Mercator 2011 - AII Data Processing

Retail grocer nd

22

MERCATOR D.D. March 2012

www.mercator.si

Stock data as of 22nd March 2012 Market price (EUR) 52 week range (EUR) Avg. daily trade vol., EUR(k) Average daily % of stock traded

Target price: 104 EUR Previous target price: 146 EUR, SELL (11.11.2011)

128.0 120.0-182.0 195.7 0.032%

LJSE ticker: MELR Bloomberg: MELR SV

Market Cap (EUR) No. of Shares Free float Dividend yield

481.8m 3.8m 99% 6.3%

Recommendation: SELL

Price performance price change in % SBI TOP index change in % relative to SBI TOP in %

12 months stock performance in EUR 200

3 months -8.6% 2.7% -11.0%

12 months -25.2% -26.9% 2.3%

Multiples:

TTM

2012F

P/E EV/Sales EV/EBITDA EV/EBIT

19.6 0.5 9.2 17.5

29.9 0.5 9.1 19.5

180

Key figures (According to International Accounting Standards) Consolidated data in EURm

160

millio n €

Income statem ent: S ales

Balance sheet: FY201 0 2,781.6

FY201 1 2,928.5

FY2012 2 ,995.5

FY2013 3,072.9

million €

FY2 01 0 7.9

FY2 011 71.9

TTM 71.9

20.8 1,070.2

27.5 1,184.7

27.5 1,1 84.7

140

Growth yoy EBITDA

5.2 % 173.2

5.3% 170.0

2.3% 171.6

2.6% 176.2

Investmen ts Cash Debt

120

M arg in EBIT M arg in

6.2 % 94.5 3.4 %

5.8% 88.8 3.0%

5.7% 79.8 2.7%

5.7% 84.4 2.7%

Net debt Eq uity Assets

1,041.6 797.9 2,608.9

1,091.1 789.0 2,647.7

1,0 91.1 7 89.0 2,6 47.7

30.4 43.1 %

23.5 -22.6%

15.6 -33.6%

19.7 26.1%

Fin. D/E Fin. D/A

1.3% 0.4%

150.2% 44.7%

150.2% 44.7%

8 .2

6.3

4.1

5.2

6.0

6.4

6.4

100 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 MELR

Net income Growth EPS

N.Debt/EBITDA

SBI TOP

Investment Thesis: The largest retailer on the local market.

•

Regional retailer with significant domestic market share: Mercator is the the leading retail chain in Slovenia and the largest retail chain in the SE European region with strong presence in the markets of Serbia, Croatia, BIH and Montenegro. In 2011 Mercator had around 33 - 34% market share in Slovenia which is decreasing on behalf of expansion abroad. By acquiring trade divisions Mercator Group has increased its market share in Montenegro to 28% - 29%. It has also more than 8% - 9% market share in Serbia, 8% - 9% market share in Croatia and a 4% - 5% market share in BIH. In 2010 Mercator also entered two new markets, namely Albania and Bulgaria. Mercator has 1% market Revenues (in mio EUR) share in Albania and less than 0.5% 1,800 market share in Bulgaria. The Group 1,600 is therefore an important regional 1,400 retailer. In the year 2011 the 1,200 company generated 57.7% of its 1,000 800 revenues in Slovenia, 41.8% in 2011 600 current foreign markets (Serbia, Plan 2012 400 Croatia, BIH and Montenegro) and 200 0.5% in new foreign markets 0 (Albania and Bulgaria). Mercator has 988 stores in Slovenia, 588 stores in current foreign markets and 10 stores in new foreign markets.

•

Expansion on the way: After the acquisitions of the company Getro in Croatia, Panto Group in Montenegro and retail activities of Coka Group in Serbia in 2010, Mercator managed to expand further into the South-Eastern Europe also in the year 2011. In the Serbian market, Mercator reinforced the position of the second largest retailer by acquiring the operations and employees of the company Familija Marketi in Belgrade and by acquiring on a long-term operating lease 27 trade facilities of the company Robne Kuče Beograd. On the other side Mercator reinforced the position of the third largest retailer in BIH by strategic agreement with Drvopromet. In 2011 Mercator also took over the company Plus Commerce in Montenegro. Acquisition of the company En Plus (renamed to M - Energija) is consistent with Mercator’s pursuit of the strategic goal of developing supplementary trade services. Customers will be offered self-service petrol stations at the parking lots of major shopping centres, initially in Slovenia but then also in Serbia and Croatia. Further expansion and strategic alliances are expected.

Regional expansion. Real estate potential. Takeover speculation.

