Albalact Written Report PDF

CFA Institute Research Challenge
Hosted in Romania
The Bucharest University of Economic Studies
CFA Institute Research Challenge | 15 Feb 2016
Albalact S.A. | BVB symbol: ALBZ | ISIN: ROALBZACNOR0 Price (BVB Close 9 Jan 2015): 0.329
Current target price: 0.41
Action: BUY
Report currency: RON
Analysts: Adriana Constantin, Claudia Creta, Georgiana Ene, Cosmin Paraschiv, Lucia Stirbu
Sector: Dairy
Radu Lupu (Faculty Advisor), Sorin Dumitrescu, CFA (Industry Mentor)
Faculty of International Business and Economics, ASE Bucharest
INVESTMENT SUMMARY
Key stock statistics (Thomson Reuters, BSE)

52 weeks Price Range (RON/sh): 0.356-0.26 Market cap: 214,741,217 Debt/Equity:61.3% P/S: 0.45
Average daily volume: 214,563 Free Float: 32% EPS: 0.01 DPS: 0.0185
Shares Outstanding (m): 652,7 Beta: 0.54 Closing price BVB: 0.329
Highlights Price performance chart
With a tradition of more than 40 years, 140 4500

RASDAQ 3 June 2015 BVB
Albalact was privatized in 1999 and 4000
130
successfully listed on the regulated 3500
market of the Bucharest Stock 120 3000
Exchange in 2015. From a local, family- 2500
owned company, Albalact managed 110
2000
to become a global player’s acquisition 100 1500
target, following the offer from Lactalis. 1000
90
500
Since listing on the regulated market,
operated by the Bucharest Stock 80 0
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Exchange, on 3 June 2015, after the Apr-15
transfer from Rasdaq market, Albalact’s
share price rose by almost 40% in a 6
months period. Supported by a robust Volume (rhs) BET (100 = 9 Jan 2015) ALBZ (100 = 9 Jan 2015)
financial situation, Albalact has
managed to grow its revenues and Dynamic daily volatility
secure the leading position of the local
3%
dairy market.
2%
In 2014, Albalact invested 8 million EUR 1%
in modernizing and expanding its
0%
production capacity. These investments
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help Albalact to consolidate its market
position and further increase the
Source: Bucharest Stock Exchange
company’s profitability.
Financials Valuation Investment Risk
Albalact has a strong financial position We issue a BUY recommendation based Albalact balances risk and reward
among Romanian milk processors. The on a one-year target price of 0.41 RON, through its operations, focusing on
company reported revenue of 474.9 representing a 23% upside potential. managing both internal and external
million RON and a 14 % CAGR of Our DCF model results are backed by risks. We analyzed the risks from a
revenue during 2009-2014. Due to a the market-based valuation and the probability-impact perspective.
constant growth of operating revenues, Monte Carlo simulation.
Albalact has become in the first half of Supply chain risks are highly relevant in
2015 the leader on the dairy market. The market-based valuation places the dairy industry since they can disrupt
Albalact in a positive light, asserting its the business operations and impact its
The company has been the subject to underestimated potential in contrast to profit. Macroeconomic risks also pose
major investments inflows and has its peers. significant threat, hampering Albalact’s
recorded an increase in total assets fundamental growth prospects.
turnover ratio during the last six years,
with a ratio of 1.29 in 2009 and 1.86 in 16% Upside/Downside potential
2014. 14%
We expect a positive evolution of return 12%
on equity. The most important driver for Supply
10%
sustaining future level of return on equity Chain
Probability
is the financial leverage. The growth of 8%

financial leverage is due to the fact 6% Reputatio
nal
that total assets will increase at a higher Financial
rate than equity. 4%
Regulatory Operational
2%
The key drivers for the positive evolution
0% Environmental
of Albalact are the reduction in VAT
80%
100%
0%
10%
20%
30%
40%
50%
60%
70%
90%
110%
-30%
-20%
-10%
from 24% to 9%, the technological Macroec

onomic
improvements, the efficiency in
Downside probability = 38%
deploying its assets in generating Impact
revenue and market share gain. Upside probability = 62%
Source: Team estimation based on Monte-Carlo analysis Source: Team assessment
1
Update: Lactalis set to take over Albalact
A statement issued by Albalact on 28th of January reveals that Lactalis has reached an agreement to acquire shares representing in
aggregate 70.3% of the company’s capital.
The price will be determined by deducting from 407.3 million RON the contractually agreed adjusted net debt of 118.2 million RON.
Following the approval of Romania’s Competition Council and after all other conditions are met, Lactalis will launch a public
takeover bid, targeting 100% of Albalact’s shares. This would translate into a price per share of 0.4543 RON, representing a premium
of approximately 37% over the closing price of Albalact shares on 27 th of January 2016, as quoted on the Bucharest Stock
Exchange.
In this case of a strategic acquisition, price is not solely determined by the estimated enterprise value. Brand, economies of scale,
market share gain, synergies, are also relevant factors that backed the ~40% premium.
Even though our valuation was conducted before the public announcement (9th January 2016), the results are not conflicting with
Lactalis’ assessment, both revealing a significant upside potential and hinting towards a strong buy decision.
BUSINESS DESCRIPTION
Total Sales and Asset To Sales for Albalact General Information

(m. RON) Albalact is a key player in the Romanian dairy market
1 600 Albalact is the largest dairy processor in Romania and one of the most dynamic and
0.9 engaged companies operating in the dairy industry. The company has managed to
500
0.8 become a top national player, starting from a value of sales of 193.8 million RON in
0.7 400 2008 and increasing up to 474.9 million RON in 2014.
0.6 Albalact is headquartered in Oiejdea, Alba district, and has a tradition of over 40
0.5 300 years in the dairy industry. The core activities of the company are the collection,
0.4 industrialization and selling of milk-based products. Albalact S.A. is part of the Albalact
0.3 200
Group together with Raraul and Albalact Logistics SRL. Albalact holds 99.01% from
0.2 100 Raraul stake and 100% of Albalact Logistics. The Oiejdea plant is Albalact’s main
0.1 facility.
0 0
2008 2009 2010 2011 2012 2013 2014 2015 The Albalact factory in Oiejdea represents the largest Greenfield investment in the
E country
Total sales Asset to Sales ratio The Albalact Group holds fully automated and high tech production lines thanks to
continuous modernization process. In 2014, Albalact finished an investment of about 8
Source: S&P Capital IQ, team calculations
million EUR for modernizing and extending the production capacity of the Oiejdea
factory. In 2014, the average utilization rates for the production lines in both facilities
Modern technology gave rise to significant was nearly 60%. Albalact processes daily over 300k liters of milk in the two units,
potential output (2014) compared to the industry average of 100k liters per day. The company holds a high
100%
potential to increase the utilization of the high value-added cheese production line.
90%
Brands and Products
80%
70% Diversifying the product portfolio now allows Albalact to target both the economic and
60%
deluxe market segments
50%
40% Albalact currently provides to the Romanian market more than 140 assortments of milk
30% and dairy products under five main brands: Zuzu, Fulga, Raraul, De Albalact and
20%
10%
Poiana Florilor and also experiments in the natural juice segment with Frupt brand. The
0% main product segments are:
Fresh drinking milk: pasteurized and UHT;
Flavored drinking milk and powder milk;
Fresh dairy products: yogurt, buttermilk, sour cream, kefir, sana;
Cheeses: white cheese, yellow cheese, cottage cheese;
Actual capacity Potential capacity
Animal fat: butter, buttercream.
Albalact has been maintaining its leadership position in the milk segment for almost
Source: Company data
eight years
Financial performance of dairy producers Since 2008, Albalact is the market leader with the Zuzu milk brand (UHT milk and
(thousand RON) pasteurized milk). Also, the company is the market leader in the segments of butter
600,000 and sour cream with De Albalact brand. The expansion of yogurt portfolio brought the
500,000 company among the top three yogurt producers in Romania.
400,000
Operational Efficiency
300,000
200,000 90% of sales originate from retail chain
100,000
The company’s volume of sales is delivered in proportion of over 90% through retail
0
companies; the remainder goes to the “milk and croissant” governmental program,
-100,000
hospitals and other collective consumption. The largest clients of the company are
Auchan Romania, Carrefour Romania, Mega Image and other retailers. In terms of
suppliers, Albalact has signed contracts with Tetra Pack Romania (packaging and
maintance), Greiner Packaging, Supremia Grup, Adi Del Boca, Ambisco, Cristi
Zootehnia, Koplax, Lacto Agrar, Lacto Natural (suppliers of raw milk) and Rompetrol
Downstream (fuel).
Total Operating Revenue EBIT Net Profit (Loss)
Source: EMIS
2
Selling of dairy products represents 63% of the company total revenues
Shareholder Structure The key drivers of revenue for Albalact are the finished goods sold, while the key
CRONIAR Holdings Limited 16% drivers of expenses are raw materials and consumables, packaging materials,
CRISWARE Holdings Limited 27% maintenance, wages and other operating expenses (water, heat, energy).
RC2 Limited 25% Operational costs in the past 5 years were 30% of total revenues.
Others 32%
Source: Central Depositary Corporate Governance
The Board of Directors meets whenever necessary and is convened by its President or
1/3 of its members. In order to be validated, the decisions require the presence of at
Board least half of the Board members.
Position Indep.
Members The Board of Directors is composed of 3 members elected by the Ordinary General
Raul Ciurtin Chairman No Assembly for a period of four years, with the possibility of reelection. Directors are
elected from candidates designated by the shareholders. The members of the Board
Petru Ciurtin Vice-President No are: Raul Ciurtin, Petru Ciurtin and Oancea Cornelia Mioara.
Cornelia
Vice-President No The financial auditor of the financial statements, prepared in accordance with IFRS
Oancea
EU, is PricewaterhouseCoopers Audit SRL, which is member of the Chamber of Auditors
of Romania. Their mandate for auditing the company was extended until the end of
the financial year 2015.
Albalact is listed on the Bucharest Stock Exchange and will adopt and comply with
the requirements presented in the Code of Corporate Governance.
INDUSTRY ANALYSIS AND COMPETITIVE POSITIONING
Romania displays significant increase in both Macroeconomic Environment

consumer confidence and economic Supported by strong domestic demand, Romania is among countries with the highest
sentiment economic growth in the EU
140
We believe Romania has significant growth prospects over the next decade, due to
-15
120 competitive labor costs, political stability, and the potential for large increases in
-25 productive capacity. With the Romanian economy recovering strongly since 2014,
100
and the country looking increasingly well-positioned to attract foreign direct
-35 80 investments (FDI) over the next few years, analysts forecast real GDP growth to
average slightly above 3.5 percent over the next 10 years, despite ongoing political
60
-45 events and the modest pace of the Eurozone economic recovery. Private
40 consumption is expected to remain robust, as growing wages, low inflation, falling
-55 20 interest rates and improving labor market conditions are all supportive of the
purchasing power of households.
-65 0
Forecasts for Romania 2014 2015 2016e 2017e
Jul-03
Nov-07
Sep-05
May-01
Oct-06
Jan-10
Feb-11
May-14
Jun-02
Aug-04
Dec-08
Jun-15
Mar-12
Apr-13
GDP growth (%, yoy) 2.8 3.5 4.1 3.6

