MASTERS IN FINANCE

“THE NAVIGATOR COMPANY” COMPANY REPORT

“PULP AND PAPER INDUSTRY” 23 MAY 2018

STUDENT: ANA CAROLINA COELHO [email protected]

European leader seeking opportunities within an “old fashion industry” Recommendation: SELL

Vs Previous Recommendation BUY However, investment decisions must be made rationally Price Target FY18: 5.11 €

▪ Coverage is initiated on “The Navigator Company”, with

a SELL recommendation, a price target of 5.11€ and an Price (as of 23-May-18) 5.37 € annualized expected shareholder return of -2,16%. Bloomberg: NVG PL

▪ UWF paper market has stagnated – global CAAGR has 52-week range (€) 3.55-5.44 been equal to -0,5%. The segment presents little growth Market Cap (€M) 3852,98 Outstanding Shares (m) 717.5 opportunities for the company in developed regions. Source: Bloomberg ▪ Tissue will be the source of growth of the company, as revenue is expected to increase 23,4% in 2018. However, Navigator 12000 6 10000 5 is a new player in a very competitive market with well-established 8000 4 players. As more production capacity is entering the market, 6000 3 4000 2 pressures on profitability increase. 2000 1 0 0 ▪ Recent large increases in the Global Pulp and Paper Prices Index, driven by North American suppliers, have provided PSI20 Index NVG PL great gains to the sector for the past three weeks. However, current price levels will not sustain in the future.

Source: Bloomberg ▪ Investments that carry negative returns – both the

(Values in € Pellets project in the USA and the Forestry project in Mozambique 2016 2017E 2018F millions) led to substantial losses that destroyed company value. Revenues 1577,4 1633,1 1654,8 EBITDA 393,8 396,6 497,0 ▪ High CAPEX level – expansion CAPEX has been growing, Net Profit 216,8 204,1 221,2 totalling €456 million in 2015-2017. EPS 0,237 0,348 0,308 EBITDA margin 25,0% 23,8% 26,7% Company description ROE 17,9% 16,5% 18,7% ROA 8,9% 8,5% 9,1% The Navigator Company, located in Lisbon, Portugal is the European leader in the Uncoated Woodfree Paper market. Other FCF 199,2 203,2 276,0 operating activities include pulp, tissue and energy production and Source: Navigator Company forestry management. Products are mainly sold in the national and European market.

THIS REPORT WAS PREPARED EXCLUSIVELY FOR ACADEMIC PURPOSES BY ANA CAROLINA COELHO, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND ECONOMICS. THE REPORT WAS SUPERVISED BY A NOVA SBE FACULTY MEMBER, ACTING IN A MERE ACADEMIC CAPACITY, WHO REVIEWED THE VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (PLEASE REFER TO THE DISCLOSURES AND DISCLAIMERS AT END OF THE DOCUMENT)

Page 1/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

Table of Contents

Executive summary…………………………………………………………………….3

Company Description………………………………………………………………….4

Shareholder structure and Share Performance…………………………….5

Dividend Policy…………………………………………………………………6

Debt……………………………………………………………………………..,7

Competition & Differentiation Strategy……………………………………….8

Macroeconomics………………………………………………………………………10 The Business segment & The sector ...... …….11

UWF paper ...... 11

Pulp ...... 13

Tissue…………………………………………………………………………..14

Energy………………………………………………………………………….16

Forestry………………………………………………………………………...16

Mozambique Project………………………………………………………….17

Pellets………………………………………..…………………………………18

Main Value Drivers………….…………………………………………………………20

CAPEX………………………………………………………………………….20

Revenue………………………………………………………………………...21

Costs…………………………………………………………………………….22 Valuation ...... 23

DISCOUNTED CASH FLOW ANALYS……………………………………………23

Multiples………………………………………………………………………..24

Sensitivity Analysis……………………………………………………………25

Appendix ...... 27

Disclosures and Disclaimer ...... 28

PAGE 2/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

Executive summary

The Navigator Company

Navigator operates in the Pulp and Paper industry, more specifically in the Printing&Writing paper segment. Within this segment, the company is the European leader in the production of UWF paper and the leader in premium paper brands. Navigator has a pulp production capacity of nearly 1,5 million tons and a paper production capacity of nearly 1,6 million tons, being in the top 40 of the world’s largest paper producers. The company is one of the most efficient producers in Europe, as it has one of the lowest cash production costs. Navigator also produces energy that consumes internally and sells to the national grid.

Tissue

Navigator is currently betting in the Iberian tissue sector, as tissue market has been growing at a global AAGR of 3,5%. However, new capacity is entering the market, which can harm Navigator’s profit margins. Total investment in this segment amounted to nearly 145€ million by the end of 2017, which included the expansion of the capacity of production. Navigator has the potential to become the second largest Iberian tissue producer.

Pellets

Navigator sold Colombo Energy, a pellets factory located in Greenwood, USA, in February 2018 for €107,7 million to the largest pellets producer worldwide. Navigator constructed the mill in 2015, however the net operating losses led to the divestiture decision.

CAPEX

Since 2015 that the company has been investing at a faster pace, as it is betting in a business and product diversification strategy. Total CAPEX amounted to €144,7 million in 2017. Investments include, besides pellets and tissue, plantation of a forestry in Mozambique.

Valuation

The Company was valued under a Discounted Cashflow analysis as all operating segments are included in the Paper and Pulp Industry. The enterprise valuation retrieves a share price of 5,11€, which leads to a SELL recommendation, as total annualized return is equal to -1,87%. The market is currently overvaluing Navigator due to the recent increases in global paper and pulp prices.

PAGE 3/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

Company description

Figure 1 – Producers of paper and pulp by revenue The Navigator Company, former “Portucel Soporcel”, headquartered in Lisbon, Source: Pwc Global Forest, Paper&Packaging Industry Survey 2016 (2015 data) Portugal, is the European leading producer of uncoated fine papers - with a market Revenue share of 19% in 2017 - and the fourth largest manufacturer worldwide. Ranking Country Company (US$) International The Navigator paper brand is the global leading brand in premium office paper, 1st USA Paper 20,129 Kimberly- 2nd USA Clark 16,732 owning a 50% market share in the European market. Worldwide, within the Paper Svenska th st 3rd Sweden Cellulosa 12,288 and Pulp industry, the company ranks in 49 place in terms of revenue and in 41

4th Japan Oji Paper 10,724 place in terms of total production capacity (3,135 million tons of paper, pulp and

5th USA Rock-Tem 10,243 tissue), according to the latest ranking available (2015 figures). UPM 6th Finland Kymmene 9,914 Other core operations include the production of bleached eucalyptus pulp, of which 7th Finland Stora Enso 9,872 nearly 80% is integrated in the company’s paper production; the production of tissue Smurfit Kappa 8th UK Group 7,931 paper since 2015; the production of energy, of which nearly 77% is sold to the Sumitomo 9th Japan Forestry 7,784 national grid; and the management of forestry in Portugal and Mozambique. Nippon 10th Japan Paper 7,534 Currently, Navigator operates four mills located in Setúbal, Figueira da Foz, Cacia

49th Portugal Navigator 1,293 and Vila Velha do Rodão.

Figure 2 – Producers of paper by total The company was founded in 1953, but it was only established as “Portucel production capacity of pulp and paper (2015 data) Soporcel” in 2001, after the merger of the two largest Portuguese paper producers Source: RISI Technology Channels – The PPI Top 100 - Portucel and Soporcel. In 2016, the company was rebranded “The Navigator Prod.Cap. Ranking Country Company (M tons) Company” as part of the growth strategy that aims to increase the company’s International 1st USA Paper 23,315 international reach and to expand into new business lines. Nine Dragons 2nd China Paper 12,630 In terms of Navigator’s contribution to the Portuguese economy, the company is WestRock 3rd USA Company 12,487 responsible for about 1% of the GDP and 3% of the exported goods, being the third UPM 4th Finland Kymmene 9,115 largest exporter of the country. Furthermore, Navigator generates about 50% of the 5th Finland Stora Enso 9,771 renewable energy produced in Portugal, which makes it a leader in the use of 6th Japan Oji Paper 9,188 South renewable sources in the country. 7th Africa Sappi 7,306 Smurfit In terms of growth, Navigator revenues have been growing at an AAGR of 1,35% Kappa 8th UK Group 7,000 for the past three years, while the industry’s average revenue has been growing at 9th UK DS Smith 6,802 Nippon an AAGR of 0,30%. For the next two years, an AAGR of 2,71% is expected for the 10th Japan Paper 6,542 company, as world prices for UWF paper will remain in a positive trend and the 41st Portugal Navigator 3,135 tissue business will “take off”, growing 24% in 2018. Figure 3 : Navigator Revenue evolution (thousand €) Recently, there have been two main events that have shaped the future of the

1 800 000 company. In 2015, Navigator decided to enter the tissue segment as the market is 1 750 000 1 700 000 growing at a fast pace. For that purpose, it acquired AMS Star Paper, a small private 1 650 000 tissue producer located in Vila Velha do Rodão. In addition, in February 2018, the 1 600 000 1 550 000 company sold the pellets business to Enviva, the largest player in the pellets market. 1 500 000 1 450 000 In 2015, Navigator saw an opportunity to diversify its business and started the construction of a pellets factory in Greenwood, USA, with a predicted annual

PAGE 4/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

Figure 4 – Number of Employees capacity of 450 thousand pellets. However, pellets market performance did not meet (thousand) Source: Navigator Company Navigator’s expectations and the company opted to divest the unit. 5 In 2016 (latest data available), the company employed 3,111 employees, a number 4 which increased at an AAGR of 15,5% for the past four years. The labour force 3 increase is justified by the growing number of new projects and investments – 2 including, for example, the expansion of tissue production and the plantation of 1 Eucalyptus in Mozambique. The trend will continue in the following years. 0 The company has a good and experienced management team that has been able to create value for shareholders in the past. However, some of the latest investment decisions, namely the pellets and Mozambique investments have not returned the Figure 5 – Revenue sourced by regions Source: Navigator Company expected value. The board of directors is composed by 14 elements, whose president is Mr. Pedro Pereira. The company faces several risks specific to the industry, such as the occurrence of Europe fires and production errors, pressure from competition that can eventually lead to 14% lower margins and disruption of supplier services as Navigator depends on a small 9% America number of suppliers for the same service. Sale prices are positively correlated with 77% Other global pulp and paper prices, therefore a sharp decrease in world prices can impact markets revenue levels severely and consequently, the value of the enterprise (see Sensitivity Analysis below). As 23% of revenue is sourced outside Europe, the company faces cashflow and exchange rate risks, especially in terms of $US. To Figure 6 – Navigator share price evolution (€) Source: Bloomberg mitigate these risks and financial risks – interest rate risk -, the company uses

6 derivative financial instruments – swaps, forwards, caps and floors. 5 For the upcoming years, Navigator will continue to pursue its current strategy 4 which is focused in organic growth and in improving production efficiency. These 3 includes initiatives such as the expansion of the tissue and pulp production capacity 2 and the development of the M2 cost cutting programme. Furthermore, the company 1 intends to remain environmental-friendly and increase the use of renewable sources

0 to produce energy, while reducing the use of CO2 intensive sources of energy.

