sonae sgps c rworten mobile 47 0,03 44 0,03 sportzone 74 0,87 75 0,86 loop 10 0,14 7 0,15 modalfa...

THIS REPORT WAS PREPARED BY MANUEL SANTOS, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND

ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES. THIS REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE

VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)

See more information at WWW.NOVASBE.PT /34

MASTERS IN FINANCE

EQUITY RESEARCH

We revised downwards our price target for year-end 2013, from

€0.99 to €0.86, due to a more conservative approach, but we

maintain our buy recommendation on Sonae SGPS’ stock as we

believe the firm is undervalued in the market.

The food retail division is adapting to a changing industry but has

solidified its market leadership position and improved its

operational performance. We expect this unit to remain a cash-cow

for the holding and continue to finance future growth.

The specialized retail division has been facing a tougher scenario

as a result of consumer expenditure contraction. In Portugal, we

expect an increase in operational efficiency in years to come. In

Spain, the firm has not yet justified its entrance in the market.

Through the retail properties business unit, we expect a freehold

decrease of international stores due to the more aggressive store

openings and a capital light investment policy. We do not

expect any SLB operations to be concluded in the coming years.

Sierra continues to struggle due to yield spikes in Europe.

However, we expect a return to a positive net income by 2015 in

light of Europe’s projected recovery and Brazil’s growing

importance in the firm’s portfolio.

Sonaecom has had a solid operational performance and we expect

the merger between Optimus and Zon to generate, not only

significant cost synergies, but also revenue synergies.

Company description

Sonae SGPS is a Portuguese holding company comprised of six business units in food retail, specialized retail, telecommunications and shopping mall management. Despite being generally considered a holding, the company focuses mainly on the food retail segment which accounts for the majority of its turnover.

SONAE SGPS COMPANY REPORT

HOLDING/RETAIL 03 JUNE 2013

STUDENT: MANUEL SANTOS [email protected]

In the pursuit of future growth…

…while facing domestic challenges

Recommendation: BUY

Vs Previous Recommendation BUY

Price Target FY13: 0.86 €

Vs Previous Price Target 0.99€

Price (as of 31-May-2013) 0.78 €

Reuters: YSO.LS, Bloomberg: SON:PL

52-week range (€) 0.350-0.795

Market Cap (€ millions) 1.562

Outstanding Shares (million) 2.000

Source:Bloomberg

Source: Bloomberg

(Values in € millions) 2011 2012 2013F

Revenues 5.541 5.379 5.326

EBITDA 602 600 610

EBIT 234 232 258

Net Profit 109 33 94

ROE 7.78% 4.32% 7.32%

ROIC 9.22% 9.71% 10.57%

P/E 14,23x 47,31x 16,49x

P/BV 0,92x 0,93x 0,87x

EPS (€) 0,05 0,02 0,05

Net Debt / EBITDA 3,26x 3,06x 2,90x

Net Debt / Market Cap 1,26 1,18 1,14

Source:Company Data and Analyst’s Estimates

0

50

100

150

200

250

Sonae SGPS PSI-20

speralta

Rectangle


PAGE 2/34

Table of Contents

SONAE SGPS VALUATION SUMMARY ................................................. 3

COMPANY OVERVIEW ........................................................................... 4

BUSINESS UNIT DESCRIPTION ............................................................. 5

Sonae MC ....................................................................................... 5 Sonae SR ......................................................................................... 5 Sonae RP ......................................................................................... 6 Sonae Sierra.................................................................................... 6 Sonaecom ........................................................................................ 7 Investment Management ................................................................. 7

MACROECONOMIC OUTLOOK .............................................................. 8

Portugal .......................................................................................... 8 International ................................................................................... 9

BUSINESS UNIT VALUATION ................................................................10

FOOD RETAIL....................................................................................................... 10 Food Retail Industry Analysis ....................................................... 10 Sonae MC Valuation ..................................................................... 11 Sonae MC Valuation Scenarios .................................................... 15 Sonae MC Angola ......................................................................... 16

SPECIALIZED RETAIL ........................................................................................... 17 Specialized Retail Industry Analysis ............................................. 17 Sonae SR Valuation ...................................................................... 18 Sonae SR Valuation Scenarios ...................................................... 21

RETAIL PROPERTIES ............................................................................................ 22 Sonae RP Valuation ...................................................................... 22

SHOPPING CENTRES ............................................................................................. 23 Shopping Centres Industry Analysis ............................................. 23 Sonae Sierra Valuation ................................................................. 25

TELECOMMUNICATIONS....................................................................................... 27 Telecommunications Industry Analysis ......................................... 27 Sonaecom Valuation ..................................................................... 28

INVESTMENT MANAGEMENT ............................................................................... 30

FREEHOLD IMPACT ...............................................................................31

FINAL VALUATION REMARKS ..............................................................32

APPENDIX ..............................................................................................33

FINANCIAL STATEMENTS ..................................................................................... 33

DISCLOSURES AND DISCLAIMER .......................................................34

RESEARCH RECOMMENDATIONS.......................................................................... 34


PAGE 3/34

Business Units (€ millions)Enterprise

ValueDebt

Equity

ValueStake

Sonae

SGPS

Equity Value

WeightsValuation

Food Retail 1.485 100% DCF

Non-Food Retail 211 100% DCF

Retail Properties 783 100% DCF

Retail Business 2.480 985 1494 100% 1494 61,13%

Sierra 1.038 50% 519 21,23% NAV

Sonaecom 604 73,96% 333 13,64% Market Value of Equity

Inv. Management 81 100% 81 3,33% Book Value of Equity

Other Businesses 934 38,19%

Food Retail Angola 92 24 68 49% 17 0,68% DCF (50% Prob.)

Total 2445

Holding Debt 541

Equity Value 1904

Shares Outstanding 2000

Fair Value (€) 0,95

Holding Discount (10%) 0,10

Price Target Year End 2013 (€) 0,86

Price as of 31-May-2013 (€) 0,78

Expected Return 10,12%

Source: Analyst’s Estimates

Sonae SGPS Valuation Summary

We have applied a Sum of the Parts approach in the valuation of the

holding company. In doing so, we considered the Enterprise Values of each

business unit in the retail segment and deducted the market value of debt1 of the

retail business. We then took Sierra’s Net Asset Value and applied Sonae’s 50%

stake. We did the same with Sonaecom’s equity value and incorporated the

Investment Management unit through its book value of equity. Sonae’s entrance

to Angola was considered with a 50% probability of actually occurring. In the end,

we removed the market value of the debt concerning the holding company.

We also took into account the fact that Sonae SGPS is a conglomerate and

attribute a conglomerate discount of 10%2 on the firm’s fair value. This is

debatable due to the fact that it has been increasingly focusing on the retail

business units. However, in light of its financial participation in Sonaecom and

even in Sonae Sierra, Sonae SGPS has costs associated with managing the

different units and investors could diversify their portfolio at lower costs. The

following table summarizes our results regarding the valuation of Sonae SGPS.

Exhibit 1 - Sonae SGPS Valuation Summary

We value Sonae SGPS at 0.86€ per share for year-end 2013 which implies a

10.12% return in a 6 month period. Thus, we highlight our buy

recommendation on the company’s stock. Despite the troubling economic

environment, Sonae SGPS has evidenced resilience in these uncertain times and

we expect its stock price to gradually increase reflecting the conglomerate’s

ability to cope with the challenging scenario.

1 Calculated through the aggregation of the listed book value of debt and the listed bonds on Bloomberg which were then discounted using the yield to

maturity of the Bloomberg bonds 2 Khorana, Shivdasani, Stendevad, Sanzhar, Citi (2011), “Spin-offs: Tackling the Conglomerate Discount” – Journal of Applied Corporate Finance. The

authors find that, for the US and Western Europe in year-end 2010, the average conglomerate discount was of 10%


PAGE 4/34

0

1.000

2.000

3.000

4.000

5.000

6.000

2008 2009 2010 2011 2012

Sonae MC Sonae SR Sonae RP

Sonaecom Inv. Mngmt.

Exhibit 2 - Turnover per unit (€ millions)

52,65%

8,90%

7,68%2,50%

2,00%

26,27%

Efanor BPI

BESTINVER Fundação Berardo

Norges Bank Others

Company Overview

Sonae SGPS is a Portuguese conglomerate that initially started in 1959 as an

engineering wood business. Nowadays, the firm operates six distinctive

business units which the company distinguishes between core businesses,

comprising wholly owned Sonae MC (“Modelo Continente”) and Sonae SR

(“Specialized Retail”), core partnerships which are Sonaecom (53.92% stake)

and Sonae Sierra (Joint Venture partnership with Grosvenor), related businesses

which is wholly owned Sonae Retail Properties (RP), and active investments

which is represented by the unit Sonae Investment Management. Despite the fact

that Sonae SGPS is generally viewed as a conglomerate, the firm’s main focus is

on the food and non food retail segments with both Sonae MC and SR

representing, in 2012, 82,9% of the firm’s total turnover. The company is present

in 66 different countries3 and its strategy revolves around three pillars:

deleveraging its balance sheet to continue to adapt to the current challenging

macroeconomic environment through “capital light” expansion policies4, the

international expansion of core businesses to unlock additional value creation

and, lastly, to continue to strive for the identification of market opportunities

and invest in related businesses capable of adding substantial value by

themselves and to the other business units.

Exhibit 3 - Sonae SGPS' organizational structure

Sonae SGPS is a family owned company. Its major shareholder is Efanor

Investimentos, SGPS SA which controls 52.6% of the firm. This parent is owned

by Belmiro de Azevedo, one of the most distinguished businessmen in Portugal.

Other relevant shareholders include BPI, a Portuguese bank owning 8.9% of the

firm and Bestinver which owns 7.7%. It is important to note that the shareholder

structure has maintained a great stability throughout the years with no

major changes being foreseen in the future. Sonae’s current chairman is

Belmiro de Azevedo and the current CEO is Paulo de Azevedo.

3 Includes operations, services rendered, representative offices, franchising and distribution contracts

4 “Capital Light” investment refers to forms of expansion revolving around renting versus owning real estate assets, or investing through JV partnerships and

franchising schemes

Source: Company Information


Exhibit 4 - Sonae SGPS' shareholder structure



PAGE 5/34

Number of

Stores

Avg. Size

(000' sqm)

Number of

Stores

Avg. Size

(000' sqm)

Continente - Hypermarkets 40 7,20 39 7,22

Continente - Supermarkets 131 1,76 138 1,76

Well's 138 0,09 141 0,09

Bom Bocado 96 0,05 96 0,05

Book.it 18 0,32 17 0,32

Meu Super 9 0,68 9 0,68

Total 432 1,27 440 1,26

2011 2012

Sonae MC Concepts

Number of

Stores

Avg. Size

(000' sqm)

Number of

Stores

Avg. Size

(000' sqm)

Worten 134 0,92 138 0,91

Vobis 6 0,58 0 0,00

Worten Mobile 47 0,03 44 0,03

Sportzone 74 0,87 75 0,86

Loop 10 0,14 7 0,15

Modalfa 107 0,54 107 0,52

Zippy 40 0,35 40 0,34

Total 418 0,63 411 0,64

Number of

Stores

Avg. Size

(000' sqm)

Number of

Stores

Avg. Size

(000' sqm)

Worten 40 2,26 42 2,26

Sportzone 36 1,23 37 1,23

Zippy 57 0,28 67 0,28

Total 133 1,14 146 1,07

2012

Sonae SR

International

Concepts

2011 2012

Sonae SR

Portugal

Concepts

2011

Exhibit 6 - SR's store evolution by geography


Business Unit Description

Sonae MC

Sonae MC (“Modelo Continente”) is the main business unit of Sonae SGPS.

Its current turnover represents approximately 60% of the firm’s total turnover. The

business unit operates several different brands. Continente, its hypermarket

brand, has 38 stores with an average store size of 7.2 thousand square meters

(sqm). It has been one of the most trusted brands by Portuguese

consumers for 11 years now in its food retail category5. At the same time, it has

been elected number one in Marktest’s reputation index6. The supermarket

brands are Modelo and Bom dia, which have been rebranded as Continente. This

was a well thought strategic move from Sonae MC as its main objective was to

leverage Continente’s position as one of the most trusted brands in Portugal.

Both of these supermarkets differ from Continente as they aim to provide fresher

products and serve the consumers’ everyday needs. The number of stores has

been consistently growing from 117 stores in 2009 to 138 stores in 2012.

Sonae MC also includes brands such as Bom Bocado, a coffee shop, Book.it, a

bookstore and Well’s, a parapharmacy which sells health and beauty products.

These stores are generally located near the firm’s hypermarkets and

supermarkets to take advantage of the client inflow. The company has also

invested in the “MeuSuper” concept which offers the possibility of franchising

food retail stores and is under negotiations to internationalize to Angola. This

announcement comes as a consequence of the saturation in the Portuguese

market and should present itself as an opportunity to unlock additional value.

Sonae SR

Sonae SR (“Specialized Retail”) is the second largest business unit of Sonae

SGPS and responsible for approximately 22% of the firm’s total turnover in 2012.

Its focus is on the non food retail segment with a number of different categories

of products invested in. It encompasses Worten and Worten mobile, a consumer

electronics and a mobile phone retailer, respectively, accounting for 69% of SR’s

turnover, Sportzone and Loop which are sports apparel and footwear retailers

accounting for 19% of the turnover and fashion retailers such as Modalfa and

Zippy which account for the remaining 12%7.

