Profits need to mature

Transcription

pa
m
Co
ny
Analyst:
Jakub Viscardi, j.viscardi@idmsa.pl, +48 (22) 489 94 69
rt
po
CEDC
Re
9/2009/CR (209) September 15, 2009
pa
m
Co
ny
9/2009/CR (209) September 15, 2009
Re
Analyst: Jakub Viscardi, j.viscardi@idmsa.pl, +48 (22) 489 94 69
rt
po
CEDC
CEDC is the largest vodka producer in Poland and Russia and
one of the leading producers worldwide. The Company managed
to strengthen its position through the successful acquisition
of companies operating in Russia – Russian Alcohol Group (RAG),
Whitehall and Parliament. We forecast that in the subsequent
years CEDC should benefit from the increased scale of its
operations and improvement in profitability stemming from
completion of restructuring processes, costs optimization and
change in product mix. However, above mentioned improvement
is already priced in, we believe. Thus, we initiate the coverage
of the Company’s shares with a LT fundamental Hold fundamental
rating. Awaiting effects of pending restructuring processes and
improving financial results we recommend a Neutral ST marketrelative stance towards CEDC’s shares.
aaThe Company’s growth in the next years should stem from:
(i) the one-off effect of the full consolidation of RAG, and (ii) further
organic growth. Given the weakening of CEE currencies (PLN, RUB
and HUF) vs. US$ and slump in the alcoholic beverages market,
we forecast marginal slide (by -1% yoy) of the Company’s consolidated
revenues in 2009. However, CEDC’s top line should improve yoy
in 2010E and 2011E by 14% and 12%, respectively.
Sector: Retail
Fundamental rating: Hold (-) Market relative: Neutral (-) Price: PLN 92.0
12M EFV: PLN 80.1 (-) Market Cap.: US$ 1,844 m
Reuters code: CEDC.WA
Av. daily turnover: US$ 1.01 m
Free float: 81%
12M range: PLN 25.80-110.40
Guide to adjusted profits
2008 profits adjusted for one-off costs associated with acquisition of related entities. 2009E profits adjusted
for revaluation of CEDC’s stake in RAG and one-off costs associated with performed acquisitions. 2008 and 2009E
pre-tax profit and net profit adjusted for revaluation of financial liabilities.
Key data
IAS consolidated
Sales
EBITDA
Adj EBITDA
EBIT
Adj EBIT
Net income
Adj net income
EPS
EPS yoy change
Adj EPS
Adj EPS yoy change
FCFF
Net debt
P/E
Adj P/E
Adj EV/EBITDA
Adj EV/EBIT
Gross dividend yield
Number of shares (eop)
2008
1,647.0
209.6
236.3
198.7
221.5
-16.6
131.2
-0.35
n.m.
2.77
61
163.3
824.9
n.m.
11.6
10.0
10.6
0.0
47,345
US$ m
US$ m
US$ m
US$ m
US$ m
US$ m
US$ m
US$
%
US$
%
US$ m
US$ m
x
x
x
x
%
ths.
2009E
1,629.1
445.2
256.8
432.8
244.4
236.2
121.8
4.02
n.m.
2.07
-25
148.2
901.9
8.0
15.5
10.9
11.4
0.0
58,690
2010E
1,863.6
306.1
306.1
289.3
289.3
160.9
160.9
2.67
-34
2.67
29
84.3
825.9
12.1
12.1
9.1
9.6
0.0
60,265
2011E
2,078.3
355.9
355.9
336.5
336.5
204.1
204.1
3.39
27
3.39
27
118.6
805.9
9.5
9.5
7.7
8.2
0.0
60,265
Source: Company, DM IDMSA estimates
Stock performance
134
118
102
86
70
aaCEDC is highly dependent on the FX rates. The stronger CEE
currencies vs. US$, the higher the valuation of CEDC’s equities
derived in US$. Moreover, CEDC has a large debt position denominated
in US$ and EUR. As a result, due to changes in FX rates, the Company
revaluates its outstanding debt at the end of each quarter, which
burdens or boosts CEDC’s reported net result. Management guidance
assumes FY09 revenues at US$ 1.55-1.68 billion and comparable EPS
at US$ 2.40-2.65. All assumptions were made at US$/PLN 3.3-3.5 and
US$/RUB 35-37, respectively. Moreover, the Company expects FY09
EBIT margin in the range of 14-15%, which is in line with our forecast.
aaBased on the acquisition of RAG and assuming organic growth
in the coming years, our 12M EFV for CEDC dwells at US$ 28.1 per
share (PLN 80.1 per share) which sets -13% downside to the
Company’s current market price. In our opinion, above-mentioned
improvement of sales and profitability is already priced in. Moreover,
54
CEDC
WIG
38
099.2009
088.2009
077.2009
066.2009
055.2009
044.2009
033.2009
022.2009
01.2009
122.2008
11.2008
22
100.2008
benefit from the economies of scale (i.e. optimization of logistics,
distribution, etc.). Moreover, the Company’s profitability improvement
should be reinforced by restructuring process launched in the Russian
subsidiaries. We forecast that the Company’s profitability at adj. EBIT
and NP lines should improve from 15.0% and 7.5% in 2009E to 15.5%,
8.6% and 16.2%, 9.8% in 2010E and 2011E, respectively.
099.2008
aaOn the back of increased scale of its operations, CEDC should
Source: ISI
Upcoming events
1. SEC filing deadline for 3Q09 results: November 9, 2009
2. SEC filing deadline for FY09 results: March 1, 2010
Catalysts
Risk factors
1. New brands introduction
2. Completion of restructuring processes
3. Management FY10 guidance to be released in
autumn 2009
1. Lack of rebound on the alcoholic beverages
market in the ST horizon
2. Large net debt position
3. Further increase in excise tax may drag demand
for alcoholic beverages
4. Dependence on FX rates
given the current development of the alcoholic beverages market,
and volatile exchange rates, we see risks standing behind our
forecasts for CEDC. However, despite some downside to our 12M EFV
assessment, the Company’s shares do not appear very expensive
from the perspective of forward multiples (e.g. 2010E P/E of 12.1x),
which may hinder – we believe – the reversion of the share market
price to the estimated fundamental value; this drives our decision
to rate CEDC a Hold (rather than a Sell).
Contents
1. Investment story . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2. Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3. Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.1. CEE alcohol beverages market development. . . . . . . . . . . . . 10
3.2. Polish alcoholic beverages market development . . . . . . . . . . 11
3.2.1.Polish alcoholic beverages market structure. . . . . . . . . 13
3.2.2.Polish alcoholic beverages market drivers. . . . . . . . . . . 16
3.3. Russian alcohol beverages market development. . . . . . . . . . 18
3.4. Hungarian alcoholic beverages market development. . . . . . . 19
4. The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.1. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.2. Shareholder structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5. Drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6. Business model and strategy. . . . . . . . . . . . . . . . . 23
6.1. Operations in Poland. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.2. Operations in Russia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.2.1.Whitehall. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.2.2.Parliament. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.2.3.Russian Alcohol Group. . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.3. Operations in Hungary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6.4. Further acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
7. Financials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
7.1. 2Q09 results review. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
7.2. Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.2.1.Geographic split of revenues. . . . . . . . . . . . . . . . . . . . . 30
7.3. Profits and margins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.4. Seasonality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.5. Dividend payout. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.6. Capex. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.7. Motivation programme. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
8. Financial forecasts . . . . . . . . . . . . . . . . . . . . . . . . . 34
8.1. Revenue forecasts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
8.2. Profits and margins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
8.3. Net debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
8.4. Management guidance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
9. Financial statements (consolidated, IAS). . . . . . . .36
CEDC
1.
Investment story
aaCEDC is the largest vodka producer in Poland and Russia and one of the leading
producers worldwide. CEDC is well-positioned to capitalise on the consolidating
alcoholic beverages markets in Poland and Russia. However, both markets suffer from
the economic slowdown and excise tax increase. As a result, both markets shrank yoy
by 10-15% in volume terms in 1H09.
aaOn the one hand, we forecast slide in the Company’s consolidated sales (even despite
RAG consolidation from 2Q09 onwards) by -1% yoy in 2009 (driven by the weakening
of CEE currencies vs. US$ and slump in the alcohol beverages market). On the other hand,
we forecast CEDC’s top line improvement in 2010E and 2011E by 14% and 12%, respectively.
The Company’s growth in the next years should stem from: (i) the one-off effect of the full
consolidation of RAG, (ii) further organic growth, and (iii) FX base.
aaOn the back of increased scale of its operations CEDC should benefit from the economies
of scale (i.e. optimization of logistics, distribution etc.). Moreover, the Company’s profitability
improvement should be reinforced by restructuring process launched in the Russian
subsidiaries.
aaCEDC is highly dependent on the changing FX rates. The stronger CEE currencies
(PLN, RUB and HUF) vs. US$, the higher the valuation of CEDC’s equities derived in US$.
aaBased on the acquisition of RAG and assuming organic growth in the coming years,
our 12M EFV for CEDC arrives at US$ 28.1 per share (PLN 80.1 per share) which sets -13%
downside to the Company’s current market price. However, despite some downside to our 12M
EFV assessment, the Company’s shares do not appear very expensive from the perspective
of forward multiples (e.g. 2010E P/E of 12.1x), which may hinder – we believe – the reversion
of the share market price to the estimated fundamental value; this drives our decision
to rate CEDC a Hold (rather than a Sell).
CEE alcoholic beverages
market, despite recent fast
growth, is not immune
to the economic downturn
Recently the CEE region has been one of the fastest growing alcoholic beverages markets
in the world. According to AC Nielsen, small and less developed markets tend to show faster growth
resulting from smaller base effect. CEE spirits market is dominated by white spirits, while market
share of whisk(e)y, brandy or cognac does not exceed 10%. According to CEDC, the alcoholic
beverages market grew by c. 5-8% yoy in 2008, exceeding the US$ 6-8 billion threshold
(c. PLN 20 billion). According to AC Nielsen, value of Polish vodka market reached PLN 10.1 billion
in 2008. In 1H09 yoy volume drop in sold alcohol beverages reached 10-15% (depending
on the country), which is a derivative of the economic slowdown and increased excise tax. Rebound
of the market should be rather moderate, while expected better sales in 2H09 vs. 1H09 will stem
mainly from seasonal effect.
Leading vodka producer in CEE
CEDC is the largest vodka producer in Poland and Russia and one of the leading producers
worldwide. The Company managed to strengthen its position through the successful acquisitions
of companies operating in Russia – Russian Alcohol Group, Whitehall and Parliament. CEDC is wellpositioned to capitalise on consolidating alcoholic beverages markets in Poland and Russia.
On the other hand, given the increased scale of the Company’s operations importance of the
Hungarian business will diminish, however market share on Hungarian market should remain
unchanged.
Organic growth on the base
The Company’s growth in the next years should stem mainly from: (i) the one-off effect of the full
consolidation of RAG, and (ii) organic growth. As a result, CEDC should continue to gain its market
share in Russia and remain the leading player on the Polish market. According to the Company,
CEDC’s market share in Russia should increase to 19.0-19.5% at the end of 2009 vs. c. 18%
at the end of 1H09. CEDC’s market share in Poland, which remains at c. 30%, has still a potential
to be improved given the recent re-launch of the Company’s two key brands: Absolwent and Bols.
of completed acquisitions
????????????????????????
5
CEDC
On the one hand, we forecast slide in the Company’s consolidated revenues (even despite RAG
consolidation from 2Q09 onwards) by -1% yoy in 2009 (driven by the weakening of CEE currencies
vs. US$ and slump in the alcoholic beverages market). On the other hand, CEDC’s top line should
improve in 2010E and 2011E by 14% and 12%, respectively.
Anticipated improvement
in profitability
CEDC should benefit from economies of scale (i.e. logistics, distribution etc.) as a result of the increased
scale of its operations. Moreover, the Company’s profitability improvement should be reinforced
by restructuring process launched in the Russian subsidiaries. According to CEDC’s management
the Company should save US$ 30-40 million due to consolidation of Russian operations. We forecast
that the Company’s profitability at adj. EBIT and adj. NP lines should improve from 15.0% and 7.5%
in 2009E to 15.5%, 8.6% and 16.2%, 9.8% in 2010E and 2011E, respectively.
High dependence on FX rates
CEDC is highly dependent on the changing FX rates. The stronger CEE currencies (PLN, RUB and
HUF) vs. US$, the higher the valuation of CEDC’s equities derived in US$. Moreover, CEDC has
a large debt position denominated in US$ and EUR. As a result, due to changes in FX rates,
the Company revaluates its outstanding debt at the end of each quarter, which burdens or boosts
CEDC’s reported net result. Management guidance assumes FY09 revenues at US$ 1.55-1.68 billion
and comparable EPS at 2.40-2.65. All assumptions were made at the base of US$/PLN 3.3-3.5 and
US$/RUB 35-37, respectively. Moreover, the Company expects FY09 EBIT margin in the range
of 14-15%, which is in line with our forecasts.
Hold + Neutral; despite
Based on the acquisition of RAG and assuming further organic growth in the coming years, our 12M
EFV for CEDC arrives at US$ 28.1 per share (PLN 80.1 per share) which implies -13% downside
to the Company’s current market price. In our opinion, above-mentioned improvement of sales and
profitability is already priced in. Moreover, given the current development of the alcoholic beverages
market, and volatile exchange rates, we see risks standing behind our forecasts for CEDC. However,
despite some downside to our 12M EFV assessment, the Company’s shares do not appear very
expensive from the perspective of forward multiples (e.g. 2010E P/E of 12.1x), which may hinder
– we believe – the reversion of the share market price to the estimated fundamental value; this drives
our decision to rate CEDC a Hold (rather than Sell).
downside to 12M EFV, the
Company’s 2010E multiples do
not look outrageous
6
????????????????????????
CEDC
2.
Valuation
aaDCF + peer-relative valuation.
aaOur DCF-derived 12M EFV assessment of CEDC stands at US$ 27.3 per share.
aaThe Company trades with a discount to its peer group, which we deem justified due
to difference in the profitability of CEDC’s and peers businesses.
aaOur final 12M per share EFV target for CEDC stands at US$ 28.1 per share.
Unleveraged beta at 1.3
We have valued CEDC using both absolute (DCF FCFF) and relative peer comparison valuation
methods. In our DCF valuation we assume an unleveraged equity beta of 1.3. The WACC for the
period rests close to 11%.
