BIMB SECURITIES RESEARCH Thursday, 19 July, 2012 MARKET INSIGHT Re-Initiate Coverage

PP16795/03/2013(031743)

Padini Holdings Buy▲ Great Brand Comes with Great Value Price RM1.92 Target Price (+14.2% upside)RM2.13 Stock Data We are re-initiating our coverage on Padini Holdings with a Bloomberg Ticker PAD MK Altman Z-score 5.4 BUY recommendation based on a target price of RM2.13 Market Cap Equity1,217.1 YTD price chg 69.7% Issued shares 657.9 YTD KLCI chg 4.4% which is derived by pegging a PER of 12x over FY13 EPS of 52-week range (H) 1.88 Beta 1.3 17.8 sen. We believe Padini to enjoy solid earnings growth 52-week range (L) 0.82 Major Shareholders going forward due to (i) an aggressive outlet expansion by 3-mth avg daily volume 1,669,835 Pang Chaun Yong 44.0% end FY12, (ii) ’s youthful population with high Free Float 47.6% Skim AmanahSaham 5.0% propensity to spend and (iii) positive outlook in the Shariah Compliant Y BuCapital Dynamics Ass 3.5% country industry.

Share Performance (%) 1mth 3mth 12mth A regional brand. Padini is one of the very few “Made in Absolute 20.0 30.9 82.3 Malaysia” retail brands that has foot prints across the region vs. KLCI 67.2 27.8 67.2 namely , , , the , , , , , , Financial Highlights , Pakistan, , and . FYE 30 June 2009 2010 2011 2012E 2013E (RMm)Revenue 475.5 518.8 568.5 732.9 850.2 Bountiful profits in store. Padini has been unrelenting in EBIT 70.0 86.3 106.1 134.1 159.5 Pre-tax profit 67.6 86.3 105.1 131.1 155.9 expanding its retail space every year. The number of stores Net Profit 49.5 61.0 75.7 98.3 117.0 will have a major impact to the Group as their sales growth EPS (sen) 7.5 9.3 11.5 14.9 17.8 is mainly generated from new expansion of gross floor area EPS growth (%) 18.7% 23.1% 24.1% 29.9% 19.0% (new retail space). For FY12, Padini has budgeted about PER (x) 24.6 20.2 16.3 12.8 10.7 DPS (sen) 2.7 4.5 4.0 6.0 7.0 74,000 sq ft gross floor for 2 Padini Concept Stores and 3 Div. Yield (%) 1.4% 2.4% 2.1% 3.1% 3.7% Brands Outlet stores by end of FY12. NTA/share (RM) 0.3 0.4 0.4 0.6 0.6 EPS (sen) 7.5 9.3 11.5 14.9 17.8 Positive retail outlook. The Distributive Trade Sector comprises of wholesale trade, retail trade and motor EBIT margin 14.7% 16.6% 18.7% 18.3% 18.8% vehicles as the three main sub-sectors. Sales value of Pre-tax margin 14.2% 16.6% 18.5% 17.9% 18.3% Distributive Trade sector in 1Q2012 increased to Effective tax rate 26.7% 29.3% 27.9% 25.0% 25.0% ROE 26.5% 27.8% 29.3% 30.4% 32.0% RM204.1bn or 9.2% as compared with 1Q2011. The retail trade sub-sector recorded the highest percentage growth in Growth ratios sales value circa. 10.7% or to RM9.1bn, followed by Turnover 24.05% 9.12% 9.57% 28.93% 16.01% wholesale trade of 10.2% and motor vehicles with 2.6% as EBIT 21.20% 23.26% 22.99% 26.36% 18.91% compared to the previous year. Pre-tax profit 17.26% 27.61% 21.76% 24.76% 18.98% Net profit 18.74% 23.10% 24.14% 29.87% 18.98% Proven track record. Padini’s track record over the last 5

