Fonterra Shareholders' Fund Strategically delivering Event

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1 NEW ZEALAND FSF NZ Price (at 08:18, 22 Mar 2017 GMT) Outperform NZ$6.18 Valuation NZ$ DCF (WACC 9.0%, beta 0.7, ERP 7.0%, RFR 3.5%, TGR 2.0%) 12-month target NZ$ month TSR % Volatility Index Low GICS sector Food, Beverage & Tobacco Market cap NZ$m day avg turnover NZ$m 1.6 Number shares on issue m Investment fundamentals Year end 31 Jul 2016A 2017E 2018E 2019E Revenue m 17,199 19,441 21,887 22,964 EBIT m 1,431 1,267 1,352 1,438 Reported profit m Adjusted profit m Gross cashflow m 1,404 1,455 1,583 1,667 CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking 1 % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x NZ imputation credits are only able to be used by shareholders to offset NZ income tax liability. FSF NZ vs NZSE50, & 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, March 2017 (all figures in NZD unless noted) 22 March 2017 Macquarie Securities (NZ) Limited Strategically delivering Event Fonterra reported its 1H17 result with NPAT of $418m, lower than our forecast of $443m, but up a little on $409m pcp. FY17 guidance range lowered to 45-55cps (from 50-60cps, 50.6cps pcp) but market consensus was closer to the bottom of previous range (Macq 51cps). Impact Fonterra continues to deliver on strategy and priorities for the year. Key positives we have seen include (1) volume growth of 17% for foodservice and 4% for consumer products moving 227m more LMEs into higher value, (2) tight cost control in downstream businesses to grow margin, (3) strong operating and free cash flow, (4) tight working capital control, and (5) debt balances in check to reduce funding costs and provide M&A capacity. Asia performed strongly in 1H17, with EBIT of $119m up 16% on pcp (on 8% volume growth) highlighting Sri Lanka and Philippines as standout markets, while Indonesia has been tougher. Greater China EBIT doubled over 1H17 to $70m (+32% C&F volume), including -$36m change in associates reflecting largely losses from Beingmate stake (~$102m China EBIT excl. associates). Normalised EBIT for the period was $607m, which was lower than our forecasts and down 9% on pcp. A large part of the decline was from Ingredients, with EBIT down 38% on pcp to $294m driven by uncontrollables including a ~$120m reduction in stream return (still marginally positive) and ~$50m headwind from the change in regulated milk price calculation. Price achievement was stable with higher $/MT offsetting the lower volume. The reduction in guidance moves the midpoint towards market consensus, with Fonterra being increasingly unlikely to hit the top end given less favourable stream return environment. Other factors influencing 2H17 will be how relative pricing turns out (WMP least favourable currently), some margin tightening in 2H and impact of elevated autumn milk intake meaning some 2016/17 season regulated return will move into inventory & realised in FY18. Going forward, the key drivers of more sustainable EBIT growth will be (1) continued movement of LMEs into value-add at current rate should add $50m p.a. to EBIT before operating leverage, (2) increased price achievement to drive ingredients margin, (3) further improvement in Australia through Darnum ramp up and Stanhope rebuild completion, (4) China farms moving from loss-making to breakeven, and (5) continued focus on tight operating cost control. Earnings and target price revision EPS: FY17E -1.0%, FY18E -0.6%. Price target unchanged. Price catalyst 12-month price target: NZ$7.50 based on a DCF methodology. Catalyst: relative commodity pricing, Danone arbitration outcome due shortly Action and recommendation Maintain O/P. We think Fonterra continues to improve operationally and this should overshadow uncontrollable negatives such as lower stream return. The valuation isn t too demanding at 12x P/E and should see reasonable EPSg. Please refer to page 8 for important disclosures and analyst certification, or on our website