ALTA Invest, investicijske storitve, d.d. Železna cesta 18 SI-1000 Ljubljana Slovenia phone: + 386 1 32 00 300 e-mail: [email protected] http://www.alta.si Head of Research: Sašo Stanovnik [email protected] Head of Trading: Igor Taljat [email protected]

1 / 10

•

Growth Prospects in the Balkan Region: All of the countries where Mercator is present are facing sluggish economic recovery after economic crisis severely hit consumers’ purchasing power and their payment discipline. Also, Mercator Group’s debt levels limited its speed of expansion. Nevertheless, Mercator Group managed to invest EUR 81.2m abroad and EUR 38.6m in Slovenia in 2011. We believe Mercator will continue to improve its market share on foreign markets while slightly decreasing its market strength in Slovenia. Also we believe South Eastern European markets have a potential for above average growth, due to its consumers purchasing power slowly increasing and therefore lowering the gap to Central European counterparts. This will enable Mercator’s top-line to increase even in future years, as Mercator generates more than a third of its revenues abroad. Capital expenditure in 2011 4.7%

5.4%

32.2% 14.9%

Slovenia Serbia Croatia Montenegro Other

42.8%

•

Multi-level brand strategy: By expanding its retail network to SE European countries, Mercator is entering markets of different economic maturity and efficiency. In order to best adapt to the needs of the customers and to improve the quality goods at reasonable prices, a multi-level brand strategy was developed at Mercator: Premium (above-standard sales program), Value (emphasis on price-to-quality ratio) and Economy market position (well-priced and cost-efficient format). Selling through different store formats allows Mercator to adapt as much as possible to the needs and desires of the customers in all markets of Mercator's operations.

•

New private label lines: In 2011 Mercator offered the customers 13 private label lines which include alimentary products, household products, apparel, technical consumer goods, cosmetics, child care products, toys, ready-made food, pastry and products for healthy diet. Last year Mercator also launched a new line of products under the brand Mercator Bio. The new private label is focused on quality, local sourcing, reasonable pricing and convenience. With this Mercator successfully follows consumptive trend of healthy and organic food.

•

Supplementary trade service for consumers: In 2011 Mercator became the owner of 100% stake of the company En Plus. Following the example of other European retailers Mercator is extending the offer of supplementary trade services with sale of petrochemicals. The company En Plus is active in trade of petrochemicals through a network of automatic self-service petrol stations. The self-service petrol stations are currently available at 18 different locations across Slovenia. According to the expectations of the company, this strategic alliance will improve the recognition, distinctiveness, and attractiveness of the shopping centres. It will also provide a comprehensive offer for the final consumer at a single location and enable further extension of the petrol stations network on the existing locations of Mercator's bigger shopping centres in Slovenia, Croatia, and Serbia. Mercator also broadened his offer of travel arrangements trough M Holidays and developed photo service. Furthermore, the Group introduced new financial services of paying utility bills at stores and the option of mobile payments (Moneta). Nevertheless we will have to see which of these products and services will gain traction and improve profitability of Mercator.

•

Monetization process/Real Estate Potential: Compared to its European peers, Mercator has an extremely low asset turnover which is a result of its excessive property ownership. At the end of last year, Mercator owned approximately 83% of its sales area property amounting to 1.7m m2. Last year the Group acquired 132 thousand m2 of new gross facilities which includes real estate owned by Mercator and operating leases. In 2011 92% of all new facilities were acquired through operating leases and 8% was acquired through ownership. Mercator initiated implementation of real estate monetisation project and has signed real estate monetisation advisory agreement with the company Cushman & Wakefield to select the appropriate real estate portfolio, select investors and execute sale and lease back of properties in Slovenia and Croatia in years 2012 and 2013. Estimated value of sale and lease back is EUR 500m according to Mercator. In 2012 EUR 250 million worth of real estate is planned for monetization. Monetisation proceeds will be directed towards repayment of financial debt. Any sale and lease back would therefore lower the debt ratios and improve risk profile of the company and with it lowering cost of capital and improve valuation of the company. Such actions would also improve Mercator’s ROE and could have a positive impact on the share price sentiment. On the other hand 2 / 10

the Slovenian real-estate market is problematic and it might take a while before Mercator will be able to monetize real-estate. So we believe that the monetization could bring additional value for Mercator, but how much depends the length of the process, % of total real estate sold, the yield on real estate and rental fees. Also we doubt this project could generate so much value for shareholders that it could alter our stance on the stock. Number of retail units given the geographic/product segmentation on 31 December 2011: No. of units H y permarkets S upermarkets N eighbour stores

Slovenia 21 62 400

C r oatia 13 21 47

BIH 7 13 42

Ser bia Montenegr o A lbania Bulgar ia 15 2 1 4 21 5 75 72 2 1

C omfort stores

1

1

1

-

-

-

-

G etro market

-

23

-

-

-

-

-

C ash & C arry

13

16

-

5

-

-

-

H ard discount stores

11

-

-

-

-

-

-

508

121

63

116

79

3

5

93

12

-

14

4

-

-

63

12

-

13

3

-

-

F urniture program C lothing program and drugstore

30 95

33

12

1 17

1 1

-

-

C lothing program D rugstore and perfumeries Intersport Restaurants M H oliday s

76 19 32 22 13

33 29 -

8 4 9 2 -

9 8 9 7 -

1 2 1 -

2 -

5

T otal food pr ogr ame H ome and furniture program H ome program

T otal other pr ogr ames

255

74

23

47

8

5

F ranchise stores

225

52

-

5

-

-

-

T otal with fr anchise stor es

988

247

86

168

87

5

5

Square meters of gross area owned or leased on 31 December 2011: Gr oss r etail ar ea O w ned retail area Leased retail area Total retail area

