Dino: Sell (Maintained) DNP PW; DNPP.WA | Retail, Poland

Tuesday, August 13, 2019 | update Dino: sell (maintained) DNP PW; DNPP.WA | Retail, Poland

Overvalued Given Cost Pressures Current Price PLN 135.90

Dino stock has enjoyed substantial gains in 2019, driven most likely Target Price PLN 111.20 by expectations of stronger like-for-like growth in Q2 2019 MCap PLN 14,372m alongside an accelerating inflation rate. While we recognize the potential of the Company's business model, at the current level we Free Float PLN 9,183m consider Dino overvalued given expected future risks. Dino's goal to ADTV (3M) PLN 42.06m improve the EBITDA margin by 0.1-0.2pp in 2019 represents a big challenge amid rising downward pressure on sales margins and Ownership upward pressure on costs, which can be only partly offset by positive like-for-like growth and improved supplier terms. As for the Tomasz Biernacki 51.10% expansion pace, we do not see much room for upside surprises—we already assume that Dino will open about the same number of new Others 48.90% stores in 2019 as its main rival, Biedronka, did during its peak openings year several years ago, and we expect 2020 openings to outpace Biedronka's record. The downside of adding new stores at such a fast rate is increasing upward pressure on labor costs Business Profile stemming from Poland's current low unemployment rate. Dino is a retail chain operator managing 775 stores at the end of 2017 after expanding at an average Furthermore, as it turns out, the value attributed to an average Dino annual rate of 37.8% between 2010 and 2017. By store according to our calculations is higher than the value of an 2020 Dino wants to increase the store count to a average store operated by its main competitor, Jeronimo Martins target 1,200 locations. (JMT), even though the cash-generating capacity of a Dino store forecast in 2019-2023 is about 33% lower. With all this in mind, DNP vs. WIG DNP looks overpriced to us at 20.2x 2019E and 15.8x 2020E EV/ 150 EBITDA. DNP PLN Overrated effects of rising food prices WIG The Polish food price inflation rate accelerated to an annual rate of 5-6% in 130 May and June 2019, driven by a rapid surge in the prices of vegetables and pork. The uneven distribution of price rises works to the disadvantage of grocery retailers by reinforcing substitution effects. The prices of wholesale fresh pork jumped 25% in Q2 2019 relative to the same year-ago period, 110 with negative implications for the profit margins of Dino's subsidiary meat processing plant, Agro Rydzyna.

Increasing pay pressures 90 Dino has a large and increasing presence in the wielkopolskie region in Western Poland, an area where the unemployment rate is among the lowest in Poland at 2.8%. This fact, combined with the Polish government's plans to 70 raise the minimum wage in 2020, creates rising pressures on Dino in terms of future labor costs.

Feb.19

Aug.18 Aug.19 Nov.18 Overvalued stores May.19 Our calculations show that the market attributes higher market capitalization 9MTP Rating per store to Dino than to Jeronimo Martins in the years 2019 and 2020. Company Meanwhile an average Dino store has weaker cash-generating capacity at new old new old PLN 0.70m than an average JMT store at PLN 1.05m according to our Dino 111.20 112.70 sell sell forecasts for 2019-23. We also draw attention to the much more capital- Current Target Company Downside intensive DNP expansion model, which makes the FCF/store ratio much less Price Price attractive than for Jeronimo Martins. Dino 135.90 111.20 -18.2%

Ambitious expansion plans Forecast update 2019E 2020E 2021E We expect Dino to open 244 new stores in 2019, followed by 293 in 2020. Revenue -0.9% +3.7% +9.4% This compares to peak yearly openings of 268 by JMT's Biedronka stores in EBITDA -3.0% +0.0% +6.1% 2013. Given the locations of existing and planned distribution centers, Dino seems to be focusing its expansion plans in Western Poland, exposing itself Net Profit -5.3% -3.7% +2.3% to high labor costs and possible cannibalization effects.

(PLN m) 2017 2018 2019E 2020E 2021E Revenue 4,462.8 5,838.5 7,673.7 9,980.2 12,221.0 EBITDA 401.4 541.1 703.9 894.2 1,100.2 EBITDA margin 9.0% 9.3% 9.2% 9.0% 9.0% EBIT 303.2 429.0 549.0 703.1 858.8 Net income 213.6 307.6 388.4 506.4 633.5 P/E 62.4 43.3 34.3 26.3 21.0 P/CE 44.5 31.8 24.5 19.1 15.2 P/BV 14.7 11.0 8.3 6.3 4.9 EV/EBITDA 35.5 25.6 20.2 15.8 12.5 Analyst:

DPS 0.0 0.0 0.0 0.0 0.0 Piotr Bogusz +48 22 438 24 08 DYield 0.0% 0.0% 0.0% 0.0% 0.0% [email protected]

Forecast Update Dino store expansion, 2011-22P 2400 19.2% We have lowered our FY2019 earnings estimates for Dino 2000 2018-22P CAGR slightly to reflect higher expected costs of financing, and on 220 the other hand we have raised our expectations as to the 1600 240 30.2% rate of future store expansion and revenue growth. 293 1200 2010-18 CAGR Consequently, we have cut our net profit forecasts for 244 800 202 2019 and 2020 by 5.3% and 3.7, respectively. 147 117 400 101 90 86 Changes to 2019-2020 earnings forecasts 43 80 2019E 2020E 0 (PLN m)

old new change old new change

2011 2012 2013 2014 2015 2016 2017 2018

2020P 2021P 2022P Revenue 7 741.9 7 673.7 -0.9% 9 622.2 9 980.2 +3.7% 2019P Gross 24.4% 24.5% +0.1 pp 24.4% 24.5% +0.1pp Total stores New stores margin Source: Dino, P – projections by Dom Maklerski mBanku EBITDA 715.3 703.9 -1.6% 884.0 894.2 +1.1% margin 9.2% 9.2% -0.1 pp 9.2% 9.0% -0.2pp Dino's main rival, the Biedronka chain of supermarkets EBIT 561.2 549.0 -2.2% 696.8 703.1 +0.9% owned by the listed Portuguese retailer Jeronomo Martins, Pre-tax 512.6 484.2 -5.6% 657.4 633.0 -3.7% income experienced peak expansion during the 2011-2013 period, Net income 410.1 381.7 -5.3% 525.9 500.3 -3.7% when is increased its store count from 1,649 to 2,393, i.e. Source: Dino, Dom Maklerski mBanku by 248 locations on average per year (culminating at 268 in 2013). The Biedronka stores opened during that time were larger than an average Dino store with a square Store Expansion Accelerates in H2 meterage of ca. 615 vs. ca. 385sqm Dino. 2019 Dino's growth model is to build stores on greenfield sites Dino operated 1,056 stores as of 30 June 2019 after the using the services of just one general contractor (a addition of 81 locations during the first half of the year construction firm called Krot-Invest). Looking at the current versus 74 locations opened in the first half of 2018. With land bank, a growing logistics network, and the partnership 244 total openings expected in 2019, this would imply that with a proven building firm, Dino looks well-prepared to the Retailer has scheduled 67% of this year's target move forward with the planned expansion. During the four openings for the second half of the year, a higher years to 2022, we predict Dino might be opening more percentage than the 64% annual average registered in H2 stores per year than rival Biedronka did at the height 2016-2018. The acceleration marks a departure from of its expansion effort, with 250 average openings the original plan to stagger openings more evenly expected yearly against Biedronka's 248 in 2011- across four quarters. 2013. Based on Biedronka's example, the rate of yearly openings by Dino will probably decline from Dino H1 and FY new store openings and H2 openings 2021. as a pct. of FY openings, 2016-2019E 300 68% Biedronka vs. Dino annual store openings, 2010-20P 66.7% 66.8% 350 250 66% 300 200 64% 250 63.4% 200 150 62%

