INDEPENDENT RESEARCH Top Picks 15th October 2013 Top Picks 4Q 2013 Top Picks

ACCOR BUY EUR32 This is the fourth volume of our ‘Top Picks’ for 2013. As with those Last Price EUR32.89 Market Cap. EUR7,482m previously published, this list is not intended to be a model portfolio but ADIDAS GROUP BUY EUR93 Last Price EUR81.58 Market Cap. EUR17,067m simply a pure stock-picking exercise in our coverage universe. However

ALTRAN TECHNOLOGIES BUY EUR7.3 it reflects a bias towards themes that we believe fit perfectly with the Last Price EUR6.27 Market Cap. EUR1,095m current macro and financial environment.

FRESENIUS SE BUY EUR112 Emerging markets currencies have not been the right place to be since Fed Last Price EUR91.18 Market Cap. EUR13,188m 

LVMH BUY EUR165 chief Ben Bernanke signalled in May that the central bank was considering Last Price EUR144.8 Market Cap. EUR73,563m scaling back the $85 billion in bonds they are buying each month. As such,

QIAGEN BUY EUR17 we have adopted a more cautious stance on EMs FX exposure and a Last Price EUR15.3 Market Cap. EUR3,667m greater exposure to Europe showing signs of stabilisation: Accor, Altran, SAINT GOBAIN BUY EUR40 Last Price EUR37.44 Market Cap. EUR20,709m Fresenius SE, Saint Gobain, Veolia, & Allianz.

SAP BUY EUR69  The Fed’s unconventional monetary policy is becoming more uncertain Last Price EUR53.8 Market Cap. EUR66,118m and although Janet Yellen should preserve the Fed’s dovish bias, current SODEXO BUY EUR75 Last Price EUR69.89 Market Cap. EUR10,981m QE cannot be maintained for ever. The calendar is everything but certain,

VEOLIA ENVIRONNEMENT BUY EUR15 another reason to hedge potential impacts with stocks based on self- Last Price EUR13.715 Market Cap. EUR7, 528m helped investment cases: Accor, Altran, Fresenius SE, Qiagen, Saint

AXA BUY EUR18.5 Gobain, Veolia. Last Price EUR18.32 Market Cap. EUR43,847m

ALLIANZ BUY EUR140  The Growth segment is also represented but only by stocks that deserve a Last Price EUR120 Market Cap. EUR54,713m significant re-rating versus peers and/or that, for very specific reasons,

should experience higher organic growth going forward: adidas, SAP, Sodexo, Qiagen. This document is a compilation of the notes written for the update of our Top Picks list

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100.000 Top Picks 8.8% STOXX 600 7.7% STOXX 50 5.6% Q3 2013

98.000

Perf Perf Perf Perf Perf Q1 13 Q2 13 H1 13 Q3 13 9M 13 Top Picks (EUR) 5.40% -1.10% 4.24% 8.81% 13.43% STOXX EUROPE 600 5.04% -2.98% 1.91% 7.69% 9.75%

STOXX EUROPE 50 4.66% -3.46% 1.04% 5.62% 6.72%

r r

Top Picks

Table of contents

Our top picks for 4Q 2013 are ...... 3

Top picks for 3Q 2013 performances ...... 4

Luxury & Consumer Goods : Towards more favourable trends by the end of 2013 // Top Picks: LVMH and adidas Group ... 5 Insurance : Q4 2013 Top Picks: back to the fundamentals ...... 7 Business Services : Top Picks Q4 2013: Sodexo retained, Bureau Veritas exited ...... 8 Healthcare : Top Picks Q4 2013 – High selectivity limits choices to two : Qiagen and Fresenius SE...... 9 Hotels : Top pick: We are maintaining Accor ...... 10 IT Software & Services : Q3 2013 review, prospects for the rest of 2013 and 2014, and Top Picks: SAP and Altran ...... 11 Utilities : Q3 2013 review, prospects for the rest of 2013, and Top Picks : Veolia Env. remains ...... 12 Construction & Materials : TOP Picks Q4 2013 : Saint-Gobain remains our favourite ...... 13 Bryan Garnier stock rating system ...... 15

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Top Picks

Our top picks for 4Q 2013 are Changes :

+ LVMH Fig. 1: Valuation ratios: 4Q 2013 Top Picks + AXA + ALLIANZ Market Cap. EV/EBIT(x) PER (x) RDT (%) + FRESENIUS SE (EUR) 2013e 2014e 2013e 2014e 2013e 2014e ACCOR 7 203 8.9 8.4 23.8 19.9 2.4% 2.8%

ADIDAS 16 873 10.7 8.9 20.0 16.6 2.0% 2.4% - RICHEMONT ALTRAN TECHNOLOGIES 1 059 7.5 5.4 12.1 9.6 1.3% 2.0% - SAFILO - SCOR FRESENIUS SE 15 981 7.2 6.6 15.8 14.1 1.3% 1.5% - SWISS RE LVMH 74 122 11.4 10.0 20.9 18.4 2.2% 2.5% - BUREAU VERITAS QIAGEN 3 701 12.5 11.2 18.7 16.7 0.0% 0.0% - (out 1st Aug.) SAINT GOBAIN 21 077 7.5 6.4 18.4 13.3 3.3% 3.5%

- ACTELION SAP 65 725 11.4 9.8 16.2 14.7 1.7% 2.1% - SODEXO 10 781 9.1 8.3 21.4 18.7 2.3% 2.6% - PENNON - HOLCIM VEOLIA ENVIRONNEMENT 7 456 9.4 8.4 44.2 24.4 5.2% 5.2%

AXA 54 554 - - 9.3 9.2 4.3% 4.4%

ALLIANZ 43 715 - - 9.0 8.4 4.2% 4.5%

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

Fig. 2: Dividend payments: 4Q 2013 Top Picks

Top Picks Ex-Dividend date Amount

LVMH 28/11/13 €1.24

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

Our Top Picks are updated and published every quarter.