Used for own oper ations Leased out T otal 831,683 182,785 1,014,468 388,803 14,894 403,697 1,220,486 197,679 1,418,165

O w ned w arehouse capacity

145,590

0

Leased w arehouse capacity

54,398

0

54,398

199,988

0

199,988

O w ned commercial facilities

25,756

2,093

27,849

Leased commercial facilities

5,293

71

5,364

31,049

2,164

33,213

1,451,523

199,843

1,651,366

1,003,030 448,493

184,878 14,965

1,187,907 463,459

Total w arehouse capacity

Total commercial facilities G ross area under management - of w hich ow ned - of w hich leased

145,590

•

Maintaining market share: Since deteriorating consumer sentiment had a strong impact on personal consumption in the recent financial crisis, there has also been a significant pressure on Mercator’s margins and market share from the low-cost producers, such as Lidl and Hofer. These low cost producers have been trying to gain market share in Slovenia lately, so Mercator has focused on lowering product prices and on trying to prevent customers from switching their retailer. Lowering prices on key products had on one hand boosted sales, but negatively impacted margins. However, focusing on its own private brands (which provide higher margins) could allow Mercator to obtain higher margins in the long run. Proof that Mercator customers are not switching their consumption habits is its Pika loyalty program which has increased the number of users. In Slovenia, the share of total retail revenues generated by purchases with Mercator Pika card amounted to 59.9%, compared to 57.5% in 2010.

•

Price investments: In order to retain the purchasing power or the consumers in times of economic hardship, Mercator Group made extensive investment in terms of retail product pricing in 2011. With this the company effectively allocated a part of its profit margin for offsetting the pressure on prices, introduced by higher prices of strategic raw materials. According to the company, lower prices will improve competitiveness of pricing and bring Mercator closer to the consumers who cut the value of their spending during the crisis. Nevertheless this is again on the expense of margins.

•

Strong Bargaining Power against Suppliers: As the largest Slovenian retail company, Mercator has a good bargaining position in relation to suppliers.

Risks: •

Deteriorating environment continues: Last year was also marked by an unfavourable economic environment with a higher propensity to save and stagnant purchasing power. In the last year consumer confidence remained low. Compared to a year earlier, even higher share of consumers felt the impact of the economic crisis on everyday life. Economic trends and uncertainties have influenced shopping habits which have leaned towards rational spending on 3 / 10

products and services. Consumers have started to purchase basic goods rationally which was reflected in lower consumption of food and drinks. The concentration and modernization of trade operations with an emphasis on the development of new store formats is expected to continue even though long term financing sources will still remain restricted. At this point we must note that macroeconomic conditions for 2012 are notably different (worse) from those assumed in the Mercator Group Medium-term business plan for the period 2011-2015, therefore the expectations of future performance of the company included in this plan are no longer realistic. As already stated in “maintaining market share” and “price investments” segments, deteriorating economic environment is not only affecting revenues but even more so profit margins. This is seen in 2011 with the drop in margins and net loss in 4Q11. •

Increased Competition: Because of the deterioration in personal consumption the retail sector is faced with changes in consumer behaviour. There are increasing numbers of discounters present in Slovenia that threaten Mercator’s operating results. In the following years, margins will remain under pressure if the company will try to retain its customers. Also as already stated many Mercator actions (price investments) will boost sales but negatively influences margins.

•

High Debt Burden: Net debt to EBITDA ratio is still high. Due to its relatively high debt burden, Mercator financial expenses are also high, especially if Euribor rates rises. Mercator Group will therefore have to grow more thorough internally generated funds which will slow down its growth.

•

The Balkan Risk: Among Balkan countries our concerns are highest for Croatia. The reason is its large amount of external debt. To manage this risk Mercator is actively monitoring the macroeconomic background, the changes in the exchange rates and reducing the risk by natural hedging. Nevertheless, currency risk remains an important issue, which could negatively impact the Group’s bottom-line. Currency issue is also important for Serbian market.

•

Dividends decrease: According to the resolution adopted at the regular Shareholders Meeting, Mercator Group paid out gross dividend of EUR 8.00 per ordinary share. Due to expectations of harsh economic circumstances in 2012 the management proposes only EUR 4.50 gross per ordinary share for this year payment (total cash outflow of EUR 16.9m). This proposal is yet to be confirmed by the Shareholder’s Assembly.

•

50

10,0

8,0

30 6,0 20

Dividend

Net Income (EUR m)