Inflation (%, yoy) 1.4 -0.4 -0.3 2.3
Consumer Confidence Unemployment (%) 6.8 6.7 6.6 6.5
Economic Sentiment Indicator Public budget balance (% of GDP) -1.4 -1.2 -2.8 -3.7
Gross public debt (% of GDP) 39.9 39.4 40.9 42.8
Source: Directorate General for Economic and Financial Current account balance (% of GDP) -0.4 -0.8 -1.9 -2.6
Affairs, European Commission
Source: European Commission (DG ECFIN) - November 2015
Negative inflation, alongside tax cuts can generate growth for the dairy industry
Inflation rate is expected to enter the target
band starting 2017 In 2015 Q3, the annual CPI inflation rate moved deeper into negative territory,
reaching -1.7 percent in September, remaining well beneath the lower bound of
4 the 2.5 percent flat target. The developments in consumer prices in recent periods
and over the projection interval are significantly affected by the fiscal measures
2 concerning the indirect tax cuts, largest effect coming from the broadening of the
scope of the 9 percent reduced VAT rate to all food items, non-alcoholic
0 beverages and public food services.
-2
Food and beverages are an important part of the ‘shopping basket’, having a
weight of 37.5% in the Consumer Price Index (CPI). Data from National Bank of
-4
Romania reveals that dairy products, having a weight of 5.6 percent in the CPI,
III IV I II III IV I II III IV I II III have registered a 10.4 percent price drop since December 2014.
2014 2015 2016 2017 Under the current baseline scenario, the annual CPI rate is projected to remain in
negative territory until May 2016, returning to the variation band of the target from
Annual inflation rate excluding round January 2017. In addition, we expect the country's Central Bank to maintain low
I effects of VAT decrease
interest rates over the coming quarters, keeping borrowing costs low. These factors
Annual inflation rate will continue to boost household disposable incomes and therefore boost consumer
confidence.
Source: National Bank of Romania projections The fiscal relaxation plan is still on the table after Romania’s government resignation
On November 17, the Romanian parliament approved a new technocratic
government, following the previous government’s resignation. The formation of a
new technocratic government in Romania does not change the positive economic
growth outlook for the country. The administration is set to adhere to the ‘Plan for
Fiscal Relaxation in Romania 2016-2020’ of the former administration, which will
further consolidate household incomes.
3
Global and EU dairy market

World Prices for Raw Milk (eur/100kg) Production and consumption of milk have increased in developing countries
50
Total milk production has increased by 32% over the last two decades, whereas per
45 capita world milk production has decreased. This trend has been due to a fall in the
40 milk production in developed countries, counterweighted in part by an increase in
35 developing countries.
30 Milk consumption has flattened in developed countries, while in developing
25 countries consumption has increased, driven by population growth and increased
20 per capita income. The most prominent characteristic of the dairy sector is that it is
15 highly localized, owing to the fact that dairy products are generally consumed in
10 their country of origin.
5 Increasing purchasing power is pressuring the global dairy industry to consider
0 strategic alliances
Sept
Sept
Sept
Sept
Sept
Sept
May
May
May
May
May
May
Jan
Jan
Jan
Jan
Jan
Jan
Consumer power is increasing in the dairy industry. Key customers of dairy products
2010 2011 2012 2013 2014 2015 are food retailers and the food processing industry in general. Leading companies
in this sector are on average larger than the dairy companies, and their market
UE NZ USA
power is expanding due to the global consolidation process. This is putting pressure
Source: Milk Market Observatory on the dairy sector, which has seen an increase in mergers, strategic alliances and
acquisitions over the recent period.
EU milk quota removal brings the reforming of dairy sector one step further
Dairy sector alliances The European dairy market has been moving toward liberalization. The past
Feb. 2014 interventionist policies have been aimed at maintaining market stability by setting
Danone and China Mengniu
Dairy Company have
of a target price for milk.
agreed to establish a The milk quota was introduced in 1984 with the aim to address structural oversupply
strategic alliance through by imposing penalties on producers surpassing their allocated production levels. The
which Danone will enlarge
quota has been eliminated in March 2015, as part of the reform embedded in the
share capital of Mengniu.
Common Agricultural Policy.
Jul. 2014 Abbott Laboratories and
Fonterra Co-operative The removal of the quota has increased EU dairy industry’s exposure to world prices,
Group have signed an which resulted in the import of price volatility from the world market. Higher volatility
agreement for developing a may have negative consequences both when prices go up, as this determines the
dairy farm hub located in substitution of the product, as well as when prices go down, as this affects the
China through a joint-
bottom line of producers and may threat the solvency of those whose financial
venture. This project is
expected to be complete in
position is not strong.
2017. The removal of the milk quota has benefited mostly large milk producers, who
Sep. 2014 expanded their output and exports in search of economies of scale. Small
Parmalat – owned by
Lactalis – have announced producers, on the other hand, may face pressure from lower prices and their
the purchasing of eleven inability to adjust quickly production costs.
dairy manufacturing plants
from one of the largest dairy Romanian Dairy Industry
producer in Brazil: BRF. Seasonality plays an important role in the Romanian dairy industry
Source: Bloomberg, Euromonitor, Dairy Reporter The dairy industry presents extreme seasonality. During summer, the quantity of milk
collected is increased by 50%, whereas demand for dairy products decreases. Even
though the majority of production is in summer, the consumption is higher during
winter. This gap caused by seasonality can lead to price volatility. This is, however,
minimized by Albalact by adjusting production deficits in the winter with imports
and leveraging excess production by using dried milk or UHT milk. The purpose of
using UHT and dried milk is to preserve it, since both have a far longer shelf life than
Production Volume seasonality liquid milk (UHT milk has a typical shelf life of six to nine months, while dried milk can
(% of total production) last between 3-5 years under the right temperature conditions). Thus, building up
0.3 inventory has the role to accommodate high forecasted product demands in the
winter.
0.25 Romania is endowed with a high natural potential
0.2 Romania is the largest country in Southeastern Europe, having a total area of
238,391 square kilometers. The agricultural surface counts over 13.3 million ha, from
0.15
which about 36% is represented by pastures and natural hayfields (4,828,411 ha in
2014). Traditionally, the milk is produced in hilly and mountainous areas. The highest
milk volumes are collected from Transylvania, 60% of the milk processors being
0.1
localized in this region, 20% in Southern Romania and the remaining 20% in
Moldova.
0.05
The Romanian farms present a high degree of fragmentation
0 The production of raw milk is widely spread in rural areas, while the principal market
Winter Spring SummerAutumn
for processed dairy products is in the urban area. Therefore, collection and
Source: NBG securities research distribution logistics represent a challenge for milk processors. The Romanian sector
of raw milk production consists of a large proportion of farms having 1 to 10 milk
cows. The production of raw milk is highly dispersed, around 98% of the cows,
buffalos, sheep and goats being raised in individual farms.
4
Most farms in Romania are subsistence and semi-subsistence farms. The effect of this
fragmentation manifests through a low quality of raw milk and deficiencies in dairy
Romanian Dairy Food Market Value (m. RON) collection. The small size of cow farms, poor infrastructure development and
by Category and Growth (Y-o-Y) inconsistent agricultural policies are reflected in the production of milk and its
usage. The quantity of milk for industrialization is only 20% of total production. The
remaining 80% is split between the so called ’street trade’ and farm members’
consumption.
Milk and cheese offer the highest value to the overall dairy market
Historical data reveal that milk and cheese are the principal products that offer a
high value to the overall dairy market. In 2013 and 2014 the two amounted to
approximately 4 billion RON. Cream, soy products, drinkable yogurt and butter
brought over the analyzed period a lower added value. The forecasts show that the
overall market value will reach 9 billion RON by 2019.
Competitive Positioning
Traditional competitors, alongside private labels and street trade lead to a highly
competitive market
Albalact enjoys the leader position on the local dairy market. Nevertheless, apart
from traditional competitors, two important categories distinguish as a potential
Source: Canadean threat, the shadow market and the private labels, both challenging Albalact with
low prices. There are, though, some players ruled out of the market by the high
Porter’s five forces operating costs enforced through rigorous regulations in terms of food safety
standards.
In recent years, private labels have had a significant growth in both the European
Barriers to and the Romanian market. Presently 30 percent of the total dairy market is held by
entry
5 private labels. The current value of Romanian dairy market is estimated at 980
4 million EUR, accounting for 7.7 percent of total food industry.
Threat of 3 Bargaining
Substitute 2 Power of Consumers experience increased bargaining power as their possibility of choice is
Products 1 Suppliers enhanced through the expansion of retailers, the consolidation of Internet access
0
and online marketing. Together with the increasing purchasing power, these
concerns have weakened the pricing control for the companies, created
Bargaining Intensity of
knowledgeable customers and enabled them to exercise their negotiating
Power of Competitive
Customers Rivalry capacity.
The market for dairy products substitutes is rather underdeveloped and it targets a
small segment of consumers. Even though open to innovation, customers are aware
of the differences in nutritional profiles and remain loyal to dairy products. Albalact
can consider this alternative as an opportunity to secure a new market share.
Source: Team analysis
FINANCIAL ANALYSIS
Albalact Revenue and operating profit Overview
800.00 20.00 The strong financial position is driven by sustainable earnings

