Asaleo Care. NZ$ pulped. We review the outlook for Asaleo. Earnings and target price revision. Price catalyst. Catalyst: CY15 results.

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1 AUSTRALIA AHY AU Price (at 06:10, 16 Jul 2015 GMT) Outperform A$1.80 Valuation - EV/EBITA A$ month target A$ month TSR % Volatility Index Low GICS sector Household & Personal Products Market cap A$m 1, day avg turnover A$m 2.2 Number shares on issue m Investment fundamentals Year end 31 Dec 2014A 2015E 2016E 2017E Revenue m 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 % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x AHY 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, July 2015 (all figures in AUD unless noted) NZ$ pulped Event We review the outlook for Asaleo. Impact Solid 1H result expected: Asaleo s 1H15 result is expected on 26 th August. Our forecast for 1H15 adjusted NPAT of $31.1 is up 10% on pcp, full-year guidance is for low to mid single digit EBITDA and NPAT growth. We expect growth to be 1H weighted given the cycling of a relatively weak pcp on the tissue side, realisation of the remaining benefits of the Project Samson cost saving program and a hedge profile which delays significant impact of pulp cost inflation. Cash generation is expected to remain strong but we expect no capital management until full-year results in February. By then, we forecast AHY will be ~$20m below the low end of the x target gearing range. This suggests an additional ~3cps to be returned to shareholders in the absence of investment opportunities in FY15 and ~4cps in FY16 relative to our current forecasts or a circa 20cps special if the Board decided to gear up to the midpoint of the gearing range. Asaleo will face higher sourcing costs in FY15, increasing further in FY16/7 due to higher US$ pulp prices with the weakening of the A$ and NZ$. While still facing headwinds, the Personal Care and Professional Hygiene divisions ranges are mainly sourced in or locally manufactured, which are likely to be at a competitive advantage to competitors which mainly import in US$. Based on current exchange rates and our forecasts for key currencies, we calculate a circa $4m NPAT headwind into CY15 increasing to ~$14m in CY16. Higher raw material costs will be an industry-wide phenomenon but the markets are competitive and we would not be surprised if there is a lag before cost increases are recovered. In our forecasts, we continue to assume Asaleo is successful in offsetting around half of these increases. Earnings and target price revision FY15E no change, FY16/7E EPS -3% reflecting lower NZ$ outlook. Price catalyst 12-month price target: A$2.00 based on an EV/EBIT methodology. Catalyst: CY15 results. Action and recommendation Asaleo's relatively resilient and defensive earnings streams and high cash generation remain attractive at current prices in this market. We see headwinds from the weaker A$ and NZ$ building into CY16 but we also expect capital management to be on the agenda by then. 16 July 2015 Macquarie Securities (Australia) Limited Please refer to page 8 for important disclosures and analyst certification, or on our website

2 Analysis Asaleo s 1H15 result is expected on 26 th August. Our forecast for 1H15 adjusted NPAT of $31m is up ~10% on pcp. Our result expectations are detailed below. Fig 1 Result snapshot $m 1H14a 2H14e FY14a 1H15e Change 2H15e FY15e Personal Care % Tissue % Total sales revenue % Personal Care % Tissue % EBITDA % Depreciation % EBIT % Interest exp % Pre-tax profit % Less Tax Expense % NPAT % Net Abn Reported Profit % Adjusted profit % EBITDA % 20% 25% 22% 21% 24% 23% EBIT % 15% 21% 18% 16% 20% 18% Persona; Care EBITDA % 34.6% 35.9% 35.3% 34.8% 36.4% 35.6% Tissue EBITDA % 12.8% 19.7% 16.4% 13.5% 18.8% 16.3% Source: Company data, Macquarie Research, July 2015 Asaleo typically has a 40-45% 1H EBITDA seasonality. Our forecasts imply a 1H result towards the upper end of that range and remain in line with guidance on a full-year basis of low to mid single digit EBITDA growth. Interim dividend forecast of 4cps is at the upper end of the 70-80% targeted payout range. Free cash generation in H1 is expected to be strong with no cash tax payable in Australia and capex well below depreciation. We expect no capital management until full-year results in February. By then, we forecast AHY will be ~$20m below the low end of the x target gearing range. This suggests an additional ~3cps to be returned to shareholders in the absence of investment opportunities in FY15 and ~4cps in FY16 relative to our current forecasts or a circa 20cps special if the Board decided to gear up to the midpoint of the range in one hit. Fig 2 Personal Care revenue and... Fig 3 EBITDA growth forecasts Revenue ($m) 220 EBITDA margin (%) 40.0% EBITDA ($m) % 30.0% 25.0% % 15.0% 10.0% 5.0% % 10.0 CY11a CY12a CY13a CY14a CY15e CY16e 0.0 Personal Care ($m) Personal Care (%) CY11a CY12a CY13a CY14a CY15e CY16e Source: Company data, Macquarie Research, July 2015 Source: Company data, Macquarie Research, July July

