ENCE. overreacting to the electric reform in Spain. ENCE 2014 Evolution 3,10 3,00 2,90 2, ,60 2,50 2,40

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2 Investors are undervaluing ENCE, overreacting to the electric reform in Spain. 3,10 3,00 2,90 2,80 2, ,60 2,50 2, ENCE 2014 Evolution 2

3 However, we strongly recommend to buy ENCE, as we are convinced there s still much value in a company with two impressive businesses. The first step will be to understand the company we are speaking about 3

4 From a pure pulp company Established in 1957, it was state owned until 1990 Pure pulp company until 1997, and marginal electricity business contribution until : Huge 250 underperformance 200 vs Ibex35 ( 267%) ENCE IBEX 35 4

5 to an integrated operator First European producer of eucalyptus pulp, fifth in the world. Biomass market leader in Spain e 2016e 10% 78% 11% 27% 72% 1% 28% 71% 1% 0% 20% 40% 60% 80% 100% ENCE IBEX 35 Energy sales Pulp sales Forest sales 5

6 Core shareholders have been key 39,45% 25,59% 13,17% In 2006 Juan Luis Arregui joins ENCE. 3,03% 3,13% 4,02% 5,00% RETOS OPERATIVOS XXI SL ALCOR HOLDING SA 6,62% IMVERNELIN PATRIMONIO SL DE URRUTIA VAL VICTOR JUAN AMBER CAPITAL UK LLP Full commitment of core shareholders: 130m capital increase in 2010, fully subscribed. Overhang risk diluted: Amber Capital in, Liberbank almost out. COMENGE SANCH JOSE IGNACIO NORGES BANK Free Float 6

7 in the company s successful revolution Key point: empowering the ENERGYBUSINESS Improving More visibility Synergies: Achieving cashcost reduction revenue to long term complementary diversification income businesses Enhancing the pulp business efficiency Shift to forestry management vs forestry ownership: Uruguay, Portugal, etc. Conservative debt management: capital increase, project finance (biomass plants), corporate debt issue, etc. 7

8 for a brighter future PULP: 1.34tm installed capacity, with mills in Navia, Pontevedra and Huelva. Strong market etposition o and decee excellentsales breakdown: beado 9% 8% 20% ITALY GERMANY 15% OTHER WESTERN EUROPE 18% FRANCE 12% 18% SPAIN EASTERN EUROPE OTHER (MAINLY CHINA) ENERGY: 280MW (+20MW, 2H14), of which 230MW are biomass: 27% of ENCE s total revenues. Good integration with pulp activity. Attractive shareholder s h remuneration:cash h dividends d d +bonusissues Focused onoperative improvements, cost efficiencies andlow leverage. 8

9 Introducing the transformed ENCE OLD ENCE Pure pulp company Cyclical business Volatility and higher exposure to the economic cycle Tendency to underperformance in the long run RENEWED ENCE Integrated company: Pulp (70%) + Electricity (30%) More stable cash flows and earnings visibility Reduction of risk Better performance in the long run ( 267% vs IBEX35, ) (+20,87% vs IBEX 35, last 2 years) And there s still more let s have a look at its financials and valuation 9

10 A walk in the business let s go step by step

11 Pulp business: our outlook for e Average Pulp Price BHKP ($/t) % 17% Upswing cycle althougth slower 753 growth in China Entry of new capacity 2H14: (1.5tm Brazil and 1.3tm Uruguay) e e e Average EURUSD USA economy recovery; tapering Balanced for a still strong euro % e 2015e 2014e

12 Pulp figures: what do we predict? 2,500 2,000 1,500 1, Pulp EBITDA ( m) Forest sales ( m) % 76.4 Pulp sales ( m) Sales: Stable or slightly decreasing ( 1% CAGR e) Costs, a challenge in progress: plan 2013e 1.0% 2014e 2015e 2016e 0 of operational efficiencies of 20m ( e) Pulp personnel & others ( m) Cost of pulp sales ( m) 1.5% EBITDA: Narrower margins in a competive industry, ( 3.3% CAGR e) e 2014e 2015e 2016e

13 Energy business: weathering the storm Capacity (MW) Energy sales estimated ( m) Energy sales PRE REFORM estimated ( /m) e 2014e 2015e 2016e New regulatory framework July Reduction in global energy prices of 35%. An structural impact in ENCE s energy revenues of 69m.