2010 2011 2012 2013 2014 2015 2016 2017 2018 2009 Shareholder structure and share performance

Figure 7 – PSI 20 evolution (€) Source: Bloomberg The Navigator Company went public in July 2000 in the Euronext Lisbon and is currently a member of the PSI20 index. Over a 10-year period (since 2008), 12000 Navigator has registered a CAGR of 9,30%, while the index has registered a CAGR 10000 8000 of -7,05%, especially due to Portugal’s financial crisis. Therefore, Navigator’s Figure – PSI20 Index evolution (€) Source:6000 Bloomberg performance in the stock market has been justified by its intrinsic characteristics. 4000 Its strong cashflow generation and profitability measures have been very appealing 2000 to investors. Nevertheless, since the beginning of 2017 the Portuguese index has 0 been registering significant improvements, with that year registering a growth of 15,15%, justified by the improvement in the overall economy and in the country’s

PAGE 5/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

Figure 8 – European pulp and UWF paper rating. Furthermore, Navigator’s share performance also accompanied this trend price Index evolution Source: Bloomberg during 2017, with the share price improving 30,23%. After the announcement of 1000 the pellets business sale in December 29th, 2017, the market 800 reacted positively with the share price increasing by 4,47% in two 600 400 days (from €4,27 to 4,44€). An important phenomenon to note is 200 that since the beginning of May this year, the share has valued 0 22%, going from 4,34€ to 5,34€ in little more than two weeks. This phenomenon is happening to several companies in the industry FOEX BHK Pulp Index as world pulp and paper prices have been increasing sharply FOEX A4 Copy Paper Index since last year, with the European BHK pulp and the A4 Copy

Figure 9 – Navigator ownership structure paper Index reaching in the end of April this year, 847€/ton and 855€/ton, (2017) Source: Bloomberg respectively.

Semapa The majority shareholder of Navigator is Semapa, owning 69,35% of the shares (of 22% which 35,68% is held directly by Semapa and the remaining is held by Seinpar Banco 2% BPI Investments and other companies of the group). Semapa is a portuguese Zoom conglomerate holding company with interests in the cement, pulp and 2% 70% Lux 4% Norges paper and environmental services sectors in Portugal, including interests in Bank Other companies such as Secil Group and ETSA. Semapa revenue and net income amounted to €2,16 billion and €124 million in 2017, respectively. Navigator contributed to 75% of the revenue and 98,5% of the net income. Therefore, Figure 10 - Semapa revenue by segment (million €) Source: Bloomberg Navigator is a strategically important company for the group. Also, the positive

200,0 financial performance of the group is almost entirely driven by Navigator’s performance, as the cement segment of the group has 100,0 been registering losses since 2012 (except for 2014) – Secil net income losses amounted to €1,1 million in 2017 – and the 0,0 126,5 146,1 112,8 81,5 114,9 124,0 environmental segment is very small (corresponds to 1,3% of total - 100,0 2012 2013 2014 2015 2016 2017 revenue). Consequently, Semapa’s share capital of Navigator is Pulp & Paper Environment expected to remain at this percentage for the following years. Cement Holding Company Nevertheless, Semapa used to held a higher percentage of the

company – about 81% - until 2015, when it launched an exchange Figure 11 – Semapa 2017 key ratios (%) Source: Bloomberg offer of its own shares for Navigator shares with the purpose of increasing Navigator’s liquidity and reorganize both companies shareholder structures. Net… 3,38 Net Debt/Equity 137 The CEO of Navigator is Mr. Diogo da Silveira since 2014, while Mr. Pedro Payout ratio 29,26 Queiroz Pereira, the chairman of the board of directors and majority shareholder of Dividend Yield 2,53 Profit margin 5,73 Semapa, owns directly and indirectly 70,5% of the share capital. EBITDA margin 22,82 ROIC 7,49 Dividend Policy ROA 3,07 ROE 14,54 Navigator’s dividend policy has consisted of distributing 80% to 120% of the net 0 50 100 150 income of the year to its shareholders. In 2015, the payout ratio was equal to 222%

PAGE 6/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

Figure 12 – Industry Dividend yield and due to an early earnings distribution to shareholders. The payout ratio will be kept Payout ratio (2017) Source: Bloomberg at a 100% level for the 140,0 120.3 113.0 upcoming years, driven by 120,0 100,0 Semapa’s decision to resort 63,0 68,1 60,2 80,0 51,7 50,35 60,0 36,4 to Navigator’s dividends to 40,0 Dividend yield 20,0 7,1 2,6 3,7 4,80,0 2,8 3,3 7,1 3,2 2,63 pay dividends to its 0,0 Payout Ratio shareholders – Semapa dividend payout ratio stood at 29,26% in 2017- and to invest in other group companies which are not as profitable as Navigator, as mentioned before. Also, Semapa’s net debt to EBITDA is high, standing at a 3,39x level in 2017, which increases dependency on Navigator’s dividend payments. However, forecasts in this valuation include a drop in the dividend payout to a 75%-85% from 2022 onwards, since the company has been using debt, in part to finance the dividends payout, which is not sustainable in the long-term. The dividend yield has been varying between 7,1% and 15,8% in the period of 2012-2017. For 2018, a dividend yield of 5,8% has been considered. As seen in figure 12 ,when compared to direct peers and the industry average (2,89%), it is clear that Navigator pays one of the highest dividend yields. Figure 13 – Net Debt Evolution (thousand €) Source: Navigator Company Debt As seen in figure 13, from 2014 to 2015, net debt increased from 312,9€ million to 800 000 700 000 692,4€ million mainly due to the issuance of new commercial paper programmes – 600 000 in the amount of 225€ million to finance investment projects and dividends payment; 500 000 400 000 and the renegotiation of the maturities of some of the outstanding commercial 300 000 programmes – in the amount of 125€ million. Also, Navigator resorted to debt to 200 000 100 000 partially finance the buying of AMS Star Paper, which was comprised of two loan 0 agreements and one short term loan, in the total amount of nearly 25€ million. Nevertheless, in 2015, Navigator started a debt restructuring programme with the purpose of extending maturities and reducing interest expenses, which included Figure 14 – Net Debt/Equity and Net Debt/EBITDA the early repayment of Portucel Senior Notes 5.375%, in the amount of €350 million Source: Navigator Company 200% 1,74 1,72 1,84 in 2015 and 2016. This allowed the company to save €16 million in expense costs. 150% 1,01 0,96 As debt increased, also net debt to equity ratio increased sharply from 22% to 57% 100% 57% 55% 61% in 2015. As mentioned before, Navigator has been contracting more debt to finance 50% 23% 22% its investment projects and pay dividends to shareholders. 0% In 2017, net debt to equity ratio stood at a 61% level. When compared to direct competitors, Navigator ranks in the middle, as seen in figure 15. Furthermore, as Net Debt/Equity the paper and pulp industry is a capital-intensive industry, we can expect net debt Net Debt/EBITDA to equity to be at a high level, which is actually true as the industry’s average stood

PAGE 7/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

Figure 15 – Industry Net Debt/Equity (%) - 2017 at 189,09% in 2017. Therefore, Navigator stands on a position of underleverage Source: Bloomberg compared to the sector. However, it is expected that Navigator stays in this position

Ind. Avg. 189,3 as investment needs will start decreasing from 2019 until 2023 and dividend payout KC 722,1 ratio will decrease from 2022 onwards. Consequently, debt will remain at lower Svenska Cell. 18,0 IP 155,0 levels. Even though net debt to EBITDA will reach 2.23x in 2020, it will drop below Stora Enso 39,2 2.0x from 2022 onwards. Altri 103,2 UPM-KYM. 3,4 Competition & Differentiation Strategy Mondi 32,9 The Paper and Pulp Industry is a capital-intensive and very competitive industry, in NVG 58,7 which world prices are defined in the market. Paper related outputs are considered 0,0 500,0 1000,0 undifferentiated goods, however Navigator has been able to differentiate itself from competitors by following a product and premium brands differentiation strategy based on product quality. Navigator premium goods represent 49% of the output,

Figure 16 – Integrated vs. Non-integrated mills Average Inputs consumption while the industry’s average is equal to 14%. The paper Source: Industrial Efficiency Data Tech base produced by the company is one of the highest-quality paper available in the market due to the high quality of the raw Tissue 7 1200 UWF Paper 14 1200 materials used in the production process. Furthermore, Pulp 0 100% Integrated Mills Navigator compares very favourably with its direct peers in terms Tissue 1640 18,1 of cost efficiency. Navigator has one of the highest EBITDA and UWF Paper 17,9 1280 EBIT margins – 24,3% and 15,5%, respectively – which leads to Pulp 11,2 640 Non-Integrated Mills strong financial key ratios, as seen below in figure 20. Both paper -350 150 650 1150 1650 mills are 100% integrated - pulp produced at the mills is Energy Use (kWh/Adt) Fuel Use (Gj/Adt) immediately incorporated in paper production - which allows the company to save in pulp consumption costs (e.g. Navigator does not have expenses Figure 17 – 2017 European UWF Paper Market Share with transporting pulp from one mill to another and only buys 85% of the pulp to Source: Navigator Company other suppliers). As seen in figure 16, integrated mills also require lower quantities of inputs to produce the same quantity of output. Therefore, costs of goods and Navigator services consumed – that include chemicals, pulp, energy and fuel consumed – of Mondi 19% integrated mills are, on average, 15% lower than non-integrated mills. Another of 31% Stora Enso 16% the metrics used in the industry to benchmark cost efficiency is the “cash production IP 10% cost”. The metric compares companies’ COGS. As seen in figure 18, Navigator has 12% UPM-KYM. 12% the lowest average COGS per ton produced – €208,4 - and the second lowest Other average operating expenses per ton - €440,3 - among its peers, which proves once again the company’s efficient cost structure.

Figure 18 – Paper and Pulp Direct Competitors Source: Bloomberg

In million € Navigator Mondi UPM- Altri Stora IP KYM. Enso Total Capacity (million tons) 3,1 9,6 13,7 1,0 22,0 28,4 UWF Paper Prod. Capacity 1,6 1,7 3,1 0,0 1,6 4,5 Pulp Production Capacity 1,4 4,2 3,6 1,0 9,1 3,7

PAGE 8/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

Tissue production 0,1 0,0 0,0 0,0 0,0 0,0 capacity Revenue 1633,1 7096,0 10010,0 656,1 10045,0 19286,1 Average selling price (€) 521,8 738,6 730,7 636,9 455,6 679,1 Operating expenses 1378,1 6139,0 8787,0 518,6 9207,0 18026,6 Cost of goods sold 652,2 3981,0 - 257,0 - 13571,2 Average Op. Expenses per 440,3 639,0 641,4 503,5 417,6 634,7 ton Average COGS per ton 208,4 414,4 - 249,5 - 477,9

Figure 19 – 2017 European Tissue Market Share Source: Navigator Publicly traded direct competitors include Mondi, UPM Kymmene OYJ, Altri, Stora Enso and International Paper in the UWF paper and pulp segments. Svenska 4% 4% 5% Cellulosa and Kimberly-Clark are the competitors considered in the tissue segment. 6% 39% Other important tissue players such as Renova, Goma Camps or Industrie Cartarie 6% Tronchetti could not be included in the comparison since they are private companies 7% 9% 12% and do not disclose financial information. Factors such as the size of the company, 8% position in the market, types of products sold and geographical have been taken Svenska Cel. Renova into consideration when choosing peers. ICT Navigator Navigator is the number one player in the European fine papers market and the Goma Camps Cel Tec fourth player in the Iberian tissue segment, even though it has the lowest total KC Cominter production capacity among direct competitors – 3,1 million tons. In other Dicepa Suavecell regions/continents, Navigator’s market share is not relevant (below 1%).

