Atlantic Grupa Intercapital Research

COMPANY ANALYSIS - Atlantic Grupa InterCapital Research

Food Industry August 9th 2013

Continuing to Operate at a High Level BUY

1 Y target price: HRK 768.81 (HRK000) 2012 2013 F 2014 F 2015 F 2016 F Price August 8th 2013: HRK 650.00 Potential growth: 18.3% Sales 4.930.441 5.098.076 5.301.999 5.514.079 5.679.501 EBITDA 575.122 585.698 615.728 643.311 666.815 EBIT 395.057 423.639 452.049 477.996 499.846 GENERAL SHARE INFORMATION

Net income 55.229 173.634 201.804 232.014 258.468 Bloomberg ticker ATGRA ZA

EpS (HRK) 16,6 52,1 60,5 69,6 77,5 Number of shares 3.334.300

EBITDA margin 11,5% 11,4% 11,5% 11,5% 11,6% Market capitalization 2.167,3 (HRKm) PROFIT margin 1,1% 3,4% 3,8% 4,2% 4,5%

ROE 3,8% 10,8% 11,3% 11,8% 11,9% 1Y high/low (HRK) 695.00/453.03 1Y average daily 0,2 P / E* 39,2 12,5 10,7 9,3 8,4 turnover (HRKm) P / S* 0,4 0,4 0,4 0,4 0,4 Free Float 16,6%

EV / S* 0,9 0,9 0,8 0,7 0,7 Index member YES

EV / EBITDA* 8,1 7,6 7,0 6,5 6,0 Website w w w .atlantic.hr

FCF yield (CFO - CAPEX)* 9,1% 8,3% 8,7% 10,5% 11,3%

Dividend Yield* - 1,4% 1,4% 2,3% 2,7% th CROBEX ATGRRA ZA * Multiples and indicators were calculated based on the market price on August 8 2013 60%

Atlantic Grupa’s recent operating performance has been encouraging, and in our 50% view suggests that the company has the capacity to maintain moderate topline growth. 40%

30% Based on trends in the FMCG industry, the data obtained from the Company’s Management 20%

and business analysis of Atlantic Grupa, we projected sales growth in 2013 at 3.4% Price change; % change; Price and also CAGR 3.4% in the projected period from 2012 – 2017. 10%

0% Our estimate of EBITDA margin is in the range from 11.4% to 11.6% in the -10% projected period. Similar trend is anticipated for the EBIT margin, whereas we estimate it 8.8.2012 8.1.2013 8.6.2013 will settle in 8.3% - 8.8% range.

In 2012 limiting factor on the results of Atlantic Grupa was a net foreign exchange TURNOVER ATGRRA ZA 800 4 loss in the amount of HRK 64m due to significant changes in the exchange rate 700 EUR/RSD. Assuming that there is no significant weakens of the dinar in 2013 600 3 potentially we can expect a significant increase in net profit in 2013. Normalized net 500 profit in 2012 amounted to HRK 112.5m. If we add to this the amount of savings in interest 400 2

Price;HRK 300 expense in the amount of HRK 30m, EBIT growth of 5.3% and assuming that potentially HRKm Turnover; 200 1 dinar exchange rate EUR/RSD will not move adversely, we expect net profit in amount of 100 HRK 173.6m, which implies a return on equity of 10.8%. However, if we use current price 0 0 and expected net profit for 2013, we can see that the company is currently trading at 8.8.2012 8.1.2013 8.6.2013 forward P/E of 12.5x.

Our analysis has shown a fair value of Atlantic Grupa in the amount of HRK 2,563.4m or HRK 768.81 per share, which shows a potential growth by 18.3% Tomislav Bajic compared to the current market value of Atlantic Grupa’s shares. Accordingly, we Head of Research give to the shares of Atlantic Grupa a BUY recommendation. Tel. +385 1 4825 858 [email protected]

Atlantic Grupa InterCapital Securities Ltd. 1/17

COMPANY ANALYSIS - Atlantic Grupa

Valuation Snapshot: Atlantic Grupa (ATGRRA ZA), BUY, HRK 768.81

Exhibit 2 Development of share price

900 HRK 861.25 (+33%)

800 HRK 768.81 (+18%) Why recommendation 700 HRK 704.18 (+8%) BUY? Trading at 10.7x P/E and 7.0x EV/EBITDA 2014e 600 AG looks attractive, using 2017e trading at 7.8x P/E 500 and 5.6x EV/EBITDA AG 400 looks under-priced

300 8.8.11 8.2.12 8.8.12 8.2.13 8.8.13 8.2.14

Source: Bloomberg, InterCapital estimates

Exhibit 3 Scenario analysis

Target price Calcualted based on DCF (11.3% WACC, 2% terminal growth rate from HRK 768.81 2017) and peer analysis (FY 2013 estimated financial results)

Recovery of region before expectations: Bull Case HRK DCF + Peer - sales growth increase by 50 bps; If we change base case 861.25 Analysis - EBIT margin increase by 50 bps. assumptions regarding sales growth and EBIT margin development Atlantic Base Case HRK DCF + Peer Stable business operations with 50 bps EBIT margin increase in period Grupa still has higher Analysis 768.81 2013-2017 projected price than current market price Prolonged recession and pressure on margins: Bear Case HRK DCF + Peer - sales growth decrease by 50 bps; 704.18 Analysis - EBIT margin decrease by 50 bps.