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Top Picks

Top picks for 3Q 2013 performances 3Q 2013 perf. incl. Div. Euro Local Ccy Euro Local Ccy

RICHEMONT N 8.2 7.2 9.33 8.2 ADIDAS (XET) -4.6 -4.6 -4.6 -4.6 SAFILO GROUP -2.9 -2.9 -2.9 -2.9 HOLCIM 'R' 4.5 3.6 4.5 4.5 SAINT GOBAIN 16.6 16.6 16.6 16.6 PENNON GROUP 9.6 7.0 12.58 7.1 VEOLIA ENVIRONNEMENT 44.0 44.0 44.0 44.0 ACTELION 13.6 12.6 13.6 13.6 QIAGEN (XET) 2.7 2.7 2.7 2.7 SANOFI* (excl. from 1st Aug. ) 0.38 0.38 0.4 0.4 ACCOR 11.2 11.2 11.2 11.2 ALTRAN TECHNOLOGIES 12.0 12.0 13.63 13.6 SAP (XET) -1.4 -1.4 -1.4 -1.4 SCOR SE 3.7 3.7 3.7 3.7 SWISS RE 6.9 6.0 6.9 6.9 CAP GEMINI 16.7 16.7 16.7 16.7

3Q 2013 Top picks average Perf. 8.81 8.40 9.20 8.80

STOXX EUROPE 600 7.7 7.7 8.20 STOXX EUROPE 50 5.6 5.6 6.28

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

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Top Picks

Luxury & Consumer Goods : Towards more favourable trends by the end of 2013 // Top Picks: LVMH and adidas Group

LOOKING BACK ON Q3 2013 1 M 3 M 6 M 31/12/12 In Q3, our Luxury goods stocks sample, with an absolute 10% increase, has slightly outperformed Pers & H/H Gds 0.9% 2.0% 0.0% 10.3% the DJ Stoxx (+1.3%). The best-performing stock in Q3 was Tod’s with a 25% increase, followed by DJ Stoxx 600 2.6% 8.2% 4.5% 11.1% Burberry (+21%). On the other hand, (+4%) and Ferragamo (+6%) were the worst performers. *Stoxx Sector Indices While LVMH gained around 15%, Richemont won almost 10%. Our Consumer goods and HPC samples underperformed the DJ Stoxx by respectively 1% and 6%, as they have been more affected Companies covered ADIDAS BUY EUR93 by the concerns on the emerging countries economic slowdown. Over the last three months, L’Oréal’s share price remained stable (+21% since beginning of the year) vs. -2.5% for Beiersdorf, Last Price EUR80.41 Market Cap. EUR16,823m whilst adidas Group lost 4.5% during the period following its profit-warning at end-September. BEIERSDORF SELL EUR65 Last Price EUR67.972 Market Cap. EUR15,416m Mixed news from the macro side. US and Japanese data were quite reassuring despite a relative BIC NEUTRAL EUR91 slowdown in the US recently: the US Conference Board Consumer Confidence index was still well- oriented in September (79.7) but a bit lower than in August (81.8) and July (81). The slowdown is Last Price EUR85.18 Market Cap. EUR4,118m also illustrated by the US retail sales which were up 4.7% in August vs. +5.7% in July. Clearly the CHRISTIAN DIOR BUY EUR145 recent “US shutdown” and the uncertainties about the US debt level are a source of concern in the Last Price EUR143.85 Market Cap. EUR26,141m short term and could weigh on US consumer spending. Japan seems better oriented. The PMI index ESSILOR BUY EUR98 reached 52.5 in August, its highest level since the Fukushima crisis in 2011. Retail sales increased Last Price EUR77.8 Market Cap. EUR16,764m 1.1%, highlighting a significant improvement vs. July (-0.3%). In H1 13, our luxury groups have grown GROUPE SEB BUY EUR70 by 10% organically in Japan on average, which is the best performance in 4 years. This positive Last Price EUR65.05 Market Cap. EUR3,263m environment is very helpful for the luxury brands (LV, Gucci, Cartier, Tod’s for the Autumn/Winter HERMES Intl NEUTRAL EUR205 13 collection), which are or have implemented price increases to offset (thanks also to the hedging Last Price EUR265.7 Market Cap. EUR28,050m policy) the negative impact of the JPY fall on profitability. We assume that these price increases will L'OREAL BUY EUR147 be well accepted by the local clientele. Indeed, after some price increases passed in H1, some Last Price EUR125.7 Market Cap. EUR75,992m groups (Louis Vuitton, Richemont…) have implemented new price hikes in Q3 or are ready to do so. This confirms that the first wave of price increases was well accepted by consumers. We therefore LUXOTTICA BUY EUR44 think also that the consumption tax increase from 5% to 8% should not be an issue for luxury Last Price EUR38.44 Market Cap. EUR18,350m brands. LVMH BUY EUR165 vs. 160 For a few months, news coming from China has been encouraging after some disappointments Last Price EUR144.75 Market Cap. EUR73,512m during Q2 (HSBC PMI below 50 points in June and in May). The latest HSBC Chinese PMI figures in KERING NEUTRAL EUR174 August and September were respectively 50.1 and 51.2 after 47.7 in July and 48.3 in June. Last Price EUR164.85 Market Cap. EUR20,801m PRADA BUY HKD87 We are more optimistic on sales growth in Q3 2013 (+10% on average) after +9% (for our luxury sample) in H1, including +9% in Q2. Luxury groups will benefit from easier comparison bases (+11% Last Price EUR76.65 Market Cap. EUR196,134m in Q3 12 after +14% in Q2) as Q3 12 was marking a significant slowdown, mainly due to China which RICHEMONT BUY CHF95 was affected by the political transition. This is particularly true for LVMH and its F&L division Last Price Market Cap. CHF47,789m CHF91.55 (respectively +6% and +5% in Q3 12 after +12% and +10% in H1 12). Kering will also profit from less SAFILO BUY EUR16.5 demanding comps at Gucci brand (7% in Q3 12 after +11% in H1 12). Nevertheless, Hong Kong has Last Price EUR14.63 Market Cap. EUR904m recently shown encouraging signs with better momentum than in Mainland China. For instance, SALVATORE FERRAGAMO NEUTRAL EUR21.8 Swiss watch exports to HK for the first eight months of 2013 were only down 8% in HK vs. 15% for Last Price EUR25.68 Market Cap. EUR4,325m MC, and the Jewellery and Watches retail sales in HK were up 28% in July after +42% in June. In THE SWATCH GROUP BUY CHF595 Europe, the situation is still under pressure given a deceleration in tourist inflows due to the EUR Last Price CHF578.5 Market Cap. CHF30,345m strength versus the JPY and Brazilian Real and the soft activity with the local clientele. TOD'S GROUP SELL EUR107 Last Price EUR138.4 Market Cap. EUR4,236m WHAT WE SEE FOR Q4 13

After expecting that Q3 would be well-oriented, we assume that Q4 should also benefit from an As closed of 2nd October easier comparison base. Indeed, the first signs of the slowing activity in the luxury sector and particularly in China appeared in Q3 12. Indeed, the average organic sales growth for our luxury sample was no more than 10% in Q4 12, down from 11% in Q3. We expect that trends in the US and Japan will remain favourable. Nevertheless, we do not anticipate any strong recovery as we do not think that the situation in Greater China is likely to improve significantly as early as in Q3: While the situation is clearly improving in Hong Kong both for the hard and the soft luxury, the luxury goods sector in Mainland China remains under pressure as the gifting market has not yet recovered and the campaigns against corruption or ostentation have hampered the demand for luxury products. Nevertheless, we assume that more and more customers from MC are buying their products in HK in order to be more discrete!