Share Price Chart years had been impressive. During the period, the group has 2.00 consistently delivered positive revenue and net profit CAGR of 15% and 22% respectively. As Padini targets mainly the 1.80 younger generation, we believe the Group’s growth 1.60 momentum is set to continue supported by the increasing 1.40 young population in the country. We expect Padini to 1.20 register net profit of RM98.3m and RM117m for FY12 and 1.00 FY13 respectively, mainly driven by outlet expansion and 0.80 positive consumer sentiment. 0.60 View & Valuation. We are re-initiating coverage on Padini 0.40 Group Berhad with a Target Price of RM2.13 based on a 5- Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 year average PER Band of 12x over FY13 EPS of 17.8sen. This The Research Team translates into potential total return of 14.2%, including the [email protected] expected dividend yield of 3%. Re-initiate with a BUY 03-26918887 ext 111 recommendation.

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19 July 2012 Re-Initiate Coverage: Padini Holdings

BUSINESS PROFILE

Brief background. Padini Holdings Berhad (Padini) was incorporated in 1971 and started its business in manufacturing & wholesaling before venturing into trading, distribution and retailing. Mr Yong Pang Chaun, whom is the present managing director and also a substantial shareholder with a 44.0% stake, is also the founder of the group. Over the years, the group has developed their retail business for the low to middle income level. Started life as a manufacturer and supplier of garments around the early 70’s, the group then made inroads into the retail scene some years later with its diversified flagship brand. To date, Padini has over 41 years under its and is still going strong.

Company History

1971 • Group started as manufacturer cum wholesaler of women's • PADINI, VINCCI & MIKI brands established to distribute men's, women's 1975 - 87 and children's wear

1988 • Switch from wholesaler to consignor

1990 • SEED label established to distribute contemporary fashion

1992 • First of the Group's single brand retail store opened • VINCCI ceased its apparels line; full emphasis on women's fashion ; 1994 PADINI AUTHENTICS established

1998 • Listing of Padini Holdings Berhad on the KLSE Second Board • First of the Group's multi-brand concept store opened; two more labels, 1999 P&Co and PDI added

2004 • Padini Holdings Berhad moved to the KLSE Main Board

2006 • First of the Group value stores, Brands Outlet, opened

2009 • Padini brand was valued by Interbrand at RM245 million

• An implementation of an ERP solution from SAP, started in August 2008, 2010 finally went "live" in June 2010

Source : Company

Well-established fashion labels. Currently Padini owns 9 well-established fashion labels: Vincci, Vincci+, Vincci Accessories, Padini, Padini Authentics, PDI, Seed, Miki and P&Co. Each of their distinct labels represents a particular fashion philosophy that encompasses a comprehensive range of products that fit into their targeted consumer’s universe.

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19 July 2012 Re-Initiate Coverage: Padini Holdings Group’s Trading Subsidiary

PADINI GROUP

Vincci Ladies Mikihouse Padini Seed Yee Fong Hung Specialties Corporation Corporation Children's Wear

Source: Company, BIMB Securities

PRINCIPAL ACTIVITIES

A regional retail player. Already an established retailer domestically, Padini had embarked on its regional expansion and have embedded their presence in Thailand, Brunei, Saudi Arabia, Philippines, Cambodia, Egypt, Oman, United Arab Emirates, Indonesia, Syria, Pakistan, Qatar, Bahrain and Morocco. For overseas markets, the products are sold mostly through retail stores managed by licensees and dealers.

Well-diversified. Today, Padini is a leader in the domestic and garment industry with extensive network retailing its labels via freestanding stores, multi-brand Padini Concept Stores (PCS), franchised outlets and consignment counters in Malaysia and overseas. As at 2011, Padini operates 45 single brand stores, 22 multi-brand concept stores and 13 Brands Outlet stores. On top of that, Padini also involves in the distribution and retailing of its own fashion labels through 140 consignment outlets and 14 franchise stores and dealer stores throughout the nation. For markets abroad, the products are sold mostly through retail stores managed by licensees and dealers. The increasing and declining number of stores will have a major impact to the company as their sales growth is generated from new expansion of gross floor area (new retail space).

