MG Unit Trust. Strategy taking shape A$1.88 AUSTRALIA. Event. Impact. Earnings and target price revision. Price catalyst. Action and recommendation

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1 AUSTRALIA MGC AU Price (at 08:53, 29 Feb 2016 GMT) Outperform A$1.88 Valuation A$ DCF (WACC 8.5%, beta 0.9, ERP 5.0%, RFR 3.8%, TGR 2.0%) 12-month target A$ month TSR % Volatility Index High GICS sector Food, Beverage & Tobacco Market cap A$m day avg turnover A$m 2.1 Number shares on issue m Investment fundamentals Year end 30 Jun 2015A 2016E 2017E 2018E Revenue m 2, , , ,654.6 EBIT m Reported profit m Adjusted profit m Gross cashflow m CFPS CFPS growth % nmf PGCFPS x PGCFPS rel x EPS adj EPS adj growth % nmf PER adj x PER rel x Total DPS Total div yield % Franking % nmf ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x MGC AU vs Small Ordinaries, & 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, February 2016 (all figures in AUD unless noted) 29 February 2016 Strategy taking shape Event MGC reported its 1H16 result with NPAT under the PSM of $25.2m, below our forecast of $30.8m. Outlook for FY16 is at the bottom end of the range with FMP of $5.60/kgMS (available, range from $ ) or $63m NPAT assuming no further deterioration in commodity prices or changes in FX. Consistent with prior years, sales and profit are likely to be stronger in 2H as the seasonal inventory build converts to sales and timing of new products. Impact The opening milk price is expected to be the final milk price (i.e. no stepups) under MGC s revised guidance. Whilst the continued shift into Dairy Foods provided a positive influence, this was not enough to offset declines in commodity prices relative to prospectus assumptions and also lower expected milk intake which is now forecast to be down 1-2% on pcp due to El Nino. We think dairy commodity prices are somewhere near a bottom (SMP/WMP 40% below 10 year averages) however headwinds to a significant recovery are likely to persist in the near term with weaker Chinese powder demand, Russia remaining out of the market and strong EU production. We continue to view MGC s strategic positioning and direction favourably. MGC s private label cheese contract with Coles starts in Feb-17 which should provide improved mix and operational efficiency, and MGC s branded strategy is bearing fruit with Devondale branded sales +46% and now 19% of group. International Dairy Foods growth was strong, up 110%, ahead of PDS. MGC is enjoying significant growth in retail powder sachets, much of which is driven by strong Asian demand and will benefit in terms of margin and volume from improved distribution in China. In FY15 MGC sold an estimated 20k MT of powder sachets through Australian retail channels and we believe this has more than doubled on a run-rate basis with capacity remaining a constraint. Earnings and target price revision EPU: FY16/F17E -19.6%/-20.6% on slower commodity recovery. PT to $2.60 (from $2.70) reflecting lower near term earnings, FX and roll valuation fwd. Price catalyst 12-month price target: A$2.60 based on a DCF methodology. Catalyst: update on nutritionals investment, commodity prices Action and recommendation While the earnings guidance at the bottom of the range is a little disappointing (but not entirely unexpected due to commodity prices), MGC have made significant progress on strategy execution, with Dairy Foods delivering revenue growth ahead of PDS, particularly focussed in international sales. We see a strong earnings growth outlook medium term from the ongoing execution of strategy including growth in milk powder sachets and consumer cheeses, the launch of Devondale NatraStart, and the nutritionals plant. We think the trough commodity prices/ share price weakness provides a buying opportunity and we maintain our Outperform recommendation. Please refer to page 13 for important disclosures and analyst certification, or on our website

