control Louvre Hotels and owns c. 13% of AccorHotels' equity capital, Marriott International merged with Starwood). Finally, the most important newsflow is set to come from AccorHotels with an update on the “Booster” project during 2016 FY results presentation on 22nd February.

CONCLUSIONS AND TOP PICKS As such, we have decided to remove Melia Hotels from our Top Pick list and to include AccorHotels. As said, no major surprise is expected for 2016 FY results and the most important newsflow will be the intermediate update on 22nd February on the execution phase of AccorHotels’ “Booster” project i.e. the deconsolidation of HotelInvest (application for tax rulings & production of audited financial statements, implementation of legal schemes, formalising contracts between HI and HS, finalising financing and long-term institutional investors). Note that after three years of massive transformation, the “Booster” project is about to be finalised and will definitely move AccorHotels into a new era with a positive impact on valuation with cash to be returned to shareholders. On cash returns, assuming that AccorHotels sells off 70% of HotelInvest to be deconsolidated (management’s guidance is between 50% and 80%), AccorHotels will receive EUR4.5bn based on the current GAV of EUR7.3bn. Taking into account current net debt amounting to EUR1.4bn (gross debt of EUR3bn with cash of EUR1.6bn), this should represent financial leverage of 2.8x based on 2017e EBITDA of c. EUR500m. As such, most of the cash received from the disposal will be free to use. Management is not ruling out any options (organic growth, return to shareholders, selective M&A, balance sheet optimisation). The Booster project will concern most of HI's GAV i.e. EUR6.5bn excluding mainly Orbis (52.7% owned by AccorHotels) with an overall tax friction estimated at below 5% of the GAV transferred. We are convinced that some cash could be retained for organic growth (brand investments, digital services) or selective bolt-on M&A, but based on the investment strategy over the past three years (“disruptive” investments amounted to around EUR500m and a digital plan of EUR250m). Then, we estimate that EUR3bn could be returned to shareholders i.e. around EUR10 per share. We can also highlight that some shareholders i.e. Colony Capital and Eurazeo, both of them members of the Board and shareholders of AccorHotels since May 2008, could ask for cash returns. Regarding valuation, based on a HotelInvest valuation of EUR7.3bn (EUR7bn net or c. EUR25 per

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share), the implied valuation of HotelServices is EUR4bn in EV representing an EV/EBITDA 2017e of 7.0x which looks relatively inexpensive compared with peers. In fact, even if a discount has been observed with comparable US asset-light business models, it seems somewhat excessive (IHG or Marriott/Starwood are currently valued respectively 12.7x and 13.2x).

NEXT CATALYSTS Orpea: Q1 Revenue on 8th February (before opening) Korian: Q1 Revenue on 8th February (after closing) IHG: FY Results on 21st February AccorHotels: FY Results on 22nd February Melia Hotels: FY Results end of February

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Top Picks

Consumer Goods : Q1 2017 Top Picks: Ahold Delhaize (FV: EUR24), Campari (FV: EUR10.7), Inditex (FV: EUR38), LVMH (FV: EUR194)

LOOKING BACK ON Q4 2016 1 M 3 M 6 M 31/12/15 Our Consumer “Top Picks” encompass all our consumer franchises: Luxury, Consumer goods, Retail, Pers & H/H Gds 5.4% -0.2% -0.1% -0.2% Spirits, Brewers and Food. DJ Stoxx 600 7.8% 6.5% 10.1% 1.2% Food & Beverages: In Q4 2016 the Food & Beverage stocks under coverage underperformed the DJ *Stoxx Sector Indices Stoxx by 8.9%. In their capacity as bond proxies, they were impacted by rising bond yields. Spirits CHANGES and Food dropped by 4.7% and 10.8% respectively over the period on a relative basis. Brewers SELL turned in the worst performance. In the fourth quarter they saw their shares tumble by 10% (after BURBERRY 1350p vs. NEUTRAL 8% in Q3), underperforming the market by 14% (after -16% in Q3). And even now, upside for From Jan. 2017, brewers is relatively limited, but they are cheaper than they have been for a very long time. All PRADA we will no longer include PRADA in our research universe" brewers are trading at 18x 2017 earnings which is the average of the sector over the past five years. EUR145 ADIDAS NEUTRAL The exception is AB InBev although the stock's 2017 PE of 21.5x is also at the average valuation level vs.136 of the past five years (21.4x). EUR129 BIC NEUTRAL Food Retail: In Q4, the best performer among Food retailers was Casino, partly thanks to a potential vs.124 Via Varejo disposal that we highlighted some time ago while the worst one was Dia following EUR145 GROUPE SEB BUY disappointments in store performances in Spain and Portugal despite renovations. vs. 140 Luxury Goods: Q4 2016 was a great quarter for our luxury goods groups sample with a 13% average EUR74 HUGO BOSS NEUTRAL hike (+6% vs DJ Stoxx). The clear catalyst was better news from Greater China as Chinese customers vs. 70 account for a third of the luxury goods industry. The best performers were CDI (+24%), Kering and EUR18.5 MONCLER BUY LVMH (+19%) and Hugo Boss (+18%) as investors welcomed the turnaround plan positively. Even the vs. 17.5 watchmakers did well with Richemont up 14%. Our two Top Picks Moncler and Hermès gained 9% EUR90 REMY COINTREAU BUY and 8% respectively. vs.85 Optical & Eyewear: Luxottica was by far the best-performing stock (+20%) following a reassuring NEUTRAL AB INBEV EUR107 publication while Essilor (-6%) and GrandVision (-16%) were impacted by lower-than-expected Q3 vs. BUY numbers, but investors have already started to take advantage of these attractive entry points (1M SELL CARLSBERG DKK599 performance: +7% for EI and +9% for GVNV). Safilo suffered from profit-taking moves in Q4 (-7%) vs. NEUTRAL after +17% in Q3. Consumer Goods: the whole sector was negatively affected by sector rotation such as adidas Companies covered Group (-3% / +67% in 2016), SEB (+3% / +36%) or even L’Oréal (+3% / +12%). BIC continued to ADIDAS GROUP NEUTRAL EUR145 underperform with a 2% decline (-15% in 2016). The rotation temporarily benefited H&M (+5%/- Last Price EUR151,3 Market Cap. EUR31,654m 16%), which was lagging behind Inditex (-2%/+2%) but trends over the past month have reversed BEIERSDORF NEUTRAL EUR80 (H&M: -3% / ITX: +7%) in view of Inditex’s positive Q3 publication and H&M’s disappointing Last Price EUR82,176 Market Cap. EUR18,638m November sales performance. Last but not least, YNAP and Zalando both declined 2% over Q4. BIC NEUTRAL EUR129 WHAT WE SEE FOR Q1 2017 Last Price EUR129,55 Market Cap. EUR6,210m Food & Beverages: We maintain our cautious stance on Food companies. They are suffering from local competition, which is much tougher than before. In China, the food and non-alcoholic SELL BURBERRY 1350p vs. NEUTRAL beverages market has deteriorated as a result of 1/ the weaker macro background and, Last Price 1497p Market Cap. GBP6,586m consequently, some reverse migration of workers going back to rural areas and 2/ a shift between channels with the rapid growth of e-commerce. The regulation of the Chinese infant milk industry is CHRISTIAN DIOR BUY EUR190 highly disruptive and is inducing destocking and intense price competition, mainly in the mainstream Last Price EUR201,15 Market Cap. EUR36,554m and premium segments. ESSILOR BUY EUR123 The outlook for spirits groups looks better. The US which is the most profitable spirits market in Last Price EUR107,3 Market Cap. EUR23,437m the world is continuing to grow very strongly at +4% and China is recovering gradually on the back GRANDVISION BUY EUR27 of a return to normal consumption behaviour. In 2017 the Chinese New Year is a bit sooner than Last Price EUR21,03 Market Cap. EUR5,351m last year (28th January this year vs 8th February in 2016), implying a positive technical effect for GROUPE SEB BUY EUR145 cognac players in calendar Q4. Last Price EUR129,8 Market Cap. EUR6,512m Regarding brewers, for both Heineken and AB InBev on which we have a Buy recommendation, H & M NEUTRAL SEK295 the fourth quarter of 2016 (to be published in February) is likely to be the worst of 2016 and also Last Price SEK253,6 Market Cap. SEK419,726m the first quarter will still be difficult as both are up against high comparable results in some of their key markets. As a result, we would expect downbeat sentiment on these stocks to prevail in coming HERMES Intl BUY EUR410 months. India remains a big question mark for food & beverage companies. The upcoming releases Last Price EUR394,1499 Market Cap. EUR41,610m should provide more visibility about the extent and the duration of the slowdown in the country. We HUGO BOSS NEUTRAL EUR74 remind that the most exposed companies are Diageo, Pernod Ricard (both generate 10% of their Last Price EUR59 Market Cap. EUR4,154m sales in India) and Unilever (8% of sales). INDITEX BUY EUR38 Last Price EUR32,6 Market Cap. EUR101,603m Food Retail: The sector remains of little interest to the market. It is still harshly penalised by a lack of growth prospects (i.e. 1/ deflation, 2/ apathetic demography and 3/ high penetration rate of modern KERING BUY EUR218 food retail), which does not allow retailers to naturally amortise natural cost inflation (which reach Last Price EUR216,65 Market Cap. EUR27,356m 1.5/2.0% in mature countries). The sector is currently trading on very high multiples (16.5x 2017 P/E L'OREAL BUY EUR177 vs 14x on average over the past decade) whereas there is no longer any growth. In this context, we Last Price EUR173,45 Market Cap. EUR97,132m would conclude that poor share performances are far from being undeserved.