60.7% 244 150 293

100 202 60% 268

252 244

100 224 202

147 194 117 183

50 58% 50 147 117

81 90

21 80 101 55 101 77 74 80

46 49 43

0 56% 0

2010 2011 2012 2013 2014 2015 2016 2017 2018

2016 2017 2018 2019 2020P Biedronka Dino 2019P Stores added in H1 (lhs) Source: Dino, Jeronimo Martins, P – projections by Dom Maklerski mBanku Stores added in FY (lhs) Stores added in H2 as a % of FY openings (rhs) Dino's current contract with Krot-Invest runs until 30 Source: Dino, Dom Maklerski mBanku June 2020, and if renewed for another period the construction costs might increase looking at the Aiming for 250 New Stores A Year current trends in prices of building materials and services. in 2019-2022

Assuming Dino opens 244 new stores in 2019, this indicates Geographic Risk an annual rate of expansion of 20%, continuing into 2020 with a further 293 openings. We currently forecast a Pace of expansion 2018-2022 openings CAGR of 19% assuming Dino The 1,056 Dino stores in business as of 30 June 2019 adds 250 new stores on average per year in the years represent a density rate of 2.6 locations per 100,000 2019-2022. population, up from 2.1 in June 2018. The density rate

increased the most over the past year in the regions

of wielkopolskie, lubuskie, and kujawsko-pomorskie,

and it changed the least in the regions of warmińsko-

mazurskie, mazowieckie, and małopolskie.

Dino stores per 100,000 population Dino's expansion plans are built around the locations of distribution centers, of which the ones opened most recently are based in Rzeszotary and Wolbórz, with a new warehouse in Łobez set to launch in 2019. If Dino concentrates its future expansion efforts on regions where it already has a substantial presence, this might produce a cannibalization effect in those regions. Consequently the new stores might generate lower sales effectiveness, though on the plus side they will have a cost advantage due to their proximity to distribution centers. Dino stores aged 1 year or less generated lower sales in Q4 2018 and Q1 2019 than in the same periods the previous year, but this was due to a large number of openings in Q4 2018 and a negative Easter effect in Q1 2019. If the decline in sales at young stores continues in future periods, however, Dino should take this as a warning sign. In Q2 2019, the Easter effect was positive for retail sales in Poland, however there are no similar boosts on the calendar for the rest of the year.

Per-sqm revenues of Dino stores aged 1 year or less 1,500 40%

1,200 32%

Source: Dino, Dom Maklerski mBanku 900 24%

Dino's "Core Regions," i.e. regions where the Company 600 16%

1,109

947

1,092

1,086

1,071

914

899 1,017 opens new stores at the fastest rate, are the following: 300 1,009 8% dolnośląskie, kujawsko-pomorskie, lubuskie, łódzkie, opolskie, mazowieckie, wielkopolskie, and 0 0% zachodniopomorskie. The remaining geographic areas -300 -8% represent the "Noncore Regions" which in 2018 -600 -16% accounted for about 21% of total network growth.

2Q'17 3Q'17 4Q'17 1Q'18 2Q'18 3Q'18 4Q'18 1Q'19 It is worth noting the faster pace since Q1 2018 of 1Q'17 new openings in the Core Region of wielkopolskie, YoY change (rhs) Revenue per square meter (PLN, lhs) where the density rate is already the highest; in Q1 2019, Source: Dino, Dom Maklerski mBanku the stores opened there accounted for 52% of the total openings in the quarter (see table on next page). We wanted to explore how the Dino store count in each of the Core Regions would change for a density rate of 8.2 Estimated count of Dino stores and distribution stores per 100,000 population. We arrived at a total store centers (existing and planned) as of March 2019 count of 1,399, a number similar to the one we expect

to see at the end ofQ3 2020.

Dino growth scenario for Core Regions for a 8.2 density rate

Source: Dino, Dom Maklerski mBanku

Potential pressure on wages Looking at the locations of Dino's existing and planned distribution centers, we expect to see the 28% of all Dino stores as of March 2019 were located in the fastest rate of expansion in the years ahead in regions wielkopolskie region, where openings over the past few in western and north-western Poland. A rapid rollout quarters increased at a faster rate than in the other Core in these areas might produce a cannibalization effect, Regions. The wielkopolskie region has a low and pay pressures due to low unemployment and a unemployment rate of 2.9%, a fact which increases rising minimum wage might drive up labor costs. the risk of staff shortages for the future stores, Furthermore, expansion at a rate of 240+ stores a potentially resulting in heightened pay pressures, year carries the risk that some of the locations will fail underpinned by Poland's plans to raise the minimum to meet targets and will have to be closed in the wage again in 2020. future. For these reasons, it is possible that Dino will have to curb its annual expansion rate below 20%, in Unemployment rates in Poland's administrative which case its growth would look overvalued at 20x regions as of May 2019 current 2019E EV/EBITDA.

Source: Central Statistical Office (GUS), Dom Maklerski mBanku

Quarterly growth in Dino stores by region 3Q'16 4Q'16 1Q'17 2Q'17 3Q'17 4Q'17 1Q'18 2Q'18 3Q'18 4Q'18 1Q'19 Dolnośląskie 3 6 0 3 6 12 3 6 6 9 0 Kujawsko-Pomorskie 4 4 4 2 0 2 4 8 2 8 2 Lubuskie 1 3 0 3 2 7 1 1 3 9 4 Łódzkie 0 0 0 5 5 5 0 2 2 7 0 Opolskie 2 1 0 0 5 3 1 4 0 4 2 Mazowieckie 5 5 0 0 5 5 5 5 0 11 0 Wielkopolskie 0 10 4 14 6 8 3 14 10 14 17 Zachodniopomorskie 0 5 0 3 5 5 2 3 2 9 2 Other 20 1 3 8 6 10 5 5 20 11 5 Source: Dino, Dom Maklerski mBanku

Market capitalization per store, DNP vs. JMT (PLN m) High Relative MCap Per Store 12

