CFA Institute Research Challenge Files/CFA Institute Research Challenge...PKN Orlen acquired 62.99% of Unipetrol shares from the National Property Fund in 2005. The second largest

CFA Institute Research Challenge

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Team D

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Unipetrol Daily Stock Price Developmnet since November 2014

Team D, Student Research This report is published for educational purposes only by students

competing in The CFA Institute Research Challenge Downstream Sector, Oil & Gas Industry

Prague Stock Exchange (PSE) Recommendation: BUY Unipetrol a.s. Date: 17/12/2015

Current Price: CZK 160.1

Ticker: UNPE.PR (Reuters), UNIPE CP (Bloomberg) Target Price: CZK 206.0 (28% upside)

Unipetrol: From ashes like a phoenix!

We issue a BUY recommendation on Unipetrol with a 12-month target price of CZK 206.0, obtained as an equally weighted average of discounted free cash flow and multiples-based peer group valuation. This offers a 28% upside to the closing price of CZK 160.1 as of December 17, 2015. The main value driver is the downfall of crude oil price. Additionally, Unipetrol benefits from an acquisition of 100% stake in Česká rafinérská refinery, strong GDP growth in the Czech Republic, increased interest of its parent PKN Orlen, and positive FX momentum. Due to a recent accident in Litvinov refinery, the share is currently traded at 41% of EV/Sales compared to peer group median versus a long-term average of 99%. However, we see that the market significantly overreacted and created a significant space for growth.

Highlights

When Oil Price Declines, Unipetrol Grows | Decline of average crude oil price to the level of 52.5 USD/bbl (-47% y/y) in 2015 positively affects the refining margins (+3.3 USD/bbl y/y in 3Q2015) and petrochemical margins to the level of 942 EUR/t (+43% y/y in 3Q2015). Taking into account current oil oversupply, demand dynamics and geopolitical situation, we expect further minor decrease of oil prices in 2016 and 2017, followed by a rebound to the level of 56 USD/bbl in 2020. Petrochemical product prices are expected to follow the price of the inputs and decline.

Stronger by M&A Activities | In 2015, Unipetrol acquired 100% stake in Česká rafinérská refinery and increased its production capacity from 5.9 mt/y to 8.7 mt/y. The Company is about to buy 70 fuel filling stations from OMV and gain additional 5% market share in retail business. Higher volumes along with high margins have already been reflected in this year’s strong interim results.

Positive FX Momentum | Strengthening dollar motivates foreign investors to enter the Czech market. Especially, given the 27 EUR/CZK floor held by the Czech National Bank until the end of 2016, foreign investors can expect additional profits from FX rate in the near future. We see the Unipetrol’s cost and revenue structures to be further benefiting from future FX rates.

Market Overreacted to the Steam Cracker Accident | Exceptionally low EV/EBITDA and EV/Sales of 2.5 and 0.17, respectively, are far from being justified, especially since ROIC increased significantly compared to peer companies recently. Unipetrol’s stock price fell 32% in reaction to the steam cracker shutdown from August 2015. We estimate the material losses and lost profits of CZK 4.3bn, versus Company claims of CZK 2.2bn and market reaction of CZK c. 6bn. Before the accident (2011 – 3Q 2015), the share was traded at average of 99% of EV/Sales median. Last year, it was traded at 87% of EV/EBITDA median. Currently, the share is traded at 41% EV/Sales and 29% of EV/EBITDA peers median, which cannot be rationalized neither by the accident nor any other factors.

Higher Demand For Fuels and Petrochemical Products | Company’s results are further driven by macroeconomic factors such as GDP growth and increased performance in sectors which have high diesel consumption demands. Czech GDP experienced the highest growth of 4.5% in 3Q2015 and 4.4% over the same quarters of the previous year. In 2016, GDP is expected to keep reasonable momentum of 2.8%, positively affecting domestic demand for motor fuels and petrochemical products.

PKN Expresses Higher Interest in Supporting Unipetrol | The management of the parent PKN Orlen changed its attitude and repeatedly expressed its interest to support Unipetrol. The management flagged its intention to establish a stable dividend policy starting next year, as a result of exceptionally profitable results.

Valuation Weight Price Target

(CZK)

DCF 50% 189.3

Peer Group Valuation

50% 222.7

Price Target 206.0

Upside 27.9%

Market Profile

52-week price range (CZK)

119.35 – 194.90

Average daily volume (CZK)

10 791 986

Average daily volume

66 471

As % of shares outstanding

0.04%

Shares outstanding

181 334 764

Free float 27 867 423

Market Cap (CZK bn)

29.032

BV per share (CZK)

155.4

ROE 2015E 24.1%

P/BV 1.03

P/E 3.94

EPS (LTM) 41.1

Price Target – CZK 206.0

28% upside

Market Price

CZK 160.0 as

of 17/12/2015

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CFA Institute Research Challenge 2016 Team D, Czech Republic

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Refining PetChem Retail

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Paramo

Unipetrol Deutschland

Unipetrol Slovensko

Unipetrol Hungary

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Figure 4. Company Structure

Source: Company data

Figure 5. Shareholders (% on share of votes)

Business Description Unipetrol a.s. is the leading refining and petrochemical group in the Czech Republic and one of major players in Central Europe. In the Czech Republic, it is the largest crude oil processor, one of the most important plastics manufacturers and the owner of the largest fuel filling station network under the brand Benzina. In 2014, the Group was in terms of revenues of CZK 124.2 bn the 5th largest company in the Czech Republic.

The Group consists of two major business segments: downstream and retail distribution of fuels. Within the downstream segment, which combines refining and petrochemical production, the Company holds a 100% stake in Česká rafinérská a.s., the operator of refineries in Litvinov and Kralupy nad Vltavou with annual refining capacity of 8.7 mt/y. Subsidiary Unipetrol RPA, s.r.o. operates a steam cracker and PE/PP units used for production of basic plastics. PE/PP production units have approximate share of nearly 3% of PP and over 5% of PE on total European output, respectively. Unipetrol is also a leader on the Czech wholesale and retail fuels market operating network of Benzina filling stations with approximate market share of 15.3% in 2015. The Group is active in all Central Europe and is among the biggest companies in the region with 3,800 employees.

Unipetrol is present only in the downstream part of Oil & Gas value chain and specializes in buying crude oil and other feedstock used for further processing. Downstream segment has recently witnessed strong improvement driven mainly by good macro and lowest crude oil prices since the crisis. However, an unplanned shutdown of a steam cracker on 14 August, 2015 interrupted production of ethylene. Despite the accident, downstream segment has reported its very best performance so far.

Retail segment is represented by the company Benzina s.r.o., the largest operator of filling stations in the Czech Republic with network of 339 branches. Benzina reported growth of 2% in 2013 and 2014 and expects to reach 15.3% market share in 2015, driven by additional refining capacity, lower crude oil price, and solid dynamics of Czech GDP together with active marketing activities of Benzina. In 2016, Benzina plans to further increase its market share to 20% through acquisition of 70 OMV filling stations.

The Group also continues to develop export activities, giving the highest priority to the intragroup cooperation. Unipetrol Slovakia continues its operation covering both Slovakian and Hungarian markets where the new subsidiary was established in 2015. In Germany, the Company maximized deliveries for Orlen Deutschland, reaching out a major supply of its 550 petrol stations. In 2015. Unipetrol was also able to increase sales to Austria using the southern ČEPRO terminals for direct fuel supply.

Another business line is operated by Paramo a.s., the largest Czech oil and lubricant producer that exports more than 60% of its production. Paramo controls 35% share in the Czech market, supplying major retail chains and prominent industrial companies such as OKD, ArcelorMittal Ostrava and Třinecké železárny. Paramo is also a major hydraulic oil supplier for Czech Railways and the Army of the Czech Republic.

In 2015, the Company continues to fulfill its Unipetrol Group Strategy 2014-2017 which can be described by the following 4 pillars:

● Excellence in operations in Refining – Unipetrol aims to increase efficiency of refining assets, improve operating performance and maximize the share of internal captive demand (feedstock for petrochemical production and product provider for retail segment)

● Strengthening its market position in PetChem - Main goal is to increase steam cracker utilization, increase petrochemical sales volumes and new polyethylene unit commissioning

● Gain market share in Retail – Unipetrol plans to leverage on its strong market position for further growth (organic, acquisitions) of market share that also stimulates higher utilization of refining capacity in the future

● Optimized costs of Energo – Last goal is to minimize total energy costs (electricity + heat) for the whole Unipetrol Group while maintaining flexibility and security of energy needs

Shareholder Structure | Majority of Unipetrol is owned by two major shareholder groups - PKN Orlen SA and J&T Group. PKN Orlen acquired 62.99% of Unipetrol shares from the National Property Fund in 2005. The second largest shareholder is J&T Group, financial investor, with 23.70% stake. The free float as of 17 December 2015 was equal to roughly 15.37% often affected by open market operation conducted by J&T.

Corporate Structure | In April 2015, the acquisition of shares of Česká rafinérská amounting to 32.445% of the Česká rafinérská’s share capital from Eni International B.V. was completed. Following completion of the transaction increased Unipetrol’s stake in the Česká rafinérská’s share capital from 67.555% to 100.00%. In November 2015, Unipetrol informed of a merger by amalgamation of subsidiaries Unipetrol RPA, s.r.o. and Benzina, s.r.o. Another planned merger between the Polymer Institute Brno and Unipetrol RPA aims at further business operational excellence and strengthening the Company's position on the Czech market. Recent establishment of a new subsidiary in Hungary and a merger of Slovakian subsidiaries in December confirm Unipetrol´s long-term interests in these markets and should contribute to strengthening of business activities in Hungary and Slovakia.

Corporate Management | Current management of Unipetrol consists of 6 senior professionals. The CEO, Marek Świtajewski that joined Unipetrol group in 2010 and has served as the Chairman of the Board of Directors since 2013 and previously managed subsidiaries Unipetrol RPA and Česká rafinérská. Under his leadership, Unipetrol announced and started the biggest investment project of construction and commissioning of new polymer unit PE3. Other 5 Members of the Board have extensive experience in refining, petrochemical industry and energy sector: Piotr Wielowieyski, Łukasz Piotrowski and Martin Durčák, or are in finance and business development: Mirosław Kastelik, Andrzej Jerzy Kozłowski.

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Figure 1. Revenues by Segment (CZK bn)

Figure 2. Regions of Operations

Source: Team estimates

Figure 3. Revenue by Country in 2014




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Figure 6. Distribution system in CZ and SK

Figure 7. Crude Oil Throughput (in kt)


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Industry Overview and Competitive Positioning

Czech Petroleum Industry

Refining and petrochemical industry is characterised by significant entry barriers and high capital intensity. Most of the international oil companies (PKN Orlen, MOL Group) are active in all segments of the industry, whereas smaller companies (Unipetrol, Slovnaft) tend to focus on one or two core segments. Unipetrol is a former state-owned company which was privatized in 2005 and owns the only refining assets in the Czech Republic today. Its biggest competitor in the region is Slovakian Slovnaft with 3,250 employees and revenue of EUR 4.0bn in 2014.

Czech GDP Growth Record Since the Crisis | GDP growth and lower level of unemployment implied better performance of high diesel consumption sectors as well as greater willingness of households to spend, exhibiting itself in higher demand for gasoline and finished petrochemical products. In 3Q2015, Czech GDP experienced the highest growth of 4.5% and is expected to keep reasonable momentum also during 2016, positively affecting domestic demand for motor fuels and petrochemical products.

Crude Oil Transportation via Pipelines | Kralupy refinery processes light sweet crude Azeri Light from Azerbaijan and CPC Blend from Kazakhstan transported via TAL/IKL pipeline. Small amount of crude is also transported from Moravian crude deposits. Litvinov refinery receives Russian crude (REBCO, “Ural”) transported via Druzhba pipeline. Thus, by increasing Ural volumes throughput, it can take advantage of widening Brent/Ural differential with positive impact on refining and petrochemical margins. Both IKL and Czech part of Druzhba pipeline are operated by state-owned company MERO a.s.