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Top Picks

LUXOTTICA NEUTRAL EUR52 Luxury goods: We remain globally positive on the luxury sector for Q1 2017 as i/ comps are less Last Price EUR51,75 Market Cap. EUR25,055m demanding, particularly in Western Europe, which began to suffer from the terrorist attacks in Paris LVMH BUY EUR194 in November 2015 with Q4 2015 sales in Europe up by no more than 4% (+11% on 9m 2015), Last Price EUR181,8 Market Cap. EUR92,195m followed by +3% in Q1 2016. APAC was also very poor in Q4 2015 (-10%) and in Q1 2016 (-3%) while ii/ positive signs from Greater China are increasingly visible in recent months in Mainland China but MONCLER BUY EUR18,5 even more so recently in HK and in Macao. Last Price EUR16,8 Market Cap. EUR4,204m For instance, Swiss watch exports were stable in Hong Kong in November which had not been the RICHEMONT BUY CHF73 case since February 2015; iii/ furthermore the stronger USD following Donald Trump’s election is Last Price CHF67,45 Market Cap. CHF37,772m very good news for the sector as at least 40% of luxury groups sales are denominated in USD or SAFILO NEUTRAL EUR11 correlated currencies (for instance LVMH achieves 25% of its sales in US). As a reminder, Q4 2015 Last Price EUR8,03 Market Cap. EUR503m and Q1 2016 USD/EUR average were respectively 1.08 and 1.10 iv/ and the recent rise in oil prices is SALVATORE FERRAGAMO NEUTRAL EUR23,8 also positive for the sector, particularly for Richemont and Swatch Group as Middle East accounts Last Price EUR22,98 Market Cap. EUR3,879m for close to 9% of sales. THE SWATCH GROUP NEUTRAL CHF320 We take the opportunity of this Top Pick review to drop coverage of Prada. Last Price CHF316,7 Market Cap. CHF17,489m Consumer Goods / Optical & Eyewear: let’s continue to play the “feel good” factor. Despite TOD'S GROUP SELL EUR53 ongoing rotation within these sectors, we believe that investors would continue to favour groups Last Price EUR62,6 Market Cap. EUR2,072m with solid momentum and a reassuring risk profile (i.e. L’Oréal, Groupe SEB, Inditex) while recovery YOOX NET-A-PORTER BUY EUR33 stocks (Hugo Boss, Luxottica) should continue their rally, especially since their numbers are gradually Last Price EUR27,62 Market Cap. EUR3,749m improving. Last but not least, groups with a high USD exposure (LUX: 59% of sales, EI: 48%, BIC: 47%) can be favoured, provided that their fundamentals are good enough. ZALANDO NEUTRAL EUR39 CONCLUSIONS AND TOP PICKS Last Price EUR36,905 Market Cap. EUR9,125m Food & Beverages: We have removed Rémy Cointreau from the Top Pick list (Buy, FV upgraded to EUR90 vs EUR85) as we have rolled over our estimates by one year. The stock was the best

Companies covered performer within the food & beverages coverage in the last quarter, up 6.6% in absolute terms and AB INBEV NEUTRAL EUR107 1.2% in relative. A pause is likely in Q1 2017. Last Price EUR100.2 Market Cap. EUR169,663m We have added Campari to the list (Buy, FV: EUR10.7). Its portfolio, which is comprised of bitters CAMPARI BUY EUR10.7 and bourbon is well aligned with the tastes of the Millennial generation. Besides, its financial Last Price EUR9.26 Market Cap. EUR5,378m position should enable more acquisitions as of 2017. We calculate that the group can acquire a target with sales of EUR100m in 2017 and one with sales of EUR300m in 2018. The stock CARLSBERG SELL DKK599 underperformed the market by 12% in Q4 2016, impacted by sector rotation, the Italian Last Price DKK612.5 Market Cap. DKK93,374m referendum and higher than expected SG&A costs in Q4 2016 related to the strengthening of on- DANONE NEUTRAL EUR70 trade capabilities in the US and the implementation of a new in market company in South Africa. Last Price EUR60.04 Market Cap. EUR39,380m Because of these relative valuation levels, we thought about adding a brewer to the Top Picks DIAGEO NEUTRAL 2150p selection again (after having none for the last two quarters), but decided against it. In absolute Last Price 2099p Market Cap. GBP52,825m stock price terms Carlsberg and Molson Coors are about 20% over their lowest level in 2016 and HEINEKEN BUY EUR83 Royal Unibrew 12%. AB InBev and Heineken shares are only 6% above their bottom price in 2016, Last Price EUR71.22 Market Cap. EUR41,023m but should release a poor Q4. These two companies could have been Top Picks. AB InBev operational MBWS NEUTRAL EUR18 performance has probably a higher degree of visibility given that the integration of SABMiller will Last Price EUR17.8 Market Cap. EUR504m generate about USD2bn of cost savings over the next two years (that is 16% of 2016 operating MOLSON COORS NEUTRAL USD107 profit). For Heineken, we appreciate the company’s strong geographic diversification and its strong balance sheet. Indeed, unlike AB InBev and Molson Coors which were leveraging themselves in 2016 Last Price USD97.88 Market Cap. USD21,031m to net debt/EBITDA of over 4x, Heineken should end 2016 at just over 2x allowing it to seize NESTLE BUY CHF86 opportunities when they arrive. One of those is its approach last month to buy in the UK 1,900 pubs Last Price CHF72.7 Market Cap. CHF226,254m from Punch Taverns for GBP1.27bn. This would not only have an immediate financial leverage PERNOD RICARD BUY EUR115 impact on earnings (+2%), but also increase UK margins and potentially increase its market share in Last Price EUR103.2 Market Cap. EUR27,391m the UK by 2% to 21% (at the expense of Molson Coors who supplies most beers to that pub estate, REMY COINTREAU BUY EUR90 that would fall to 16%). Last Price EUR81.4 Market Cap. EUR4,045m In view of the lack of a compelling catalyst to upside, we are downgrading Carlsberg to Sell from ROYAL UNIBREW NEUTRAL DKK306 Neutral (upside to FV of DKK599 is -2%) and AB InBev to Neutral from Buy (upside to FV of EUR107 Last Price DKK269.6 Market Cap. DKK14,585m is 6%). UNILEVER NEUTRAL EUR44 Food Retail: we remove Carrefour (Buy-FV: EUR30) and we add Ahold Delhaize (Buy-FV: EUR24). In a Last Price EUR38.985 Market Cap. EUR110,432m gloomy environment for the sector, we have a stock picking approach for Q1 2017. At this stage, we will favour the stocks that offer the best visibility on earnings momentum. In this context, 1/ current UNILEVER Plc NEUTRAL 3990p momentum proves Ahold Delhaize’s overall resilience, 2/ Ahold Delhaize has virtually no exposure to Last Price 3275p Market Cap. GBP42,033m unwell emerging markets and hence, 3/ offers better visibility on operating performances for 2017 than others, 4/ Ahold Delhaize enjoys one of the best FCF profiles in the sector (high single digit FCF

yield), 5/ via cost-sharing, the merger between Ahold and Delhaize offers an alternative within a sector that is suffering an obvious lack of growth, 6/ ultimately, Ahold Delhaize shares could be supported by the EUR1bn buyback programme scheduled for 2017. Luxury Goods: We have removed Hermès (Buy-FV: EUR410) from our Top Picks list for Q1 2017. The stock gained 8% during Q4 and given the current price and our EUR410 FV, the upside appears too limited (5%) even if still have a buy recommendation. Furthermore, Q4 should register a slowdown in sales momentum for the leather goods division (almost 50% of sales).

