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Deutsche Bank Markets Research Rating Buy Europe United Kingdom Consumer Staples Food Manufacturing Company A B Foods Date 29 July 2016 Special Report An introductory guide Reuters Bloomberg Exchange Ticker ABF.L ABF LN LSE ABF ADR Ticker ISIN ASBFY US0455194029 An introduction to ABF: from field to fork and from teabags to t-shirts ________________________________________________________________________________________________________________ Deutsche Bank AG/London Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Price at 28 Jul 2016 (GBP) 2,686.00 Price Target (GBP) 3,200.00 52-week range (GBP) 3,599.00 - 2,350.00 Warwick Okines Research Analyst (+44) 20 754-58546 [email protected] Jaina Mistry Research Associate (+44) 20 754-71337 [email protected] Charlie Muir-Sands, CFA Research Analyst (+44) 20 754-75749 [email protected] This report is intended for readers looking for an introduction to AB Foods and its five divisions. We would direct those familiar with the company to our report "Not just about Primark", also published today, for a discussion of our view of the stock. A diverse conglomerate: around the world in 80 years AB Foods (ABF) is listed in the Food Producers & Processors sector and is the 26th largest company in the FTSE100 by market capitalisation. It is majority owned by the Weston family and CEO George Weston is a grandson of the founder. It operates five divisions: Grocery, Sugar, Agriculture, Ingredients and Retail. Its largest brand by both sales and profits is Primark, a value fashion retailer operating predominantly in Europe. In addition ABF owns consumer food brands such as Twinings, Ovaltine, Ryvita and Kingsmill; it is a manufacturer of sugar on three continents; and develops and manufactures a wide range of ingredients and agricultural feeds. This report describes the history, operations and drivers of the group. 10 things you may not know about AB Foods Whilst this Introductory Guide is aimed at those new to ABF, we see value for more seasoned readers. Ten things we would highlight as being of interest are: ABF’s ultimate controlling party is a charitable trust; In 2015 51% of profits were generated outside the UK, the highest proportion since the global financial crisis; Capital expenditure excluding spend on Primark has declined since 2011; When Penneys entered the UK in 1973, it used the Primark brand because Penneys was registered to JC Penney; Primark sells more units than Inditex each year but has one third of its revenues; Primark’s average selling price is less than half of H&M’s and it makes less than half of the profit from selling 100 items than H&M; Grocery has the second highest divisional ROCE, after Retail, reaching its record adj. operating profit margin of 9.0% in 2015; Sugar fell from 46% to 4% of group adj. EBIT between 2012 and 2015. As well as sugar the division grows tomatoes and produces electricity; The Agriculture division is small but has a 10 year adj. operating profit CAGR of over 10%, second only to Retail; The Ingredients business develops enzymes that are not only used in food production but also in textiles, detergents and converting waste to biofuels. Distributed on: 07/29/2016 18:04:03GMT

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Page 1: Company Buy A B Foodspg.jrj.com.cn/acc/Res/CN_RES/INVEST/2016/7/29/6e208aef-c...2016/07/29  · Markets Research Rating Buy A B Foods Europe United Kingdom Consumer Staples Food Manufacturing

Deutsche Bank Markets Research

Rating

Buy Europe

United Kingdom

Consumer Staples

Food Manufacturing

Company

A B Foods

Date

29 July 2016

Special Report

An introductory guide

Reuters Bloomberg Exchange Ticker ABF.L ABF LN LSE ABF

ADR Ticker ISIN ASBFY US0455194029

An introduction to ABF: from field to fork and from teabags to t-shirts

________________________________________________________________________________________________________________

Deutsche Bank AG/London

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016.

Price at 28 Jul 2016 (GBP) 2,686.00

Price Target (GBP) 3,200.00

52-week range (GBP) 3,599.00 - 2,350.00

Warwick Okines

Research Analyst

(+44) 20 754-58546

[email protected]

Jaina Mistry

Research Associate

(+44) 20 754-71337

[email protected]

Charlie Muir-Sands, CFA

Research Analyst

(+44) 20 754-75749

[email protected]

This report is intended for readers looking for an introduction to AB Foods and its five divisions. We would direct those familiar with the company to our report "Not just about Primark", also published today, for a discussion of our view of the stock.

A diverse conglomerate: around the world in 80 years AB Foods (ABF) is listed in the Food Producers & Processors sector and is the 26th largest company in the FTSE100 by market capitalisation. It is majority owned by the Weston family and CEO George Weston is a grandson of the founder. It operates five divisions: Grocery, Sugar, Agriculture, Ingredients and Retail. Its largest brand by both sales and profits is Primark, a value fashion retailer operating predominantly in Europe. In addition ABF owns consumer food brands such as Twinings, Ovaltine, Ryvita and Kingsmill; it is a manufacturer of sugar on three continents; and develops and manufactures a wide range of ingredients and agricultural feeds. This report describes the history, operations and drivers of the group.

10 things you may not know about AB Foods Whilst this Introductory Guide is aimed at those new to ABF, we see value for more seasoned readers. Ten things we would highlight as being of interest are:

ABF’s ultimate controlling party is a charitable trust;

In 2015 51% of profits were generated outside the UK, the highest proportion since the global financial crisis;

Capital expenditure excluding spend on Primark has declined since 2011;

When Penneys entered the UK in 1973, it used the Primark brand because Penneys was registered to JC Penney;

Primark sells more units than Inditex each year but has one third of its revenues;

Primark’s average selling price is less than half of H&M’s and it makes less than half of the profit from selling 100 items than H&M;

Grocery has the second highest divisional ROCE, after Retail, reaching its record adj. operating profit margin of 9.0% in 2015;

Sugar fell from 46% to 4% of group adj. EBIT between 2012 and 2015. As well as sugar the division grows tomatoes and produces electricity;

The Agriculture division is small but has a 10 year adj. operating profit CAGR of over 10%, second only to Retail;

The Ingredients business develops enzymes that are not only used in food production but also in textiles, detergents and converting waste to biofuels.

Distributed on: 07/29/2016 18:04:03GMT

Page 2: Company Buy A B Foodspg.jrj.com.cn/acc/Res/CN_RES/INVEST/2016/7/29/6e208aef-c...2016/07/29  · Markets Research Rating Buy A B Foods Europe United Kingdom Consumer Staples Food Manufacturing

29 July 2016

Consumer Staples

A B Foods

Page 2 Deutsche Bank AG/London

Model updated:29 July 2016

Running the numbers

Europe

United Kingdom

Food Manufacturing

A B Foods Reuters: ABF.L Bloomberg: ABF LN

Buy Price (28 Jul 16) GBP 2,686.00

Target Price GBP 3,200.00

52 Week range GBP 2,350.00 - 3,599.00

Market Cap (m) GBPm 21,219

USDm 27,839

Company Profile

Associated British Foods PLC is listed in the Food Producers & Processors sector. It operates 5 divisions: Grocery, Sugar, Agriculture, Ingredients and Retail. Its largest brand is Primark, a value fashion retailer operating mainly in Europe. ABF also owns consumer food brands such as Twinings, Ovaltine, Ryvita and Kingsmill; it is a manufacturer of sugar on three continents; and develops and manufactures a wide range of ingredients and agricultural feeds.

Price Performance

12001600200024002800320036004000

Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16

A B Foods FTSE 100 INDEX (Rebased)

Margin Trends

6

8

9

11

12

14

13 14 15 16E 17E 18E

EBITDA Margin EBIT Margin

Growth & Profitability

02468101214

-5

0

5

10

15

13 14 15 16E 17E 18E

Sales growth (LHS) ROE (RHS)

Solvency

0

50

100

150

200

250

-10

-5

0

5

10

15

13 14 15 16E 17E 18E

Net debt/equity (LHS) Net interest cover (RHS)

Warwick Okines

+44 20 754-58546 [email protected]

Fiscal year end 14-Sep 2013 2014 2015 2016E 2017E 2018E

Financial Summary

DB EPS (GBP) 98.09 104.08 102.05 102.78 119.92 131.02

Reported EPS (GBP) 74.05 96.46 67.34 100.55 118.49 129.77

DPS (GBP) 32.35 34.00 35.00 36.55 42.03 46.24

BVPS (GBP) 779.1 814.8 802.0 868.4 939.8 1,018.3

Weighted average shares (m) 790 790 790 790 790 790

Average market cap (GBPm) 13,479 20,947 23,590 21,219 21,219 21,219

Enterprise value (GBPm) 14,429 21,497 23,787 21,394 21,016 20,491

Valuation Metrics P/E (DB) (x) 17.4 25.5 29.3 26.1 22.4 20.5

P/E (Reported) (x) 23.0 27.5 44.3 26.7 22.7 20.7

P/BV (x) 2.32 3.22 3.80 3.09 2.86 2.64

FCF Yield (%) 4.2 3.2 2.5 2.4 3.3 4.2

Dividend Yield (%) 1.9 1.3 1.2 1.4 1.6 1.7

EV/Sales (x) 1.1 1.7 1.9 1.6 1.4 1.3

EV/EBITDA (x) 8.9 13.6 16.6 13.6 11.9 10.9

EV/EBIT (x) 13.3 19.9 25.1 19.6 16.9 15.3

Income Statement (GBPm)

Sales revenue 13,315 12,943 12,800 12,997 14,522 15,184

Gross profit 3,220 3,150 3,029 3,076 3,437 3,593

EBITDA 1,623 1,576 1,429 1,568 1,766 1,886

Depreciation 405 402 401 421 470 492

Amortisation 130 94 81 55 54 52

EBIT 1,088 1,080 947 1,092 1,242 1,342

Net interest income(expense) -87 -58 -53 -40 -21 -6

Associates/affiliates 0 0 0 0 0 0

Exceptionals/extraordinaries -128 -2 -172 0 0 0

Other pre-tax income/(expense) -5 0 -5 -5 0 0

Profit before tax 868 1,020 717 1,047 1,221 1,336

Income tax expense 240 237 193 246 285 312

Minorities 43 21 -8 6 -1 -1

Other post-tax income/(expense) 0 0 0 0 0 0

Net profit 585 762 532 794 936 1,025

DB adjustments (including dilution) 190 60 274 18 11 10

DB Net profit 775 822 806 812 947 1,035

Cash Flow (GBPm)

Cash flow from operations 1,169 1,369 1,143 1,183 1,306 1,497

Net Capex -601 -691 -542 -675 -595 -607

Free cash flow 568 678 601 508 711 890

Equity raised/(bought back) -22 34 -34 0 0 0

Dividends paid -232 -256 -271 -289 -332 -365

Net inc/(dec) in borrowings 0 0 0 0 0 0

Other investing/financing cash flows -57 -98 -44 50 0 0

Net cash flow 257 358 252 269 379 525

Change in working capital -97 100 -66 -53 -110 -27

Balance Sheet (GBPm)

Cash and other liquid assets 362 519 702 726 1,104 1,629

Tangible fixed assets 4,552 4,665 4,488 4,996 5,126 5,246

Goodwill/intangible assets 1,581 1,467 1,367 1,338 1,310 1,284

Associates/investments 218 212 212 212 212 212

Other assets 3,661 3,609 3,503 3,531 3,775 3,871

Total assets 10,374 10,472 10,272 10,803 11,528 12,243

Interest bearing debt 1,166 965 896 896 896 896

Other liabilities 2,689 2,754 2,825 2,829 2,990 3,086

Total liabilities 3,855 3,719 3,721 3,725 3,886 3,982

Shareholders' equity 6,155 6,437 6,336 6,861 7,425 8,045

Minorities 364 316 215 217 217 216

Total shareholders' equity 6,519 6,753 6,551 7,077 7,641 8,261

Net debt 804 446 194 170 -208 -733

Key Company Metrics

Sales growth (%) 8.7 -2.8 -1.1 1.5 11.7 4.6

DB EPS growth (%) 12.5 6.1 -2.0 0.7 16.7 9.3

EBITDA Margin (%) 12.2 12.2 11.2 12.1 12.2 12.4

EBIT Margin (%) 8.2 8.3 7.4 8.4 8.5 8.8

Payout ratio (%) 43.7 35.2 52.0 36.4 35.5 35.6

ROE (%) 9.7 12.1 8.3 12.0 13.1 13.3

Capex/sales (%) 4.6 5.5 4.8 5.2 4.1 4.0

Capex/depreciation (x) 1.2 1.4 1.3 1.4 1.1 1.1

Net debt/equity (%) 12.3 6.6 3.0 2.4 -2.7 -8.9

Net interest cover (x) 12.5 18.6 17.9 27.5 59.0 221.9

Source: Company data, Deutsche Bank estimates

Page 3: Company Buy A B Foodspg.jrj.com.cn/acc/Res/CN_RES/INVEST/2016/7/29/6e208aef-c...2016/07/29  · Markets Research Rating Buy A B Foods Europe United Kingdom Consumer Staples Food Manufacturing

29 July 2016

Consumer Staples

A B Foods

Deutsche Bank AG/London Page 3

Table Of Contents

A brief history ...................................................................... 4 Diversification, acquisition and expansion .......................................................... 4

A summary: the ABC of ABF ............................................... 6 The group today ................................................................................................. 6 Management team ............................................................................................. 7 Shareholder structure ......................................................................................... 7 Financial summary ............................................................................................. 8 Share price performance .................................................................................. 12 Strategy ............................................................................................................ 12 Balance sheet ................................................................................................... 13

Grocery .............................................................................. 17 Grocery division in the group context ............................................................... 17 Description of ABF’s Grocery division .............................................................. 17 Track record and performance ......................................................................... 18 Market share and competitive landscape ......................................................... 19 Strategy and the future ..................................................................................... 23

Sugar ................................................................................. 24 Sugar division in the group context .................................................................. 24 An introduction to the sugar industry ............................................................... 24 Description of ABF’s Sugar division ................................................................. 28 Track record and performance ......................................................................... 32 Market share and competitive landscape ......................................................... 33 Strategy and the future ..................................................................................... 33

Agriculture ......................................................................... 34 Agriculture division in the group context .......................................................... 34 An introduction to the animal feeds industry.................................................... 34 Description of ABF’s Agriculture division ......................................................... 34 Track record and performance ......................................................................... 35 Market share and competitive landscape ......................................................... 36 Strategy and the future ..................................................................................... 36

Ingredients ......................................................................... 37 Ingredients division in the group context ......................................................... 37 An introduction to the ingredients industry ...................................................... 37 Description of ABF’s Ingredients division ......................................................... 38 Track record and performance ......................................................................... 39 Market share and competitive landscape ......................................................... 39 Strategy and the future ..................................................................................... 39

Retail .................................................................................. 40 Retail division in the group context .................................................................. 40 Description of ABF’s Retail division .................................................................. 40 Track record and performance ......................................................................... 48 Market share and competitive landscape ......................................................... 54 Strategy and the future ..................................................................................... 57

Page 4: Company Buy A B Foodspg.jrj.com.cn/acc/Res/CN_RES/INVEST/2016/7/29/6e208aef-c...2016/07/29  · Markets Research Rating Buy A B Foods Europe United Kingdom Consumer Staples Food Manufacturing

29 July 2016

Consumer Staples

A B Foods

Page 4 Deutsche Bank AG/London

A brief history Diversification, acquisition and expansion

Rising from bakery

With its founding roots in a chain of bakeries in Toronto opened by George

Weston in the late 1800s, AB Foods (ABF) has turned into an international

conglomerate with diverse operations. This section highlights some key

moments in ABF’s history, from processing ingredients and groceries to selling

apparel and developing enzyme technologies.

Allied Bakeries Ltd was incorporated in 1935 by W. Garfield Weston, president

of George Weston Limited that his father had founded in Canada. Allied

Bakeries was a group of biscuit and bread factories in the UK and it expanded

rapidly. It rebranded to Associated British Foods (ABF) in 1960 and acquired

Twinings in 1964. In 1969 the group opened its first clothing store under the

Penneys brand in Mary Street, Dublin. By the 1970s, ABF’s strengths lay in

bakery, milling and its grocery business but its operations also included

activities in seed technology, restaurants and catering. Since then, we can

divide the modern history of the group into three periods.

Period 1 – 1980s and 1990s: Diversification

The 1980s and 1990s marked the first key period in ABF’s modern history:

decades of diversification that shaped how the company looks today. In this

time, ABF formed its ingredients business and acquired its sugar and

agricultural businesses. Penneys, which had entered the UK in 1973 using the

brand Primark since Penneys was registered to JC Penney, continued to grow.

In 1992 it opened a 50,000 sq ft major flagship on O’Connell Street, Dublin.

Period 2 – 1999-2005: Acquisitions which define the group

As a result of weak trading in the late 1990s, ABF exited its food retailing

business in 1997 and focused on strengthening its core businesses through a

series of acquisitions. ABF acquired almost 20 companies between 1999-2005.

These included Ovaltine, which would later be merged with Twinings and

together are the bulk of today’s Grocery division. Primark developed through

acquiring parcels of stores. In 1999 it acquired 11 stores from the Co-Op and in

2000 it acquired 11 stores from C&A which exited the UK market. 2005 was a

seminal year in the development of Primark. During the year it acquired 6 UK

stores from department store chain Allders, allowing it to open a major 70,000

sq ft flagship on Oxford Street, London. This better enabled the brand to begin

to express a stronger fashion image. In July 2005 ABF acquired Littlewoods

stores (120 stores in total, of which 41 stores became Primark). This would

propel the growth and development of Primark, which became the largest

profit by division in FY Sep-06.

Period 3 – 2006-2015: The age of Primark

Having evolved into a large-sized store format and developed its fashion

credentials in the UK & Ireland, Primark then embarked upon continental

European expansion in 2006 by opening in Spain. A smooth management

transition in 2009 took place when Arthur Ryan, who had founded the

business 40 years previously, was succeeded as Primark CEO by Paul

Marchant, who had been recruited from UK value fashion competitor New

Look. By 2014 the brand was ready to announce its entry into the US, and it

opened its doors the following year. By FY Sep-14 Primark had become the

majority of group profits and arguably the main driver of ABF’s share price.

