2.2. DCF Valuation of EUR9

INDEPENDENT RESEARCH DIA 12th March 2015 Olé! Food retailing Fair Value EUR8.5 (price EUR6.79) BUY Coverage initiated

Bloomberg DIA.SM Dia has an excellent business model (discount is not only a format for Reuters DIA MC mature countries but also a means of conquering international 12-month High / Low (EUR) 7.1 / 4.6 business) while circumstances are beneficial (tax credits and recovery Market capitalisation (EURm) 4,419 Enterprise Value (BG estimates EURm) 5,002 in Spanish economy). As such, in view of the group's attractive Avg. 6m daily volume ('000 shares) 5,250 valuation (2016 PER of 13.3x vs 16.1x for the sector, i.e. a PEG of 0.9x), Free Float 90.0% we are initiating coverage of the stock with a Buy recommendation 3y EPS CAGR 14.7% Gearing (12/14) 141% and FV of EUR8.5. Dividend yields (12/15e) 2.48%

 Never call me France again! The value creation premium (i.e. the YE December 12/14 12/15e 12/16e 12/17e implied share valuation as in EV/IC = ROCE/WACC, relative to the Revenue (EURm) 8,011 9,630 10,375 11,198 current price) stands at 14% today whereas it averaged at 35% over Curr Op Inc. EURm) 400.7 402.6 458.6 536.6 2012/14! Despite the considerable improvement in the group's profile Basic EPS (EUR) 0.51 0.40 0.57 0.63 Diluted EPS (EUR) 0.41 0.41 0.51 0.62 prompted by the disposal of French activities, the market is therefore EV/Sales 0.62x 0.52x 0.47x 0.42x placing an increasingly low price on value creation potential. Realignment EV/EBITDA 8.5x 8.0x 7.0x 6.0x with the historical average would imply a valuation of EUR7.8. EV/EBIT 15.3x 15.5x 11.9x 9.6x  Dia boasts a good format..: the retailer's healthy operating P/E 16.6x 16.5x 13.3x 11.0x performances (+103bp market share in Spain between 2009 and 2014) ROCE 32.2 32.3 33.2 35.6 stem especially from the fact that the soft discount model is particularly suitable to Spain’s economic conditions and prospects. The model is not 7.8 only a defensive format in a crisis period, but also a winning vehicle for 7.3 those aiming to rapidly dominate in emerging markets (Brazil and 6.8 Argentina in particular). 6.3  … and beneficial circumstances: 1/ following the disposal of activities 5.8 in France, Dia has significant tax assets (EUR185m in tax credits due to a

5.3 capital loss) and can reallocate capex notably in favour of emerging markets; the group is an ideal vehicle for playing a recovery in the 4.8 2/ Spanish economy (85% of EBITDA) especially since it is 3/ in a strong 4.3 10/09/13 10/12/13 10/03/14 10/06/14 10/09/14 10/12/14 10/03/15 position to consolidate the Spanish market (the Schlecker operation DISTRIBUIDORA INTNAC.DE ALIMENTACION SXX EUROPE 600 RETAIL proved that it is comfortable with the subject).  Franchises, a key asset in preserving margins in the Iberian market: by 2017, 1/ the gradual disappearance of the operating deleverage effect (from -30bps in 2015 to +20bps in 2017) thanks to a progressive return to positive LFL sales growth, and 2/ the evolution of the format mix in favour of the franchise (+35bps) should offset the dilutive impact generated by the acquisition of the El Arbol and Eroski stores (-41bps). DIA should thus be able to nearly stabilise its EBITDA margin by 2017 (9.4% vs. 9.6% in 2014).

Analyst: Sector Analyst Team: Antoine Parison Loïc Morvan 33(0) 1 70 36 57 03 Cédric Rossi [email protected] Virginie Roumage