Figure 20 – 2017 Key Financial Ratios for the Industry Source: Bloomberg

In million € NVG Mondi UPM- Altri Stora Enso IP Svenska KC Industry KYM. Cel. Average Market Cap. 3050,8 10547,5 13818,4 1060,7 10425,6 19900,9 6039,0 35238,5 11456,0 ROE 17,2 18,9 11,5 26,0 10,6 39,5 7,8 43,5 8,96 ROA 8,6 9,2 7,2 7,7 5,2 6,4 3,5 15,3 7,38 ROIC 10,9 13,4 10,3 12,1 7,4 18,1 1,6 33,4 11,37 EBITDA 24,3 20,0 17,0 29,1 14,2 17,4 21,9 22,0 15,42 margin EBIT margin 15,5 14,1 12,5 20,9 9,3 10,8 15,1 18,1 8,92 Profit margin 12,6 9,9 10,0 14,6 7,1 6,6 11,3 12,1 6,34 FCF yield 6,0 4,1 9,1 10,0 6,0 1,5 6,2 5,0 5,71 Net Debt to 1,7 1,0 0,2 2,1 1,8 3,6 1,8 1,7 2,7 EBITDA

When analysing key financial ratios, it is clear that Navigator ranks above the industry’s average in every ratio, with the exception of ROIC – 10,9%. When compared to direct peers, Navigator stands in an upper-middle position. All competitors, with the exception of Altri (which is a Portuguese pulp manufacturer), offer a more diversified range of products – including coated papers, paperboard&packaging and care products. Therefore, they are not as exposed to one single market – the UWF paper market – as Navigator, which carries higher

PAGE 9/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

Figure 21 – 2016 Capacity Utilization rates risks for the company. This is one of the reasons why Navigator decided to start Source: RISI Info & Navigator Company producing tissue. Furthermore, both IP and KC are USA producers and are more

0,89 exposed to this market – accounting for 75% and 46% of revenue, respectively – Tissue 0,81 while the others are European producers mainly exposed to the European market. 0,89 Pulp 1 Most of north American mills are completely integrated and the market is well Paper 0,91 1 consolidated, with a small number of large players dominating the market. These 0 0,5 1 1,5 factors allow producers as IP and KC to have high profit ratios, as seen in ROE, Capacity utilization rates Industry ROA and ROIC presented figures. The European market is highly fragmented. Most Average producers are small privately held companies. Capacity utilization rates NVG In terms of capacity utilization rates, only Navigator’s tissue segment has a lower operating rate than the industry average. Navigator only started producing tissue in Figure 22 – Internet Penetration Rate (billion mid-2015; therefore, it has not yet completely established its market position. users) Source: Internet Statistics Furthermore, there was a fire in the Cacia mill in May 2016, which led to a 5 4,2 3,7 production stoppage. Both paper and pulp utilization rate have stood at a 100% level 4 3,4 3,1 2,8 for several years, which proves the manufacturing processes efficiency and the 3 2,5

2 high-quality of the machinery used.

1 0,54 0,33 0,39 0,424 0,464 0,495 0 2012 2013 2014 2015 2016 2017 Macroeconomics

Number of users The Pulp and Paper industry is positively correlated with global cycles. As seen in % global population figure 23, global real GDP growth has been at a 3,2% level, as economies recover

Figure 23 – GDP real growth rate from the latest financial crisis. Developing countries have a higher real growth rate Source: World Bank than developed economies – 4,8% vs. 2,3%. The trend is

6,0% 5,1% 5,1% 4,7% 4,8% 4,9% expected to continue in the following years. Private 5,0% 4,3% 4,4% 3,8% 3,9% 3,9% 3,8% 3,5% consumption is positively correlated with GDP, with global 4,0% 3,1% 3,2% 3,2% 3,0% 2,1% 2,3% 2,3% 2,2% and European consumption growing at an average 2% and 1,7% 1,7% 2,0% 2,15%, respectively, since 2014. 1,0% 0,0% A variable that is intrinsically correlated with paper 2014 2015 2016 2017 2018F 2019F 2020F consumption trends is digitalization. As digitalization Global Developing regions Developed regions increases, consumption of paper decreases, especially of

Figure 24 – Penetration rate by region (2017) printing&writing paper, as documents in paper format are substituted by the digital Source: Internet Statistics format. A proxy used for this variable is internet penetration rate. As seen in figure 22 , this rate has been growing fast since 2012, with 52% of world population using Global 52% internet by 2017. An interesting variable to analyse is the number of computers per Middle East 60% capita. Switzerland ranks in first place, with a value of 65; followed by the USA (57) Eastern Europe 67% and Sweden (51). On the one hand, real GDP and private consumption growth

Western Europe 87% contribute positively for paper demand, as populations have more income to spend. On the other hand, digitalization contributes negatively for paper consumption. The North America 89% latter effect will be more felt in developed countries, as seen in figure 24. 0% 50% 100%

PAGE 10/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

The Sector & Business Segments

Figure 25 – UWF paper revenue evolution (thousand €) UWF Paper 1 400 000 Navigator core business is the sale of uncoated woodfree/fine paper sheets, with 1 350 000 revenue accounting for 73% of total revenue in 2016 or €1,9 billion (latest official 1 300 000 data available). UWF paper is produced from bleached hardwood pulp which is 1 250 000 produced using Eucalyptus wood. This type of paper is used primarily for “writing & 1 200 000 reading” and properties include good strength and brightness. 1 150 000

Paper revenue has grown at an AAGR of 0,6% from 2012 to 2017. In the following

2018F 2019F 2020F 2021F 2022F 2016A

2015A two years, revenue is expected to grow at an AAGR of 4,8% as global paper prices 2017A/F will keep increasing. In the long-term, we expect prices to return to previous levels, Figure 26 – UWF paper production evolution with growth being driven by small production increases – AAGR will stand at (thousand €) 0,25%. 1640 1621 1623 1618 1617 Paper is produced in two different mills, one located in Setúbal, with a production 1620 1605 capacity of 820 thousand tons of paper and the other one located in Figueira da 1600 1587 1578 Foz, with a production capacity of 775 thousand tons. Total production capacity will 1580 1560 1555 increase slightly, as seen in figure ,as production processes become more efficient. 1540 Navigator owns 9 different brands of paper sheet: Inacopia, Pioneer, Target, Inaset, 1520 Soporset, Explorer, Multioffice, Discovery Navigator. Multioffice, Discovery and

Navigator are premium brands.

2017F 2018F 2019F 2020F 2021F 2022F 2016A 2015A UWF paper sale prices are positively correlated with global paper price indexes, Figure 27 – NVG paper price and FOEX A4 Copy Index evolution (Eur/ton) mainly with the FOEX A4 B Copy EUR/ton, that fluctuate according to demand and supply. For the past years, Navigator has been selling 802 2022F 838 paper at a discount, charging between 91% to 101% of the 801 2021F 837 817 2020F 854 index value. Since the beginning of 2017, the index has 834 2019F 871 been gradually improving, as seen in figure 27, as capacity 813 2018F 850 779 2017F 814 has been closing all around the globe. The trend is 774 2016A 824 expected to continue until the end of 2019. 832 2015A 823 Since 2008, the printing&writing paper market has been 700 750 800 850 900 suffering major drawbacks due to the spread of digital NVG sale price FOEX A4 Copy Paper Index contents and, consequently, the replacement of printed documents by the digital format. In 2016, global output amounted to 95 million. Figure 28 – NVG’s UWF Paper Revenue by region Source: Navigator Company From 2012 to 2016, the global market slowed down at a CAGR of -1,9%, driven by the decrease in paper consumption in developed regions, with UWF paper 12% 17% slowing down at a more modest rate of -0,5%. Nevertheless, the growing 71% popularity of 3D printing technology is one of the key trends for the future of the UWF paper market, valued at €2.4 billion in 2016 and expected to reach €11,2 Europe MEA America billion by 2021.

PAGE 11/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

Figure 29 – Growth evolution of global P&W and Between 2012 and 2017, not only UWF European paper demand decreased at a UWF paper demand and production capacity Source: Risiinfo CAGR of -1,0%, with 2017 registering a slightly higher demand, but also production 1,0% capacity decreased at an CAGR of -2,0%. Small suppliers have been exiting the 0,0% market due to the latest consumption trends and exploring more promising 2012 2013 2014 2015 2016 -1,0% markets, such as the Paperboard & Packaging market, which is estimated to grow -2,0% at a CAGR of 4,2% until 2024, reaching €315 billion. As seen in figure 29, global -3,0% capacity is decreasing at a faster rate than global demand, which is not the case Growth in P&W demand for the European market, as seen in figure 30. Growth in UWF demand Even though projections point out to a global decrease in consumption of 2,2 Growth in P&W capacity million tons by the end of this year, there is a disparity between developed and Figure 30 – European UWF Paper Demand and Supply developing regions. North America P&W paper demand has been shrinking at the Source: Navigator Company highest rate, at a constant 4,5%-5% for the last three years, with the sub-segment 10 UWF paper shrinking at an average 4%. This trend is expected to continue in the 8,3 8,2 8,2 8,1 7,7 7,5 8 following 2/3years, with demand decline slowing down afterwards. Latin America 7 7 7 6,9 6,6 6,7 6 demand for UWF paper has been shrinking in the past years going from 3,6 million 4 tons in 2012 to 3,4 million tons in 2016 – a 5,5% decrease - but in 2017 this trend 2 changed, and demand actually increased 1%. Projections point out to a steady 0 2012 2013 2014 2015 2016 2017 increase of 1%-2% for the following 2 to 3 years.

Production Capacity Demand Worldwide paper exports value amounted to €14,2 billion in 2016, which represents a 13,4% decrease from 2012 level. As seen in figure 32, the Figure 31 – UWF paper global production and international trade Source: FAO United Nations largest exporter is Germany (12,5% of exports), followed by China (11,8%). China has the highest surplus in 40 32 31,6 30,9 31 30,9 the international trade of paper – €12,8 billion – 30 which gives the country a strong competitive 16,4 15,8 16,4 20 14,8 14,5 15,3 14,1 13,8 14,7 14,2 advantage. Also, production capacity is 10 concentrated mainly in Asia (10,1 million tons 0 produced annually), Europe (9,3 million tons) and 2012 2013 2014 2015 2016 North America (8,4 million tons produced). Production (million tons) Globally Traded Quantities (million tons)

Globally Traded Quantities (billion €) One of the current main challenges the industry is facing is the rise of global trading barriers and Figure 32 – Top country exporters of paper by revenue (€ billion) protectionism through the imposition of taxes and export duties. Namely in the USA, as capacity is closing at an YOY 2,8% rate or minus 100 million tons of paper Sweden 7,5 per year, imports have increased sharply. To stop imports volume from exploding, Finland 0,75 US authorities have been accusing several foreigner suppliers, including USA 1,34 Navigator, of dumping practices in the country and have charged them with anti- China 1,64 dumping duties. Figure 34 illustrates the import duty rates charged to foreigner Germany 1,74 producers.