Fig. 1 CEDC; DCF model
Cost of equity
Risk free
Equity market premium
Unleveraged beta
Leveraged beta
Required rate of return
Cost of debt
Pre-tax cost of debt
Tax rate
After-tax cost of debt
WACC
Equity share
Debt share
Cost of equity
After-tax cost of debt
WACC
Financial forecasts
Sales (US$ m)
yoy change
EBIT (US$ m)
yoy change
NOPLAT (US$ m)
yoy change
D&A (US$ m)
NWC change (US$ m)
Capex (US$ m)
PV of FCFF (US$ m)
2009E
2010E
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
3.5%
5.7%
1.3
2.1
15.7%
3.5%
5.9%
1.3
2.1
15.8%
3.5%
6.0%
1.3
2.0
15.2%
3.5%
6.0%
1.3
1.9
14.6%
3.5%
6.0%
1.3
1.8
14.0%
3.5%
6.0%
1.3
1.7
13.5%
3.5%
6.0%
1.3
1.6
13.1%
3.5%
6.0%
1.3
1.5
12.4%
3.5%
6.0%
1.3
1.4
11.7%
3.5%
6.0%
1.3
1.3
11.2%
4.3%
6.0%
1.3
1.3
12.1%
6.4%
20.0%
5.1%
6.3%
20.0%
5.0%
6.5%
20.0%
5.2%
6.5%
20.0%
5.2%
6.5%
20.0%
5.2%
6.5%
20.0%
5.2%
6.5%
20.0%
5.2%
6.5%
20.0%
5.2%
6.5%
20.0%
5.2%
6.5%
20.0%
5.2%
6.5%
20.0%
5.2%
55%
45%
15.7%
5.1%
10.9%
57%
43%
15.8%
5.0%
11.2%
61%
39%
15.2%
5.2%
11.3%
65%
35%
14.6%
5.2%
11.3%
69%
31%
14.0%
5.2%
11.3%
73%
27%
13.5%
5.2%
11.3%
77%
23%
13.1%
5.2%
11.3%
100%
0%
12.4%
5.2%
12.4%
100%
0%
11.7%
5.2%
11.7%
100%
0%
11.2%
5.2%
11.2%
100%
0%
12.1%
5.2%
12.1%
1,629.1
-1%
244.4
23%
195.6
439%
12.3
-58.1
-166.2
163.3
1,863.6
14%
289.3
18%
231.5
18%
16.7
-23.6
-76.4
148.2
2,078.3
12%
336.5
16%
269.2
16%
19.4
-26.9
-177.4
84.3
2,140.6
3%
361.2
7%
289.0
7%
22.5
-10.8
-182.0
118.6
2,183.0 2,226.2
2%
2%
383.0
387.8
6%
1%
306.4
310.2
6%
1%
25.7
29.0
-7.3
-7.5
-181.2
-25.0
143.5 306.8
2,270.3
2%
395.2
2%
316.1
2%
29.9
-7.6
-23.3
315.1
2,315.2
2%
407.7
3%
326.2
3%
25.8
-7.8
-19.1
325.1
2,361.1
2%
419.7
3%
335.8
3%
22.4
-8.0
-21.0
329.2
2,407.8 2,455.5
2%
2%
425.8
434.0
1%
2%
340.6
347.2
1%
2%
22.7
22.1
-8.1
-8.3
-24.3
-22.5
330.9 338.5
Source: DM IDMSA estimates
????????????????????????
7
CEDC
Fig. 2 CEDC; DCF summary
FCFF terminal growth
WACC in residual period
Residual value (US$ m)
PV of residual value (US$ m)
PV of FCFF (US$ m)
EV (US$ m)
Net debt (US$ m)
Equity value (US$ m)
Number of shares (m)
Equity value per share (US$)
1.5%
12.1%
3,254.4
1,197.6
1,372.7
2,570.3
901.9
1,668.4
61.0
27.3
1.5% residual growth
assumption
Risk free rate equal to yield
of US 10Y and 30Y Treasury bonds
We assume a 1.5% residual nominal growth rate in our base-scenario EFV assessment with
an estimated average weighted cost of capital during residual period of 12.1%.
We apply risk free rate in the definite period equal to yield of the US 10Y Treasury bond, while risk
free rate in the residual period is equal to yield of the US 30Y Treasury bond.
ERP states at 6%
Equity risk premium in our model is weighted by the revenues derived from regions of the Company’s
operations. We apply 4.5% ERP for Polish operations and ERP of 7% for other operations (mainly
Russian, but also Hungarian). As a result our weighed ERP in the definite period states at 6%.
12M DCF based EFV at US$
We ran sensitivity analysis for CEDC’s EFV changing two variables: (i) residual growth rate and
(ii) WACC during the residual period. The Company’s EFV range varies from US$ 24.9 per share
to US$ 30.6 per share with central value of US$ 27.3 per share. CEDC is highly dependent
on the changing FX rates. The stronger CEE currencies (PLN, RUB and HUF) vs. US$ the higher
the valuation of CEDC’s equities derived in US$ and vice versa. We assume US$/PLN 3.3, 3.25
and US$/RUB 32, 31 in 2009 and 2010, respectively. For more information please refer to Figure 3.
27.3 per share
Fig. 3 CEDC; Sensitivity of DCF Valuation (US$ per share)
FCFF growth
0.5%
1.0%
1.5%
2.0%
2.5%
11.7%
26.1
27.1
28.1
29.3
30.6
11.9%
25.8
26.7
27.7
28.8
30.1
WACC
12.1% 12.3%
25.5
25.2
26.4
26.0
27.3
27.0
28.4
28.0
29.6
29.2
12.5%
24.9
25.7
26.6
27.6
28.7
Source: DM IDMSA estimates
Fig. 4 CEDC; Peer valuation relative to foreign peers
Company
Diageo
Pernod-Ricard
Belvedere
Remy Cointreau
Davide Campari-Milano SpA
Laurent-Perrier SA
Brown-Forman Corp
Constellation Brands Inc
Average
Median
Min
Max
CEDC
Implied CEDC's share price (US$)
Average implied CEDC's share price (US$)
EV/EBITDA
2009E 2010E 2011E
10.6
10.1
9.4
11.9
11.1
10.5
17.5
19.4
17.5
11.6
10.8
9.6
9.5
8.7
8.3
14.6
13.6
11.9
10.1
9.7
9.2
8.6
8.0
7.6
11.8
11.4
10.5
11.1
10.4
9.5
8.6
8.0
7.6
17.5
19.4
17.5
10.7
8.8
7.6
66.2
38.8
42.2
2009E
11.7
13.0
21.2
12.8
10.5
15.8
10.9
12.6
13.5
12.7
10.5
21.2
11.2
75.2
EV/EBIT
2010E
11.1
12.3
36.1
12.1
9.5
14.6
10.4
11.5
14.7
11.8
9.5
36.1
9.4
42.3
48.1
2011E
10.4
11.5
30.9
10.6
9.1
13.3
10.0
10.6
13.3
10.6
9.1
30.9
8.0
45.2
2009E
13.4
12.4
n.m.
16.6
12.1
18.0
15.8
9.4
14.0
13.4
9.4
18.0
7.8
52.0
P/E
2010E
12.5
11.7
n.m.
15.0
10.9
15.2
14.8
8.6
12.7
12.5
8.6
15.2
11.7
32.9
2011E
11.3
10.2
n.m.
13.1
10.2
13.0
13.8
7.9
11.3
11.3
7.9
13.8
9.2
37.8
Source: Reuters, IDMSA estimates
8
????????????????????????
CEDC
Discount vs. peers justified
Comparative valuation of CEDC against its peers generates a higher value than the DCF model.
In our opinion, CEDC should be given a discount towards its peers as the Company’s business
profitability is much lower than its competitors. As a result our ultimate 12M per share EFV target
for CEDC – constituting a 50%-50% mix of the outcomes of the DCF and peer-relative exercises –
stands at US$ 28.1 per share.
Fig. 5 CEDC; Valuation summary
Valuation method
12M EFV
per share (US$)
27.3
28.8
28.1
DCF
Peer-relative (after incorporation of 40% discount)
Average
Source: Reuters, DM IDMSA estimates
Fig. 6 Profitability of the alcohol producers vs. CEDC, 2009E-2011E
EBITDA Margin
Diageo
Pernod-Ricard
Belvedere
Remy Cointreau
Laurent-Perrier SA
Brown-Forman Corp
Average
CEDC
EBIT Margin
Diageo
Pernod-Ricard
Belvedere
Remy Cointreau
Laurent-Perrier SA
Brown-Forman Corp
Average
CEDC
Net Income Margin
Diageo
Pernod-Ricard
Belvedere
Remy Cointreau
Laurent-Perrier SA
Brown-Forman Corp
Average
CEDC
2009E
2010E
2011E
32.6%
28.4%
5.2%
21.7%
24.1%
24.0%
24.6%
26.8%
23.4%
15.8%
33.0%
29.4%
4.6%
22.4%
24.8%
24.6%
25.2%
28.1%
24.0%
16.4%
33.5%
29.7%
4.9%
23.9%
24.5%
26.7%
26.1%
28.1%
24.7%
17.1%
29.5%
26.0%
4.3%
19.7%
21.9%
22.2%
22.8%
18.4%
20.6%
15.0%
29.9%
26.6%
2.5%
20.0%
22.7%
22.9%
23.3%
19.7%
20.9%
15.5%
30.4%
27.2%
2.8%
21.6%
22.4%
24.1%
24.1%
20.1%
21.6%
16.2%
19.1%
15.2%
neg.
11.0%
13.8%
10.4%
14.5%
10.2%
13.5%
7.5%
19.6%
16.1%
neg.
11.7%
14.1%
11.6%
15.0%
11.6%
14.2%
8.6%
20.1%
17.1%
neg.
12.7%
14.6%
12.8%
15.5%
12.0%
15.0%
9.8%
Source: Reuters, DM IDMSA estimates
????????????????????????
9
CEDC
3.
Market
aaCurrent slowdown of the alcoholic beverages market in Poland is a consequence
of the economic downturn and rise of excise tax. According to Datamonitor, value
the alcoholic beverages market in Poland in 2009E and 2010E should increase by 5.3%
and 5.2% yoy, respectively. Moreover, the alcoholic beverages market should expand
by approx. 5% annually over the next five years. In our view, given the current market
conditions it may be hard to reach those targets.
aaPolish alcoholic beverages market (25th largest in the world) is dominated by beer
(4th largest market in Europe) and vodka (4th largest market in the world) as their value
market share stands at 91%. However, wine and other strong spirits successively increase
their market shares. Wine volume market share in Poland approaches to 5%, while strong
spirits (beside vodka) continue their way north.
aaStrong alcoholic beverages market segmentation is a mirror reflection of a society’s
purchasing power and drinking habits cultivated within the years. Poland and other CEE
countries have still large possibilities for the market development by improving the quality
and value of alcohol sold (as value of the alcohol sold does not correspond with its volume
as on the Western European markets) and increasing share of imported premium alcohols.
Alcohol from top shelf dynamically increases its market share, but still obtains less than
10% share on the strong alcoholic beverages market.
aaPolish spirits market features increasing competition between four market leaders:
CEDC, Belvedere (Sobieski), Polmos Lublin and Pernod Ricard which hold more than 80%
market share. As the market is getting more saturated, the new brands introduction and
migration to premium brands seem to be the key ideas for increasing sales. Potential
further acquisition would have rather limited impact on the market share division among
current players.
aaAlcohol beverages market evolution is dependent on the excise tax policy conducted
by the government. Growth of excise tax by 9% in 2009 may translate into change
of the strong alcoholic beverages demand structure (downselling especially in more price
sensitive lower-end segments) and increase of spirits grey economy as it already took
place in the past (vide cigarettes sales case Eurocash/KDWT).
aaRussian spirits market is dominated by vodka with 95% market share. Russian vodka
market is the largest in the world with its annual official production of 1.2 billion litres. Despite
the market fragmentation, it becomes more concentrated as the share of 5 key market
players increased to 37% in 2008 from 28% in 2007.
aaVolume of the Hungarian spirits market stays at 58 million litres after 7% yoy decline
in 2008. Currently in Hungary the consumption of alcoholic beverages decreases, while
imported beverages increase their share in the total value of alcohol beverages sold.
3.1.
CEE alcohol beverages market
despite recent fast growth is not
immune for economic downturn
10
CEE alcohol beverages market development
Recently the CEE region has been one of the fastest growing alcoholic beverages markets around
the world. According to AC Nielsen, small and more developing markets tend to show faster growth
as a result of smaller base effect. CEE spirits market is dominated by white spirits, while market
shares of whisk(e)y, brandy or cognac does not exceed 10%. According to CEDC, the alcoholic
beverages market grew by c. 5-8% yoy in 2008, exceeding the US$ 6-8 billion threshold
(c. PLN 20 billion). According to AC Nielsen, value of Polish vodka market reached PLN 10.1 billion
in 2008. In 1H09 volume drop in sold alcoholic beverages reached 10-15% (depending the country),
which is a derivative of the economic slowdown and increased excise tax. Rebound of the market
????????????????????????
CEDC
should be rather moderate, while expected better sales in 2H09 vs. 1H09 will stem mainly from
seasonal effect.
Fig. 7 Alcohol market growth by region; 2006/2007 yoy
Fig. 8 Fastest growing markets overall; all beverage alcohol measured; 2006/2007 yoy
45%
18%
40%
16%
35%
14%
30%
12%
25%
10%
20%
8%
15%
10%
6%
5%
4%
North America
Asia Pacific
Latin America
Source: AC Nielsen
Source: AC Nielsen
Fig. 9 CEE alcoholic drinks market segmentation (share by value, 2008)
Fig. 10 Eastern Europe spirit market (share by value, 2008)
Rest of Europe; 81.3%
Other spirits
8.6%
Rum
Whisk(e)y
0.4%
1.5%
Poland; 3.5%
Hungary; 1.1%
Brandy and Cognac
5.9%
Liqueurs
4.2%
Camerroon
Norrway
Austtralia
Switzerland
Hunggary
Thailand
Brazil
B
Poland
Ruussia
EEMEA
Czech Repuublic
Europe
Slovak Repuublic
Global
Argenntina
0%
Venezuela
Ukrraine
0%
2%
Tequila (and Mezcal)
0.1%
White spirits
79.4%
uss a; 12.6%
6%
Russia;
Czech Republic; 1.5%
Source: Datamonitor
Source: Euromonitor International
3.2.
