E CONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES.T HIS REPORT WAS SUPERVISED BY

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THIS REPORT WAS PREPARED BY MANUEL SANTOS, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES. THIS REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE

M

ASTERS IN

F

INANCE

E

QUITY

R

ESEARCH

We revised downwards our price target for year-end 2013, from €0.99 to €0.86, due to a more conservative approach, but we maintain our buy recommendation on Sonae SGPS’ stock as we believe the firm is undervalued in the market.

The food retail division is adapting to a changing industry but has solidified its market leadership position and improved its operational performance. We expect this unit to remain a cash-cow for the holding and continue to finance future growth.

The specialized retail division has been facing a tougher scenario as a result of consumer expenditure contraction. In Portugal, we expect an increase in operational efficiency in years to come. In Spain, the firm has not yet justified its entrance in the market. Through the retail properties business unit, we expect a freehold decrease of international stores due to the more aggressive store openings and a capital light investment policy. We do not expect any SLB operations to be concluded in the coming years. Sierra continues to struggle due to yield spikes in Europe. However, we expect a return to a positive net income by 2015 in light of Europe’s projected recovery and _{Brazil’s growing}

importance in the firm’s portfolio.

Sonaecom has had a solid operational performance and we expect the merger between Optimus and Zon to generate, not only significant cost synergies, but also revenue synergies.

Company description

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

S

ONAE

SGPS

C

OMPANY

R

EPORT

HOLDING/RETAIL

03 J

UNE

2013

S

TUDENT

:

M

ANUEL

S

ANTOS

manuel.santos2012@novasbe.pt

In the pursuit of future growth…

…while facing domestic challenges

Recommendation: BUY

Vs Previous Recommendation BUY

Price Target FY13: 0.86 €

Vs Previous Price Target 0.99€

Price (as of 31-May-2013) 0.78 €

Reuters: YSO.LS, Bloomberg: SON:PL

52-week range (€) 0.350-0.795

Market Cap (€ millions) 1.562

Outstanding Shares (million) 2.000

Source:Bloomberg

Source: Bloomberg

(Values in € millions) 2011 2012 2013F

Revenues 5.541 5.379 5.326

EBITDA 602 600 610

EBIT 234 232 258

Net Profit 109 33 94

ROE 7.78% 4.32% 7.32% ROIC 9.22% 9.71% 10.57% P/E 14,23x 47,31x 16,49x P/BV 0,92x 0,93x 0,87x EPS (€) 0,05 0,02 0,05 Net Debt / EBITDA 3,26x 3,06x 2,90x Net Debt / Market Cap 1,26 1,18 1,14 Source:Company Data and Analyst’s Estimates

0 50 100 150 200 250

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SONAE SGPS COMPANY REPORT

Sonae SGPS Valuation Summary

We have applied a Sum of the Parts approach in the valuation of the holding company. In doing so, we considered the Enterprise Values of each business unit in the retail segment and deducted the market value of debt1_{of the}

retail business. We then took Sierra’s Net Asset Value and applied Sonae’s 50% stake. We did the same with Sonaecom’s equity value and incorporated the Investment Management unit through its book value of equity. Sonae’s entrance to Angola was considered with a 50% probability of actually occurring. In the end, we removed the market value of the debt concerning the holding company. We also took into account the fact that Sonae SGPS is a conglomerate and

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

debatable due to the fact that it has been increasingly focusing on the retail business units. However, in light of its financial participation in Sonaecom and even in Sonae Sierra, Sonae SGPS has costs associated with managing the different units and investors could diversify their portfolio at lower costs. The following table summarizes our results regarding the valuation of Sonae SGPS.

Exhibit 1 - Sonae SGPS Valuation Summary

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

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

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

environment, Sonae SGPS has evidenced resilience in these uncertain times and we expect its stock price to gradually increase reflecting the conglomerate’s ability to cope with the challenging scenario.

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

maturity of the Bloomberg bonds

2_{Khorana, Shivdasani, Stendevad, Sanzhar, Citi (2011), “}

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0 1.000 2.000 3.000 4.000 5.000 6.000

2008 2009 2010 2011 2012

Sonae MC Sonae SR Sonae RP Sonaecom Inv. Mngmt.

Exhibit 2 - Turnover per unit (€ millions)

52,65%

8,90% 7,68%

2,50% 2,00%

26,27%

Efanor BPI

BESTINVER Fundação Berardo

Norges Bank Others

Company Overview

Sonae SGPS is a Portuguese conglomerate that initially started in 1959 as an engineering wood business. Nowadays, the firm operates six distinctive business units which the company distinguishes between core businesses, comprising wholly owned Sonae MC (“Modelo Continente”) and Sonae SR

(“Specialized Retail”), core partnerships which are Sonaecom (53.92% stake) and Sonae Sierra (Joint Venture partnership with Grosvenor), related businesses which is wholly owned Sonae Retail Properties (RP), and active investments which is represented by the unit Sonae Investment Management. Despite the fact that Sonae SGPS is generally viewed as a conglomerate, the firm’s main focus is on the food and non food retail segments with both Sonae MC and SR representing, in 2012, 82,9% of the firm’s total turnover. The company is present in 66 different countries3 and its strategy revolves around three pillars: deleveraging its balance sheet to continue to adapt to the current challenging macroeconomic environment through “capital light” expansion policies4_,

the international expansion of core businesses to unlock additional value creation and, lastly, to continue to strive for the identification of market opportunities and invest in related businesses capable of adding substantial value by themselves and to the other business units.