0,0 10,0 20,0

PAGE 12/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

Figure 33 – Top country importers of paper by Figure 34 – Imports duty rates charged by import value (€ billion) USA authorities

Australia Paper 222% China 0,36 Suzano 22% Navigator 8% Italy 0,46 APRIL Indonesia 23% France 0,7 APP Indonesia 13%

Germany 1,21 Asia Symbol 91% APP China 156% USA 1,47 UPM China 326% 0,0 10,0 20,0 Sun Paper 326%

Pulp Figure 35– Pulp revenue (thousand €) Navigator also produces and sells Bleached Eucalyptus/Hardwood Kraft Pulp, 250 000 being the European leader and the fifth leading producer worldwide. Total output 200 000 in 2017 amounted to 1,48 million tons, of which nearly 1,17 million tons or 80% of 150 000 the output was integrated in the production of paper. The company’s pulp market 100 000 share in Europe is less than 1% as supply amounted to 311 thousand tons in 2017. 50 000 As expected, revenue level is relatively low, standing at €151,4 billion in 2016 0 (latest official data available).

Pulp is produced at three different mills. Setúbal mill - with an annual production

2022F 2017F 2018F 2019F 2020F 2021F

2015A 2016A capacity of 580 thousand tons - and Figueira da Foz mill - with an annual Figure 36 – Pulp production (thousand tons) production capacity of 550 thousand tons - are completely integrated. The third 2 000 mill, located in Cacia, has an annual production capacity of 340 thousand tons. A 141 141 142 1 500 245 210 253 291 311 portion of the latter’s output is sold to other European paper producers (93% of 1 000 pulp revenues). 1 336 1 410 1 413 1 415 500 1 171 1 179 1 169 1 270 Sale prices are also correlated with the respective European Index – the FOEX 0 BHK Pulp Index (€/ton). For the past years, Navigator charged prices that

accounted for 79% to 91% of the index value. Since the beginning of 2017 there

2017F 2018F 2019F 2020F 2021F 2022F

2015A 2016A

Pulp used by Navigator Pulp sold has been an upward trend in global pulp prices that is expected to continue until the end of 2019. From that year onwards, the index prices are expected to go Figure 37 – NVG’s and Index Pul price evolution (€)) back to previous values and Navigator’s pulp

566 revenue will decrease, as seen in figure 35. 2022F 662 578 2021F 676 From 2012 to 2016, the global BHK pulp market 608 2020F 711 745 grew from 129,5 million tons to 139,0 million tons – 2019F 871 696 2018F 814 at an CAGR of 1,8%, as seen in figure 38. 619 2017F 724 520 China has been the largest producer of pulp – 99,3 2016A 628 557 2015A 706 million tons of output in 2016 – and the largest 0 100 200 300 400 500 600 700 800 900 1 000 consumer of pulp worldwide accounting for nearly NVG's pulp sale price FOEX BHKP Index 34% of global demand. From 2006 to 2016, China’s

PAGE 13/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

Figure 38 – 2916Global pulp production. Imports and Exports Source: FAO United Nations demand rised from 7,9 million tons to 21,1 million tons, which represents a 21,7% CAGR. Europe 136,3 139 150 129,5 130,3 135,5 comes in second place, with a demand of 18,9 100 million tons in 2016. However, consumption in 54,3 47,2 49 50 51,9 50 Europe has been falling since 2006 at an CAGR 24 23,2 23,2 27,8 27,8 of 2,0%. North America comes in third place, with 0 a consumption of 7,7 million tons in 2016 which 2012 2013 2014 2015 2016 represents a decrease of 1,2 million tons when Production (million tons) Globally Traded Quantities (million tons)

Globally Traded Quantities (billion €) compared with 2015. In terms of international trade, the largest Figure 39 – 2016 Pulp Production, Exports and Imports by region (million tons) Source: FAO United Nations exporters of paper are South America and

Europe; while the largest importers are Asia and 15,1 Europe 18,8 31,8 Europe. North America has the highest

4,9 Asia 27,1 production capacity, followed by Europe. 26,5

20,3 However, given the recent paper capacity South America 0,92 26,3 closures in Europe and in the USA, we can expect 14,3 North America 5,7 51,6 pulp imports from Asia to increase in the medium-

0 10 20 30 40 50 60 term. Exports Imports Production

Figure 40 – Tissue revenue (thousand €) Tissue

In 2015, Navigator decided to diversify its business by entering the tissue market. 250 000 200 000 The company acquired AMS Star Paper, a small Portuguese tissue producer 150 000 located in Vila Velha do Rodão, for €80 million. At the time, the company had a 100 000 production capacity of 59 thousand tons of tissue and had developed a partnership 50 000 with one of Navigator’s competitors, Altri. After acquiring AMS, Navigator decided 0 to expand the capacity to 70 thousand tons and by the end of the year output amounted to 68 thousand tons - 33 thousand reels and 35 thousand finished Reels sales Finished goods sales products. The majority of reels produced is used internally in converting goods production. Only 5% to 20% is sold to other tissue producers. Products are Figure 41 – Tissue production (thousand tons) included in consumer tissue (sold to supermarkets and stores) or in away-from- 134 150 125 127 130124 130 114 107 home segment (sold to hotel chains), accounting for 75% and 25% of revenue,

100 76 69 respectively. In 2016, revenue level stood at €67,45 million. In 2022, tissue 56 49 4742 50 3335 revenue will account for 10,9% of total revenue. It is important to note that there are synergies with other core businesses, as tissue is also produced from 0 Eucalyptus wood. Currently, nearly 99% of revenues are sourced from the Iberian market, however

Reels Finished goods the company intends to expand to other regions, including the Middle East.

PAGE 14/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

Figure 42 – 2016 Consumption by Region Tissue has become one of the most promising markets within the Paper and Pulp Source: Risiinfo Industry, as “traditional” paper segments have lost relevance in a more

13% technological world. The segment average annual global growth rate has been 25% 11% equal to 3,5% since 2006, reaching a total amount of 36,4 million tons in 2016. This growth is driven by Eastern Europe and Asia’s increasing demand. Nevertheless, 12% 21% North America is still the largest consumer, accounting for 25% of demand, followed 18% by Western Europe (18,3%) and China (21,3%), as seen in figure 42. These North America China markets, except for the Chinese one, are growing at very modest rates –an AAGR Western Europe Asia of 1,5% and the second, at an AAGR of 1%. Consequently, in the next decades, South America Other developing countries’ demand will surpass developed countries´ demand, since

Figure 43 – 2006-2016 Consumption AAGR by Eastern European market is expected to keep growing at an AAGR of 4,5% and Region Source: Risiinfo Asia, at an AAGR of 5%, with Chinese demand growing at an AAGR of 8%.

Europe’s consumption amounted to 8,65 million tons of tissue with the largest Africa 6% consumer being Germany (17% of consumption), followed by the UK (13%), France Asia 6% (10%) and finally, Iberia (10%). According to Navigator, the UK tissue market could Eastern Europe 6% be one of the most attractive markets for the company, as it is one of the largest Western Europe 1% European markets and most of UK’s tissue producers are non-integrated which China 8% means that Navigator has a competitive advantage regarding cost efficiency. North America 2% In Europe, and particularly in the Iberian Peninsula, supply has been increasing in

0% 5% 10% the latest years due to more aggressive competition and new capacity entering the market – in 2017, capacity increased by 241 thousand tons. In addition, pulp prices Figure 44 – Iberian Production Capacity in 2017 (thousand tons) Source: Navigator Company are expected to keep increasing at least in the next two years which will lead to

further pressure on European tissue producers´ profitability margins. Suavecell 60 Dicepa 67 Navigator faces a competitive market with well-established players. The largest Cominter 78 producer within Iberia is Svenska Cellulosa, followed by Renova and Industrie KC 90,0 Cel Tec 97,0 Cartarie Tronchetti. Navigator is currently the 4th largest player in Iberia, Goma Camps 115 Navigator 135 nevertheless, with the implementation of the tissue line at Cacia mill, Navigator’s ICT 120 production capacity will surpass Renova’s, possibly becoming the second largest Renova 187,0 Svenska Cel. 616 player. At a global scale, Navigator is a small player, as seen in figure 45. Capacity 0 200 400 600 800 utilization rates in this segment are relatively low when compared to other segments Figure 45 – Production capacity of the Largest tissue producers (thousand tons) Source: as they stand at 89% in Europe, mainly because demand has been growing at a European Tissue slower rate than new capacity is entering the market. In the long term, European Metsa 602 Kruger 650 producers will have to look for opportunities outside the continent, especially in WEPA 700 developing countries where tissue paper consumption per capita is expected to CMPC Tissue 720 Sofidel 1020 increase in a few years while disposable income and urbanization rates grow and Hengan 1150 P&G 1370 health and hygiene conditions improve. GP 2537 APP 2770 KC 3817 ESSITY 4550 0 1000 2000 3000 4000 5000

PAGE 15/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

Energy

Figure 46 – Revenue (thousand €) and price (€) evolution During pulp and paper production process, energy is also

150 000 123 742 72 115 417 produced. Nearly 78% of the energy produced is sold to the 112404 107520 70 101719 98269 91810 68 100 000 83834 national grid and the remaining is used by Navigator. The 66 64 company has been selling energy at a subsidized price to the 50 000 62 60 national grid, as part of a plan defined by the government to 0 58 promote the optimization of the energetic resources in Portugal. However, since 2012, due to the economic and

Revenue Subsidized sale price political crisis and the presence of Troika in the country, renewable energy regulation regarding energy produced by Figure 47 – Quantities produced by destination (tons) co-generation plants has changed and the subsidized prices have become lower

3000 for plants with a certain age of production activity. This change in the value of

2500 subsidized prices has already happened for two of the plants, Cacia and Figueira

2000 330 473 573 612 692 936 1019 1099 da Foz plants, which have already changed to a self-consumption basis since it 1500 became more expensive for the company to sell energy and buy it back than to 1000 1961 1641 1653 1654 1615 1404 1350 1290 500 consume it directly. In 2020, Setúbal mill will be affected by the change as well, so

0 forecast include the change to a self-consumption basis by that year. Total revenue stood at €115,4 million in 2016, registering a CAGR of – 20% since 2012. Energy

Energy sold to the grid Energy used by NVG revenue accounts for 6% of total revenue. Total energy produced by Navigator has been reducing since 2013 at a CAGR of - Figure 48 – Quantities produced by source (tons) 3,4%, as seen in figure In 2017, the quantity amounted to 2226 GWh. However, as 3000

2500 explained above, with the decrease in subsidized prices, Navigator has been

2000 reducing the quantities sold to the grid, as seen in figure 47, which has a positive 948 957 962 957 1074 879 920 934 1500 impact in costs related to energy consumption. However, the price decrease will 1000 1 3031 3291 3561 3791 4041 428 have a negative impact in 2018-2022 EBITDA of €22 million. 500 12171 235

0 Energy is generated by seven generation units located in Setúbal, Figueira da Foz and Cacia. Three different generation processes are used - natural gas

from biomass from gas natural cogeneration cogeneration process, biomass cogeneration process and from biomass power plants. In addition, Navigator is increasing the use of renewable sources of energy Navigator produces 5% of the energy generated in the country and decreasing the use of CO2 intensive sources, as seen in figure 48.

