July 25, 2016 Food, Beverage & Tobacco Packaged Foods & Meats

Company Rating Under Review

Zito consolidation boosted top line Reuters: PODR.ZA Bloomberg: PODRRA CZ ZSE: PODR-R-A

Podravka's top line grew 20.8% yoy in 2Q16 to HRK991m on the back of Zito acquisition and inclusion of Zito financials since 3Q15. Consequently, Last price (HRK) 329 overall 1H16 sales jumped 26.2% yoy to HRK1989m. Due to higher Price target (HRK) n/a transparency and comparability, 1H16 results will be explained on pro- Previous target (HRK) 364 forma level as if Zito Group was consolidated at the beginning of 2015. 12-month range (HRK) 306-359 That said, pro-forma results show a meagre 1.2% yoy higher sales amid 12-month volatility 19% 1.4% yoy higher sales of Food&Beverages (F&B) while Pharma sales practically stagnated (+0.4% yoy). If we take a closer look at the F&B Expected return (12-months) n/a performance, the strongest positive contribution came from Mediterranean food, and staples (+3.1% yoy), and Baking and Market capitalization (HRKm) 2.339 milling segment (+5.1% yoy). The former segment benefited from sales Free float 28.8% growth in Russian and German market, while both segments profited from the expansion of activities in Slovenian market. On the other hand, 7.3% yoy lower sales of Sweet snacks and beverages had the strongest negative Stock price performance contribution on top line due to temporary changes in the delivery 360 2.500 dynamics according to the statement. Furthermore, Pharma sales saw 340 PODR -R-A CROBEX 2.300 13.1% yoy growth in RX drugs as the negative impact of the state 320 healthcare insurance (HZZO) price cut of RX drugs (by est. HRK2.3m) was 300 2.100 successfully offset with further expansion on the Russian and B-H markets 280 260 1.900 where negative FX effects were successfully shaken off. Regional break- 240 down performance did bring some positive surprises in 1H16 as Russian, 1.700 220

CIS and Baltic region transfigure into the key positive contributor (+64.7% 200 1.500 yoy ) thanks to new business model where direct contracts with retailers 2011 2012 2013 2014 2015 2016 increased product availability and successfully offset HRK25.6m negative impact from the Russian ruble depreciation . Adria region has underperformed with 1.8% yoy sales drop given high preassure from private label and orientation on their own brands in Pharma segment in order o increase profitability. 200 On profits, pro-forma EBITDA stayed largely unchanged (+0.3% yoy) in EBITDA EBIT 1H16 at HRK222m as Mirna consolidation affected last year’s other 150 revenues with HRK24.8m one-off. Consequently, pro-forma EBITDA margin went down by 10bp to 11.2%. Finally, net profit after minority interest 100 amounted HRK97.3m and apart from the aforementioned it was also 50 positively affected by lower financial costs in 1H16. Looking forward, leading position in the Adria region does not leave much 0 room for organic growth and therefore continuation of business -50 internationalization, whereby today was signed distribution agreement 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 with Adriatic Group for the easier access on the EU market, is the logical goal along with the Zito Group integration process. Podravka expects HRK18.9m synergies on EBITDA in FY17 while full effect should be seen in 2019 with HRK36.8m synergies. Furthermore, HRK500-600m of capex is planned in course of this year and HRK233m of it was already realized in 1H16. In next year they see capex of HRK300-400m while in 2018 it should fell to HRK250-350m. Although the potential of state share in Podravka went by the board at least until early elections in September, ownership structure is still entangled. Namely, on AGM members did not managed to agree on decisions regarding members of the Supervisory Board and Statute, though HRK 7 dividend per share is successfully Hrvoje Stojić confirmed. Meanwhile, we keep our price and recommendation UNDER Analyst REVIEW until we assess the expected effects of synergies more properly (+385) 1 603 0509 and due to the change of the analyst in our team . [email protected]

SEE THE DISCLOSURES APPENDIX FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATION July 25, 2016 Packaged Foods & Meats Podravka

