Portuguese Retail Retail

BPI EQUITY RESEARCH Portuguese Retail Retail

Consolidated in promotions 23rd October 2014 4 The Portuguese retail market is one of the most concentrated in Europe but also highly competitive which has been preventing returns similar to those in other regions. Portugal

4 We have attended several meetings with top management of some of the most important food retailers in Portugal. The main conclusions we have drawn from these are: (1) DIA vs. JMT vs. SON vs. A moderate but positive outlook; (2) Promotions to be continued but the intensity Eurostoxx Retail level should not increase. The main hurdle should come from deflation; (3) Low NRM profitability should be a cap for new promotions; (4) Players to be focused on plk quality vs. pricing; and (5) Online not a short term priority. NOR 4 The market has been highly promotion oriented, particularly since 2012 when Pingo bìêçëíçññ= Doce abandoned its every-day-low-price strategy. This new trend in the market led NMM oÉí~áä national brands to regain weight in household wallets. Recently, we started to witness that promotion efficacy has reached a cap and volumes have not been af^ reacting to promotions. JM and Sonae continue to be the clear winners with 230bps TR

and 90bps market share gains respectively since YE11. gj RM 4 In terms of outlook we share the moderate but positive view for the industry. Short lÅíJNP cÉÄJNQ gìåJNQ lÅíJNQ term should still be ruled by deflation pressure which however should ease Source: Bloomberg. throughout 2015 (+0.6% of inflation forecasted vs. -0.3% in FY14). Volumes should also pick up on the back of improving disposable income (employment) while trade-up should also benefit sales. Pingo Doce should not push for additional promotions and instead focus on profitability, Sonae should remain a price-follower while Lidl has not been cutting prices and should not deviate from its strategy. DIA could be tempted to be more aggressive but more than promotions, the company needs to invest in its stores and "quality" perception of its offer in the market.

4 Implications on Sonae, JM and DIA: Sonae is the retailer most exposed to Portugal (70% of sales) and this slightly positive outlook should be reassuring for the IC. JM is a strong player and benefits from a its price image and proximity/locations. We expect JM to focus on profitability and extract the potential from its network. DIA is in a difficult situation, facing competition in its natural market: proximity (Meu Super), price (Pingo Doce) and perceived quality to other hard-discounters (Lidl). DIA could revert the short term headwinds but we can not rule out a potential mid- term exit from Portugal (not over the next 12-18 months) if trends do not revert. We maintain our CoRe Buy recommendation and preference for SON and DIA.

Summary of Recommendations

Market YE15 LfL Recommendation Multiple EPS EBITDA Chg (E/share) Price(1) PT chg. New Old PE14 14-17F 14-17F DIA 4.81 7.20 0% CoRe Buy CoRe Buy 12.9 6% 0% JMT 8.38 9.80 -5% Neutral Neutral 15.4 5% 0% SON 0.97 1.75 0% CoRe Buy CoRe Buy 10.5 12% 0% (1) Prices as of October 17th 2014. Source: BPI Equity Research.

Analysts Available on our website: José Rito Bruno Bessa www.bpiequity.bpi.pt, BPI Online, [email protected] [email protected] Phone 351 22 607 3142 Phone 351 22 607 3183 and Bloomberg at NH BPD Equity Research 4 Portuguese Retail 4 October 2014

INDEX

3 PORTUGUESE FOOD RETAIL SNAPSHOT 3 GDP, consumer confidence and retail sales 3 PPI, CPI and food retail sales 4 Food retail format evolution: the promotion era 7 Market share evolution by company

10 COMPANIES MEETING HIGHLIGHTS

11 OUTLOOK 15 Main risks to our outlook

COMPANIES

17 DIA 21 Jeronimo Martins 25 Sonae

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PORTUGUESE FOOD RETAIL SNAPSHOT

GDP, CONSUMER CONFIDENCE AND RETAIL SALES

The last decade has been particularly difficult for the Portuguese economy with a mere 0.4% average quarterly growth since 2000 and with extremely difficult times lived in 2003, 2009 and 2013. Consumer confidence reflects this reality as despite the improvements registered since YE12, the level stands below Jan'00 levels. Is this a mid-term opportunity?

Portuguese Retail vs GDP (% yoy) Consumer confidence

NOB JR

UB JNR

QB dam JOR MB JPR JQB oÉí~áä JQR JUB

JRR JNOB

JSR lÅíJNN lÅíJNQ ^éêJMT ^éêJNM ^éêJNP pÉéJMO pÉéJMR pÉéJMU j~êJMN j~êJMQ

Source: Bloomberg. Source: Bloomberg.

The improvements registered at the macro front since Q2 last year justify the relative recovery of retail sales witnessed in 2013 (-2.2% vs. -5.4% in FY12). It seems that the sales momentum has been easing and despite the better relative figures (-1.6% YTD), it remains on negative ground and without a major defined trend. We link this gloomy sales backdrop to an increased deflationary trend in the industry (adjusted by prices, sales have increased 0.9% YTD).

PPI, CPI AND FOOD RETAIL SALES

Food retail sales have been more resilient during the market downturns and 2013 was a particularly positive year for the industry with a 1.2% yoy gain. The situation has been changing and declining prices have been driving sales down YTD (flat, excluding the deflation factor).

PPI evolution also indicates that producer prices have been on a descending trend which represents a relief to some extent for the retailers' operational performance. Against this backdrop, we should still expect some operational deleverage but rising PPI with declining CPI would be dreadful for earnings evolution, which seems not to be the case.

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Food Retail sales (QoQ) CPI vs PPI (% YoY)

NRB NOB

NMB UB `mf QB RB

MB MB JQB JRB mmf JUB JNMB lÅíJNQ g~åJMN cÉÄJMQ pÉéJMU pÉéJNN j~êJMN ^ìÖJMQ g~åJMU j~óJNN lÅíJNQ ^ìÖJMO ^ìÖJMR j~êJMT j~êJNM j~êJNP

Source: INE. Source: Bloomberg.

FOOD RETAIL FORMAT EVOLUTION: THE PROMOTION ERA

We have been witnessing important changes in the Portuguese retail space: 1) Promotions have been intense; 2) Private labels have been losing weight; and the 3) Shopping frequency is declining.

1. Promotions have skyrocketed Pingo Doce/Jeronimo Martins has joined the industry promotion trend in mid-2012 with its famous 50% price cut in all products. Sonae and other hypers were already applying a "high & lows" price strategy but we believe the new Pingo Doce policy ("every-day-low-price" previously) has definitely reshaped the market. The traditional promotional oriented food retailers (hypers) had to intensify their marketing campaigns while others, such as the hard-discounters (DIA, Lidl), were forced to follow these steps in order to prevent an even more pronounced drag on market share evolution.

Since mid-2013, promotion intensity has once again increased as a response to Lidl's greater aggressiveness in the market. Lidl proclaimed plans to invest cE 60mn (E 45mn in FY13) in store refurbishments and an improved “fresh” offer as well as new and premium products (Deluxe brand). This led Pingo Doce to advance and intensify its promotion campaigns, which once again had to be accommodated by the key players in the market.

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% of sales under promotion Active leaflets for Sonae and Jeronimo Martins

33.8% OU 27.8% 27.9% gÉêçåáãç j~êíáåë 24.1% 23.7% NM 21.4%

16.5% 16.1% 15.9%

NO pçå~É V

OMNN OMNO OMNP cj`d j~åìÑ~ÅíìêÉêë OMNO OMNP mêáî~íÉ=i~ÄÉäë Source: Nielsen Source: Companies

2. Private labels have been losing market share Market share of Private This promotion intensity has been supported by national brands which have reverted Labels the long term declining trend to private labels. Consequently, in some of the key 36.3% players, particularly Pingo Doce, the weight of private labels has declined as a 34.1% 34.7% 31.8% consequence of the more competitive price positioning from the national brands. 30.2%

Market share of private labels

TNB TOB SVB RUB RQB RSB

QOB QNB PQB POB PPB OMMV OMNM OMNN OMNO OMNP PPB PNB OTB PNB OQB OTB OTB Source: Nielsen.

^ìÅÜ~å `çåíáåÉåíÉ fqj iáÇä jáåáéêÉ´ç máåÖç=açÅÉ Private labels weighted by OMNN OMNO OMNP geography in FY13

Source: Nielsen. fq ONKQB

^q OVKRB

_b PQKPB This trend is in fact somewhat different from what we have seen in other European mq PQKTB markets where private labels continue to win market share. We think this is explained by some cultural differences (the Portuguese are more sensitive to promotions) co PQKUB and the fact that the promotion intensity reached levels never seen in the country, bro PRKTB even when compared to other markets. rh PTKQB

ab PVKQB

Initial impact from promotions was positive on sales… bp QMKMB This promotion effort and rising weight from national brands in the retailers' baskets ki QPKPB had an initial positive impact on sales as despite the rebates on prices, prices for national brand products stand on average higher and therefore for the same volumes, Source: Nielsen.

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sales were positively affected by a different mix. FMCG sales increased by 4.3% in FMCG sales evolution in 2013, o.w. +0.2p.p was volumes and the remainder price. Portugal

…but its efficacy has been declining QKNB The problem arises if volumes do not increase, particularly when promotions continue

to increase. In this scenario, national brands would need to continue gaining 0.5% PKSB 4.3% weight in order to continue to propel sales growth. Still, we think this has its MKTB 0.8% limits. We have been witnessing volumes remaining broadly unchanged and -0.2% 0.2% customers are increasingly opportunistic and demanding higher promotions (less efficacy if the promotion is lower than 50%) to respond, which indicates that the -2.8% substitution effect (national brands/private label) seems to be close to saturation level. In the end, we have reached a situation in which the market presents a OMNN OMNO OMNP deteriorated sales base (sales are more dependent on promotions) and high råáí=s~äìÉ=`Ü~åÖÉ sçäìãÉ=`Ü~åÖÉ dependence on promotions. FMCG sales registered a 0.7% YTD (until August) kçãáå~ä=dêçïíÜ decline. Source: Nielsen.