40

4,0 10 2,0

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012F -10

0,0 Net Income

Dividende

Shareholder’s structure remained intact despite sales process: In October 2011 consultant in the sale of a majority share in Mercator (owned by several banks and Pivovarna Laško group) ING has collected the offers. Agrokor made the highest bid, namely EUR 221 per share, and the offer automatically implied a takeover bid. Agrokor intended to provide financing in a consortium with EBRD, IFC and JP Morgan One Equity Partners. But in the beginning of 2012 Agrokor has given up and withdrew from the battle to takeover Mercator, as there was significant opposition in the public, political sphere and at some owners, not to mention in Mercator’s management. Here also the representatives of the new government expressed their opposition to the entry of Agrokor in Mercator. So officially, after extensive period of talks and several complications in the sale process, they are no longer interested in the company. It cannot be ruled out that Agrokor will not try again, especially since banks and Pivovarna Laško are not long-term owners of Mercator (banks because of the nature of business, Pivovarna Laško due to high debt burden). One possibility would be the takeover bid at a price below the current price of EUR 221 and the second possibility would be a gradual entry into the ownership of Mercator by buying nearly a quarter of Mercator stake owned by Pivovarna Laško. But we find both scenarios less likely. For now we only know that ING again called three private investment funds that have already responded to the last call (Mid Europa, CVC Capital Partners and Warburg Pincus). ING is also in touch with the Belgian Delhaize, which last year bought a Serbian retail chain Maxi. At this point Mercator definitely needs a stable ownership structure and the intentions of its owners need to be cleared up as the long story of finding owners is also affecting business results.

• Real estate impairment: Mercator owns approximately 83% of its sales property. On one hand a sale-and-lease back of real estate could enhance the company’s value, but the real estate could also pose a problem to the bottom line if write-offs become necessary. Namely the real estate sector of the Slovenian and other foreign markets is still highly problematic.

4 / 10

2011 Results and Recent news Net sales slightly above, net profit well below our expectations million €

FY2010

FY2011

YoY

4Q10

3Q11

4Q11

QoQ

YoY

Sales EBITDA

2,781.6 173.2

2,928.5 170.0

5.3% -1.8%

742.8 43.2

759.4 45.4

752.7 37.0

-0.9% -18.4%

1.3% -14.3%

Margin

6.2% 94.5

5.8% 88.8

-6.0%

5.8% 16.4

6.0% 24.5

4.9% 16.7

-31.8%

1.7%

3.4% 30.4 1.1%

3.0% 23.5 0.8%

2.2% 2.4 0.3%

3.2% 8.5 1.1%

2.2% -3.5 -0.5%

EBIT

Margin Net income

Margin

•

Revenues of the Group increased by 5.3%.

Revenues in foreign markets increased by 13.9%.

-22.6%

In 2011 Mercator Group generated revenues in the amount of EUR 2,928m, which is 5.3% more than last year, when they amounted to EUR 2,782m. Achieved revenues were slightly above our Sales revenues (in mio EUR) expectations (EUR 2,830m). Revenues in foreign markets increased by 13.9%, mostly as a result of 3,000.0 2,928.4 the takeover of trade operations of the companies 2,900.0 2,781.6 Pantomarket and Plus Commerce in Montenegro 2,800.0 2,708.6 2,643.3 and Familija Marketi and Coka Group in Serbia. On 2,700.0 the other side, in Slovenia revenues actually 2,600.0 decreased by 0.2% YoY. The largest share of 2,500.0 2,445.3 revenues (85.9%) the Group achieved with 2,400.0 products for everyday use. 4Q11 showed only a 2,300.0 2,200.0 1.3% YoY increase and 0.9% QoQ decrease. 2007

2008

2010

2011

4Q11

3Q11

Macedonia

120,000

Albania

100,000

Bulgaria 80,000

Montenegro

60,000

BIH Croatia

40,000

Serbia 20,000

Slovenia

0 2010

•

2Q11

1Q09

EUR 119.7m invested in retail network.

1Q11

CAPEX amounted to EUR 119.7m. 32.2% of this sum was invested in Slovenia, 65.8% was invested in existing foreign markets (mostly in Serbia) and 2.0% was invested in other markets. Mercator Group acquired 132 thousand square meters of new gross area, of which 92% was obtained by operating lease and 8% was obtained by acquisitions or construction. In 2011 Mercator disposed of EUR 17.2m worth of property, plant and equipment.

4Q10

•

Net financial debt increased by 15%.

3Q10

At the end of last year Mercator Group net financial debt amounted to EUR 1,091m, which is 15.0% more than in 2010. The increase is mostly a result of Mercator decision to make use of early payment discounts offered by their suppliers, which resulted in a decrease in trade payables by EUR 58.8m compared to the end of 2010.

2Q10

•

In 4Q11 achieved net loss of EUR 3.5m.

1Q10

In 2011 net profit amounted to EUR 23.5m, which represents a 22.5% decrease YoY. The realized net income was also well below our Net profit (in mio EUR) expectations (EUR 37.1m) and company planes 12.00 11.01 10.29 10.18 at the beginning of the year. Looking quarterly, 10.00 8.35 8.52 Mercator achieved net loss of EUR 3,5m in 8.00 6.52 6.65 6.32 4Q11. The reason for the step back in 6.00 4.84 performance are mostly the result of notable 3.42 4.00 2.44 aggravation of the economic circumstances in 2.00 2H11, negative impact thereof on the volume 0.00 and composition of consumption and required -2.00 additional investment into favorable prices for -4.00 -3.51 the consumers. 4Q11 is a concerning result in -6.00 terms of profitability for 2012. 4Q09

•

3Q09

In 2011 cost of sales amounted to EUR 2,762m, which represent a 5.8% increase compared to last year. In 2011 net operating profit totalled EUR 88.8m, which represent a 6.0% decrease compared to last year, when it stood at EUR 94.5m. Operating margin deteriorated.