3 All three divisions entered 1H15 with good momentum. Baby Hygiene revenues will have benefitted on translation from the stronger NZ$ through the half (AHY has a natural hedge A$/NZ$ with a corresponding offset in exports into A$ although there is likely to be a small stock flow timing difference). Underlying revenues should benefit from market share gains in the main NZ market and increasing penetration in Australia with new retail (Chemist Warehouse) and B2B customers (Staples). Feminine Hygiene is relatively stable and defensive. We expect similar ~2% revenue growth rate to what was achieved in FY14. Industry growth is driven by population growth, favourable demographics with the aging population, increased per capita consumption with greater focus on personal hygiene and growing preference for premium products. The products are nondiscretionary with a high degree of product and brand loyalty. Asaleo s Libra brand has strong brand positioning and should benefit from ongoing investment in new products and marketing support. The Incontinence Hygiene business is higher growth and a key attraction within AHY. Overall, this category has shown a CAGR of 12.3% p.a. since 2003 (at the retail level), benefiting from favourable demographic shifts due to aging populations in both Australia and New Zealand and increased consumer awareness and acceptance of incontinence and its treatment. Revenues increased 8.5% in FY14 (1H14 growth ~5%) after a slow 1H in the healthcare channel. Stronger 2H growth in the healthcare channel should have carried on into 1H15. Fig 4 Tissue revenues cycling a weaker pcp Revenue ($m) EBITDA margin (%) 18.0% Fig 5 Tissue EBITDA to get final benefits of Project Samson EBITDA ($m) % 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% CY11a CY12a CY13a CY14a CY15e CY16e 0.0% 0.0 CY11a CY12a CY13a CY14a CY15e CY16e Tissue ($m) Tissue (%) Source: Company data, Macquarie Research, July 2015 Source: Company data, Macquarie Research, July 2015 Consumer tissue is cycling a relatively weak pcp where sales were impacted by commissioning constraints and reduced promotional activity. Professional hygiene revenues should benefit from new contract wins secured late in 2H14. The tissue capex program is now effectively complete with market demand now fully supplied. FY15 will benefit from the remaining ca$5m cost saving benefit from Project Samson which should help to offset underlying cost inflation. The group was fully hedged for FY15 at ~88c versus 94c in FY14. The hedging has pushed the more substantial price inflation from the weaker A$ into FY July