Retail Distribution Network

Retailing

Free Standing Multi Brand Brands Franchise Dealer Consignments Store Store Outlet Store Store Store

Source: Company, BIMB Securities

Affordability + Extensive = Brands Outlet. In addition, the Group also utilizes a great number of lesser known house brands to market as value-for-money merchandise in its Brands Outlet (BO) stores. BO is the personification of shopping convenience, variety and affordability. Another feature of BO is that the store layout is designed to make the shopping experience easy and fun and is well-organised to showcase the extensive options within each product category. BO has grown exponentially from 2006 to become a substantial earnings driver, contributing 20% to group revenue in Q1FY12. From the first store opened in Dec 2006 at Ampang Point BO now cover a total gross floor area of 197,335 sq ft.

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19 July 2012 Re-Initiate Coverage: Padini Holdings

Padini Concept Store Outlet Brands Outlet

Source: Padini

Padini’s Brands Portfolio

Brand Sample Brands Description

Padini  Provides chic, formal and smart casual wear for today’s young executives. Office attire range includes tailored suits, separates, shirts, slacks and knitwear.  Designed with a contemporary feel for modern executives and managers between the mid 20’s and late 30’s; both genders

Padini Authentics  A casual line for men, women and kids to reflect a relaxed and easy lifestyle; this line includes jeans wear, active wear, nauticals, khakis, knitwear and , and a range of accessories that is consistent with the label’s casual image.

 PDI is casual wear that includes jeans, Tshirts, and PDI accessories.  Basic, easy to mix and match garment items with slight fashion elements to enhance the aesthetic appeal of the brand;  Designed for the teens to the 30’s; both genders

 A playground for lovers and addicts.  A line of contemporary fashion accessories, including shoes, VINCCI bags, belts, jewellery, eyewear, and watches. Vincci morphs the hottest inspiration straight off the world’s fashion catwalks into up-to-the minute and stylish accessories.  Emphasis on affordability, trendy and a quick-to-market strategy.

VINCCI+  Vincci+ offers stylish shoes, bags and accessories that are high on the lure and fashion factor.  Offers higher quality , more refined daimente and stones, softer satins, prettier laces or sturdier woods.

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19 July 2012 Re-Initiate Coverage: Padini Holdings

VINNCI  A spin-off from Vincci, as the purveyor of all things related to accessories such as , bangles, rings and earrings to Accessories belts, , shoes, bags and etc.

 P&Co’s motto is fashion unlimited and they live up to it in P&Co designs that are ahead of the others on the street.  Eclectic, edgy and experimental, P&Co is a label for the individualistic fashionista.

 Focus on contemporary fashion, trendy and creative offering Seed both career and casual dressing for the young and even hip kids!  Offer runway-inspired and hottest trends alongside updated work wear pieces that are fashionably tailored for the corporate world.

MIKI Kids and MIKI Maternity

 Children’s wear that is bright, fun and colourful, catering for those between 3 to 13;  Miki Maternity is designed that carries a range of that is practical yet fashionable for the mums-to-be. i.e: Corporate Mum, Relaxed Mum, and Glamour Mum.

Source: Company’s website/BIMB Securities

GROWTH STRATEGY

Network expansion plans. Padini has budgeted about 74,000 sq ft of gross floor to expand their market reach by 4QFY12 located in the Paradigm Mall (PJ) and the Setia City Mall(Klang), the latest shopping landmarks for their respective vicinity.

i. BO and PCS - Leveraging on its successful core business, Padini is expanding its BO and PCS stores in with 10 new stores for FY12. Out of these, 5 are already operational while the remaining 5 are to be opened in 4QFY12 encompassing 2 PCS and 3 BO. The PCS expansion will cover a gross floor area of approximately 46,000 sq ftand are slated to open by end of FY12 which will be located in the Klang Valley and Ipoh. As for BO, the expansion will be covering a gross floor area of approximately 28,000 sq ft; 2 will be in the Klang Valley and 1 in Kuching, Sarawak.