2Q09

•

Net profit of the Group decreased by 22.5%.

Dividend for 2012 would amount to EUR 4.50 gross per share.

2009

2011

Recent News In accordance with the decision of the Shareholders Meeting, Mercator paid out gross dividend of EUR 8.00 per ordinary share in 2011, which amounted to a total of EUR 29.8m and was 11% more than in 2010. Because of the announced aggravation of the economic crisis in 2012 and resulting further challenges for the operations of Mercator Group, the company is planning to pay out dividend in the amount of EUR 4.50 gross per share in 2012. So they proposed a dividend cut.

5 / 10

Relative valuation: EV/S Company name

EV/EBITDA

2012F

2013F

TTM

2012F

2013F

TTM

2012F

Tesco

0.6

0.5

0.5

7.1

6.0

5.6

9.9

8.4

8.7

Carrefour

0.3

0.3

0.3

14.6

5.9

5.7

61.2

10.4

10.2

Metro

0.2

0.2

0.2

4.0

3.6

3.7

7.5

5.7

5.6

Sainsbury

0.4

0.3

0.3

6.7

5.4

5.1

11.4

8.7

8.2

Delhaize Group

0.3

0.3

0.3

4.9

4.1

4.0

8.5

6.7

6.6

0.5

0.5

0.4

6.9

6.0

5.6

9.3

8.1

7.6

Kesko

0.3

0.3

0.3

6.5

6.1

5.7

9.5

9.2

8.3

Konzum

0.3

n.a.

n.a.

4.0

n.a.

n.a.

5.0

n.a.

n.a.

X5

0.7

0.5

0.4

9.6

6.5

5.7

15.8

10.1

8.3

Mercator

0.5

0.5

0.5

9.2

9.1

8.8

17.5

19.5

18.5

Average

0.4

0.3

0.3

7.1

5.4

5.1

15.4

8.4

8.0

TTM

2012F

2013F

TTM

2012F

2013F

TTM

2012F

2013F

Tesco

0.4

0.4

0.3

9.4

8.8

8.0

1.6

1.3

1.1

Carrefour

0.2

0.1

0.1

35.2

11.9

11.2

2.0

1.5

1.5

Metro

0.2

0.1

0.1

16.2

9.2

8.8

1.6

1.3

1.2

Sainsbury

0.3

0.2

0.2

9.6

9.8

8.8

1.0

0.9

0.8

Delhaize Group

0.2

0.2

0.2

8.5

7.2

6.8

0.7

0.7

0.6

P/S

P/E

P/B

WM Morrison Supermarkets

0.4

0.4

0.4

11.2

9.6

8.9

1.4

1.2

1.2

Kesko

0.3

0.3

0.2

13.8

13.2

12.7

1.2

1.1

1.1

Konzum

0.3

n.a.

n.a.

9.1

n.a.

n.a.

1.7

n.a.

n.a.

X5

0.4

0.3

0.3

11.9

14.0

10.9

3.1

2.1

1.7

Mercator

0.2

0.2

0.2

19.6

29.9

23.7

0.6

0.6

0.6

Average

0.3

0.3

0.2

13.9

10.5

9.5

1.6

1.3

1.2

EBITDA margin TTM

Company name

…while profitability is also lagging.

2013F

WM Morrison Supermarkets

Company name

Mercator trades at premium to its peers….

EV/EBIT

TTM

EBIT margin Profit margin (%) (%)

ROE TTM

Assets turnover

ROA TTM

Div. yield (%)

Assets/ Equity

Net debt to EBITDA

Tesco

8.0%

5.7%

4.5%

16.7%

5.8%

1.28

4.34

2.90

1.77

Carrefour

2.1%

0.5%

0.5%

5.5%

0.8%

1.70

10.94

7.24

6.99

Metro

5.3%

2.8%

0.9%

9.9%

1.9%

1.96

4.32

5.34

1.13

Sainsbury

5.4%

3.2%

2.7%

10.6%

5.0%

1.84

4.93

2.10

1.84

Delhaize Group

6.5%

3.8%

2.2%

8.8%

3.9%

1.73

3.21

2.26

1.94

WM Morrison Supermarkets

7.4%

5.4%

3.9%

12.5%

7.0%

1.79

3.85

1.83

1.13

Kesko

4.3%

2.9%

1.9%

8.3%

4.3%

2.26

5.12

1.93

0.32

Konzum

8.1%

6.4%

3.5%

18.1%

5.4%

1.54

1.00

3.36

0.00

X5

6.9%

4.2%

1.7%

26.2%

3.1%

1.81

0.00

3.95

3.30

Mercator

5.8%

3.0%

0.8%

2.9%

0.9%

1.11

6.45

3.36

6.42

Average

6.0%

3.9%

2.4%

13.0%

4.1%

1.77

4.19

3.43

n.a.