A simplified calculation of the value (based on market 10 capitalization) of an average Dino store compared to an average store operated by the rival listed retailer 8 Jeronimo Martins (JMT) indicates that Dino is 6

overvalued. Jeronimo Martins operates different kinds of 11.3 9.2

4 9.1 8.4

retail establishments, from supermarkets to drugstores, in 8.0

7.9

7.7

7.4 7.0 different parts of the world, including in Poland, Portugal, 6.3 2 and Colombia. Nevertheless its stores have a larger average trading area than an average Dino store. 0

2020 2021 2022 2023 2019 JMT Dino

Source: Dino, Dom Maklerski mBanku

The estimated per-store market caps of Dino and Jeronimo Like-For-Like Growth Slows Martins even out in 2021 after a faster expansion pace assumed for the former. Dino generated the strongest growth in like-for-like sales in

2017, supported by the introduction of the "500+" family When it comes to the cash-generating capacity of the benefits program in 2016 and its positive effect on the two sales networks, the average OCF per store in buying power of consumers in small and mid-sized cities. 2019-2023 at Dino is only about 0.67x of the OCF Other drivers included an increasing share of stores aged 5 generated by Jeronimo Martins (OCF is calculated ex- or under in the total Dino network, and low inflation. The IFRS16 effects). The difference again stems from the positive effects on consumer spending of the 500+ benefits smaller average size of Dino stores. was the most pronounced in 2016-2017, and its extension

in 2019 is not likely to have as much of an impact. OCF per store, DNP vs. JMT (PLN m) 1.2 LFL growth vs. food price inflation 1.0 20% 16.6% 16.2% 14.1% 0.8 15% 11.3% 11.6%12.2% 0.6

1.1 10%

1.1

1.0 1.0

1.0 7.5% 0.4 5.6% 5.1%

4.3% 4.2% 4.2%

0.7

0.7 0.7 0.7 5% 2.6% 0.2 2.2% 0.8% 0% 0.0 -0.9% -1.7%

-5%

2019 2020 2021 2022 2023

JMT Dino

2012 2013 2014 2015 2016 2017 2018 2011 Source: Dino, Dom Maklerski mBanku LFL InflacjaFood price inflation rate 2019P

Source: Dino, Dom Maklerski mBanku The OCF Yields derived from the worth and cash- generating capacity of an average store confirm Dino operated the largest number of stores aged 3 or under Dino's over-valuation relative to Jeronimo Martins. as a percentage of total stores in the years 2012-2014. In 2016-2018, the proportion remained stable at around 48%, OCF/Market Cap, DNP vs. JMT implying reduced potential to improve lfl growth in the 15% coming years. Accordingly, we assume like-for-like growth going forward will remain in the low single digits, and we view a return to double-digit growth as highly unlikely. 10% Proportion of young stores in total vs. like-for-like growth at Dino

14.0% 80% 20%

13.5% 13.3%

5% 13.2% 66% 10.8%

10.4% 62%

10.0% 62% 9.1%

7.8% 54%

6.2% 60% 15% 47% 48% 47% 48% 0%

40% 10%

2019 2020 2021 2022 2023 20% 5% JMT Dino

Source: Dino, Dom Maklerski mBanku 0% 0%

Based on the estimated OCF Yield, the implied

2012 2013 2014 2015 2016 2017 2018 valuation of Dino forecast for 2021 would figure to 2011 PLN 9.6bn, a value which is more than 30% below the Stores 1yo or less Stores 2yo or less current market capitalization. Stores 3yo or less LFL sales (rhs) Source: Dino, Dom Maklerski mBanku Implied Valuation of DNP based on OCF Yield Annual store expansion rate vs. like-for-like growth 2019 2020 2021 at Dino 60% Implied valuation of 7,945 8,205 9,572 52% DNP (PLN m) 50% OCF Yield, DNP 6.22% 7.85% 9.19% 39% 38% 40% 27% OCF Yield, JMT 10.83% 13.23% 13.27% 30% 25% 23% 23% 26% 25% Source: Dom Maklerski mBanku 17% 16% 20% 14% 11% 12%12% 8% 4% 5% 10%

2012 2013 2014 2015 2016 2017 2018

2011 2019P YoY growth in store count LFL growth Source: Dino, P – projections by Dom Maklerski mBanku

Stores up to 3 years represent a higher proportion of the YoY change in quarterly sales margins of Dino vs. Dino network than registered by Biedronka during its peak change in average pork prices expansion period, resulting in more robust like-for-like 30% 1.5% growth. Nevertheless as stores mature this diminishes the 20% 1.0% potential to keep like-for-like sales growing at double-digit rates. 10% 0.5%

0% 0.0% Proportion of young stores in total vs. like-for-like growth at Biedronka -10% -0.5% 40% 36% 16% 34% 34% 33% 35% 14% -20% -1.0% 29% 12% 30% 25% -30% -1.5% 25% 10% 8%

20%

2Q'15 3Q'15 4Q'15 1Q'16 2Q'16 3Q'16 4Q'16 1Q'17 2Q'17 3Q'17 4Q'17 1Q'18 2Q'18 3Q'18 4Q'18 1Q'19 2Q'19 13% 6% 1Q'15 15% 9% 9% 4% Change in price of pork (%, lhs) 10% 7% 2% Change in Dino sales margin (p.p., rhs) 5% 0% Source: Dino, Dom Maklerski mBanku 0% -2%

We assume that the Agro Rydzyna facility buys fresh meat

2010 2011 2012 2013 2014 2015 2016 2017 2018 2009 wholesale on the spot market, which means the higher Share of stores aged 3Y or less LFL sales prices it has had to pay since April will have been weighing Source: Jeronimo Martins, Dom Maklerski mBanku on the profit margins of the whole Dino Group. The following diagram shows how fluctuations in wholesale prices can affect the sales margins of meat producers using the Rising Pork Prices Reflect On example of the listed Polish sausage maker Tarczyński. Future Sales Margins YoY change in quarterly sales margins of Tarczyński Dino was able to improve sales margins considerably in vs. change in wholesale pork prices 30% 10% 2018 by consistently raising prices at its stores, leveraging 7.7% scale for better trading terms, and thanks to relatively low 20% 4.8% prices of pork, benefitting the profit margins of the 5% subsidiary meat processing unit Agro Rydzyna. 10% 1.6%

1.2% 2014-2018 gross margin evolution 0% 0% 25.0% +0.9pp -10% 24.5% -1.3% -5% +0.1pp 24.0% +0.6pp -20% 23.5% 23.0% +0.6pp -30% -10% 22.5%

22.0%

2Q'15 3Q'15 4Q'15 1Q'16 2Q'16 3Q'16 4Q'16 1Q'17 2Q'17 3Q'17 4Q'17 1Q'18 2Q'18 3Q'18 4Q'18 1Q'19 2Q'19 21.5% 1Q'15 21.0% Change in price of pork (%, lhs) 20.5% Change in sales margin of TAR (%, rhs) 20.0% Source: Tarczyński, Dom Maklerski mBanku