This business unit is currently following two distinct principles as guidance for its

value creation: international expansion and market leadership consolidation

5 Survey carried out by Reader’s Digest

6 Study done with 18 brands and chosen based on interviews with the general population aged 15-64

7 Source: Sonae SGPS’ Investors’ Presentation – April 2013

Exhibit 5 - MC's Store evolution



PAGE 6/34

0

200

400

600

800

1.000

1.200

1.400

2008 2009 2010 2011 2012

Sonae SR PT Sonae SR INT

74%

18%

1%

7%

Food based retail Specialised retail PTSpecialised retail INT Investment management

in Portugal. It is divided between its national and international operations

representing 71.6% and 28.4% of the turnover, respectively. Nationally, there are

currently 411 stores with an average store size of 638 square meters.

Internationally, the number of stores has grown to 129 with an average store size

of approximately 1200 square meters. Sonae SR’s internationalization focus

is Spain, through Worten, Sportzone and Zippy, while also entering Middle

Eastern countries and Latin America through Zippy8. Regardless, in recent years,

the internationalization of SR has slowed due to the macroeconomic reality

lived in Spain and the less available capital. In light of this, the mode of entry has

shifted to the aforementioned capital light investment policy with the focus being

on franchising schemes and joint venture partnerships.

Sonae RP

Sonae RP (“Retail Properties”) is a business unit with a focus on managing and

developing the real estate infrastructure associated with Sonae’s retail

business units. It accounts, in 2012, for 2.2% of Sonae SGPS’ total turnover. This

company allows Sonae MC and SR to focus solely on the management of their

own units. Currently, Sonae RP has under its portfolio 33 Continente

hypermarkets and 96 Continente Modelo supermarkets, amongst others. This

business unit main source of turnover comes from the rents received from the

retail units and it currently has € 1.335 billion of invested capital.

Another objective of this business unit is to conduct Sales & Leaseback (SLB)

operations in order to withdraw assets from Sonae’s balance sheet and, with

it, a considerable amount of debt. In this regard, this business unit focuses on

one of the strategic pillars of the holding company which is to deleverage its

balance sheet. These operations also allow the firm to finance growth

opportunities in today’s constrained capital markets due to the cash-in

provided by the asset sales.

Sonae Sierra

Sonae Sierra is the first business unit described here not associated with the

retail industry (directly at least). This company is responsible for the ownership,

development and management of shopping centres throughout the world. Sierra

is a joint venture partnership between Sonae SGPS and Grosvenor, a United

Kingdom based developer and owner of real estate property. Sonae Sierra has

47 shopping centres spread through Portugal, Brazil, Italy, Spain, Germany,

Greece and Romania and a total GLA9 under management of 2.2 million sqm. It

has an additional four confirmed shopping centre openings with two being in

8 Zippy is present in countries such as Turkey, Venezuela, Saudi Arabia, Malta, Dominican Republic and others

9 Gross Leased Area

Exhibit 7 - SR's turnover by geography (€ millions)


Exhibit 8 - RP's asset ownership by unit



PAGE 7/34

0

100

200

300

400

500

600

700

800

900

1.000

2011 2012

Mobile Wireline SSI Media

0

50

100

150

200

250

300

2011 2012

Mobile Wireline SSI Media

45%

19%

11%

4%

2%

2%17%

Portugal Spain Italy Germany

Romania Greece Brazil

Brazil, one in Germany and another in Romania. It has also won more than 100

awards to date10

. Furthermore, the company has been further successful in

Brazil by completing an Initial Public Offering (IPO) of its Brazilian division in

2011. This country is becoming a cornerstone of Sierra’s growth due to the

country’s thriving economy.

The company has always maintained a solid internationalization strategy by

never investing in a new real estate project on its own. Instead, the company

opted to form partnerships with local firms to acquire market knowledge and

mitigate the risks associated with a highly capital intensive industry and the lack

of local market knowledge when dealing with internationalization strategies.

Currently, the unit’s strategy revolves around recycling capital by selling

stakes in non-controlled projects. The capital infusion from these sales will be

used to finance additional projects.

Sonaecom

Sonaecom is Sonae’s telecommunications’ business unit and is currently listed

on the Lisbon stock exchange. It has three distinct business areas which is the

mobile and fixed segment (through the Optimus brand, representing 87.33% of

total turnover and 98.63% of the total EBITDA), the Software and Information

Systems (SSI) and the Online and Media business unit. The firm is owned by

Sonae SGPS with a 53.92% with the second highest shareholder being France

Télécom with 20%. Currently, 21.48% of the shares are in free float.

Optimus, the main brand, is a convergent and fully integrated

telecommunications operator meaning that it offers the four main products of

telecoms: mobile, fixed, television and internet. However, its main focus is on the

mobile segment being the 3rd

player in the Portuguese market. Currently, the

firm is in advanced talks to finalize its merger proposal between Optimus and

Zon and both Zon’s and Sonaecom’s shareholders approved the deal on April

2013. The merger will be a key driver behind the firm’s value in the years to

come due to the existence of, not only cost synergies, but also the potential to

unlock revenue synergies.

Investment Management

The Investment management business unit is responsible for managing the

holding company’s investment portfolio. It aims to support Sonae SGPS in

Mergers, Acquisitions and Restructuring (M&A) operations in order to maximize

shareholder value. This business unit currently has in its portfolio MaxMat (“Do it

yourself”) stores, MDS insurance agency and a travel agent GeoStar.

10

These awards are mainly concerning Sierra’s marketing strategy

Exhibit 9 - Owned shopping centres by country


Exhibit 10 - Sonaecom's turnover by segment (€ millions)

Exhibit 11 - Sonaecom's EBITDA by segment (€ millions)




PAGE 8/34

0%

2%

4%

6%

8%

10%

12%

2008 2009 2010 2011 2012 2013

PT 10Y CDS Spread

ESP 10Y CDS Spread

GER 10Y CDS Spread

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2009 2010 2011 2012

Portugal International

0%

5%

10%

15%

20%

-4%

-2%

0%

2%

4%

6%

2000 2002 2004 2006 2008 2010 2012

GDP Growth Rate (left axis)

Unemployment Rate (right axis)

0%

20%

40%

60%

80%

100%

120%

2000 2002 2004 2006 2008 2010 2012

Investment as a % of GDP

Net Debt as a % of GDP

Macroeconomic Outlook

When we look at Sonae SGPS, it becomes apparent that the firm is highly

dependent on the well being of the Portuguese economic environment with

over 90% of its turnover coming from national operations. Due to this, we will

focus our analysis on Portugal and, at an international level, on Spain and Brazil.

Portugal

When the financial and sovereign crisis hit by 2007, most European countries

which were ill prepared to deal with a stressful scenario were put in the limelight

asking Troika (ECB, IMF and EU) for bailouts. Portugal was one of these

countries that had to resort to outside assistance in 2011. By the end of 2009,

Portugal’s Gross Domestic Product (GDP) had contracted by 2.9%. This trend

was partially offset in the end of 2010 with a GDP increase of 1.4%. However, in

2011 and 2012 the GDP had, once again, contracted by approximately 1.7% and

3%, respectively. The inability of Portugal to deal with the arrival of the financial

crisis was mainly justified through its Net Debt position. From 2004 to 2012, the

net debt of Portugal increased from 55.9% of the GDP, to 123.6% in 2012. This

had terrible social and economic consequences as the country continued to

increase its debt levels without a significant influence on its GDP growth.

Socially, the unemployment levels rose from 7.6% of the total labour force in

2008 to 12.7% by the end of 201111

. The austerity measures (including tax

reforms) alongside the unemployment rates have led to numerous protests due

to the reduction of disposable income.

At the same time, a great deal of banks had to register impairments on their

assets due to the increase in defaults. As a result, banks had to start adapting to

the economic environment by reducing their leverage and increasing their

capital ratios. This was even more accentuated due to the need for banks to

meet the Basel Agreement’s stricter controls. Due to this, the banks were in no

position to lend money and therefore, encourage economic development.

Portugal’s rating was downgraded to BB (S&P) and A112

(Moody’s) as the

agencies were worried about the unsustainable position of Portugal. With the

worsening of the macro environment, financial markets showed their distrust

in Portugal and, consequentially, the Credit Default Swap (CDS) spread rose

from 0.41% in the beginning of 2008 to 10.41% four years later. Bond yields had

the same evolution leading to the withdrawal of Portugal from the financial

markets. However, with the somewhat successful implementation of austerity

measures, both the CDS spreads and bond yields started to decline by the

11

Source: Trading Economics 12

By 2012, Moody’s further downgraded Portugal to Ba3

Exhibit 12 - Sonae SGPS' turnover by geography


Exhibit 14 - Portugal’s GDP growth and Unemployment

Source: IMF, World Economic Outlook, April 2013


Exhibit 15 - Portuguese, Spanish and German CDS spreads

Source: Bloomberg

Exhibit 13 - Portugal's net debt and investment


PAGE 9/34

0%

10%

20%

30%

40%

50%

60%

70%

80%

2000 2002 2004 2006 2008 2010 2012


Net Debt as a % of GDP

0%

5%

10%

15%

20%

25%

30%

-6%

-4%

-2%

0%

2%

4%

6%

2000 2002 2004 2006 2008 2010 2012


Unemployment Rate (right axis)

Exhibit 18 - Spanish Net Debt and Investment


0%

5%

10%

15%

20%

25%

-2%

0%

2%

4%

6%

8%

2000 2002 2004 2006 2008 2010 2012

Investment as a % of GDP (right axis)


Exhibit 19 - Brazil's GDP growth and Investment


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2008 2009 2010 2011 2012 2013

PT 10Y Bond Yields

ESP 10Y Bond Yields

GER 10Y Bond Yields

middle of 2012 allowing Portugal to return to the financial markets and more

easily refinance its long term debt. S&P also revised its outlook for Portugal from

negative to stable evidencing the confidence of international investors in the

country’s recovery. This recovery is projected to occur by the end of 2014 with

an increase of the GDP by 0.6%13

. Regardless, it is our opinion that the worst is

not over and Sonae SGPS will continue to struggle due to its dependency on

the domestic environment.

International

Spain has evidenced a more resilient GDP growth rate until 2009 when it

dropped from 0.9% to a staggering -3.7%. Spain had particular characteristics

which marked its downfall. The country was sustaining its GDP growth rate by

taking advantage of the housing bubble in the country, however, when the crisis

hit, the bubble exploded paving the way for several bank bailouts and an

increase in the debt of Spanish families14

. At the same time, the social

consequences have been even more negative than in Portugal with the

unemployment level reaching an astounding 21.6% of the labour force in 2011,

further increasing to 25% by the end of 201215

.

The austerity measures and structural stability, even though mildly successful,

are still expected to take its toll on the country16

and Sonae’s specialized retail

division has been struggling to justify its internationalization to this country.

However, according to the IMF Global Economic Outlook report, Spain is

projected to recover by the end of 2014 with a GDP growth rate of 0.7% and

unemployment levels peaking at 27% in 2013 with a downward tendency after

the end of 2014.

On an opposite note, Brazil is somewhat distant from the economic reality

lived in Europe. After a mild recession in 2009, it presented an astounding

recovery to 7.2% in 2010 and became the 6th largest economy in the world

17 in

2011. The country’s growth has been attributed to a Foreign Direct Investment

increase from approximately USD 50 billion in 2008 to USD 71 billion by 201118

.

According to the IMF, the country is predicted to continue growing at an

accelerated pace becoming the 5th

largest economy in the world by the end

of this decade. Due to this, we believe that Sonae Sierra’s investment in this

country will be a tremendous source of value creation.

13

Source: World Bank and IMF Global Economic Outlook Report – April 2013 14

Source: Bloomberg 15

Source: Eurostat. Youth unemployment levels have been even more negative with 44.4% of youth female unemployment and 48% of male unemployment in 2011 16

Source: IMF Global Economic Outlook report – 2012 17

Source: World Bank 18

Source: World Bank. Data is in current USD

Source: Bloomberg

Exhibit 17 - Spanish GDP growth and Unemployment


Exhibit 16 - Portuguese, Spanish and German bond yields


PAGE 10/34

-70

-60

-50

-40

-30

-20

-10

0

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2008

2009

2010

2011

2012

2013

PT Food Retail Sales YoY (left axis)

PT Consumer Confidence Index (right axis)

0%

10%

20%

30%

40%

50%

60%

70%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

- Convenience Stores - Discounters

- Forecourt Retailers - Hypermarkets

- Supermarkets

Business Unit Valuation

Our valuation was performed based on the individual business units through a

sum of the parts approach (SotP) while taking out the market value of debt in

the end. We use a standard Discounted Cash Flow (DCF) approach to value

Sonae MC, Sonae SR and Sonae RP. We value Sierra according to the Net

Asset Value (NAV) framework. Sonaecom was valued using an M&A scenario

approach where we estimate its market value with synergies incorporated. The

Investment Management business unit was valued through its book value of

equity due to the lack of information and relevancy.

Food Retail

Food Retail Industry Analysis

In Portugal, the food retail industry has evidenced resilience in spite of the

economic downturn. This is obviously explained by the fact that food retailers sell

first necessity goods which, regardless of disposable income by the families, are

always needed in their day-to-day life. However, the economic downturn has had

a major influence on the way consumers make their purchases. Regardless of

food products being first necessity goods, consumers have become more price-

sensitive. Due to this, we can see that the food retail sales (in value) in

Portugal have dropped significantly.