Page 5: Company Buy A B Foodspg.jrj.com.cn/acc/Res/CN_RES/INVEST/2016/7/29/6e208aef-c...2016/07/29  · Markets Research Rating Buy A B Foods Europe United Kingdom Consumer Staples Food Manufacturing

29 July 2016

Consumer Staples

A B Foods

Deutsche Bank AG/London Page 5

Figure 1: Key events in ABF’s history

1935 Allied Bakeries founded by W. Garfield Weston

1960 The company is renamed Associated British Foods

1964 Twinings acquired

1969 First apparel store, named 'Penneys', is opened in Dublin in June under the leadership of Arthur Ryan

1971 Food retail business, Fine Fares, opens its first superstores

1973 Primark opens its first store in the UK

1982 ABF lists on the stock exchange

1986 Fine Fares sold to what became Somerfield

1988 George Weston, grandson of the founder, joins the company as manager of flour-milling operations in Australia

1991 British Sugar (including AB Agri) acquired

1995 ABF acquires Kraft’s food ingredients business, first named AC HUMKO and later ACH

1997 Exit of food retail through sale of Irish supermarkets to Tesco

1999 Garry Weston, son of W. Garfield, retires, having run the company since 1967. Peter Jackson becomes CEO.

Garry’s son George is appointed to the board and John Bason appointed as Finance Director

2002

2004

Ovaltine acquired for £171m

AB Mauri (ingredients business) is formed from a number of acquisitions of bakery ingredients businesses

2005 Allders & Littlewoods stores are acquired in the UK

George Weston succeeds Peter Jackson as CEO in April

Fire in Primark distribution centre in Magna Park, Lutterworth

2006 Primark's first store in continental Europe opens in Spain

AB Sugar acquires a 51% stake in Illovo for £317m

2007 Aquires Patak’s and takes 20% stake in Jordans for a combined c.£150m

Vivergo Fuels formed as a joint venture between ABF, BP and DuPont

2008 ABF’s Jordans and Ryvita businesses merge to form Jordans & Ryvita, 62% owned by ABF

Primark enters the Netherlands

AB World Foods is formed

2009 Arthur Ryan becomes Chairman of Primark as Paul Marchant joins from New Look to become CEO

Primark enters Portugal and Germany

AB Sugar acquires Azucarera (Iberian sugar business)

2010 Primark enters Belgium

2012 Primark enters Austria

Agriculture: AB Connect is formed (UK feed business) and AB Vista launches the Quantum blue enzyme

Vivergo begins production of bioethanol in Hull (UK)

2013 Primark enters France

Primark runs 12 week trial of online sales with Asos, subsequently discontinued

Collapse of a factory in Bangladesh used by Primark (as well as H&M, Inditex and numerous other brands) sparks controversy about workers' conditions

Jordans & Ryvita now fully owned by ABF

2014 In April Primark announces its intention to launch in the US

2015

Primark enters the US with opening in Boston

AB Sugar closes 2 factories in Heilongjiang Province, Northern China

2016 Primark opens its first store in Italy

Acquisition of Illovo minority stake for £245m

Source: Deutsche Bank, company data

Page 6: Company Buy A B Foodspg.jrj.com.cn/acc/Res/CN_RES/INVEST/2016/7/29/6e208aef-c...2016/07/29  · Markets Research Rating Buy A B Foods Europe United Kingdom Consumer Staples Food Manufacturing

29 July 2016

Consumer Staples

A B Foods

Page 6 Deutsche Bank AG/London

A summary: the ABC of ABF

The group today

5 business segments, with operations throughout the supply chain

ABF has 5 separate business segments. These are briefly summarised as:

Grocery: owns and manufactures food brands, ranging from hot

beverages (e.g. Twinings) to world foods (e.g. Patak’s).

Sugar: grows, processes and sells beet and cane sugar, predominantly

for use in industry. It also produces co-products, for example

generating power for its own operations, and in some markets

exporting its surplus.

Agriculture: focuses on manufacturing animal feed and developing

new technologies for animal nutrition.

Ingredients: primarily manufactures yeast and bakery ingredients, but

also has operations in the pharmaceuticals, chemicals and other

industries.

Retail: value fashion retailing in all major European markets and in the

US through its Primark brand (named Penneys in Ireland but in this

report we use Retail and Primark interchangeably).

Figure 2: A breakdown of ABF’s businesses and brands

Business Breakdown Brands/Description

Grocery AB World Foods Blue Dragon, Patak's, Levi Roots, Tabasco, Meena's

Allied Bakeries Kingsmill, Allison, Burgen, Sunblest

George Weston foods Tip Top, Golden, Burgen, Watsonia, Mauri anz, Don, KR Castlemaine, Jasol, Abbott’s Village Bakery

Speedibake Produces bakery products

Twinings Ovaltine Twinings, Ovaltine

Westmill foods Asli, Pride, Lea & Perrins, HP sauce, Stokelys, Rajah, Tolly Boy, Lucky Boat noodles, Levi Roots, Jimmy's, Green Dragon, Guru, Habib, Elephant Atta, Daawat, Asli Atta, Amoy, Patak's

ACH Mazola, Capullo, Spice Islands, Durkee, Weber seasoning, Tone's, French's, Patak's, Karo, Argo, Kingsford, Fleischmann's, Henri's

Allied Mills Produces flour and semolina

Jordans, Dorset & Ryvita Jordans, Dorset Cereals, Ryvita

Silver spoon company

Strata

Sells sugar

Sells bottled oil products

Sugar AB Sugar China, British Sugar, Azucarera, Illovo, Vivergo, Germains (seed technology)

Agriculture AB Agri AB Vista, AB Connect, Speciality Nutrition, AB Sustain, AB Agri China, Frontier Agriculture

Ingredients AB Enzymes Enzymes for baking, food, animal feed, textile, pulp and paper

Ohly Yeast extracts, yeast based flavours and speciality powders

SPI Pharma Supplies pharmaceutical industry

AB Mauri Yeast and bakery ingredients

ABITEC Corporation Ingredients for toll manufacturing, pharmaceutical industry, nutritional sciences, speciality chemicals, personal care and cosmetics

PGP international Supplies and manufactures cereal food ingredients

Retail Primark & Penneys Clothing, footwear, accessories and homewares retailer

Source: Company data, Deutsche Bank

Page 7: Company Buy A B Foodspg.jrj.com.cn/acc/Res/CN_RES/INVEST/2016/7/29/6e208aef-c...2016/07/29  · Markets Research Rating Buy A B Foods Europe United Kingdom Consumer Staples Food Manufacturing

29 July 2016

Consumer Staples

A B Foods

Deutsche Bank AG/London Page 7

Management team

Charles Sinclair: Non-executive Chairman

Charles Sinclair was appointed Chairman of ABF in April 2009. He joined ABF

in 2008 from Daily Mail and General Trust plc, where he was CEO for over 20

years. He previously was a director at Reuters, Schroders and Euromoney

Institutional Investor.

There are two executive directors:

George Weston: CEO

George Weston, a grandson of the company’s founder W. Garfield Weston,

became CEO in 2005. He succeeded Peter Jackson, the company’s only CEO

outside of the Weston family. Mr Weston was previously Managing Director of

George Weston Foods, Westmill Foods and Allied Bakeries at ABF. He is a

non-executive director of Wittington Investments Limited and a trustee of the

Garfield Weston Foundation.

John Bason: Finance director

John Bason was appointed as finance director in May 1999. He was previously

finance director at Bunzl Plc. He is currently a non-executive director at

Compass Group plc.

Shareholder structure

55% is family owned...

ABF has one class of share and the Weston family holds a 54.5% controlling

stake through the company Wittington Investments Ltd (50.9%) and its

subsidiary Howard Investments Limited (3.6%). For the remaining free float,

the average daily volume traded has fallen since its peak in 2007 and has

remained stable at 800,000 shares over the last few years.

Figure 3: Top 5 shareholders

Shareholder Share

Wittington Investments Ltd 54.5%

Capital Group companies Inc 10.0%

Fidelity Management & Research 3.3%

Blackrock 3.2%

Associated British Foods trustee 2.0% Source: Bloomberg Finance L.P.19 July 2016

...of which a charitable foundation owns a majority stake

Wittington Investments Ltd is a company which manages investments in a

wide range of assets. Its largest is its shareholding in ABF but it also owns

Fortnum and Mason plc and Heal’s plc as well as real estate and other assets.

The Garfield Weston Foundation was set up in 1958 and is the beneficial

owner of 79.2% of Wittington Investments Ltd, and therefore ABF’s ultimate

controlling party. Its trustees are descendants of the Weston family, including

ABF’s CEO George Weston. The trustees are not remunerated for their work at

the foundation. The foundation states that all income is spent each year,

including on grants to a wide range of UK charities.

Page 8: Company Buy A B Foodspg.jrj.com.cn/acc/Res/CN_RES/INVEST/2016/7/29/6e208aef-c...2016/07/29  · Markets Research Rating Buy A B Foods Europe United Kingdom Consumer Staples Food Manufacturing

29 July 2016

Consumer Staples

A B Foods

Page 8 Deutsche Bank AG/London

ABF is not affiliated to other Weston family businesses such as George Weston

Limited in Canada, which owns the publicly traded Loblaw and Weston Foods,

or Selfridges & Co. in the UK, but ABF does have common key management

personnel with these companies.

Financial summary

A £13bn revenue business

ABF’s diverse operations generated c.£13bn of revenues and profits of over

£1bn in 2015.

Figure 4: ABF generated revenues of c.£13bn in 2015 ... Figure 5: ... and group adjusted profits of over £1bn

5,6

22

5,9

96

6,8

00 8

,235 9,2

55

10,1

67

11,0

65

12,2

52

13,3

15

12,9

43

12,8

00

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Group Sales (£m)

555

561 622 664 720

909

920

1,0

77 1,1

80

1,1

63

1,0

92

0

200

400

600

800

1,000

1,200

1,400

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Group adj. EBIT (£m)

Source: Company data, year end September

Source: Company data, year end September

A number of P&L adjustments

A fuller P&L record is shown in Figure 6. Adjusted operating profit (adj. EBIT) is

reported after charging central costs and booking ABF’s share of post-tax

profits/losses from joint ventures and associates. There are numerous JVs and

Associates but these include Vivergo Fuels in Sugar (prior to 2015), and

Frontier Agriculture.

Figure 6: A bridge from adjusted operating profit to profit before tax

YE September 2006 2007 2008 2009 2010 2011 2012 *2013 2014 2015

Revenue 5,996 6,800 8,235 9,255 10,167 11,065 12,252 13,315 12,943 12,800

Adjusted operating profit (adj. EBIT)** 561 622 664 720 909 920 1,077 1,180 1,163 1,092

Net Profits on sale of non-current assets 10 8 10 -1 -9 5 -6 0 -11 8

Amortisation of non-operating intangibles -41 -74 -74 -82 -81 -83 -100 -92 -72 -55

Exceptional items -97 0 -46 -12 0 0 -98 0 0 -98

Operating profit 433 556 554 625 819 842 873 1,088 1,080 947

Net Profit/(loss) on business sale/closure -12 -39 5 -65 28 0 -9 -128 -2 -172

Net financial income/(expense) -2 -9 -32 -65 -84 -85 -103 -92 -58 -58

Adjusted Profit Before Tax 559 613 632 655 825 835 974 1,088 1,105 1,034

Profit Before Tax 419 508 527 495 763 757 761 868 1,020 717

Adjusted EPS p 50.9 53.0 54.9 57.6 72.2 74.0 87.2 98.1 104.1 102.1

EPS p 38.1 46.7 45.2 45.5 69.3 68.7 70.4 74.1 96.5 67.3

Source: Company data, Deutsche Bank * restated; ** includes central costs and share of JVs/associate profits and losses

Below adj. EBIT there are three charges taken which bridge to Operating profit.

These are [1] net profits on sale of non-current assets, [2] the amortisation and

impairment of non-operating intangibles. These are intangible assets that arise

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on business combinations and typically include technology, brands, customer

relationships and grower agreements; and [3] exceptional items. Exceptional

non-cash impairment charges in 2012 were taken for the Australian meat

business within George Weston Foods and in 2015 were taken largely for

shareholder loans to Vivergo Fuels.

Figure 7 sets out these adjustments to operating profit, sliced by division.

Figure 7: The adjustments to EBIT shown by division

2006 2007 2008 2009 2010 2011 2012 *2013 2014 2015

Adjusted operating profit (adj. EBIT)** 561 622 664 720 909 920 1,077 1,180 1,163 1,092

- Grocery 182 153 194 191 229 244 187 224 269 285

- Sugar 115 199 153 168 240 315 510 434 189 43

- Agriculture 15 18 33 34 33 40 40 47 50 60

- Ingredients 79 71 78 88 104 61 27 5 41 76

- Retail 185 200 233 252 341 309 356 513 662 673

- Central costs -22 -26 -28 -34 -42 -48 -48 -51 -49 -45

- Discontinued activities (within Adj EBIT) 7 7 1 21 4 -1 5 8 1 0

Total adjusting items -128 -66 -110 -95 -90 -78 -204 -92 -83 -145

- Grocery -8 -14 -81 -27 -14 -21 -114 -19 -44 0

- Sugar -93 -32 2 -26 -57 -29 -21 -21 -17 -130

- Agriculture -1 0 0 -13 3 -1 -1 -1 -2 1

- Ingredients -29 -28 -34 -29 -23 -27 -61 -51 -2 -1

- Retail 2 8 3 0 0 0 0 0 -14 -8

- Central costs 1 0 0 0 1 0 -7 0 -4 -7

Operating profit 433 556 554 625 819 842 873 1,088 1,080 947

- Grocery 174 139 113 164 215 223 73 205 225 285

- Sugar 22 167 155 142 183 286 489 413 172 -87

- Agriculture 14 18 33 21 36 39 39 46 48 61

- Ingredients 50 43 44 59 81 34 -34 -46 39 75

- Retail 187 208 236 252 341 309 356 513 648 665

- Central costs -21 -26 -28 -34 -41 -48 -55 -51 -53 -52

- Discontinued activities (within Adj EBIT) 7 7 1 21 4 -1 5 8 1 0 Source: Company data, Deutsche Bank * restated; ** includes central costs and share of JVs/associate profits and losses

Below operating profit sit net profits/losses on business sale/closure (Figure 6).

The two largest charges taken were in 2013 and 2015. In 2013 this was mostly

for disposals and closures in Ingredients in US, China and India, but also for

the disposal of a sugar business in Chifeng, north China. In 2015 these charges

were taken on ABF’s sale of two beet sugar factories in north China and to

account for the effective disposal of ABF’s original equity-accounted stake in

the Vivergo JV prior to assuming BP’s 47% interest in the business.

Retail (Primark) is today the largest division by both sales and adj. EBIT...

Retail is currently ABF’s largest division. It accounts for c.40% of group sales

and c.60% of group adj. EBIT (measured before central costs). Grocery is the

second largest division, generating a quarter of group sales and adj. EBIT.

Hence, after Primark, ABF’s second biggest brand in the group is Twinings, we

estimate representing c.5% of group sales and c.9% of group adj. EBIT.

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The remaining divisions (Sugar, Agriculture and Ingredients) make smaller

contributions to sales and profits today. Retail has only recently begun to

dominate the group financially. As recently as 2012 the Sugar division

represented 46% of group profits and in 2005 Grocery accounted for 46% of

revenues. As of 2015, ABF’s most profitable sugar business, Illovo, was fully

consolidated in adj. EBIT but 51% owned, with its non-controlling share

deducted as a non-controlling interest at the net income level. It announced

the acquisition of the minority stake in 2016.

Figure 8: Retail currently generates c.40% of group

sales...

Figure 9: ...and c.60% of group adj. EBIT

Grocery

25%

Sugar

14%

Agriculture

9%Ingredients

10%

Retail

42%

Group Sales Split 2015

Grocery

25%

Sugar

4%

Agriculture

5%

Ingredients

7%

Retail

59%

Group adj. EBIT before central costs 2015

Source: Company data

Source: Company data

... and has been the main driver of sales and adj. EBIT growth in past decade

The summary growth rates of ABF’s separate divisions are shown in Figure 10.

Figure 10: Retail and Agriculture have grown profits fastest in the past 10 years

Sales £m Adj. EBIT £m Adj. EBIT margin % Sales CAGR % Adj. EBIT CAGR %

FY Sep-15 FY Sep-15 FY Sep-15 2005-15 2005-15

Group 12,800 1,092 8.5% 9% 7%

Grocery 3,177 285 9.0% 2% 4%

Sugar 1,818 43 2.4% 10% -13%

Agriculture 1,211 60 5.0% 5% 12%

Ingredients 1,247 76 6.1% 8% 2%

Retail 5,347 673 12.6% 18% 17%

Central/eliminations 0 -45 na na na

Source: Company data. Deutsche Bank

The story of the past decade is perhaps best summarised in Figure 11 and

Figure 12. Primark represented 60% of the group’s sales growth and virtually

all of the group’s adj. EBIT growth over the last decade. It has achieved this

through expansion in the UK and entering continental Europe.

Sugar has, in particular, experienced difficult trading since 2013 as a result of

falls in World and European sugar prices which have essentially been caused

by over-supply from larger than expected harvests. 2015 was notable for its

poor Sugar performance: divisional adj. EBIT fell from £189m to £43m as low

prices pushed down margins.

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Figure 11: Retail was over 60% of sales growth ... Figure 12:...and almost all the adj. EBIT growth 2005-15

5,614

12,810

587

1,118476

664

4,341

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2005 Sales Grocery Sugar Agriculture Ingredients Retail 2015 Sales

Sales bridge, 2005 to 2015 (£m)

555

1,092

(24)

100

(123)

4011

533

0

200

400

600

800

1,000

1,200

2005 adj. EBIT

Central costs

Grocery Sugar Agriculture Ingredients Retail 2015 adj. EBIT

Adj. EBIT bridge, 2005 to 2015 (£m)

Source: Company data, continuing revenue

Source: Company data

The UK remains the biggest market

The UK and Europe & Africa are key regions for ABF. In 2015, the UK

generated 42% of group revenues and Europe & Africa a little behind at 32%.

