consumer discretionary - macquarie€¦ · virtual book library, film and tv streaming (prime...

Please refer to page 32 for important disclosures and analyst certification, or on our website

www.macquarie.com/research/disclosures.

AUSTRALIA

Contents

Understanding the Amazon philosophy

and success to date 2

Online retail penetration across markets 7

Forecasting Amazon’s impact on

Australia 13

Impact on Australian retail by category 15

Population growth & wage inflation 16

Impact on Australian retail by category 17

Sensitivity Analysis – Impact on

Australian retail by category 17

Sensitivity Analysis – Impact on JBH,

HVN and MYR 18

Sales productivity of an Amazon

Fulfilment Centre 21

REIT occupancy cost and specialty

sales productivity 23

Competitor impact – Best Buy (US) 25

Competitor impact – GameStop (US) 26

Competitor impact – Dixons (UK/EU) 27

31 March 2017 Macquarie Securities (Australia) Limited

Consumer discretionary Amazon: Rumble in the jungle Event

Talk of Amazon’s pending entry into Australia has been prolific across the

press and the market in recent months. While much of the news flow appears

to be of unsubstantiated origin, the drum beat is getting louder. As a result, we

take a look at Amazon’s experience across a range of markets, we estimate

what the company could achieve in Australia and the implications across a

range of retail categories and incumbents.

Impact

Online penetration estimated at 12.5% by 2025, Amazon capable of 25%

share. Based on the experience in the US and UK, but also taking into

account constraints experienced in Canada, we estimate that online will

increase to 12.5% of total retail sales by 2025 in Australia. Assuming a 25%

share of online this implies Amazon could capture $14.5b revenues by 2025.

We expect Amazon’s strategic approach to differ in Australia to the UK

and US. In order to achieve this degree of success by 2025 we believe

Amazon will need to take into account the characteristics of the Australian

market, particularly given the learnings from Canada. We believe third-party

suppliers (domestic and international) will be more important to establishing a

presence in Australia, while Prime and Fresh will be needed to deliver greater

penetration and wallet share across the more lucrative metropolitan markets.

Expectations for Australian retailers is not imminent disaster.

Implications for Australia’s retailers include micro and macro factors. On the

micro level, incumbents will need to address inadequacies in pricing,

customer engagement/loyalty, data analytics, website speed and ease-of-use

and fulfilment. On a macro level, online is forecast to capture ~30% of total

retail sales growth which leaves a lower amount of growth available to the

existing fleet of physical stores. The near-universal experience from overseas

is that the leading category players can prevail, but inevitably with a smaller,

more effective property footprint. However, we believe the impact of Amazon

will take a number of years to make material impact and, assuming no

mitigation, the earnings implications for listed retailers looks, in some cases,

to be more than factored into share prices at current levels.

Outlook

Amongst the retail sector, we prefer WES and MTS in staples and JBH

and MYR in discretionary (all Outperform). Based on our analysis, there is

risk to discount department stores which impacts WES only modestly at group

level and MTS may actually benefit should Amazon require a strategic partner

in grocery supply. On our estimates, JBH is more than adequately pricing in

the downside risk of an Amazon entry, while MYR is addressing (albeit,

slowly) its excessive store footprint, repositioning its cost base and improving

its relevance to customers.

http://www.macquarie.com/research/disclosures

Macquarie Wealth Management Consumer discretionary

31 March 2017 2

Understanding the Amazon philosophy and success to date

Over the last two decades Amazon has evolved into an incredibly powerful global business,

whose strategy is arguably now more about its capacity to grow and control the online ecosystem

rather than simply selling goods to customers online.

We estimate Amazon has 4.2% market share of US retail sales (ex Petrol), 38% share of online

retail sales and contributed 65% of total online sales growth in the US over 2016.

In the UK the statistics are similar for Amazon, with an estimated 3.5% share of total UK retail

sales (ex Petrol), 24.4% share of online retail sales and contributed ~30% of total online sales

growth.

Key principles easy to imitate but hard to replicate

By understanding Amazon’s key principles we can get an improved perspective on how the

company will contest the market into the future:

Have a customer obsession, rather than a competitor obsession;

Eagerness to invent and pioneer;

Willingness to fail;

Patience to think long term; and

Taking a professional pride in operational excellence.

While some firms can tick some of these boxes, few can tick all and Amazon’s industry defining

growth and thin margins tends to suggest that the above principles are exactly the basis by which

the company is operating, assisted by patient shareholders.

Nurturing and globalising the big bets

In addition to the above principles, Amazon continues to focus on “nurturing and globalising” its

three big offerings (in addition to looking for a fourth “big bet”):

Amazon Web Services (AWS) – IT services business covering a range of services evolving

around cloud computing (database, storage, computation, analytics, mobile, enterprise

applications and internet of things platforms).

Marketplace – Launched in 2000 to enable third-party sellers (3P) to upload products to

Amazon’s’ site, materially increasing ranging and customer satisfaction. Since enhanced with

Facilitated by Amazon (FBA or 2P) which brings third-party inventory directly into Amazon’s

fulfilment centres, potentially bringing these products into the Prime offering, and this year

extended further with Seller Fulfilled Prime enabling consistently high performing sellers to join

Prime offering directly from their own warehouses, again improving the Prime range.

Prime – Started out as a premium membership model entitling customers in a small number

of locations to two-day delivery times across a small selection of products for an annual fee.

Prime has now been expanded to over 50 million products, 7-day delivery across more than

35 cities globally. Incremental services have been added including music, photo storage,

virtual book library, film and TV streaming (Prime Video). Prime Now is a relatively new

extension which offers customers a one-hour delivery across a core range of daily essential

items and groceries across 30 cities.

With more than 50% of units now coming from third-party sellers (2P and 3P) through

Marketplace, one-third of marketplace sales taking place across borders and 40% of operational

earnings from AWS, the Amazon business is becoming more about how the company can

continue to capture an increasing level of loyalty and spend from its ever growing customer base

(suppliers and purchasers), globally. It is estimated that Prime membership currently exceeds 65m

globally.


31 March 2017 3

Take the good with the bad

We also think that when anticipating an Australian expansion from Amazon, we should consider

how the group’s broader strategy and previous learnings from international expansions

(successful or otherwise) will shape the priorities for Amazon in Australia.

We go into further detail in the note on the measurable success of Amazon in the US and UK (key

points also above), but there are other learnings from regions like Canada which also provide

insights into how Amazon can adapt its model for the Australian market. The observations from

US and UK are the primary drivers of our assumptions for modelling Amazon in the Australian

market. However, the experience in Canada suggests the plan of attack in Australia could be

significantly different to that seen in US and UK over the last 20 years.

Canadians have utilised Amazon for many years, primarily by using the US website to access

product and delivered to lockers across the border. However, in 2010 Amazon opened Canadian

fulfilment centres to increase its access to the market.

While details remain scant, Amazon’s expansion directly into Canada has been met with a

relatively lacklustre response – so far. Some of the issues in Canada noted from online observers

and former Amazon staff are the economics of outbound logistics across a sparsely populated

country, relatively limited assortment compared to amazon.com site and price/non-price barriers to

trade in Canada. Like Australia, Canada’s online penetration rate has lagged US and UK markets,

but at 3.6% online share Canada is even below estimates for Australia (7.1%). The characteristics

which limit online and Amazon’s growth in Canada are, in our view, also relevant in Australia.

On the plus side, the clustering of large proportions of the Canadian population into a small

number of cities presents a significant opportunity for Amazon Fresh.

While this is a different category to lead customer engagement than US and UK, the opportunity to

cherry pick high population centres with marketplace and Fresh is as relevant in Canada as it is in

Australia.


31 March 2017 4

Source: Company announcements, Macquarie Research, March 2017


31 March 2017 5

What does all this mean for Australia?

Should Amazon decide to enter the Australian market and based on the company’s principals and

strategic priorities, we assume the following strategy in Australia:

Build on the beachhead already established by AWS in Australia;

Rapidly drive customer engagement through Prime;

Incremental rollout of departments/categories;

Third-party/marketplace to take on greater importance from a local supply perspective and

supplemented by a modest initial offering from Amazon and its third-party suppliers offshore;

Third-party suppliers may also be able to access international growth, given Amazon’s focus

on Asian expansion and cross-border trade; and

Amazon Fresh rollout to broaden offering and drive engagement with customer base,

particularly in the high density metro markets.

As discussed in greater detail below, should Amazon launch its full offering into the Australian

market we believe its higher standard of offering and greater consumer engagement could lift the

online penetration rate by ~0.6%pa out to 2025 to 12.5%, with Amazon taking ~25% share by that

stage, equating to ~$14.5b in sales for Amazon by 2025.

Fig 1 AUS online retail could reach 12.5% of total retail

Fig 2 Amazon potential share of AUS online retail (25%)

Source: ABS, Company Data, Macquarie Research, March 2017 Source: ABS, Company Data, Macquarie Research, March 2017

The implications of increased competition in Australia are not new. While in Amazon’s case the

format is different and areas of competitive advantage differ, the story remains primarily one of

increased capacity in the industry and the potential for market share losses for incumbents.

In other markets, the success of Amazon has seen a number of weaker competitors fail, while the

leaders have been able to restructure underperforming aspects of their business to return to a

more sustainable level of performance and has also enabled smaller, more nimble operators to

prosper. The same will be true in Australia.

Should Amazon enter the Australian market, we believe a range of categories would likely face

increased competition for market share. The most obvious amongst the retail sector would be the

department store/discount department store category, electrical/home appliances, sporting goods,

apparel and, to a lesser extent, food.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

0

50,000

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Market share (%)

AU Retail sales ($m)

AUS Total retail sales (AUDm)

AUS online retail sales (AUDm)

AUS Online Sales / Total sales (AUDm) 57,079

14,270

0.0%

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Market share (%)

AU Retail value (AUDm)


Amazon - GMV Total (AUDm)

Amazon Online market share - Total (%)


31 March 2017 6

We estimate post Amazon’s entry the following long-run average growth per category:

Fig 3 Australian retail sales growth by category based on a base expectation of online penetration of 12.5% by the year 2025

Source: Macquarie Research, March 2017

DS/DDS brick and mortar sales to grow at ~0.6%, suggesting store contraction will now be a

key priority in order to minimise losses of underperforming stores. We would go so far as to

suggest one of the majors may need to shut down entirely to improve sustainability of the

category.

Electrical and appliance brick and mortar sales to grow at ~2.1%, suggesting the industry

should continue to see marginal reductions in stores to ensure comparable store sales growth can

be maintained at 2.5%.

Clothing and footwear brick and mortar sales growth of ~3.0%, which is enough to underpin

stable margins with no net new store expansion, however floor space going to international

apparel retailers suggests domestic incumbents should be managing their operations on a lower

future store base.

Food and Liquor sales growth to brick and mortar retailers of ~4.4%. This is well above

current levels of growth of ~3% and implicitly assumes a return to inflation. The risk here is that

WOW, Coles and Aldi continue to expand stores (although at an admittedly slower pace of 0.5%-

1.0% for the majors) which would dilute the potential to maintain margins on a comparable store

basis. Any continuation of the current deflationary process in grocery prices risks further downside

to sales growth, further curtailing the potential for operating leverage.