Source: InterCapital estimates

Exhibit 4 Bear to Bull scenario

1000,0

900,0 80,6 11,9 800,0 55,0 9,7 700,0 Risks to our model are 600,0 prolonged recession, input 500,0 cost inflation, share losses 861,3 in key categories which can 400,0 768,8 704,2 negatively impact sales and 300,0 profitability development 200,0 100,0 0,0 Bear Case 50bp annual 50bp annual Base Case 50bp annual 50bp annual Bull Case sales EBIT margin EBIT margin sales increase decrease decrease increase

Source: InterCapital estimates

Atlantic Grupa InterCapital Securities Ltd. 2/17

COMPANY ANALYSIS - Atlantic Grupa

Investment Case

We are updating our model of Atlantic Grupa with a BUY recommendation and a HRK 768.81 price target. We have a positive view of the company’s fundamental outlook. Atlantic Grupa presents attractive cash return story in our coverage, as well as a compelling long-term opportunity for regional exposure.

Atlantic Grupa’s recent operating performance has been encouraging, and in our view suggests the company has the capacity to maintain moderate topline growth.

To get better picture of Atlantic Grupa’s business model we calculated margins per business units. The most profitable Strategic Business Unit (SBU) are Savoury Spreads and Beverages. It is normal that Strategic Distribution Units (SDU) have higher sales and lower profitability.

Exhibit 5 Segment analysis

30,0%

25,0%

20,0%

15,0%

10,0%

EBIT Margin EBIT 5,0%

0,0%

-5,0%

-10,0% -5,0% 0,0% 5,0% 10,0% 15,0% 20,0% 25,0% 30,0% EBITDA Margin SBU Beverages SBU Coffee SBU Snacks SBU Savoury Spreads SBU Sports and Functional Food SBU Pharma and Personal Care SDU Croatia SDU Slovenia, Serbia and Macedonia

*Other Segments are excluded (Sales HRK 373m, EBITDA HRK -132m, EBIT HRK -183m) Source: Atlantic Grupa

According to the strategic management guidelines for 2013 focus will be on organic growth and further rationalization of operations. Specifically, the management is expected in 2013 sales growth of 4%, normalized EBITDA of 4.7% and normalized EBIT of 5.3% and a decrease in interest expense by 14.1% comparing to 2012. The fall in interest expenses is due to the new refinancing agreement entered by the company at the end of last year. We believe Atlantic Grupa is well on track to meet once again guidance for 2013.

At the end of last year Atlantic Grupa signed a refinancing contract with the European Bank for Reconstruction and Development (EBRD) and the International Finance Corporation (IFC). Specifically, it was a transaction worth EUR 307m whereby Atlantic Grupa used proceeds to refinance existing loan obligations, generated when acquiring Droga Kolinska, with an extended repayment period. The new repayment structure is more balanced and the repayment plan is sustainable throughout the repayment period.

In the new loan structure, EBRD arranged a syndicated loan in amount of EUR 232m. EBRD participated in the loan with EUR 60m own funds, while other EUR 172m were syndicated to partner banks - Raiffeisen Bank, Unicredit Bank, Sberbank and Erste Bank. The remaining EUR 75m from the total package was split between IFC with EUR 50m and Raiffeisenbank Austria Zagreb and Zagrebacka banka with EUR 25m.

Atlantic Grupa InterCapital Securities Ltd. 3/17

COMPANY ANALYSIS - Atlantic Grupa

In our opinion for Atlantic Grupa, participation of Russian bank Sberbank, to which at this time was one of the largest regional deals, could potentially open spaces for stronger positioning on the Russian market. Russian and Eastern European markets accounted for HRK 245m of sales revenues in 2012. Brands with the biggest potential in those markets are: Donat Mg, Argeta, Bebi and Multipower.

Proceeds from the arranged EUR 307m loan package was used primarily for balance sheet restructuring, specifically in amount of EUR 272m. The rest of the amount was used for upgrading energy efficiency (EUR 10m) and as a line of credit for financing working capital (EUR 25m).

Weighted average interest rate for the entire deal amounts to 4.71%, which is 80bps lower than the existing loan. According to our calculations, Atlantic Grupa should generate savings in amount of EUR 8-10m in the next seven years.

The debt structure is going to remain the same after refinancing, meaning the debt registered to subsidiaries is set to stay there. Accordingly, Atlantic's consolidated earnings are going to remain under the influence of exchange rate differences. So far, the consolidated earnings were limited by the net loss from exchange rate differences related to dinar and euro.

In 2012 limiting factor on the results of Atlantic Grupa was a net foreign exchange loss in the amount of HRK 64m due to significant changes in the exchange rate EUR/RSD.

Exhibit 6 EURRSD and projecting P/E ratio

130 39

120 34

110 29

100 24

90 19

80 14

70 9

4 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Source: Bloomberg, InterCapital estimates

Assuming that there is no significant weakens of the dinar in 2013 potentially we can expect a significant increase in net profit in 2013. Normalized net profit in 2012 amounted to HRK 112.5m. If we add to this the amount of savings in interest expense in the amount of HRK 30m, EBIT growth of 5.3% and assuming that potentially dinar exchange rate EUR/RSD will not move adversely, we expect net profit in amount of HRK 173.6m, which implies a return on equity of 10.8%. However, if we use current price and expected net profit for 2013, we can see that the company is currently trading at forward P/E of 12.5x.

Atlantic Grupa InterCapital Securities Ltd. 4/17

COMPANY ANALYSIS - Atlantic Grupa

Overview of key issues related to Atlantic Grupa’s business activities

Key question Market view Our opinion

Although Atlantic Grupa has high level of debt there are The current high level of the company’s debt represents two important conclusions: debt is mostly used for both financially and operational burden. At the end of financing acquisition of Droga Kolinska and volatility of High level of debt 2013 net debt probably would be around HRK 2.2bn and company’s business model (strong and predictable cash net debt / EBITDA 3.7x. flow). Having these two facts in mind we believe that debt is sustainable.

