MERCATOR D.D.

Transcription

1 7 st September 2011 MERCATOR D.D. Retail grocer LJSE ticker: MELR Bloomberg: MELR SV 12 months stock performance in EUR 200 Target price: 146 EUR Previous target price: 151 EUR, HOLD ( ) Recommendation: HOLD Stock data as of 7 st September 2011 Market price (EUR) Market Cap (EUR) 572.7m 52 week range (EUR) No. of Shares 3.8m Avg. daily trade vol., EUR(k) 90.8 Free float 95% Average daily % of stock traded 0.015% Dividend yield 5.3% Price performance Multiples: TTM 2011F 3 months 12 months P/E price change in % -8.6% 11.0% EV/Sales SBI TOP index change in % -13.3% -18.2% EV/EBITDA relative to SBI TOP in % 5.4% 35.7% EV/EBIT Key figures (According to International Accounting Standards) Consolidated data in EURm Income statement: Balance sheet: million FY2009 FY2010 FY2011 FY2012 million FY2009 FY2010 TTM Sales 2, , , ,093.7 Investments Growth yoy -2.4% 5.2% 1.7% 9.3% Cash EBITDA Debt 1, , ,163.3 Margin 6.3% 6.2% 6.6% 6.5% Net debt 1, , , EBIT Equity Margin 2.7% 3.4% 3.6% 3.5% Assets 2, , ,661.7 Net income Fin. D/E 130.5% 134.1% 144.0% 100 Growth -48.0% 43.1% 22.2% 8.0% Fin. D/A 42.4% 41.0% 43.7% Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 EPS N.Debt/EBITDA MELR SBI TOP Investment Thesis: The largest retailer on the local market. Regional expansion. Strong bargaining power against suppliers. Real estate potential. Takeover speculation. ALTA Invest, investicijske storitve, d.d. Železna cesta 18 SI-1000 Ljubljana Slovenia phone: invest@alta.si Head of Research: Sašo Stanovnik saso.stanovnik@alta.si Head of Trading: Igor Taljat igor.taljat@alta.si Regional retailer with significant domestic market share: Mercator is the largest retail chain in the SE European region, the leading retail chain in Slovenia and has a strong presence in the markets of Serbia, Croatia, BIH and Montenegro. In 2010 Mercator had around 33 to 34% market share in Slovenia which is decreasing on behalf of expansion abroad. By acquiring trade divisions in 2010 Mercator Group has increased its market share in Montenegro from 4% to 20%. It has also more than 8% market share in Serbia, 9% market share in Croatia and a 4% market share in BIH. In 2010 Mercator also entered two new markets, namely Albania and Bulgaria. Mercator has 1% market share in 40% Albania and less than 0.5% market 35% share in Bulgaria. The Group is therefore an important regional 30% retailer. In the first six months of 25% 2011 the company generated 20% 59.0% of its revenues in Slovenia, 15% % in current foreign markets 10% 2012 (Serbia, Croatia, BIH and 5% Montenegro) and 0.5% in new 0% foreign markets (Albania and Bulgaria). Mercator has 996 stores in Slovenia, 529 stores in current foreign markets and 10 stores in new foreign markets. Source: Mercator plans Expansion: After the acquisitions of the company Getro in Croatia, Panto Group in Montenegro and retail activities of Coka Group in Serbia in 2010, Mercator managed to expand further into the South-eastern Europe also in the first half of this year. Mercator took over the operations and employees of the company Familija Marketi in Belgrade and acquired on a long-term operating lease 27 trade facilities of the company Robne Kuče Beograd, with a total area of over 22 thousand square meters. In 1H11 Meractor also signed a strategic alliance agreement with the company Hram Holding according to which Mercator will become the owner of 100% of the company En Plus (oil retail). Further expansion and strategic alliances are expected.

