Tuesday, August 30, 2016 | update Grupa Azoty: hold (downgraded) ATT PW; ATT.WA | Chemicals,

Cheap Grain Keeps Prices Down Current Price PLN 64.79 Target Price PLN 65.50 After a bumper harvest in former Soviet states and in both Americas, the world is set for the fourth consecutive global grain surplus in the Market Cap PLN 6.4bn 2016/2017 season which, in our view, is more than likely to keep Free Float PLN 1.5bn the prices of crops and cereals low at least through to the end of ADTV (3M) PLN 8.52m 2016. In this environment, there is no room for producers of agricultural like Grupa Azoty to raise their sales prices for Ownership at least another year-and-a-half. Accordingly, we have lowered our 2016 and 2017 grain price assumptions, originally predicated on the Polish Government 33.00% expectation that a lower harvest in Europe would mitigate the global Wiaczesław Kantor (Acron) 19.70% oversupply of crops, and likewise we have downgraded our NN OFE 9.96% expectations as to the prices of fertilizers. Consequently, we have TFI PZU AM 8.60% revised our financial forecasts for Grupa Azoty's Fertilizer business, EBRD 5.75% and we now expect that the segmental EBITDA will post a drop of

12.2% in 2016 and 25.2% in 2017. On a positive note, at the same time we expect improvement in the Chemicals segment, driven Others 22.99% mainly by high prices of . On our updated estimates, ATT is trading at respective premiums of 4% and 16% relative to 2017E Business Profile and 2018E peer EV/EBITDA ratios. We are lowering our price target Grupa Azoty is a fertilizer producer with a portfolio for Grupa Azoty from PLN 86.10 to PLN 65.50 per share, with the consisting among others of fertilizers (with annual maximum production at 2.0-2.1mmt of investment rating downgraded from buy to hold. nitrate fertilizer, 0.7mmt of ammonium nitrate, 0.7mmt of ammonium sulfate, 1.2mmt of UAN, and Grupa Azoty posts weak second quarter of 2016 0.2mmt of "AdBlue" technical ), compound On a higher sales volume, Grupa Azoty reported disappointing profits in Q2 fertilizers (1.8mmt max), caprolactam (170,000 2016, led by the Fertilizer business. With EBITDA per ton of fertilizer sold in tons), PA6 (92,000 tons), melamine (96,000 tons), the period shrunken by about one-third compared to Q2 2015, the total plasticizers (83,500 tons), OXO alcohols (205,000 quarterly EBITDA fell 39% short of the market estimate, and the net profit tons), and titanium white (40,000 tons). Grupa Azoty is a top-two fertilizer producer in Poland missed the consensus by 63%. The worsened profitability of fertilizer sales alongside Anwil. was additionally exacerbated by an unexpected increase in SG&A expenses. ATT vs. WIG Europe trails World on wheat harvest 120 The USDA predicts that due to adverse weather conditions the European wheat supply in the 2016/2017 season will be 7.8% lower than in the PLN previous season. At the same time, a much higher harvest is expected in former Soviet states and in North America. The resulting oversupply on a 105 global scale, while the local yields tighten, is likely to reduce the purchasing power of EU farmers, with demand for fertilizers further dampened by the fact that the soil needs less fertilizer after a poorer harvest. 90

Gas costs due to fall again in Q3 Low prices of natural gas fuel help mitigate weak demand for fertilizers at Grupa Azoty, and in Q3 2016 we expect the Company's gas costs to go down 75 3%. ATT

WIG Scaled-back CAPEX Grupa Azoty has recently revised its planned 2016 capital expenditures from 60 Aug-15 Nov-15 Feb-16 May-16 Aug-16 the original PLN 2.0bn to PLN 1.6bn after reviewing the projects lined up by the former Management Board. Within the next few months, given that it Target Price Rating spent only PLN 0.55bn in the first half of the year, we expect the Company Company to cut the CAPEX budget further to ca. PLN 1.4bn. new old new old Grupa Azoty 65.50 86.10 hold buy

Current Target Upside / (PLN m) 2014 2015 2016E 2017E 2018E Company Price Price Downside Revenue 9,898.5 10,024.4 9,260.1 9,760.0 9,896.4 Grupa Azoty 64.79 65.50 +1.1% EBITDA 822.4 1,309.3 1,204.9 1,114.7 1,268.6 Forecast revision 2016E 2017E 2018E EBITDA margin 8.3% 13.1% 13.0% 11.4% 12.8% since last update EBIT 302.2 830.0 709.4 584.1 686.4 Revenue -5.3% -1.5% -2.2% Net profit 231.4 609.5 507.6 399.4 458.6 EBITDA -15.9% -15.5% -11.6%

DPS 0.42 0.00 0.84 1.54 2.42 Net profit -21.9% -25.6% -20.9% P/E 27.8 10.5 12.7 16.1 14.0 P/CE 8.6 5.9 6.4 6.9 6.2 Analyst: P/BV 1.1 1.0 0.9 0.9 0.9 EV/EBITDA 9.2 5.5 6.3 7.3 6.6 Jakub Szkopek +48 22 438 24 03 DYield 0.6% 0.0% 1.3% 2.4% 3.7% jakub.szkopek@.pl

Market Outlook World biggest wheat-producing regions (mmt), 2012-2017

Crop Harvest 180 160 The US Department of Agriculture projects the 2016/2017 140 global wheat harvest at 728 million tons after a year- 120 on-year rise of 1.2%, driven by a record expected average yield of 3.37 tons per hectare led by former Soviet 100 states, North America, and South Asia. As a result, the 80 Agency anticipates the fourth consecutive season of 60 growing world supplies , with the stocks-to-use ratio kept high at close to 35%. 40 20 Global wheat production and consumption (mmt, 0 lhs), and average yield (t/ha, rhs), 2000-2017P East Asia EU28 F. Soviet North South Asia 800 4.0 States America 12/13 13/14 14/15 15/16 16/17 700 3.5 Source: USDA, Dom Maklerski mBanku 600 3.0

500 2.5 Net wheat exports by region (mmt), 2012-2017 400 2.0 50 300 1.5 40 200 1.0 100 0.5 30

0 0.0 20

10 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 Production Consumption Yield per hectare 0

Source: USDA, Dom Maklerski mBanku -10

Global wheat stocks (mmt, lhs) and stocks-to-use -20 ratio (%, rhs), 2000-2017 East Asia EU28 F. Soviet North South Asia States America 300 40% 12/13 13/14 14/15 15/16 16/17 35% 250 Source: USDA, Dom Maklerski mBanku 30% 200 25% The USDA also anticipates a record global corn harvest 150 20% in the 2016/2017 season at a projected 1,028mmt after a 7.2% y/y jump, resulting in a high stocks-to-usage 15% 100 ratio above 20% . 10% 50 5% The areas where the corn harvest is expected to be the highest this year are North America and South 0 0% America, with the latter, similarly to the wheat-producing former Soviet States, able to offer low dollar prices in the

00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 wake of local currency depreciation. Stocks Stock/Usage ratio Global corn production and consumption (mmt, lhs), Source: USDA, Dom Maklerski mBanku and average yield (t/ha, rhs), 2000-2017P At the same time, the USDA's forecast for Europe is that, 1,200 7 due to adverse weather conditions (flooding, heavy rainfall 6 during planned harvest), the European wheat supply in 1,000 the 2016/2017 season will be 7.8% lower than in 5 800 the previous season . Contrary to what we had assumed 4 earlier, however, the lower harvest in Europe will not result 600 in a reduction in the global oversupply. 3 400 2 After a high harvest, shipments of wheat from the former Soviet states and from North America are due to increase 200 1 in the 2016/2017 season, putting downward pressure on 0 0 global prices. This effect will be compounded by the fact that, after a sharp depreciation in their respective local currencies in the last three years, exporters in Ukraine, 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 Kazakhstan, and Russia can generate high profit margins Production Consumption Yield per hectare even as global wheat prices decline. Source: USDA, Dom Maklerski mBanku