Despite of fact that these markets probably won’t offer opportunity for high growth, Atlantic Grupa has a few strategic advantages. First off all Atlantic Grupa has Atlantic Grupa’s core regional markets are Croatia, potential to further develop presence on each market. For Strong regional presence Serbia, and Slovenia. These markets won’t offer example Atlantic Grupa has strong presence in coffee opportunity for a high growth. segment in Slovenia and Serbia, so Croatia offer opportunity for further growth. Through this way Atlantic Grupa can overcome limited growth potential of abovementioned markets.

We agree with this fact, but in our opinion competitive Diversified product portfolio and advantage of Atlantic Grupa is strong distribution network. 12 brands are with sales over EUR 15m in 2012. More or vertically integrated business Atlantic Grupa developed very good integration which less all of these brands are among top brands in region. model strengthen total portfolio and offer benefits from negotiation power synergies.

After Agrokor’s successful takeover of Mercator, regional We see more positive impacts from this acquisition than retail market is more or less consolidated. Due to Consolidation of regional negative. Mercator in the last two years has own negotiating power new entity will pressure producers and challenges. New entity would have more power but also retailers squeeze their margins. Also in Croatia Argeta and coffee can be reliable partner for Atlantic Grupa. are not present in Konzum.

After acquisition of Droga Kolinska, the structure of Some analyst highlights worrying trends regarding private company's brands changed significantly in favor of own label brands for FMCG producers. For example, the brands which certainly was one of the reasons for the Private labels representation of private brands in Europe reaches 30%- acquisition. Current share of sales of own brands in total 40%, while only 15%-20% in Croatia, with a tendency to sales amounts to 72% vs prior 42.8% (before the Droga grow. Same situation is in region. Kolinska acquisition). We see here limited pressure for Atlantic Grupa’s brands.

In 2012 Atlantic Group’s net profit was negatively affected by exchange rate differences mainly due to Serbian dinar devaluation. To be specific these differences are mostly a result of credit liabilities by All of these movements are from accounting treatment. It FX volatility Serbian companies which are part of Atlantic Group. Also is important to highlight that these foreign exchange Atlantic Grupa recorded negative exchange rate movements don’t impact cash flow. differences in in equity mostly due to recalculations of balance sheet items of Serbian companies amid changes in HRKRSD rate.

If the recession prolonged there are a number of risks Prolonged recession and default In 2014 and onwards market expect slow recovery of which could ultimately manifest themselves and weaken region. Also there is a risk of default of small retailers. of small retailers investor confidence in the company’s mid-term outlook.

Source: InterCapital estimates

Atlantic Grupa InterCapital Securities Ltd. 5/17

COMPANY ANALYSIS - Atlantic Grupa

Atlantic Grupa Results for 1H 2013

Exhibit 8 Atlantic Grupa results for 1H 2013 Change Change (HRKm) 2011 2012 1H 2012 1H 2013 % %

Sales revenues 4.727,8 4.930,4 4,3% 2.342,5 2.420,7 3,3%

EBITDA 500,7 575,1 14,9% 282,8 289,5 2,4%

EBIT 334,8 395,1 18,0% 208,2 219,1 5,2%

Net income 54,9 66,1 20,4% 14,4 116,7 710,4%

EpS (HRK) 16,5 19,8 20,4% - - - EBITDA margin 10,5% 11,5% +100 bps 12,1% 12,0% -10 bp

PROFIT margin 10,9% 11,3% +40 bps 0,6% 4,8% +420 bp P/E* 36,5 30,3 -16,9% - - -

P/S* 0,4 0,4 -4,1% - - - EV/EBITDA* 8,9 7,2 -18,6% - - -

Source: Atlantic Grupa

In 1H 2013 Atlantic Grupa recorded a sales growth of 3.3% compared to 1H 2012. This increase in sales was mainly driven by increased income from SBU Sports and Functional Food (16.9%) and Other segments (16.4%). On the other hand SDU Croatia marks a decline of sales by 9.1% YoY.

EBITDA margin lowering by 10 bps to 12.0%, while EBITDA in absolute amount increased by 2.4% to HRK 289.5m. The growth was influenced by cost optimization and positive trends in some production materials. On the other hand negative impact came from the temporarily suspended distribution of own and principal brands in March this year in the Croatian market which resulted in lower sales with equal fixed expenses.

Finally, on the bottom line Atlantic Grupa recorded a net profit in the amount of HRK 116.7m, compared to net profit of HRK 14.4m in the 1H 2012 due to lower interest expense, decrease in the effective tax rate and foreign exchange gains, compared with last year foreign exchange losses as a result of strong Serbian dinar depreciation.

Exhibit 9 EBITDA and net income movement with according margins (HRKm)

700 16% EBITDA Net profit EBITDA margin Profit margin 600 14% 12,1% 12% 500 11,7% 12,1% 12,0% 10,6% 10% 400 8%

300 Margin; % 6%

200 4,8%

EBITDA EBITDA and netprofit; HRKm 3,2% 4%

100 1,2% 1,3% 2% 0,6%

0 0% 2010* 2011 2012 1H 2012 1H 2013

*Pro-forma consolidated Source: Atlantic Grupa

Atlantic Grupa InterCapital Securities Ltd. 6/17

COMPANY ANALYSIS - Atlantic Grupa

Financial Projections

Financial Projections Until 2017

Time horizon of our projection is 5 years. We developed a financial model based on the data provided by Atlantic Grupa, analysis of available financial reports and FMCG sector trend analysis.

Assumptions for Model Development

At sales level we expect CAGR of 3.4% in the projected period (2012 - 2017). Looking at SBU's (Strategic Business Unit), the highest CAGR is expected from SBU Sports and Functional Food and SBU Coffee, which contain three of five biggest brands according to sales. More specifically, Barcaffe is brand for which we expect substantial growth, especially on the Croatian market in the Espresso segment. We see the big potential for growth in the HoReCa channel with the synergy of Atlantic Grupa and Droga Kolinska brands (Grand Coffee, Barcaffe, Cedevita, Cockta, Donat MG, Montana).