Expected slowdown, however
still heading north in the midterm horizon
Alcoholic beverages production
began to decrease
????????????????????????
Polish alcoholic beverages market development
Poland is the 25th largest alcohol consumption and 4th largest vodka consumption market
in the world. According to CEDC, the alcoholic beverages market grew by c. 5-8% yoy in 2008,
exceeding the US$ 6-8 billion threshold (c. PLN 20 billion). According to AC Nielsen, value of Polish
vodka market reached PLN 10.1 billion in 2008. The economic downturn puts pressure on alcoholic
beverages sales development. Moreover, a general trend of slower rising household incomes
and increasing unemployment rate (the unemployment rate jumped in Poland to 10.8% in July 2009
vs. 9.4% year earlier) do not support sales of spirit products. Next increases of excise tax may have
further negative influence on consumers demand. According to Datamonitor forecasts,
the value of the alcoholic beverages market in Poland in 2009E and 2010E should increase yoy
by 5.3% and 5.2% respectively. According to Datamonitor, the alcoholic beverages market should
expand by approx. 5% annually over the next five years, which however may be hard to reach, in our
view.
According to Central Statistical Office (CSO), production of pure vodka increased by 16.5% yoy
in 2008 reaching 1,076 million hl. However, in 1Q09 production of pure vodka decreased by 7.2% yoy
reaching 218 ths. hl. Similar situation was observed in the beer and wine production segments. Beer
production in Poland reached 36.935 million hl, which implies 0.6% yoy growth. In 1Q09 production
declined by 9.7% yoy and reached 7.170 million hl. Fruit wine production in Poland decreased during
11
CEDC
the last few years. In 2008 wine production slumped by 6.3% yoy to 1.209 million hl. In 1Q09 fruit
wine production in Poland dropped by 22.6% to 146 ths. hl. Slide of alcohol beverages production
is also a mirror reflection of the CPI index of alcohol beverages. Alcohol prices index noticeably
accelerated during the first months of 2009. Increase of vodka and other alcohol beverages prices
was strictly connected with increase of excise tax by 9% in the beginning of the year.
Fig. 11 Pure vodka production growth in Poland (ths. hl of 100% spirit)
Fig. 12 Beer production in Poland (ths. hl)
40,000
35%
35 000
35,000
30%
1,000
15%
25%
10%
30,000
20%
800
5%
yoy changee
10%
600
5%
25,000
15%
20,000
0%
15,000
-5%
0%
400
-5%
-10%
200
yyoy change
1,200
10 000
10,000
-10%
5,000
-15%
15%
0
0
-20%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
1Q09
-15%
1998
2Q09
1999
2000
2001
2002
2003
2004
2005
2006
2007
Source: CEIC, GUS
Source: CSO
Fig. 13 Cider and other fruit wines production in Poland (ths. hl)
Fig. 14 Alcoholic beverages prices annual growth in Poland
3,500
20%
3,000
10%
0%
2 500
2,500
1Q08 1Q09
(corresponding month of previous year = 100)
106
106
105
105
-10%
2 000
2,000
-20%
1,500
-30%
104
104
103
103
Source: CEIC/GUS
Worsening alcoholic beverages
sales already witnessed
Alcoholic bewerages market
hit by deteriorating consumer
confidence
3.2009
101
2.2009
1Q09
1.2009
1Q08
12.2008
2008
11.2008
2007
10.2008
2006
9.2008
2005
8.2008
2004
7.2008
2003
6.2008
-60%
2002
102
5.2008
0
102
4.2008
-50%
3.2008
500
2.2008
-40%
40%
1.2008
1,000
12
2008
Source: CEIC,GUS
The yoy dynamics of alcoholic beverages sales in Poland already began to show weakness in 1Q09.
According to Polish Spirits Industry (PSI), sales of spirit products in 1Q09 reached 21.1 million litres
and was 28% lower yoy. Sales growth of beer significantly decelerated in 2008, while according
to CEIC/Carlsberg forecasts for 2009 beer sales should fall between 3%-5% yoy. The key driver
standing behind such significant slide in spirit beverages sales is increase of excise tax by 9%
at the beginning of 2009. Additionally, alcoholic beverages sales are affected by the increasing
unemployment rate and more rational household spending due to the economic downturn.
In our opinion, demand may be affected by consumer confidence which has been deteriorating
during the year and despite slight rebound during the last few months it still remains at very low
levels (according to the Central Statistical Office (CSO), this stemmed mainly from a deteriorating
perception of financial situation of households (recent and expected in the near future), an expected
future increase in the unemployment rate, as well as declining expectations for future savings
possibilities) and worsening of employment market conditions (unemployment rate reached 10.8%
in July vs. 10.7%, 10.8% and 11.0% in July, May and April, respectively, however slight improvement
of the situation on the labour market is attributable to the seasonal changes; as forecasted
by the Ministry of Finance, the unemployment rate at the end of 2009 should reach 12.5%). Both
leading and current consumer affluence indices significantly deteriorated this year and still remain
at very low levels seen recently in 2005 and 2004, respectively.
????????????????????????
CEDC
05.2009
03.2009
01.2009
11.2008
09.2008
07.2008
05.2008
03.2008
01.2008
Fig. 16 Indicator of financial standing of households in Poland
11.2007
09.2007
07.2007
05.2007
03.2007
01.2007
11.2006
09.2006
07.2006
05.2006
03.2006
00
0.0
01.2006
Fig. 15 Consumer confidence index in Poland
10
Superiority of positive answers
5
-5.0
0
-10.0
-5
-15.0
15 0
-20.0
-10
-25.0
-15
30.00
-30
-35.0
-40.0
-20
current indicator
Superiority of negative answers
leading indicator
-25
-45.0
II'05
Source:CSO, CEIC
II'06
II'07
II'08 VIII'08 IX'08
X'08
XI'08 XII'08
I'09
II'09
III'09
IV09
V'09
VI'09
Source: Pentor Research International
Fig. 17 Average salary and unemployment rate in Poland
3,500
25%
3,000
20%
2,500
15%
2,000
1,500
10%
1,000
Average gross salary (PLN) (LHS)
500
5%
Unemployment rate (RHS)
0
0%
2001 2002 2003 2004 2005 2006 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09
Source: CSO, PAP, IS, IBnGR
CEDC may be hit by the
unfavourable market
development
CEDC, being the leader on the strong spirits market, is hit by the unfavourable changes on the
alcoholic beverages market in Poland (which was already seen in 1H09). It may be hard to expand
portfolio of premium vodka and other spirits beverages, which seemed to be a strategy of winning
consumers on the more demanding market, following the evaluation of habits of the consumers
(as the changes may prove to be slower than previously expected on the back of weak economy).
Many spirit producers and distributors will have to face with decreasing demand and possible rise
in the grey vodka economy on the back of excise tax increase and more rational spending
of the households.
3.2.1.
Market dominated by beer and
pure vodka
Polish beer market become
saturated
????????????????????????
Polish alcoholic beverages market structure
Polish alcoholic beverages market is dominated by beer and vodka as their coupled value market
share stands at 91%. However, wine and other strong spirits beside vodka successively increase
their market share. Wine market share volume in Poland approaches to 5%, while flavoured strong
spirits in the strong spirits segment approaches to 10% share. Polish wine market is divided among
table and sparkling wine, which have 3.6% and 1% share in the alcohol beverages market,
respectively. As production of Polish wines is not meaningful, vast majority of wine sold is imported,
especially from countries such as Bulgaria, Moldova, Italy, France and New World countries. Average
value of wine sold varies between US$ 3-6 per bottle.
Polish beer market grew at high pace during the last year, but when in 2008 beer consumption
reached level of 96 litres per person (an average in the EU) its further growth will be limited
as the market seem to become saturated. Moreover, negative effect was exerted by increased
excise tax and the economic slowdown.
13
CEDC
Fig. 18 Beer sales in Poland (million hl)
Fig. 19 Sales of beer in Poland and in CEE (US$ billion)
40
14%
80
35
12%
70
10%
30
60
8%
6%
20
4%
15
50
yoy
y change
25
2%
10
0%
5
0
2001
2002
2003
2004
2005
2006
2007
2008
2008
2010
2012
40
30
20
-2%
10
-4%
0
2009E
CEE
Source: ZPPP
Poland
Source: Euromonitor International
Strong alcoholic beverages market segmentation is a mirror reflection of the society purchasing
power and drinking habits cultivated within the years. Poland and other CEE countries have still
large possibilities for the market development by upselling (as value of the alcohol sold does not
correspond with its volume as on the Western European markets) and increasing share of imported
premium alcohols.
Fig. 20 Strong alcohol market segmentation in Poland (1)
Fig. 21 Strong alcohol market segmentation in Poland (2)
100%
4.0%
Vodka
90%
Other
Dec 2007 - Nov 2008
3 5%
3.5%
Dec 2006 - Nov 2007
80%
3.0%
70%
2.5%
60%
50%
2.0%
40%
1.5%
30%
1.0%
20%
0.5%
10%
0.0%
0%
Dec 2007 - Nov 2008
Source: AC Nielsen
Mainstream and economy
segments leading the vodka
market
High market concentration
among producers
14
Dec 2006 - Nov 2007
Cognac
Liquer
Gin
Rum
Brandy
Whisky
Source: AC Nielsen
Vodka market in Poland is dominated by the mainstream and economy segments with premium
brands share close to one fourth of the market. During the last years the migration from the low-end
into medium segments and from mainstream into premium segments was observed. As a result
of the economic slowdown coupled with the increased alcohol prices, we will probably observe
an opposite trend on the market during the coming months, however in the long-term horizon
premium brands should manage to increase their market share vs. the lower segments of the
market.
Alcoholic beverages market is highly concentrated in both leading segments: spirits and beer.
Despite the fact that there are many companies with a noticeable market share, on the spirit market
4 key market players have more than 80% market share in both segments. CEDC is a leader
in the strong alcoholic beverages market with its 26 % market share. Next in the line are respectively:
Stock Poland, Belvedere and Pernod Ricard. Unquestioned leader on the beer market is Kampania
Piwowarska with its 43% market share followed by Żywiec, Carlsberg and Royal Unibrew. Imported
beer market share is less than 2.5%. The entrance of new players is still possible, as many global
players are not present on the Polish market as producers (i.e. Bacardi-Martini), however we deem
that it rather will not take place in the nearest future.
????????????????????????
CEDC
Fig. 22 Vodka market segmentation in Poland
100%
Fig. 23 Value market share by producers and distributors in Poland (sales value)
35%
Top premium; 6%
Jan-Nov 2008
90%
30%
Jan-Nov 2007
Premium; 20%
80%
25%
70%
20%
60%
15%
Mainstream; 47%
50%
10%
40%
5%
30%
0%
20%
CEDC
Economy; 27%
10%
0%
2008
Brown- Wyborowa Polmos
V&S
Sobieski Polmos
(Belvedere) Lublin Luksusowa Forman (Pernod BielskoPolska
Ricard)
Biala
(Oaltree Zielona
Góra
Capital)
(Pernod
Ricard)
Diageo
Polmos
Jozefow
Source: Company
Source: AC Nielsen
Fig. 24 Vodka market share by producers in Poland (sales volume); (March, 2009)
Fig. 25 Beer market share by producers in Poland (sales volume); (March, 2009)
Akwawit
Other; 17.0%
W boro a & V&S
Wyborowa
Luksusowa (Pernod
Ricard); 11.0%
Other; 11.1%
CEDC; 26.0%
Żywiec Group; 30.0%
Kompania Piwowarska
((SAB Miller);); 42.9%
25 0%
Polmos Lublin; 25.0%
Royal Unibrew; 3.2%
Sobieski (Belvedere);
21.0%
Source: AC Nielsen, companies
Convenience stores leading the
alcohol retail distribution market
Carlsberg Poland;
12.8%
Source: AC Nielsen, companies
Convenience stores are distribution leaders on the alcoholic beverages market with more than 75%
market share while super- and hypermarkets possess the rest. In our opinion it is also a consequence
of the Polish retail market segmentation, which contrary to Western European countries
is characterised by relatively strong position of small groceries and traditional stores vs. large hyperand supermarkets. In Poland, the share of small convenience stores is close to 50%, while joined
share of discounts, hyper- and supermarkets approaches 40%. In countries such as France, Belgium
or the Netherlands, modern channels dominate retail sales while traditional shops generate only
4-7% of total grocery retail sales. This stems from: (i) people’s unchanged habits based on the
Fig. 26 Alcohol retail distribution chains
Hipermarkets
> 2,500 sq m; 6.40%
Supermarkets
< 2,500 sq m; 18.11%
Convenience stores;
75.49%
Source: AC Nielsen
????????????????????????
15
CEDC
conviction of more comfortable shopping in stores in the vicinity of their residence, and
(ii) the demographic structure of Polish society – less than 10% of towns have population in excess
of 5 thousand and traditional sales remain strong in such small localities.
Fig. 27 Structure of the domestic grocery market in Poland
100%
6%
80%
70%
49%
60%
5%
6%
Hypermarkets
Supermarkets
Discounts
Small shops
Specialistic shops
Other grocery shops
7%
90%
45%
50%
40%
12%
11%
30%
15%
13%
20%
10%
15%
17%
2007
2012E
0%
Source: Euromonitor International, DM IDMSA estimates
Potential privatizations likely,
but not significant
Poland – alcohol net importer;
negative trade balance will
escalate
It is possible that some of remaining state-owned alcohol producers will be privatized. Ministry
of Treasury informed that it plans to re-launch sale process of Polmos Józefów. Amendments
to the Privatization and Commercialization Act will allow to dispose 85% stake hold in the company.
Next company waiting in the queue to be disposed is Polmos Bielsko-Biała. However, recent
negotiations of Ministry of Treasury with investors failed, as the compromise regarding the price
was not reached. Other companies which will may be disposed in the future by the MT are
Polmos Toruń and Polmos Konin. Some of the companies are in difficult financial situation and may
even go bankrupt.
Poland is a net importer of alcoholic beverages, however scale of the international trade is becoming
higher every year. While the value of Polish exports has remained at comparable level during the last
years, the value of imported alcoholic beverages continuously raises. Among others it is an effect
of increasing share of imported premium alcohols such as whisky, cognac, brandy, sherry, vodka,
wines and beer. In our opinion, in the long time horizon such trend should be maintained as share
of premium alcohols on the market ought to raise on the back of increasing disposable income
of households and the evaluation of drinking habits of consumers.