r r

DIA

Simplified Profit & Loss Account (EURm) 2012 2013 2014 2015e 2016e 2017e Revenues 10,125 9,844 8,011 9,630 10,375 11,198 Change (%) 3.5% -2.8% -18.6% 20.2% 7.7% 7.9% Adjusted EBITDA 610 642 585 623 691 783 Adjusted operating income 331 375 401 403 459 537 Exceptionals (42.9) (49.1) (76.8) (80.0) (50.0) (50.0) EBIT 288 326 324 323 409 487 Change (%) 35.3% 13.2% -0.5% -0.4% 26.7% 19.1% Financial results (33.0) (39.8) (40.7) (35.0) (26.5) (14.7) PBT 255 286 283 288 382 472 Tax (102) (95.5) (74.6) (34.5) (32.2) (83.8) Profits from associates 1.1 0.60 0.0 0.0 0.0 0.0 Income from discontinued activities (7.5) 5.1 121 0.0 0.0 0.0 Minority interests 11.5 13.3 0.0 0.0 0.0 0.0 Net profit / group share 158 209 329 253 350 388 Restated net profit 195 238 262 259 314 380 Change (%) 29.7% 22.0% 10.0% -1.2% 21.3% 20.8% Cash Flow Statement (EURm) Operating cash flows 378 397 532 553 632 684 Capex, net (331) (362) (342) (400) (413) (426) Change in working capital (15.1) (19.6) (137) 181 83.3 92.0 FCF 31.6 15.6 53.3 334 303 351 Financial investments (10.2) (56.0) (254) 0.0 0.0 0.0 Dividends (72.5) (83.9) (103) (104) (107) (110) Capital increase (24.0) (45.7) (37.2) (200) 0.0 0.0 Assets disposal 4.1 81.9 600 0.0 0.0 0.0 Other 17.6 66.4 (142) (80.0) (50.0) (50.0) Increase in net debt (53.5) (21.7) 118 (50.0) 146 191 Net debt 629 651 533 583 438 247 Balance Sheet (EURm) Company description Tangible fixed assets 1,619 1,602 1,270 1,450 1,631 1,810 Intangibles assets 461 500 497 497 497 497 DIA is one of the world’s leading Cash & equivalents 364 268 199 149 295 485 specialist discount food retailers. It Other assets 960 1,001 1,160 1,322 1,396 1,478 operates in five countries: Spain & Total assets 3,405 3,371 3,127 3,418 3,818 4,270 Portugal (85% of the EBITDA), Shareholders' funds 148 184 378 326 569 847 Brazil, Argentina and China. Apart L & ST Debt 980 913 732 732 732 732 Provisions 101 72.6 86.1 86.1 86.1 86.1 from the discount model, the Others liabilities 2,177 2,200 1,931 2,273 2,430 2,604 comparative edge of Dia has to to Total Liabilities 3,405 3,370 3,127 3,418 3,818 4,270 with the deployment of its franchise WCR (1,052) (1,032) (895) (1,076) (1,160) (1,252) concept that is low capital intensive Capital employed 1,028 1,069 872 871 968 1,055 and structurally more profitable than Ratios the integrated business. Franchised Operating margin 3.26 3.81 5.00 4.18 4.42 4.79 Tax rate 39.98 33.42 26.34 11.98 8.42 17.76 stores represented 45% of the Normative tax rate 30.00 30.00 30.00 30.00 30.00 30.00 portfolio at end 2014 (vs 27% in Net margin 1.93 2.42 3.28 2.69 3.03 3.39 2009); they should represent 60% of it ROCE (after tax) 22.50 24.53 32.16 32.35 33.16 35.59 by the end of 2017. Gearing 426 353 141 179 76.89 29.17 Net debt / EBITDA 1.03 1.01 0.91 0.94 0.63 0.32 Pay out ratio 54.27 49.39 31.27 41.83 31.11 29.45 Number of shares, diluted 659 646 643 630 617 617 Data per Share (EUR) EPS 0.24 0.32 0.51 0.40 0.57 0.63 Restated EPS 0.30 0.37 0.41 0.41 0.51 0.62 % change 31.0% 24.5% 10.5% 0.8% 23.9% 20.8% Operating cash flows 0.57 0.61 0.83 0.88 1.02 1.11 FCF 0.05 0.02 0.08 0.53 0.49 0.57 Net dividend 0.13 0.16 0.16 0.17 0.18 0.19

Source: Company Data; Bryan, Garnier & Co ests.

DIA

Table of contents

1. Investment Case ...... 4

2. Dia is a Buy opportunity in view of upside potential of 23% ...... 5

2.1. An unmerited narrowing in the value creation premium ...... 5

2.2. DCF valuation of EUR9 ...... 5

2.3. A good price/quality ratio (2016 PEG of 0.9x) ...... 7

3. Dia has an attractive format… ...... 8

3.1. The discount format is a mature markets format that Dia masters perfectly ...... 8

3.2. The discount format is also a growth lever for emerging markets ...... 9

3.3. 2014/17 CAGR in sales of 11.8%e, primarily driven by emerging markets ...... 10

4. … and beneficial circumstances ...... 11

4.1. Reallocation of capex and activation of tax-loss carry-forward ...... 11

4.2. Dia is a good vehicle for obtaining exposure to the recovery in Spain ...... 12

4.3. Dia is in a strong position to consolidate the Spanish market ...... 14

5. Operating margin should also hold up thanks to franchises ...... 16

5.1. By 2017, franchises could account for 60% of the network (vs 54% in 2014) ...... 16

5.2. The switch to franchise enables a 300-400bp improvement in the margin ...... 17

5.3. Slight narrowing in Iberian margin only in 2017 vs 2014, despite acquisitions...... 18

Bryan Garnier stock rating system...... 23

DIA

1. Investment Case

The reason for writing now We believe Dia is a good vehicle for playing the recovery in Spanish consumer spending (recent messages from Carrefour have been reassuring). In addition, we believe that the discounter is in a strong position to consolidate the Spanish market.

Valuation Relative to its earnings growth potential (2014/17 CAGR in EPS of 14.7%), Dia's valuation is not excessive. Its 2016 PEG stands at 0.9x (vs. 1.7x for Jeronimo Martins, its closest peer)

Catalysts We have identified two main catalysts: 1/ a like-for-like growth rate back in positive territory in Spain between now and end-2015, 2/ management's demonstration of its ability to rapidly integrate the El Arbol and Eroski stores.