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Global corn stocks (mmt, lhs) and stocks-to-use Fertilizer Market ratio (%, rhs), 2000-2017 250 35% The expected low prices of basic crops will most likely affect the purchasing power of EU-based farmers, with 30% 200 implications for fertilizer producers. In Poland, a 5% 25% higher grain harvest and a bigger vegetable harvest will be offset by a 10-20% lower rapeseed harvest this year. What 150 20% is more, the lower crop yields anticipated in Europe, 100 15% leaving the soil less depleted of nutrients, may mean reduced fertilizer purchases for the 2017 planting 10% 50 season. 5% In line with the downward price revisions for crops, we 0 0% have lowered our 2016 and 2017 price expectations for nitrogen fertilizers , from EUR 351 to 349 and from

00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 EUR 371 to EUR 354/t, respectively, for urea , and from Stocks Stock/Usage ratio EUR 312 to EUR 310 and from EUR 324 to EUR 319/t

Source: USDA, Dom Maklerski mBanku respectively, for ammonium nitrate , with the expected 2016 price of UAN cut from EUR 181 to EUR 163/t while World biggest corn-producing regions (mmt), 2012- the 2017 price forecast remains intact. When it comes to 2017 multi-nutrient fertilizers, our 2016 and 2017 price forecasts have not changed. 450 400 Wheat and corn price projection for Poland (PLN /t), 350 2010-2019P 1000 300 250 900 200 800 150 100 700 50 600 0 East Asia EU28 F. Soviet North South 500 States America Amercia 12/13 13/14 14/15 15/16 16/17 400 Source: USDA, Dom Maklerski mBanku

Net corn exports by region (mmt), 2012-2017 Wheat Corn 50 Source: Polish Institute for Agricultural and Food Economics (IERiGŻ), Dom 40 Maklerski mBanku 30 Fertilizer-to-wheat price ratios in Poland, 20 2010-2019P 10 3.5 0 -10 3.0 -20 2.5 -30 -40 2.0 East Asia EU28 F. Soviet North South States America Amercia 1.5 12/13 13/14 14/15 15/16 16/17 1.0 Source: USDA, Dom Maklerski mBanku

0.5 Based on the projected high supply, we have revised our 2016 and 2017 average price forecasts for wheat downward from $170 to $169 and from $189 to $175 per ton, respectively. By the same token, we have lowered our average price forecasts for a ton of corn downward Urea/Wheat Urea/Corn AN/Wheat AN/Corn from $175 to $172 in 2016 and from $185 to $174 in CAN/Wheat CAN/Corn 2017. UAN/Wheat UAN/Corn Polifoska® NPKS Fert/Wheat Polifoska®/Corn

Source: Polish Institute for Agricultural and Food Economics (IERiGŻ), Dom Maklerski mBanku

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Nitrogen fertilizer prices in Poland (PLN/t), Benchmark European margins for urea, ammonium 2010-2019P nitrate, and calcium ammonium nitrate (CAN) 2200 (2015-2016) (USD/t) 250 1700 200 1200 150 700 100 200

50

Ammonium Sulfate Urea Jul-15 Jul-16 Jan-15 Jan-16 Mar-15 Mar-16 Sep-15 Nov-15 Ammonium Nitrate CAN May-15 May-16 Urea (W. Europe) UAN Source: Polish Institute for Agricultural and Food Economics (IERiGŻ), Dom Ammonium Nitrate (Baltic) Maklerski mBanku CAN (Europe)

Source: Bloomberg, Dom Maklerski mBanku Multi-nutrient fertilizer prices in Poland (PLN/t), 2010-2019P Benchmark European margins on DAP (lhs) and NPK 2500 (rhs) fertilizers (2015-2016) (USD/t) 375 200 2400 350 190 2300 325 180 2200 300 170 2100 275 160 2000 250 150 1900 225 140 1800 200 130 1700 175 120 Jul-15 Jul-16 Jan-15 Jan-16 Mar-15 Mar-16 Sep-15 Nov-15 NPK DAP May-15 May-16

Source: Polish Institute for Agricultural and Food Economics (IERiGŻ), Dom DAP (Baltic) NPK (Black Sea) Maklerski mBanku Source: Bloomberg, Dom Maklerski mBanku

For natural gas-fueled fertilizer production facilities like Thanks to the falling energy prices, we estimate that the those of Grupa Azoty, weak demand can be mitigated natural gas costs of Grupa Azoty will decrease to an by low prices of natural gas, and by a downward estimated PLN 783 per 1000 cubic meters in Q3 2016 trend in the costs of phosphate rock and potash salt, from PLN 808 in Q2 2016 (-3% q/q) and PLN 853 in Q1 which boosts the profit margins on NPK fertilizers. 2016. This will result in average quarterly per-ton EBITDA of a projected PLN 104 in Q3 2016 (vs. PLN 116 in Q3'15), Natural gas prices in Poland and Germany followed by expansion to PLN 157 in Q4 2016 (vs. PLN 175 (2008-2016) (US$/MWh) in Q4'15). In turn, this would imply that the quarterly 35 EBITDA of Grupa Azoty's fertilizer business will show year-on-year shrinkage at annual rates of 12% in Q3 30 and 15% in Q4 2016 .

25 Grupa Azoty natgas costs in 2014-2016 (PLN/1000 m 3) 20 1,600

15 1,400

1,200 10 1,000 Jul-15 Jul-16

Jan-15 Jan-16 800 Mar-15 Mar-16 Sep-15 Nov-15 May-15 May-16 Germany Poland 600 Source: Bloomberg, Dom Maklerski mBanku 400

Natgas price in Poland Price of German contract Average natgas cost for Grupa Azoty

Source: Bloomberg, Dom Maklerski mBanku

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Quarterly EBITDA per ton in the Fertilizer business, On a positive note, Grupa Azoty's Chemicals business has 2015-2016P (PLN 1000/t) a successful second half of 2016 ahead thanks to 0.30 sustained high margins achievable on melamine, supported by high demand, especially from the furniture industry. 0.25 Natural gas-melamine price spread, 2005-2016P 0.20 4,000 8,000 3,500 7,000 0.15 3,000 6,000 0.10 2,500 5,000

0.05 2,000 4,000

0.00 1,500 3,000 1,000 2,000

500 1,000 Source: Dom Maklerski mBanku 0 0 & Chemicals

Our H2 2016 outlook for Grupa Azoty's Plastics business melamine-natgas price spread (fwd price, PLN /t) (lhs) assumes that thanks to a slight improvement in the price price of melamine (fwd price, PLN/t) (rhs) spread between benzene and phenol inputs and Source: Bloomberg, Dom Maklerski mBanku caprolactam the quarterly EBITDA will hover around zero in Q3 and in Q4 2016 (compared to quarterly Grupa Azoty's quarterly per-ton EBITDA in Plastics losses of PLN 12-13m posted in H1). At the same time, the and Chemicals, 2010-2016P (PLN 1000/t) caprolactam-to-polyamide-6 price ratio continues to hover around 1 due to price pressures in Asian markets. 1.50