2 Fig 1 1H17 result wrap The good The not so good The interesting Asia (ex China) posted a solid result, with normalised EBIT up 16% on pcp. This was driven by consumer and foodservice volumes increasing by ~8%, with particularly positive outcome from Sri Lanka and Philippines. China was also very strong at $70m of normalised EBIT including a $32m loss on its share in Beingmate, compared to $35m in the pcp. Consumer and Foodservice sales in China were up 32% for the year. Fonterra s consumer product gross margin increased 3pp to 31% in 1H17 vs. pcp, while foodservice declined 1pp to 27%. This margin growth (+2pp overall) was despite higher raw milk input prices. Fonterra continues to deliver on branded volume growth, with foodservice volumes up 17% on pcp and consumer volumes up 4% across the business. This has seen ~227m litres liquid milk equivalent (LME) moved into value-add, and Fonterra remains on target to move 400m litres over FY17. We note consumer volume growth were weaker due to reclassification of some UHT volumes as ingredients and sale of YDD business in Australia. Total normalised EBIT came in at $607m, down 9% on pcp and below our forecast of $682m. We note a portion of this is the share of associate losses in Beingmate as well as lower stream returns and changes to the milk price calculation. Guidance lowered to 45-55cps (from 50-60cps) reflecting some of the potential upside factors seen earlier in the year not playing out (hence impacting the top end) hence adjusting the range down. We note the market was towards the bottom of previous guidance range so are now in the middle of the new range. Fonterra signalled pressure on 2H gross margins to come through for the consumer and foodservice business with higher raw milk prices. Fonterra previously seemed more confident with the ability to pass through milk price COGS increases shorter term to help maintain margin. Latin America continues to be a challenge with economic issues in Brazil seeing declining category sizes in Brazil, and this impact has been worse than Fonterra expected. Fonterra have gained share in the market to help offset the pressures. Fonterra highlighted that higher autumn milk supply could have an impact on earnings for FY17. This would be driven by product being manufactured in late FY17 but held as inventory at year end, and part of the regulated return would be spread over these volumes hence embedded in the inventory (and not recognised in this year s EBIT). Fonterra highlighted that the changes in milk price manual has had a $0.06/kgMS (~$90m FY impact) to COGS vs. pcp. This impact will swing around, and generally in a rising milk price environment has a larger negative impact. As expected, Fonterra has further revised its outlook for NZ collection, now forecasting being down 3% compared to a 5% decline previously (and 7% decline before that). While capex in 1H was very low, Fonterra still expect to spend around their $900m p.a. guidance with a lot of the maintenance occurring in 2H during winter as well as value-added spend for the Mozzarella plant and continues rebuild of Stanhope in Australia. Fonterra highlighted that they continue to hold to the forecast full year dividend of 40 cents, Gearing was 46.6% (vs. 49.2% pcp), or net debt of despite the revised earnings per share forecast, $6.1bn, which was lower than our forecast with which reflects our balance sheet strength. good working capital control and lower capex ($244m vs. $453m pcp). Working capital days have While stream returns remained positive, Fonterra s payout ratio of 65-75% is over time declined a further eight days to 68. Fonterra s gross margin for non-reference products (we think 