Difference from consensus Following the acquisitions in Spain, management is ambitious in terms of synergies. Given the excellence it has previously shown in this subject, we are giving it the benefit of the doubt. Our estimates are therefore higher than the consensus figures (10% on average over 2014/2017).

Risks to our investment case We believe that like-for-like growth in Spain is the main indicator that the most pessimistic observers look at. As such, the financial community could take a tough view on persistently negative like-for-like figures at end-2015.

DIA

2. Dia is a Buy opportunity in view of upside potential of 23% 2.1. An unmerited narrowing in the value creation premium Despite selling off France, Dia's theoretical share price as in EV/IC = ROCE/WACC currently works out to EUR6.0. This is the value creation the minimum price the market is supposed to pay, if only to reflect value creation. premium has narrowed clearly The premium showed by the spot price to this implied valuation (35% on average between 2011 and 2014) reflects investor visibility on value creation potential.

However, despite the clear improvement in the group's profile, following the disposal of French activities, this now stands at just 14%. Realignment with the historical average level implies a minimum share price of EUR7.8.

Our FV (EUR8.5) corresponds to the average of this amount and our DCF valuation.

Fig. 1: Yearly value creation (EURm) and value creation premium (%)

300 60%

50%

200 40%

30%

100 20%

10%

0 0% 2012 2013 2014 2015 e

Yearly Value Creation (EUR m) Value creation premium (%)

Source: Company Data; Bryan, Garnier & Co ests. 2.2. DCF valuation of EUR9 The main assumptions in our DCF valuation are:

 A 2015/22e CAGR in sales of 6.8% (vs. +1.3% over 2008/13, at the worst of the crisis).

 A normal average EBIT margin of 4.9% and a growth rate to infinity of 2.0%.

 A normal average D&A rate equal to that of capex (i.e. 2.5% of sales).

 Change in WCR representing on average 0.9% of sales over 2015/22 and stable in a normal average year.

 WACC of 8.43% (risk-free rate of 2.3%, beta of 1.1x, and risk premium of 6.6%).

DIA

Fig. 2: DCF valuation of Dia

EURm 2015 2016 2017 2018 2019 2020 2021 2022 Normative Sales 9 630 10 375 11 198 12 015 12 829 13 631 14 449 15 297 15 602 % change 20,2% 7,7% 7,9% 7,3% 6,8% 6,3% 6,0% 5,9% 2,0% EBIT 403 459 537 579 620 660 701 742 765 % change 0,5% 13,9% 17,0% 7,8% 7,2% 6,5% 6,1% 5,9% 3,0% Margin 4,2% 4,4% 4,8% 4,8% 4,8% 4,8% 4,9% 4,9% 4,9% Tax (34) (32) (84) (157) (173) (190) (207) (225) (229) EBIT after tax 368 426 453 421 447 471 494 517 535 D&A 220 232 246 260 274 288 301 315 390 As a % of sales 2,3% 2,2% 2,2% 2,2% 2,1% 2,1% 2,1% 2,1% 2,5% WCR variation 181 83 92 91 91 90 91 95 0 Capex (400) (413) (426) (435) (442) (446) (447) (446) (390) As a % of sales 4,2% 4,0% 3,8% 3,6% 3,4% 3,3% 3,1% 2,9% 2,5% Operational cash-flow 369 329 365 338 370 403 440 481 535 Discounted Cash-flow 346 285 291 248 251 252 254 256 262 Sum of discounted cash flows 2 181 Terminal value 4 158 Total 6 339 Net debt (533) Others (86) Value of group equity capital 5 719 Number of shares 630 Value of group equity capital per share 9,1

Source: Company Data; Bryan, Garnier & Co ests.

At this stage, emerging markets "only" account for 35% of sales and 15% of EBITDA at Dia. Their rise in momentum in the portfolio is set to be gradual and we believe these markets could account for 52% of sales and 33% of EBITDA by 2022. As such, the retailer's sensitivity to changes in emerging markets currencies, relative to that of normal average EBIT margin is set to increase further, as shown in the following table.

Fig. 3: Sensitivity of our DCF valuation to changes in forex and normal average EBIT margin assumptions

Normative EBIT margin

Depreciation of Forex 9,1 3,5% 4,0% 4,9% 5,5% 6,0% -30% 8,2 9,0 10,4 11,4 12,1 -20% 7,8 8,6 9,9 10,8 11,5 -10% 7,5 8,2 9,5 10,3 11,0 0% 7,2 7,9 9,1 9,9 10,6 10% 6,9 7,6 8,7 9,5 10,1 20% 6,6 7,3 8,4 9,1 9,7 30% 6,4 7,0 8,1 8,8 9,4

Source: Company Data; Bryan, Garnier & Co ests.