In addition to these macro factors, a proposed launch into Australia by Amazon would also require

incumbents to improve micro factors such as pricing (pricing has improved over the last decade),

deliver greater customer engagement/insights/loyalty, improve ease of use and responsiveness of

websites, expanded ranges and improve fulfilment of deliveries across a range of delivery options

and durations.

None of these adjustments come cheap, and we anticipate a credible response will require a

capital reallocation away from new store capex towards online, data management and fulfilment.

Bricks & Mortor retail sales growth by category (%)

Year

Clothing

and

apparel

Department

stores

Electrical &

appliances

Household

goods

Personal &

Recreation

al goods

Grocery

and Liquor

Takeaway

Food Other Total

2017e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.8% 3.9%

2018e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.7% 3.9%

2019e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.7% 3.9%

2020e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.7% 3.9%

2021e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.7% 3.9%

2022e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.7% 3.9%

2023e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.6% 3.9%

2024e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.6% 3.9%

2025e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.6% 3.9%


31 March 2017 7

Online retail penetration across markets

Online sales penetration rates continue to climb globally, with online’s share of total retail sales

growth continuing to increase as the scale of the channel increases.

Based on published government statistics we estimate the online penetration rate in the US retail

sector (ex Petrol) in 2016 was ~11%. The share of retail sales growth that is captured by online

each year is also continuing to increase, from ~18% in 2011 to ~40% in 2016. This is leaving little

breathing space for traditional retailers to deliver comparable sales growth, let alone to sustain

store expansion. The story gets worse if we consider categories contested well online, but little

data is publicly available to confirm this thesis adequately.

The story is more advanced in the UK. We estimate the online penetration rate at ~14% and

online’s share of growth trending upward from ~30% in 2011 to (a likely short-term high) of ~75%

in 2016.

In Australia, the experience is a little different, online penetration is ~7%, based on NAB’s Online

retail Sales Index. However, this could change if a market leading participant, such as Amazon,

were to enter the market.

Amazon has proven a formidable competitor in its home market of the US, and in other

international markets as it has expanded, though to varying degrees of success.

Should Amazon enter the Australian market, there is little doubt its presence would be felt by

incumbents, but the degree to which would depend on what path Amazon takes.

Fig 4 US online sales penetration (10.9%) Fig 5 US online share of total retail growth (42.4%)

Source: US Census Bureau (USCB), Macquarie Research, March 2017 Source: USCB, Macquarie Research, March 2017

Fig 6 UK online sales penetration (14.6%) Fig 7 UK online share of total retail growth (76.2%)

Source: ONS, Macquarie Research, March 2017 Source: ONS, Macquarie Research, March 2017

0.0%

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US retail sales - ex. Petrol (USDm)

US Online retail sales - ex. Petrol (USDm)

US Online Sales / Total US Sales (ex. Petrol)

-60.0%

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Incremental sales (USDm)

US retail sales - ex. Petrol (USDm) - growth ($)

US Online retail sales - ex. Petrol (USDm) - growth ($)

US Online sales contribution to Total sales growth (%)

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UK Retail sales (£m)

UK retail sales - ex. Petrol (£m)

UK Online retail sales - ex. Petrol (£m)

UK Online Sales / Total UK Sales (ex. Petrol)

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Incremental sales (£m)

UK retail sales - ex. Petrol (£m) - change ($)

UK Online retail sales - ex. Petrol (£m) - change ($)

UK Online sales contribution to Total sales change (%)


31 March 2017 8

Fig 8 AUS online sales penetration (7.1%) Fig 9 AUS online share of total retail growth (23%)

Source: ABS, NAB, Macquarie Research, March 2017 Source: ABS, NAB, Macquarie Research, March 2017

American homeland demonstrates the upside case for Amazon over time

As discussed above, the US market has seen significant online penetration to ~11% in 2016. The

share of online retail sales that is captured by the Amazon system each year is also continuing to

increase, from ~18% in 2011 to ~40% in 2016.

We estimate Amazon’s sales (grossed up for third-party sales) represented 4.2% of total retail

sales in the US over 2016 (ex Petrol), capturing ~28% of total sales growth over the period. To

gross up the third-party sales revenue received by Amazon, we assumed a 20% charge to

retailers by Amazon based on commission rates, related fulfilment costs, shipping fees and other

third-party seller services.

In relation to online sales, we estimate Amazon to have just under 40% share, while the proportion

of online sales growth captured by Amazon is estimated to have been in excess of 50%

consistently since 2013.

While online growth has been strong in the US, outside of the financial crisis period of 2008-2010

online has captured between 15% and 40% of total retail sales growth. This suggests that there

remains very modest growth for the traditional bricks and mortar businesses in the US of about

2.5%, barely enough to maintain profit margins for existing retailers on a comparable store basis.

In aggregate, these growth rates across the physical stock of retail assets would suggest a flat to

declining physical store footprint should be expected in the US if these online trends are to

continue.

What differs in recent years is the nature of Amazon’s sales, which are increasingly skewing to

third-party sales as the group facilitates a broader range of online retailing activity through its

online or logistics infrastructure. We estimate third-party sales are now the majority of Amazon’s

online retail sales in the US, with growth flattening out in the traditional Amazon online operations

(1P).

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AUS Online Sales / Total sales (AUDm)

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31 March 2017 9

Fig 10 Amazon share of US retail market (4.2%) Fig 11 Amazon share of US retail growth (27.7%)

Source: USCB, Company Data, Macquarie Research, March 2017 Source: USCB, Company Data, Macquarie Research, March 2017

Fig 12 Amazon share of US online retail (38.1%) Fig 13 Amazon share of US online growth (65.4%)


Fig 14 Online vs. Bricks and Mortar contribution to total US retail growth ($)

Fig 15 Online vs. Bricks and Mortar contribution to total US retail growth (%)


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US Retail value (USDm)

US retail sales - ex. Petrol (USDm)

Amazon market share - Electronics & general merch (%)

Amazon Retail market share - Total (%)

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US retail sales - ex. Petrol (USDm) - change ($)

Amazon contirbution to US retail sales - ex Petrol - change (%)

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Amazon market share - Electronics & general merch (%)


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US Online retail sales - ex. Petrol (USDm) - change ($)

Amazon contirbution to US Online retail sales - ex Petrol - change (%)

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US retail sales - ex. Petrol (USDm) - change (%)


31 March 2017 10

Fig 16 Amazon vs. 3rd party retailers by market share: 3rd party retailers contributing 54% of sales

Fig 17 Amazon vs. 3rd party retailers by growth: 3rd party retailers the majority contributor to growth

Source: Company Data, Macquarie Research, March 2017 Source: Company Data, Macquarie Research, March 2017

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US Online retail market share

(%)

Amazon US market share (%) 3rd Party retail market share (%)

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60.0%

70.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Share of growth (%)


US online retail change from 3rd party Retail (%)

US online retail change from Amazon Retail (%)

Amazon contirbution to US Online retail sales - ex Petrol - change (%)


31 March 2017 11

Amazon’s UK operations are well established in a strong online oriented market

As discussed above, we estimate UK online penetration rate at 14.6% and online’s share of

growth trending upward from 30% in 2011 to (a likely short-term high) of 75% in 2016.

UK’s high population density, congested traffic conditions and constrained high street retail

footprint have made online retailing a more suitable option for UK consumers. With such a

propensity to online, it should come as little surprise that Amazon has been able to garner ~3.5%

of the entire UK retail market. Amazon’s’ share of total sales growth has been volatile, but we

estimate the group accounted for ~23% of annual retail sales growth in 2016.

We estimate Amazon represents ~24% of the UK online market. This is well below the equivalent

statistics in the US, and should be expected given the strong online execution of many of the UK’s

incumbent retailers and the higher proportion of online sales in the supermarket sector.

Despite this higher competition, Amazon has managed to capture between 25% and 40% of

annual online sales growth since 2009 (2016 ~28%).

UK retail sales growth has been quite varied in recent years, trading around an average growth

rate of ~3%. Online sales are capturing a fairly consistent share of 40% since ~2010 and

accelerated in 2016 to in excess of 70%. If not for the strong online capabilities of many of UK’s’

retailers, these online trends would suggest ~1% of retail sales growth was captured by traditional

brick and mortar formats, nowhere near the level required to maintain store profits (all else held

equal).

Like the US, Amazon is stepping up third-party retailers to support growth in the UK. However, in

this instance we have needed to estimate the contribution of third-party retailers based on modest

disclosures. At this point, we estimate that third-party sales represent the majority of Amazon’s

sales growth in the UK since 2012 but suggested treating the statistic with due caution.

Fig 18 Amazon share of UK retail market (3.5%) Fig 19 Amazon share of UK retail growth (76.2%)

Source: ONS, Company Data, Macquarie Research, March 2017 Source: ONS, Company Data, Macquarie Research, March 2017

Fig 20 Amazon share of UK online retail (24.3%) Fig 21 Amazon share of UK online growth (30.1%)


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Market share (%)

UK Retail value (£m)

UK retail sales - ex. Petrol (£m)


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

20

03

20

04

20

05

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06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Share of growth (%)


Amazon - Total (£m) - change ($)


Amazon contirbution to UK retail sales - ex Petrol - change (%)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0

10,000

20,000

30,000

40,000

50,000

60,000

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Market share (%)

UK Retail value (£m)

UK Online retail sales - ex. Petrol (£m)


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Share of growth (%)


Amazon - Total (£m) - change ($)


Amazon contirbution to UK Online retail sales - ex Petrol - change (%)


31 March 2017 12

Fig 22 Online vs. Bricks and Mortar contribution to total UK retail growth ($)

Fig 23 Online vs. Bricks and Mortar contribution to total UK retail growth (%)


Fig 24 Amazon vs. 3rd party retailers by market share: 3rd party retailers contributing 54% of sales



-10,000

-5,000

0

5,000

10,000

15,000

20,000

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

UK Retail sales (£m)


UK B&M retail sales - ex. Petrol (USDm) - change ($)


0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Contribution to sales growth (%)

US Retail sales growth (%)

US Online sales contribution to Total sales change (%)

UK B&M sales contribution to Total sales change (%)

UK retail sales - ex. Petrol (£m) - change (%)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

UK Online retail market share

(%)

Amazon UK market share (%) 3rd Party retail market share (%)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Share of growth (%)


UK online retail change from 3rd party Retail (%)

UK online retail change from Amazon Retail (%)

Amazon contirbution to UK Online retail sales - ex Petrol - change (%)


31 March 2017 13

Forecasting Amazon’s impact on Australia

We have used the insights from Amazon’s UK and US expansions to estimate the potential market

impact in Australia, should the company decide to enter the local market. In order to derive these

estimates we are applying the following assumptions:

Amazon date of entry: 2018;

Total AUS retail growth: +4.6% pa (based on category growth at 10-year averages);

AUS online retail penetration rate by 2025: 12.5% (2016: 7.1%);

Amazon online market share by 2025: 25.0%;

% Amazon revenue (not grossed up sales) by third-party by 2025: 25.0%.