2 Fig 1 1H16 result wrap The good The not so good The interesting Dairy foods business came in ahead of our expectations with revenue of $695m vs. our $686m (+27% on pcp), and ahead of PDS growth rate for FY16 of 23%. Domestic Dairy Foods was the key driver with revenue +28% on pcp driven by a 350% lift in consumer milk powder (retail sachet) and strong growth in chilled milk, long life milk and new iced coffee / milkshakes. Average price per tonne for Dairy Foods was $2,009/MT ahead of PDS assumption of $1,910/MT. MGC estimates that $60m of Domestic Dairy Foods sales were ultimately consumed offshore (e.g. powder sachets). This gives international Dairy Foods growth of 110%, ahead of the FY16 growth rate assumed in the PDS of 79%. Dairy Foods now 70% of sales volumes vs. commodity Ingredients at 30%. This highlights the strategic mix shift that MGC are pursuing. Over the last two years, Dairy Foods & Nutritionals EBIT has grown at 26% CAGR. Gearing at period end was 25.6% compared to our forecast of 32.4%, however capex has been slower than expected. MGC expects to make an announcement around off-take arrangements for the nutritionals investment in coming weeks. This is likely to involve a significant offtake partner(s) we think $5.60 is a realistic assessment of the overall market and broadly in line with industry expectations. This has assumed spot commodity and AUD/USD, and hopefully this ends up being conservative with futures showing some improvement in sentiment recently. Outlook for FY16 at the bottom end of scenario range with FGMP of $5.60/kgMS (available, range from $ based on a commodity recovery) or $63m NPAT assuming no further deterioration in commodity prices or changes in FX. This compares to preresult consensus of $69m and our $80m. This is also below prospectus of $6.05 or $86m which in turn was dependent on strengthening in global commodity prices. Improved dairy foods mix effect only a partial offset to weaker commodity prices and slightly lower overall milk intake. Underlying Ingredients revenue was below our expectation. We suspect this may be due to mix with TDP volumes being excluded from the average which are generally higher value milk powder sales (mostly for MGC s B2C products). Timing of sales (forward sell) relative to commodity price moments may also be a factor here. El Nino has had a negative impact on volume with a forecast decline of 1-2% over the season and with 1H 0.7% below pcp. This is consistent with Dairy Aust expectations and compares with flat FY volume assumption in the prospectus. in order to de-risk the $ m planned Interim dividend of 3.5cpu was below our investment. Capacity expansion is planned at forecast (5.0cpu). This reflects $25m of 63kt across grown-up milk powders, infant NPAT under application of PSM and formula, nutritional base powders and premium lower 1H dividend payout. MGC indicated WMP/SMP for export markets in Asia. a 30/70 1H/2H split re distribution with lower 1H % reflecting seasonal skew of Strong growth in Devondale branded revenue at business to 2H and conservative 1H 46% over last 12 months. On track for $0.5b approach. plus of FY Devondale sales (1H16 $264m). Tough dairy commodity markets Whilst $5.60 FMP was at lower end of the range, Source: Company data, Macquarie Research, March 2016 continue. WMP/SMP prices are 40% below 10 year averages and however headwinds to a significant recovery are likely to persist in the near term with weaker Chinese powder demand, Russia remaining out of the market and strong EU production. MGC announced the launch of Devondale NatraStart branded infant formula in March 2016, leveraging the Devondale brand and its existing position in UHT/milk powder products in China. The product has regulatory approval for launch. We understand MGC has secured orders with an Australian supermarket chain as well as Asian buyers. This will be available online in China in Apr-16. MGC cited varied farming conditions across the regions with East being favourable and West being dry, while NSW was favourable but TAS was very dry. Milk collection share remains consistent at ~37% of Australia. Nutritionals revenue was up 3.8% on 1H15 related to new contracts and supply arrangements in recent years. This business will grow significantly once the new plant comes online, however we wonder the impact of MGC launching its branded product and hence competing with B2B customers. MGC have confirmed the site for the dairy beverages investment, being Laverton and now expects this to be completed in mid- FY18, a little behind our expectations. MGC are considering further investment in consumer cheese allowing for additional cheese formats. This is likely following the new private label contract, Devondale branded expansion and foodservice demand. MGC appointed Kiera Grant as a new nonexecutive Director, bringing the number of Special Directors to three, per the PDS. MGC highlighted that typically around 50% of first half milk intake is held at inventory at December period end, and hence skews the seasonality greatly to 2H. Statutory NPAT of $10m compared to $25m under application of profit share mechanism. Difference reflects inventory still sitting in the system, due to seasonal nature of the business (57% of FY intake occurs in 1H resulting in inventory build-up at end of 1H which is sold in 2H). Inventory impacts should normalise in 2H so that FY statutory NPAT = FY NPAT under application of profit share mechanism (PSM). PSM implied 1H FMP of $5.04 is below $5.37 price paid in 1H given that PSM application in 1H is impacted by higher seasonal intake (i.e. higher volume = less value per unit) which then normalises in 2H as inventory is sold combined with lower 2H in-take (i.e. PSM 2H price > actual paid). 29 February