Quarterly Income Statement

HRKm 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 Food & Beverages 776 690 620 674 739 740 578 671 713 701 612 648 737 975 847 763 Pharmaceuticals 195 246 185 217 185 267 171 203 200 266 172 206 187 241 183 196 Sales 970 936 804 891 9241.007 749 874 913 967 756 820 9231.216 997 991 Other revenues 9 10 16 17 14 47 12 26 20 37 40 21 10 138 22 19 Operating revenues 979 946 820 908 937 1.054 761 901 932 1.004 796 841 934 1.353 1.020 1.010 Operating expenses -903 -933 -773 -806 -807 -1.050 -742 -797 -807 -928 -685 -762 -842 -1.180 -891 -922 EBITDA 77 13 47 102 130 4 19 104 125 76 111 80 92 174 128 88 Depreciation -39 -38 -38 -37 -37 -36 -32 -32 -35 -35 -34 -34 -34 -47 -46 -46 EBIT 38 -25 9 65 93 -32 -13 72 90 40 77 46 58 127 82 42 Net financial result -8 -23 -13 -8 -28 -15 -22 -4 -15 -44 -16 3 -29 -25 -5 1 Associates & extraordinaries 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Pre-tax profit 30 -48 -4 57 65 -48 -35 68 74 -4 62 50 29 102 77 43 Tax -7 -28 -5 -8 -6 17 -1 -7 -16 15 -1 -18 10 171 -16 -5 Net profit 23 -76 -9 49 59 -30 -36 61 58 11 61 31 39 273 61 39

Growth (%, yoy) 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 Food & Beverages n/a n/a -2,4 -3,4 -4,8 7,3 -6,7 -0,5 -3,6 -5,3 5,9 -3,4 3,4 39,1 38,3 17,7 Pharmaceuticals n/a n/a 2,5 4,6 -5,0 8,6 -7,6 -6,1 8,3 -0,2 0,6 1,3 -6,5 -9,4 6,3 -4,7 Sales n/a n/a -1,3 -1,6 -4,8 7,6 -6,9 -1,9 -1,2 -4,0 0,9 -6,2 1,2 25,7 31,9 20,8 Other revenues n/a n/a 1,2 -55,0 53,3 356,7 -22,8 53,6 46,4 -22,5 223,6 -21,8 -48,9 276,9 -43,9 -10,1 Operating revenues n/a n/a -1,3 -3,8 -4,3 11,4 -7,2 -0,8 -0,5 -4,8 4,6 -6,6 0,1 34,9 28,1 20,1 Operating expenses n/a n/a 2,3 -6,1 -10,6 12,6 -4,0 -1,1 0,0 -11,7 -7,7 -4,4 4,2 27,1 30,2 21,1 EBITDA n/a n/a -37,0 19,9 69,9 -72,2 -59,9 1,7 -3,9 1.927 484,0 -23,4 -26,4 129,9 15,4 10,7 Depreciation n/a n/a -0,1 -2,1 -4,5 -6,1 -16,3 -14,3 -3,7 -1,5 5,2 4,8 -4,4 33,6 35,9 37,9 EBIT n/a n/a -75,2 37,7 145,1 30,0 -242,3 11,0 -4,0 -226,0 -693,7 -36,0 -35,2 214,0 6,5 -9 Net income n/a n/a -9,7 -61,2 240,6 n/a n/a 25,4 -1,7 n/a n/a -48,7 -32,6 2.291 1,3 23

Profitability (%, ttm) 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 EBITDA margin 8,9 6,8 6,0 6,6 8,1 7,6 7,0 7,0 6,9 9,0 11,4 11,0 10,0 11,6 11,4 11,2 EBIT margin 4,8 2,6 1,9 2,4 4,0 3,6 3,1 3,3 3,2 5,3 7,7 7,1 6,2 7,9 7,6 7,2 Net profit 2,2 -0,4 -1,2 -0,4 0,6 1,8 1,1 1,5 1,5 2,6 5,3 4,5 4,0 10,3 9,8 9,5 ROA 2,1 -0,4 -1,2 -0,4 0,6 1,9 1,2 1,6 1,5 2,7 5,4 4,2 3,6 9,5 9,0 8,6 ROE 4,7 -0,9 -2,5 -0,8 1,3 4,1 2,5 3,2 3,1 5,5 10,9 8,1 6,7 17,2 15,8 14,9