These should be considered a best-case scenario for Amazon in Australia, considering that both

the US and UK expansions took place while online retailing was in its infancy and that Amazon’s

success in logistically challenged markets (such as Canada) has yet to be adequately

demonstrated.

Assuming Amazon captures ~25% of the online market by 2025 implies the group will need to see

ongoing improvements in share of online growth from 25% in 2018 to more than 50% in 2025.

This trend would lift online sales growth to a consistent ~30% of total retail sales growth pa. Again,

like the US and UK, this leaves relatively modest growth for brick and mortar retailers; our

Australian scenario growth of ~3.9% is a little better than the US and UK, but still not enough to

give comfort around store expansion programs for incumbent retailers.

Amazon has clearly demonstrated an increased reliance on third-party retailers to drive sales.

There is also evidence to suggest this is even more the case in Canada. Equally we expect

Amazon to lean hard on local retailers to fractionalise Amazon’s local cost base, driving third-party

sales well above levels seen in the UK and US.

This reliance on third-party retailers is important to understand as it should provide an opportunity

for local retailers to grow share through Amazon’s ecosystem (at a cost) and would be a similar

model to that already seen by eBay in Australia.

Fig 26 Amazon share of AUS retail market (3.1%) Fig 27 Amazon share of AUS retail growth (13.2%)


3.1%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

20

16

20

17

e

20

18

e

20

19

e

20

20

e

20

21

e

20

22

e

20

23

e

20

24

e

20

25

e

Market share (%)


AUS Total retail sales (AUDm)



0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

0

5,000

10,000

15,000

20,000

25,000

20

16

20

17

e

20

18

e

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19

e

20

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e

20

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e

20

22

e

20

23

e

20

24

e

20

25

e

Share of growth (%)

Incremental sales (AUDm)

Amazon - Total (AUDm) - change ($)


Amazon contirbution to AUS retail sales - ex Petrol - change (%)


31 March 2017 14

Fig 28 Amazon share of AUS online retail (25%) Fig 29 Amazon share of AUS online growth (52.3%)


Fig 30 Online vs. Bricks and Mortar contribution to total AUS retail growth ($)

Fig 31 Online vs. Bricks and Mortar contribution to total AUS retail growth (%)


Fig 32 Amazon vs. 3rd party retailers by market share: 3rd party retailers contributing ~50% of sales



57,079

14,270

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0

10,000

20,000

30,000

40,000

50,000

60,000

20

16

20

17

e

20

18

e

20

19

e

20

20

e

20

21

e

20

22

e

20

23

e

20

24

e

20

25

e

Market share (%)





0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

0

1,000

2,000

3,000

4,000

5,000

6,000

20

16

20

17

e

20

18

e

20

19

e

20

20

e

20

21

e

20

22

e

20

23

e

20

24

e

20

25

e

Share of growth (%)

Incremental sales (AUDm)

Amazon - Total (AUDm) - change ($)


Amazon contirbution to AUS Online retail sales - ex Petrol - change (%)

0

5,000

10,000

15,000

20,000

25,000

20

12

20

13

20

14

20

15

20

16

20

17

e

20

18

e

20

19

e

20

20

e

20

21

e

20

22

e

20

23

e

20

24

e

20

25

e

AUS Retail sales (AUDm)

AUS B&M retail sales change (AUDm)



0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

20

12

20

13

20

14

20

15

20

16

20

17

e

20

18

e

20

19

e

20

20

e

20

21

e

20

22

e

20

23

e

20

24

e

20

25

e

Contribution to sales growth

(%)

AUS Retail sales growth (%)

AUS Online sales contribution to Total sales (%)

AUS B&M sales contribution to Total sales (%)

AUS Total retail sales - change (%)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

20

16

20

17

e

20

18

e

20

19

e

20

20

e

20

21

e

20

22

e

20

23

e

20

24

e

20

25

e

AU Online retail market

share (%)

Amazon AUS market share (%) 3rd Party retail market share (%)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

20

16

20

17

e

20

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e

20

19

e

20

20

e

20

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e

20

22

e

20

23

e

20

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e

20

25

e

Share of growth (%)


AUS online retail change from 3rd party Retail (%)

AUS online retail change from Amazon Retail (%)

Amazon contirbution to AUS Online retail sales - ex Petrol - change (%)


31 March 2017 15

Impact on Australian retail by category

The below analysis highlights estimates of Australian retail sales growth by category across bricks

and mortar retailers in an online environment where Amazon has entered the Australian market,

essentially building on the forecasts outlined in the prior section. The methodology is as follows:

2016 Online retail sales value ($) and market share (%) provided by NAB Online Retail Sales

Index;

2016 Online retail sales penetration by category (as a % of total category retail) based on

Online retail sales value vs. Total retail sales value (ABS);

Retail sales (ABS) separated into corresponding categories and forecast from 2017 to 2025

based on the 10yr average growth rates by category to imply total retail annual growth rates;

Increases in online retail penetration by category assumed to reflect the increase across total

online retail penetration (12.5% by 2025);

Online retail sales value ($) backed out from online sales penetration (%) and forecast total

retail sales value ($);

Brick and mortar retail sales value ($) implied by the difference between Total retail sales

value ($) and online retail sales value ($).

Fig 34 Australian retail sales growth by category based on an base expectation of online penetration of 12.5% by the year 2025


Store closures or lower comp growth environment expected. If we assume retail operations

require comparable sales growth of +2.5% in order to cover expected cost increases, this would

imply that both department and electronic retailers will likely be required to reduce space in order

to achieve the necessary level of comparable sales growth. While clothing and apparel retailers

have a relatively small buffer to growth stores, given the comparable growth requirements, if we

consider the elevated store rollout of international retailers then domestic apparel retailers will

likely remain under significant pressure to their reduce industry footprint.

Bricks & Mortor retail sales growth by category (%)

Year

Clothing

and

apparel

Department

stores

Electrical &

appliances

Household

goods

Personal &

Recreation

al goods

Grocery

and Liquor

Takeaway

Food Other Total

2017e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.8% 3.9%

2018e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.7% 3.9%

2019e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.7% 3.9%

2020e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.7% 3.9%

2021e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.7% 3.9%

2022e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.7% 3.9%

2023e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.6% 3.9%

2024e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.6% 3.9%

2025e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.6% 3.9%


31 March 2017 16

Population growth & wage inflation

We have previously considered retail sales growth in Australia to be a factor of wage inflation and

population growth. As outlined in the below chart, over the past 10 years’ retail sales growth has

averaged 4.3%, and the combination of population growth and wage inflation has averaged 4.9%.

Fig 35 Retail sales / wage inflation / population growth


Population growth is currently running at ~1.5%, with our economist expecting an uptick in

population growth in FY17 (to 1.8%) factoring an increase in net migration. Wage inflation is

currently running at 1.9%, however is expected to increase over coming years to ~2.6% by FY20.

In FY20, the aggregate of wage inflation and population growth is ~4.1%. Although this analysis of

sales growth excludes other variables (such as a structural shift in the Australian savings rate), it

does provide a cross-check to our Australian sales growth forecasts over coming years.

An implication from this analysis is that the underlying drivers of consumption growth, employment

growth and wage inflation, are growing at a slower rate than our forecast for retail sales growth.

This could flag a risk to our underlying expectations for industry and category growth if savings

rates to not subsidise a slower income environment.

Fig 36 Population Growth is running at ~1.5%, with an uptick expected in FY17 to ~1.8%

Fig 37 Wage inflation & population growth could reach ~4.1% in aggregate in FY20

Source: ABS, Macquarie Research, March 2017 Source: ABS, Macquarie Research, March 2017

4.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Sep-98 Mar-01 Sep-03 Mar-06 Sep-08 Mar-11 Sep-13 Mar-16 Sep-18

Wage + Population growth Sales growth

(%)

0.0

0.4

0.8

1.2

1.6

2.0

2.4

Mar-82 Mar-88 Mar-94 Mar-00 Mar-06 Mar-12 Mar-18

Natural population growth Net migration

Australia: Population growth (% change)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Sep-98 Mar-01 Sep-03 Mar-06 Sep-08 Mar-11 Sep-13 Mar-16 Sep-18

Wage inflation Population growth

Wage inflation & population growth (%)


31 March 2017 17

Impact on Australian retail by category

The below analysis highlights estimates of Australian retail sales growth by category across bricks

and mortar retailers, as noted in the text around Fig 34 above.

Sensitivity Analysis – Impact on Australian retail by category

In addition to our base case scenario of 12.5%, we have extended our analysis to a “Bull case” of

10% online penetration by 2025 and a ‘Bear case” of 15% online penetration.

Under the Bull case we estimate 4.2% growth for brick and mortar retailers, 0.9% for DS/DDS,

2.5% for Electrical and 3.3% for apparel.

Under the Bear case we estimate 3.6% growth for brick and mortar retailers, 0.3% for DS/DDS,

1.8% for Electrical and 2.7% for apparel.

Fig 38 Online penetration 10% by 2025


Fig 39 Online penetration 12.5% by 2025


Fig 40 Online penetration 15% by 2025


Online penetration 10.0%

Bricks and mortor retail sales growth by category (%)

Clothing

and

apparel

Department

stores

Electrical &

appliances

Household

goods

Personal &

Recreation

al goods

Grocery

and Liquor

Takeaway

Food Other Total

2017e 3.3% 0.9% 2.5% 3.7% 5.1% 4.7% 5.6% 3.1% 4.2%

2018e 3.3% 0.9% 2.5% 3.7% 5.1% 4.7% 5.6% 3.1% 4.2%

2019e 3.3% 0.9% 2.4% 3.7% 5.1% 4.7% 5.6% 3.1% 4.2%

2020e 3.3% 0.9% 2.4% 3.7% 5.1% 4.7% 5.6% 3.1% 4.2%

2021e 3.3% 0.9% 2.4% 3.7% 5.1% 4.7% 5.6% 3.1% 4.2%

2022e 3.3% 0.9% 2.4% 3.7% 5.1% 4.7% 5.6% 3.1% 4.3%

2023e 3.3% 0.9% 2.4% 3.7% 5.1% 4.7% 5.6% 3.1% 4.3%

2024e 3.3% 0.9% 2.4% 3.7% 5.1% 4.7% 5.6% 3.1% 4.3%

2025e 3.3% 0.9% 2.4% 3.7% 5.1% 4.7% 5.6% 3.0% 4.3%



Clothing

and

apparel

Department

stores

Electrical &

appliances

Household

goods

Personal &

Recreation

al goods

Grocery

and Liquor

Takeaway

Food Other Total

2017e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.8% 3.9%

2018e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.7% 3.9%

2019e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.7% 3.9%

2020e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.7% 3.9%

2021e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.7% 3.9%

2022e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.7% 3.9%

2023e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.6% 3.9%

2024e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.6% 3.9%

2025e 3.0% 0.6% 2.1% 3.4% 4.7% 4.4% 5.3% 2.6% 3.9%



Clothing

and

apparel

Department

stores

Electrical &

appliances

Household

goods

Personal &

Recreation

al goods

Grocery

and Liquor

Takeaway

Food Other Total

2017e 2.7% 0.3% 1.8% 3.1% 4.4% 4.1% 5.0% 2.4% 3.6%

2018e 2.7% 0.3% 1.8% 3.1% 4.4% 4.1% 5.0% 2.4% 3.6%

2019e 2.6% 0.3% 1.8% 3.1% 4.4% 4.1% 5.0% 2.3% 3.6%

2020e 2.6% 0.3% 1.7% 3.1% 4.4% 4.1% 5.0% 2.3% 3.6%

2021e 2.6% 0.2% 1.7% 3.1% 4.4% 4.1% 5.0% 2.3% 3.6%

2022e 2.6% 0.2% 1.7% 3.1% 4.4% 4.1% 5.0% 2.2% 3.6%

2023e 2.6% 0.2% 1.7% 3.1% 4.4% 4.0% 5.0% 2.2% 3.6%

2024e 2.6% 0.2% 1.7% 3.0% 4.4% 4.0% 5.0% 2.1% 3.6%

2025e 2.6% 0.2% 1.7% 3.0% 4.3% 4.0% 5.0% 2.1% 3.6%


31 March 2017 18

Sensitivity Analysis – Impact on JBH, HVN and MYR

We have conducted a sensitivity analysis across the listed discretionary retailers most at risk by

the entry of Amazon into the Australian market. Scenarios considered reflect the potential

penetration of online retail sales limiting the growth of bricks and mortar based retailers (as

discussed previously).