4 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Macquarie Wealth Management Fig 6 Pulp prices delivered to China Fig 7 Pulp prices in A$ lagged 15 months US$/t A$/t NBSK NBSK BHK - Eucalyptus (from Brazil) - to East Asia (S Korea - Japan - Taiwan - SE Asia) [1] Source: Macquarie Research, July 2015 Source: Macquarie Research, July 2015 BHK - Eucalyptus (from Brazil) - to East Asia (S Korea - Japan - Taiwan - SE Asia) [1] The table above highlights historical pulp price for Asian delivery. The price spread between soft and hardwood pulp has narrowed through 1H15. We understand Asaleo mix would be roughly 60% hardwood, 40% softwood but there is some small flexibility to the proportion of inputs in the production process. Macquarie s US Pulp and Paper team expects pricing has topped out in both hardwood and softwood. They expect modest price declines seen in June to continue gradually throughout the end of the year. They forecast hardwood capacity growth to exceed demand growth over the next 3 years which should keep a lid on pricing. As previously discussed, the movement in the currency is expected to be a far greater driver of volatility in sourcing costs. The chart on the right above shows the pulp price in A$ lagged 15 months. The forecasts into CY16 assume largely flat pulp prices and our currency forecasts through the end of the year. The table below provides our estimate of effective hedge rates based on historical exchange rates and Macquarie s forecasts through CY16. Fig 8 FX outlook- NZ$ weaker AUD/USD NZD/USD AUD/EUR CY CY % % % CY % % % Source: Macquarie Research, July 2015 The most significant change in our forecasts has been the lowering of the NZ$ on the back of weaker dairy prices and the prospect of additional RBNZ rate cuts. Asaleo provided sensitivities that a 1% change in AUD/USD would have a $0.4m impact on FY15 NPAT, 1% change in NZD/USD would be $0.4m and AUD/EUR 0.3m impact. We do note these sensitivities are presented on the basis that only one variable is changed and do not take into account mitigating actions that could be expected to be taken to help offset the effect of these moves. Based on current exchange rates and our forecasts for key currencies, we calculate a circa $4m NPAT headwind into CY15 increasing to ~$14m in CY16. Asaleo hedges its FX exposure on a rolling 12-month basis which provides it with time to consider pricing strategies. Higher raw material costs will be an industry-wide phenomenon but the markets are competitive and we would not be surprised if there is a lag before cost increases are recovered. In our revised forecasts, we continue to assume Asaleo is successful in offsetting around half of these increases. 16 July

5 Fig 9 Price Target $2.00 Valuation - FY15 EBIT Multiples Valuation EV/EBITA Valuation High Low High Low Asaleo EBITA $1, Small Industrials EBITA Multiple Premium/(Discount) 4.2% 0.0% Less Net Debt $239.4 $239.4 Plus option Cash Equity Value $1,214.4 $1,156.3 Value Per share $2.01 $1.92 Source: Macquarie Research, July 2015 Our valuation is detailed above. No change to price target of $2.00. Asaleo's relatively resilient and defensive earnings streams and high cash generation remain attractive at current prices in this market. We see headwinds from the weaker A$ and NZ$ building into CY16 but we also expect capital management to be on the agenda by then. 16 July

6 (AHY:$1.79) 16-Jul-15 Interim results 2H/13A 1H/14A 2H/14A 1H/15E Profit & Loss 2014A 2015E 2016E 2017E Revenue Revenue $m EBITDA $m EBITDA $m Depreciation $m Depreciation $m Amortisation of goodwill $m Amortisation of goodwill $m EBIT $m EBIT $m Net Interest expense $m Interest expense $m Pre-Tax Profit $m Pre-Tax Profit $m Tax Expense $m Tax Expense $m Net Profit $m Net Profit $m Outside equity interests $m Outside equity interests $m Net Abn/Extra $m Net Abnormals/Extra. $m Reported Earnings $m Reported Earnings $m Adjusted Earnings $m Adjusted Earnings $m Gross Cashflow $m Gross Cashflow $m EPS (Adj/dil) c EPS (adj/diluted) c EPS growth % EPS growth % CFPS c PE (adj) x CFPS Growth % CFPS c EBITDA/Sales % CFPS Growth % EBIT/Sales % PGCFPS x Earnings Split % DPS c Revenue Growth % Yield % EBIT Growth % Franking % Profit and Loss ratios 2014A 2015E 2016E 2017E Cashflow Analysis 2014A 2015E 2016E 2017E Revenue Growth % EBIT Growth % Pre-tax Profit $m EBITDA/Sales % Depreciation & Amortisation $m EBIT/Sales % Tax Paid $m Effective tax rate % Gross cashflow $m Payout ratio % Changes in working capital $m EV/EBITA x Other $m EV/EBITDA x Operating Cashflow $m EV/Sales* x Acquisitions $m Capex - Plant & Equip. $m Balance sheet ratios Asset Sales $m ROE % IT development $m ROA % Investing cashflow $m ROFE % Dividend (ordinary) $m Net Debt $m Equity raised $m Net Debt/Equity % Other $m Interest Cover x Financing cashflow $m Price/NTA x NTA per share $ Net Change in cash/debt $m EFPOWA m Historical performance 2011A 2012A 2013A 2014A Balance Sheet 2014A 2015E 2016E 2017E Cash $m Revenue $m Receivables $m EBITDA $m Inventories $m Depreciation/Amortisation $m Investments $m EBIT $m Property, plant & equipment $m Net interest expense $m Intangibles $m Pre-Tax Profit $m Other Assets $m Tax Expense $m Total Assets $m Net Profit $m Payables $m Net Abn/Extra $m Short Term Debt $m Long Term Debt $m Reported Earnings $m Other Liabilities $m Adjusted Earnings $m Total Liabilities $m Ordinary DPS c Shareholders Funds $m EBITDA/Sales % Minority Interests $m EBIT/Sales % Total Shareholders Equity $m ROE % nmf nmf ROFE % nmf nmf Total Funds employed $m EFPOWA m FY13(a) FY14(a) FY15(e) FY16(e) Personal Care $m Tissue $m Total sales revenue $m Personal Care $m Tissue $m EBITDA $m Margin Personal Care 34.4% 35.3% 35.6% 35.3% Tissue 13.8% 16.4% 16.3% 14.7% EBITDA 19.9% 22.4% 22.6% 21.6% Source: Company data, Macquarie Research, July July