3-yr rolling), so may be variances y/y. declined by $87m with the milk price inventory levels have improved by 11% on pcp. While China Farms was still negative in terms of increasing faster than these product prices. normalised EBIT (-$24m), the run rate improved Management highlighted that Anmum infant Fonterra said total stream return was down slightly (-$29m). Milk yields were up 9% over the formula volumes were up 20% in China. $120m to $40m. period. Sales volumes of fresh milk increased by Fonterra s operating expenditure was down 6% Indonesia is staring to face challenges with 22% and Fonterra sold through some milk in 1H17 on pcp reflecting benefits from the changes in consumption patterns and powder inventory too. Lower Chinese raw milk business transformation. This is the fifth year in Fonterra is having to adjust its business prices remain a challenge, however, Fonterra a row of continuous cost improvement. model accordingly. delivered a 7% reduction in operating cost/kg. As highlighted in the recent investor day, The value of livestock on balance sheet has No update was provided on the Danone Fonterra s price achievement in Ingredients was arbitration with the accounts still maintaining trended down once again to $317m (from stable through higher per MT levels offsetting the $11m maximum contractual contingent $342m at FY16), despite net $12m investment the lower volumes sold through. liability. The outcome was expected earlier cash flow in livestock, which could reflect Fonterra s Australian ingredients business saw a but it is taking longer to form a decision, outlook for raw milk prices in China. $37m improvement in normalised EBIT through changes in the farmgate milk price and operational improvement. Fonterra continues to have no peak costs during this season due to the recent capacity investment and lower peak intake. On the Darnum sale into the JV with Beingmate, Fonterra booked a one-off $42m gain (relative to book value) which was subsequently normalised out of earnings. Fonterra expect to exceed total estimated bankable gains from the business transformation to improve EBIT, balance sheet and FGMP. which may be read as negative. The business has plans around potential outcomes and how this would be addressed from funding. Fonterra continue to investigate downstream processing opportunities in China to support its C&F operations and better utilise raw milk produced from its China Farms. The interest income in the P&L was $17m while CF was $6m, reflecting income accrued on loans outstanding to farmers on advances. Advance balances increased $15m from FY16. Management highlighted that it will continue to look at M&A, but focussed on partnerships, however, if a market leader (#1 or #2) business was available it could look to buy. It remains focussed on Africa, South America and SE Asia. 22 March

3 Result summary 1H17 normalised EBIT of $607m (Macq $682m) Fonterra reported its 1H17 result with NPAT attributable to shareholder of $413m or 25.8cps, up around 2% on pcp, but a little below our forecast of $438m. Fonterra lowered its FY17 guidance to 45-55cps, (from 50-60cps) with some of the upside risk previously seen no longer there, and a few moving parts with continuous market volatility in 2H. We note that the market and our forecast was towards the bottom end previously, so the movement of range may not be entirely a surprise. Global Ingredients & Operations business delivered 1H17 normalised EBIT of $294m, below our $332m forecast and down from $447m in the pcp. We note the biggest driver of the move was reduction in stream return with less favourable relative product mix causing a -$120m impact. The other larger contributor would have been the change in milk price calculation, which is expected to have a $0.06/kgMS impact (or $90m) for the season, so maybe $50m in 1H. Price