Unipetrol Increasing Crude Oil Deliveries Agreements | New annexes to long-term crude oil supplies agreements were signed between Unipetrol and PKN Orlen, increasing crude oil deliveries in 2014 and 2015. Unipetrol also has long-term supplies agreements with the Slovak national pipeline operator Transperol and long-term lignite supplies agreement with Severní energetická a.s. In 2015, contract with ČEPRO was signed for providing pipeline and logistics services for indefinite period with a 12-month notice period. Estimated annual contract value is CZK 600 million and the contract brings estimated savings on unit costs basis of 5-10% depending on actual volumes pumped.

Refining Utilization Peak Disrupted by Steam Cracker Shutdown | In 2014, 5,130 thousand tons of crude oil were processed by Česká rafinérská facilities, 42% higher compared to 2013. In 2015, even higher volume is expected to be processed, in spite of the steam cracker shutdown in 3Q2015. The main reasons for the greater processed volume were higher refining capacities in Česká rafinérská due to the acquisition of additional share of the company, high demand for petrochemical products and also good sales volumes of motor fuels during the second half of the year. Refining utilization ratio reached the level of 95% in 2Q2015 but dropped to 85% due to the steam cracker accident.

Record Refining and PetChem Margins | A slight increase of yearly average of integrated margin (combination of refining and PetChem margins) is expected in 2015 and 2016 due to expected decrease of crude oil price and increase in fuels and petrochemical products consumption. In 2015, Unipetrol reached a multi-year high of model refining margin at 5.8 USD/bbl and a record high petrochemical margin at 942 EUR/t compared to 0.2 USD/bbl and 648 EUR/t in the beginning of 2014, respectively. In the late 2015 oil price decrease continued to significantly support both refining and petrochemical margins. However, October data showed decrease of refining margin to 2.9 USD/bbl as the price of finished products started to adjust to current oil price levels in August-September.

Petrochemical Production - Steam Cracker Shutdown | In the area of olefins and chemicals, the sale of steam cracker products and ammonia is the core business of Unipetrol. The most important steam cracker products include ethylene, propylene, C4 fraction and benzene. In August, an accident on steam cracker unit prevented Unipetrol from production of ethylene, the main feedstock for its PP/PE production units used for production of basic plastics. Estimated lost profit due to steam cracker accident not covered by business interruption insurance in 3Q15 amounts to approximately CZK 1.6 bn. Steam cracker utilization declined to 38% q/q. Based on current estimations, the steam cracker unit will be restarted at minimum capacity utilization around 65% in July 2016 and maximum capacity utilization will be achieved in October 2016. It is currently too early to estimate any amount of future payments from insurer to Unipetrol but all the physical damaged, estimated CZK 597 million, should be fully insured.

Macro Environment

Unipetrol Benefits From Lowest Crude Oil Price Driven by OPEC Oversupply of 2 m bbl/d | Brent crude oil price approached seven-year lows in early December as OPEC opted to continue producing at will to defend its market share. Average daily supply of crude oil accounted for 96.6 m bbl/day in 2015 was driven by increased OPEC production. In 2015, average crude oil demand was approximately 94.6 million barrel/day mostly led by China, USA, India, and somewhat surprisingly Europe. Resulting oversupply of 2 m bbl/day pushed the 2015 average Brent crude oil price to the level of 52.5 USD/bbl (-47% y/y). In our opinion, the future oil price will continue decreasing due to OPEC’s supply decisions based on their ability to achieve desired market share.

Oil Supply Drivers Allow for Increasing Production of OPEC in the Future | Oil market oversupply should remain in the near term as OPEC decided to produce 5.7% over its official daily quotas. This OPEC’s oversupply is expected to be further increased by Iran, which once pumped around 4 m bbl/day and is now down to about half of that. Iran is preparing to come back fully on line once it sheds nuclear-related sanctions in early next year. Its market entry is expected in 2Q2016 with incremental supply volume of 0.6 m bbl/day representing 0.5% of total daily oil supply in 2015. All these expectations can be further supported by the fact that OPEC members, including Iran, have the least marginal production costs among all oil producers. On average, these are 11 USD/bbl with Saudi Arabia on top with 3 USD/bbl. OPEC constitutes 41.8% of world oil production and controls 81% of world oil reserves. These factors allow OPEC to easily increase supply volumes and push the oil

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Table 1. Oil Demand Growth (m bbl/day)

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Figure 13. Number of Filling Stations in 2015


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prices to even lower levels while sustaining reasonable profitability. For 2016, after accounting for easement of Iran sanctions, we expect the total oil supply to account for 96.7 m bbl/day.

Oil Demand Drivers Indicate Demand Growth Slowdown in 2016 | According to IEA, global 2016 oil demand should continue to grow at slower pace compared to growth achieved in 2015. This growth slowdown is mainly driven by stagnating oil demand in Europe, America and Asia Oceania (OECD). In the same time, also pressured by lower oil demand growth of China that is expected to drop from 0.6 m bbl/day in 2015 to 0.3 m bbl/day in 2016. As IEA reported, the average daily oil demand is estimated at the level of 95.8 m bbl/day in 2016, resulting in oversupply of 0.9 m bbl/day.

Oil Supply and Demand Drivers to Create Further Pressure on Oil Prices in the Future | Given the supply and demand factors, we expect further pressure on global oil prices to lower the average crude oil price in 2016 and 2017 to the levels of 48.5 USD/bbl and 47.3 USD/bbl, respectively. These oil price declines later followed by rebound with target price of 56 USD/bbl in 2020 are in line with OECD estimates. However, we can not rule out the possibility of short term price shocks caused by the current political instability in the Middle East, Libya and Eastern Europe.

Widening Brent/Urals Differential Beneficial For Unipetrol | Brent/Ural differential captures the difference between quoted prices of Brent/Ural crude oils respective to their distillation yields. The spread has widened recently due to current situation in global oil markets, positively affecting refining margins of Unipetrol by lower price of feedstock in Litvinov that uses cheaper Ural oil in production process. Based on PKN Orlen estimates for 2016 onwards, we expect the Brent/Urals differential to fluctuate between 1 USD/bbl to 2 USD/bbl. However, we cannot rule out a possibility of rising differential based on current supply factors, creating a window for further improvement in future.

Favorable Macro in the Czech Republic | Continuation of demand increase for diesel with a slight drop in demand for gasoline in CEE region is expected for the rest of 2015 and 1H2016. Factors both of macroeconomic and technical nature positively affected fuel consumption in the Czech Republic over the whole 2014-2015 period. In 2014 and 2015, higher performance of international road transportation has also had a positive impact on increasing fuel purchase. Unit gasoline fuel margins will be the key profitability factor to follow during next years in retail segment as these were recently lower due to very strong price competition on the Czech retail market which is expected to persist. Czech GDP set to grow at moderate pace of 2.8% in 2016 followed by growth of demand for PetChem products by 4% expected by Unipetrol management.

Competitive Positioning

As of 2015, Unipetrol is the sole owner of Litvinov and Kralupy refineries. The Company is a refining monopoly and is the only major crude oil processor in the Czech Republic. Still, Unipetrol faces fierce competition within all three business sectors. Hungarian group MOL has the second largest filling station network with 317 stations and operates one of the most modern European refineries - Slovakian Slovnaft near Bratislava. Major fuel competitors OMV, Eni and Shell are preoccupied with upstream issues related to their oil drilling assets in connection to drop of global oil price. Therefore, they lack focus on their Czech assets and do not create much competitive pressure on Unipetrol at this moment.

Česká rafinérská in Need of Modernization to Regain Competitiveness | The two largest petrochemical companies in Central Europe, PKN and MOL, are fighting for dominance in the Czech oil products market. MOL’s quality of fuel is determined by modern Bratislava refinery, which processes the oil into quality products with higher margins compared to Unipetrol. Litvinov and Kralupy in this regard lag far behind. The refineries underwent last major modernization between 1997 and 2002 when Unipetrol was still owned by the state. However, announced PE3 investment and further PKN investment strategy aims to regain refining and petrochemical competitiveness. Unipetrol production capacity of high density polyethylene is about to increase by 47% (150 kt/year) with the PE3 investment.

Leveraging on Strong Market Position in Retail | Although MOL’s gasoline and diesel come from its refinery in Bratislava, it is connected to the Czech fuel distribution system, meaning no disadvantage compared to Unipetrol. OMV, the third strongest player, recently offered 70 of its 217 filling station for sale and Unipetrol expressed its interest in buying to fulfill the Strategy goal of 20% retail share. Together with the acquisition of the additional stake in Česká rafinérská, Unipetrol signed a five-year contract for supplies of motor fuels to the Shell’s Czech retail network. At the same time, the Company managed to win tenders and thus renew contracts with the Czech Railways, Tesco Stores and other key customers.

LPG sales increased by 43% in 2014 compared to 2013 and are expected to increase in 2015. The situation in Ukraine caused worse availability of a typical lower-value product coming from Russia, which led to the higher prices of this source. This enabled the Company to place more products on the Czech market and to reach better prices at the same time.

Paramo Controls 35% of the Czech Lubricant Market | Paramo controls 35% share in the Czech lubricant market, supplying major retail chains and prominent industrial companies such as OKD, ArcelorMittal Ostrava and Třinecké železárny. Paramo is also a major hydraulic oil supplier for Czech Railways and the Army of the Czech Republic. Paramo also supplied the AutoKelly network by the Starline brand and produced oils for the Czech company Zetor. Among others, Paramo is known for its premium brand Mogul that can be considered as a household name for motor oils in the Czech market. In 2015, the company invested into modernisation of production line improving its cost efficiency while producing superior products. Such investment of CZK 18m allows Paramo to sustain its strong market position.

Exports – Increased Sales in Austria | Unipetrol Slovakia continues its successful operation covering both Slovakian and Hungarian markets where the new subsidiary was established in 2015. In Germany, the Company maximized deliveries for Orlen Deutschland reaching out a major supply of its 550 petrol stations. Unipetrol was also able to further increase sales to Austria using the southern ČEPRO terminals for direct fuel supply. However, exports of fuel tends to be less profitable than sales on the domestic market - the question is whether Polish owner of Unipetrol will suffer in the long term. Otherwise, Unipetrol had to reduce production, which would have negative impact on the operations of its refineries.

Demand Growth m bbl/day

2015 2016F Change

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America 0.3 0.1 -0.2

China 0.6 0.3 -0.2

Asia exl. China 0.5 0.4 -0.1

Latin America 0.0 0.0 0.0

Middle East 0.1 0.2 0.1

Africa 0.1 0.2 0.1

Total Growth 1.9 1.2 -0.7

Iran market entry 2Q2016 +0.6 m bbl/day,

Avg growth 2016 +1.1 m bbl/day y/y

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Figure 18. Unipetrol share price development since January 2013

Investment Summary Low Oil Price and Favorable Macro Environment | In 2015, the Company reached exceptionally high refining and petrochemical margins and reported the best results in the last ten years. Thanks to the oil price decline, Unipetrol increased its margins across all segments; aggregate gross margin improved from 5% in 2014 to 14% in 9M2015. Low crude oil price, record GDP growth and increased fuel and petrochemical sales were the main drivers of the exceptional performance - 9-month net profit of CZK 6.8bn vs. loss of 1.1bn in 9M2014.

Česká rafinérská Acquisition | In 2015, Unipetrol became a sole shareholder of Česká rafinérská, increasing its stake from 67% to 100%. Complete control of the refineries enables Unipetrol to achieve higher synergy effect and therefore increase overall utilization. In 2015, refineries increased the utilization of available production capacities up to 95% which was the main driver for the stock to hit 4-year old maximum. We expect similar utilization values after the steam cracker is repaired in 2016 or even higher due to the new PE3 unit in 2018.