To reflect the potential online retail penetrations of 10%/12.5%/15%, as discussed above, we have

reduced our current comparable sales growth expectations by -0.5%/-1.0%/-1.5% while keeping

CODB and gross margins unchanged.

Each scenario demonstrates the earnings sensitivity assuming no change in costs and no

mitigation of estimated earnings impacts. Even on this basis, our base-case scenario for JBH post

the entry of Amazon would result in a DCF-based valuation of $28.03, well above the current

share price.

Fig 41 JBH: Comparable sales growth at -0.5%/-1.0%/-1.5% current expectations…

Fig 42 JBH: … results in EBIT margin declines to 4.3%/3.7%/2.9% respectively


Fig 43 JBH: EBIT shows operating leverage impact of a reduction in sales growth

Fig 44 JBH: Bear case price target still above current share price ($24.60 as at 30/03/2017)

Source: USCB, Company Data, Macquarie Research, March 2017 Source: Company Data, Macquarie Research, March 2017

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

FY16 FY17e FY18e FY19e FY20e FY21e FY22e FY23e FY24e FY25e

Comp sales growth (%)

Comp sales growth (Current)

Comp sales growth (Online Penetration 10.0%)



0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%


EBIT margin (%) EBIT margin (Current)

EBIT margin (Online Penetration 10.0%)



0

50

100

150

200

250

300

350

400

450


EBIT ($m) EBIT (Current)

EBIT (Online Penetration 10.0%)


EBIT (Online Penetration 15.0%)33.17

30.59

28.03

25.50

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

Price Target ($) Price Target (DCF) - Current Price Target (DCF) - Penetration 10.0%

Price Target (DCF) - Penetration 12.5% Price Target (DCF) - Penetration 15.0%


31 March 2017 19

Similarly for HVN, our base-case scenario post the entry of Amazon would result in a DCF-based

valuation of $4.57, above the current share price.

Fig 45 HVN: Comparable sales growth at -0.5%/-1.0%/-1.5% current expectations…

Fig 46 HVN: … results in EBIT margin declines to 4.6%/4.1%/3.6% (based on network sales)


Fig 47 HVN: Operating leverage impact less pronounced due to franchisee structure

Fig 48 HVN: Base case price target still above current share price ($4.47 as at 30/03/2017)


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%







3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%






0

50

100

150

200

250

300

350

400





EBIT (Online Penetration 15.0%)5.08

4.82

4.57

4.33

3.80

4.00

4.20

4.40

4.60

4.80

5.00

5.20

Price Target ($)

Price Target (DCF) - Current Price Target (DCF) - Penetration 10.0%

Price Target (DCF) - Penetration 12.5% Price Target (DCF) - Penetration 15.0%


31 March 2017 20

For MYR, the extreme operating leverage of the business model and starker outlook for the

DS/DDS channel would drive a base-case DCF valuation of $0.92, below our current DCF

valuation of $1.22 and well above the current share price.

MYR’s current strategy to reduce floor space demonstrates it is already trying to mitigate the

impact of increased competition, furthermore, recent corporate activity in the stock is likely to

provide a floor for the share price.

Fig 49 MYR: Comparable sales growth at -0.5%/-1.0%/-1.5% current expectations…

Fig 50 MYR: … results in EBIT margin declines to 4.1%/2.9%/1.6% (based on network sales)


Fig 51 MYR: Operating leverage impact significant due to high cost base

Fig 52 MYR: At risk given significant operating leverage (share price $1.22 as at 30/03/2017)


-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%







0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%






0

50

100

150

200

250





EBIT (Online Penetration 15.0%) 1.28

1.06

0.92

0.78

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

Price Target ($)

Price Target (DCF) - CurrentPrice Target (DCF) - Penetration 10.0%Price Target (DCF) - Penetration 12.5%Price Target (DCF) - Penetration 15.0%


31 March 2017 21

Sales productivity of an Amazon Fulfilment Centre

As a cross-check to our growth assumptions for Amazon, we have reviewed the sales each

fulfilment centre in the US and UK currently achieves. In the US, there are ~109 FCs, which each

average ~$1.7bn of sales. This equates to ~$300k of sales for sqm of FC. Interestingly, using the

same process, we estimate that each UK FC generates ~ $1.6bn of sales, or ~$300k per sqm.

Under an assumption of Amazon requiring three fulfilment centres (at 80,000 sqm each), this

would imply the group could generate ~$6.5bn of sales. This is currently 2.1% of Australian retail

sales, and 2.7% of retail sales on the Eastern Seaboard (NSW, QLD and VIC). Under an

assumption that three FCs were to open in Sydney in the short to medium term, this would be a

significant headwind to NSW-based retail landlords.

Fig 53 In the US each fulfilment centre generates ~$1.6-1.7bn of sales…

Fig 54 Assuming 3 fulfilment centres in Australia, this could sustain $6-7bn of sales in the long run

US UK

Sales A$m 184,266 20,805

Fulfilment centres # 109 13

Sales / DC A$/Centre 1,691 1,600

Fulfilment centre size sqm 6,840,569 673,947

Avg fulfilment centre size sqm/centre 62,758 51,842

Avg sales per sqm A$m/sqm 0.03 0.03

Potential sales in Australia (FC check)

240 8.62

Assumed Aust. FC # 3 7

Assumed Aust. FC size sqm 80,000 80,000

Total sales from FC’s $m 6,465 15,085

Australia total retail sales $m 304,918 304,918

LT Amazon market share % 2.1% 4.9%

Eastern Sea-board $m 236,228

LT Amazon market share % 2.7%

Source: Macquarie Research, March 2017 Source: Macquarie Research, March 2017

As previously outlined, we estimate that Amazon could reach ~$14bn of retail market share by

2025. As outlined below, Amazon would require approximately seven FCs in order to achieve this

target. This could imply three centres in NSW and two in each of Melbourne and Brisbane which,

at a high level, appears feasible.

1,691 1,600

300

500

700

900

1,100

1,300

1,500

1,700

1,900

US UK

Sales per fullfilment centre ($m)


31 March 2017 22

US store closures

As outlined below, ~440 department store closures have been announced for 2017 alone.

Although this is a relatively small amount of the overall retail landscape in the US, we believe that

this highlights the headwinds facing the retailers in the US.

Fig 55 US retail store closures

Stores Store Closure

Comment

JC Penny 138 Closures impact rural locations

Macy's 68 Will focus on better-performing locations to elevate status as preferred shopping destinations

Sears & Kmart 150 Ability to trade as a going concern is rising

HH Gregg 88

Total 444


As well as department stores closing ~440 stores, other national retailers are closing stores

including, The Limited (~250 stores), RadioShack (~550 stores) and Payless Shoe Source (~450

stores).

Retail REIT portfolio composition

We believe sub-regional malls and lower-quality regional malls are likely to be most impacted by

the entrance of Amazon over time. This is due to: i) our estimated lower specialty apparel tenant

EBIT margins in sub-regional assets (and therefore an inability to absorb declining revenue); ii)

higher exposure to Discount Department Stores which are likely to be impacted by the sale of a

commoditised product online at a cheaper price point; iii) challenges to increase footfall as

customers continue to be attracted to super-regional assets (driven by developments); and iv)

potential inability of some assets to adapt to a convenience, high frequency of visitation offering

(e.g. food).

Fig 56 SCG and VCX have the largest retail exposure across stocks under coverage

Fig 57 GPT, SGP and MGR are the diversified REITs, with between 35-70% exposure to retail

Note: 1. Inclusive of passive capital only (ie. ex active earnings such as residential etc).

Source: Company data, Macquarie Research, March 2017

Although sub-regional assets are more likely to be impacted by Amazon, in our view, we note

there are a number of high performing sub-regionals given specific demographics, catchment

influences, varying levels of convenience offering, exposure to services/food etc. We also note

there are a number underperforming lower quality regional malls that may be impacted by

declining sales as a result of the above mentioned headwinds.

Under the assumption that Amazon will enter the Australian market through commoditised product

categories (such as electronics, apparel etc), in our view, it is the portfolios of SGP (44% sub-

regional), MGR (26% sub-regional) and VCX (23% sub-regional) that are more likely to be

impacted. If AmazonFresh is introduced into Australia, this will impact a neighbourhood and

freestanding shopping centre’s ability to attain turnover rent from supermarket anchor tenants of

Woolworths and Coles, and therefore inhibiting NPI growth for landlords such as SCP and CQR.

31,938

14,922

5,317 6,961 2,927 2,201 2,715

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

SCG VCX GPT SGP MGR SCP CQR

Retail Office Industrial Other

REIT portfolio value ($bn)

100% 100%

48%

70%

35%

100% 100%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Retail Office Industrial Other


31 March 2017 23

Fig 58 REIT retail capital is primarily deployed to the eastern seaboard

Fig 59 44% of SGP’s assets are sub-regionals … VCX, MGR, SCP are also exposed to this sector

Note: 1. VCX Victorian data includes Tasmania. 2. CQR New South Wales data includes ACT


Note: 1. Regionals include: major regional, city centre, and super-regional. 2. Other includes: outlet centres, free-standing centres.


Retail REIT earnings sensitivity

As outlined in the chart below (LHS), specialty retailers comprise ~56% of VCX’s rental income. In

our view, specialty retail categories more likely to come under pressure from Amazon include

apparel, general retail and household goods which comprise ~19% of total GLA or ~58% of

specialty GLA. With income by category not readily available, we estimate ~58% of specialty rent

is more likely to be at risk (i.e. space assumed to be consistent with rent). Using the VCX income

split as an industry proxy and assuming a 5% reduction in rent for these categories at risk, results

in a 1.6% decline in total rental income.