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Top Picks

The limited upside also explains our decision to remove Moncler (Buy-FV: EUR18.5 vs. EUR17.5) Companies covered following a nice run over Q4 (+9%). Fundamentally speaking, the Italian group remains one of our AHOLD DELHAIZE BUY EUR24 favourite stocks considering a robust top line momentum (current weather conditions are clearly Last Price EUR19.96 Market Cap. EUR25,575m more favourable than last year), its strong brand equity and legitimacy and the successful CARREFOUR BUY EUR30 implementation of “Retail Excellence”. Last Price EUR23.485 Market Cap. EUR17,760m On the other hand, we have added LVMH (Buy-FV: EUR194). We are convinced that the group CASINO GUICHARD BUY EUR57 should benefit from all of the positive news in the luxury goods industry and particularly from APAC Last Price EUR46.51 Market Cap. EUR5,162m (29% of sales) and US (25% of sales) due to both geographical and business exposures. LV has DIA NEUTRAL EUR6 regained positive momentum in Q3 and this should continue in Q4 and Q1. Furthermore, the earlier CNY in 2017 vs 2016 (28th January vs 8th February) should help Q4 cognac sales with easy Last Price EUR4.721 Market Cap. EUR2,939m comparison also helping (+4% in Q4 2015 vs +23% in Q3 2015). The group is the best proxy for the JERONIMO MARTINS NEUTRAL EUR13.5 sector. Given our current EUR194 FV, upside is close to 8%. Last Price EUR14.875 Market Cap. EUR9,361m Furthermore, we downgrade Burberry (FV: 1,350p) from Neutral to Sell as the better sales METRO AG SELL EUR26 momentum in Q2 (comparable retail sales down 3% in Q1 but +2% in Q2) was fully due to the UK Last Price EUR31.685 Market Cap. EUR10,269m (+30%) with no acceleration in APAC and we think that the Brexit impact should be less positive in RALLYE BUY EUR18.5 coming quarters as comps will become increasingly demanding. Last Price EUR19 Market Cap. EUR928m Consumer Goods: We also add Inditex (Buy-FV: EUR38), which demonstrated again that it had the TESCO SELL 170p best strategy in the industry to address current issues (stronger USD, volatile apparel market, Last Price 206.15p Market Cap. GBP16,852m increasing online competition, etc.), as highlighted by a good Q3 publication. We anticipate further strong momentum over Q4 since sales from 1st November to 12th December soared 16% FX-n and~10%e LFL (vs. 9% FX-n and ~2% LFL in Nov for H&M). In our view, ITX’s major key competitive advantage is its local sourcing and short lead time (60% in Europe/neighbouring countries) that are unmatched in this industry (see our comment: FASHION: Towards more local sourcing). Click here to download

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Top Picks

Healthcare : We continue to overweight Medtech in Q1 with FRE and QIA. Ipsen replaced by Genmab

1 M 3 M 6 M 31/12/16 LOOKING BACK ON 2016 Healthcare 7.5% -0.4% -4.5% 1.3% Now that it is behind us, we can say that 2016 was a bad year for the Healthcare sector and even the DJ Stoxx 600 7.6% 5.5% 10.8% 1.1% worst in the decade. This statement is not only based on the overall stock market performance with *Stoxx Sector Indices the Stoxx Europe 600 Healthcare down 10.2% over the year, underperforming the DJ Stoxx by close to 9% but also with much less momentum and far fewer NME approvals (only 22 under CDER rules CHANGES i.e. the lowest level since 2010 and more than half the number achieved in 2015) whereas concerns EUR18 ABLYNX BUY vs. 16 about price pressures and reimbursement issues in the US hit all-time highs. From a CHF196 French/European angle, more drugs than usual were also denied reimbursement or granted limited ACTELION BUY vs. 194 overall benefit over SoC. ADOCIA BUY EUR74 Within this general backdrop, we were right in selecting few Large Cap Pharmaceutical companies 5250p ASTRAZENECA BUY vs. 5100p over the year in our successive quarterly Top Pick lists, except UK stocks favoured in the very first EUR106 part of the year. Indeed GSK was the one to pick in 2016 since it was the only one in positive BAYER NEUTRAL vs.98 territory in absolute terms over the year (+13.8%). AstraZeneca and Sanofi resisted well whereas the EUR143 two Swiss groups and Bayer were sharply down (from -14% to -16%) and Novo-Nordisk collapsed (- BIOMERIEUX NEUTRAL vs. 130 36%). Speaking about segments, MedTech was certainly the one to overweigh in 2016 since it was EUR32 BONE THERAPEUTICS BUY less exposed to pricing discussions and all big market caps performed well: Fresenius up 13%, vs.30 Qiagen up 6% and BioMerieux up 29%. As often, if not always, Biotech was mixed because more EUR38 CELLECTIS BUY dependent on newsflow on a stock by stock basis. As an illustration, some stocks declined severely vs. 37 (Ablynx -32%, Cellectis -42%, Erytech -46%, Zealand -30%) whereas others did particularly well, EUR23 CELYAD NEUTRAL vs. 21 starting by our strongly advocated Genmab, up 28% in 2016. EUR100 DBV TECHNOLOGIES BUY vs.91 But maybe the best segment last year was that of Specialty Pharma where we have transformational ERYTECH BUY EUR30 stories able to perform whatever the general market or sector conditions. Pleasantly, it was our call EUR101 for most of 2016 with our favourites among the best performers like Actelion (+58%) or Ipsen FRESENIUS MED.CARE BUY vs. 94 (+13%). Shire was flat. EUR82 FRESENIUS SE BUY vs.78 One last word about 2016 to focus on Q4 when the performance was again down in absolute terms EUR67 (-1.1%) but more importantly underperformed general indices by more than 6%. Those who GALAPAGOS BUY vs. 64 believed in a potential partial recovery towards the year-end must be disappointed. It is worth GENEURO BUY EUR18.2 noting however that Euro stocks recovered somewhat in Q4 (Sanofi up 14%, Bayer up 11%) and of GENMAB BUY DKK1900 course with Actelion surging on the back of discussions with J&J and Sanofi for a possible merger.

1850p GLAXOSMITHKLINE BUY vs.1930p WHAT WE SEE FOR 2017 EUR22 We are starting 2017 with one serious question about the type of policy that will be followed in the GRIFOLS NEUTRAL vs.21 US in the field of healthcare under the new Trump Administration. From the original statements EUR24 during the campaign to the most recent speeches from the President-elect of the United States or INNATE PHARMA BUY vs. 23 some of his close advisors, there have been some changes and it is hard to say what is going to EUR73 IPSEN BUY happen for sure and what the very first decisions will be. Thus, the impact on the sector is uncertain vs. 72 but we know that even short sentences can be devastating. Honestly, it can go either way. EUR66 MORPHOSYS BUY vs. 65 If we put this political issue aside, then we can say that 2017 in isolation is unlikely to be a terrific CHF80 NOVARTIS NEUTRAL vs. 81 year in terms of profit growth considering that overweight large pharma companies will face generic SELL DKK274 vs. challenges (Gleevec, Lantus, Crestor, Advair, biosimilars). 2017 can be seen as a turning point for NOVO NORDISK vs. NEUTRAL 270 several of these companies and therefore at some point during the year, it could be attractive to EUR34 BUY and build new positions to play the upcoming new cycle. It is all the more appealing that QIAGEN BUY vs. 30 valuations have become attractive again (average P/E 2017 ratio of 15x for large cap CHF275 ROCHE HOLDING BUY pharmaceuticals). However, when comparing P/E to EPS growth, hence using PEG ratio, the vs.285 hierarchy can be significantly different. MedTech for instance is expensive based on P/E ratios but SANOFI NEUTRAL EUR83 more competitive when PEG is considered. SHIRE PLC BUY 6800p SEK100 In conclusion, before we have more visibility on the sector in general, we would continue to favour SOBI SELL vs. 90 highly secured investment cases. Obviously, transformational stories have performed strongly EUR83 already and appear less attractive going forward, starting with Actelion but also mentioning Ipsen. UCB NEUTRAL vs.80 We would not rule out at all, unlike our traditional behaviour, to make changes in our list during the DKK220 ZEALAND BUY course of the quarter. vs.223

