Woolworths. Refuelling the balance sheet A$23.19 AUSTRALIA. Event. Impact. Earnings and target price revision. Price catalyst

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1 AUSTRALIA WOW AU Price (at CLOSE#, 10 Nov 2016) Neutral A$23.19 Valuation A$ Sum of Parts month target A$ month TSR % -0.6 Volatility Index Low GICS sector Food & Staples Retailing Market cap A$m 29, day avg turnover A$m 87.2 Number shares on issue m 1,288 Investment fundamentals Year end 30 Jun 2016A 2017E 2018E 2019E Revenue m 58,086 58,637 59,792 60,802 EBIT m 2,564 2,519 2,651 2,736 Reported profit m ,560 1,668 1,751 Adjusted profit m 1,558 1,560 1,668 1,751 Gross cashflow m 2,628 2,612 2,742 2,844 CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x WOW AU vs ASX 100, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, November 2016 (all figures in AUD unless noted) 11 November 2016 Macquarie Securities (Australia) Limited Refuelling the balance sheet Event We analyse the potential benefits and costs to WOW in divesting the Petrol business. Impact Valuation range could be very wide for Petrol: We estimate a potential transaction value of $1.35b based on a multiple of 10.5x EBITDA and a forecast EBITDA of $127m. However, there is an estimated fuel redemption cost of ~$70m which could be separated out of the transaction, potentially lifting valuation to $1.8-2b. Transaction is complicated and will take time to finalise: given the political nature of the retail petrol industry, we believe the divestment process will take time, particularly in relation to gaining approval from the ACCC. Furthermore, the interconnected nature of the value of the asset, WOW Petrol s significant volumes throughput of 3.5b litres per annum and WOW s fuel discount offer, we believe a divestment will require a very clear commitment from WOW around its discount offer to achieve the upper end of the valuation range. Credit and cash flow improvements supportive of refurbishment: From a credit perspective, WOW doesn t have a debt problem it has a lease cost and earnings problem. Assuming a similar rent to sales ratio as Coles Express (implied from Viva REIT), we estimate that WOW credit metrics would move comfortably back into BBB/Baa2 post the sale of its Petrol division (we note WOW is currently rated at BBB/Baa2 however its credit ratios suggest a downgrade if a turnaround cannot be effected). All else held constant, the balance sheet and cashflow capacity should be able to support current dividend and an accelerated supermarket refurbishment program which could revitalise WOW s comparable store sales growth once the company is comfortable with its new supermarket format. Earnings and target price revision Minimal change to earnings (<1%). However, we have increased our price target after aligning our WOW Food and Coles EV/EBITDA multiple in our SOP to 9-10x. Price catalyst 12-month price target: A$22.23 based on a Sum of Parts methodology. Action and recommendation The divestment of Petrol could be a catalyst for WOW, enabling greater balance sheet flexibility. However the key point from our perspective is not the ability to fund further discounts, it is WOW s ability to fund an accelerated store refurbishment program which in turn will drive comparable store sales growth. Upgrade to Neutral. Please refer to page 12 for important disclosures and analyst certification, or on our website