Unipetrol is Fulfilling its Strategy | One of the main goals of the Strategy, gaining 20% share on the retail market, is in the final stage of negotiations. Due to some degree of uncertainty remaining, we conservatively forecast 15% revenue growth in retail segment in 2016 as a consequence of 70 filling station acquisition. New polyethylene unit with production capacity of 270 kt of HDPE will be the largest investment project in the history of the Czech petroleum industry (CZK 8.5bn). PE3 will contribute to high utilization of the steam cracker, allowing better integration of the petrochemical and refining production. PE3 is planned to be fully operational in the middle of 2018. We estimate NPV of the PE3 unit of CZK c. 5.5bn.

Explosion and Market Overreaction | Unipetrol’s stock dropped 32% due to the steam cracker shutdown in August. According to our estimates, market overreacted. We estimate total damages and lost profits to account for CZK c. 4bn versus market reaction of CZK c. 6bn. Unipetrol expects the steam cracker to be restarted at 65% production capacity in July 2016, reaching maximum capacity by October. Underutilization of the entire refinery will be used for further repairs and investments thus planned periodical shutdown could be avoided in this period. We see the loss of confidence stemming from the umpteenth operational problem in the Company, which we however attribute to bad luck, or six sigma event as statisticians would like.

Unipetrol is Strongly Undervalued Compared to its Peer Group | Over the past four years, Unipetrol has been traded at average of 99% of EV/Sales and in 2014 it was traded at 87% of EV/EBITDA median. Currently, the share is traded at 41% of EV/Sales and 29% of EV/EBITDA peers median, which cannot be rationalized neither by the accident nor any other factors. Especially, in a situation of significantly improved margins compared to its peers in recent years (see Appendices 8 and 10). If the share was traded at our conservatively estimated fair value, multiples would be 70,65% of EV/Sales and 63,3% of EV/EBITDA peers median.

Peaking Dollar and Positive FX Momentum | US dollar has reached its peak making emerging market investments relatively cheap. Since Unipetrol has been underpriced compared to its peers, investing in a profitable asset in CZK today is strongly reasonable. We see an additional upside for foreign investors who enter a long position in the Czech market, due to the Czech National Bank holding a floor at around CZK 27 per EUR until the end of 2016. This would result in appreciation of CZK to EUR and USD, where the net effect will be positive for the Company. Even though petrochemical revenues are in Euros, crude oil purchased in US dollars is the main driver of the profitability.

Explosion is Covered by the Insurance | We do not include any insurance coverage in our model. We estimate total damages and lost profits of CZK c. 4bn versus market reaction of CZK c. 6bn. So far, PKN Orlen has helped with deliveries to Unipetrol’s customers and also provides steam cracker product ethylene to Unipetrol for further processing to alleviate the damages.

Source: Adjusted Reuters data, Team estimates

-2%

3%

8%

FY2011 FY2012 FY2013 FY2014 LTM

PKN Orlen MOL

Slovnaft Unipetrol

Figure 17. Gross Margins of Unipetrol vs. Peers


6

66%

12%

22%

Refining Retail PetChem

61%10%

29%

Refining Retail PetChem

Figure 20. EBITDA (in CZK bn)

Figure 21. Revenues Structure in 2015


Figure 22. Revenues Structure in 2016


-4

-2

0

2

4

6

8

10

12


Dividend Policy | The management indicated its intention to establish a stable dividend policy starting this year. Unipetrol has no debt and its net cash position reached nearly CZK 7bn in 9M2015, or c. 7% of its revenues. The final decision depends on the loss estimates and the amount of insurance coverage, but we provide an illustrative balance sheet (see Appendix 2), where the accumulation of cash in the long term is apparent.

Investment Risks | The main risks are amount of damages related to the steam cracker accident and the date when it will become operational again, new refineries under construction by the coasts in the long term, and crude oil price direction.

Financial Analysis Table 2. Financial Ratios

RATIOS 2013 2014

2015E 2016E 2017E 2018E 2019E 2020E

Profitability

Gross margin 4.7% 6.6%

18.7% 11.9% 10.1% 10.2% 10.9% 9.5%

EBITDA margin 1.6% 3.9%

11.4% 7.3% 6.5% 6.7% 7.3% 6.1%

EBIT margin -0.9% 2.1%

9.3% 5.5% 3.6% 3.9% 4.4% 3.4%

Net profit margin -1.4% -0.4%

6.7% 3.3% 2.6% 2.9% 3.3% 2.5%

Return on Assets -2.8% -1.1%

14.2% 6.6% 5.1% 5.6% 6.1% 4.7%

Return on Equity -4.8% -2.0%

21.6% 9.1% 7.0% 7.7% 8.3% 6.4%

Liquidity

Current ratio 1.29 1.73

1.94 1.87 1.82 1.88 2.01 1.97

Quick ratio 0.72 1.05

1.27 1.22 1.19 1.24 1.37 1.32

Cash ratio 0.06 0.23

0.36 0.38 0.35 0.40 0.53 0.49

Activity

Cash Conversion Cycle 16 27

28 26 26 26 26 26

Total asset turnover 2.0 2.5

2.1 2.0 1.9 1.9 1.8 1.9

Fixed Asset Turnover 3.8 5.2

4.4 3.9 3.6 3.7 3.5 3.7

Shareholder Ratios

Earnings per share -7.7 -3.1

37.9 18.1 14.7 17.1 19.5 15.9

Dividend per share

7.6 3.6 4.4 5.1 7.8 6.4

Dividend payout ratio 0% 0%

20% 20% 30% 30% 40% 40%

Dividend yield

4.7% 2.3% 2.7% 3.2% 4.8% 3.9%


In this section, we summarize the underlying assumptions used in our forecasts. The future performance of Unipetrol was modeled separately for its individual segments - refining, petrochemicals and retail. Company now reports refining and petrochemical segment together as downstream, but thanks to historical data, we were able to model each segment separately.

Revenues Will Fall in 2015 and 2016 to Forecasted CZK 99bn, but Will Regain Positive Momentum Thereafter | Due to the oil price decline and the steam cracker accident, Company’s revenues will decline c. 20% over two years. When the steam cracker will be operational again, we estimate a conservative 8-year CAGR of c. 2% compared to historical 5-year CAGR of 9.6%. Our revenue forecast reflects developments in each of the three operational segments.

Refining Segment | We estimate a 15% y/y revenue decline in 2015 followed by a 1.6% 8-year CAGR. The initial downfall is caused by lower crude oil prices, which are directly reflected in the product price. The acquisition of additional 32% stake in Česká rafinérská refinery at the end of April partially offset the effect of lower product prices by higher throughput volume. Consecutive estimated growth is driven by higher demand for refinery products in the region. The ownership of the whole Česká rafinérská provides Unipetrol with increased production capacity of 8.7 mt/y vs 5.9 mt/y previously and higher efficiency and flexibility in its operations.

Petrochemical Segment | We forecast 25% y/y segment revenue decline in 2015, 29% decline in 2016 followed by c. 5% growth over the next 8 years. Initial decline is caused by the reflection of input price decline in the price of the petrochemical products and also by the steam cracker accident in Litvinov. The steam cracker is expected to be partially working from the 1H16 and fully operational by September 2016. The PE3 unit is expected to replace the old PE1 unit in mid-2018 and will increase PE production capacity by net 150 kt/y (+47%). We expect petrochemical margins to reverse back to previous levels as PetChem prices will adjust to the price of inputs.

Retail Segment | Unipetrol is in the final stage of negotiations to acquire 70 filling station from OMV and increase its market share from 15% to 20%, which we incorporate in our model and consider the main driver in retail segment revenues. These are further forecasted to grow thanks to sound GDP growth in the Czech Republic that has substantial influence on fuel consumption. We assume 2.3% 8-year revenue CAGR in retail segment.

Improved Margins Utilizing From Higher Flexibility and Cheap Crude Oil | Gross margins account to around 10% of total sales from 2016 ongoing exhibited a profound increase from 5% level in 2014. The future outlook is mainly determined by relatively cheap crude oil price since it represents the largest portion of COGS

75%

77%

79%

81%

83%

85%

87%

89%

91%

Figure 19. Refining Utilization Ratio



7

82%

7%

5%6%

Materials & Energy External services

COGS Other

0%

1%

2%

3%

4%

5%

6%

2001 2003 2005 2007 2009 2011 2013 2015

CZ 10Y yield EU 10Y yield

0%

1%

2%

3%

4%

5%

6%

7%

2001 2003 2005 2007 2009 2011 2013 2015

Infl. CZ Infl. EU

Figure 23. Cost by Nature in 2014


Figure 24. Inflation Rate

Source: IMF, WEO 2014

Figure 25. Government Bond Yields

Source: IMF

Table 4. WACC Calculation


(we assume that the crude oil price does not exceed USD 55/bbl until 2020). Sound margins are also supported by higher utilization of refining processes and flexibility of vertical integration after acquisition of Česká rafinérská and implementation of PE3 unit. PetChem remains the most profitable segment and contributes to EBITDA margins by 63% in 2016 up to 69% in 2024.

DuPont Analysis - PM and ATO as the Main Drivers of Profitability | In 2014, Unipetrol exhibited return on equity of -2%, however, the period of turbulent and negative net profits now seems to be over. One year later, ROE achieved exceptional 21.6% driven by net profit margin, equity multiplier as well as total assets turnover. Our analysis indicates future ROE to stabilize at approximately 7% (forecast ROE in 2020 6.4%) which is still very attractive compared to historical performance. DuPont analysis shows that the major influencing factor of return on equity will be net profit margin. Forecasted total asset turnover reflects the decline in product prices and modernized fixed assets.. Since Unipetrol does not utilize LT debt, financial leverage has a very low influence.

Table 3. DuPont Decomposition

DUPONT 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Net Profit Margin -1.4% 1.9% 7.5% 4.1% 2.6% 2.9% 3.3% 2.5%

Total Asset Turnover 1.98 2.52 2.12 1.99 1.93 1.93 1.83 1.91

Equity Multiplier 1.74 1.74 1.52 1.37 1.37 1.37 1.35 1.35

ROE -4.8% 8.4% 24.1% 11.3% 7.0% 7.7% 8.3% 6.4%


Strong Cash Generating Abilities | Revenues and margins growth in the forecasted period result in strong positive cash flow from operations – Unipetrol is very capable to generate cash from operations with its peak of CZK 10.8 bn in 2015. Moreover, the results of our forecast show high earnings quality represented by 151% CFO/EBIT (2015E - 2024F). Thanks to the strong cash generation, the Company is able to finance all its capital needs including those arising from the unexpected events and still have excess cash.

No Need for Future External Financing | Unipetrol financed its resources entirely via equity in previous years. Thus, we assume this trend to continue also in the future. Loan for PE3 investment amounting to CZK 4bn provided by PKN in the last year was rather exceptional. Positive financial results in 2015 however enabled the Company to refund the debt earlier by CZK 2 bn repayments this year.

Unipetrol liquidity ratios remain at high level (in 2014 Current ratio: 1.73, Quick ratio 1.05), and we forecast a moderate increase of their future levels up to CR 2.16 and QR 1.52 in 2024. Due to the strong cash generation, we expect the Company to continually increase its dividend payout ratio.

Valuation – 12M Price Target of CZK 206.0

We base our price target on equally weighted estimates obtained from our 10-yr discounted cash flow (DCF) model and peer group valuation. We obtained 12M target value of CZK 189.3 from the DCF model and peer group valuation estimate of CZK 222.7, which gives us price target of CZK 206.0 per share, or 28% upside.

DCF Model

Using a 10-year DCF model, we arrive at present fair value of CZK 178.0 per share, which implies a 12-month price target of CZK 189.3 (upside of 18%). Since the DCF model is very sensitive and only as good as its inputs, here we describe our assumptions and how we arrived at our estimates. We start with the WACC decomposition, followed by a description of Company’s EBIT drivers, CAPEX plan, and assumptions on terminal growth of the FCFF. To obtain Unipetrol’s fair value, we sum PV of FCFF and terminal value and add 3Q2015 net cash, which we adjusted for planned capex in the 4Q2015, due to its relatively significant effect on the fair value.