2015 2016 2017 2018 2014 According to analysts by ABR SESTA, prices of pork meats at Polish stores increased at a much slower Source: Dino, Dom Maklerski mBanku rate than the rise in wholesale prices of fresh meat recorded in Q2 2019. According to industry insiders, the Dino increased its quarterly sales margins at a faster rate slow pace of retail price adjustments is negatively impacting than rival Biedronka in 2018, owing in part to its cost the profitability of meat producers. advantage as owner of the Agro Rydzyna meat factory during a period of low pork prices. This advantage was YoY change in average promotional retail sales largely obliterated in Q2 2019, when wholesale prices of prices of pork meats fresh pork jumped 25% over the year-ago quarter. Cash&Carry 2.4% YoY change in pork prices vs. change in sales margins of Dino and Jeronimo Martins Hypermarts 5.6% 1.5 60%

1.0 40% Supermarkets 7.7%

0.5 20% Discount stores 8.7% 0.0 0% Convenience stores 11.2% -0.5 -20% 0% 2% 4% 6% 8% 10% 12%

Source: ABR SESTA, Dom Maklerski mBanku

1Q'17 2Q'17 3Q'17 4Q'17 1Q'18 2Q'18 3Q'18 4Q'18 1Q'19 2Q'19 Sales margin change, DNP (pp, lhs) Sales margin change, JMT (pp, lhs) Change in meat price (rhs) Source: Dino, Jeronimo Martins, Dom Maklerski mBanku

We suspect that Dino, along with other grocery retailers in Cost Pressures Mount Poland, will eventually start to gradually raise the prices of meat products to offset the higher wholesale costs. In the Dino registered an increase in SG&A expenses as a meantime, however, their sales margins are going to percentage of sales in 2018, driven mainly by higher salaries take a hit, in case of Dino exacerbated by negative (+0.67pp y/y), with the ratio of G&A expenses for the year base effects which might weigh until Q1 2020. In the reduced by 0.2pp to 0.9% thanks to tight discipline. The medium term, once the higher wholesale prices are passed negative impact of a higher SG&A/Sales ratio on the EBITDA onto end consumers, the downward margin pressure will margin for 2018 was offset by an increase in gross margin ease, accompanied by improvement in like-for-like sales. by 0.9pp to 24.2%, and as a result the operating margin for

the year grew by 0.5pp to 9.3%. Competition SG&A expenses as a pct. of sales at Dino Rated grocery retailers improved sales margins in 2018, 18.0% owing among others to an acceleration in the rate of inflation 17.5% 16.9% 16.9% 16.5% 16.5% in food prices to 2.8%. As a result, companies were able to 17.0% 16.3% mitigate the negative impact of pay pressures on EBITDA 16.5% 0.9% 16.0% 1.5% margins, but they reported slow sales growth on a like-for- 1.4% 1.3% 1.1% like basis. At Biedronka, we anticipate an acceleration in lfl 15.5% 15.0% growth from Q2 2019, supported by positive base effects. 16.0% 14.5% 15.4% 15.1% 15.2% 15.2% 14.0% Food price inflation in Poland vs. lfl growth at select 13.5% chain grocery stores

25%

2014 2015 2016 2017 2018 20% General expenses/Sales Selling expenses/Sales SG&A/Sales Source: Dino, Dom Maklerski mBanku 15% In 2019, the proportion of selling expenses vs. 10% general expenses as a pct. of sales is set to reverse 5% looking at the current upward trend wholesale meat 0% prices and prices of energy, combined with a slower- but-still-upward trajectory in payroll costs -5%

YoY change in costs of materials and energy and

2Q 16 2Q 16 3Q 16 4Q 17 1Q 17 2Q 17 3Q 17 4Q 18 1Q 18 2Q 18 3Q 18 4Q 19 1Q 1Q 16 1Q payroll costs as a percentage of sales 2% lfl Dino lfl Biedronka 0.6% 0.3% 1.0% 0.9% 0.9% 1% 0.6% lfl Delikatesy Centrum Food price inflation 0.4% 0.4% Source: Dino, Jeronimo Martins, Eurocash, Dom Maklerski mBanku 1% 0.1% 0.2% 0% Slow lfl growth, combined with rising labor costs, forced -1% 0.0% Biedronka to concentrate on protecting sales margins during -0.3% -0.4% -1% -0.7% 2018, and as a result the EBITDA margin for the year -1.1% -1.0% -2% -1.2% showed flat year-over-year growth (based on our -1.5% -2% calculations, which use the consolidated 2018 gross margin

and SG&A expenses of Jeronimo Martins, the owner of

2Q'17 3Q'17 4Q'17 1Q'18 2Q'18 3Q'18 4Q'18 1Q'19 Biedronka, which accounted for 89% of last year's 1Q'17 Materials and energy Payroll consolidated EBITDA). Once lfl sales pick up as expected in Source: Dino, Dom Maklerski mBanku Q2 2019, Biedronka will no longer have put as much effort into safeguarding sales margins depending on the Summing up, we expect Dino to deliver expanding magnitude of the upward pressure on salaries and energy. sales margins from Q2 2019, but with cost pressures We expect retailers to continue raising prices during 2019, still in place we predict a decline in the EBITDA but at a slower pace than in 2018. margin for FY2019 by 0.1pp to 9.2%.

Factors shaping EBITDA margins at Jeronimo Martins Factors shaping Dino's EBITDA margins (adjusted for 2014 2015 2016 2017 2018 expenses related to 2017 IPO) LFL Biedronka -0.8% 3.2% 9.5% 8.6% 2.7% (%) 2015 2016 2017 2018 2019P Gross margin* 21.22% 21.40% 21.29% 21.25% 21.68% Gross margin 22.6% 23.2% 23.3% 24.2% 24.5% SG&A/Sales* 17.63% 17.72% 17.41% 17.61% 18.25% SG&A/Sales -16.5% -16.5% -16.3% -16.9% -17.4% Other operating EBITDA margin** 6.80% 7.00% 7.20% 7.30% 7.30% 0.1% 0.0% 0.0% 0.0% 0.0% gains/losses EBIT margin 6.2% 6.7% 7.1% 7.3% 7.2% YoY change (pp) D&A expenses 1.9% 2.0% 1.9% 1.9% 2.0% LFL Biedronka 4.00% 6.30% -0.90% -5.90% EBITDA margin 8.1% 8.7% 9.0% 9.3% 9.2% Gross margin* 0.18% -0.11% -0.04% 0.44% YoY change (pp) SG&A/Sales* 0.10% -0.32% 0.21% 0.63% Gross margin 0.58 0.62 0.11 0.87 0.35 EBITDA margin** 0.20% 0.20% 0.10% 0.00% SG&A/Sales 0.40 -0.01 0.22 -0.62 -0.48 Source: Jeronimo Martins, Dom Maklerski mBanku; *Consolidated gross margin Other operating of Jeronimo Martins; **Standalone margin of Biedronka 0.18 -0.07 0.02 0.02 -0.05 gains/losses