Exhibit 3 - Sonae SGPS' organizational structure

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

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

by Belmiro de Azevedo, one of the most distinguished businessmen in Portugal. Other relevant shareholders include BPI, a Portuguese bank owning 8.9% of the firm and Bestinver which owns 7.7%. It is important to note that the shareholder structure has maintained a great stability throughout the years with no

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

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

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

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

franchising schemes

Source: Company Information

Source:Company Information

Exhibit 4 - Sonae SGPS' shareholder structure

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Number of Stores

Avg. Size (000' sqm)

Continente - Hypermarkets 40 7,20 39 7,22 Continente - Supermarkets 131 1,76 138 1,76

Well's 138 0,09 141 0,09

Bom Bocado 96 0,05 96 0,05

Book.it 18 0,32 17 0,32

Meu Super 9 0,68 9 0,68

Total 432 1,27 440 1,26 2011 2012 Sonae MC Concepts

Avg. Size (000' sqm)

Worten 134 0,92 138 0,91

Vobis 6 0,58 0 0,00

Worten Mobile 47 0,03 44 0,03

Sportzone 74 0,87 75 0,86

Loop 10 0,14 7 0,15

Modalfa 107 0,54 107 0,52

Zippy 40 0,35 40 0,34

Total 418 0,63 411 0,64

Avg. Size (000' sqm)

Worten 40 2,26 42 2,26

Sportzone 36 1,23 37 1,23

Zippy 57 0,28 67 0,28

Total 133 1,14 146 1,07 2012

Sonae SR International

Concepts

2011 2012 Sonae SR

Portugal Concepts

2011

Exhibit 6 - SR's store evolution by geography

Business Unit Description



Sonae MC

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

Its current turnover represents approximately 60% of the firm’s total turnover. The business unit operates several different brands. Continente, its hypermarket brand, has 38 stores with an average store size of 7.2 thousand square meters (sqm). It has been one of the most trusted brands by Portuguese

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

been elected number one in Marktest’s reputation index6_{. The supermarket}

brands are Modelo and Bom dia, which have been rebranded as Continente. This was a well thought strategic move from Sonae MC as its main objective was to leverage Continente’s position as one of the most trusted brands in Portugal. Both of these supermarkets differ from Continente as they aim to provide fresher products and serve the consumers’ everyday needs. The number of stores has been consistently growing from 117 stores in 2009 to 138 stores in 2012.

Sonae MC also includes brands such as Bom Bocado, a coffee shop, Book.it, a bookstore and Well’s, a parapharmacy which sells health and beauty products. These stores are generally located near the firm’s hypermarkets and supermarkets to take advantage of the client inflow. The company has also invested in the “MeuSuper” concept which offers the possibility of franchising

food retail stores and is under negotiations to internationalize to Angola. This announcement comes as a consequence of the saturation in the Portuguese market and should present itself as an opportunity to unlock additional value.



Sonae SR

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

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

Its focus is on the non food retail segment with a number of different categories of products invested in. It encompasses Worten and Worten mobile, a consumer electronics and a mobile phone retailer, respectively, accounting for 69% of SR’s turnover, Sportzone and Loop which are sports apparel and footwear retailers accounting for 19% of the turnover and fashion retailers such as Modalfa and Zippy which account for the remaining 12%7_.

This business unit is currently following two distinct principles as guidance for its value creation: international expansion and market leadership consolidation

5_{Survey carried out by Reader’s Digest}

6_{Study done with 18 brands and chosen based on interviews with the general population aged 15-64} 7_Source:_{Sonae SGPS’ Investors’ Presentation –}_{April 2013}

Exhibit 5 - MC's Store evolution

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0 200 400 600 800 1.000 1.200 1.400

2008 2009 2010 2011 2012

Sonae SR PT Sonae SR INT

74% 18%

1%

7%

Food based retail Specialised retail PT Specialised retail INT Investment management

in Portugal. It is divided between its national and international operations representing 71.6% and 28.4% of the turnover, respectively. Nationally, there are currently 411 stores with an average store size of 638 square meters. Internationally, the number of stores has grown to 129 with an average store size of approximately 1200 square meters. Sonae SR’s internationalization focus is Spain, through Worten, Sportzone and Zippy, while also entering Middle Eastern countries and Latin America through Zippy8_{. Regardless, in recent years,}

the internationalization of SR has slowed due to the macroeconomic reality

lived in Spain and the less available capital. In light of this, the mode of entry has shifted to the aforementioned capital light investment policy with the focus being on franchising schemes and joint venture partnerships.



Sonae RP

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

developing the real estate infrastructure associated with Sonae’s retail

business units. It accounts, in 2012, for 2.2% of Sonae SGPS’ total turnover. This company allows Sonae MC and SR to focus solely on the management of their own units. Currently, Sonae RP has under its portfolio 33 Continente hypermarkets and 96 Continente Modelo supermarkets, amongst others. This business unit main source of turnover comes from the rents received from the retail units and it currently _{has € 1.335 billion of invested capital}.

Another objective of this business unit is to conduct Sales & Leaseback (SLB) operations in order to _{withdraw assets from Sonae’s balance sheet and, with} it, a considerable amount of debt. In this regard, this business unit focuses on one of the strategic pillars of the holding company which is to deleverage its balance sheet. These operations also allow the firm to finance growth

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

provided by the asset sales.



Sonae Sierra

Sonae Sierra is the first business unit described here not associated with the retail industry (directly at least). This company is responsible for the ownership, development and management of shopping centres throughout the world. Sierra is a joint venture partnership between Sonae SGPS and Grosvenor, a United Kingdom based developer and owner of real estate property. Sonae Sierra has 47 shopping centres spread through Portugal, Brazil, Italy, Spain, Germany, Greece and Romania and a total GLA9_{under management of 2.2 million sqm. It}

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

8_{Zippy is present in countries such as Turkey, Venezuela, Saudi Arabia, Malta, Dominican Republic and others} 9_{Gross Leased Area}

Exhibit 7 - SR's turnover by geography

(€ millions)

Exhibit 8 - RP's asset ownership by unit

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0 100 200 300 400 500 600 700 800 900 1.000

2011 2012

Mobile Wireline SSI Media

0 50 100 150 200 250 300

2011 2012

Mobile Wireline SSI Media

45%

19% 11% 4%

2% 2%

17%

Portugal Spain Italy Germany

Romania Greece Brazil

Brazil, one in Germany and another in Romania. It has also won more than 100 awards to date10. Furthermore, the company has been further successful in Brazil by completing an Initial Public Offering (IPO) of its Brazilian division in 2011. This country is becoming a cornerstone of Sierra’s growth due to the country’s thriving economy.

The company has always maintained a solid internationalization strategy by never investing in a new real estate project on its own. Instead, the company opted to form partnerships with local firms to acquire market knowledge and mitigate the risks associated with a highly capital intensive industry and the lack of local market knowledge when dealing with internationalization strategies. Currently, the unit’s strategy revolves around recycling capital by selling stakes in non-controlled projects. The capital infusion from these sales will be used to finance additional projects.