The regional shares have seen little change since 2010, with the exception of

Europe & Africa growing in importance at the expense of Asia Pacific.

Figure 13: Over 70% of revenues come from the UK,

Europe and Africa...

Figure 14: ...and 80% of profits

UK

42%

Europe & Africa

32%

Americas

10%

Asia Pacific

16%

Revenues by geography, pre disposals 2015

UK

49%

Europe & Africa

31%

Americas

13%

Asia Pacific

7%

Group adj. EBIT by geography, pre disposals 2015

Source: Company data

Source: Company data

Exposure to a range of currencies

ABF is exposed to currency movements because of this diverse geographic

exposure. The company does not actively hedge the translation impact of

foreign exchange rate movements on the income statement but receives

foreign currency earnings and fixes its currency rates at the point of

purchasing goods and services.

The currency exposure varies by division but generally a weak Sterling against

Euro and US Dollar is favourable for the group. In Grocery the effects are

mostly translation. We estimate that around 40% of Grocery sales are UK with

the other main currencies being Euro, US Dollar and Australian Dollar. In Sugar

there are translation effects from China, Southern Africa and Spain. There is

also a transactional effect at British Sugar, where its end sale is priced in Euros

but its costs are in Sterling. As a result we estimate that less than 10% of

Sugar sales are in Sterling. In Retail the movement of Sterling is more

conflicting. With around half of sales and profits in the UK and the rest in

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Consumer Staples

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Page 12 Deutsche Bank AG/London

Euros, weak Sterling has a positive translation effect. However, about 80% of

costs of goods sold are in US dollars, so strength of USD against Sterling and

Euro causes higher purchasing costs. In Agriculture, the main business AB

Vista supplies yeast and natural nutrients to the global animal nutrition

industry. It is headquartered in the UK but operates regional hubs in Brazil,

India, North America, Singapore and Spain. Agriculture also operates AB Agri

China and some UK-only businesses such as the Frontier Agriculture JV. In

Ingredients, the majority of the division is AB Mauri which is a global supplier

of yeast and bakery ingredients to more than 90 countries. It has both non-

Sterling sales and operating costs.

Share price performance

Total shareholder returns have closely followed EPS. Since 2010 the expansion

of Primark in Europe has helped ABF shares outperform the FTSE100. In recent

years Sugar profit declines have partly offset the profit growth in Retail.

Figure 15: ABF has outperformed the market since 2010,

largely as a result of Primark’s success

Figure 16: EPS revisions were downward in FY Sep-15

40

50

60

70

80

90

100

110

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

2000 2002 2004 2006 2008 2010 2012 2014 2016

EP

S (

p)

Tota

l share

hold

er

retu

rn r

ela

tive t

o F

TS

E100

ABF performance relative to FTSE100

Total shareholder return (LHS)

EPS (RHS)

40

50

60

70

80

90

100

110

120

130D

ec 0

4

Dec 0

5

Dec 0

6

Dec 0

7

Dec 0

8

Dec 0

9

Dec 1

0

Dec 1

1

Dec 1

2

Dec 1

3

Dec 1

4

EPS momentum (p)

2008 2009

2010 2011

2012 2013

2014 2015

Source: Deutsche Bank, Datastream, company data. We have used annual adjusted EPS and the latest reported figure is for FY Sep-15; data correct as of 22 July 2016

Source: Deutsche Bank, IBES, Datastream; data correct as of 22 July 2016

Strategy

The five business segments are managed separately, with the corporate centre

agreeing divisional strategy and budgets as well as managing the group

balance sheet. The corporate centre also provides some shared services, such

as finance, procurement, and sharing best practice. Broadly the group-wide

strategy is to develop strong and sustainable positions in their markets through

both organic growth and acquisitions.

On a divisional basis, the strategies differ:

In Grocery it is to develop and grow its brands, depending on their

stage of development, in new and existing markets. This can be

through both product innovation and range extension. It also

selectively pursues M&A;

In Sugar its aim is to be a world-leading sugar business. Its strategy is

to reduce the cost base to make it more profitable at current sugar

prices and for a post-quota world. Additionally the division aims to

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expand its co-product operations, including ethanol and power

generation;

Agriculture aims to improve the sustainability of food production and

make agri-food production more efficient through innovation and

partnerships. It aims to diversify geographically both organically and

through the pursuit of strategic acquisitions and partnerships;

In Ingredients the strategy is to provide a relevant supply of

ingredients and technology to its customer base. It aims to grow by

serving its customers backed by high levels of research and

development and investment in technology;

In Retail the focus is on organic expansion opportunities in Europe and

in the US, in regions where it already has operations.

Balance sheet

A strengthening balance sheet

ABF currently has the lowest level of gearing in a decade. In FY Sep-11, net

debt was £1.3bn but by the end of FY Sep-15 it had declined to £0.2bn. Net

debt balances tend to be higher at the H1 balance sheet date, implying

average annual net debt is several hundred millions higher than at year end.

Adjusted net debt/EBITDAR currently stands at 1.2x, after a steady decline

since 2011. Management has indicated on several occasions that it is

comfortable that the cash position of the company would enable it to carry out

any investment projects. To quote George Weston at the company’s full year

results presentation for FY Sep-12: “...the balance sheet is the servant of the

business, not the other way round”.

Figure 17: Net debt has been declining Figure 18: Adjusted net debt/EBITDAR is 1.2x

212

-298 -311

-791

-999

-816

-1,285

-1,061

-804

-446

-194

-1,400

-1,200

-1,000

-800

-600

-400

-200

0

200

400

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Net cash/(debt) £m

0.1 x

1.0 x 0.9 x

1.4 x

1.6 x

1.4 x

1.6 x1.5 x

1.4 x

1.2 x 1.2 x

-0.3 x

0.4 x 0.4 x

0.9 x1.0 x

0.7 x

1.0 x

0.7 x

0.5 x

0.3 x0.1 x

-0.5

0.0

0.5

1.0

1.5

2.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Adj net debt/EBITDAR Net debt/EBITDA

Source: Deutsche Bank, company data

Source: Deutsche Bank, company data. Leases capitalised at 8x

£2bn of firepower from committed debt facilities

ABF has total committed facilities amounting to £2.1bn, of which over half

(£1.2bn) is in the form of a revolving credit facility that matures in July 2020.

The remainder of the group’s debt facilities consist of £0.6bn of US private

placement notes and £0.3bn of locally committed funds in Africa and Spain.

ABF owns a large proportion of its land and buildings...

ABF’s operating lease charge on property rentals in FY Sep-15 was £192m.

These are typically fixed leases with no contingent (turnover-related) portion.

We know from Primark’s UK subsidiary accounts (Primark Stores Ltd) that the

UK rental charge was £81.1m (42% of the group operating lease charge).

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ABF had land and buildings on its balance sheet of £2,255m at cost with a net

book value of £1,759m as at September 2015. The majority of this, we believe,

relates to Primark store freeholds in UK and Ireland. The company does not

revalue its properties within its balance sheet but in September 2007 disclosed

a valuation of Primark properties: £1.0bn on a vacant possession, £1.26bn with

a Primark covenant and £0.58bn in net book value. Since 2007 ABF has added

c.£140m of Primark UK freehold at cost and c.£550m of freehold across the

group and all of its divisions. If we assume three-quarters of this relates to

Primark then we estimate a rental shield of c.£75m, which in turn implies that

Primark’s EBIT margin is around 140bps higher than it would be if it operated

on a fully leased basis.

Figure 19: Net Book Value of land and buildings within ABF and Primark UK

Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15

Net book value of Land & Buildings 1,097 1,278 1,487 1,610 1,778 1,751 1,796 1,824 1,759

- Freehold 874 976 1,161 1,249 1,385 1,365 1,388 1,399 1,360

- Long leasehold 153 214 242 271 295 290 313 322 301

- Short leasehold 70 88 84 90 98 96 95 103 98

ow Net book value of Primark 579 NA NA NA NA NA NA NA NA

ow NBV of Primark UK* 420 413 472 487 491 504 509 510 510

Primark valuation on vacant possession 1,002 NA NA NA NA NA NA NA NA

Valuation on Primark covenant 1,262 NA NA NA NA NA NA NA NA Source: Deutsche Bank, company data, * Primark Stores Ltd accounts Note: Company disclosed an external valuation in its FY Sep-07 annual report

... although off balance sheet liabilities are significant

Despite ABF’s property ownership it still has significant operating lease

liabilities. As at September 2015 its minimum future lease payments were

£3.5bn and total operating lease charges during the year were £206m. Dividing

the two gives a rough sense of an average lease length being 17 years.

However, management has suggested that the leases coming on balance

sheet under the new accounting standards at the end of the decade would be

in the ‘order of some £2bn’.

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Figure 20: ABF’s operating lease base has increased by 5x since 2005

684870

1,210

1,5251,657

1,898

2,5182,733

2,884

3,3113,511

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Future minimum operating lease payments at YE(land & buildings)

Within 1 year 1-5 years After 5 years

Source: Deutsche Bank, Company data

Capital expenditure is increasingly focussed on retail

Capex has been spent at Primark on store openings, expansions, relocations

and improvements to its distribution facilities. In the other businesses,

management has focussed on improving efficiency (e.g. Allied Bakeries),

opening new production plants (e.g. AB Mauri) and re-launching brands (e.g.

Twinings).

Figure 21: Capex* has declined since 2011, but investment into Primark has

remained steady

403445 427

575 579

726844

714

616

708

614

0

1

2

3

4

5

6

7

8

9

0

100

200

300

400

500

600

700

800

900

1,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Other (£m LHS) Primark (£m LHS) Capex/Sales (% RHS)

Source: Deutsche Bank, company data, * excluding acquisitions

Return on capital is highest in retail

Returns vary by division, as Figure 22 shows. Returns are highest in Retail and

Grocery, although historically Sugar returns have been higher. The returns

shown for Retail are influenced by the proportion of freehold in its mix, which

has been declining. We discuss Primark’s returns in the Retail chapter.

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Figure 22: Return on average capital employed* is highest in the Retail and

Grocery divisions

Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15

Grocery 19.7% 17.6% 12.2% 16.9% 20.8% 22.5%

Sugar 14.0% 17.3% 26.5% 23.3% 10.5% 2.4%

Agriculture 18.1% 19.0% 16.5% 16.4% 17.3% 19.2%

Ingredients 8.3% 8.3% 4.3% 0.6% 5.8% 11.1%

Retail 23.5% 18.2% 19.2% 26.0% 33.2% 31.1% Source: Company data (pre-tax, ex leases), *Company definition: Adj EBIT/average capital employed

Pension fund is well funded

The company has defined benefit pension schemes which mostly relate to the

UK. The UK scheme was closed to new entrants in October 2002. At FY Sep-15

it had an IAS19 net deficit of £16m with scheme assets and liabilities of £3.6bn

and having made cash contributions of £39m during the year. A triennial

valuation of the UK scheme was undertaken as at 5 April 2014. The scheme

had a surplus of £90m so there is no recovery plan in place.

Figure 23: ABF has relatively low valuation sensitivity to changes in discount & inflation rates

FY Sep-15 Market Cap £m

Assets £m Liabilities £m

Net -25bps discount rate (£m)

+25bps inflation

(£m)

Discount sensitivity/m

arket cap

Inflation sensitivity/m

arket cap

Discount rate used

(%)

Inflation rate used

(%)

ABF UK pension 21,264 3,343 -3,253 90 -150 -133 1% 1% 3.8% 3.3%

ABF Overseas pension 21,264 291 -391 -100 na na na na 0.9-16.3% 0-7.4%

Irrecoverable surplus -6 na na na na na na

Total 21,264 3,634 -3,644 -16 na na na na na na

Source: Company data (last financial year), Deutsche Bank, Thomson Reuters (29 Jun 2016)

Dividends are considered against adjusted EPS

Dividends have steadily risen over the last decade and were 35p per share in

2015. This resulted in a payout ratio of c.50%, significantly higher than its 10

year average of c.40%, as shown in Figure 24. The board has a progressive

dividend policy and considers dividends against its Adj EPS metric.

Figure 24: Dividends have been rising since 2005 Figure 25: 2015 had a bumper payout ratio

18 19 20 20 21

2425 25

32

3435

0%

5%

10%

15%

20%

25%

30%

0

5

10

15

20

25

30

35

40

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

DPS (LHS) Growth rate (RHS)

37%

49%

42%

45%46%

34%36% 36%

44%

35%

52%

0%

10%

20%

30%

40%

50%

60%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Dividend payout ratio 10 yr average

Source: Deutsche Bank, company data

Source: Deutsche Bank, company data

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Grocery

Grocery division in the group context

Grocery’s contribution to ABF has been declining

Over the past decade Grocery has reduced as a proportion of group sales. In

2005 it was ABF’s largest business, accounting for 46% of group revenues.

This has steadily declined to 25% by 2015, as a result of Primark’s fast growth.

Figure 26: While its contribution to group sales has

declined since 2005...

Figure 27: ...its adj. EBIT* contribution has been more

stable and has recovered to a quarter of the group

46%

43%

38%

34%

34%

34%

33%

30%

27%

26%

25%

54%

57%

62%

66%

66%

66%

67%

70%

73%

74%

75%

0%

25%

50%

75%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Grocery as a % of salesGrocery Other

32%

32%

24%

28%

26%

24%

25%

17%

18%

22%

25%

68%

68%

76%

72%

74%

76%

75%

83%

82%

78%

75%

0%

25%

50%

75%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Grocery as a % of adj. EBIT

Grocery Other

Source: Company data, Deutsche Bank

Source: Company data, Deutsche Bank; * adj. EBIT before central costs

Description of ABF’s Grocery division

Manufactures and sells grocery brands

Grocery is the second largest division within ABF, producing a quarter of

revenues and adj. EBIT. The grocery business manufactures and sells a variety

of consumer facing brands. It operates across hot beverages, sugar, vegetable

oils, world foods, baked goods, herbs & spices and meat, and a

comprehensive list of brands were shown in Figure 2.

Figure 28 and Figure 29 show an estimated breakdown of revenue and profit

by brand. The company does not disclose these figures, however we estimate

Twinings Ovaltine to be its leading subdivision, generating c.30% of Grocery

revenues and c.60% of Grocery profits. ACH and Allied Bakeries also produce a

significant proportion of revenues; however we estimate they achieve single-

digit profit margins.

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Page 18 Deutsche Bank AG/London

Figure 28: Twinings Ovaltine generates an estimated

c.30% of Grocery revenues...

Figure 29: ...and 60% of Grocery Adj. EBIT at a margin of

17%

Twinings Ovaltine31%

Allied Bakeries19%

ACH15%

Jordans Dorset Ryvita

5%

World Foods5%

Other25%

Grocery Revenue 2015E

Twinings Ovaltine60%

ACH12%

Allied Bakeries10%

World Foods7%

Jordans Dorset Ryvita

6%

Other5%

Grocery Adj. EBIT 2015E

Source: Deutsche Bank estimates

Source: Deutsche Bank estimates

Below we summarise the key businesses and brands:

Twinings Ovaltine: merged in 2003 after the acquisition of Ovaltine for

£171m, these two brands are sold internationally. Twinings sells a

range of premium teas and Ovaltine sells malt based drinks. We

estimate Twinings to be slightly bigger than Ovaltine;

Jordans, Dorset & Ryvita: Dorset Cereals was acquired in October

2014 for £60m, and has been integrated with the Jordans Ryvita

business. Jordans and Dorset sell premium cereals, and Ryvita sells

crispbreads;

ACH: operates in North America and Mexico and its main business is

in edible oils (corn, olive, canola or rapeseed) through the brands

Mazola (in the US) and Capullo (in Mexico). ACH also sells herbs,

seasoning and spices;

Allied Bakeries: produces and sells bread in the UK. Its primary brand

is Kingsmill;

Other businesses include George Weston Foods (the Australian bread,

meats and baked goods division), AB World Foods and Westmill

Foods that sell a range of ethnic food brands (including Patak’s, Blue

Dragon and Elephant Atta) and Silver Spoon which sells refined sugar.

Track record and performance

Becoming a higher margin business

Over the last decade, grocery sales and profits have benefitted from several

acquisitions as well as strong performances from key brands including

Twinings and Ovaltine. As of recent years however, the business has faced

pressures from food commodity price deflation and tough competition, which

has resulted in declining revenues.

Grocery adj. EBIT has been volatile over the last decade and after a dip in 2012

(due to restructuring costs at George Weston Foods and Allied Bakeries and

the price pressures mentioned above) it has significantly recovered. Indeed

while revenues have fallen, adj. EBIT has risen since 2012. This is a reflection

of successful investment programmes and cost reduction measures at Allied

Bakeries as well as strong performances from Twinings Ovaltine, ACH and

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George Weston Foods. FY Sep-13 was also restated to transfer a flour milling

business of George Weston Foods from Grocery to Ingredients. The main

effect was to remove £272m from Grocery revenues in FY-13 and also boosted

margins by 30bps.

Figure 30: Revenues have fallen due to price deflation... Figure 31: ...but adj. EBIT has risen on the back of

increased efficiencies and product innovation

2,590 2,578 2,605

2,820

3,188

3,406

3,671 3,7263,568

3,3373,177

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Grocery sales £m

185 182

153

194191

229244

187

224

269

285

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

50

100

150

200

250

300

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Grocery adj. EBIT £m Grocery adj. EBIT margin %

Source: Company data, Deutsche Bank

Source: Company data, Deutsche Bank

Market share and competitive landscape

Due to the diverse brands owned by the grocery business that span numerous

industries and geographies, in this section we delve deeper into the key brands

by looking at the markets in which they operate and their key drivers.