7 Macquarie Quant View The quant model currently holds a neutral view on. The strongest style exposure is Growth, indicating this stock has good historic and/or forecast growth. Growth metrics focus on both top and bottom line items. The weakest style exposure is Quality, indicating this stock is likely to have a weaker and less stable underlying earnings stream. 69/102 Global rank in Household & Personal Products % of BUY recommendations 33% (1/3) Number of Price Target downgrades 0 Number of Price Target upgrades 0 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 (Household & Personal Products) 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. Ansell 0.1 Ansell 0.1 Coca-Cola Amatil -0.1 Coca-Cola Amatil Treasury Wine Estates -0.1 Treasury Wine Estates % -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. Ansell 0.1 Ansell -0.3 Coca-Cola Amatil -1.0 Coca-Cola Amatil Treasury Wine Estates 0.1 Treasury Wine Estates % -30% -20% -10% 0% 10% 20% 30% 40% 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 Percentile relative to sector(/102) Percentile relative to market(/412) 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) 16 July

8 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 First South - 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 June 2015 AU/NZ Asia RSA USA CA EUR Outperform 46.23% 58.36% 47.27% 44.20% 60.65% 43.01% (for US coverage by MCUSA, 9.68% of stocks followed are investment banking clients) Neutral 37.67% 25.65% 29.09% 49.29% 34.19% 40.93% (for US coverage by MCUSA, 5.53% of stocks followed are investment banking clients) Underperform 16.10% 15.99% 23.64% 6.52% 5.16% 16.06% (for US coverage by MCUSA, 1.38% of stocks followed are investment banking clients) AHY 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, July month target price methodology AHY AU: A$2.00 based on a EV/EBIT methodology Company-specific disclosures: AHY AU: MACQUARIE EQUITIES LIMITED or one of its affiliates managed or co-managed a public offering of securities of Ltd in the past 24 months, for which it received compensation. MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates managed or co-managed a public offering of securities of Ltd in the past 24 months, for which it received compensation. Important disclosure information regarding the subject companies covered in this report is available at Date Stock Code (BBG code) Recommendation Target Price 22-Jan-2015 AHY AU Outperform A$ Aug-2014 AHY AU Outperform A$ Aug-2014 AHY AU Outperform A$2.00 Target price risk disclosures: AHY 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: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN , AFSL No ) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN , AFSL No ) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN , AFSL No ) ("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 in Australia. 16 July

9 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 Any MGL subsidiary noted in this research, apart from MBL, 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 is 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 16 July