Total FMCG sales UKMB

QKMB MKTB MKMB JMKTB JQKMB JPKNB

JUKMB gìäJNP gìäJNQ lÅíJNP g~åJNQ ^éêJNQ gìåJNQ pÉéJNP cÉÄJNQ ^ìÖJNP kçîJNP aÉÅJNP j~êJNQ ^ìÖJNQ j~óJNQ

k~íáçå~ä=_ê~åÇ qçí~ä=cj`d=ë~äÉë

mêáî~íÉ=i~ÄÉä vqa=NQ=îë=vqa=NP

Source: Nielsen.

3. Shopping frequency declines Average basket has been increasing but store visits declined in 2014. We believe this lower frequency is partially explained by the weekly promotion flyers which help customers to be more selective on their buying decisions.

This market trend of lower frequency is usually good for larger concepts (hypers vs. supermarkets) or in the case of similar formats (e.g. supermarkets), the chains that offer a wider assortment (supermarket vs. hard-discounter).

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Basket size (E) # stores visits (from Jan-May) 29.0 máåÖç 13.2 máåÖç=açÅÉ 25.9 14.2 24.8 açÅÉ 14.4 16.7 10.1 jáåáéêÉ´ç 15.9 jáåáéêÉ´ç 11.0 15.5 11.9 20.3 7.4 iáÇä 20.5 iáÇä 7.4 20.8 8.3 24.7 9.5 fqj 24.6 fqj 9.2 26.0 9.4 41.0 10.0 `çåíáåÉåíÉ 40.9 `çåíáåÉåíÉ 10.1 41.5 10.3 34.5 6.0 ^ìÅÜ~å 34.0 ^ìÅÜ~å 6.4 34.3 6.0

vqa=j~ó=NO vqa=j~ó=NP vqa=j~ó=NO vqa=j~ó=NP vqa=j~ó=NQ vqa=j~ó=NQ

Source: Nielsen

MARKET SHARE EVOLUTION BY COMPANY

Moving parts in the industry… Before pointing out the winners and laggers in the food retail industry in Portugal, it is important to highlight some of the key strategic shifts undertaken by the different players over recent years: 1. Pingo Doce abandoned its "every-day-low price" strategy, trading down its concept while it started a loyalty card program; 2. SON merged its two retail brands (Continente and Modelo), invested in logistics (Kaisen approach), upgraded its stores and worked on the potential of its loyalty card which already accounts for more than 90% of sales; 3. Auchan focused on prices and tried to develop some wholesale experiences on its hypers and 4. Lidl has been trading up its concept (bakery, fresh products, enlarged services on the store - butchers, fish corners) and raising its marketing campaigns.

Operational Figures (FY13)

Sonae(1) JM DIA(3) Intermarche Lidl Auchan Selling area (th sqm) 584 457 221 320 233 197 # stores 270 376 591 232 238 32 Avg selling area/store (th sqm) 2.2 1.2 0.4 1.4 1.0 6.2 Sales (E mn) 3 415 3 181 774 1 291 1 225 1 405 EBIT(2) (E mn) 239.0 82.8 49.3 35.4 46.6 15.9 Mg 7.0% 2.6% 6.4% 2.7% 3.8% 1.1% Sales per sqm (E th) 5.8 7.0 3.5 4.0 5.3 7.1 (1) Food retail (Continente, Meu Super). (2) Adjusted by SON's real estate. Assumed 50% free-hold. (3) EBIT margin estimate for DIA (6.7% for Iberia). Source: Companies, Retail-Index, Retail Analysis and BPI Equity Research.

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Evolution of the Price/Quality image in Portugal

Source: BPI Equity Research.

Our conclusions: 1. SON improved its price/quality proposition as it was able to maintain a good pricing image and at the same time enhance the shopping experience; 2. Pingo Doce and Lidl are now somewhat closer (in relative terms as both players have different positioning in terms of number of SKUs and penetration of private labels); 3. DIA and Intermarche were the players that have least changed their positioning; 4. In terms of stores openings, proximity has been the most dynamic format with Sonae making some steps through the Meu Super franchising stores; 5. Several players are now much closer and the price/quality gap between several players has narrowed;

JM and SON the two clear winners, but don't forget Lidl Pingo Doce and Sonae, the two largest players in the market have been the clear winners adding 230bps and 90bps to their market shares since 2011, respectively. We think this reflects (1) Pingo Doce's price aggressiveness and good quality perception for its products with the company adjusting its format to the negative macro backdrop in Portugal; and (2) Sonae's strong retail proposition in the country, leveraging on its market leadership and combined with a highly efficient loyalty card.

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FMCG Retail Market Share Evolution (2011-2013)

PMB 25.9% 25.5% 24.9% 23.8% ORB 22.1% 22.5% 21.0% 22.7% 19.7% OMB

NRB

9.6% NMB 9.6%9.0% 8.7% 8.3% 7.0% 7.4% 7.0%6.9% 6.2% 6.4% 6.1% RB pçå~É gj fqj iáÇä jáåáéêÉ´ç ^ìÅÜ~å líÜÉêë

OMNN OMNO OMNP

Source: Nielsen.

Lidl has reverted the negative trend in terms of market share evolution while Intermarche and DIA have been the formats that have been losing the most, reflecting the decline in some of their customer's bases.

Lidl Weekly Market share evolution % of total shoppers (YTD2014 vs. YTD2013)

8.5% 77% 74% 75% 77% 75%74% 63% 60% 7.6% 7.6% 7.5%7.5% 60% 7.3% 49% 7.3% 7.3% 47% 47% 48% 47% 6.8% 37% 42% 34% 6.6% 34% HMKPéé HMKVéé HMKTéé iáÇä fqj açÅÉ máåÖç ^ìÅÜ~å jáåáéêÉ´ç `çåíáåÉåíÉ

YTD M ay 12 YTD M ay 13 YTD M ay 14 MNJMQ=L=NP MRJMU=L=NP MVJNO=L=NP NPJNS=L=NP NTJOM=L=NP MNJMQ=L=NQ MRJMU=L=NQ MVJNO=L=NQ NPJNS=L=NQ NTJOM=L=NQ

Source: Nielsen Note: Each household uses 3.3x retail chains. Source: Nielsen

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COMPANIES MEETING HIGHLIGHTS

We attended several meetings over the last month with some of the key food retailers in Portugal and we point out the main conclusions from these:

1. Visibility on the promotion intensity evolution is difficult to determine. Still, market players recognized that short term sales trend should be mainly constrained by deflation pressure rather than promotions, which nevertheless should be maintained. This could mean a weak sales evolution until 1H15.

2. Players started to acknowledge that the current promotion level is not yielding further sales gains and that a more rational behavior would be welcome. Promotions intensity should not accelerate from current levels.

3. Some players expect that the ongoing profitability decline in the industry and the fact that manufacturers have been more reluctant to support promotions could ease pricing pressure in the near future.

4. More than promotions, the focus should be on "quality perception" investments.

5. Players still see scope to add selling area in Portugal, mainly in the proximity segment.

6. The market is already well consolidated and the two largest players would be unable to absorb any other retailer due to competition issues. This would be an issue if any player decides to exit the market. Most food retailers do not envisage a market exit in the short term (apart from small operations, Leclerc?) but some adjustments to the selling area could still occur (Intermarche, a franchising base operation) particularly until the point at which we see some more normalized pricing in the industry.

7. Overall, a conservative to positive mid-term outlook for the food retail industry.

8. Online. Incipient in Portugal while Sonae is the only player with an active offer. The pick-up in online sales should be rather limited in the short term. Profitability remains a concern due to the operations' higher costs (picking and transport) but if the business gains scale it will require (1) that retailers adjust and be more efficient; and (2) greater support from customers (if the client values the service, he should be willing to pay for it).

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OUTLOOK

We believe 2015 should still be a difficult but recovering year for the food retail industry BPI Macroeconomic forecasts

Starting from the top, GDP expectations are better for 2015 and therefore we would 13 14F 15F expect unemployment to maintain a downward trend. This should help to improve GDP -1.4 1.0 1.5 consumer confidence levels in Portugal, which we remark stand at a low historical Private consumption -1.7 1.0 1.2 level as well as when compared to other European countries. Public spending -1.8 -1.0 -0.2 Investment -7.3 2.0 3.0 Exports 6.1 4.0 3.0 Imports 2.8 3.5 2.2 Consumer confidence in FY13 Average inflation rate 0.3 -0.3 0.6 NOQ Unemployment rate 16.3 14.2 14.0 NNN NNM NMR Public balance, % of GDP 4.9 4.0 2.5 NMM VQ Source: INE, BPI forecasts. UV UR UQ UM TQ RU RN QR QQ rh rp^ pé~áå fëê~Éä _ê~òáä `Üáå~ g~é~å cê~åÅÉ dêÉÉÅÉ pïÉÇÉå `~å~Ç~ mçêíìÖ~ä= aÉåã~êâ fåÇçåÉëá~ sÉåÉòìÉä~

Source: Bloomberg and Nielsen.

Families remain leveraged in Portugal, but interest rates should remain low (mortgage is the main household expense) and increasing savings over recent years suggest some margin of maneuver to increase consumption levels. That said, we expect volumes to maintain a slightly positive trend.