Benzene-caprolactam price spread (lhs) and price of 1.00 caprolactam flakes (rhs) (PLN/t) 2005-2016 7,000 12,000 0.50

0.00 6,000 10,000 -0.50 5,000 8,000 -1.00 4,000 6,000 -1.50

3,000 4,000

2,000 2,000 Plastics Chemicals

Source: Dom Maklerski mBanku 1,000 0 Q3 and Q4 2016 Earnings Outlook

Grupa Azoty is set to experience revenue contraction in H2 spread price of caprolactam flakes 2016 compared to the same period in 2015, led by lower sales prices of fertilizers and plastics. On a quarterly basis, Source: Bloomberg, Dom Maklerski mBanku the projected year-over-year revenue shrinkage will

amount to 7% in Q3 and 3% in Q4 2016. Caprolactam-Polyamide 6 price spread, 2010-2016

12,000 1.15 Grupa Azoty's quarterly sales revenue, 2015-2016P (PLN m) 11,000 3,000 10,000 1.10 9,000 2,500 1.05 8,000 2,000

7,000 1.00 1,500 6,000 2,839 2,495 2,476 5,000 0.95 1,000 2,401 2,404 2,290 2,223 2,158

500

0 Price of polyamide (PLN/t) (lhs) 1Q 2Q 3Q 4Q Polyamide-Caprolactam price ratio (rhs) 2015 2016 Source: Bloomberg, Dom Maklerski mBanku Source: Dom Maklerski mBanku

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When it comes to the quarterly EBITDA , the worsened performance of the Fertilizer segment in H2 2016 is expected to be mitigated by improving results in Plastics and Chemicals , resulting in Q3 and Q4 2016 EBITDA declines at respective annual rates of 4% and 6%.

Grupa Azoty's quarterly EBITDA, 2015-2016P (PLN m) 600

500

400

300 510 200 483 327 309 100 281 223 215 170 0 1Q 2Q 3Q 4Q 2015 2016

Source: Dom Maklerski mBanku

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Valuation

We used DCF analysis and relative valuation to assess the (PLN) weight price value of Grupa Azoty. The DCF model yielded per-share Relative Valuation 50% 65.1 valuation of PLN 58.20, and multiples comparison indicates a value of PLN 65.10. DCF Analysis 50% 58.2 price 61.7

9M target price 65.5

Relative Valuation

We compared Grupa Azoty with a group of international fertilizer producers: Acron, Agrium, CF Industries, Israel Chemicals, K+S, Mosaic, Phosagro, Potasch, Uralkali, and Yara.

Multiples Comparison P/E EV/EBITDA 2015 2016E 2017E 2018E 2015 2016E 2017E 2018E ACRON 7.8 5.4 5.4 5.0 5.2 5.4 4.7 4.3 AGRIUM INC 12.6 17.4 15.3 13.6 8.2 9.9 9.0 8.1 CF INDUSTRIES HOLDINGS INC 6.4 22.2 21.3 13.2 5.9 7.8 6.5 5.4 ISRAEL CHEMICALS LTD 9.1 12.8 11.2 10.1 6.9 8.2 7.5 6.9 K+S AG-REG 7.0 24.1 13.0 9.1 4.9 10.2 7.0 5.6 MOSAIC CO/THE 10.0 53.0 26.6 19.7 6.0 11.5 9.7 8.9 PHOSAGRO OAO-GDR REG S 10.0 7.5 7.3 6.8 5.5 6.1 6.0 5.4 POTASH CORP OF SASKATCHEWAN 10.2 29.3 22.3 19.7 6.6 12.4 10.2 9.9 URALKALI PJSC-SPON GDR-REG S ------YARA INTERNATIONAL ASA 8.4 12.3 11.8 10.2 4.5 5.9 6.3 5.6

Mxsimum 12.6 53.0 26.6 19.7 8.2 12.4 10.2 9.9 Minimum 6.4 5.4 5.4 5.0 4.5 5.4 4.7 4.3 Median 9.1 17.4 13.0 10.2 5.9 8.2 7.0 5.6 Grupa Azoty 10.5 12.7 16.1 14.0 5.5 6.3 7.3 6.6 premium (discount) 16.3% -27.3% 24.0% 37.3% -7.3% -23.2% 4.2% 16.5%

Implied valuation

Median 9.1 17.4 13.0 10.2 5.9 8.2 7.0 5.6 Discount 0% 0% 0% 0% 0% 0%

Multiple weight 50% 50%

Year weight 33% 33% 33% 33% 33% 33%

Value per share (PLN) 65.1

ACRON JSC is a vertically integrated Russian mineral ISRAEL CHEMICALS LIMITED through its subsidiaries, fertilizer producer with a diversified product portfolio develops, manufactures, and markets chemical and consisting of multi-nutrient fertilizers such as NPK and bulk fertilizer products in Israel, Europe, and the Americas. blends, as well as straight nitrogen-based products such as Products include bromine specialty chemicals, potash, urea, ammonium nitrate, and UAN. phosphate fertilizers, and specialty performance and industrial products. AGRIUM INC. supplies nitrogen, potash and phosphate for agricultural, industrial, and specialty use. The Company K+S AG manufactures and markets within the fertilizer operates throughout the Americas while it markets its division standard and specialty fertilizers to the agricultural products globally. and industrial industries worldwide. In its salt business, the company produces de-icing salt, food grade salt, industrial CF INDUSTRIES HOLDINGS, INC. manufactures and salt and salt for chemical use. distributes nitrogen and phosphate fertilizer products globally. The Company's principal products in the nitrogen THE MOSAIC COMPANY produces and distributes crop segment are , urea, urea-ammonium nitrate nutrients to the agricultural communities located in North solution, ammonium nitrate, diesel exhaust fluid, and aqua America and other countries. The Company's principal ammonia. The principal products in the phosphate segment products include concentrated phosphates and potash. are diammonium phosphate and monoammonium phosphate.

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PHOSAGRO OAO is a global vertically integrated Company extracts and processes potassium ore and sells phosphate-based fertilizer producer. The Company focuses standard and granular muriate of potash for the agriculture on the production of phosphate-based fertilizers, feed and chemical industries. Uralkali's main markets include phosphate and high-grade phosphate rock, as well as Brazil, India, China, Southeast Asia, Russia, the United ammonia and nitrogen-based fertilizers. States and Europe.