DIA

2.3. A good price/quality ratio (2016 PEG of 0.9x) Dia offers an excellent We consider that Colruyt and Jeronimo Martins are the most similar peers (two discounters present in price/quality ratio (2016 mature markets with a high penetration rate in modern retailing). However, despite a CAGR in PEG of 0.9x vs 1.8x for 2014/17 EPS of 14.7%, higher than that of Colruyt (2%e) and Jeronimo Martins (10.8%e), the Jeronimo Martins Spanish group is trading on a discount of 22% relative to the Belgian retailer and of 29% relative to the Portuguese retailer in terms of 2016 P/E.

As such, if we take Dia's ratio relative to its earnings growth potential, 2016 PEG (i.e. 2016 P/E relative to the 2014/17 EPS CAGR) works out to 0.9x vs 7.8x and 1.7x, respectively for Colruyt and Jeronimo Martins. Dia's valuation seems particularly attractive relative to that of Colruyt, especially since this latter has no credible source of future growth on an international level, contrary to Dia.

Fig. 4: PER 2016/2017 and PEG 2016 of the sector (consensus figures for peers and BG’s estimates when it comes to Dia)

P/E 2015 P/E 2016 PEG 2016

Dia 16,5 x 13,3 x 0,9

Ahold 17,2 x 16,2 x 1,3

Carrefour 17,9 x 15,9 x 1,4

Casino 17,0 x 14,9 x 1,6

Colruyt 17,7 x 17,1 x 7,8

Delhaize 17,0 x 15,4 x 0,9

JM 21,0 x 18,7 x 1,7

Metro 15,3 x 13,7 x 0,9

Tesco 22,0 x 17,0 x 0,9

Average excl. Dia 18,1 x 16,1 x 2,1 x

Median excl. Dia 17,5 x 16,0 x 1,4 x

Source: Datastream; Bryan, Garnier & Co ests.

DIA

3. Dia has an attractive format… 3.1. The discount format is a mature markets format that Dia masters perfectly The discount format is a Since it was listed on 5th July 2011, the Dia share price has gained 109%. The group derives the mature markets format majority of its revenue from Iberia (Spain and Portugal representing 85% of EBITDA). Having entirely suited to suffered historically each time fears concerning Spain have emerged, the group has often bounced economic prospects in back after publishing excellent operating figures. These performances have stemmed from the fact Spain and Portugal that the soft discount format is very well suited to economic conditions and prospects in Iberia.

Fig. 5: Stockmarket performances of Dia, the MSCI Europe Food Retail and the IBEX 35 (base 10 on 5th July 2011)

2,3 2,1 1,9 1,7 1,5 1,3 1,1 0,9 0,7 0,5 14 11 12 13 11 14 12 13 12 13 14 14 12 13 15 ------Jul Jul Jul Jul Jan Jan Jan Jan Oct Oct Oct Oct Apr Apr Apr

Dia MSCI Food Retail Europe IBEX 35

Source: Company Data; Bryan, Garnier & Co ests.

In addition to the fact that the crisis environment is beneficial to the concept, we believe that the convenience discount format is suited to mature markets and is likely to strengthen in European economies in coming years. Indeed, these economies are increasingly suffering from sociological constraints (ageing population, single parent families etc.) as well as economic ones (less wealthy middle classes and polarisation of the offer), which notably plays in favour of convenience formats.

In addition, from a theoretical viewpoint, the discount format’s competitive edge is all the more significant as the cost of unqualified manual labour is high, sales per employee being higher than in traditional formats. Hence, the discount format is in essence a mature markets format (PS: France is an exception to this rule given its very specific regulatory framework, the so called LME, that is highly detrimental to the discount format). Like Colruyt in Belgium, Pingo Doce in Portugal and Lidl/Aldi in the UK, this is visible at Dia in significant market share gains (+103bp in Spain since 2009) and the 196bp increase in EBITDA margin since 2010 in Iberia.

DIA

Fig. 6: Change in Dia market share in Spain between 2009 and 2014 and following acquisitions of El Arbol and Eroski stores

9,00%

7,83% 7,53% 7,61%

7,08% 7,14% 6,80%

2009 2010 2011 2012 2013 2014 2014 ex post

Source: Company Data; Bryan, Garnier & Co ests. 3.2. The discount format is also a growth lever for emerging markets Low capital intensity The discount format is not only defensive during crisis periods, but further out, it also offers growth makes the discount guarantees in an industry suffering from the erosion of its sales potential (weaker demographic factors format a vehicle for and deflation/disinflation). Industrialisation of the model, the massification of flows over a small conquering emerging number of references and a weaker cost structure results in low capital intensity. markets

In detail, a very small assortment means players have high stock rotation, fewer suppliers and increased negotiating power with these. They cash money from their customers rapidly and pay their suppliers late. As such, highly negative WCR enables a record level of ROCE, and like Biedronka (30%e) and BIM (90%e), enables the financing of expansion capex. As such, the format seems ideal for those rapidly aiming to take positions in emerging markets.