Exhibit 10 Profit and loss account 2011 – 2012 and projections until 2017 (in HRK000) InterCapital estimate CAGR INCOME STATEMENT 2011 2012 2013 2014 2015 2016 2017 12 - 17 Sales 4.727.766 4.930.441 5.098.076 5.301.999 5.514.079 5.679.501 5.821.489 3,4% Other operating revenue 46.619 75.042 60.034 60.634 61.240 61.853 62.471 -3,6% Operating revenue 4.774.385 5.005.483 5.158.110 5.362.633 5.575.319 5.741.354 5.883.960 3,3% Inven. change of fin. g. and WIP -5.772 -3.667 -3.704 -3.741 -3.778 -3.816 -3.854 1,0% Material costs 2.828.846 2.970.389 3.074.353 3.218.847 3.373.352 3.484.672 3.578.759 3,8% Personnel costs 568.985 578.532 590.103 601.905 613.943 626.222 638.746 2,0% Other operating costs 881.656 885.107 911.660 929.893 948.491 967.461 986.810 2,2% Operating costs 4.273.715 4.430.361 4.572.412 4.746.905 4.932.008 5.074.539 5.200.461 3,3% EBITDA 500.670 575.122 585.698 615.728 643.311 666.815 683.499 3,5% Amortization 165.827 180.065 162.059 163.679 165.316 166.969 168.639 -1,3% EBIT 334.843 395.057 423.639 452.049 477.996 499.846 514.860 5,4% Net financial result -256.006 -321.481 -197.956 -184.798 -172.231 -160.227 -148.755 -14,3% EBT 78.837 73.576 225.683 267.252 305.764 339.619 366.105 37,8% Income tax 23.945 7.465 40.623 53.450 61.153 67.924 73.221 57,9% Net income before min. Int. 54.892 66.111 185.060 213.801 244.611 271.695 292.884 34,7% Minority interest 8.291 10.882 11.426 11.997 12.597 13.227 13.888 5,0%

Net income 46.601 55.229 173.634 201.804 232.014 258.468 278.996 38,3% Source: Atlantic Grupa, InterCapital estimates

In line with income growth, we expect operating costs to rise at all levels by 2017. Material costs and are estimated at higher CAGR of 3.8%. We expect them to be between 60% - 62% of sales. Personnel costs we estimate to grow 2% in 2013 and also 2% CAGR in the total projected period.

On the costs side as a positive moment we see synergies in distribution, specifically in merging of distribution networks, optimization of distribution routes, increasing the occupancy of the distribution fleet, thus lower transportation costs (gasoline/leasing) and optimizing the sales force. This will certainly result in a higher economy of scale in the distribution segment, and therefore in lower marginal distribution costs.

On the other hand, as a negative moment we see potential inflation of commodity prices, which can decrease profitability.

Atlantic Grupa InterCapital Securities Ltd. 7/17

COMPANY ANALYSIS - Atlantic Grupa

Exhibit 11 Margins 2011 - 2012 and projections until 2017 InterCapital estimate Margins 2011 2012 2013 2014 2015 2016 2017 EBITDA margin 10,5% 11,5% 11,4% 11,5% 11,5% 11,6% 11,6% EBIT margin 7,1% 8,0% 8,3% 8,5% 8,7% 8,8% 8,8% EBT margin 1,7% 1,5% 4,4% 5,0% 5,5% 5,9% 6,2%

PROFIT margin 1,0% 1,1% 3,4% 3,8% 4,2% 4,5% 4,7% Source: Atlantic Grupa, InterCapital estimates

Due to all the above, we expect profit margins to be stable in the projected period up to 2017. Our estimate of EBITDA margin is in the range from 11.4% to 11.6% in the projected period. Similar trend is anticipated for the EBIT margin, whereas we estimate it will settle in 8.3% - 8.8% range.

Exhibit 12 CAPEX 2011 - 2012 and projections until 2016 InterCapital estimate CAGR 2011 2012 2013 2014 2015 2016 2017 12 - 17 CAPEX (HRK000) 96.526 78.812 125.000 140.000 150.000 166.969 168.639 16,4% % growth -18,4% 58,6% 12,0% 7,1% 11,3% 1,0% - CAPEX/D&A 58,2% 43,8% 77,1% 85,5% 90,7% 100,0% 100,0% -

CAPEX/SALES 2,0% 1,6% 2,5% 2,6% 2,7% 2,9% 2,9% - Source: Atlantic Grupa, InterCapital estimates

In 2013 we expect CAPEX at HRK 125m and in the coming years in range of HRK 140 - 170m. We predict CAPEX to be spent on regular maintenance, new manufacturing plans, modernization of production capacities in Serbia and similar projects. CAPEX in the 1H 2013 amounts to HRK 31.7m, with the most significant investments related to the following: automation of the line for coffee in Izola, investment in the flips packaging machine in Soko Štark, investment in the line for packaging multi-packs of Donat Mg, investments related to the HRIS system (human resources information system), investments related to the project of developing, implementing and relocating the regional data centre in Zagreb, purchase of espresso and Coffee 2 Go machines and, and refurbishment of pharmacies and specialised stores.