Forestry

Navigator manages 118 thousand hectares of forestry through the subsidiary “Viveiros Aliança”, which owns four nurseries located in Pegões, Constança, Penamacor and Eixo. About 74% of the hectares are planted with Eucalyptus and the company uses almost 100% of the wood that can be extracted from this tree in pulp production. However, Navigator still has to buy wood to national and

PAGE 16/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

international producers from Spain, Uruguai and Brazil. In 2016, the amount of Figure 49 – Wood extracted and wood bought (m3) wood extracted amounted to 607 thousand m3 of a total of 4,5 million m3 needed.

5000 4500 Apart from Eucalyptus, there are 12 million species planted. Therefore, forestry sale 4000 products included, in 2016 (latest data available), 14 thousand arrobas, 109 3500 3000 thousand litres of wine and 28 thousand tons of softwood. In 2016, revenue 4071 4080 2500 3654 3803 3858 4050 4168 4187 2000 amounted to 14,6 million €. Even though forestry revenue varied over the years, as 1500 seen in figure 50, it has always been below 1% of total revenue. Therefore, forestry 1000 500 sales are not significant. Only Eucalyptus wood extraction is an important activity 618 607 582 495 470 465 591 591 0 for the company, as wood is the main raw material used in pulp production. Every year, large extents of Portuguese forests are burned down. Only in 2016, a Figure 50 – Forestry Revenue (thousand €) total area of 2,497 hectares was affected by fires, which corresponds to 2.1% of the

1,0% 14642 16000 managed area. In 2017, the situation deteriorated even further due to the quantity 0,9% 12405 14000 0,8% of fire occurrences during June and October that destroyed thousands of hectares. 11280 12405 12000 0,7% 9863 0,6% 8384 9757 10000 Therefore, 2017 and 2018’s forecasted figures are lower than 2016’s, as seen in 0,5% 7964 8000 0,4% 6000 figure 49. To mitigate the fire risk, the company invests 3 million € in fire prevention, 0,3% 4000 0,2% yearly. Furthermore, it has become very difficult for forestry managers to get 0,1% 2000 0,0% 0 permission from the ICNF – Institute of Nature Conservation and Forests -, to replant and plant new Eucalyptus areas in Portugal, as a regulation limiting the

% of total revenue Forestry revenue planted area has been issued by the government in August 2017 (law nº77/2017). Therefore, Navigator’s plantation Eucalyptus in the country is limited to the current managed areas. Consequently, yearly m3 of extracted wood will remain at current levels.

Mozambique Project Figure 51 – Eucalyptus Planted area (thousand hectares) One of the constraints of European woodland, specifically the Portuguese one, is 40,0 35,4 35,0 32,4 that rents are not as productive as in other parts of the world, such as South 29,4 30,0 26,4 America or Africa. Wood can only to be extracted from the same “place” with a 23,4 25,0 19,5 time lapse of 12 years. In other regions, such as Brazil or Mozambique, this period 20,0 15,6 15,0 11,7 is usually equal to 8 years. Therefore, Navigator decided to plant an Eucalyptus 10,0 6,9 nursery in Mozambique. Initially, the project included the plantation of 356 5,0 3,0 thousand hectares of land in Zambezia starting in 2014 and the construction of a 0,0 pulp factory with an annual production capacity of 1,5 million tons in 2023. The extracted wood would then be used to produce pulp that would be exported to Asia, namely China. However, by the end of 2017, the company had only forested 11,7 thousand hectares of land and the decision to construct the mill had been differed to 2023. The investment is being supported by the World’s Bank International Finance Corporation, which has acquired 20% of Portucel Mozambique share capital so far, even though it has committed to acquire a higher percentage of the capital. Given the current political and economic instability in the

PAGE 17/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

country, due to rising debt levels, rising US interest rates, lower commodity prices, Figure 52 – Wood extraction (m3) lower demand from international trading partners and fall in investment levels, 454454 500 427 there has been a delay in the progress of the project. Furthermore, in 2016, the 400 373 400 346 319 International Monetary Fund and the World Bank have discovered unrevealed 292 300 public debt in the amount of 1,4 trillion USD$ or nearly 11% of the GDP and

200 decided to stop financing the country. By the end of 2017, the assets related to the

100 Mozambique project had been impaired in 99% of the initial value recorded in the

0 balance sheet (almost in 95€ million), as Navigator considers that given the current

country conditions the project will be negatively affected, and Navigator will not be

2024F 2025F 2026F 2027F 2028F 2029F 2030F 2023F able to recover the initial investment. However, the company has also publicly stated that intends to keep investing in Eucalyptus plantation for the following years, but at a much slower pace. Yearly capital expenditure will be kept at 10€ million. Furthermore, after interviewing the company’s Investor Relations, it is very unlikely (probability below 5%) that Navigator will construct the pulp factory in 2023. Therefore, a conservative approach has been conducted and cashflows related to that part of the project have not been included in the valuation. The project has been valued at book value. Nevertheless, the valuation includes the forestation of the remaining hectares, however at a slower pace, as mentioned before, reaching a total planted area of 35,4 thousand hectares in 2023. Since the mill will not be constructed, Investor Relations has stated the company is evaluating the costs of transporting the wood extracted from Mozambique nursery to Portugal. The wood will then be used to produce pulp in Portuguese mills. This is the most likely scenario to happen since demand for wood is much higher than current extraction level and costs related to wood acquisitions to third parties are very high (between 34% and 37% of the cost of inventories sold and consumed). Furthermore, tissue production will require an increase in pulp production and consequently in wood procurement. Pellets Project

Figure 53 – 2017 Pellets consumption, by Pellets are biofuels created by the compression of an organic material or biomass. region Wood pellets are produced from industrial wastes from the manufacturing of wood

10% Western products. Pellets are used to generate electricity and residential heating. Europe 8% The pellets market has been growing at a large scale, especially in Western Europe Asia 9% and North America, for both industrial and commercial purposes. The global wood North pellet demand amounted to 8,15 billion € in 2017 and forecasts point out to a total America market size of 18,6 billion € in a ten-year time, which accounts for a CAGR of 8,7%. 73% Other The main driver for this phenomenon is the rise in the prices of other fuels/substitutes, such as natural gas and oil for the past years and the uncertainty

PAGE 18/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

Figure 54 – 2016 pellets production, by region that surrounds both prices in the future. In addition, pellets are an environmental (million tons) friendly source of energy, so the consumption has been stimulated by governments. 12 10,7 Developing countries contribute to only 1% of consumption, as supply is low and 10 8,5 environmental issues are not a priority. Therefore, growth in the medium to long 8 term will be driven by demand in developed economies. Furthermore, the Asian 6 market, is expected to grow at a CAGR of 9,9%. 4 3 3 The largest players are located in both South and North America, namely in Chile, 2 0,4 Brazil and Canada. The USA is the largest producer worldwide, with a production 0 Oceania South China Western North capacity of 9,2 million tons in 2016 that will increase to 14,6 million in 2020. These America Europe America countries also play an important role in international trade. Particularly, exports from Figure 55 – 2017 US largest pellets producers capacity (million tons) the USA to Europe amounted to 4,1 million tons or 71% of Europe’s total import

volume in 2015, as Europe is the largest importer – imports amounted to 5,8 million 2,5 2,2 2 tons. Nevertheless, supply has been increasing as wood extraction levels keep 1,5 1,3 increasing and more manufacturers, namely in Sweden, are looking for innovative 1 0,7 opportunities within the wood products market. 0,5 0,35 0,5 Navigator decided to enter the pellets segment in 2015 and started building a pellets 0 mill - Colombo Energy - in Greenwood, USA, with a final annual production capacity of 450 thousand of industrial and domestic grade pellets. Initial investment amounted to €112,8 million. Production started in September 2016 and revenue amounted to €1,5 million in 2017. However, Navigator´s expectations regarding the segment performance were not achieved and the company decided to sell the Figure 56 – Cashflows of the pellets project (thousand $US) factory in the end of 2017 to Enviva, a Northern American wood pellets producer

that is one of the main players in the global market. The sale was Disposal 134500 finalized in mid- February this year for USD$134,5 million (€107,7 -1919,5 Other expenses -2726 Enerpar fee million), generating a gain of €15,2 million in 2018’s EBITDA, as the -6381 Payroll costs pellets assets book value were valued at nearly €92,5 million. -12477 Cost of revenues Navigator will receive the proceeds in two tranches, the first one, in -23504 Expenses Revenues 19195 the amount of USD$89,5 million, this year (66,5% of the total value); -126847,88 Investment and the second tranche, in 2023. The net present value of the project -200000 -100000 0 100000 200000 has been computed in order to understand how much value the pellets segment has created for Navigator. Therefore, the NPV includes cash inflows and outflows related to the initial investment, recurring investments, revenues, operating costs and disposal proceeds of the segment. To compute the discount rate, a WACC based on the specifics of the pellets industry has been calculated. Most of the pellets producers are privately held companies, but 18 publicly traded peers specialized in pellets production and located mainly in North America have been chosen. After collecting information regarding the unlevered beta, capital structure and cost of debt of each of the peers, the group variables’ average were computed and used as proxy for Colombo’s Energy

PAGE 19/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

variables - 1,91; 42,01% and 4,4% respectively. To compute the cost of equity, the Capital Asset Pricing model was followed. The risk-free rate used was the 10y US government AAA bond yield and the market risk premium was computed as the average of the difference between the monthly return of the MSCI World in US$ and the monthly risk-free yield, from January 2015 to January 2018. The cost of equity was equal to 14,58%. Finally, a WACC of 11,10% was obtained. Afterwards, the Net Present Value of the project was computed at 2015 values, by discounting the cash flows generated between 2016 and 2023 by the WACC, taking into consideration the numbers of years elapsed. Finally, a NPV of USD$-37,29 million was reached, which corresponds to €-36,01 million, taking into consideration yearly exchange rates for the periods. In conclusion, the pellets project has a negative NPV, which means that it destroyed value for Navigator. Furthermore, after the announcement of the sale of the pellets business on the 29th of December, Navigator’s share price appreciated by 4,47% in two days, going from €4,25 to 4,44€, which shows the market support of Navigator’s divestment decision. Figure – 57 CAPEX and depreciation evolution (thousand €)