Fig. 28 Foreign trade of alcoholic beverages in Poland (EUR m)
400
Export
vs.
Import
350
300
Strong alcohol&spirit
Wine&cider
Beer
Total
250
200
150
100
50
0
2006
2007
2008
2006
2007
2008
Source: Eurostat
3.2.2.
Excise tax – important price
driver on the market
16
Polish alcoholic beverages market drivers
Excise tax is one of the leading price drivers on the alcoholic beverages market (similar to tobacco
market vide Eurocash). Excise tax in strong alcoholic beverages has c. 50% share in total price
????????????????????????
CEDC
of the product sold. Taking into account the structure of the vodka market segmentation in Poland
(mainstream and economic segments possess jointly 74% vodka market share) and recent increase
in excise tax by 9% from the beginning of 2009 it is obvious that many price sensitive consumers will
be forced to change their drinking habits by: (i) downselling from premium or mainstream into
mainstream and economy segments, respectively, (ii) switch from economy into grey vodka segment,
or (iii) decrease the amount of consumed alcohol. Data for the 1H09 clearly show that sales
of vodka and other strong alcohols have been noticeably impacted by the excise tax changes
conducted at the beginning of 2009. Polish Spirits Industry (PSI) estimates that in 2009 income from
excise tax to the national budget will be much smaller than previously expected and should reach
PLN 5.71 billion vs. PLN 6.55 billion estimated by the government. According to PSI, excise tax
collection decrease will be similar to the one already witnessed in 2001, when government increased
excise tax rate to PLN 6.28 ths. from PLN 5.7 ths. per 1 hl previously, i.e. by 10% (in comparison with
9% increase conducted this year). Excise tax increase has also significant impact on grey spirit
production. According to PSI, on the back of 9% excise tax increase it is even possible that grey
spirit market share will increase from estimated 10% to even 20%. In 2008 Polish customs officers
and boarder guard intercepted 500 ths. litres of grey spirit.
Fig. 29 Excise tax from alcoholic beverages in Poland (PLN m)
Fig. 30 National budget income from spirt products excise tax
7.0
6.00
National budget income from excise tax (PLN billion)
2008
Excise tax rate ((PLN ths. pper 1 hl))
2007
6.0
5.00
50
5.0
4.00
4.0
3.00
3.0
2.00
2.0
1.00
1.0
0.0
0.00
wine
strong alcohols
beer
Source: Ministry of Finance
Prices of raw materials/semi
products determine costs
of alcohol production
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009E
2010E
Source: Polish Spirits Industry
Vodka is produced from spirit received in process of fermentation of grain, potato or other plants
reach in starch. According to different sources, the value of raw materials (grain, potato, molasses
etc.) used in production of ethanol varies between 50% to 70% of total production costs. As a result,
changes in prices of the raw materials used in ethanol production have significant impact on costs
of spirit which is purchased by distilleries in order to product vodka. After hike in wheat prices
observed from mid 2007 to mid 2008 prices came back to levels seen in late 2006 i.e. PLN 490 per
tonne. According to the Institute of Agricultural and Food Economics National Research Institute
(IERiGŻ in Polish abbreviation), prices of wheat should stabilize in the range of PLN 450-480 per
Fig. 31 Wheat prices (PLN per tone)
1,000
900
800
700
600
500
400
300
200
100
01.2005
02.2005
03.2005
04.2005
05.2005
06.2005
07.2005
08.2005
09.2005
10.2005
11.2005
12.2005
01.2006
02.2006
03.2006
04.2006
05.2006
06.2006
07.2006
08.2006
09.2006
10.2006
11.2006
12.2006
01.2007
02.2007
03.2007
04.2007
05.2007
06.2007
07.2007
08.2007
09.2007
10.2007
11.2007
12.2007
01.2008
02.2008
03.2008
04.2008
05.2008
06.2008
07.2008
08.2008
09.2008
10.2008
11.2008
12.2008
01.2009
02.2009
03.2009
04.2009
05.2009
0
Source: CSO
????????????????????????
17
CEDC
tonne, while in the end of 2009 prices may raise to PLN 490-540 per tonne. According to OECD,
prices of grain up to 2018 should be 10-20% higher than in the period of 1997-2006.
Sales of alcohol beverages as other consumption goods, is dependent on general macroeconomic
situation, which has been worsening recently. Evaluation of drinking habits of Poles indicates,
however that vodka and beer will seem to dominate the market in the long run. On the other hand,
premium alcohols should continue to increase their stake, becoming important supplement of the
alcoholic beverages market. In the long term horizon, customers purchasing power should improve.
As a result, consumers will be able to spend more money on premium alcohols or consume more
alcohol (which however may be doubtful, as Polish market seems to be saturated).
General consumption trends
& changing drinking habits
Fig. 32 Alcohol consumption in Poland (litres of 100% alcohol per 1 citizen)
Fig. 33 Structure of alcohol beverages consumption in Poland
9.5
100%
spirit products
wine&mead
beer
90%
9.0
80%
70%
8.5
60%
8.0
50%
40%
7.5
30%
20%
7.0
10%
6.5
0%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
1998
Source: CSO
1999
2000
2001
2002
2003
2004
2005
2006
2007
Source: PARPA, CSO
Fig. 34 Number of bottles available to purchase for an average monthly salary
1,200
no bottles of beer
b ttl off wine
i
no bottles
1,000
no bottles of vodka
800
600
400
200
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Source: CSO, PARPA
3.3.
Vodka has 95% share
in Russian spirits market
18
Russian alcohol beverages market development
Russian spirits market is dominated by vodka with 95% market share. Russian vodka market is the
largest in the world with its official annual production of 1.2 billion liters. According to the Company,
Russian vodka market may grow at 7% p.a. in the next 3 years. On the other hand, it is likely
that volume of vodka sold will decrease in 2009 and 2010. Vodka market segmentation in Russia
is similar to the one in Poland. It may also become an argument standing behind forecasted growth
of the vodka market value on the back of upselling possibilities stemming from growing purchasing
power of Russian consumers.
????????????????????????
CEDC
Fig. 35 Vodka market segmentation in Russia
100%
Premium; 8%
90%
80%
70%
60%
Mainstream; 64%
50%
40%
30%
20%
Economy; 28%
10%
0%
2008
Source: Company
Vodka market still fragmented,
but becoming more
concentrated
Russian vodka market is divided among many players. Key 5 vodka producers have c. 37% market
share, while 11 largest market players have 52% market share. Despite the market is still fragmented
(in comparison with Polish vodka market) it becomes more concentrated each year. In 2007 key 5
and 11 producers had 28% and 45% market share, respectively. It is very likely that the concentration
process will continue as during the last 5 years number of vodka producers fell by a half.
Fig. 36 Number of vodka licensed producers in Russia
400
350
300
250
200
150
100
50
0
2006
2007
2008
Source: Company
Wine consumption in Russia
remains at low level
Annual wine consumption in Russia stands at 8 liters per capita. According to the Company,
the possible growth of the wine market consumption in the next 3 years may reach up to 9% p.a.
The fastest growing wine segment in Russia is sparkling wine. According to Euromonitor, the sales
of this product increased yoy by 8% by volume and 22% by value in 2008.
3.4.
Hungarian market divided
between local and imported
alcohols
????????????????????????
Hungarian alcoholic beverages market development
Hungarian alcoholic beverages market is dominated by bitter and flavoured alcohols. According
to the Company, currently in Hungary the consumption of alcohol beverages decreases, while
an increase in imported beverages in the total value of sold alcoholic beverages is observed.
The Company estimates the volume of the Hungarian spirits market at 58 million litres after 7% yoy
decline in 2008. Hungarian spirits market is divided into 2 segments: local and imported products.
Local producers offer products at low prices in the mainstream and lower segments (despite Palinka
– local spirit), while imported products occupy higher and more competitive segments of the market.
Market leader on the Hungarian market is Zwack Unicum Zrt, followed by CEDC, Bacardi-Martini,
Pernod-Ricard Hungary, Heinemann and Brown-Forman.
19
CEDC
4.
The Company
aaCEDC has operated on the Polish market since 1990 and has been successfully
enlarging the scale of its operations through acquisitions and organic growth, becoming
the leading vodka producer in Poland.
aaCEDC’s CEO – one of the Company’s founders – remains a leading shareholder.
Company’s free float remains at 81%.
4.1.
Almost 20 years of operations
on the Polish market
Scale of operations
successively increased
Background
Carey Agri – the first company of CEDC Group – was founded in Poland in 1990. The company’s
founders were: William O. Carey, Jeffrey Peterson and William V. Carey, the current President and
CEO of CEDC. In 1991, Carey Agri became the exclusive importer of selected beer products
for Poland. On the back of the initial success in the distribution, the company quickly expanded
its offer. Most of the sales in this period was destined to wholesale distributors in Poland.
In 1993 Carey Agri started to introduce a 24h direct supply system. Additionally, simultaneously
the company created retail sales networks in Poland. Carey Agri rented a warehouse facility,
expanded its transport base and started to sell the products directly to groceries and pubs.
The Warsaw supply model was later reproduced in Kraków (1993), Wrocław (1994), Szczecin (1994),
Gdynia (1994), Katowice (1995), Toruń (1995) and Poznań (1996). CEDC was registered as a Carey
Agri holding company in 1997.
IPO gave funding for expansion
In 1998 CEDC issued 2 million shares in its initial public offering on the NASDAQ Small Cap market.
In 1999, the Company was admitted to trading on the NASDAQ National Market (currently
the NASDAQ Global SELECT Market). CEDC used proceeds from IPO for: (i) acquisition of three
regional distributors, (ii) purchase of Polish wine importer, and (iii) expansion of the distribution
network in Poland.
Acquisitions accelerated
In subsequent years CEDC gradually increased its distribution capacity organically and
by acquisition. CEDC acquired 18 regional alcoholic beverage distributors, one wine importer
(Piwnice Wybornych Win), and 3 production companies.
CEDC’s growth in Poland…
… and abroad
20
In 2006, CEDC acquired its first operating company outside Poland: Bols Hungary – an importer
of alcoholic beverages. In 1Q08 CEDC purchased Copecresto – a company producing Parliament
Vodka. Next acquisitions of Whitehall (importer of wine and spirit products) and RAG (the largest
producer of vodka in Russia) helped CEDC to improve its position on the Russian market.
????????????????????????
CEDC
4.2.
Free float remains at 81%
Shareholder structure
CEDC’s CEO – one of the Company’s founders – remains a leading shareholder. Company’s free
float remains at 81%.
Fig. 37 CEDC; shareholder structure
Other; 80.7%
Takirra Investment
Corporation N.V.; 5.1%
Mark Kaoufman;
Kao fman 5.9%
5 9%
William Carey;
y; 8.2%
Source: Company
????????????????????????
21
CEDC
5.
Drivers
aaCEDC’s financial results will depend on: (i) alcoholic beverages market development
which, despite the forecasted growth in the LT horizon, should suffer in 2009/10 on the back
of excise growth and economic slowdown, (ii) organic growth (i.e. change of product mix,
expansion of distribution network), and (iii) effects of conducted acquisitions. Entrance
on the Russian market gives CEDC possibility to capitalize on the large and prospective,
however more risky market.
We are of the opinion that CEDC’s development and financial performance will depend on:
Alcoholic beverages market development, expected to witness slowdown in the short
aa
term horizon on the back of excise tax increase (Poland and Russia) and the economic
downturn. According to Datamonitor forecasts, the value of the alcoholic beverages market
in Poland in 2009E and 2010E should increase yoy by 5.3% and 5.2% respectively. In our opinion,
it may be hard to deliver after already witnessed yoy slide of the production and sales of alcohol
beverages in 1H09. According to Datamonitor, the alcoholic beverages market should expand
by approx. 5% annually over the next five years.
The worsening economic situation should be more favourable for the mainstream and
aa
economic segments of the vodka market rather than premium brands. CEDC recently
focuses on development of premium brands on the one hand and decreases sales of the low
end brands. Such move should help the Company to increase its profitability, however may put
pressure on volumes sold (already witnessed in 1H09 like-to-like) as, in our opinion, downselling
than upselling should be witnessed on the market in the coming quarters.
Organic growth. The Company increases scale of its operations by introduction of new brands
aa
in its portfolio and elimination of less perspective ones. Moreover, CEDC continues to develop
its distribution network (the Company had 19 distribution centres and 124 branches in 2008
vs. 17 and 87 in 2007, respectively).
Acquisitions. CEDC is an active player on the M&A market. The Company made its first
aa
acquisitions in Poland, but during the last years it become an active player in the CEE market,
purchasing companies in Hungary (2006) and Russia (2008). Acquisitions helped CEDC to enter
the largest vodka market worldwide.
Scale of activities. Acquisitions accompanied by organic growth should allow the Company
aa
to maintain its dynamic path of growth, however after recent strengthening of the position
of Polmos Lublin (2nd player on the Polish vodka market), a question mark may (however does
not have to) hang over the CEDC’s leading market position in Poland.
Diversification of operations. CEDC business model, which was previously based on pure
aa
import and distribution of alcoholic beverages was successively developed incorporating
production and exports. As Hungarian market decreases its volume (it is not a meaningful
contributor to CEDC’s results) Russian market seems to be much more prospective and
demanding.
22
????????????????????????
CEDC
6.
Business model and strategy
aaThe CEDC business model is based on providing its clients with alcoholic beverages
through specialized distribution network and motivated sales force. The Company
has operated for almost 20 years, successfully enhancing scale of its operations
in order to create longer value chain not only as a distributor, but also as a producer.
CEDC encompasses delivery of its products to a broad group of clients: supermarkets,
hypermarkets, discounts, grocery shops, hotels, bars, restaurants, night clubs and petrol
stations.
aaCEDC owns vodka production plants located in Poland (Polmos Białystok and Bols),
Russia (Moscow region, Tula, St.-Petersburg, Novosibirsk – RAG, Moscow region –
Parliment) and Georgia (Tbilisi – RAG) with exclusive rights to produced brands of: Bols
(in Poland and Russia), Soplica, Żubrówka, Absolwent, Parliament, Green Mark,
Royal Vodka, Zhuravli, and many others.
aaThe Company’s growth is based on organic development and acquisitions. As a result
of acquisitions of Bols Hungary, Copecresto, Whitehall and RAG, the Company significantly
increased the scale of its operations entering the new markets.
aaCEDC owns more than 120 branches in Poland and is still expanding its network.