Adjusting our FY17 NPI forecasts for a 1.6% reduction in NPI is a ~2% headwind for VCX SCG

(below, RHS). The impact on GPT, SGP and MGR (<1%) is more limited due to the diversification

of these businesses. There are a number of variables associated with this analysis (such as

timing, extent of impact etc), however this provides a means to assess the downside risks to

earnings of either an increase in vacancy or declining rent due to an increase in Amazon’s market

share over coming years in Australia.

Fig 60 Specialties account for ~56% of VCX’s rent

Fig 61 SCG and VCX earnings are most leveraged to a 1.6% decline in NPI

Source: Company data, Macquarie Research, March 2017 Source: Company data, Macquarie Research, March 2017

REIT occupancy cost and specialty sales productivity

The charts below outline specialty sales productivity and specialty occupancy costs for the REITs

over time. Occupancy costs across the sector have generally been reducing over the past 24

months. Interestingly, SGP’s specialty sales productivity has increased by just 3% since 2013,

compared to +23% for GPT. We believe that a limited level of asset recycling from SGP is partly

driving this static specialty productivity growth, compared to other REITs such as GPT.

52%

20%

44%57%

64%

25%

47%

15%

48%

41% 11% 3%

22%

10%

15% 13%

8%26% 31%

24%20%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


NSW VIC QLD WA Other

2%

23%44% 26%

24%8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Regional Sub-regional Neighborhood Other

Majors20%

Mini-majors12%

Specialties56%

Other retail4%

Non-retail8%

-2.0% -1.9%

-1.0%-0.9%

-0.8%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

VCX SCG GPT SGP MGR


31 March 2017 24

Fig 62 Occ Costs for regionals and sub-regionals have come down over the past 24 months

Fig 63 SGP sales productivity has been relatively static over, rising just 3% since 2013

Source: Company data, Macquarie Research, March 2017 Source: Company data, Macquarie Research, March 2017

We believe that a limited level of asset recycling from SGP is partly driving this static specialty

productivity growth, compared to other REITs which are focusing on improving, maintaining and

developing regional assets, whilst taking advantage of the current cap rate cycle to dispose of

under-performing non-core assets (e.g. SCG, VCX).

Fig 64 A number of REITs have taken advantage of the cyclical to divest non-core assets…

Fig 65 … which has impacted the growth in portfolio value ($m) over recent years

Note: 1. VCX in 2013 is the aggregate of CFX and FDC


Note: 1. SCG excluded due to change of structure. 2. VCX in 2013 is the aggregate of CFX and FDC


5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

19.0%

21.0%

Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16CQR GPT SGPMGR SCG VCX

%, Occupancy costs

Regionals

Sub-regionals

Neighbourhoods

8,964 8,766

11,036

9,025

-

2,000

4,000

6,000

8,000

10,000

12,000

GPT SGP

2013 2014 2015 2016 1H17

Sales/sqm ($)

102

44 46

19 15

75

40 39

17 13

-

20

40

60

80

100

120

VCX SGP SCG MGR GPT

2013 1H17

Number of assets (#)15,060

5,368 4,490

1,696

14,922

6,961

5,318

2,927

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

VCX SGP GPT MGR

2013 1H17

Portfolio value ($m)


31 March 2017 25

Competitor impact – Best Buy (US)

Best Buy remains a dominant player in the US consumer electronics market with leading market

share. However, Amazon has been rapidly catching up with BBY within this category, reportedly

now in second place ahead of Macys.

The Electrical category has gradually lost share of total retail sales and BBY has seen its share

reverse after the failure of Circuit City back in March 2009. Much of this is attributable to Amazon’s

success in the categories. BBY has also closed some of its underperforming stores from 2013 but

this had little impact on share.

Comparable store sales growth has been flat to down on average since 2008, leaving gross

margin enhancement and cost out to drive earnings. EBIT margins declined after 2011, but have

subsequently recovered towards longer-term averages of ~4-5% in the US division.

Fig 66 US Retail: Electronics and Appliances Fig 67 Best Buy market share


Fig 68 Market share: Best Buy vs. Amazon Fig 69 Best Buy store impact


Fig 70 Best Buy gross margin impact Fig 71 Best Buy EBIT margin impact


0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

20

02

20

03

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07

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08

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09

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10

20

11

20

12

20

13

20

14

20

15

20

16

Share (%)Sales (USDm) Total US retail salesTotal US Electronics and Appliance StoresElect. And Appliance contribution to total US sales

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

0

20,000

40,000

60,000

80,000

100,000

120,000

20

02

20

03

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04

20

05

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06

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20

10

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11

20

12

20

13

20

14

20

15

20

16

Share (%)Sales (USDm) Total US Electronics and Appliance StoresBest Buy SalesBest Buy Market share - US Electronics and Appliances

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

20

02

20

03

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04

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05

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07

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20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Sales (USDm)Best Buy Sales Amazon US Sales (GMV)

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

20

02

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03

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04

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05

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06

20

07

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08

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09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Margin (%)Sales (USDm)Amazon US Sales (GMV) Best Buy Store #

20.5%

21.0%

21.5%

22.0%

22.5%

23.0%

23.5%

24.0%

24.5%

25.0%

25.5%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

20

02

20

03

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04

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05

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07

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09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Margin (%)Sales (USDm)Amazon US Sales (GMV) Best Buy GM

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

20

02

20

03

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04

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06

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09

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10

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11

20

12

20

13

20

14

20

15

20

16

Margin (%)Sales (USDm)Amazon US Sales (GMV) Best Buy EBIT margin


31 March 2017 26

Competitor impact – GameStop (US)

GameStop’s US position has been impacted over the last decade with market share peaking in

2010. Shortly after this period store count was managed down and the company’s strategy shifted

more towards higher-margin second hand goods and digital downloads.

Despite the tougher conditions since 2008, GameStop’s EBIT margin has been reasonably stable

over the period. GameStop has announced the closure of an additional 150 stores in March 2017

after sales disappointed.

Fig 72 US Retail: Electronics and Appliances Fig 73 Game Stop market share


Fig 74 Market share: Game Stop vs. Amazon Fig 75 Game Stop store impact


Fig 76 Game Stop gross margin impact Fig 77 Game Stop EBIT margin impact


0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

20

02

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03

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11

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20

14

20

15

20

16

Share (%)Sales (USDm) Total US retail salesTotal US Electronics and Appliance StoresElect. And Appliance contribution to total US sales

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

0

20,000

40,000

60,000

80,000

100,000

120,000

20

02

20

03

20

04

20

05

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10

20

11

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12

20

13

20

14

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15

20

16

Share (%)Sales (USDm) Total US Electronics and Appliance StoresGame Stop SalesGame Stop Market share - US Electronics and Appliances

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

20

02

20

03

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04

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05

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10

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11

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16

Sales (USDm)Game Stop Sales Amazon US Sales (GMV)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

0

20,000

40,000

60,000

80,000

100,000

120,000

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160,000

20

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16

Margin (%)Sales (USDm)Amazon US Sales (GMV) Game Stop Store #

20.0%

22.0%

24.0%

26.0%

28.0%

30.0%

32.0%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

20

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16

Margin (%)Sales (USDm)Amazon US Sales (GMV) Game Stop GM

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

20

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13

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14

20

15

20

16

Margin (%)Sales (USDm)Amazon US Sales (GMV) Game Stop EBIT margin


31 March 2017 27

Competitor impact – Dixons (UK/EU)

Electronics sales have declined materially as a share of total retail spending in the UK. Over this

period, Dixons managed to grow market share gradually before stepping up in 2015 after the

merger with Carphone Warehouse.

For well over a decade Dixons have been culling its store portfolio, during a period of deep

earnings underperformance as the market negotiated its way through the GFC and changing

competitive landscape. We note that Amazon’s UK sales accelerated around the late 2000’s,

coinciding with period of lower margins.

There is little doubt that Amazon would have made an impact on DC, however it is difficult to

isolate the impact against the very weak economic backdrop.

Fig 78 UK Retail: Electronics and Appliances Fig 79 Dixon market share


Fig 80 Market share: Dixon vs. Amazon Fig 81 Dixon store impact (note acquisition in 2015)


Fig 82 Dixon gross margin impact (n/a) Fig 83 Dixon EBIT margin impact


0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

20

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16

Share (%)Sales (GBPm) Total UK retail salesTotal UK Electronics and Appliance StoresElect. And Appliance contribution to total UK sales

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

0

2,000

4,000

6,000

8,000

10,000

12,000

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20

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16

Share (%)Sales (GBPm) Total UK Electronics and Appliance StoresDixon SalesDixon Market share - UK Electronics and Appliances

0

2,000

4,000

6,000

8,000

10,000

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14,000

20

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16

Sales (GBPm)Dixon Sales Amazon UK Sales (GMV)

0

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16

Margin (%)Sales (GBPm)Amazon UK Sales (GMV) Dixon Store #

0.0%

1.0%

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3.0%

4.0%

5.0%

6.0%

0

2,000

4,000

6,000

8,000

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20

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20

16

Margin (%)Sales (GBPm)Amazon UK Sales (GMV) Dixon EBIT margin


31 March 2017 28

Source: Company Data, Macquarie Research, March 2017

JB Hi-Fi (JBH.AU)

Interim results 1H16a 2H16a 1H17e 2H17e Profit & Loss FY15a FY16a FY17e FY18e FY19e

Sales Revenue $m 2116.8 1837.7 2616.2 3029.3 Sales Revenue $m 3652.1 3954.5 5645.5 6781.9 7103.3

Total Operating Revenue $m 2116.8 1837.7 2616.2 3029.3 Total Operating Revenue $m 3652.1 3954.5 5645.5 6781.9 7103.3

EBITDA $m 157.9 104.1 203.8 154.3 EBITDA $m 240.0 262.1 358.1 419.4 435.5

Depreciation $m 19.8 21.1 23.1 31.2 Depreciation $m 39.1 40.9 54.3 64.1 65.2

Amortisation $m 0.0 0.0 0.0 0.0 Amortisation $m 0.0 0.0 0.0 0.0 0.0

Consolidated EBIT $m 138.2 83.0 180.7 123.0 EBIT $m 200.9 221.2 303.8 355.3 370.3

Non-recurring items $m 0.0 0.0 (15.3) (4.0) Non-recurring items 0.0 0.0 (19.3) (4.0) 0.0

Share of Associates $m Associates/JV's $m

Reported EBIT $m 138.2 83.0 165.4 119.0 Reported EBIT 200.9 221.2 284.5 351.3 370.3

Net Interest expense $m 1.7 1.6 1.3 11.0 Net interest expense $m 5.4 3.3 12.3 21.6 20.2

Pre-Tax Profit $m 136.4 81.4 164.1 108.1 Pre-Tax Profit $m 195.5 217.8 272.2 329.7 350.1

Tax consolidated $m 41.2 24.4 54.1 32.4 Tax consolidated $m 59.0 65.7 81.7 98.9 105.0