POTASH CORPORATION OF SASKATCHEWAN INC . YARA INTERNATIONAL ASA produces, distributes, and produces potash, phosphate, and nitrogen to the sells nitrogen-based mineral fertilizers and related agricultural and industrial industries worldwide. The industrial products. The Company also distributes and sells Company conducts operations in Canada, Chile, the United a range of phosphate and potash-based mineral fertilizers, States, Brazil, and Trinidad. as well as complex and specialty mineral fertilizer products. Yara is the largest producer of mineral fertilizers URALKALI PJSC produces potash and operates mines and in Europe. ore-treatment mills in the Perm Territory, Russia. The

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Additional assumptions

Cost and Price Projection: Fertilizer Segment 2013 2014 2015 2016P 2017P 2018P 2019P 2020P 2021P Ammonium sulfate (AS) (USD/t) 161 139 139 105 110 110 110 109 109 Ammonium sulfate (AS) (PLN/t) 508 452 525 411 408 407 407 405 403 Urea (EUR/t) 425 391 384 349 354 371 371 369 367 Urea (PLN/t) 1781 1636 1604 1509 1469 1538 1538 1530 1523 Ammonium nitrate (AN) (EUR/t) 351 343 341 310 319 324 324 322 321 Ammonium nitrate (AN) (PLN/t) 1474 1437 1426 1342 1324 1344 1344 1338 1331 Calcium ammonium nitrate CAN (EUR/t) 311 297 296 269 288 281 281 279 278 Calcium ammonium nitrate CAN (PLN/t) 1304 1243 1239 1166 1195 1165 1165 1159 1153

NPK (Polifoska) (EUR/t) 533 489 470 442 471 458 458 456 454 NPK (Polifoska) (PLN/t) 2234 2046 1963 1915 1953 1901 1901 1892 1882 Diammonium phosphate (NP) (EUR/t) 564 507 518 511 544 530 530 527 524 Diammonium phosphate (NP) (PLN/t) 2364 2121 2167 2214 2258 2198 2198 2187 2176

UAN (EUR/t) 194 204 206 163 190 189 189 188 187 UAN (PLN/t) 814 853 862 703 788 783 783 779 776

What, Poland (USD/t) 276 221 179 169 175 199 199 199 199 Wheat (PLN/t) 872 720 703 658 648 737 737 737 737 Corn, Poland (USD/t) 269 207 160 172 174 194 194 194 194 Corn (PLN/t) 851 674 654 670 644 719 719 719 719

Urea/Wheat 2.0 2.3 2.3 2.3 2.3 2.1 2.1 2.1 2.1 Urea/Corn 2.1 2.4 2.5 2.3 2.3 2.1 2.1 2.1 2.1 AN/Wheat 1.7 2.0 2.0 2.0 2.1 1.9 1.9 1.8 1.8 AN/Corn 1.7 2.1 2.2 2.0 2.0 1.8 1.8 1.8 1.8 CAN/Wheat 1.5 1.7 1.8 1.8 1.9 1.6 1.6 1.6 1.6 CAN/Corn 1.5 1.8 1.9 1.7 1.8 1.6 1.6 1.6 1.6 UAN/Wheat 0.9 1.2 1.2 1.1 1.2 1.1 1.1 1.1 1.1 UAN/Corn 1.0 1.3 1.3 1.0 1.2 1.1 1.1 1.1 1.1 Polifoska/Wheat 2.6 2.8 2.8 2.9 3.0 2.7 2.7 2.6 2.6 Polifoska/Corn 2.6 3.0 3.0 2.9 3.1 2.6 2.6 2.6 2.5

Natural gas (PGNiG tariff + 1328 1328 1167 930 1006 1012 1018 1016 1023 transmission) (PLN/1000m3) Natural gas (German contract) USD/1000m3 420 327 258 172 200 200 250 250 250 Natural gas (German contract) PLN/1000m3 1328 1067 971 669 740 740 925 925 925

Average cost of gas (PLN/1000m3) 1328 1221 1082 800 873 876 972 971 974 Non-PGNiG gas purchases as pct.. of total 16% 41% 43% 50% 50% 50% 50% 50% 50%

Sulfur (USD/t) 155 160 165 131 131 132 133 133 134 Sulfur (PLN/t) 488 523 621 510 486 489 491 494 496 Potassium chloride (USD/t) 370 292 302 241 242 243 245 246 247 Potassium chloride (PLN/t) 1168 951 1138 940 896 901 905 910 914 Phosphorites (USD/t) 140 123 129 102 102 103 103 104 104 Phosphorites (PLN/t) 443 401 486 397 378 380 382 384 386

EUR/PLN 7.9 7.9 7.9 7.9 7.9 7.9 7.9 6.2 6.2 USD/PLN 5.8 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 Source: Comarch, Dom Maklerski mBanku

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Cost and Price Projection: Plastics Segment 2013 2014 2015 2016P 2017P 2018P 2019P 2020P 2021P Polyoxymethylene (POM) (EUR/t) 2250 2250 2150 1468 1411 1433 1454 1476 1498 Polyoxymethylene (POM) (PLN/t) 9439 9414 8985 6355 5857 5945 6034 6125 6217 Polyamide 6 (EUR/t) 2000 2021 1669 1490 1749 1800 1764 1768 1771 Polyamide 6 (PLN/t) 8390 8456 6975 6448 7259 7470 7321 7336 7351 Caprolactam (EUR/t) 1886 1900 1613 1510 1698 1748 1713 1716 1720 Caprolactam (PLN/t) 7911 7950 6740 6535 7047 7252 7108 7123 7137

Benzene (EUR/t) 998 995 635 620 660 726 704 704 704 Benzene (PLN/t) 4188 4164 2653 2683 2739 3013 2922 2922 2922 Cyclohexane (USD/t) 1521 1557 877 756 924 1001 974 974 974 Cyclohexane (PLN/t) 4806 5080 3306 2950 3420 3702 3605 3605 3605 Phenol (EUR/t) 1582 1576 1212 1132 1361 1395 1376 1376 1376 Phenol (PLN/t) 6635 6596 5065 4900 5646 5788 5709 5709 5709 Brent crude (USD/bbl) 109 101 52 50 65 75 75 75 75 Naphtha (USD/t) 900 774 467 429 557 643 643 643 643

Caprolactam / Cyclohexane 1.6 1.6 2.0 2.2 2.1 2.0 2.0 2.0 2.0 Caprolactam / Phenol 1.2 1.2 1.3 1.3 1.3 1.3 1.3 1.3 1.3 Polyamide / Caprolactam 1.1 1.1 1.0 1.0 1.0 1.0 1.0 1.0 1.0 Naphtha / Brent 1.0 0.9 1.1 1.0 1.0 1.0 1.0 1.0 1.0 Benzene / Naphtha 1.5 1.6 1.5 1.6 1.3 1.3 1.2 1.2 1.2 Cyclohexane / Benzene 1.1 1.2 1.2 1.1 1.2 1.2 1.2 1.2 1.2 Cyclohexane / Phenol 0.7 0.8 0.7 0.6 0.7 0.7 0.7 0.7 0.7 Phenol / Propylene 1.5 1.5 1.5 1.8 1.7 1.7 1.7 1.7 1.7 Phenol / Benzene 1.6 1.6 1.9 1.8 1.8 1.8 1.8 1.8 1.8 Source: Comarch, Dom Maklerski mBanku

Cost and Price Projection: Chemicals Segment 2013 2014 2015 2016P 2017P 2018P 2019P 2020P 2021P Melamine (EUR/t) 1408 1331 1350 1385 1333 1341 1350 1347 1356 Melamine (PLN/t) 5905 5570 5641 5996 5533 5565 5601 5589 5627 Oxoplast Plasticizer (EUR/t) 1565 1512 1377 1245 1520 1430 1385 1385 1385 Oxoplast Plasticizer (PLN/t) 6562 6326 6177 5390 6308 5934 5748 5748 5748 Titanium white (EUR/t) 2442 2353 2158 2019 2462 2475 2487 2499 2512 Titanium white (PLN/t) 10243 9843 9018 8737 10218 10269 10321 10372 10424 OXO alcohol (2-Ethylhexanol) (EUR/t) 1446 1390 1105 859 1198 1072 1072 1072 1072 OXO alcohol (2-Ethylhexanol) (PLN/t) 6067 5814 4620 3719 4970 4450 4450 4450 4450 OXO alcohol (n-butanol) (EUR/t) 1137 1122 916 712 992 889 889 889 889 OXO alcohol (n-butanol) (PLN/t) 4768 4694 3829 2952 4118 3688 3688 3688 3688 OXO alcohol (i-butanol) (EUR/t) 1069 1023 868 675 941 842 842 842 842 OXO alcohol (i-butanol) (PLN/t) 4485 4281 3629 2609 3903 3495 3495 3495 3495