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Top Picks

CONCLUSIONS AND TOP PICKS Despite our previous comments, we come today with clear hierarchies in each segment of our coverage in healthcare. Please note, before we discuss the names, that we have applied the roll- over from 2016 to 2017 to our DCF and EVA models for all the stocks we cover, adjusted for currencies and increased our basic sector beta upwards from 0.80 to 0.85 after disrupting fiscal year 2016. Starting with Pharmaceuticals, we maintain BUY recommendations on three stocks that carry upsides in the region of 17-18% based on new FVs, namely AstraZeneca, GSK and Roche. However, we have decided not to put any of the three in the list for Q1 because we are not fully comfortable with the speeches to be made in connection with their respective FY announcements. The four others have limited upside potential in the range of 5-10%. We have decided to keep Bayer, Novartis and Sanofi at NEUTRAL considering potential upgrades to the scenarios prevailing in our models. We have downgraded Novo-Nordisk to SELL because we do not see light at the end of the tunnel yet. The field of diabetes should remain one of the toughest in 2017 again and we would recommend limiting investments in this domain, Zealand being the exception for obvious reasons, as the sum of royalties and milestones on Soliqua alone is higher than the current market cap. Within the Specialty Pharma space that we like a lot, we would be inclined to have Actelion in the Top Pick list as we expect a final price to be negotiated north of CHF260 per share but the spirit of the list is not to play on a purely speculative scenario. We have decided to remove Ipsen although we are sure that the story is far from over. However, we do not know what the strategic decisions will be after the review by David Meek or how the market will react to them. Moreover, it looks like there is some controversy about CABOSUN results that could make less likely a scenario of 1L RCC market share takings. The momentum in Q1 is simply less certain but our strong conviction remains. In this space, Shire may be our strongest call as we start the year although here also we are not fully comfortable with the exercise of guidance for 2017 and see limited catalysts, hence our decision not to have it on board. So it is once again in the MedTech space that we find the greatest level of excitement as we come closer to the dates of FY announcements. Fresenius SE (BUY – FV EUR82) and QIAGEN (BUY – FV EUR34) were already in the list in Q4 and if they performed quite well (+4.6% and +8.9% respectively), we are convinced that they should both continue to do so at the beginning of 2017. With the roll-over from 2016 into 2017, our FVs have risen and we are confident in solid guidance to be formed by Fresenius SE entering 2017 and strong execution at Qiagen (2017 guidance communicated ahead of its IR Day in Nov. 2016). Looking at Fresenius SE, we believe in a continuous rerating of the share price driven by 1/ strong performance of the KABI business in Q4 and hence FY2016 numbers mainly driven by Gx Daptomycin which should continue in the first quarter of 2017, 2/ the likelihood of synergies from the Quirónsalud deal revised upward now that the latter has been cleared by antitrust authorities and 3/ the issuance of LT targets alongside the publication of FY2016 results on 22nd February. Turning to QIAGEN, 2017 should be a year of strong execution by management. While there is no overhang anymore on the US development of GeneReader sales, we see QuantiFERON-TB driving both growth and margins (internalisation of production fully effective in 2017). Note also that leverage on G&A should continue to help margins throughout the course of the year. We have also decided to add Genmab (BUY – FV DKK1,900) to our Top Pick list. The street is overly cautious about daratumumab 2017 sales in our view (BG: USD1.7bn vs CS: USD1.4bn, hence a 20% differential). All eyes have been on data from POLLUX (which evaluated “dara” in combination with Revlimid/ dexa-methasone) since their publication and even more with the updated data at ASH; but our understanding is that little focus has been put on CASTOR (with JNJ’s Velcade). Still, 1/ efficacy-wise we saw these data as far superior to Revlimid/Velcade/dex (median PFS has not been reached for the active arm after a median follow-up of 13.0m); 2/ Dara/Velcade/dex would be a less expensive combo, especially from year 2 (as fewer injections are to be made). Also, one should keep in mind that Velcade’s generics are about to reach the market in H1 thus making the cocktail even more “affordable”. Genmab’s management is very likely to provide fresh financial guidance for the new year, and we believe dara’s revenue assumption will range from USD1.4bn to USD1.6bn. Click here to download

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Top Picks

TMT : Q1 2017 Top Picks Capgemini, Infineon, Wirecard, Iliad. :

1 M 3 M 6 M 31/12/16 LOOKING BACK ON Q4 2016 Softw.& Comp. 6.7% -1.1% 17.9% 0.4% In Q4 2016, the TMT sector had a flattish performance amidst uncertainties caused by the US DJ St oxx 600 7.1% 6.2% 12.8% 1.2% elections, the Italian referendum, and interest rates rebounding from very low (and sometimes *Stoxx Sector Indices negative) levels. Over the period, the DJ STOXX Europe Software & IT Services and Telecom indices were down 1% and underperformed the DJ STOXX Europe 600 index by 6%. The index in Payments Companies covered changes was flat and underperformed the DJ STOXX Europe 600 index by 5%. Finally, the Philadelphia ALTEN NEUTRAL EUR60 vs.57 Semiconductor Index was up 9%. ALTICE BUY EUR20.7 vs. 19 During the period, the best performers were Soitec (+79%, supported by FX tailwind, improving ALTRAN TECHNOLOGIES BUY EUR15 fundamentals and strong H1 results), STMicroelectronics (+48%, supported by FX tailwind and good ams NEUTRAL CHF30 vs. 27 Q3 results) and Altice (+18%, US driven mostly: potential IPO announced and positive market ASML SELL EUR88 vs. 83 reactions following D. Trump’s election). The worst performers were Indra Sistemas (-13%, ATOS BUY EUR118 vs.115 announcement of a voluntary tender offer by Spanish IT Services company Tecnocom on 29th AXWAY SOFTWARE BUY EUR33 vs. 31 November 2016), our Q4 top pick Wirecard (-12%, unfairly impacted by both the cash shortage in BOUYGUES BUY EUR35 India and the short seller report written on Paysafe in December) and Sage (-10%, strengthening of CAPGEMINI BUY EUR95 the British pound against the euro and the US dollar + new restructuring moves). CAST NEUTRAL EUR3.3 DASSAULT SYSTEMES SELL EUR66 vs. 64 NEW ESTIMATES, FAIR VALUES AND RECOMMENDATIONS We have taken the opportunity to update our forecasts for 2016-2019 and our DCF-derived Fair DIALOG SEMICONDUCTOR NEUTRAL EUR47 vs. 40 Values: 1) the roll-over of our models to 2017 for the companies under coverage for which we had GEMALTO SELL EUR52 not yet done (Software & IT Services companies, Telecom, Semiconductors); 2) update to our ILIAD BUY EUR220 vs. 212 forward fx assumptions (Software & IT Services companies, Telecom, Semiconductors). INDRA SISTEMAS BUY EUR12 As such, we have adjusted our DCF-derived Fair Values for: INFINEON BUY EUR19 vs. 18.5 Software & IT Services: Alten (EUR60 vs. EUR57), Atos (EUR118 vs. EUR115), Axway Software INGENICO GROUP BUY EUR112 (EUR33 vs. EUR31), Dassault Systèmes (EUR66 vs. EUR64), Sage Group (650p vs. 645p), SAP (EUR84 MELEXIS SELL EUR52 vs. 48 vs. EUR82), and Temenos Group (CHF80 vs. CHF77). NETS SELL DKK105 Semiconductors: ams (Neutral, FV CHF30 vs. CHF27), ASML (Sell, FV EUR88, vs. EUR83), Dialog ORANGE BUY EUR17.8 vs. 17.1 (Neutral, FV EUR47 vs. EUR40), Infineon (Buy, FV EUR19.0 vs. EUR18.5), Melexis (Sell, FV EUR52 vs. SAGE GROUP NEUTRAL 650p vs.645p EUR48), STMicroelectronics (Neutral, FV EUR9.3 vs. EUR7.3), Soitec (Neutral vs. Buy, FV EUR1.30 vs. EUR1.25), u-blox (Buy, FV CHF265 vs. CHF255). SAP NEUTRAL EUR84 vs. 82 Telecom: Iliad (EUR220 vs. EUR212), Orange (EUR17.8 vs. EUR17.1), Altice (EUR20.7 vs. EUR19), SFR SFR Group NEUTRAL EUR30 vs. 29.7 (EUR30 vs. EUR29.7). SOFTWARE AG BUY EUR40 NEUTRAL SOITEC EUR1.3 vs. 1.25 vs. BUY WHAT WE SEE FOR Q1 2017 For Software & IT Services, based on industry analysts’ forecasts, we are anticipating a slight growth SOPRA STERIA GROUP BUY EUR125 acceleration in IT spending for 2017, with est. growth of 6-7% for Software (vs. +6% for 2016), still STMICROELECTRONICS NEUTRAL EUR9.3 vs. 7.3 driven by the now established SaaS model, and est. growth of 4-5% for IT Services (vs. +4%) driven SWORD GROUP BUY EUR32 by digital transformation projects. At this stage, most of the effects - positive or negative - of Brexit TEMENOS GROUP BUY CHF80 vs. 77 are yet to be seen as the referendum's “no” vote had no immediate impact on IT spending. That UBISOFT BUY EUR35 said, global and offshore IT Services companies largely exposed to application services (TCS, Infosys, u-blox BUY CHF265 vs. 255 Cognizant, Wipro, Capgemini…), have displayed some caution in discretionary IT spending for banks WIRECARD BUY EUR58 in the UK. Finally, Indian IT Services companies are exposed to two challenges in 2017: 1) the advent WORLDLINE BUY EUR32 of machine learning and artificial intelligence technologies, which remove the need for manual tasks WORLDPAY NEUTRAL 278p in IT programming or IT maintenance; 2) the fresh reintroduction in the US Congress of a bill aimed at amending the H-1B visa programme by eliminating the Master’s Degree exemption, which would translate into a cut in H-1B entitlements to 65k from 85k per year, and raise the minimum annual wage level to USD100k from USD60k. While it could take time for Indian players to overcome the first challenge given their dependence on manual tasks, it is still unclear if the H-1B reform will actually be adopted. We estimate both Capgemini and Atos have very limited exposure to H-1B visas (respectively, 8% and 2% of staff based in North America). For Semiconductors: We are optimistic regarding most of the semiconductor market segment for Q1 2017. The Communication segment (1/3 of semi market) should benefit from CES and MWC where Several flagship smartphones should be launched (including the Samsung Galaxy S8) triggering new orders for components (however we continue to anticipate a slowdown of iPhone 7 sales in Q1). Momentum in the automotive segment (about 10% of semiconductor sales) should remain strong thanks to sustained volumes (+2/3% in Q1 17e) and continuous pervasion of semiconductor content in cars. The industrial segment should also outperform the industry on the back of a supportive environment. Finally, the Computer and Consumer Goods segment (c. 1/3 and 10% of sales respectively) could be the weakest segment in Q1, mainly due to seasonal effects. Overall, while 2016 semiconductor revenues are set to be flat, we expect sales to rebound slightly in 2017 and 2018, by 3% and 2% respectively. In our coverage,