The Company supplies alcoholic beverages products through motivated sales team
to more than 39,000 clients in Poland.
aaThe Company is an active M&A player on the consolidating Russian alcohol distribution
and production market. Polish spirits market is divided between 4 leading players, and
next transactions (if appear) are unlikely to change current status quo.
6.1.
Operations in Poland
CEDC’s operations in Poland encompass production, export and distribution of produced and
imported alcoholic beverages. The Company manages its portfolio of more than 700 brands. CEDC
is the largest vodka producer in Poland and one of the leading producers worldwide. The Company
imports spirit products, wines, beer and has exclusive rights for c. 40 imported brands. Distribution
network is efficient and able to deliver products within 24h from placing the order. CEDC exports
products to more than 30 countries worldwide.
Production capacity of Polish
plants stays at 58 million litres
of 100% alcohol p.a.
Raw materials obtained from
many suppliers
Enhanced sales team helps to
reach a broad number of clients
????????????????????????
CEDC’s production plants in Poland are located in Białystok and Oborniki Wielkopolskie (near
Poznań). Polmos Białystok production capacity stays at 24 million litres of 100% alcohol p.a. and
is utilized in 75%-85%. In Białystok such brands of alcohol as: Żubrówka (one of leading export
brands), Absolwent or Palace Vodka are produced. Production plant in Oborniki Wielkopolskie
produces one of best selling vodka in Poland – Bols and Soplica – one of 10 best selling vodkas
in mainstream segment. Bols distillery production capacity stays at 34 million of 100% alcohol
p.a. and is utilized in 50%-60%.
Key semi-products used in the production of vodka are: raw spirit, aromas such as bison grass etc.
and packaging materials: bottles, cartons, labels, caps etc. All the semi-products and raw materials
are obtained from different suppliers in Poland on the basis of signed long term agreements (prices
of delivered goods are set once a year) or through the execution of purchases on the free market.
For each category of semi products the Company has a few suppliers, which increases CEDC’s
negotiating power and secures continuity of supplies. Moreover, the Company does not depend
on any supplier. The same model has been replicated in Russia.
The Company’s distribution network consists of 124 branches and 19 distribution centres. CEDC
continues to enhance its distribution network, which in 2008 increased by 37 new branches and
23
CEDC
2 distribution centres. Well-developed distribution network allows CEDC to serve 39,000 sales
points in Poland through the specialised sales team (consisting of c. 650 sales representatives) to:
supermarkets, hypermarkets, discounts, grocery shops, hotels, bars, restaurants, night clubs and
petrol stations. CEDC delivers: (i) its own produced alcohol products and (ii) imported alcohol
beverages.
Exclusive rights for c. 40 well
known imported products
in Poland
Export of the key brands
to more than 30 countries
worldwide
Many trade restrictions imposed
on the Company’s operations
CEDC imports such alcohols as: spirit products, wines, beer and non-alcoholic beverages.
The Company has exclusive rights for c. 40 imported brands. Additionally, CEDC provides
a marketing support for suppliers which entrusted their brands to the Company.
The Company’s key export product is Żubrówka which is sold in US, U.K., Japan and France, where
it has the position of best selling premium vodka. It is also exported to other 30 countries around
the world (the number of new markets is increasing). Second export product is Absolwent (Graduate
in export version) sold mainly on U.K., Ireland, US and Japan markets.
The trade restrictions imposed on CEDC’s operations concern such areas as: concessions and
permission for alcohol production and distribution, adequate product marking, marketing (i.e. Polish
law forbids any commercial or promotion in mass media of any alcoholic beverage which contains
more than 18% of alcohol), as well as relations with wholesale and retail distributors. Moreover,
the Company directly influences any excise tax or duty tax rate changes. As a result, any event,
such as for example, not prolonging the validity of already existing concession, may automatically
translate into CEDC’s financial situation. Additionally, as an alcohol producer CEDC must meet many
restrictive environment protection regulations regarding disposal of pollutant and dangerous
substations.
6.2.
18% share in Russian vodka
production market
Raising retail network helps
to increase market penetration
Products exported to many CEE
and chosen UE countries
CEDC conducts its operations in Russia through companies: RAG, Whitehall, Parliament and joint
venture with Moet&Hennessey. Each of the enterprises provides different products, which allows
the Company to build a wide range of products. Diversified products portfolio with strong brand
names gives the Company a possibility to become an aggressive market share fighter. Currently
CEDC’s market share on the Russian vodka production market stays at c. 18%.
In Russia Whitehall, Parliament and RAG distribute their products through their sales teams which
are responsible for the sales of products to key retail clients and depend on external distribution
network – warehouses, which may reach smaller and medium sized points of sales. As a result
of developing retail networks of hyper- and supermarkets across the country, it should become
easier for the Company to increase its penetration of the alcoholic beverages market, especially
outside of the largest cities.
Among CEDC’s portfolio, Parliament vodka is exported to many CEE countries and to chosen EU
countries where the largest export market is Germany. Its export volume reached 0.2 million of 9 litre
cases.
6.2.1.
Importer with exclusive rights
to many brands
CEDC owner of 80% stake
24
Operations in Russia
Whitehall
Whitehall is an importer of diverse alcoholic beverages: spirit products, wines and champagnes with
exclusive rights to many brands as: Concha y Toro, Constellation or chosen brands of Campari
portfolio. The company is also an owner of distribution centres located in Moscow, St. Petersburg,
Rostov and on Siberia. Whitehall has a network of retail stores selling wines and spirit products
in Moscow. Additionally, the company is a 50% stake owner of joint venture company with
Moet&Hennessy.
In 2008 CEDC purchased a 75% stake (50% minus one vote) in Whitehall for US$ 200 million in cash
and 843,524 in shares. Due to the execution of price corrections stemming from guaranteed minimal
purchase price, CEDC made additional payment of US$ 5.9 million in cash and issued 2.1 million
shares. Next cash payment of US$ 2 million was executed in March 2009. Deferred payments,
already due under the original stock purchase agreement, were paid with EUR 8 million on June
????????????????????????
CEDC
2009 and one is still remaining at EUR 8 million falling on September 2009. Regarding these
payments, the Company received an additional 375 class B shares of Whitehall, which represents
an increase in the Company’s stake from 75% to 80%. Whitehall has been consolidated starting
from May 2008.
CEDC has right to purchase
remaining stake of Whitehall
CEDC has right to purchase remaining stake in Whitehall. The price of remaining stake will be set
in accordance with Whitehall EBIT margin in two periods: (i) 2008 and (ii) two years preceding
purchase of Whitehall’s remaining stake. Exercise price cannot be smaller than future value of US$
32 million and not higher than future value of US$ 89 million plus dividend withdrew by Whitehall.
White Horse – owner of Whitehall’s remaining stake – has a put option for its stake in the company,
which may be executed beginning from 2011.
6.2.2.
CEDC possess a 85% stake in
Parliament + option
for remaining 15% shares
CEDC purchased Parliament - the leading vodka brand in Russia - with sales of 3 million 9 litres
cases in 2008, 20% up yoy. The company’s production plant is located in Balahikha, Moscow region.
CEDC paid for Parliament US$ 180 million in cash and issued 2,488,806 shares. Additional payment
of US$ 15 million should take place by the end of 2009. CEDC financed acquisition of Parliament
from proceeds of convertible bonds issue at amount of US$ 310 million (US$ 304 million net).
The Company has an option for remaining 15% shares, which may be executed beginning from
2015.
6.2.3.
Owner of the best selling vodka
brand in Russia
5 production plants located
in Russia and Georgia
Specialized sales teams
serve 28,000 sales points
countrywide
Parliament
Russian Alcohol Group
RAG posses c. 16% market share on the Russian vodka production market and is the largest vodka
producer in the country with sales exceeding 17 million 9 litre cases in 2008. The company produces
best selling vodka in Russia – Green Mark, and second best selling premium vodka – Zhuravli.
RAG has 5 production plants which are located in Russia: Moscow region, Tula, St.-Petersburg,
Novosibirsk and in Georgia’s capital - Tbilisi. Newly opened production plant in Novosibirsk in 2008
should allow the company to reduce logistic costs as it decidedly cuts distribution chain and delivery
time to Eastern regions of the country.
RAG has 42 sales teams (1,500 people) which distribute the company’s products in 42 regions
countrywide. Sales teams are in direct contact with retailers and are responsible for adequate
products positioning. The sales teams control deliveries to c. 28,000 sales points (c. 33% penetration
countrywide).
Fig. 38 Payment for remaining stake in RAG
Cash
EUR m
US$ m
Value (US$ m)
Shares
Value (US$ m)
Warrants
Strike (US$)
Value (US$ m)
Total value (US$ m)
2009E
0.0
17.8
17.8
1,550,802
48.4
0
2010E
22.8
25.3
57.9
1,575,000
49.2
0
2011E
62.2
69.1
157.9
0
0
1,490,550
22.1
17.4
2012E
63.1
70.0
160.0
751,852
23.5
300,000
26.0
3.4
2013E
62.2
69.1
157.9
0
0
1,803,813
26.0
23.2
Total value
551.5
121.1
44.0
716.6
58% stake will be increased
to 100%
????????????????????????
In July 2008 CEDC purchased a 42% stake in Russian Alcohol Group (RAG) from Cayman 2 (Cayman
Island-based company). Payments were divided between: (i) US$ 182 million paid in cash,
(ii) purchase of Cayco’s (Cayman 2 subsidiary) convertible bonds for US$ 104 million. In 2009, on the
basis of the signed agreement, CEDC made additional payment of US$ 18 million and 1.7 million
shares. Next payments will take place in the years 2010-2013, while CEDC’s stake in RAG will be
increased to 100%. As a result CEDC will pay c.US$ 550 million in cash, c. US$ 95 million in shares
and c. US$ 24 million in warrants. Recently CEDC purchased additional 6% stake in RAG from
25
CEDC
the minority shareholders for US$ 30 million. As a result, current stake of the Company in RAG stays
at 58%.
6.3.
Operations in Hungary
CEDC’s operations in Hungary are conducted through its subsidiary – Bols Hungary. The company
sells Royal Vodka which is produced in Poland and has 28% market share in Hungary. Bols Hungary
is also an exclusive importer of such brands as: Metaxa, Jagermeister – best selling bitter vodka in
Hungary, and many others. The company employs 20 salesmen responsible for sales of products to
key clients across the country.
6.4.
Further acquisitions likely,
however not included
in our forecasts
26
Further acquisitions
CEDC does not rule out next acquisitions if attractive opportunities appear. However, at least
for the time being, the Company does not give any precise information regarding either the possible
date or scale of such transactions. In our opinion, it is possible that subsequent transactions will
be executed, as the alcoholic beverages market in Russia is in the process of consolidating and
CEDC, with its strengthening market position and track record of executed transactions, may sustain
its role in this process.
????????????????????????
CEDC
7.
Financials
aaCEDC revenue growth in the last years was driven mainly by acquisitions and organic
growth additionally fuelled by favourable FX changes, i.e. strengthening of CEE currencies
vs. US$ - the reporting currency. CEDC’s revenue CAGR in 2006-2008 reached 32%.
aaThe Company’s profitability continues to improve on the back of performed acquisitions
and change of product mix towards larger share of higher margin products. As a result,
CEDC’s consolidated EBIT margin increased to 12.1% in 2008 from 9.9% in 2007. Moreover,
significant improvement is awaited also in the coming years.
aaNWC needs are derivative of raising scale of operations, i.e. improving distribution
network and expanding the Company’s operations in Russia and entrance on new export
markets.
aaLarge FX debt position creates additional FX risk. Quarterly debt revaluation impacts
the Company’s balance sheet and P&L which burdens or boosts reported results, making
them more volatile for FX rate changes.
aaCapital expenditures are mainly connected with payments for acquired companies
in Russia and renewable capex for production plants. After execution of payments for RAG,
which will burden CEDC’s cash flows by 2013, capital expenditure needs in the LT should
not be significant in relation to sales.
aaThe Company’s dividend policy, assumes no dividend payout in the foreseeable
future.
7.1.
2Q09 results review
CEDC released its consolidated 2Q09 results on August 4, 2009. It was the first quarter of RAG full
consolidation (previously this company was consolidated under the equity method). As a result,
posted results are not comparable on the yoy basis.
Market decline and FX hit
the Company’s sales
Polish and Russian vodka market is still under pressure with falling volumes sold. According
to the Company, Polish vodka market witnessed about 5-6% volume decline in 2Q09 in comparison
with 10% yoy slide in 1Q09, while the situation on the Russian vodka market has become even
worse. According to the Company, Russian vodka market witnessed 10% to 15% yoy decline
in 2Q09. However, according to the Company, CEDC managed to fall less than the market.
Fig. 39 CEDC; 2Q09 key revenue drivers
30%
26.7%
Total sales
20%
Organic growth
Reduction of low margin products
Acquisitions
10%
FX effect
0.2%
4.5%
0%
-10%
-14%
-20%
-30%
-40%
2Q09A
-38.8%
Source: Company
????????????????????????
27
CEDC
Nevertheless, CEDC’s 2Q09 consolidated sales decreased by 14% yoy reaching US$ 362.1 million.
The key factor of top line erosion was yoy weakening of PLN, RUB and HUF vs. US$ – the reporting
currency. For that reason CEDC’s top line decreased by US$ 140 million yoy. Moreover, the Company
reduced the number of sold low margin products, which diminished CEDC’s consolidated revenues
by US$ 16.2 million.
Improvement of profits
due to RAG consolidation
CEDC’s reported EBITDA and EBIT were boosted by revaluation of stake in RAG due to change from
equity into full consolidation method. As a result, the Company showed a one-off gain on this
operation of c. US$ 200 million at the pre-tax level. CEDC’s adjusted EBITDA and EBIT excluding
one-off gain on revaluation and other one-off items (i.e. connected with additional costs stemming
from recently performed acquisitions) increased yoy by 25% and 29%, respectively.