700.00 18.00 In the context of an improving macroeconomic situation in Romania and a high
16.00 growing potential of the dairy market, Albalact is endowed with a strong financial
600.00
14.00
500.00 position among Romanian milk processors. In terms of financial performance, in 2014
12.00
Albalact managed to reach a peak for both revenues and net income. From 2009 to
400.00 10.00
8.00 2014, CAGR of revenues was 14%, while net income had an average growth rate of
300.00
6.00 30% for the same period. Moreover, the constant growth of operating revenues
200.00 helped Albalact to become in the first half of 2015 the leader in the dairy market.
4.00
100.00 2.00 Macroeconomic changes and intra-company improvements are the key drivers
0.00 0.00
The key drives of this positive evolution are the increase in production and efficiency
2014
2010
2011
2012
2013
2015 E
2016 E
2017 E
2018 E
2019 E
but also the reduction in VAT from 24% to 9% for basic food products with a clear
short-term positive effect on demand. Another important key driver for the company’s
Revenue EBIT (lhs) revenue is the product portfolio. Our revenue breakdown revealed that basic dairy
products represent over 60% of Albalact’s revenue in 2014.
Source: S&P Capital IQ, team calculations
New factories spark the efficiency in generating revenue
Revenue Breakdown Starting in 2009, Albalact SA has been the subject of capital increases and major
investments inflows. The company has recorded in this period an increase in total
assets turnover ratio, partially due to the efficiency in deploying its assets in generating
19%
revenue. The major investments made in 2007 and 2008 (opening a new factory in
Oiejdea and acquiring the control stock in Raraul Campulung Moldovenesc) enabled
7% Albalact to tap into new opportunities on the local market. Since the acquisition in
1% 2008 of the Raraul production unit, we can observe a slightly increase in PPE (Property,
10% 63% Plant and Equipment) of about 5% (CAGR).
Capital Structure
Albalact benefits from a 60-40 capital structure
Dairy products Butter
Powder Milk Merchandise
Others The capital structure of the company consists of 60% debt and 40% equity, proving
that Albalact prefers to finance its current activity from borrowed funds. During the
period 2009-2014 both debt and equity have increased, reaching values of 158.2
5
million RON and respectively 107.2 million RON. As of 31st of December 2014, Albalact
reported retained earnings of 22.1 million RON.
Borrowed funds as a financing source favored over equity
Albalact has disobeyed the indebtedness commitment in three loan arrangements
with ING Bank, but without negative consequences. The company has signed a credit
facility arrangement with ING Bank which consists in granting a EUR-denominated
facility to finance payments to suppliers and extraordinary financial debts to public
authorities. Also, Albalact is carrying a total of 39 financial leasing contracts.
KEY FINANCIAL RATIOS 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Activity Ratios
Inventory Turnover 6.64 8.82 11.72 10.67 14.56 12.59 9.28 8.37 7.91 7.55 7.27
Accounts Receivables Turnover 9.37 7.41 6.71 6.44 8.05 7.91 7.07 6.56 6.22 5.94 5.73
Total Assets Turnover 1.29 1.36 1.63 1.64 1.89 1.86 1.70 1.54 1.43 1.35 1.28
Liquidity Ratios
Current Ratio 0.89 0.85 0.91 0.97 0.86 0.89 0.97 0.98 1.00 1.00 1.00
Quick Ratio 0.53 0.61 0.67 0.70 0.68 0.63 0.66 0.68 0.69 0.69 0.69
Cash Ratio 0.05 0.03 0.05 0.06 0.16 0.09 0.08 0.08 0.08 0.08 0.08
Solvency Ratios
Debt-to-Assets Ratio 0.37 0.30 0.25 0.17 0.22 0.25 0.21 0.19 0.17 0.15 0.14
LT Debt-to-assets Ratio 0.14 0.10 0.08 0.07 0.04 0.01 0.00 0.01 0.01 0.01 0.01
Debt-to-Equity Ratio 0.81 0.69 0.60 0.35 0.55 0.61 0.59 0.58 0.57 0.56 0.56
Financial Leverage 2.19 2.31 2.42 2.09 2.49 2.48 2.80 3.11 3.41 3.70 3.99
Profitability Ratios
Return on Assets (%) 1.39% 0.30% 2.67% 3.59% 3.43% 4.63% 2.76% 2.57% 2.41% 2.28% 2.25%
Return on Equity (%) 3.04% 0.70% 6.44% 7.49% 8.53% 11.47% 7.74% 7.99% 8.22% 8.45% 8.99%
Gross Profit Margin (%) 37.9% 31.8% 29.4% 32.4% 31.0% 33.6% 34.0% 33.0% 34.0% 34.0% 34.0%
EBIT Margin (%) 9.99% 1.72% 2.81% 3.11% 2.74% 2.02% 2.67% 2.80% 2.94% 3.04% 3.17%
Net Profit Margin (%) 1.11% 0.23% 1.71% 2.12% 1.98% 2.59% 1.76% 1.77% 1.77% 1.77% 1.84%
Shareholder Ratio 0.46 0.43 0.41 0.48 0.40 0.40 0.36 0.32 0.29 0.27 0.25
Source: Company Data, Team Calculations
Financial Ratios
Liquidity ratios have an upward trend
In 2014, the company’s current ratio increased to 0.89 from the previous year’s current ratio of 0.86. In the future, the current ratio will
remain around 1, around the industry average. At the end of the same year, Albalact SA had negative net working capital, as
current liabilities were 121.24 million RON while total current assets were only 108.04 million RON.
Positive evolution of net income has determined an increase in dividend payout
Out of the 474.92 million RON in revenue reported by the company in 2014, the cost of goods sold was 315.47 million RON, or 66.43%
revenues. The 2.59% net profit margin reached in 2014 was higher than the historical average due to a 7.2 million RON gain from the
sale on fixed assets. During the first six months of 2015, dividends paid by Albalact SA reached the value of 0.02 RON per share. The
price stock varies around 0.3 RON, so the dividend yield is around 6.5 – 6.6 %.
Increased indebtedness led to a rising debt to equity ratio
The company recorded higher debt of 65.71 million RON at the end of fiscal year 2014 compared to the previous year’s total debt
of 53.7 million RON. The debt to equity ratio has been increasing in the last three years, reaching a level of 0.61 at the end of 2014.
We forecast lower debt to equity ratio due to a slightly growth of debt and to a constant level of the retained earnings.
DuPont Analysis reveals a more efficient resources employment
In the analyzed historical period (2011-2014), Albalact exhibited an impaired return on equity mainly due to lower net income. The
11.47% return on equity reached in 2014 is sustained by the higher level of net profit margin. Our analysis indicates a positive
evolution of ROE in the next five years, mainly driven by financial leverage. Given the fact that total assets will increase with a higher
degree than equity, we expect an increase in financial leverage.
The growth of total assets is sustained by an increase in Albalact’s investments and by a slightly growing CAPEX.
6
VALUATION
DCF Valuation Assumptions Discounted Cash Flow Valuation

Revenue Growth 4.0% We used a two-stage growth DCF model
COGS/Sales 66.0% A discounted cash flow analysis with a five-year explicit forecast was used to value Albalact
SG&A/Sales 7.0% SA due to the predictability of cash flows in relation to growth and profitability. The model
Other OE/Sales 21.0% captures a high potential for FCFF growth in the next five years as the company optimizes its
NWC/Revenues -4.0% product portfolio. Therefore, we estimate a target price of 0.41 RON, suggesting a 23% upside
Terminal growth 2.0% potential as a sign for a BUY recommendation. The valuation was made in relation with the
Tax rate 16.0% share price as at 9th of January 2016.
Capex growth 1.0% Estimation of the Weighted Average Cost of Capital was conducted within the CAPM framework
Weighted Average Cost of Capital For the computation of WACC we used a target capital structure of 59.6% Debt and 40.4%
Assumptions Equity. We assumed the cost of equity of 7.0% based on a CAPM framework. The risk free rate
of 3.8% was based on the current yield of 10-year government bonds. Beta of 0.54 was
Bond Rating Baa3
computed by regressing historical Albalact returns with the Bucharest Stock Exchange Index
YTM (Bonds) 6.5%
(BET XT). The market risk premium is 6.0%, reflecting our own estimates as well as market
Tax Rate 16.0% consensus. Based on our computation, WACC for Albalact is 6.1%, using a cost of debt of
Beta 54.0% 6.5%. In the discounted cash flow analysis we applied weighted average cost of capital as
Debt as % of Total Assets 59.6% the discount rate for the forecasted cash flows in order to find the net present value of the
10-Yr Treasury Bond Yield 3.8% company.
Market Risk Premium 6.0% DCF Model Assumptions
In order to construct the DCF model we made a series of assumptions based on the historical
Cost of Equity 7.0%
financial analysis of the company. We considered that cost of goods sold would not exceed
Equity as % of Capital 40.4% the level of 66% of sales for the forecasted period. Also, the majority of SG&A are fixed and
WACC 6.1% we expect them stay in the next 5 years at about 7% of sales. Due to no significant growth
plans for the short and medium term CapEx will increase with 1.0% y-o-y. Likewise, we suppose
Estimation of Target Price based on DCF
that the company uses a straight line depreciation method for Plant, Property and
Valuation
Equipment, thereby accumulated depreciation will amount 16.4 million RON for the
Terminal Value 196.5 forecasted period.
PV Terminal Value 146.3
The two-stage discounted model is based on a high level of growth for the period 2015-2019
PV FCF (Yr2015 to Yr2019) 27.9
and a stable growth thereafter. We estimate an approximate growth rate of 4% for the
Enterprise Value 174.2 forecasted period. Due to potential market saturation in the next years, we assume a terminal
+ MV of non-operating assets 2.9 growth rate of 2%. Based on the present values of the Free Cash Flow to the Firm and the
‒ MV of net debt -87.5 discounted Terminal Value we obtained the Enterprise Value. Furthermore, by using the fair
Fair value of equity 264.6 value of equity and the outstanding shares we arrived at a target price of 0.41 RON.
Shares outstanding 652.7 DCF Valuation Summary
Target Price 0.41 Terminal
Upside potential 23% 2014 2015e 2016e 2017e 2018e 2019e
Value
Revenues (Sales) 474.9 493.9 513.7 534.2 555.6 577.8 600.9

COGS 315.5 326.0 339.0 352.6 366.7 381.3
Gross Profit 159.4 167.9 174.6 181.6 188.9 196.4
SG&A 31.9 34.6 36.0 37.4 38.9 40.4
Other operating
expense/income 101.6 103.7 107.9 112.2 116.7 121.3
Depreciation 16.4 16.4 16.4 16.4 16.4 16.4
EBIT 9.5 13.2 14.4 15.7 16.9 18.3
‒Taxes 2.0 2.1 2.3 2.5 2.7 2.9
NOPAT 7.5 11.1 12.1 13.1 14.2 15.3 16.0
Add: Depreciation 16.4 16.4 16.4 16.4 16.4 16.4 16.4

Less: Capital Expenditures 23.8 24.0 24.3 24.5 24.8 25.0 25.3
WACC Less: Increase in NWC -2.1 -4.5 -0.8 -0.8 -0.9 -0.9 -0.9
5% 6% 7% 8% 9% FCF 2.2 8.0 5.0 5.9 6.7 7.6 8.0
Revenue growth
0% 0.21 0.19 0.19 0.18 0.17
2% 0.35 0.30 0.27 0.25 0.23 NWC -15.3 -19.8 -20.5 -21.4 -22.2 -23.1 -24.0
4% 0.50 0.41 0.36 0.32 0.29
NOPAT/ Sales 1.6% 2.3% 2.4% 2.5% 2.6% 2.7% 2.7%
6% 0.68 0.54 0.46 0.40 0.36
8% 0.87 0.68 0.57 0.49 0.44 Sensitivity Analysis