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Top Picks

Infineon (Buy, FV EUR19.0 vs. EUR18.5) remains best positioned with a strong footprint in the Auto and industrial sectors offering better visibility and stronger growth than consumer-related segments. STMicroelectronics (Neutral, FV EUR9.3 vs. EUR7.3) is also a leader in these two segments, however note that the group has higher exposure to consumer-related segments (about 30% of ST’s sales) increasing risks due to rapid volume adjustments. In addition, the group still suffers from the wind down of the STB business, such that we expect FY17e growth of 4.6%. For Melexis (Sell, FV EUR52 vs. EUR48) and u-blox (Buy, FV CHF265 vs. CHF255), which are also strongly involved in the Automotive segment despite being smaller players, we anticipate FY17e growth of 12% and 23% respectively thanks to a niche positioning. Regarding ams (Neutral, FV CHF30 vs. CHF27) and Dialog (Neutral, FV EUR47 vs. EUR40), strongly tied to Apple, we believe that the benefit of the smartphone rebound should come later this year (with the start of production of the next iPhone). We remain cautious on ASML (Sell, FV EUR88, vs. EUR83) given the strong comparison basis due to the ramp-up of 10nm production in FY16. Finally, we adopt a Neutral recommendation on Soitec (Neutral vs. Buy, FV EUR1.30 vs. EUR1.25). We remain confident regarding company fundamentals, however given the strong performance of the stock since our upgrade and over the Q4 (+79% in Q4 2016), we expect the stock’s momentum to slow down pending more tangible proof of the validation of management's incentive plan. The payments sector should continue to benefit fully from the major trend of a gradual disappearance in cash and checks in favour of electronic payments (mainly EMV cards). EMV migration in the US (small and mid-sized merchants still have to migrate) has witnessed a rapid and temporary market decline in the US caused by the change in EMV rules as of July, and difficult conditions in Brazil. However, Europe and China are experiencing solid growth, and there is rising demand for payment services outsourcing (notably e-commerce) and for security in electronic payments. 1) Wirecard (Buy – FV of EUR58, pure player in online payments) is now a global issuing and acquiring payment service provider (since the acquisition of Citi Prepaid Card Services in the US). It should post FY16 organic sales growth of ~20% with a 30% Ebitda margin (driven notably by south-east Asia), which should translate into 2016 EPS growth of 38%. Its organic sales growth should continue to accelerate in Q4 2016 (record sign-ups of new merchants and consumers, and a push towards digitalisation notably in India). 2) Ingenico Group (Buy – FV of EUR112, 100% of sales in payment) has the best commercial multi-channel offer available today. To meet its FY 2016 guidance (>=+7% in lfl revenue growth and >=20% in Ebitda margin), the group has to generate a - 2% organic top-line growth in Q4 2016 and a minimum of 18.5% in Ebitda margin over H2 (reassuring read-across from VeriFone’s Q4 earnings on the US and Brazil). 3) Worldline (Buy – FV of EUR31, 78% of 2016 sales in payment) is at last fully considered as a PSP (it is #1 in Europe since the acquisition of Equens and KB vs. #3 before). We expect the group to post 2% organic sales growth in Q4 (impact of the radar contract loss until the end of H1 2017), namely almost +3.5% lfl over FY 2016 with an EBITDA margin of 20% (we are slightly above the FY guidance). 4) Worldpay (Neutral – FV of 278p; 100% of its sales in payment) is struggling in the US (half of group sales), such that the associated poor lfl top-line growth cannot create any leverage to its proprietary platform. We expect 7% organic sales growth and a 9.3% Ebitda margin at best over the FY, so its outperformance in H1 cannot be extrapolated to H2. 5) Gemalto (Sell – FV of EUR52; ~30% of its sales in payment) should again post weak lfl sales growth in Q4 at +3% lfl (even if we expect a sequential improvement after - 2.5% in Q3), still impacted by a decline in the SIM (between -10% and -15% Y/Y) and slowdown in payments (comparison base). These two key segments represent ~60% of its sales. Overall, it should post FY16 organic sales growth of 0.8% with a PFO margin of 13.5%. 6) Nets (Sell – FV of DKK105) is guiding for lfl growth in net sales of 6-7% with underlying EBITDA margin of 35-36% (calculated on net sales). No guidance was given for gross sales and unadjusted EBITDA, a fact we regret since these are the only data that enable comparison with European peers. We expect Q4 lfl growth and profitability to be slightly above the first nine months. As a result, we see FY gross sales of +7/8% lfl (i.e. +6/7% in net sales) and EBITDA margin of 19.5% on gross sales (i.e. underlying EBITDA margin on net sales of 35.7%), in line with its positioning (it is mainly a physical PSP). For Telecoms, the game is set to remain uncertain and unstable for players in the French market, but promotional intensity should decline following Xmas activity, and we maintain a generally positive outlook on the sector, driven by improving revenue trends and further cost cutting. On the mobile side, we expect the very gradual trend for stabilisation in ARPU to continue, with promotional activity levelling off, and the Xmas ARPU impact will not be fully visible in Q4 results yet. On the fixed side, the impact of 2016 price hikes should be confirmed in improving ARPU trends. The CAPEX war is set to remain in full swing in fibre deployment and 4G coverage. From an M&A and development viewpoint, we could see renewed activity on the content side, driven by Altice’s aggressive convergence strategy and the latest declarations by Orange about Canal+ suggesting an evolution in its content strategy.

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We do not expect a return to market consolidation discussions in Q1, due to the political context in France. Growth at Iliad (Buy - FV EUR220 vs EUR212) is set to continue, with H2 EBITDA expected to rise 12.4% yoy in 2016, the good trend in mobile services ARPU should be confirmed, the launch of a new bundled offer with CanalSat should be visible in Q4, boosting fixed ARPU. At SFR (Neutral - FV EUR30 vs EUR29.7) comparison in Q4 is set to be extremely favourable, while Q2 2016 price hikes as well as further cost cutting initiatives should drive Q4 EBITDA growth of around 25%. But the company is still likely to struggle commercially for several months, and the remuneration model with Altice has yet to be implemented. Altice (Buy – FV EUR20.7 vs EUR19) had an outstanding performance in Q4, the best in our coverage, with +17.9% vs Stoxx Europe 600 Telecom at -0.8%. We believe this upside is mostly due to the US, factoring in Q2 and Q3 results above expectations at Suddenlink and Optimum, potential IPO of the US activities, and bull financial markets driven by expectations of pro business policies following D. Trump’s elections. The rally could go on, driven by strong EBITDA growth at both SFR and the US. Nevertheless, we think rate hikes might end up weighing on the stock performance, with less appetite from investors for high yield. Also, although we do not exclude positive market reactions from a potential IPO of the US business, the structure and the objectives of such an IPO remain unclear and we believe the market has now correctly priced in the value of the US activities of Altice. Orange (Buy – FV EUR17.8 vs EUR17.1), should keep on steaming ahead as the only all-around premium telecom provider on the French market, boosted by an Xmas market driven by premium offers and subsidised handsets. With a good performance in Q4 at +3.6%, vs Stoxx Europe 600 Telecom at -0.8%, the group has caught up some of its backlog, but is still trading at a low 4.8x 2017e EBITDA. Although the company should maintain healthy commercial trends in France, with possible good results from the Canal+ deal on the fixed side, we expect no significant beat of 2016 guidance (EBITDA above 2015), questions about content strategy could weigh on the stock, and we see no major catalyst justifying adding it to our Top Pick list. Bouygues (Buy – FV EUR35) should confirm improving trends in the construction business, and keep on delivering revenue and EBITDA growth at Bouygues Telecom, in line with its standalone strategy. The stock achieved a great performance in Q4, at +15.4%, outperforming the CAC40, Stoxx Europe 600 Telecom and Stoxx Europe 600 construction and materials. We think the market has now correctly priced in the good outlook in the construction businesses as well as the standalone recovery of Bouygues Telecom. We see no major catalyst in Q1 that justifies adding Bouygues to our Top Pick list. For Video Games: We are optimistic on Ubisoft’s fundamentals (5 AAA games in fiscal Q3 and Q4: mainly Watch Dogs 2 on 15th November 2016 and Ghost Recon Wildlands on 7th March 2017; the impact of the Assassin’s Creed film could be neutral this fiscal year). Moreover, we would not be surprised if the share reflects a speculative premium. We estimate a fair offer in the EUR41-51 range (EUR45-51 if Vivendi was the bidder, a takeover bid from the end of March 2017?).