2 Growth Prospects in the Balkan Region: All of the countries where Mercator is present were facing sluggish economic recovery, but at the same time, as the consequence of the global economic crisis in 2009 and 2010, this had a negative impact on consumers purchasing power and their payment discipline. Also, Mercator Capital expenditure in 1H11 Group s debt levels limited its speed of expansion. Nevertheless, Mercator Group 5,0% 2,5% managed to invest EUR 53.9m abroad and EUR 20,5% 13.8m in Slovenia in the first half of this year. We believe Mercator will continue to improve its market share on foreign markets while slightly decreasing its market strength in Slovenia. As mentioned before, macroeconomic situation in the Balkan countries is currently weak, but when it improves, we can expect continuation of an 12,7% Slovenia Serbia Croatia Montenegro Other above average growth as Mercator generates a 59,3% third of its revenues abroad. Multi-level brand strategy: By expanding its retail network to SE European countries, Mercator is entering markets of different economic maturity and efficiency. In order to best adapt to the needs of the customers and to improve the quality goods at reasonable prices, a multi-level brand strategy was developed at Mercator: Premium (above-standard sales program), Value (emphasis on priceto-quality ratio) and Economy market position (well-priced and cost-efficient format). Selling through different store formats allows Mercator to adapt as much as possible to the needs and desires of the customers in all markets of Mercator's operations. Supplementary trade service for consumers: The strategic alliance agreement, under which Mercator is to become an owner of 100% stake of the company En Plus has entered into force. Following the example of other European retailers Mercator is extending the offer of supplementary trade services with sale of petrochemicals. The company En Plus is active in trade of petrochemicals through a network of automatic self-service petrol stations. The self-service petrol stations are currently available at 18 different locations across Slovenia. According to the expectations of the company, this strategic alliance will improve the recognition, distinctiveness, and attractiveness of the shopping centres, will provide a comprehensive offer for the final consumer at a single location and also enable further extension of the petrol stations network on the existing locations of Mercator's bigger shopping centres in Slovenia, Croatia, and Serbia. Real Estate monetization valuation. Monetization process/real Estate Potential: Compared to its European peers, Mercator has an extremely low asset turnover which is a result of its excessive property ownership. At the end of last year, Mercator owned approximately 83% of its sales area property amounting to 1.5m m 2, which they had valued at EUR 1.7 billion (37% land, 63% buildings). In the first six months of this year the Group acquired 31 thousand m 2 of new gross facilities which includes real estate owned by Mercator and operating leases. In 1H % of all new facilities were acquired through operating leases and 28.4% was acquired through ownership. Mercator has plans to monetize the real estate potential. The company already prepared the tender documentation for selection of the consultant for the project of monetization and has sent this documentation to leading international real estate experts and investment bankers. In the next months Mercator will analyze the bids submitted, select the most appropriate service provider, compose an appropriate real estate portfolio and offer it to international investors. Consistently with the medium term goals Mercator will select the investors and carry out the sale and leaseback of real estate in Slovenia and in Croatia in the years 2012 and 2013, in the planned value of EUR 500 million in each of these two years. It has been decided that the received funds will be used for debt repayment. Such actions would also significantly improve Mercator s ROE and could have a positive impact on the share price. On the other hand the Slovenian real-estate market is problematic and it might take a while before Mercator will be able to monetize realestate. Also the end effect depends on different variables. The impact expected from the process is currently not included in the valuation assumptions. We believe that the monetization could bring additional value for Mercator, but how much depends the length of the process, % of total real estate sold, the yield on real estate and rental fees.

3 Anyway the sale and lease back would definitely lower the debt ratios and therefore improve risk profile of the company and with it lowering cost of capital and with it improve valuation of the company. Number of retail units given the geographic/product segmentation on 30 June 2011: No. of units Slovenia Croatia BIH Serbia Montenegro A lbania Bulgaria Hy permarkets Supermarkets Neighbour stores C omfort stores Getro market C ash & C arry Hard discount stores Total food programe Home and furniture program Home program Furniture program Clothing program and drugstore Clothing program Drugstore and perfumeries Intersport Restaurants M Holiday s Total other programes Franchise stores T otal with franchise stores Square meters of gross area owned or leased on 30 June 2011: Gross retail area Used for own operations Leased out Total O wned retail area 842, ,250 1,027,137 Leased retail area 338,029 14, ,565 Total retail area 1180, ,786 1,379,702 Owned warehouse capacity 147, ,214 Leased warehouse capacity 22, ,329 Total w arehouse capacity 169, ,543 O wned commercial facilities 25,432 2,283 27,715 Leased commercial facilities 4, ,911 Total commercial facilities 30,272 2,354 32,626 Gross area under management 1380, ,140 1,581,872 - of w hich owned 1,015, ,533 1,202,067 - of w hich leased 365,198 14, ,805 Shareholder s structure: Both Pivovarna Laško and Infond Holding have lost their majority influence in Mercator as they have put their shares as collateral to obtain loans at several Slovenian banks which they weren t able to repay. Hence, eight Slovenian banks became official owners through repossessing shares of Infond Holding (NLB, Banka Celje, Gorenjska Banka, NKBM, Abanka, Banka Koper, Hypo Bank) and Istrabenz (Unicredit). Slovenian banks altogether hold 36% of Mercator Group. In 2010 three Slovenian banks, namely NKBM, NLB and Abanka, which hold a 19% share of Mercator, signed an agreement not to sell their stakes until September 2012 in exchange for dividend increases of EUR 0.8 per share until The agreement arguably provides Mercator with a more stable shareholder structure. In our opinion, the agreement is questionable due to bank s strict regulatory requirements which might force Slovenian banks to sell their non-core investments before Mercator Pika Loyalty Program Maintaining its Margins: Since deteriorating consumer sentiment had a strong impact on personal consumption in the recent financial crisis, there has also been a significant pressure on Mercator s margins from the lowcost producers, such as Lidl and Hofer. These BIH Croatia low cost producers have been gaining market Serbia share in Slovenia lately, so Mercator has Slovenia focused on lowering product prices and is trying to prevent customers from switching their retailer. 0 Lowering prices on key products had on one 1H10 1H11 hand boosted sales, but negatively impacted margins. However, focusing on its own private brands (which provide higher margins) will allow Mercator to obtain higher margins also in the long run. Additional proof that Mercator customers are not switching their consumption habits is 5,24% Top 5 banks in Mercator shareholder's structure 3,80% 2,75% 8,01% 10,75% NLB d.d. UNICREDIT BANKA SLOVENIJA d.d. NOVA KBM d.d. GB d.d., Kranj ABANKA d.d.