Net profit after tax $m 95.2 57.0 110.4 81.1 Profit after tax $m 136.5 152.2 196.3 232.0 245.1

Outside equity interests $m 0.0 0.0 0.0 0.0 Outside equity interests $m 0.0 0.0 0.0 0.0 0.0

Reported profit $m 95.2 57.0 110.4 81.1 Reported Earnings $m 136.5 152.2 196.3 232.0 245.1

Adjusted Earnings 1 $m 95.2 57.0 125.4 79.7 Adjusted Earnings 1 $m 136.5 152.2 209.8 234.8 245.1

Gross Cashflow 2$m 115.0 78.1 133.5 112.3 Gross Cashflow 2

$m 175.6 193.1 250.7 296.1 310.2

Profit and Loss ratios 1H16a 2H16a 1H17e 2H17e Profit and Loss ratios FY15a FY16a FY17e FY18e FY19e

PER (adj Earnings) x 13.6 22.8 12.8 18.5 PER (adj Earnings) x 15.1 17.1 15.1 12.9 12.2

EPS (Reported) c 96.1 57.7 102.3 70.9 EPS (Reported) c 173.2 153.8 173.2 202.9 214.3

EPS (Adjusted) c 96.1 57.7 116.2 69.7 EPS (Adjusted) c 137.9 153.8 185.8 205.3 214.3

DPS c 63.0 37.0 72.0 44.0 DPS c 90.0 100.0 116.0 134.0 140.0

Dividend Yield % 2.4% 1.4% 2.7% 1.7% Dividend Yield % 3.4% 3.8% 4.4% 5.1% 5.3%

Revenue Growth % 7.7% 8.9% 23.6% 64.8% Revenue Growth % 4.8% 8.3% 42.8% 20.1% 4.7%

EBITDA growth % 6.2% 14.1% 29.0% 48.2% EBITDA growth % 5.9% 9.2% 36.6% 17.1% 3.8%

EBIT margin % 6.5% 4.5% 6.9% 4.1% EBIT margin % 5.50% 5.59% 5.38% 5.24% 5.21%

Reported EBIT Growth % 6.3% 17.0% 19.7% 43.3% EBIT Growth % 5.1% 10.1% 28.6% 23.5% 5.4%

Effective tax rate % 30.2% 30.0% 32.7% 25.0% Effective tax rate % 30.2% 30.1% 27.9% 29.6% 30.0%

Payout ratio % 65.5% 64.2% 70.4% 62.0% Payout ratio % 52.0% 65.0% 67.0% 66.1% 65.3%

EV/EBIT x 9.1x 16.0x 8.7x 14.1x EV/EBIT x 13.5x 12.1x 11.2x 9.5x 8.9x

EV/EBITDA x 8.0x 12.7x 7.7x 11.2x EV/EBITDA x 11.3x 10.2x 9.5x 8.0x 7.6x

FCF Yield % 17.6% -7.6% 17.9% -4.6% FCF Yield % 5.2% 5.1% 6.4% 7.9% 8.0%

Balance sheet ratios 1H16a 2H16a 1H17e 2H17e Balance sheet ratios FY15a FY16a FY17e FY18e FY19e

ROE % 50.8% 28.1% 34.6% 18.6% ROE % 42.8% 40.7% 30.8% 25.4% 24.5%

ROFE % 90.8% 35.9% 30.8% 18.5% ROA % 22.5% 13.9% 13.5% 15.6% 16.0%

ROA % 30.9% 9.1% 22.6% 9.2% ROFE % 46.3% 47.8% 22.8% 26.8% 27.8%

Net Debt $m -101 58 299 461 Net Debt $m 90 58 461 370 289

Net Debt/Equity x -0.2 0.1 0.3 0.5 Net Debt/Equity x 0.3 0.1 0.5 0.4 0.3

Net Debt/EBITDA x -0.3 0.3 0.7 1.5 Net Debt/EBITDA x 0.4 0.2 1.3 0.9 0.7

Net Interest Cover (EBIT) x 79.0 52.3 127.2 10.8 Net Interest Cover (EBIT) x 37.4 66.3 23.2 16.3 18.3

Net Interest Cover (EBITDA) x 90.3 65.6 156.8 14.1 Net Interest Cover (EBITDA) x 44.7 78.6 29.2 19.4 21.6

EFPOWA m 99.0 98.8 107.9 114.4 EFPOWA m 99.0 99.0 114.4 114.4 114.4

Cashflow Analysis 1H16a 2H16a 1H17e 2H17e Cashflow Analysis FY15a FY16a FY17e FY18e FY19e

EBITDA $m 158 104 189 150 EBITDA $m 240 262 339 419 435

- Incr. in WC $m 131 (156) 151 (147) - Incr. in WC $m (8) (25) 5 (3) (11)

- Net interest expense $m (2) (2) (0) (12) - Net interest expense $m (6) (4) (12) (22) (20)

- Tax paid $m (34) (33) (34) (37) - Tax paid $m (60) (66) (71) (87) (101)

+ Other op. cashflows $m 6 12 (29) 16 + Other op. cashflows $m 14 18 (14) (3) 0

Total operating cashflows $m 260 (74) 276 (29) Total operating cashflows $m 180 185 247 305 303

- Capex $m (29) (24) (20) (40) - Capex $m (42) (52) (60) (68) (62)

- Acquisitions / (Divestments)$m 0 0 (846) (0) - Acquisitions / (Divestments)$m (2) 0 (847) 0 0

+ Other inv. Cashflows $m 0 0 0 (9) + Other inv. Cashflows $m 0 0 (9) 0 0

Total investing cashflows $m (29) (23) (867) (49) Total investing cashflows $m (44) (52) (916) (68) (62)

- Dividends paid $m (31) (62) (37) (82) - Dividends paid $m (87) (93) (119) (146) (160)

+ Equity raisings $m (8) 1 395 (1) + Equity raisings $m (2) (7) 394 0 0

- Debt raisings $m (140) 110 315 200 - Debt raisings $m (40) (30) 515 (50) (50)

+ Other fin. cashflows $m 0 (0) (11) 0 + Other fin. cashflows $m (0) (0) (11) 0 0

Total Financing cashflow $m (179) 48 663 116 Total Financing cashflow $m (130) (131) 779 (196) (210)

Free Cashflow $m 231 (98) 256 (69) Free Cashflow $m 137 133 187 237 241

Net Change in cash/debt $m 52.3 (49.5) 72.6 38.2 Net Change in cash/debt $m 5.7 2.8 110.8 40.6 31.0

Balance Sheet FY15a FY16a FY17e FY18e FY19e

Cash $m 49 52 163 203 234

Receivables $m 81 98 186 132 138

Inventories $m 479 546 733 791 823

Investments $m 0 0 0 0 0

Property, plant & equipment $m 176 184 224 229 225

Intangibles $m 85 86 982 982 982

Other Assets $m 25 27 128 128 128

Total Assets $m 895 992 2415 2464 2530

Payables $m 326 385 664 665 692

Short Term Debt $m 0 0 0 0 0

Long Term Debt $m 139 110 623 573 523

Other Liabilities $m 86 93 257 270 273

Total Liabilities $m 552 588 1545 1508 1488

Shareholders Funds $m 343 405 870 956 1042

Minority Interests $m 0 0 0 0 0

Total Shareholders Equity $m 343 405 870 956 1042

Total Funds employed $m 483 514 1494 1530 1565


31 March 2017 29


Harvey Norman Limited Price: $4.47Group P&L FY14A FY15A 1H16A 2H16A FY16A 1H17E 2H17E FY17E FY18E FY19E

Sales Revenue (International) AU$m 1,514 1,617 912 884 1,796 976 908 1,905 1,898 1,934

Cost of Sales AU$m -1,065 -1,127 -630 -602 -1,232 -664 -619 -1,307 -1,302 -1,326

Gross Profit AU$m 449 490 282 281 564 312 289 598 596 607

Revenues and other income items AU$m 1,034 1,101 626 604 1,230 716 606 1,319 1,283 1,299

Share of JV profits and revaluations AU$m 18 9 0 4 4 2 0 0 0 0

CODB AU$m -1,085 -1,112 -576 -589 -1,165 -600 -601 -1,192 -1,221 -1,263

EBITDA AU$m 415 489 333 300 634 430 295 725 657 643

D&A AU$m -78 -78 -57 -54 -111 -54 -44 -98 -98 -98

EBIT AU$m 337 411 277 246 522 376 251 627 559 545

Interest expense AU$m -36 -33 -15 -14 -29 -10 -8 -18 -17 -24

Minorities AU$m -1 -1 -2 -1 -3 -3 0 -3 0 0

Tax AU$m -89 -109 -75 -67 -142 -106 -73 -179 -163 -156

Reported NPAT AU$m 212 268 186 163 349 257 170 428 379 365

Non-recurring items (after tax) AU$m 8 -6 -15 -19 -34 -53 0 -53 0 0

Underlying NPAT AU$m 220 262 171 144 315 204 170 375 379 365

Key ratios

Adjusted EPS cps 20.7 23.9 15.3 12.9 28.3 18.3 15.3 33.6 34.0 32.7

DPS cps 14.0 34.0 13.0 17.0 30.0 14.0 18.0 32.0 32.4 32.3

FCFPS cps 0.26 0.26 0.09 0.24 0.33 0.21 0.17 0.39 0.37 0.36

PER x 21.6 18.7 14.6 17.3 15.8 12.2 14.6 13.3 13.1 13.7

EV/EBITDA x 12.9 11.1 7.5 8.3 8.7 6.5 8.5 7.6 8.6 8.9

EV/EBIT x 15.8 13.2 9.0 10.2 10.6 7.4 10.0 8.8 10.1 10.5

EV/Sales x 2.1 2.0 1.6 1.7 1.8 1.6 1.7 1.7 1.8 1.8

Dividend Yield % 3.1 7.6 5.8 7.6 6.7 6.3 8.1 7.2 7.2 7.2

Payout ratio % 67.6 142.2 84.7 131.3 106.1 76.3 118.0 95.2 95.2 98.7

Sales grow th % 14.4 6.8 8.7 13.6 11.0 7.0 2.7 6.1 -0.4 1.9

EBITDA grow th % 28.5 17.7 30.1 29.1 29.6 29.0 -1.8 14.4 -9.3 -2.1

Underlying NPAT grow th % 19.3 19.0 22.5 17.4 20.2 19.7 18.0 19.0 1.3 -3.8

EPS grow th % 19.3 15.5 18.7 17.4 18.3 19.5 17.9 18.9 1.2 -3.9

Cost of Sales / Revenue % 70.4 69.7 69.0 68.2 68.6 68.0 68.2 68.6 68.6 68.6

CODB / Revenue % 71.7 68.7 63.1 66.7 64.9 61.5 66.2 62.6 64.3 65.3

Gross Profit Margin % 29.6 30.3 31.0 31.8 31.4 32.0 31.8 31.4 31.4 31.4

EBITDA margin % 27.4 30.2 36.6 34.0 35.3 44.1 32.5 38.1 34.6 33.3

EBIT margin % 22.3 25.4 30.3 27.8 29.1 38.5 27.7 32.9 29.5 28.2

NPAT margin % 14.5 16.2 18.7 16.3 17.5 20.9 18.7 19.7 20.0 18.9

ROA % 8.0 9.5 12.4 10.9 11.7 16.3 10.8 13.7 12.1 11.5

ROE % 9.0 10.3 13.1 10.8 12.0 15.0 12.3 13.6 13.6 13.0

Franchise (Aus)