WACC Our model is particularly sensitive to perpetual growth rate assumptions. We provide two
5% 6% 7% 8% 9% sensitivity tables to better illustrate the valuation range. In the first table the determinants are
0% 0.38 0.33 0.31 0.28 0.27
the rate of revenue growth from 2015 to 2019 and the WACC. For example, a 9% WACC and
an 8% rate of revenue growth give us a 0.44 target price. The second table illustrates the
TV growth
1% 0.42 0.37 0.33 0.30 0.28

sensitivity of our model to WACC and terminal value growth. For example, a 5% WACC and a
2% 0.50 0.41 0.36 0.32 0.29 4% terminal value growth result in a target price of 1.15 RON.
3% 0.66 0.49 0.40 0.35 0.31
4% 1.15 0.64 0.47 0.39 0.34
7
Monte Carlo Valuation based on DCF Model
In order to further strengthen our DCF valuation, we moved from a static, deterministic model
which produces a single point estimate to a stochastic model based on probability
distribution. We ran a Monte Carlo simulation which helps to characterize the range of
potential values in Albalact’s stock valuation and assess the probability of reaching specific
target values. Our results show that upside probability accounts for 62% of the distribution,
thus reinforcing our buy decision.
Simulated Price
4%
4% Price at 09 Jan 2016 = 0.329 RON
3%
3%
2%
2%
1%
1%
0%
-0.10
-0.06
-0.02
0.02
0.06
0.10
0.14
0.18
0.22
0.26
0.30
0.34
0.38
0.42
0.46
0.50
0.54
0.58
0.62
0.66
0.70
0.74
0.78
0.82
0.86
0.90
0.94
0.98
Downside probability = 38% Upside probability = 62%
Simulated Revenue Simulated TV growth Simulated WACC

Company EV/Sales P/S growth distribution distribution 9% distribution
12%
35% 8%
S.C. Albalact S.A. 0.63 0.45 10% 30% 7%
6%
AB Vilkyskiu pienine 0.36 0.17 8% 25%
5%
20%
Centrale del Latte 6% 4%
15% 3%
di Torino & C. 0.53 0.35 4%
10% 2%
S.p.A. 2% 1%
5%
Kri Kri S.A. 0.81 0.73 0% 0%
0%
7.50%
9.00%
0.00%
1.50%
3.00%
4.50%
6.00%
10.50%
12.00%
Lanzhou
-4.00%
-2.50%
-1.00%
0.50%
2.00%
3.50%
5.00%
6.50%
8.00%
9.50%
0.00%
2.00%
2.80%
3.60%
0.40%
0.80%
1.20%
1.60%
2.40%
3.20%
4.00%
Zhuangyuan 1.64 1.18
Pasture Co., Ltd. Simulated from normal distribution with Simulated from gamma distribution Simulated from lognormal distribution
Savencia SA 0.29 0.18 mean 0.04 and standard deviation with paramenters κ = 4, θ = 0.0025, α = with paramenters m=0.0609 and v =
0.02 1 and β = 1 0.012
Schwalbchen
Molkerei Jakob 0.20 0.17
Berz AG Relative Valuation
AB Pieno Zvaigzdes 0.33 0.22 While the DCF analysis represents our prime valuation approach, we also considered the
Ausnutria Dairy method based on peer companies' financial status on the market. This second method serves
1.39 1.17
Corporation Ltd. as reinforcement for our main results but at an industry aggregated level.
Dutch Lady Milk
2.88 3.04 Selected peers present similarities in terms of key financial indicators
Industries Bhd
Jordan Dairy We gave consideration only to listed companies whose core business is the collection and
1.27 1.35 industrialization of milk and other dairy products. Comparable companies were screened for
Company Ltd.
Source: S&P Capital IQ enterprise value, growth rates, product offerings and similar risks.
Chosen valuation multiples recognize sales as the main driver of performance in the dairy
sector
Given how value is measured and created in the dairy industry, we performed the relative
valuation using sales as a main driver of performance. The advantages of using sales as a
denominator come from the fact that this value is the least susceptible to accounting
differences and remains applicable even when earnings are negative or highly cyclical.
EV/Sales upside 6%
Enterprise value multiples are highly relevant for our valuation since it comprises the total
value of a company, including company’s equity, debt, cash and minority interests.
P/Sales upside 20%
As a statistical measure, in order to eliminate the influence of outliers from the data set we
Average upside potential used the median, since in this case it will provide a much more representative overview of the
13% sample than the average function.
based on sales multiples
For the market-based valuation we computed the Enterprise value to sales ratio and the Price
to sales ratio, generating a 6%, respectively 20% upside potential for Albalact by comparing
with the industry. Our relative analysis resulted in a target price of 0.37 RON, at an average
upside potential of 13%, compared to the share price as of January 9th, 2016.
8
INVESTMENT RISKS
Risk Matrix Macroeconomic Risks

Seasonality
Supplier Potential global economic crisis
deliv ery
Foreign I nterest
Frequent The rout in China's stock market, declining oil prices and the asymmetric monetary
legislativ e
Exchange rate
changes
cycles are the three main warning signals for a gloomy economy outlook. Despite
Potential
Albalact’s robust fundamentals, an external shock such as a global economic crisis
Probability
Political
Adv erse
damages to will be strongly reflected in the performance of the company and the overall stock
w eather
instability
conditions
firm's exchange. There is a consensus among professional analysts that the future of the
reputation
Equipment
global economy is in a fragile condition.
Market risk and plant
breakdow n
The BRICS emerging countries, excepting India, are facing either strong downturns or
Free trade Disease
Global recessions. The focus is now on China, which has witnessed a stock market crash and
agreements outbreak
economic
crisis
a Chinese Yuan's devaluation. As crude oil prices collapse below $30 per barrel and
Impact
metals trade near record lows, we are also in a monetary cycle asymmetry. The
Federal Reserve Bank (FED) ended quantitative easing and started the interest rate
Macroeconomic Environmental
hike while the European Central Bank (ECB) has just started QE and is committed to
maintain rates close to zero in the near future.
Financial Operational The combined adverse effects of these three developments could trigger a strong
shock on the markets that would generate financial contagion via known transmission
Regulatory Reputational channels, and would also disrupt the Romanian economy, thus hampering Albalact’s
fundamental growth prospects.
Supply chain
Source: Team assessment Financial Risks
Market risk
Analyzing dynamic volatility reveals that Albalact shows medium volatility compared
with selected peers, averaging between the first and fourth quartile of the distribution.
Risk Overview While listed on the RASDAQ market, Albalact has shown significant higher daily
volatility, primarily due to lack of liquidity. The transfer from RASDAQ to the regulated
Risk category Mitigating factors market of the Bucharest Stock Exchange has led to a boost in average daily trading
Establish and maintain volume, thus increasing liquidity and reducing volatility. As a result, market risk
associated with variability of returns has decreased since June 2015.
adequate credit facilities
Macroecono Interest rate risk
Review expenditures and
mic risks
cut unnecessary fixed Given that Albalact has short term and long term loans with both variable and fixed
costs interest rates, the company is facing the risk that arises from fluctuating interest rates.
Finance investments via Part of the exposure to interest rate risk is covered by Albalact via variable rate
deposits. This risk can materialize in higher interest rate costs for the company.
leasing
Albalact is constantly monitoring the interest rate risk exposures by performing
Hedging using derivatives constant scenario analysis. In order to mitigate this risk, the company seeks loans
Financial risks
instruments (forward denominated in currencies with less volatile interest rate and the company mostly
contracts, interest rate financed its investment through leasing.
swaps, futures) Foreign Exchange risk
Ensure compliance with
Regulatory EUR denominated loans represent the most important part of the loan portfolio (over
both environmental and 90% of bank loans and financial leases), fact which is exposing Albalact to exchange
risks
capital markets regulations rate fluctuations. In addition to EUR loans, the company is also dealing in HUF with
Have in place the Business suppliers. As a mitigating factor against FX risk exposure, Albalact is involved in
Supply chain hedging activities by using forward contracts, while constantly seeking to review the
interruption / contingency
risks exchange rate forecasts so to adjust the pricing strategy.
plan
Monitor and conduct Regulatory Risks
evaluations at regular Frequent changes to EU/local regulations (most especially environmental policy)
Operational intervals based on key
Even though we have witnessed considerable improvements in the legislative area,
risks performance indicators
Romania still faces the major problem of burdensome and non-transparent
(KPIs) and key risk bureaucratic procedures. In addition, regulations usually change quite frequently and
indicators (KRIs) may be vaguely worded or poorly explained, leading to significant costs in order to
Environmental impact comply. Ease of doing business is a ranking system proposed by the World Bank which
assessment aids in assessing the level of regulatory performance and how it progresses over time.
Crisis management plan The evolution of this indicator shows an improvement over the last 5 years, while
pinpointing the areas where the regulations are cumbersome. The forecasted
with environmental
Environmental budgetary deficit of 3% for 2016 may create the pressure for government to raise
incidents checklist certain taxes or diminish some of the fiscal stimulus for companies and investors. These
risks
Supplier diversification in fiscal changes can have an important impact on Albalact’s activity and its financial
order to minimize the results.
impact of environmental Political instability and corruption
hazards
Political risk refers to uncertainty regarding adverse political decisions that may have a
Maintain good PR and negative impact on the company. Combined with corruption, this may lead to
investor’s relations unfavorable changes. For example, the school milk schemes (which Albalact is a part
Reputational
Prepare and be ready to of) or other government-funded programs could be shadow auctioned or assigned
risks
deploy the crisis via bribes. Having a ~10% exposure to this sort of programs, Albalact could be
management plan damaged in this regard.
9
Trade agreements
Dynamic volatility: GARCH estimates, The EU soon intends to sign two far-reaching trade agreements: one with the USA,
comparison with peers Transatlantic Trade and Investment Partnership (TTIP) and one with Canada,
10.00%
4th quartile Comprehensive Economic and Trade Agreement (CETA). The impact of such
9.00% 1st quartile measures is twofold: on one side there is the harmonization of food safety standards
3 June 2015
Albalact
which will change the regulatory environment and on the other side there is the
8.00%
RASDAQ BVB potential of foreign (US and Canadian) dairy companies looking to extend in Eastern
Europe, more particularly Romania, where there is a high potential for milk
Dynamic daily volatilities
7.00%
consumption.
6.00%
Supply Chain Risks
5.00%
Supplier delivery risks
4.00%
In the context of the milk supply chain, the risks a manufacturer deals with mostly
3.00%
concern the flow of raw materials from farmers, both in terms of quantity and quality,
2.00% since the flow of raw materials has a great chance of disrupting production
procedures and hence diminish the performance. This is the reason why Albalact
1.00%
should consider applying any instruments of supply chain risk management that
0.00% effectively mitigate this type of risk.
J-10 J-11 J-12 J-13 J-14 J-15 J-16
Seasonality risk
Source: Thomson Reuters Datastream, team calculations
An important feature of dairy industry is seasonality, which has a twofold meaning. The
production is highly dependent on the season, reaching its peak during the summer
Systematic risk: dynamic beta model period whereas consumption has recorded significant growth in the winter time. This
estimates, comparison with peers inverse correlation in seasonality between production and consumption can lead to
1.80
4th quartile price fluctuations and subsequently to a negative impact on financial statements.
1.60
1st quartile
Operational Risks
3 June 2015
Albalact
Dynamic Beta (systematic risk)
1.40
1.20
Equipment and plant breakdown due to inadequate or failed internal processes
RASDAQ BVB
1.00 The operational risks refer to any kind of failure in the production process, be it due
human, system error or external events, which could imply additional costs to the firm.
0.80
However, in the event of a factory malfunction, Albalact's remaining factories could
0.60 partly take over the production given that none of its plants is operating at full
0.40 capacity.
0.20 Environmental Risks
0.00 Disease outbreak
-0.20
Even though there are some well-known and recognized benefits of milk, the dairy
industry is vulnerable to health risks. On the one hand, there are various potential
health concerns ranging from bacteria, to heart, bone and other major diseases,
Source: Thomson Reuters Datastream, team calculations caused by different milk components. On the other hand, important sources of health
risks are connected to certain human activities like feeding growth hormones to cows
in order to increase their milk production or antibiotics to protect the animals from
bacterial diseases, or improper sanitation and waste management, all which can
lead to contamination of the food supply.
Adverse weather conditions
The dairy industry is hugely dependent on climate conditions, as prerequisite elements
in the manufacturing process. The cultures of crops and grass need proper weather
conditions in order to support the milk delivery. Exceptional periods of hot weather,
especially those unusual both in duration and intensity, impact cow food productivity.
Albalact may be affected by low natural rainfall and dry conditions during the
summer period as water is the key to the outcome for crops and, consequently, the
underlying element for milk production. There is a risk that the quantity of milk
collected will decrease during or the autumn-winter season, just when the demand for
dairy products is higher.
10
Appendix 1: Balance Sheet
For the Fiscal Period Ending 31 2008 2009 2010 2011 2012 2013 2014
December (m.RON)
ASSETS
Cash And Equivalents 3.8 2.9 2.4 4.5 3.4 11.8 8.4
Short Term Investments - - - - 1 5.4 2.5
Total Cash & ST Investments 3.8 2.9 2.4 4.5 4.5 17.2 10.9
Accounts Receivable 23.6 26.2 44.3 56.5 50.3 55 65.1