4 its Pika loyalty program which has increased the number of users to 1.7m in the first six months of this year. In this period the amount of new Pika card users grew for 107,648. Price investments: In order to retain the purchasing power or the consumers in times of economic hardship, Mercator Group locked the prices of over 300 private label products and cut the prices of over 2,000 products in the first half of this year. Price investments amounted to nearly EUR 12 million. With this the company effectively allocated a part of its profit margin for offsetting the pressure on prices, introduced by higher prices of strategic raw materials. According to the company, lower prices will improve competitiveness of pricing and bring Mercator closer to the consumers who cut the value of their spending during the crisis. Strong Bargaining Power against Suppliers: As the largest Slovenian retail company, Mercator has a good bargaining position in relation to suppliers. This will help the company maintain its margins. Previous takeover bids: For Pivovarna Laško stake private equity funds offered around 170 to 180 EUR for Mercator stake, while Agrokor bided north of EUR 220. The macro situation is changing but these prices nevertheless imply the price of Mercator could increase in case of a takeover. Especially Agrokor could offer a big premium as he has best position to create synergies and due to some other specific reasons. Risks: Deteriorating environment continues: Last year was also marked by an unfavourable economic environment with a higher propensity to save and stagnant purchasing power. In the first half of this year consumer confidence remained low. Compared to last year, even higher share of consumers felt the impact of the economic crisis on everyday life, as this figure nearly reached three quarter of the population (73%). Economic trends and uncertainties have influenced shopping habits which have leaned towards rational spending on products and services. Consumers have started to purchase basic goods rationally which was reflected in lower consumption of food and drinks. However, Mercator still expects that total retail trade in products for daily and home use will increase by an average of about 3% per annum in the period. The concentration and modernization of trade operations with an emphasis on the development of new store formats is expected to continue even though long term financing sources will still remain restricted. High Debt Burden: Net debt to EBITDA ratio is still high and problematic. Due to its relatively high debt burden, Mercator financial expenses are high and difficult to maintain. Mercator Group will therefore have to grow thorough internally generated funds which will slow down its growth. The Balkan Risk: Among Balkan countries our concerns are highest for Croatia. The reason is its large amount of external debt. To manage this risk Mercator is actively monitoring the macroeconomic background, the changes in the exchange rates and reducing the risk by natural hedging. Nevertheless, currency risk remains an important issue, which could negatively impact the Group s bottom-line. Dividends increase: As already mentioned above, Mercator Group has formed an agreement with three of its shareholders NKBM, NLB and Abanka. Under the agreement the three Slovenian Banks promised not to sell their shares in Mercator in exchange for future dividend increases. Increases in dividends should discipline management and support cost reduction measures, but might, in our opinion, also pose a threat for Mercator s long term net income growth. In addition, current high involvement of banks in Mercator s ownership structure can lead to lender/owners conflict of interest. Increased Competition: Because of the deterioration in personal consumption the retail sector is faced with changes in consumer behaviour. There are increasing numbers of discounters present in Slovenia that threaten Mercator s operating results. In the following years, margins might come under pressure if the company will try to retain its customers. Also as already stated many Mercator actions (price investments) will boost sales but negatively influences margins. Real estate impairment: Mercator owns approximately 83% of its sales property. On one hand a sale-and-lease back of real estate could enhance the company s value. On the other hand the real estate could pose a problem to the bottom line if write-offs become necessary. The real estate sector of the Slovenian and other foreign markets is still highly problematic.