achievement was flat despite softer volumes (management estimate $10-15m), but made up for by higher $/MT. Management were cautious around 2H with stream return and a strong autumn hard to forecast, which could cause some more of the regulated return to be held over into FY18 as inventory. Oceania was a little softer than expectations, with normalised EBIT of $74m (Macq $111m). Ingredients improved its contribution by $37m while exit of the loss-making yoghurt and dairy desserts business also helped. Management highlighted that NZ contribution, from a local consumer and foodservice perspective was stable. This business should see further improvement with the increased focus on brands, ramp up of Darnum for IF completion of Stanhope rebuild. Asia was strong with normalised EBIT of $119m, up from $103m in the pcp. This business benefited from higher sales volume (+8%) as well as good cost control (sales and marketing down $21m on pcp). The bright spots were Sri Lanka and the Philippines, while Indonesia and the Middle East were more challenging. Greater China was a strong performer in 1H17, with normalised EBIT of $70m, up from $35m in 1H16. This was despite the share in associates profits declining by $36m (to -$32m) reflecting weak performance from Beingmate and small impact of the Abbott farming JV. Total volume was up 32% for consumer and foodservice products to provide operating leverage, while operating expenses declined. Latin America faced some challenges, with the normalised EBIT result of $44m flat on pcp and below our forecast of $54m. The operating environment in Brazil deteriorated further, and while categories declined Fonterra took share. As a result, total consumer and foodservice were up 19% for Latam. In Venezuela, which faces its own challenges, Fonterra focussed on local sourcing or insulate itself from currency risks. Net financing costs were down materially and below our forecast, on the back of lower debt balance but also movements in derivatives in 1H16. Effective tax rate was a little higher at 14%. Fig 2 Result summary Normalised EBIT 1H16A 1H17E 1H17A % change % diff Global ingredients + operations % -12% Oceania % -33% Asia + Greater China % 2% Latam % -18% Eliminations Recurring EBIT % -11% Non-recurring items % Total EBIT % -6% Net financing costs % -14% PBT % -2% Tax expense (credit) % 23% NPAT % -6% Post-tax non-recurring % Normalised earnings % -6% Non-controlling interest % 0% NPAT to shareholders % -6% EPS (normalised) % -8% DPS % 0% 22 March

4 1H12A FY12A 1H13A FY13A 1H14A FY14A 1H15A FY15A 1H16A FY16A 1H17A 1H12A FY12A 1H13A FY13A 1H14A FY14A 1H15A FY15A 1H16A FY16A 1H17A Operating cash flow on an underlying basis (before working capital) was up around 4% on pcp to $662m, and when adjusting for stay in business capex (proxied by depreciation and amortisation) underlying free cash flow was up 7% on pcp to $373m. Fig 3 Solid operating and free cash flow 1H15 1H16 1H17 % change pcp EBIT % Adjustments (Depreciation, FX, other) % Adjusted EBIT % Less: net interest paid % OCF before tax % Tax paid % OCF % Depreciation + amort = SIB capex % Underlying FCF % Working capital was a net outflow of $1.1bn, in line with the usual seasonal trend around inventory and receivables build at 1H, offset by higher amounts owed to farmers. We note that 1H16 didn t see the same large working capital build due to this being offset by the benefits of the business transformation. Advance rates are lower than usual we think given the trajectory of milk price. Adjusting for working capital out of underlying free cash flow would have an outflow of ~$730m for the 1H17 but this will reverse in 2H as seasonal impact unwind. Fig 4 Working capital investment per seasonal trends 1H15 FY15 1H16 FY16 1H17 Inventories 4,651 3,025 4,071 2,401 4,566 Trade and other receivables 2,461 2,322 2,282 1,625 