ROE decomposition (company/peer average): EBITDA margin 5.8% 6.0% EBIT/EBITDA 52.2% 64.7%

Assets to Equity 3.36 3.43

Profit margin 0.8% 2.4%

ROE 2.9%

13.0%

ROA NI/EBIT 26.5%

Sales to assets 62.8%

1.11

In order to get a market insight we compared Mercator to its peers from the industry. The comparison shows that Mercator share price is currently trading at a premium to its peers, except when the P/B and P/S multiples are used. As Mercator has significant debt on the balance sheet, EV multiples are difficult to use. This high debt burden is also evident in high net debt to EBITDA ratio but it should also be considered that Mercator has significant assets in the form of real-estate. Also due to this P/B shows significant undervaluation, but its use is inappropriate due to lower ROE compared to peers.

Peer analysis implies a target price of 97 EUR.

0.9%

4.1%

1.77

When Mercator is compared to its western peers all multiples show a premium which is a result of the difference in their financial structure and growth rates. When compared to its eastern peers, the premium is lower. Our relative valuation model is based on P/E multiples (trailing and forward) and P/S multiples (lower weight due to lower margins) which give an approximate value of Mercator at EUR 97 per share. 6 / 10

EV/EBITDA 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 1.1.2002

1.1.2005

1.1.2008

1.1.2011

1.1.2008

1.1.2011

P/E 60.0 50.0 40.0 30.0 20.0 10.0 0.0 1.1.2002

1.1.2005

Outlook: •

Challenging environment will pressure growth. We therefore lowered expectations.

•

• •

Reduced investment plans.

•

Year Sales Sales growth EBITDA EBITDA margin EBIT EBIT margin EBT EBT margin Net income Net income growth Year Fixed assets PPE Intangible assets LT-investments Other fixed assets Current assets Inventories Trade receivables Cash ST-investments Other current assets Total Assets Debt ST-debt LT-debt Provisions Trade payables Other liabilities Minority intrest Equity Year Net profit margin Asset turnover ROA Equity multiplier ROE CAPEX/Depreciation Financial debt/Equity Financial debt/Assets Net debt/EBITDA Working capital/ Sales ROIC

In this year, Mercator expects the business environment to be equally or more challenging than in the 2011, meaning consumption will still be under downward pressure. For 2012 Mercator Group therefore plans to achieve revenues in the amount of EUR 3,030.4m (+3.5% YoY growth), EBIT of 76.3m (14% decrease YoY), net income of EUR 15.7m (33% decrease YoY) and ROE of 2%. All these numbers are a disappointment for us, as they are lower than expected and also lower YoY (with exception of revenues). Given this guidance and a big disappointment in 4Q11 we significantly lowered our guidance for 2012 and beyond. So for 2012 we now envisage EUR 3bn of revenues, EBIT of 79.8m and net income of EUR 15.6m all closely resembling management guidance, only revenues and EBIT are lower due to our regression model showed bigger deteriorating given lower GDP dynamic foreseen for Slovenia and Balkan. According to their plans, 56% of Group revenue will be generated in Slovenia and the remaining 44% will come from foreign markets. The Group plans to generate the majority of revenue by retail and wholesale of fast-moving consumer goods, which will represent 84% of total revenue. Responding to the expectations of harsh conditions in 2012, the Group additionally reduced investment plans. Total investment is planned at EUR 88.5m, with planned divestment of non-core assets in the amount of EUR 10.1m. 49.1% of the sum is planned for investment in Slovenia, 47.2% will be invested in existing foreign markets and 3.8% in new foreign markets. In 2012 Mercator Group will obtain 83,914 square meters of new gross area all by operating lease. We adjusted our CAPEX figures accordingly and we believe CAPEX will remain on this level for several years. This is necessary to repay debt, but does limit the possible growth rate. Net financial debt at the end of 2012 is anticipated at EUR 732.3m. Mercator will reduce the debt by efficient management of financial liabilities and assets and by monetizing a part of its real property. 2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2,445.3

2,708.6 10.8% 194.1 7.2% 100.3 3.7% 50.0 1.8% 40.7 -479.4%

2,643.3 -2.4% 542.1 20.5% 446.1 16.9% 399.5 15.1% 395.5 872.4%

2,781.6 5.2% 173.2 6.2% 94.5 3.4% 40.3 1.5% 30.4 -92.3%

2,928.4 5.3% 179.3 6.1% 88.8 3.0% 31.9 1.1% 23.6 -22.5%

2,995.5 2.3% 171.6 5.7% 79.8 2.7% 19.5 0.7% 15.6 -33.8%

3,072.9 2.6% 176.2 5.7% 84.4 2.7% 24.6 0.8% 19.7 26.1%

3,167.3 3.1% 184.7 5.8% 92.9 2.9% 34.0 1.1% 27.2 38.2%

3,265.7 3.1% 193.7 5.9% 101.6 3.1% 43.4 1.3% 34.8 27.9%

3,375.7 3.4% 203.5 6.0% 111.1 3.3% 53.8 1.6% 43.1 24.0%

172.1 7.0% 91.3 3.7% 0.0 0.0% -10.7

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

1,538.3 1,402.4 80.3 24.2 31.5 534.7 247.8 253.6 23.1 7.9 2.3 2,073.0 836.6 201.1 635.5 35.2 487.1 41.9 2.3 685.9