Atlantic Grupa InterCapital Securities Ltd. 8/17

COMPANY ANALYSIS - Atlantic Grupa

Exhibit 13 Balance sheet 2011 - 2012 and projections until 2017 (in HRK000) InterCapital estimate CAGR BALANCE SHEET 2011 2012 2013 2014 2015 2016 2017 12 - 17 Total noncurrent assets 3.235.531 3.048.846 3.034.326 3.024.440 3.023.182 3.037.515 3.052.135 0,0% Tangible assets 1.191.436 1.094.815 1.057.757 1.034.077 1.018.762 1.018.762 1.018.762 -1,4% Intangible assets 1.956.194 1.870.965 1.889.675 1.899.123 1.908.619 1.918.162 1.927.753 0,6% Financial assets 20.411 10.811 11.027 11.579 12.158 12.765 13.404 4,4% Other noncurrent assets 67.490 72.255 75.868 79.661 83.644 87.826 92.218 5,0% Total current assets 2.108.343 2.085.219 2.169.212 2.206.956 2.307.062 2.434.811 2.579.367 4,3% Inventories 672.807 657.184 682.254 714.320 748.607 773.311 784.385 3,6% Accounts receivable 1.127.896 1.149.597 1.173.256 1.205.660 1.223.672 1.244.822 1.275.943 2,1% Financial assets 60.044 27.573 35.845 43.014 51.617 61.940 74.328 21,9% Cash and cash equivalents 247.596 250.865 277.858 243.963 283.166 354.738 444.710 12,1% Active time separation 11.371 15.446 15.600 15.756 15.914 16.073 16.234 1,0% TOTAL ASSETS 5.355.245 5.149.511 5.219.139 5.247.153 5.346.158 5.488.399 5.647.736 1,9% Total shareholders equity 1.512.324 1.461.367 1.606.407 1.779.659 1.962.723 2.164.217 2.379.646 10,2% Share capital 133.372 133.372 133.372 133.372 133.372 133.372 133.372 0,0% Own shares reserves 1.264.431 1.225.630 1.250.851 1.394.477 1.545.830 1.719.840 1.913.691 9,3% Net income 46.601 55.229 173.634 201.804 232.014 258.468 278.996 38,3% Minority interest 67.920 47.136 48.550 50.007 51.507 52.537 53.588 2,6% Total noncurrent liabilities 2.715.054 2.515.960 2.413.933 2.254.956 2.169.750 2.089.760 2.014.761 -4,3% Provisions 76.515 79.691 80.488 81.293 82.106 82.927 83.756 1,0% Noncurrent financial liabilities 2.346.725 2.198.900 2.088.955 1.921.839 1.825.747 1.734.459 1.647.736 -5,6% Other noncurrent liabilities 291.814 237.369 244.490 251.825 261.898 272.374 283.269 3,6% Total current liabilities 1.068.988 1.130.319 1.156.096 1.168.981 1.169.257 1.189.107 1.207.106 1,3% Current financial liabilities 375.035 354.101 357.642 339.760 305.784 290.495 275.970 -4,9% Accounts payable 574.722 626.864 640.139 661.407 683.912 706.482 725.557 3,0% Other current liabilities 119.231 149.354 158.315 167.814 179.561 192.130 205.580 6,6% Passive time separation 58.879 41.865 42.702 43.556 44.427 45.316 46.222 2,0% TOTAL CAPITAL AND LIABILITIES 5.355.245 5.149.511 5.219.139 5.247.153 5.346.158 5.488.399 5.647.736 1,9% Source: Atlantic Grupa, InterCapital estimates

We expect the value of Atlantic Grupa's assets to grow at CAGR 1.9% in the projected period. We estimate tangible assets to decline at CAGR 1.4% due to low investments CAPEX).

On the other hand, we expect the equity to grow at CAGR 10.2% primarily due to continuous growth in net income. In 2013 Atlantic Grupa paid HRK 30m of dividend or HRK 9 per share. The dividend is paid from the part of the retained earning of the Company realized in the business year 2010. According to our expectations, Atlantic Grupa will be paying dividend again throughout the projected period. We estimate 2014 dividend at HRK 9, while the coming years should deliver around 25% of net income.

As for net debt, we expect a contraction throughout the projected period at CAGR 8.5%. Therefore, we expect a significant improvement of the net debt / EBITDA ratio, from 4.0x in 2012 to 2.2x in 2017. We project this improvement from decrease of debt level and gradually increase level of EBITDA.

Atlantic Grupa InterCapital Securities Ltd. 9/17

COMPANY ANALYSIS - Atlantic Grupa

Exhibit 14 Cash flow 2012 and projections until 2017 (in HRK000) InterCapital estimate CASH FLOW STATEMENT 2012 2013 2014 2015 2016 2017 Net income 55.229 173.634 201.804 232.014 258.468 278.996 Adjusted for: Amortization 180.065 162.059 163.679 165.316 166.969 168.639 Cash flow from operating act. before 235.294 335.692 365.483 397.330 425.437 447.634 changes in work. cap.

Financial assets 9.600 -216 -551 -579 -608 -638 Accounts receivable -21.701 -23.659 -32.404 -18.012 -21.150 -31.121 Inventories 15.623 -25.070 -32.066 -34.287 -24.704 -11.075 Other assets 23.631 -12.039 -11.118 -12.743 -14.665 -16.940 Accounts payable 52.142 13.275 21.268 22.505 22.569 19.075 Other liabilities -38.160 17.717 18.493 23.504 24.755 26.080 Net cash flow from operating activities 276.429 305.700 329.104 377.717 411.634 433.016 Net purchase of tan. and intan. assets 1.785 -143.710 -149.448 -159.496 -176.512 -178.230 Net cash flow from investing activities 1.785 -143.710 -149.448 -159.496 -176.512 -178.230 Change in own shares reserves -85.402 -30.008 -30.008 -50.451 -58.004 -64.617 Minority interest -20.784 1.414 1.457 1.500 1.030 1.051 Inc. (dec.) in loan liabilities -168.759 -106.404 -184.999 -130.068 -106.577 -101.248 Net cash flow from financing activities -274.945 -134.998 -213.550 -179.019 -163.550 -164.814 Net change in cash and cash equiv. 3.269 26.993 -33.895 39.203 71.572 89.972 Cash and cash equivalents (1 Jan) 247.596 250.865 277.858 243.963 283.166 354.738