3 Result summary; 1H16 NPAT of $25.2m, FY16 guided to bottom of range MGC reported its 1H16 result with NPAT under the PSM of $25.2m, below our forecast of $30.8m. Outlook for FY16 now at the bottom end of the range with FGMP of $5.60/kgMS (available, range from $ ) or $63m NPAT assuming no further deterioration in commodity prices or changes in FX. We think MGC have taken some conservatism here given the volatility that is currently being seen in the dairy commodity market. MGC declared an interim dividend of 3.5cpu, below our forecast (5.0cpu) and reflecting a 30/70 1H/2H split to the full-year outlook, and this is expected to be the policy going forward. Revenues came in at $1,379m, below our forecast of $1,416m with slightly lower 'other' segment revenue (milk broking and trading) and higher intersegment offsets. Total expenses were slightly below forecast, while depreciation was materially lower. Fig 2 1H16 result summary $m 1H15 PF 1H16E 1H16A Difference Growth pcp Ingredients & nutritionals % -13.0% Dairy foods % 27.2% Other % 1.8% Intersegment revenue % 47.7% Total revenue 1, , , % 3.7% Southern milk pool payments % -9.1% Other cost of goods sold % 31.9% Total cost of goods sold 1, , , % 4.8% Gross profit % -1.5% Distribution expenses % 13.1% Selling & marketing expenses % 17.3% Administrative expenses % 18.3% Other expenses % % Total expenses % 8.0% Share of profit/ (loss) in associates % -59.4% EBIT % -24.4% Depreciation % 3.0% EBITDA % -16.5% Net financing cost % 153.3% Profit before tax % -37.8% Tax % -42.9% NPAT % -34.7% Minorities % -69.6% Total NPAT % -36.7% EPS (cents) % -36.7% DPS (cents) N/A % N/A Source: Company data, Macquarie Research, March 2016 From the figures above, the distributable milk pool was $701.7m for the period (as shown overleaf). This was on 132m kgms of volume in the Southern milk pool. Applying the profit sharing mechanism gives an iterated milk price for the period of $5.04/kgMS and correspondingly a 3.58% allocation to NPAT. This then implies an NPAT of $25.2m attributable to shareholders/unitholders and Southern Milk pool payments of $663.7m. After solving for the milk COGS, we can calculate gross profit of $232.2m (4% below our forecast) and EBIT of $48.7m (12.4% below Macq). Operating cash flow was -$125.4m, better than our expectations of -$165m, with the negative absolute figure reflecting seasonal inventory build. 29 February

4 Fig 3 Calculation of the Milk Pool $m 1H16 Revenue 1, COGS ex Southern Milk pool Operating costs Share of profits from associates Net financing costs Minority interests -0.7 Distributable milk pool Southern Milk Pool size 1,811 In kgms 132 Iterated allocation to FMP ($/kgms) 5.04 Final allocation to NPAT 3.58% NPAT allocation 25.2 Tax allocation 12.9 Southern milk pool payments Source: Company data, Macquarie Research, March 2016 Milk intake volumes for 1H were 0.7% below pcp and the outlook is for a decline of 1-2% over the season. The progression of volumes over the season can be found below. Fig 4 Volume down 5.6% in VIC in January... Fig 5...concentrated in Eastern and Northern VIC 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% 6.1% 5.5% 3.6% 3.8% 0.8% -0.2% -0.4% -0.6% -1.8% -1.7% -3.4% -4.5% -3.8% -5.3% -5.9% -5.6% Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Season -to-date Vic Aus 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% 5.0% 4.2% 8.2% 8.1% 1.0% 0.3% 2.0% 0.2% -1.1% -0.9% -1.7% -1.5% -2.7% -3.0% -2.9% -4.2% -5.3% -4.8% -4.1% -5.6% -5.6% -6.3% -7.2% -7.0% Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Season -to-date Eastern Northern Western Source: Dairy Australia, Macquarie Research, March 2016 Source: Dairy Australia, Macquarie Research, March 2016 A summary of the key operating metrics is below. Key takeaways were the shift of mix towards 69% Dairy Foods, and average DF revenue/mt coming in slightly higher at $2,009/MT. Fig 6 MGC 1H16 key operating metrics 1H15 PF 1H16E 1H16A Difference Growth pcp Total milk intake m litres 2,044 2,084 2, % -0.7% Southern region milk intake m litres 1,835 1,817 1, % -1.3% Southern region milk intake m kgms % -1.5% Ingredients & Nutritionals '000 MT % 7.0% Dairy Foods '000 MT % 12.7% Total volume '000 MT % 10.9% I&N volume share % 32% 27% 31% 3.1% -1.1% DF volume share % 68% 73% 69% -3.1% 1.1% I&N revenue share % 45% 37% 37% 1.0% -7.2% DF revenue share % 41% 48% 50% 1.9% 9.3% Other revenue share % 18% 19% 18% -0.5% -0.3% I&N revenue $/MT 4,187 3,799 3, % -20.8% Dairy Foods revenue $/MT 1,780 1,910 2, % 12.9% Source: Company data, Macquarie Research, March February