5 1H11 Results and Recent news Net sales in line, net profit below our expectations million 1H10 1H11 YoY 2Q10 1Q11 2Q11 QoQ YoY Sales 1.334, ,4 6,1% 697,7 675,5 740,9 9,7% 6,2% EBITDA 91,8 87,7-4,5% 46,1 46,4 41,3-11,0% -10,5% Margin 6,9% 6,2% 6,6% 6,9% 5,6% EBIT 53,1 47,6-10,3% 28,5 25,2 22,4-11,0% -21,3% Margin 4,0% 3,4% 4,1% 3,7% 3,0% Net income 17,7 18,5 4,9% 11,0 10,2 8,3-18,1% -24,2% Margin 1,3% 1,3% 1,6% 1,5% 1,1% Revenues of the Group increased by 6.1%. Revenues in foreign markets boosted by 18.3%. Net profit of the Group increased by 4.9%. In the first six months of this year Mercator Group generated revenues in the amount of EUR 1,416m, which is 6,1% more than in the same period last year, when they amounted to EUR 1,335m. Achieved revenues represent 48.1% of the annual plan for 2011 and were in line with our expectations (EUR 1,415m) ,3 Sales revenues (in mio EUR) Despite a harsh macroeconomic situation 0 and a drop in purchasing power in all markets, the company has achieved revenue 1H07 1H08 1H09 1H10 1H11 growth in most markets. In Slovenia revenues from sale of goods, materials and products increased by 1.1%. Revenues in foreign markets were boosted by 18.3%, mainly due to strategic alliances, development of retail network and marketing activities. The largest share of revenues (85.9%) the Group achieved with products for everyday use. In the first half of this year cost of sales increased over the same period last year, namely EUR 1,323m. Net operating profit in the first six months of this year totalled EUR 47.6m, which represent a decrease compared to the same Net profit (in mio EUR) period last year, when it stood at EUR 53.1m. Net profit amounted to EUR 18.5m, which represent an increase of 4.9% compared to the same period last year. The realized net income represents 45.7% of the annual plan for the year 2011 and is below our expectations. 22,3 11,3 17, ,5 In the first half of this year financial liabilities 1H07 1H08 1H09 1H10 1H11 rose by 8.7% compared to the same period last year. At the end of the second quarter Mercator Group net financial debt amounted to EUR 1,075m, which is 13.3% more than at the end of The increase is a result of YoY dynamics in trade industry. 0 EUR 67.8m invested in retail network. During the first six months of 2011 the Group invested EUR 67.8m in retail network development. With this the company acquired more than 31 thousand square meters of new gross area, on which nearly half in Serbia. 71.6% of the area Mercator acquired by rental business and 28.4% by buying or building their own Albania Bulgaria Montenegro BIH Croatia Serbia Slovenia Planned net profit for this year is EUR 40.5m. In this year Mercator Group plans to achieve revenues in the amount of EUR 2,944.9m and net profit of EUR 40.5m. 0 1H10 1H11 Mercator began to pay dividends in the amount of EUR Recent News In accordance with the decision of the Shareholders Meeting, Mercator began to pay dividends in the amount of EUR 8.00 per share, which is 11% more than last year. The distributable profit for 2010 amounted to EUR 40.4m. Despite still harsh economic conditions, Mercator follows the outlined dividend policy. According to the expectations of the company, higher dividends will increase the attraction of shares to investors, which will contribute to the stability of the ownership structure.