2 Divesting Petrol business A recent market update by WOW in relation to its Petrol business (30/09/2016) stated that they had received incomplete and conditional proposals from a number of parties in relation to: The purchase of the Petrol business; The development of an enhanced convenience and loyalty offer to its customers. We recently discussed the potential for a WOW Petrol business sale by Caltex in the following note: Caltex Australia Fast lane to Convenience expansion. We analyse the potential benefits and costs to WOW in divesting the Petrol business. Fig 1 Australian petrol retailing market dominated by supermarkets 100% 90% 80% Share of volume of petrol sales by brand 6% 7% 6% 6% 7% 8% 9% 10% 10% 14% 0% 18% 20% 22% 22% 23% 23% 17% 17% 18% 19% 70% 16% 23% 24% 24% 24% 60% 50% 40% 25% 25% 22% 20% 22% 22% 22% 23% 24% 24% 30% 20% 24% 22% 18% 16% 16% 17% 16% 16% 18% 18% 18% 18% 10% 0% 20% 20% 18% 19% 19% 20% 19% 17% 19% 16% 15% 13% BP Caltex Mobil Shell Coles/Shell /Caltex Independent Source: ACCC, Macquarie Research November 2016 WOW and Coles entered petrol retailing in the early to mid-2000s in order to drive greater customer engagement, loyalty and increase spend per transaction. Both Coles and WOW rapidly gained share through alignment with incumbent fuel retailers Shell and Caltex, respectively. After a relatively recent renegotiation of its partnership with CTX in 2014, WOW now has 530 Petrol sites generating revenues of $4.6b and estimated EBITDA of $128m in FY16. How important are fuel redemptions to the supermarkets? A decade ago petrol discount redemption programs were a very effective way to increase customer spend and drive loyalty for the major supermarkets. Since then a lot has changed in the market, including a material decline in fuel prices, retailers voluntary undertaking not to exceed 4c/L discounts and the increased focus on value after Aldi s ascendency. Over this period redemption rates on fuel discounts have declined and volumes of fuel sold through retailers sites have declined. There are now significant questions around the effectiveness of the redemption program, which underpin volumes of the WOW Petrol franchise, but are becoming less effective as a customer loyalty program (see Fig 2 below). We believe Coles would have similar concerns over its fuel redemption program. A divestment of Petrol division will enable WOW to reconsider the merits and characteristics of its loyalty program, which we estimate currently costs WOW $70m in EBIT pa. This is derived from equating 50% of 4cpl over the 3.5bL WOW sells through its Petrol business. Should WOW look to re-engineer its fuel discount offer, reducing costs, the value of the Petrol division could be materially higher than forecast. Potentially as much as $2b. 11 November

3 Fig 2 Index of comparable volume growth shows material decline in volumes from 2010 Index WOW comp volumes Coles comp volumes FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17e Source: Company accounts, Macquarie Research, November 2016 WOW Petrol business valued at $1.4b, including fuel redemption costs At present WOW are providing little detail around the asset divestment process, but have highlighted that they remain in discussion with a number of interested parties with the media speculating Caltex, BP and Vitol being involved. As detailed in prior analysis on CTX, we consider the Petrol business to be worth ~$1.36b based on ~$127m of underlying EBITDA and a 10.5x EBITDA acquisition multiple. However, the complicated interconnection between fuel volumes and the sustainability of discount fuel offers suggests the sale process could be a quite complicated and elongated process. Given the ACCC scrutiny we anticipate any potential transaction to be completed by the start of FY18. Why sell something for $1.4b when you could get $2b? We estimate the cost of fuel redemption has declined for WOW from about $100m per annum to ~$70m per annum in FY16. Given our previously discussed view that both WOW and Coles would prefer to exit (or at least reengineer) their fuel based loyalty programs, we anticipate the Petrol divestment process could split the loyalty costs out of the asset sale, with a separate contract to cover a loyalty scheme over a shorter time period to be negotiated concurrently. Under this scenario, a greater amount of earnings ~$ m in EBITDA could be divested by WOW under this transaction, taking transaction value to a range of $1.8 to $2b. A transaction on this basis would see a $50-$70m decline in EBIT within the Foods division which would need to fund an ongoing fuel discount offer. 11 November