From the Euromonitor report with data up to 2011, we can extract two trends that

have materialized. First, consumers are increasingly favouring lower cost

goods which reflect the increase in market share of the retailers’ private labels.

In Europe, the private labels share of total FMCG (Fast moving consumer goods)

products have increased from 21.1% in 2007 to 29.9% in 2010 which further

increased to 35.6% of value share and 45.1% in unit share as of the end of

201219

. This trend is here to stay as it is expected a continuous increase in the

importance of private labels, particularly in countries which have been hit hard by

the economic downturn20

. The second trend is evidenced by the fact that

consumers are less willing to travel to large hypermarkets and/or shopping

centres due to, not only the cost of gas, but also due to the fact that large stores

and shopping centres usually entice consumers to make more than the needed

purchases. Convenience has become a trend in the industry. When we look

at the overall turnover in the food retail sector by channel, we can clearly see that

hypermarkets, which have represented in 2006 a share of 28.9%, have lost

importance with a value of 23.2% in 2011. This loss of share was transferred

19

Source: Symphony IRI Group – Private Label in Europe – 2012 20

Source: Nielsen Retail audit and Nielsen Global Private Label Report March 2011

Exhibit 20 - Portuguese food retail sales and consumer confidence index

Source: Bloomberg

Exhibit 21 - Portuguese turnover evolution per concept

Source: Euromonitor Portuguese retail market report - 2011


PAGE 11/34

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2008 2009 2010 2011

Sonae MC JMT Intermarché

Auchan Lidl Minipreço

2.800

3.000

3.200

3.400

3.600

3.800

20%

25%

30%

35%

2009 2010 2011 2012

FMCG References (right axis)

Private Labels (% of FMCG) (left axis)

mostly to supermarkets with a 51.5% of share in 2006 and 59.8% in 2011.

According to Euromonitor’s projections, by 2016, the supermarket channel will

detain 61.3% of the market share with the hypermarkets decreasing to

approximately 22%.

Due to the saturation of the industry and macro environment, store openings

have decreased and, as such, competition has been based on aggressive

discounts. Consequentially, Like-for-like21

(LFL) sales have decreased in

general22

. Despite the aggressive price competition, the sector is somewhat

concentrated with the major top six retailers holding approximately 60% of the

market23

. Sonae MC holds the leadership position; however, the gap between

its market share and the second player (Jerónimo Martins, SGPS, SA) has been

reduced in recent years, mainly due to two reasons. First, Jerónimo Martins has

introduced the loyalty card which was Sonae MC’s major advantage. Second,

consumers are valuing convenience and Jerónimo Martins, through its “Pingo

Doce” brand, has substantially smaller stores in urban centres unlike MC’s

hypermarkets located, generally, on the periphery and in shopping centres.

Consequentially, Jerónimo Martins increased its market share from 2011 to year

end 2012 by 1.6 basis points while Sonae managed a 0.5 basis point increase24

.

We expect the food retail industry to become even more concentrated in

favour of the two top competitors in detriment of the remaining players. The

reason for this is the inability to compete with the two major retailers due to their

higher brand awareness, loyalty established with the Portuguese consumers and

the superior quality items (at a lower price) of the private labels of both Jerónimo

Martins and Sonae MC25

.

Sonae MC Valuation

The economic downturn has had a great impact on the food retail industry simply

because consumers are becoming more price-driven and taking a closer look at

their expenses. This translates into the preference for private labels which are

usually significantly cheaper than the alternatives. Sonae MC has taken

advantage of this trend by increasing its private label offering from 23% of

FMCG sales in 2009 to 31% in year end 2012 according to company data.

At the same time, Sonae MC has been increasing its market share in recent

years. This is largely due to their loyalty cards which now represent

approximately 75% of the total number of households in Portugal through

which 90% of the company’s sales are made. The loyalty cards have not only

21

Like-for-Like is a key measure for retailers. It represents the increase in turnover without accounting for new store openings 22

Source: Investor’s Presentation – April 2011 23

Source: Euromonitor Portuguese Retail Market Report – 2011. Market share is defined by value 24

Source: Homescan Nielsen – December 2012 25

Source: Euromonitor Portuguese Retail Market Report – 2011

Exhibit 22 - Food Retailers market share evolution (measured in value €)


Exhibit 23 - Sonae MC's private label evolution



PAGE 12/34

0%

2%

4%

6%

8%

10%

12%

2008 2009 2010 2011 2012

MC EBITDA Margin (%)

MC EBITDAR Margin (%)

Industry EBITDA Margin (%)

Industry EBITDAR Margin (%)

2.700

2.800

2.900

3.000

3.100

3.200

3.300

3.400

3,5%

4,5%

5,5%

6,5%

7,5%

8,5%

2008 2009 2010 2011 2012

Turnover (€ millions) (right axis)

EBITDA Margin (left axis)

EBIT Margin (left axis)

allowed Sonae MC to increase their share but also to increase their cost

effectiveness as they can, more easily than competitors without such a tool,

adapt their product offering on a store by store basis dependent on which type of

customers frequent that given store. They can also target more easily the right

consumers with the right promotional campaign and provide a more effective

stock management system based on demand information.

The increase in market share has one very important consequence which must

not be disregarded. By becoming a larger competitor, Sonae MC has increased

its bargaining power with suppliers. On an industry in which consumers are

becoming more price sensitive, this allows them to aggressively pursue discount

campaigns and promotions all the while having their suppliers also share

some of the burden of the lower retail prices of products. The factors

mentioned so far have allowed Sonae MC to increase its EBITDA26

margin from

6.38% in 2008 to 7.53% in 2012. This margin also reflects the single-branding of

their supermarket stores Modelo and Bom Dia into the Continente brand which

has resulted in an increase in operational efficiency.

The EBITDA margin of Sonae MC has been consistently above competition

with an industry average of roughly 6.47% in the 201227

. However, we need to

understand that unlike its competitors, due to the existence of Sonae RP, Sonae

MC actually pays rents on all the stores it operates in. Due to this, we also

considered the EBITDAR28

margins to take into account the operational

performance without the influence of store ownership policy. In this regard,

Sonae MC presented, in 2012, a margin of 11.03% with the industry average

being 7.95%. Regardless, the sustainability of Sonae MC’s margin can be

argued and we believe that further increases are highly unlikely particularly

concerning the current and future macroeconomic environment and the expected

price wars in light of the growing importance of private labels which usually have

lower margins than manufacturers’ labels. Due to this, we have assumed a

constant 7.00% EBITDA margin in our forecasts.

In spite of the strong operational performance, due to the macroeconomic decay

in Portugal resulting in consumers generally choosing cheaper products,

revenues have decreased by 1.39% during 2012. Even though Sonae MC, as

mentioned, has one of the most trusted brands in Continente, the shift of

consumers to small and more convenient stores and their price driven purchases

has mildly benefited its main competitor. Notwithstanding, turnover has been

projected for the future years as dependent on two key factors: total sqm and

26

Earnings before interest, taxes, depreciation and amortization 27

Source: Bloomberg Industry. Industry average was computed as the average of 18 food retailers 28

Earnings before interest, taxes, depreciation, amortization and rents

Source: Company Information, Analyst’s estimates and Bloomberg

Exhibit 24 - MC's and Industry's EBITDA and EBITDAR margins evolution

Exhibit 25 - MC's operational performance evolution



PAGE 13/34

Hypermarkets 2012 2014 2016 2018 2020

Turnover (€ millions) 1597 1581 1605 1638 1730

Grow th (%) -1,39% 0,00% 1,00% 1,00% 2,78%

LFL (€ millions) 1634 1581 1605 1638 1730

Grow th (%) 0,86% 0,00% 1,00% 1,00% 2,78%

Stores 39 39 39 39 40

Sales per sqm (thousands) 5,67 5,62 5,70 5,82 5,99

Supermarkets 2012 2014 2016 2018 2020


Grow th (%) -1,39% 0,62% 1,64% 2,37% 3,45%

LFL (€ millions) 1496 1572 1615 1674 1771

Grow th (%) -6,65% 0,25% 1,13% 1,05% 1,25%

Stores 138 139 141 145 151


Other Concepts 2012 2014 2016 2018 2020


Grow th (%) -1,39% 0,65% 2,14% 2,87% 4,05%

LFL (€ millions) 103 102 105 112 120

Grow th (%) -1,51% -0,33% 1,17% 1,93% 2,79%

Stores 263 268 275 283 295


49%

48%

3%

Hypermarkets Supermarkets Other Concepts

sales per sqm. As a rule of thumb, each new store opening will have 50% of the

sales per sqm of a more mature store. We assume that it will take one year to

reach to the same level of sales per sqm of the mature store which is a

conservative assumption when considering the operational know-how at

Sonae MC’s disposal. Total sqm have been projected per brand assuming a

relatively constant average size of each store. Therefore, the only factor

influencing total sqm is actually the store openings.

For the first brand, Continente hypermarkets which represent 49% of MC’s 2012

turnover, we assumed a mere one store opening in 2019 as we are not expecting,

under the macro environment, recent consumer trends and saturation of

the industry, a heavy investment on this format. At the same time, since families

have seen their disposable income decrease in light of tax burdens and austerity

measures, we assume a -1.00% decrease of its sales per sqm by the end of 2013

with it remaining constant in 2014 and recovering a year later to a 0.5% increase.

Therefore, from 2013 to 2016 we expect a top-line CAGR29

for this brand of

approximately 0.12% with 1.89% for 2016 onwards, based on our assumptions

and on the projections by the IMF of the Portuguese inflation rate.

For the supermarkets concept, we expect a heavier investment from Sonae MC

as a result of shifting consumer preferences and, as such, we project a store

increase of 1 per year until 2016. However, after 2016, the investment should be

higher (in reaction to economic recovery) representing a 2 store increase per year

until 2018 and 3 per year from 2018 to 2020. Regardless, sales per sqm should

behave like the hypermarkets’, however we expect a better performance from

this concept. Therefore, the sales per sqm should drop by the end of 2013 by -

0.75% with expected recovery occurring in 2015. Due to the greater potential of

these units and taking into account our assumptions, we projected a top-line

CAGR of 2.53% from 2016 to 2020. The remaining concepts had a similar

treatment. Overall, based on our assumptions, we are estimating a top-line CAGR

for the period of 2013 to 2016 of approximately 0.41% with an increase by a

CAGR of 2.36% until the end of 2020 in light of projected economic recovery.

Exhibit 28 - Sonae MC's operational forecasts

29

Compounded annual growth rate

Projections 2012 2013 2014 2015 2016 2017 2018 2019 2020

Turnover (€ millions) 3281 3252 3262 3291 3335 3387 3446 3549 3661

Grow th (%) -1,39% -0,89% 0,32% 0,87% 1,35% 1,55% 1,73% 3,01% 3,16%

LFL (€ millions) 3242 3252 3244 3283 3323 3363 3421 3470 3629

Grow th (%) -2,57% -0,90% -0,24% 0,62% 0,98% 0,82% 1,00% 0,71% 2,25%

Stores 440 441 446 450 455 461 467 477 486

Sales per sqm (thousands) 5,93 5,87 5,86 5,89 5,95 6,00 6,06 6,10 6,24

EBITDA (€ millions) 247 228 228 230 233 237 241 248 256

EBITDA Margin (%) 7,53% 7,00% 7,00% 7,00% 7,00% 7,00% 7,00% 7,00% 7,00%


Exhibit 27 - MC's operational forecasts by concept

Source: Company Information and Analyst’s Estimates


Exhibit 26 - MC's turnover weight by concept (2012)


PAGE 14/34

Multiples EV/Sales EV/EBITDA EV/EBIT EV/EBITDAR

Kesko 0,28 6,33 10,21 3,35

Jerónimo Martins 0,80 10,87 15,40 8,46

Morrison 0,42 5,71 7,94 6,00

Sainsbury 0,36 6,15 10,06 N/A

Delhaize 0,22 3,60 6,65 N/A

X5 Retail Group 0,47 6,51 10,92 3,38

Casino 0,42 6,33 8,95 4,85

Koninklijke 0,36 5,27 8,39 3,64

Carrefour 0,30 6,12 10,76 5,00

Tesco 0,51 6,62 9,33 N/A

Industry Average 0,41 6,35 9,86 4,95

Sonae MC 0,46 6,40 10,41 4,12

Risk Free Rate 2,73%

Market Risk Premium 5,50%

Beta Levered 1,07

Beta Country Portugal 1,30

Cost of Equity 10,37%

Cost of Debt 6,97%

E/V 65,69%

D/V 34,31%

Tax Rate 26,50%

WACC 8,57%

WACC Computation

As far as the investing cash flow goes, we need to take into account that we are

dealing with a saturated industry. Most of the capital expenditures projections

came down to the refurbishment of assets and the investment in new stores.

These values were based on tangible assets in our projection of the balance

sheet which depend on the total sqm of each business unit30

. Net working capital

had a similar treatment and we expect it to remain negative for our projected time

period since this is a key characteristic of this industry. Due to these

assumptions, we arrive at the following Free Cash Flows (FCF).