5 Strategic progress; branded infant formula launch, milk powder sachet growth and close to an off-take for nutritional powders MGC has increased its exposure to high value Dairy Foods products, representing around 70% of volume in 1H16. This remains the key area of focus for the company with it investing significantly in capital projects here to enable more efficient and lower cost of production, while also increasing capacity and product format capabilities. Interestingly, Devondale branded products now make up ~$264m of sales (~19% of group sales), up 46% on 1H15. Fig 7 Growth in key value-added businesses Fig 8 New Devondale NatraStart infant formula $m H14 1H15 1H16 Domestic DF International DF Nutritionals Source: Company data, Macquarie Research, March 2016 Source: Company data, Macquarie Research, March 2016 A summary of the key strategic growth areas are below: Infant formula: As we previously speculated (see note), MGC have decided to launch a branded infant formula product, known as Devondale NatraStart, which will begin sales in March We understand MGC have sales commitments from a large supermarket in Australia as well as some Asian buyers. This will look to leverage the Devondale brand and its existing position in UHT/milk powder products in China. This will be available online in China in Apr-16. We haven t included anything in our forecasts due to uncertainty around volumes, and we generally acknowledge the challenges with launching branded infant products, however MGC should be well positioned to do so given its supply chain and existing brand presence in the Australian and Chinese markets. Milk powder sachets: MGC has seen significant growth in this product line, with growth both domestically through the existing supermarket chains (with a large amount of this product being consumed offshore) as well as directly through online and traditional sales channels. This product has remained capacity constrained, and we understand MGC have recently invested in additional processing and packing capacity, unlocking volume constraints and helping to meet surplus demand in the market. Nutritional powders: The company announced that it is in the final stages of securing offtake arrangements to underpin its $ m investment in nutritionals powders at Koroit. This investment would be expected to commence in the next 6 months with a ~24 month build time. MGC expects to announce further details next week, but as we previously estimated, this could be ~12-15% accretive to FY19 NPAT and ~5% to our DCF, with none of this included at present. Cheese: We would expect further growth in consumer and foodservice cheese products with the new Coles private label deal (~20-25k MT), further growth in the Caboolture brand and new product launches in the Devondale branded space. The company expects to complete the Cheese investment in Q2 FY17 and are considering further investment in consumer cheese allowing for additional cheese formats. 29 February

6 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Macquarie Wealth Management Ingredients & Nutritionals; Revenue -13% on 1H15, -$25.4m EBIT contribution The Ingredients and Nutritionals (I&N) division saw revenues decline by 13% on pcp, but was in line with our forecast. Compositionally, revenue declined for ingredients products due to weaker commodity prices but offset by slightly higher volumes. Nutritionals revenues increased by 3.8% related to new contracts and supply arrangements in recent years. Segmental contribution was -$25.4m following the milk price being paid higher than breakeven for the commodity products being sold. This is due to the milk price for MGC being averaged up by the higher value Dairy Foods products. Fig 9 Ingredients revenue decline due to price, but nutritionals up modestly... Fig 10...while >80% of the revenue was international $m % Domestic International