Fig. 7: Estimated average operating costs by format type (% of sales)

Traditional Traditional Low-cost Discounter supermarket hypermarket hypermarket Sales 100.0% 100.0% 100.0% 100.0%

Cost of goods sold and shrink -69.0% -73.5% -76.0% -81.0%

Gross margin 31.0% 26.5% 24.0% 19.0%

Store labour cost -13.5% -12.5% -8.0% -4.0%

Central costs -14.0% -12.5% -10.0% -8.0%

EBITA*1 3.5% 1.5% 6.0% 7.0%

*1 EBITA: earnings before interest, taxes, and amortisation Source: Oliver Wyman; Bryan, Garnier & Co ests.

DIA

3.3. 2014/17 CAGR in sales of 11.8%e, primarily driven by emerging markets By 2017, we estimate that Dia could generate a CAGR in sales of 11.8%, driven by the domestic market and, above all, the rising momentum of emerging markets, which should benefit from a gradual reallocation of investment spending, especially following the disposal of the French businesses.

Fig. 8: What Dia could look like in 2017 and beyond in terms of geographical exposure

2011 Net Sales 2011 EBITDA

10% 25% Iberia Iberia 16% France France 51% 24% Emerging markets 74% Emerging markets

2015 Net Sales e 2015 EBITDA e

18% 36% Iberia Iberia

64% Emerging markets Emerging markets 82%

2017 Net Sales e 2017 EBITDA e

23% 42% Iberia Iberia 58% Emerging markets Emerging markets 77%

2022 (DCF) Net Sales e 2022 (DCF) EBITDA e

33% 48% Iberia Iberia 52% Emerging markets Emerging markets 67%

Source: Company Data; Bryan, Garnier & Co ests.

DIA

4. … and beneficial circumstances 4.1. Reallocation of capex and activation of tax-loss carry-forward The disposal of France In our view, the LME made the sale of Dia France an unavoidable prospect. As such, we were not implies a reallocation of surprised by the deal's price tag in view of the new restrictions in terms of commercial urbanism in capex in favour of growth France. Indeed, these restrictions are set to make the creation of new sales space far more difficult in emerging markets and costly and automatically increase the value of existing business. Carrefour has thus spent EUR283m and taken on EUR336m in debt from Dia (i.e. an EV/sales multiple of 0.35x) in order to repurchase an asset that it had sold off via a spin-off in 2011....

Fig. 9: EV retained during Dia France disposal

36% 35%

20% 20%

615 600

337 339 0%0

Min Max Average Median Final EV

EV EV / Sales multiple

Source: Company Data; Bryan, Garnier & Co ests.

We estimate this operation has boosted our 2014/17e EPS estimates by an average of 7%. However, what we note even more is the gradual reallocation of capex from France towards high-potential countries. In 2014, the amount of capex for emerging markets stood at EUR144m, including around EUR70me for store openings resulting in a scope effect of 9.9%:

 In other words, EUR7m in capex in emerging markets generated approximately one point in scope effect.

 The amount of expansion capex should reach EUR90m on our estimates in 2016 as well as in 2017 (vs EUR65me in 2013 and EUR70m in 2014).

 This acceleration should result in a scope effect of 11.4% and 10.9% in 2016 and 2017 respectively (vs 9.9% in 2014 and 9.5% in 2015).

DIA

Fig. 10: Capex (EUR) earmarked for expansion in emerging markets

90 90

75 70 65

2013 2014 2015 e 2016 e 2017 e

Source: Company Data; Bryan, Garnier & Co ests.

Following the disposal of In addition, the capital loss (i.e. the difference between the book value of the French asset and the Dia France, the capital disposal price) corresponds to an asset that, at this stage, can be deducted from tax expenses relative loss represents a potential to the Spanish business. We understand that Dia therefore has a deductible tax credit of EUR185m, tax gain of EUR185m implying that the group will pay virtually no taxes in Spain in 2015 (around EUR7me), none in 2016 and just EUR43me in 2017. The impact on reported EPS estimates stands at around 20% on average over 2015/17.

We have taken account of this tax windfall in our reported net profit forecast as well as our cash flow estimate. In contrast, we have adjusted our EPS estimates for this exceptional item.

In addition to this tax credit comes the tax-loss carry-forward from El Arbol, acquired by Dia in 2014. It represents EUR380m that can be deducted from the tax expenses related to El Arbol only. Furthermore, we understand that its activation, once the company generates positive earnings, remains subject to approval by the relevant tax authorities. As such, its impact on Dia's consolidated EPS should be insignificant in the short and medium terms.

4.2. Dia is a good vehicle for obtaining exposure to the recovery in Spain Despite a decline in lfl Until fairly recently, the market did not hesitate in punishing sluggish sales performances. Dia has growth, Dia managed to nevertheless managed to reduce its cost base and maintain its margin rate despite a decline in like-for- maintain its margin rate like sales. Between 2011 and 2014, energy costs as a percentage of sales therefore dropped by 30bp, whereas property and logistics costs narrowed by 20bp and 50bp respectively. The number of franchises also rose by 35% (beneficial margin mix).