Exhibit 30 - Sonae MC's FCF projections

We used the Capital Asset Pricing Model to arrive at the cost of equity by taking

a five year average of the returns of the German 10 year government bond as it

is widely used due to its resemblance to a theoretical risk free asset. The levered

beta of Sonae MC was computed by taking the industry average betas (11

retailers were considered), deleveraging them and weighting them (at the

companies’ market capitalizations) to a single beta. We then took the industry

average capital structure as we assume this to be a long term tendency for

Sonae and arrived at the firm’s levered beta. As for the market premium, we

considered a 5.5% average as suggested by common literature31

. We also took

into account, due to the deteriorated macroeconomic environment of

Portugal, a country beta32

which was obtained by performing a regression of the

PSI20 Index with the MSCI World Index for a 4 year monthly time frame. The

cost of debt was computed as the average of the current Portuguese CDS

spread, the current Sonae’s bond yields and a synthetic rating through the firm’s

theoretical rating based on its Interest Coverage Ratio (ICR) and averaged the

results33

. With all of this, we arrive at a WACC of 8.57% for Sonae MC.

30

When we projected balance sheet items, we split RP’s invest capital amongst the retail business units to account for their true FCF 31

Source: Mckinsey Valuation – “Measuring and Managing the Value of Companies” – 5th Edition

32 Country Beta is a measure of the systematic risk associated with the country and is translated into the WACC by incorporating the needed return that a

well diversified investor would require to invest in the given country 33

Synthetic Rating spread over risk free – 4%, Portugal’s CDS spread of first 4 months of 2013 – 4.32% and Sonae’s Bloomberg bond spread – 4,39%

FCF (millions €) 2013 2014 2015 2016 2017 2018 2019 2020

Turnover 3252 3262 3291 3335 3387 3446 3549 3661

EBITDA (includes E&A) 233 234 236 239 243 247 254 262

EBIT 143 144 145 148 152 155 162 167

NOPLAT 105 106 107 109 111 114 119 123

Depreciation -76 -76 -77 -77 -77 -78 -78 -80

Operating Cash Flow 182 182 184 186 189 192 197 203

Capex 77 85 81 83 89 90 116 95

Changes in NWC 41 -1 -3 -4 -5 -6 -10 -11

FCF 64 98 106 107 105 108 91 119

Discounted FCF 64 90 90 84 75 72 56 67

Present Values of FCF 597

Terminal Value 894 Terminal Growth at 1%

Enterprise Value 1491


Exhibit 29 - WACC assumptions


Exhibit 31 - Multiples comparison

Source: Bloomberg


PAGE 15/34

Turnover (€ millions) 2013 2016 2018 2020

Base Case 3252 3335 3446 3661

Worst Case 3247 3259 3359 3468

Best Case 3276 3407 3588 3823

Stores 2013 2016 2018 2020

Base Case 441 455 467 486

Worst Case 441 449 457 466

Best Case 445 464 482 503

Sales per sqm (€ thousands) 2013 2016 2018 2020

Base Case 5,87 5,95 6,06 6,24

Worst Case 5,86 5,84 5,97 6,10

Best Case 5,87 5,95 6,08 6,35

EBITDA Margin (%) 2013 2016 2018 2020

Base Case 7,53% 7,00% 7,00% 7,00%

Worst Case 7,53% 6,90% 6,90% 6,90%

Best Case 7,53% 7,10% 7,10% 7,10%

0%

5%

10%

15%

20%

ROIC (%) WACC

Scenario Results (€

millions)

Enterprise

Value

Scenario

Probabilty

Final

EV

Base Case 1491 80%

Worst Case 1434 15%

Best Case 1551 5%

1485

Based on our assumptions and with a terminal growth rate of about 1%, we can

see that Sonae MC’s enterprise value (EV) is of €1.491 million. Our valuation

puts Sonae MC at 6.49 times EBITDA trading multiple compared to the industry

average of 6.04. However, this is due to the fact that it pays rents on all of its

assets (higher cost). Considering the EV/EBITDAR multiple, Sonae MC is

actually below the industry average which could be justified by its higher

EBITDAR margin. Regardless, the unit is generating value to Sonae’s

shareholders with a projected ROIC clearly above the WACC considered.

Sonae MC Valuation Scenarios

Despite our previous assumptions, we are aware that the food industry trends are

dependent on both the macroeconomic environment and the level of

competition in the industry. Since families are seeing their disposable income

decrease in light of austerity measures in the country, all the while shifting their

preferences to less costly products and even to Sonae’s competitors, we need to

imply some variability in our model in order to cope with these challenges. We

applied a scenario analysis based on three key factors: store openings, sales

per sqm and EBITDA margins. We attribute a probability of 80% to our base

case; however, we take into account that the worst scenario is more likely

than our optimistic scenario because the changes in the food industry advent

from the crisis add a higher uncertainty, we attribute a probability of 15% to the

former with 5% representing the latter to reflect a more conservative approach.

In the worst case scenario we take a smaller EBITDA margin all the while

decreasing our overall investment in terms of store openings. At the same time,

we considered a more severe impact in the sales per sqm in the end of 2013

leading to a top-line revenue decrease. We were also stricter in our projections

of top-line recovery estimating that this recovery would occur a year later than on

our base case scenario previously mentioned. We also assumed a lower growth

of the sales per sqm after 2016. This scenario results in a top-line CAGR of -

0.17% from 2013 to 2016 and 1.57% from 2016 to 2020. All in all, this leads the

EV of this business unit to decrease from €1.491 million to €1.434 million.

The reverse analysis was made in a best case scenario with an increase in

both the EBITDA margin and store openings. We also took into account a less

severe impact on the sales per sqm in 2013 and an earlier top-line growth

recovery for the period immediately after. Under this scenario, top-line revenue

growth is expected to be represented by a CAGR of 0.88% from 2013 to 2016

and 2.25% from 2016 to 2020. This leads to an EV of €1.551 million. This

scenario analysis leads us to project our final EV for year-end 2013 to be of

€1.485 million.

Exhibit 32 - ROIC vs WACC comparison


Exhibit 33 - Scenario Analysis for key variable factors

Exhibit 34 - Scenario Results




PAGE 16/34

8,64% 9,14% 9,64% 10,14% 10,64%

3% 74 61 51 41 33

4% 100 82 67 55 45

5% 139 113 92 75 61

6% 209 163 129 104 84

7% 364 260 195 152 120Term

inal G

row

th

WACC(€

millions)

0%

5%

10%

15%

20%

25%

2000 2002 2004 2006 2008 2010 2012


GDP Growth Rate


-4

-2

0

2

4

6

8

10

12

14

16

0

50

100

150

200

250

2014 2015 2016 2017 2018 2019 2020

EBITDA (right axis)

EBIT (right axis)

Turnover (left axis)

Sonae MC Angola

Sonae SGPS has recently issued its interest in entering an emerging economy

through its food retail business unit. This move has been anticipated for awhile

due to the saturation that the firm has been facing in the Portuguese

economy. In this regard, Angola was the country chosen. The reality in Angola is

similar to Brazil in terms of the growth registered in recent years. From 2004 to

2007, the company registered a CAGR of its GDP of 17.60%. Despite the drop in

growth during the financial crisis, the country registered a growth rate of 8.41% in

2012. It is now the 5th

largest economy in Africa according to the IMF.

Regardless, the country is not even close to resembling a fully developed country

since, according to the firm, it only has 10% of its retail sector’s turnover

through organized supermarkets and hypermarkets. This is a risk, but also an

opportunity for Sonae MC to quickly develop its position in the Angolan market.

At the same time, due to the particular difficulties of entering such an uncertain

environment, Sonae’s entrance will be done through a joint venture with Condis,

a local company which is, coincidentally, owned by the businesswoman and

daughter of the country’s president, Isabel dos Santos34

. Sonae announced a

€79.6 million investment in 4 or 5 hypermarkets with the first opening in 2014.

We assume that the investment will be financed with 70% equity and 30% debt.

The WACC used was the same as the MC’s business unit but we added a

country beta to the computation of the cost of equity35

. For the cost of debt, we

used the previously computed risk-free rate but added a spread for Angolan’s

BB- rating. This leads us to a WACC of 9.64%. We also assumed that the stores

would start at a low EBITDA margin and sales per sqm but would tend to MC’s

current operational performance by the end of 2020. Also, cash flows were

projected based on Angola’s inflation rate.

All in all, we arrived at an EV of €91.77 million. A simple sensitivity analysis

highlights the acute variation of the EV to the terminal growth rate and the WACC

considered as the terminal value represents 140% of the EV. Indeed this move

from MC has the potential to unlock new top-line growth despite the fact that,

according to our assumptions, MC Angola would only represent 6.16% of MC’s

EV. This value would increase substantially if we assumed additional store

openings in the country. For our investment case, however, due to the fact that

there is still much uncertainty around the actual entrance of MC to Angola, we

attribute a 50% likelihood of the plan actually going forward and thus, considered

that influence on our final stock price.

34

Owner of 28.8% of Zon which is now finalizing its merger with another of Sonae’s business units – Sonaecom. 35

We used Brazil’s stock index BOVESPA due to the fact that Angola does not have a stock index and we considered Brazil a good proxy due to its resemblance to Angola as an emerging economy dependent on oil and future growth prospects

Exhibit 35 - Angola's GDP and Investment evolution

Exhibit 36 - MC Angola's operational forecasts (€ millions)


Exhibit 37 - MC Angola's Sensitivity Analysis



PAGE 17/34

0

500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

2012 2013 2014 2015 2016

Apparel Electronics and Appliance

Health and Beauty Home and Garden

Leisure & Culture Mixed Retailers

Others

-20%

-15%

-10%

-5%

0%

5%

10%

2008 2009 2010 2011 2012 2013

PT Food Retail Sales YoY

PT Non-Food Retail Sales YoY

Market Shares 2009 2010 2011

Worten 2,80% 3,00% 3,00%

Zara 2,20% 2,20% 2,20%

El Corte Inglés 1,90% 2,00% 2,10%

IKEA 1,20% 1,50% 1,70%

Fnac 1,40% 1,50% 1,50%

Leroy Merlin 1,00% 1,30% 1,40%

Hello 0,60% 0,90% 1,20%

Aki 0,90% 1,00% 1,00%

Rádio Popular 0,90% 0,90% 1,00%

Sportzone 0,80% 0,90% 0,90%

Media Markt 0,80% 0,70% 0,80%

Staples 0,80% 0,80% 0,70%

C&A 0,50% 0,50% 0,70%

Movif lor 0,80% 0,70% 0,70%

Decathlon 0,50% 0,60% 0,70%

Modalfa 0,60% 0,60% 0,60%

Casa 0,50% 0,60% 0,50%

Multiopticas 0,50% 0,50% 0,50%

H&M 0,40% 0,40% 0,40%

Pull & Bear 0,40% 0,40% 0,40%

Others 80,50% 79,00% 78,00%

Specialized Retail

Specialized Retail Industry Analysis

In the non-food retail sector, Sonae mainly competes in 3 sectors: consumer

electronics, sports apparel and the clothing segment. All three of these sectors

are largely more affected by the economic crisis than the food based retail

sector. As opposed to food products, these products are not considered first

need goods which is translated into lower purchases from consumers when their

disposable income decreases. In 2007, non-food retail represented 54.9% of total

retail turnover and this weight declined to 51.2% by 2011. By 2016, this weight is

projected to decrease to 48.8% at a CAGR of its sales of -0.77%. The apparel

segment and the electronics segment are projected to lead the decline in

sales of the non-food retail industry with an estimated CAGR, between 2012 and

2016, of -1.13% and -2.35%, respectively36

.

Looking at Worten, Sonae SR’s electronic and appliances brand, we can see that

it benefits from a leadership position in the non-grocery market. It has increased

its market share from 2.7% in 2008 to 3% in 2011. Keep in mind that the

presented market shares are defined in terms of value in relation to the overall

non food retail sector. Its closest competitor, Rádio Popular, also increased its

market share during the same time period from 0.9% to 1%. Media Markt follows

in third with a market share of 0.8% in both time periods. As observed, Worten

has a sustained competitive position and has been cementing its leadership

position in recent years. It was, at par with Continente, voted as one of the

most trusted brands in Portugal37

.

In the sports apparel segment, Sportzone enjoys a leadership position

detaining 0.9% of market share in 2011 (up from 0.8% in 2008). Its closest

competitor is Decathlon which has had a threatening performance jumping

from 0.4% of market share to 0.8% in the same time period. The entrance and

successful establishment of Decathlon in the Portuguese market comes from its

product offering at attractive prices38

and the company already stated that they

plan to reinforce their position in Portugal. Also, Sports Direct acquired in 2010 a

50.1% stake in Portugal becoming the third largest sports retailer. As of April

2012, it had 13 stores in Portugal and the company is planning to increase their

investment in the country39

.