Fig. 40 CEDC; 2Q09 revenues (geographical split)
IAS
(US$ million)
Poland
Russia
Hungary
2Q09
2Q08
216.3
137.9
8.0
349.7
62.3
9.2
2Q09
2Q08
24.6
22.1
1.2
29.5
14.3
1.4
yoy
change
-38.2%
121.1%
-13.7%
Source: Company
Fig. 41 CEDC; 2Q09 adjusted EBIT (geographical split)
IAS
(US$ million)
Poland*
Russia
Hungary
yoy
change
-16.6%
54.4%
-12.6%
* EBIT in Poland adjusted for one-off gain on RAG stake revaluation
Source: Company
Profitability of Russian
operations decline due to RAG
consolidation
On the one hand, the Company’s EBIT margin improved in Poland and Hungary, however on the
other hand it tumbled in Russia. The reason for profitability improvement in Poland and Hungary
was a change in offered product mix: cutting sales of low margin products and lower prices of raw
spirit. Significant decrease of operating margin in Russia was a direct influence of RAG’s
consolidation. In comparison with other CEDC’s Russian subsidiaries – Whitehall and Parliament –
products offered by RAG represent lower margin popular segment.
Fig. 42 CEDC; 2Q09 adjusted EBIT margin (geographical split)
IAS (US$ million)
2Q09
2Q08
Poland
Russia
Hungary
11.4%
16.0%
15.4%
8.4%
22.9%
15.3%
yoy
change
2.9%
-6.9%
0.2%
Source: Company
Revaluation of financial
liabilities impacted positively
2Q09 posting
Many question marks regarding
meeting 2H09E results
28
The Company’s pre-tax profit was boosted by one-off gain on financial liabilities revaluation due
to qoq strengthening of PLN vs. US$ - the reporting currency. As a result the reported pre-tax profit
improved by 347% yoy, however, after the adjustments it decreased by 12% yoy. CEDC’s net profit
increased by 364% yoy, however, after incorporation of all the above-mentioned adjustments
it finally decreased by 18% yoy. The Company’s adjusted net profit margin decreased by -0.3pp yoy
in 2Q09 to 5.1% from 5.4% year earlier. It was mainly an effect of higher net debt position and higher
net interest costs.
Consequently the CEDC’s EPS reached US$ 3.74 while comparable EPS reached US$ 0.32.
In our opinion, the Company’s consolidated results during the next quarters should be influenced
by the same factors already witnessed in 2Q09, i.e. RAG consolidation and very likely qoq
strengthening of PLN vs. US$ and EUR (however should still remain lower yoy). On the one hand, we
are concerned about the alcohol beverages market evolution in the coming quarters as 1H09
definitely showed that the market is not immune for the economic slowdown and excise tax increase.
The worsening outlook for 2H09 – raising unemployment rate, decreasing retail sales may prove
????????????????????????
CEDC
to have negative impact on CEDC most profitable quarters of 3Q and 4Q. On the other hand, recently
signalled by the Company improvement of the market conditions may translate into slower yoy
volumes decline in the coming quarters, which may be supportive for CEDC results in the seasonal
pick of sales falling on 4Q.
Fig. 43 CEDC; 2Q09 and 1H09 results
IAS consolidated
US$ m
yoy
change
2Q09A
362.1
250.9
69.3%
61.7
17.1%
247.2
68.3%
58.1
16.0%
268.4
74.1%
27.5
7.6%
213.7
59.0%
18.6
5.1%
Sales
EBITDA
EBITDA margin
Adj EBITDA
Adj EBITDA margin
EBIT
EBIT margin
Adj EBIT
Adj EBIT margin
Pre-tax profit
Pre-tax profit margin
Adj pre-tax profit
Adj pre-tax profit margin
Net profit
Net profit margin
Adj net profit
Adj net profit margin
2Q08A
421.3
47.0
11.2%
49.3
11.7%
42.8
10.2%
45.1
10.7%
60.1
14.3%
31.3
7.4%
46.0
10.9%
22.7
5.4%
-14%
434%
25%
477%
29%
347%
-12%
364%
-18%
1-2Q09A 1-2Q08A
580.0
734.9
274.0
75.6
47.2%
10.3%
73.0
79.1
12.6%
10.8%
267.5
68.3
46.1%
9.3%
66.6
71.8
11.5%
9.8%
180.6
83.0
31.1%
11.3%
60.0
46.5
10.4%
6.3%
126.1
64.4
21.7%
8.8%
28.4
34.9
4.9%
4.7%
yoy Realisation of the Realisation of the
change FY figures in 2Q: FY figures in 1-2Q:
2009E 2008A 2009E 2008A
-21%
22%
26%
36%
45%
262%
56%
22%
62%
36%
-8%
24%
21%
28%
33%
292%
57%
22%
62%
34%
-7%
24%
20%
27%
32%
118%
85%
379%
57%
524%
29%
15%
16%
33%
23%
96%
90%
n.m.
53%
n.m.
-19%
15%
17%
23%
27%
-
7.2.
Many factors influencing
CEDC’s reported top line
Enhancement of distribution
network improves sales
Vodka – the key revenue
contributor
New brands introduction
and change of sales mix
????????????????????????
Revenues
Growth of CEDC’s revenues during last years derived from: (i) organic development, (ii) acquisitions,
(iii) strengthening of PLN, RUB and HUF vs. US$ - which is the reporting currency, and (iv) movement
of the sales contracts from a distributor to the producer, which reduced the amount of net sales
reported through the elimination of excise tax (made in 2008). Starting from 4Q08 the weakening
of CEE currencies (PLN, RUB and HUF) vs. US$ started to influence negatively the Company’s
reported revenues. It was responsible for 45% and 39% yoy revenue decline in 1Q09 and 2Q09,
respectively. As a result, even full consolidation of RAG in 2Q09 did not save CEDC’s consolidated
revenues from slide.
CEDC develops its distribution network in order to reach broader number of customers.
The Company’s distribution network consists of 124 branches and 19 distribution centres. CEDC
continues to enhance its distribution network, which in 2008 increased by 37 new branches and
2 distribution centres. Well-developed distribution network allows CEDC to serve 39,000 sales
points in Poland through the specialised sales team (consisting of c. 650 sales representatives).
As a result of organic development, the Company’s top line improved yoy by 7.4% and 3.6%
(excluding FX effect) in 2007 and 2008, respectively.
During the last years CEDC’s sales mix remain almost unchanged. Vodka has the largest share
in the Company’s sales mix constituting c. 75% of total revenues. The following positions are
occupied by: beer, wine and other spirits. As a result of RAG full consolidation, share of vodka
in the Company’s sales mix will increase. On the other hand, in the long run, as a result of the
increasing wealth of consumers flavoured spirits may increase its share in CEDC’s portfolio, however
the changes should not be significant, in our view.
In 2008 the Company changed its policy regarding offered product mix and intentionally started
to cut sales of low margin products where it did not see potential for further development. Due to this
reason only in 2Q09 CEDC consolidated sales diminished by US$ 16.2 million. This policy may
29
CEDC
further exert a negative impact on the Company’s revenues development, however its impact should
be rather limited, in our view. Moreover, in order to fill the gap of the Company’s lower mainstream
products in Russia CEDC plans to introduce two new brands in its portfolio, yet this autumn.
Fig. 44 CEDC; Sales mix structure
100%
Fig. 45 CEDC; Key revenue drivers
1%
7%
90%
1%
10%
8%
80%
Excise tax effect (movement of the sales contracts from a distributor to the producer)
7%
8%
9%
50%
2%
6%
FX effect
40%
9%
9%
13.8%
Acquisitions
Organic growth
70%
30%
60%
6.0%
50%
20%
40%
75%
76%
72%
17.0%
10%
30%
Vodka
Beer
Wine
Spirits (beside vodka)
Other
20%
10%
12.9%
19.4%
5.7%
9 7%
9.7%
7.4%
3.0%
0%
29.1%
3.6%
-8.2%
8.2%
0%
-10%
2006
2007
2008
Source: Company
2005
2006
2007
2008
Source: Company
7.2.1.
Poland still remains CEDC’s key
revenue contributor
Geographic split of revenues
CEDC’s geographic split of revenues changed during the last years on the back of executed
acquisitions. In 2006 and 2007 revenues from Polish market constituted 97.5% and 95.8% of the
Company’s consolidated sales, respectively. In 2008 share of revenues deriving from Polish market
decreased to less than 80% of CEDC consolidated revenues. As a result of RAG full consolidation
beginning from 2Q09 share of revenues from Russian market significantly increased and reached
38% in 2Q09. Nevertheless, Poland still remains the Company’s key top line contributor.
Fig. 46 CEDC; Geographical split of revenues 2005-2008 (US$ m)
Fig. 47 CEDC; Geographical split of revenues in 2008
1,800
USA
1 600
1,600
Hungary
2 6%
2.6%
Poland
Russia
1,400
1,200
Other
1.0%
USA
0 4%
0.4%
Russia
18.1%
Hungary
Oth
Other
1 000
1,000
800
600
400
Poland
77.8%
200
0
2005
2006
2007
Source: Company
Source: Company
7.3.
Profitability dependent
on many factors
Consolidated profitability moves
upwards
30
2008
Profits and margins
CEDC’s profitability is a derivative of many factors such as: performed acquisitions, prices of raw
spirit or changes in the Company’s product mix. Additionally, profitability of CEDC’s business varies
geographically and depends on the products portfolio offered by CEDC’s subsidiaries.
In 2008 CEDC profitability was influenced by: change of sales structure, lower raw spirit prices and
movement of the sales contracts from a distributor to the producer, which reduced the amount of net
sales reported through the elimination of excise tax, which had a positive influence on reported EBIT
margin. Additionally, CEDC profitability was influenced by consolidation of acquired subsidiaries –
????????????????????????
CEDC
Parliament and Whitehall - from 1Q08 and 2Q08, respectively. Parliament is a producer of a subpremium vodka, while Whitehall is an importer of variety of alcohol products – usually from the
upper segment. As a result consolidation of both entities exerted a positive impact on CEDC’s
consolidated EBIT margin in 2008. Consequently, CEDC adjusted EBIT margin increased yoy
in 2008 to 13.5% from 10.3% and 9.7% in 2007 and 2006, respectively.
Net profit margin improved but
still stays under pressure of high
net debt
Profitability varies
geographically
On the back of EBIT margin improvement in 2008 also CEDC’s consolidated adjusted net profit
margin visibly increased by 2.1pp to 8.0% from 5.9% in 2007. The Company’s adjusted consolidated
net profit margin decreased however in 2Q09 by -0.3pp yoy to 5.1% from 5.4% year earlier. It was
mainly an effect of higher net debt position and higher net interest costs.
CEDC’s profitability differs among the countries of its operations, i.e. Poland, Russia and Hungary.
In 2008 the most profitable operations were based in Russia, where operated two subsidiaries –
Parliament and Whitehall – which are occupied with sales of high margin alcohol products.
As a result, EBIT margin from Russian operations reached 24.6% in comparison with 9.6% and
17.6% delivered from Polish and Hungarian operations, respectively. Due to consolidation of RAG
beginning from 2Q09, differentiation of profitability between countries of operation will be smaller
as products offered by RAG represent lower margin, popular segment (in comparison with products
of other CEDC’s Russian subsidiaries – Whitehall and Parliament).
Fig. 48 CEDC; EBIT* margin by regions in 2006-2008
25%
Fig. 49 CEDC; Geographical split of EBIT* 2006-2008 (US$ m)
250
Poland
Hungary
Russia
20%
200
15%
150
10%
100
5%
50
0%
Poland
Russia
Hungary
0
2006
2007
2008
* EBIT before stock option expense and general corporate overhead
Source: Company
Profitability in Poland and
Hungary dwindled in 2008,
rebounded in 2Q09
falling on 4Q
????????????????????????
2007
2008
* EBIT before stock option expense and general corporate overhead
Source: Company
Profitability of CEDC’s operations in Poland and Hungary dwindled at EBIT line in 2008 yoy
by -0.6pp and -2.6%pp, respectively. It was partially an impact of PHS acquisition made in 2007
(distribution business is less profitable than production; moreover it was only partially consolidated
in 2007). In Hungary negative effect was exerted by unfavorable FX changes as CEDC’s subsidiary
operating in Hungary is an importer. In 2Q09 rebound in margins was already visible as it improved
at EBIT line in Poland and Hungary by 2.9pp and 0.2pp, respectively (regarding details, please refer
to Section 7.1 of this research report).
7.4.
High seasonality with peak
2006
Seasonality
CEDC business is characterized by strong quarterly seasonality of sales and profitability. The first
quarter is the weakest in terms of sales and profitability and generates c. 20% of consolidated
annual sales and not more than c. 16% of the consolidated full year operating profit. On the other
hand, the fourth quarter is the strongest, generating c. 30% and c. 40% of the consolidated full year
sales and EBIT, respectively. Execution of sales falling on 4Q during the last years remains
at the comparable level reaching between 28-32%, while share of EBIT falling on 4Q is steadily
improving reaching 33.8%, 38.6% and 39.1% in 2006, 2007 and 2008, respectively. As a result,
the realization of the Company’s FY guidance becomes more dependent on the successful 4Q.
31
CEDC
Fig. 50 CEDC; Sales seasonality 2005 - 2008 (US$ m)
500
Sales (US$ m)
Gross profit on sales (US$ m)
EBIT (US$ m))
Seasonality of sales
Seasonality of gross profit on sales
Seasonality of EBIT
450
400
350
60%
50%
40%
300
250
30%
200
20%
150
100
10%
50
0
0%
1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09
Source: Company
7.5.
No dividend expected – at least
in midterm horizon
CEDC does not plan to pay dividend in the foreseeable future. In our opinion, the Company may
start to pay dividend when it finishes its extensive capital expenditures and decreases the level
of its interest bearing debt, however we do not expect both factors to materialize in the mid-term
horizon.
7.6.
Extensive capital expenditures
up to 2013
designed for the years
2007-2017
32
Capex
Capital expenditures in the forecasted period will be connected with payments for acquired company
in Russia – RAG, and very likely increase of stakes in other owned entities – Whitehall and Parliament.
The Company has already announced that proceeds from new share issue will be allocated
for the purchase of minority stakes of Parliament (c. US$ 65-70 million dedicated to this aim)
and Whitehall. CEDC has recently purchased 6% minority stake in RAG for US$ 30 million.
The Company’s capital expenditures will remain at relatively high level up to 2013 reaching up to 8%
capex/sales ratio. Afterwards (if the Company does not decide to execute further M&A) capex should
fall in the range of 1% capex/sales ratio.
7.7.
Motivation programme
Dividend payout
Motivation programme
On April 2007 CEDC’s AGM approved motivation programme called 2007 Stock Incentive Plan
which provides for the grant of stock options, stock appreciation rights, restricted stock and restricted
stock units to directors, executives, and other employees and to non-employee service providers
of the Company. The Company has reserved for future issuance of up to 1,397,333 shares (subject
to an anti-dilution adjustment in the event of a stock split, re-capitalization, or similar transaction).