In addition, the crisis was an opportunity for Dia to round out its portfolio of stores by seizing top- notch locations in town centres on very attractive lease terms (these having notably been deserted by banks which closed a number of branches). This move came at the expense of renovation capex and naturally took a toll on like-for-like growth. Further out however, Dia should benefit from the rising momentum of these new units.

DIA

Fig. 11: Change in lfl growth and margin rate in Spain and Portugal

4,2% Dilutive impact of Synergies + mix in El Arbol and Eroski's stores favour of franchise

1,2% 1,3% 1,1% 0,8% 0,5% 0,5% 0,5% 0,5% 0,2% 0,0%

-0,7% -0,6% -1,5% -2,3% -2,7% -3,8% -3,5% -4,3% -4,2% -5,0% -5,7% -6,7% -7,1% +110 bp +100 bp +90 bp +80 bp +80 bp +70 bp +61 bp +60 bp +60 bp +60 bp +60 bp +55 bp +34 bp +30 bp +20 bp +20 bp +20 bp +15 bp +10 bp 46 bp 46 - 105 bp 105 114 bp 114 - - 173 bp 173 181 bp 181 - - Q1 11 Q1 11 Q2 11 Q3 11 Q4 12 Q1 12 Q2 12 Q3 12 Q4 13 Q1 13 Q2 13 Q3 13 Q4 14 Q1 14 Q2 14 Q3 14 Q4 15 Q1 15 Q2 15 Q3 15 Q4 16 Q1 16 Q2 16 Q3 16 Q4

LFL sales growth EBITDA margin gains

Source: Company Data; Bryan, Garnier & Co ests.

2015 seems to have started better. A number of retailers, such as Carrefour, have made engaging statements. The decline in the population should slow while inflation could return to positive territory in Dia's view. In addition, a number of tax measures (lower income tax rate, rerating of minimum wage etc.) combined with a decline in fuel prices, should be beneficial to consumer spending. As such, GDP growth should exceed 2% in 2015 (vs. +1.4% in 2014).

Fig. 12: Change in inflation (i.e. potential increase in shopper basket) 3,6% 3,1% 3,1% 2,4% 2,3% 1,4% 1,0% 0,8% 0,4% 0,2% - 1,2% 1,2% - - 2012 2013 2014 e 2015 e

CPI Processed food prices Unprocesses food prices

Source: Company Data; Bryan, Garnier & Co ests.

In difficult periods, customers generally consume less on shopping trips, albeit making these more frequently. As such, the prospect of emerging from the crisis probably implies a slowdown in footfall, offset by trading-up and an increase in the average basket price. Intuitively, hard discounters are not necessarily the best placed to benefit from this.

Dia is nevertheless situated in the soft discount segment given its assortment of between 2,800 and 3,500 products (vs. around 1,500 for a pure hard discounter) and that also includes national brands (which are absent from hard discounters' shelves). Furthermore, the retailer is currently aiming to extend its range of skills via targeted acquisitions (see the following section), which should help it to better benefit from the Spanish recovery thanks to a diversification in its offering. Indeed, we

DIA

understand that the current recovery in Spain is notably due to the renewed momentum in the fresh products segment, a skill Dia has precisely reinforced via the acquisition of El Arbol.

As such, we remain reasonably optimistic and in view of advantageous comparison with the year- earlier period, we are forecasting a return to flat lfl growth as of Q4. This quarter on quarter improvement (see Fig. 10) nevertheless implies that the operating deleveraging effect persists until Q3, before dissipating as of Q4. In 2016, we estimate that like-for-like figures should simply allow natural cost inflation to be wiped out, thereby prompting insignificant operating leverage. In 2015 however, the effect should be positive by around 20bp (see Fig. 18).

4.3. Dia is in a strong position to consolidate the Spanish market In a very fragmented Once the crisis is over, we consider that Dia is in a position of force in order to consolidate a still market, Dia could round very-fragmented Spanish market (its market share widened by 103bp in Spain between 2009 and out and diversify its asset 2014). After the acquisitions of the El Arbol and Eroski stores this should reach 9.0% and make the portfolio discounter the second-largest player in the market behind Mercadona and ahead of Carrefour).

Indeed, numerous small regional players are currently struggling and would be "easy" prey for a retailer that has proven its excellence in terms of negotiations and acquisitions integration as shown by the disposal of Dia France and the acquisition of Schlecker. If necessary, the group could maximise critical mass effects on a fixed cost industry.

Fig. 13: Market share of five main retailers in the main European countries

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Porugal UK France Germany Belgium Spain

Source: Kantar; Company Data; Bryan, Garnier & Co ests.

In our view, Dia's acquisition policy could respond to a logic of expanding its portfolio in market segments that are theoretically not part of its natural range of competence. This is how the discounter took control of Schlecker in 2013. More recently, the acquisition of El Arbor should help strengthen its expertise in the fresh produce offering (around 50% of the retailer's sales), which has so far not been one of its comparative advantages.