WACC Calculation

Beta | Our calculation of beta is based on Peers analysis. We regressed logarithmic returns of peers against MSCI world index logarithmic changes in single currency (EUR). Betas of companies with extremely low volumes were omitted, the remaining ones were adjusted for leverage and the resulting unlevered industry beta median is 0.44. After relevering median beta and shrinking it to 1, we arrived at Unipetrol’s beta of 0.77.

Country Risk Premium | Based on current country rating provided by Moody’s (A1), S&P (AA-) and Fitch (A1) and on risk premiums published by Damodaran, we set country risk premium at the value of 1.05%.

Risk Free Rate and Inflation Differential | Current Eurozone bond yield with 10-year maturity is trading at 0.67% while 5 year average is 1.24 %. We believe that low inflation and interest rate environment will not persist in the long term and that recent extremely low interest rates will grow in following years. Regarding inflation, we expect that Czech inflation will grow towards CNB (Czech national bank) inflation target of 2% till 2020 and Eurozone inflation to be at 1.5%.

Size Premium | Unipetrol has total assets of EUR 1,895m that generates sales of EUR 4,197m. With the current market cap of EUR 1,052m (LTM ending in 30.9.2015) can be considered a small cap company. Based on the best practice of Ibotson (Ibbotson SBBI classic yearbook 2014), size premium of Unipetrol should be 2.2%.

Equity Risk Premium | Based on Damodaran who currently use 6.11%, Duff and Phelps who use ERP of 5% (2014) and BoA Merrill Lynch who used 4% in 2012 and our best knowledge, we set ERP at 5%.

Debt | Taking median indebtedness of peer group, we estimated theoretical optimal capital structure which implied optimal indebtedness of Unipetrol to be 36.88%. Cost of debt is taken from Unipetrol 2014 annual report at level of 2.58%.

WACC Calculation

RF rate 1.24%

CZ infl. premium 0.5%

Country risk premium 1.05%

RF with premium 2.75%

Beta 0.77

Equity premium 5.0%

Risk premium 3.87%

Size premium 2.2%

Cost of equity 8.82%

Cost of debt 2.58%

Tax rate 19.0%

Weight of equity 63.12%

Weight of debt 36.88%

WACC 6.34%


8

-

5

10

15EV/EBITDA

EV/Sales

ROICCash to cash

Financialleverage

Average 4 years* LTM

Figure 26. Significant Position Change Compared

to Past

Source: Thomson Reuters, Team estimates

Figure 27. PM, ICTO and Sales (size, EUR m) of

peers and Unipetrol in 2015

Source: Thomson Reuters


Table 6. DCF Valuation (2/2)


Table 5. DCF Valuation (1/2)

[CZK m] 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

NOPAT 6 215 2 723 2 068 2 494 2 995 2 396 2 357 2 314 2 281 2 252

Depreciation 3 099 2 744 2 964 3 066 3 157 3 240 3 314 3 381 3 442 3 496

Capex/Divestitures -5 460 -5 000 -5 000 -4 000 -4 000 -4 000 -4 000 -4 000 -4 000 -4 000

Change in NWC 1 040 561 -70 -661 39 -729 265 -250 -21 -21

Free Cash Flow 4 894 1 028 -38 899 2 191 907 1 936 1 445 1 701 1 727

WACC 6.34% 6.34% 6.34% 6.34% 6.34% 6.34% 6.34% 6.34% 6.34% 6.34%

PV of FCF 4 602 909 -31 703 1 612 627 1 259 884 979 934

EBIT

We estimate 2015 EBIT of CZK 8.6bn versus last year’s loss of CZK 1bn. Company’s exceptional operating results are a consequence of the oil price slump, which led to strong margin improvements in refining, petrochemical and retail segment as well. We further estimate volatile operating profit due to forecasted growing oil price, deteriorating margins, launch of the PE3 unit, and full utilization of the damaged steam cracker. Due to the numerous significant changes in Unipetrol’s profitability described above, we gave higher weight to recent results in our forecast, over the long term trend. Net operating profit after tax is obtained by adjusting EBIT for 19% income tax rate.

Capital Expenditures and Depreciation

The Company had a CAPEX plan for 2013-2017 of CZK 19bn but was able to invest only around CZK 5bn in the first three years. After talking to the Company, CFO confirmed that the strategic plans remain the same. The Company will fulfill half of its CAPEX plan until the end of 2015, which implies CAPEX of CZK 4bn in 4Q15. We forecast the CAPEX in line with the plan and add additional capital needs resulting from the explosion of the steam cracker that we estimate around CZK 1bn. If we examine historical investments, our projections are at the higher end. That is in line with the Company CAPEX plan and long term strategy. Consequently, depreciation is expected to grow.

Terminal Growth

We assume a slight 1% growth of the FCFF after 2024 mainly due to the pressure on inland downstream coming from the emergence of new refineries at the coasts of the oil rich countries. We believe, that it will take considerable time for new refiners to establish themselves on the market and their impact on Unipetrol will be apparent in the long term only. Nevertheless, being an important strategic player in the Czech Republic, we expect the Company to retain its position either on its own or through the state support, thus, we use 1% perpetual growth along with inflation.

Peer Group Valuation

Having chosen 13 predominantly European downstream small to mid cap companies, we conducted relative pricing analysis using benchmark EV/Sales and EV/EBITDA ratios. For the purpose of valuation, we employed EV/Sales ratio rather than EV/Ebitda ratio that have only supportive role. We perceive EV/Sales as most stable indicator since during 2011-2014 it was developing closely with peers median as opposed to EV/EBITDA, that was rather volatile.

Firstly, to understand the financial position of Unipetrol relative to its peers, we compared key financial indicators among this group. Unipetrols average ROIC was 11th best in period 2010-2014. It had the lowest leverage and it’s cash to cash cycle was 9th best among peers. Therefore, Unipetrol had moderate financial position compared to peers, exhibiting rather weak operational performance with low indebtedness and sufficient operational efficiency (Detailed ROIC decomposition and comparison to peers in Appendix 8).

Unipetrol‘s average market multiple EV/Sales during 2011-2014 was 8th best in the peer group. During this period, Unipetrol was traded at 84-120% of EV/Sales peers median. While EV/EBITDA multiple of Unipetrol was very volatile and above median during 2011-2013 thanks to low EBITDA levels. During 2014, EBITDA stabilized and Unipetrol was traded at 84% of EV/EBITDA peers median.

Table 3. Financial Ratios Compared to Peers


Currently, the situation of Unipetrol has changed significantly due to steam cracker accident leading to loss of key asset in times of unusually high margins. This led to worsening of Unipetrols EV multiples, which are currently the worst in peer group and Unipetrol is trading at 41% of EV/Sales peers median and 29% of EV/EBITDA median.

As steam cracker accident is only major negative event that changed Company profile significantly compared to past, we valued it’s effect on Company value separately. We estimate this event to have two major effects. Firstly, it can lead to loss of major customers as Unipetrol might not be able to cover all of its orders. Secondly, it has direct financial costs in terms of potentially lost profit.

Sum of PV of FCF 12 478

Terminal value growth 1%

Term value at 0% growth 32 680

Terminal value PV 17 676

Enterprise Value 30 155

Net cash/(Net Debt) 2 130

Fair value 32 284

Shares outstanding (m) 181

Present value 178,0

Upside 11%

Price Target 189.3

Upside 18%

Financial ratios 2011–2014 median 2011–2014 Unipetrol 2015 median 2015 Unipetrol

ROIC 4,6% 0,2% 12,3% 30,4%

Fin. Leverage 59,0% 11,7% 56,5% 0,0%

CCC (days) 19,00 25,87 12,20 34,69

EV/Sales 0,29 0,28 0,41 0,17

EV/EBITDA 7,05 12,08 5,65 1,66

14.0%

0

13.0% 7.0% 6.0% 5.0%

4.0% 3.0

2.0% 1.0

0.0% -

1.0% 12

11

10 9 8 7 6 5 4 3 2 1

PM

ICTO

UNPE.P

TUPRS.IS ORL.T

A

PZOL.TA

ESSF.PA

NIIS.BEL

1SLN01AE.BV

MORr.AT

LTSP.WA

HEPr.AT

SRS.MI

MOLB.BU

NESTE.HE

PKN.WA

5,000


9

Figure 29. Unipetrol EV/Sales Development

- 10 20 30 40 50 60 70

EV/Sales

EV/EBITDA

Milions

Figure 28. EV of Unipetrol (1st quartile

to median)


Figure 30. Risk Matrix


Table 8. Rating Guide


Ignoring direct financial costs of steam cracker accident, we expect that Unipetrol should be traded at 80% of EV/Sales and 70% of EV/EBITDA peers median. Decrease compared to past is justified by steam cracker accident’s indirect cost in terms of potential market share loss. On the other hand, new positive signals as building new PE unit, largest investment in history of Unipetrol, and higher interest of PKN Orlen lead us to decision that increase of market multiples discount to peers median should be only moderate.

Implied enterprise value of Unipetrol is CZK 36.78bn based on EV/Sales and CZK 45.09bn based on EV/EBITDA multiples. Our expectation of direct financial costs of steam cracker accident on Company value is CZK 4.3bn, net debt of Company is strongly negative thanks to extreme money balances and almost no debt in 3Q2015.

Finally, we expect Unipetrol’s price per share to be around CZK 222.7 based on EV/Sales ratio. We take the EV/Sales ratio into account in our valuation since we perceive it as the most robust measure. Based on EV/EBITDA, potential upside would be even higher since expected price in one year would be up to CZK 277.0. However, this multiple had been very volatile in the past and has been currently strongly distorted by extreme shifts in PetChem and refining margins caused by significant crude oil price drop. Thus, we interpret it rather as supportive measure that is not included in determining our final recommended stock price.

Concerning market timing, we suggest to enter market immediately. If we look at technical indicators, the share has been traded at 12% average forward EV/EBITDA discount to its peer group over the past three years, while it is currently trading at c. 65% discount. A situation that cannot last long as we expect gap to close in short notice as market will realize overreaction to steam cracker accident.

DCF and Peers multiples synthesis

Our final valuation is based on equally weighted average of DCF and EV/Sales multiple valuation approaches. Based on DCF expected share price in one year is CZK 189.3 (18% upside), while EV/Sales would imply share price of CZK 227.2 (39% upside) in one year. When combined together by equal weighting, our recommended stock price is CZK 206.0 (27.9% upside) in one year (17/12/2016).

Based on estimated market capitalization, net debt and income statement predictions for next three years, average forward multiples for period 2016-2018 are EV/Sales of 0.35 and EV/EBITDA of 5.6. Comparing this values to historical average of Unipetrol EV/Sales of 0.31 (2011-2015), we expect slight improvement caused mainly by expectation of higher margins in following years. Historically, EV/EBITDA multiple of Unipetrol was very volatile since Unipetrol realized low EBITDA during 2011-2013, however, peer median was stable at levels around 5.39. We perceive higher than average EV/EBITDA peers historical median as justified since we expect whole industry to gain from higher margins, implying higher peers future median. Moreover, as we have seen in recent years improvements of Unipetrol’s operational performance compared to peers should lead to better multiples of Unipetrol.

Corporate Governance and Social Responsibility

Corporate Governance | Unipetrol Group continuously strives to maintain long-term and transparent relationships with its shareholders and investors. Unipetrol Group management follows the Corporate Governance Code based on the OECD Principles. Most of new corporate governance changes have been introduced as PKN Orlen took over the Company in 2005 to increase optimization of production within the Group. In 2015 important steps are to follow within the Group structure. In 2009 general meeting approved modifications to the Articles of Association, which arose from the new Act on Auditors. The Articles were amended by the addition of a new mandatory body within the Company – the Audit Committee. The Company also complies with all the Prague Stock Exchange corporate governance rules.