1,873.3 1,772.0 78.2 4.8 18.3 666.8 272.4 329.1 45.9 18.6 0.8 2,540.1 1,035.6 412.8 622.8 31.4 599.9 59.1 2.0 812.1

1,947.6 1,863.3 52.0 4.1 28.1 528.8 292.1 193.3 16.8 0.0 26.6 2,476.3 1,042.2 367.9 674.4 37.2 525.1 66.5 0.3 805.1

2,016.7 1,870.4 52.6 3.9 89.8 592.1 322.1 231.9 20.8 0.0 17.4 2,608.9 1,070.2 395.9 674.4 35.7 642.7 61.8 0.2 798.2

2,035.4 1,906.0 47.6 71.9 9.8 612.3 335.2 247.3 27.5 2.0 0.2 2,647.7 1,184.7 362.6 822.1 32.7 586.4 54.9 0.2 788.7

2,035.5 1,904.0 47.6 74.1 9.8 634.8 325.1 279.3 28.2 2.1 0.2 2,670.2 1,164.7 356.5 808.3 33.0 629.4 55.4 0.2 787.4

2,038.0 1,904.3 47.6 76.3 9.8 664.5 337.9 295.4 28.9 2.1 0.2 2,702.6 1,152.7 352.8 799.9 33.4 667.8 56.0 0.2 792.0

2,043.4 1,907.4 47.6 78.6 9.8 674.8 354.3 288.4 29.8 2.2 0.2 2,718.2 1,130.7 346.1 784.7 33.6 685.6 56.4 0.3 811.7

2,051.6 1,913.2 47.6 80.9 9.9 708.4 366.2 309.1 30.7 2.3 0.2 2,760.0 1,112.7 340.6 772.2 34.1 718.6 57.2 0.3 837.5

2,062.8 1,921.9 47.6 83.4 9.9 722.5 376.0 327.1 16.9 2.3 0.2 2,785.4 1,088.7 333.2 755.5 34.4 735.3 57.8 0.3 869.1

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

-0.4% 1.18 -0.5% 3.02 -1.6% 204.2% 1.22 0.40 4.54 1.5% 0.0%

1.5% 1.07 1.6% 3.13 5.0% 318.0% 1.28 0.41 4.98 1.8% 4.4%

15.0% 1.07 16.0% 3.08 49.1% 163.9% 1.29 0.42 1.88 -0.9% 23.9%

1.1% 1.07 1.2% 3.27 3.8% 147.9% 1.34 0.41 6.04 -2.4% 3.8%

0.8% 1.11 0.9% 3.36 3.0% 132.3% 1.50 0.45 6.04 0.8% 3.3%

0.5% 1.12 0.6% 3.39 2.0% 97.8% 1.48 0.44 6.06 0.1% 3.3%

0.6% 1.14 0.7% 3.41 2.5% 100.4% 1.46 0.43 5.87 -0.2% 3.5%

0.9% 1.17 1.0% 3.35 3.3% 103.3% 1.39 0.42 5.40 -0.4% 3.8%

1.1% 1.18 1.3% 3.30 4.2% 106.3% 1.33 0.40 5.06 -0.4% 4.2%

1.3% 1.21 1.5% 3.20 5.0% 109.5% 1.25 0.39 4.73 -0.5% 4.5%

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Discounted Cash Flow Valuation: Year

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

TV

NOPLAT NOPLAT growth Depreciation Depretiation/Sales CAPEX CAPEX/Sales Change in net working capital NWC/Sales FCF to firm FCF valuation Value in forecasting period Continuing value Total enterprise value Net debt Equity value No. of shares (in mio) Equity value per share

63.8 -2.5% 91.9 3.1% 89.8 3.0% -20.6 0.1% 86.5

67.5 5.8% 91.8 3.0% 92.1 3.0% -8.6 -0.2% 75.8

74.3 10.0% 91.9 2.9% 94.9 3.0% -7.6 -0.4% 78.9

81.3 9.4% 92.1 2.8% 97.9 3.0% 0.5 -0.4% 75.0

88.9 9.3% 92.4 2.7% 101.2 3.0% -2.7 -0.5% 82.8

94.2 6.0% 92.9 2.6% 105.2 3.0% 10.2 -0.1% 71.6

100.4 6.6% 93.6 2.6% 109.4 3.0% -0.2 -0.1% 84.7

106.7 6.3% 94.4 2.5% 113.8 3.0% -0.2 -0.1% 87.5

113.2 6.1% 95.4 2.4% 118.4 3.0% -0.2 -0.1% 90.5

119.9 5.9% 96.6 2.4% 123.1 3.0% -0.2 -0.1% 93.6

123.3 2.9% 97.2 2.3% 98.2 2.3% -13.1 -0.5% 135.3

DCF valuation implies target price of EUR 111.