Twinings: developing its premium range globally

We estimate that Twinings is a c.£700m brand by revenues and that the UK

contributes around one fifth of its sales. Twinings is the number 2 brand in the

£800m UK market (Euromonitor, 2015) and it has rapidly grown its market

share since 2012. Its 17% share however masks key differences within the

different subsectors, as shown in Figure 33 to Figure 35. Twinings dominates

the fruit/herbal and green tea markets by a clear distance as a result of its

refreshed product ranges, formats and advertising campaigns. In black tea the

market is less concentrated, with Twinings holding a 13% share in 2015.

Figure 32: Twinings is the second largest player in the

UK tea market, with a 17% market share

Figure 33: It is the number 4 player in Black Teas...

PG Tips (Unilever)18%

Twinings (ABF)17%

Tetley (Tata Global Beverages)

14%

Private label13%

Yorkshire (Betty's & Taylors Group)

10%

Typhoo (Apeejay Surrendra Group)

4%

Clipper (Koninklijke Wessanen)

3%

Other14%

UK tea market 2015

PG Tips (Unilever)25%

Tetley (Tata Global Beverages)

17%

Private label15%

Yorkshire (Bettys & Taylors Group)

15%

Twinings (ABF)13%

Typhoo (Apeejay Surrendra Group)

5%

Clipper (Koninklijke Wessanen)

3%

Others7%

UK Black Tea market share, 2015

Source: Euromonitor

Source: Euromonitor

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Figure 34: ... but it is the clear market leader in an

otherwise fragmented fruit/herbal tea market...

Figure 35: ...as is the case in the green tea market, in

which Twinings has a 32% market share

Twinings (ABF)33%

Private label10%

Pukka (Pukka Herbs)

6%

Yogi Tea (East West Tea Co)

4%

Tetley (Tata Global Beverages)

1%

Others31%

UK Fruit/Herbal Tea market share, 2015

Twinings (ABF)32%

Clipper (Koninklijke Wessanen)

17%

Tetley (Tata Global Beverages)

17%

Private label6%

PG Tips (Unilever Group)

3%

Jacksons of Piccadilly (ABF)

3%

Others21%

UK Green Tea market share, 2015

Source: Euromonitor

Source: Euromonitor

We estimate that Twinings is the division’s most profitable brand, though

management has only gone so far as to confirm that it generates margins in

excess of 10%. Twinings has driven growth by successfully expanding its

premium product range and improving packaging. The re-launch of its

Infusions range combined with marketing investment drove sales in 2013. This

was subsequently furthered by developments in their green tea and specialty

black tea ranges, which have been particularly successful in developed

markets.

International expansion is the second part to the growth story and Twinings is

now sold in over 100 countries. Figure 36 shows the countries with the largest

market shares. Despite having a global presence, Twinings only holds more

than a 10% market share in less than a quarter of the countries (where data is

available). In particular, Twinings holds a large market share in primarily

developed countries and it has a long tail of smaller shares in less developed

regions. Of this, we estimate that the UK, USA and Australia are Twining’s key

markets by sales.

Figure 36: Twinings’ key markets are the UK, Australia

and the USA

Figure 37: Twinings has grown its market share in

Australia and the UK since 2013

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Norw

ay

Dom

inic

an R

epublic

Fin

land

Austr

alia

Sw

eden

Italy

Gre

ece

United K

ingdom

Denm

ark

Nig

eria

Fra

nce

Sw

itzerland

Guate

mala

Iran

Irela

nd

Cam

ero

on

Belg

ium

New

Zeala

nd

Hungary

Thaila

nd

US

A

Saudi A

rabia

Spain

United A

rab E

mirate

s

Slo

venia

Nort

h A

merica

Bulg

aria

Au

str

ia

Slo

vakia

Hong K

ong, C

hin

a

Rom

ania

Uru

guay

Canada

Twinings market share by country, 2015

0%

5%

10%

15%

20%

25%

30%

2010 2011 2012 2013 2014 2015

Twinings market share in its key markets

Australia

UK

USA

Source: Deutsche Bank, Euromonitor, Key markets are highlighted in grey

Source: Deutsche Bank, Euromonitor

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Ovaltine: a high margin business in concentrated markets

Ovaltine was acquired from Novartis in 2002 for £171m and management and

operations were combined with ABF’s existing Twinings business in 2003 to

create a single business unit called Twinings Ovaltine. Like Twinings, it is an

international brand. However, its focus is on developing markets due to the

nutritional content of malt barley: indeed its advertising slogan is ‘Nutritiously

Delicious’.

We estimate that Ovaltine’s sales were around £300m in FY Sep-15. According

to Euromonitor estimates, Thailand is Ovaltine’s largest market, generating

sales of £63m in 2015. Other important markets are China, USA, Nigeria and

Indonesia.

As the market shares in Figure 39 demonstrate, the niche malt-based drinks

market is highly concentrated and is characterised by one player dominating

each regional market. In Asia, Ovaltine’s largest competitor is Milo (owned by

Nestle). In 60% of the 29 markets in which data was available, Ovaltine has a

market share of over 20%. This affords a level of pricing power and thus EBIT

margins above 10%.

Figure 38: We estimate that Ovaltine’s largest market by

sales is Thailand

Figure 39: Ovaltine has a large market share in c.60% of

the markets studied*

63

30

21 20

13

0

10

20

30

40

50

60

70

Thailand China USA Nigeria Indonesia

Ovaltine: Top 5 markets by sales £m, 2015

10098 97

8780

75

59 59 5853 52 50

3935 35

31

21 19 1712 12

8 8 7 73 2 2 2

0

10

20

30

40

50

60

70

80

90

100

Bra

zil

Austr

ia

Belg

ium

Neth

erland

s

Hung

ary

Thaila

nd

Sw

itze

rland

Canad

a

Fra

nce

No

rth A

merica

US

A

Taiw

an

Saud

i A

rab

ia

Chin

a

Ho

ng

Ko

ng

, C

hin

a

Irela

nd

United

Kin

gd

om

Vie

tnam

Ge

rmany

Ind

onesia

United

Ara

b E

mirate

s

Po

rtug

al

New

Zeala

nd

Phili

pp

ines

Sin

gap

ore

Austr

alia

Gre

ece

Mala

ysia

Venezu

ela

Ovaltine market share (%) by country, 2015

Source: Euromonitor, Deutsche Bank

Source: Euromonitor, Deutsche Bank, *key markets highlighted in grey

Jordans, Dorset & Ryvita: a venture into healthy snacking

Jordans, Dorset & Ryvita was formed in 2014 and is the product of acquisition,

acquiring Ryvita back in 1949, Jordans over the period 2007-13 and Dorset

Cereals in 2014. All three brands have a growing international presence though

their principle market is the UK. Ryvita is the clear market leader in bread

substitutes in the UK, a £78.1m market, with a 42% market share. Jordans and

Dorset Cereals operate in the much larger breakfast cereals market, worth

£1.9bn in the UK and hold a 2% and 1% share respectively.

Key drivers of these brands are product innovation, the continuation of the

shift towards healthy eating, international expansion in targeted markets and

increases in disposable income. An example of innovation was the 2008

launch of ‘Ryvita Thins’, a snack product designed for dipping and positioned

for the trend towards healthier snacking. The launch created a new product

category in the UK and has seen significant growth.

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Page 22 Deutsche Bank AG/London

Allied Bakeries and ACH: low margin businesses

While these businesses generate a large proportion of revenues, about £1bn in

FY Sep-15, we estimate that they achieve single digit adj. EBIT margins, hence

below those of Twinings Ovaltine and Jordan’s, Dorset & Ryvita. Both Allied

Bakeries and ACH have suffered from challenging competition and increased

cost pressures.

Kingsmill, Allied Bakeries’ main brand, currently has a 12% share in a

concentrated UK bread market. Due to price deflation in the category, margins

have eroded. Allied Bakeries embarked on a 5 year investment programme to

improve efficiency and product quality, which completed in 2015. Allied

Bakeries has also diversified its offering, introducing new lines to complement

its existing bread range. Examples include the introduction of ‘Sandwich Thins’

in 2014 and new bread variants such as Great White.

ACH also operates in a competitive market and in Figure 41 we show that its

key brand, Mazola, holds a 9% share of the market. The brand has stemmed its

falling market share in recent years through successful advertising campaigns

highlighting the health benefits of corn oil.

The low margin nature of both Allied Bakeries and ACH means that sales and

profits are driven by volumes. In addition, in the near future we believe key

drivers will be new product launches (for Allied Bakeries), advertising

campaigns and changes to their existing contracts with supermarkets.

Figure 40: The UK bread market is held by 4 key players,

of which Kingsmill has a 12% share

Figure 41: Mazola oil is number 3 in the US oil market,

with a 9% market share

Artisanal

22%

Warburtons

(Warburtons Ltd)

18%

Hovis (Premier

Foods Plc)

14%

Private label

14%

Kingsmill (ABF)

12%

Others

10%

UK Bread market 2015

Wesson (ConAgra

Foods Inc)

11%

Crisco (JM

Smucker Co)

12%

Mazola (ABF)

9%

Pam (ConAgra

Foods Inc)

8%

LouAna (Ventura

Foods)

4%

Private label

42%

Others

14%

USA Vegetable and seed oil market 2015

Source: Euromonitor

Source: Euromonitor

George Weston Foods operates in Australia and New Zealand. It develops and

manufactures consumer brands which it supplies to restaurants and

supermarkets and it supplies ingredients to third party brands. There are four

main parts to the business: [1] Tip Top, a bakery business producing breads,

muffins and crumpets; [2] Don, a small goods business selling packaged

meats; [3] Mauri anz, which supplies bakery ingredients; and [4] Jasol, a

hygiene solution business.

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Strategy and the future

A result of ABF’s decentralised management, each division within Grocery has

its own strategy. The Twinings brand strategy is to develop and expand the

product range. Ovaltine continues to expand internationally and develop its

range of malt-based products. Jordans and Ryvita aim to expand in its core

markets, while management continue to premiumise the Dorset brand.

Additionally, management has indicated that it will acquire new brands when

the opportunity arises.

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Page 24 Deutsche Bank AG/London

Sugar

Sugar division in the group context

Current contribution to group underplays importance of the division

Sugar is probably the most complex division within the group, where

commodity costs and regulation meet business in three continents. Sugar

currently represents only a small proportion of ABF, generating 14% of group

revenues and only 4% of group adj. EBIT in FY Sep-15. However, this has not

always been the case. Its profits fell from £510m in FY Sep-12 to £43m in FY

Sep-15 and therefore its current contribution may underplay its future

importance to the group mix.

Figure 42: Sugar accounted for c.15% of sales in 2015... Figure 43:...and only 4% of adj. EBIT*

12%

11%

17%

15%

16%

19%

19%

22%

20%

16%

14%

88%

89%

83%

85%

84%

81%

81%

78%

80%

84%

86%

0%

25%

50%

75%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Sugar as a % of salesSugar Other

29%

20% 3

1%

22%

23%

25% 33% 4

6%

35%

16%

4%

71%

80% 6

9%

78%

77%

75% 67% 5

4%

65%

84%

96%

0%

25%

50%

75%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Sugar as a % of adj. EBITSugar Other

Source: Company data, Deutsche Bank

Source: Company data, Deutsche Bank; * adj. EBIT before central costs

An introduction to the sugar industry

A story about beet and cane

Sugar is a simple carbohydrate with a complex production process. Sugar can

be extracted from cane and beet. We highlight the principle differences

between the two crops in Figure 44.

Figure 44: The differences between beet and cane sugar

Beet Cane

What is it? Underground root crop Type of grass

Where is it primarily grown?

Western, Central and Eastern Europe, USA, China, Japan

Brazil, Cuba, Mexico, India, Australia

Length of production cycle

Less than 1 year Up to 4 years

When is it grown? Sown in March, harvested in September - February

Anytime

What are the optimal weather conditions?

Mild, humid conditions. Dry and sunny periods before harvest

Tropical climate

What are the costs associated with it?

Higher cost of production but produces useful by-products

Has a lower cost of production

Sugar content 13-18% 10-15%

Source: Deutsche Bank, ECRD, FAO

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The sugar content of beet is affected by the weather and depends on the type

of beet grown. Frost in particular can damage the quality of beet and the

quantity of sugar produced.

A high-energy production

There are 4 main variables in a sugar business:

Volume: in Europe the EU sugar regime currently restricts volumes,

though as we describe shortly this is coming to an end. Elsewhere

increasing capacity or improving the sugar content of the crop can

increase volumes.

The price paid to farmers for beet/cane. This is the biggest cost of

sugar production (Figure 46). For AB Sugar this is its purchase of cane

and beet from out-growers or the cost of its own cane fields in

Southern Africa. In the UK the price for beet is negotiated by the

National Farmers Union (NFU) and set over a year in advance (see

Figure 51); in the European Union the price is agreed through regional

councils in Spain. Around 6-8 tonnes of beet crop are required to make

1 tonne of sugar, depending on the crop.

Energy costs to process the sugar. The second largest cost is

processing energy costs and also the general overheads of running the

sugar refineries. Costs can be offset by generating power from

biomass by-products to meet internal needs and export power into the

local grid.

The price the sugar processor charges to its customers. The world

benchmark contract for sugar trading is the Sugar No. 11 future. This

is quoted in US dollar cents per lb (and shown in Figure 63). The Sugar

No. 11 contract prices the physical delivery of raw cane sugar (free on-

board the receiver’s vessel in the country of origin of the sugar). The

by-products of sugar beet production can be monetised. The residual

pulp resulting from sugar extraction is dried and used in animal feeds

and molasses can be used in alcohol fermentation and in the

production of yeast.

Figure 45: The sugar beet farming calendar Figure 46: A simplified illustration of the sugar P&L

Profit

Processing costs

Beet costsBeet costs

0

20

40

60

80

100

Year 1 Future

Profit?

Fixed with

farmers

Energy costs and

overheads

Source: Company data (British Sugar), Deutsche Bank

Source: Deutsche Bank

The production of sugar from beet and cane is similar and can be simplified

into 4 processes:

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Page 26 Deutsche Bank AG/London

Extraction: to extract sugar from beet, hot water is forced past beets

using a process of diffusion. Sugarcanes are pressed to extract their

sugar syrup. The result of both processes is a liquid containing sugar;

Evaporation: these liquids are boiled, leaving a thick sugary syrup;

Crystallisation: this syrup is turned into crystals called raw sugar;

Refining: raw sugar is then refined to produce the end product. Brown

sugars (such as Muscovado and Demerara) are the result of relatively

less refinement. White sugar requires further refining to produce

smaller crystals.

What is sugar used for?

The output of sugar processing can broadly be split into core products and co-

products. Core products are the range of sugars that can be produced. Whilst

some ends up in retail use (e.g. granulated, icing, brown, and fair trade sugars)

most sugar produced is used for commercial and industrial purposes. This can

include food manufacturing (e.g. powdered, crystal, liquid, inverted or caster

sugars to provide taste, texture and structure in foods and drink) and

pharmaceutical use (e.g. liquid sugar used in lozenges and syrups or silk sugar

in chews). There are also a number of co-products. Bioethanol is produced

through the fermentation of sugarcane juice and molasses, and this can be

blended with gasoline to reduce petroleum use and improve vehicle emissions.

Specialty products can be made from the by-products of sugar beet processing.

Sugar beet pulp and molasses are used in the production of solid and liquid

animal feeds, dried sugar cane pulp (bagasse) can be used to make paper,

plastics and building materials, or burned to generate power and the carbon

dioxide generated from processing sugar can be used to grow tomatoes.

Brazil, India and the EU are the largest producers of sugar

The global sugar production on a country level is shown in Figure 47 and

Figure 48. Brazil, India and the EU produce just less than half of the world’s

sugar collectively. Beyond that, the remaining share is made up of many

different countries.

As a result of its high sugar production, Brazil and India are net exporters of

sugar, supplying 44% and 4% respectively of the sugar export market. In turn,

the EU is a net sugar importer due to regulation in the EU sugar market which

we discuss shortly. These regulations are due to ease in 2017 and have the

potential to result in an increase in output from the EU.

Figure 47: Brazil is the largest sugar producer... Figure 48: ...producing c.20% of the world’s sugar

Total Production (1,000 metrics tons, raw value) in 2014/15 175,103

Brazil 35,950

India 30,240

European Union 16,750

China 11,000

Thailand 10,790

United States 7,845

Mexico 6,344

Pakistan 5,230

Australia 4,700

Russia 4,350

Brazil

21%

India

17%

European Union

10%Thailand

6%

China

6%

United States

4%

Mexico

4%

Pakistan

3%

Australia

3%

Russia

2%

Other

8%

Global Production of Sugar by Country 2014/15

Source: Foreign Agricultural Service/USDA

Source: Foreign Agricultural Service/USDA

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Figure 49: Brazil makes up just under half of the world’s

sugar exports ...

Figure 50: ... while global sugar imports are more

fragmented

Brazil

44%

Thailand

15%

Australia

7%

India

4%

Guatemala

4%

European Union

3%

Mexico

3%

Other

5%

Sugar exports by country 2014/15

China

10%

Indonesia

6%

US

6%

EU

5%

UAE

5%

Malaysia

4%

Bangladesh

4%South Korea

4%Algeria

4%

Other

22%

Sugar imports by country 2014/15

Source: Foreign Agricultural Service/USDA

Source: Foreign Agricultural Service/USDA

The current regulations in EU – quotas, minimum prices, tariffs

In 2006 a first round reform to the EU sugar market began and set the basis of

today’s market. The reforms aimed to provide a market to developing countries

associated with the EU. Quotas were put in place such that EU sugar

production was in structural deficit with the idea that developing countries

would fill the gap by exporting cane sugar. This was also in response to

dumping accusations by the WTO. Overall, this resulted in the EU becoming a

net sugar importer. The problem was that the developing countries were

unable to increase production sufficiently and the cut to EU production led to a

sharp increase in world sugar prices. This made it less attractive to sell sugar

into the EU market so the EU Commission applied exceptional measures to

allow greater supply and limit price increases. These, in hindsight, lasted too

long, resulting in over-supply in the EU. Coupled with global surpluses this led

to a dramatic fall in world prices.