Sonaecom

Sonaecom is Sonae’s telecommunications’ business unit and is currently listed on the Lisbon stock exchange. It has three distinct business areas which is the mobile and fixed segment (through the Optimus brand, representing 87.33% of total turnover and 98.63% of the total EBITDA), the Software and Information Systems (SSI) and the Online and Media business unit. The firm is owned by Sonae SGPS with a 53.92% with the second highest shareholder being France Télécom with 20%. Currently, 21.48% of the shares are in free float.

Optimus, the main brand, is a convergent and fully integrated telecommunications operator meaning that it offers the four main products of telecoms: mobile, fixed, television and internet. However, its main focus is on the mobile segment being the 3rd player in the Portuguese market. Currently, the firm is in advanced talks to finalize its merger proposal between Optimus and Zon and both Zon’s and Sonaecom’s shareholders approved the deal on April 2013. The merger will be a _{key driver behind the firm’s} value in the years to come due to the existence of, not only cost synergies, but also the potential to unlock revenue synergies.



Investment Management

The Investment management business unit is responsible for managing the

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

Mergers, Acquisitions and Restructuring (M&A) operations in order to maximize shareholder value. This business unit currently has in its portfolio MaxMat (“Do it yourself”) stores, MDS insurance agency and a travel agent GeoStar.

10_These_{awards are mainly concerning Sierra’s marketing strategy}

Exhibit 9 - Owned shopping centres by country

Exhibit 10 - Sonaecom's turnover by

segment (€ millions)

Exhibit 11 - Sonaecom's EBITDA by

(8)

0% 2% 4% 6% 8% 10% 12%

2008 2009 2010 2011 2012 2013

PT 10Y CDS Spread ESP 10Y CDS Spread GER 10Y CDS Spread

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2008 2009 2010 2011 2012 Portugal International

0% 5% 10% 15% 20%

-4% -2% 0% 2% 4% 6%

2000 2002 2004 2006 2008 2010 2012

GDP Growth Rate (left axis) Unemployment Rate (right axis) 0%

20% 40% 60% 80% 100% 120%

2000 2002 2004 2006 2008 2010 2012

Investment as a % of GDP Net Debt as a % of GDP

Macroeconomic Outlook

When we look at Sonae SGPS, it becomes apparent that the firm is highly dependent on the well being of the Portuguese economic environment with over 90% of its turnover coming from national operations. Due to this, we will focus our analysis on Portugal and, at an international level, on Spain and Brazil.



Portugal

When the financial and sovereign crisis hit by 2007, most European countries which were ill prepared to deal with a stressful scenario were put in the limelight asking Troika (ECB, IMF and EU) for bailouts. Portugal was one of these countries that had to resort to outside assistance in 2011. By the end of 2009, Portugal’s Gross Domestic Product (GDP) had contracted by 2.9%. This trend was partially offset in the end of 2010 with a GDP increase of 1.4%. However, in 2011 and 2012 the GDP had, once again, contracted by approximately 1.7% and 3%, respectively. The inability of Portugal to deal with the arrival of the financial crisis was mainly justified through its Net Debt position. From 2004 to 2012, the net debt of Portugal increased from 55.9% of the GDP, to 123.6% in 2012. This had terrible social and economic consequences as the country continued to increase its debt levels without a significant influence on its GDP growth. Socially, the unemployment levels rose from 7.6% of the total labour force in 2008 to 12.7% by the end of 201111. The austerity measures (including tax reforms) alongside the unemployment rates have led to numerous protests due to the reduction of disposable income.

At the same time, a great deal of banks had to register impairments on their assets due to the increase in defaults. As a result, banks had to start adapting to the economic environment by reducing their leverage and increasing their capital ratios. This was even more accentuated due to the need for banks to meet the Basel Agreement’s stricter controls. Due to this, the banks were in no position to lend money and therefore, encourage economic development. Portugal’s rating was downgraded to BB (S&P) and A112 (Moody’s) as the agencies were worried about the unsustainable position of Portugal. With the worsening of the macro environment, financial markets showed their distrust in Portugal and, consequentially, the Credit Default Swap (CDS) spread rose from 0.41% in the beginning of 2008 to 10.41% four years later. Bond yields had the same evolution leading to the withdrawal of Portugal from the financial markets. However, with the somewhat successful implementation of austerity measures, both the CDS spreads and bond yields started to decline by the

11_{Source: Trading Economics}

12_{By 2012, Moody’s further downgraded Portugal to Ba3}

Exhibit 12 - Sonae SGPS' turnover by geography

Exhibit 14 - Portugal’s GDP growth and

Unemployment

Source: IMF, World Economic Outlook, April 2013

Exhibit 15 - Portuguese, Spanish and German CDS spreads

Source: Bloomberg

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0% 10% 20% 30% 40% 50% 60% 70% 80%

2000 2002 2004 2006 2008 2010 2012 Investment as a % of GDP Net Debt as a % of GDP

0% 5% 10% 15% 20% 25% 30%

-6% -4% -2% 0% 2% 4% 6%

2000 2002 2004 2006 2008 2010 2012 GDP Growth Rate (left axis) Unemployment Rate (right axis)

Exhibit 18 - Spanish Net Debt and Investment

0% 5% 10% 15% 20% 25%

-2% 0% 2% 4% 6% 8%

2000 2002 2004 2006 2008 2010 2012

Investment as a % of GDP (right axis) GDP Growth Rate (left axis)

Exhibit 19 - Brazil's GDP growth and Investment

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

2008 2009 2010 2011 2012 2013 PT 10Y Bond Yields ESP 10Y Bond Yields GER 10Y Bond Yields

middle of 2012 allowing Portugal to return to the financial markets and more easily refinance its long term debt. S&P also revised its outlook for Portugal from negative to stable evidencing the confidence of international investors in the

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

an increase of the GDP by 0.6%13. Regardless, it is our opinion that the worst is not over and Sonae SGPS will continue to struggle due to its dependency on the domestic environment.



International

Spain has evidenced a more resilient GDP growth rate until 2009 when it dropped from 0.9% to a staggering -3.7%. Spain had particular characteristics which marked its downfall. The country was sustaining its GDP growth rate by taking advantage of the housing bubble in the country, however, when the crisis hit, the bubble exploded paving the way for several bank bailouts and an increase in the debt of Spanish families14. At the same time, the social consequences have been even more negative than in Portugal with the unemployment level reaching an astounding 21.6% of the labour force in 2011, further increasing to 25% by the end of 201215_.