EBIT margin 1.16 0.54 0.35 0.28 -0.19 D&A expenses -0.05 0.03 -0.04 0.00 0.10 EBITDA margin 1.11 0.56 0.31 0.27 -0.09 Source: Dino, P – projections by Dom Maklerski mBanku

Cash Conversion Cycle Has Room With fast-growing sales and profits, as the cash cycle improves, Dino is able to fund its capital expenditures with For Further Improvement increasing operating cash flow. In 2018, the Company's OCF/CAPEX ratio was 93%, and in 2019 it is expected Dino improved its cash cycle significantly in 2018 (-12 days to be 92% based on the expected record number of new y/y to -56 days), through better management across the store openings. This will be followed by a rebound to a board, with the payables cycle extended by 7 days to 94 projected 110% in 2020. days. CAPEX & OCF at Dino Cash conversion cycle at Dino 1,200 180% 93.1% 92.6% 110% 50 3 3 4 3 1 1 1 800 140% 81% 101% 1,085 25 40 39 40 39 37 37 37 400 79% 860 100% 497 634 0 245 324 0 60% -25 -278 -382 -457 -75 -78 -82 -636 -50 -87 -94 -94 -96 -400 -25 -865 -918 20% -30 -37 -75 -800 -45 -20% -64 -70

-100 -1,200 -60%

2014 2015 2016 2017 2018

2015 2016 2017

2019P 2020P

2018P 2019P 2020P Inventory days Receivables days Payables days OCF CAPEX Financing costs OCF/CAPEX

Source: Dino, P – projections by Dom Maklerski mBanku Source: Dino, P – projections by Dom Maklerski mBanku

The trade payables period has been seen to rise over the Given the huge investment in new stores planned in 2019, recent years, but with other investment payables expected Dino is not likely to reduce debt this year, resulting in an to normalize the conversion ratio in 2019 is not likely to unchanged net debt/EBITDA ratio. In future years, however, change. the ratio will decrease in line with increasing EBITDA, to reach a projected 0.3x at the end of 2021. Trade and other payable days at Dino 100 Debt and Net debt/EBITDA ratio of Dino 1200 3.0 80 2.6 1000 2.5 60 2.0 94.2 800 1.7 2.0 40 82.2 86.5 64.6 70.8 71.5 600 1.2 1.5 20 1.0 1.0 0.7 0 400 1.0 0.3

200 0.5

2016 2017 2018 Trade payables Trade & other payables 0 0.0

Source: Dino, Dom Maklerski mBanku

2015 2016 2017

2014

2019P 2020P 2021P Compared to Jeronimo Martins, Dino still has room for 2018P Gross debt (PLN m, Ihs) Net Debt/EBITDA (rhs) improvement when it comes to the cash conversion cycle, evident mainly in inventories. The Company is aiming to Source: Dino, P – projections by Dom Maklerski mBanku improve its cash cycle by 1-2 days every year in the 2019-2022 period, and we assume it will fulfill this Our Forecasts vs. Analysts' goal. Consensus Cash conversion cycle at Dino and Jeronimo Martins (2018) Our expectations as to Dino's sales revenues in the years 2019-2021 exceed the corresponding market forecasts by 80 1-3%, which we attribute to our greater optimism as to 60 future revenues per square meter. Our EBITDA and net profit forecasts are in line with the average consensus 40 82 72 forecasts. After applying a more conservative approach to forecasts beyond 2022, we have adjusted lower our 20 37 26 1 1 valuation of Dino. 0 Inventory Acc. Receivable Acc. Payable Dino Jeronimo Martins Source: Dino, Jeronimo Martins, Dom Maklerski mBanku

Earnings projection for Dino by Dom Maklerski mBanku vs. market consensus 2019E 2020E 2021E (PLN m) mDM Consensus difference mDM Consensus difference mDM Consensus difference Revenue 7,673.7 7,619.3 +1% 9,980.2 9,664.1 +3% 12,221.0 11,823.3 +3% EBIT 549.0 565.1 -3% 703.1 718.3 -2% 858.8 885.3 -3% EBITDA 703.9 715.8 -2% 894.2 909.7 -2% 1,100.2 1,119.5 -2% Net income 388.4 409.2 -5% 506.4 530.2 -4% 633.5 664.6 -5% Source: Bloomberg, Dom Maklerski mBanku

Valuation

We used discounted cash flow analysis and relative (PLN) weight price valuation to assess the value of Dino. The DCF model yielded Relative Valuation 50% 101.2 a per-share valuation of PLN 107.6, and the value obtained with multiples comparison amounted to PLN 101.2. DCF Analysis 50% 107.6 price 104.4

9M target price 111.2

DCF Valuation

Assumptions: five years, and we predict CAPEX per distribution center . Cash flow is discounted at the end of July 2019. Equity of PLN 60m. Investment in the Agro Rydzyna meat value calculations factor in net debt as of 31 December processing capacity is likely to total PLN 208m between 2018. 2019 and 2028. . We assume EBITDA margin decrease by 0.1pp to 9.0% . We assume an annual tax rate of 20% in 2019-28E. in 2019 (adjusted for IFRS16), followed by stabilization . The risk-free rate is 3.5%. at an average 8.9% in 2020-2028. . We assume that FCF after FY2026 will grow at an annual . We raised the expected average annual CAPEX per store rate of 2.5%. in the forecast period from PLN 2.8m to PLN 3.3m. We . Leveraged beta=1.06. assume store revamp costs at PLN 0.15m apiece every

Operating Assumptions: 2014 2015 2016 2017 2018 2019E 2020E 2021E Store count 410 511 628 775 977 1.221 1.514 1.754 y/y change 24.6% 22.9% 23.4% 26.1% 25.0% 24.0% 15.8% Total store area (1,000 sqm) 151 192 238 295 376 474 593 693 y/y change 27.2% 24.2% 23.8% 27.3% 26.1% 25.1% 16.9% Avg. store area (sqm) 368 376 380 381 385 388 391 395 y/y change 2.0% 1.0% 0.3% 1.0% 0.9% 0.9% 0.9% Avg. monthly revenue per sqm (PLN) 1.301 1.258 1.286 1.394 1.450 1.506 1.560 1.585 y/y change -3.3% 2.2% 8.4% 4.1% 3.8% 3.6% 1.6% Gross profit margin 22.01% 22.59% 23.20% 23.32% 24.19% 24.60% 24.60% 24.59% y/y change 0.58pp 0.62pp 0.11pp 0.87pp 0.41pp 0pp -0.01pp SG&A/Sales 16.89% 16.49% 16.72% 16.55% 16.89% 17.38% 17.49% 17.50% y/y change -0.4pp 0.24pp -0.17pp 0.34pp 0.48pp 0.11pp 0.01pp EBITDA margin 7.01% 8.12% 8.46% 8.72% 9.27% 9.24% 9.02% 9.07% y/y change 1.11pp 0.34pp 0.26pp 0.55pp -0.03pp -0.21pp 0.04pp