On an opposite note, Sonae SR has mainly two brands of clothing stores,

Modalfa and Zippy. These brands are not market leaders and, looking at the

36

Source: Euromonitor Portuguese Retail Market Report – 2011 37

Source: Company information 38


Source: Sports Direct Annual Report - 2012

Exhibit 38 - Portuguese food and non-food retail sales comparison

Source: Bloomberg

Exhibit 39 - Non-food sales forecasts by

segment (€ millions)



Exhibit 40 - PT's non-food retailers' market shares (value)


PAGE 18/34

0

50.000

100.000

150.000

200.000

250.000

2007 2009 2011 2013 2015 2017

Grocery Retailers Non-Grocery Retailers

-4%

-2%

0%

2%

4%

6%

8%

0

200

400

600

800

1.000

1.200

2008 2009 2010 2011 2012

Turnover (€ millions) (left axis)

EBITDA Margin (right axis)

EBIT Margin (right axis)

-20%

-15%

-10%

-5%

0%

5%

10%

-50

-40

-30

-20

-10

0

2008 2009 2010 2011 2012 2013

ESP Consumer Confidence Index (left axis)

ESP Non-Food Retail Sales YoY (right axis)

industry numbers, we can clearly see that Inditex (Zara) assumes the leadership

position with 2.2% of market share in 2011. El Corte Inglés is the second player

and Modalfa only appears at number four with a 0.6% market share. Unlike the

remaining non-food brands, the fashion apparel industry is much more

fragmented and consumers are becoming more price-driven benefiting low

cost clothing retailers40

.

In Spain, the reality lived is quite similar to Portugal’s. The consumer

confidence index has dropped significantly, as well as the non-food retail sales

values. The non-food retail sector represented, in 2007, €115.7 billion of total

retail sales of €210 billion (55.1%). This value is projected to decrease to €80.6

billion by 2017 alongside a decrease to €171 billion of total retail sales41

. This

highlights the negative environment lived in Spain as unemployment levels are

considerably higher than in Portugal and, as such, Spanish families are expected

to cut expenses of non necessary goods.

Sonae SR’s brands have no significant market position there due to their late

entrance into this market (Sportzone 2008 and Worten 2009). Regardless, in

spite of the deteriorated economic environment, Sonae SR wants to keep on

investing by opening more stores in the next few years42

. Currently, the market

leader in the sports apparel segment is Decathlon with 1.3% market share of total

non-food retail turnover and in the consumer electronics segment, the market

leader is Media Markt with 1.7% market share43

.

Sonae SR Valuation

As mentioned, in Portugal, Sonae SR’s brands have a very good and sustainable

market leadership position with the exception of the clothing segment. Despite

this, in recent years, this unit has seen its revenues considerably decrease from

€988 million in 2009 to €845 million in 2012 representing a CAGR of -5.08%.

This is justified by the economic crisis which, as explained, has a more direct

(negative) impact on discretionary goods.

Regarding our projections, we estimate the top-line growth in the same way we

did for the food retail division. We assume a constant average store size while

projecting future store openings and sales per sqm. Again, we need to take into

account that the impact that the crisis and austerity measures will have on

this unit will be more severe than in the food retail segment. We estimate a

decrease in the sales per sqm by the end of 2013 of 2.00%, with recovery

occurring by 2015. However, this industry is less saturated than the food

40


Source: Euromonitor Spanish Retail Market Report – 2012 42


Source: Euromonitor Spanish Retail Market Report – 2012

Source: Bloomberg

Exhibit 42 - Spanish food vs non-food retail sales (€ millions)

Source: Euromonitor Spanish retail market report - 2012

Exhibit 43 - SR Portugal's operational performance


Exhibit 41 - Spanish non-food retail sales and consumer confidence index


PAGE 19/34

EBITDA Margins 2010 2011 2012

Hennes & Mauritz 22,73% 18,53% 18,01%

Inditex 18,28% 18,29% 19,54%

Brow n Group 13,86% 13,16% 13,02%

Clothing Apparel 18,29% 16,66% 16,86%

Ted Baker 12,98% 11,27% 12,67%

JD Sports 8,98% 7,22% 4,87%

Sports Direct 8,54% 8,45% 8,45%

Sports Apparel 10,17% 8,98% 8,66%

Target 7,79% 7,62% 7,11%

Best Buy 5,07% 4,63% 2,90%

Darty 2,86% 1,43% 1,43%

Cons. Electronics 5,24% 4,56% 3,81%

Industry Average 11,23% 10,07% 9,78%

-25%

-20%

-15%

-10%

-5%

0%

0

50

100

150

200

250

300

350

400

2008 2009 2010 2011 2012


EBITDA Margin (right axis)

EBIT Margin (right axis)

retail segment and, as such; the future potential is deemed to be higher.

Therefore, we estimate its sales per sqm to reach higher growth rates than in

Sonae MC (3.00% as opposed to 1.50%). With our assumptions, we expect a

top-line CAGR of 0.44% from 2013 to 2016, and 3.99% from 2016 to 2020.

At the same time, due to the increase of the business units’ stocks44

before the

impact of the financial crisis, its EBITDA margin decreased from 6.49% in 2008

to 3.25% in 2012. As a consequence, Sonae SR is shifting its stock

management system and logistics organization to prevent this from happening a

second time45

. It is also investing in online platforms which will help to limit its

physical stock exposure. As a consequence, we expect EBITDA margins to

steadily increase in the future reaching, by 2020, a value of 8.00%. We

considered this value below the industry average as Worten is responsible for

most of the turnover for Sonae SR46

and its segment has considerably lower

EBITDA margins than the sports and fashion apparel segments47

.

Exhibit 45 - Sonae SR PT's operational forecasts

At an international level our focus turns to Spain48

. As it occurred in Portugal, the

financial crisis had a deteriorating impact on consumers’ disposable income.

Furthermore, since Sonae SR’s brands do not benefit from a strong competitive

position, it becomes increasingly difficult to justify Sonae SR’s decision, in

2008, to enter the Spanish market. In spite of the tough situation, the

international division has been somewhat successful offsetting some of the

decrease in turnover from the Portuguese market registering an increase in

turnover from €144 million in 2009 to €335 million in 2012 representing a

staggering 32.55% CAGR. However, this increase comes from aggressive

store openings occurred in the given time period and not through LFL sales. In

spite of this, due to their only recent expansion to international markets and,

obviously, the inability to predict such an acute impact of the financial crisis,

EBITDA margins have been consistently negative (-15.66% in 2012).

44

In apparel segment, products are usually bought in advance based on demand estimates 45


Source: Sonae SGPS’ Investor’s presentation – April 2013 47

Source: Bloomberg. Industry refers to non-food retailers. We have considered competitors from the three segments in which Sonae SR is present in. However, we do not have the ability to further investigate each segment as the company segment the SR division by geography and not by concepts 48

Other countries we considered in an aggregated manner due to their, still, relatively low importance

Projections PT 2012 2013 2014 2015 2016 2017 2018 2019 2020


Grow th (%) -7,97% -1,97% -0,30% 1,44% 2,65% 3,63% 4,26% 3,93% 4,13%

LFL (€ millions) 854 828 824 837 857 890 926 966 1003

Grow th (%) -6,97% -2,00% -0,52% 1,34% 2,33% 3,45% 3,93% 3,92% 3,90%

Stores 411 415 422 429 437 445 453 461 470


EBITDA (€ millions) 27 37 41 46 52 58 65 72 80

EBITDA Margin (%) 3,25% 4,50% 5,00% 5,50% 6,00% 6,50% 7,00% 7,50% 8,00%

Exhibit 44 - EBITDA margins of comparables

Source: Bloomberg

Source: Company information and Analyst’s estimates

Exhibit 46 - SR International's operational performance



PAGE 20/34

WACC SR PT SR INT

Risk Free Rate 2,73% 2,73%

Market Risk Premium 5,50% 5,50%

Beta Levered 1,07 1,07

Beta Country Portugal 1,30 1,30

Beta Country Spain 1,57 1,57

Cost of Equity 10,38% 11,98%

Cost of Debt 6,97% 6,97%

E/V 82,82% 82,82%

D/V 17,18% 17,18%

Tax Rate 26,50% 26,13%

WACC 9,48% 10,81%

0%

1%

2%

3%

4%

5%

6%

7%

0

200

400

600

800

1.000

1.200

1.400

1.600

1.800

2013 2014 2015 2016 2017 2018 2019 2020


Capex as a % of Turnover (right axis)

Despite the international division not breaking even thus far, Sonae SR has

stated their interest in continuing the investment as it could present itself as a key

area in terms of growth potential. Due to this, we estimate a higher number of

store openings for the international division than we did for the Portuguese

division (but at a slower pace than in recent years), all the while reflecting the

future potential when we analyze the increase in sales per sqm. In this case, we

estimate that, despite a decrease for 2013 and 2014, the sales per sqm will

steadily increase reaching a growth rate of 4.50% by 2020. Regardless, we have

given a 2 year time frame for the recovery of the EBITDA margin, reaching 8.00%

by 2020. These assumptions lead to a top-line CAGR of 3.70% from 2013 to

2016 and 9.48% from 2016 to 2020.

Exhibit 47 - Sonae SR International's operational forecasts

Concerning the investing cash-flow, we took the same approach as we did in the

food retail unit of Sonae SGPS. The capital expenditures will reflect new store

openings as well as the refurbishment of existing assets. However, a key

difference is that Sonae SR is much more recent and thus, has fewer stores than

Sonae MC. Since the company has been investing through capital light policies

and we project a higher increase in the number of stores than in Sonae MC,

capital expenditures, as a percent of sales will tend to decrease.

Exhibit 50 - Sonae SR's FCF projections

Projections INT 2012 2013 2014 2015 2016 2017 2018 2019 2020


Grow th (%) 5,81% 0,42% 1,49% 5,44% 7,61% 8,20% 10,11% 9,69% 9,92%

LFL (€ millions) 323 327 338 348 374 407 448 492 542

Grow th (%) 1,93% -2,50% 0,34% 1,82% 3,76% 4,98% 6,76% 6,54% 6,93%

Stores 146 150 154 161 169 180 189 198 207


EBITDA (€ millions) -52 -25 0 7 16 21 28 35 45

EBITDA Margin (%) -15,66% -7,50% 0,00% 2,00% 4,00% 5,00% 6,00% 7,00% 8,00%

FCF (millions €) 2013 2014 2015 2016 2017 2018 2019 2020

Turnover 1165 1168 1198 1248 1311 1391 1472 1562

EBITDA (Includes E&A) 12 42 55 69 81 95 110 128

EBIT -62 -32 -19 -5 7 22 38 57

NOPLAT -62 -32 -19 -6 5 16 28 42

Depreciation -70 -69 -69 -69 -68 -68 -67 -65


Capex 73 74 74 75 73 73 70 70

Changes in NWC -23 11 -2 -4 -5 -7 -8 -8

FCF -42 -48 -23 -8 5 18 32 45

Discounted FCF -42 -43 -19 -6 4 11 18 23

Present Values of FCF -54 Terminal Growth for SR PT at 1.50%

Terminal Value 277 Terminal Growth for SR INT at 2%



Exhibit 48 - SR's Capex forecasted evolution



Exhibit 49 - WACC Computation



PAGE 21/34

2010 2011 2012

Hennes & Mauritz 2,32 2,53 2,68

Inditex 1,91 2,13 3,46

Esprit 1,02 0,35 0,56

Sports Direct 0,69 0,73 1,22

Brow n Group 1,29 1,06 1,53

Next 1,06 1,44 1,76

Target 0,75 0,68 0,72

Darty 0,13 0,08 0,14

Industry Average 1,15 1,12 1,51

Industry / Yearly Average

Sonae SR Implied Valuation

1,26

0,17

Comparables Specialized RetailEV/Sales

Scenario Results (€

millions)

Enterprise

Value

Scenario

ProbabiltyFinal EV

Base Case 223 80%

Worst Case 91 15%

Best Case 384 5%

211

Turnover (€ millions) 2013 2016 2018 2020

Base Case 1165 1248 1391 1562

Worst Case 1154 1179 1278 1404

Best Case 1177 1309 1491 1717

EBITDA (€ millions) 2013 2016 2018 2020

Base Case 12 67 93 125

Worst Case 2 56 77 103

Best Case 23 79 109 149

Stores 2013 2016 2018 2020

Base Case 565 606 642 677

Worst Case 558 581 607 636

Best Case 570 621 665 708

The results shown above are the aggregated FCFs of both the national and the

international divisions. Each of the cash flows were discounted independently

using the same approach as we did for Sonae MC. However, the WACC of both

divisions are different due to the beta country used49

. Therefore, the WACC for

Sonae SR Portugal is 9.48% while for the international division the WACC

considered was 10.81%. At the same time, we also assume a higher terminal

growth rate for SR than for Sonae MC since the latter is clearly in a more mature

market. Therefore, we assume a value of 1.5% for the Portuguese division and

2% for the international division. We can clearly see that the value advent from

SR comes from its terminal value which represents €277 million. The EV of

Sonae SR, based on our assumptions is of €223 million. We can clearly see

that Sonae SR is below the EV/Sales multiples of its peers. This is obviously due

to the fact that the international division is, as of 2012, actually destroying

value due to its negative EBITDA margins.

Sonae SR Valuation Scenarios

A scenario analysis becomes even more important in this business unit

due to its higher volatility in relation to Sonae MC. We applied the same

principles for the different scenarios built by changing our assumptions of the

EBITDA margins, sales per sqm and store openings. In the worst case scenario,

we assume a lower number of store openings in Sonae SR as a whole as a result

of the macroeconomic pressure and increased competition faced by each of the

brands. Sales per sqm were projected to have a steeper decrease in 2013 and in

2014. The recovery of the sales per sqm will also be slower while reaching, by

2020, 50bps less than our original forecasts. We also assume a slightly lower

EBITDA margin and an additional year of recovery of the margin for the

international division. With this, we reach an EV of merely €91 million.