Other Receivables 0.6 2.1 0.9 0.3 0.1 0.2 0.4
Total Receivables 24.2 28.3 45.2 56.8 50.4 55.2 65.4
Inventory 22.2 21.4 19 21.8 21.8 18.4 31.7

Other Current Assets 13.4 - - - - - -
Total Current Assets 63.6 52.6 66.6 83.1 76.7 90.8 108
Gross Property, Plant & Equipment - 148.5 153.9 135.6 133.4 140.4 164.2
Accumulated Depreciation - -33.5 -43.1 -41.1 -46.5 -53.9 -58.5
Net Property, Plant & Equipment 110.1 115 110.8 94.5 86.9 86.5 105.7
Long-term Investments - 17.8 18 39 39 39 46.7

Other Intangibles 1 0.5 0.2 0.2 0.5 0.6 0.4
Other Long-Term Assets - 1.1 3 0.6 0.1 28.3 4.6
Total Assets 174.7 187.1 198.5 217.4 203.1 245.1 265.4
LIABILITIES
Accounts Payable 23.2 22.5 40.2 39.1 42.3 40.9 41.4
Accrued Exp. - 4 7.7 8.2 - - -
Short-term Borrowings 21.5 22 20.6 10.4 15.3 39.9 56.9
Curr. Port. of LT Debt - 5.9 5.5 4.8 5.0 5.0 5.0
Curr. Port. of Cap. Leases - 4.7 3.8 7.2 - - -
Curr. Income Taxes Payable - - - 0.4 - - -
Unearned Revenue, Current 0 0 - - - - -
Other Current Liabilities 3.5 0.1 0.2 21.1 16.3 20.3 17.9
Total Current Liabilities 48.3 59.3 78 91.3 78.9 106 121.2
Long-Term Debt 35.2 25.7 20.6 18.1 13.6 8.8 3.8

Capital Leases - 10.6 8.5 13.1 - - -
Unearned Revenue, Non-Current 6.6 5.7 5.3 4.6 4.4 4.1 3.9
Pension & Other Post-Retire. Benefits 0.2 0.2 0.2 0.2 0.2 0.2 0.2
Def. Tax Liability, Non-Curr. 0.1 - - - - - -
Other Non-Current Liabilities - - - - 8.6 27.5 29.2
Total Liabilities 90.4 101.5 112.6 127.4 105.7 146.7 158.2
Common Stock 66.5 65.3 65.3 65.3 65.3 65.3 65.3

Retained Earnings 4 4.2 2 7.4 9.3 12 22.1
Treasury Stock - - - - - -0.4 -3.4
Comprehensive Inc. and Other 13.9 16.1 18.6 17.3 22.9 21.6 23.2
Total Common Equity 84.3 85.6 85.9 90 97.4 98.5 107.2
Minority Interest - - - - - - -
Total Equity 84.3 85.6 85.9 90 97.4 98.5 107.2
Total Liabilities And Equity 174.7 187.1 198.5 217.4 203.1 245.1 265.4
Total Debt
56.66 69.00 58.98 53.68 33.90 53.72 65.71
Source: S&P Capital IQ
Appendix 2: Income Statement
For the Fiscal Period Ending 31 December 2008 2009 2010 2011 2012 2013 2014
(m.RON)
Revenue 193.8 226.9 261.3 338.3 343.8 424 474.9

Other Revenue - 6.5 - - - - -
Total Revenue 193.8 233.3 261.3 338.3 343.8 424 474.9
Cost Of Goods Sold 123 144.8 178.1 239 232.6 292.6 315.5
Gross Profit 70.8 88.5 83.2 99.3 111.3 131.5 159.5
Selling General & Admin Exp. 51.8 21.9 23.6 28.6 30 32.4 31.9
R & D Exp. - - - - - - -
Depreciation & Amort. 10.2 - 13.5 11.7 12.5 13.6 16.4
Other Operating Expense/(Income) 0.8 43.4 41.7 49.4 58 73.9 101.6
Other Operating Exp., Total 62.8 65.3 78.7 89.8 100.5 119.9 149.9
Operating Income 8 23.3 4.5 9.5 10.7 11.6 9.6
Interest Expense -9.1 -3.4 -2.3 -2.2 -1.7 -1.5 -2.2

Interest and Invest. Income 2.3 0.2 0 0 0.1 0 0
Net Interest Exp. -6.8 -3.2 -2.2 -2.2 -1.6 -1.5 -2.2
Other Non-Operating Inc. (Exp.) - -4.4 -1 -0.5 -0.4 -1.1 -0.3

EBT Excl. Unusual Items 1.1 15.6 1.2 6.8 8.7 8.9 7.1
Impairment of Goodwill - - - - - - -
Gain (Loss) On Sale Of Assets -0.4 - - - - 0.9 7.2
Asset Writedown 0.1 -12.8 - - - - -
Other Unusual Items - - - - - - -
EBT Incl. Unusual Items 0.8 2.8 1.2 6.8 8.7 9.8 14.3
Income Tax Expense 0.2 0.2 0.6 1 1.4 1.4 2

Earnings from Cont. Ops. 0.6 2.6 0.6 5.8 7.3 8.4 12.3
Earnings of Discontinued Ops. - - - - - - -

Extraord. Item & Account. Change - - - - - - -
Net Income to Company 0.6 2.6 0.6 5.8 7.3 8.4 12.3
Minority Int. in Earnings - - - - - - -

Net Income 0.6 2.6 0.6 5.8 7.3 8.4 12.3
Pref. Dividends and Other Adj. - - - - - - -
NI to Common Incl. Extra Items 0.6 2.6 0.6 5.8 7.3 8.4 12.3
NI to Common Excl. Extra Items 0.6 2.6 0.6 5.8 7.3 8.4 12.3
Appendix 3: Cash Flow Statement
For the period ending 31 December (RON) 2010 2011 2012 2013 2014
Net cash flow from operating activities -

19,156,377 1,033,115 8,211,306 17,064,313 384,652
Net cash flow from investing activities - - - -
6,872,162 22,665,313 664,257 6,123,886 16,878,240
Net cash flow from financing activities - - -
12,763,986 21,506,354 7,675,239 1,876,544 11,391,418
Net increase in Cash and Cash - - -

Equivalents 479,771 2,192,074 128,463 12,816,971 5,871,474
Cash and Cash Equivalents at the
Beginning of the Year 2,897,068 2,417,297 4,539,592 4,459,843 17,171,423
Cash and Cash Equivalents at the End of
the Year 2,417,297 4,539,592 4,459,843 17,171,423 10,894,307
Source: Albalact
Appendix 4: Production Facilities
Installed capacity Utilization

Production Facilities Products
(l/day) rate
Fresh milk (ESL)
UHT milk
School milk, flavored milk
Cream
Oiejdea 350000 60-75%
Yoghurt, spoonable and drinkable
Sour milk
Sana and kefir
Butter
Source: Albalact
Installed capacity Utilization

Production Facilities Products
(l/day) rate
Local type yellow cheese
White cheese "telemea"
Tvarog type cheese, processed
Campulung cheese 200000 35-50%
Moldovenesc
Cream and butter
Milk powder
Whey drying
Source: Albalact
Albalact operates two main facilities: Oiejdea, as main facility, and Raraul - Campulung Moldovenesc,
owned 99.01% by the company. Both show an important production potential as the utilization rate is not yet
operating at its full installed capacity, allowing Albalact to boost its milk output whenever needed at low costs.
As shown in the tables above, each production facilities manage a specific portfolio of products.
Appendix 5:
Drinking Milk Market Share of Albalact by Volume Sour Cream Market Share of Albalact by Volume
and by Value (% of total segment) and by Value (% of total segment)
30 20
25
15
20
15 10
10
5
5
0 0
yr2012 yr2013 yr2014 yr2012 yr2013 yr2014
Volume Value Volume Value
Source: NBG Securities Source: NBG Securities
White Cheese Market Share of Albalact by Volume Yellow cheese market share of Albalact by Volume
and by Value (% of total segment) and by Value (% of total segment)
0.6 5
0.5 Source: NBG Securities
4
0.4
3
0.3
2
0.2
0.1 1
0 0
yr2012 yr2013 yr2014 yr2012 yr2013 yr2014

Yogurt Market Share of Albalact by Volume and by Sana Market Share of Albalact by Volume and by
Value (% of total segment) Value (% of total segment)
20 10
8
15
6
10
4
5
2
0 0
yr2012 yr2013 yr2014 yr2012 yr2013 yr2014
Buttermilk Market Share of Albalact by Volume Butter market share of Albalact by Volume and
and by Value (% of total segment) by Value (% of total segment)
12 29
28
10
27 Source: NBG Securities
8 26
6 25
24
4
23
2 22
0 21
yr2012 yr2013 yr2014 yr2012 yr2013 yr2014
Albalact is the top player in both the drinking milk and sour cream sector. Concerning yogurt products,
Albalact is number two in the market behind its main competitor Danone.
Appendix 6: Albalact’s cheese market potential
5%
Albalact market share