Disposable Income, Consumption and Savings Savings Rate in Portugal NQB

NOB RR RR QS PS NMB NP NM NR V UB RV QR RQ RO SB

OMMM OMMN OMMO OMMP OMMQ OMMR OMMS OMMT OMMU OMMV OMNM OMNN OMNO OMNP QB aáëÅêÉíáçå~êó=`çåëìãéíáçå p~îáåÖë kçå=aáëÅêÉíáçå~êó=`çåëìãéíáçå OMMM OMMQ OMMU OMNO

Source: PCG. Source: INE.

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What about prices? We believe promotions should continue going forward as this is already embedded in the Portuguese consumption structure, but we should expect some positive tailwinds:

(1) From deflation to some inflation (even if price evolution remains subdued). Expectations point to some higher price indexes in the coming years, which should provide top line support. Still, we expect a rather smooth evolution in terms of price indexes.

Food Prices evolution in Portugal NOB qçí~ä UB

^äÅçÜçäáÅ=ÄÉîÉê~ÖÉë= _mf=bëíáã~íÉë cççÇ=~åÇ=åçåJ~äÅçÜçäáÅ= JQB ~åÇ=íçÄ~ÅÅç ÄÉîÉê~ÖÉë

JUB pÉéJMQ pÉéJMR pÉéJMS pÉéJMT pÉéJMU pÉéJMV pÉéJNM pÉéJNN pÉéJNO pÉéJNP pÉéJNQ pÉéJNR j~êJMR j~êJMS j~êJMT j~êJMU j~êJMV j~êJNM j~êJNN j~êJNO j~êJNP j~êJNQ j~êJNR

Source: Bank of Portugal, INE, BPI Macro Team.

(2) Promotions should ease and/or manufactures should increase prices. Profitability has been under pressure in the food retail industry in Portugal and remains at unattractive levels. We believe this should at least prevent discounts from increasing while we do not rule out some easing pressure in the market. We detail our view on each of the main players' strategies:

Pingo Doce: We start by JM's banner in Portugal, which we believe to be one of the Pingo Doce pre-tax ROIC strongest, if not the strongest, promoter in the market. We think JM is prepared evolution for difficult times ahead. The company has conservative expectations regarding NOB the food retail market evolution ahead and is prepared to be a forcible player and continue gaining market share, which we think should be possible at the expense NMB of softer concepts in the market (Intermarche, DIA, Auchan?). Still, we believe returns are also on the company's agenda and after the successful commercial UB repositioning in 2012, it would make sense to push for profitability. A substantial part of these returns should come from the inside (logistics, processes) but a SB milder promotion activity would almost be inevitable to attain a decent level of QB returns. OB Looking at the market structure in Portugal - consolidated market, no major growth potential - the trade-off “top line growth vs. returns”, indicates that the key players MB should rather focus on the latter. This suggests that with a more stable macro OMNM OMNN OMNO OMNP OMNQc environment some more balanced behavior should finally be expected, which should Source: JM and BPI Equity Research. also include Pingo Doce. We are not expecting Pingo Doce to exit from this promotion mode, but we would expect some more tactical decisions, which should allow the company to continue advancing in terms of market share and profitability (similar

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to Sonae in 2011-13). Furthermore, considering the recent moves from other retailers such as Lidl but also the continued store improvements at Sonae, Pingo Doce would probably have to seriously look at undertaking an extra effort in terms of its "quality" perception which would imply additional capex efforts (higher invested k, higher pressure on returns).

Sonae: Is the leader in Portugal and therefore has no incentive to be an active price promoter in the market. We think Sonae will remain a price-follower, focused on preserving its market share and profitability. The company's high margins are a reference in the industry but Sonae remains one of the most competitive players and with a very good pricing image.

Price ranking in Portugal

jÉì=pìéÉê NNN

pé~ê NNM

`çîáê~å NMV

jáåáéêÉ´ç NMS

fåíÉêã~êÅÜ¨=pìéÉê NMR

máåÖç=açÅÉ NMQ

iáÇä NMQ

`çåíáåÉåíÉ=jçÇÉäç NMP

`çåíáåÉåíÉ NMP

gìãÄç NMM

Source: DECO, June 2014.

SON’s improved B/S to dissuade competitors? Going forward, the remaining players in Portugal, before starting to cut prices, should be increasingly aware that this is Sonae's main market/business and the group's improving B/S situation (particularly if it finally advances with the S&L operations, cash-in of E 450-500mn) make it a strong competitor. The company's leverage situation is completely different from the reality seen in 2012 and therefore we think this should be a more dissuasive factor for other players' strategies in the future.

Sonae has been one of the most active players in terms of store expansion. The company has been mainly focused on the proximity segment and through franchising (Meu super, ~200sqm/store), leveraging on its scale in the country (logistics, sourcing) and private label. This is a risk to DIA, the player most exposed to the proximity format.

Lidl: The company's approach in Portugal is aligned with the group's European strategy. Lidl has not been a strong price promoter in Portugal. The company's strategy has been focused on “marketing, marketing, marketing” and improved quality perception of its offer. The company has not been opening new stores and has channeled its capex budget (cE 50-60mn/year) to store remodeling. In terms of assortment the company has been betting on bakery (already in the 3rd phase of the concept), fresh products and in a strong "in&out" non-food products.

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Non-Food products are designed in Germany, produced in Asia and then sold across Europe. The strong marketing campaigns, attractive non-food promotions (leveraged on the group's European scale) and increased trade-up of the concept (Lidl has been introducing additional services in the stores, namely butcher and is studying the incorporation of a fish market as well as coffee corners) make Lidl a strong player to take into account.

Lidl's improved offer is a risk mainly to Pingo Doce and DIA, while its differentiation strategy has not been focused on prices. We therefore believe that in a backdrop in which promotions are less effective, Pingo Doce and DIA should be focused more on quality rather than price to fight the Lidl approach.

Intermarche and Auchan: Both competing more with Sonae due to their exposure to big boxes. We believe Auchan has been a more competitive player backed by its high focus on prices and some wholesale innovative approaches which have been allowing it to improve its pricing image over time. Still, its scale in the country, lack of profitability and limited growth possibilities should make Auchan a soft player going forward. Nevertheless, we do not expect an exit of Auchan from the market.

Regarding Intermarche, this franchising model has been developed throughout the country, capitalizing on the opportunity left by the big names (Sonae, Pingo Doce) which have mainly grown in the larger cities (because of their first mover advantage) pushing Intermarche into tier 2-3 cities. The concept lies on a franchising scheme in which the owner is given a high degree of operational control and store ownership (unlike DIA in which the majority of the store goodwill is detained by the company, only outsourcing the store management).

The franchising operation generally works well in local communities with the managers having a good knowledge of their catchment area. On the other hand, this is also a more difficult structure to adapt to a changing environment, which has been the case over recent years (Pingo Doce, Lidl, Sonae).

The main tailwind for Intermarche operation in Portugal has been the increased competition in tier 2-3 cities. Sonae has been focusing its store openings (ex-Meu Super) in these cities while DIA has also been quite aggressive in terms of selling area expansion through franchising. We think this trend should intensify in the DIA store evolution in future which could trigger the closure of some Intermarche stores. Portugal SMM DIA: Living a difficult situation in Portugal. We believe the company is experiencing a strategic debate which alloyed to the recent moves from Pingo Doce (aggressive RSM price promotions), Lidl (trade-up, marketing) and Sonae (rising number of proximity stores - Meu Super) have been cornering DIA into a very fragile position. ROM

DIA has recently replaced its management team in Portugal and some new measures should be expected in the short term. The company's strengths include: (i) a QUM rather good price image, (ii) high margins, and (iii) scale support from DIA Spain. The negatives include, apart from increased competition in key features (price - QQM Pingo Doce; quality - Lidl and proximity - Meu Super), quality perception. Overall, OMMU OMMV OMNM OMNN OMNO OMNP the company should work on: (i) marketing; (ii) product quality perception; and (iii) strong capex refurbishment of the stores (not the small upgrade being Source: DIA.

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undertaken into DIA Market III), which should also include additional store services. Meu Super stores evolution This should require a substantial capex effort (and lower margins) but we see this 100 as essential to have a long term presence in a very competitive and "high quality

perception" market. We therefore believe DIA will not focus its strategy on prices. 80

Finally on manufacturers, we have been getting feedback to the effect that some 60 manufacturers have been raising prices on national brands to somewhat offset higher promotions. We assume that food retailers should pass-through this increase. 40

(3) Customers should trade-up, compensating some potentially negative effects to 20 retailers from a possible higher weight of private labels as with lower discounts, the price gap between national brands and private labels should widen again. 0 gìåNN gìåNO gìåNP gìåNQ pÉéNN pÉéNO pÉéNP aÉÅNN j~êNO aÉÅNO j~êNP aÉÅNP j~êNQ

MAIN RISKS TO OUR OUTLOOK Source: Sonae.

1. Price competition:

(i) Pingo Doce willing to be leader in Portugal, disregarding ROIC. This would be painful for the overall industry while the end gain for the company would be questionable as it would imply even lower returns.

(ii) DIA to start investing on prices to regain its market share. This would possibly imply a reaction from Pingo Doce and Sonae (Lidl's strategy is mainly defined at the European level and we would not expect a major shift in its approach).

(iii) Lidl's improved stance in the market to increase its market share above an "acceptable level". We think this may propel Pingo Doce to continue to fight based on price, despite the fact that Lidl has been mainly focusing on the "quality perception". The right move from Pingo Doce would be betting on differentiation/trade up of the concept rather than a new price offer.

2. A market exit. The Portuguese food retail market reached a level of consolidation that a potential exit from one of the larger players would constitute a problem, potentially generating a phase out and huge pricing pressure in the short term. JM and Sonae have a dominant position in the market which would theoretically represent a huge competition constraint in terms of a new acquisition.