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

are still expected to take its toll on the country16and Sonae’s specialized retail

division has been struggling to justify its internationalization to this country. However, according to the IMF Global Economic Outlook report, Spain is projected to recover by the end of 2014 with a GDP growth rate of 0.7% and unemployment levels peaking at 27% in 2013 with a downward tendency after the end of 2014.

On an opposite note, Brazil is somewhat distant from the economic reality lived in Europe. After a mild recession in 2009, it presented an astounding recovery to 7.2% in 2010 and became the 6th_{largest economy in the world}17_in

2011. The country’s growth has been attributed to a Foreign Direct Investment increase from approximately USD 50 billion in 2008 to USD 71 billion by 201118. According to the IMF, the country is predicted to continue growing at an accelerated pace becoming the 5th largest economy in the world by the end of this decade. Due to this, we believe that Sonae Sierra’s investment in this country will be a tremendous source of value creation.

13_{Source: World Bank and IMF Global Economic Outlook Report}_–_{April 2013} 14_{Source: Bloomberg}

15_{Source: Eurostat. Youth unemployment levels have been even more negative with 44.4% of youth female unemployment and 48% of male unemployment}

in 2011

16_{Source: IMF Global Economic Outlook report}_–₂₀₁₂ 17_{Source: World Bank}

18_{Source: World Bank. Data is in current USD} Source: Bloomberg

Exhibit 17 - Spanish GDP growth and Unemployment

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-70 -60 -50 -40 -30 -20 -10 0

-10% -8% -6% -4% -2% 0% 2% 4% 6% 8%

2008 2009 2010 2011 2012 2013

PT Food Retail Sales YoY (left axis) PT Consumer Confidence Index (right axis)

0% 10% 20% 30% 40% 50% 60% 70%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 - Convenience Stores - Discounters - Forecourt Retailers - Hypermarkets - Supermarkets

Business Unit Valuation

Our valuation was performed based on the individual business units through a sum of the parts approach (SotP) while taking out the market value of debt in the end. We use a standard Discounted Cash Flow (DCF) approach to value Sonae MC, Sonae SR and Sonae RP. We value Sierra according to the Net Asset Value (NAV) framework. Sonaecom was valued using an M&A scenario approach where we estimate its market value with synergies incorporated. The Investment Management business unit was valued through its book value of equity due to the lack of information and relevancy.

Food Retail



Food Retail Industry Analysis

In Portugal, the food retail industry has evidenced resilience in spite of the economic downturn. This is obviously explained by the fact that food retailers sell first necessity goods which, regardless of disposable income by the families, are always needed in their day-to-day life. However, the economic downturn has had a major influence on the way consumers make their purchases. Regardless of food products being first necessity goods, consumers have become more price-sensitive. Due to this, we can see that the food retail sales (in value) in Portugal have dropped significantly.

From the Euromonitor report with data up to 2011, we can extract two trends that have materialized. First, consumers are increasingly favouring lower cost

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

In Europe, the private labels share of total FMCG (Fast moving consumer goods) products have increased from 21.1% in 2007 to 29.9% in 2010 which further increased to 35.6% of value share and 45.1% in unit share as of the end of 201219_{. This trend is here to stay as it is expected a continuous increase in the}

importance of private labels, particularly in countries which have been hit hard by the economic downturn20. The second trend is evidenced by the fact that consumers are less willing to travel to large hypermarkets and/or shopping centres due to, not only the cost of gas, but also due to the fact that large stores and shopping centres usually entice consumers to make more than the needed purchases. Convenience has become a trend in the industry. When we look at the overall turnover in the food retail sector by channel, we can clearly see that hypermarkets, which have represented in 2006 a share of 28.9%, have lost importance with a value of 23.2% in 2011. This loss of share was transferred

19_{Source: Symphony IRI Group}_–_{Private Label in Europe}_–₂₀₁₂

20_{Source: Nielsen Retail audit and Nielsen Global Private Label Report March 2011}

Exhibit 20 - Portuguese food retail sales and consumer confidence index

Exhibit 21 - Portuguese turnover evolution per concept

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0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

2008 2009 2010 2011

Sonae MC JMT Intermarché Auchan Lidl Minipreço

2.800

3.000 3.200

3.400 3.600 3.800

20% 25% 30% 35%

2009 2010 2011 2012

FMCG References (right axis)

Private Labels (% of FMCG) (left axis)

mostly to supermarkets with a 51.5% of share in 2006 and 59.8% in 2011. According to Euromonitor’s projections, by 2016, the supermarket channel will detain 61.3% of the market share with the hypermarkets decreasing to approximately 22%.

Due to the saturation of the industry and macro environment, store openings have decreased and, as such, competition has been based on aggressive discounts. Consequentially, Like-for-like21 (LFL) sales have decreased in general22_{. Despite the aggressive price competition, the sector is somewhat}

concentrated with the major top six retailers holding approximately 60% of the market23. Sonae MC holds the leadership position; however, the gap between its market share and the second player (Jerónimo Martins, SGPS, SA) has been reduced in recent years, mainly due to two reasons. First, Jerónimo Martins has introduced the loyalty card which was Sonae MC’s major advantage. Second, consumers are valuing convenience and Jerónimo Martins, through its “Pingo Doce” brand, has substantially smaller stores in urban centres unlike MC’s

hypermarkets located, generally, on the periphery and in shopping centres. Consequentially, Jerónimo Martins increased its market share from 2011 to year end 2012 by 1.6 basis points while Sonae managed a 0.5 basis point increase24. We expect the food retail industry to become even more concentrated in favour of the two top competitors in detriment of the remaining players. The reason for this is the inability to compete with the two major retailers due to their higher brand awareness, loyalty established with the Portuguese consumers and the superior quality items (at a lower price) of the private labels of both Jerónimo Martins and Sonae MC25_.