Market potential
95%
Source: Albalact
Albalact holds only 5% of the cheese market potential, which gives the company the opportunity to
further focus and expand in this sector as there are significant earnings prospects.
Appendix 7: Albalact Net Income (% of Revenue)
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
Net Income (% of Revenue)
Net profit, as percentage of the revenue, is also called profit margin and it is the percentage of the
selling price that is turned into profit. This ratio is important because one should know what percentage of profit
will get on a particular investment. The profit margin is used for internal comparison. We can observe that in the
years before the global financial crisis the net income had higher values than the ones after 2010.
Appendix 8: Dupont Analysis
Return on Equity
2011 2012 2013 2014
6% 8% 9% 11%
Profit Margins Total Asset Turnover Financial Leverage

2011 2012 2013 2014 2011 2012 2013 2014 2011 2012 2013 2014
2% 2% 2% 3% 156% 169% 173% 179% 242% 209% 249% 248%
Net Total Total Shareholder's

income Sales Sales assets assets Equity
2011 1.33 2011 77.92 2011 77.92 2011 50.07 2011 50.07 2011 20.73
2012 1.65 2012 77.35 2012 77.35 2012 45.69 2012 45.69 2012 21.91
2013 1.88 2013 94.86 2013 94.86 2013 54.84 2013 54.84 2013 22.03
2014 2.74 2014 105.93 2014 105.93 2014 59.20 2014 59.20 2014 23.90
Source: Team computations
DuPont Analysis decomposes return on equity into Profit Margins, Total Asset Turnover and Financial
Leverage. For-profit businesses exist to create wealth for its owners. ROE is the most important key ratio because
it indicates the rate at which owner wealth is increasing.
The profitability is measured through net profit margin and indicates the rate at which sales are
converted into profits. It appears that during 2011 and 2013 the value was constant at 2% and in 2013 it
reached 3%. Turnover is important because it indicates how well the assets of the firm are used to generate
cash. Our analysis ranges between 2011 and 2014 and it can be observed that the value increased from 168%
to 178%. The leverage ratio measures the extent to which Albalact relies on debt financing in its capital
structure.
All in all, DuPont Analysis is used to get a quick snapshot of the overall performance of the firm.
Appendix 9: Executive Team
Name Position held Description

Stephane Batoux is a French executive with extensive
experience on FMCG market in Romania. He has been
managing Albalact as General Manager since June
2014. Stephane took over the company's development
plans from Raul Ciurtin. His job is to decide on the
strategic projects and activities of Albalact Group
Stephane Batoux CEO
(Albalact SA, Raraul SA and Albalact Logistics) and to
deal with the retail partners and clients. Stephane is
working side by side with a consolidated management
team who laid a solid foundation for the developments
and performance of the company over the past years.
Adrian Radovici coordinates the strategic, operational

and tactical objectives of the Finance and IT
departments of the company. Adrian Radovici joined
Albalact’s management team in 2012, bringing along a
solid financial experience acquired in the banking
Adrian Radovici CFO
sector. He assisted one of the most important and
successful projects of the company: Albalact's debut
on the regulated market of the Bucharest Stock
Exchange in 2015.
Irina Mandoiu has been the Business Director of

Albalact since 2010. She manages the Sales,
Distribution, Trade Marketing, Operations and Business
Analysis departments. She is responsible for
implementation and development of the sales and
Business Manager distribution strategy across all sales channels of the
Irina Mandoiu company, she manages the credit system, coordinates
market researches, promotions and in-store activities,
and participates, together with the marketing team, in
brand positioning and launches. She built the business
department she is leading from zero and this represents
her biggest career achievement.
She joined Albalact team in 2008 and since then she

managed to shape and render the 900 people team
more efficiently. As HR Manager, Mihaela Anca
manages the human resources policy and strategy for
all the companies in the group. This includes
Human Resources management of the development directions,
Mihaela Anca
Manager recruitment, payroll, compensations, safety and
environment, reconstruction of the HR department of
Albalact and consolidation of the teams across all
departments. Similarly, she implemented new human
resources and performance management programmes
and improved the employee appraisal tools.
Bogdan Paraschiv is the specialist who coordinates all

development, production and technology lines
Bogdan Technical and performance improvement programmes, approves up
Paraschiv Quality Manager taking and processing of raw materials and other
materials and handles modernization process of the
company’s infrastructure. Furthermore, Bogdan
supervises quality control and product traceability.
Bogdan joined Albalact team in 2006, and from the
very beginning he coordinated all internal procedures
for acquisition and functioning of modern production
equipment.
Source: Albalact
Appendix 10: Organizational Chart Albalact
Source: Albalact
Appendix 11: Consumer Price Index – Basket of Goods Distribution
18.5%
Non Food Goods

5.6% 44.1%
Food Goods
Milk and Dairy Products
Services
32.0%
Source: National Institute of Statistics (INSSE)
Milk and dairy products represent approximately 7% of the goods and services basket from the CPI.
Having an important weight in the CPI and given a relatively inelastic demand for milk, the change in the
demand for dairy products is less than the change of its price. As such, a negative inflation rate will not
significantly boost the demand for dairy-related products.
Appendix 12: Monthly Average Net Earnings
RON
1900
1850
1800
1750
1700
1650
1600
1550
1500
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10
2013 2014 2015
As a result of economic recovery since 2008 crisis, monthly average net earnings have been on an
upward trend since 2013. Over these three years (2013 - 2015) there has been a 21% increase, earnings going
up to nearly 1900 RON at the end of 2015.
Appendix 13:Retail Sales Evolution (%)
114.0
112.0
110.0
108.0
106.0
104.0
102.0
100.0
98.0
96.0
94.0
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
2014 2015
As a result of the expansionary fiscal policy (most important measure being the decrease of VAT rate),
alongside increasing private consumption, the retail sales rose during the last eight quarters.
Appendix 14: Romania's Credit Rating
Credit Rating Romania's credit

Agency rating
Standard & Poor's BBB-
Moody's Baa3 Positive
Fitch BBB-
Source: Bloomberg
In December 2015, due to correcting the macroeconomic imbalances, Moody’s decided to change
the outlook on Romania's Baa3 government rating from stable to positive. Mainly driven by an increase in
exports, Romania's trade deficit shrunk noticeably to 4.2% of GDP in 2014, from more than 16% of GDP in 2007.
As a result, Romania's current account deficit narrowed substantially to 0.5% of GDP in 2014, from 13.5% of GDP
in 2007.
Appendix 15: Ease of Doing Business
100
90
80
70
60
50
40
30
20
10
0
2010 2011 2012 2013 2014 2015 2016
Source: World Bank

Knowing where an economy stands relative to the ease of doing business is useful for investors. Doing
Business Index is measuring the regulations that enhance business activity and those that constrain it. A high
ease of doing business ranking means the regulatory environment is more friendly to the starting and operating
of a local firm. Doing Business presents quantitative indicators on business regulations and the protection of
property rights that can be compared across multiple countries. Following continuous improvements in the
regulatory area, Romania is ranked the 37th place in 2016.
Appendix 16: Raw Milk productions New Zealand, USA and Australia (1 000 t)
14000
12000
10000
8000
Australia
6000 NZ
USA
4000
2000
Source: Milk Market Observatory
The world production of raw milk has increased slowly during the past 5 years. Historical data show the
impact of seasonality over milk quantities produced. For United States, Australia and New Zeeland the levels of
production are higher in spring, autumn and winter than in summer. High volumes of milk are being produced in
USA comparing to the rest of the world. Both NZ and Australia experienced a decrease in production in the last
year.
Appendix 17: Romania Dairy Food Market Value (RON m) and Growth (Y-o-Y)
10000 8.00%
9000 7.00%
8000
6.00%
7000
6000 5.00%
5000 4.00%
4000 3.00%
3000
2.00%
2000
1000 1.00%
0 0.00%
2009 2010 2011 2012 2013 2014 2015 2016 E 2017 E 2018 E 2019 E
Market Value Y-o-Y Growth
Source: Canadean
The dairy market in Romania benefited from a continuous increase since 2009 up to 2015, with a y-o-y
growth of about 6%. The forecasts for the next 5 years show that the trend of the market value will follow the
same path with an annual growth rate of 7%.
Appendix 18: Romanian Dairy Food Market Value (RON m) by Category
10000
9000
8000 Cheese
7000 Yogurt
6000 Soymilk & Soydrinks
5000 Milk
4000 Drinkable Yogurt
3000 Dairy-based &Soy Desserts
2000 Cream
1000 Butter & Spreadable Fats
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
E E E E E
Source: Canadean
Historical data reveal that milk and cheese are the principal products that offer a high value to the
overall dairy market. In 2013 and 2014 the two amounted to approximately 4 billion RON. Cream, soy products,
drinkable yogurt and butter brought over the analyzed period a lower added value. The forecasts show that
the overall market value will experience a significant increase, reaching 9 billion RON by 2019.
Appendix 19 :Romanian farm structure
1-2 cows
9% 3-9 cows
4%
4% 10-19 cows
3% 37%
8% 20-29 cows
30-49 cows
35% 50-99 cows

>100 cows
Source: Albalact
In Romania, the production of milk is spread in rural areas and it is dispersed. The farms present a high
degree of fragmentation, which can be highlighted by the deficiencies in the milk collection and the low
quality of the milk. The Romanian sector of raw milk production consists of a large proportion of farms having 1
to 10 milk cows. The decrease in cattle began in 2009 when many small farmers sold their cows because the
milk price was too low.
Appendix 20: Romania Dairy Products Value % Total
13% 12%
Butter & Spreadable Fats
5% Cheese
Cream
23% Dairy-based &Soy Desserts

Drinkable Yogurt
Milk
Soymilk & Soydrinks
41%
1% Yogurt
3% 2%
Source: Canadean
In 2015 milk represented 41% from the total value of the dairy market, high values being also registered
for cheese, yogurt and butter. On the opposite cream and soy drinks offer lower value to the overall dairy
market.
Appendix 21: Cheese market split by product
3.3% 2.6% 2.2%

3.4% Yellow cheese
4.3% White cheese
30.4% Processed cheese
6.3%
Fresh cheese
10% Cream cheese
Fagaras cheese
16.4% 21.1% Cottage cheese
Burduf cheese
Source: Albalact BVB presentation
Albalact is focusing more on the production and selling of yellow, white and fresh cheese, accounting
for 61% of the entire cheese portfolio.
Appendix 22: Romanian cheese production from cows’s milk (1 000 t)
68.00
66.00
64.00
62.00
60.00
58.00
56.00
54.00
52.00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Cheese from cows'milk (1 000 t)
Source: Eurostat
For the Romanian dairy market the quantities of cheese produced from raw cow milk have increased in
the past years. The highest level of production was registered in 2008, 65.5 thousand tons, similar with the level
produced in 2014. For the next years, the trend shows a further increase in cheese production.
Appendix 23 : Romanian butter production (1 000 t)