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Top Picks

The mega brands are implementing a two-fold premiumisation: LV and Gucci are increasing the weight of their high-end product offering (product premiumisation) and are more selective in their retail strategy (wholesale rationalisation, less store openings, etc.). We still anticipate a 9% organic sales growth for 2013 (in line with the 2012 performance) for our luxury goods groups sample with a stronger growth in Q3 and Q4 thanks to easier comparison bases. But be careful with currencies! In 2013, the luxury groups’ top-line growth should be affected by a negative currency impact of around 2 points, mainly caused by the JPY fall against the EUR (-19% YTD vs. 2012 average and the USD only -2% ytd). Concerning the Consumer groups, the negative impact on sales growth should be more significant (e.g. ~5% negative impact for adidas Group) and mainly coming from emerging countries’ currencies like Latin America. For instance, we anticipate a 3.7 points negative FX impact for L’Oréal and -3 points for Beiersdorf. Nevertheless, partly thanks to hedging gains, L’Oréal’s gross margin is expected to increase 70bp in 2013.

CONCLUSIONS AND TOP PICKS We remove Richemont (BUY – FV: CHF95) from our Top Picks: Actually, given the recent share price performance (almost +10%), our upside is now limited with regards to our FV unchanged at CHF95. Consequently we remove Richemont from our Top Picks. The group reported a LFL sales growth of +9% for the first five months and we expect the momentum to accelerate thanks to easier comps: Richemont’s Q3 2012/13 (October-December) was +5% vs +12% in H1. At this point, we maintain our 10% organic sales growth. We also remove Safilo (BUY – FV: EUR16.5): the stock has rebounded by 11.4% since early September, after the Safilo share suffered from a profit-taking phase following H1 13 results in August that were in line with consensus. Despite this share price weakness, the stock is still up by 120% ytd. Short-term newsflow will be a bit less supportive since comps will become harder (Q3 12: +0.8% LFL, Q4 12: +13.8% vs. -4.1% in H1) as H2 12 was characterised by the recovery of Safilo and the favourable phase-out of G. Armani. Furthermore, investors are still concerned by the CEO transition that is taking place on October 15th. However, we definitely think that blue skies will return by the end of 2013 considering the numerous catalysts for 2014: i) new partnerships with Essilor and Fendi, which are set to have a positive impact as of 2014, ii) the new CEO, Ms Luisa Delgado, will be offered to talk directly to investors who should be reassured, and iii) a strong operating leverage expected next year (FY14 EBITDA margin: +160bp to 11.8%). With 2014e PEG of 0.4x, Safilo also offers the best value/growth ratio in the Optics sector (2013-15e EPS CAGR of 43%). Q3 13 results to be released on November 13th. LVMH (BUY – FV: EUR165): We include LVMH in our Top Picks given the potential upside (14%) on the last share price. LVMH should benefit from easier comps for H2 and momentum improvement at LV. The stock is trading at an 11% discount vs. peers. (cf. our report on LVMH issued today). adidas Group (BUY – FV: EUR93): last September, ADS issued a profit-warning due to two key challenges: i) logistics issues in Russia with its new distribution centre and ii) a significant adverse impact from currencies. However, we remain confident on the rebound potential of the stock after unhelpful Q3 results thanks to a more positive outlook. Indeed, management confirmed a strong LFL growth acceleration in Q4 (BG: +8%e) on the back of easy comps (Q4 12: +1% vs. +8% in 9M) and the first deliveries of products dedicated to the 2014 WC, as already highlighted by Nike’s Q1 14 solid earnings. This PW does not call into question the MT self-help margins improvement, driven by: i) the streamlining of the supply chain (natural hedging in Russia, local sourcing in Brazil accounts for 50% of volumes sold locally, etc.), ii) the price-mix, as new products are launched in H2, and iii) geographical mix (LatAm, Greater China) and channel mix (retail). ADS is trading at 16.2x 2014e P/E, which offers an attractive 2014e PEG of 0.7x within the Consumer sector. Q3 13 results to be reported on November 7th. NEXT CATALYSTS L’Oréal Q3 sales (30 October), Q3 sales (18 November), Groupe SEB Q3 sales (22 October), BIC Q3 results (23 October), Essilor Q3 sales (24 October), Kering Q3 sales (25 October), Luxottica Q3 results (29 October), LVMH Q3 sales (Mid October, TBD), Tod’s Group Q3 results (7 November), adidas Q3 results (7 November), Richemont H1 2013/14 results (8 November) and Safilo Q3 results (13 November). Click here to download