Previous motivation programme for the years 1997-2007 allowed to issue up to 5,906,250 shares.
The option exercise price for stock options granted under the motivation programme may not be
less than fair market value but in some cases may be in excess of the closing price on the date
of grant. Stock options may be exercised up to 10 years after the date of grant except as otherwise
provided in the particular stock option agreement. Payment for the shares must be in cash, which
must be received by the Company prior to any shares being issued. The motivation programme will
expire in November 2017.
????????????????????????
CEDC
Fig. 51 CEDC; Options within the motivation programme
Total Options
Outstanding at January 1, 2009
Granted
Exercised
Forfeited
Outstanding at March 31, 2009
Exercisable at March 31, 2009
Outstanding at March 31, 2009
Granted
Exercised
Forfeited
Outstanding at June 30, 2009
Exercisable at June 30, 2009
Number of options Weighted-average
exercise price
(US$)
1,350,252
28.16
132,125
19.79
1,482,377
27.86
1,038,225
22.22
1,482,377
27.86
68,500
20.24
-20,250
13.65
-9,500
60.92
1,521,127
27.50
1,089,550
22.87
Source: Company
????????????????????????
33
CEDC
8.
Financial forecasts
aaThe Company’s sales growth in subsequent years will stem from the full consolidation
of RAG and further organic development, i.e. introduction of new brands, increase
of distribution network etc. We therefore forecast top line growth in 2009E-2012E
at a CAGR of 10%.
aaCEDC’s profitability improvement should stem from scale effects arising from RAG
consolidation (i.e. rationalization of logistics) and restructuring process in Russian
subsidiaries (i.e. redundancies). We forecast that CEDC’s adj. EBIT and NP margins should
increase to 15.5% and 8.6% in 2010E from 15.0% and 7.5% in 2009E, respectively.
aaCEDC should deliver satisfactory 3-4Q09E results which will not come as a surprise
for the investment community. However, we forecast 2009E yoy decease of sales and
adjusted net profit by -1.1% and -7.2% respectively. It should stem mainly from unfavourable
FX changes. In 2010E we forecast CEDC’s consolidated sales and adjusted net profit
to improve yoy by 14% and 38%, respectively. Such significant top line improvement should
stem from FX base, consolidation of RAG and further organic development. Net profit
increase should be a direct effect of larger scale of operations coupled with performed
restructuring process in the Group and change of product mix.
aaThe Company’s management guidance assumes revenues at US$ 1.55-1.68 billion
with EPS at 2.40-2.65 in FY09. CEDC’s management will update its FY09 guidance and
present FY10 guidance in autumn 2009.
8.1.
2009E revenues should remain
almost unchanged yoy
Revenue forecasts
We forecast marginal slide of the Company’s consolidated revenues in 2009E by -1% yoy.
Deterioration of CEDC’s top line will be mainly driven by unfavourable exchange rates, ie. weakening
of CEE currencies (PLN, HUF and RUB) vs. US$ – the reporting currency. On the other hand,
the top line will be positively influenced by consolidation of RAG beginning from 2Q09. Given
the fact that delivered results will be dependent on development of FX rates in 2H09, it is even
possible that CEDC’s 2009E top line will be flat yoy. However, if we extract RAG’s contribution from
CEDC, its revenues would fall by c. 25% yoy.
Fig. 52 CEDC; Sales forecasts
3,000
2,500
Poland
Russia
H
Hungary
US$ m
2,000
1,500
1,000
500
0
2008
2009E
2010E
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
Source: DM IDMSA, Company
Consolidated revenues
to improveby 14% and 12%
in 2010E and 2011E, respectively
34
During the next years CEDC’s revenues will be driven by full consolidation of RAG and further
organic development. We forecast that the Company’s consolidated sales should improve by 14%
and 12% yoy in 2010E and 2011E, respectively. In the long-term horizon we do not assume any
????????????????????????
CEDC
investments (despite renewable capex) nor acquisitions, which could additionally boost CEDC’s top
line. As a result, we forecast revenues increase in 2011E-2019E at CAGR of 2%.
Russian operations will increase
its share in the Company’s
revenues
Sales structure will change on the back of RAG full consolidation. As a result revenues
from Russian market will significantly increase their share in CEDC’s consolidated top line.
The importance of the Hungarian market, on the back of enlarged scale of operations will become
even smaller. We forecast that revenues from Polish, Russian and Hungarian markets will change
its share to 50.0%, 47.9% and 2.1% in 2010E from 57.5%, 40.1% and 2.4% in 2009E, respectively.
8.2.
2Q09 yoy profitability
improvement should continue
in 2H09
Further profitability
improvement on the horizon
Adj. EBIT margin should reach
15.5% and 16.2% in 2009E
and 2010E, respectively
Net profit margin will be
a derivative of improving
operational profitability and
decreasing net debt
After profitability improvement already seen in 2Q09 (discussed in the Section 7.1 of this research
report) we should witness further improvement of the profitability in 3-4Q09E. It should stem from
already introduced restructuring process in Russia, limiting of low margin products (change in sales
mix), lower yoy prices of raw spirit and consolidation of RAG. According to CEDC’s management,
we should witness c. 17-18% EBIT margin in 4Q09 (which is seasonally the strongest quarter).
We forecast that in line with the Company’s guidance CEDC should witness yoy improvement
of its profitability. We forecast FY09 adj. EBIT margin to reach 15%, which will result mainly from
consolidation of RAG (which will dilute profitability of Russian operations, however still boost
consolidated profitability of CEDC). According to the Company’s management, synergies arising
from consolidation of Russian subsidiaries may reach c. US$ 30-40 million savings per annum.
In 2010E and 2011E we forecasts that adjusted EBIT margin should increase to 15.5% and 16.2%,
respectively. It should be a result of utilization of post-merger synergies – i.e. effects of executed
restructuring process, economy of scale and optimization of processes such as logistics and
distribution. In the long term horizon we forecast EBIT margin in the range of c. 17.5%, which is still
below CEDC’s peers (however it is important to bear in mind that peer comparison is not fully
adequate due to differences in the business models).
We forecast that CEDC’s adjusted net profit margin in 2009E and 2010E ought to reach 7.5% and
8.6%, respectively. Improving net profit margin will be a derivative of improving operational
profitability (discussed above) and decreasing net debt position (discussed below) which both
should exert a positive impact on the net profit margin development.
8.3.
Net debt/EBITDA should fall
to 2.7 at the end of 2010E
Profits and margins
Net debt
CEDC has significant net debt position, which we forecast to reach US$ 902 million at the end
of 2009E. It implies net debt/EBITDA ratio at 3.5. According to CEDC’s management, net debt/
EBITDA ratio should fall below 3.0 at the end of 2010. According to our forecasts, net debt/EBITDA
ratio should reach 2.7 at the end of 2010E.
8.4.
Management guidance
The Company’s FY09 guidance assumes revenues at US$ 1.55 to 1.68 billion and comparable EPS
at 2.40-2.65. Moreover, the Company’s CEO stated that FY EBIT margin should be in the range
of 14-15%. CEDC’s management informed that it will publish its updated FY09 guidance and
introduce FY10 guidance in autumn. Our forecasts are in line with the management outlook, despite
comparable EPS, which partially stems from different number of shares used in both calculations.
????????????????????????
35
CEDC
9.
Financial statements (consolidated, IAS)
Fig. 53 CEDC; Balance sheet
US$ m
Fixed assets
- intangible fixed assets
- tangible fixed assets
Financial fixed assets
Current trade assets
- inventory
- net trade receivables
- cash and equivalents
Accruals
Assets
Shareholders' funds
Reserves
Liabilities
- interest bearing debt
Accruals
Shareholders equity and liabilities
Ratios:
Debt/Equity
Net WC/Total assets
Current ratio
Quick ratio
Sales / Total assets
Sales / Net WC
Inventory turnover (days)
Average receivable turnover (days)
Average accounts payable period (days)
Cash conversion cycle (days)
ROA
ROE
2008
1,408.0
1,315.8
92.2
309.8
718.6
180.3
430.7
107.6
47.3
2,483.7
994.1
0.0
1,409.3
932.5
80.3
2,483.7
2009E
2,691.8
2,478.1
213.7
175.3
1,020.1
231.8
553.8
234.5
129.4
4,016.6
1,587.7
0.0
2,252.3
1,136.4
176.7
4,016.6
2010E
2,691.8
2,476.4
215.5
175.3
1,114.3
252.0
601.8
260.5
148.0
4,129.4
1,738.4
0.0
2,188.9
1,086.4
202.1
4,129.4
2011E
2,691.5
2,474.3
217.3
175.3
1,135.0
266.9
637.6
230.5
165.0
4,166.9
1,936.6
0.0
2,004.9
1,036.4
225.4
4,166.9
2012E
2,690.4
2,471.5
218.9
175.3
1,170.3
274.9
656.7
238.7
170.0
4,206.1
2,162.7
0.0
1,811.2
986.4
232.1
4,206.1
2013E
2,686.7
2,467.5
219.2
175.3
1,155.3
280.4
669.7
205.2
173.3
4,190.7
2,416.1
0.0
1,537.9
859.9
236.7
4,190.7
2014E
2,680.1
2,462.0
218.2
175.3
1,366.8
285.9
683.0
397.9
176.8
4,399.0
2,677.6
0.0
1,480.1
790.7
241.4
4,399.0
2015E
2,673.1
2,457.3
215.8
175.3
1,590.9
291.6
696.5
602.8
180.3
4,619.6
2,951.0
0.0
1,422.5
721.6
246.2
4,619.6
2016E
2,670.6
2,454.5
216.1
175.3
1,681.6
297.4
710.3
673.9
183.8
4,711.3
3,247.1
0.0
1,213.1
500.5
251.1
4,711.3
2017E
2,672.0
2,454.9
217.1
175.3
1,761.8
303.3
724.4
734.2
187.5
4,796.7
3,564.7
0.0
976.0
251.3
256.0
4,796.7
2018E
2,673.6
2,455.7
217.9
175.3
1,858.2
309.3
738.7
810.2
191.2
4,898.4
3,898.2
0.0
739.1
2.2
261.1
4,898.4
2019E
2,673.7
2,456.2
217.5
175.3
2,218.7
315.4
753.3
1,150.0
195.0
5,262.7
4,244.9
0.0
751.6
2.2
266.3
5,262.7
0.9
0.1
1.5
1.1
0.8
15.7
48
83
128
3
-0.8%
-1.8%
0.7
-0.1
1.8
1.4
0.5
-16.6
63
110
243
-70
7.3%
18.3%
0.6
-0.1
1.9
1.4
0.5
-6.4
66
113
303
-124
3.9%
9.7%
0.5
0.0
1.8
1.4
0.5
-13.3
64
109
256
-83
4.9%
11.1%
0.5
0.0
1.8
1.4
0.5
100.0
66
110
218
-42
5.5%
11.2%
0.4
0.1
2.0
1.5
0.5
11.5
67
111
181
-3
6.1%
11.1%
0.3
0.1
2.3
1.9
0.5
8.1
67
111
162
16
6.1%
10.4%
0.2
0.1
2.7
2.2
0.5
8.0
67
111
161
17
6.1%
9.7%
0.2
0.1
2.8
2.3
0.5
8.0
67
111
161
17
6.3%
9.4%
0.1
0.1
2.9
2.4
0.5
7.9
67
111
160
18
6.6%
9.2%
0.0
0.1
2.9
2.5
0.5
7.8
67
111
159
18
6.9%
8.9%
0.0
0.1
3.5
3.0
0.5
7.8
67
111
159
19
6.8%
8.5%
36
????????????????????????