ii. Negotiations - Other than that, Padini also in negotiations stage with Genting to open a BO at the Genting Hotel Complex to be opened in FY13. Another negotiations are also ongoing with FJ Benjamin for them to be the franchisee for their Vincci products in Indonesia. Headquartered in and listed on the Singapore Exchange since November 1996, FJ Benjamin has offices in nine cities, manages over 20 iconic brands and operates 166 stores. FJ Benjamin exclusively and distributes brands such as Banana Republic, Catherine Deane, Céline, Gap, Givenchy, Goyard, Guess, La Senza, RAOUL, and Sheridan across various territories. Its retail footprint includes , and . It distributes in-house labels RAOUL and Catherine Deane through pointsof- sale across Europe, the United States and the .

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19 July 2012 Re-Initiate Coverage: Padini Holdings

Revenue by Distribution Channels

Consignment Own Stores

73.7% 73.4% 73.4% 76.4% 77.9%

16.9% 17.7% 15.8% 14.5% 13.7%

FY07 FY08 FY09 FY10 FY11

Source: Company/BIMB Securities

Revenue Breakdown (FY2005-FY2013E)

900RMm 850.2 Vincci Ladies 800 732.9 Specialties Centre BS 700 Padini 568.5 Corporation SB 600 518.8 475.5 500 Seed 383.3 Corporation SB 400 316.9 286.1 Yee Fong Hung 300 243.3 (M) SB

200 Mikihouse Children's Wear 100 SB Others 0 2005 2006 2007 2008 2009 2010 2011 2012E 2013E

Source: Company, BIMB Securities

RETAIL SECTOR OUTLOOK

Encouraging demography. We are of the view that the future for retail players looks bright especially with the country’s young population. As Padini’s main customers are mostly teenagers and young adults, there is tremendous growth potential for Padini’s brands.

Malaysia Population by Age Group (2000 & 2010)

2000 2010

4.0% 4% 27.2% 32% Below 15 years old

15 - 64 years old

65 years old and above 62.0% 64%

Source: Department of Statistics/BIMB Securities

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19 July 2012 Re-Initiate Coverage: Padini Holdings Malaysia’s retail industry defined. Distributive Trade Sector comprises of wholesale trade, retail trade and motor vehicles as the three main sub-sectors. Sales value of Distributive Trade sector in 1Q2012 increased to RM204.1bn or 9.2% as compared with 1Q2011. The retail trade sub-sector recorded the highest percentage growth in sales value circa. 10.7% or to RM9.1bn, followed by wholesale trade of 10.2% and motor vehicles with 2.6% as compared to the previous year.

Sales Value of Distributive Trade sector (2010 – 1Q2012)

Sales value RM bn 250 204 206.8 204.1 195.6 200 186.9 173.4 178.9 164.4 169.4

150

100

50

0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2010 2011 2012

Source: Department of Statistics/BIMB Securities

FINANCIAL HIGHLIGHTS

Proven track record. Padini’s track record has been impressive with continuous growth since 2005. During the period, the group had posted revenue and net earnings CAGR of 15% and 22% respectively. Going forward, we expect Padini to register net profit of RM98.3m and RM117m for FY12 and FY13 respectively, mainly driven by outlet expansion and positive sector outlook.

Resilient Revenue, Pre-tax Profit and Net Profit (FY2005-FY2011) RMm RMm 180 1000

160 900

140 800 700 120 600 100 500 80 400 60 300

40 200

20 100

0 0 2005 2006 2007 2008 2009 2010 2011 2012E 2013E

Pretax Profit (PBT) Net Profit Revenue

Source: Company/BIMB Securities

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19 July 2012 Re-Initiate Coverage: Padini Holdings Impressive ROE. Padini’s efficiency is second to none as the group managed to maintain its ROE at above 25% since 2006, way above the market’s average of 15%-16%. For FY12 and FY13, we expect Padini’s ROE to be even more astounding at above 30%.