Corporate Social Responsibility | Unipetrol is a Company that bears responsibility for its conduct and supports activities that have a positive impact on the environment, the municipalities in its vicinity and other groups involved. With regard to its position as a leader in the chemical industry, it helps young talents and supports education in areas that help the development and evolution of the chemical sector in the Czech Republic. Unipetrol Group tirelessly works with and supports many projects and institutions in areas of volunteering, donations, environmental protection, and sport sponsorship.

Investment Risks

Market Risk | Crude Oil Price (MR1) Unipetrol continues to fare well, running at quasi-full utilization and benefiting from the unexpected summer margin strength. At the same time, any reversal, seasonal or more fundamental, poses a large downside risk for earnings. We believe that the low crude oil prices are crucial to enable Unipetrol and similar European refineries to run profitably. Brent crude oil price stabilization is expected under the level of 50 USD/bbl and increase moderately in upcoming years.

Market Risk | Unfavorable Market Conditions (MR2) An unexpected drop in GDP growth and higher unemployment rate would decrease overall demand for motor fuels and petrochemical products. According to CNB, GDP growth is expected to slow down from this year's 4.6% but should keep a reasonable momentum above 2% in 2016-2020 period.

Market Risk | Macro Refining and Petrochemical Margins (MR3) Unipetrol remains significantly influenced by the refining and petrochemical macro, which has been exceptionally strong with the low input prices. Now, the product prices follow the crude oil and margins are slowly shrinking. Strong European refining profits are expected to extend to the end of 2015 and beyond due to extensive plant maintenance, strong fuel demand and low crude oil prices.

Market Risk | Foreign Exchange Rate Fluctuations (MR4) Unipetrol is exposed to FX rate risk due to collection of its revenues in EUR and CZK, and incurring costs in USD and CZK. The Company uses natural hedging and derivative financial instruments to hedge these risk exposures (petrochemical revenues in EUR, retail revenues and fixed costs in CZK, crude oil in USD). We expect an exit from the CNB intervention regime,

Rating Guide (over the next 12 months)

Buy Hold Sell

15% or greater Flat

returns Negative returns

LOW MEDIUM HIGH

LO

W

ME

DIU

M

H

IGH

Impact

Pro

ba

bil

ity

0,10

0,15

0,20

0,25

0,30

0,35

0,40

2 013 2 014 2 015 2016E 2017E 2018E

EV/Sales EV/Sales Hist. Avg.


10

14

17

20

23

26

29

2011 2013 2015E 2017E 2019E

EUR/CZK USD/CZK

Figure 31. Exchange Rates Forecast

Source: CNB, Team estimates

Figure 32. Porter Five Forces Analysis


which will lead to appreciation of CZK to EUR and USD, where the first has negative effect and the latter positive. Current dynamics and peaking dollar indicate that there might be an additional upside to our target price resulting from faster appreciation of CZK to USD than to EUR.

Market Risk | CNB and the Euro (MR5) The Czech National Bank (CNB) has been intervening on the foreign-exchange market since 2013 to stop the currency from breaching a limit of CZK 27 against the Euro. In September 2015 CNB reiterated that it would not exit its intervention regime before the second half of 2016. Despite the political pressure against the CNB’s policy, the governor stands firm behind his decision. We expect appreciation of the Czech koruna after the exit from the intervention regime by the end of 2016. If the Czech Republic adopts the Euro during the 5-year forecasted period the exchange risk will decrease significantly. However, the adoption is highly unlikely until after 2020.

Market Risk | Competitiveness (MR6) New modern refineries in the USA and the Middle East, aided by low-priced feedstock, low operating costs and cheaper refinery fuel (natural gas), have increased their competitiveness relative to European plants and their exports of diesel, gasoil, and jet oil to the euro region.

Operational Risk | Steam Cracker Shutdown (OR1) The explosion and fire at the steam cracker, which damaged three-to-four of the 10 furnaces, forced a full shutdown of the unit as well as all of the petrochemical units (some polymer plants were restarted on purchased ethylene, but their margin contribution is likely to be small). All the physical damage should be fully covered by the insurance and coverage for the lost profits in 4Q2015 and 6M2016 is expected by the management. There is a potential threat of reparation delay.

Operational Risk | Labour Union Strikes (OR2) As of December 2015, labour unions successfully managed to negotiate one-off bonus as well as higher wages for all Unipetrol’s employees. This fact has already been accounted for in our analysis. However, labour unions might demand other favorable conditions and potential wage increase might be put in jeopardy due to the steam cracker shutdown.

Operational Risk | New Supply Contracts (OR3) Success in negotiations with important trading partners could lead to an increase in our earnings projections. Unipetrol and the state-owned company MERO have not been able to sign a long-term supply contract since 2013 due to disagreements on pricing and fees.

Political Risk | Russia/Ukraine Conflict (PR1) Over half of Unipetrol’s crude oil supply comes from Russia. Due to Russia’s investment in building alternative supply routes (to the Druzhba pipeline), Russian supply may not always be as smooth as in the past, or it may become more expensive, eating into Unipetrol’s margins. Political tension between Russia and Ukraine also represents high amount of risk in crude oil deliveries. Only Kralupy refinery uses low-sulphur non-Russian crude within the PKN group - any change in the Urals differential has nearly a 1:1 impact on PKN’s realized refinery margin, so far.

Political Risk | Polish Elections (PR2) Polish opposition party PiS won the parliamentary elections this October. In November, Remigiusz Nowakowski was appointed as Member of the Supervisory Board of PKN and replaced Maciej Bałtowski. In December, the Polish State Treasury announced that Wojciech Jasiński will replace current PKN CEO, Jacek Krawiec, in January 2016. The depth of any further changes is difficult to predict. This is likely to be taken negatively by the market, as the current management team enjoys a relatively good reputation, despite some of its controversial priorities (i.e., spending on questionable, non-core projects rather than distributing excess cash). A new management team may not necessarily be better or worse, but would certainly imply some uncertainty in the near term.

Regulatory Risk | Changes in Regulatory Environment (RR1) New POZE Act on renewable sources of energy under which the fee will not be based on the consumption but on the capacity will come into effect by 1/1/2016. Unipetrol expects to save ca CZK 300m per year from 2016. Proposed regulations include Amendment to the Excise Duty Act which proposes a very minor reduction of tax relief for highly concentrated biofuels and Amendment to Act on Air Protection containing the term for bio duty fulfillment and control each quarter of the year. Other recent EU environmental laws (e.g., for biofuels and bio-additives, or for CO2 and other emissions, or excise taxes, or the stockpiling fee) will have a negative effect on Unipetrol’s profitability.

Sensitivity Analysis of Target Price Below, we performed sensitivity analysis of target price to WACC vs. terminal value growth in the first table and sensitivity analysis to FX rates. We highlighted the bottom left area of even stronger CZK.

Table 9. Effect of Changes in WACC and Terminal Value Growth on Target Price Table 10. Effect of Changes in USD/CZK and EUR/CZK Exchange Rates on Target Price

WACC

2017 USD/CZK

term

ina

l v

alu

e g

row

th

5,3% 5,6% 5,8% 6,1% 6,3% 6,6% 6,8% 7,1% 7,3%

20

17

EU

R/C

ZK

21,8 22,4 23,0 23,6 24,2 24,8 25,4 26,0 26,6

-2% 194 192 190 188 186 185 183 182 181

28,6 297 285 274 263 251 240 229 217 206

-1% 201 198 196 193 191 189 187 186 184

27,9 281 270 259 247 236 225 214 202 191

0% 210 206 203 200 197 195 193 190 188

27,3 266 255 244 232 221 210 198 187 176

1% 224 218 214 210 206 203 200 197 194

26,6 251 240 229 217 206 195 183 172 161

2% 245 237 230 224 219 214 209 206 202

25,9 236 225 214 202 191 180 168 157 146

3% 286 270 258 247 239 231 225 219 214

25,3 221 210 198 187 176 165 153 142 131

4% 386 345 316 293 276 262 250 241 233

24,6 206 195 183 172 161 149 138 127 115


Impact

-

1

2

3

4

5

Threat of NewEntrants

Threat ofSubstitute

Products orServices

BargainingPower of

Customers

BargainingPower ofSuppliers

Intensity ofCompetitive

Rivalry


11

Appendix 1: Income Statement

INCOME STATEMENT 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

[CZK m]

Total Sales 99 415 124 229 100 412 95 064 96 619 104 923 104 068 113 815

COGS -97 112 -118 243 -85 178 -84 413 -87 468 -95 054 -93 396 -103 704

Gross profit 2 303 5 986 15 234 10 651 9 151 9 869 10 672 10 111

Distribution costs -1 963 -2 090 -2 142 -2 207 -2 262 -2 318 -2 376 -2 436

Administrative costs -1 192 -1 274 -1 306 -1 338 -1 372 -1 406 -1 441 -1 477

Other operating income/(expenses) -41 -3 619 -1 014 -1 000 0 0 0 0

EBITDA 1 522 1 273 10 772 6 106 5 517 6 145 6 855 6 198

Depreciation -2 415 -2 270 -3 099 -2 744 -2 964 -3 066 -3 157 -3 240

EBIT (Operating Income) -893 -997 7 673 3 362 2 553 3 079 3 697 2 959

Other financial cost -450 -365 -108 -399 -331 -301 -285 -329

Share of profit/loss in Associates

Profit (loss) before tax -1 343 -1 362 7 565 2 963 2 222 2 778 3 413 2 630

Income Tax credit/expense -53 806 -1 437 -563 -422 -528 -648 -500

Extraordinary Income/Expenses 0 0

0 0 0 0 0

Profit for the period -1 396 -556 6 127 2 400 1 800 2 250 2 764 2 130

Attributable to:

Equity holders of the parent -1 396 -556 6 127 2 400 1 800 2 250 2 764 2 130

Minority interest 0 0 0 0 0 0 0 0

Net Income -1 396 -556 6 127 2 400 1 800 2 250 2 764 2 130



12

Appendix 2: Balance Sheet – illustrative

BALANCE SHEET – illuatrative 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

[CZK m]

PP&E 23 177 18 893 21 254 23 510 25 546 26 480 27 323 28 083

Investment Property 427 419 419 419 419 419 419 419

Intangible Assets 1 748 1 792 1 792 1 792 1 792 1 792 1 792 1 792

Other Investments 1 1 1 1 1 1 1 1

Non-current receivables 53 29 29 29 29 29 29 29

Derivative financial instruments

Deferred tax asset 259 1 039 1 039 1 039 1 039 1 039 1 039 1 039

Goodwill

Other

Total Non-Current Assets 25 664 22 173 24 534 26 790 28 825 29 760 30 603 31 363

Inventory 10 705 10 320 8 168 8 094 8 387 9 115 8 956 9 944

Receivables 12 393 12 506 11 004 10 418 10 588 11 498 11 405 12 473

Prepayments and other current assets 0

ST financial assets 49 1 764 1 764 1 764 1 764 1 764 1 764 1 764

Income tax receivables 70 72 72 72 72 72 72 72

Cash and Cash Equivalents 1 117 1 682 2 130 2 834 2 529 3 184 5 145 5 785

Assets held for sale

Other ST Assets

Total Current Assets 24 334 26 344 23 137 23 183 23 341 25 633 27 341 30 038

TOTAL ASSETS 49 998 48 517 47 671 49 972 52 166 55 393 57 944 61 401

Equity 18 133 18 133 18 133 18 133 18 133 18 133 18 133 18 133

Retained Earnings & Reserves 10 157 10 320 16 447 18 847 20 647 22 898 25 662 27 792

Total Shareholders' Equity 28 290 28 453 34 581 36 981 38 781 41 031 43 796 45 926