Who could exit? Not Lidl or Intermarche but in the case of the latter, we may witness some franchisees shutting down. We believe Auchan and DIA would be the theoretical candidates while Leclerc with a rather small presence in Portugal (20 stores, less than 1% market share), could therefore also decide to leave.

In the case of Auchan, considering it is a private company, we may also consider that despite the lower returns, the operation would be maintained. DIA's management has been showing a superior track record in exiting the most problematic markets and therefore if the operation continues to head south we can not rule out a market exit. The problem in identifying the potential buyer persists. Sonae and JM would likely be prevented from a full acquisition while for Intermarche, Auchan and Lidl, DIA would not fit their strategy. Nevertheless, we do not expect this scenario of a possible exit from the market to be considered in the coming 12-18 months. Obviously, a potential exit would imply some short-term risks but the long term benefits would be sizeable.

15 Equity Research 4 Portuguese Retail 4 October 2014

Company Notes

16 EQUITY RESEARCH DIA Retail

Portugal - a challenging market CoRe Buy E ( 7.20 Price Target and CoRe Buy Recommendation maintained) Medium-Risk

4 The market has been changing fast in Portugal and DIA was caught off-guard. Portugal 23rd October 2014 accounts for c9% of the company's sales and we estimate c10% of the recurrent EBITDA. Increased competition has been eating into the company's market Spain share in the country (-40bps since YE11). DIA has been trying to offset this through selling area, being one of the most active players in the market but the DIA vs. IBEX35 vs. Eurostoxx reduced sales density has been affecting EBITDA margins which we estimate to Retail be at c9.0% vs. 9.7% in Spain. Profitability is still quite high and for this, we NOM f_buPR think that DIA should try to revert the situation.

4 A new management is in place in Portugal and the group has the upgrade of its NMM stores to DIA Market III in Iberia on its agenda. This encompasses a E 50k investment/store but we believe more is needed in Portugal. We have two clear bìêçëíçññ=oÉí~áä market leaders in Portugal (vs. one in Spain) and the market is quite consolidated UM while 50% of the market is in the hands of regional retailers with less than 1% af^ of the market in Spain. Customers are used to quality at low prices in Portugal which should force DIA to adjust. These investments may imply lower returns SM for DIA but ultimately, would still be accretive. lÅíJNP cÉÄJNQ gìåJNQ lÅíJNQ Source: Bloomberg. 4 The next 12-18 months should be critical for DIA in Portugal. We believe the recent decline in market share could be reverted but this should be firmly assumed by Valuation Summary

the management. Competition should remain quite strong and without a clear Business E mn % of EV and strong strategy we do not rule out a possible exit of DIA in the mid-term. Iberia (DCF, 7.8% wacc) 3 299 60% DIA has been showing a better track record at disposing vs. recovering problems France(1) 724 13% but the departing point in Portugal is also different vs. Turkey, France and Emerging Markets (DCF) 1 499 27% Beijing. We do not expect Portugal to be an issue to the investment case. We Argentina (23.6% wacc) 141 3% have maintained our YE15 Price Target at E 7.20. CoRe Buy. Brazil (9.9% wacc) 1 298 23% China (9.0% wacc) 60 1% Stock data EV 5 522 100% Net Debt YE15(2) 882 Price (17th Oct): 4.81 Price Target (YE15): 7.20 Fin. Investments 51 # shares (mn): 651.1 M. Cap (E mn) / F. Float: 3 132 / 82% Total Equity Value 4 691 Reuters/Bloomberg: DIDA.MC/ DIA SM Avg. Daily Vol. [E'000]: 31 816 # shares (mn) 651 Major Shareholders: Blue Capital (8.9%); Baillie Gifford (8.1%); Treasury Stock (1.0%) YE15 Price Target (E) 7.20 (1) EV of E 600mn + E 124mn NPV of Estimates 2011 2012 2013 2014F 2015F 2016F 2017F tax credits; (2) Adjusted by B/S PE Adj. 32.8 19.8 16.4 12.9 12.2 11.5 11.0 provisions. Source: BPI Equity Research. Dividend yield 11.3% 2.3% 2.7% 3.3% 3.7% 4.0% 4.4% FCFE Yield 1.4% 0.7% 2.1% -2.5% 3.8% 7.6% 6.7% Historical Recommendation FCFF Yield 8.5% 7.1% 8.6% 1.7% 6.6% 7.9% 8.3% Date Recommendation PBV 33.1 21.5 17.1 6.6 5.1 4.1 3.5 08-May-13 Buy EV/EBITDA(1) 7.1 6.2 5.7 5.6 5.4 5.1 4.8 21-Oct-13 CoRe Buy EV/Sales(1) 0.4 0.4 0.4 0.4 0.4 0.3 0.3 13-Jan-14 Buy (1) EV is fixed with current market cap and MV of remaining items. 22-Oct-14 CoRe Buy Source: BPI Equity Research.

BPI vs. Consensus Stock Momentum

Company: DIA Sector: DJ Euro Stoxx Retail E Pr Price Performance Forward P/E and EV/EBITDA

22 1 Y Forward P/E Valuation monitor 18

Relative Valuation 2014 2015 2016 3 M 14 EV/EBITDA 10 BPI 5.6 5.4 5.1 YTD EV/EBITDA Consensus 6.3 6.1 5.5 6 Sector 10.3 9.2 8.3 -30% -20% -10% 0% P/E 2 BPI 12.9 12.2 11.5 DIA DJ Euro Stoxx Retail € Pr Jul-11 Aug-12 Sep-13 Oct-14 Consensus 12.0 11.5 10.0 Market Price Rating (E) Market Recommendations Sector 18.4 16.5 14.9 8 PBV Price Target Neutral BPI 6.6 5.1 4.1 Consensus 29% Positive 7 Consensus 7.8 5.8 4.6 53% Sector 5.4 4.6 4.1 Dividend yield 6

BPI 3.3% 3.7% 4.0% Price

Consensus 3.3% 3.6% 3.9% 5 Sector 3.4% 3.6% 4.0% Negative 4 18% P&L and B\S monitor Sep-13 Apr-14 Oct-14 Fair Value Comparison (E) CAGR 2013-16 BPI estimates/Consensus 2014 2015 2016

Revenues -0.2% -9.8% -9.2% 8 7.25 7.20 Adj. EPS EBITDA -4.9% -5.1% -8.4% 6.49 EBIT -5.7% -2.7% -5.9% 6 Net Profit Net Profit 53.9% 0.0% -12.2% 4.37 EBIT Net Debt 64.0% 151.6% 193.6% 4 Capex 57.7% 47.8% 22.2% EBITDA Profitability monitor 2 Revenues EBITDA Margin BPI 7.0% 7.0% 6.8% 0 -5% 0% 5% 10% 15% Consensus 7.3% 6.7% 6.8% P/E15 PBV15Consensus BPI BPI Consensus Current M arket Price EBIT margin BPI 4.7% 4.7% 4.7% EBITDA Consensus (E mn) EPS Consensus (E) 0.6 Consensus 5.0% 4.4% 4.5% 950 Net Profit margin FY16 FY16 BPI 4.9% 3.1% 3.0% 0.5 850 Consensus 3.2% 2.8% 3.1% FY15 Key leverage ratios FY1 750 0.4 Net Debt/EV 5 BPI 17.4% 17.3% 14.9% 650 0.3 Consensus 10.6% 6.9% 5.1% FY14 FY14 Net Debt/EBITDA BPI 1.5 1.4 1.2 550 0.2 Oct-11 Oct-12 Oct-13 Oct-14 Oct-11 Oct-12 Oct-13 Oct-14 Consensus 0.9 0.5 0.4 Source: Factset, Bloomberg and BPI Equity Research.

18 Equity Research 4 Portuguese Retail 4 October 2014

DIA at a Glance

1H14 Sales Breakdown (E3.8bn) 1H14 Rec. EBITDA Breakdown (E245mn)

Source: DIA. Source: DIA.

LfL Performance vs. Food Retail Sales: Dia's Selling Area Evolution Spain and Portugal (%) 4.0% 30%

Spain LatAm 20% 0.0% 10% Iberia Portugal 0% -4.0% -10% LfL -8.0% -20% 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 2009 2010 2011 2012 2013

Source: DIA and INE. Source: DIA.

FMCG(1) Retail Market Share in Spain (2013) Modern Retail mkt share - Portugal (2013)

(1) Fast Moving Consumer Goods. Source: Kantar. Source: Nielsen.

DIA's Refinancing Needs (E mn) (1) DIA's New Openings Evolution (#) (2) 400 300

300 200

200 100

100 0 2013 2014F 2015F 2016F 2017F 0 Spain Portugal Argentina Brazil China 1H15 1H16 1H19 >1H19

(1) Recently refinanced with a 5y maturity. (2) Spain excludes the acquisition of Schlecker's stores in 2012 Source: DIA and BPI Equity Research. Source: DIA and BPI Equity Research.