H14 1H15 1H16 Ingredients Nutritionals 81% Source: Company data, Macquarie Research, March 2016 Source: Company data, Macquarie Research, March 2016 Milk powder prices have tracked down since December period end, and now sit at US$1,890/1,762/MT respectively for WMP/SMP. However, the futures curve is indicating a modest recovery over the next 6 months to around US$2,250/MT. Cheese and Butter prices have continued to soften after December as increased domestic European milk production has translated into higher commodity volumes. MGC will continue to optimise ingredients mix as much as possible, however, on our numbers, the main commodity baskets remain around par at current GDT prices. Fig 11 Milk powder prices Fig 12 Cheddar and Butter prices 3,000 2,800 2,600 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1,000 US$/MT 3,700 3,600 3,500 3,400 3,300 3,200 3,100 3,000 2,900 US$/MT WMP SMP WMP futures SMP futures Butter Ched Source: GDT, Macquarie Research, March 2016 Source: EC, Macquarie Research, March February

7 Dairy Foods; Revenue up 27% on 1H15, $65.8m EBIT contribution Revenue came at $694.7m, ahead of our forecast of $686.1m with continued product roll-out and growth in key product segments such as milk powders and UHT. International dairy foods improved in all markets (Middle East, SE Asia, China) and the business, as we previously highlighted (see note) has improved its supply chain into online sales channels including JD.com and Tmall.com, and distribution into Tier 2 and 3 cities. Consumer milk powder revenue in Australia was up 350% to $91m, and including international sales and outbound sales, revenue grew 110% half-on-half. Growth will continue in this segment following the new private label supply contract with Coles commencing Feb-17 for ~$130m per annum (~20-25k MT we think). 1H16 also only saw a partial period of many new product lines (such a milkshakes), new sales channels for milk powder as well as experiencing capacity constraints in the milk powder sachet business. Further out, this business will benefit from the new dairy beverage and cheese packing capacity that is set to come online in FY Fig 13 Strong growth in domestic and international dairy foods sales... Fig 14...and the run rate for international is ahead of expectations, leaving less in 2H to hit FY16 PDS $m $m H14 1H15 1H16 Domestic International 0 FY12 FY13 FY14 FY15 FY16 1H 2H FY Source: Company data, Macquarie Research, March 2016 Source: Company data, Macquarie Research, March 2016 While international Dairy Foods revenue was up 21.4% in 1H16 on pcp, the adjusted number to include outbound sales was +110% growth ($145m revenue). This is ahead of the run rate of +79% in the PDS. Total dairy foods revenue growth of 27% in 1H is ahead of the run rate for FY16 in the PDS of 23%. We think this highlighted the success of MGC s strategy execution over the period. Average revenue per MT for this business came in at $2,009/MT, ahead of expectations of $1,910, likely driven by mix shift towards higher value products. We previously highlighted (see note) how new products such as the Devondale milkshake could generate up to $4,800/MT on an equivalent basis to the $2,009/MT average for the segment. Further mix accretion is expected as milk powder sachet volumes grow through direct channels and MGC launch the Devondale NatraStart infant formula product. Illustratively, MGC could move B2B nutritionals/infant volume from ~A$8,500/MT to A$12-15,000/MT for their branded product, with some additional processing and packing cost, plus advertising/promotion spend. 29 February

8 Forecast revisions; slower commodity price recovery key change We have lowered our commodity price assumptions by ~US$ /MT to reflect the more subdued recovery anticipated due to ongoing oversupply and weak demand. We now assume prices conservatively around spot for 2H16, then gradually recovering but remaining below long term averages in our model. This has been partially offset by lower Macq. FX assumptions. Fig 15 Commodity price forecast changes (US$/MT) Current 2H16 1H17 2H17 1H18 2H18 WMP 1,890 2,250 2,500 2,750 3,025 SMP 1,762 2,000 2,222 2,444 2,689 Butter 3,000 3,075 3,152 3,231 3,311 Cheddar 3,023 3,099 3,176 3,255 3,337 AUD/USD Previous 2H16 1H17 2H17 1H18 2H18 WMP 2,500 2,700 3,000 3,300 3,325 SMP 2,100 2,450 2,722 2,994 3,017 Butter 3,300 3,382 3,467 3,553 3,580 Cheddar 3,442 3,528 3,616 3,707 3,734 AUD/USD Change 2H16 1H17 2H17 1H18 2H18 WMP SMP Butter Cheddar AUD/USD Source: Company data, Macquarie Research, March 