Cash and cash equivalents (31 Dec) 250.865 277.858 243.963 283.166 354.738 444.710 Source: Atlantic Grupa, InterCapital estimates

We expect Atlantic Grupa to generate a stable net cash flow from operating activities, which should amount to between HRK 335.7m and HRK 447.6m throughout the projected period and should ensure regular operations and meeting of the liabilities. We expect net cash flow from investing activities at negative levels because of CAPEX. Net cash flow from financial activities is estimated at levels from HRK -135m to HRK -213.6m on assumption of continuous dividend payment and repayment of liabilities. Altogether, Atlantic Grupa should generate a stable cash position which should serve as a strong business support.

Atlantic Grupa InterCapital Securities Ltd. 10/17

COMPANY ANALYSIS - Atlantic Grupa

Valuation

Discounted Cash Flow Method

In DCF method we used FCFF (free cash flow to firm) model which we believe is optimally adjusted to the business model, capital structure and business strategy of Atlantic Grupa and gives the most objective look to Atlantic Grupa's fundamental value.

Exhibit 15 DCF valuation (in HRK000) 2013 2014 2015 2016 2017 NOPLAT 383.016 398.599 416.843 431.922 441.639 Amortization 162.059 163.679 165.316 166.969 168.639 CAPEX 125.000 140.000 150.000 166.969 168.639 Change in WC 35.453 43.202 29.794 23.285 23.120 FCFF 384.622 379.076 402.365 408.637 418.519

Growth rate (perpetual ) 2,00% WACC (perpetual ) 11,3% Terminal value 4.603.849 PV of terminal value 3.076.526 PV of FCFF 1.575.299 Enterprise value 4.651.824 Net debt 2.168.739 Minority interest 86.723

Equity value 2.396.362

By using discounted cash flow method and FCFF model we calculated Atlantic Grupa's equity value in the amount of HRK 2,396.4m. Atlantic Grupa has an EV of HRK 4,651.8m of which a market cap of HRK 2,396.4m, and net debt of HRK 2,168.7m.

Exhibit 16 Sensitivity analysis -0,50% -0,25% WACC 0,25% 0,50% 0,50% 2.783.125 2.681.472 2.585.612 2.495.066 2.409.401 0,25% 2.674.310 2.578.685 2.488.359 2.402.904 2.321.936 PGR 2.571.713 2.481.608 2.396.362 2.315.591 2.238.954 -0,25% 2.474.815 2.389.778 2.309.205 2.232.756 2.160.119 -0,50% 2.383.155 2.302.780 2.226.518 2.154.061 2.085.130

By using sensitivity analysis of perpetual growth rate (PGR) and weighted average cost of capital (WACC) we calculated Atlantic Grupa's value of HRK 2,085.1m to HRK 2,783.1m.

Atlantic Grupa InterCapital Securities Ltd. 11/17

COMPANY ANALYSIS - Atlantic Grupa

Comparables Method

The key step in using the comparables method for valuation is the selection of companies operating within relevant markets and whose business model is comparable to that of Atlantic Grupa. Unlike the previous update, we have used the comparables method in valuation despite the fact that after Droga Kolinska acquisition, which made an already complex business model even more complex. We decided to use diversified FMCG companies although they don’t have same product categories as Atlantic Grupa.

Exhibit 17 Comparables – key data and multiples ATLANTIC GRUPA EV/S EV/EBITDA P/E Ticker COMPARABLES 2013 2014 2013 2014 2013 2014

Greencore Group GNC LN Equity 0,8 0,7 8,8 8,2 10,6 9,7

Herbalife HLF US Equity 1,4 1,3 8,5 7,5 13,2 11,7

AVI Brands AVI SJ Equity 2,2 2,0 11,3 10,1 16,9 15,0

Marr MARR IM Equity 0,6 0,6 9,4 8,8 13,9 13,1

Mieszko MSO PW Equity 0,9 0,9 8,4 8,1 10,6 9,6

Strauss Group STRS IT Equity 1,0 1,0 9,7 8,7 24,0 21,4

Podravka Group PODRRA ZA Equity 0,7 0,7 6,6 5,8 14,0 9,0

Median - 0,9 0,9 8,8 8,2 13,9 11,7

Average - 1,1 1,0 9,0 8,2 14,7 12,8

Atlantic Grupa ATGRRA ZA Equity 0,9 0,8 7,6 7,0 12,5 10,7

ATLANTIC GRUPA @ 2013e

Sales 5.098.076 EBITDA 585.698 Net income 173.634 Net debt 2.168.739 Equity 1.606.407

EV/S 0,9 2.572.471 EV/EBITDA 8,8 3.002.972 P/E 13,9 2.416.983

Value 2.664.142 Source: Bloomberg

Valuating Atlantic Grupa with comparables method and applying the multiples on results which are expected in 2013, we have generated Atlantic Grupa's value of HRK 2,664.1m.

Atlantic Grupa InterCapital Securities Ltd. 12/17

COMPANY ANALYSIS - Atlantic Grupa

Valuation conclusion

In valuation of Atlantic Grupa we used the DCF method and the comparables method.

Since DCF method reflects future business results, it is optimal for determining company's value. This model favorizes profit margin movements. However we were conservative in estimating profit margin which is line with business expectations. For this reason, this method has been given a weight of 70% in Atlantic Grupa's valuation. Given Atlantic Grupa's business environment in the comparables method, this method has been given a weight of 30% in valuation, since peer companies aren't fully comparable with Atlantic Grupa.