6 Relative valuation: EV/S EV/EBITDA EV/EBIT Company name TTM 2011F 2012F TTM 2011F 2012F TTM 2011F 2012F Tesco Carrefour Metro Sainsbury Delhaize Group WM Morrison Supermarkets Kesko Konzum 0.4 n.a. n.a. 4.5 n.a. n.a. 6.2 n.a. n.a. X Mercator Average Mercator trades at premium to its peers. P/S P/E P/B Company name TTM 2011F 2012F TTM 2011F 2012F TTM 2011F 2012F Tesco Carrefour Metro Sainsbury Delhaize Group WM Morrison Supermarkets Kesko Konzum 0.4 n.a. n.a n.a. n.a. 2.1 n.a. n.a. X Mercator Average Company name EBITDA margin TTM EBIT margin (%) Profit margin (%) ROE TTM ROA TTM Assets turnover Div. yield (%) Tesco 7.9% 5.6% 4.4% 16.1% 5.6% Carrefour 2.3% 2.0% 0.5% 4.3% 0.8% Metro 5.8% 3.3% 1.3% 14.6% 2.8% Sainsbury 5.8% 3.5% 3.0% 11.9% 5.6% Delhaize Group 7.4% 4.7% 2.8% 11.9% 5.5% WM Morrison Supermarkets 7.4% 5.5% 3.8% 11.7% 6.9% Kesko 4.9% 3.6% 2.4% 10.5% 5.3% Konzum 7.8% 5.7% 3.3% 19.8% 5.0% X5 7.2% 4.5% 2.4% 26.3% 3.7% Mercator 5.9% 3.1% 1.1% 3.9% 1.2% Average 6.3% 4.3% 2.7% 14.1% 4.6% n.a. Assets/ Equity Net debt to EBITDA In order to get a market insight we compared Mercator to its peers from the industry. The comparison shows that Mercator share price is currently trading at a premium to its peers, except when the P/B and P/S multiples are used. As Mercator has significant debt on the balance sheet, EV multiples are difficult to use. This high debt burden is also evident in high net debt to EBITDA ratio but it should also be considered that Mercator has significant assets in the form of real-estate. Also due to this P/B shows significant undervaluation, but its use is inappropriate due to lower ROE. Peer analysis implies a target price of 149 EUR. When Mercator is compared to its western peers all multiples show a premium which is a result of the difference in their financial structure and growth rates. When compared to its eastern peers, the premium is lower. We believe that differences arise from different debt structures and significant decreases in the growth rates of major Eastern European retailers. Our relative valuation model is based on P/S and P/E multiples (trailing and forward) which give an approximate value of Mercator at EUR 149 per share. 20,0 18,0 16,0 14,0 12,0 10,0 8,0 6,0 4,0 2,0 0,0 EV/EBITDA 60,0 50,0 40,0 30,0 20,0 10,0 P/E 0,0

7 Outlook: Challenging environment will pressure growth. In the first half of 2011, Mercator expects the business environment to be equally or more challenging than in the 2010, meaning consumption will still be under downward pressure. Mercator also plans to start executing its monetization process first by choosing the right monetization method. Funds from the monetization will be intended for further development of the Group and repayment of debt. In the last investment strategy, Mercator presented its sales forecasts for the next 5 years. By the end of this year, Mercator plans to generate approximately EUR 3bn of sales. According to the company, by the end of 2015 sales will stand at EUR 4.2bn. We can expect slight margin expansion. Concerning margins, we expect Mercator to maintain long term EBITDA margin around 7.0%, which is slightly lower than margins reached in 2008 and in line with its peers. In 2011 Mercator plans to invest EUR form 125m to 155m in property, plant and equipment. In coming years we forecast CAPEX to grow to approximately EUR 200m and then fall in line with amortization cost. Year Sales 2, , , , , , , , , ,002.3 Sales growth 18.4% 10.8% -2.4% 5.2% 1.7% 9.3% 10.5% 8.9% 7.5% EBITDA EBITDA margin 5.9% 7.0% 7.2% 6.4% 6.2% 6.6% 6.5% 6.9% 7.1% 7.1% EBIT EBIT margin 2.5% 3.7% 3.7% 2.7% 3.4% 3.6% 3.5% 3.7% 3.9% 3.9% EBT EBT margin 0.0% 2.6% 1.8% 1.0% 1.5% 1.6% 1.6% 1.9% 2.3% 2.4% Net income Net income growth % -24.2% -47.8% 43.2% 22.2% 8.0% 32.1% 27.4% 12.4% Year Fixed assets 1, , , , , , , , , ,316.9 PPE 1, , , , , , , , , ,122.4 Intangible assets LT-investments Other fixed assets Current assets Inventories Trade receivables Cash ST-investments Other current assets Total Assets 1, , , , , , , , , ,116.8 Debt , , , , , , , ,085.2 ST-debt LT-debt Provisions Trade payables Other liabilities Minority intrest Equity Year Net profit margin -0.3% 2.2% 1.5% 0.8% 1.1% 1.3% 1.3% 1.6% 1.8% 1.9% Asset turnover ROA -0.4% 2.6% 1.6% 0.9% 1.2% 1.4% 1.5% 1.9% 2.3% 2.4% Equity multiplier ROE -1.2% 7.8% 5.0% 2.6% 3.8% 4.6% 4.9% 6.4% 7.7% 8.1% CAPEX/Depreciation 207.0% 204.2% 318.0% 163.9% 147.9% 141.3% 142.2% 138.8% 152.9% 156.5% Financial debt/equity Financial debt/assets Net debt/ebitda Working capital/ Sales 4.1% 1.5% 1.8% -0.9% -2.4% -2.8% -4.7% -4.5% -4.5% -4.5% ROIC 0.0% 5.0% 4.4% 3.3% 3.8% 4.3% 4.6% 5.3% 5.9% 6.3%