2,210 Other Gross working capital investment 7,150 5,385 6,391 4,064 6,814 Owing to farmers , ,359 Trade and other payables 1,997 1,984 1,983 2,169 2,176 Net working capital 4,175 3,242 3,195 1,176 2,279 Change 1, ,019 1,103 Fonterra s net debt was $6.1bn at 1H17, down 11% on pcp which reflects strong cash flow and lower capex ($244m vs. $453m pcp). Gearing was 46.6% at balance date (down from 49.2%) and management expects this to be back within the 40-45% target range at year end. The net debt number was also helped by continued tight working capital control, with working capital days dropping eight days to 68 at 1H17. Fig 5 Net debt remains low Fig 6 Working capital days continue to improve $m 8, % 110 Working capital days 7,000 6,000 5, % 40.0% , % 80 3,000 2,000 1, % 10.0% % Net debt Gearing (RHS) 22 March

5 Consumer pricing yet to rebound Below we estimate the average price per MT of product sold across the businesses, with a particular focus on consumer and foodservice. We see that over 1H17, Ingredients prices increased by around 16%, reflecting higher commodity prices, while C&F prices continued to decline overall. This must still reflect the inventory with low input costs flowing through and delays in notified pricing increases being realised in the business. Fig 7 Revenue, volume and price movements by division Revenue Volume (LME) Price ($/ 1,000 LME) 1H16 1H17 % chg pcp 1H16 1H17 % chg pcp 1H16 1H17 % chg pcp Ingredients 6,709 7,228 8% 11,830 10,980-7% % Consumer & foodservice Oceania 1, % % 1,090 1,086 0% Asia % % 1,272 1,085-15% Greater China % % 1, % Latin America % % 2,390 2,086-13% Total 3,220 3,239 1% 2,480 2,710 9% 1,298 1,195-8% International farming % % % Eliminations -1,186-1, Total 8,838 9,241 5% 14, % 626 4, % Below we illustrate the trend over the last few years in margin. We note this is a $/MT basis (as opposed to LME) due to longer reported history of the figure, but may be impacted by mix shift (e.g. increased fluid products). While Asia and Greater China continue to trend down, a portion of this is currency related so the trend prices have been generally stable in the last three half-year periods. Fig 8 Average price/mt for Oceania and Latam Fig 9 Average price/mt for Asia and Greater China 4,000 NZ$/MT 7,000 NZ$/MT 3,500 6,500 3,000 6,000 5,500 2,500 5,000 2,000 4,500 1,500 Oceania Latin America 4,000 Asia Greater China 1H14 2H14 1H15 2H15 1H16 2H16 1H17 Note: done on a MT basis as opposed to LME due to longer historical reporting of metrics. 1H14 2H14 1H15 2H15 1H16 2H16 1H17 Note: done on a MT basis as opposed to LME due to longer historical reporting of metrics. Fonterra continues to provide a bridge of underlying movements in EBIT for the consumer and foodservice business which we find really useful. We have seen the impact of volume growth from 1H15-1H17 has delivered around $140m of EBIT uplift. The net impact of movements in prices and COGS has been +$73m over the last few half year periods; however, we note that 1H15 was impacted by the very high milk prices so in our view was an abnormally low EBIT number of the business. Fonterra has highlighted how it is looking to move prices up across the branded businesses to help offset the higher COGS that will be experienced over 2H and into FY18 given FGMP. 22 March