WACC 539 962 1,501 1,084 417 3.8 111

2012

Tax rate Cost of debt Beta Cost of equity Debt/Equity WACC Perpetuity growth rate

20.0% 4.8% 2.9 19.8% 241.8% 8.5%

TV 20.0% 4.8% 2.5 16.7% 187.4% 8.3% 2.0%

Since conditions on the market, especially the risk free rate and equity risk premium not to mention Mercators plan for 2012, have changed, our DCF valuation was revised downwards. Our revised target price is EUR 111 per share. We believe Mercator will be able to perform in line with GDP growth, especially by expanding to the Balkan region, but Slovenia is an exception here, since we expect a decrease in sales on the domestic market. On the other hand we also applied a slightly higher country risk premium due to the same reason. According to the volume of debt and our projections, dividends at current levels are not sustainable if they want to continue to expand in accordance with their plans. It is also important to note that the time span for stock value to reach DCF level is uncertain, since there are several unresolved issues concerning company’s shareholder structure, which might have a strong impact on stock’s movement when they materialize. Long term EBITDA margin is projected at 6.0%, terminal value growth is set at 2.0%, while WACC is set at 8.3%. Implied EV/EBITDA terminal multiple is at 8.5, which seems high given current growth.

WACC

Perpetuity EBITDA margin

EBITDA margin 2017-2021

Sensitivity analysis: 5.4% 5.6% 5.8% 6.0% 6.2% 6.4% 6.6%

2.5% 80.8 84.8 88.9 92.9 97.0 101.1 105.1

3.0% 86.4 90.6 94.7 98.8 102.9 107.0 111.1

Sales growth 2017-2021 3.5% 4.0% 4.5% 92.2 98.1 104.1 96.4 102.3 108.4 100.6 106.6 112.7 104.7 110.8 117.0 108.9 115.1 121.3 113.1 119.3 125.6 117.3 123.5 129.9

5.0% 110.2 114.6 118.9 123.3 127.6 132.0 136.4

5.5% 116.4 120.9 125.3 129.7 134.1 138.5 143.0

5.4% 5.6% 5.8% 6.0% 6.2% 6.4% 6.6%

1.1% 42.8 53.8 64.7 75.7 86.7 97.7 108.7

1.4% 51.9 63.4 74.9 86.4 97.9 109.4 120.9

Perpetuity Growth 1.7% 2.0% 2.3% 61.9 72.8 84.9 74.0 85.5 98.2 86.0 98.2 111.5 98.1 110.8 124.8 110.1 123.5 138.2 122.1 136.1 151.5 134.2 148.8 164.8

2.6% 98.2 112.2 126.3 140.4 154.4 168.5 182.6

2.9% 112.9 127.8 142.7 157.6 172.5 187.4 202.3

6.8% 7.3% 7.8% 8.3% 8.8% 9.3% 9.8%

1.1% 133.6 111.2 92.1 75.7 61.4 48.9 37.8

1.4% 150.4 125.5 104.4 86.4 70.8 57.2 45.2

Perpetuity Growth 1.7% 2.0% 2.3% 169.3 190.4 214.4 141.3 158.9 178.6 117.9 132.8 149.3 98.0 110.8 124.8 81.0 92.0 104.1 66.1 75.9 86.4 53.2 61.7 71.0

2.6% 241.8 200.8 167.7 140.3 117.4 97.9 81.1

2.9% 273.4 226.1 188.3 157.6 132.0 110.4 92.0

Final target price calculation:

Target price is set at 104 EUR.

Our final target price EUR 104 per share comprises of both DCF and relative valuation, with equal 50:50% weights on both valuation methods. As already stated we see upside only through takeover premium being applied to our target price, which is based on projected improvement of profitability and on possible synergy effects. Given the current shareholder structure possible takeover cannot be ruled out and with it speculative increases in the stock price, but as Agrokor story showed us, Mercator is a tough shell to crack. So potential is only in takeover speculation, while normal valuation deteriorated as did the business results and plans.

8 / 10

Top5 shareholders: Pivovarna Union d.d.

12.3%

NLB d.d.

10.8%

Pivovarna Laško d.d.

8.4%

Unicredit Slovenia d.d.

8.0%

SG - Splitska Banka d.d.

7.7%

Brief Company profile Mercator is by far the largest retail grocer in Slovenia. Mercator is also the largest retail merchant in the region, selling mostly groceries and other consumer products. Over the past few years, it grew through takeovers of competitors and by opening new hypermarkets in major cities in Slovenia and abroad (at the same time, it was selling off its smaller and unprofitable stores). This growth is in-line with the company’s strategy to become one of the leading retail chains in the markets of former Yugoslavia. In the year 2011, Mercator operated with total 988 stores in Slovenia, with 247 units in Croatia, in Serbia with 168, in BiH with 86, in Montenegro with 87 stores, in Bulgaria with 5 units and in Albania with 5 stores. Altogether Mercator Group has 1,586 retail units with gross sales area outreaching 1,272,466 square meters. Beside Slovenia, Mercator operates on six foreign markets. Slovenia is still its most important market where it generates 57.7% of revenue. Mercator’s Slovenian market share (fast-moving consumer goods) at the end of 2011 was about 33-34%. Group sales by region (2011)

Group sales by segment (2011)

6.0%

8.4%

7.1% 14.7%

57.7% 19.2%

86.9% Slovenia

Disclaimer

Serbia

Croatia

Other

Fast moving consumer goods Home program Other (Modiana and Intersport)

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9 / 10

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10 / 10