4 Fig 3 Key credit metrics POST Petrol business sale FY16 FY17f FY18f FY19f FY20f - Pre FY20f - Post Change EBITDA 3,586 3,538 3,692 3,796 3,883 3, % EBITDA (adjusted) 5,608 5,621 5,806 5,948 6,068 5, % Statutory gearing Net debt (statutory) 3,414 3,246 2,855 2,353 1, % Total debt (statutory) 4,362 4,194 3,803 3,301 2, % Net debt/ebitda % Fixed charges cover (EBITDAR) % EBIT interest cover % ND/ND+E 28.0% 25.0% 21.1% 16.8% 12.6% -0.3% bps Lease-adjusted gearing Net debt (adjusted) 20,672 21,831 21,838 21,629 21,349 17, % Total debt (adjusted) 21,964 22,779 22,786 22,578 22,297 18, % Lease adj. net debt/ebitda % Lease adj. total debt/ebitda % EBIT interest cover % ND+OL/ND+OL+E 70.2% 69.1% 67.1% 64.9% 62.7% 58.3% -441 bps Funds From Operations/Gross debt 11.2% 16.7% 17.2% 17.9% 18.8% 21.7% 294 bps Source: Company data, Macquarie Research, November 2016 Credit Metrics Improved post Petrol business sale A key constraint for WOW has been the board-stipulated credit rating. WOW s board has a target to maintain the company s investment grade credit rating. While the cost to WOW of sinking below investment grade would be minimal (given low rates and reducing debt position) such a step change would have adverse implications for its current credit investors and the capital value of its debt. In our view, the ability for WOW to fund an accelerated store refurbishment program is a key reason behind the need for a strong credit rating. Based on our analysis, the sale of the Petrol business not only provides a potential cash injection of ~$2.0bn, it also reduces the level of lease liabilities that favourably impacts the credit metrics of WOW. From a credit perspective, WOW doesn t have a debt problem it has a lease cost and earnings problem. Assuming a similar rent to sales ratio as Coles Express (lease to sales ratio of 1.9% implied from Viva REIT), we estimate that WOW credit metrics would move comfortably back into BBB/Baa2 post the sale of its Petrol division (we note WOW is currently rated at BBB/Baa2 however its credit ratios suggest a downgrade if a turnaround cannot be effected). Cash flow implications Is selling Petrol enough to fund refurbishments? We anticipate that WOW will accelerate its store refurbishment program from the expected 80 stores in FY17 to 120 in FY18. At an estimated cost per store of ~$4m to complete the required refurbishment (based on industry research), this implies capex of $320m and $480m in FY17 and FY18, respectively, allocated to supermarket refurbishments. We have assessed the potential impact of a refurbishment program and capex profile on comparable sales growth in the section below. Below outlines the key credit metrics and cashflow implications BEFORE the potential sale of WOW Petrol business and subsequent investment in the supermarket refurbishment program. Without divesting the Petrol business WOW ability to adequately fund a refurbishment program appears to be constrained from a credit metric perspective. 11 November

5 Fig 4 Key credit metrics BEFORE Petrol business and refurbishment capex FY16 FY17f FY18f FY19f FY20f EBITDA 3,586 3,538 3,692 3,796 3,883 EBITDA (adjusted) 5,608 5,621 5,806 5,948 6,068 Statutory gearing Net debt (statutory) 3,414 3,083 2,681 2,171 1,645 Total debt (statutory) 4,362 4,031 3,630 3,119 2,593 Net debt/ebitda Fixed charges cover (EBITDAR) EBIT interest cover ND/ND+E 28.0% 24.0% 20.0% 15.6% 11.4% Lease-adjusted gearing Net debt (adjusted) 20,672 21,668 21,665 21,448 21,162 Total debt (adjusted) 21,964 22,616 22,613 22,396 22,110 Lease adj. net debt/ebitda Lease adj. total debt/ebitda EBIT interest cover ND+OL/ND+OL+E 70.2% 68.9% 66.9% 64.7% 62.4% Funds From Operations/Gross debt 11.2% 16.9% 17.4% 18.2% 19.0% Source: Company data, Macquarie Research, November 2016 Fig 5 Cash flow from operations Fig 6 FCF less dividends adjusted for asset sales $m CFFO Capex Freecash flow $m Free cash flow Dividend Asset sales FCF less Div FCF less Dividend add asset sales FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17f FY18f FY19f FY20f FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17f FY18f FY19f FY20f Source: Company data, Macquarie Research, November 2016 Source: Company data, Macquarie Research, November 2016 Estimating net impact post Petrol divestment, including refurb program Below outlines the key credit metrics and cashflow implications AFTER the potential sale of WOW Petrol business for proceeds of $2b and subsequent investment in the supermarket refurbishment program. Risk reduces from a gearing perspective. Fig 8 and 9 below highlight that despite the sale of the Petrol business providing a cash injection, the elevated supermarket capex profile required to restore growth to the Food division continues to stretch the credit metrics. We estimate that WOW would maintain a BBB/Baa2 rating, but only just. The additional capex profile highlights that WOW would be at risk of further potential credit downgrades (to BBB1/Baa3 in the first instance) should execution fail to meet expectations. Capex profile manageable on a cashflow perspective. Based on our forecasts WOW are capable of sustaining the capex profile for supermarkets outlined above on a free cash flow basis, albeit marginally. Further, in order to maintain the current dividend profile WOW would be relying on the continuation of asset sales to provide the cash and potentially an increase in future borrowings. 11 November