Also Atlantic Grupa has non-core assets (real estate in Ljubljana). We included this asset in summarized calculations.

Exhibit 18 Summarized calculation (in HRK000) DCF COMPARABLES

EQUITY VALUE 2.396.362 2.664.142 WEIGHT 70,0% 30,0% WEIGHTED VALUE 2.476.696

NON-CORE ASSET 86.746 TOTAL VALUE 2.563.441 NUMBER OF SHARES 3.334.300

PRICE PER SHARE (in HRK) 768,81

By using projected values for 2013 we estimated weighted value of Atlantic Grupa in the amount of HRK 2,563.4m or HRK 768.81 per share, which makes us to give Atlantic Grupa's shares a BUY recommendation.

Atlantic Grupa InterCapital Securities Ltd. 13/17

COMPANY ANALYSIS - Atlantic Grupa

Exhibit 19 Results 2011 – 2012 and projections until 2017 (in HRK000) InterCapital estimate CAGR INCOME STATEMENT 2011 2012 2013 2014 2015 2016 2017 12 - 17 Sales 4.727.766 4.930.441 5.098.076 5.301.999 5.514.079 5.679.501 5.821.489 3,4% Other operating revenue 46.619 75.042 60.034 60.634 61.240 61.853 62.471 -3,6% Operating revenue 4.774.385 5.005.483 5.158.110 5.362.633 5.575.319 5.741.354 5.883.960 3,3% Inven. change of fin. g. and WIP -5.772 -3.667 -3.704 -3.741 -3.778 -3.816 -3.854 1,0% Material costs 2.828.846 2.970.389 3.074.353 3.218.847 3.373.352 3.484.672 3.578.759 3,8% Personnel costs 568.985 578.532 590.103 601.905 613.943 626.222 638.746 2,0% Other operating costs 881.656 885.107 911.660 929.893 948.491 967.461 986.810 2,2% Operating costs 4.273.715 4.430.361 4.572.412 4.746.905 4.932.008 5.074.539 5.200.461 3,3% EBITDA 500.670 575.122 585.698 615.728 643.311 666.815 683.499 3,5% Amortization 165.827 180.065 162.059 163.679 165.316 166.969 168.639 -1,3% EBIT 334.843 395.057 423.639 452.049 477.996 499.846 514.860 5,4% Net financial result -256.006 -321.481 -197.956 -184.798 -172.231 -160.227 -148.755 -14,3% EBT 78.837 73.576 225.683 267.252 305.764 339.619 366.105 37,8% Income tax 23.945 7.465 40.623 53.450 61.153 67.924 73.221 57,9% Net income before min. Int. 54.892 66.111 185.060 213.801 244.611 271.695 292.884 34,7% Minority interest 8.291 10.882 11.426 11.997 12.597 13.227 13.888 5,0% Net income 46.601 55.229 173.634 201.804 232.014 258.468 278.996 38,3%

(in HRK000) InterCapital estimate CAGR BALANCE SHEET 2011 2012 2013 2014 2015 2016 2017 12 - 17 Total noncurrent assets 3.235.531 3.048.846 3.034.326 3.024.440 3.023.182 3.037.515 3.052.135 0,0% Tangible assets 1.191.436 1.094.815 1.057.757 1.034.077 1.018.762 1.018.762 1.018.762 -1,4% Intangible assets 1.956.194 1.870.965 1.889.675 1.899.123 1.908.619 1.918.162 1.927.753 0,6% Financial assets 20.411 10.811 11.027 11.579 12.158 12.765 13.404 4,4% Other noncurrent assets 67.490 72.255 75.868 79.661 83.644 87.826 92.218 5,0% Total current assets 2.108.343 2.085.219 2.169.212 2.206.956 2.307.062 2.434.811 2.579.367 4,3% Inventories 672.807 657.184 682.254 714.320 748.607 773.311 784.385 3,6% Accounts receivable 1.127.896 1.149.597 1.173.256 1.205.660 1.223.672 1.244.822 1.275.943 2,1% Financial assets 60.044 27.573 35.845 43.014 51.617 61.940 74.328 21,9% Cash and cash equivalents 247.596 250.865 277.858 243.963 283.166 354.738 444.710 12,1% Active time separation 11.371 15.446 15.600 15.756 15.914 16.073 16.234 1,0% TOTAL ASSETS 5.355.245 5.149.511 5.219.139 5.247.153 5.346.158 5.488.399 5.647.736 1,9% Total shareholders equity 1.512.324 1.461.367 1.606.407 1.779.659 1.962.723 2.164.217 2.379.646 10,2% Share capital 133.372 133.372 133.372 133.372 133.372 133.372 133.372 0,0% Own shares reserves 1.264.431 1.225.630 1.250.851 1.394.477 1.545.830 1.719.840 1.913.691 9,3% Net income 46.601 55.229 173.634 201.804 232.014 258.468 278.996 38,3% Minority interest 67.920 47.136 48.550 50.007 51.507 52.537 53.588 2,6% Total noncurrent liabilities 2.715.054 2.515.960 2.413.933 2.254.956 2.169.750 2.089.760 2.014.761 -4,3% Provisions 76.515 79.691 80.488 81.293 82.106 82.927 83.756 1,0% Noncurrent financial liabilities 2.346.725 2.198.900 2.088.955 1.921.839 1.825.747 1.734.459 1.647.736 -5,6% Other noncurrent liabilities 291.814 237.369 244.490 251.825 261.898 272.374 283.269 3,6% Total current liabilities 1.068.988 1.130.319 1.156.096 1.168.981 1.169.257 1.189.107 1.207.106 1,3% Current financial liabilities 375.035 354.101 357.642 339.760 305.784 290.495 275.970 -4,9% Accounts payable 574.722 626.864 640.139 661.407 683.912 706.482 725.557 3,0% Other current liabilities 119.231 149.354 158.315 167.814 179.561 192.130 205.580 6,6% Passive time separation 58.879 41.865 42.702 43.556 44.427 45.316 46.222 2,0% TOTAL CAPITAL AND LIABILITIES 5.355.245 5.149.511 5.219.139 5.247.153 5.346.158 5.488.399 5.647.736 1,9%