2016 The commodity price changes have had the largest impact on FY16/17 earnings, lowered by 19.6%/20.6% respectively. Illustratively, mid-cycle commodity prices (long term average) and Macq. long run FX (0.75) would have FY17E NPAT of ~$100m. Fig 16 Forecast revisions FY16E FY17E FY18E $m Previous Current % chg Previous Current % chg Previous Current % chg Ingredients & nutritionals 1, , % 1, , % 1, , % Dairy foods 1, , % 1, , % 1, , % Other % % % Intersegment revenue % % % Total revenue 3, , % 3, , % 3, , % Southern milk pool payments 1, , % 1, , % 1, , % Other cost of goods sold 1, , % 1, , % 1, , % Total cost of goods sold 2, , % 3, , % 3, , % Gross profit % % % Distribution expenses % % % Selling & marketing % % % Administrative expenses % % % Other expenses Total expenses % % % Associates % % % EBIT % % % Depreciation % % % EBITDA % % % Net financing cost % % % Profit before tax % % % Tax % % % NPAT % % % Minorities % % % Total NPAT % % % EPU/DPU (cents) % % % Source: Company data, Macquarie Research, March February

9 MGC has traded broadly with spot GDT commodity powder prices The MGC unit price has been relatively strongly correlated with milk powder price movements on the GlobalDairyTrade platform. We note that commodity products are less than 30% of mix by volume (liquid unadjusted) or ~37% of revenue share, and within this, around 40% of the ingredient mix is powder. MGC continues to migrate more of its powder volumes into high value dairy foods sachets. We remain of the view that dairy commodity prices are somewhere near a bottom (SMP/WMP 40% below 10 year averages) and are generally unsustainable to global farming systems. However headwinds to a significant recovery are likely to persist in the near term with weaker Chinese powder demand, Russia remaining out of the market and strong EU production. That said, dairy futures are starting to show some improvement in sentiment recently, with WMP prices of ~US$2,250/MT in the next six months. Fig 17 MGC share price vs. spot GDT WMP/SMP in USD Jul Aug Sep Oct Nov Dec Jan Feb-16 MGC (LHS) WMP (US$) SMP (US$) Weighted (US$) Source: IRESS, GDT, Macquarie Research, March 2016 Fig 18 MGC share price vs. spot GDT WMP/SMP in AUD Jul Aug Sep Oct Nov Dec Jan Feb-16 MGC (LHS) WMP (A$) SMP (A$) Weighted (A$) Source: IRESS, GDT, Macquarie Research, March February

10 29 February Fig 19 Global comparable companies MGC remains at a significant discount to local and international comps International PE EV/EBIT EV/EBITDA EPS CAGR Div yield EBITDA margin EBIT margin SG&A/sales Country FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17 FY14-17 FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17 Last reported FMCG Nestle SZ % 3.2% 3.2% 3.4% 16.4% 18.4% 19.2% 13.0% 14.8% 15.7% 34.2% Unilever GB % 2.9% 3.1% 3.3% 18.1% 17.3% 17.9% 15.3% 14.7% 15.2% Kraft Heinz US % 1.5% 3.1% 16.4% 24.0% 29.4% 14.8% 20.4% 26.4% Danone FR % 1.2% 1.3% 2.8% 7.2% 8.5% 17.1% 10.0% 11.6% 13.5% Mead Johnson US % 2.2% 2.4% 2.6% 24.9% 26.3% 27.4% 22.7% 23.7% 24.7% 40.3% Average % 1.9% 2.3% 3.0% 16.6% 18.9% 22.2% 15.2% 17.0% 19.1% 37.2% Consumer brands and processing Kerry IR % 0.6% 0.7% 0.7% 12.8% 13.5% 14.2% 10.9% 11.3% 11.8% China Mengniu CH % 1.3% 1.4% 1.6% 8.1% 8.5% 8.6% 5.3% 5.4% 5.6% 25.2% Meiji JN % 0.6% 0.9% 1.1% 8.5% 9.6% 10.2% 4.8% 6.0% 6.5% 30.3% China Foods HK % 0.7% 1.1% 3.5% 4.7% 5.1% 1.6% 2.9% 3.4% 24.1% Dairy Crest GB % 0.0% 0.0% 0.0% 6.3% 20.5% 21.0% 3.7% 15.3% 16.2% Average % 0.5% 0.6% 0.8% 7.5% 10.5% 10.9% 4.9% 7.4% 7.9% 26.5% Processing oriented Saputo CA % 1.3% 1.4% 1.5% 10.3% 10.7% 11.2% 8.7% 9.0% 9.5% 8.0% Bongrain FR 0.0% 0.0% 0.0% 5.6% 6.3% 6.5% 2.9% 3.4% 3.7% Dean Foods US % 1.5% 1.5% 1.7% 2.5% 4.4% 5.4% 0.6% 2.2% 3.3% 21.3% Parmalat IT % 0.8% 0.9% 0.9% 7.6% 7.3% 7.9% 5.2% 5.0% 5.6% 13.7% Average % 0.9% 1.0% 1.0% 6.5% 7.2% 7.7% 4.3% 4.9% 5.5% 14.3% Australia / NZ FMCG Coca-Cola Amatil AU % 5.0% 5.1% 5.4% 16.8% 18.2% 18.4% 11.5% 12.9% 13.1% 30.2% Average % 5.0% 5.1% 5.4% 16.8% 18.2% 18.4% 11.5% 12.9% 13.1% 30.2% Consumer brands and processing Fonterra* NZ % 5.5% 5.9% 9.1% 8.8% 6.2% 6.1% 11.9% Select Harvests AU % 10.8% 7.8% 6.4% 43.1% 26.5% 23.7% 38.4% 22.7% 18.8% 3.7% Synlait NZ % 0.0% 0.0% 0.0% 9.0% 10.9% 10.7% 5.9% 7.9% 8.2% 9.3% Tassal AU % 3.6% 4.1% 4.5% 31.3% 19.1% 19.3% 24.7% 14.7% 14.7% 6.4% Webster AU % 0.0% 1.1% 3.0% 27.4% 28.9% 36.4% 19.0% 22.5% 32.3% 40.6% Huon Ag AU % 1.1% 1.7% 20.4% 13.2% 21.0% 13.5% 5.4% 14.3% 11.4% Bega Cheese AU % 1.5% 1.7% 2.0% 3.8% 5.6% 6.2% 1.8% 3.7% 4.3% 9.8% Bellamy's Australia AU % 3.6% 4.1% 