19 Equity Research 4 Portuguese Retail 4 October 2014

P&L Valuation Summary @ Market CAGR Multiples(1) (E mn) 2011 2012 2013 2014F 2015F 2016F 2017F 13-17F Revenues 9 779 10 124 9 844 7 994 8 318 9 018 9 775 0% Implied EBITDA 505 587 592 559 584 617 648 2% Business Emn EV/EBITDA EBITDA adj. 558 610 641 584 594 622 653 0% EBITDA adj. mg. 5.7% 6.0% 6.5% 7.3% 7.1% 6.9% 6.7% Iberia 2 854 5.7 Depreciation & others -292 -299 -282 -182 -190 -196 -207 -7% France(2) 724 n.a. EBIT 213 288 326 377 394 421 441 8% Emerging Markets 928 10.7 EBIT adj. 266 310 375 402 404 426 446 4% Argentina 0 n.a. Net financial results -35 -32 -39 -36 -33 -37 -34 -4% Income tax 83 102 95 99 105 113 122 6% Brazil 928 19.2 Others 0 -7 5 150 0 0 0 n.s. China (Shanghai) 0 n.a. Minority Interests -5 -11 -13 0 0 0 0 n.s. EV 4 507 6.5 Net Profit reported 100 158 209 392 256 271 285 8% Net Debt YE14(3) 888 Net Profit adj. 128 179 237 260 263 275 289 5% Fin. Investments 51 Balance Sheet Total Equity Value 3 669 CAGR # shares (mn) 651 (E mn) 2011 2012 2013 2014F 2015F 2016F 2017F 13-17F Market NAV (E) 5.65 Net Intangibles 461 461 500 500 500 500 500 0% (1) Average EV/Sales and EV/EBITDA; Net Fixed Assets 1 626 1 619 1 602 1 745 1 884 1 956 2 076 7% (2) EV of E600mn + E124mn NPV of Net Financials 59 81 87 237 237 237 237 29% tax credits; (3) Adjusted by B/S Inventories 522 527 545 428 445 491 542 0% ST Receivables 291 311 318 254 263 292 324 0% provisions. Source: BPI Equity Research. Other Assets 60 55 58 59 61 63 65 3% Cash & Equivalents 290 350 262 100 100 100 100 -21% Total Assets 3 310 3 405 3 371 3 322 3 490 3 639 3 843 3% YE15 PT Sensitivity to LT Equity & Minorities 105 148 184 471 613 758 905 49% EBITDA mg in Iberia MLT Liabilities 600 553 701 701 351 351 351 -16% o.w. Debt 600 553 701 701 351 351 351 -16% 4.0% 4.80 ST Liabilities 2 605 2 704 2 486 2 150 2 526 2 530 2 587 1% 5.0% 5.40 o.w. Debt 266 427 212 233 577 466 396 17% 6.0% 6.00 o.w. Payables 1 750 1 709 1 685 1 356 1 367 1 438 1 518 -3% 7.0% 6.60 Equity+Min. + Liabilities 3 310 3 405 3 371 3 322 3 490 3 639 3 843 3% 8.0% 7.20 Cashflow 9.0% 7.75 (E mn) 2011 2012 2013 2014F 2015F 2016F 2017F 10.0% 8.35 + EBITDA 505 587 592 559 584 617 648 Source: BPI Equity Research. - Chg in Net W.C. -103 -2 -44 171 -5 -39 -44 - Income Taxes 141 116 142 91 106 115 123 = Operating Cash Flow 467 472 494 297 482 542 569 DCF Sensitivity (E/share) - Growth Capex 135 97 98 110 102 30 77 - Replacement Capex 186 196 206 216 227 238 250 Ch in Rf - Net Fin. Inv. 7 30 0 0 0 0 0 -0.5% 0.0% 0.5% = Cash Flow after Inv. 138 150 190 -28 153 274 242 - Net Fin. Exp. 35 32 39 36 33 37 34 -0.5% 7.45 6.95 6.50 - Dividends Paid 369 75 88 104 115 126 139 Ch in g 0.0% 7.75 7.20 6.75 +/- Equity 0 0 -3 0 0 0 0 0.5% 8.10 7.50 7.00 Other -58 -97 -97 -15 0 0 0 Source: BPI Equity Research. =Change in Net Debt 323 53 37 183 -6 -111 -70 Net Debt (+)/Net Cash (-) 576 629 651 834 828 716 646 Market Multiples Growth, per share data and ratios F F F F 2011 2012 2013 2014 2015 2016 2017 ROIC PE15 EPS PEG Sales growth 2% 4% -3% -19% 4% 8% 8% 15F(1) PE15 14-16 14-16 EBITDA Adj. growth 10% 9% 5% -9% 2% 5% 5% EPS Adj. growth 109% 40% 32% 10% 1% 4% 5% DIA 18% 12.2 6% 4.5 Avg. # sh (mn) 679.3 679.3 651.1 651.1 651.1 651.1 651.1 Carrefour 15% 12.9 9% 3.2 Basic EPS 0.15 0.24 0.29 0.37 0.39 0.42 0.44 Ahold 17% 12.0 9% 2.8 EPS Adj. Fully diluted 0.19 0.26 0.36 0.40 0.40 0.42 0.44 Colruyt 21% 14.6 4% 9.2 DPS 0.11 0.13 0.16 0.18 0.19 0.21 0.23 Payout 47.36% 42.40% 43.43% 42.94% 49.19% 51.12% 53.48% Axfood 18% 17.6 4% 6.9 ROCE (after tax) 8.0% 9.8% 11.6% 12.6% 12.7% 12.6% 12.3% Peer Sample 18% 14.3 6% 5.5 ROE 37.7% 125.9% 124.7% 119.7% 47.2% 39.6% 34.3% (1) Pre-Tax ROIC with (8x) capitalised Gearing (ND/EV) 12.0% 13.1% 13.6% 17.4% 17.3% 14.9% 13.5% rentals. Source: BPI Equity Research Net Debt/EBITDA 1.1x 1.1x 1.1x 1.5x 1.4x 1.2x 1.0x (DIA) and Factset. Source: Company data and BPI Equity Research (F).

20 EQUITY RESEARCH Jeronimo Martins Retail Neutral A strong player in Portugal Medium-Risk (Price Target cut from E 10.30 to E 9.80; Neutral Recommendation maintained) 23rd October 2014 4 JM's banner in Portugal, Pingo Doce, has been one of the most dynamic retailers in Portugal. It has made two deep strategic changes and proved to be right. The first Portugal was in late 2000 when it decided to move from a high-end/margin retailer to an every-day low price operation. With this move, JM was able to substantially increase Jeronimo Martins vs PSI20 vs. its market share, obviously at the expense of margins, but total EBITDA increased Eurostoxx Retail and ROIC improved as the negative WK was fuelled by the top line growth. The NRM second reshape was operated in 2012 with the introduction of promotions. The trade down of the Pingo Doce concept allowed the company to protect against mpfOM NOR hard-discounters. bìêçëíçññ= NMM oÉí~áä 4 What's next? We think JM was victim of its own success in Portugal and logistics lagged behind, particularly with the "in&out" promotions. JM has been investing in 3 new DCs (1 already in operation), from a total of 7, which should better prepare TR

the company for this new reality. We therefore expect margins to evolve positively in gj coming years in Portugal and this should also allow JM to remain one of the most RM competitive players in the market. lÅíJNP cÉÄJNQ gìåJNQ lÅíJNQ Source: Bloomberg. 4 Portugal weights low in the IC. JM is a story of execution in Poland. The country accounts for 82% of our target EV and JM's share price should be ruled by what Sum of Parts (E mn) unfolds in Poland. JM has been an underperformer (-40% YTD) with the share EV % of price reflecting the difficulties from the company in maintaining LfL on positive Business Attrib. EV Portugal 797 12% ground and margins flat in Poland. JM should present a new business strategy for Retail (DCF) 546 8% Poland in its investor day (13th Nov) which should encompass a new format to Cash & Carry (DCF) 251 4% allow it to continue expanding in the urban areas (less affordable for a hard- Poland (DCF) 5 530 82% discount concept). We have excluded Hebe from our valuation (E 0.30/sh) and Hebe 0 0% (1) applied a 75% discount to Colombia (E 0.20/sh) due to visibility concerns, setting Colombia (DCF) 181 3% Manufacturing & JMD (2) 226 3% E our YE15 Price Target at 9.80. NEUTRAL. Non core assets (3) 49 1% Total EV 6 782 100% Stock data Net debt YE15 (4) 609 Price (17h Oct.): 8.38 Price Target (YE15): 9.80 Total Equity Value 6 173 # shares (mn): 629.3 M. Cap (E mn) / F. Float: 5 273 / 39% # shares mn (adj) 628 E Reuters/Bloomberg: JMT.LS/JMT PL Avg. Daily Vol. [E'000]: 9 663 YE15 Price Target ( ) 9.80 (1) 75% execution risk; (2) 13.3x PE14; (3) Major Shareholders: Soares dos Santos Family (56.1%); Heerema (5.0%) BCP shares, real estate and others; (4) includes pension fund liabilities. Estimates 2011 2012 2013 2014F 2015F 2016F 2017F Source: BPI Equity Research. PE Adj. 15.0 14.0 13.7 15.4 15.1 14.8 13.4 Dividend yield 0.0% 6.1% 3.5% 3.6% 3.5% 3.4% 3.4% FCFE Yield 3.9% 2.5% 1.8% 0.6% 1.2% 2.9% 2.5% Historical Recommendation FCFF Yield 5.4% 5.4% 5.6% 6.0% 6.1% 6.4% 6.9% Date Recommendation PBV 4.7 4.4 3.8 3.4 3.1 2.8 2.5 08-Apr-13 CoRe Buy EV/EBITDA(1) 9.1 8.6 8.4 8.7 8.4 8.1 7.5 27-Sep-13 Buy EV/Sales(1) 0.7 0.6 0.6 0.5 0.5 0.5 0.4 30-Jul-14 Neutral (1) EV is fixed with current market cap and MV of remaining items. Source: BPI Equity Research.