DIA

Fig. 14: Market share of various players in food retailing (fast-moving consumer goods, self-service fresh produce)

42,0%

22,0%

9,0% 8,3% 6,2% 3,9% 3,1% 2,0% 1,9% 1,6% Lidl Eorski Auchan Consum Carrefour Ahorra Mas Mercadona (< 1,0%) (< Eroski stores El Corte Ingles Corte El Small family & family Small Dia + El Arbol + Arbol + El Dia regional players players regional

Source: Company Data; Bryan, Garnier & Co ests.

Dia could diversify its At present, we can clearly imagine an acquisition in the health & beauty segment. Indeed, when portfolio in market visiting shopping malls, we were surprised by the proliferation in banners such as Kiko and Primor. segments that we do not At the time, Carrefour was also testing specific corners. Entering this dynamic and highly profitable expect segment would make sense in our view. Jeronimo Martins (decidedly a very complementary peer for Dia...) has also invested in this field via Hebe.

Between now and then, the group will nevertheless have plenty to do in integrating the El Arbol stores (451 units with total 2014 sales of EUR725m) and Eroski (160 sales points which generated 2014 sales of EUR380m). Management has provided details on its synergies estimates and breakeven targets. Given the excellence it has shown in this respect following the Schlecker operation, we give management the benefit of the doubt and have aligned ourselves pretty much with its expectations.

Fig. 15: Estimates on changes in margin for El Arbol and Eroski stores

El Arbol Eroski stores

5,0%

2,5%

0,0%

-2,5%

-5,0% Initial Synergies EBITDA Synergies EBITDA Synergies EBITDA EBITDA Synergies EBITDA Synergies EBITDA EBITDA 2015 2016 2017 2015 2016 2017

Source: Company Data; Bryan, Garnier & Co ests.

DIA

5. Operating margin should also hold up thanks to franchises 5.1. By 2017, franchises could account for 60% of the network (vs 54% in 2014) In 2017, franchised stores, DIA initially operated integrated stores (company owned/company operated or COCO), a business which are more profitable model in which the retailer owns the business but rarely the property, and directly operates the store. than integrated ones, It then developed two types of franchise: 1/ the franchise owned, franchise operated model (FOFO) should account for 60% and the 2/company owned/franchise operated model (COFO). of the portfolio vs. 54% in 2014 and 39% in 2011  In terms of 1/ the FOFO model, Dia has more than 20 years experience (firstly in rural areas where the COCO model has not worked), the retailer is remunerated by the sale of goods to the franchises at a fixed-margin rate. Operating costs are shouldered by the franchisee, except for logistics and supervision costs. This model presents a low level of capital intensity, since the business is owned by the franchisee and the property is generally leased.

 In terms of 2/ the COFO model (developed in recent years), Dia shoulders the investment and equipment costs, whereas management and operation of the business is handled by the franchisee. The group is remunerated in the same way as in the FOFO model. The only difference with the FOFO model is the fact that Dia pays the rent directly before retroceding it to the franchisee. In addition, the company continues to own the business. These are mostly former COCOs transformed into franchises.

The franchised stores clearly outperform the rest of the portfolio. In 2014, like-for-like sales were down 2.2%, compared with a 5.6% decline for the whole network (i.e. a double-digit decrease for integrated stores). This is not surprising given that the franchised stores are responsible for their own cost base and that their remuneration is naturally dependent on the sales performances that they can generate.

Fig. 16: Breakdown of sales performances by format

Franchised stores + integrated stores (e) = total stores portfolio

16,3% 13,5% 13,4% 14,8%

4,3% 2,8% 2,5% 3,3% -2,2% -2,3% -0,2% -4,1% -5,3% -4,2% -7,1% -9,0% -8,9% -7,2% -5,3% -0,9% -5,7% -4,8% -3,5% -5,0%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

LFL Expansion Total growth

Source: Company Data; Bryan, Garnier & Co ests.

DIA

However, the group estimates that the franchised stores could account for 60% of the portfolio between now and 2017 (50% in Spain and Portugal and 80% in emerging markets on our estimates) vs 45% in 2014. This rise in momentum is therefore a major catalyst for the share especially since the models' profitability prospects are excellent.

5.2. The switch to franchise enables a 300-400bp improvement in the margin The change in the store We understand that there are three types of store in Spain that differ according to their operating mix in favour of performances: franchised stores should enable margin growth of  Highly profitable stores (1) (i.e. EBITDA margin > 10%), generally situated in the best city- around 10bp/year in Iberia centre locations and which are not intended to become a franchise.

 Profitable stores (2) (i.e. EBITDA margin of 3-4%), which are concerned by a switch to franchise that is very profitable for Dia (300-400bp gain in terms of profitability).

 Stores that barely break even or lose money (3) and which are not destined to become franchises given that Dia prefers to supervise them directly.

This last category (3) therefore weighs on the profitability of the integrated stores as a whole (1) + (3) whose consolidated margin nevertheless works out pretty much in line with that of franchised stores, thanks to the first category (1).