14 Energy figures: what do we forecast? Energy EBITDA ( m) Energy sales ( m) % 12.9% +6.2% % Capacity: main investment has been made. Now the goal is to maximize production Sl Sales: High negative impact on revenues of 2013 reform, but they will recoup significantly by 4.7% CAGR from e 2014e 2015e 2016e Pulp personnel & others ( m) Cost of energy sales ( m) +6.7% +21.9% % Cost: will follow a normal curve for a growing business, +4,3% CAGR EBITDA: despite the reform, it will recover by +6.2% CAGR e 16e e 2014e 2015e 2016e

15 The ability to bounce back EBITDA ( m) Net Profit ( m) % EBITDA will be able to recover after 20.6% the storm % e 39% e % e e Net profit will grow gradually from 2014 by 2.9% % (CAGR )

16 towards a positive CF performance CAPEX/Sales (%) CAPEX ( m) % Excellent CAPEX/sales ratio performance e 2014e 2015e 2016e 0 Net Debt( m) Free cash flow to Equity ( m) A continued deleveraging policy reduces financial risks A improvemet in cash flow generation of2.6% (CAGR ) % % e 2014e 2015e 2016e

17 In summary 1. Pulpsales will keep stable ( 1% CAGR e) 2. Once the uncertanty is gone, we expect ENCE to recover profit growth at rates of 2.9% (CAGR e) 3. Excellent financial structure

18 Let s put a number to this 18

19 How do we value ENCE? ENCE s valuation process The energy is the key: Under great regulatory uncertainty. Growing contribution to the business mix. The big question: Is the market valuing properly this division? Probably not, the market s approach maybe unfair. Once this issue is solved, it will be easy to determine the fundamental value of ENCE. Therefore, our recommendation. 19

20 Market value of the energy Energy business implicit EV ENCE s market EV: ENCE s pulp business ENCE s energy business implicit EV: 385m 942m EV: 557m Pulp peers avg. EV/EBITDA 7.7x 5% Adjusted Pulp EV/EBITDA 7.3x (ENCE s slower growth rate) X ENCE s pulp business EBITDA 76m 20

21 ...Is it fair? Is it reasonable? According to our estimates, to match those 385m, the market would be considering: Market s hypothesis Our view Growth rate: G = 0.1% Growth rate: Once the tariff deficit is solved (2015), it must grow at least at inflation s rate. New energy regulation lti impact: Way worse than the worst scenario: ENCE & consensus: approx. 65m. Own scenario: approx. 70m. approx. 90m p g p Extrapolating Iberdrola s impact to ENCE, it would mean 27m. 21

22 In summary: What is ENCE s fair value? ENCE's sum of the parts Pulp's EV/EBITDA valuation 557m + Energy's DCF valuation 515m = ENCE's EV 1,072m Net debt & LT liabilities 307m = ENCE's equity value 765m Shares outstanding = 250m ENCE's value per share ,54 3, % upside Current price Fair price 22

23 The moment doesn t last forever 1. Market has over reacted to uncertanty 2. Share is cheap 3. Market will quickly move towards a fair valuation of the biomass business momentum is key

24 The moment doesn t last forever so we ve got to seize this moment, and we have to seize it soon Barack Obama BUY ENCE Target price 3.06 (+20% upside)

25 APPENDIX Financial Projections, Valuation hypothesis and data

26 Pulp peers EV/EBITDA multiple 2013e 2014e EBITDA's 2015e EBITDA's Name Mkt Cap ( m) EV ( m) EBITDA ( m) EV/EBITDA EBITDA ( m) EV/EBITDA growth EBITDA ( m) EV/EBITDA growth EMPRESAS CMPC SA 3,711 5, x x 22.0% x 2.4% FIBRIA CELULOSE SA 4,422 6,697 1, x x 17.9% x 2.8% SUZANO PAPEL E CELULO PREF A 3,047 5, x x 0.8% x 34.0% PORTUCEL SA 2,341 2, x x 4.6% x 7.1% ALTRI SGPS SA 513 1, x x 0.7% x 6.1% Average 8.2x 8.2x 0.1% 7.6x 8.0% Average without Suzano * 7.7x 7.7x 0.0% 7.6x 1.6% * Due to Suzano's EBITDA's growth rate, that distorts the sector's average, we have excluded the company when we calculate the valuation multiple. 26

27 Pulp peers (1/2) 2014e ALTRI PORTUCEL FIBRIA CMPC SUZANO Avg (Ex. ENCE) ENCE P/E P/BV EV/Sales n.r. EV/EBITDA EV/EBIT FCF Yield (%) DPS Dividend Yield (%) Pay out (%) ROE (%) NetDebt/EBITDA Capex/Sales

28 Pulp peers (2/2) 2014e ALTRI PORTUCEL FIBRIA CMPC SUZANO Avg (Ex. ENCE) ENCE Sl Sales ,488 7, , , , Sales (%) Gross Margin (%) n.r. EBITDA , , , EBITDA (%) 6.1 n.r EBITDA/ Sales Margin (%) EBIT , , EBIT (%) 2.1 n.r Pre Tax Profit Pre Tax Profit (%) 8.6 n.r Ordinary Profit Ordinary Profit (%) 15 n.r Net Profit Net Profit (%) FCF FCF (%) 27.5 n.r Net Debt , , , ,