Atlantic Grupa InterCapital Securities Ltd. 14/17

COMPANY ANALYSIS - Atlantic Grupa

(in HRK000) InterCapital estimate CASH FLOW STATEMENT 2012 2013 2014 2015 2016 2017 Net income 55.229 173.634 201.804 232.014 258.468 278.996 Adjusted for: Amortization 180.065 162.059 163.679 165.316 166.969 168.639 Cash flow from operating act. before 235.294 335.692 365.483 397.330 425.437 447.634 changes in work. cap.

(in HRK000) InterCapital estimate 2011 2012 2013 2014 2015 2016 2017 Sales growth - 4,3% 3,4% 4,0% 4,0% 3,0% 2,5% EBITDA margin 10,5% 11,5% 11,4% 11,5% 11,5% 11,6% 11,6% EBIT margin 7,1% 8,0% 8,3% 8,5% 8,7% 8,8% 8,8% Profit margin 1,0% 1,1% 3,4% 3,8% 4,2% 4,5% 4,7% ROA 0,9% 1,1% 3,3% 3,8% 4,3% 4,7% 4,9% ROE 3,1% 3,8% 10,8% 11,3% 11,8% 11,9% 11,7% Equity ratio 35,7% 36,4% 39,6% 44,0% 47,9% 51,7% 55,3% Net debt (HRK000) 2.474.164 2.302.136 2.168.739 2.017.636 1.848.365 1.670.216 1.478.996 Neto dug/EBITDA 4,9 4,0 3,7 3,3 2,9 2,5 2,2

CAPEX/Sales 2,0% 1,6% 2,5% 2,6% 2,7% 2,9% 2,9% Source: Atlantic Grupa, InterCapital estimates

Atlantic Grupa InterCapital Securities Ltd. 15/17

COMPANY ANALYSIS - Atlantic Grupa

Disclaimer

Information in this report is intended for informative purposes only and does not represent the solicitation to buy or sell any financial instruments or participate in any particular trading strategy. The information contained in this report has been obtained from public sources as well as directly from Companies’ Management. Although we believe our information and price quotes to be reasonably reliable, we do no guarantee their accuracy or completeness. In addition, the price or value of financial instruments described in this report may fluctuate and realize gains or losses. InterCapital Securities Ltd, headquartered in Zagreb, Masarykova 1, does not assume any responsibility for the damage caused by the use of information and projections contained in this report. Opinions expressed in this report constitute current judgment of the author(s) as of the date of this report and are subject to change without notice.

InterCapital Securities Ltd uses various methods in Company valuations. Among the rest are comparative analyses of peer companies, discounted cash flow methods and other.

Fundamental analysis is a financial analysis of industries and companies based on factors such as sales, assets, profit, products or services, markets and management. In conducting fundamental analysis, InterCapital Securities Ltd uses various methods to determine a value of the Issuer. Among the rest, analysis of comparable companies, discounted cash flow and other methods are being used. Although InterCapital Securities Ltd uses models commonly accepted in the financial industry and theory, the results of these models depend on plans and information obtained from the Issuer as well as subjective opinions of analysts.

InterCapital Securities Ltd owns the following issues:

The author of fundamental analyses in this report is Tomislav Bajic. Tomislav Bajic is employed in InterCapital Securities Ltd registered in Zagreb, Masarykova 1 as Head of Research. InterCapital Securities Ltd is supervised by Croatian Financial Services Supervisory Agency (HANFA).

Tomislav Bajic has no ownership interest in Atlantic Grupa. He doesn’t own any shares of Atlantic Grupa, and neither do his immediate family members.

The company InterCapital Securities Ltd. acts as a market maker for ADPLRA ZA and HTRA ZA.

Fundamental rating values of an Issuer are given according to the following scale:

Sell - equities with expected absolute value decrease in the monitored time period

Hold - equities with expected absolute revenue of 0%-10% in the monitored time period

Buy - equities with expected absolute revenue of 10%-20% in the monitored time period

Strong buy - equities with expected absolute repayment of more than 20% in the monitored time period

2Q2013 (1 April - 30 June 2013) Companies which InterCapital Securities Ltd. Number Share provided investment banking service within last 12 months Strong Buy 5 29,4% Buy 1 5,9% Hold 3 17,6% VIRO-R-A Sell 1 5,9% Under Review 7 41,2% HT-R-A, CROS-R-A, CROS-P-A

Atlantic Grupa InterCapital Securities Ltd. 16/17

COMPANY ANALYSIS - Atlantic Grupa

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Chronology of share recommendations

Date Report Recommendation Market price Target price

15-Nov-07 Initial analysis BUY N.A. HRK 1,062.00 15-Dec-08 Update STRONG BUY HRK 435.00 HRK 605.68 3-Apr-09 Update STRONG BUY HRK 438.78 HRK 527.75 28-Apr-11 Update HOLD HRK 799.94 HRK 822.29 3-Aug-12 Update HOLD HRK 455.00 HRK 493.26 9-Aug-13 Update BUY HRK 650,00 HRK 768.81

InterCapital Securities Research contacts

Tomislav Bajic, Head of Research, +385 (0)1 4825 858, [email protected]

Kreso Vugrincic, Junior Analyst, +385 (0)1 4825 864, [email protected]

Atlantic Grupa InterCapital Securities Ltd. 17/17