Given the lack of distinct reporting between the various store types, it is difficult to isolate the impact of the roll-out of franchised stores on Dia's profitability. However, when a store switches to the franchise model, our understanding is that the margin improves by between 300bp and 400bp. Indeed, EBITDA margin and ROCE increase constantly between 2008 and 2014, as the weight of franchises in the portfolio increased.

Fig. 17: Change in number of franchised stores and ROCE at Dia

60% 55% 50% 45% 42% 41% 38% 35,6% 33,2% 32% 32,2% 32,3% 27% 22,5% 24,5% 19,7% 15,4% 12,4%

2009 2010 2011 2012 2013 2014 2015 e 2016 e 2017 e

% of franchised stores ROCE

Source: Company Data; Bryan, Garnier & Co ests.

We have undertaken a simple simulation: 1/ for every store model in the Iberian peninsula, whether integrated or franchised, we have maintained a constant margin rate over time; 2/ we have simply estimated that the profitability generated by Dia in operating an integrated store is 350bp lower than that it obtains on the sale of goods to a franchisee; 3/ as such, the change in the mix in favour of

DIA

franchised stores must alone guarantee an average increase of 10bp a year in the margin rate. The exercise is also conclusive for emerging markets ("guaranteed" average annual growth of 15bp).

5.3. Slight narrowing in Iberian margin only in 2017 vs 2014, despite acquisitions In the end, Iberia remains the main operating driver in the short term (see section 4.2). In this region, between now and 2017, the gradual wiping out of the operating deleveraging effect (-30bp in 2015e, zero in 2016, +20bp leverage in 2017e / see section 4.2) as well as the change in the format mix in favour of franchises (+30bp / see section 5.2) should mostly offset the dilution (-50bp in cumulative terms/-11bp in 2015) caused by the acquisition of the El Arbol and Eroski stores (see section 4.3). As such, we estimate a best-in-class EBITDA of 9.4% in 2017 (vs. 9.6% in 2014).

Fig. 18: Breakdown of EBITDA margin in Iberia out to 2017

9,6%

20bp 9,1% 10bp 111bp 38bp NS 8,6% 10bp 9,6% 15bp 30bp 31bp 9,4%

8,1% 8,7% 8,3%

7,6% 2014 (1) (2) (3) 2015 (1) (2) (3) 2016 (1) (2) (3) 2017 margin margin margin margin

(1) El Arbol & Eroski (2) Mix in favour of franchise (3) Operating Leverage

Source: Company Data; Bryan, Garnier & Co ests.

Fig. 19: Breakdown of our estimates by region

IBERIA 2013 2014 2015 e 2016 e 2017 e Gross sales under banner 6 143 6 096 7 185 7 329 7 529 (1) LFL -3,3% -6,0% -2,4% 0,5% 1,5% (2) Expansion & Acquisitions 8,0% 5,2% 20,3% 1,5% 1,2% Ow Acquisitions 4,9% 2,7% 18,1% 0,0% 0,0% (1)+(2) = var (%). 4,7% -0,8% 17,9% 2,0% 2,7% Net sales 5 284 5 222 6 155 6 278 6 450 Adjusted EBITDA 505 499 511 547 606 As a % of sales 9,6% 9,6% 8,3% 8,7% 9,4% bps var. 62 bps 0 bps -125 bps 42 bps 68 bps

Source: Company Data; Bryan, Garnier & Co ests.

DIA

EMERGING 2013 2014 2015 e 2016 e 2017 e Gross sales under banner 3 154 3 304 4 116 4 853 5 625 (1) LFL 16,4% 20,7% 10,0% 6,5% 5,0% (2) Expansion 11,2% 9,9% 9,5% 11,4% 10,9% (1)+(2) = var at cc (%). 27,7% 30,6% 19,5% 17,9% 15,9% (3) Currency -18,8% -25,8% 5,1% 0,0% 0,0% (1)+(2)+(3) = var (%). 8,9% 4,8% 24,6% 17,9% 15,9% Net sales 2 662 2 789 3 475 4 097 4 748 Adjusted EBITDA 77 86 112 144 177 As a % of sales 2,9% 3,1% 3,2% 3,5% 3,7% bps var. 82 bps 21 bps 12 bps 29 bps 21 bps

Total group 2013 2014 2015 e 2016 e 2017 e Gross sales under banner 11 476 9 400 11 302 12 182 13 154 (1) LFL 0,5% 3,1% 1,9% 2,7% 2,9% (2) Expansion & Acquisitions 6,8% 6,8% 16,5% 5,1% 5,1% (1)+(2) = var at cc (%). 7,3% 9,9% 18,5% 7,8% 8,0% (3) Currency -4,9% -8,8% 1,8% 0,0% 0,0% (1)+(2)+(3) = var (%). 2,4% 1,1% 20,2% 7,8% 8,0% Net sales 9 845 8 011 9 630 10 375 11 198 Adjusted EBITDA 642 585 623 691 783 As a % of sales 6,5% 7,3% 6,5% 6,7% 7,0% bps var. 50 bps 79 bps -84 bps 19 bps 33 bps

Source: Company Data; Bryan, Garnier & Co ests.

DIA

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