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Top Picks

Insurance : Q4 2013 Top Picks: back to the fundamentals

LOOKING BACK ON Q3 2013 1 M 3 M 6 M 31/12/12 Q2 2013 numbers, released this summer, have been pretty convincing in most business lines, driven Insurance 3.2% 8.0% 9.5% 15.3% by strong underwriting performances: lower underlying combined ratios in P&C, higher NBV margins DJ Stoxx 600 2.6% 8.2% 4.5% 11.1% in life, solid underwriting performances in reinsurance despite a high level of natcats. Unsurprisingly, *Stoxx Sector Indices RoI remained under pressure because: i/ companies continue to experience stress on recurring Companies covered returns, and ii/ they are reluctant to use extra capital gains (which makes sense: what would they AEGON SELL EUR5 then do with the excess cash?). Because of higher interest rates compared to end-Q1 and dividend Last Price EUR5.652 Market Cap. EUR12,047m payments, the NAV at end-June came under pressure (negative marked-to-market). ALLIANZ BUY EUR140 Most asset classes experienced nice performances in Q3 2013: i/ rates on govies have come down Last Price EUR117.3 Market Cap. EUR53,483m slightly (-9 bps for the 10Y weighted average for Germany, France, Italy and Spain); ii/ corporate AXA BUY EUR18.5 bonds’ spreads have come down even further, be it for industrial (iTraxx Europe Main down 31 bps) Last Price EUR17.11 Market Cap. EUR40,932m or financial (iTraxx Europe Senior financials down 43 bps) groups, and iii/ equity markets have gone CNP ASSURANCES NEUTRAL EUR12 up (CAC40 +11%, DJ Stoxx50 +7%). This is good news from an NAV standpoint. Last Price EUR13.47 Market Cap. EUR9,249m WHAT WE SEE FOR Q4 2013 EULER HERMES SELL EUR80 Last Price EUR91.38 Market Cap. EUR4,132m Macro-economic environment has been slightly improving in Europe, with small GDP growth now expected in most countries as of H2 2013. However the unemployment rate is at record high levels HANNOVER RE SELL EUR60 (12% at end-August). At some point, social risk could become a critical issue. Last Price EUR54.5 Market Cap. EUR6,573m MUNICH RE SELL EUR155 We see no reason to suspect insurers will deviate from current underwriting strategies, i.e. focusing Last Price EUR144.65 Market Cap. EUR25,942m on the combined ratio in P&C and on product-mix in Life/Protection. This strategy is key for overall SCOR BUY EUR28.5 profitability in a low rate environment. Last Price EUR24.66 Market Cap. EUR4,734m Interest rates and spreads movements will remain critical issues for the sector. Since the FED SWISS RE BUY CHF85 shocked markets on 18th September with its decision not to scale back its monetary stimulus, we Last Price CHF75.25 Market Cap. CHF27,896m think that Ben Bernanke will not lock his successor into a policy change that he/she may not agree ZURICH INS. GROUP BUY CHF308 with. Remember that Bernanke's term is up at end-January 2014. As such, tapering may not happen Last Price CHF232.9 Market Cap. CHF34,326m in the very short term, which could push interest rates lower. This would be good news for insurers’ NAV (positive marked-to-market), but in the end bad news for business conditions. As closed of 2nd October CONCLUSIONS AND TOP PICKS In this context, we like to focus on industrial stories. Our top picks for Q4 2013 are Allianz (Buy, FV EUR140) and AXA (Buy, FV EUR18.5).

At Allianz, P&C underwriting results have been improving and will continue to do so through price increases, lower claims ratio (exc. Natcat volatility) and productivity gains, and partially compensated for recurring pressure on investment income. P&C represents 45-50% of operating profit. The company has strong solvency (economic solvency at 206% at end-June 2013, i.e. EUR25.1bn theoretical excess economic capital), a healthy investment portfolio (EUR6.6bn unrealised capital gains after tax and policyholder participation on bonds and equities at end-June 2013), operating cash flows above EUR15bn p.a., and a solid and credible management team. The stock is currently trading at a 5% premium to peers (P/E, P/NAV), which we see as a minimum considering Allianz’s “Deutsche Qualität” profile. Q3 2013 numbers are due to be published on 8th November 2013. At AXA, P&C insurance (40% of operating profit) has been producing particularly convincing earnings momentum, mainly on the back of its retail franchise (price momentum: +3% in H1 2013) and a well- executed plan to optimise the risk portfolio and costs. Targets for combined ratios in 2015 (reported combined ratio < 96%, combined ratio excluding run-offs < 97%) are quite credible. In life insurance (50% of operating profit), the bulk of profits stems from protection/health and UL businesses (80% of total life division), with sales growing at more than 10% p.a. with pleasing margins (> 40% NBV margin), while the US VA business now seems under control. The stock is currently trading at a 5- 10% discount to peers (P/E, P/NAV), which is not justified in the current financial environment. Q3 2013 sales and NBV numbers are due to be published on 25th October 2013. Click here to download

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Top Picks

Business Services : Top Picks Q4 2013: Sodexo retained, Bureau Veritas exited

1 M 3 M 6 M 31/12/12 LOOKING BACK ON Q3 2013 Inds Gds & Svs 3.7% 10.9% 6.6% 15.2% With a slight better macro-economic environment in Europe, staffing companies continued to DJ Stoxx 600 2.6% 8.4% 5.0% 10.7% improve their results highlighted by less negative like-for-like revenue growth quarter after quarter *Stoxx Sector Indices since the end of last year and showed again the best performance during this quarter, i.e. nearly Companies covered +10% relative to the DJ Stoxx for Adecco and 20% for Randstad. ADECCO SELL vs. NEUTRAL CHF58 In food services, without really positive catalysts, all companies underperformed the DJ Stoxx with Last Price CHF64 Market Cap. CHF12,113m for once Compass group registering the lowest performance in Q3 (-8.5% in EUR). Strong exposure RANDSTAD SELL vs. NEUTRAL EUR33 to LatAm currencies kept Edenred under pressure (-6.5% in Q3) despite strong fundamentals. Last Price EUR41.555 Market Cap. EUR7,366m Although a negative performance (-2%), a better trend in Q3 for Sodexo after -12% in Q2, the share was largely impacted by disappointing H1 results. BUREAU VERITAS BUY EUR27 Last Price EUR22.06 Market Cap. EUR9,753m Contrasting performances for the TIC sector with a decrease of nearly 3% in Euro vs. DJ stoxx for SGS SGS BUY CHF2400 mainly due to its strong exposure to minerals, the sector which registered a significant slowdown. Last Price CHF2113 Market Cap. CHF16,528m There was a more positive share price trend for Bureau Veritas, up 4% during Q3. Remember that the stock price was hit hard in Q2 (-15%) by lower guidance on lfl revenue growth for 2013 than COMPASS GROUP NEUTRAL 900p defined in the “2015 strategic plan”. Last Price 848p Market Cap. GBP15,295m EDENRED NEUTRAL EUR25 WHAT WE SEE FOR Q4 2013 Last Price EUR23.425 Market Cap. EUR5,292m For all groups exposed to fast-growing emerging countries, i.e. especially SGS, Bureau Veritas in the SODEXO BUY EUR75 TIC sector and Edenred in food services, the Q3 results are at risk largely due to negative currency Last Price EUR68.79 Market Cap. EUR10,809m impacts. In general, this is mainly forex risks, hedges arising naturally with the matching of income and expenses in most countries in which the groups operate, since services are provided locally. th Nevertheless, with a higher margin in most fast-growing zones, such negative currency impacts As closed of 4 October could weigh on the EBIT margin.

All in all, on top-line growth, currency conversion would have a negative impact of nearly 6% in Q3 for Bureau Veritas (-2.4% in H1) and 7.5% for Edenred (-4.8% in H1). SGS doesn’t release quarterly results. Accordingly, we exit Bureau Veritas from our top pick list. Staffing Rating changes After strong Q3 performances, we have decided to downgrade our recommendation on staffing companies to sell from neutral on Adecco (Fair Value CHF58) and Randstad (Fair Value to EUR38 from EUR33) mainly due to valuations. We are convinced that the inflection point could be reached in Q4, i.e. positive lfl revenue growth after negative figures since Q1 2012 for Adecco and Q2 2012 for Randstad. • Revenue growth expected in 2014 (lfl revenue growth of 2.7% for Adecco and 5.2% for Randstad, set through the strong correlation with GDP anticipated by Consensus Economics for each country where the groups have a presence.