29 Pulp peers EV/EBITDA multiple 2013e 2014e EBITDA's 2015e EBITDA's Name Mkt Cap ( m) EV ( m) EBITDA ( m) EV/EBITDA EBITDA ( m) EV/EBITDA growth EBITDA ( m) EV/EBITDA growth EMPRESAS CMPC SA 3,711 5, x x 22.0% x 2.4% FIBRIA CELULOSE SA 4,422 6,697 1, x x 17.9% x 2.8% SUZANO PAPEL E CELULO PREF A 3,047 5, x x 0.8% x 34.0% PORTUCEL SA 2,341 2, x x 4.6% x 7.1% ALTRI SGPS SA 513 1, x x 0.7% x 6.1% Average 8.2x 8.2x 0.1% 7.6x 8.0% Average without Suzano * 7.7x 7.7x 0.0% 7.6x 1.6% * Due to Suzano's EBITDA's growth rate, that distorts the sector's average, we have excluded the company when we calculate the valuation multiple. 29

30 Pulp business EV ENCE 2014e Calculation Pulp peers average EV/EBITDA 7.7x M0 Adjustment due to slower growth 5% Adj Final average EV/EBITDA 7.3x M1 = M0 x (1 + Adj) Pulpbusiness' EBITDA ( m) 76 EB Pulp business' EV ( m) 557 EVPU= M1 X EB 30

31 Energy business market EV ENCE Cl Calculation lti Current share price ( ) 2.54 P Shares Outstanding (m) 250 N Market capitalization ( m) 636 MC = P x M Net Debt ( m) 225 D Other LT liabilities ( m) 82 L ENCE's implicit EV ( m) 942 EVT = MC + D + L Pulp business' EV ( m) 557 EVPU Energy business' implicit EV ( m) 385 EVEN = EVT EVPU 31

32 Energy business DCF valuation Energy's DCF 2013e 2014e 2015e 2016e Terminal FCF Cost of debt 7.3% Effective cost of the latest bond issue (Jan. 2013) Tax Rate 30.0% Effective tax rate according to company's data Cost of debt (after taxes) 5.1% Kd = Cd x (1 T) Risk free rate 3.7% Yield of Spanish government bond 10y as at 12 February 2014 (Rf) Equity risk premium 4.5% R Beta 1 Electricity business estimate (B) Cost of equity 8.2% Ke = Rf + (R x B) Equity / (Equity + Debt) 78.0% E Debt / (Equity + Debt) 22.0% D WACC energy business 7.5% WACC = Kd x D + Ke x E G 2.0% Growth rate, inflation growth NPV 475 Energy business' EV ( m)

33 ENCE s sum of the parts ENCE's sum of the parts Energy's EV ( m) 515 EV as the NPV of Distribution FCFF, WACC = 7.5% and G=2.0% Pulp's EV ( m) 557 EV calculated as 7.3x EV/EBITDA ENCE's EV ( m) 1072 Sum of Energy's EV and Pulp's EV Net Debt 2013 ( m) 224 According to our model as at December 2013 Other LT liabilities ( m) 82 According to our model as at December 2013 Equity value ( m) 765 Enterprise Value less net debt and other LT liabilities Shares outstanding (m) 250 Number of shares Current share price ( ) 2.54 Current share price as at 12 February 2014 Price ( ) 3.06 Upside of 20.4% 33

34 Sensitivity analysis (Premium vs. G) Discount on the premiu um Growth rate 0.5% 1.0% 1.5% 2.0% 2.5% 45.0% % % % %

35 Sensitivity analysis (energy reform vs. G) Energy re eform impac ct Growth rate 0.5% 1.0% 1.5% 2.0% 2.5% 100m m m m m

36 Sensitivity analysis (WACC vs. G) WAC CC Growth rate 05% 0.5% 10% 1.0% 15% 1.5% 20% 2.0% 25% 2.5% 6.5% % % % %

37 Sensitivity analysis (Pulp price 2014e) Variation 2014e BHKP ($/t) Share price 2.50% % 125% base scenario % 1.25% %

38 Sensitivity analysis (Pulp price 2014e vs. G) Pulp price variation Growth rate 0.5% 1.0% 1.5% 2.0% 2.5% 2.50% % % % %

39 Spanish biomass capacity projection (MW) Installed capacity Target % 764 MW (Nov13) 1,350 MW (2020) 57% 39

40 Spain s renewable energy jobs per MW Technology Number of jobs Installed capacity N (,000) % MW % Jobs/MW Biomass 39 34% 764 3% 51 Hydropower 2 2% 2,035 7% 1 Solar PV 12 10% 4,208 15% 3 CSP 34 30% 899 3% 38 Wind power 28 24% 21,028 73% 1 Total % 28, % 4 40

41 Pulp industry installed capacities (mt) 41

42 2013 Sales Breakdown 42

43 2013 & 01 13Pulp Price Evolution 43

44 Pulp prices estimates 44