In the best case scenario, we applied the opposite approach where we were a

bit more optimistic in terms of macro environment and operational performance.

All in all, we arrived at an EV of €384 million. This wide range is a consequence

of the weight of the terminal value on the EV as currently; most of the value

generated comes from future growth opportunities and not from the current

operational performance. The main conclusion we can take from this analysis is

that there is indeed a growth prospect in this business unit but it also comes with

a significant risk in light of the recent macroeconomic environment and the

market positions of SR’s brands in the future. With a probability of 80% of our

base case coming true, 15% for the worst case scenario and 5% for the best

case scenario, we arrive at a final enterprise value of €211 million.

49

For the international division, we ran a regression between the Spanish IBEX stock index and the MSCI for four years of monthly returns

Exhibit 51 - Multiples comparisons

Source: Bloomberg

Exhibit 52 - Scenario Analysis for key variable factors

Source: Bloomberg

Exhibit 53 - Scenario Results

Source: Bloomberg


PAGE 22/34

SLB Transactions Period ValueCapital

GainsYield

Azambuja Logistics

Platform1H10 33 7 7,62%

2 Modelo Stores 1H10 12 3 7,23%

4 Modelo and 3

Shopping Stores2H10 65 29 7,00%

1 Continente and 1

Worten1H11 42 17 6,10%

Total 152 56 6,99%

20%

30%

40%

50%

60%

60%

65%

70%

75%

80%

85%

90%

2007 2008 2009 2010 2011 2012

Sonae MC (left axis)

Sonae SR (right axis)

0%

20%

40%

60%

80%

100%

120%

140%

0

20

40

60

80

100

120

140

160

2008 2009 2010 2011 2012

Turnover (€ millions) EBITDA (€ millions)

EBIT (€ millions) EBITDA Margin (%)

EBIT Margin (%)

Retail Properties

Sonae RP Valuation

Sonae RP is responsible for managing the stores operated by the other retail

business units. It is also currently seeking to conduct SLB operations. From its

creation in 2009, RP has merely conducted a total of 8 SLB operations on a

Triple Net basis50

, with the last two being in the first half of 2011. These SLB

operations resulted in a total cash-in of €153 million corresponding to

approximately €56 million of capital gains and were finalized at attractive yields. It

has been two years since any additional operations were carried out which is

largely due to the unattractiveness of actually buying an asset and renting it

out in light of the current economic reality.

Currently, the firm has a level of freehold51

of 77.43% of the food retail stores it

operates. This is considerably above the industry average of 55%52

. This level

of freehold has been decreasing from 80.18% in 2010, however, this decrease is

not due to the SLB operations but rather because Sonae has been adopting, as

mentioned, a capital light investment policy resorting to franchising and

partnerships. The ownership situation of Sonae SR’s stores has been largely

different as the freehold decreased from 38.28% in 2009 to 26.24% in 2012 (40%

nationally and 5% internationally). This occurs because this business unit is

much more recent and has been registering a higher increase in terms of store

openings through the same type of capital light investments, such as franchising

schemes and joint ventures in Spain. Regardless, this business unit is extremely

far away from reaching the goal of decreasing the level of freehold of its food

retail properties to industry standards through its asset monetization program.

To perform RP’s valuation we need that this unit’s turnover is based on the

rents received from the retail units. At the same time, keep in mind that the

cash in resulting from asset sales are actually considered operational revenue in

this unit. Due to the fact that this business revolves solely around the

management of retail properties, its EBITDA margin has remained constant at

around 90% with only spikes occurring whenever SLB operations were finalized.

We are not taking into consideration any additional SLB operations in our DCF

valuation due to the fact that it has been increasingly difficult to find demand

since the real-estate market has been stale due to the crisis.

We maintain a constant level of freehold in the food retail stores which implies

admitting that for every four new sqm, three will be owned by Sonae while one

50

Tenant is responsible for paying real estate taxes, building insurance and maintenance fees of the leased property 51

Freehold represents the fraction of total owned sqm versus total sqm operated by the retail units 52

Source: Sonae SGPS’ Investors’ Presentation – April 2013

Exhibit 54 - Completed SLB Transactions (€ millions)


Exhibit 55 - Freehold levels by unit


Exhibit 56 - RP's operational performance



PAGE 23/34

will be rented out (~77% freehold). For the non food retail, we follow the same

approach for the Portuguese operations although we slightly decrease the

freehold of international operations to account for the capital light

investment policy. Also, due to the macroeconomic environment, we are

expecting a decrease of rents in 2013 by 3.00% which will progressively

decrease to evidence a recovery in 2016 and, ultimately, reach inflation rate

levels of, approximately, 1.50%.

Exhibit 57 - Sonae RP's FCF projections

As a result, we value Sonae RP at an EV of €783 million with a terminal growth

rate at the level of the predicted inflation and a WACC of 9.62% which

corresponds to an average of the retail units WACC. This is obviously explained

due to the fact that these business units are largely interdependent. However, if

we were indeed to analyze RP’s value at the property yields of past transactions

(around 7.00%), the EV would climb substantially to approximately €1.131

million. However, we do not consider this yield to be a truthful measure simply

because it does not account for the increased risk of real estate properties

advent from the crisis since 2011 or the fact that Sonae RP’s main business is

managing the stores and not actually selling them.

Shopping Centres

Shopping Centres Industry Analysis

The Shopping Centres segment is part of the real estate industry’s commercial

sector. In this segment, it is extremely important to understand what drives the

value of shopping centre development and property ownership. In this case, the

Mark-to-Market value of the assets will depend on the future cash flow

prediction from each asset and the yields associated with each project. These

factors depend mainly on the occupancy rates of the development centres, the

rents charged by the property owner to the tenants and the overall well being of

the economy (including interest rates, unemployment rates, credit access and

FCF (millions €) 2013 2014 2015 2016 2017 2018 2019 2020

Turnover 116 114 112 112 113 114 117 120

EBITDA (Includes E&A) 107 105 103 103 104 105 108 110

EBIT 82 81 79 79 80 81 84 87

NOPLAT 60 59 58 58 59 60 62 64

Depreciation -70 -69 -69 -69 -68 -68 -67 -65


Capex 24 24 24 23 23 23 23 23

FCF 61 60 59 59 59 60 62 65

Discounted FCF 61 54 49 44 41 38 36 34

Present Values of FCF 358

Terminal Value 424 Terminal Growth at 1,5%




PAGE 24/34

affluence to shopping centres) which have a direct impact on real estate yields53

.

It should also be noted that we will focus our attention on Europe (Portugal and

Spain mainly) and Brazil due to their importance to Sierra’s portfolio.

In Europe, the shopping centre sector has been facing the influence of lower

consumer expenditure and lack of credit access. In 2012, the completed projects

represented 6.5 million sqm of added GLA. This represents an increase from

2011 which stood at 5.2 million sqm of GLA; however, we can see that the

number of new projects has decreased tremendously from the beginning of

the financial crisis. For year-end 2013, the projection is for only a mere 5.5 million

sqm of new GLA. The number of shopping centre projects expected to be

completed by the end of 2013 is of 274 with the majority, 164, being in Eastern

European countries such as Russia, Poland and Turkey. Despite this, the

pipeline in Europe has continuously fallen below forecasts with the general

predictions, for 2012, being 6.9 million sqm of added GLA which came 0.4 million

sqm short on actual figures due to delays and project terminations54

.

In Portugal, the macro environment is taking its toll on shopping centre

development. In the end of 2012, there was approximately 0.2 million sqm of

proposed projects to complete by the end of 2015. However, only about 70

thousand are actually under construction with delays expected making it so that

future projections remain dim. Despite this, Portugal is still above the

European average in terms of Shopping centres GLA per 1000 inhabitants

representing around 280 million versus the European average of approximately

250 million sqm. Spain presents itself just below the European average with

around 230 million sqm of GLA. Both of these markets are reaching maturity

which is putting pressure on the operational efficiency of current shopping centre

developers54

. However, despite similarities in the industry, the Spanish market

is showing a more rapid recovery than Portugal’s as it accounts for 0.5 million

m2 of the total European pipeline projections of 5.5 million m2. On the other

hand, Portugal is expected to only represent 0.1 million sqm by year-end 2013.

In Europe, due to the financial crisis, real estate yields have come under

upward pressure in 2012, particularly in Portugal, Italy, Spain, Greece, France

and the Netherlands. One of the reasons for this is the drop in affluence to

shopping centres and other infrastructure which puts the tenants under an

operational pressure. This pressure eventually leads to the closing of stores and,

as such, the owners have an incentive to reduce the rents in order to

maintain high occupancy rates. However, the European average yield

decreased in the last year from 6.92% to 6.88% following the growing importance

53

Real Estate yield is equivalent to a cost of capital which translates into the return and risk from a given project 54

Cushman & Wakefield’s Shopping Centre Development Report – September 2012

Source: Cushman & Wakefield’s Shopping Centre Development Report – Sep 2012

Exhibit 59 - European GLA per 1000

inhabitants (million sqm)


Exhibit 60 - Shopping centre Pipeline for 2013 (million sqm)


Exhibit 58 - European shopping centre evolution


PAGE 25/34

0

2

4

6

8

10

12

14

16

0

100

200

300

400

500

600

2006 2007 2008 2009 2010 2011 2012 2013 2014

GLA (million sqm) (right axis)

Number of Shoppings (left axis)

Shopping Centres

by Region

Shopping

CentresWeight

GLA (million

sqm)Weight

North 19 4,1% 0,49 4,3%

Northeast 62 13,4% 1,74 15,1%

Center West 42 9,1% 0,89 7,7%

Southeast 257 55,5% 6,75 58,3%

Southeast 83 17,9% 1,71 14,7%

Total 463 100% 11,59 100%

of Russia, Romania, Poland and Turkey in terms of both GLA and future

projections55

. However, in Portugal, yields increased from 7.28% to 7.61% while

in Spain, yields showed an even steeper growth from 6.83% to 7.51%56

.

Lastly, we also need to look at Brazil as it is becoming one the most

dominant markets for Sonae Sierra. The shopping centre segment in Brazil is

experiencing a completely different environment than that of Portugal or the

remainder of Europe. Between 2006 and 2012, the number of shopping centres

has increased from 351 to 457. The total GLA increased by more than half in

the same time period going from 7.492 million sqm to 11.403 million sqm. The

number of visits to shopping centres went from 203 million per month in 2006 to

398 million in 2012. As a consequence, tenant turnover increased by 23.17%

per annum. These effects were also evidenced on Brazil’s yields which dropped

from 8.58% in 2008, to 8.24% in 201251

.

These amazing results are a consequence of Brazil’s thriving economy. With the

arrival of the World Cup and the Summer Olympics, the investment in shopping

centres is not expected to slow down anytime soon with a projection of an

added 40 shopping centres by the end of 2013 representing an increase of 1.4

million m2 of GLA. In 2014, the number of shopping centres is projected to

increase by 32 (confirmed projects), representing an added GLA of nearly 1

million sqm57

. It is important to note, however, that the development of shopping

centres in Brazil is currently polarized in the Southeast region of Rio de

Janeiro and São Paulo which represented, in 2012, 55.5% of the total number

of shopping centres.

Sonae Sierra Valuation

Sierra is valued through the 2007 INREV58

NAV framework. Its value is assessed

by this independent agent and it computes the market value of the assets by the

adaptation of future cash flows and discounts them at the real estate yields

associated with the infrastructure characteristics. Keep in mind that, under this

framework, each asset is valued as if a potential theoretical sale was done in

order to reflect the Mark-to-Market value of Sierra’s infrastructure assets.

Sonae Sierra has two distinct factors that influence its NAV. The first factor is the

direct income which comes from the operational performance. The second factor

is the indirect income which represents the influence of real estate yields on the

firm’s market value. In this regard, a yield increase would lead to a loss

recognition in the income statement of Sierra as indirect results.

55

Cushman & Wakefield’s Shopping Centre Development Report – September 2012 56

Sonae SGPS – Annual Report 2012 57

Source: ABRASCE – “Associação Brasileira de Shopping Centres” 58

European Association for Investors in non listed Real Estate Vehicles. The main purpose was to standardize Real-Estate valuation through transparency for comparison purposes.

Exhibit 61 - Brazil's shopping centre sector development

Source: ABRASCE

Exhibit 62 - Brazil's shopping centres segmentation by geography

Source: ABRASCE


PAGE 26/34

-120

-100

-80

-60

-40

-20

0

20

40

60

80

100

2010 2012 2014 2016 2018 2020

Direct income Indirect income Net income

0

10

20

30

40

50

0

200

400

600

800

1.000

1.200

1.400

2009 2010 2011 2012 2013

Real estate NAV (lef t axis)

NAV per share (€) (right axis)

New Centres Location YearGLA (million

sqm)

Capex (€

million)Stake

Boulevard Londrina Brazil 2013 48 88 28%

Passeio das Águas Brazil 2013 78 167 33%

Hofgarten Solingen Germany 2013 29 120 50%

Adora Mall Romania 2014 59 111 100%

0

50

100

150

200

250

300

2010 2012 2014 2016 2018 2020

Turnover EBITDA

As a whole, Sierra’s operational performance has been showing clear signs of

resilience. Occupancy rates have remained at around 97% in the past four

years. Rents from the tenants have decreased in Portugal by -4.2%, in Spain by -

5.2% and in Greece by -0.8%. However, Italy, Brazil and Germany were able to

sustain the rental income which actually translated, from 2011 to 2012, to an

increase of 0.3%. Tenant sales have shown a 1.5% decrease, from 2011 to

2012, with Europe representing -4% and the EBITDA margin increased from

49.67% in 2011 to 51.17%. All in all, from 2010 to 2012, the company’s direct

net income has grown by 3.95% per year which, in light of the current

economic conditions is truly impressive.