• Such growth will have a positive impact on margin (EBITA margin up 60bps for Adecco to 4.7% and +20bps for Randstad to 3.7%) but today largely integrated with a P/E 2014e of 18.6x for

Adecco and 16x for Randstad compared with median historicals of respectively 17.3x and 16.3x.

TOP PICK

For Q4 2013, we retain Sodexo. Since our upgrade at the end of May 2013, the stock performance has been a bit disappointing, i.e. st +0.4% relative to the DJ Stoxx, reflecting sluggish results expected for FY 2012/13 ending 31 August. Nevertheless, actions implemented in H1 and reinforced in H2 as well as the group’s fundamentals should help it to restore a more robust pace of growth, bearing in mind that the group’s target is to

reach a 6.3% EBIT margin by the end of FY2014/15 compared to 5.1% anticipated for 2012/13, down 18bps.

Regarding the valuation, over the next 3 years (2013/2015), we forecast average annual growth of 2.6% in sales and 8.4% in EPS (vs. 9.5% over 2008/2012). At the current share price, the stock is trading at 10.6x and 8.7x EV/EBIT 2014e and 2015e respectively vs. 10.6x median historical (2003/2013). NEXT CATALYSTS Edenred: Q3 revenues on 16th October and Investors day on 12th November; SGS: Investors days on 24th & 25th October; Randstad: Q3 results on 31st October and Investors day on ; Bureau Veritas: Q3 revenue on 6th November; Adecco: Q3 results on 6th November; Sodexo: FY results on 14th November; Compass Group: FY results on 27th November. Click here to download

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Top Picks

Healthcare : Top Picks Q4 2013 – High selectivity limits choices to two : Qiagen and Fresenius SE

WHAT HAPPENED IN Q3-2013 1 M 3 M 6 M 31/12/12 Healthcare -1.1% -0.9% 1.9% 12.5% For the first time in the two years, Healthcare underperformed the general indices in the last DJ Stoxx 600 1.0% 7.2% 7.7% 10.6% quarter with an absolute performance of +1.5%, i.e. -5.7% compared to the DJ Stoxx 600. Few stocks *Stoxx Sector Indices grew at double-digit rates over the last quarter with the exceptions of Shire and Actelion. Among heavyweight stocks, two big pharmaceutical companies did particularly badly in Q3, namely GSK and Companies covered Sanofi, both down 7.5%. Within our coverage, FMC and Zealand were also severely hit. ACTELION BUY CHF67 Last Price CHF62.9 Market Cap. CHF7,565m Healthcare suffered from sector rotation in the market that favoured more defensive stocks like ASTRAZENECA BUY 3620p Telecoms or Utilities. Moreover, the slowdown in emerging markets with severe specific warnings Last Price 3170.5p Market Cap. GBP39,721m for Sanofi in Brazil and GSK in China acted as a signal for a pause in the sector, despite continuous BAYER BUY EUR98 good trends and results in R&D and on the regulatory front. It is fair to say that the same two had Last Price EUR84.86 Market Cap. EUR70,175m two setbacks with delays in filing of Lyxumia in the US and the failure of MAGE-3 in melanoma, respectively. BIOMERIEUX NEUTRAL EUR66 Last Price EUR71.19 Market Cap. EUR2,809m From an M&A perspective: i) Actelion finalised the acquisition of Ceptaris (whose product Valchlor DIASORIN BUY EUR33 was approved by the FDA in August), ii) Fresenius SE acquired most of the hospitals managed by Last Price EUR32.33 Market Cap. EUR1,808m competitor Rhön Klinikum, iii) AstraZeneca bought Amplimmune (and its candidate PD1 Mab) and FRESENIUS MED.CARE BUY EUR53.5 partnered with Fibrogen on FG-4592 for anaemia associated with kidney diseases, and iv) Last Price EUR47.69 Market Cap. EUR14,703m BioMérieux announced the acquisition of BioFire, a US-based private molecular diagnostic company. FRESENIUS SE BUY EUR112 Last Price EUR90.65 Market Cap. EUR16,212m WHAT WE SEE FOR THE REMAINDER OF 2013 GALAPAGOS BUY EUR22.5 Can sector rotation again develop against Healthcare in Q4? Tough to say but undoubtedly emerging Last Price Market Cap. EUR450m EUR15.13 markets and currencies will play against the sector. China, the Middle East and LatAm are of concern GLAXOSMITHKLINE NEUTRAL 1870p ahead of the Q3 reports while currency impacts will hit a peak, with the USD adding to the list. Last Price 1566p Market Cap. GBP76,401m GRIFOLS BUY EUR32.5 To make it short, the Q3 season is unlikely to be inspiring for the sector. So, should stocks perform, it would more likely depend on product news as M&A activity is more difficult to predict. Obviously Last Price EUR29.75 Market Cap. EUR9,214m some meetings could have impacts like Investors’ Days of Qiagen, FMC, Novartis and Novo-Nordisk IPSEN NEUTRAL EUR29.5 on 18 November, 21-22 November, 22 November and 3 December respectively. Some PDUFA dates Last Price Market Cap. EUR2,499m EUR29.675 for key products should be impactful too like Opsumit (Actelion, 19 October), Anoro (GSK, 18 MERCK KGaA NEUTRAL EUR110 December), GA101 (Roche, 20 December) or Lemtrada (Sanofi, 27 December). Last Price EUR112.55 Market Cap. EUR24,469m