Analysts Available on our website: Jose Rito Bruno Bessa www.bpiequity.bpi.pt, BPI Online, [email protected] [email protected] Phone 351 22 607 3142 Phone 351 22 607 3183 and Bloomberg at NH BPD Equity Research 4 Portuguese Retail 4 October 2014

BPI vs. Consensus Stock Momentum

Company: Jeronimo Martins Sector: DJ Euro Stoxx Retail E Pr Price Performance Forward P/E and EV/EBITDA 30

25 Valuation monitor 1 Y Forward P/E 20 Relative Valuation 2014 2015 2016 EV/EBITDA 3 M 15 BPI 8.7 8.4 8.1 10 Consensus 7.5 7.0 6.4 YTD EV/EBITDA Sector 10.1 9.0 8.1 5 P/E -60% -40% -20% 0% 0 BPI 15.4 15.1 14.8 DJ Euro Stoxx Retail € Pr Jan-07 Aug-09 Mar-12 Oct-14 Consensus 14.9 13.6 12.1 Jeronimo M artins Sector 18.0 16.1 14.6 Market Price Rating (E) Market Recommendations PBV 19 Price Target BPI 3.4 3.1 2.8 Consensus Consensus 3.4 3.0 2.6 17 Neutral Sector 5.3 4.6 4.0 15 36% Positive Dividend yield Price 43% 13 BPI 3.6% 3.5% 3.4% Consensus 3.6% 3.5% 3.7% 11 Sector 3.5% 3.7% 4.1% Negative 9 21%

7 Sep-13 Jan-14 Apr-14 Jul-14 Oct-14 P&L and B/S monitor Fair Value Comparison (E) CAGR 2013-16

BPI estimates/Consensus 2014 2015 2016 16 Adj. EPS Revenues -0.7% -1.3% -2.3% 12.28 EBITDA -2.2% -5.4% -9.7% 11.00 Net Profit 9.80 EBIT -4.2% -9.5% -15.3% 8.92 EBIT Net Profit -2.6% -9.6% -17.1% 8 Net Debt 10.1% 26.0% 22.3% EBITDA Profitability monitor EBITDA Margin Revenues

BPI 5.9% 5.7% 5.6% 0 -5% 0% 5% 10% Consensus 6.0% 5.9% 6.0% P/E15 PBV15 Cons. BPI BPI Consensus EBIT margin Current M arket Price BPI 3.7% 3.5% 3.4% E E Consensus 3.9% 3.8% 3.9% EBITDA Consensus ( mn) EPS Consensus ( ) Net Profit margin 1.3 BPI 2.7% 2.6% 2.5% 1400 FY16 Consensus 2.8% 2.8% 2.9% 1200 1.1 Key leverage ratios FY15 FY16 Net Debt/EV 1000 0.9 FY15 BPI 7.3% 8.5% 7.4% FY14 FY14 Consensus 7.6% 7.7% 6.8% 800 0.7 Net Debt/EBITDA BPI 0.6 0.7 0.6 600 0.5 Consensus 0.6 0.5 0.4 May-12 Mar-13 Dec-13 Oct-14 May-12 Mar-13 Dec-13 Oct-14

Source: Factset, Bloomberg and BPI Equity Research.

22 Equity Research 4 Portuguese Retail 4 October 2014

Jeronimo Martins at a Glance

1H14 Sales Breakdown (E 6.1bn) 1H14 EBITDA Breakdown (E 341mn) 400 - 36 95 300

200 341 282 100

0 Biedronka Retail Portugal Others Total

Source: JM. Source: JM.

LfL Performance vs. Food Sales: Poland (%) LfL Performance vs. Food Sales: Portugal (%)

26 12.0

21 JM JM 16 6.0

6 0.0 Food sales

1 Food sales -4 -6.0 2Q09 2Q10 2Q11 2Q12 2Q13 2Q14 2Q09 2Q10 2Q11 2Q12 2Q13 2Q14

Source: JM, BPI Equity Research, Polish Central Statistical Office. Source: JM, BPI Equity Research, INE.

Modern Retailers mkt share - Portugal (2013) Retail market share - Poland (2013)

Source: Nielsen. Source: JM and BPI Equity Research.

JM Share price vs. E/PLN Biedronka's new openings evolution Eur/Pln Eur 400 5,000 4.6 17 4,000 JM 300 4.4 15 3,000 200 13 4.2 290 2,000 252 268 250 Eur/PLN 11 100 150 150 150 150 1,000 4.0 9 0 0 3.8 7 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 New Openings Total Stores

Source: Bloomberg. Source: JM and BPI Equity Research.

23 Equity Research 4 Portuguese Retail 4 October 2014

P&L DCF Assumptions (Poland CAGR Retail) (E mn) 2011 2012 2013 2014F 2015F 2016F 2017F 13-17F Revenues 9 838 10 683 11 829 12 677 13 629 14 516 15 289 7% EBITDA 721 740 777 749 777 806 872 3% Re 9.6% EBITDA adj. 721 740 777 749 777 806 872 3% Rf 4.0% EBITDA adj. mg. 7.3% 6.9% 6.6% 5.9% 5.7% 5.6% 5.7% Depreciation&others 208 221 249 274 299 314 335 8% Beta Equity 0.9 EBIT 512 518 528 475 478 492 537 0% Mkt Premium 6.0% EBIT adj. 512 518 528 475 478 492 537 0% Rd 5.5% Net financial results -30 -17 -20 -19 -19 -18 -14 -9% Income tax 111 116 111 100 96 100 110 0% Tax rate 19.0% Others -14 -19 -4 0 0 0 0 n.s. D/EV 20.0% Minority Interests 17 6 10 12 14 18 19 17% WACC 8.6% Net Profit reported 340 360 382 343 348 357 394 1% Net Profit adj. 340 360 382 343 348 357 394 1% g 2.0% Source: BPI Equity Research. Balance Sheet CAGR (E mn) 2011 2012 2013 2014F 2015F 2016F 2017F 13-17F Net Intangibles 831 794 806 803 800 797 795 0% Sensitivity Analysis to EBITDA Net Fixed Assets 2 301 2 572 2 783 3 208 3 577 3 792 4 077 10% (1) Net Financials 59 128 130 130 130 130 130 0% mg in Poland Inventories 388 474 575 605 652 695 731 6% ST Receivables 170 175 169 174 180 185 190 3% 4.7% 5.70 Other Assets 202 254 264 266 275 284 292 3% 4.9% 6.10 Cash & Equivalents 530 375 372 100 100 100 100 -28% Total Assets 4 481 4 772 5 099 5 286 5 713 5 983 6 314 5% 6.1% 8.70 Equity & Minorities 1 422 1 502 1 649 1 802 1 967 2 150 2 367 9% 6.6% 9.80 MLT Liabilities 795 957 726 872 835 747 758 1% 7.1% 10.90 o.w. Debt 394 582 372 500 450 350 350 -2% ST Liabilities 2 265 2 313 2 724 2 612 2 911 3 086 3 189 4% (1) Average EBITDA mg in 2014-20. o.w. Debt 359 112 340 79 205 224 177 -15% Source: BPI Equity Research. o.w. Payables 1 726 2 038 2 193 2 354 2 512 2 654 2 792 6% Equity+Min. + Liabilities 4 481 4 772 5 099 5 286 5 713 5 983 6 314 5%

Cashflow (E mn) 2011 2012 2013 2014F 2015F 2016F 2017F + EBITDA 721 740 777 749 777 806 872 Sensitivity Analysis to LfL in - Chg in Net W.C. -78 -102 -63 -121 -114 -102 -104 (1) - Income Taxes 88 118 105 91 86 90 102 Poland = Operating Cash Flow 711 724 735 779 805 818 874 - Growth Capex 126 248 328 515 460 345 419 -0.7% 7.80 - Replacement Capex 158 212 182 182 204 182 199 0.7% 9.00 - Net Fin. Inv. 13 91 -31 0 0 0 0 = Cash Flow after Inv. 415 174 256 83 141 291 257 1.7% 9.80 - Net Fin. Exp. 30 17 20 19 19 18 14 2.7% 11.10 - Dividends Paid 0 323 186 192 185 178 178 3.7% 11.70 +/- Equity 0 0 0 0 0 0 0 Other -34 60 -72 -10 -12 -14 -18 (1) Average LfL in 2014-20 =Change in Net Debt -351 107 22 138 76 -81 -47 Source: BPI Equity Research. Net Debt (+)/Net Cash (-) 223 319 341 479 555 474 427

Growth, per share data and ratios 2011 2012 2013 2014F 2015F 2016F 2017F Sales growth 13% 11% 9% 7% 8% 7% 5% EBITDA Adj. growth 16% 3% 5% -4% 4% 4% 8% EPS Adj. growth 21% 6% 6% -10% 1% 2% 11% Avg. # sh (mn) 629.3 629.3 629.3 629.3 629.3 629.3 629.3 Basic EPS 0.56 0.60 0.61 0.55 0.55 0.57 0.63 EPS Adj. Fully diluted 0.56 0.60 0.61 0.55 0.55 0.57 0.63 DPS 0.51 0.30 0.31 0.29 0.28 0.28 0.31 Payout 95.1% 51.5% 50.2% 54.0% 51.0% 50.0% 50.0% ROCE (after tax) 15.9% 15.8% 14.9% 12.6% 11.7% 11.3% 11.6% ROE 30.4% 29.7% 29.5% 23.5% 21.6% 20.0% 19.9% Gearing (ND/EV) 12.4% 17.7% 18.9% 26.6% 30.8% 26.3% 23.7% Net Debt/EBITDA 0.3x 0.4x 0.4x 0.6x 0.7x 0.6x 0.5x Source: Company data and BPI Equity Research (F).