Propylene (EUR/t) 1057 1080 815 620 921 894 894 894 894 Propylene (PLN/t) 4433 4517 3406 2682 3823 3709 3709 3709 3709 Methanol (EUR/t) 390 383 339 232 235 239 242 246 250 Methanol (PLN/t) 1634 1604 1418 1003 976 991 1006 1021 1036 Ilmenite (USD/t) 207 113 87 110 110 111 112 112 113 Ilmenite (PLN/t) 653 368 329 429 409 411 413 415 417

Propylene / Naphtha 1.6 1.8 1.9 1.6 1.9 1.6 1.6 1.6 1.6 Ilmenite / Titanium white 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2-Ethylhexanol / Propylene 1.4 1.3 1.4 1.4 1.3 1.2 1.2 1.2 1.2 OXO Alcohols / Propylene 1.2 1.1 1.2 1.2 1.1 1.0 1.0 1.0 1.0 POM / Methanol 5.8 5.9 6.3 6.3 6.0 6.0 6.0 6.0 6.0 Plasticizers / Propylene 1.5 1.4 1.8 2.0 1.7 1.6 1.6 1.6 1.6 Melamine / Natgas 4.4 4.2 4.8 6.4 5.5 5.5 5.5 5.5 5.5 Source: Dom Maklerski mBanku

10

Sales volume projection 1000 tons 2013 2014 2015 2016P 2017P 2018P 2019P 2020P 2021P POM 8.3 9.5 9.4 8.9 9.0 9.2 9.4 9.6 9.8 PA6 90.2 94.8 105.5 104.2 122.7 136.3 147.6 151.2 153.2 Caprolactam 77.9 74.7 66.4 62.4 42.1 28.2 16.6 13.0 10.9

Nitrogen fertilizers: 4,116.9 4,298.5 4,354.2 4,199.8 4,287.4 4,325.5 4,364.9 4,406.7 4,449.6 Urea and AdBlue 1,082.2 1,249.9 1,276.0 1,225.7 1,235.6 1,245.7 1,255.8 1,266.1 1,276.5 Ammonium nitrate 1,076.2 1,094.1 1,102.4 1,101.9 1,118.4 1,135.2 1,152.4 1,169.9 1,187.7 CAN 577.1 639.7 647.5 613.5 615.3 617.1 618.9 620.7 622.6 UAN 671.4 568.7 613.5 610.2 622.4 634.9 647.6 660.5 673.7 Granulates (new facilities) 0.0 0.0 0.0 0.0 0.0 164.5 246.3 328.2 410.2

NPK fertilizers 988.6 1,089.9 1,338.5 1,308.3 1,321.4 1,334.6 1,347.9 1,361.4 1,375.0

Melamine 80.3 78.7 83.0 83.8 85.0 86.3 87.6 88.9 90.2 OXO alcohols 143.9 152.2 118.3 110.8 111.3 111.9 112.4 113.0 113.6 Plasticizers 28.1 24.0 33.2 34.9 40.1 44.2 47.7 49.1 50.6 Titanium white 36.6 34.8 33.6 33.1 33.6 34.1 34.6 35.2 35.7 Source: Dom Maklerski mBanku

Sales volume growth projection Y/Y pct. change 2014 2015 2016P 2017P 2018P 2019P 2020P 2021P POM 13.8% -0.5% -6.2% 2.0% 2.0% 2.0% 2.0% 2.0% PA6 5.1% 11.3% -1.2% 17.8% 11.1% 8.2% 2.4% 1.4% Caprolactam -4.1% -11.2% -6.1% -32.4% -33.2% -40.9% -22.0% -16.1%

Nitrogen fertilizers: 4.4% 1.3% -3.5% 2.1% 0.9% 0.9% 1.0% 1.0% Urea and AdBlue 15.5% 2.1% -3.9% 0.8% 0.8% 0.8% 0.8% 0.8% Ammonium nitrate 1.7% 0.8% 0.0% 1.5% 1.5% 1.5% 1.5% 1.5% CAN 10.8% 1.2% -5.3% 0.3% 0.3% 0.3% 0.3% 0.3% UAN -15.3% 7.9% -0.5% 2.0% 2.0% 2.0% 2.0% 2.0%

NPK fertilizers 10.2% 22.8% -2.3% 1.0% 1.0% 1.0% 1.0% 1.0% Melamine

OXO alcohols -2.0% 5.5% 0.9% 1.5% 1.5% 1.5% 1.5% 1.5% Plasticizers 5.8% -22.3% -6.4% 0.5% 0.5% 0.5% 0.5% 0.5% Titanium white -14.5% 38.2% 5.0% 15.0% 10.0% 8.0% 3.0% 3.0% Source: Dom Maklerski mBanku

EBITDA projection by operating segment (PLN m) 2013 2014 2015 2016P 2017P 2018P 2019P 2020P 2021P Agro Fertilizers 632.5 594.4 998.1 876.8 655.9 840.3 759.8 808.1 844.6 Plastics -109.1 -33.5 -10.4 -29.9 -1.3 7.9 12.3 14.7 14.4 Chemicals 71.3 45.6 134.7 236.5 268.6 223.3 190.5 186.2 186.6 Energy 69.2 80.0 77.9 73.8 61.1 53.7 54.0 154.5 171.4 Other 59.3 77.9 114.5 47.7 130.4 143.4 160.7 177.9 177.4 Total 723.0 764.4 1 314.8 1 204.9 1 114.7 1 268.6 1 177.3 1 341.4 1 394.3 Source: Dom Maklerski mBanku

Per-ton EBITDA projection by operating segment PLN 1000/t 2013 2014 2015 2016P 2017P 2018P 2019P 2020P 2021P Agro Fertilizers 0.122 0.115 0.182 0.168 0.123 0.156 0.140 0.147 0.152 Plastics -0.360 -0.245 0.008 -0.168 -0.007 0.046 0.071 0.084 0.083 Chemicals 0.132 0.168 0.314 0.460 0.510 0.415 0.347 0.334 0.329 Source: Dom Maklerski mBanku

11

CAPEX Projection (PLN m) 2016P 2017P 2018P 2019P 2020P 2021P Elektrownia Puławy power plant 100.0 375.0 450.0 194.9 0.0 0.0 Nitric acid plant extensions (GA Puławy) 50.0 115.8 173.8 173.8 173.8 7.9 AN mechanical granulation plant (1) 91.7 91.8 0.0 0.0 0.0 0.0 AN mechanical granulation plant (2) 0.0 96.3 64.2 32.1 0.0 0.0 EC Kędzierzyn CHP 160.0 15.4 0.0 0.0 0.0 0.0 Flue gas treatment unit, Police 32.1 0.0 0.0 0.0 0.0 0.0 Ammonia plant upgrades, Police 70.0 18.0 0.0 0.0 0.0 0.0 Polyamide plant (GA Tarnów) 140.0 118.3 0.0 0.0 0.0 0.0 Fertilizer granulation plant (GA Tarnów) 109.0 0.0 0.0 0.0 0.0 0.0 Other, Tarnów 236.2 4.0 0.0 0.0 0.0 0.0 Other, Kędzierzyn 35.0 40.0 10.7 0.0 0.0 0.0 Other, Puławy 70.0 81.3 0.0 0.0 0.0 0.0 Other, Police 60.0 35.4 0.0 0.0 0.0 0.0 Other, Siarkopol 10.0 8.7 0.0 0.0 0.0 0.0 Maintenance 239.6 346.8 212.3 349.3 456.0 558.1 Acquisitions 0.0 0.0 0.0 0.0 0.0 0.0 Total 1,403.6 1,346.9 910.9 750.1 629.8 565.9 Source: Dom Maklerski mBanku

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DCF Valuation

The DCF model is based on the following underlying ° Beta = 1.0. assumptions: ° Future cash flows are discounted to their present value ° Risk-free rate: 3.5% (10Y Treasury bond yield). as of the end of August 2016. ° FCF growth rate after FY2025: 2%.