NOVARTIS BUY CHF76 Last Price CHF68.05 Market Cap. CHF184,156m TOP PICKS FOR Q4 2013 NOVO NORDISK NEUTRAL DKK1040 Despite an expected approval of Opsumit in October in the US (and potentially a CHMP decision in Last Price DKK915.5 Market Cap. DKK405,121m December), we are removing Actelion from our Top Pick List for Q4 after its strong performance. ORPEA BUY EUR38 Next stage in the story is now dependent on selexipag and execution which are more 2014 topics. Last Price EUR37.34 Market Cap. EUR1,979m Sanofi was removed from the list when its Q2 results came out. It may be premature to put the QIAGEN BUY EUR17 name in again as caution is required ahead of Q3 numbers. U300 and PCSK9 phase III results Last Price EUR15.57 Market Cap. EUR3,732m however should sustain the share price, as well as Lemtrada’s approval during the last week of the ROCHE HOLDING NEUTRAL CHF252 year. Last Price CHF237.8 Market Cap. CHF167,069m Qiagen is maintained on the list because we believe that the November CMD should provide greater SANOFI BUY EUR88 insights about Qiagen’s strategy in next-generation sequencing. We see potential for the “sample to Last Price EUR74.74 Market Cap. EUR99,173m result” approach especially with the importance of bioinformatics and interpretation. Moreover, SHIRE PLC NEUTRAL 2350p Qiagen will come back on MDx growth drivers such as Personalized Healthcare or QuantiFeron-TB. Last Price 2450p Market Cap. GBP13,552m STRATEC BIOMEDICAL NEUTRAL EUR29.5 After a roughly muted performance YTD (+3%), we believe it may be time to revisit Fresenius SE’s investment case. Acquiring RHK’s hospitals with a simplified deal structure (7% accretion in 2015) Last Price EUR32.24 Market Cap. EUR379m will enable the company to benefit from significant synergies and to increase geographic footprint. UCB BUY EUR59 We acknowledge that Kabi US should continue to suffer from the return on the market of some EUR41.385 EUR43.995 Market Cap. EUR8,070m competitors but believe it is well captured in the guidance. Lastly, Fresenius SE represents a good ZEALAND BUY DKK90 vehicle to play a less negative final rule regarding dialysis reimbursement as FMC is c.30% of FSE Last Price DKK60.5 Market Cap. DKK1,403m profits. th As closed of 8 October For the first time we don’t have any big pharma names as a top pick. We do believe that 2014 will offer clearer opportunities to invest in the segment as several companies should turnaround. Click here to download

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Top Picks

Hotels : Top pick: We are maintaining Accor

1 M 3 M 6 M 31/12/12 LOOKING BACK ON Q3 2013 Travel&Leisure 2.0% -2.1% 4.3% 14.2% Again in Q3, IHG underperformed the DJ Stoxx with a share price decrease of almost 11% vs. +3% for DJ Stoxx 600 2.5% 6.1% 6.2% 10.8% Accor and +16% for Melia Hotels. Based on the total return, to take into account the ordinary and *Stoxx Sector Indices special dividend of respectively 15.1p and 87.1p paid by IHG, the share price underperformed the Companies covered DJ Stoxx 6.2% vs. +2.7% and 16.1% respectively for Accor and Melia Hotels. ACCOR BUY EUR32 Undoubtedly, Melia Hotels largely benefited from a better financial situation with: 1) the issue in Last Price EUR31.82 Market Cap. EUR7,238m two steps of a EUR250m convertible bond used to redeem the syndicated loans maturing in 2013 InterContinental Hotels NEUTRAL 1925p and 2014 for a total amount of EUR312m; and 2) the renewal of more than 90% of its credit Last Price 1801p Market Cap. GBP4,698m facilities maturing in one year. Management’s confidence in the Q3 results, highlighting 20% Melia BUY EUR7.2 bookings growth from major European tour operators and direct channels, was also another main Last Price EUR7.52 Market Cap. EUR1,390m driver of the stock price performance. th As closed of 7 October Despite management uncertainties and disappointing results in H1 especially with limited new

rooms opened and lower asset disposals than expected, Accor’s stock price improved slightly due to its exposure to Europe (better economic trend). Finally, with the same situation in Q3 compared to Q2 for IHG, with no specific positive newsflow and still a “noisy” trend from Greater China, particularly linked to lower positive impacts on the results from new openings which are now focused on secondary cities.

WHAT WE SEE FOR Q4 2013 As previously, hotel fundamentals remain favourable, i.e. demand is still growing at a faster pace than supply of number of rooms. Today, with a better economic outlook for main European countries, hoteliers most exposed could benefit from the situation, i.e. Accor (Europe 62% of the total number of rooms, o/w 30% in France) and Melia Hotels (67% total number of rooms, o/w 45% in Spain). Nevertheless, all group still highlight the low visibility. TOP PICK We are maintaining Accor as our top pick, awaiting Sébastien Bazin’s presentation on the next investors’ day. 1) “Base case”: This is our current Fair Value of EUR32 which is based on Accor’s main goals for 2016 defined by Denis Hennequin in early 2013, i.e. 80% asset light vs. 57% at the end of 2012, average new rooms per annum of 35,000 and EBIT margin over 15% vs. 9.3% in 2012. Regarding the EBIT margin, this is the level that the group could have generated in 2012 based on 80% asset light with all other things being equal. 2) “Best case”: We have also defined a “best case” taking into account the mid-term margin targets communicated by the group for fully-owned and lease contracts. With such an hypothesis, the EBIT margin could have reached nearly 20% and based on that level, the equity value per share reaches EUR41. 3) What we are waiting: At the investors’ day on 27th November, Sébastien Bazin will confirm the group strategy but could also decide to amplify and/or accelerate.

NEXT CATALYSTS Accor: Q3 revenues on 16th October; Investors’ day on 27th November. IHG: Q3 IMS on 5th November; Investors’ day on 19th November; Melia Hotels: Q3 results early November. Click here to download

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Top Picks

IT Software & Services : Q3 2013 review, prospects for the rest of 2013 and 2014, and Top Picks: SAP and Altran

1 M 3 M 6 M 31/12/12 LOOKING BACK ON Q3 2013 Softw.& Comp. 0.0% 2.3% -0.2% 3.6% In Q3 2013, the performance of the Software & IT Services sector was slightly up (+4% for the