24 EQUITY RESEARCH Sonae Retail / Holding Food master in Portugal (E 1.75 Price Target and CoRe Buy Recommendation maintained) CoRe Buy High-Risk 4 Sonae (SON) is highly leveraged on the food retail business which accounts for 70% of its sales and represents the bulk of the company's CF. SON has been showing 23rd October 2014 throughout the years that it remains one of the most competitive players in the food retail market both in terms of innovation (loyalty card, online), efficiency Portugal (logistics, Kaisen) and shopping experience (recurrently high maintenance capex). This has allowed the company to differentiate itself from the competition, improve Sonae vs. PSI20 vs. Eurostoxx margins (being a reference in the industry: EBITDAR margins close to 10%) Retail while at the same time maintain a strong price position. NSM

plk 4 SON has performed incredibly well in the difficult years (2011-2013) with sales

increasing by 3% and margins by 60bps. The potential for further restructuring NPM gains is now limited and therefore short term margins should remain constrained by the promotion intensity/deflation in the market. Still, margins remain stellar

and absolute EBITDA should remain almost flat in FY14. Mid-term outlook is NMM positive for the industry and we therefore expect SON to continue leveraging on bìêçëíçññ=oÉí~áä its leadership position. mpfOM TM 4 Food is already top-notch, upside is elsewhere. Food retail is one of the key lÅíJNP cÉÄJNQ gìåJNQ lÅíJNQ components of our target NAV (35%) but the EPS and valuation drivers lie on Source: Bloomberg. its more discretionary formats (specialized retail, shopping malls) and the telecoms unit. Overall, we expect EPS to follow a 12% CAGR14-17F and underlying average FCFE to reach 11% until 2017. We have maintained our YE15 Price Valuation Summary E Target at 1.75. Real estate yields, delivery on NOS synergies and Non-Food Business Stake E mn %NAV recovery remain the triggers for the stock. CoRe Buy. Retail (DCF, Yields) 100% 3 185 69% Sierra (NAV Forecast) 50% 627 13% Stock data SNC (NAV)(1) 88% 775 17% Price (17th Oct): 0.97 Price Target (YE15): 1.75 Inv. Management (BV) 100% 56 1% # shares (mn): 2 000 M. Cap (E mn) / F. Float: 1 932 / 28% TOTAL NAV 4 643 Reuters/Bloomberg: SON.LS / SON PL Avg. Daily Vol. [E'000]: 4 522 Net debt YE15 750 Major Shareholders: Azevedo's Family (52.6%); Banco BPI (9.4%)(2); TOTAL Equity 3 892 Bestinver (4.9%); Fundação Berardo (2.5%); Norges Bank (2.3%) # shares (mn) 2 000 E Estimates 2011 2012 2013 2014F 2015F 2016F 2017F YE15 Fair Value ( ) 1.95 PE Adj. 13.2 46.6 n.s. 10.5 8.7 8.4 7.9 Holding Discount 10% Dividend yield 3.4% 3.4% 3.4% 3.6% 3.6% 3.6% 3.6% YE15 Price Target (E) 1.75 FCFE Yield 6.2% 10.1% 34.9% 2.6% 10.7% 12.0% 13.7% (1) Cash + 27.14% of NOS @ MV + SSI E FCFF Yield 13.7% 12.7% 18.9% 10.7% 12.0% 12.5% 12.7% ( 101mn). Source: BPI Equity Research. PBV 1.4 1.5 1.2 1.2 1.1 1.0 0.9 EV/EBITDA(1) 3.6 3.6 5.7 5.3 4.9 4.6 4.4 EV/Sales(1) 0.4 0.4 0.4 0.4 0.4 0.4 0.4 (1) EV is fixed with current market cap and MV of remaining items. Historical Recommendation (2) 6.6% through a cash settled Equity Swap. Date Recommendation 11-Jun-13 CoRe Buy Source: BPI Equity Research.

Analysts Available on our website: José Rito Bruno Bessa www.bpi.pt/equity, BPI Online [email protected] [email protected] Phone 351 22 607 3142 Phone 351 22 607 3183 and Bloomberg, at NH BPD. Equity Research 4 Portuguese Retail 4 October 2014

BPI vs. Consensus Stock Momentum

Company: Sonae Sector: DJ Euro Stoxx Retail E Pr Price Performance Forward P/E and EV/EBITDA 30

1 Y Forward P/E 25 Valuation monitor

20 Relative Valuation 2014 2015 2016 3 M

EV/EBITDA 15 BPI 5.3 4.9 4.6 Consensus 5.6 5.2 4.8 YTD 10 Sector 10.1 9.0 8.1 5 P/E -20% -15% -10% -5% 0% EV/EBITDA BPI 10.5 8.7 8.4 0 Sonae DJ Euro Stoxx Retail € Pr Consensus 13.8 11.7 8.4 Jan-07 Dec-10 Oct-14 Sector 18.0 16.1 14.6 Market Price Rating (E) Market Recommendations PBV 1.5 BPI 1.2 1.1 1.0 Price Target Consensus Positive Consensus 1.2 1.1 1.0 1.3 Neutral 75% 25% Sector 5.3 4.6 4.0 Price Dividend yield 1.1 BPI 3.6% 3.6% 3.6% Consensus 3.6% 3.6% 3.6% Sector 3.5% 3.7% 4.1% 0.9

0.7 P&L and B\S monitor Sep-13 Jan-14 Jun-14 Oct-14 Fair Value Comparison (E) CAGR 2013-16 BPI estimates/Consensus 2014 2015 2016 5 Revenues 0.0% 0.6% 0.5% Net Profit 4.17 EBITDA 5.1% 4.9% 4.2% 4 EBIT 3.4% 5.7% 3.8% EBIT Net Profit 30.9% 21.7% 2.0% 3

Net Debt -0.9% -5.5% -4.0% 2 1.79 1.75 EBITDA Profitability monitor 1.40 1 EBITDA Margin Revenues BPI 8.1% 8.5% 8.8% 0 Consensus 7.8% 8.4% 9.0% P/E15 PBV15Consensus BPI -20% -10% 0% 10% 20% EBIT margin Current M arket Price BPI Consensus BPI 4.5% 5.0% 5.4% EBITDA Consensus (Emn) EPS Consensus (E) Consensus 4.3% 4.8% 5.5% Net Profit margin 900 0.2

BPI 3.7% 4.3% 4.4% FY16 Consensus 2.8% 3.7% 4.5% 700 0.1 Key leverage ratios FY15 Net Debt/EV

BPI 57.4% 57.0% 55.3% 500 FY15 FY16 0.1 Consensus 57.9% 60.4% 57.6% FY14 Net Debt/EBITDA FY14 BPI 3.0 2.5 2.0 300 0.0 Apr-13 Oct-13 Apr-14 Oct-14 Consensus 3.2 2.8 2.2 Apr-13 Jan-14 Oct-14 Source: Factset, Bloomberg and BPI Equity Research.

26 Equity Research 4 Portuguese Retail 4 October 2014

Sonae at a Glance

1H14 Sales Breakdown (E 2.3bn) 1H14 Rec. EBITDA Breakdown (E 154mn) OMM R NRQ RT JN NMM NMM JT

M ^ÇàìëíK bäáãK=^åÇ pçå~É=po pçå~É=om pçå~É=j` fåîÉëíãÉåí `çåëçäáÇ~íÉÇ j~å~ÖÉãÉåí

Source: Sonae. Source: Sonae.

LfL Performance vs. Food Sales: Portugal (%) LfL Performance vs. Non-food Sales: Portugal (%) 7.0 12.0 So nae So nae 5.0 7.0

3.0 2.0

1.0 -3.0

-1.0 -8.0 Non-fo od Sales -3.0 -13.0 Foo d Sales -5.0 -18.0 2Q09 2Q10 2Q11 2Q12 2Q13 2Q14 2Q09 2Q10 2Q11 2Q12 2Q13 2Q14

Source: Sonae and INE. Source: Sonae and INE.

Food Retail Selling Area Breakdown in Non-Food Retail Selling Area Breakdown in 1H14 (584k sqm) 1H14 (399k sqm)

Source: Sonae. Source: Sonae.

Retail mkt share - Portugal (2013) Sonae's Refinancing Needs (E mn) (1)

1200 60%

1000 50%

800 40%

600 30%

400 20%

200 10%

0 0% 2014 (1) (2) 2015 (1) (2) 2016 2017 2018 >2019

Refinancing needs %

Source: Nielsen. (1) includes commercial paper; (2) already refinanced Source: Sonae and BPI Equity Research. 27 Equity Research 4 Portuguese Retail 4 October 2014

P&L Real Estate Yields Sensitivity CAGR Analysis (E mn) 2011 2012 2013 2014F 2015F 2016F 2017F 13-17F Revenues 5 541 5 379 4 821 4 967 5 123 5 263 5 369 3% EBITDA 602 599 376 405 437 466 485 7% ∆ in Retail Real Sierra Sonae EBITDA adj. 602 599 378 405 437 466 485 6% yields vs. Estate EV NAV PT EBITDA adj. mg. 10.9% 11.1% 7.8% 8.1% 8.5% 8.8% 9.0% 4% BPI (bps) (Emn) (E/sh) (E/sh) Depreciation & others 368 366 187 183 183 183 183 -1% EBIT 235 232 188 222 254 282 302 13% -100 1 777 49.73 1.95 EBIT adj. 235 232 190 222 254 282 302 12% -50 1 644 43.76 1.84 Net financial results -84 -119 -10 -7 18 16 33 n.s. Base Case 1 529 38.54 1.75 Income tax 24 25 30 27 45 63 84 30% Others 0 -17 315 0 0 0 0 n.s. 50 1 428 33.94 1.67 Minority Interests 23 39 145 3 4 5 6 -55% 100 1 339 29.85 1.60 Net Profit reported 104 33 319 185 222 230 245 -6% Net Profit adj. 104 33 112 185 222 230 245 22% Source: BPI Equity Research.