CAPEX (PLN m) 207 266 374 424 647 865 918 854 Stores (PLN m) 186 238 287 361 539 694 836 723 Distribution centers (PLN m) 8 19 71 42 44 103 60 60 Agro-Rydzyna meat processing plant (PLN m) 8 6 14 15 50 52 4 52 Other (PLN m) 5 3 1 7 15 17 18 19

DCF Model (PLN m) 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2028+ Revenue 7,674 9,980 12,221 14,010 15,697 16,923 17,885 18,949 20,030 21,129 change 31.4% 30.1% 22.5% 14.6% 12.0% 7.8% 5.7% 5.9% 5.7% 5.5% EBITDA 694 884 1,090 1,258 1,408 1,517 1,579 1,663 1,751 1,836 EBITDA margin 9.0% 8.9% 8.9% 9.0% 9.0% 9.0% 8.8% 8.8% 8.7% 8.7% D&A expenses 154.9 191.1 241.4 284.6 315.8 340.9 353.2 363.5 377.1 386.0 EBIT 549 703 859 984 1,102 1,186 1,236 1,309 1,384 1,460 EBIT margin 7.2% 7.0% 7.0% 7.0% 7.0% 7.0% 6.9% 6.9% 6.9% 6.9% Tax on EBIT 108.6 140.6 171.8 196.8 220.4 237.3 247.2 261.9 276.8 292.0 NOPLAT 440 562 687 787 882 949 989 1,047 1,107 1,168

CAPEX 865.1 918.0 854.2 784.2 826.5 576.1 495.9 569.3 612.8 386.0 Working capital -251.0 -307.4 -293.3 -246.6 -208.6 -151.8 -119.0 -131.5 -133.7 82.6

FCF -19 143 368 534 579 866 965 973 1,005 1,085 1,112 WACC 8.6% 8.6% 8.7% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% discount factor 90.3% 83.2% 76.5% 70.3% 64.6% 59.4% 54.6% 50.2% 46.2% 42.4% PV FCF -17.0 118.9 281.2 375.6 374.6 514.5 527.2 488.7 464.0 460.4

WACC 8.6% 8.6% 8.7% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% Cost of debt 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% Risk-free rate 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% Credit risk premium 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Effective tax rate 19.8% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% Net debt / EV 5.0% 4.4% 2.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Cost of equity 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% Risk premium 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% Beta 1.07 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06 1.06

FCF growth after the forecast period 2.50% Sensitivity Analysis Terminal value 17,693 FCF growth after the forecast period Present value of terminal value 7,507 1.5% 2.0% 2.5% 3.0% 3.5% Present value of FCF in the forecast period 3,588 WACC -1.0 pp 116.9 123.2 130.6 139.2 149.4 Enterprise value 11,095 WACC -0.5 pp 107.2 113.0 119.7 127.5 136.8 Net Debt 549 WACC 102.7 108.2 114.6 122.1 131.0 Minority interests 0.0 WACC +0.5 pp 98.4 103.7 109.8 116.9 125.4 Equity value 10,546 WACC +1.0 pp 90.4 95.2 100.8 107.3 115.0 Shares outstanding (millions) 98.04 Equity value per share (PLN) 107.6 9M cost of equity 6.5% Target Price (PLN) 114.6

EV/EBITDA('19) at target price 15.0 P/E('19) at target price 27.2 TV / EV 68%

Relative Valuation

We compared Dino with a peer group of eight international much faster than the competition in the coming years (we chain retailers using the price-to-earnings ratio, the feel the ratio is a more reliable measure of Dino'(w value EV/EBITDA multiple, and the EV/EBITDA Growth ratio, given relative to other retailers, some of whom report low net respective weights of 40%, and 40%, and 20%. The peer earnings, affecting comparability based on the group consists of Tesco, Carrefour, X5, Metro, O'Key, Price/earnings-to-growth ratio used previously). As such, Magnit, Eurocash, and Jeronimo Martins. Based on we believe Dino should be traded at a premium to the peer EV/EBITDA Growth, Dino demonstrates potential to grow group on P/E and EV/EBITDA.

Multiples Comparison EV/EBITDA Growth P/E EV/EBITDA Price 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E TESCO PLC 238.7 0.8 0.6 0.6 16.8 14.0 12.8 8.0 6.4 6.2 CARREFOUR SA 17.8 1.2 1.1 1.1 15.2 13.4 12.3 5.7 5.3 5.0 X 5 RETAIL-GDR 35.1 1.3 1.1 1.0 15.8 13.9 12.7 9.6 8.6 7.9 METRO AG 15.9 -45.8 -47.5 -47.3 14.3 15.2 14.8 6.6 6.8 6.8 O'KEY 1.6 0.9 0.8 0.7 11.8 10.3 9.3 5.2 4.5 4.3 MAGNIT PJSC-SPON 15.3 0.7 0.6 0.5 14.5 13.1 11.7 6.4 5.6 5.1 EUROCASH 19.9 4.6 4.1 4.0 31.9 17.9 19.2 8.3 7.4 7.2 JERONIMO MARTINS 14.3 1.3 1.2 1.1 20.9 19.1 17.5 11.1 10.3 9.6

Minimum -45.8 -47.5 -47.3 11.8 10.3 9.3 5.2 4.5 4.3 Maximum 4.6 4.1 4.0 31.9 19.1 19.2 11.1 10.3 9.6 Median 1.0 0.9 0.9 15.5 13.9 12.7 7.3 6.6 6.5

DINO 0.9 0.7 0.5 46.5 35.9 27.2 27.5 21.2 16.5 premium / discount -15% -28% -40% 200% 158% 114% 278% 220% 156%

Implied Valuation

Median 1.0 0.9 0.9 15.5 13.9 12.7 7.3 6.6 6.5 Multiple weight 20% 40% 40% Year weight 7% 7% 7% 13% 13% 13% 13% 13% 13% Premium/Discount 0% Equity value per share (PLN) 101.2

Earnings History and Future Projections (PLN m) 2015 2016 2017 2018 2019E 2020E 2021E 2022E Revenue 2,589.6 3,320.6 4,462.8 5,838.5 7,673.7 9,980.2 12,221.0 14,010.5 change 22.8% 28.2% 34.4% 30.8% 31.4% 30.1% 22.5% 14.6%

COGS -2,004.7 -2,550.1 -3,422.2 -4,426.1 -5,790.8 -7,531.8 -9,224.0 -10,574.9 Gross profit 584.9 770.5 1,040.6 1,412.5 1,882.9 2,448.4 2,997.0 3,435.6 Gross margin 22.6% 23.2% 23.3% 24.2% 24.5% 24.5% 24.5% 24.5%