CONCLUSIONS AND TOP PICKS In Software & IT Services, while we consider that the negative news flow on Indian IT Services companies (Brexit, US elections, pending M&A in Health Insurance in the US, potential issues on H- 1B visas) seems to have been absorbed by investors, we recommend buying specific stories based on a market rebound following a poor share price performance. As such, we add Capgemini to our Top Pick list: 1) Capgemini’s poor share price performance over the last 12 months stems from two ‘sales warnings’ (one in July, one in October) based on events that now look like under control (turmoil in the Oil & Gas sector in North America, delayed hardware sales in Brazil due to the depreciation of the real); 2) Capgemini has limited exposure to H-1B visas (only an est. 8% of North American staff) compared to its Indian peers; 3) we cannot rule out potential surprises on FY16 results to be published on 16th February (company operating margin guidance: 11.3-11.5%; BG est.: 11.4%) if the integration of Igate is successful – expected synergies announced in April 2015 for 2018 were USD75-105m on efficiency gains and USD100-150m on sales synergies; 4). Valuation remains attractive compared to large US peers (15-25% discount on est. 2017 EV/EBIT multiple). In Semiconductors, while the average performance of stocks in our semi coverage was above +17% in calendar Q4 2016 with a FX tailwind for European semi players, Infineon lagged behind with a performance of only 4% (below SOX at +8.5% and STOXX 600 at +5.4%). For CQ1, we expect the supportive environment and FX to provide tailwinds for fiscal Q1 2017e results (to be announced on 2nd February 2017) and install a positive backdrop for FQ2. We therefore expect FQ1 2017e sales growth of -3.5% and Adj. EBIT margin of 14.3%, above company guidance and consensus at - 4.0%/14.0% and -4.4%/14.1% respectively. As such, we anticipate a catching up by Infineon stock in CQ1 2017e boosted by better than expected FQ1 results and including IFX in our Top Pick list. Based on our estimates, IFX trades on 2017e P/E of 20.0x and PEG of 1.6, i.e. a very limited premium compared to IDM peers trading at 2017e P/E 18.9x on average despite a strong profile.

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In Payments, we expect investors to show increasing appetite for the rising momentum of eCommerce. Moreover, Wirecard was unfairly impacted by both the cash shortage in India and the short seller report written on Paysafe at the end of Q4 2016. As a result, we maintain Wirecard (Buy, FV EUR58) on our Top Pick list to benefit from a reconnection with its fundamentals (pure player in ePayment, global reach, and exposure to South-East Asia) and a speeding up in digitalisation (notably in India via the cash crunch). We expect Wirecard to post the best fundamentals in the industry again this year. Its valuation is appealing with a P/E of 19x vs. EPS growth of 33% over 12 rolling months. In Telecoms, we are including Iliad (Buy, FV EUR212) on our Q1 Top pick list. Iliad (Buy, FV EUR212) is currently trading at a low 6.8x 2017e EBITDA, given consensus 2018e EBITDA growth of 9.1%. It is the worst performer of our coverage in Q4, with -2.2% vs -0.8% for Stoxx Europe 600 Telecom and +9.3% for CAC40, and we expect a catch up. In addition, we expect good news on the fixed revenues side thanks to the Canal+ deal, and uncertainties regarding the Italian project have now been taken into account, with fears over the Italian referendum having faded. With no change in the guidance expected, we see no major risk of Iliad underperforming in Q1, in a sector that should confirm improving trends. In Video Games, 2017 should be buoyant thanks to speculation surrounding Ubisoft (probably from the end of March, as the major releases will be completed). This main theme is set to drive the share price in 2017. However, and despite our Buy recommendation, we find it difficult to predict the exact timing of an increase in Ubisoft’s capital by Vivendi and/or a formal takeover bid for the whole company... As a result, we like the name but are not including it in our Q1 2017 Top Pick list.

NEXT CATALYSTS Software & IT Services: TCS’ Q3 FY17 results on 12th January after the Indian markets close. Infosys’ Q3 FY17 results on 13th January before the Indian markets open. IBM’s FY16 results on 19th January after US markets close. SAP may pre-announce FY16 results on the week of 9th January. FY16 sales and results for European companies officially start on 24th January (SAP). Semiconductors: ASML’s Q4 earnings on 18th January, Soitec’s Q3 sales on 25th January (after trading), STMicroelectronics’ Q4 earnings on 26th January, Infineon’s Q1 earnings on 2nd February, ams’ Q4 earnings on 7th February, Melexis’s Q4 earnings on 8th February, and u-blox’ FY16 earnings on 16th March. Payments: Worldline’s FY earnings on 21st February (after trading), Ingenico Group’s FY earnings on 23rd February (after trading), Nets’ FY earnings on 28th February (before trading), Gemalto’s FY earnings on 3rd March (before trading), Worldpay’s FY earnings on 7th March (before trading), and Wirecard’s FY earnings on 6th April (before trading). Telecom: FY 2016 results on 23rd February before trading for Orange and Bouygues, expected mid- March for Altice/SFR and Iliad. Video Games: Ubisoft’s fiscal Q3 sales on 9th February (after trading).

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Utilities : Top Picks Q1 2017 visibility too weak to have strong convictions

1 M 3 M 6 M 31/12/16 LOOKING BACK ON Q4 2016 Utilities 7.3% -1.9% -6.2% -0.8% The utilities sector underperformed the Euro Stoxx 600 in Q4 2016 (-3.9% vs. +0.3%) and over 2016 DJ Stoxx 600 7.1% 6.2% 12.8% 1.2% (-8.9% vs. -1.2% for the Euro Stoxx 600). Since our initiation of coverage in July 2014, we have *Stoxx Sector Indices recommended staying out of the sector as a whole and playing it safe through stocks offering strong earnings growth stories based on restructuring efforts. We previously played Suez in Q4 Companies covered 2016 as we believed the speeding-up of the company’s transformation plan would reinsure ALBIOMA BUY EUR16 investors on the resilience of the company’s margins. In the end, in 2016, and particularly in Q4, the Market Last Price EUR16,18 EUR489m sector suffered strongly from the increase in interest rates with dividend-paying stocks becoming

E.ON SUSPENDED less attractive. Inside the BG universe, Albioma was the best performer in Q4 and in 2016 (+7.5% and +10.6% respectively). EDF (-10.6%), EDPR (-15.5%), Engie (-12.1%), Veolia (-21.1%) all strongly Last Price EUR6,706 Market EUR13,419m underperformed both the market and the sector in Q4 amid concerns over top-line growth, the EDF NEUTRAL EUR10,4 unsupportive macro environment (low inflation, spluttering industrial production in Europe) and Market Last Price EUR9,597 EUR20,241m depressed energy prices. Over the year, European power prices fell by c. 16% on average, while gas

EDP RENOVAVEIS NEUTRAL EUR7,65 (TTF) and coal prices respectively decreased by c. 23% and by c. 2%. Last Price EUR6 Market EUR5,234m EUR14.9 ENGIE BUY WHAT WE SEE FOR Q1 2017 vs. 14,8 We still do not expect any short-term recovery in commodities prices in Europe. We also expect Last Price EUR12,175 Market EUR29,650m renewables commissioning to slow down in 2017 due to a challenging comparable basis and amid PENNON GROUP SELL 830p various uncertainties including D. Trump’s investiture in the USA, the expected recalibration of Market Last Price 826p GBP3,418m Chinese subsidies and the recent increase in interest rates. In this context, we would favour

RWE SUSPENDED diversification strategies (with enhanced focus on solar energies and on emerging markets, still two Last Price EUR11,985 Market EUR7,251m fast growing segment and area). Some catalysts are expected in Q1 with EDF's prospective capital EUR17.6 SUEZ BUY increase, which could negatively weigh on the stock, and the upcoming full-year results season. vs. 17,5 Respective comments from Veolia and Suez on their outlook will be watched closely as we believe Last Price EUR14,06 Market EUR7,935m visibility has worsened in the companies’ French water businesses (negative tariff indexation could VEOLIA EUR19.7 NEUTRAL be expected, increased headwinds from regulatory issues). We also believe the end of various ENVIRONNEMENT vs. 22 international contracts could infringe on Veolia’s outlook for 2017. In all, we believe the sector does Last Price EUR15,795 Market EUR8,898m not have to be played for its earnings growth potential, while the appeal of its yield has been VOLTALIA BUY EUR15,5 undermined by the increase in interest rates. We would therefore favour a potential rerating linked Last Price EUR8,98 Market EUR440m to transformed structures through self-help measures and the asset rotation programme. In our last update on EDF (Downgrade to neutral due to ongoing low earnings visibility), we updated our

model with the latest macro data (update on power prices, notably) and latest rollover to 2017. We have therefore undertaken similar work on Engie (Buy, FV @ EUR14.9), Suez and Veolia. Note that our risk-free rate and market premium assumptions remain unchanged at 1.6% and 7.0% respectively.

As for Suez and Veolia, we have also updated our models with new assumptions regarding the company’s respective French water businesses (see our morning mail today: Struggling to keep its head above the water). Given, the expected negative tariff indexation in France, the end of various international contracts as well as no upcoming positive catalysts in the short-to-mid-terms, we have downgraded Veolia to Neutral (FV at @ EUR19.7 vs. EUR22.0). We would favour Suez (Buy, FV @ EUR17.6 vs. EUR17.5) over Veolia as we believe the company should be able to face these expected headwinds notably on the back of strong international growth.

Table 1: change in our recommendation and FV Recommendation New FV Old FV % chg. Upside Engie Buy 14.9 14.8 +0,7% +22.4% Suez Buy 17.6 17.5 +0,6% +25.2% Veolia Neutral vs. Buy 19.7 22.0 (10.5%) +24.7% Source : Bryan Garnier & Co. ests.