8 Discounted Cash Flow Valuation: Year TV NOPLAT 82,3 86,7 100,1 115,7 126,4 128,5 133,9 141,4 149,3 157,7 170,7 NOPLAT growth 15,6% 5,3% 15,5% 15,6% 9,2% 1,7% 4,2% 5,6% 5,6% 5,6% 8,3% Depreciation 84,9 92,8 109,4 119,2 128,1 135,2 142,8 150,8 159,3 168,2 160,0 Depretiation/Sales 3,0% 3,0% 3,2% 3,2% 3,2% 3,2% 3,2% 3,2% 3,2% 3,2% 3,0% CAPEX 120,0 132,0 151,8 182,2 200,4 200,4 200,4 200,4 200,4 200,4 164,3 CAPEX/Sales 4,2% 4,3% 4,4% 4,9% 5,0% 4,7% 4,5% 4,3% 4,0% 3,8% 3,1% Change in net working capital -10,0-65,9-10,0-13,8-12,5 53,3-7,1-7,5-7,9-8,4-2,4 NWC/Sales -2,8% -4,7% -4,5% -4,5% -4,5% -3,0% -3,0% -3,0% -3,0% -3,0% -3,0% FCF to firm 57,2 113,4 67,7 66,5 66,6 10,0 83,4 99,3 116,1 133,8 168,8 FCF valuation Value in forecasting period 522 Continuing value Total enterprise value Net debt Equity value 538 No. of shares (in mio) 3,8 Equity value per share 143 Since conditions on the market, especially the risk free rate and equity risk premium, have changed our DCF valuation was revised downwards, still indicating a slight upside potential to current price. Our revised target price is EUR 143 per share. Perpetuity growth rate used was 1.5% since we believe Mercator will be able to perform in line with GDP growth, especially by expanding to the Balkan region. On the other hand we also applied a slightly higher country risk premium due to the same reason. It is important to note that the time span for stock value to reach DCF level is quite uncertain, since there are several unresolved issues concerning company s shareholder structure (banks selling their stakes), which might have a strong impact on stock s movement when they materialize. Sensitivity analysis: EBITDA margin WACC 2011 TV Tax rate 20,0% 20,0% Cost of debt 4,3% 4,3% Beta 2,7 2,5 Cost of equity 18,7% 17,1% Debt/Equity 213,3% 188,7% WACC 8,3% 8,1% Perpetuity growth rate 1,5% Sales growth % 4.6% 5.1% 5.6% 6.1% 6.6% 7.1% 6.4% % % % % % % Perpetuity EBITDA margin WACC Perpetuity Growth 0.6% 0.9% 1.2% 1.5% 1.8% 2.1% 2.4% 6.4% % % % % % % Perpetuity Growth 0.6% 0.9% 1.2% 1.5% 1.8% 2.1% 2.4% 6.6% % % % % % % Implied multiples: EV/EBITDA Current price 9,6 8,8 8,2 Target price 9,7 9,0 8,4 Terminal 6,8 Final target price calculation. P/E Current price 16,8 13,8 12,8 Target price 17,7 14,5 13,4 Terminal 0,3 Our final target price EUR 146 per share comprises of both DCF and relative valuation.

9 Top5 shareholders: Pivovarna Union d.d. 12.3% NLB d.d. 10.8% Pivovarna Laško d.d. 8.4% Unicredit Slovenia d.d. 8.0% NKBM d.d. 5.2% Brief Company profile Mercator is by far the largest retail grocer in Slovenia. Mercator is also the largest retail merchant in the region, selling mostly groceries and other consumer products. Over the past few years, it grew through takeovers of competitors and by opening new hypermarkets in major cities in Slovenia and abroad (at the same time, it was selling off its smaller and unprofitable stores). This growth is in-line with the company s strategy to become one of the leading retail chains in the markets of former Yugoslavia. In the first six months of this year, Mercator operated with total 996 stores in Slovenia, with 251 units in Croatia, in Serbia with 140, in BiH with 50, in Montenegro with 88 stores, in Bulgaria with 4 units and in Albania with 6 stores. Altogether Mercator Group has 1,535 retail units with gross sales area outreaching 1,581,872 square meters. Beside Slovenia, Mercator operates on six foreign markets. Slovenia is still its most important market where it generates 60.9% of revenue. Mercator s Slovenian market share (fast-moving consumer goods) at the end of 2010 was about 33-34%. 14,4% Group sales by region (1H11) 7,9% Group sales by segment (1H11) 7,2% 6,9% 18,7% 59,0% 85,9% Slovenia Serbia Croatia Other Fast moving consumer goods Home program Other (Modiana and Intersport) Disclaimer GENERAL DISCLOSURE The analysis department of ALTA Invest, investicijske storitve, d.d. (eng. ALTA Invest, investment services, Inc.), is, in order to avoid and deter conflict of interests, a separate organizational part of the company. It is independent in its decisions about selecting, monitoring and updating its investment recommendations of an individual issuer. 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They also do not have any important financial interest with the issuer of those instruments, which might arise from the cross ownership, financial instruments market making, providing the activity of public offerings for financial instruments or any other special services connected to this instruments in the last 12 months, as well as interests from the purchases of this document, the remuneration of the employees and/or other participating subjects, especially financial analysts, connected with turnover of tangible financial instruments or with other interest relations, eg. any other agreements, which might refer to providing services with financial instruments. ALTA Invest, investicijske storitve, d.d. also declares, that there are neither no conflicts of interests of the stated individuals/entities connected with financial instruments, which are subject of this document, nor any conflicts of interests concerning the issuer of the instrument. Limited liability The document was prepared by ALTA Invest, investicijske storitve, d.d. (eng. ALTA Invest, investment services, Inc.), Železna cesta 18, Ljubljana. ALTA Invest, investicijske storitve, d.d. is a member of Ljubljana stock exchange and it is supervised by Slovenian security and exchange commission, Poljanski nasip 6, Ljubljana. The document is, according to the 378. article of The Securities Market Act, treated as an investment recommendation. The recommendation is prepared solely for better understanding of financial instruments and performance of the capital markets and not intended for specific audience. Therefore it is not to be constructed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instrument. Additionally, the recommendation also doesn't