Leverage (ttm) 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 Assets/Equity 2,2 2,2 2,2 2,1 2,1 2,0 2,1 2,1 2,0 2,0 1,9 1,8 1,7 1,8 1,7 1,7 Net debt/Equity 0,7 0,7 0,7 0,6 0,5 0,5 0,6 0,5 0,5 0,5 0,5 0,3 0,3 0,3 0,4 0,4 Net debt/EBITDA 3,5 4,3 5,0 4,0 3,1 3,1 3,7 3,6 3,8 2,7 2,3 2,4 1,8 2,0 2,2 2,1

Valuation 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 ttm P/S 0,3 0,4 0,4 0,4 0,4 0,4 0,4 0,4 0,5 0,4 0,4 0,5 0,7 0,6 0,6 0,6 P/EBITDA 3,4 5,5 6,4 5,6 4,4 4,5 5,8 5,9 6,6 4,9 3,7 4,3 6,3 5,3 4,8 4,9 P/EBIT 6,4 14,0 20,6 15,3 9,0 9,5 13,0 12,6 14,2 8,3 5,6 6,6 10,2 7,8 7,2 7,7 P/E 14,1 n/a n/a n/a 57,1 18,8 35,2 27,9 31,0 16,6 8,1 10,4 15,9 5,9 5,6 5,8 P/B 0,7 0,8 0,9 0,8 0,7 0,8 0,9 0,9 0,9 0,9 0,8 0,6 0,9 0,9 0,8 0,8 EV/Sales 0,6 0,7 0,7 0,6 0,6 0,6 0,7 0,7 0,7 0,7 0,7 0,8 0,8 0,9 0,8 0,8 EV/EBITDA 6,9 9,8 11,4 9,6 7,5 7,7 9,5 9,5 10,4 7,5 6,0 6,7 8,2 7,3 7,0 7,1 EV/EBIT 12,9 25,2 36,6 26,3 15,4 16,1 21,4 20,3 22,5 12,9 9,0 10,3 13,2 10,8 10,6 11,0

Source: unaudited financial reports, Addiko research

Page 2 July 25, 2016 Packaged Foods & Meats Podravka

FY Financial Statements

Income Statement (HRKm) 2012 2013 2014 2015 Sales 3.627 3.626 3.503 3.716 Other revenues 73 94 95 209 Operating revenues 3.700 3.720 3.598 3.924 Operating expenses -3.449 -3.436 -3.274 -3.467 EBITDA 251 284 324 457 Depreciation -153 -148 -135 -148 EBIT 98 135 189 308 Net financial result -68 -65 -85 -66 Associates & extraordinaries 0 0 0 0 Pre-tax profit 30 70 104 242 Tax -46 -1 -9 162 Net profit -16 68 95 404

Balance Sheet (HRKm) 2012 2013 2014 2015 Cash 118 179 220 292 Inventories 631 582 604 789 Accounts receivable 1.011 979 852 1.030 Intangible assets 280 244 270 311 Property, plant and equipment 1.330 1.155 1.111 1.678 Other assets 247 319 450 847 Total assets 3.618 3.458 3.509 4.946 Accounts payable 546 468 434 565 Short-term debt 478 500 333 467 Long-term debt 727 573 749 752 Equity 1.628 1.691 1.785 2.818 Net debt 1.087 893 862 927