Sierra currently has four confirmed projects which should, together, represent an

investment of €486 million and will add 214.000 m2 in GLA. Two of these

investments will be in Brazil, one in Germany and the remaining in Romania.

What we can extract from this is that the company is acknowledging the difficulty

of its traditional markets and is investing in countries which have been much less

affected by the financial crisis. For 2013, we expect the Iberian market and

Greece to continue struggling with a decrease of rents but a stable

occupancy rate. However, we project that this will be more than compensated by

Brazil, Germany and Romania due to their growth in this sector and their

increased importance in Sierra. The increased importance of these countries will

continue to provide an increase in revenues and we project this increase to be of

around 5.77% by year end 2013 with an EBITDA increase of 3.79%.

On the other hand, the indirect income requires a more conservative

approach on our part. In fact Sierra only returned to a positive net income in

2010 in spite of consistent increases in the direct income. In 2012, it returned to

negative net income due to a negative €108 million posted as indirect income.

This is due to the real estate yields evolution in recent years. In fact, the Open

Market Values (OMV) of Sierra’s properties has greatly deteriorated in Portugal

and Spain due to the rise of its yields. In Brazil however, the opposite occurred

which was able to offset some of the negative impact of the European Market59

.

As a consequence of Sierra’s assets market value deterioration, from 2007 to

2012, the NAV per share of Sierra depreciated by a CAGR of -9.33%, going from

approximately €53 per share to €32 per share. We believe that the yields will

continue to increase in the Iberian market, Greece and Italy, while Germany

will remain stable and Brazil and Romania will experience a slight yield

decrease. These projections were done looking at the average of the past four

years’ yield evolutions in each country. This leads us to project a recovery of the

59

Source: Sonae Sierra’s Annual Report – 2012

Exhibit 65 - Sierra's Net income breakdown (€ millions)

Exhibit 66 - Sierra's NAV evolution and forecast (€ millions)

Source: Company information




Exhibit 64 - Sierra's new projects timeline

Exhibit 63 - Sierra's operational performance (€ millions)


PAGE 27/34

0

500

1.000

1.500

2.000

2.500

3.000

3.500

2008 2009 2010 2011 2012

Net Debt without Sierra

Net Debt with Sierra

100%

110%

120%

130%

140%

150%

160%

170%

180%

2008 2009 2010 2011 2012

Portugal Europe

net income to positive levels only in 2015 and a deterioration of its Real Estate

NAV from €1.050 million to €1.038 million, a discount of 1.14%. This results in

the decrease of the NAV per share to €31.92, from the previous €32.29.

Exhibit 67 - Yield evolution and forecast by country

As of 2012, this firm is now consolidated through the equity method to comply

with IFRS 11 meaning that it now counts as a financial investment in the parent

company’s balance sheet due to its Joint Venture nature. As a consequence,

Sonae SGPS issued, recently, restated balance sheet. From the graph on the

left, we can clearly see the main reason which led Sonae to be so eager to

deconsolidate the business unit as it represented 27.25% of Sonae SGPS’ total

net debt in 2011.

Telecommunications

Telecommunications Industry Analysis

Sonaecom is the business unit responsible for the telecommunications industry in

Portugal. The main focus, as explained, is the mobile industry through its

brand Optimus, as it is the highest contributor to the company’s turnover and

EBITDA. Both the SSI and Media segments are still extremely underdeveloped

which does not allow us to conduct a detailed analysis.

The mobile segment in Portugal is extremely concentrated with the main

Optimus’ competitors being PT (with the TMN brand) and Vodafone. By the end

of 2012, TMN was the market leader with a share of 43.5% of the market

followed by Vodafone with 41.6% and Optimus comes last with 13.4%60

. This

segment is amongst the most saturated in Europe as it had, by the end of

2012, a mobile penetration rate of 159.3% compared to Europe’s average of

128% with the number of subscribers remaining relatively constant.

At the same time, in the Portuguese market, service providers have been offering

plans to their clients allowing for free calls between people with the same plans.

This accentuates one of the key characteristics of this industry: network

externalities. The more people who have adhered to a given plan, the more

60

Source: ICP – Anacom, Mobile Segment – 2012

Real Estate Yields 2008 2009 2010 2011 2012 2013

Portugal 5,82% 6,71% 6,77% 7,28% 7,61% 8,03%

Spain 6,54% 7,15% 7,00% 6,83% 7,51% 7,76%

Italy 6,35% 6,62% 6,67% 6,53% 6,89% 7,00%

Germany 5,92% 6,09% 6,09% 6,09% 6,11% 6,12%

Romania 8,00% 9,00% 9,00% 8,75% 8,75% 8,63%

Brazil 8,58% 8,51% 8,51% 8,49% 8,24% 8,11%

Greece 7,00% 7,00% 8,50% 10,00% 10,50% 11,50%

Exhibit 68 - Sonae SGPS' net debt

breakdown (€ millions)



Exhibit 69 - Mobile Penetration rates in Europe and Portugal

Source: ANACOM


PAGE 28/34

0%

5%

10%

15%

20%

25%

30%

35%

750

800

850

900

950

1.000

2008 2009 2010 2011 2012

Turnover (€ millions)

EBITDA Margin (%)

EBIT Margin (%)

0

1

2

3

4

5

6

7

Mobile Termination Rates (€ cents)

0

5

10

15

20

25

2008 2009 2010 2011 2012

Optimus PT Vodafone

shifting costs those people will have as switching service provider will entail a

higher cost of their phone calls in the future. This is an extremely good industry

characteristic for the market leaders; however, since Optimus does not have a

leading position, it becomes increasingly difficult to acquire more

subscribers and thus increasing market share. Regardless, due to its brand

awareness and keen operational efficiency through strict investment and cost

control61

, Optimus remains a very solid brand with positive prospects in the future

as it has been evidencing an improved performance showing a 10% increase in

EBITDA margin from 2009 (around 20%) to 2012 (around 30%).

At the same time, ANACOM62

has been implementing a lower Mobile

Termination Rate63

(MTR) in recent years to benefit the consumers. This

translates into the fact that the larger operators will not be able to charge as

much as they used to on calls made to their networks by other operators. This

action, again, decreases the ARPU of the telecom companies. PT’s CEO, Zeinal

Bava, actually expressed his discontent stating that the telecommunications

sector is already under enough pressure64

. However, this move has been more

beneficial to Optimus since it has a lower market share and its users make

more calls to the larger operators’ networks. Regardless, due to the plans

mentioned above and the lower MTRs, the industry’s Average Revenue per User

(ARPU) has been depreciating in recent years.

These prospects are also translated into the recently announced merger between

Optimus and Zon Multimédia. These companies will share significant cost

synergies mainly advent from the rationalization of their operations in back office

functions, call centres and licensing fees. Furthermore, particularly when

considering that both of these companies together will be able to actively cross-

sell between different client bases, the merged entity will become a major

player in the “4Play”65

segment. Through ZON’s know-how concerning television

and internet and Sonaecom’s position in the mobile segment. These companies,

when merged, will see their position strengthened and be in a much better

competitive position to be able to compete with market leader PT.

Sonaecom Valuation

In December 2012, Zon and Sonaecom announced the ongoing negotiations for

the merger of Zon and Sonaecom’s Optimus as the obstacles that prevented this

merger were finally lifted66

. According to the companies, this deal will take the

61

Source: Sonae SGPS’ Investor’s Presentation – April 2013 62

Portuguese Telecommunications’ Industry Regulator 63

MTR – Cost to the origin’s caller operator charged by the recipient’s operator 64

Statement made in 2011 after continuous review from the European Commission on the subject of MTRs 65

4Play – Television, Internet, Mobile and Fixed 66

Mainly concerning Zon’s Shareholder structure as it did not allow any shareholder to have more than 10% of the company while some Zon shareholders were also PT’s shareholders.

Source: Companies’ Annual Reports


Source: ANACOM

Exhibit 72 - ARPU evolution of main players (€)

Exhibit 71 - Mobile Termination Rates

Exhibit 70 - Sonaecom’s operational performance


PAGE 29/34

Remaining Shareholders

Sonae SGPS

SonaecomIsabel dos

Santos

ZOPT

Zon

Optimus

74%

7,3%

50.01%

50%50%

42.69%

Unitel International Holdings 18,80%

Kento Holding Limited 10,00%

Isabel dos Santos 28,80%

Others 47,02%

Subtotal 75,82%

Free Float 24,18%

Total 100%

Sonae SGPS 53,95%

FT-Orange 20,01%

BCP, S.A 3,42%

Sonaecom Ow n Shares 1,18%

Subtotal 78,56%

Free Float 21,44%

Total 100%

Zon

Sonaecom

form of an in market merger meaning that most of the synergies would come

from cost savings. In light of this, the general consensus is that cost synergies

would come from a reduction of call centres, stores and headcount, less fees for

network usage and obviously, back-office operations. At the same time, this deal

also has the nature of a market-extension due to the ability to cross-sell

products between the different client base and an improved product offering as

they would be able to offer more effective “4Play” solutions67

.

Currently, Sonaecom’s shareholder structure is mainly composed by Sonae

SGPS with a 53.92% stake and France Télécom (FT) with 20%. However, Sonae

SGPS has struck a deal with FT in the beginning of 2013 giving the former the

ability to buy the 20% stake until June 2014 at €98.9 million. This value would

increase to €113.5 million if the merger between Optimus and Zon follows

through. Concerning Zon’s shareholder structure, it was largely diluted in 2011

year end, with the main shareholder having been Caixa Geral de Depósitos

(CGD) with a 10% stake. However, Isabel dos Santos, through Kento Holdings,

purchased CGD’s stake along with others to increase her position in Sonaecom

to 28.8% after the firm changed the statuses governing the shareholder structure

which did not allow any shareholder to hold more than 10% of the firm.

Following the approval of both of the company’s shareholders in the

beginning of this year, as well as the waiver from the Portuguese Securities and

Markets Commission to launch mandatory takeover bid (as deemed by

Portuguese legislation in these scenarios), the merger has become almost a

certainty with the remaining obstacle being the approval of the Portuguese

competition authority. Both companies have also agreed to set an exchange ratio

based on pre-announcement market values which would lead to the valuation of

Zon to be equal to 150% of Optimus68

.

For valuation purposes, we computed the pre-merger announcement stock price

of each firm by taking the average stock price of weekly returns in November

2012. This leads to a market cap for Zon and Sonaecom of €798 million and

€519 million, respectively. As seen, this implies Zon to be approximately 150% of

Optimus as stated by the companies. The merger will be carried out through an

investment vehicle called ZOPT which would own 50.1% of the new merged

entity and would be owned 50% by Sonaecom and 50% by Isabel dos Santos.

However, due to the fact that Optimus is currently 100% owned by Sonaecom,

Isabel dos Santos would need to buy a portion of Optimus from Sonaecom to

detain a 50% share of the new vehicle. For Isabel dos Santos to achieve this

parity position, she will need to make a cash offer of approximately €103 million

67

Through the combination Sonaecom’s Mobile and Fixed segment and Zon’s Media and Television 68

Sonae SGPS’ Investor’s Presentation – April 2013

Exhibit 73 - Zon and Sonaecom shareholder structure

Source: Companies’ information

Exhibit 74 - M&A structure

Source: Sonae SGPS’ Investor’s Presentation – April 2013


PAGE 30/34

00,5

11,5

22,5

33,5

4

11-2

012

12-2

012

01-2

013

02-2

013

03-2

013

04-2

013

05-2

013

Sonaecom Zon

0%

5%

10%

15%

20%

25%

0

20

40

60

80

100

120

140

160

180

2008 2009 2010 2011 2012

Turnover (€ millions)

EBITDA Margin (%)

to Sonaecom69

. After the cash offer from Isabel dos Santos, Sonaecom, besides

an ownership stake on the new merged entity through ZOPT, will still have a

direct participation on the entity with a stake of 7.27%.

To compute the value of the synergies, we assumed that the current stock price

would already reflect the synergies attributed to these companies. Due to this, we

observed the average of weekly returns in the month of April and the first week of

May 2013 following the announcement of the approval of both companies’

shareholders and the waiver of a public offering. This is translated into a market

cap for Zon and Optimus of €1.013 million and €625 million. By computing the

difference between these stock prices and the pre-merger announcement market

caps of both firms, we arrive at a value of the market’s perception of the potential

synergies of €321 million. Obviously, this computation implies a general belief

that the current stock prices of both firms reflect the true value of the

synergies and that no other information has been incorporated into these

companies’ stock prices. However, the value achieved is in line to general

consensus which has been between €300 million to €400 million.

These values lead to a €1.650 million valuation of the new merged entity,

and, considering the different stakes involved leads to a Sonaecom valuation of

€671 million. Considering that Sonaecom will become a holding company with a

50% stake on ZOPT and the SSI and Media business units, we apply a 10%

holding discount. We also take into account the likely purchase of FT’s position in

Sonaecom by Sonae SGPS and, as stated, this will rise to €113.5 million leaving

Sonae SGPS with a 73.92% stake on the firm. Sonae SGPS stake would,

therefore, amount to €333 million.