250000 Main Value Drivers 200000

150000 CAPEX

100000 Investment in machinery and in efficient production processes is essential for 50000 companies to remain competitive in this industry. Since 2015 that Navigator has 0 been investing at a faster pace, with CAPEX amounting to €455,9 million in 2015- 2017. The company has engaged in several projects that require large amounts of D&A CAPEX capital expenditure, as seen in figure 58. Currently, the company is engaged in a

Figure 58 – Past CAPEX projects (million €) cost cutting programme - M2 -, which aims to reduce variable costs in 100 million

Mozambique 50,3 €, in 2015-2019. Tissue line 34,4 Projected CAPEX includes the creation of a tissue line in Cacia, in the total amount Pellets 114 of 120 million €, from which expenses have been spread between 2017 and 2018. Pulp 42 The new line will start operating in mid-2018; and the expansion of pulp production

Figure 59 – 2017 Reinvestment rate (%) capacity at the Figueira da Foz mill from 580 to 650 thousand tons, which

NVG -3,50 investment amounted to 96 million €. Mondi -2,45 Furthermore, according to the company, between 2018 and 2022, Navigator will UPM-Kym. 4,26 spend a total 200 million € in CAPEX, including both projects mentioned above. Altri 26,03 On average, depreciation has been higher than investment in capital, which means Stora Enso 5,11 that Navigator has not been able to “refurbish” its operating assets. By comparing IP 25,32 Navigator reinvestment rate with the direct peers’ rate, as seen in figure 59, we can Svenska Cell. 256,20 KC 343,85 state that only Mondi is in a similar situation, as it has registered a negative reinvestment rate (-2,45%). Other competitors are reinvesting at high rates,

PAGE 20/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

especially the tissue competitors, with rates of 256,20% and 343,85%. Navigator’s situation is unsustainable in the long term; therefore, from 2023 onwards, projected CAPEX will be higher than depreciation.

Figure 60 – Production capacity by segment Revenue (thousand tons)

Revenue key drivers include machines’ capacity utilization 264 2022F 1557 1617 254 rates, quantities produced and sale price. Firstly, for all 2021F 1554 1623 240 2020F 1550 1621 segments, quantities produced will vary in line with the 231 2019F 1546 1618 investments in CAPEX – both expansion and maintenance - 144 2018F 1515 1605 105 within that segment. For both pulp and paper segments, 2017 1480 1608 89 2016A 1470 1587 capacity utilization rates are forecasted to remain at 100%. 2015A 68 1571 1424 Events that cause lower rates – fire, machines damage - are 0 500 1000 1500 2000 impossible to predict. For the tissue segment, reels capacity Tissue Production UWF Paper Production Pulp Production utilization rate will reach 100% in 2020 and finished goods Figure 61 –Average segments prices (€) and capacity utilization rates will reach 100% in 2022, since as years go by, Navigator profitability ratios (%) will be able to maximize production. 832 813 834 817 900 779 801 802 774 745 800 696 As seen in figure 60, pulp capacity will increase by 5,2% from 2016 to 2019 due to 619 608 700 557 578 566 520 600 the investment projects previously mentioned. Paper production capacity will 500 400 increase slowly, as smaller investments are made to improve production efficiency, 300 reaching 1,617 million tons in 2022. Tons of paper produced per ton of pulp used 200 63 70 68 65 63 70 68 65 100 will be kept at 0,20 for the Figueira da Foz mill and at 0,23 for Setúbal mill. Tissue 0 2015A 2016A 2017 2018F 2019F 2020F 2021F 2022F production will increase from 89 thousand tons in 2016 to 240 thousand tons in UWF Paper Price Pulp Price 2020, as the new Cacia tissue line will start operations this year. Energy price In terms of pricing strategy, a conservative approach has been followed and 1600 forecasts regarding pulp and paper price charged are in line with past figures, with 1400 1200 pulp sale price estimated at 85,5% of the FOEX BHK pulp index forecasted; and 1000 800 paper sale price estimated at 95% of the FOEX A4 B Copy index forecasted. For 600 400 the tissue segment, there is a different price for reels and finished goods, with the 200 latter being higher than the first, as seen in figure 61. As Navigator just entered 0 2015A 2016A 2017 2018F 2019F 2020F 2021F the market two years ago, increases in both prices are expected to be in line with Tissue Average Price Reels price peers’ pricing strategy. Energy prices will depend on the subsidized price that the Converted goods Price government will pay Navigator. As prices will keep decreasing until 2019, reaching 30,0% a value of 63€ per GWh in that year, they will increase again in 2020 to 70€ per 25,0%

20,0% GWh, as Setúbal natural gas cogeneration unit will switch to a self-consumption

15,0% mode.

10,0% In terms of profitability measures, ROE, ROIC and EBITDA margin will reach the 5,0% highest values in 2018 – 18,7%; 13,5% and 26,5%, respectively -, as global pulp 0,0% 2015A2016A 2017 2018F 2019F 2020F 2021F 2022F and paper prices are forecasted to increase and Cacia tissue line starts to operate.

ROE ROIC EBITDA margin In the following years, these ratios will return to previous levels.

PAGE 21/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

Costs

Figure 62 – Total costs (thousand €) Cost of inventories sold and consumed accounted for 54% of total costs in 2016.

1400000 57,0% Two of the raw materials, wood and chemicals, account for nearly 50% of COGS 56,0% 1350000 55,0% as they are indispensable to production. Since expenses related to these materials 1300000 54,0% 53,0% have increased at a fast pace until 2014, Navigator launched a cost cutting 1250000 52,0% 51,0% programme in 2015 focused primarily on variable costs, especially on wood, 1200000 50,0% 1150000 49,0% 48,0% chemicals, water and fuels. In2015-2017, Navigator was able to save 48€ million. 1100000 47,0% Wood costs depend on the difference between tons of wood needed and tons of wood extracted from own lands. As in 2023, Navigator will start extracting wood Total Costs % COGS from Eucalyptus planted in Mozambique nursery, wood purchased to suppliers will

Figure 63 – COGS by item (thousand €) decrease. Consequently, from 2016 to 2023, wood costs will decrease 6,1%.

Energy costs will also decrease since own consumption of energy will increase due 740000 40,0% 720000 35,0% to changes in subsidized prices. Therefore, between 2016 and 2020, these costs 700000 30,0% 25,0% 680000 20,0% will decrease by 4,0%. 660000 15,0% 640000 10,0% In addition, operating costs related to personnel expenses – wages, pensions – are 620000 5,0% 600000 0,0% expected to increase in the following years as Navigator is recruiting more employees, especially in the tissue and forestry segment. However, as wages are COGS Wood lower in Mozambique, average salary will decrease in 2018 and 2019 and increase Natural gas Other fuels

Chemicals Pulp slowly in the following years, in line with inflation. Furthermore, transportation costs have a substantial role in the industry, as Figure 64 – Employee costs (thousand €) products are transported through maritime transport and by road, to all parts of the

250000,0 5,0 globe, creating a necessity of having an organized logistics hub around the world. 200000,0 4,0 In 2016, maritime transport accounted for 65% and 85% of paper and pulp exports, 150000,0 3,0 100000,0 2,0 respectively. Tissue is almost 100% transported by road as consumers are mainly 50000,0 1,0 located in Portugal and Spain. 0,0 0,0 Transportation costs have accounted for 9%-12% of Navigator’s total costs from 2014 to 2016. These costs are highly dependent on fuel world prices. Given the low Payroll costs oil prices since 2014, transportation costs have also decreased. However, in the Average salary

Number of employees long-term fuel prices will increase and consequently, transportation costs will increase. Moreover, expenses with advertising have substantially increased in Figure 65 – Transportation costs vs oil price 2016 – growing 18,8% - when the company started selling tissue products. Since

135000 70,00 tissue is a more “differentiated” and client focused product, advertising starts to gain 130000 60,00 125000 50,00 a relevant role in Navigator’s business model. Advertising costs will grow in the 120000 40,00 115000 future as Navigator becomes a main player in the Iberian tissue market. 30,00 110000 20,00 In terms of cost structure, variable costs accounted 118% of fixed costs in 2016. 105000 100000 10,00 The ratio will steadily decrease, as the company is reducing variable costs, until it 95000 0,00 reaches 109% in 2022.

Transportation costs Brent oil price

PAGE 22/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

Valuation

The methodology used to value Navigator was a Discounted Cash Flow Analysis. Even though Navigator separates its business in four different segments: paper, pulp, tissue and others (energy, forestry and pellets), all segments are included within the paper and pulp industry (energy produced is the result of paper production process). Forecasts have been made for the years 2018-2030. The valuation includes projections for the years 2019-20130 and a terminal value with a perpetual annual growth of 0,5% which is in line with previous years expected FCF growth and market forecasts. The WACC used to discount the cash flows is equal to 5,45%. Finally, the fair total Enterprise Value amounts to €4373,622 million. By subtracting net non-operating liabilities, net debt and minority interest to enterprise value, we reach the total equity available to shareholders, which is equal to €3664,796 million. Finally, by dividing this value by the total number of shares outstanding - 717,500 million -, we get a share price of 5,11€.

Cost of Capital

To calculate the discount rate to value the company, the Weighted Average Cost of

Figure 66 – Peers Unlevered Betas Capital formula was used, since capital structure includes both financial debt and

NVG 1,160835 equity. Both the cost of equity and debt were estimated. To estimate the cost of Mondi 0,751522 equity, the Capital Asset Pricing model has been used. Firstly, a group of 8 peers UPM-Kym. 1,170787 (including Navigator) has been considered – the group includes the competitors Altri 1,38 mentioned in chapter “Competitors and Differentiation Strategy”. Every company’s Stora Enso 0,91 levered beta has been calculated by regressing its monthly returns on the Eurostoxx IP 0,48 600 monthly returns from March 2013 to March 2018. The levered betas were then Svenska Cell. 0,7 KC 0,04 unlevered. To calculate Navigator’s unlevered beta, a weight of 85% has been given Weighted Avg. to the average unlevered beta of the pulp and UWF paper competitors group, while Unlevered Beta 0,89 a weight of 15% has been given to the tissue competitors group. The weights have Figure 67 – Estimation of NVG been chosen based on the relative weights of the segments’ revenue in total WACC revenue in the medium term. An unlevered beta of 0,885 was obtained. To find MRP 4,96% Risk free rate 0,6% Navigator´s levered beta, the target capital structure of 40% and the future tax rate Beta Equity 1,14 of 27,5% have been considered. Finally, a levered beta of 1,138 was obtained. Cost of equity 6,26% For the risk-free rate, the 10y AAA+ Eurozone bond yield was considered – 0,85%. Cost of debt 4,94% For the market risk-premium, the monthly returns of the risk-free bond were CLR 0,0156% subtracted to the monthly returns of the Eurostoxx 600 from March 2013 to March Tax Rate 28,5% Target D/E 40% 2018, reaching a market risk premium of 4,96%. Finally, a cost of equity of 6,26% WACC 5,45% was obtained. Navigator is rated as a BB/Ba2 company (S&P and Moody’s ratings, respectively). The bond with the longest maturity is also rated as BB/Ba2. However, the yield of the bond is indexed to Euribor, which has been at very low levels for the

PAGE 23/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

past years (below 1%). Therefore, the bond’s yield is not a good proxy for the cost of debt of the company in the long-term. The average yield of 10y BB bonds was used as a proxy for the cost of debt, which is equal to 4,94%. Taking into consideration the credit loss rate – 0,1562% - and the tax rate – 28,5%, an after tax cost of debt of 3,42% was reached. At last, a WACC of 5,45% was obtained.