Minority Interests 9 9 0 0 0 0 0 0

LT Loans 2 000 4 000 0 0 0 0 0 0

Deferred tax liability 226 203 203 203 203 203 203 203

Provisions 433 457 457 457 457 457 457 457

Financial lease liability

0 0 0 0 0 0

Derivative financial instruments

0 0 0 0 0 0

Other LT Liabilities 202 185 185 185 185 185 185 185

Non-current Liabilities 2 862 4 845 845 845 845 845 845 845

ST Payables 17 313 13 582 10 968 10 870 11 263 12 240 12 026 13 354

Current portion of LT Loans

ST Loans 507 350 0 0 0 0 0 0

Current portion of financial lease liability

ST Financial liabilities 349 412 412 412 412 412 412 412

Provisions 541 782 782 782 782 782 782 782

Income tax payable 127 84 84 84 84 84 84 84

Liabilities classified as held for sale 0

Other ST Liabilities

Current Liabilities 18 837 15 210 12 246 12 147 12 541 13 517 13 304 14 631

TOTAL LIABILITIES AND EQUITY 49 998 48 517 47 671 49 973 52 166 55 394 57 944 61 402



13

Appendix 3: Statement of Cash Flow

CASH FLOW STATEMENT 2013 2014

2015E 2016E 2017E 2018E 2019E 2020E

[CZK m]

EBT -1 343 -1 362

7 565 2 963 2 222 2 778 3 413 2 630

Depreciation 2 415 2 270

3 099 2 744 2 964 3 066 3 157 3 240

Income tax (paid)/received -53 806

-1 437 -563 -422 -528 -648 -500

Cash generated from Operations 1 019 1 714

9 226 5 144 4 765 5 316 5 921 5 370

Change in WC -1 246 -3 458

1 040 561 -70 -661 39 -729

Net cash from Operations -227 -1 744

10 267 5 704 4 695 4 655 5 961 4 640

Purchase of PP&E -1 728 -2 093

-5 460 -5 000 -5 000 -4 000 -4 000 -4 000

Proceeds from disposals of PP&E 0 0

Proceeds from disposals of ST financial assets -406

Other

533

Net cash from Investing -1 728 -1 966

-5 460 -5 000 -5 000 -4 000 -4 000 -4 000

Change in Debt -332 1 843

-4 350 0 0 0 0 0

Dividends Paid 0 0

-9 0 0 0 0 0

Other 0 0

0 0 0 0 0 0

Net cash from Financing -332 1 843

-4 359 0 0 0 0 0

Net Change in Cash -2 287 -1 867

448 704 -305 655 1 961 640



14

Appendix 4: Financial Ratios

RATIOS 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Profitability

Gross margin 4.7% 6.6% 18.3% 11.2% 9.5% 9.4% 10.3% 8.9%

EBITDA margin 1.6% 3.9% 10.7% 6.4% 5.7% 5.9% 6.6% 5.4%

EBIT margin -0.9% 2.1% 8.7% 4.6% 2.6% 2.9% 3.6% 2.6%

Net profit margin -1.4% -0.4% 6.1% 2.5% 1.9% 2.1% 2.7% 1.9%

Return on Assets -2.8% -1.1% 12.7% 4.9% 3.5% 4.2% 4.9% 3.6%

Return on Equity -4.8% -2.0% 19.4% 6.7% 4.8% 5.6% 6.5% 4.7%

ROIC -2.5% 8.1% 18.1% 8.4% 4.8% 5.4% 5.9% 4.4%

Liquidity

Current ratio 1.29 1.73 1.89 1.91 1.86 1.90 2.06 2.05

Quick ratio 0.72 1.05 1.22 1.24 1.19 1.22 1.38 1.37

Cash ratio 0.06 0.23 0.32 0.38 0.34 0.37 0.52 0.52

Activity

Cash Conversion Cycle 18 21 28 28 28 28 28 28

Invested capital Turnover 3.6 4.7 2.6 2.3 2.2 2.3 2.0 2.1

Total asset Turnover 2.0 2.5 2.1 1.9 1.9 2.0 1.8 1.9

Fixed Asset Turnover 3.8 5.2 4.3 3.7 3.5 3.6 3.4 3.7

Inventory Turnover 9.4 11.2 9.2 10.4 10.6 10.9 10.3 11.0

Days in Inventory 39 32 40 35 34 34 35 33

Accounts Receivable Turnover 8.7 10.0 8.5 8.9 9.2 9.5 9.1 9.5

Days in Accounts Receivable 42 37 43 41 40 38 40 38

Accounts Payable Turnover 5.8 7.7 6.9 7.7 7.9 8.1 7.7 8.2

Days in Accounts Payable 62 48 53 47 46 45 47 45

Financial Leverage

Long-term debt to assets 0.04 0.09 0.00 0.00 0.00 0.00 0.00 0.00

Long-term debt to equity 0.08 0.15 0.01 0.01 0.00 0.00 0.00 0.00

Debt to equity 0.10 0.16 0.01 0.01 0.00 0.00 0.00 0.00

Interest Coverage -1.98 -2.73 71.04 8.42 7.72 10.24 12.99 9.00

Shareholder Ratios

Earnings per share -7.7 -3.1 33.8 13.2 9.9 12.4 15.2 11.7

Dividend per share 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Dividend payout ratio 0% 0% 0% 0% 0% 0% 0% 0%


Note: Turnover ratios are computed takenthe average of balance sheet items at the begining and the end of a particular year.


15

Appendix 5: DCF Valuation

[CZK m] 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

EBIT 7 673 3 362 2 553 3 079 3 697 2 959 2 910 2 857 2 816 2 781

Tax rate 19% 19% 19% 19% 19% 19% 19% 19% 19% 19%

NOPAT 6 215 2 723 2 068 2 494 2 995 2 396 2 357 2 314 2 281 2 252

Depreciation 3 099 2 744 2 964 3 066 3 157 3 240 3 314 3 381 3 442 3 496

Capex/Divestitures -5 460 -5 000 -5 000 -4 000 -4 000 -4 000 -4 000 -4 000 -4 000 -4 000

Change in NWC 1 040 561 -70 -661 39 -729 265 -250 -21 -21

Free Cash Flow 4 894 1 028 -38 899 2 191 907 1 936 1 445 1 701 1 727

WACC 6.34% 6.34% 6.34% 6.34% 6.34% 6.34% 6.34% 6.34% 6.34% 6.34%

Discount factor 0,94 0,88 0,83 0,78 0,74 0,69 0,65 0,61 0,58 0,54

PV of FCF 4 602 909 -31 703 1 612 627 1 259 884 979 934

Sum of PV of FCF 12 478

Terminal value growth 1%

Term value at 0% growth 32 680

Terminal value PV 17 676

Enterprise Value 30 155

Net cash/(Net Debt) 2 130

Fair value 32 284

Shares outstanding (m) 181

Present value 178,0

Upside 11%

Price Target 189.3

Upside 18%



16

Appendix 6: Beta and leverage

Levered beta for each company is calculated from 5year regression of monthly returns against MSCI world index in single currency (EUR). Companies with extremely low volumes are ignored as their beta might be biased.

Levered Beta Leverage

Unlevered

Beta

Beta

relevered

Beta with

shrinkage

Ticker FY2011 FY2012 FY2013 FY2014 LTM FY2011 FY2012 FY2013 FY2014 LTM Average LTM LTM LTM

PKN.WA 0.90 0.87 0.96 0.62 0.49 93% 43% 43% 51% 38% 54% 0.34 0.63 0.75

NESTE.HE 1.07 1.17 1.58 1.40 1.20 119% 93% 48% 36% 29% 65% 0.78 0.67 0.78

MOLB.BU 1.20 1.19 0.98 0.59 0.63 58% 51% 51% 64% 30% 51% 0.44 0.62 0.75

SRS.MI 1.21 1.34 1.06 0.90 1.01 58% 49% 55% 74% 29% 53% 0.71 0.63 0.75

HEPr.AT 0.72 0.70 0.48 0.62 0.39 59% 18% 63% 160% 180% 96% 0.22 0.78 0.86

LTSP.WA 1.13 1.09 0.93 0.64 0.43 251% 123% 135% 139% 127% 155% 0.19 0.99 1.00

MORr.AT Low vol. Low vol. Low vol. Low vol. Low vol. 199% 129% 115% 166% 122% 146% Low vol. 0.96 0.98

1SLN01AE.BV Low vol. Low vol. Low vol. Low vol. Low vol. 13% 38% 22% 35% 16% 25% Low vol. 0.53 0.69

NIIS.BEL Low vol. Low vol. Low vol. Low vol. Low vol. 38% 31% 59% 79% 109% 63% Low vol. 0.67 0.78

ESSF.PA 1.11 1.13 1.07 1.01 0.92 15% 21% 63% 89% 0% 38% 0.70 0.58 0.72

PZOL.TA 0.78 0.78 0.70 0.52 0.62 122% 108% 109% 80% 59% 95% 0.35 0.78 0.85

ORL.TA NA 0.89 0.82 0.84 0.96 130% 139% 170% 189% 112% 148% 0.44 0.97 0.98

TUPRS.IS 1.16 1.25 1.02 1.16 1.09 14% 29% 52% 55% 57% 41% 0.82 0.59 0.72

UNPE.PR Low vol. Low vol. Low vol. Low vol. Low vol. 8% 9% 9% 20% 0% 9% Low vol. 0.65 0.77

1st quartile 84% 85% 79% 61% 48% 15% 27% 46% 48% 25% 40% 0.31 0.31 0.31

Median 111% 111% 97% 74% 77% 58% 46% 57% 76% 47% 58% 0.44 0.66 0.77

3rd quartile 118% 121% 106% 105% 103% 124% 111% 110% 144% 115% 109% 0.72 0.83 0.86

Source:Thomson Reuters, Team estimates

Appendix 7: Risk free rates and inflation differentials

Date

CZ 10Y

yield

EU 10Y

yield

Yield

Spread Infl. CZ Infl. EU

Infl.

Spread

CZ GDP

growth

EU GDP

growth

GDP grow.

spread

2015 0.53% 0.60% -0.07% 0.37% 0.02% 0.35% 3.91% 1.48% 2.43%

2014 0.72% 0.54% 0.19% 0.36% 0.44% -0.07% 1.98% 0.87% 1.11%

2013 2.50% 1.94% 0.56% 1.41% 1.35% 0.06% -0.53% -0.28% -0.25%

2012 1.80% 1.30% 0.49% 3.30% 2.49% 0.80% -0.90% -0.81% -0.10%

2011 3.54% 1.82% 1.72% 1.94% 2.72% -0.78% 1.97% 1.64% 0.33%

2010 3.90% 2.95% 0.95% 1.41% 1.62% -0.21% 2.30% 2.05% 0.25%

2009 3.92% 3.39% 0.53% 1.04% 0.29% 0.76% -4.84% -4.57% -0.27%

2008 4.24% 2.95% 1.30% 6.35% 3.28% 3.08% 2.71% 0.46% 2.25%

2007 4.70% 4.32% 0.38% 2.92% 2.14% 0.78% 5.53% 3.03% 2.50%2006 3.71% 3.96% -0.25% 2.53% 2.18% 0.36% 6.88% 3.23% 3.65%

2005 3.56% 3.30% 0.25% 1.85% 2.19% -0.34% 6.44% 1.67% 4.77%

2004 4.78% 3.67% 1.10% 2.83% 2.14% 0.69% 4.95% 2.26% 2.69%

2003 4.78% 4.30% 0.49% 0.13% 2.08% -1.94% 3.60% 0.67% 2.93%

2002 4.14% 4.19% -0.04% 1.79% 2.25% -0.46% 1.65% 0.95% 0.70%

2001 5.33% 4.99% 0.33% 4.76% 2.34% 2.42% 3.05% 2.12% 0.94%

Source: International Monetary fund, World economic outlook database (October 2015)


17

Appendix 8: Peers Analysis

Unipetrol underperformed compared to peers in period 2011-2013, while the trend have changed significantly in recent years when petchem and refining margins have increased. Change in 2014 was driven mainly by increased gross margin and higher sales. In 2015 ROIC was unusually high for all companies in the industry as petchem and refining product prices did not reflect extreme decline of oil prices and margins were at record highs. During this period Unipetrol was not only able to keep high profit margins, but it also increased sales of it’s products, which lead to best ROIC in peer group in 9/2014 till 9/2015.