Sales made by HVN franchisees AU$m 4,770.0 4,950.0 2,720.0 2,610.0 5,330.0 2,860.0 2,803.1 5,663.1 5,864.9 6,043.5

Revenue franchising operations AU$m 814.0 870.8 489.9 450.1 940.0 516.5 480.7 997.1 1,029.0 1,038.1

Tactical support AU$m -103.2 -81.4 -29.2 -40.0 -69.2 -28.8 -41.2 -70.0 -73.5 -77.2

Other CODB AU$m -512.1 -538.2 -285.6 -269.3 -555.0 -293.2 -278.6 -571.8 -596.4 -617.6

EBITDA 198.7 251.2 175.1 140.7 315.8 194.4 160.9 355.3 359.1 343.4

D&A AU$m -45.7 -42.3 -21.3 -20.7 -42.1 -20.3 -19.9 -40.3 -40.3 -40.3

EBIT AU$m 153.0 208.9 153.7 120.0 273.8 174.1 141.0 315.1 318.8 303.1

HVN franchisee EBIT/Total franchise sales % 3.2 4.2 5.7 4.6 5.1 6.1 5.0 5.6 5.4 5.0

Franchisee sales grow th % 1.1 3.8 7.5 7.9 7.7 5.1 7.4 6.2 3.6 3.0

Revenue from franchisee grow th % -1.5 7.0 7.8 8.1 7.9 5.4 6.8 6.1 3.2 0.9

EBIT grow th % 21.7 36.6 28.5 34.5 31.1 13.2 17.5 15.1 1.2 -4.9

EBITDA margin % 24.4 28.8 35.7 31.3 33.6 37.6 33.5 35.6 34.9 33.1

EBIT margin % 18.8 24.0 31.4 26.7 29.1 33.7 29.3 31.6 31.0 29.2

HVN stores (number) # 198.0 194.0 191.0 192.0 192.0 193.0 194.0 194.0 196.0 198.0

Sales per store AU$m 23.6 25.3 28.2 27.0 27.6 29.8 29.0 29.3 30.1 30.7

Grow th in sales per store % 4.8 7.0 10.6 9.5 9.4 5.7 7.4 6.2 2.5 2.0

Franchisee revenue per store AU$m 4.0 4.4 2.5 2.3 4.9 2.7 2.5 5.2 5.3 5.3

Grow th in franchisee revenue per store % 2.2 10.3 10.8 9.8 9.6 6.0 6.8 6.1 2.1 -0.1

Retail oeprations (International)

Revenue

New Zealand AU$m 694.3 751.8 404.4 428.0 832.4 469.8 432.9 902.7 891.5 890.8

Asia (Singapore & Malaysia) AU$m 374.8 395.1 214.6 229.5 444.1 216.3 218.5 434.8 431.4 443.0

Europe (Slovenia & Croatia) AU$m 96.4 95.5 54.3 52.7 107.0 56.4 48.8 105.2 106.3 112.1

Europe (Ireland & Northern Ireland) AU$m 223.0 234.1 160.6 121.8 282.4 160.0 122.7 282.7 285.7 301.2

Other non-franchised retail (Aus) AU$m 143.0 153.1 87.8 79.0 166.8 94.8 84.6 179.3 182.9 186.6

Clive Peters/Rick Hart AU$m 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Revenue AU$m 1,531.5 1,629.6 921.6 911.0 1,832.7 997.2 907.6 1,904.8 1,897.8 1,933.6

CODB AU$m -1,477.2 -1,562.9 -862.2 -858.9 -1,721.1 -922.0 -850.7 -1,772.8 -1,766.4 -1,805.3

EBITDA AU$m 54.3 66.7 59.4 52.1 111.5 75.2 56.9 132.0 131.4 128.3

D&A AU$m -20.2 -21.3 -15.0 -18.6 -33.6 -21.9 -11.7 -33.6 -33.6 -33.6

EBIT

New Zealand AU$m 49.8 53.1 33.8 34.9 68.7 40.2 36.6 76.7 73.1 71.3

Asia (Singapore & Malaysia) AU$m -3.0 -6.0 5.5 6.1 11.6 11.6 12.3 23.9 21.6 19.9

Europe (Slovenia & Croatia) AU$m 3.5 3.2 2.2 1.8 4.1 2.6 1.6 4.2 4.0 4.2

Europe (Ireland & Northern Ireland) AU$m -19.3 -11.3 2.0 -6.2 -4.2 3.7 -6.6 -2.8 2.9 3.0

Other non-franchised retail (Aus) AU$m 4.0 6.3 0.9 -3.1 -2.2 -4.8 1.2 -3.6 -3.7 -3.7

Clive Peters/Rick Hart AU$m -1.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total EBIT AU$m 34.1 45.4 44.4 33.6 77.9 53.3 45.1 98.4 97.9 94.7

Revenue grow th % 14.4 6.4 9.3 15.8 12.5 8.2 -0.4 3.9 -0.4 1.9

EBIT grow th % 80.9 33.4 94.6 48.4 71.6 20.1 34.4 26.3 -0.6 -3.2

EBIT margin % 2.2 2.8 4.8 3.7 4.3 5.3 5.0 5.2 5.2 4.9

Property

Revenue AU$m 219.4 236.1 137.1 145.6 282.7 196.3 125.7 322.0 253.6 261.2

CODB AU$m -67.4 -73.0 -40.0 -40.0 -80.0 -39.0 -45.4 -84.2 -86.7 -89.3

EBITDA AU$m 152.1 163.2 97.1 105.6 202.8 157.3 80.3 237.8 166.9 171.9

D&A AU$m -7.2 -9.4 -12.0 -4.8 -16.8 -5.0 -9.3 -14.3 -14.3 -14.3

EBIT AU$m 144.8 153.8 85.1 100.8 186.0 152.3 71.0 223.5 152.6 157.6

Revenue grow th % -4.2 7.6 15.0 24.6 19.7 43.1 -13.7 13.9 -21.2 3.0

EBIT grow th % 71.9 6.2 12.1 29.6 21.0 78.8 -29.5 20.2 -31.7 3.3

EBIT margin % 66.0 65.1 62.1 69.2 65.8 77.6 56.5 69.4 60.2 60.3

Yield bearing properties % 1,931.1 1,957.4 1,989.0 2,048.8 2,048.8 n/a n/a 2,212.7 2,279.1 2,347.5

Grow th % 3.2 1.4 2.1 4.7 4.7 n/a n/a 8.0 3.0 3.0

Yield % 11.8 11.4 5.2 5.9 11.1 n/a n/a 11.1 11.1 11.1

Cashflow

Operating Cashflow AU$m 338.9 340.4 141.8 295.9 437.7 279.5 215.4 495.1 474.7 469.2

Investing Cashflow AU$m -113.1 -81.8 -106.6 -73.2 -179.9 -127.1 -36.9 -164.0 -184.2 -184.2

Financing Cashflow AU$m -235.2 -220.6 -180.3 -127.1 -307.4 -235.1 -178.5 -413.5 -290.5 -285.0

Net Increase/(decrease) in cash held AU$m -9.4 38.0 -145.2 95.6 -49.6 -82.7 0.0 -82.5 0.0 0.0

Balance Sheet FY14A FY15A FY16A FY17E FY18E FY19E FY20E

Assets DCF valuation

Cash AU$m 145.0 185.8 139.9 54.5 54.5 54.5 54.5

Receivables AU$m 1,119.4 1,142.6 1,096.6 1,066.8 1,071.3 1,077.8 1,102.6 9.3%

Inventories AU$m 297.7 298.4 315.7 314.0 315.1 322.4 330.4 3.7%

Property Plant & Equipment AU$m 2,472.6 2,488.5 2,627.1 2,792.7 2,878.9 2,965.2 3,051.4 8.7%

Intangibles AU$m 77.9 83.7 81.2 78.8 78.8 78.8 78.8

Other Assets AU$m 112.9 159.5 171.3 213.0 213.0 213.0 213.0 4.67

Total Assets AU$m 4,225.3 4,358.5 4,431.8 4,519.8 4,611.7 4,711.7 4,830.8

Liabilities 5.05

Creditors AU$m 740.7 813.5 746.5 773.0 775.6 793.6 813.3

Short Term Debt AU$m 469.9 408.4 453.0 395.0 395.0 395.0 395.0 13.0

Long Term Debt AU$m 238.1 290.0 201.0 192.0 272.7 352.6 437.6 7.2

Other Liabilities AU$m 285.6 289.8 342.6 378.5 378.8 381.0 383.3 20.1

Total Liabilities AU$m 1,734.2 1,801.7 1,743.1 1,738.4 1,822.2 1,922.2 2,029.3

Equity 15.0

Issued Capital AU$m 259.6 380.3 385.3 385.3 385.3 385.3 385.3 6.3

Retained Earnings AU$m 2,109.0 2,043.5 2,125.2 2,207.6 2,215.8 2,215.7 2,227.8

Other AU$m 122.5 133.1 178.2 188.5 188.5 188.5 188.5

Total Equity AU$m 2,491.1 2,556.9 2,688.7 2,781.4 2,789.6 2,789.5 2,801.6

Dividend yield

Div Yield at Target Price

Capital return

Total Return

PER at target

Cost of Equity

Cost of debt

Effective WACC

Valuation today

Target price


31 March 2017 30


Myer (MYR.AU) - AU$1.22

Interim results 1H16 2H16 1H17e 2H17e Profit & Loss FY16 FY17e FY18e FY19e

Total Sales Value (ex GST) $m 1,794.8 1,494.8 1,784.6 1,450.6 Total Sales Value (ex GST) $m 3,289.6 3,235.2 3,254.1 3,277.6

Concession sales $m 309.7 300.9 386.2 346.4 Concession sales $m 610.6 732.7 805.9 846.2

Revenue from sale of goods (ex GST) $m 1,460.3 1,179.8 1,376.6 1,087.1 Revenue from sale of goods (ex GST) $m 2,640.2 2,463.7 2,409.3 2,392.5

EBITDA $m 138.5 67.7 142.2 68.4 EBITDA $m 206.2 210.6 212.4 215.4

Depreciation $m 44.7 48.0 47.0 48.7 Depreciation $m 92.8 95.7 91.4 91.0

Amortisation $m 0.0 0.0 0.0 0.0 Amortisation $m 0.0 0.0 0.0 0.0

Consolidated EBIT $m 93.8 19.7 95.2 19.7 EBIT $m 113.5 114.9 121.0 124.3

Non-recurring items $m 0.0 (18.3) 0.0 (20.0) Non-recurring items $m (18.3) (20.0) (30.0) (20.0)