DCF Model (PLN m) 2016P 2017P 2018P 2019P 2020P 2021P 2022P 2023P 2024P 2025P + Revenue 9,260.1 9,760.0 9,896.4 10,026.3 10,168.6 10,313.5 10,461.5 10,597.2 10,731.0 10,868.1 11,038.5 change -7.6% 5.4% 1.4% 1.3% 1.4% 1.4% 1.4% 1.3% 1.3% 1.3% 1.6% EBITDA 1,204.9 1,114.7 1,268.6 1,177.3 1,341.4 1,394.3 1,398.7 1,397.0 1,402.2 1,402.8 1,439.1 EBITDA margin 13.0% 11.4% 12.8% 11.7% 13.2% 13.5% 13.4% 13.2% 13.1% 12.9% 13.0% D&A 495.4 530.6 582.2 651.4 720.1 715.6 699.3 686.6 682.8 669.6 669.6 EBIT 709.4 584.1 686.4 525.9 621.3 678.7 699.4 710.4 719.5 733.2 769.5 EBIT margin 7.7% 6.0% 6.9% 5.2% 6.1% 6.6% 6.7% 6.7% 6.7% 6.7% 7.0% Tax on EBIT 115.6 98.1 122.0 91.1 109.6 121.2 125.8 128.4 130.5 133.5 140.8 NOPLAT 593.8 486.0 564.4 434.8 511.7 557.5 573.6 582.0 589.0 599.7 628.7

CAPEX -1403.6 -1346.9 -910.9 -750.1 -629.8 -565.9 -608.2 -629.4 -652.3 -648.6 -669.6 Working capital 65.2 -42.6 -11.6 -11.1 -12.1 -12.4 -12.6 -11.6 -11.4 -11.7 -14.5 Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

FCF -249.1 -372.8 224.1 325.0 589.9 694.8 652.1 627.6 608.0 609.0 614.2 WACC 8.3% 8.0% 7.9% 7.9% 8.0% 8.2% 8.3% 8.4% 8.4% 8.5% 8.5% Discount factor 0.97 0.90 0.84 0.78 0.72 0.66 0.60 0.56 0.51 0.47 0.43 PV FCF -242.6 -336.5 187.5 252.2 422.4 457.4 394.4 348.5 309.8 284.4 264.4

WACC 8.3% 8.0% 7.9% 7.9% 8.0% 8.2% 8.3% 8.4% 8.4% 8.5% 8.5% Cost of debt 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% Risk-free rate 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% Risk premium 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% Effective tax rate 17.0% 18.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% Net debt / EV 4.8% 12.5% 13.7% 14.7% 12.0% 8.5% 5.9% 3.7% 1.8% 0.0% 0.0%

Cost of equity 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% Risk premium 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% Beta 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0

FCF growth after the forecast period 2.0% Sensitivity Analysis

Terminal value 9,449.4 FCF growth in perpetuity

Present value of terminal value 4,412.9 0.0% 1.0% 2.0% 3.0% 5.0%

Present value of FCF in the forecast period 2,077.5 WACC +1.0 p.p. 42.8 46.3 50.7 56.5 75.8

Enterprise value 6,490.4 WACC +0.5 p.p. 46.5 50.6 55.9 62.9 87.5

Net debt -51.1 WACC 50.7 55.6 61.9 70.5 102.4

Other noncore assets 0.0 WACC -0.5 p.p. 55.5 61.2 68.8 79.5 122.3

Minority interests 768.9 WACC -1.0 p.p. 60.8 67.7 77.1 90.6 150.2

Equity value 5,772.6 Number of shares (millions) 99.2 NAV per share (PLN) 58.2 9M cost of equity 6.3% 9M target price (PLN) 61.9

EV/EBITDA ('16) at target price 6.0 P/E ('16) at target price 12.1 TV / EV 68.0%

13

Income Statement (PLN m) 2013 2014 2015 2016P 2017P 2018P 2019P 2020P 2021P Revenue 9,821.0 9,898.5 10,024.4 9,260.1 9,760.0 9,896.4 10,026.3 10,168.6 10,313.5 change 38.3% 0.8% 1.3% -7.6% 5.4% 1.4% 1.3% 1.4% 1.4%

Agro Fertilizers 5,565.1 5,580.4 6,057.9 5,583.7 5,677.5 5,770.3 5,844.0 5,889.4 5,935.1 Plastics 1,466.5 1,460.2 1,248.0 1,150.4 1,240.6 1,277.5 1,255.5 1,260.0 1,264.6 Chemicals 2,385.3 2,505.6 2,302.2 2,147.2 2,450.7 2,444.3 2,494.8 2,532.8 2,577.8 Energy 265.5 194.6 209.2 212.9 217.1 221.5 243.6 292.3 336.2 Other 138.6 157.7 207.1 165.9 174.2 182.9 188.4 194.0 199.8

COGS 8,441.8 8,231.6 7,760.2 6,944.3 7,619.0 7,649.5 7,936.8 7,980.3 8,047.4 Selling expenses 447.8 581.1 633.3 805.2 821.2 795.5 786.0 775.6 765.3 Administrative expenses 707.8 740.0 736.5 736.0 748.5 761.4 774.5 788.0 801.7

Other operating gains / losses 474.1 -43.6 -64.3 -36.6 0.0 0.0 0.0 0.0 0.0

EBIT 697.9 302.2 830.0 709.4 584.1 686.4 525.9 621.3 678.7 change 87.7% -56.7% 174.6% -14.5% -17.7% 17.5% -23.4% 18.1% 9.2% EBIT margin 7.1% 3.1% 8.3% 7.7% 6.0% 6.9% 5.2% 6.1% 6.6%

Financing gains / losses 17.5 -12.6 -4.7 -19.6 -39.2 -44.2 -46.2 -44.5 -40.7 Other 12.4 13.9 13.7 12.6 11.7 13.3 12.4 14.1 14.6

Pre-tax profit 727.8 303.5 839.1 689.8 544.9 642.2 479.7 576.8 638.0 Tax 18.4 37.7 147.2 117.3 98.1 122.0 91.1 109.6 121.2 Minority interests 26.5 33.7 82.3 64.9 47.4 61.6 52.3 56.3 60.5

Net profit 639.0 231.4 609.5 507.6 399.4 458.6 336.3 410.9 456.2 change 117.1% -63.8% 163.5% -16.7% -21.3% 14.8% -26.7% 22.2% 11.0% margin 6.5% 2.3% 6.1% 5.5% 4.1% 4.6% 3.4% 4.0% 4.4%