Source: Thomson Reuters, Team calculations

Appendix 9: List of comparable companies

List of comparable companies used in peers analysis with information about product portfolio and main markets where they operate (Segment percetages are captured as percentage of sales including intercompany transactions)

Ticker Company Refining& Petchem

Retail/ Trading

others Markets

PKN.WA PKN Orlen 74.48% 25.29% 0.23% Germany and Central Europe

NESTE.HE Neste Oil 63.23% 24.06% 12.71% Baltic sea region

MOLB.BU MOL Plc 70.17% 16.25% 13.59% Eastern Europe and UK

SRS.MI SARAS group 74.67% 21.05% 4.28% Italy, Spain

ELPE.AT Hellenic Petroleum

73.79% 25.99% 0.22% South Eastern europe

LTSP.WA Grupa Lotos 96.79% 0.00% 3.19% Poland and surrounding

MOH.AT Motor Oil Hellas Group

73.96% 26.04% 0.00% Greece and South eastern europe

SLV.BE SLOVNAFT 98.39% 10.56% -8.95% Central Europe, Germany and Austria

NIIS.BEL NIS ad Novi Sad 75.29% 0.00% 24.71% South east Europe

ESSF.PA Esso Francaise SA

NA NA NA France

PZOL.TA Paz Oil Company Ltd

57.75% 42.25% 0.00% Israel

ORL.TA Oil Refineries Ltd 100.00% 0.00% 0.00% Israel

TUPRS.IS TUPRAS 100.00% 0.00% 0.00% Turkey

UNPE.PR Unipetrol 91.00% 9.00% 0.00% Czech Republic and central europe

Source: Annual reports 2014, Team calculations

Year 2 011 2 012 2 013 2 014 LTM

Unipetrol 2.97 3.65 3.36 4.00 4.50

Peers med. 3.30 3.31 3.49 4.00 2.66

Invested capital turnover

Year 2 011 2 012 2 013 2 014 LTM

Unipetrol 29.28 23.63 19.06 12.21 18.94

Peers med. 15.80 19.03 16.89 11.44 19.98

ST part of Invested capital turnover

Year 2 011 2 012 2 013 2 014 LTM

Unipetrol 3.30 4.32 4.08 5.94 5.90

Peers med. 3.99 3.77 3.93 2.94 2.69

LT part of Invested capital turnover

Year 2 011 2 012 2 013 2 014 LTM

Unipetrol -1.2% -0.1% -0.7% 1.7% 6.8%

Peers med. 2.5% 1.8% 0.5% 0.3% 3.6%

PM (After tax)

Year 2 011 2 012 2 013 2 014 LTM

Unipetrol -3.6% -0.2% -2.3% 6.8% 30.4%

Peers med. 8.6% 6.7% 1.7% 1.5% 12.3%

ROIC

Year 2 011 2 012 2 013 2 014 LTM

Unipetrol 5.5% 5.5% 4.7% 6.6% 13.1%

Peers med. 8.7% 7.8% 6.4% 3.7% 8.2%

Gross margin

Year 2 011 2 012 2 013 2 014 LTM

Unipetrol 3.8% 3.0% 3.2% 2.7% 3.0%

Peers med. 3.9% 4.2% 3.8% 3.9% 5.1%

SG&A, distribution expenses and others/Sales

Year 2 011 2 012 2 013 2 014 LTM

Unipetrol 3.2% 2.6% 2.4% 1.8% 1.7%

Peers med. 1.9% 1.8% 1.9% 2.2% 2.5%

Depreciation/Sales


18

Appendix 10: Detailed development of key finanancial ratios in the peer group ans sales of each company

ROIC Profit margin

Company FY2011 FY2012 FY2013 FY2014 LTM FY2011 FY2012 FY2013 FY2014 LTM

PKN.WA 8.6% 6.4% 1.0% 1.2% 12.3% 2.6% 1.8% 0.3% 0.3% 3.5%

NESTE.HE 16.6% 17.3% 17.3% 14.8% 16.6% 4.6% 4.0% 3.9% 4.0% 6.0%

MOLB.BU 21.2% 20.2% 7.2% 8.5% 13.8% 9.5% 8.4% 2.6% 3.7% 7.0%

SRS.MI 7.5% -0.8% -11.6% -58.7% 12.5% 1.3% -0.1% -0.9% -3.4% 1.3%

HEPr.AT 4.5% 2.8% -3.8% -10.7% -0.3% 1.7% 1.0% -1.2% -2.6% -0.1%

LTSP.WA 6.8% 6.8% 0.8% -3.6% 0.2% 3.5% 3.1% 0.4% -1.7% 0.1%

MORr.AT 9.8% 6.7% 1.4% -2.7% 14.5% 1.9% 1.0% 0.2% -0.4% 2.4%

1SLN01AE.BV 3.5% 6.2% 4.5% 3.6% 16.6% 1.0% 1.9% 1.3% 1.3% 6.5%

NIIS.BEL 47.0% 43.5% 19.4% 15.1% 10.3% 23.6% 29.3% 18.4% 16.4% 13.0%

ESSF.PA 10.6% 13.6% -7.5% -37.0% -7.4% 0.9% 1.0% -0.7% -1.8% -0.7%

PZOL.TA 5.6% 2.7% 2.7% 7.9% 10.7% 2.5% 1.3% 1.0% 2.9% 5.2%

ORL.TA 0.3% -2.5% 1.7% 1.5% 9.8% 0.1% -0.8% 0.5% 0.3% 3.6%

TUPRS.IS 28.9% 15.3% 8.2% 4.5% 12.8% 3.7% 2.0% 1.5% 1.1% 4.8%

UNPE.PR -3.6% -0.2% -2.3% 6.8% 30.4% -1.2% -0.1% -0.7% 1.7% 6.8%

ICTO Total RevenueCompany FY2011 FY2012 FY2013 FY2014 LTM FY2011 FY2012 FY2013 FY2014 LTM

PKN.WA 3.30 3.61 3.79 4.33 3.49 24 023 29 508 27 403 24 960 22 175

NESTE.HE 3.61 4.27 4.41 3.71 2.75 15 456 17 951 17 317 15 068 11 644

MOLB.BU 2.24 2.41 2.77 2.32 1.97 17 040 19 050 18 447 15 394 13 950

SRS.MI 5.64 8.55 12.35 17.26 9.74 11 037 11 889 11 206 10 214 8 950

HEPr.AT 2.68 2.92 3.13 4.16 2.19 9 308 10 469 9 674 9 478 7 883

LTSP.WA 1.97 2.17 1.96 2.16 1.74 6 571 8 135 6 889 6 659 5 728

MORr.AT 5.18 6.45 6.69 7.25 6.02 8 739 9 682 9 282 9 050 7 452

1SLN01AE.BV 3.59 3.22 3.40 2.76 2.56 4 730 4 627 4 733 4 006 3 763

NIIS.BEL 1.99 1.48 1.05 0.92 0.79 1 750 2 020 2 268 2 132 1 861

ESSF.PA 12.21 14.08 11.30 20.41 11.20 15 924 17 703 16 287 15 674 14 152

PZOL.TA 2.24 1.97 2.81 2.74 2.07 3 784 3 773 4 121 3 934 3 280

ORL.TA 2.86 3.31 3.49 4.51 2.68 7 386 7 331 7 272 7 711 5 700

TUPRS.IS 7.75 7.71 5.33 4.00 2.66 16 993 18 052 13 933 14 072 12 336

UNPE.PR 2.97 3.65 3.36 4.00 4.50 3 814 4 278 3 641 4 498 4 197 Source: Reuters, Team calculations


19

Appendix 11: Ratios and adjustments

Adjusted EBITDA of Unipetrol

𝐴𝑑𝑗. 𝑔𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 = 𝑅𝑒𝑝𝑜𝑟𝑡𝑒𝑑 𝑔𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛&𝐴𝑚𝑜𝑟𝑡.1

𝐴𝑑𝑗. 𝐸𝐵𝐼𝑇𝐷𝐴 = 𝑅𝑒𝑝𝑜𝑟𝑡𝑒𝑑 𝑔𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛&𝐴𝑚𝑜𝑟𝑡.1− 𝑆𝐺&𝐴 𝑎𝑛𝑑 𝑜𝑡ℎ𝑒𝑟 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠2

1) Reported gross profit of Unipetrol already incur Depreciation & Amortization, therefore we had to add it back. For peers analysis we use

adjustment only for companies that don’t report depreciation separately from gross profit

2) Unusual costs in form of PP&E impairments and one off gains were excluded from other operational expenses

𝐴𝑑𝑗. 𝐸𝐵𝐼𝑇 = 𝐴𝑑𝑗. 𝐸𝐵𝐼𝑇𝐷𝐴 − 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛&𝐴𝑚𝑜𝑟𝑡.

Some of financial data from Reuters were adjusted for unusual gains and inconsistencies in Reuters data (For example Unussual expense in 2011 were

doubled in Reuters database).

Enterprise value

𝐸𝑉 = 𝑁𝑒𝑡 𝑑𝑒𝑏𝑡 + 𝑀𝑎𝑟𝑘𝑒𝑡 𝐶𝑎𝑝

𝑁𝑒𝑡 𝐷𝑒𝑏𝑡 = 𝑆𝑇 𝐷𝑒𝑏𝑡 + 𝐿𝑇 𝑑𝑒𝑏𝑡 − 𝐶𝑎𝑠ℎ 𝑎𝑛𝑑 𝑆𝑇 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 − 𝐿𝑇 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠

ROIC

𝑅𝑂𝐼𝐶 = 𝐸𝐵𝐼𝑇 ∗1 − 𝑇𝑅

𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 = 𝑁𝑒𝑡 𝐷𝑒𝑏𝑡 + 𝐸𝑞𝑢𝑖𝑡𝑦 & 𝐸𝑞. 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡𝑠

Cash to cash cycle formula

𝐶𝐶𝐶 = 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 − 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠

𝑑𝑎𝑦𝑠 𝑖𝑛 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = 365 ∗𝐼𝑛𝑣𝑒𝑡𝑜𝑟𝑦𝑡 + 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦𝑡−1

2 ∗ 𝐶𝑂𝐺𝑆𝑡

𝑑𝑎𝑦𝑠 𝑖𝑛 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 = 365 ∗𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠𝑡 + 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠𝑡−1

2 ∗ 𝑆𝑎𝑙𝑒𝑠𝑡

𝑑𝑎𝑦𝑠 𝑖𝑛 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 = 365 ∗𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠𝑡 + 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠𝑡−1

2 ∗ 𝐶𝑂𝐺𝑆𝑡

Financial leverage

𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒 =𝑆𝑇 + 𝐿𝑇 𝐷𝑒𝑏𝑡

𝐸𝑞𝑢𝑖𝑡𝑦

Invested capital turnover

𝐼𝐶 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

𝑆𝑎𝑙𝑒𝑠

𝑆𝑇 𝐼𝐶 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =𝑆𝑇 𝑎𝑠𝑠𝑒𝑡𝑠 + 𝑆𝑇 𝑑𝑒𝑏𝑡 − 𝐶𝑎𝑠ℎ&𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡𝑠 − 𝑆𝑇 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠


𝐿𝑇 𝐼𝐶 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =𝐿𝑇 𝑎𝑠𝑠𝑒𝑡𝑠 + 𝐿𝑇 𝑑𝑒𝑏𝑡 − 𝐿𝑇 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 − 𝐿𝑇 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠



20

Appendix 12: OECD Demand

1Q14 2Q14 3Q14 4Q14 2014 1Q15 2Q15 3Q15 4Q15 2015 1Q16E 2Q16E 3Q16E 4Q16E 2016E

OECD DEMAND

America 23.9 23.7 24.4 24.6 24.1 24.2 24.1 24.7 24.6 24.4 24.4 24.2 24.7 24.8 24.5 Europe 13.0 13.3 13.8 13.4 13.4 13.4 13.5 14.1 13.6 13.7 13.5 13.7 13.9 13.6 13.7 Asia Oceania 8.9 7.7 7.7 8.3 8.2 8.8 7.7 7.8 8.4 8.1 8.7 7.6 7.8 8.4 8.1 Total OECD 45.7 44.8 45.9 46.3 45.7 46.5 45.3 46.6 46.6 46.3 46.5 45.5 46.4 46.8 46.3 NON-OECD DEMAND