4.5% 31.3% 19.1% 19.3% 24.7% 14.7% 14.7% 18.8% Average % 2.5% 3.0% 3.4% 24.2% 17.9% 20.2% 18.4% 13.4% 16.2% 16.9% Summary International FMCG avg % 1.9% 2.3% 3.0% 16.6% 18.9% 22.2% 15.2% 17.0% 19.1% 37.2% International Consumer brands and processing avg % 0.5% 0.6% 0.8% 7.5% 10.5% 10.9% 4.9% 7.4% 7.9% 26.5% International Processing oriented avg % 0.9% 1.0% 1.0% 6.5% 7.2% 7.7% 4.3% 4.9% 5.5% 14.3% Australia / NZ FMCG avg % 5.0% 5.1% 5.4% 16.8% 18.2% 18.4% 11.5% 12.9% 13.1% 30.2% Australia / NZ Consumer brands and processing avg % 2.5% 3.0% 3.4% 24.2% 17.9% 20.2% 18.4% 13.4% 16.2% 16.9% TOTAL avg % 1.5% 1.7% 2.0% 13.7% 14.0% 15.7% 10.5% 10.8% 12.4% 21.3% Murray Goulburn AU % 8.2%...vs Intl FMCG -45% -43% -51% -31% -53% -51% -53% -67% -59%...vs Intl Consumer brands & processing -36% -44% -50% -43% -55% -56% -40% -57% -57%...vs Intl Process oriented -41% -39% -46% -44% -39% -35% -17% -41% -38%...vs Aus/NZ FMCG -3% -25% -39% 10% -25% -32% 6% -29% -33%...vs Aus/NZ Consumer brands & processing -68% -49% -30% -33% -48% -28% -35% -50% -33%...vs FSF -24% -9% -20% -30% -33% -37% -20% -35% -36%...vs All comps -56% -47% -45% -37% -51% -45% -39% -56% -49% Source: Bloomberg, FactSet, Macquarie Research, March 2016

11 Fig 20 MGC financial summary Murray Goulburn Group (Last price:$1.880) Interim Profit & Loss 1H15A 2H15A 1H16A 2H16E 1H17E 2H17E Annual Profit & Loss 2013A 2014A 2015A 2016E 2017E 2018E Revenue $m 1, , , , , ,845.2 Revenue $m 2, , , , , ,654.6 Southerm milk COGS $m Southerm milk COGS $m 1, , , , , ,595.7 Other COGS $m Other COGS $m , , , ,475.6 Gross Profit $m Gross Profit $m Total expenses $m Total expenses $m Share of profit/ (loss) of associates $m Share of profit/ (loss) of associates $m EBIT $m EBIT $m Depreciation $m Depreciation $m EBITDA $m EBITDA $m Net finance costs $m Net finance costs $m Profit before tax $m Profit before tax $m Tax $m Tax $m NPAT $m NPAT $m Minorities $m Minorities $m NPAT attributable to share/unitholders $m NPAT attributable to share/unitholders $m Distributable milk pool $m Distributable milk pool $m 1, , , , , ,751.8 Actual weighted avg. Southern FMP $/kgms Actual weighted avg. Southern FMP $/kgms Divisional breakdown 1H15A 2H15A 1H16A 2H16E 1H17E 2H17E Divisional breakdown 2013A 2014A 2015A 2016E 2017E 2018E Southern milk collection m lt 1,798 1,377 1,811 1,332 1,817 1,381 Southern milk collection m lt 2,990 3,119 3,175 3,143 3,198 3,262 Non-Southern milk collection m lt Non-Southern milk collection m lt Total milk collection m lt 2,043 1,537 2,030 1,476 2,040 1,527 Total milk collection m lt 3,120 3,392 3,580 3,506 3,567 3,639 Ingredients & nutritionals volume 000MT Ingredients & nutritionals volume 000MT Dairy Foods volume 000MT Dairy Foods volume 000MT Total volume 000MT Total volume 000MT ,087 1,134 1,165 WMP (GDT avg.) US$/MT 2,651 2,610 2,217 1,890 2,250 2,500 WMP (GDT avg.) US$/MT 3,690 4,653 2,627 2,112 2,389 2,908 SMP (GDT avg.) US$/MT 2,765 2,350 1,861 1,762 2,000 2,222 SMP (GDT avg.) US$/MT 3,622 4,410 2,522 1,874 2,124 2,585 Butter (EU avg.) US$/MT 4,172 3,432 3,244 3,000 3,075 3,152 Butter (EU avg.) US$/MT 3,635 3,974 3,738 3,226 3,118 3,277 Cheese (EU avg.) US$/MT 4,659 3,580 3,316 3,023 3,099 3,176 Cheese (EU avg.) US$/MT 3,725 4,487 4,027 3,272 3,142 3,302 AUD/USD average c AUD/USD average c Ingredients average revenue A$/MT 4,187 3,710 3,401 3,417 3,985 4,237 Ingredients average revenue A$/MT 3,415 4,604 3,906 3,373 4,125 4,623 Dairy foods average revenue A$/MT 1,778 1,863 2,009 2,009 1,994 2,131 Dairy foods average revenue A$/MT 1,805 1,940 1,822 1,910 2,066 2,188 Ingredients & nutritionals revenue $m Ingredients & nutritionals revenue $m 1, , , , , ,447.6 Dairy Foods revenue $m Dairy Foods revenue $m , , , ,863.1 Other revenue $m Other revenue $m Intersegment revenue $m Intersegment revenue $m Total revenue $m 1, , , , , ,845.2 Total revenue $m 2, , , , , ,654.4 Ingredients & nutritionals EBIT $m Ingredients & nutritionals EBIT $m Dairy Foods EBIT $m Dairy Foods EBIT $m Other EBIT $m Other EBIT $m Total EBIT $m Total EBIT $m Corporate costs & associates $m Corporate costs & associates $m Reported EBIT $m Reported EBIT $m Discounted Cashflow Valuation FY16 FY17 Ratios & margins 2013A 2014A 2015A 2016E 2017E 2018E Equity value $m Gross margin % 13.9% 15.8% 15.1% 15.1% 15.4% 16.0% Implied P/E x 22.4x 16.7x EBITDA margin % 5.0% 6.9% 6.0% 5.5% 6.5% 7.5% Implied EV/EBITDA x 9.9x 8.1x EBIT margin % 2.8% 5.1% 4.2% 3.7% 4.3% 5.3% Implied EV/EBIT x 14.9x 12.2x Net profit margin % 1.9% 3.4% 2.4% 2.1% 2.5% 3.0% Implied dividend yield % 