6 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17f FY18f FY19f FY20f FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17f FY18f FY19f FY20f Macquarie Wealth Management Fig 7 Key credit metrics AFTER Petrol business and refurbishment capex FY16 FY17f FY18f FY19f FY20f EBITDA 3,586 3,538 3,432 3,596 3,725 EBITDA (adjusted) 5,608 5,621 5,463 5,593 5,776 Statutory gearing Net debt (statutory) 3,414 3,411 1,803 1,870 1,910 Total debt (statutory) 4,362 4,359 2,751 2,818 2,858 Net debt/ebitda Fixed charges cover (EBITDAR) EBIT interest cover ND/ND+E 28.0% 25.9% 14.5% 13.9% 13.2% Lease-adjusted gearing Net debt (adjusted) 20,672 21,996 18,994 19,503 19,998 Total debt (adjusted) 21,964 22,944 19,942 20,451 20,946 Lease adj. net debt/ebitda Lease adj. total debt/ebitda EBIT interest cover ND+OL/ND+OL+E 70.2% 69.2% 64.1% 62.7% 61.4% Funds From Operations/Gross debt 11.2% 16.6% 18.6% 19.0% 19.2% Source: Company data, Macquarie Research, November 2016 Fig 8 Petrol divestment not enough offset capex requirements from a credit risk perspective Fig 9 with WOW at risk of further potential credit downgrades. Net debt/ebitda (x) Upgrade Net debt / EBITDA (12m rolling) Downgrade EBIT cover (x) upgrade EBIT interest cover downgrade Source: Company data, Macquarie Research, November 2016 Source: Company data, Macquarie Research, November 2016 Fig 10 FCF capable of marginally covering elevated supermarket capex Fig 11 with dividend profile relying on the continuation of asset sales. $m 4000 CFFO Capex Freecash flow FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17f FY18f FY19f FY20f Source: Company data, Macquarie Research, November 2016 Source: Company data, Macquarie Research, November November

7 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e FY20e Macquarie Wealth Management Refurbishments Strong positive impact on comps While reducing prices is an important first step, investing in price without sufficiently investing in other non-price areas will impair the Return On Price Investment (ROPI). Key areas of non-price investment which we believe needs addressing includes refurbishments, staffing levels (to address service levels, stock outs, queue times, etc), efficiency (supply chain, etc), marketing and advertising, etc. More recently WOW has invested in staff levels, improving service standards and availability, particularly of an afternoon and on weekends. However, the next big step remains refurbishment. Store refurbishments have been a key area of underinvestment from WOW in recent years, as WOW now lags Coles and IGA, with Metcash now more than two years into the Diamond Store Accelerator program. Store age is a critical driver of sales. Sales and EBIT productivity varies widely based on store age, with new and recently refurbished supermarkets delivering high single digit comp sales growth while stores which have not been materially refurbished for more than seven years typically delivering flat to negative comp growth. WOW s average store age has increased to nine years following an underinvestment in refurbishments in FY13 and FY14 (41 combined refurbishments) led to average store age increasing from ~8yrs to ~9 years currently. Refurbishments occur in waves. Supermarkets traditionally refurbish stores on a cyclical basis, rolling out a new, consistent format on a national basis which is differentiated from the existing network and competitors in order to drive an uplift in foot traffic, volume and ultimately generate a higher ROI. Major refurbishment program would reduce average store age and significantly increase comps growth. In order for WOW to materially improve the average age of the store network and comparable store sales growth we anticipate a refurbishment program of >100 stores p.a. over the next few years is required. Fig 12 The new 2020 format requires >100 refurbishments p.a. over the next 3 years Fig 13 which is equivalent to ~12-14% of the network each year in FY18 FY20 Refurbishments 2020 Format 2015 Format Format pre-2010 Format Source: Company data, Macquarie Research, October 2016 Source: Company data, Macquarie Research, October November