The current regulations in place are summarised below:

EU production quota: this limits annual sugar production in the EU to 13.5m tonnes for use in food industries. Production in excess of this quota can be exported (but is limited by the WTO to 1.3m tonnes), offset against next year’s quota or sold for use in non-food industries. Producers are awarded quota shares based on their volume market share in the EU. British Sugar has approximately 10% of the EU sugar production quota;

Tariff-rate quotas: these limit the amount of sugar that can be imported into the EU at reduced or zero duty from ‘less-developed countries’ and certain African, Caribbean and Pacific regions. Beyond this quota a tariff is charged on imports from all other regions (€419/tonne for white sugar and €339/tonne for raw sugar);

Minimum guaranteed price to farmers: this is calculated using farmers’ input costs, euro exchange rates and wheat prices;

EU reference price: a price around which wholesale prices should fluctuate. In order to reach the reference price, the EU Commission can force sugar producers to withdraw sugar from the market.

As a result of these regulations the EU sugar price is higher than the world

sugar price.

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30 September 2017 will mark a change...

2017 will mark the end of EU production quotas and the WTO’s export limit.

The minimum guaranteed price and the distinction between sugar sold for

food and non-food uses will also be removed. The tariff rate quota, which

limits imports into the EU at low duty, will remain in place.

...bringing more sugar to the world market

The end of the quota will allow sugar producers in the EU to produce without

constraint for export on the world market. This means that when world market

prices are high, more EU sugar is likely to be exported, and when low, supply

may exceed demand. As a result the EU and world sugar prices may be better

aligned in the future. EU producers are likely to face increasing competitive

and margin pressures without the protection around EU pricing.

But the effect may be mitigated by existing tariffs and the EU’s production

flexibility

However, we believe the remaining tariff will still act as a safeguard to EU

sugar prices. Tariffs, which work by pushing up the price of imports, still have

the ability to shield sugar producers in the EU from the full competitiveness of

the global markets. In addition, the EU may bring stability to world prices as

the region operates on a more flexible cycle. The region primarily produces

beet sugar, which has a production cycle of 1 year. This is significantly shorter

than the 4 years required for cane sugar and will enable producers to alter

production according to market conditions.

Deregulation will mean EU sugar volumes will play a greater role in driving

profitability

Volumes are currently largely fixed in the European sugar market because

these regulations fix maximum production and low-duty import levels and the

market operates at these ceilings. When the EU’s forthcoming deregulation

changes this, volumes will become a factor influencing sugar profitability in a

way it has not previously. Volumes are in turn is affected by [1] the volume of

beet/cane grown by farmers (alternative crops, crop productivity, weather), [2]

factory capacity, and [3] refining capability.

The volume of beet/cane that farmers decide to grow will principally be

influenced by how much they are paid. With the removal of quotas, British

Sugar has agreed contract terms for 2017/8. One and three year contacts are

available, with bonus elements linked to the EU sugar price between €475-700

per tonne.

Figure 51: ABF British Sugar purchase agreements from UK beet growers

ABF's financial year impacted Sep-14 Sep-15 Sep-16 Sep-17 Sep-18

Contract offer year/campaign 2013/14 2014/15 2015/16 2016/17 2017/18

When agreed/announced Jun-12 Jun-13 Jul-14 Jun-15 Jul-16

For beet planted/harvested: Mar/Sep 13 Mar/Sep 14 Mar/Sep 15 Mar/Sep 16 Mar/Sep 17

Growers' selling price to ABF (£/tonne)* 26.51 31.67 24.00 20.30 **22.00 Source: National Farmers Union, British Sugar, Deutsche Bank * Applies to both Contract Tonnage (CTE) and Industrial Tonnage (ICE) beet price, except for 2013/4 contract price when ICE was £25.51. Price for surplus beet varies ** Following EU quota removal one and three year contracts are offered. Both set at £22 based on sugar price of €475, with sliding scale up to €700

Description of ABF’s Sugar division

The business processes sugar in Europe, China and Southern Africa .

AB Sugar processes sugar beet (45%) and sugar cane (55%) on three

continents. This is then sold on the international markets, with the majority

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sold as industrial sugar for food manufacturing and bio-ethanol production. Its

production is also used in ABF’s consumer facing brand Silver Spoon, which

sits in the Grocery division. The company has 34 production plants and has

operations in the UK, Spain, China and Southern Africa.

In Figure 52 we summarise the structure of the business. British Sugar,

Azucarera, AB Sugar China and Illovo are subsidiaries of AB Sugar that

produce sugar. ABF acquired a 51% stake in the Southern African business

Illovo in 2006 for £317m and since then has fully consolidated its results.

Hence Sugar has, arguable, been slightly inflated in importance in the sales

and profit mixes we have been showing. In any case, in 2016 ABF and Illovo

shareholders agreed the acquisition of the remaining 49% for 25 Rand per

share or £245m.

Figure 52: Sugar breakdown

Region Subsidiary name Beet/cane Input Priced in:

UK British Sugar Beet Mostly* sourced from independent growers Euros

Spain Azucarera Beet and cane Sourced from independent growers Euros

China AB Sugar China Beet and cane Sourced from independent growers Yuan and various other currencies

Southern Africa**

Illovo Cane Sourced from own agricultural operations and independent growers*

African currencies for domestic African sales

Euros and Dollars for exports to Europe and US respectively

Source: Deutsche Bank, company websites * Agreed to reduce the area of beet it grows in the UK by 50% in 2015 ** South Africa and around 40% of other Southern Africa production sourced from independent growers. ABF’s area under cane at end of FY Sep-15 was 69,944 hectares (around half in Malawi & Zambia, and the rest in South Africa, Swaziland, Tanzania and Mozambique).

Figure 53 and Figure 54 show the breakdown of sugar production by tonnes in

2015 and then comparing the change in production mix over time. Illovo

remains the group’s largest sugar producer, though the UK and Spain have

grown their share of production. This is partly a result of a shift towards

activity in more profitable regions.

Figure 53: Illovo is ABF’s biggest producer of sugar Figure 54: ...and while it has remained the largest

producer, production in the UK has caught up

1,640

1,450

709

413

0

300

600

900

1,200

1,500

1,800

Illovo UK Spain (Azucarera) China

ABF's sugar production (tonnes, FY Sept 15)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2015

Mix of ABF sugar production (in tonnes)

China

Spain

UK

Illovo

Source: Company data

Source: Company data

The revenue and profit breakdown by division is heavily impacted by sugar

prices and this is a reason why production volumes are a more reliable

indicator of the relative importance of regions. Nevertheless we estimate the

divisional breakdown in Figure 55 and Figure 56 using Illovo public accounts

and comparisons to peers. We estimate that Illovo and British Sugar were the

largest contributors to revenue, together generating over 60%. However, Illovo

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Page 30 Deutsche Bank AG/London

was the only significant profit generating unit in 2015, contributing c. £70m to

a division that reported £43m EBIT. This implies that the division’s profits were

mainly because Illovo’s results are fully consolidated.

Figure 55: Revenues in 2015 were divided evenly

between the operating divisions...

Figure 56: ...but we estimate that in 2015 Illovo

generated the majority of profits

Illovo

36%

British Sugar

25%

Azucarera

18%

China

14%

Vivergo

7%

2015 Sugar Revenue split

70

1

-18

-10

43

-30

-20

-10

0

10

20

30

40

50

60

70

80

Illovo Azucarera British Sugar and

Vivergo Fuels

China Total EBIT

2015 Sugar EBIT split, £m

Source: Deutsche Bank estimates

Source: Deutsche Bank estimates; Illovo fully consolidated, and Vivergo Fuels was 47% JV, booked as a share of net income, until stake was raised to 94% in May 2015

... and Vivergo Fuels produces bioethanol

In addition to producing sugar, the company also generates power to meet AB

Sugar’s needs. They export any surplus power to the local national grid. AB

Sugar also has a 94% shareholding in Vivergo Fuels, a wheat-fed bioethanol

production facility in Saltend, Hull, that ferments sugar to produce alcohol.

This is used to make unleaded petrol and its by-product used in animal feed.

Management has said that it expects to run this business at a small loss in the

short term as the European bioethanol market is weaker than expected. Other

operations include seed technology and supplying raw sugar to European

sugar refineries.

Illovo is the Southern African business that grows and produces sugar, and

sells the by-products of the sugar production process

Illovo itself is the parent company of a host of subsidiaries, and we summarise

the group structure in Figure 57. The acquisition of Illovo does not impact the

proportional ownership Illovo’s subsidiary holdings. Illovo currently has

operations in South Africa, Mozambique, Zambia, Malawi, Swaziland and

Tanzania. While South Africa generates c.35% of Illovo’s revenues, it only

generates 13% of Illovo’s EBIT. Indeed, Zambia and Malawi are the most

profitable regions, combined accounting for over 70% of profits.

Figure 57: ABF has increased its stake in Illovo South Africa from 51% to

100% in 2016, though minorities remain in its subsidiaries

Region Company Stake

South Africa Illovo Sugar South Africa Limited 100%*

Mozambique Maragra Acucar SA 90%

Zambia Zambia Sugar Plc 82%

Malawi Illovo Sugar (Malawi) Limited 76%

Swaziland Ubombo Sugar Limited 60%

Tanzania Kilombero Sugar Company Limited 55% Source: Company data * acquisition completed in June 2016

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Illovo dates back to 1891 as a public company named Reynolds Brothers. It

was renamed to Illovo in 1994 and management built up the business by

acquiring sugar companies with operations in Southern Africa. Illovo primarily

produces sugar, and this activity accounts for 70% of the business’s revenues

and profits.

Figure 58: South Africa accounts for 35% of Illovo’s

revenues...

Figure 59: ...but only accounts of 8% of EBIT. Zambia

and Malawi are the most profitable regions at Illovo

SA

35%

Zambia

22%

Malawi

19%

Swaziland

11%

Tanzania

10%

Mozambique

3%

Illovo - Revenue split by region (FY Mar-16)

488454

230

134120

-16

-100

0

100

200

300

400

500

600

Zambia Malawi Tanzania Swaziland SA Mozambique

Illovo - EBIT split by region (Rand m, FY Mar 16)

Source: Company data

Source: Company data

It has 16 manufacturing plants and the company supplies sugar to Africa, the

EU and the USA. In addition to brown and refined sugar, Illovo also produces

syrups and specialty sugars, which are sold domestically and abroad. Unlike its

European counterparts, it grows cane sugar as well as sourcing it from

independent growers. This accounts for 19% of group revenues.

The remaining business is ‘Downstream and co-generation’, which is the

production and sale of the by-products of sugar production. This includes

ethanol, agricultural products (e.g. soil improvers), flavourants and electricity.

In fact Illovo is the sole supplier of electricity for its operations in Swaziland

and it exports surplus electricity to the power grid. Downstream &

cogeneration is a high margin business that accounts for 10% of revenues but

24% of Illovo’s EBIT.

Figure 60: c.70% of Illovo’s revenues come from sugar

production...

Figure 61: ...and c.60% of EBIT comes from sugar

production

Sugar production

71%

Cane growing

19%

Downstream and

co-generation

10%

Illovo - Revenue split by operation (FY Mar-16)

Sugar production

59%Cane growing

17%

Downstream and

co-generation

24%

Illovo - EBIT split by operation (FY Mar-16)

Source: Company data

Source: Company data

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Page 32 Deutsche Bank AG/London

Track record and performance

The division has enjoyed sweeter moments .

AB Sugar grew its sales and adj. EBIT significantly during the period 2005 to

2012, achieving a CAGR in adj. EBIT of 8%. This was due to international

expansion, high sugar prices and improvements to both agricultural and

production efficiency. At its peak in 2012, Sugar generated profits of over

£500m and accounted for 46% of group adj. EBIT before central costs.

...but has been more recently impacted by declining sugar prices

Conditions rapidly deteriorated after 2012, however, dragging margins down

to only 2%. This was primarily a result of weak sugar prices from high sugar

supplies in the EU (a relationship that is closely linked, as shown in Figure 63);

however in 2014 the company also cited lower volumes and adverse currency

movements. In 2015, as discussed earlier, the company booked two non-cash

charges below divisional adjusted profits. The first of these was a charge of

£98m to impair the group’s shareholder loans to Vivergo Fuels following the

decline in the price of fuel biofuel. The second was a £100m charge for the

closure of its Northern China factories in Heilongjiang Province, at Yi’an and

BoCheng.

Figure 62: Sales and adj. EBIT have rapidly deteriorated

since 2013

Figure 63: Adj. EBIT closely follows the price of sugar

700671

1,1511,267

1,475

1,941

2,134

2,666 2,677

2,083

1,818

0

100

200

300

400

500

600

0

500

1,000

1,500

2,000

2,500

3,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Sugar Sales £m (LHS)

Sugar adj. EBIT £m (RHS)

0

100

200

300

400

500

600

10

12

14

16

18

20

22

24

26

Jan-1

2

Mar-

12

May-1

2

Jul-12

Sep-1

2

Nov-1

2

Jan-1

3

Mar-

13

May-1

3

Jul-13

Sep-1

3

Nov-1

3

Jan-1

4

Mar-

14

May-1

4

Jul-14

Sep-1

4

Nov-1

4

Jan-1

5

Mar-

15

May-1

5

Jul-15

Sep-1

5

Nov-1

5

Jan-1

6

Mar-

16

World sugar price vs AB Sugar EBIT

New York no. 11 (US cent/lb, LHS) EBIT (£m, RHS)

Source: Company data, Deutsche Bank

Source: Company data, Thomson Reuters Datastreams We use full year AB Sugar division’s adjusted EBIT, which has been reported to September 2015

Currency

Revenues from the sugar business are affected by currency movements. Below

we outline the key rates:

EUR/GBP as sugar produced from British Sugar and Azucarera are

both priced in Euros and proceeds are converted to British pounds.

Euro strength therefore is positive due to translational effects;

EUR/ZAR and USD/ZAR as sugar exported by Illovo is priced in Euros

and US Dollars and proceeds converted to South African Rand. In turn

this is then reported in sterling in the ABF accounts;

The majority of the sugar produced from Illovo is sold domestically,

with key currencies being the Malawian Kwacha, Tanzanian Shilling

and Mozambique Metical.

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Market share and competitive landscape

Due to the volatility of sugar prices, and their impact on the results of sugar

producers, a market share by volume of sugar produced is the widely used

measure of relative market size. Suedzucker discloses its estimates of the EU

market shares, which we present in Figure 64. Combining British Sugar (11%)

and Azucarera (5%), we estimate that AB Sugar holds a 16% share of the EU

sugar market. This makes it the number 3 player.

Figure 64: British sugar has a 11% share of the EU sugar market, according to

market leader Suedzucker

Suedzucker Group

24%

Nordzucker

15%

Tereos

11%

British Sugar

11%

Azucarera

5%

Pfeifer & Langen

8%

Cristal Union

8%

Royal Cosun

7%

Others

11%

EU sugar market share by volume, 2015/16

Source: Suedzucker, Deutsche Bank

Strategy and the future

A focus on reducing costs...

Weak global and EU sugar prices have driven down ABF’s operating margins

in recent years. In response to this and also in preparation of EU changes in

2017, the company has been implementing efficiency measures to drive down

costs.

In particular over the last 2 years it has been reducing overheads, such as its

factory closures in northern China, in order to focus on operations in more

profitable regions. Azucarera has improved efficiency by storing sugar in “big-

bags” in warehouses close to customers as opposed to in factory silos. By

reducing the distance to the end user and improving order fulfilment and

delivery times, the company indicates it has made substantial savings.

... and ensuring capacity for increased volumes

Once the EU rule changes come into force in 2017 the market is likely to

become more volatile. Sugar companies and companies producing calorific

sweeteners will be free to increase production, thereby increasing supplies.

World and EU prices are likely to be more closely aligned. This will increase the

need for EU processors to continue to improve their competiveness. There may

be consolidation in the market as a result. The willingness of farmers to grow

beet sugar (rather than alternative crops) will also be a determinant in where

prices settle.

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Page 34 Deutsche Bank AG/London

Agriculture

Agriculture division in the group context

Agriculture is a small division that specialises in animal feeds. Until 2010 it was

disclosed as Sugar & Agriculture. It contributed only 9% to group revenues in

2015 and 5% to group adj. EBIT, and these proportions have been stable over

time.

Figure 65: Agriculture has consistently contributed

c.10% to sales...

Figure 66: ...and c.5% to adj. EBIT*

13%

10%

9%

11%

10%

9%

10%

10%

11%

10%

9%

87%

90%

91%

89%

90%

91%

90%

90%

89%

90%

91%

0%

25%

50%

75%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Agriculture as a % of salesAgriculture Other

3%

3%

3% 5%

5%

3%

4%

4%

4%

4% 5%

97%

97%

97%

95%

95%

97%

96%

96%

96%

96%

95%

0%

25%

50%

75%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Agriculture as a % of adj. EBIT

Agriculture Other

Source: Company data, Deutsche Bank

Source: Company data, Deutsche Bank; * adj. EBIT before central costs

An introduction to the animal feeds industry

Demand driven by population changes

The use of nutritional animal feed is beneficial to livestock farmers as it

shortens the time it takes to get meat to market. The additional nutrients,

minerals and enzymes in animal feed work to accelerate weight gain for

animals as well as supplying them with nutrients. Demand for animal feeds is a

reflection of consumer demand for meat. This looks set to increase with a

growing and wealthier global population. In addition, demand for feeds is

affected by the outbreak of disease and weather conditions.

The profitability of the business will in turn depend on the cost of protein and

energy, including commodity prices, the efficiency of feed mills, and the level

of R&D required to maintain competitiveness. Legislation on feeds is

harmonised at an EU level.

Description of ABF’s Agriculture division

AB Agri started in 1985 as an attempt by British Sugar to manage the leftover

waste pulp from sugar beet processing. This pulp became the basis of

nutritious animal feed. It was acquired by ABF in 1991. Today AB Agri is

primarily a supplier of animal feed and animal feed ingredients. It also has

operations in grain trading and providing consultancy services to the

agricultural industry. It operates in over 70 countries and is split into 6 units:

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AB Vista: the international animal feeds business. We estimate this is

the largest contributor to the division. It was started in 2005 and

focuses on developing technology and supplying feed enzymes and

other ingredients for use in animal feeds.