Cash Flow Statement (HRKm) 2012 2013 2014 2015 Operating cash flow 254 292 287 274 Net capital expenditures -90 -95 -158 -265 Net increase in debt -186 -109 -4 476 Dividends paid -1 0 0 0 Other investing/financing cash flow -4 -27 -84 -413 Net cash flow -28 61 41 72 Change in working capital 68 -80 -80 -492

Growth (%) 2012 2013 2014 2015 Sales 0,0 0,0 -3,4 6,1 EBITDA -38,8 13,1 14,2 41,0 EBIT -61,3 38,8 39,7 63,2

Profitability (%) 2012 2013 2014 2015 EBITDA margin 6,8 7,6 9,0 11,6 EBIT margin 2,6 3,6 5,3 7,9 Net profit -0,4 1,8 2,6 10,3 ROA -0,4 1,9 2,7 9,6 ROE -1,0 4,1 5,5 17,6

Leverage 2012 2013 2014 2015 Assets/Equity 2,2 2,0 2,0 1,8 Net debt/Equity 0,7 0,5 0,5 0,3 Net debt/EBITDA 4,3 3,1 2,7 2,0

Source: unaudited financial reports, Addiko research

Page 3 July 25, 2016

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HT 6; 6; 6; Belje 6; 8; 8; Podravka 8;

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Research published prior to 31/12/2008 were based on the following three-tier recommendation system: Buy: Expected total return (including dividends) of 15% or more over a 12-month period; Hold: Expected total return (including dividends) between -15% and 15% over a 12-month period; Sell: Expected total return (including dividends) of -15% or worse over a 12-month period.

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Restricted: The coverage of the company has been suspended temporarily due to market events that make coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where Addiko Bank is acting as an advisor in a merger or strategic transaction involving the company. Under review: Financial forecasts and/or target are not disclosed owing to circumstances such as changes in the research team and other market events that require additional efforts to determine the value of the company based on the used valuation methods. July 25, 2016

Our company valuations are based on but not limited to the following valuation methods: Multiple-based models (P/E, P/cash flow, EV/sales, EV/EBIT, EV/EBITA, EV/EBITDA, etc.), peer-group comparisons, historical valuation approaches (e.g acquisition multiple comparisons), discount models (DCF, DVMA, DDM), break-up value approaches or asset-based evaluation methods. Furthermore, recommendations may be also based on the Economic profit approach. Although the definition and application of these methods are based on generally accepted industry practices and models developed in the financial economics literature, please note that there is a range of reasonable variations within these models. Valuation models are dependent on macroeconomic factors, such as interest rates, exchange rates, commodities, and on assumptions about the economy that are subject to uncertainty and also may change over time. Any valuation is dependent upon inputs that are based on the subjective opinion of the analysts carrying out this valuation. Investors and other recepients of this research may request further information and details with respect to the valuation models or assumptions applied to the models. Furthermore, market sentiment and the overall liquidity situation affect the valuation of companies. The valuation is also based on expectations that might change rapidly and without notice, depending on industry-specific developments. Our recommendations and target prices derived from the models might consequently change accordingly. Recommendations generally relate to a 12- month horizon. They are, however, also subject to market conditions and can only represent a snapshot. The ratings may in fact be achieved more quickly or slowly than expected, or need to be revised upward or downward.

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Date Rating Target price 650 27.4.2006 Hold HRK 373 22.3.2010 Hold HRK 355 Source: Bloomberg, Addiko Research 30.7.2010 Buy HRK 355 14.2.2011 Hold HRK 355 550 1.8.2011 Hold HRK 355 14.12.2011 Hold HRK 287 13.2.2013 U/R N/A 450 18.7.2013 U/R N/A 11.10.2013 Hold HRK 265 12.2.2014 Hold HRK 265 29.7.2014 U/R N/A 350 12.11.2014 Buy HRK 404 18.02.2015 Add HRK 364 24.07.2015. U/R N/A 250 28.10.2015 U/R N/A 19.2.2016 U/R N/A 2.5.2016 U/R N/A 150

50 1997 1999 2001 2003 2005 2006 2008 2010 2012 2014 2016

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