Note that we suspend the coverage of German integrated utilities E.ON and RWE as we need to review both companies’ business models, valuations and investment cases.

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CONCLUSIONS AND TOP PICKS For Q1 2017, we have decided not to place any utilities stocks on the BG Top Picks list as we see limited positive catalysts and an overall limited visibility within our coverage universe. Note however that we clearly appreciate Engie’s enhanced visibility with the past two negative catalyst now behind us with the recent announcement of the increase in Belgian nuclear provisions – due to a lower discount rate (3.5% vs. 4.8% initially) and the 2016e-2018e “no-growth” scenario being priced in by both the market and the consensus (few downward revisions remain in our view). The awaited exploration and production asset disposals remain the main short-to-mid-term catalyst. It nevertheless remains hard to assess whether the disposal could be announced in Q1 2017 or later this year. This disposal would enable the group to take a significant step towards its target to focus on regulated and contracted assets and therefore to limit its exposure to commodities prices.

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Business Services : Top picks: Review of TIC sector with SGS

1 M 3 M 6 M 31/12/16 LOOKING BACK ON Q4 2016 Support&Service 4.6% 2.2% 12.8% 0.9% In Foodservices, Elior, again our Top Pick in Q4, reported the best performance, up 6.6% in absolute DJ Stoxx 600 6.1% 6.6% 14.6% 1.1% terms and 1.1% vs. the DJ Stoxx followed by Sodexo up 3% and down 2.3% vs. the DJ Stoxx. *Stoxx Sector Indices Compass Group was respectively up 1.8% and down 3.5% while Edenred reported the worst performance, down 9.5% in absolute terms and 14.1% relative to the DJ Stoxx. During 2016, Sodexo Companies covered reported the best performance, up 21% ahead of Elior +12.5%, Compass Group +10.3% and Edenred BUREAU VERITAS NEUTRAL EUR20 +7.9%. Market Last Price EUR18,96 EUR8,380m

COMPASS GROUP NEUTRAL 1430p In the TIC sector, all of our coverage reported negative performances vs. the DJ Stoxx in Q4 with Last Price 1458p Market GBP23,971m Bureau Veritas down 8.5%, SGS -8.1% and Eurofins -5%, the only stock slightly positive (+0.2%) in EDENRED NEUTRAL EUR22 absolute terms. During 2016, Eurofins (BG initiate coverage at the end of May 2016) reported the Last Price EUR19,48 Market EUR4,552m best performance, up 25.8% in absolute terms mainly achieved during Q3 (+21.4%) after better H1 ELIOR BUY EUR24 results followed by an equity capital increase to secure its dynamic expansion, SGS was up 10% and Last Price EUR21,54 Market EUR3,714m Bureau Veritas broadly flat (+0.1%). EUROFINS SCIENTIFIC SELL EUR400 WHAT WE SEE FOR Q1 2017 Last Price EUR413,649Market EUR6,975m Globally for all stocks, no surprises are anticipated for forthcoming earnings publications. SGS SA BUY CHF2300 Comments on forecasts from management could be more positive after 2016 challenges. In fact, Last Price CHF2101 Market CHF16,434m most companies will benefit from favourable comps in FY 2017 for lfl growth (except for Sodexo in SODEXO NEUTRAL EUR92 H1 and Eurofins) and some forex gains notably the Brazilian Real (Edenred, Sodexo and Compass Last Price EUR108,3 Market EUR16,650m Group). Finally, TIC management could be more positive on energy related businesses after the oil

price rebound. Regarding Sodexo, which is due to release its Q1 revenue with its new segment reporting this week,

the first part of the year will be challenging as guided with negative Q1 lfl revenue growth anticipated (our forecast is -0.5% in reported terms with lfl growth of -0.2% compared with the consensus respectively at -1.2% and -0.5%) due notably to the significant positive impact of RWC in 2015-16.

CONCLUSIONS AND TOP PICKS Confirming our Buy recommendation on Elior, we nevertheless remove the stock from our Top Picks list mainly due to limited short term newsflow. In the TIC sector, we have decided to include SGS taking into account an earlier improvement in commodity exposed businesses. During the CMD in Poland at the end of October, SGS’s management adjusted its FY 2016 lfl revenue growth to approximately 2.5% vs. 2.5%-3.5% guided at the end of H1, which implies a significant slowdown in H2 to around 1.6% compared with H1 up 3.4%. The adjustment was due to OGC, MIN and IND still under pressure due to current market conditions. As such, management expects 2016 and 2017 to be softer than initial planned and we have reduced our 2016 top-line growth to 2.5% vs. 3.1% previously and 2017 to 2.6% vs. 3.4%. Nevertheless, management has maintained its forecast for adjusted operating income improvement vs. 2015. Our forecast is CHF944 i.e. +CHF27m. Consensus is 2.4% on lfl revenue growth with broadly flat adjusted operating profit at CHF924m i.e. margin down 50bps at 15.5%. NEXT CATALYST However, although we are not anticipating any surprises in FY results, management could deliver a Sodexo: Q1 2016-17 revenue on 12th January more positive message on forecasts notably due to the positive impact of oil prices on market SGS: FY 2016 results on 23rd January conditions in energy related business lines i.e. OGC (20% consolidated revenue), MIN (11%) and Elior: Q1 2016-17 revenue on 27th January IND (15%). In fact, lfl revenue growth in these businesses could be back in the black in 2017 earlier Compass Group: Q1 IMS on 2nd February than expected after two years of negative numbers notably on OGC (our 2017 forecast for Edenred: FY 2016 Results on 23rd February consolidated lfl revenue growth is 2.6% o/w -2.5% in OGC after -4% in 2016 and -2.2% in 2015). Bureau Veritas: FY 2016 Results on 24th Moreover, as seen in 2016, with healthy financials (net debt to EBITDA of 0.4x) SGS has room to February sieze M&A opportunities in a challenging environment. In fact, SGS undertook around 20 deals for

Eurofins: FY 2016 Results on 28th February a total annualised revenue of around CHF160m (CHF55m H1 total revenue acquired). The 2016-2020 strategic plan presented in October 2016 confirmed a contribution from acquisitions in the range of Click here to download CHF1bn. Finally, having recently completed its share buyback programme started in January 2015 (3.08% of its share capital for a total amount of CHF458m), the group could announce a new one or decide to guide on a new minimum dividend for the next three years as it did in 2014 (in 2014, management announced a dividend of at least CHF65 with CHF68 finally paid in 2015 and 2016), bearing in mind that an attractive shareholder returns policy is one of the group's priorities. At the current share price, the stock is trading at 17x EV/EBIT 2017e and 16x 2018e compared with the historical median of 14.9x.

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Insurance : Top Pick Q1 2017: AXA

1 M 3 M 6 M 31/12/15 LOOKING BACK ON Q4 2016 Insurance 0.6% 14.3% 27.5% 0.2% At the beginning of the quarter we chose not to place any insurance stocks on our Top Pick list DJ Stoxx 600 2.3% 7.1% 11.1% 0.6% considering the high level of uncertainty. This was a bad idea bottom line, as it was a great quarter *Stoxx Sector Indices for insurance (+15.4% vs. market +5.4%). The performance did not stem from Q3 publications, which were reported in November (very decent publications overall, but no breakthrough compared to Companies covered previous trends), but was mainly driven by the ongoing rise in interest rates, a higher USD and AEGON NEUTRAL EUR5.7 vs. 6 booming equity markets following Donald Trump's election. Among our coverage, the best performances came from companies like Aegon, AXA and Scor, which

are more sensitive than average to US rates and the USD. Most companies with more defensive ALLIANZ BUY EUR186 vs.180 profiles (most reinsurers, Zurich) underperformed. US rates have continued to rise (10Y US rate at 2.45% vs. 1.61% at end-September and 1.49% and AXA BUY EUR29 end-June) driven by the prospects of the Fed’s December decisions and the potential inflationary consequences of Donald Trump's policy. European rates followed partially (10Y Euro rate at 0.80% SELL vs. 0.35% at end-September) driven by the Bund (0.11% vs. -0.19% at end-September) and some CNP ASSURANCES EUR17 vs. 15 vs. NEUTRAL spread widening within the eurozone (mainly Italy and France). “Risky” asset classes performed well, with lower corporate spreads (down 4bps for the iTraxx Main, COFACE NEUTRAL EUR 6.8 vs. down 42bps for the iTraxx Xover, down 13bps for the iTraxx Senior Financials and down 28bps for UR the iTraxx Sub. Financials) and higher equity markets (DJ Stoxx600 up 5.4%). EULER HERMES BUY EUR96 vs. 89 NEW ESTIMATES, RECOMMENDATIONS AND FAIR VALUES We take the opportunity to update our earnings forecasts for 2016-2019. On average, both our NEUTRAL HANNOVER RE EUR110 vs. SELL operating profit and net income sequences are revised downwards by 1%. Our sequence for NAV is revised downwards by 5% on average, mainly driven by higher interest rates (lower unrealised gains). MUNICH RE SELL EUR176 vs. 185 We have also updated our Fair Values, which are based on our new 2017 estimates and adjustments we have made in our company specific betas. Please note that BG valuation criteria remain SCOR BUY EUR37 vs. 35 unchanged (risk-free rate 1.6%, equity risk premium 7.0%). We take this opportunity to upgrade from Sell to Neutral our recommendation on Hannover Re SELL (strong business model, strong earnings resilience), and to downgrade from Neutral to Sell our SWISS RE CHF95 vs. 100 vs. NEUTRAL recommendations on CNP (no upside potential on our theoretical Fair Value following the strong 2016 stock performance with the rise of BRL, no more discount to peers) and Swiss Re (earnings

pressure going forward, no upside potential on our theoretical Fair Value). ZURICH INSURANCE NEUTRAL CHF303 vs. 270 GO EUR Fair value Theoretical Recommendation New Old upside (%) New Old Aegon 5.7 6.0 10% Neutral Neutral Allianz 186 180 16% Buy Buy AXA 29 29 18% Buy Buy

CNP 17 15 -4% Sell Neutral Zurich (CHF) 303 270 6% Neutral Neutral Hannover Re 110 110 7% Neutral Sell Munich Re 176 185 -1% Sell Sell Scor 37 35 15% Buy Buy Swiss Re (CHF) 95 100 -1% Sell Neutral Coface 6.8 UR 6% Neutral Neutral Euler Hermes 96 89 15% Buy Buy Source: Bryan Garnier & Co. ests.