Speciality Nutrition: the business supplies premixes, starter feed and

micro-ingredients (e.g. vitamins and minerals) to manufacturers of

animal feeds. It was previously named Premier Nutrition.

AB Agri China: supplies animal feeds to manufacturers, farms and

food processors in China. It is specialised in the ruminant, pig and

poultry sectors and has a manufacturing plant in China.

AB Connect: with operations solely in the UK, it manufactures animal

feeds and supplies the food, drink and bioethanol industries.

Frontier Agriculture: a joint venture with Cargill in which ABF owns

50%. It trades grain, sells fertiliser and crop protection products and

provides agronomic advisory services in the UK. Its revenues are not

consolidated by ABF but were £1.5bn in 2015. ABF consolidates 50%

of the JV’s net income and we believe this to be one of the more

profitable activities within the division.

AB Sustain: delivers product solutions in the agriculture supply chain.

Quantum blue has driven AB Vista

A product called Quantum Blue, developed by AB Vista, has been the success

story at AB Vista since 2012. In technical terms, it is a phytase used in animal

feeds to bind nutrients to indigestible phytates. More simply, Quantum Blue is

used in animal feeds to release vital nutrients into animals’ digestive systems.

The product has been extremely successful and has seen growing sales and

profits.

Track record and performance

In 2007, the agricultural business acquired two companies: Premier Nutrition

(later renamed to Specialty Nutrition) and Primary Diets, in line with its strategy

to acquire complementary businesses. These acquisitions increased revenues

but the division has seen declining revenues since 2013 driven by lower wheat

and other commodity prices. Despite this, the business has increased

profitability, largely due to Quantum Blue’s strong performance. This has

supported EBIT margins, increasing to 5% in 2015 albeit below group margins

of 8.5%.

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Page 36 Deutsche Bank AG/London

Figure 67: Agriculture revenues have been depressed by

soft commodity prices ...

Figure 68: ... but adj. EBIT has been driven by the

success of Quantum Blue

735

623 645

867913

954

1,127

1,265

1,410

1,312

1,211

0

200

400

600

800

1,000

1,200

1,400

1,600

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Agriculture Sales £m

20

1518

33 34 33

40 40

4750

60

0%

1%

2%

3%

4%

5%

6%

0

10

20

30

40

50

60

70

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Agriculture adj. EBIT £m Agriculture adj EBIT margin %

Source: Company data, Deutsche Bank

Source: Company data, Deutsche Bank

Market share and competitive landscape

It is difficult to estimate the size of the animal feed market. In 2012, ABF

estimated the global phytase market to be “north of 250m” and forecast

growth of 7-8% a year. This would mean the market was worth between £300-

315m in 2015. We do not have data on market shares in animal feeds however

the company has said that 1 in 5 chickens worldwide contain a product made

by AB Vista. Its key competitors in the feed enzymes industry are DSM,

DuPont and BASF.

Strategy and the future

AB Agri’s strategy involves both organic growth and complementary

acquisitions. The division aims to make agri-food production more efficient by

working in partnership with customers. Investing in product innovation is

important to maintain its competitiveness.

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Ingredients

Ingredients division in the group context

Ingredients is a small division with mid single-digit margins. It has been

through some restructuring in recent years but has historically been a cash

generator for other more capital hungry divisions.

Figure 69: Ingredients have remained 10% of sales... Figure 70:...while it is 7% of group adj. EBIT*

10%

11%

10%

10%

11%

10%

10%

9%

10%

10%

10%

90%

89%

90%

90%

89%

90%

90%

91%

90%

90%

90%

0%

25%

50%

75%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Ingredients as a % of salesIngredients Other

11%

14%

11%

11%

12%

11%

6%

2%

0% 3% 7%

89%

86%

89%

89%

88%

89%

94%

98%

100%

97%

93%

0%

25%

50%

75%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Ingredients as a % of adj. EBIT

Ingredients Other

Source: Company data, Deutsche Bank

Source: Company data, Deutsche Bank; * adj. EBIT before central costs

An introduction to the ingredients industry

Ingredients, as the name suggests, are vital inputs in the production of food,

however they represent a low proportion of the final value of food products.

The industry is characterised by a wide range of subsectors which in turn

command different levels of profitability. We estimate that the profit margins

of enzymes and cultures are higher than those of colours and texturants (an

ingredient that affects the texture of a product).

Bakery ingredients form the main part of ABF’s Ingredients business, and

these include enzymes and emulsifiers (a texturant). We identify three main

drivers of the bakery ingredients industry.

The demand for these inputs is driven by product innovation and

expenditure on Research & Development.

The need for product innovation is in turn driven by regulation and

shifts in consumer taste. For example, the trend towards consumption

of healthier products, combined with increased regulation of the food

industry has driven companies to meet changing demands.

The demand for the end product i.e. bakery products and alcohol

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Description of ABF’s Ingredients division

The Ingredients division is a manufacturing business that produces bakery

ingredients (including yeast), enzymes, proteins, lipids and cereal specialities.

These are sold to food and non-food producers.

Approximately 80% of AB Ingredients’ revenues come from its subsidiary AB

Mauri (Figure 71). This estimate is based on the disclosure on AB Mauri’s

website that its sales in 2015 were $1.6bn. AB Mauri is the international yeast

and bakery division that supplies bakers, and is used for foodservice and

wholesale purposes. It has a wide reach, with plants in 26 countries (AB Mauri

in 21 and Specialty Ingredients in 4 European markets plus the USA) and sales

in more than 90 countries. AB Mauri sells all ingredients used in industrial

baking, for example dough conditioner, a product that can improve the baking

process from affecting the crumb texture to changing the fermentation

tolerance. Other main products also include bread improvers and bakery

mixes.

The Specialty Ingredients segment is a significantly smaller part of the

business, generating c.20% of the division’s revenues. It is comprised of AB

enzymes, Ohly, SPI Pharma, ABITEC Corporation and PGP International. Figure

73 summarises the breakdown.

Figure 73: AB Ingredients breakdown

Company Operations

AB Mauri Yeast and bakery ingredients

AB enzymes Enzymes for baking, food, animal feed, textile, pulp and paper

Ohly Yeast extracts, yeast based flavours and speciality powders

SPI Pharma Supplies pharmaceutical industry

ABITEC Corporation Ingredients for toll manufacturing, pharmaceutical uses, nutritional sciences, speciality chemicals and personal care and cosmetics

PGP international Supplies and manufactures cereal food ingredients Source: Deutsche Bank

Figure 71: AB Mauri is the main business, generating

over 80% of revenues

Figure 72: We estimate the group holds a 5% share in

the bio-ingredients market

AB Mauri

83%

Specialty

Ingredients

17%

Ingredients revenue breakdown 2015

DSM

16%

DuPont Danisco

13%

Chr. Hansen

11%

Novozymes

10%BioSpringer

6%

ABF

5%

Kerry Group

5%

Cargill

2%

Others

32%

Bio-ingredients market, 2015

Source: Deutsche Bank, company websites

Source: Deutsche Bank estimates, company data

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Track record and performance

Squeezed margins during 2011-2013

Ingredients is a mature, small part of ABF. The division’s profits however have

been volatile this decade. It saw significant declines in adj. EBIT from 2011 to

2013 (Figure 75), impacted by high raw material costs such as molasses. 2013

was also impacted by a £21m rationalisation charge for the closure of a dry

yeast production in Italy and a £5m accelerated depreciation charge in China.

Figure 74: Rising revenues... Figure 75:...mask volatile EBIT

583

683 698

824

9891,067 1,090 1,067

1,360

1,261 1,247

0

200

400

600

800

1,000

1,200

1,400

1,600

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Ingredients revenues £m

65

79

71

78

88

104

61

27

5

41

76

0%

2%

4%

6%

8%

10%

12%

14%

0

20

40

60

80

100

120

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Ingredients adj. EBIT £m Ingredients adj. EBIT margin %

Source: Company data, Deutsche Bank; Sales increase in 2013 reflects in part the transfer into the division of a flour milling business of George Weston Foods which was previously reported in Grocery (representing sales of £272m and Adj. EBIT of £4m)

Source: Company data, Deutsche Bank

Recovery through cost reductions

2013 marked trough profits for the business. It also marked the first year of a

new divisional management team. New management successfully initiated a

turnaround and the business saw a profit recovery in 2014 and 2015 through a

series of cost reductions, restructuring in Europe and China and the acquisition

of a bakery business in Western Europe. The Speciality Ingredients business,

while small, also contributed to the recovery in 2015, with strong growth in

yeast extracts and speciality powders.

Market share and competitive landscape

The ingredients division is a small business not only within ABF, but within the

industry. Overall, we estimate that AB Ingredients has a 5% share of the bio

ingredients industry. The industry is defined by DSM, a company specialised in

the production of health, nutrition and materials, as ‘specialty products based

on fermentation processes’ and includes products such as yeast extracts,

cultures and food enzymes.

Strategy and the future

Investing to grow in an already concentrated market

As shown in Figure 72, we estimate that the market is dominated by 4 players

who together hold 50% of the market. Yeasts are the main product of the

division and since yeast is a relatively small input cost for a baker, quality and

consistency of performance are more important than price. Hence ABF aims to

achieve growth through a high level of investment in technology, innovation

and research & development.

The wider market of human nutrition is currently seeing volume growth of 5%

and flat pricing and our chemicals analysts believe this trend is likely to

continue.

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Consumer Staples

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Page 40 Deutsche Bank AG/London

Retail

Retail division in the group context

The largest division by sales and profits

The Retail division has been steadily rising as a proportion of group sales and

profits. We refer to it interchangeably with Primark, albeit it trades under the

name of Penneys in Ireland, since it is the sole business within Retail and has

been since the management buyout of Allied Glass Containers in 2002.

Figure 76: Retail contributes for c.40% of group sales... Figure 77: ...and c.60% of group adj. EBIT*

18%

22%

24%

23%

25%

27%

28%

29%

32%

38%

42%

82%

78%

76%

77%

75%

73%

72%

71%

68%

62%

58%

0%

25%

50%

75%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Retail as a % of salesRetail Other

24% 32%

31%

34%

34%

36%

32%

32% 42% 5

5%

59%

76% 68%

69%

66%

66%

64%

68%

68% 58% 4

5%

41%

0%

25%

50%

75%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Retail as a % of adj. EBITRetail Other

Source: Company data, Deutsche Bank

Source: Company data, Deutsche Bank; * adj. EBIT before central costs

Description of ABF’s Retail division

A Primark primer: a long history with a stable management team

Penneys was founded in Ireland in 1969 and trades as Primark in all of its other

markets. Arthur Ryan, who founded the business and was CEO until 2009, is

Chairman of the company. Paul Marchant took over as CEO in 2009, joining

from New Look where he was latterly COO. It is predominantly a European

value fashion retailer of its own private label garments selling from large-sized

stores on high streets and in shopping malls. Its ranges also include footwear,

accessories, homewares and beauty. It does not disclose its category sales mix

but we would estimate, based on Kantar Worldpanel data, that the mix is

c.54% womens, c.20% mens, c.17% childrenswear and c.10%

homewares/beauty. Primark expanded beyond the British Isles for the first time

in 2006, entering Spain, and beyond Europe in 2015 when it entered the USA.

A big brand internationalising rapidly.

Primark generated £5.3bn sales from 293 stores and 11.15m sq ft in FY Sep-

15. The division does not report sales or profits by country (only store numbers

and square footage). From UK subsidiary accounts we can, however, estimate

the sales contribution from the UK and hence derive the aggregate other

countries.

The UK is undoubtedly Primark’s largest market, accounting for an estimated

c.55% of the division’s sales and profits. The remaining sales and profits are in

Europe and in Euros. We estimate profits in Spain now exceed those in Ireland

and estimate Spain is the highest margin country for Primark.

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Figure 78: We estimate c.55% of Primark revenues were

from the UK in 2015...

Figure 79: ...and that the UK also represents c.55% of

adj. EBIT

UK

54%

Spain

15%

Germany

10%

Ireland

9%

Netherlands

4%

Portugal

3%

France

2%

Austria

2%Belgium

1%

Retail Sales mix by country 2015

UK

57%

Spain

17%

Ireland

9%

Other

17%

Retail adj. EBIT geographic split, 2015

Source: Deutsche Bank estimates based on Primark Stores Ltd accounts

Source: Deutsche Bank estimates

We show a snapshot of Primark’s operations across its 11 markets in Figure

80.

Figure 80: Primark snapshot FY Sep-15

Year of No of stores Sq ft 000s Ave. store size Sales Sales per ave. Sales per ave.

Country entry* Year End * Year End * sq ft at YE * £m sq ft £ store £m

Ireland 1969 36 1,028 28,556 464 450 12.7

UK 1973 164 6,083 37,091 2,891 477 17.6

Spain 2006 40 1,369 34,225 812 600 20.3

Netherlands 2008 12 547 45,583 252 564 25.2

Portugal 2009 8 267 33,375 141 564 18.8

Germany 2009 19 1,194 62,842 506 500 31.6

Belgium 2010 4 166 41,500 56 564 22.6

Austria 2012 4 193 48,250 95 564 27.0

France 2013 5 231 46,200 130 564 26.1

USA 2015 1 77 77,000 **NA **NA **NA

Italy*** 2016 0 0 0 0 na 0.0

Total 293 11,155 38,072 5,347 500 18.7

Source: Deutsche Bank estimates except * company data; ** opened two days before year end, *** launched in 2016 Estimates based on the assumption that smaller markets have identical sales densities

The business model: a disruptive value retailer

In our view the value proposition of any retailer can be assessed qualitatively

through five areas, all of which help to define the brand. These are price,

range, quality, convenience and service. The attributes on which Primark

scores highly are price and fashion. This is shown in our 2016 UK consumer

survey results (Figure 82).

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Figure 81: The value proposition of a retailer Figure 82: Shoppers perceive Primark to be strong on

price and fashion, though weaker on most other aspects

Range(width,

depth)

Convenience(Store location, layout,

Online delivery etc)

Service

(store, online)

Price

Supply Chain

Central functions

how differentiated is the “Value

Proposition” ?

How is this trending relative to

the competition?

How sustainable is this

positioning?

How agile/ flexible is the

business model?

How good is management at

executing this proposition?

BRAND

(awareness; perception vs

reality; momentum; reliability;

exclusivity)

Quality(level, consistency)

0

2

4

6

8

10Price

Fashion

Quality

Range

Ethics

Shop environment

Website

Delivery

Primark score vs benchmark

Benchmark

Primark

Source: Deutsche Bank

Source: Research Now®, Deutsche Bank; consumer survey of 1,000 female British consumers aged 18-75, April 2016. Scores out of 10 on different attributes. Benchmark refers to how important eight different attributes were to consumers making their clothing & footwear purchase decisions.

Evidence of Primark’s strength in fashion perception can perhaps also be

inferred from Kantar Worldpanel data. This shows its greatest share gains have

been in younger age groups. Our 2016 UK consumer survey showed around

half of under 34 year old women said they shopped at Primark frequently

(every three months or more often). This was higher than ASOS (26%) and

slightly higher than New Look (45%).

Figure 83: Primark’s highest market shares are in

younger age groups ...

Figure 84: ... where shopping frequency is high

0

5

10

15

< 20 20 - 24 25 - 34 35 - 44 45 - 54 55 - 74

Primark: Womenswear (inc shoes) market share by age %

2008 2014

53%

49%

44%

26%

16%

12%

39%

41%

37%

45%

49%

41%

8%

10%

19%

29%

36%

48%

0% 20% 40% 60% 80% 100%

18-24

25-34

35-44

45-54

55-64

65-75

Primark: breakdown by age and frequency

Frequent Infrequent Non -shopper

Source: Kantar WorldPanel

Source: Research Now®, Deutsche Bank Base N = 1003 (all)

Primark tries to change the perception of value in the market in which it

operates, employing a predominantly ‘every-day low price’ strategy. It aims to

be the lowest price in its markets, which is why value fashion is often called

‘disposable’ fashion. Primark does not disclose its gross margin (it deems this

commercially sensitive) but we believe these are in the mid-40s and therefore

around 1000bps below mid-market peers. A common question is how Primark

can sell at such low prices (we estimate, based on Kantar Worldpanel data,

that the average is £3.50 per item excluding VAT). We think this can be

answered, and its competitive advantages can be seen, from Figure 85. This

shows that Primark makes less than half of the profit from selling 100 units

that H&M makes (even after the 860bps decline in H&M’s EBIT margins

between its peak of 23.5% in FY Nov-07 to the 14.9% achieved in FY Nov-15).

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Figure 85: From 100 units, Primark makes half the profit as H&M

Primark H&M

Volumes 100 100

Average Selling Price £ (ex-VAT) 3.50 8.00

Sales £ 350 800

Gross margin % 44.6% 57.0%

Gross profit £ 156 456

Operating costs -112 -337

Cost as % sales 32.1% 42.1%

EBIT £ 44 119

EBIT margin % 12.6% 14.9%

Fully leased

Operating costs -117 -337

Cost as % sales 33.4% 42.1%

EBIT fully leased £ 39 119

EBIT margin fully leased % 11.2% 14.9%

Source: Deutsche Bank estimates, Primark FY Sep15 and H&M FY Nov-15

Volume, volume, volume

Primark achieves an attractive return, much like the hard discounters in Food

Retail or the general merchandise discounters, by buying large volumes from

suppliers and selling at a low price to generate high sales per square foot.

Large stores also keep cost densities down and also help to attract customers

more frequently and to buy more items. Primark, like Zara, is visited

significantly more frequently than a typical clothing retailer, which must in part

be attributable to its regular new fashion arrivals. The average basket of 4

items is higher than Zara (just under 3) and the market average of around 2.5

units per basket. The virtuous circle of large stores, low gross margins, low

prices, high volume, high densities and acceptable margins is hard to replicate.