4.5% 6.0% Earnings per unit c Implied P/E x 26.3x 10.8x 14.2x 16.2x 12.1x 9.5x DCF assumptions Dividend per unit c N/A N/A N/A Terminal year FY25 Asset beta 0.85 Dividend yield % N/A N/A N/A 6.2% 8.2% 10.5% TGR 2.00% Target D/D+E 40% Net debt % RFR 3.75% Cost of debt 6.25% ND/ND+E % 43% 41% 48% 19% 29% 35% ERP 5.00% WACC 8.50% ND/E % 77% 70% 94% 24% 42% 53% Cashflow Analysis 2016E 2017E 2018E Balance Sheet 2013A St 2014A St 2015A St 2016E 2017E 2018E EBITDA $m Cash $m Net interest expense $m Receivables $m Tax paid/(credit) $m Inventories $m Other $m PP&E $m , ,219.1 Gross cashflow $m Intangibles $m Changes in working capital $m Other assets $m Operating cashflow $m Total Assets $m 1, , , , , ,287.6 Capital expenditure $m Current payables $m Proceeds from asset sales $m Short term debt $m Other $m Long term debt $m Investing cashflow $m Other liabilities $m Issue of equity $m Total Liabilities $m , , ,154.9 Dividends paid $m Net Assets $m , , ,132.7 Net change in borrowings $m Issued capital $m Other $m Other $m Financing cashflow $m Parent equity $m , , ,132.7 Minorities $m Net change in cash $m Total equity $m , , ,132.7 Source: Company data, Macquarie Research, March February

12 Fundamentals Macquarie Wealth Management Macquarie Quant View The quant model currently holds a neutral view on. The strongest style exposure is Valuations, indicating this stock is under-priced in the market relative to its peers. The weakest style exposure is Profitability, indicating this stock is not efficiently converting its investments to earnings as proxied by ratios such as ROE, ROA etc. 310/487 Global rank in Food Beverage & Tobacco % of BUY recommendations 67% (2/3) Number of Price Target downgrades 2 Number of Price Target upgrades 0 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 Beverage & Tobacco) 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. Tassal Group 0.8 Tassal Group Costa Group Holdings 0.7 Costa Group Holdings Freedom Foods Group 0.7 Freedom Foods Group Fonterra Shareholders' Fu 0.5 Fonterra Shareholders' Fu Ridley Corporation 0.5 Ridley Corporation 0.1 Webster -1.5 Webster % -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. Tassal Group Costa Group Holdings Freedom Foods Group Fonterra Shareholders' Fu Ridley Corporation Webster NaN Tassal Group Costa Group Holdings Freedom Foods Group Fonterra Shareholders' Fu Ridley Corporation Webster % -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return 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 NaN NaN Percentile relative to sector(/487) Percentile relative to market(/394) 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) 29 February

13 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 31 December 2015 AU/NZ Asia RSA USA CA EUR Outperform 50.68% 61.04% 53.16% 47.90% 65.22% 43.59% (for global coverage by Macquarie, 5.33% of stocks followed are investment banking clients) Neutral 31.51% 24.66% 34.18% 47.70% 29.71% 34.62% (for global coverage by Macquarie, 5.02% of stocks followed are investment banking clients) Underperform 17.81% 14.30% 12.66% 4.39% 5.07% 21.79% (for global coverage by Macquarie, 3.78% of stocks followed are investment banking clients) MGC AU vs Small Ordinaries, & rec history (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, February month target price methodology MGC AU: A$2.60 based on a DCF methodology Company-specific disclosures: MGC AU: MACQUARIE EQUITIES LIMITED or one of its affiliates managed or co-managed a public offering of securities of in the past 12 months, for which it received compensation. MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates managed or co-managed a public offering of securities of in the past 12 months, for which it received compensation. Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of 's equity securities. Important disclosure information regarding the subject companies covered in this report is available at Date Stock Code (BBG code) Recommendation Target Price 01-Sep-2015 MGC AU Outperform A$2.70 Target price risk disclosures: MGC 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. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business 29 February

14 in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act Apart from Macquarie Bank Limited ABN (MBL), any MGL subsidiary noted in this research,, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return and delete the document. We do not guarantee the integrity of any s or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at Macquarie Group 29 February