Associates/JV's $m 0.0 0.0 0.0 0.0 Associates/JV's $m 0.0 0.0 0.0 0.0

Reported EBIT $m 93.8 1.5 95.2 (0.3) Reported EBIT $m 95.2 94.9 91.0 104.3

Net Interest expense $m 8.5 6.0 5.5 6.2 Net interest expense $m 14.5 11.7 7.1 6.0

Pre-Tax Profit $m 85.2 (4.5) 89.7 (6.5) Pre-Tax Profit $m 80.7 83.2 83.9 98.3

Tax consolidated $m 25.6 4.1 26.8 4.1 Tax consolidated $m 29.7 31.0 34.2 35.5

Tax on NRIs $m 0.0 (9.5) 0.0 (6.0) Tax on NRIs $m (9.5) (6.0) (9.0) (6.0)

Total tax expense $m 25.6 (5.4) 26.8 (1.9) Total tax expense $m 20.2 25.0 25.2 29.5

Net profit after tax $m 59.7 0.9 62.8 (4.6) Profit after tax $m 60.5 58.2 58.7 68.8

Outside equity interests $m 0.0 0.0 0.0 0.0 Outside equity interests $m 0.0 0.0 0.0 0.0

Reported profit $m 59.7 0.9 62.8 (4.6) Reported profit $m 60.5 58.2 58.7 68.8

Adjusted profit 1 $m 59.7 9.6 62.8 9.4 Adjusted Profit 1 $m 69.3 72.2 79.7 82.8

Gross Cashflow 2 $m 104.4 48.9 109.8 44.1 Gross Cashflow 2 $m 153.3 153.9 150.1 159.9

Profit and Loss ratios 1H16 2H16 1H17e 2H17e Profit and Loss ratios FY16 FY17e FY18e FY19e

PER (adj Earnings) x 7.2 52.5 8.0 54.1 PER (adj Earnings) x 12.7 14.0 12.7 12.3

EPS (Reported) c 8.5 0.1 7.7 -0.6 EPS (Reported) c 8.6 7.1 7.2 8.4

EPS (Adjusted) c 8.4 1.2 7.6 1.1 EPS (Adjusted) c 9.6 8.7 9.6 10.0

DPS c 2.0 3.0 3.0 2.0 DPS c 5.0 5.0 5.0 5.0

Dividend Yield % 1.6% 2.5% 2.5% 1.6% Dividend Yield % 4.1% 4.1% 4.1% 4.1%

Revenue Grow th % 1.8% 4.4% -0.6% -3.0% Revenue Grow th % 2.9% -1.7% 0.6% 0.7%

EBITDA grow th % -4.7% -13.0% 2.7% 1.0% EBITDA grow th % -7.6% 2.1% 0.8% 1.4%

EBITDA margin % 7.7% 4.5% 8.0% 4.7% EBITDA margin % 6.3% 6.5% 6.5% 6.6%

Reported EBIT Grow th % -6.5% -40.6% 1.6% -0.1% EBIT Grow th % -15.0% 1.3% 5.3% 2.7%

Effective tax rate % 30% 119% 30% 29% Effective tax rate % 25% 30% 30% 30%

Payout ratio % 23.6% 2825.5% 39.2% -356.5% Payout ratio % 58.2% 70.5% 69.9% 59.7%

EV/EBIT x 4.6x 28.1x 5.3x 28.7x EV/EBIT x 9.4x 9.8x 9.2x 8.7x

EV/EBITDA x 3.1x 8.2x 3.5x 8.3x EV/EBITDA x 5.2x 5.4x 5.3x 5.0x

P/FCFPS x 2.4x -7.2x 3.7x -5.1x P/FCFPS x 8.8x 27.7x 17.5x 12.9x

FCF Yield % 41% -14% 27% -20% FCF Yield % 11% 4% 6% 8%

Balance sheet ratios 1H16 2H16 1H17e 2H17e Balance sheet ratios FY16 FY17e FY18e FY19e

ROE % 12.0% 1.7% 11.1% 1.7% ROE % 7.0% 6.5% 7.1% 7.2%

ROFE % 16.5% 3.3% 16.6% 3.2% ROFE % 9.4% 9.3% 9.8% 10.1%

ROA % 10.3% 2.2% 10.5% 2.1% ROA % 6.2% 6.3% 6.6% 6.8%

Net Debt $m 7 102 -8 117 Net Debt $m 102 117 100 62

Net Debt/Equity % 0.6% 9.2% -0.7% 10.4% Net Debt/Equity % 9.2% 10.4% 8.8% 5.3%

Net Debt/EBITDA x 0.0 0.8 0.0 0.9 Net Debt/EBITDA x 0.5 0.6 0.5 0.3

Net Interest Cover (EBIT) x 11.0 0.2 17.2 (0.0) Net Interest Cover (EBIT) x 6.5 8.1 12.8 17.4

Net Interest Cover (EBITDA) x 16.3 11.2 25.7 11.0 Net Interest Cover (EBITDA) x 14.2 17.9 29.9 35.9

EFPOWA m 707.7 825.5 826.9 832.5 EFPOWA m 789.1 829.7 832.5 832.5

Cashflow Analysis 1H16 2H16 1H17e 2H17e Cashflow Analysis FY16 FY17e FY18e FY19e

EBITDA $m 138.5 49.5 142.2 48.4 EBITDA $m 188.0 190.6 182.4 195.4

- Incr. in WC $m 90.1 -98.6 70.2 -53.1 - Incr. in WC $m -8.5 17.1 17.7 1.5

- Net interest expense $m -9.3 -6.6 -5.2 -6.2 - Net interest expense $m -15.9 -11.5 -7.1 -6.0

- Tax paid $m -5.4 -14.9 -18.6 -26.8 - Tax paid $m -20.4 -45.4 -25.1 -27.3

+ Other op. cashflow s $m -16.7 23.0 5.7 0.0 + Other op. cashflow s $m 6.3 5.7 0.0 0.0

Total operating cashflows $m 197.1 -47.6 194.3 -37.7 Total operating cashflows $m 149.5 156.6 167.9 163.5

- Capex $m -18.3 -22.2 -57.2 -62.8 - Capex $m -40.5 -120.0 -110.0 -85.0

- Acquisitions / (Divestments) $m -10.2 1.5 -10.3 0.0 - Acquisitions / (Divestments) $m -8.7 -10.3 0.0 0.0

+ Other inv. Cashflow s $m 1.1 -10.2 8.6 0.0 + Other inv. Cashflow s $m -9.1 8.6 0.0 0.0

Total investing cashflows $m -27.4 -30.9 -58.8 -62.8 Total investing cashflows $m -58.3 -121.6 -110.0 -85.0

- Dividends paid $m 0.0 -16.4 -24.6 -24.6 - Dividends paid $m -16.4 -49.3 -46.1 -41.1

+ Equity raisings $m 212.0 0.1 0.0 0.0 + Equity raisings $m 212.0 0.0 0.0 0.0

- Debt raisings $m -295.1 0.1 -50.0 125.2 - Debt raisings $m -295.0 75.2 -11.8 -37.4

+ Other f in. cashflow s $m 0.0 0.1 -0.2 0.0 + Other f in. cashflow s $m 0.1 -0.2 0.0 0.0

Total Financing cashflow $m -83.1 -16.3 -74.8 100.5 Total Financing cashflow $m -99.4 25.7 -57.9 -78.5

Free Cashflow $m 178.8 -69.8 137.1 -100.5 Free Cashflow $m 109.0 36.6 57.9 78.5

Net Change in cash/debt $m 86.7 -94.8 60.7 0.0 Net Change in cash/debt $m -8.1 60.7 0.0 0.0

Balance Sheet FY16 FY17e FY18e FY19e

Cash $m 45.2 105.9 105.9 105.9

Receivables $m 37.9 37.3 37.5 37.7

Inventories $m 396.3 373.2 357.5 358.7

Investments $m 9.2 15.2 24.2 30.2

Property, plant & equipment $m 445.4 470.1 488.8 482.7

Intangibles $m 904.2 901.1 901.1 901.1

Other Assets $m 29.8 15.7 15.7 15.7

Total Assets $m 1,867.9 1,918.4 1,930.7 1,932.0

Payables $m 400.6 394.0 396.3 399.1

Short Term Debt $m 0.0 0.0 0.0 0.0

Long Term Debt $m 147.3 223.0 205.5 167.4

Other Liabilities $m 212.3 177.8 192.6 201.4

Total Liabilities $m 760.1 794.8 794.4 768.0

Shareholders Funds $m 1,107.8 1,123.6 1,136.3 1,164.0

Minority Interests $m 0.0 0.0 0.0 0.0

Total Shareholders Equity $m 1,107.8 1,123.6 1,136.3 1,164.0

Total Funds employed $m 1,255.0 1,346.6 1,341.8 1,331.5

2 Gross Cashflow is Profit after Tax plus 1 Adjusted for NRIs and Goodw ill Amortisation


31 March 2017 31

Companies mentioned in this report:

Amazon.com (AMZN US, US$874.32, Outperform, TP: US$895.00, Ben Schachter)

Wesfarmers (WES AU, A$45.49, Outperform, TP: A$45.50)

Metcash (MTS AU, A$2.43, Outperform, TP: A$2.60)

JB Hi-Fi (JBH AU, A$24.60, Outperform, TP: A$32.80)

Myer (MYR AU, A$1.22, Outperform, TP: A$1.21)

Harvey Norman (HVN AU, A$4.47, Underperform, TP: A$5.05)

Stockland (SGP AU, A$4.71, Neutral, TP: A$4.53, Paul Checchin)

Mirvac Group (MGR AU, A$2.22, Outperform, TP: A$2.38, Rob Freeman)

Vicinity Centres (VCX AU, A$2.88, Underperform, TP: A$2.90, Rob Freeman)

Shopping Centres Australasia Property Group (SCP AU, A$2.28, Underperform, TP: A$2.13, Stuart

McLean)

Scentre Group (SCG AU, A$4.38, Underperform, TP: A$4.52, Rob Freeman)

Charter Hall Retail REIT (CQR AU, A$4.44, Neutral, TP: A$4.27, Stuart McLean)

GPT Group (GPT AU, A$5.20, Neutral, TP: A$5.09, Rob Freeman)


31 March 2017 32

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie – South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada

Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be

expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 31 December 2016

AU/NZ Asia RSA USA CA EUR Outperform 57.53% 50.72% 45.57% 42.28% 60.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients)

Neutral 33.90% 33.97% 43.04% 50.11% 37.23% 35.62% (for global coverage by Macquarie, 8.05% of stocks followed are investment banking clients)

Underperform 8.56% 15.30% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients)

Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.

Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN 58 002 832 126, AFSL 238947, a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN 41 002 574 923 AFSL 237504 ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited (“MENZ”) an NZX Firm. Macquarie Private Wealth’s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) (“MBL”) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Apart from Macquarie Bank Limited ABN 46 008 583 542 (MBL), any MGL subsidiary noted in this research, , is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group‘s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures © Macquarie Group

This publication was disseminated on 30 March 2017 at 14:44 UTC.

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