D&A 548.1 520.2 479.3 495.4 530.6 582.2 651.4 720.1 715.6 EBITDA 1,246.0 822.4 1,309.3 1,204.9 1,114.7 1,268.6 1,177.3 1,341.4 1,394.3 change 103.8% -34.0% 59.2% -8.0% -7.5% 13.8% -7.2% 13.9% 3.9% EBITDA margin 12.7% 8.3% 13.1% 13.0% 11.4% 12.8% 11.7% 13.2% 13.5%

Shares at year-end (millions) 99.2 99.2 99.2 99.2 99.2 99.2 99.2 99.2 99.2 EPS 6.4 2.3 6.1 5.1 4.0 4.6 3.4 4.1 4.6 CEPS 12.0 7.6 11.0 10.1 9.4 10.5 10.0 11.4 11.8

ROAE 11.5% 4.0% 9.6% 7.5% 5.7% 6.3% 4.6% 5.5% 6.0% ROAA 6.4% 2.3% 5.7% 4.6% 3.5% 3.9% 2.8% 3.4% 3.7%

14

Balance Sheet (PLN m) 2013 2014 2015 2016P 2017P 2018P 2019P 2020P 2021P ASSETS 9,950.8 9,948.3 10,777.2 11,151.2 11,497.3 11,768.5 11,824.5 12,020.7 12,204.3 Fixed assets 6,629.9 6,781.1 7,224.9 8,136.6 8,959.7 9,298.4 9,411.4 9,346.3 9,224.7 Intangible assets 519.6 510.4 532.8 639.2 741.3 801.2 846.2 880.3 909.3 Property, plant and equipment 5,780.9 5,966.3 6,429.8 7,235.0 7,956.0 8,234.9 8,302.9 8,203.6 8,053.1 Equity value 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Long-term receivables 3.4 2.9 1.8 1.8 1.8 1.8 1.8 1.8 1.8 Long-term investment 210.8 201.9 185.2 185.2 185.2 185.2 185.2 185.2 185.2 Long-term prepayments 103.5 86.9 62.8 62.8 62.8 62.8 62.8 62.8 62.8

Current assets 3,320.8 3,167.2 3,552.2 3,014.6 2,537.6 2,470.1 2,413.0 2,674.4 2,979.6 Inventory 1,165.5 1,347.8 1,180.6 1,090.6 1,149.5 1,165.5 1,180.8 1,197.6 1,214.6 Current receivables 1,273.1 1,161.4 1,078.3 996.1 1,049.9 1,064.5 1,078.5 1,093.8 1,109.4 Trade receivables 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Short-term investment 128.6 92.7 538.1 538.1 338.1 238.1 148.1 148.1 148.1 Cash 713.0 558.6 753.1 387.9 -1.8 -0.1 3.5 232.8 505.3 Short-term prepayments 40.6 6.7 2.2 2.0 2.1 2.1 2.2 2.2 2.2

(PLN m) 2013 2014 2015 2016P 2017P 2018P 2019P 2020P 2021P EQUITY AND LIABILITIES 9,950.8 9,948.3 10,777.2 11,151.2 11,497.3 11,768.5 11,824.5 12,020.7 12,204.3 Equity 5,562.7 5,759.0 6,367.3 6,791.6 7,038.7 7,257.7 7,272.9 7,431.6 7,579.7 Share capital 496.0 496.0 496.0 496.0 496.0 496.0 496.0 496.0 496.0 Supplementary capital 2,418.3 2,418.3 2,418.3 2,418.3 2,418.3 2,418.3 2,418.3 2,418.3 2,418.3 Retained earnings 2,649.8 2,843.4 3,452.2 3,876.5 4,123.6 4,342.6 4,357.8 4,516.6 4,664.6 Minority interests 707.8 729.1 768.9 825.8 854.7 887.9 910.4 927.9 943.1

Long-term liabilities 998.5 849.5 1,437.6 1,437.6 1,437.6 1,437.6 1,437.6 1,437.6 1,437.6 Debt 657.2 497.1 1,063.6 1,063.6 1,063.6 1,063.6 1,063.6 1,063.6 1,063.6

Current liabilities 2,033.6 2,047.7 1,575.9 1,469.2 1,539.0 1,558.1 1,576.2 1,596.0 1,616.3 Trade creditors 1,350.5 1,459.0 1,399.4 1,292.7 1,362.5 1,381.5 1,399.6 1,419.5 1,439.7 Debt 683.1 588.6 176.5 176.5 176.5 176.5 176.5 176.5 176.5 Provisions 622.2 557.7 621.0 621.0 621.0 621.0 621.0 621.0 621.0 Other 25.9 5.3 6.4 5.9 6.3 6.4 6.4 6.5 6.6

Debt 1,340.3 1,085.8 1,240.1 1,240.1 1,240.1 1,240.1 1,240.1 1,240.1 1,240.1 Net debt 498.7 434.5 -51.1 314.2 903.9 1,002.2 1,088.5 859.2 586.8 (Net debt / Equity) 9.0% 7.5% -0.8% 4.6% 12.8% 13.8% 15.0% 11.6% 7.7% (Net debt / EBITDA) 0.4 0.5 0.0 0.3 0.8 0.8 0.9 0.6 0.4

BVPS 56.1 58.1 64.2 68.5 71.0 73.2 73.3 74.9 76.4

15

Cash Flow (PLN m) 2013 2014 2015 2016P 2017P 2018P 2019P 2020P 2021P Cash flow from operating activities 990.5 819.8 1,630.2 1,158.9 967.1 1,124.9 1,060.8 1,194.5 1,232.7 Net profit 639.0 231.4 609.5 507.6 399.4 458.6 336.3 410.9 456.2 D&A 548.1 520.2 479.3 495.4 530.6 582.2 651.4 720.1 715.6 Working capital 328.2 -35.9 299.5 65.2 -42.6 -11.6 -11.1 -12.1 -12.4 Other -524.9 104.2 241.9 90.6 79.7 95.7 84.2 75.6 73.2

Cash flow from investing activities -688.5 -648.1 -1,503.4 -1,403.6 -1,146.9 -810.9 -660.1 -629.8 -565.9 CAPEX -675.5 -675.5 -1,054.7 -1,403.6 -1,346.9 -910.9 -750.1 -629.8 -565.9 Equity investment -13.0 76.2 -448.7 0.0 200.0 100.0 90.0 0.0 0.0

Cash flow from financing activities 167.6 -326.1 67.7 -120.6 -210.0 -312.3 -397.0 -335.4 -394.3 Debt 695.7 -253.1 165.6 0.0 0.0 0.0 0.0 0.0 0.0 Dividend/buyback -170.8 -41.8 0.0 -83.3 -152.3 -239.6 -321.0 -252.2 -308.2 Dividends in consolidated subsidiaries 0.0 0.0 -25.5 -8.1 -18.5 -28.4 -29.8 -38.7 -45.4 Other -357.2 -31.3 -72.4 -29.2 -39.2 -44.2 -46.2 -44.5 -40.7

Change in cash 469.6 -154.4 194.5 -365.3 -389.7 1.7 3.7 229.3 272.5 Cash at period-end 713.0 558.6 753.1 387.9 -1.8 -0.1 3.5 232.8 505.3

DPS (PLN) 1.72 0.42 0.00 0.84 1.54 2.42 3.24 2.54 3.11 FCF 881.7 77.7 404.8 -249.1 -372.8 224.1 325.0 589.9 694.8 (CAPEX/Sales) -6.9% -6.8% -10.5% -15.2% -13.8% -9.2% -7.5% -6.2% -5.5%