Sonae MC Valuation

The economic downturn has had a great impact on the food retail industry simply because consumers are becoming more price-driven and taking a closer look at their expenses. This translates into the preference for private labels which are usually significantly cheaper than the alternatives. Sonae MC has taken advantage of this trend by increasing its private label offering from 23% of FMCG sales in 2009 to 31% in year end 2012 according to company data. At the same time, Sonae MC has been increasing its market share in recent years. This is largely due to their loyalty cards which now represent approximately 75% of the total number of households in Portugal through

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

21_{Like-for-Like is a key measure for retailers. It represents the increase in turnover without accounting for new store openings} 22_{Source: Investor’s Presentation –}_{April 2011}

23_{Source: Euromonitor Portuguese Retail Market Report}_–_{2011. Market share is defined by value} 24_{Source: Homescan Nielsen}_–_{December 2012}

25_{Source: Euromonitor Portuguese Retail Market Report}_–₂₀₁₁

Exhibit 22 - Food Retailers market share

evolution (measured in value €)

Source: Euromonitor Portuguese retail market report - 2011

Exhibit 23 - Sonae MC's private label evolution

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0% 2% 4% 6% 8% 10% 12%

2008 2009 2010 2011 2012

MC EBITDA Margin (%) MC EBITDAR Margin (%) Industry EBITDA Margin (%) Industry EBITDAR Margin (%)

2.700 2.800 2.900

3.000 3.100 3.200 3.300 3.400

3,5% 4,5%

5,5% 6,5% 7,5% 8,5%

2008 2009 2010 2011 2012

Turnover (€millions) (right axis)

EBITDA Margin (left axis)

EBIT Margin (left axis)

allowed Sonae MC to increase their share but also to increase their cost effectiveness as they can, more easily than competitors without such a tool, adapt their product offering on a store by store basis dependent on which type of customers frequent that given store. They can also target more easily the right consumers with the right promotional campaign and provide a more effective stock management system based on demand information.

The increase in market share has one very important consequence which must not be disregarded. By becoming a larger competitor, Sonae MC has increased its bargaining power with suppliers. On an industry in which consumers are becoming more price sensitive, this allows them to aggressively pursue discount campaigns and promotions all the while having their suppliers also share some of the burden of the lower retail prices of products. The factors mentioned so far have allowed Sonae MC to increase its EBITDA26 margin from 6.38% in 2008 to 7.53% in 2012. This margin also reflects the single-branding of their supermarket stores Modelo and Bom Dia into the Continente brand which has resulted in an increase in operational efficiency.

The EBITDA margin of Sonae MC has been consistently above competition with an industry average of roughly 6.47% in the 201227. However, we need to understand that unlike its competitors, due to the existence of Sonae RP, Sonae MC actually pays rents on all the stores it operates in. Due to this, we also considered the EBITDAR28 margins to take into account the operational performance without the influence of store ownership policy. In this regard, Sonae MC presented, in 2012, a margin of 11.03% with the industry average being 7.95%. Regardless, the _{sustainability of Sonae MC’s margin can be} argued and we believe that further increases are highly unlikely particularly concerning the current and future macroeconomic environment and the expected price wars in light of the growing importance of private labels which usually have lower margins than manufacturers’ labels. Due to this, we have assumed a constant 7.00% EBITDA margin in our forecasts.

In spite of the strong operational performance, due to the macroeconomic decay in Portugal resulting in consumers generally choosing cheaper products, revenues have decreased by 1.39% during 2012. Even though Sonae MC, as mentioned, has one of the most trusted brands in Continente, the shift of consumers to small and more convenient stores and their price driven purchases has mildly benefited its main competitor. Notwithstanding, turnover has been projected for the future years as dependent on two key factors: total sqm and

26_{Earnings before interest, taxes, depreciation and amortization}

27_{Source: Bloomberg Industry. Industry average was computed as the average of 18 food retailers} 28_{Earnings before interest, taxes, depreciation, amortization and rents}

Source: Company Information, Analyst’s estimates and Bloomberg

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

Exhibit 25 - MC's operational performance evolution

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Hypermarkets 2012 2014 2016 2018 2020

Turnover (€ millions) 1597 1581 1605 1638 1730 Grow th (%) -1,39% 0,00% 1,00% 1,00% 2,78%

LFL (€ millions) 1634 1581 1605 1638 1730 Grow th (%) 0,86% 0,00% 1,00% 1,00% 2,78%

Stores 39 39 39 39 40

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

Supermarkets 2012 2014 2016 2018 2020

LFL (€ millions) 1496 1572 1615 1674 1771 Grow th (%) -6,65% 0,25% 1,13% 1,05% 1,25% Stores 138 139 141 145 151

Sales per sqm (thousands) 6,50 6,47 6,57 6,70 6,90

Other Concepts 2012 2014 2016 2018 2020

LFL (€ millions) 103 102 105 112 120 Grow th (%) -1,51% -0,33% 1,17% 1,93% 2,79% Stores 263 268 275 283 295 Sales per sqm (thousands) 3,55 3,48 3,50 3,57 3,67

49% 48%

3%

Hypermarkets Supermarkets Other Concepts

sales per sqm. As a rule of thumb, each new store opening will have 50% of the sales per sqm of a more mature store. We assume that it will take one year to reach to the same level of sales per sqm of the mature store which is a conservative assumption when considering the operational know-how at

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

relatively constant average size of each store. Therefore, the only factor influencing total sqm is actually the store openings.

For the first brand, Continente hypermarkets which represent 49% of MC’s 2012 turnover, we assumed a mere one store opening in 2019 as we are not expecting, under the macro environment, recent consumer trends and saturation of the industry, a heavy investment on this format. At the same time, since families have seen their disposable income decrease in light of tax burdens and austerity measures, we assume a -1.00% decrease of its sales per sqm by the end of 2013 with it remaining constant in 2014 and recovering a year later to a 0.5% increase. Therefore, from 2013 to 2016 we expect a top-line CAGR29 for this brand of approximately 0.12% with 1.89% for 2016 onwards, based on our assumptions and on the projections by the IMF of the Portuguese inflation rate.