We think that the business model can best be illustrated by comparing Primark

on these metrics against a wider set of its peers.

Figure 86: A large average store size ... Figure 87: ... and low gross margins ...

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Debenhams Primark M & S (Clothing &

Home)

H & M brand Next Zara New Look

Average store size (sq ft 000s)

30%

35%

40%

45%

50%

55%

60%

Next Inditex H & M M & S (Clothing &

Home)

New Look Debenhams Primark

Gross margin %

Source: Deutsche Bank, company data Note: Average store size during 2015/6 financial year

Source: Deutsche Bank, company data Note: 2015/6 financial year. Next, Primark and Debenhams gross margins not disclosed. We estimate Debenhams’ gross margins for own-bought clothing & home (ie excluding concessions) to be 52%

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Figure 88: ... enables competitive pricing ... Figure 89: ... which drives significant volumes ...

£15

£9 £8 £8 £7

£45

£48

£40

£35

£19

£0

£10

£20

£30

£40

£50

£60

M&S Next H&M New Look Primark

Women's Jeans*: Full retail price inc. VATMedian

0

200

400

600

800

1,000

1,200

1,400

1,600

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Number of units sold (m)

Primark Inditex

Source: Deutsche Bank, Company websites and stores Note: June 2016 pricing survey;* Next own brand only, chart excludes an outlier at M&S priced at £89.

Source: Deutsche Bank estimates, Inditex Note: 2015 = FY Jan-16 Inditex and FY Sep-15 Primark. Assume average selling price of £4 throughout for Primark. We estimate that H&M sold c.1,760m units in FY Nov-15

Figure 90: ... at high sales densities ... Figure 91: ... and a low cost to sales ratio ...

0

100

200

300

400

500

600

Next Primark Zara M & S (Clothing &

Home)

New Look H & M Debenhams

Sales per square foot (£)

Sales per sq ft (£) Sales per sq ft excluding e-commerce (£)

20%

25%

30%

35%

40%

45%

50%

Primark Debenhams Next Inditex New Look H & M M & S (Clothing &

Home)

Operating costs to sales %

Source: Deutsche Bank, company data Note: 2015/6 financial year translated at average currency rates

Source: Deutsche Bank, company data Note: 2015/6 financial year. M&S Clothing & Home implies operating margin of 9.5% (and Food 5.4%)

Figure 92: ... and leads to attractive profit densities ... Figure 93: ... at a solid percentage EBIT margin

0

20

40

60

80

100

120

Next Inditex Primark H & M M & S (Clothing &

Home)

New Look Debenhams

EBIT per sq ft (£)

0%

5%

10%

15%

20%

25%

Next Inditex H & M Primark New Look M & S (Clothing &

Home)

Debenhams

Adj EBIT margin %

Source: Deutsche Bank, company data Note: 2015/6 financial year translated at average currency rates

Source: Deutsche Bank, company data Note: 2015/6 financial year

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A transactional website does not seem to be likely in the near-term ...

Like some of the discounters in other categories, its high frequency and low

ticket price is hard to replicate but also hard to make profitable online. Hence

Primark does not offer e-commerce, which arguably hinders the attractiveness

of its proposition given that c.15% of European apparel is omnichannel. Indeed

this is a relative disadvantage for Primark’s convenience (Figure 81) since it is

the only retailer in the top 20 of UK apparel not to offer transactional online. Its

website does, however, attract 0.3m customers per week to view products and

share their purchases on social media, and this acts as a further means of

advertising. Having no transactional website also helps to keep the business

simple and low cost.

... but never say never

For a few months in 2013 Primark trialled a limited online offering on Asos. We

suspect that the trial ended because low average transaction values and low

gross margins did not make the offer economic. We estimate that Primark’s

average basket is around £20, or roughly 5 items at £4. This would achieve £9

of gross profit per transaction, so would simply not be attractive without full

cost recovery. This in turn would be difficult to achieve since online leaders

such as Asos offer free delivery and returns. In contrast, Inditex’s average

basket is c.€85 and so its gross profit per transaction is close to c.€50 and

ASOS’s average basket is c.£68 (inc. VAT, pre-returns). However, Primark’s

average transaction may grow over time (in its flagship stores transaction

value averages €30-40) or costs of fulfilment may fall. Management’s view is

pragmatic, that there is more profitable growth elsewhere at present.

The supply chain follows a traditional model ...

Unlike Inditex, which has a competitive advantage in sourcing through a

uniquely different supply chain, Primark’s model is more conventional. Like

most of its competitors it sources a large proportion of its clothes from third

party manufacturers in Asia, where production costs are typically below those

of Europe and the US. Some garments which require a shorter lead time,

typically because they are higher fashion or in-season repeats, are sourced

from Eastern Europe. In 95% of cases these suppliers also manufacture for

Primark’s value and mid-market peers. Indeed Primark does not wish to be

more than 50% of a manufacturer’s orders.

Figure 94:Primark’s sourcing mix is conventional within

European apparel and is approximately 80% USD and

20% EUR

Figure 95: ... with most costs being labour and raw

materials

China50%

Bangladesh15%

Indian subcontinent &

other Asia15%

Turkey & Eastern Europe

20%

Sourcing mix by geography 2015

Cut, Make, Trim Labour30%

Other mfg costs8%

Textile/ Apparel mfg profit

7%Raw materials

11%

Freight5%

Duty8%

Supply chain overheads

8%

Yarn & Textile Manufacturing (labour, energy

etc)23%

Percentage split of cost of goods sold for a typical clothing retailer

Source: Deutsche Bank estimates

Source: Deutsche Bank estimates

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Page 46 Deutsche Bank AG/London

Once the design has been sampled production commences and finished goods

are shipped to Primark’s own-operated distribution centres in Europe before

being delivered to store. The process from design concept to store takes

around 6 months on average but for some fashion lines takes as little as 6

weeks. These stages are summarised in Figure 96.

Figure 96: Five stages of the supply chain

Source: Deutsche Bank, company data

... and supply chain capacity has received considerable investment

Warehouse capacity doubled between 2013 and 2015 to meet Primark’s

international expansion plans. Previously, Primark’s stock was shipped to one

of its distribution centres in the UK and then distributed to stores. However,

expansion into Continental Europe and USA has altered this process. There are

now distribution centres in Monchengladbach (Germany), Torija (Spain), Bor

(Czech Republic), Naas (Ireland), Roosendaal (Netherlands, 2017) and a third-

party facility in Bethlehem Pennsylvania (USA). In the UK, Primark has 2 DCs in

Thrapston and Magna Park Lutterworth, with the latter relocating to a larger,

custom built site in Islip in 2016. These warehouses, which include hanging

garment facilities, have advanced warehouse management systems with

technology such as voice picking. The Monchengladbach facility, which

receives by train or barge products which have docked in Rotterdam, opened

in 2012 and reduced time to store by nine days on the continent.

A number of drivers of gross margin

There are many drivers of Primark’s (undisclosed) gross margin but more

simply can be split into intake margin and markdown.

Intake margin, the cost of procurement, is the consequence of many things.

These include volumes purchased, cost of labour, fabric, freight rates,

exchange rates and retail price. To adjust to these pressures a clothing

company can change the location of manufacturing to access lower labour

costs. It can alter garment fabrics and composition to respond to cotton prices

or the oil price’s impact on man-made fibres. Generally the US dollar is the

purchasing currency in Asia, though the cost/benefit of any divergence

between US dollar and local Asian currency can be negotiated between the

retailer and manufacturer (whose costs are largely local).

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Currency movements do not immediately impact gross margins. Freight

contracts in dollars tend to be set annually. When Primark places an order with

a manufacturer it decides whether it is intended for sale in the UK or in the

Eurozone and fixes a dollar rate into the cost price. It then sells the garment on

average six months later, roughly when it is paying the supplier in dollars

purchased at the fixed cost price. Hence while Primark does not take out

hedging instruments, it is typically hedged for 6 months. A strong Sterling

against the dollar is favourable for Primark for purchasing goods. However

strong sterling against the Euro is unfavourable for translating its continental

profits.

Markdown reflects the promotion and clearance activity of stock below the

original full price. Primark has a clear-as-you-go policy and an everyday low

pricing approach so it is no surprise that its promotional participation is fairly

low by industry standards and has not changed by much over time.

Figure 97: Primark’s sales on discount are significantly

lower than its peers

Figure 98: ...has increased its proportion of sales on

discount but by less than the market ...

11

16

23 2427 27

30 31

3739 39

43 43

52

57

0

10

20

30

40

50

60

Prim

ark

Geo

rge

Next/

Dir

Riv

er

Isla

nd

Mata

lan

New

Lo

ok

Tesco

Mark

s &

Sp

encer

TO

TA

L M

AR

KE

T

Sho

p D

irect

Gro

up

Sain

sb

ury

Cla

rks

TK

Maxx

Bhs

Deb

enham

s

% sales on discount, by value (2015)

-3

0

2 23

56 6

77

89 9 9

10

-4

-2

0

2

4

6

8

10

12

Tesco

Cla

rks

TK

Maxx

Geo

rge

Prim

ark

TO

TA

L M

AR

KE

T

New

Lo

ok

Next/

Dir

Mark

s &

Sp

encer

Bhs

Sho

p D

irect

Gro

up

Riv

er

Isla

nd

De

benham

s

Sain

sb

ury

Mata

lan

% sales on discount, by value: change from 2009

Source: Kantar Worldpanel (52 weeks to August 2015)

Source: Kantar Worldpanel (52 weeks to August 2015 versus 2009)

So what is special about Primark?

Though it operates a conventional model, there are a number of aspects about

the supply chain which are key in achieving the financial results.

First, as we have seen, Primark operates off lower gross margins than its peers

though it may be manufacturing from the same supplier as its competition.

Second, the volumes Primark buys in are significantly larger than most of its

peers, which reinforces the low-cost of production. It has a limited number of

suppliers with whom it has been working for many years (around 90% of

goods purchased come from 250 suppliers). Third, the company has built up

fashion intelligence in recent years through expanding its buying teams in

Dublin (Ireland) and Reading (UK).

Fourth, newness is crucial to fast fashion as consumers want to be able to buy

new trends soon after they appear on the catwalk, and Primark’s model

responds well to new fashions. Stores typically receive at least 5 deliveries

each week and these will include the introduction of around 800 new items

into stores per week. Store managers and category managers can adjust the

number of units they receive through an in-store ordering process depending

on the levels of demand they are seeing and their expectations. To make room

for this newness, Primark has a clear-as-you-go model to deal with product

failures (which are natural in fashion). Typically if new lines are not well

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received by customers within two weeks this will have been identified and the

product price will be lowered to clear inventories over the next two weeks.

This frees up shelf space for more productive garments. Store managers have

some price flexibility both to clear product and to compete locally against

peers.

Track record and performance

More stores, larger stores...

Over the last decade Primark has typically been opening larger stores and

enlarging existing stores. Indeed over this time the number of stores has

doubled but space has quadrupled as the average store size has increased

from 20,000 sq ft in 2005 to 38,000 sq ft in 2015. Its largest store is in

Manchester, UK, (155,000 sq ft or 14,400 square metres). The average store

size in its newer continental European markets (43,000 sq ft, FY Sep-15)

significantly exceeds its average size within the UK & Ireland (36,000 sq ft).

Figure 99: Store growth has been rapid ... Figure 100: ... and the average store is getting bigger...

93108 114 116 120 122

143

170181

191204

223

242257

278293

0

50

100

150

200

250

300

350

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Primark store numbers

1516

18 1819

20

24

2830

3132

33

35 3537

38

0

5

10

15

20

25

30

35

40

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Average store size ('000 sq ft)

Source: Company data Note: at year end

Source: Deutsche Bank, company data Note: average during financial year

...driving sales growth...

Unsurprisingly, therefore, sales per store and total revenues have grown

significantly. Its compound annual sales growth was 18% over the 10 year

period (2005-15) and 14% over the 5 year period (2010-15).

Figure 101: ... leading to higher sales per store Figure 102: ... and rapidly growing total revenues

5.15.9

6.57.3

8.3

9.9 10.211.0

12.4

13.814.3

15.1

17.1

18.5 18.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Sales per average store (£m)

429 515654 752 858

1,0061,309

1,602

1,933

2,314

2,730

3,043

3,503

4,273

4,950

5,347

0

1,000

2,000

3,000

4,000

5,000

6,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Primark sales (£m)

Source: Deutsche Bank, company data

Source: Company data

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...and sales densities

More of a surprise, perhaps, is that sales densities have generally risen despite

the increasing store size. More normally in retail, larger stores would imply

lower sales per square foot but commensurately lower costs (e.g. rent/staff)

per square foot. Primark’s performance is explained by the larger (and in many

cases full) offering drawing in greater footfall and thus achieving greater sales

densities. Its large stores often put some of the more productive categories (eg

ladies shoes) on higher floors to drive traffic through the store.

The large catchment areas of these stores have, in certain instances, led to

cannibalisation. In FY Sep-15 the strong store opening programme in the

Netherlands and Germany was a major factor why the overall like for like sales

(LFLs, defined as sales growth of stores which have been trading for 53 weeks

or longer) were +1% while excluding these markets it was +4%. Back in FY

Sep-07 the significant UK store opening programme explained why the overall

LFLs were +1%: excluding cannibalisation these were +7%. Although the

reported LFL record has been modest in some years, LFLs were negative for

the first time in H1 2015/6 (LFLs of -1% or +1% excluding cannibalisation).

Figure 103: Sales densities have grown despite larger

stores ...

Figure 104: ... while space growth has been a bigger

driver than LFL

327346

371390

419444

353383

411

444 442 449

488516

500

0

100

200

300

400

500

600

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Sales per sq ft (£)

27%

21%

17%

13%

12%

8%

14%

16%

13%

12%

8%

3%

1%

4%

7%

6%

3%

3%

5%

4%

1%

0%

5%

10%

15%

20%

25%

30%

35%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E

Primark constant currency sales growth %

New Space contribution Like for like

Source: Deutsche Bank estimates, company data; decline in 2007 reflects the shift to larger average store sizes following Allders & Littlewoods store acquisitions

Source: Company data, Deutsche Bank

UK is growing but is less important in the mix

According to subsidiary accounts, the UK achieved a five year sales CAGR of

8% (2010-15). Nevertheless, the UK has fallen in the sales mix from 73% to

54% over the same period due to the rapid growth in continental Europe.

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Figure 105: The UK generates the majority of Primark

sales...

Figure 106: ...but is becoming less important as Primark

expands into Continental Europe and USA

0

1,000

2,000

3,000

4,000

5,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Primark sales by geography (£m)

UK Ireland Continental Europe & US

0%

20%

40%

60%

80%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Primark sales mix by geography %

UK Ireland Continental Europe & US

Source: Deutsche Bank estimates, company data

Source: Deutsche Bank estimates, company data

Fairly stable gross margins

Although Primark does not disclose gross margins management does refer

directionally to the movement year on year. From this we can (rather

tentatively) conclude that gross margins have if anything fallen over the past

ten years. The key decision was made in FY Sep-11 when a spike in cotton

prices put pressure on costs of goods sold at the same time as VAT was

increased by the UK government. Management decided that it would sacrifice

some margin to improve its price leadership further. So whilst prices rose, they

rose less than the industry and gross margins fell sharply (we estimate

c.250bps). Profits fell by over 9% as a result, the worst year on record.

And a narrow band of adj. EBIT margins

Adj. EBIT growth has been robust with the exception of 2011, a year that was

impacted by higher cotton prices and increased VAT in the UK. Since then,

earnings and operating margins have benefitted from increased

warehouse/distribution efficiencies and international expansion though

investment levels remain high. Historically, Primark’s margins have fluctuated

between 10% and 14% on a reported basis. As we described earlier (Figure 19)

Primark owns freehold property which gives it a rental ‘shield’. The property

has not been revalued since 2007 but we estimate that its operating margins

would have been 140bps lower if all its stores were leased. Its reported

Figure 107:We estimate gross margins are possibly a

touch lower than a decade ago ...

Figure 108: ... and not correlated with currency

movements (r2=3%)

47.3%46.8%

46.0% 45.9%

45.3%

46.2%

43.8% 43.6%

44.8%

45.6%

44.6%

40.0%

42.5%

45.0%

47.5%

50.0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Retail Gross margins (%)

-1500bps

-1250bps

-1000bps

-750bps

-500bps

-250bps

0bps

250bps

500bps

H2 2

007

H1 2

008

H2 2

008

H1 2

009

H2 2

009

H1 2

010

H2 2

010

H1 2

011

H2 2

011

H1 2

012

H2 2

012

H1 2

013

H2 2

013

H1 2

014

H2 2

014

H1 2

015

H2 2

015

H1 2

016

Primark's (DBe) gross margin movements vs a theoretical currency model (6m hedges)

DB estimate of Primark gross margins (chg bps) Theoretical currency model

Source: Deutsche Bank estimates

Source: Deutsche Bank estimates, Thomson Reuters Datastream

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operating margins are lower than some of its major listed competitors (and

lower still on a fully leased basis), but is mitigated by its business model which

aims to drive volumes through low prices.

Figure 109: Primark’s Adj. EBIT margins have fluctuated

between 10-14% on a reported basis

Figure 110: ... though profit per square foot have

generally been increasing

0%

2%

4%

6%

8%

10%

12%

14%

16%

Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15

Primark EBIT margins %

EBIT margin % EBIT margin % fully leased

0

10

20

30

40

50

60

70

80

Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15

Primark EBIT per sq ft (£)

EBIT per sq ft EBIT per sq ft fully leased

Source: Company data, Deutsche Bank estimates

Source: Company data, Deutsche Bank estimates

Low marketing spend

As well as sourcing cheaply, Primark also focuses on keeping operating costs

low. The company does not spend heavily on marketing (except at a local level

around store openings) or celebrity endorsements, but instead relies on large

and visible stores in high footfall locations, social media, its large branded bags

and word of mouth as forms of advertising. Nevertheless, there has been

limited operational leverage, with sales and costs typically growing in line with

each other. We suspect this is deliberate management to operate on low

operating profit margins.