CEDC
Fig. 54 CEDC; Income statement
US$ m
Net sales
Cost of operating activities
Gross profit on sales
Selling and administration costs
Profit on sales
Other operating income
Other operating costs
EBITDA
Adj EBITDA
EBIT
Adj EBIT
Financial income
Financial costs
Gross income
Extraordinary items
Pre-tax profit
Adj pre-tax profit
Income tax
Minorities and other obligatory net profit
reduction
Net profit
Adj net profit
Margins:
Gross profit on sales
Profit on sales
Adj EBITDA margin
Adj EBIT margin
Adj pre-tax margin
Adj net margin
Nominal growth:
Sales
Profit on sales
Adj EBITDA
Adj EBIT
Adj pre-tax profit
Adj net profit
2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E
1,647.0 1,629.1 1,863.6 2,078.3 2,140.6 2,183.0 2,226.2 2,270.3 2,315.2 2,361.1 2,407.8 2,455.5
-1,224.9 -1,195.3 -1,335.6 -1,475.0 -1,502.1 -1,514.3 -1,544.3 -1,574.9 -1,606.1 -1,637.9 -1,672.7 -1,707.1
422.1 433.8 527.9 603.3 638.5 668.6 681.8 695.3 709.1 723.2 735.1 748.4
-223.4 -206.3 -238.6 -266.8 -277.3 -285.6 -294.1 -300.2 -301.4 -303.4 -309.3 -314.4
198.7 227.5 289.3 336.5 361.2 383.0 387.8 395.2
407.7
419.7 425.8 434.0
0.0
225.6
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
-20.3
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
209.6 445.2 306.1 355.9 383.7 408.7 416.8 425.1 433.5 442.1 448.4 456.1
236.3 256.8 306.1 355.9 383.7 408.7 416.8 425.1 433.5 442.1 448.4 456.1
198.7 432.8 289.3 336.5 361.2 383.0 387.8 395.2
407.7
419.7 425.8 434.0
221.5 244.4 289.3 336.5 361.2 383.0 387.8 395.2
407.7
419.7 425.8 434.0
0.4
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
-183.3
-118.5
-77.8
-74.3
-70.8
-64.6
-57.8
-52.9
-42.8
-26.3
-8.9
-0.2
15.8 314.3
211.5 262.2 290.4 318.4 330.0 342.2 364.9 393.4 416.9 433.9
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
15.8 314.3
211.5 262.2 290.4 318.4 330.0 342.2 364.9 393.4 416.9 433.9
198.3 180.4
211.5 262.2 290.4 318.4 330.0 342.2 364.9 393.4 416.9 433.9
-13.0
-62.9
-42.3
-52.4
-58.1
-63.7
-66.0
-68.4
-73.0
-78.7
-83.4
-86.8
-19.5
-15.2
-8.4
-5.6
-2.8
0.0
0.0
0.0
0.0
0.0
0.0
0.0
-16.6
131.2
236.2
121.8
160.9
160.9
204.1
204.1
229.5
229.5
254.7
254.7
264.0
264.0
273.8
273.8
291.9
291.9
314.7
314.7
333.5
333.5
347.1
347.1
25.6%
12.1%
14.3%
13.5%
12.0%
8.0%
26.6%
14.0%
15.8%
15.0%
11.1%
7.5%
28.3%
15.5%
16.4%
15.5%
11.4%
8.6%
29.0%
16.2%
17.1%
16.2%
12.6%
9.8%
29.8%
16.9%
17.9%
16.9%
13.6%
10.7%
30.6%
17.5%
18.7%
17.5%
14.6%
11.7%
30.6%
17.4%
18.7%
17.4%
14.8%
11.9%
30.6%
17.4%
18.7%
17.4%
15.1%
12.1%
30.6%
17.6%
18.7%
17.6%
15.8%
12.6%
30.6%
17.8%
18.7%
17.8%
16.7%
13.3%
30.5%
17.7%
18.6%
17.7%
17.3%
13.9%
30.5%
17.7%
18.6%
17.7%
17.7%
14.1%
38%
68%
79%
81%
133%
88%
-1%
14%
9%
10%
-9%
-7%
14%
27%
19%
18%
17%
32%
12%
16%
16%
16%
24%
27%
3%
7%
8%
7%
11%
12%
2%
6%
7%
6%
10%
11%
2%
1%
2%
1%
4%
4%
2%
2%
2%
2%
4%
4%
2%
3%
2%
3%
7%
7%
2%
3%
2%
3%
8%
8%
2%
1%
1%
1%
6%
6%
2%
2%
2%
2%
4%
4%
2008
91.5
-16.6
14.8
-100.8
194.1
-667.9
-126.1
6.9
646.2
511.3
135.0
0.0
0.0
69.8
2009E
115.5
236.2
12.3
-58.1
-75.0
-26.2
-166.2
140.0
-301.8
0.0
-227.4
0.0
-74.4
-212.4
2010E
238.1
160.9
16.7
-23.6
84.1
-76.4
-76.4
0.0
-127.8
0.0
-50.0
0.0
-77.8
33.9
2011E
278.9
204.1
19.4
-26.9
82.2
-177.4
-177.4
0.0
-124.3
0.0
-50.0
0.0
-74.3
-22.8
2012E
313.1
229.5
22.5
-10.8
71.9
-182.0
-182.0
0.0
-120.8
0.0
-50.0
0.0
-70.8
10.3
2013E
340.4
254.7
25.7
-7.3
67.3
-181.2
-181.2
0.0
-191.1
0.0
-126.5
0.0
-64.6
-32.0
2014E
346.0
264.0
29.0
-7.5
60.5
-25.0
-25.0
0.0
-126.9
0.0
-69.1
0.0
-57.8
194.1
2015E
351.8
273.8
29.9
-7.6
55.7
-23.3
-23.3
0.0
-122.1
0.0
-69.1
0.0
-52.9
206.4
2016E
355.5
291.9
25.8
-7.8
45.6
-19.1
-19.1
0.0
-263.9
0.0
-221.1
0.0
-42.8
72.6
2017E
358.3
314.7
22.4
-8.0
29.2
-21.0
-21.0
0.0
-275.5
0.0
-249.1
0.0
-26.3
61.9
2018E
359.9
333.5
22.7
-8.1
11.8
-24.3
-24.3
0.0
-258.0
0.0
-249.1
0.0
-8.9
77.6
2019E
364.0
347.1
22.1
-8.3
3.1
-22.5
-22.5
0.0
-0.2
0.0
0.0
0.0
-0.2
341.4
Fig. 55 CEDC; Cash flow
US$ m
Operating cash flow
Net income
Depreciation
Change in working capital
Other
Net funds from investing activities
Capital expenditures
Other
Net funds from financial activities
Income from shares issue
Net change in debt
Dividends paid
Other
Change in cash
????????????????????????
37
BASIC DEFINITIONS
A/R turnover (in days) = 365/(sales/average A/R))
Inventory turnover (in days) = 365/(COGS/average inventory))
A/P turnover (in days) = 365/(COGS/average A/P))
Current ratio = ((current assets – ST deferred assets)/current liabilities)
Quick ratio = ((current assets – ST deferred assets – inventory)/current liabilities)
Interest coverage = (pre-tax profit before extraordinary items + interest payable/interest payable)
Gross margin = gross profit on sales/sales
EBITDA margin = EBITDA/sales
EBIT margin = EBIT/sales
Pre-tax margin = pre-tax profit/sales
Net margin = net profit/sales
ROE = net profit/average equity
ROA = (net income + interest payable)/average assets
EV = market capitalization + interest bearing debt – cash and equivalents
EPS = net profit/ no. of shares outstanding
CE = net profit + depreciation
Dividend yield (gross) = pre-tax DPS/stock market price
Cash sales = accrual sales corrected for the change in A/R
Cash operating expenses = accrual operating expenses corrected for the changes in inventories and A/P,
depreciation, cash taxes and changes in the deferred taxes
DM IDM S.A. generally values the covered non bank companies via two methods: comparative method and
DCF method (discounted cash flows). The advantage of the former is the fact that it incorporates the current
market assessment of the value of the company’s peers. The weakness of the comparative method is the risk
that the valuation benchmark may be mispriced. The advantage of the DCF method is its independence from
the current market valuation of the comparable companies. The weakness of this method is its high sensitivity to
undertaken assumptions, especially those related to the residual value calculation. Please note that we also resort
to other valuation techniques (e.g. NAV-, DDM- or SOTP-based), should it prove appropriate in a given case.
Banks
Net Interest Margin (NIM) = net interest income/average assets
NIM Adjusted = (net interest income adjusted for SWAPs)/average assets
Non interest income = fees&commissions + result on financial operations (trading gains) + FX gains
Interest Spread = (interest income/average interest earning assets)/ (interest cost/average interest bearing liabilities)
Cost/Income = (general costs + depreciation + other operating costs)/ (profit on banking activity + other
operating income)
ROE = net profit/average equity
ROA = net income/average assets
Non performing loans (NPL) = loans in ‘substandard’, ‘doubtful’ and ‘lost’ categories
NPL coverrage ratio = loan loss provisions/NPL
Net provision charge = provisions created – provisions released
DM IDM S.A. generally values the covered banks via two methods: comparative method and fundamental target
fair P/E and target fair P/BV multiples method. The advantage of the former is the fact that it incorporates
the current market assessment of the value of the company’s peers. The weakness of the comparative
method is the risk that the valuation benchmark may be mispriced. The advantage of the fundamental target
fair P/E and target fair P/BV multiples method is its independence of the current market valuation of the comparable
companies. The weakness of this method is its high sensitivity to undertaken assumptions, especially those
related to the residual value calculation.
Assumptions used in valuation can change, influencing thereby the level of the valuation. Among the most
important assumptions are: GDP growth, forecasted level of inflation, changes in interest rates and currency
prices, employment level and change in wages, demand on the analysed company products, raw material prices,
competition, standing of the main customers and suppliers, legislation changes, etc.
Changes in the environment of the analysed company are monitored by analysts involved in the preparation
of the recommendation, estimated, incorporated in valuation and published in the recommendation whenever
needed.
KEY TO INVESTMENT RANKINGS
This is a guide to expected price performance in absolute terms over the next 12 months:
Buy – fundamentally undervalued (upside to 12M EFV in excess of the cost of equity) + catalysts which should close the valuation gap identified;
Hold – either (i) fairly priced, or (ii) fundamentally undervalued/overvalued but lacks catalysts which could close the valuation gap;
Sell – fundamentally overvalued (12M EFV < current share price + 1-year cost of equity) + catalysts which should close the valuation gap identified.
This is a guide to expected relative price performance:
Overweight – expected to perform better than the benchmark (WIG) over the next quarter in relative terms
Neutral – expected to perform in line with the benchmark (WIG) over the next quarter in relative terms
Underweight – expected to perform worse than the benchmark (WIG) over the next quarter in relative terms
The recommendation tracker presents the performance of DM IDMSA’s recommendations. A recommendation expires on the day it is altered or on the day 12 months after its issuance, whichever comes first.
Relative performance compares the rate of return on a given recommended stock in the period of the recommendation’s validity (i.e. from the date of issuance to the date of alteration or – in case of maintained
recommendations – from the date of issuance to the current date) in a relation to the rate of return on the benchmark in this time period. The WIG index constitutes the benchmark. For recommendations that expire
by an alteration or are maintained, the ending values used to calculate their absolute and relative performance are: the stock closing price on the day the recommendation expires/ is maintained and the closing value
of the benchmark on that date. For recommendations that expire via a passage of time, the ending values used to calculate their absolute and relative performance are: the average of the stock closing prices for the day the
recommendation elapses and four directly preceding sessions and the average of the benchmark’s closing values for the day the recommendation expires and four directly preceding sessions.
LT fundamental recommendation tracker
Recommendation
CEDC
Hold
-
Issue date
Reiteration date
Expiry date
Performance
Relative
performance
Price at issue/
reiteration (PLN)
12M EFV
(PLN)
15.09.2009
-
Not later than
15.09.2010
-
-
92.0
80.1
Issue date
Reiteration date
Expiry date
Price at issue/
reiteration (PLN)
Relative
performance
15.09.2009
-
Not later than
15.09.2010
92.0
-
Market-relative recommendation tracker
Relative recommendation
CEDC
Neutral
-
Distribution of IDM’s current recommendations
Numbers
Percentage
Buy
13
21%
Hold
30
48%
Sell
18
29%
Suspended
1
2%
Under revision
0
0%
Suspended
1
2%
Under revision
0
0%
Distribution of IDM’s current market relative recommended weightings
Numbers
Percentage
Overweight
18
29%
Neutral
22
35%
Underweight
21
34%
Distribution of IDM’s current recommendations for companies that were within the last 12M IDM
customers in investment banking
Numbers
Percentage
Buy
1
14%
Hold
4
57%
Sell
1
14%
Suspended
1
14%
Under revision
0
0%
Distribution of IDM’s current market relative recommended weightings for the companies that were
within the last 12M IDM customers in investment banking
Numbers
Percentage
Overweight
1
14%
Neutral
4
57%
Underweight
1
14%
Suspended
1
14%
Under revision
0
0%
Institutional sales
Director – Dariusz Wareluk
tel.: +48 (22) 489 94 12
d.wareluk@idmsa.pl
Leszek Mackiewicz
tel.: +48 (22) 489 94 23
l.mackiewicz@idmsa.pl
Maciej Bąk
tel.: +48 (22) 489 94 14
m.bak@idmsa.pl
Bartosz Zieliński
tel.: +48 (22) 489 94 13
b.zielinski@idmsa.pl
Research
Sobiesław Pająk, CFA
(IT, Media, Equity strategy)
tel.: +48 (22) 489 94 70
s.pajak@idmsa.pl
Sylwia Jaśkiewicz, CFA
(Construction materials, Retail, Mid-caps)
tel.: +48 (22) 489 94 78
s.jaskiewicz@idmsa.pl
This report is for information purposes only. Neither the information nor the opinions expressed in the report constitute a solicitation or an offer to buy or sell any securities
referred herein. The opinions expressed in the report reflect independent, current judgement of DM IDM S.A. Securities. This report was prepared with due diligence and
scrutiny. The information used in the report is based on all public sources such as press and branch publications, company’s financial statements, current and periodic
reports, as well as meetings and telephone conversations with company’s representatives. We believe the above mentioned sources of information to be reliable, however
we do not guarantee their accuracy and completeness. All estimates and opinions included in the report represent our judgment as of the date of the issue. The legal entity
supervising DM IDM S.A. is Financial Supervision Commission in Warsaw (KNF in Polish abbreviation).
Maciej Wewiórski
(Commodities, Construction, Real estate)
tel.: +48 (22) 489 94 62
m.wewiorski@idmsa.pl
Michał Sobolewski
(Banks)
tel.: +48 (22) 489 94 77
m.sobolewski@idmsa.pl
IDM does not take any responsibility for decisions taken on the basis of this report and opinions stated in it. Investors bear all responsibility for investment decisions taken
on the basis of the contents of this report. The report is intended exclusively for private use of investors – customers of IDM. No part or excerpt of the report may be
redistributed, reproduced or conveyed in any manner or form written or oral without the prior written consent of IDM. This report is released to customers the moment
it is issued and the whole report is made available to the public one month after the issuance.
Jakub Viscardi
(Telco, Retail)
tel.: +48 (22) 489 94 69
j.viscardi@idmsa.pl
The analyst(s) responsible for covering the securities in this report receives compensation based upon the overall profitability of IDM which includes profits derived from
investment banking activities, although the analyst compensation is not directly related thereto.
Adrian Kyrcz
(Construction)
tel.: +48 (22) 489 94 74
a.kyrcz@idmsa.pl
IDM releases analytical reports via mail or electronic mail to selected clients (professional clients).
Apart from mentioned above, there are no ties of any kind between DM IDM S.A., the analyst/analysts involved in the preparation of the report and his/her relatives and the company/
companies analyzed in this publication, especially in the form of: i) offering of financial instruments in the primary market or/and Initial Public Offer within 12 months preceding
the issue of this report, ii) purchasing and selling of financial instruments for own account due to tasks connected with organization of the regulated market, iii) purchasing
and selling of financial instruments due to underwriting agreements and iv) the role of a market maker for securities analysed by IDM. The analysed company/companies
does/do not possess DM IDM S.A. shares.
IDM has not signed with the company/companies any contracts for recommendation writing. Investors should assume that DM IDM S.A. is seeking or will seek business
relationships with the company/companies described in this report. A part of the report was shown to the analyzed company/companies before the distribution
of the report to clients.
Łukasz Prokopiuk
(Associate)
tel.: +48 (22) 489 94 72
l.prokopiuk@idmsa.pl
Marek Kaźmierczak
(Associate)
tel.: +48 (22) 489 94 64
m.kazmierczak@idmsa.pl
Copyright © 2008 by DM IDMSA
Dom Maklerski IDMSA
Mały Rynek 7
31-041 Kraków
www.idmsa.pl
Information: (+48) 0 801 900 201

Profits need to mature

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