DJ Stoxx 600 2.5% 6.1% 6.2% 10.8% DJ EuroSTOXX Software & IT Services index, or a lower performance to that of the DJ EuroSTOXX 600 *Stoxx Sector Indices index, which was +8%), with early signs of improvement in the economic backdrop. Companies covered During the period, the lead pack of best performers consisted of Alten (+20%), Sopra (+18%), ALTEN NEUTRAL EUR32 Capgemini (+17%), Steria (+17%), Software AG (+15%) and Altran (+12%), with more investor Last Price EUR32.3 Market Cap. EUR1,058m confidence on de-rated stocks. The worst performers were Sage (-4%), Temenos (-3%), SAP (-1%, ALTRAN TECHNOLOGIES BUY EUR7.3 with FY13 guidance slightly revised downwards) and (0%), in the absence of new positive Last Price EUR6.14 Market Cap. EUR1,073m catalysts. ATOS NEUTRAL EUR60 WHAT WE SEE FOR THE REST OF 2013 AND 2014 Last Price EUR57.18 Market Cap. EUR4,961m CAPGEMINI BUY EUR50 Based on industry analysts’ forecasts, we anticipate a deceleration in global IT spending growth for Last Price EUR43.885 Market Cap. EUR6,983m 2013 (+0.8% vs. +2.5% in 2012, source Gartner) dragged by the decline in PC and mobile phone markets, then a re-acceleration for 2014 (+3.6%) driven by better growth in IT Services and Devices. DASSAULT SYSTEMES NEUTRAL EUR96 From a stock market standpoint, we think the share price performance will continue to improve, Last Price EUR97.54 Market Cap. EUR12,303m especially if appetites for risk increases, as tough comps fade, and companies are armed for increasing GROUPE STERIA BUY EUR15 margins. Last Price EUR12.97 Market Cap. EUR418m INDRA SISTEMAS SELL EUR9.3 1). In Software, we forecast slight growth acceleration (+6-7% for 2013-14 vs. +4-5% for 2012), yet Last Price EUR11.73 Market Cap. EUR1,925m we expect the improvement will really start from Q4 13. For the largest vendors (SAP, Dassault Systèmes, Sage), solid sales execution was no longer enough in H1 13 to compensate for the SAGE GROUP NEUTRAL 365p consequences of the economic slowdown, but we estimate the trough was reached as year-on-year Last Price Market Cap. GBP3,625m 329p comps become easier from H2 13. Smaller vendors (Software AG, Temenos) should follow similar SAP BUY EUR69 trends but remain volatile. Obviously, by nature, margins and free cash conversion rates will remain Last Price EUR54.11 Market Cap. EUR66,474m high as usual for Software. SOFTWARE AG BUY EUR30 2). In IT Services, we estimate the rebound will take place in 2014 (+4-5%, vs. +2% for 2012-13). Last Price EUR25.32 Market Cap. EUR2,201m While the environment was tough in Europe in 2013 with French, Spanish and Dutch markets SOPRA GROUP BUY EUR75 experiencing a decline, we deem the momentum will gradually improve with pent-up demand in Last Price Market Cap. EUR760m EUR63.86 Consulting & Systems Integration seen during the summer by Accenture. As usual, value-added SWORD GROUP CORPORATE EUR18 offerings, offshoring and salary pyramid optimisation should play a positive role in margin upside. Last Price EUR15.09 Market Cap. EUR140m The positive signals seen in Automotive and Banking sectors for Q4 13 - which materialise with the TEMENOS GROUP BUY CHF28 resumption of engineer hiring - should allow High-tech Consulting players to keep growing for 2013 Last Price CHF21.5 Market Cap. CHF1,548m and accelerate thereafter.

CONCLUSIONS AND TOP PICKS As closed of 7th October We now become more selective on our Top Pick list as the share price of many stocks we cover performed nicely year-to-date (Capgemini +36%, Temenos +33%, Sopra +29%, Alten +22%). For that reason, we decide to remove Capgemini from our list as we see more limited upside potential (14%), even though we still believe the company is on its way to reach a 10% op. margin by 2016. In addition, we still consider “defensive” stocks (Dassault Systèmes, Sage, Atos) do not provide any upside as their valuation multiples are rich. In this context, our two Top Picks would be: SAP. 1). Exaggerated fears: organic growth has waned recently due to the delayed effects of the 2011 crisis, but this does not undermine either SAP’s ability to deliver 2013 guidance or 2015 targets; 2). The clear advantage provided by the HANA in-memory database, which lies in its ability to help clients transform their business model; 3). We believe Cloud margins should improve by 50ppt between 2012 and 2015; and 4). Shares are trading at a 20% EV/EBIT discount vs. Dassault Systèmes. Altran Technologies. 1). Engaged in reaching 2015 ambitions: with the acquisition of IndustrieHansa, Altran is in line for reaching EUR2bn sales, a top-cycle EBITA margin of 11-12% and a free cash flow margin of 6% of sales by 2015; and 2). Reasonably valued: est. 8.2x 2013 and 6.1x 2014 EV/EBIT multiples. NEXT CATALYSTS Accenture’s Investors’ Day on 8th October. Infosys’ Q2 FY14 results on 12th October. TCS’ Q2 FY14 results on 15th October. IBM’s Q3 13 results on 16th October. Q3 13 results for European Software & IT Services companies from 21st October (with SAP) to 14th November.

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Top Picks

Utilities : Q3 2013 review, prospects for the rest of 2013, and Top Picks : Veolia Env. remains

LOOKING BACK ON Q3 2013 1 M 3 M 6 M 31/12/12 Utilities 4.2% 10.9% 6.4% 6.1% In Q3 2013, the Utilities sector increased by 8.5%, outperforming vs. the Stoxx 600 which rose by DJ Stoxx 600 1.0% 7.2% 7.7% 10.6% 7.7%. During the period, the lead pack of best performers consisted of Veolia (+44%), EDF (+32%) *Stoxx Sector Indices and GDF Suez (+24%). The worst performer was Séché Env. (-15%).

Companies covered WHAT WE SEE FOR THE REST OF 2013 EDF SELL EUR17 Last Price EUR23.76 Market Cap. EUR44,194m Main investor themes in 2013 are likely to remain: i) The impact of GDP developments on the Waste businesses and energy prices should remain one GDF SUEZ BUY EUR19 of the main themes in 2013. Our forecasts are based on flattish GDP growth in the OECD region for Last Price EUR19.225 Market Cap. EUR46,387m the 2013-16 period. While this will not drive profits strongly up, this should help to put an end to the PENNON GROUP BUY 800p declining trend of waste volumes started in Q2 2012. Should the recyclate prices and industrial Last Price 688p Market Cap. GBP2,549m production remain at the current levels for the rest of 2013, this would imply flattish to slightly down SECHE ENVIRONNEMENT BUY EUR36 y/y vs. 2012. However, this would also imply a strong positive inflection point sequentially as of Q3. As Last Price EUR28.7 Market Cap. EUR248m a consequence, we will continue to closely monitor their movements, as any deviation would have a NEUTRAL EUR11 meaningful impact. Last Price EUR12.43 Market Cap. EUR6,342m VEOLIA ENVIRONNEMENT BUY EUR15 ii) European power prices have been bottoming out since the start of September, putting an end to Last Price EUR13.185 Market Cap. EUR7,237m more than two years of continuous decline. This has been led by improving expectations for demand, anticipation of a weakening support for renewables in Germany, talks about a CO2 price th floor in Germany which add to increasing capacity closures. This leads to higher spreads for As closed of 8 October generators as it is not linked to higher input costs.

iii) We believe 2013 will also be led by efficiency programmes and their impacts on the P&L. In 2012, most companies implemented cost-cutting measures, and/or increased their initial targets. First efforts appear to be on track. However, a still-difficult economic environment prompts cautiousness. We have a preference for companies with the greatest room for manoeuvre and the largest impact on the P&L.