8 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e FY20e FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e FY20e Macquarie Wealth Management Fig 14 average store age has increased to 9 years in FY16 Average store age Source: Company data, Macquarie research, October 2016 We estimate a 100bps-150bps uplift in the contribution from refurbs to comps would be possible from a major refurbishment program in FY18 - FY20. This assumes a ~10ppt acceleration in year one comp growth, which then gradually moderates over the following three years back towards group comp growth. While this acceleration appears large, we note prior to refurb, the stores selected for investment are likely to be heavily underperforming the broader group in sales per sqm terms. Fig 15 Estimated contribution from refurbs to comps to lift by ~100bps 150bps p.a. in FY18 FY20 vs. minimal contribution from FY13 FY16 Comp Sales growth tailwind (ppts) FY20 FY19 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 2.7% 2.3% 1.7% FY18 pre-2020 format 1.1% FY17 Total 0.8% 0.7% 0.9% 1.2% 1.6% 2.1% Comp Sales growth tailwind (ppts) 2.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 0.0% Source: Company data, Macquarie Research, January 2016 Execution of the physical refurbishment will be critical. As is the case in every aspect of retailing, execution will be key. The quality of the new format that is ultimately rolled out, the selection of sites to be refurbished and the communication of this roll out to shoppers will all be important drivers of the ROIC outcomes achieved by WOW. Much of this will depend on the resourcing of the construction and property redevelopment teams. In our view, WOW needs to invest in major refurbs (rather than light touch programs), including refrigeration. We have previously analysed in detail the state of the supermarket network and the potential costs and benefits that could be generated in a mass refurbishment strategy. Although a number of assumptions have changed slightly the underlying analysis still holds true. The research note can be accessed here: Searching for the fountain of youth. 11 November

9 Scenario valuation and earnings revisions Although this analysis highlights the potential for modest earnings changes associated with asset divestment and balance sheet remediation, there are no material changes to our current forecasts at this stage given divestment of the Petrol division is yet to take place. We would note that at a time when most companies are gearing up balance sheets through easily EPS accretive transactions, the divestment of WOW s Petrol business would do the opposite. We estimate FY18 EPS forecasts would fall by 4.9% compared to our current expectations as the Petrol earnings and petrol discount contribution are deducted from current forecasts. On this basis, WOW would be trading at 19.2x FY18, which translates to ~17% premium to ASX200 Industrials ex financials. Recognising a more visible route to a self-funded refurbishment program and based on the increasing realisation that WOW and Coles supermarkets are stepping into a more intense competitive environment, we have increased our EBITDA multiple on Australian Food to 10-11x, to align with the assumption for Coles in our WES valuation. Our PT increases by 8.0% to $ Fig 16 WOW forecast earnings impact from divestment of Petrol and refurb program FY18f (current) FY18f (post fuel and refurb) change (%) Australian Food & Liquor & Petrol 48, , % Food 35, , % Liquor 8, , % Petrol 4, % New Zealand Supermarkets 5, , % Big W 3, , % Hotels 1, , % Other revenue % Total Revenue 59, , % EBITDA 3, , % D&A -1, % Australian Food & Liquor & Petrol 2, , % Food 1, , % Liquor % Petrol % New Zealand Supermarkets % Big W % Hotels % Other EBIT % EBIT from continuing operations 2, , % Total EBIT 2, , % Net Interest % Tax % Minorities % Underlying NPAT 1, , % Underlying EPS % Non recurring items (post tax) na Reported NPAT 1, , % OCF 2, , % Net capex 1, , % Net Debt 2, , % DPS % Source: Company data, Macquarie Research, November November