Figure 111: Operating costs have grown in line with sales

...

Figure 112: ... and in the UK we can see that rent and

staff costs are broadly unchanged as a percent of sales

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Primark sales growth vs operating cost growth %

Primark sales growth Primark operating cost growth

10.2

%

11.2

%

11

.7%

11.3

%

10.5

%

10.4

%

10.2

%

10.8

%

10.9

%

11.2

%

11.0

%

3.2

% 2.9

%

3.8

%

3.6

%

3.8

%

3.7

%

3.3

% 3.9

%

3.5

%

3.5

%

3.2

%

2.4

% 3.3

% 3.2

%

2.9

%

2.7

%

2.7

%

2.8

% 2.8

%

3.0

%

2.9

%

2.8

%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Primark UK operating costs as % sales

Staff costs Depreciation Lease costs

Source: Deutsche Bank

Source: Company data (Primark Stores Ltd)

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Figure 113: ABF Retail (Primark) historic record

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Revenue 1,006 1,309 1,602 1,933 2,314 2,730 3,043 3,503 4,273 4,950 5,347

Revenue growth % 17.2% 30.1% 22.4% 20.6% 19.7% 18.0% 11.5% 15.1% 22.0% 15.8% 8.0%

- Currency 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -1.9% 1.0% -1.2% -5.0%

- LFL 9.2% 2.7% 1.0% 4.0% 7.0% 6.4% 3.0% 3.0% 5.0% 4.0% 1.0%

- Space 8.0% 27.4% 21.4% 16.6% 12.7% 11.6% 8.5% 14.0% 16.0% 13.0% 12.0%

Gross profit (DBe) 476 613 737 887 1,049 1,238 1,333 1,527 1,916 2,259 2,387

Gross margin % (DBe) 47.3% 46.8% 46.0% 45.9% 45.3% 46.2% 43.8% 43.6% 44.8% 45.6% 44.6%

Operating costs (DBe) -336 -428 -536 -654 -797 -897 -1,024 -1,171 -1,403 -1,597 -1,714

Adjusted Operating Profit 140 185 200 233 252 341 309 356 513 662 673

Adjusted Operating Profit margin % 13.9% 14.1% 12.5% 12.1% 10.9% 12.5% 10.2% 10.2% 12.0% 13.4% 12.6%

Adjusted Operating Profit growth % 29.6% 32.1% 8.3% 16.3% 8.2% 35.3% -9.4% 15.2% 44.1% 29.0% 1.7%

Source: Deutsche Bank, company data; currency effects on sales not disclosed before 2012

Over half of the group’s capex spend is on Primark

Primark’s capital expenditure has represented half of group capex in the past

two financial years. As a proportion of Primark’s own sales or depreciation, it

has been falling.

Figure 114: Primark represents around half of group

capex ...

Figure 115: ... though capex has been falling as a percent

of its sales

29%38%

46%37%

53% 50%

71%62%

54%63%

47% 50%

0%

25%

50%

75%

100%

Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15

Capital expenditure by division

Retail Other divisions

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15

Primark capex as % sales

Source: Deutsche Bank, company data

Source: Deutsche Bank, company data

This reflects, we think, that a reasonable degree of heavy infrastructure

investment (head office and distribution centres) has taken place, while the

amount of new retail space being added has been quite consistent.

Figure 116: Capex has been fairly constant in recent years

Retail division Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15

Capital expenditure £m 214 323 326 228 378 306

Capex £ per new retail sq ft 369 404 354 285 315 322

Capex as % sales 7.8% 10.6% 9.3% 5.3% 7.6% 5.7%

Capex : Depreciation 2.10 3.23 2.47 1.51 2.21 1.77 Source: Deutsche Bank estimates, company data

Its ROCE and GMROI are increasing

ABF discloses a pre-tax return on average capital employed for each division,

as we saw in Figure 22. From this we can estimate the post-tax ROCE

including capitalised leases, though this requires a number of estimates. The

company does not disclose operating lease charges for Primark, so we assume

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c.80-85% of group leases relate to Primark. This implies that the rent to sales

ratio is c.3% (UK 2.8% as disclosed in subsidiary accounts and c.4%

elsewhere) or c.4.5% fully leased. We capitalise leases on 8x, in line with

market convention, though we would note that average lease lengths are

probably around 17 years (based on total group lease commitments of £3.5bn

as at Sept-15 and group operating leases of £206m). The calculations are

summarised in Figure 117 and show rising ROCE on all measures.

Figure 117: Primark’s ROCE has been rising, whatever the definition

Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15

Capital Employed

Average Capital Employed (ex leases) 1,451 1,698 1,854 1,973 1,994 2,164

"Debt" Value of capitalised leases (8x) 678 782 894 1,154 1,302 1,380

Average Capital Employed (inc leases) 2,129 2,480 2,748 3,127 3,296 3,544

Return

Adj. EBIT 341 309 356 513 662 673

Taxed Adj. EBIT 273 247 285 410 530 538

Operating leases (DB est.) 85 98 112 144 163 173

EBITR 426 407 468 657 825 846

Taxed EBITR 341 325 374 526 660 676

Tax rate (normalised, DB est.) 20% 20% 20% 20% 20% 20%

Pre-tax ROCE (ex cap leases)* 23.5% 18.2% 19.2% 26.0% 33.2% 31.1%

Post-tax ROCE (ex cap leases) 18.8% 14.6% 15.4% 20.8% 26.6% 24.9%

Post-tax ROCE (inc cap leases) 16.0% 13.1% 13.6% 16.8% 20.0% 19.1% Source: Deutsche Bank estimates, * company data

GMROI (Gross Margin Return on Inventory) is a measure that allows us to

examine the returns retailers are earning on their capital invested in inventory.

This measure takes into account two key ratios that are critical to any retailer,

gross margins and stock turnover and enables a fair comparison to be made

across retailers who have different business models. Neither of these

components are disclosed, however. We have already discussed and

estimated Primark’s gross margins. Primark’s inventory levels are not disclosed

at a divisional level, but net working capital is broadly neutral and we

extrapolate from UK inventory levels, which represented 13% of group sales in

FY Sep-15. We present GMROI and stock turn, on these assumptions, in Figure

118. These returns also appear to have increased over time.

Figure 118: Asset and stock rotation have been accelerating at Primark

Retail division Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15

Asset turn (x) 1.88 1.79 1.89 2.17 2.48 2.47

Stock Turnover (x) 4.09x 3.73x 3.77x 4.10x 4.22x 4.24x

GMROI (x) 1.86x 1.63x 1.65x 1.84x 1.93x 1.89x

Net Working Capital as % sales 1.0% 1.0% 1.0% 0.5% 0.5% 0.5% Source: Deutsche Bank estimates

Growth has not been without its challenges

Primark has gone from strength to strength but nevertheless has faced its own

challenges over time. In November 2005 fire destroyed Primark’s 440,000 sq ft

warehouse at Magna Park. In 2008 it faced negative publicity related to ethical

practices of a small number of sub-contractors. Recession swiftly followed and

then there was management transition. In 2011 high cotton prices impacted

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profit margins. In 2013, as one of a number of international brands being

supplied from it, Primark was caught up in the tragedy of the Rana Plaza

factory collapse in Bangladesh which killed approximately 1,130 people.

Besides these events, online has a much more rapid channel of growth than

store growth in the apparel industry, but Primark has been able to deliver rapid

sales growth without it.

Market share and competitive landscape

Primark is number 3 in the UK fashion market

The UK clothing, footwear and accessories market was worth £35.8bn

including VAT in the year to May 2016, according to Kantar Worldpanel data

and is highly fragmented. The top three players are M&S, Next and Primark, as

seen in Figure 119, which hold a combined 22% share of the fashion industry.

Figure 120 tracks the market share over time. Its market share has significantly

risen from 1.9% in 2006 to 5% in 2015 but the pace of increase has been

declining. We would note that Primark’s subsidiary accounts report revenues

which imply larger market share gains in most years than those shown in

Figure 120.

Figure 119: In 2015, Primark held a 5% market share in

the UK apparel market

Figure 120: This has grown over time, albeit at a slowing

rate

M&S

10%

Next

7%

Primark

5%

Debenhams

5%

Asda

5%

Arcadia

5%New Look

4%Tesco

3%H&M

2%

Zara

1%

Other

46%

UK Clothing, footwear and accesories market, 2015

1.9

2.9 2.93.1

4.1 4.0

4.44.6 4.6

5.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Sep 06 Sep 07 Sep 08 Sep 09 Sep 10 Sep 11 Sep 12 Sep 13 Sep 14 Sep 15

Primark UK total market share %

Source: Kantar Worldpanel, Deutsche Bank, 52 week rolling market shares to 20 Dec 2015. Selected retailers shown.

Source: Kantar Worldpanel data, Deutsche Bank, 52 week rolling market shares to mid September of each year

Primark is a relatively young brand in the majority of countries in continental

Europe and has a small but growing market share. These countries have

typically more fragmented clothing markets than the UK, with the top 3 market

leaders holding less than 20% of the market.

Primark’s first international venture was Spain, in 2006, and it has performed

remarkably well. In 2010, Primark ranked number 11 with a 0.9% market share

in Spain, according to Euromonitor. Primark is now the second largest player,

with a 3.2% market share and ahead of H&M. Though Primark remains behind

the clear market leader, Zara (owned by Inditex), we think its volume market

share in Spain is higher than Zara.

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Figure 121: Primark has a strong market share in the regions where [1] it has

an established presence and [2] the market is relatively more concentrated

Share by value Market share Rank Market share of top 10

Ireland 31% 1 63%

UK 5% 3 47%

Spain 3% 2 25%

Portugal 3% 4 27%

Germany 1% 14 21%

Netherlands 1% 12 20%

Austria 1% 17 25%

France 1% 21 21%

Belgium na na 26%

US na na 18%

Italy na na 16%

Source: Euromonitor, Kantar Worldpanel, Deutsche Bank, company data

A different competitor set in each country

Figure 122 - Figure 131 show the top 10 retailers in each market, including

Primark where relevant.

Figure 122: The Irish clothing market is highly

concentrated, and Primark holds a 31% market share

Figure 123: Primark holds a 3.2% market share in Spain,

behind the leader Zara

30.6

15.8

7.0

3.41.6 1.4 0.8 0.7 0.7 0.6

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Penneys Dunnes

Stores

TJ

Maxx

H&M Zara River

Island

Monsoon Clarks Schuh New

Look

Top 10 brands by market share (%) - Ireland 2015

7.4

3.2

2.7

2.2 2.2

1.71.5 1.5 1.5 1.4

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Zara Primark H&M Nike Bershka Pull &

Bear

Mango C&A adidas Massimo

Dutti

Top 10 Brands by Market Share (%) - Spain 2015

Source: Euromonitor

Source: Euromonitor, Zara, Bershka, Pull&Bear and Massimo Dutti are all owned by Inditex

Figure 124: Primark has a 2.8% share in Portugal Figure 125: The German market is led by H&M

6.5

3.5

2.8 2.8

2.1 2.1 2.0 1.91.7 1.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Zara Nike adidas Primark Mo H&M C&A Bershka Pull &

Bear

Massimo

Dutti

Top 10 brands by market share (%) - Portugal 2015

5.4

3.1

2.5

1.8 1.71.4 1.3 1.2 1.2 1.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

H&M C&A Deichmann adidas Nike Hugo

Boss

S Oliver TCM Esprit Takko

Top 10 Brands by market share (%) - Germany 2015

Source: Euromonitor

Source: Euromonitor

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Figure 126: ...as is the Netherlands... Figure 127: ...and Austria

5.9

3.5

1.5 1.4 1.3 1.3 1.3 1.2 1.1 1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

H&M C&A Scapino adidas Zara M&S Mode Esprit WE Miss

Etam

VanHaren

Top 10 brands by market share (%) - Netherlands 2015

5.2 5.1

2.8

2.3 2.3

1.9

1.3 1.3 1.31.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

H&M C&A Deichmann Kik Esprit Fussl NKD COS Takko Jello

Top 10 brands by market share (%) - Austria 2015

Source: Euromonitor

Source: Euromonitor

Figure 128: H&M and Zara are key retailers in France... Figure 129: ...as well as Belgium

3.9

3.1

2.42.2

1.6 1.6 1.6 1.5 1.4 1.3

0.0

1.0

2.0

3.0

4.0

5.0

Kiabi H&M La Halle Zara Camaïeu Nike C&A Etam Cache

Cache

Celio

Top 10 Brands by Market Share (%) - France 2015

6.3

4.7

3.1

2.21.9 1.9

1.7 1.61.3 1.2

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

C&A H&M JBC Zeeman Zara Esprit Brantano Shoe

Discount

Torfs E5-Mode

Top 10 brands by market share (%) - Belgium 2015

Source: Euromonitor

Source: Euromonitor

Figure 130: The US market is dominated by American

retailers

Figure 131: H&M and Zara are amongst the top 3

retailers in Italy

6.0

1.7 1.71.4 1.4

1.2 1.1 1.1 1.1 1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Nike Old Navy Victoria's

Secret

Target Ralph

Lauren

adidas Jones Under

Armour

Forever

21

Hanes

Top 10 Brands by Market Share (%) - US 2015

3.2

1.91.8 1.8

1.6

1.21.1

1.0 1.0 1.0

0.0

1.0

2.0

3.0

4.0

OVS H&M Zara United

Colors of

Benetton

Nike adidas Giorgio

Armani

Geox Bata Dolce &

Gabbana

Top 10 Brands by market share (%) - Italy 2015

Source: Euromonitor

Source: Euromonitor

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How Primark compares to its global peers

We have shown these country market shares in some detail in order to

demonstrate that competition is local. Nevertheless, peers like H&M and Zara

are present of all of Primark’s markets and these are some of the more obvious

companies to benchmark Primark financially. Figure 132 sets out some of

these metrics.

Figure 132: Benchmarking Primark against global peers £m Primark Inditex H&M Gap Inc Fast Retailing

Year end Sep-15 Jan-16 Nov-15 Jan-16 Aug-15

Geographies

Home Market UK & Ireland Spain Sweden USA Japan

Number of markets 11* 91 47 52 17

Format

Number of banners 1 9 7 5 6

% sales of leading banner 100% 64% 95% 42% 82%

Total stores (inc. franchise) 293 7,013 3,924 3,721 1,639

- Europe 292 4,888 2,570 275 25

- Americas 1 682 437 2,810 42

- Asia & rest of world 0 1,443 917 636 1,572

Year end space (sq m) 1,036,245 4,086,904 5,008,374 3,521,029 1,626,707

Average store size (at YE) 3,537 583 1,276 946 992

Sales

Sales £m 5,347 15,145 14,108 10,379 9,166

Sales per ave. sq m 5,383 3,847 2,963 2,936 5,987

Sales CAGR (3 years**) 15% 9% 14% 0% 14%

Profits

EBIT £m 673 2,664 2,102 1,001 897

EBIT per ave. sq m 678 677 441 283 586

EBIT CAGR (3 years**) 24% 6% 7% -8% 9%

Currency rate used £1.00 €1.38 SEK12.82 $1.52 ¥183.5

Indexed P&L

Sales 100 100 100 100 100

- Europe 100 70 65 5 2

- Americas 0 10 11 84 3

- Asia & rest of world 0 21 23 11 96

Gross margin 45 58 57 36 51

Operating costs 32 40 42 26 41

EBIT margin 13 18 15 10 10 Source: Deutsche Bank, Company data, *Primark markets include Italy, opened in 2016, ** reported currency

Strategy and the future

Primark’s strategy is to build on the successes of the past and expand its

footprint. There are three main elements to this:

New stores

Primark’s growth strategy is based on roll-out of stores in its 11 current

markets. The company has indicated that it will continue to open new stores in

all of these markets and still sees potential to grow in the UK. Primark opened

its first store in Italy in FY Sep-16 and for a long time has planned to operate 9

stores in North Eastern USA before pausing to assess the business. Over time

we see scope for Primark to enter more markets, particularly Eastern Europe

and eventually Asia.

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Improved stores

There are two aspects to this. The first is to continue to open larger stores and

expand existing stores. The other aspect is to drive its fashion credentials

through its store environment. In recent years its larger store strategy has been

accompanied by improvements in window presentation, visual merchandising

and the introduction of new denim, footwear and beauty departments.

New product development

Primark has developed ranges in new categories in recent years and plans to

grow and develop these further. These have included home accessories,

accessories such as scarves and jewellery, athleisure, licensing e.g. Walt

Disney, and Health & Beauty. Its PS beauty brand is now available in all stores

and sells across a range of fragrances, skincare and makeup. In addition we

expect the brand to continue to test higher price point products, potentially

stretching its price architecture which is biased to the bottom of a

‘good/better/best’ structure.

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Appendix 1

Important Disclosures

Additional information available upon request

Disclosure checklist

Company Ticker Recent price* Disclosure

A B Foods ABF.L 2,689.69 (GBp) 28 Jul 16 NA *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=ABF.L

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Warwick Okines

Historical recommendations and target price: A B Foods (ABF.L) (as of 7/28/2016)

1

2

0.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

3,500.00

4,000.00

Aug 13 Nov 13 Feb 14 May 14 Aug 14 Nov 14 Feb 15 May 15 Aug 15 Nov 15 Feb 16 May 16

Secu

rity

Pri

ce

Date

Previous Recommendations

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating

Current Recommendations

Buy Hold Sell Not Rated Suspended Rating

*New Recommendation Structure as of September 9,2002

**Analyst is no longer at Deutsche Bank

1. 11/11/2013: Hold, Target Price Change GBP1,900.00 Harold Thompson**

2. 23/04/2014: Hold, Target Price Change GBP3,000.00 Harold Thompson**

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Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock.

Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock

Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.

Newly issued research recommendations and target prices supersede previously published research.

39 %

55 %

6 %

47 % 38 %

24 %0

50

100

150

200

250

300

350

Buy Hold Sell

European Universe

Companies Covered Cos. w/ Banking Relationship

Regulatory Disclosures

1.Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the

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Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are

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