Trading Multiples 2013 2014 2015 2016P 2017P 2018P 2019P 2020P 2021P

P/E 10.1 27.8 10.5 12.7 16.1 14.0 19.1 15.6 14.1 P/CE 5.4 8.6 5.9 6.4 6.9 6.2 6.5 5.7 5.5 P/B 1.2 1.1 1.0 0.9 0.9 0.9 0.9 0.9 0.8 P/S 0.7 0.6 0.6 0.7 0.7 0.6 0.6 0.6 0.6

FCF/EV 12.7% 1.1% 6.3% -3.7% -5.1% 3.0% 4.3% 8.1% 9.9% EV/EBITDA 6.1 9.2 5.5 6.3 7.3 6.6 7.2 6.1 5.7 EV/EBIT 10.9 25.1 8.6 10.7 14.0 12.1 16.0 13.2 11.7 EV/S 0.8 0.8 0.7 0.8 0.8 0.8 0.8 0.8 0.8 CFO/EBITDA 79% 100% 125% 96% 87% 89% 90% 89% 88%

DYield 2.7% 0.6% 0.0% 1.3% 2.4% 3.7% 5.0% 3.9% 4.8%

Price (PLN) 64.79 64.79 64.79 64.79 64.79 64.79 64.79 64.79 64.79 Shares at year-end (millions) 99.2 99.2 99.2 99.2 99.2 99.2 99.2 99.2 99.2 MC (PLN m) 6,426.9 6,426.9 6,426.9 6,426.9 6,426.9 6,426.9 6,426.9 6,426.9 6,426.9 Minority interests (PLN m) 707.8 729.1 768.9 825.8 854.7 887.9 910.4 927.9 943.1 EV (PLN m) 7,633.4 7,590.4 7,144.7 7,566.9 8,185.5 8,316.9 8,425.8 8,214.0 7,956.8

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List of abbreviations and ratios contained in the report: EV – net debt + market value EBIT – Earnings Before Interest and Taxes EBITDA – EBIT + Depreciation and Amortisation P/CE – price to earnings with amortisation MC/S – market capitalisation to sales EBIT/EV – operating profit to economic value P/E – (Price/Earnings) – price divided by annual net profit per share ROE – (Return on Equity) – annual net profit divided by average equity P/BV – (Price/Book Value) – price divided by book value per share Net debt – credits + debt papers + interest bearing loans – cash and cash equivalents EBITDA margin – EBITDA/Sales

Recommendations of Dom Maklerski mBanku: A recommendation is valid for a period of 6-9 months, unless a subsequent recommendation is issued within this period. Expected returns from individual recommendations are as follows: BUY – we expect that the rate of return from an investment will be at least 15% ACCUMULATE – we expect that the rate of return from an investment will range from 5% to 15% HOLD – we expect that the rate of return from an investment will range from –5% to +5% REDUCE – we expect that the rate of return from an investment will range from -5% to -15% SELL – we expect that an investment will bear a loss greater than 15% Recommendations are updated at least once every nine months. mBank S.A. with its registered office in Warsaw at Senatorska 18 renders brokerage services in the form of derived organisational unit – Brokerage Office which uses name Dom Maklerski mBanku.

This document has been created and published by Dom Maklerski mBanku. The present report expresses the knowledge as well as opinions of the authors on day the report was prepared. The opinions and estimates contained herein constitute our best judgment at this date and time, and are subject to change without notice. The present report was prepared with due care and attention, observing principles of methodological correctness and objectivity, on the basis of sources available to the public, which Dom Maklerski mBanku S.A. considers reliable, including information published by issuers, shares of which are subject to recommendations. However, Dom Maklerski mBanku S.A., in no case, guarantees the accuracy and completeness of the report, in particular should sources on the basis of which the report was prepared prove to be inaccurate, incomplete or not fully consistent with the facts. mBank S.A. bears no responsibility for investment decisions taken on the basis of the present report or for any damages incurred as a result of investment decisions taken on the basis of the present report.

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Recommendations are based on essential data from the entire history of a company being the subject of a recommendation, with particular emphasis on the period since the previous recommendation. Investing in shares is connected with a number of risks including, but not limited to, the macroeconomic situation of the country, changes in legal regulations as well as changes on commodity markets. Full elimination of these risks is virtually impossible.

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Individuals who did not participate in the preparation of recommendations, but had or could have had access to recommendations prior to their publication, are employees of Dom Maklerski mBanku authorised to access the premises in which recommendations are prepared and/or individuals having to access to recommendations based on their corporate roles, other than the analysts mentioned as the authors of the present recommendations.

Strong and weak points of valuation methods used in recommendations: DCF – acknowledged as the most methodologically correct method of valuation; it consists in discounting financial flows generated by a company; its weak point is the significant susceptibility to a change of forecast assumptions in the model. Relative – based on a comparison of valuation multipliers of companies from a given sector; simple in construction, reflects the current state of the market better than DCF; weak points include substantial variability (fluctuations together with market indices) as well as difficulty in the selection of the group of comparable companies. Economic profit s – discounting of future economic profits; the weak point is high sensitivity to changes in the assumptions made in the valuation model. Discounted Dividends (DDM) – discounting of future dividends; the weak point is high sensitivity to changes in the assumptions as to future dividends made in the valuation model. NAV - valuation based on equity value, one of the most frequently used method in case of developing companies; the weak point of the method is that it does not factor in future changes in revenue/profits of a company.

Previous ratings issued for Grupy Azoty rating hold hold buy buy rating day 2016-01-05 2016-02-02 2016-06-02 2016-06-07 price on rating day 96.30 104.00 68.20 72.00 WIG on rating day 45356.65 44294.89 44700.67 45582.80

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Dom Maklerski mBanku Senatorska 18 00-082 Warszawa http://www.mbank.pl/

Research Department

Kamil Kliszcz Michał Marczak Michał Konarski director tel. +48 22 438 24 01 tel. +48 22 438 24 05 tel. +48 22 438 24 02 [email protected] [email protected] [email protected] strategy, resources, metals banks, financials energy, chemicals, power generation

Jakub Szkopek Paweł Szpigiel Piotr Zybała tel. +48 22 438 24 03 tel. +48 22 438 24 06 tel. +48 22 438 24 04 [email protected] [email protected] [email protected] industrials, chemicals media, IT, telco construction, real-estate development

Piotr Bogusz tel. +48 22 438 24 08 [email protected] retail

Sales and Trading

Traders

Piotr Gawron Krzysztof Bodek Mateusz Choromański dyrektor tel. +48 22 697 48 89 tel. +48 22 697 47 44 tel. +48 22 697 48 95 [email protected] [email protected] [email protected]

Tomasz Jakubiec Anna Łagowska Adam Prokop tel. +48 22 697 47 31 tel. +48 22 697 48 25 tel. +48 22 697 47 90 [email protected] [email protected] [email protected]

Szymon Kubka , CFA, PRM Jędrzej Łukomski Michał Rożmiej tel. +48 22 697 48 16 tel. +48 22 697 49 85 tel. +48 22 697 49 85 [email protected] [email protected] [email protected]

Tomasz Galanciak Wojciech Wysocki tel. +48 22 697 49 68 tel. +48 22 697 48 46 [email protected] [email protected]

Sales, Foreign Markets

Marzena Łempicka-Wilim Mariusz Adamski deputy director tel. +48 22 697 48 47 tel. +48 22 697 48 82 [email protected] [email protected]

Private Broker

Kamil Szymański Jarosław Banasiak director, active sales deputy director, active sales tel. +48 22 697 47 06 tel. +48 22 697 48 70 [email protected] [email protected]

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