10 Other companies mentioned in this report: Wesfarmers (WES AU, A$41.17, Outperform, TP: A$41.80) 11 November

11 Macquarie Quant View The quant model currently holds a marginally positive view on. The strongest style exposure is Quality, indicating this stock is likely to have a superior and more stable underlying earnings stream. The weakest style exposure is Valuations, indicating this stock is over-priced in the market relative to its peers. 106/175 Global rank in Food & Staples Retailing % of BUY recommendations 13% (2/15) Number of Price Target downgrades 4 Number of Price Target upgrades 4 Fundamentals Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Food & Staples Retailing) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. Wesfarmers 0.9 Wesfarmers Metcash Treasury Wine Estates Coca-Cola Amatil J Sainsbury Tesco Metcash Treasury Wine Estates Coca-Cola Amatil J Sainsbury Tesco % -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple. Wesfarmers Metcash Treasury Wine Estates Coca-Cola Amatil J Sainsbury Tesco Wesfarmers Metcash Treasury Wine Estates Coca-Cola Amatil J Sainsbury Tesco % -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Incremental Capex Consensus Recommendation IRR Dividend Disc. Model Capex to Sales FY0 FCF Yield FY0 Interest Cover Profit Margin Last Actual Operating Margin FY0 Negatives Positives -34% -38% -27% -28% 36% 36% 34% 42% -60% -40% -20% 0% 20% 40% 60% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score Percentile relative to sector(/175) Percentile relative to market(/423) Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 11 November

12 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 September 2016 AU/NZ Asia RSA USA CA EUR Outperform 47.26% 55.50% 38.46% 45.47% 59.09% 48.21% (for US coverage by MCUSA, 8.20% of stocks followed are investment banking clients) Neutral 38.01% 29.31% 42.86% 48.77% 37.88% 36.79% (for US coverage by MCUSA, 8.25% of stocks followed are investment banking clients) Underperform 14.73% 15.19% 18.68% 5.76% 3.03% 15.00% (for US coverage by MCUSA, 8.00% of stocks followed are investment banking clients) WOW AU vs ASX 100, & rec history WES AU vs ASX 100, & rec history (all figures in AUD currency unless noted) (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, November month target price methodology WOW AU: A$22.23 based on a Sum of Parts methodology WES AU: A$41.80 based on a Sum of Parts methodology Company-specific disclosures: WOW AU: Macquarie Group Limited or one of its affiliates is currently providing non securities services to Ltd for which it expects to receive or intends to seek compensation. Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Limited's equity securities. WES AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Wesfarmers Limited's equity securities. MACQUARIE SECURITIES (AUSTRALIA) LIMITED or one of its affiliates managed or co-managed a public offering of securities of Wesfarmers Ltd in the past 24 months, for which it received compensation. Important disclosure information regarding the subject companies covered in this report is available at Date Stock Code (BBG code) Recommendation Target Price 29-Oct-2016 WOW AU Underperform A$ Aug-2016 WOW AU Underperform A$ Jul-2016 WOW AU Underperform A$ Jul-2016 WOW AU Underperform A$ Jul-2016 WOW AU Underperform A$ May-2016 WOW AU Underperform A$ Apr-2016 WOW AU Underperform A$ Feb-2016 WOW AU Underperform A$ Jan-2016 WOW AU Underperform A$ Oct-2015 WOW AU Underperform A$ Oct-2015 WOW AU Underperform A$ Aug-2015 WOW AU Underperform A$ Jul-2015 WOW AU Underperform A$ Jun-2015 WOW AU Underperform A$ May-2015 WOW AU Underperform A$ November

13 This publication was disseminated on 10 November 2016 at 14:45 UTC. Macquarie Wealth Management 17-Apr-2015 WOW AU Underperform A$ Feb-2015 WOW AU Underperform A$ Feb-2015 WOW AU Outperform A$ Nov-2014 WOW AU Outperform A$ Sep-2014 WOW AU Underperform A$ Aug-2014 WOW AU Underperform A$ Apr-2014 WOW AU Underperform A$ Feb-2014 WOW AU Underperform A$ Feb-2014 WOW AU Outperform A$ Jan-2014 WOW AU Outperform A$35.10 Target price risk disclosures: WOW AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. WES AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN , AFSL , a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN AFSL ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. 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