FSU 4.6 4.9 5.1 5.1 4.9 4.6 4.9 5.1 4.9 4.9 4.7 4.8 5.0 4.9 4.9 Europe 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 China 10.4 10.6 10.5 11.0 10.6 11.0 11.3 11.3 11.3 11.2 11.3 11.7 11.5 11.6 11.5 Other Asia 12.0 12.1 11.7 12.1 12.0 12.4 12.5 12.3 12.9 12.5 12.9 13.0 12.8 13.2 13.0 Latin America 6.6 6.8 7.0 7.0 6.8 6.7 6.8 6.9 6.9 6.8 6.7 6.9 7.0 7.0 6.9 Middle East 7.8 8.2 8.4 7.9 8.1 7.7 8.3 8.5 8.0 8.1 7.9 8.4 8.8 8.2 8.3 Africa 4.0 4.0 3.9 4.0 4.0 4.1 4.1 3.9 4.1 4.0 4.2 4.2 4.1 4.3 4.2 Total Non-OECD 46.1 47.2 47.3 47.7 47.1 47.1 48.6 48.7 48.9 48.3 48.4 49.7 49.9 49.9 49.5

Total Demand 91.8 92.0 93.2 94.0 92.7 93.5 93.9 95.3 95.5 94.6 94.9 95.1 96.4 96.7 95.8

OECD SUPPLY

Americas1,7 18.2 18.9 19.2 19.8 19.0 19.9 19.5 19.8 19.8 19.7 19.5 19.2 19.2 19.4 19.4 Europe2 3.5 3.2 3.1 3.4 3.3 3.4 3.5 3.4 3.4 3.4 3.4 3.3 3.1 3.3 3.3 Asia Oceania3 0.5 0.5 0.5 0.5 0.5 0.4 0.4 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 Total OECD 22.2 22.6 22.9 23.8 22.9 23.7 23.5 23.7 23.7 23.6 23.5 23.0 22.8 23.2 23.1

NON-OECD SUPPLY

FSU 13.9 13.8 13.8 13.9 13.9 14.0 14.0 13.9 14.0 14.0 13.9 13.9 13.8 13.8 13.9 Europe 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 China 4.2 4.2 4.2 4.3 4.2 4.3 4.4 4.3 4.4 4.3 4.3 4.3 4.3 4.3 4.3 Other Asia5 3.5 3.5 3.4 3.6 3.5 3.6 3.6 3.6 3.7 3.6 3.7 3.6 3.5 3.5 3.6 Americas5,7 4.2 4.3 4.5 4.6 4.4 4.6 4.5 4.5 4.5 4.6 4.6 4.6 4.6 4.7 4.6 Middle East 1.3 1.3 1.3 1.3 1.3 1.3 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.1 1.2 Africa5 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.2 2.2 2.2 2.2 2.2 Total Non-OECD 29.7 29.6 29.6 30.1 29.7 30.3 30.1 30.0 30.1 30.1 30.1 29.9 29.8 29.8 29.9 OPEC

2.4

1.3

Crude8 30.0 30.1 30.5 30.5 30.3 30.5 31.5 31.7 31.7 31.7 31.7 32.3 32.3 32.3 32.2 NGLs 6.3 6.3 6.4 6.5 6.4 6.4 6.5 6.5 6.6 6.5 6.7 6.8 6.8 6.8 6.8

Total OPEC5 36.3 36.4 36.9 37.0 36.6 36.9 38.0 38.3 38.4 38.3 38.5 39.1 39.1 39.2 39.0

Total Supply 92.1 93.0 94.1 95.3 93.6 95.0 96.2 96.9 96.8 96.6 96.2 96.7 96.8 97.0 96.7

Source: IEA


21

Appendix 13: Proven Oil Reserves 2014

Proven Oil Reserves 2014 m bbl

North America 40 681

Latin America 342 235

Eastern Europe and Eurasia 119 863

Western Europe 11 577

Middle East 802 518

Africa 127 561

Asia and Pacific 48 445

Total 1 492 880

OPEC 1 206 004

OPEC % 81% Source: OPEC

Appendix 14: Marginal Cost of Production (USD/bbl)

Marginal Cost of Production (USD/bbl) 2014

Russia (Arctic/Onshore) 120/ 18

Europe (Biodiesel/Ethanol) 110/ 103

Canada (Ethanol/ Sand) 90/ 66

USA (Deep water/ shale) 57/ 73

Angola (offshore) 40

Equador (Total) 20

Venezuela (Total) 20

Kazakhstan (Total) 16

Nigeria (Deep Water/ Onshore) 30

Oman (Total) 15

Qatar (Total) 15

Iran (Total) 15

Algeria (Total) 15

UAE (Total) 7

Iraq (Total) 6

Saudi Arabia (Total) 3

OPEC Average 11 Source: knoema.com


22

Appendix 15: Porter Five Forces Analysis

0 No threat to the business

1 Insignificant threat to the business 2 Low threat to the business

3 Moderate threat to the business 4 Significant threat to the business

5 High threat to the business

Threat of New Entrants:

Unipetrol operates two out of three Czech refineries. Paramo refinery, also owned by Unipetrol, was closed in 2012 due to overall underutilization of European refineries. Underutilization, extreme barriers to entry and European refining long-term forecasts make a new Czech refinery or petrochemical plant investment improbable. Retail is the most competitive sector with chains of various sizes. Benzina was increasing its market share, pushing out other players, in line with its Strategy. According to annual report of Slovnaft, Hungarian MOL is the only competitor that aims to expand in terms of petrochemical products and retail in the Czech Republic. We assess risks of new entrants as LOW.

Threat of Substitute Products or Services:

By acquisition of Česká rafinerská in June 2015, Unipetrol owns all refinery assets in the Czech Republic. Unipetrol also holds a very strong position in petrochemical sector, representing 5% of European HDPE production capacity from which ⅔ are exported. However, most of the products from Unipetrol’s portfolio can be imported from all Central Europe. In retail, Benzina is well recognized brand that offers high quality products in the Czech Republic. However, its products can be substituted. After the steam cracker shutdown, Unipetrol has to face consequences of the disrupted supply chain. Fortunately, PKN has partly replaced the deliveries to Unipetrol’s core customers, avoiding the threat of losing them. Unipetrol’s market position is still strong and should resume the deliveries completely in October 2016, keeping its market share. Thus, we assess the risk to the business as MODERATE.

Bargaining Power of Customers:

High-quality products are the main driver of Unipetrol’s sales success. Main refining customers are controlled by PKN (Spolana, Butadien Kralupy, Benzina, Paramo). In petrochemical sector, customers include Unipetrol’s and PKN’s long-term partners (Synthos, Lovochemie, Pegas Nonwovens). Unipetrol also supplies fuel to its biggest competitors in retail (Shell), indirectly controlling additional market share. As most of the customers have long-term contracts and good relationships with Unipetrol, we assess the bargaining power of customers to be INSIGNIFICANT.

Bargaining Power of Suppliers:

Czech crude oil supplies represent only a small fraction of Unipetrol’s processing. Most of the crude oil is imported from Russia and other foreign Producers. Unipetrol benefits from bargaining power thanks to much larger PKN Orlen, its parent company. Lower crude oil price and oversupplied market imply even better conditions in future contracts. PKN has a long-term contract with Rosneft, Unipetrol with Slovakian state-owned Transperol. Unipetrol has not been able to sign a contract with Czech state-owned company MERO for several years due to differences in the price settings but it has recently signed a new contract with state-owned supplier and distributer ČEPRO. Therefore, we assess the bargaining power of customers to be LOW.

Intensity of Competitive Rivalry:

European refining, petrochemical and fuel distribution industry is very competitive. Unipetrol leverages on its size and refining monopoly

position in the Czech Republic. Hungarian group MOL has the second largest filling station network and operates one of the most modern

European refineries - Slovnaft. Major fuel competitors OMV, Eni and Shell seem preoccupied with their upstream issues and see the Czech

market as secondary. In a long term, Unipetrol and especially Western European refineries will have to face new refining competition from

the Middle East and other emerging countries with crude oil deposits. We assess the threat of competitive rivalry as LOW.

-

1

2

3

4

5

Threat of NewEntrants

Threat ofSubstitute

Products orServices

BargainingPower of

Customers

BargainingPower ofSuppliers

Intensity ofCompetitive

Rivalry


23

Appendix 16: SWOT Analysis

Strenghts Weaknesses

Česká rafinérská shares purchase Disabled PetChem Production

Leveraging on retail market position New Polish Government Changes

Refining Monopoly in CR Low Competitiveness

High Refining & PetChem Margins

Record GDP Growth

Low Crude Oil Price

Strong US Dollar

Opportunities Threats

PE3 Investment Project MOL Group influence Growth

Low Crude Oil Forecast New Gulf and US refineries

Strengthening Export

Further CNB Interventions

Divident Payout


24

Appendix 17: List of abbreviations

ATO Asset Turnover

Bbl Barrel

bn Billion

C4 Composition 4

CAGR Compounded Annual Growth Rate

CAPEX Capital Expenditures

CCC Cash Conversion Cycle

CEE Central and Eastern Europe

CEO Chief Operating Officer

CFI Cash Flow from Investments

CFO Chief Financial Officer

CFO Cash Flow from Operations

CNB Czech National Bank

CoGS Cost of Goods Sold

CPC Blend Caspian Pipeline Consortium Blend Crude Oil

CZK Czech Crown

ČEPRO České produktovody

DCF Discounted Cash Flow

EBIT Earnings before Interest and Taxes

EBITDA Earnings before Interest, Taxes, Depreciation and Amortization

ECB European Central Bank

ERP Equity Risk Premium

EU European Union

EUR Euro

EV Enterprise Value

FCFF Free Cash Flow For The Firm

FX Exchange

GDP Gross Domestic Product

HDPE High-density Polyethylene

IKL Ingolstadt–Kralupy–Litvínov Pipeline

IMF International Monetary Fund

kt Kilotons

kt/y Thousand

LIFO Last in - First out

LMT Long-term Memory?

LPG Liquefied Petroleum Gas

LTM Last Twelf Month

MOL Magyar Olaj

MR Market Risk

mt/y Million ton/year

NI Net Income

NOPAT Net Operating Profit After Tax

NPV Net Present Value

OECD Organisation for Economic Co-operation and Development

OKD Ostravsko-karvinské doly

OMV Österreichische Mineralölverwaltung

OPEC Organization of the Petroleum Exporting Countries

OR Operational Risk

PE Polyethylene

PetChem Petrochemics

PetChem Polyethylene

PKN Orlen Polski Koncern Naftowy ORLEN

PM Profit Margin

PR Political Risk

q/q Quarter-to-uarter

REBCO Russian Export Blend Crude Oil

ROE Return on Equity

ROIC Return on Invested Capital

RR Regulatory Risk

TAL Transalpine Pipeline

US United States

USD United States Dollar

WACC Weight Average Cost of Capital

WTI West Texas Intermediate

y/y Year-to.year


25

Disclosures: Ownership and material conflicts of interest:

The authors or a member of their household, of this report do not hold a financial interest in the securities of this company.

The authors or a member of their household, of this report do not know of the existence of any conflicts of interest that might bias the content or publication of this report.

Receipt of compensation:

Compensation of the author(s) of this report is not based on investment banking revenue.

Position as a officer or director:

The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company.

Market making:

The author(s) does not act as a market maker in the subject company’s securities.

Disclaimer:

The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Czech Republic, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

CFA Institute Research Challengei

Documents

CFA Institute Research Challenge Files/CFA Institute Research Challenge...PKN Orlen acquired 62.99% of Unipetrol shares from the National Property Fund in 2005. The second largest