provide any personal investment services or advice, since it does not take into consideration any specific investment objectives, financial situation, investors knowledge, investors experience or particular needs of any specific person, which has by any chance been confronted with the content of this document or its part. The document was prepared for the purposes of ALTA Invest, investicijske storitve, d.d. clients and may not be a subject of reproduction, distribution or publishing without ALTA Invest, investicijske storitve, d.d. explicit permission. Also any kind of mediation, variation or summarizing of this document is allowed only with prior explicit written consent of ALTA Invest, investicijske storitve, d.d. With the acceptation and examination of this document, the reader is obligated that he/she will not disclose the contents, opinions, conclusions or any other data arising from this document as well as all investment recommendations, evaluations, forecasts and target price, without prior explicit permission of ALTA Invest, investicijske storitve, d.d. Any information in this document is based on data obtained from public sources, printed media, annual and semi-annual reports, Bloomberg L.P., electronic media and other sources, for which ALTA Invest, investicijske storitve, d.d. consider to be reliable on the date of publication, or specially

10 indicates its doubts concerning its reliability. However, no representations or guarantees are made by ALTA Invest, investicijske storitve, d.d. with regard to the accuracy or completeness of the data. Facts, on which the document is grounded, are clearly differentiated from the interpretations, assessments, opinions and other information, which are not facts. Projections, forecasts and target prices are marked and the document clearly shows main assumptions on which they are based, but are subject to change without notice. The document can also consist of historical data about the profitability of financial instruments, however past performance is not necessarily indicative of future results. For the purposes of this document the financial analysts of ALTA Invest, investicijske storitve, d.d. have gathered the data, reformed it and processed it accordingly to the principles of fairness and with special care of the individuals, which deal with the formulation of recommendations professionally. ALTA Invest, investicijske storitve, d.d. and its affiliated entities, its employees and other individuals, which have participated in the formulation of this document, can possess financial instruments arising from this document or can be business partners with its issuers. ALTA Invest, investicijske storitve, d.d. points that any investment in financial instrument, including the financial instruments that are subject to this document, are risky. When investing in financial instruments, it is important to be aware of both systematic and unsystematic risk. Unsystematic risk applies to a certain financial instrument, which does not have the influence on the entire financial market and is independent of the movements on those markets. The effects of the unsystematic risk can be eliminated with portfolio diversification. On the other hand, systematic risk applies to factors that influence the entire financial market and therefore affect the value of investor's portfolio. Furthermore, settlement and custodial risk in emerging markets may be higher than in markets where there is a long established infrastructure. Stock liquidity may be impacted by the number of market participants which may therefore impact upon the reliability of any investments made as a result of acting upon information contained in this document. Further risks not discussed in this document may apply to the discussed security. Investors should always investigate the various risk aspects of any security in any market before making an investment decision. We advise investors contacts appropriate investment consultants or brokers to gather additional information. The selling price of financial instrument is usually not known in advance and can differ from the expected target price used to calculate expected gross return. Therefore realized and expected gross return can differ. Also investor must take into account that provisions, trade cost and taxes will influence final net return earned by difference between purchase and selling price of financial instrument. The difference can be positive or negative and cannot be forecasted in advance. In addition, all investors should be aware of the possibility of the failure to reach forecasted events and assumptions of the valuation on which the document is based, as well as the possibilities of price fluctuation of a particular financial instrument issuer. In the case of unfavourable movements of the price of a particular financial instrument, there is a possibility of lower future value of the investment, compared to the initial (purchase) value or vise versa. If a financial instrument is denominated in a currency other than an investor s currency, a change in exchange rates may adversely affect the price or value of, or the income derived from, the financial instrument, and such investor effectively assumes currency risk. The reader of the recommendation should first also be aware of the large