ROE and ROA Performances

ROE ROA

35%

30%

25%

20%

15%

10%

5%

0% 2005 2006 2007 2008 2009 2010 2011 2012E 2013E Source: Company, BIMB Securities

EBITDA Margin

30%

22.52% 22.03% 20.83% 21.63% 18.31% 18.86% 20% 16.32% 16.09% 14.21%

10%

EBITDA Margin

0% 2005 2006 2007 2008 2009 2010 2011 2012E 2013E

Source: Company, BIMB Securities

Dividend Policy. Padini does not have a formal dividend policy. However, the group declared about 35% of net profit as dividend for FY11. The group’s dividend has ranged between 1.1sen – 4.5sen per share for the past 5 years (FY07-FY11) or translating to a payout ratio from a low of 23% to a high of 49% (FY10). Going forward, we expect the group to surpass the 35% payout for FY11 and have estimated approximately 40% for both FY12 and FY13, resulting to a yield of above 3%.

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19 July 2012 Re-Initiate Coverage: Padini Holdings Dividend Payout 140 60%

120 50%

100 40% 80 30% 60 20% 40

20 10%

0 0% 2005 2006 2007 2008 2009 2010 2011 2012E 2013E

Net Income Dividend Payout Dividend Payout Ratio

Source: Company, BIMB Securities

VIEW AND RECOMMENDATION

We are re-initiating coverage on Padini Group Berhad with a Target Price (TP) of RM2.13 which is derived by pegging a target 5 years average PER Band of 12x over FY13 EPS of 17.8sen. The impressive upside potential is justifiable given that:

i. Network expansion. Padini already a household brand name will continue to strive to expand its reach not only domestically by also in Indonesia as well.

ii. Hip and young urban population. Since Padini’s customer segments are predominantly teenagers and adults, growth potential is huge. Going forward, we expect consumer spending to be buoyed by this segment with high spending power.

iii. Positive retail outlook. The Distributive Trade Sector comprises of wholesale trade, retail trade and motor vehicles as the three main sub-sectors. Sales value of Distributive Trade sector in 1Q2012 increased to RM204.1bn or 9.2% as compared with 1Q2011. The retail trade sub-sector recorded the highest percentage growth in sales value circa. 10.7% or to RM9.1bn, followed by wholesale trade of 10.2% and motor vehicles with 2.6% as compared to the previous year.

Table 1: Peer Comparison Company Mkt Cap Price (RM) Target EPS (sen) P/E (X) ROE Div Yield (RMm) Price (TP) FY11 FY12F FY11 FY12F PADINI HOLDINGS 1,263.19 1.92 2.13 0.15 0.16 13.15 11.48 29.28 3.12 ZHULIAN CORP BHD 979.80 2.13 2.30 0.23 0.26 9.26 8.19 25.61 5.63 WING TAI MALAYSIA BHD 618.99 1.90 n.a. 0.29 0.39 6.55 4.87 12.54 2.63 BONIA CORP BHD 463.62 2.30 3.10 0.29 0.33 8.07 7.08 17.97 2.17 VOIR HOLDINGS BHD 57.60 0.48 n.a. n.a. n.a. n.a. n.a. 9.23 2.63 TEO GUAN LEE CORP BHD 60.30 1.48 n.a. n.a. n.a. n.a. n.a. 14.23 10.00 HING YIAP GROUP BHD 119.10 2.85 n.a. n.a. n.a. n.a. n.a. 14.21 1.75 Average 0.24 0.28 9.26 8.00

Source: Company, BIMB Securities

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19 July 2012 Re-Initiate Coverage: Padini Holdings Historical PE Chart

2.50

2.00 13x

1.50 10x 9x

1.00 6x

4x 0.50

0.00

Feb-08 Feb-09 Feb-10 Feb-11 Feb-12

Aug-07 Aug-08 Aug-09 Aug-10 Aug-11

Nov-07 Nov-08 Nov-09 Nov-10 Nov-11

May-08 May-09 May-10 May-11 May-12

Relative Performance (2004-2011)