12.00
10.00
8.00
6.00
4.00
2.00
0.00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Total butter produced (1000 t)
Source: Eurostat
As shown in the graph, butter production in Romania had a steady trend in the past 7 years, with a slight
increase in 2009 and 2014. The lowest level was registered in 2006 at about 7 900 tons of butter.
Appendix 24: Butter and Cheese to Outperform Milk Production
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
-10.0
2010 2011 2012 2013 2014 2015e 2016f 2017f 2018f 2019f
Romania - Milk production, % y-o-y Romania - Butter production, % y-o-y

Romania - Cheese production, % y-o-y
Source: Business Monitor International 2016
Cow's Raw Milk Prices - Romania vs. EU-15 (EUR/100kg) EU Butter prices (EUR/100kg)
45 450
40
35
400
30
25
20 350
15
10
300
5
0
Jul2010
Jul2011
Jul2012
Jul2013
Jul2014
Jul2015
Apr2010
Oct2010
Apr2011
Oct2011
Apr2012
Oct2012
Apr2013
Oct2013
Apr2014
Oct2014
Apr2015
Oct2015
Jan2010
Jan2011
Jan2012
Jan2013
Jan2014
Jan2015
Jan2016
250
200
Romania EU-15 1/1/2010 1/1/2011 1/1/2012 1/1/2013 1/1/2014 1/1/2015
Source: Eurostat Source: Eurostat
Given the ongoing low price of raw milk, followed in response by farmers' decision to slaughter their dairy herd,
we expect a decrease in Romania's milk output in the near future. EU prices of cow's raw milk decreased in
November 2015 by 8% comparing to December 2014. If producers received in December 2013 40.21 EUR/100
kg of cow's raw milk, the amount paid to them in December 2015 lessened to 30.47 EUR/100 kg. Despite the
decrease in also the dairy commodities prices, the current level of dairy products like butter and cheese outline
as the best opportunity to orientate more and more quantities of raw milk in this direction.
Appendix 25: Porter's five forces
Barriers to entry
5
4
Legend 3
Threat of Bargaining
2
0 – No threat to Albalact Substitute Power of
Products 1 Suppliers
1 – Insignificant threat to Albalact
0
2 – Low threat to Albalact
3 – Moderate threat to Albalact
4 – Significant threat to Albalact
5 – High threat to Albalact Bargaining Intensity of
Power of Competitive
Customers Rivalry
Intensity of Competitive Rivalry

In 2014, Albalact was the largest player on the dairy market in Romania.The following companies are its major
competitors: Covalact SA, Danone SA, Dorna Lactate SA, Hochland Romania SRL, Lactalis Romania SRL,
Napolact SA.
The concentration of the dairy market is relatively high. The top 10 companies hold over 50% of the domestic
dairy market. Consequently, each player has a desire to win a larger share of the market.
Due to increased competition, Albalact adopted new packaging and processing technologies in order to
improve products in terms of quality. However, if Albalact fails to develop innovative technologies or in
adopting marketing policies at least to match its mainly competitors, sales of the products offered by Albalact
could drop significantly. This could have major effects on the activity and on the financial situation of the
company.
Large agro-food groups with financial strength can enter the market through acquisitions of other dairy
companies that are operating in this field. Therefore, the pressure on selling prices will represent a consequence
of increased competition.
Besides traditional competitors, there is also an important shadow market (street trade) who plays a major role
in the lower quality, lower prices bracket. There is also a market perception, mostly associated with rural areas,
that these products are more natural and healthier. Private labels of retailers are also solid competitors, who
have a volume market share of ~30%, surpassing all other individual competitors.
Barriers to entry
Barriers to entry in the dairy industry have arisen from two main sources: public health measures and price
stabilization policy. Ensuring compliance with both local regulations (national legislation regarding food safety
standards and requirements) and EU policies is an important barrier to entry due to the high cost associated
with following the applicable legislation.
In addition, in Romania there are high costs for the collection of raw milk from farms due to fragmentation and
the production costs are increasing due to higher prices for raw materials such as milk, sugar and fuels. The
emergence of small and medium players in the industry is unlikely because of the structural weaknesses
associated with such companies, more specifically the absence of economies of scale.
One factor that contributed to a more open market is the removal of EU milk quotas in April 2015.This can
increase the presence of foreign dairy producers in the Romanian market.
Bargaining power of suppliers

Given the level of fragmentation for the Romanian farms, the collection of milk is poor. It is estimated that
around 80% of the milk produced originates from small and medium sized farms. Sanitary and food hygiene
standards are increasingly stringent and adjusting the legislation to European standards can significantly
reduce the number of suppliers.
The company has signed commercial contracts with farms, livestock associations and private companies, both
at national and EU level. The price of milk as raw material is negotiated with suppliers in order to provide
optimal mix of price / fat / protein.
The company's goal is to increase both the collection of milk from few suppliers and the amount collected from
farms, thereby collection and transport costs will be reduced, while emphasizing the high quality of the raw
material.
Provided materials by main suppliers
Company name Town/country Provided materials

Thrace Greiner Sibiu Packings
Supremia SRL Alba Stabilizers
Rompetrol Romania Fuels
Ambro Suceava Packings
Tetra Pak Sweden Packings
Bargaining power of customers

According to financial information, Albalact obtains 68.44% of revenues via these main retailers:Metro, Selgros,
Auchan, Real, Kaufland, Lidl, Mega image, Carrefour, Profi, Rewe.
It has been noticed a reduced consumer willingness to experience new products, although there is interest in
innovation. Nowadays, consumers are heading towards economic products. This may be related to the fact
that consumption per capita is among the lowest in Europe. Another argument to sustain the bargaining power
of customers is the increasing purchasing power and the slowing down growth in consumption of milk packed
products. Given the fact that there are a lot of small, individual customers, no group can pose a significant
threat to the company.
Online marketing and Internet data availability facilitates consumers making informed decisions by offering the
possibility to adequately compare products using criteria such as price, quality, ingredients. This technology
evolution creates a more competitive position for customers in terms of negotiating power, awareness and
knowledge.
Threat of substitutes
There are some alternatives that come close to the attributes of dairy products regarding the taste and the
texture, but they don’t necessarily have the same nutritional profile. The threat of dairy substitutes is not
significant since the market for milk and cheese alternatives is fairly modest. The market penetration rate of
such products is limited and it mostly targets two segments of consumers: vegans and vegetarians on one side,
and people who adhere to religious fasting periods (abstaining from certain foods, including dairy products).
Another small category is represented by lactose intolerant consumers.
One of the alternatives is soymilk, which is the most recognizable and the most available regular milk substitute
in grocery stores. It can be used as a substitute for people with lactose intolerance.
Another alternative is rice milk, which is made from boiled rice, brown rice syrup and brown rice starch. Its taste
is sweeter than cow’s milk due to the addition of sweeteners and vanilla and it is also a popular alternative for
people suffering from lactose intolerance. Almond milk is made of ground almonds, water and a small amount
of sweetener. This alternative contains very little protein and has a lack in many of the nutritive qualities that are
found in cow’s milk.
Oat milk that is made of oat groats, water and other grains and beans, can be considered a good substitute
for low-fat milk. On the other way, coconut milk is higher in calories and saturated fats that may actually be
beneficial.
Sources: Team Analysis

Appendix 26: SWOT Analysis
SWOT Analysis
Strengths: Weaknesses:
Leading position on the market for milk, butter Investment necessity for logistics
and sour cream and second position for yogurt improvement
and cheese Inexistence of an effective milk collecting
Wide experience in the field of dairy system from small producers
Fastest growing competitor in the Romanian Lack of active promotion for the De Albalact
dairy market brand
Modern and efficient factories which provide Underutilization of the Raraul plant capacity
high quality products and satisfy European (only 35-50% utilization rate)
standards in the field
The new factory which supports production
growth: positive production growth prospects
favored by the new main factory
Cutting edge technology which enhances
efficient production
Diversified portfolio of products thus covering a
considerable segment of the dairy market
Incorporates two strong, well-known brands:
Zuzu, Fulga
Efficient organization of distribution activity
Specialized human resources for all activity
divisions: production, collection, placement,
quality control
Opportunities: Threats:
Significant growth potential for the dairy market The need to comply with complex and
as supported by the expansion of major numerous European regulations regarding
retailers in throughout the country food safety and hygiene
Financing programs from EU for dairy producers New competitors on dairy market, including
Greater orientation and willingness of important private label brands
Romanian for new sorts of cheese, milk and Bureaucracy, corruption
yogurt Underdeveloped transport infrastructure
Less expensive labor force comparing to other Seasonal production of necessary raw
European countries materials
Romanian Government's decision to cut food Potential increase in imports due to
VAT from 24% to 9% which enhances elimination of milk quota
consumption Consumers preference towards “street
High potential to produce organic dairy market” milk
products
Consumers’ appreciation of dairy as healthy
food
The SWOT Analysis was conceived in order to scan Albalact’s key features for each of the four levels and to
base the company’s status on the market. Every dimension analyzed is built upon a series of factors which were
rated according to their importance (each score corresponds to the degree of impact on the company). This
ranking system was then used to compute the overall position of Albalact.
Strengths Rating Weaknesses Rating
Opportunities Rating Threats Rating
Source: Team Analysis

Appendix 27: Peer Valuation
Company EV/Sales Price to Sales Ratio

S.C. Albalact S.A. 0.63 0.45
AB Vilkyskiu pienine 0.36 0.17
Centrale del Latte di Torino & C. S.p.A. 0.53 0.35
Kri Kri S.A. 0.81 0.73
Lanzhou Zhuangyuan Pasture Co., Ltd. 1.64 1.18
Savencia SA 0.29 0.18
Schwalbchen Molkerei Jakob Berz AG 0.20 0.17
AB Pieno Zvaigzdes 0.33 0.22