6 Cost controls have been evident here with $32m increase in normalised EBIT for C&F due to operating expenses. We note selling and marketing expenses are down materially while this doesn t appear to have impact volume growth. Fig 10 Consumer and foodservice profitability driven by volume $m EBIT Net +$90m from price and COGS movements H15A Volume Price COGS Operating expenses Overall net gain from lower COGS but 1H15 reflects weak performance with very high FGMP Net -$17m from price and COGS movements Other 1H16A Volume Price COGS Operating expenses Other 313 1H17A Fonterra s consumer product gross margin increased 3pp to 31% in 1H17 vs. pcp, while foodservice declined 1pp to 27%. This margin growth (+2pp overall) was despite higher raw milk input prices. Total normalised EBIT for Fonterra s C&F operation was up 30% on pcp and EBIT margin has expanded from 7.5% to 9.7%. We note this is down from 11.0% in 2H16 reflecting the period with lowest farmgate milk price in COGS. The growth in margin has been driven by operating leverage from volume growth (+1.4bn litres LME annualised from FY14-1H17) as well as cost control including a $40m reduction in selling and marketing expenses for the regional operations over 1H17 vs. pcp. Fig 11 Improved margins across Fonterra s consumer and foodservice businesses 20% 15% Consumer & foodservice EBIT margin % % % % 1H14 2H14 1H15 2H15 1H16 2H16 1H Overall Oceania Asia Greater China Latam $/LME (RHS) 22 March

7 Mead Johnson Unilever Saputo Dean Foods Dairy Crest Nestle Synlait Milk Glanbia Danone Kerry FrieslandCampina Fonterra China Mengniu Arla Foods Parmalat May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 Mead Johnson Nestle Unilever Danone China Mengniu Kerry Murray Goulburn Dairy Crest Fonterra China Foods Glanbia Parmalat Saputo Synlait Milk Dean Foods Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec x 17.1x 16.7x 13.7x 18.7x 18.5x 16.9x 14.1x 11.4x 9.7x 19.7x 16.2x 15.0x 12.0x 9.3x (FSF:$6.18) Interim Profit & Loss 2H/16A 1H/17A 2H/17E 1H/18E Annual Profit & Loss 2015A 2016A 2017E 2018E 31 July Year End 31 July Year End Operating revenue $m 8,361 9,241 10,200 10,857 Operating revenue $m 18,845 17,199 19,441 21,887 Gross profit $m 1,757 1,758 1,870 1,877 Gross profit $m 3,298 3,630 3,628 3,812 EBITDA - pre unusual $m ,019 EBITDA - pre unusual $m 1,535 1,928 1,849 2,050 Depreciation $m Depreciation $m Amortisation $m Amortisation $m EBIT - pre unusual $m EBIT - pre unusual $m 974 1,358 1,230 1,352 EBIT $m EBIT $m 942 1,431 1,230 1,352 Net interest expense $m Net interest expense $m Pre-taxation profit $m Pre-taxation profit $m ,025 Taxation expense $m Taxation expense $m (82) Profit after taxation $m Profit after taxation $m Minorities $m Minorities $m Reported profit after taxation $m Reported profit after taxation $m Tax-affected non-recurring items $m (10) Tax-affected non-recurring items $m (23) Pre abnormal profit after tax $m Pre abnormal profit after tax $m Non cash items (tax affected) $m Adjusted NPAT to shareholders $m ^ EBIT and EBITDA includes equity accounted profit share Divisional EBIT 2H/16A 1H/17A 2H/17E 1H/18E Divisional EBIT 2015A 2016A 2017E 2018E NZ Milk Products (Ingredients) NZ Milk Products (Ingredients) Consumer - A/NZ Consumer - A/NZ (24) Consumer - Asia & AME Consumer - A/A&ME Consumer - Latam Consumer - Latam Eliminations/other (8) Eliminations/other (15) Total Total 942 1,431 1,230 1,352 NZMP ROCE - ungeared post tax 6.6% 7.3% 5.2% 5.3% Discounted Cashflow Valuation A/NZ ROCE - ungeared post tax -0.6% 3.8% 5.0% 5.2% PV FCFs available to owners $m 17,059 Asia & AME ROCE - ungeared post tax 15.2% 23.3% 28.5% 28.6% Less net debt $m 5,473 Latam ROCE - ungeared post tax 14.9% 14.4% 10.8% 11.9% Other adjustments $m (360) Company - ungeared post tax 6.0% 8.1% 7.1% 7.6% Equity Value (ex Minority equity) $m 11,226 Shares outstanding # 1,604 Ratios 2015A 2016A 2017E 2018E Equity value per share $ p.s EPS (reported) c Last price $ p.s EPS (adjusted) c DPS c DCF Assumptions Effective tax rate % -19.3% 10.5% 14.0% 13.7% Terminal year 2029 Payout ratio % 86% 79% 79% 78% Perpetuity growth rate 2.0% EV/EBIT % Risk free rate 3.5% EV/EBITDA x Asset beta ROE % 7.3% 11.4% 10.9% 11.7% Post-tax market risk premium 7.0% Net debt (closing) $m 7,257 5,995 5,416 5,366 Target D/V 45.0% Economic net debt $m 7,252 6,692 5,903 6,230 WACC 9.0% Net Debt/(ND+Equity) % 52.1% 46.3% 42.8% 41.8% Price/NTA