Balance Sheet CAGR (E mn) 2011 2012 2013 2014F 2015F 2016F 2017F 13-17F Net Intangibles 1 240 1 221 814 780 746 713 681 -4% Net Fixed Assets 2 672 2 603 1 827 1 833 1 845 1 854 1 859 0% Net Financials 575 516 1 379 1 429 1 488 1 533 1 573 3% Inventories 651 538 589 632 662 684 698 4% DCF Assumptions (Food Retail) ST Receivables 493 505 346 351 359 367 375 2% Other Assets 260 274 155 156 157 157 158 0% Re 10.4% Cash & Equivalents 426 378 366 200 200 200 361 0% Total Assets 6 317 6 035 5 477 5 380 5 456 5 509 5 705 1% Rf 3.25% Equity & Minorities 1 700 1 669 1 908 2 026 2 183 2 348 2 529 7% CRP 1.15% MLT Liabilities 2 166 2 029 1 588 1 370 1 220 1 220 1 230 -6% Beta Equity 1.0 o.w. Debt 1 791 1 687 1 363 1 263 1 113 1 113 1 113 -5% ST Liabilities 2 451 2 338 1 980 1 983 2 054 1 941 1 946 0% Market Premium 6.0% o.w. Debt 600 526 230 183 197 34 0 -100% Rd 6.0% o.w. Payables 1 313 1 282 1 218 1 259 1 298 1 334 1 361 3% Tax Rate 27.5% Equity+Min. + Liabilities 6 317 6 035 5 477 5 380 5 456 5 509 5 705 1% D/EV 30.0% Cashflow WACC 8.6% (E mn) 2011 2012 2013 2014F 2015F 2016F 2017F g 1.0% + EBITDA 602 599 376 405 437 466 485 Source: BPI Equity Research. - Chg in Net W.C. 33 1 -167 -1 -19 -22 -19 - Income Taxes 25 9 31 27 47 65 87 = Operating Cash Flow 544 588 511 379 409 422 418 - Growth Capex 158 15 8 7 5 0 0 - Replacement Capex 225 230 128 148 156 159 156 - Net Fin. Inv. -44 -42 548 0 0 0 0 = Cash Flow after Inv. 204 384 -173 175 188 217 222 - Net Fin. Exp. 84 119 10 7 -18 -16 -33 Implied Retail multiples @ - Dividends Paid 66 66 66 70 70 70 70 +/- Equity 4 4 1 0 0 0 0 Mkt Prices Other -5 -74 857 -168 -59 -46 -30 =Change in Net Debt -54 -129 -609 20 -136 -163 -195 SON's MK (@ E0.97) 1 932 Net Debt (+)/Net Cash (-) 1 931 1 802 1 214 1 234 1 097 934 739 Sierra (@ NAV) 546 SNC's MK NAV (@ E2.54) 686 Growth, per share data and ratios Invest. Management (@BV) 56 2011 2012 2013 2014F 2015F 2016F 2017F Sales growth -6% -3% n.s. 3% 3% 3% 2% Retail Market Value (• mn) 645 EBITDA Adj. growth -19% -1% n.s. 8% 8% 7% 4% Implied Retail PE14F 5.9 EPS Adj. growth -38% -69% 244% 65% 20% 3% 6% Current MK 1 932 Avg. # sh (mn) 2000.0 2000.0 2000.0 2000.0 2000.0 2000.0 2000.0 Basic EPS 0.05 0.02 0.01 0.09 0.11 0.12 0.12 Adj. Net Debt(1) 1 413 EPS Adj. Fully diluted 0.05 0.02 0.01 0.09 0.11 0.12 0.12 Market Value Financial Stakes 1 231 DPS 0.03 0.03 0.03 0.03 0.03 0.03 0.03 Adjusted EV14 2 113 Payout 63.6% 203.1% 21.8% 37.7% 31.3% 30.2% 28.4% ROCE (after tax) 6.3% 5.5% 9.8% 10.8% 12.0% 12.9% 13.5% EV/EBITDA14F 5.2 ROE 7.7% 2.4% 22.1% 11.4% 12.7% 12.0% 11.8% (1) Deducting the cash from SNC. Gearing (ND/EV) 63.8% 64.8% 57.7% 47.6% 42.1% 37.4% 34.5% Source: Bloomberg and BPI Equity Net Debt/EBITDA 3.2x 3.0x 3.2x 3.0x 2.5x 2.0x 1.5x Research. Source: Company data and BPI Equity Research (F).

28 BPI

This research report is only for private circulation and only partial reproduction is allowed, subject to mentioning the source. This research report is based on information obtained from sources which we believe to be credible and reliable, but is not guaranteed as to accuracy or completeness. This research report does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive it. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this research report and should understand that the statements regarding future prospects may not be realized. Unless otherwise stated, all views (including estimates, forecasts, assumptions or perspectives) herein contained are solely expression of BPI's Equity Research department and are subject to change without notice. Recommendations and opinions expressed are our current opinions as of the date referred on this research report and they may change in the period of time between the dates on which the said opinion or recommendation were formulated and made public. Current recommendations or opinions are subject to change as they depend on the evolution of the company and subsequent alterations to our estimates, forecasts, assumptions, perspectives or valuation method used. The valuation models are systematically reviewed and validated, particularly with regard to the method of valuation and assumptions used. Investors should also note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Accordingly, investors may receive back less than initially invested. There are no pre-established policies regarding frequency, update or change in recommendations issued by BPI Equity Research. The same applies to our coverage policy. Past performance is not a guarantee for future performance. BPI Group accepts no liability of any type for any indirect or direct loss arising from the use of this research report. For further information concerning BPI Research recommendations and valuations, please visit www.bpi.pt/equity.

This research report did not have any specific recipient. The company subject of the recommendation was unaware of the recommendation or did not validate the assumptions used, before its public disclosure.

Each Research Analyst responsible for the content of this research report certifies that, with respect to each security or issuer covered in this report: (1) all of the views expressed accurately reflect his/her personal views about those securities/issuers; and (2) no part of his/her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. There are no conflicts of interests between BPI or its Analysts and the issuer covered, except when mentioned in the Report. The Research Analysts do not hold any shares representing the capital of the companies of which they are responsible for compiling the Research Report, except when mentioned in the Report. BPI Analysts do not participate in meetings to prepare BPI's involvement in placing or assisting in public offers of securities issued by the company that is the subject of the recommendation, except when disclosed in the research report.

BPI has compiled policies and procedures applicable to the investment recommendations activity. Such document is available for consultation on request.

In November 2007, Banco BPI has celebrated an "Equity Swap" contract with Sonae Investments with strictly financial settlements (Cash Settled Share Swap Transaction), to cover the inherent risk in the acquisition of 6.64% of Sonae's share capital, at a price of E2.06 per share. In this contract, the periodic repercussion over Sonae Investments of the amounts corresponding to Sonae share price changes relative to the above-mentioned price was agreed as well as the amounts equivalent to the proceeds to be received by Banco BPI under the exercise of rights inherent to these shares. The contract had a maximum maturity of 3 years. In October 2010, the maximum maturity of this "Equity Swap" (covering at such date the inherent risk in respect of 6.52% of Sonae's share capital) was extended up to 3 years. In November 2013, the maximum maturity of this "Equity Swap"(covering at such date the inherent risk in respect of 6.13% of Sonae's share capital) was extended up to 12 Months, until November 2014. In February 2008 BPI entered into a liquidity provider agreement with Euronext Lisbon for the Banco Popular Español shares. Such agreement ended last October 2013.

Banco BPI and/or Banco Português de Investimento participate or have participated, as a syndicate member and/or assisting the issuer, in the share offerings of CTT, Espirito Santo Saúde, and Sonaecom, and in the bonds offerings of Brisa, EDP, Portugal Telecom, Sonae Investimentos, REN, Semapa and ZON Optimus.

BPI Group may provide corporate finance and other investment banking services to the companies referred to in this report.

Amongst the companies covered by BPI Equity Research, BPI Group has qualified stakes in Ibersol, Impresa, ZON Optimus, Semapa and Sonae SGPS.

BPI Group, members of the board, or BPI Group employees, may hold a position or any other financial interest in issuer's covered by BPI Equity Research, subject to change, which shall be disclosed when relevant for assessing the objectivity of the recommendation.

BPI's activity is supervised by both Banco de Portugal (the Portuguese Central Bank) and by the CMVM (Stock Exchange Regulator).

INVESTMENT RATINGS AND RISK CLASSIFICATION (TOTAL RETURN IN 12-18 MONTHS): INVESTMENT RATINGS STATISTICS

Low Risk Medium Risk High Risk As of 30th September BPI Equity Research's investment ratings were Buy/CoRe Buy >15% >20% >30% distributed as follows: Neutral >5% and < 15% >10% and <20% >15% and < 30% CoRe Buy 11% Reduce >-10% and < 5% >-10% and < 10% >-10% and < 15% Buy 27% Sell < -10% < -10% < -10% Neutral 38% These investment ratings are not strict and should be taken as a general rule. Reduce 15% Sell/Accept Bid 4% Under Revision/Restricted 3% Total 100%

BANCO PORTUGUÊS DE INVESTIMENTO, S.A. Oporto Office Madrid Office Paris Office Cape Town Office Rua Tenente Valadim, 284 Pº de la Castellana, 40-bis-3ª 31, Avenue de L'Opéra 20th Floor, Metropolitan Life Centre, 4100-476 Porto 28046 Madrid 75001 Paris 7 Walter Sisulu Avenue, Foreshore, Cape Town, 8001 - South Africa Phone: (351) 22 607 3100 Phone: (34) 91 328 9800 Phone: (33) 1 4450 3325 Phone: (27) 21 410 9000 Telefax: (351) 22 606 4183 Telefax: (34) 91 328 9870