Multiples Valuation

To further analyse Navigator’s performance within the industry and how it compares to direct peers, a comparable analysis has been performed.

Figure 68 – Direct competiors Multiples

2017 2016 EV/EBITDA P/S P/E EV/EBITDA P/S P/E Navigator 14,69 1,86 14,68 12,96 1,46 10,57 Mondi 12,71 1,48 15,67 11,79 1,42 14,8 UPM-Kymmene OYJ 11,28 1,38 14,24 12,15 1,27 14,15 Altri 13,12 1,59 11,04 10,76 1,31 10,17 Stora Enso 15,32 1,04 16,73 16,33 0,82 17,31 International Paper 24 1,1 16,8 24,42 1,12 18,69 Svenska Cellulosa 26,57 3,56 38,38 20,12 2,4 27,75 Kimberly-Clark 15,02 2,34 19,5 14,41 2,25 18,91 Median 14,855 1,535 16,2 13,685 1,365 16,055

After analysing the table, we can see that tissue producers are valued at higher multiples than paper producers. This can be explained by be the fact that the tissue market is expanding fast, while the printing and writing paper market is contracting, as mentioned in previous chapters. From the 2nd of May until the 23rd of May 2018, Navigator share price has rallied 10%, going from €4,88 to 5,37€., driven by the several recent increases in global and pulp prices – e.g. only during the month of April, pulp prices increased, on average, 25$ per ton - and announcements of further price increases in May and June this year. The same is happening with most of the companies in this industry. For example, for the same period of days, Altri share price increased 28%. Currently, Navigator P/E multiple stands at 17,3, which is higher than last year multiple value, as seen in figure 68. As current global price levels will not sustain in the long-term, the latest share appreciation does not carry long-term stability. Currently, Navigator is being overvalued by the market. The multiples valuation method is based on the notion that companies with operations in the same industry and offering the same type of products should be valued at the same price. This is not entirely true because each company has its own characteristics, such as capital structure, management style, cost structure,

PAGE 24/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

among others, that give the company its unique identity. Therefore, when using the median of the peers group as a proxy for the fair valuation, we must take into consideration all those factors. Also, competitor’s valuation may not be correct.

Figure 69 – WACC & terminal growth Sensitivity Analysis rate sensitivity analysis

WACC A sensitivity analysis regarding WACC and terminal value growth g 5,25% 5,35% 5,45% 5,55% 5,65% rate was performed to evaluate how sensitive the expected share

0,35% 5,28 5,15 5,03 4,91 4,80 price is to changes in these two variables. The terminal value

0,40% 5,32 5,19 5,07 4,94 4,83 accounts for 58% of the enterprise value so changes in expected 0,45% 5,36 5,23 5,10 4,98 4,86 growth might have a relevant impact in share price. In the base 0,50% 5,40 5,27 5,11 5,01 4,89 case scenario, a 0,5% growth rate has been considered. This 0,55% 5,44 5,31 5,18 5,05 4,93 rate is in line with the expected growth rate for the last three years 0,60% 5,48 5,35 5,22 5,09 4,96 forecasted, if ROE and the reinvestment rate are kept at the 0,65% 5,53 5,39 5,26 5,12 5,00 predicted levels. Navigator is the European leader in the UWF paper with a stable revenue level that will become one of the three main players of the European tissue segment in the medium to long term. Therefore, even though the global P&W market is expected to shrink, the outlook for Navigator is positive. Nevertheless, it is important to test how share price will react to both positive and negative variations in growth rate - as seen in figure 69 - as unpredictable phenomena can happen and cause slight movements in growth rate. In addition, WACC is dependent on different variables that can change over time, especially the cost of equity. The cost of equity is dependent on the risk-free rate, market return and the levered beta. Variations in beta can happen as Also, the cost of debt may vary over time, as companies repay and contract debt every year, being subject to the market interest rates.

Moreover, both downside and upside scenarios were projected to estimate how changes in key variable assumptions will impact the expected enterprise value. Five key variables have been considered: the international price of BEK pulp, the international price associated to UWF paper, expected growth in paper revenue ,expected growth in tissue revenue and exchange rate US$/EUR, as seen in figure 70.

Figure 70 – Further Sensitivity Analysis FOEX BHK Pulp (EUR): Navigator’s pulp sale price has been, on average, equal

to 85,5% of the BHKP index (€). Therefore, the company is dependent on the world BHKP pulp Price Share price (€) Variation market price, which is extremely volatile. However, as Navigator also uses pulp -10% 5,07 internally (which accounts for production costs), changes in the index will always 0% 5,11 impact the company both positively and negatively, as gains/losses at sale price 10% 5,15 level are losses/gains at costs level. Therefore, as seen in the figure, variations of

PAGE 25/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

price at a 10% level for all years forecasted (both negatively and positively) will not A4 copy Price Share price (€) Variation affect the company’s value as much as, for example, a 10% change at the FOEX -10% 4,16 A4 B copy level. 0% 5,11 FOEX A4 B Copy: Navigator’s UWF paper sale price is also dependent on the 10% 6,06 respective index, being, on average, equal to 95% of the index value, since 2012.

Paper Revenue Share price (€) A 10% increase on the predicted index level will lead to a fair share price of €6,06, Growth Variation -1,00% 4,21 while a reduction of 10% will lead to a fair share price of €4,16. -0,50% 4,65 Paper Revenue Growth: UWF paper market is expected to shrink in the future, 0% 5,11 therefore two scenarios in which growth in this segment is 1% or 0,5% lower than 0,50% 5,59 the expected were estimated. These returns fair share prices of €4,21-€4,61, 1,00% 6,11 respectively. However, as production capacity has been decreasing at a higher rate than demand has been slowing down, two upside scenarios have also been Tissue Revenues Share price Growth Variation (€) forecasted, in which the company is able to gain further market share from its -1% 4,97 competitors and increase revenue level. The fair share price will be €6,11 and €5,59, -0,50% 5,03 respectively. 0% 5,11 Tissue Revenue Growth: As explained before, tissue is the main growth driver of 0,50% 5,18 the company in the following years. Therefore, if tissue revenue growth is lower than 1,00% 5,27 expected – 1% or 0,5% lower - , the fair share price will be equal to €4,97 or €5,03,

Exchange rate USD/EUR Share price respectively. If it is higher than expected – 1% or 0,5% higher -, the fair share price (€) -10% 4,99 will be equal to €5,27 or €5,18. -5% 5,05 Exchange rate US$/EUR: Navigator sources about 9% of the revenues from the 0% 5,11 USA and most of the European prices are calculated based on US prices. 5% 5,17 Therefore, volatility in US$/EUR currency exchange rate will affect the company. If 10% 5,22 the currency appreciates by 10% or 5%, the share price will be equal to €5,22 or €5,17. If the currency depreciates by 10% or 5%, the share price will be equal to 4,99€ or 5,05€.

PAGE 26/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

Appendix

Consolidated Income Statement

Fiscal Year Ending The Navigator Company

2015 2016 2017E 2018F 2019F 2020F 2021F 2022F

Amounts in thousand €

Operating Revenue 1628023 1577385 1633144 1684746 1757719 1673991 1659473 1666037

Cost of sales -1090977 -1068933 -1085233 -1064068 -1143071 -1173325 -1139604 -1120926

Gross Margin 537046 508453 547911 620679 614648 500665 519869 545111

Operating expenses -161713 -161568 -185437 -175699 -203512 -216392 -209023 -217182

D&A -121716 -166661 -144704 -157062 -118394 -104586 -103117 -94974

Operating income from sales 253618 180224 217770 287917 292742 179687 207730 232954

Other operating income 26208 41519 29805 46740 33102 31575 31299 31408 Change in the fair value of biological assets 3028 8616 3784 7764 8230 8723 7706 8091 Change in the fair value of financial assets 0 0 0 0 0 0 0 0

Associate results 0 0 0 0 0 0 0 0 Net financial results excluding net interest expense -6 491 -3 148 541 -2 454 -2 561 -2 439 -2 418 -2 427

EBIT 276 362 227 211 251 900 339 967 331 512 217 547 244 317 270 026

Taxes on operations -47 957 2 475 -42 073 -84 869 -73 140 -39 421 -49 079 -56 125

Operating Income after tax 228 405 229 686 209 827 255 098 258 373 178 127 195 238 213 901

Other Comprehensive Income 229 -27 819 0 0 0 0 0 0

Net Operational Result 228 634 201 868 209 827 255 098 258 373 178 127 195 238 213 901

Net interest expense -43 767 -17 648 -8 238 -47 477 -19 062 -18 175 -21 354 -19 278

Financial Expense before tax -43 767 -17 648 -8 238 -47 477 -19 062 -18 175 -21 354 -19 278

Tax shield 12 128 4 791 2 490 13 531 5 433 5 180 6 086 5 494

Financial Expense after tax -31 639 -12 856 -5 748 -33 946 -13 629 -12 995 -15 268 -13 783

Comprehensive income 196 994 189 011 204 078 221 152 244 744 165 131 179 970 200 118

PAGE 27/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

Consolidated Balance Sheet

Fiscal Year Ending The Navigator Company 2015A 2016A 2017E 2018F 2019F 2020F 2021F 2022F

Amounts in thousand € Operating Assets Working cash 32560 31548 32663 33695 35154 33480 33189 33321 Goodwill 377 339 377 339 377 339 377339 377339 377339 377339 377339 Other intangible assets 4 932 4 301 3 878 4951 5042 5436 5739 5519 Plant property and equipment 1 321 226 1 295 406 1 256 658 1250759 1244044 1215341 1189215 1156370 Biological assets 116 997 125 613 129 397 137161 145390 154114 161820 169910 Deferred tax assets 50 934 44 199 44 728 41092 42872 40830 40475 40636 Inventories 212 555 208 888 188 599 213458 222704 212095 210256 211088 Receivable and other current assets 215 371 215 878 240 705 249250 260046 247659 245511 241918 State and other public entities 57 643 69 619 75 076 68472 71437 68035 67445 67711 Other financial assets & investment in associates 229 260 424 229 229 229 229 229

Total Operating Assets 2389786 2373052 2349468 2376406 2404259 2354558 2331219 2304041

Operating Liabilities Deferred taxes liabilities 88 296 59 860 83 024 91051 94995 90470 89686 90040 Provisions 59 206 31 049 19 537 22 319 0 0 0 0 Portion of Payables and other current liabilities 221 088 254 060 257 155 245947 256599 244376 242257 243215 State and other public entities 77 346 81 098 43 572 87628 91423 87068 86313 86655 Investment Grants 37 216 31 202 25152 30652 24602 30102 24052 29552 Liability for Defined Benefits 0 6 457 5 090 3818 0 0 0 0