x EFPOWA m 1,598 1,600 1,604 1,604 Cashflow Analysis 2015A 2016A 2017E 2018E Balance Sheet 2015A 2016A 2017E 2018E EBITDA $m 1,610 2,088 1,923 2,050 Cash $m Net interest expense $m Receivables $m 2,322 1,625 1,982 2,144 Tax (paid)/credit $m (55) Inventories $m 2,401 3,005 3,257 3,380 Other (share of equity accounted profit) $m (35) (791) (12) (24) Investments $m 1, Gross cashflow $m 1, ,475 1,539 Property, Plant & Equipment $m 6,159 6,172 6,416 6,624 Changes in working capital $m 962 (2066) (27) 56 Intangibles $m 3,142 3,017 2,914 2,811 Operating cashflow $m 249 2,870 1,502 1,482 Other Assets $m 2,764 1,970 1,983 2,131 Capital expenditure (net) $m 1, Total Assets $m 18,315 17,118 17,816 18,354 Proceeds from asset sales $m Overdraft $m Other $m (871) (261) (70) 0 Current Payables $m 1,984 2,169 2,736 2,987 Investing cashflow $m (2040) (1094) (830) (803) Short Term Debt $m 1, Net equity raised $m Long Term Debt $m 5,879 5,397 4,907 4,865 Dividends paid $m Other Liabilities $m 2,073 1,638 2,065 2,170 Other $m 2,004 (941) Total Liabilities $m 11,656 10,171 10,585 10,892 Financing cashflow $m 1,771 (1642) 297 (630) Net assets $m 6,659 6,947 7,230 7,462 Net change in cash $m (20) Shareholders' equity $m 6,473 6,859 7,159 7,391 FX adjustment $m Minority Interests $m Change in cash (B/S inc o/draft) $m (20) Total Shareholders' Equity $m 6,659 6,947 7,230 7, x 25.0x 20.0x 15.0x 10.0x 5.0x 0.0x FMCG 16.7x Key Comparable Companies Consumer brands and processing Processing focussed 14.9x 14.4x 21.0x 19.0x 17.0x 15.0x 13.0x 11.0x 9.0x 7.0x 12 month forward EV/EBIT for Global Comps 12m forward EV/EBIT Time Series - Weekly EV/EBIT (FY17) Average Return on Capital Employed Comparison FMCG Consumer brands and processing Processing oriented All comps Relative Stream Revenues 40% 35% 30% 25% 20% 15% 10% 5% 0% Pre-tax Return on Capital Employed (FY0) 34.3% 24.8% 19.1% 16.9% 15.9% 15.3% 13.5% 13.2% 12.8% 12.8% 9.9% 9.3% 7.8% 7.5% 7.1% USD revenue per MT of milk Downgrade from relative cheese returns Most baskets around par 1Q strong stream return Less favourable stream conditions Recovery in commodity prices - baskets at par WMP basket weakest again WMP + AMF SMP + AMF SMP + Butter Cheese + byproduts Source: Bloomberg, FactSet, GlobalDairyTrade, Macquarie Research, March 2017 Multiples calendarised to 31 July year end Note: Return on capital employed is EBIT/Capital Employed where capital employed is calculated by taking the total assets and subtracting current liabilities for the last reported financial year 22 March

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 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 2016 AU/NZ Asia RSA USA CA EUR Outperform 57.53% 50.72% 45.57% 42.28% 60.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients) Neutral 33.90% 33.97% 43.04% 50.11% 37.23% 35.62% (for global coverage by Macquarie, 8.05% of stocks followed are investment banking clients) Underperform 8.56% 15.30% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients) FSF NZ vs NZSE50, & rec history (all figures in NZD 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, March month target price methodology FSF NZ: NZ$7.50 based on a DCF methodology Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at Date Stock Code (BBG code) Recommendation Target Price 22-Sep-2016 FSF NZ Outperform NZ$ Aug-2016 FSF NZ Outperform NZ$ Mar-2016 FSF NZ Outperform NZ$ Nov-2015 FSF NZ Neutral NZ$ Mar-2015 FSF NZ Neutral NZ$ Mar-2015 FSF NZ Neutral NZ$ Sep-2014 FSF NZ Neutral NZ$ Sep-2014 FSF NZ Neutral NZ$ Mar-2014 FSF NZ Neutral NZ$6.65 Target price risk disclosures: FSF NZ: 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. Unitholders will not have voting rights. 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, a division of Macquarie Equities 22 March

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