For the supermarkets concept, we expect a heavier investment from Sonae MC as a result of shifting consumer preferences and, as such, we project a store increase of 1 per year until 2016. However, after 2016, the investment should be higher (in reaction to economic recovery) representing a 2 store increase per year until 2018 and 3 per year from 2018 to 2020. Regardless, sales per sqm should behave like the hypermarkets’, however we expect a better performance from this concept. Therefore, the sales per sqm should drop by the end of 2013 by -0.75% with expected recovery occurring in 2015. Due to the greater potential of these units and taking into account our assumptions, we projected a top-line CAGR of 2.53% from 2016 to 2020. The remaining concepts had a similar treatment. Overall, based on our assumptions, we are estimating a top-line CAGR for the period of 2013 to 2016 of approximately 0.41% with an increase by a CAGR of 2.36% until the end of 2020 in light of projected economic recovery.

Exhibit 28 - Sonae MC's operational forecasts

29_{Compounded annual growth rate}

Projections 2012 2013 2014 2015 2016 2017 2018 2019 2020

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

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

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

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

Stores 440 441 446 450 455 461 467 477 486

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

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

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

Exhibit 27 - MC's operational forecasts by concept

Source: Company Information and

Analyst’s Estimates

Source:Company Information and Analyst’s Estimates Exhibit 26 - MC's turnover weight by

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

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

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

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

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

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

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

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

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

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

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

Industry Average 0,41 6,35 9,86 4,95 Sonae MC 0,46 6,40 10,41 4,12

Risk Free Rate 2,73%

Market Risk Premium 5,50%

Beta Levered 1,07

Beta Country Portugal 1,30

Cost of Equity 10,37%

Cost of Debt 6,97%

E/V 65,69%

D/V 34,31%

Tax Rate 26,50%

WACC 8,57%

WACC Com putation

As far as the investing cash flow goes, we need to take into account that we are dealing with a saturated industry. Most of the capital expenditures projections came down to the refurbishment of assets and the investment in new stores. These values were based on tangible assets in our projection of the balance sheet which depend on the total sqm of each business unit30. Net working capital had a similar treatment and we expect it to remain negative for our projected time period since this is a key characteristic of this industry. Due to these assumptions, we arrive at the following Free Cash Flows (FCF).

Exhibit 30 - Sonae MC's FCF projections

We used the Capital Asset Pricing Model to arrive at the cost of equity by taking a five year average of the returns of the German 10 year government bond as it is widely used due to its resemblance to a theoretical risk free asset. The levered beta of Sonae MC was computed by taking the industry average betas (11 retailers were considered), deleveraging them and weighting them (at the companies’ market capitalizations) to a single beta. We then took the industry average capital structure as we assume this to be a long term tendency for Sonae and arrived at the firm’s levered beta. As for the market premium, we considered a 5.5% average as suggested by common literature31_{. We also took}

into account, due to the deteriorated macroeconomic environment of Portugal, a country beta32 which was obtained by performing a regression of the PSI20 Index with the MSCI World Index for a 4 year monthly time frame. The cost of debt was computed as the average of the current Portuguese CDS spread, the current Sonae’sbond yields and a synthetic rating through the firm’s theoretical rating based on its Interest Coverage Ratio (ICR) and averaged the results33_{. With all of this, we arrive at a WACC of 8.57% for Sonae MC.}

30_{When we projected balance sheet items, we split RP’}_{s invest capital amongst the retail business units to account for their true FCF} 31_{Source: Mckinsey Valuation}_–_{“Measuring and Managing the Value of Companies” –}₅th_Edition

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

well diversified investor would require to invest in the given country

33_{Synthetic Rating spread over risk free}_–_{4%, Portugal’s CDS}_{spread of first 4 months of 2013}_–_{4.32% and Sonae’s Bloomberg bond}_spread_–_4,39%

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

Turnover 3252 3262 3291 3335 3387 3446 3549 3661

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

EBIT 143 144 145 148 152 155 162 167

NOPLAT 105 106 107 109 111 114 119 123

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

Operating Cash Flow 182 182 184 186 189 192 197 203

Capex 77 85 81 83 89 90 116 95

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

FCF 64 98 106 107 105 108 91 119

Discounted FCF 64 90 90 84 75 72 56 67

Present Values of FCF 597

Terminal Value 894 Term inal Grow th at 1%

Enterprise Value 1491

Source:Company Information and Analyst’s Estimates Exhibit 29 - WACC assumptions

Source: Analyst’s Estimates

Exhibit 31 - Multiples comparison

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Turnover (€ millions) 2013 2016 2018 2020 Base Case 3252 3335 3446 3661 Worst Case 3247 3259 3359 3468 Best Case 3276 3407 3588 3823 Stores 2013 2016 2018 2020 Base Case 441 455 467 486 Worst Case 441 449 457 466 Best Case 445 464 482 503

Sales per sqm (€ thousands) 2013 2016 2018 2020 Base Case 5,87 5,95 6,06 6,24 Worst Case 5,86 5,84 5,97 6,10 Best Case 5,87 5,95 6,08 6,35 EBITDA Margin (%) 2013 2016 2018 2020 Base Case 7,53% 7,00% 7,00% 7,00% Worst Case 7,53% 6,90% 6,90% 6,90% Best Case 7,53% 7,10% 7,10% 7,10%

0% 5% 10% 15% 20%

ROIC (%) WACC

Scenario Results (€

millions)

Enterprise Value

Scenario Probabilty

Final EV

Base Case 1491 80%

Worst Case 1434 15%

Best Case 1551 5%

1485

Based on our assumptions and with a terminal growth rate of about 1%, we can see that _{Sonae MC’s enterprise value (EV) is of €1.491} million. Our valuation puts Sonae MC at 6.49 times EBITDA trading multiple compared to the industry average of 6.04. However, this is due to the fact that it pays rents on all of its assets (higher cost). Considering the EV/EBITDAR multiple, Sonae MC is actually below the industry average which could be justified by its higher

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

shareholders with a projected ROIC clearly above the WACC considered.



Sonae MC Valuation Scenarios

Despite our previous assumptions, we are aware that the food industry trends are dependent on both the macroeconomic environment and the level of competition in the industry. Since families are seeing their disposable income decrease in light of austerity measures in the country, all the while shifting their preferences to less costly products and even to Sonae’s competitors, we need to imply some variability in our model in order to cope with these challenges. We

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

per sqm and EBITDA margins. We attribute a probability of 80% to our base case; however, we take into account that the worst scenario is more likely than our optimistic scenario because the changes in the food industry advent from the crisis add a higher uncertainty, we attribute a probability of 15% to the former with 5% representing the latter to reflect a more conservative approach. In the worst case scenario we take a smaller EBITDA margin all the while decreasing our overall investment in terms of store openings. At the same time, we considered a more severe impact in the sales per sqm in the end of 2013 leading to a top-line revenue decrease. We were also stricter in our projections of top-line recovery estimating that this recovery would occur a year later than on our base case scenario previously mentioned. We also assumed a lower growth of the sales per sqm after 2016. This scenario results in a topline CAGR of -0.17% from 2013 to 2016 and 1.57% from 2016 to 2020. All in all, this leads the EV of this business unit to decrease from €1.491 million to €1.434 million.