2.50 500.0%

400.0% 2.00 Padini Relative Performance 300.0% 1.50

200.0%

1.00 100.0%

0.50 0.0%

0.00 -100.0%

16-Jun-04 16-Jun-05 16-Jun-06 16-Jun-07 16-Jun-08 16-Jun-09 16-Jun-10 16-Jun-11 16-Jun-12

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19 July 2012 Re-Initiate Coverage: Padini Holdings

Earnings Estimates FYE 30 June (RMm) 2010 2011 2012E 2013E 2014E Revenue 518.8 568.5 732.9 850.2 974.4 Pretax profit 86.3 105.1 131.1 155.9 180.0 Core Net profit 62.1 77.3 98.3 117.0 135.0 Core EPS (sen) 9.3 11.5 14.9 17.8 20.5 EPS growth (%) 23.1% 24.1% 29.9% 19.0% 15.4% DPS (sen) 4.5 4.0 6.0 7.0 8.0 NTA/ share (RM) 0.4 0.4 0.6 0.6 0.6 Net gearing (x) net cash net cash (0.4) (0.7) (0.9) PER (x) 20.2 16.3 12.8 10.7 9.3 P/NTA (x) 5.4 4.4 3.4 3.4 3.4 Net div. yield (%) 2.4% 2.1% 3.1% 3.7% 4.2% ROE (%) 27.8% 29.3% 30.4% 32.0% 37.0% Interest Cover (x) (80.1) (216.6) 44.0 45.1 45.5

Balance Sheet

FYE 30 June (RMm) 2008 2009 2010 2011 2012E Non Current Assets 74.4 81.2 92.3 94.6 313.6 Current Assets 189.9 209.5 264.3 349.8 97.0 Total Assets 264.3 290.7 356.6 444.3 410.6

Current Liabilities 91.6 83.3 111.3 137.9 44.0 Non Current 3.2 3.4 10.9 23.7 1.6 LiabilitiesShareholders' Fund 169.5 204.0 234.3 282.7 365.0 Minority Interests 0.0 0.0 0.0 0.0 0.0 Equity & Liabilities 264.3 290.7 356.6 444.3 410.6

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19 July 2012 Re-Initiate Coverage: Padini Holdings

DEFINITION OF RATINGS BIMB Securities uses the following rating system:

STOCK RECOMMENDATION BUY Total return (price appreciation plus dividend yield) is expected to exceed 10% in the next 12 months. TRADING BUY Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain. NEUTRAL Share price may fall within the range of +/- 10% over the next 12 months TAKE PROFIT Target price has been attained. Fundamentals remain intact. Look to accumulate at lower levels. TRADING SELL Share price may fall by more than 15% in the next 3 months. SELL Share price may fall by more than 10% over the next 12 months. NOT RATED Stock is not within regular research coverage.

SECTOR RECOMMENDATION OVERWEIGHT The Industry as defined by the analyst’s coverage universe, is expected to outperform the relevant primary market index over the next 12 months NEUTRAL The Industry as defined by the analyst’s coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months UNDERWEIGHT The Industry as defined by the analyst’s coverage universe, is expected to underperform the relevant primary market index over the next 12 months

Applicability of ratings The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies.

Disclaimer The investments discussed or recommended in this report not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of BIMB securities Sdn Bhd may from time to time have a position in or either the securities mentioned herein. Members of the BIMB Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgements as of this and are subject to change without notice. BIMB Securities Sdn Bhd accepts no liability for any direct, indirect or consequential loss arising from use of this report.

Published by

BIMB SECURITIES SDN BHD (290163-X) A Participating Organisation of Bursa Malaysia Securities Berhad Level 32, Menara Multi Purpose, Capital Square, No. 8 Jalan Munshi Abdullah, 50100 Tel: 03-2691 8887, Fax: 03-2691 1262 Kenny Yee http://www.bimbsec.com.my Head of Research

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The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of BIMB Securities Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the BIMB Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opin- ions and estimates included in this report constitute our judgement as of this date and are subject to change without notice..