Total Operating Liabilities 483 152 463 726 433 529 481 416 467 620 452 017 442 308 449 462

Net Operating Assets 1906634 1909326 1915939 1894990 1936639 1902541 1888911 1854579

Financial Assets Excess cash 40097 35994 92668 Available-for-sale financial assets 0 82 0

Total Financial Assets 40097 36076 92668

Financial Obligations Non-current Interest-bearing liabilities 686571 638559 670853 Current Interest-bearing liabilities 40579 69702 150206 Finance Leases 5319 3870 2669

Total Financial Liabilities 732468 712131 823728

Net Financial Liabilities 692371 676056 731060 710112 751761 717664 704036 639687

Shareholders' Equity 1214263 1233270 1184879 1184878 1184877 1184876 1184875 1214892

PAGE 28/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

Cash-Flow Map

The Navigator Company Fiscal Year Ending Amounts in thousand € 2015 2016 2017F 2018F 2019F 2020F 2021F 2022F

EBIT 276 362 227 211 251 900 339 967 331 512 217 547 244 317 270 026

Notional Income Taxes -76 580 -61 688 -76 129 -96 891 -94 481 -62 001 -69 630 -76 958

Tax Adjustments 28 623 64 163 34 056 12 022 21 341 22 580 20 552 20 832

NOPLAT 228 405 229 686 209 827 255 098 258 373 178 127 195 238 213 901

D&A 121 716 166 661 144 704 157 062 118 394 104 586 103 117 94 974

Gross FCF 350 121 396 347 354 531 412 161 376 767 282 712 298 355 308 875

Capex -197 716 -148 826 -109 318 -160 000 -120 000 -85 000 -85 000 -70 000

Change in NWC -41 301 37 144 -2 558 -45 644 -10 848 12 447 2 158 3 589

Change in Working cash 1 715 -1 013 1 115 1 032 1 459 -1 675 -290 131

Change in Inventories 23 695 -3 666 -20 290 24 859 9 246 -10 608 -1 839 832

Change in Accounts Receivable 26 562 507 24 828 8 545 10 796 -12 387 -2 148 -3 593

Change in Accounts Payable 10 672 32 972 3 095 -11 208 10 653 -12 223 -2 119 958

Change in Operating Assets -22 229 -5 241 -5 986 10 240 -4 746 5 445 944 -427

Change in Deferred Tax Assets 27 516 -6 736 529 -3 636 1 780 -2 042 -354 160

Change in State and other public entities -5 287 11 977 5 457 -6 605 2 966 -3 403 -590 267

Change in Operating Liabilities -18 593 -30 699 -20 412 57 584 1 689 -3 380 -7 590 6 196

Change in Deferred Tax Liabilities -7 597 -28 437 23 164 8 028 3 944 -4 525 -785 355

Change in State and other public entities -16 571 3 752 -37 526 44 056 3 795 -4 355 -755 341

Change in Investment Grants 5 574 -6 014 -6 050 5 500 -6 050 5 500 -6 050 5 500

Unlevered Operating FCF 70 281 248 726 216 256 274 341 242 862 212 225 208 868 248 233

CF Derivative Financial Instruments 713 -7 541 0 0 0 0 0 0

Non-operating provisions 18 057 -28 157 -11 512 2 783 -22 319 0 0 0

CF Net Pension Funds Liabilities -7072 -5704 -1367 -1272 -3818 0 0 0

CF from Investments in Associates 0 -1 641 -164 195 0 0 0 0

CF from currency translation differences 4963 -6468 0 0 0 0 0 0

Taxes on items above when applicable 1 625 -39 0 0 0 0 0 0

FCF to the Firm 88 567 199 176 203 213 276 047 216 724 212 225 208 868 248 233

Interest expense -43 767 -17 648 -8 238 -47 477 -19 062 -18 175 -21 354 -19 278

Tax Shield 12128 4791 2490 13531 5433 5180 6086 5494

Change in Financial Debt 379 466 -16 315 55 004 -20 948 41 650 -34 097 -13 628 -64 349

Change in Financial Assets -428 610 -4 022 56 593

Change in Excess Cash -428 610 -4 103 56 674

Change in Available for sale financial assets 0 82 -82

Change in Financial Liabilities -49144 -20337 111597

Change in interest bearing liabilities -46044 -18888 112797

Change in Finance/Capital Leases -3 100 -1 449 -1 201

CF from debt financing 347 827 -29 172 49 256 -54 894 28 021 -47 092 -28 896 -78 132

Net Change in Equity (in Cash) -436 394 -170 004 -252 469 -221 153 -244 745 -165 132 -179 971 -170 101 Total Cash Flows from Investors -88 567 -199 176 -203 213 -276 047 -216 724 -212 225 -208 868 -248 233

PAGE 29/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

Disclosures and Disclaimers

Report Recommendations

Buy Expected total return (including expected capital gains and expected dividend yield) of more than 10% over a 12-month period.

Hold Expected total return (including expected capital gains and expected dividend yield) between 0% and 10% over a 12-month period.

Sell Expected negative total return (including expected capital gains and expected dividend yield) over a 12-month period.

This report was prepared by [insert student’s name], a Master in Finance student of Nova School of Business & Economics (“Nova SBE”), within the context of the Field Lab – Equity Research.

This report is issued and published exclusively for academic purposes, namely for academic evaluation and masters graduation purposes, within the context of said Field Lab – Equity Research. It is not to be construed as an offer or a solicitation of an offer to buy or sell any security or financial instrument.

This report was supervised by a Nova SBE faculty member, acting merely in an academic capacity, who revised the valuation methodology and the financial model.

Given the exclusive academic purpose of the reports produced by Nova SBE students, it is Nova SBE understanding that Nova SBE, the author, the present report and its publishing, are excluded from the persons and activities requiring previous registration from local regulatory authorities. As such, Nova SBE, its faculty and the author of this report have not sought or obtained registration with or certification as financial analyst by any local regulator, in any jurisdiction. In Portugal, the author of this report is not registered with or qualified under COMISSÃO DO MERCADO DE VALORES MOBILIÁRIOS (“CMVM”, the Portuguese Securities Market Authority) as a financial analyst. No approval for publication or distribution of this report was required and/or obtained from any local authority, given the exclusive academic nature of the report.

The additional disclaimers also apply:

USA: Pursuant to Section 202 (a) (11) of the Investment Advisers Act of 1940, neither Nova SBE nor the author of this report are to be qualified as an investment adviser and, thus, registration with the Securities and Exchange Commission (“SEC”, United States of America’s securities market authority) is not necessary. Neither the author nor Nova SBE receive any compensation of any kind for the preparation of the reports.

PAGE 30/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

Germany: Pursuant to §34c of the WpHG (Wertpapierhandelsgesetz, i.e., the German Securities Trading Act), this entity is not required to register with or otherwise notify the Bundesanstalt für Finanzdienstleistungsaufsicht (“BaFin”, the German Federal Financial Supervisory Authority). It should be noted that Nova SBE is a fully- owned state university and there is no relation between the student’s equity reports and any fund raising programme.

UK: Pursuant to section 22 of the Financial Services and Markets Act 2000 (the “FSMA”), for an activity to be a regulated activity, it must be carried on “by way of business”. All regulated activities are subject to prior authorization by the Financial Conduct Authority (“FCA”). However, this report serves an exclusively academic purpose and, as such, was not prepared by way of business. The author - a Masters’ student - is the sole and exclusive responsible for the information, estimates and forecasts contained herein, and for the opinions expressed, which exclusively reflect his/her own judgment at the date of the report. Nova SBE and its faculty have no single and formal position in relation to the most appropriate valuation method, estimates or projections used in the report and may not be held liable by the author’s choice of the latter.

The information contained in this report was compiled by students from public sources believed to be reliable, but Nova SBE, its faculty, or the students make no representation that it is accurate or complete, and accept no liability whatsoever for any direct or indirect loss resulting from the use of this report or of its content.

Students are free to choose the target companies of the reports. Therefore, Nova SBE may start covering and/or suspend the coverage of any listed company, at any time, without prior notice. The students or Nova SBE are not responsible for updating this report, and the opinions and recommendations expressed herein may change without further notice.

The target company or security of this report may be simultaneously covered by more than one student. Because each student is free to choose the valuation method, and make his/her own assumptions and estimates, the resulting projections, price target and recommendations may differ widely, even when referring to the same security. Moreover, changing market conditions and/or changing subjective opinions may lead to significantly different valuation results. Other students’ opinions, estimates and recommendations, as well as the advisor and other faculty members’ opinions may be inconsistent with the views expressed in this report. Any recipient of this report should understand that statements regarding future prospects and performance are, by nature, subjective, and may be fallible.

This report does not necessarily mention and/or analyze all possible risks arising from the investment in the target company and/or security, namely the possible exchange rate risk resulting from the security being denominated in a currency either than the investor’s currency, among many other risks.

The purpose of publishing this report is merely academic and it is not intended for distribution among private investors. The information and opinions expressed in this report are not intended to be available to any person other than Portuguese natural or legal persons or persons domiciled in Portugal. While preparing this report, students did not have in consideration the specific investment objectives, financial situation or particular needs

PAGE 31/32

“THE NAVIGATOR COMPANY” COMPANY REPORT

of any specific person. Investors should seek financial advice regarding the appropriateness of investing in any security, namely in the security covered by this report.

The author hereby certifies that the views expressed in this report accurately reflect his/her personal opinion about the target company and its securities. He/ She has not received or been promised any direct or indirect compensation for expressing the opinions or recommendation included in this report.

[If applicable, it shall be added: “While preparing the report, the author may have performed an internship (remunerated or not) in [insert the Company’s name]. This Company may have or have had an interest in the covered company or security” and/ or “A draft of the reports have been shown to the covered company’s officials (Investors Relations Officer or other), mainly for the purpose of correcting inaccuracies, and later modified, prior to its publication.”]

The content of each report have been shown or made public to restricted parties prior to its publication in Nova SBE’s website or in Bloomberg Professional, for academic purposes such as its distribution among faculty members for students’ academic evaluation.

Nova SBE is a state-owned university, mainly financed by state subsidies, students tuition fees and companies, through donations, or indirectly by hiring educational programs, among other possibilities. Thus, Nova SBE may have received compensation from the target company during the last 12 months, related to its fund raising programs, or indirectly through the sale of educational, consulting or research services. Nevertheless, no compensation eventually received by Nova SBE is in any way related to or dependent on the opinions expressed in this report. The Nova School of Business and Economics does not deal for or otherwise offer any investment or intermediation services to market counterparties, private or intermediate customers.

This report may not be reproduced, distributed or published, in whole or in part, without the explicit previous consent of its author, unless when used by Nova SBE for academic purposes only. At any time, Nova SBE may decide to suspend this report reproduction or distribution without further notice. Neither this document nor any copy of it may be taken, transmitted or distributed, directly or indirectly, in any country either than Portugal or to any resident outside this country. The dissemination of this document other than in Portugal or to Portuguese citizens is therefore prohibited and unlawful.

PAGE 32/32