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

both the EBITDA margin and store openings. We also took into account a less severe impact on the sales per sqm in 2013 and an earlier top-line growth recovery for the period immediately after. Under this scenario, top-line revenue growth is expected to be represented by a CAGR of 0.88% from 2013 to 2016 and 2.25% from 2016 to 2020. This leads to an EV of €1.551 million. This scenario analysis leads us to project our final EV for year-end 2013 to be of

€1.485 million.

Exhibit 32 - ROIC vs WACC comparison

Source: Company Information and

Analyst’s Estimates

Exhibit 33 - Scenario Analysis for key variable factors

Exhibit 34 - Scenario Results

Source:Analyst’s Estimates

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8,64% 9,14% 9,64% 10,14% 10,64% 3% 74 61 51 41 33 4% 100 82 67 55 45 5% 139 113 92 75 61 6% 209 163 129 104 84 7% 364 260 195 152 120

T

e

rm

in

a

l

G

ro

w

th

WACC

(€

millions) 0% 5% 10% 15% 20% 25%

2000 2002 2004 2006 2008 2010 2012

Investment as a % of GDP GDP Growth Rate

-4 -2 0 2 4 6 8 10 12 14 16

0 50 100 150 200 250

2014 2015 2016 2017 2018 2019 2020

EBITDA (right axis) EBIT (right axis) Turnover (left axis)



Sonae MC Angola

Sonae SGPS has recently issued its interest in entering an emerging economy through its food retail business unit. This move has been anticipated for awhile due to the saturation that the firm has been facing in the Portuguese economy. In this regard, Angola was the country chosen. The reality in Angola is similar to Brazil in terms of the growth registered in recent years. From 2004 to 2007, the company registered a CAGR of its GDP of 17.60%. Despite the drop in growth during the financial crisis, the country registered a growth rate of 8.41% in 2012. It is now the 5th_{largest economy in Africa according to the IMF.}

Regardless, the country is not even close to resembling a fully developed country since, according to the firm, it only has _{10% of its retail sector’s turnover} through organized supermarkets and hypermarkets. This is a risk, but also an opportunity for Sonae MC to quickly develop its position in the Angolan market. At the same time, due to the particular difficulties of entering such an uncertain environment, Sonae’s entrance will be done through a joint venture with Condis, a local company which is, coincidentally, owned by the businesswoman and daughter of the country’s president, Isabel dos Santos34_{. Sonae announced a}

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

We assume that the investment will be financed with 70% equity and 30% debt. The WACC used was the same as the MC’s business unit but we added a country beta to the computation of the cost of equity35. For the cost of debt, we used the previously computed risk-free rate but added a spread for Angolan’s BB- rating. This leads us to a WACC of 9.64%. We also assumed that the stores would start at a low EBITDA margin and sales per sqm but would tend to MC’s current operational performance by the end of 2020. Also, cash flows were projected based on Angola’s inflation rate.

All in all, we arrived at an EV of €91.77 million. A simple sensitivity analysis highlights the acute variation of the EV to the terminal growth rate and the WACC considered as the terminal value represents 140% of the EV. Indeed this move from MC has the potential to unlock new top-line growth despite the fact that, according to our assumptions, MC Angola would only represent 6.16% of MC’s EV. This value would increase substantially if we assumed additional store openings in the country. For our investment case, however, due to the fact that there is still much uncertainty around the actual entrance of MC to Angola, we attribute a 50% likelihood of the plan actually going forward and thus, considered that influence on our final stock price.

34_{Owner of 28.8% of Zon which is now finalizi}_{ng its merger with another of Sonae’s business units –}_Sonaecom.

35_{We used Brazil’s stock index BOVESPA due to the fact that Angola does not have a stock index and we considered Brazil a good}_{proxy due to its}

resemblance to Angola as an emerging economy dependent on oil and future growth prospects

Exhibit 35 - Angola's GDP and Investment evolution

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

Source: Analyst’s Estimates

Exhibit 37 - MC Angola's Sensitivity Analysis

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0 500 1.000 1.500 2.000 2.500 3.000 3.500 4.000 4.500

2012 2013 2014 2015 2016 Apparel Electronics and Appliance Health and Beauty Home and Garden Leisure & Culture Mixed Retailers Others

-20% -15% -10% -5% 0% 5% 10%

2008 2009 2010 2011 2012 2013

PT Food Retail Sales YoY PT Non-Food Retail Sales YoY

Market Shares 2009 2010 2011

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

Zara 2,20% 2,20% 2,20% El Corte Inglés 1,90% 2,00% 2,10% IKEA 1,20% 1,50% 1,70% Fnac 1,40% 1,50% 1,50% Leroy Merlin 1,00% 1,30% 1,40% Hello 0,60% 0,90% 1,20% Aki 0,90% 1,00% 1,00% Rádio Popular 0,90% 0,90% 1,00%

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

Media Markt 0,80% 0,70% 0,80% Staples 0,80% 0,80% 0,70% C&A 0,50% 0,50% 0,70% Moviflor 0,80% 0,70% 0,70% Decathlon 0,50% 0,60% 0,70%

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

Casa 0,50% 0,60% 0,50% Multiopticas 0,50% 0,50% 0,50% H&M 0,40% 0,40% 0,40% Pull & Bear 0,40% 0,40% 0,40% Others 80,50% 79,00% 78,00%

Specialized Retail



Specialized Retail Industry Analysis

In the non-food retail sector, Sonae mainly competes in 3 sectors: consumer electronics, sports apparel and the clothing segment. All three of these sectors are largely more affected by the economic crisis than the food based retail sector. As opposed to food products, these products are not considered first need goods which is translated into lower purchases from consumers when their disposable income decreases. In 2007, non-food retail represented 54.9% of total retail turnover and this weight declined to 51.2% by 2011. By 2016, this weight is projected to decrease to 48.8% at a CAGR of its sales of -0.77%. The apparel segment and the electronics segment are projected to lead the decline in sales of the non-food retail industry with an estimated CAGR, between 2012 and 2016, of -1.13% and -2.35%, respectively36_.