Sales and marketing costs -391.6 -505.9 -678.7 -933.7 -1,271.2 -1,674.2 -2,050.6 -2,351.1 Administrative expenses -35.4 -49.4 -60.0 -52.6 -62.3 -71.2 -87.6 -100.6 Other operating activity (net) 2.1 0.4 1.3 2.8 -0.5 0.0 0.0 0.0

EBIT 160.1 215.6 303.2 429.0 549.0 703.1 858.8 983.9 change 51.3% 34.7% 40.7% 41.5% 28.0% 28.1% 22.2% 14.6% EBIT margin 6.2% 6.5% 6.8% 7.3% 7.2% 7.0% 7.0% 7.0%

Net financing gains/losses -24.8 -29.1 -37.2 -45.0 -64.8 -70.1 -66.9 -60.7

Pre-tax income 135.2 186.5 266.0 384.0 484.2 633.0 791.9 923.2 Tax -13.1 -35.2 -52.4 -76.4 -95.8 -126.6 -158.4 -184.6

Net income 122.2 151.2 213.6 307.6 388.4 506.4 633.5 738.5 change 84.7% 23.8% 41.3% 44.0% 26.3% 30.4% 25.1% 16.6% margin 4.7% 4.6% 4.8% 5.3% 5.1% 5.1% 5.2% 5.3%

D&A expenses 50.2 65.2 85.9 112.1 154.9 191.1 241.4 284.6 EBITDA 210.2 280.8 389.1 541.1 703.9 894.2 1,100.2 1,268.5 EBITDA (ex. IFRS 16) 210.2 280.8 389.1 541.1 693.8 884.1 1,090.1 1,258.4 change 42.4% 33.6% 38.6% 39.0% 28.2% 27.4% 23.3% 15.4% EBITDA margin 8.1% 8.5% 8.7% 9.3% 9.0% 8.9% 8.9% 9.0%

EBITDA (adj.) 210.2 288.3 401.4 541.1 703.9 894.2 1,100.2 1,268.5 EBITDA margin (adj.) 8.1% 8.7% 9.0% 9.3% 9.2% 9.0% 9.0% 9.1%

Shares outstanding at eop (millions) 98.0 98.0 98.0 98.0 98.0 98.0 98.0 98.0 EPS 1.2 1.5 2.2 3.1 4.0 5.2 6.5 7.5

ROA 9.4% 9.2% 9.9% 10.7% 10.2% 10.6% 11.0% 10.7% ROE 25.9% 24.9% 26.9% 29.1% 27.6% 27.3% 26.1% 23.8%

Balance Sheet (PLN m) 2015 2016 2017 2018 2019E 2020E 2021E 2022E ASSETS 1,439.4 1,856.8 2,451.3 3,287.6 4,310.3 5,207.2 6,359.1 7,386.2 Fixed assets 1,150.8 1,457.1 1,808.0 2,458.3 3,191.7 3,918.5 4,531.3 5,030.9 Property, plant and equipment 1,024.2 1,337.2 1,697.6 2,347.0 3,076.4 3,803.3 4,416.1 4,915.7 Equity value 92.3 93.1 92.8 95.0 98.6 98.6 98.6 98.6 Deferred tax assets 34.3 26.9 17.6 16.3 16.6 16.6 16.6 16.6 Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Current assets 288.6 399.7 643.4 829.3 1,118.7 1,288.6 1,827.8 2,355.3 Inventory 212.1 276.5 368.3 445.4 585.3 761.3 932.2 1,068.7 Accounts receivable 21.7 33.7 38.0 22.1 23.7 30.8 37.7 43.2 Cash and cash equivalents 33.9 66.4 202.6 285.4 411.2 398.1 759.4 1,145.0 Other 20.8 23.1 34.5 76.5 98.4 98.4 98.4 98.4

(PLN m) 2015 2016 2017 2018 2019E 2020E 2021E 2022E EQUITY & LIABILITIES 1,439.4 1,856.8 2,451.3 3,287.6 4,310.3 5,207.2 6,359.1 7,386.2 Equity 532.2 683.5 904.5 1,211.9 1,600.3 2,106.7 2,740.2 3,478.8

Non-current liabilities 363.2 459.4 575.9 693.1 939.8 839.8 887.1 787.1 Loans and borrowings 361.8 452.4 470.6 585.3 652.3 652.3 699.6 599.6 Debt securities 0.0 0.0 99.7 99.8 269.9 169.9 169.9 169.9 Other 1.4 7.0 5.5 8.0 17.6 17.6 17.6 17.6

Current liabilities 543.9 714.0 971.0 1,382.6 1,770.2 2,260.7 2,731.8 3,120.4 Loans and borrowings 101.5 110.2 117.1 148.7 186.1 186.1 186.1 186.1 Trade creditors 429.2 574.4 811.3 1,141.9 1,494.0 1,984.5 2,455.6 2,844.2 Debt securities 0.0 0.0 0.7 0.7 0.6 0.6 0.6 0.6 Other 13.2 29.4 41.9 91.4 89.4 89.4 89.4 89.4

Debt 463.3 562.6 688.1 834.4 1,108.9 1,008.9 1,056.1 956.1 Net Debt 429.4 496.1 485.4 549.1 697.7 610.8 296.7 -188.8 Net debt / Equity 80.7% 72.6% 53.7% 45.3% 43.6% 29.0% 10.8% -5.4% Net debt/ EBITDA 2.0 1.7 1.2 1.0 1.0 0.7 0.3 -0.1

BVPS 5.4 7.0 9.2 12.4 16.3 21.5 27.9 35.5

Cash Flow (PLN m) 2015 2016 2017 2018 2019E 2020E 2021E 2022E Cash flow from operating activities 245.4 324.3 497.2 634.5 860.4 1,085.1 1,245.3 1,340.6 Pre-tax income 135.2 186.5 266.0 384.0 484.2 633.0 791.9 923.2 Taxes paid -12.6 -16.5 -34.1 -26.4 -91.4 -126.6 -158.4 -184.6 D&A expenses 50.2 65.2 85.9 112.1 154.9 191.1 241.4 284.6 Amortization (financial leases) 0.0 0.0 0.0 0.0 7.6 10.1 10.1 10.1 Working capital 43.5 47.2 131.2 116.1 251.0 307.4 293.3 246.6 Interest expenses 24.9 29.2 37.6 45.0 64.8 70.1 66.9 60.7 Other 4.2 12.7 10.6 3.6 -10.6 0.0 0.0 0.0

Cash flow from investing activities -242.5 -310.2 -402.1 -634.0 -864.6 -918.0 -854.2 -784.2 CAPEX -243.5 -311.7 -410.6 -635.9 -865.1 -918.0 -854.2 -784.2 Other 1.0 1.6 8.5 1.9 0.5 0.0 0.0 0.0