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WHAT WE SEE FOR Q1 2017 Both the Fed and the ECB did their homework in December 2016, providing financial markets with some visibility on potential future actions. But the level of political risk is high at the beginning of 2017, as investors will have to deal with the first steps of the Trump administration, the future start of Brexit discussions and general elections in major European countries. In this context, short-term, flexible investment strategies should prevail. We do not expect Q4/FY numbers to be reported in February to show a material shift in operating trends vs. previous periods. In particular, in most cases, the rise in interest rates will not ease pressure on running ROI in the short-term:  The current level of the 10Y Euro rate is 24bps higher than its 2016 average but still 11bps below its 2015 average and 100bps below its 2014 average.  Based on our theoretical bond portfolio (40% Euro govies, 10% US govies, 25% investment grade corporates, 5% high yield corporates, 20% financials), the current average investment rate is 20bps higher than the 2016 average, but what matters most for short-term ROI is the 5- year moving average, which is 65bps lower (insurers have to deal with duration effects).  Corporates continue to issue bonds at very favourable conditions. We could mention Valeo for instance, with a BBB rating at S&P with a positive outlook, which issued a 6Y EUR500m bond with a 0.625% coupon on 4th January. But the rise in interest rates should have more material, immediate impacts on NAVs and solvency margins:  Considering the typical structure of insurers’ investment portfolios, the movements on financial markets should be negative overall for the mark-to-market of assets, pushing insurers’ NAVs down vs. September levels.  More importantly, the rise in interest rates should trigger a positive impact on solvency margins (Solvency II environment). Remember for instance that AXA’s solvency margin goes up 5pts (or half the cost of the yearly dividend) for a 50bps rise in interest rates (numbers at end-June 2016), all other things being equal. Combined with on-going strong operating earnings and cash flows, we expect companies to continue delivering on shareholder’s returns, with high dividend (4.9% yield on average) and in some cases share buy-backs and/or special dividends (most reinsurers? Allianz?). We see no reason to suspect insurers will deviate from current strategies, i.e. focusing on underwriting profitability through better risk management and cost control, price discipline, a more favourable product-mix in Life/Protection, a prolonged focus on capital allocation and cash flow management. This strategy should help protect the overall profitability.

CONCLUSIONS AND TOP PICKS As was the case during recent quarters, the performance of the insurance sector will mostly be driven by interest rates and the USD, which calls for a dynamic allocation in the insurance sector. In the current environment, we have decided to add AXA (Buy, FV EUR29) to our Q1 Top Pick list, considering: i/ AXA is a prime beneficiary of higher US interest rates and USD for its US business, ii/ the company’s convincing transformational journey strategy over the last few years, iii/ the recurring quality of earnings over the last half year (pricing power, combined ratio, new business margin, solvency,… ), iv/ managements’ efforts to address shareholders’ return (pay-out ratio 45- 55%), and v/ a prolonged 10% discount to peers like Allianz and Zurich. FY 2016 numbers will be reported on 23th February.

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Construction & Materials : Why we have no Top Picks for Q1 2017 in the construction sector.

LOOKING BACK ON Q4 2016 1 M 3 M 6 M 31/12/15 In Q4 2016, Eiffage and Vinci were both penalised by higher interest rates and their share prices Cons & Mat 1.9% 5.1% 16.6% 0.1% were down -4.2% and -5%, respectively. The very strong performances by cement players in Q3 DJ Stoxx 600 2.3% 7.1% 11.1% 0.6% gradually faded during the last part of the year, from flattish (+0.3% for Vicat, +2.2% LafargeHolcim,) *Stoxx Sector Indices to slight growth (+5.4% HeidelbergCement). On the contrary, more diversified players reported Companies covered steady performances in Q4. CRH gained 10.5%, benefiting from the US election. Imerys was up CRH BUY EUR34,8 +12.1%, as the group was able to improve profitability despite a complicated macro environment Last Price EUR32,05 Market EUR26,688m and announced the acquisition project of Kerneos (more than EUR400m of sales). Saint-Gobain was EIFFAGE BUY EUR78 actually the best performer, with a 15% increase in Q4 despite an already strong +29% in Q3. Last Price EUR67,66 Market EUR6,636m WHAT WE SEE FOR Q1 2017 Q1 2017 is mostly set to be impacted by the Q4 2016 business performance and 2017 outlook. HEIDELBERGCEMENT NEUTRAL EUR95 While we are actually optimistic on the ability of Vinci or Eiffage to perform well in the last part of Last Price EUR85,91 Market EUR17,046m 2016 (toll road traffic likely to continue to be steady, French civil works to gradually stabilise, IMERYS BUY EUR75 motorway stimulus plan works to kick off), the two stocks might be penalised by the anticipation of Market Last Price EUR71,94 EUR5,724m a difficult comparison basis for traffic in Q1 (last year traffic was robust, with a 7.2% increase for

LAFARGEHOLCIM NEUTRAL CHF58 Vinci Autoroutes intercity network and 6.5% for APRR). In addition, the rates increase might add Last Price CHF53,65 Market CHF32,561m pressure too, although we think it could be offset by stronger inflation, while Vinci and Eiffage's

EUR48 gross debt is mostly fixed (>60% & c90% resp.), not too costly (3.3% & 3.9%e, resp.) with decent SAINT GOBAIN BUY vs. EUR46 duration (4.5 years for Vinci and APRR est.). Last Price EUR44,875 Market EUR24,918m We started to be more cautious on cement groups last year, with Heidelberg and LafargeHolcim VICAT NEUTRAL EUR61 downgraded to Neutral and Vicat's Neutral recommendation confirmed. We are concerned by the Last Price EUR57,85 Market EUR2,597m impact of India's demonetisation on the macro case as of Q4 2016 (LHN and VCT are the most VINCI BUY EUR74 exposed within our coverage with c11% of their sales). According to the press, 97% of the banned Last Price EUR66 Market EUR38,894m notes are thought to have been deposited in banks at end 2016 and 44% replaced by new notes, but the impact on macro conditions is uncertain.

Finally, it worth saying cement groups are EM-exposed (c61% of EBITDA for LHN, c52% for HEI and

c43% for VCT). If Donald Trump's decisions deteriorate the macro outlook for EM, cement players will be penalised. There might be some positive news though. Donald Trump might start to communicate on his infrastructure plan in more detail after his inauguration on 20th January. This would be positive for CRH, with 59% of EBITDA exposed to NAM. Clarifications on this plan might take some time, though. Imerys might benefit from an improvement in the shale oil & gas market in the US. The number of rigs reported by Baker Hughes has rebounded since last May (665 in the US on 6th January 2017 vs 404 at end May last year) although it still regards mostly basins where proppants are not primarily used (i.e. the Permian basin). But this is going in the right direction, helped by oil prices. Note that the share price of Carbo Ceramic, a peer in the ceramic proppant business, has strongly recovered since early November (>70%). Finally, Saint-Gobain should continue to report a gradual recovery in its distribution business in France, although it is difficult to foresee a proper acceleration in Q4. It is likely to be gradual anyway, especially as visibility will hardly improve before the French presidential election. Besides, Q1 will be penalised by a negative calendar effect as 2016 was a leap year. CONCLUSIONS AND TOP PICKS We are buyers of Imerys and CRH but limited upside due to recent performances prevent us from selecting them as Top Picks for Q1. We remain positive on Saint-Gobain too, but we think the improvement will be gradual and not necessarily in Q4 or early 2017. Besides, the share price has recently benefited from asset rotation, limiting upside. We have updated SGO FV with a roll-over (+EUR2 to EUR48). We are a bit concerned on the short term that Vinci and Eiffage might be penalised by concerns regarding rates. We acknowledge rates per se are still very low and eventually likely to be compensated by stronger inflation (on DCF), but market reaction might be harsh on a first time. Click here to download

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Top Picks

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