impact of chosen assumptions at predicting the target price of the financial instrument issuer, which is presented also in the sensitivity analysis, as well as the facts that past performance is not necessarily the indicator of future profitability of the financial instrument issuer and vice versa. ALTA Invest, investicijske storitve, d.d. accepts no responsibility for any damage or loss arising from the use of information in this document. BUY: The investment rating reflects the total expected return (the difference between the current price of the stock and estimated price, expressed in %, and the estimated dividend yield) for a potential investment in the 12-month period from the date of the initial rating, which is more than 10%. HOLD: The investment rating reflects the total expected return (the difference between the current price of the stock and estimated price, expressed in %, and the estimated dividend yield) for a potential investment in the 12-month period from the date of the initial rating, which is between 0% and 10%. SELL: The investment rating reflects the total expected return (the difference between the current price of the stock and estimated price, expressed in %, and the estimated dividend yield) for a potential investment in the 12-month period from the date of the initial rating, which is lower than 10%. NO RECCOMMENDATION / EVALUATION: No recommendation can be given on the basis of the data available. In the period between and the structure of all investment research was: Number Share Share of issuers, for which ALTA Invest, investicijske storitve, d.d., has provided investment services regarding financial instruments in last 12 months Buy 50 60% 6% Hold 21 25% 0% Sell 13 15% 0% Recommendations issued by ALTA Invest, investicijske storitve, d.d. Železna cesta 18, 1000 Ljubljana, are valid for 12 months, except in case of previous update of the recommendation. However, ALTA Invest, investicijske storitve, d.d. is not engaged in periodical updating of the recommendations of the issuer under consideration as well as is not obliged to notify readers about any kind of valuation, opinion or forecast changes, which have arisen from the occurrences after the recommendation release. When dealing with its customers, ALTA Invest, investicijske storitve, d.d. is not obliged to act in accordance with opinions and assessments expressed in investment recommendations. Financial analyst, who has prepared the document and other individuals, which are familiar with the time and content of the investment research, did not have any personal transactions or trade with the relevant financial instrument from the investment research or haven't been connected with the financial instruments in time during the preparation of the investment research and one day after. Specific disclosures of the issuer under consideration ALTA Invest, investicijske storitve, d.d. Železna cesta 18, 1000 Ljubljana, Slovenia, and financial analyst responsible for monitoring of the issuer under consideration, guarantee that this document has not been disclosed to the issuer of the financial instrument before it was publicly released. ALTA Invest, investicijske storitve, d.d. and its related legal entities can own shares of the issuer under consideration. A financial analyst responsible for monitoring of the issuer under consideration, does not have any significant financial interests concerning the financial instrument. They also do not have any conflict of interest concerning the issuer under consideration. In the last 12 months, ALTA Invest, investicijske storitve, d.d. has not performed (any) services concerning financial instruments to the issuer under consideration. ALTA Invest, investicijske storitve, d.d. and related entities could held securities of the relevant issuer. Statement of a financial analyst ALTA Invest, investicijske storitve, d.d. (eng. ALTA Invest, investment services, Inc.), and the undersigned financial analysts, responsible for monitoring of the issuer under consideration, declare that they have not received any kind of compensation, which could affect the formulation of this recommendation or opinion expressed in this document. The recommendation has not been disclosed to anyone before it was publicly released. Žiga Gregorinčič, research analyst On the day of the public release, the author of the recommendation did not held securities of the relevant issuer. Tina Orzan, Analyst assistant On the day of the public release, the author of the recommendation did not held securities of the relevant issuer. Sašo Stanovnik, Head of research On the day of the public release, the author of the recommendation did not held securities of the relevant issuer. First release of the recommendation was performed on Quarterly updates are planned for data, valuation, target price and recommendation. Other information Other information about the services of ALTA Invest, investicijske storitve, d.d. and financial instruments, including general conditions for provision of services, price list and other disclosures can be found at and ALTA Invest, investicijske storitve, d.d., Železna cesta 18, SI-1000 Ljubljana. Registered at the District Court of Ljubljana, Registration Number: , ID for DDV: SI , Share capital: 2.031, EUR. President of the board: Bogdan Pušnik.