Cash flow from financing activities 7.3 18.4 41.1 82.3 130.0 -180.2 -29.7 -170.8 Loans and borrowings 62.3 91.9 30.5 174.1 43.7 0.0 47.3 -100.0 Debt securities 0.0 0.0 100.0 0.0 170.0 -100.0 0.0 0.0 Finance leases -30.0 -43.9 -51.9 -46.4 -19.5 -10.1 -10.1 -10.1 Interest expenses -25.0 -29.7 -37.4 -45.4 -64.2 -70.1 -66.9 -60.7 Dividends 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Change in cash 10.2 32.5 136.2 82.7 125.8 -13.1 361.3 385.5 Cash at eop 33.9 66.4 202.6 285.4 411.2 398.1 759.4 1,145.0

DPS (PLN) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 FCF -5.2 -24.5 49.9 -64.1 -18.8 143.0 367.6 534.1 CAPEX/Sales 9.4% 9.4% 9.2% 10.9% 11.3% 9.2% 7.0% 5.6%

Trading Multiples 2015 2016 2017 2018 2019E 2020E 2021E 2022E P/E 109.1 88.1 62.4 43.3 34.3 26.3 21.0 18.0 P/CE 77.3 61.6 44.5 31.8 24.5 19.1 15.2 13.0 P/B 25.0 19.5 14.7 11.0 8.3 6.3 4.9 3.8 P/S 5.1 4.0 3.0 2.3 1.7 1.3 1.1 1.0

FCF/EV 0.0% -0.2% 0.4% -0.5% -0.1% 1.0% 2.7% 4.1% EV/EBITDA 65.4 49.2 35.5 25.6 20.2 15.8 12.5 10.4 EV/EBIT 85.9 64.1 45.5 32.3 25.5 19.8 15.9 13.4 EV/S 5.3 4.2 3.1 2.4 1.8 1.4 1.1 0.9

Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Price (PLN) 135.9 135.9 135.9 135.9 135.9 135.9 135.9 135.9 Shares outstanding at eop (millions) 98.0 98.0 98.0 98.0 98.0 98.0 98.0 98.0 MC (PLN m) 13,324 13,324 13,324 13,324 13,324 13,324 13,324 13,324 Minority interest (PLN m) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 EV (PLN m) 13,753 13,820 13,809 13,873 14,021 13,934 13,620 13,135

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

OVERWEIGHT (OW) – a rating which indicates that we expect a stock to outperform the broad market NEUTRAL (N) – a rating which indicates that we expect the stock to perform in line with the broad market UNDERWEIGHT (UW) – a rating which indicates that we expect the stock to underperform the broad market

Recommendations of Dom Maklerski mBanku: A recommendation is valid for a period of 9 months, unless a subsequent recommendation is issued within this period. Expected returns from individual recommendations are as follows: BUY – we expect that the rate of return from an investment will be at least 15% ACCUMULATE – we expect that the rate of return from an investment will range from 5% to 15% HOLD – we expect that the rate of return from an investment will range from -5% to +5% REDUCE – we expect that the rate of return from an investment will range from -5% to -15% SELL – we expect that an investment will bear a loss greater than 15% Recommendations are updated at least once every nine months. mBank S.A. with its registered office in Warsaw at Senatorska 18 renders brokerage services in the form of derived organisational unit – Brokerage Office which uses name Dom Maklerski mBanku. mBank S.A. as part of the Exchange's Analytical Coverage Support Programme (“Programme”, https://www.gpw.pl/eacsp) prepares analytical reports for the following companies: Cognor Holding, Comarch, VRG. These documents are prepared at the request of Giełda Papierów Wartościowych w Warszawie S.A. (‘WSE’), which is entitled to copyrights to these materials. mBank S.A. receives remuneration from the WSE for the preparation of the reports. All documents prepared for the Programme are available at: https://www.mdm.pl/ui-pub/site/market_and_analysis/analysis_and_recommendations/analytical_coverage_support_programme

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For U.S. persons only: This research report is a product of mBank SA which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker- dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by mBank SA only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, mBank SA has entered into an agreement with a U.S. registered broker-dealer, Cabrera Capital Markets. ("Cabrera"). Transactions in securities discussed in this research report should be effected through Cabrera or another U.S. registered broker dealer.

Strong and weak points of valuation methods used in recommendations: DCF – acknowledged as the most methodologically correct method of valuation; it consists in discounting financial flows generated by a company; its weak point is the significant susceptibility to a change of forecast assumptions in the model. Relative – based on a comparison of valuation multipliers of companies from a given sector; simple in construction, reflects the current state of the market better than DCF; weak points include substantial variability (fluctuations together with market indices) as well as difficulty in the selection of the group of comparable companies. Economic profits – discounting of future economic profits; the weak point is high sensitivity to changes in the assumptions made in the valuation model. Discounted Dividends (DDM) – discounting of future dividends; the weak point is high sensitivity to changes in the assumptions as to future dividends made in the valuation model. NAV - valuation based on equity value, one of the most frequently used method in case of developing companies; the weak point of the method is that it does not factor in future changes in revenue/profits of a company. mBank issued the following investment recommendations for Dino in the 12 months prior to this publication Rating sell reduce hold accumulate buy

Rating date 02.08.2019 02.04.2019 04.02.2019 05.12.2018 05.11.2018

Target price (PLN) 112.70 112.70 105.90 106.30 103.50

Price on rating day 143.80 126.10 100.30 100.40 84.70

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

Research Department

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

Jakub Szkopek Paweł Szpigiel Piotr Bogusz +48 22 438 24 03 +48 22 438 24 06 +48 22 438 24 08 [email protected] [email protected] [email protected] industrials, chemicals, metals media, IT, telco retail, gaming

Aleksandra Szklarczyk Piotr Poniatowski Mikołaj Lemańczyk +48 22 438 24 04 +48 22 438 24 09 +48 22 438 24 07 [email protected] [email protected] [email protected] construction, real-estate development industrials banks, financials

Sales and Trading

Traders

Piotr Gawron Krzysztof Bodek Tomasz Jakubiec director +48 22 697 48 89 +48 22 697 47 31 +48 22 697 48 95 [email protected] [email protected] [email protected]

Jędrzej Łukomski Adam Prokop Bartosz Orzechowski +48 22 697 49 85 +48 22 697 47 90 +48 22 697 48 47 [email protected] [email protected] [email protected]

Tomasz Galanciak Magdalena Bernacik Andrzej Sychowski +48 22 697 49 68 +48 22 697 47 35 +48 22 697 48 46 [email protected] [email protected] [email protected]

Sales, Foreign Markets

Joanna Łukasik +48 22 697 48 82 [email protected]

Private Client Sales

Kamil Szymański Jarosław Banasiak director deputy director +48 22 697 47 06 +48 22 697 48 70 [email protected] [email protected]