Investment Management

The investment management business unit currently operates 74 stores of the

brands MaxMat (DIY store) and MDS (insurance agency) with approximately

62.000 m2. Its turnover decreased, from 2008 to 2012 by a CAGR of 10.17%. As

of 2012, GeoStar, the travel agent, which was considered in the Investment

management business unit, was deconsolidated with the same reasoning as

Sierra’s deconsolidation. It now accounts as a financial investment in the holding.

This business unit only represents around 1.96% of Sonae SGPS’ total turnover.

Due to the lack of relevancy and information, we simply considered its book value

of equity by taking its 2012 invested capital and subtracting its book value of

debt. The book value of equity of this unit is approximately €81 million.

69

Value computed considering Zon’s pre-merger announcement stock price and Isabel dos Santos’ stake on Zon

Exhibit 75 - Sonaecom and Zon stock price evolution (€)

Source: Bloomberg

Exhibit 76 - Investment Management's operational performance



PAGE 31/34

0%

20%

40%

60%

80%

100%

120%

0,00

0,50

1,00

1,50

2,00

2,50

2008 2009 2010 2011

Debt/Assets (%) Equity/Assets (%) D/E ratio

Freehold Impact

Sonae SGPS has secured its financing needs until the end of 201470

and, as

previously mentioned, has evidenced a decrease in its net debt in recent years. It

has been able to do so due to strong cash flow generation from Sonae MC.

However, one of the major impacts that the sovereign crisis has had on Portugal

is the fact that there is less available capital to finance the country’s

companies. At the same time, Sonae also failed to achieve investment grade in

2012 as it was perceived as a highly leveraged company. The deconsolidation

of Sierra proved to be a good move both in terms of business clarification to

investors but also to take a considerable amount of debt of the balance sheet of

the company. We will now look into another way which was chosen by the firm

to release invested capital.

As previously mentioned, Sonae MC is considerably above the industry average

in terms of store ownership. In light of this, the current strategy of the firm

revolves around deploying less capital in its internationalization process. At the

same time, the importance of SLB operations cannot be overlooked. By selling a

store, Sonae MC would release a considerable amount of debt from its

balance sheet which would serve as a good indicator for investors. At the same

time, it would possibly lead to a resurgence of the firm’s intentions to acquire

the investment grade that failed in 2012 which would increase their access to

financing at lower costs. The reason behind this is that the current capital

markets in Portugal lack liquidity and, as such, it is becoming increasingly

expensive to finance through Portuguese banks.

SLB operations would also allow the firm to have a lot more flexibility,

particularly concerning the transition from hypermarkets to supermarkets in light

of the previously described consumer trends. Lastly, the cash-in resulting from

the sales of the assets could actually be used to finance growth opportunities

such as the entrance to Angola. All in all, it is extremely straightforward the

reason behind the importance attributed by the company to decreasing their level

of freehold.

In theory, the SLB operations should have no direct impact on the company’s

stock price. This occurs due to the fact that the market value of the assets

corresponds to the expected cash flow from that asset discounted at a given

yield. This cash-in would be compensated by the decrease in rents received.

However, if Sonae is able to perform SLB operations at attractive yields

(below our considered WACC), the EV of RP would increase, leading to an

70

Sonae SGPS’ Investor’s Presentation – April 2013

Exhibit 77 - Sonae’s Capital Structure

Source: Bloomberg


PAGE 32/34

106

108

110

112

114

116

118

120

122

0

2

4

6

8

10

12

14

2013 2014 2015 2016 2017 2018 2019 2020

Cash in from SLB (left axis)

Base Case - Rents (right axis)

With SLB - Rents (right axis)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

4,2

4,4

4,6

4,8

5

5,2

5,4

Value per sqm (€ thousands)

Real Estate Yields

0%

2%

4%

6%

8%

10%

12%

14%

0,00

0,10

0,20

0,30

0,40

0,50

0,60

0,70

0,80

0,90

Sonae SGPS (€) (left axis)

PT 10Y Bond Yields (right axis)

appreciation of the stock price. In light of this, we will analyze the impact of

closing these transactions at yields lower than the current WACC of RP. Keep in

mind that we are only looking at the food retail division as this is the one which is

considerably above industry average in terms of freehold.

The first thing that was done was to look at past transactions (mainly those in

2011) and compute the value of those assets at market values per sqm. After

achieving this, we look at the real estate prime yields for 2012 and 2013. These

yields were already used when computing Sierra’s value. However, in this regard

we needed to take a step further and project the yields until the end of the

forecasting period. In this regard, due to the volatile nature of the real estate

industry, we are expecting a yield increase also in 2014. From 2014 onwards,

we expect yields to decrease leading to a 7% yield in 2020 which is

approximately the same as it was in 2011.

With these yield forecasts, we are able to estimate the market values of real

estate properties by changing the value per sqm from 2011 on a year on year

basis. In this case, if we assume that one SLB operation per year will occur from

2014 to 2016 and two from 2017 to 2020, the freehold would decrease by a mere

2.36%, however, the EV of RP would climb from €783 million to €872 million.

This would lead to an appreciation of the stock price of Sonae SGPS from €0.86

to €0.90 for year-end 2013. However, closing SLB at these rates would be highly

unlikely in the near future, not only due to the stale real estate market, but also

due to the fact that Sonae RP’s main objective is not to actually conduct these

operations but rather manage the assets. Regardless, the main objective is not to

register capital gains but rather release invested capital to fund additional growth

opportunities while, at the same time, deleveraging the firm’s financial position.

Final Valuation Remarks

With the return of Portugal to the capital markets, investors’ are regaining their

trust in Portuguese companies and, as we can see, Sonae’s price has moved

in the opposite trend with the bond yields71

. Based on our valuation and on the

projected economic recovery and consequential depreciation of Portuguese

yields, we expect Sonae to carry on with this positive growth. However, we

also need to take into account that the merger announcement between Optimus

and Zon also played a vital role in Sonae’s stock price performance but, we

believe, as the merger is not yet finalized, the full effects have not yet been

recognized by the market. Due to all this, we can reinforce our investment

recommendation of buying the firm’s stock.

71

A crude econometrical regression would evidence an R2 of 94.22% which does not prove causality as further tests would have to be conducted, but does

provide a relationship evidence between the two variables

Exhibit 78 - Real estate yields and value per sqm projections


Exhibit 79 - Rents per sqm and cash-ins from asset sales projections


Exhibit 80 - Sonae's stock price vs PT's bond yields

Source: Bloomberg


PAGE 33/34

Appendix

Financial Statements

B alance Sheet (€ millio ns) F Y11 F Y12 F Y13 F Y14 F Y15 F Y16 F Y17 F Y18 F Y19 F Y20

Fixed Assets 3252 3166 3157 3176 3189 3205 3226 3248 3294 3318

Others 1495 1449 1449 1449 1449 1449 1449 1449 1449 1449

Non Current Assets 4747 4615 4606 4624 4638 4654 4675 4697 4742 4767

Stocks 651 538 582 583 591 603 617 635 659 685

Trade debtors 175 171 170 171 172 173 174 176 178 180

Liquidity 426 378 402 402 402 402 402 402 402 402

Others 318 334 334 334 334 334 334 334 334 334

Current Assets 1570 1421 1487 1489 1498 1511 1527 1547 1572 1600

T o tal A ssets 6317 6035 6093 6114 6136 6165 6202 6243 6314 6367

T o tal Equity 1700 1669 1782 1925 2085 2265 2467 2694 2952 3243

Loans 1791 1687 1640 1545 1431 1299 1154 989 814 598

Deferred tax liabilities 134 137 137 137 137 137 137 137 137 137

Provisions 91 114 114 114 114 114 114 114 114 114

Others 148 88 88 88 88 88 88 88 88 88

Non-current liabilities 2164 2026 1979 1885 1770 1639 1493 1328 1154 938

Loans 600 526 530 500 462 420 373 320 263 193

Trade creditors 1245 1222 1208 1212 1226 1249 1276 1309 1352 1400

Others 609 593 593 593 593 593 593 593 593 593

Current liabilities 2453 2341 2331 2304 2282 2262 2242 2221 2208 2186

T o tal Liabilit ies 4616 4367 4311 4189 4052 3900 3735 3549 3362 3124

Equity + Liabilit ies 6317 6035 6093 6114 6136 6165 6202 6243 6314 6367

Inco me Statement (€ millio ns) F Y11 F Y12 F Y13 F Y14 F Y15 F Y16 F Y17 F Y18 F Y19 F Y20

Turnover 5541 5379 5326 5341 5400 5541 5612 5753 5941 6144

EB IT D A 602 600 610 641 655 674 693 714 742 772

Provisions & Impairments -35 -35 -35 -35 -35 -35 -36 -36 -37 -38

Depreciation -332 -333 -318 -315 -316 -317 -317 -317 -317 -318

EB IT 234 232 258 291 304 322 340 361 388 416

Financial Results -82 -94 -87 -86 -81 -75 -68 -60 -52 -42

Sierra Direct Results 31 31 31 32 32 33 34 34 35 36

EB T 183 170 202 237 256 281 306 335 372 409

Taxes -24 -25 -28 -34 -37 -40 -44 -48 -53 -59

D irect R esults 159 144 174 203 220 240 262 287 318 351

Non-contro lling interests -23 -39 -36 -42 -46 -50 -54 -60 -66 -73

Sierra Indirect Results -27 -72 -43 -35 -28 -22 -18 -14 -11 -9

N et inco me gro up share 109 33 94 126 146 168 190 213 241 269

C F Statement (€ millio ns) F Y11 F Y12 F Y13 F Y14 F Y15 F Y16 F Y17 F Y18 F Y19 F Y20

EBITDA 600 610 641 655 674 693 714 742 772

Depreciation -333 -318 -315 -316 -317 -317 -317 -317 -318

P&I -35 -35 -35 -35 -35 -36 -36 -37 -38

Sierra Direct Income 31 31 32 32 33 34 34 35 36

Financial Results -94 -87 -86 -81 -75 -68 -60 -52 -42

Interests Paid 99 97 92 85 77 69 59 48 36

EBIT 269 299 329 341 358 375 394 420 445

Income Tax -67 -75 -82 -85 -89 -94 -98 -105 -111

Tax Adjustments -27 -33 -35 -37 -38 -40 -42 -45 -47

Net Income 229 257 281 293 306 321 337 360 381

Depreciation 333 318 315 316 317 317 317 317 318

Operat ing C ash f lo w 562 575 597 609 623 638 654 677 700

Capex 245 309 334 330 333 338 339 363 343

Changes in Working Capital -62 56 -1 -6 -9 -11 -13 -18 -20

Changes in other Assets -44 0 0 0 0 0 0 0 0

Changes in other Liabilities -33 0 0 0 0 0 0 0 0

Invest ing C ash f lo w 172 365 333 324 323 327 325 345 323

F ree C ash f lo w 390 210 264 285 300 311 329 332 376

Interests paid -99 -97 -92 -85 -77 -69 -59 -48 -36

Interests tax shield 15 14 13 12 11 10 8 7 5

Changes in Equity -176 -60 -60 -60 -60 -60 -60 -60 -60

Changers in Debt -129 -67 -125 -152 -174 -192 -219 -230 -286

F inancing C ash f lo w -390 -210 -264 -285 -300 -311 -329 -332 -376


PAGE 34/34

Disclosures and Disclaimer

Research Recommendations

Buy Expected total return (including dividends) of more than 15% over a 12-month period.

Hold Expected total return (including dividends) between 0% and 15% over a 12-month period.

Sell Expected negative total return (including dividends) over a 12-month period.

This report was prepared by Manuel Santos, a student of the NOVA School of Business and Economics, following the Masters in Finance Equity Research – Field Lab Work Project, exclusively for academic purposes. Thus, the author, which is a Masters in Finance student, is the sole responsible for the information and estimates contained herein and for the opinions expressed, which reflect exclusively his/her own personal judgement. This report was supervised by professor Rosário André (registered with Comissão do Mercado de Valores Mobiliários as financial analyst) who revised the valuation methodology and the financial model. All opinions and estimates are subject to change without notice. NOVA SBE or its faculty accepts no responsibility whatsoever for the content of this report nor for any consequences of its use. The information contained herein has been compiled by students from public sources believed to be reliable, but NOVA SBE or the students make no representation that it is accurate or complete, and accept no liability whatsoever for any direct or indirect loss resulting from the use of this report or its content. The author hereby certifies that the views expressed in this report accurately reflect his/her personal opinion about the subject company and its securities. He/she has not received or been promised any direct or indirect compensation for expressing the opinions or recommendation included in this report. The author of this report may have a position, or otherwise be interested, in transactions in securities which are directly or indirectly the subject of this report. NOVA SBE may have received compensation from the subject company during the last 12 months related to its fund raising program. Nevertheless, no compensation eventually received by NOVA SBE is in any way related to or dependent on the opinions expressed in this report. The Nova School of Business and Economics, though registered with Comissão do Mercado de Valores Mobiliários, does not deal for or otherwise offers any investment or intermediation services to market counterparties, private or intermediate customers. This report may not be reproduced, distributed or published without the explicit previous consent of its author, unless when used by NOVA SBE for academic purposes only. At any time, NOVA SBE may decide to suspend this report reproduction or distribution without further notice.

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