Looking at Worten, Sonae SR’s electronic and appliances brand, we can see that it benefits from a leadership position in the non-grocery market. It has increased its market share from 2.7% in 2008 to 3% in 2011. Keep in mind that the presented market shares are defined in terms of value in relation to the overall non food retail sector. Its closest competitor, Rádio Popular, also increased its market share during the same time period from 0.9% to 1%. Media Markt follows in third with a market share of 0.8% in both time periods. As observed, Worten has a sustained competitive position and has been cementing its leadership position in recent years. It was, at par with Continente, voted as one of the most trusted brands in Portugal37.

In the sports apparel segment, Sportzone enjoys a leadership position detaining 0.9% of market share in 2011 (up from 0.8% in 2008). Its closest competitor is Decathlon which has had a threatening performance jumping from 0.4% of market share to 0.8% in the same time period. The entrance and successful establishment of Decathlon in the Portuguese market comes from its product offering at attractive prices38_{and the company already stated that they}

plan to reinforce their position in Portugal. Also, Sports Direct acquired in 2010 a 50.1% stake in Portugal becoming the third largest sports retailer. As of April 2012, it had 13 stores in Portugal and the company is planning to increase their investment in the country39.

On an opposite note, Sonae SR has mainly two brands of clothing stores, Modalfa and Zippy. These brands are not market leaders and, looking at the

36_{Source: Euromonitor Portuguese Retail Market Report}_–₂₀₁₁ 37_{Source: Company information}

38_{Source: Euromonitor Portuguese Retail Market Report}_–₂₀₁₁ 39_{Source: Sports Direct Annual Report - 2012}

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

Exhibit 39 - Non-food sales forecasts by

Source: Euromonitor Portuguese retail market report - 2011

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0 50.000 100.000 150.000 200.000 250.000

2007 2009 2011 2013 2015 2017 Grocery Retailers Non-Grocery Retailers

-4%

-2%

0%

2%

4%

6%

8%

0

200

400

600

800

1.000

1.200

2008 2009 2010 2011 2012

Turnover (€millions) (left axis) EBITDA Margin (right axis)

EBIT Margin (right axis)

-20% -15% -10% -5% 0% 5% 10%

-50 -40 -30 -20 -10 0

2008 2009 2010 2011 2012 2013

ESP Consumer Confidence Index (left axis) ESP Non-Food Retail Sales YoY (right axis)

industry numbers, we can clearly see that Inditex (Zara) assumes the leadership position with 2.2% of market share in 2011. El Corte Inglés is the second player and Modalfa only appears at number four with a 0.6% market share. Unlike the remaining non-food brands, the fashion apparel industry is much more fragmented and consumers are becoming more price-driven benefiting low cost clothing retailers40.

In Spain, _{the reality lived is quite similar to Portugal’s}. The consumer confidence index has dropped significantly, as well as the non-food retail sales values. The non-food retail sector represented, in 2007, €115.7 billion of total retail sales of €210 billion (55.1%). This value is projected to decrease to €80.6 billion by 2017 alongside a decrease to €171 billion of total retail sales41. This highlights the negative environment lived in Spain as unemployment levels are considerably higher than in Portugal and, as such, Spanish families are expected to cut expenses of non necessary goods.

Sonae SR’s brands have no significant market position there due to their late entrance into this market (Sportzone 2008 and Worten 2009). Regardless, in spite of the deteriorated economic environment, Sonae SR wants to keep on investing by opening more stores in the next few years42. Currently, the market leader in the sports apparel segment is Decathlon with 1.3% market share of total non-food retail turnover and in the consumer electronics segment, the market leader is Media Markt with 1.7% market share43.



Sonae SR Valuation

As mentioned, in Portugal, Sonae SR’s brands have a very good and sustainable market leadership position with the exception of the clothing segment. Despite this, in recent years, this unit has seen its revenues considerably decrease from

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

This is justified by the economic crisis which, as explained, has a more direct (negative) impact on discretionary goods.

Regarding our projections, we estimate the top-line growth in the same way we did for the food retail division. We assume a constant average store size while projecting future store openings and sales per sqm. Again, we need to take into account that the impact that the crisis and austerity measures will have on this unit will be more severe than in the food retail segment. We estimate a decrease in the sales per sqm by the end of 2013 of 2.00%, with recovery

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

40_{Source: Euromonitor Portuguese Retail Market Report}_–₂₀₁₁ 41_{Source: Euromonitor Spanish Retail Market Report}_–₂₀₁₂ 42_{Source: Company information}

43_{Source: Euromonitor Spanish Retail Market Report}_–₂₀₁₂ Source: Bloomberg

Exhibit 42 - Spanish food vs non-food

retail sales (€ millions)

Source: Euromonitor Spanish retail market report - 2012

Exhibit 43 - SR Portugal's operational performance

E CONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES.T HIS REPORT WAS SUPERVISED BY

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ANUEL

S

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manuel.santos2012@novasbe.pt

In the pursuit of future growth…

…while facing domestic challenges

Table of Contents

SONAE SGPS VALUATION SUMMARY ... 3

COMPANY OVERVIEW ... 4

BUSINESS UNIT DESCRIPTION ... 5

MACROECONOMIC OUTLOOK ... 8

BUSINESS UNIT VALUATION ...10

FREEHOLD IMPACT ...31

FINAL VALUATION REMARKS ...32

APPENDIX ...33

DISCLOSURES AND DISCLAIMER ...34

Sonae SGPS Valuation Summary

Company Overview

Business Unit Description



Sonae MC



Sonae SR



Sonae RP



Sonae Sierra



Sonaecom



Investment Management

Macroeconomic Outlook



Portugal



International

Business Unit Valuation

Food Retail



Food Retail Industry Analysis



Sonae MC Valuation



Sonae MC Valuation Scenarios



Sonae MC Angola

Specialized Retail



Specialized Retail Industry Analysis



Sonae SR Valuation