Ausnutria Dairy Corporation Ltd. 1.39 1.17
Dutch Lady Milk Industries Bhd 2.88 3.04
Jordan Dairy Company Ltd. 1.27 1.35
Albalact Multiples Upside Potential
EV/Sales upside 6%
Price to Sales Ratio upside 20%
Average upside potential based on sales multiples 13%
Source: Team Calculations
The calculation of the first multiple, enterprise value per sales results in a 6% upside potential for
Albalact. The second one, price to sales ratio shows a higher upside (20%). In our relative valuation model we
used an average upside potential of 13% based on the multiples.
Peer company Market Key statistics
AB Vilkyskiu pienine AB Vilkyškiu Pienine, together Stock price: 1.73 (EUR)
with its subsidiaries, produces Market capitalization: 20.661
and sells various types of (m.EUR)
dairy products in Lithuania, EPS: 0.298(EUR)
other countries in the Beta 5y:0.46
European Union, Russia and
internationally. AB Vilkyškiu
Pienine was founded in 1993
and is headquartered in
Vilkyškiai, Lithuania. It is listed
on National Stock Exchange
of Lithuania.
Centrale del Latte di Torino & Centrale del Latte di Torino & Stock price: 3.49(EUR)
C. S.p.A. C. S.p.A. produces, treats, Market capitalization: 34.9
processes, and sells milk, food (m.EUR)
and dairy products in Italy. EPS: 0.079 (EUR)
The company was founded Beta 5y: 0.73
in 1950 and is headquartered
in Turin, Italy. Centrale del
Latte di Torino & C. S.p.A. is a
subsidiary of Finanziaria
Centrale del Latte di Torino
S.p.A. It is listed on Borsa
Italiana S.p.A, Italy’s main
stock exchange.
Kri Kri S.A. Kri Kri S.A. produces and sells Stock price: 1.7 (EUR)
dairy products in Greece. The Market capitalization: 56.21
company also exports its (m.EUR)
products to approximately 20 EPS: 0.108 (EUR)
countries in Europe, the Beta 5y: 0.64
Balkans, and the Middle East.
Kri Kri S.A. was founded in
1954 and is headquartered in
Serres, Greece. It is listed on
Athens Stock Exchange.
Lanzhou Zhuangyuan Pasture Lanzhou Zhuangyuan Pasture Stock price: 0.636 (EUR)
Co., Ltd. Co., Ltd. manufactures, Market capitalization: 89.438
markets and sells dairy (m.EUR)
products in China. The EPS: 0.086 (EUR)
company operates through Beta 5y: -
two segments, Dairy Farming
and Dairy Products
Production. It is listed on The
Stock Exchange of Hong
Kong Limited (SEHK).
Savencia SA Savencia SA produces and Stock price: 59.03 (EUR)
distributes cheese, other Market capitalization:
dairy specialties and dairy 827.759(m. EUR)
ingredients in France, other EPS: 2,785 (EUR)
European countries and Beta 5y: 0.53
internationally. The company
is based in Viroflay, France.
Savencia SA is a subsidiary of
Soparind SCA. It is listed on
Euronext Paris.
Schwalbchen Molkerei Jakob Schwälbchen Molkerei Jakob Stock price: 25.4 (EUR)
Berz AG Berz AG produces and sells Market capitalization:
dairy products under the 33.02(m. EUR)
SCHWÄLBCHEN brand in EPS: 1.915 (EUR)
Germany. It offers drinking Beta 5y: 0.07
milk, fresh products and
cream. The company was
founded in 1938 and is based
in Bad Schwalbach,
Germany. It is listed on
Deutsche Börse AG.
AB Pieno Zvaigzdes Pieno Žvaigždes, AB, a milk Stock price: 1.32 (EUR)
processing company, Market capitalization: 59.577
produces and sells dairy EPS: 0.111 (EUR)
products in Lithuania. Pieno Beta 5y: 0.10
Žvaigždes, AB also exports its
products to Russia, as well as
to countries of the European
Union, CIS and Baltics. The
company is headquartered
in Vilnius, Lithuania. It is listed
on National Stock Exchange
of Lithuania.
Ausnutria Dairy Corporation Ausnutria Dairy Corporation Stock price: 0.256 (EUR)
Ltd. Ltd, an investment holding Market capitalization: 319.771
company, produces, EPS: 0.012 (EUR)
markets, distributes and sells Beta 5y: 1.00
milk products in the People’s
Republic of China. In
addition, it markets and
distributes goat milk based
nutrition products, it
manufactures, processes and
packages nutrition products.
It is listed on The Stock
Exchange of Hong Kong
Limited (SEHK).
Dutch Lady Milk Industries Dutch Lady Milk Industries Stock price: 9.941 (EUR)
Bhd Berhad manufactures and Market capitalization: 636.257
distributes various dairy EPS: 0.359 (EUR)
products primarily in Beta 5y:0.29
Malaysia. The company is
based in Petaling Jaya,
Malaysia. Dutch Lady Milk
Industries Berhad is a
subsidiary of
FrieslandCampina DLMI
Malaysia Holding B.V. It is
listed on Kuala Lumpur Stock
Exchange.
Jordan Dairy Company Ltd. Jordan Dairy Company Ltd. is Stock price: 7.43 (EUR)
engaged in the production Market capitalization: 29.733
of fresh milk in Jordan. The EPS: 0.3697 (EUR)
company was founded in Beta 5y:
1989 and is based in Amman,
Jordan. It is listed on Amman
Stock Exchange.

Appendix 28: Albalact financial ratios versus Peers
6.00
5.00
4.00
3.00
2.00 Total Assets Turnover
1.00 Current Ratio
- Debt-to-equity ratio
Return on Capital
Source: Team calculations
2.50
2.00
1.50
1.00
S.C. Albalact S.A.
0.50
Peers Average
-
Source: Team calculations
Ratios analysis is used to support the process of comparison between Albalact and peers. The charts
above show the level of for ratios relevant for 2014. Total Assets Turnover shows that Albalact has potential to
grow the efficiency of using the assets in order to generate sales.
Albalact has a current ratio below industry average. A low value of the current ratios may indicate that
Albalact has difficulty meeting current obligations. However, a low current ratio can be supported by a strong
operating cash flow.
The debt-to-equity ratio for Albalact is higher than the average of the peers, meaning that Albalact has
a higher level of financing its growth with debt. There may be a risk for the company if earnings do not exceed
the cost of borrowed funds.
The return on capital for Albalact is lower than the average value for peers. We expect Albalact to be
more effective in the next five years in turning capital into profits.
Appendix 29: Z-Score Altman for Albalact
3.00
2.900
2.800
2.700
2.600
2.500
2.400
2.300
2.200
2.100
2.00
2009 2010 2011 2012 2013 2014
According to Altman, the Z-score can predict with 95% accuracy the possibility of a business going
bankrupt in a year and 72% within two years. A Z-Score between 1.8 and 2.8 means that the company has a
moderate risk of bankruptcy. The highest level of Z-Score was registered in 2009 (2.83). During 2009 and 2014 the
lowest value of Z-Score was 2.27 meaning that there was no high risk of bankruptcy for Albalact.
Appendix 30: Capital Structure Summary
Capital Structure Data 2009 2010 2011 2012 2013 2014
Currency RON RON RON RON RON RON

% of % of % of % of % of % of
Units Millions Total Millions Total Millions Total Millions Total Millions Total Millions Total
Total Debt
69.0 44.6% 59.0 40.7% 53.7 37.4% 33.9 25.8% 53.7 35.3% 65.7 38.0%
Total Common Equity

85.6 55.4% 85.9 59.3% 90.0 62.6% 97.4 74.2% 98.5 64.7% 107.2 62.0%
Total Minority Interest

- - - - - - - - - - - -
Total Capital
154.6 100.0% 144.9 100.0% 143.7 100.0% 131.3 100.0% 152.2 100.0% 172.9 100.0%
Debt Summary Data

Total Principal Due
69.0 100.0% 59.0 100.0% 53.7 100.0% 33.9 100.0% 53.7 100.0% 65.7 100.0%
Credit Ratios
Net Debt/EBITDA
2.0x - 3.2x - 2.3x - 1.3x - 1.5x - 2.1x -
Total Debt/EBITDA
2.1x - 3.3x - 2.5x - 1.5x - 2.1x - 2.5x -
Source: S&P IQ Capital

Appendix 31: Risk matrix
Supply
Macroeconomic Financial Regulatory Environmental Operational Reputational
chain
Supplier
Seasonality
delivery
high
Frequent
Foreign
Interest rate legislative
Exchange
changes
Potential
Adverse
Political damages to
weather
PROBABILITY
instability firm's
medium
conditions
reputation
Equipment
Market risk and plant
breakdown
Global
Free trade Disease
economic
agreements outbreak
crisis
low
insignificant moderate severe
IMPACT

Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest
in the securities of this company.
The author(s), or a member of their household, of this report does 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 Society of Buffalo
and Rochester, CFA Institute or the CFA Institute Research Challenge with regard to this
company’s stock.

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CFA Institute Research Challenge

Key stock statistics (Thomson Reuters, BSE)

With a tradition of more than 40 years, 140 4500

Financials Valuation Investment Risk

is the financial leverage. The growth of 8%

from 24% to 9%, the technological Macroec

Source: Team estimation based on Monte-Carlo analysis Source: Team assessment

Total Sales and Asset To Sales for Albalact General Information

INDUSTRY ANALYSIS AND COMPETITIVE POSITIONING

Romania displays significant increase in both Macroeconomic Environment

GDP growth (%, yoy) 2.8 3.5 4.1 3.6

Global and EU dairy market

Albalact Revenue and operating profit Overview

800.00 20.00 The strong financial position is driven by sustainable earnings

DCF Valuation Assumptions Discounted Cash Flow Valuation

Revenues (Sales) 474.9 493.9 513.7 534.2 555.6 577.8 600.9

Add: Depreciation 16.4 16.4 16.4 16.4 16.4 16.4 16.4

0% 0.21 0.19 0.19 0.18 0.17

8% 0.87 0.68 0.57 0.49 0.44 Sensitivity Analysis

1% 0.42 0.37 0.33 0.30 0.28

4% 1.15 0.64 0.47 0.39 0.34

Simulated Revenue Simulated TV growth Simulated WACC

Risk Matrix Macroeconomic Risks

Accounts Receivable 23.6 26.2 44.3 56.5 50.3 55 65.1

Inventory 22.2 21.4 19 21.8 21.8 18.4 31.7

Long-term Investments - 17.8 18 39 39 39 46.7

Long-Term Debt 35.2 25.7 20.6 18.1 13.6 8.8 3.8

Common Stock 66.5 65.3 65.3 65.3 65.3 65.3 65.3

Total Equity 84.3 85.6 85.9 90 97.4 98.5 107.2

Appendix 2: Income Statement

Revenue 193.8 226.9 261.3 338.3 343.8 424 474.9

Operating Income 8 23.3 4.5 9.5 10.7 11.6 9.6

Interest Expense -9.1 -3.4 -2.3 -2.2 -1.7 -1.5 -2.2

Other Non-Operating Inc. (Exp.) - -4.4 -1 -0.5 -0.4 -1.1 -0.3

Income Tax Expense 0.2 0.2 0.6 1 1.4 1.4 2

Earnings of Discontinued Ops. - - - - - - -

Minority Int. in Earnings - - - - - - -

Pref. Dividends and Other Adj. - - - - - - -

Appendix 3: Cash Flow Statement

Net cash flow from operating activities -

Net increase in Cash and Cash - - -

Installed capacity Utilization

Installed capacity Utilization

Volume Value Volume Value

Source: NBG Securities Source: NBG Securities

Volume Value Volume Value

Source: NBG Securities Source: NBG Securities

Volume Value Volume Value

Source: NBG Securities Source: NBG Securities

Volume Value Volume Value

Source: NBG Securities Source: NBG Securities

Albalact market share

Appendix 7: Albalact Net Income (% of Revenue)

Net Income (% of Revenue)

Source: S&P Capital IQ

Profit Margins Total Asset Turnover Financial Leverage

Net Total Total Shareholder's

Source: Team computations

Name Position held Description

Adrian Radovici coordinates the strategic, operational

Irina Mandoiu has been the Business Director of

She joined Albalact team in 2008 and since then she

Bogdan Paraschiv is the specialist who coordinates all