CONCLUSIONS AND TOP PICK We have a preference for undervalued stocks, with significant potential positive catalysts. Despite the stellar share price performance in Q3, we maintain Veolia in our top pick list as we expect Q3 results to be supportive. However, following a +9.7% gain at constant FX in Q3 we remove Pennon from our list (even if Viridor is set to benefit from waste volumes bottoming out in the UK); indeed, with more limited upside, we now fear rising UK yields will further weigh on the stock performance in coming months. In this context, Veolia Environnement (BUY - FV EUR15) remains on our top pick list. Despite this summer’s share price surge, we continue to see Veolia as an attractive self-help restructuring story (see Turnaround on track – 18/09/13): i) the target of 3.0x Adj. Net debt/(Op. CF+OFAs) could be reached a year ahead of schedule (at YE13 vs. guidance of YE14); ii) investors overlook the cost- cutting programme positive impact on P&L; 40% of our 2014 EBIT estimates depends on the reduction in the cost structure, reducing macro risks; iii) recurring EPSs are set to grow by 49% p.a. on average between 2013 and 2015; and iv) FCF has reached an inflection point and should cover dividends as of 2013 and remain so in 2014 before turning significantly positive as of 2015 (BGe EUR275m).

Next catalysts Suez Env. (Q3 results results) on 24 October; EDF (Q3 sales) and Veolia Env. (Q3 results) on 7 November; GDF Suez (Q3 results) on 13 November; and Pennon (H1 results) on 28 November.

Click here to download

12

Top Picks

Construction & Materials : TOP Picks Q4 2013 : Saint-Gobain remains our favourite

LOOKING BACK ON Q3 2013 1 M 3 M 6 M 31/12/12 Our building materials sample has been volatile in Q3 driven by current and/or expected behaviour Cons & Mat 2.6% 10.8% 12.5% 13.6% of the FED and BOJ which negatively affected the emerging markets’ foreign exchange rates. Most of DJ Stoxx 600 0.2% 4.9% 6.7% 9.7% our sample of stocks have finished the quarter higher than at the end of Q2. Our Building Materials *Stoxx Sector Indices sample has posted 10.9% in absolute terms and +2.9% relative to the Stoxx600. Saint-Gobain was Companies covered the top performer, delivering +16.6% and +8.2% respectively vs. the Stoxx600. Our Construction CIMENTS FRANCAIS SELL EUR45 coverage sample posted a flat Q3 vs. the Stoxx 600, with Vinci and Eiffage up 2.2%. Last Price EUR51.12 Market EUR1,830m WHAT WE SEE FOR Q4 2013 CRH NEUTRAL EUR15.15 The macro-economic environment remains gloomy in Europe but Q4 2013 should confirm that the Last Price EUR17.27 Market EUR12,599m worst is behind and should be helped by an easier comparison basis. Companies with high exposure NEUTRAL EUR38 EIFFAGE to Construction (CRH, Heidelbergcement, Vicat and Italcementi) and also to industrial segments Market Last Price EUR40.61 EUR3,632m (Saint-Gobain, Imerys). In the US, the picture should remain mixed with an ongoing recovery in

HEIDELBERGCEMENT SELL EUR44 housing but a difficult infrastructure market due to delays in implementing MAP-21. Last Price EUR55.98 Market EUR10,496m Concerns regarding a slower pace of growth in emerging countries could continue to weigh on HOLCIM BUY CHF79 cement players stock. However, we believe the current slowdown in these regions could lead to Last Price CHF65.25 Market CHF21,342m some massive infrastructure programme to boost economic growth. As a result, we view the current IMERYS NEUTRAL EUR47 weakness in cement stocks as an opportunity. The Middle East should continue to be difficult and Last Price EUR51.99 Market EUR3,918m unstable due to Arab Spring consequences, but Egypt could improve due to increased security in the ITALCEMENTI SELL EUR3.8 country after the military took control. Last Price EUR6.03 Market EUR1,406m Cost-cutting programmes will also be an important driver for Q4 2013 but mainly when it can be LAFARGE BUY EUR61 leveraged by some volume in particular in Asia, the Middle East & Africa or Latin America. We Last Price EUR50.26 Market EUR14,437m continue to play these plans with Holcim/Lafarge as these groups are closing the gap with SAINT GOBAIN BUY EUR40 Heidelbergcement/ CRH in our view. Last Price EUR38.265 Market EUR21,165m CONCLUSIONS AND TOP PICKS VICAT BUY EUR60 Last Price EUR51.21 Market EUR2,299m In this context, we have decided to remove Holcim due to the volatile emerging / Indian markets and VINCI BUY EUR47 we keep Saint-Gobain as our favourite. Last Price EUR43.97 Market EUR26,417m Saint-Gobain (BUY, FV EUR40): A glass half full…

th Earnings recovery underestimated by the market. The decline in earnings in Europe has shifted the As closed of 9 October group's centre of gravity to emerging markets and the US. This region is set to represent 55% of the

group's 2013e EBIT vs 45% in 2012, and drive the recovery expected in H2 to EUR1.47bn vs. the 17% decline to EUR1.25bn seen in H1. The recovery expected to start in H2 2013 should continue in 2014 thanks to more beneficial comparisons with the previous year period as well as ongoing trends in emerging markets (Pipes and Flat Glass businesses) and the US. If the scenario for a recovery in H2 2013 does not materialise, we expect radical changes. Firstly, a more aggressive disposals policy could be implemented. Beyond the announced disposal of Verallia, other arbitrage moves could be undertaken (disposals of businesses showing low-growth and volatile pricing power). Secondly, we have identified potential additional cost savings that we estimate at around EUR800m. We believe the base float price in Europe should continue to recover. The 20-25% decline in capacity in the European industry should help to stabilise the market in our view. On our information, this reduction in capacity started in March via temporary float halts especially at Japanese manufacturers Asahi and Nippon SheetGlass. The price increases have not being accepted by a number of clients, especially in Germany but the situation is starting to improve. The German price has already started to recover with the Index up 12% in August and 26% in July. Attractively valued. EV/EBITDA multiples show a discount of around -7% (2014e) vs. 2005 historic average. Our worst-case scenario points to 2013 EBIT of EUR2.4bn and a valuation of EUR28. This scenario includes a 4.2% lfl decline in sales and a 90bp narrowing in EBIT margin. NEXT CATALYSTS Q3 revenues: Saint-Gobain on the 24th of October after close. Click here to download

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Top Picks

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Top Picks

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