CFA Institute Research Challenge Hosted by CFA Society … · CFA Institute Research Challenge Hosted by ... marketing, sale and distribution of paints, ... Berger, British Paints,

CFA Institute Research ChallengeHosted by

CFA Society of MelbourneMonash University

Dulux Group at a Glance

Shares Outstanding 377,019,430

Market Capitalisation $1.67B

% of S&P 200 Index 0.12%

Free Float 100%

52 Week Trading Range 3.15 - 4.93

Net Debt $456.7M

Average Volume Traded

per day 1259508

Institutional

Shareholdings

41%

Last Dividend Paid

14/06/2013

8c 100% franked

Monash UniversityDuluxGroup

DLX AU/ DLX.AU (Bloomberg/Reuters) Price as of 22nd August 2013: $4.42

Australian Equities / Materials / Chemicals 12 Month Target price: $4.94

Recommendation: BUY Expected 52 week return 11.8%

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Volume ASX200 Rebased

DLX Share Price

Highlights

We initiate a coverage of Dulux with a BUY recommendation with a target price of $4.94, an upside of 11.8% to the current price of $4.42

DLX has outperformed the ASX200 by 20% over the last 12 months of trading and returned 72.66% since its initial public offering in July 2010.

DuluxGroup is ideally positioned to gain further market share and continue to outgrow its competitors through a better brand recognition and superior distribution network at Bunnings.

DLX has higher margins than competitors, a ROE and ROC significantly larger than the cost of capital as well as a solid balance sheet with consistent interest coverage.

Dulux has outperformed the ASX 200 by 20% over the last 12 months of tradingSource: ASX

Estimates (A$m)

Year End 2011A 2012A 2013E 2014E 2015E 2016E 2017E

Revenue 996.4 1067.8 1562.0 1618.1 1660.0 1703.8 1748.3

EBITDA 154.7 151.7 220.7 231.9 238.2 244.0 250.8

NPAT (excl significant items) 77.6 79.6 110.9 118.7 123.7 128.2 133.2

EPS (cents) 21.4 22.0 29.4 31.5 32.8 34.0 35.3

DPS (cents) 15 15.5 20.5 22 23 24 24.5

Dividend Yield 3.30% 3.40% 6.7% 7.1% 7.4% 7.7% 8.0%

PE Ratio 21.5 21 16.2 14.0 13.5 13.0 12.5

ROA 11.60% 11.22% 11.09% 11.58% 11.84% 12.04% 12.19%

ROE 56.05% 43.53% 66.32% 58.47% 51.53% 46.16% 41.83%

Monash University CFA Institute Research Challenge: DuluxGroup

DuluxGroup (DLX) is an ASX200 listed company that specialises in the manufacturing, marketing, sale and distribution of paints, surface coatings, home improvement products and garden care products to consumers and professionals. Although the group’s history can be traced back to 1918, DLX was properly established after being demerged from Orica Group’s consumer products division and formally listed on the ASX in July 2010. Since then, DLX has become the largest manufacturer of paint products in Australia, and also holds the dominant market leading position for paints in New Zealand. Recently, the group has expanded further into the home improvement market through its acquisition of Alesco Group (ALS), a building products manufacturer.

The company has operations in Australia, New Zealand, Papua New Guinea, China and South East Asia, however, operations in Australia account for around 78% of total revenues.

In total, DLX operates 12 manufacturing sites, 13 distribution centres and 73 trade centres, with products being sold via 5,000 retail outlets and 230 trade distribution outlets.

The four business segments that DLX operates in are outlined below:

1. Paints Australia (57% of Group FY12 revenues)

Manufactures and markets decorative paints, texture, protective and woodcare coatings products for both consumer and professional markets in Australia.

2. Paints New Zealand (22% of Group FY12 revenues)

Manufactures and markets decorative paints, texture, protective and woodcare coatings products for both consumer and professional markets in New Zealand.

3. Selleys Yates (14% of Group FY12 revenues)

Manufactures and distributes home improvement and garden care products in Australia and New Zealand for both consumer and professional markets.

4. Offshore and other (7% of Group FY12 revenues)

Manufactures and markets: powder, refinish, industrial coatings in Australia and New Zealand; DLX paints in Papua New Guinea; incorporates DLX’s China and Hong Kong operations under the DGL Camel International brand; and also DLX’s South East Asia coatings and home improvement business.

We identify the following key strengths that drive continued market share growth and form the basis of the company’s strong business fundamentals: continued investment into marketing, technical innovation and customer service; a diverse product portfolio; operations on an international scale, with global supply chain networks in Australia, New Zealand, Papua New Guinea, China, and South East Asia; leading market positions in their existing decorative paint products; an already well-established strong global brand name; and that over two thirds of the business is exposed to relatively stable drivers of demand such as renovations and maintenance of existing homes.

The recent acquisition of Alesco has increased DLX’s business cycle risk. Originally, 10% of the group’s revenues were derived from the cyclical ‘new housing’ sector, however, exposure has since doubled from 10% to 20% post-acquisition. Further drawbacks in recent times include DLX’s lack of control over input costs, specifically titanium dioxide, ALS’s Robinhood financial underperformance, and the higher insurance premiums incurred as a result of the Rocklea, QLD flood in 2011.

DLX’s current strategy can be described under three umbrellas:

Continuing organic growth: increasing current market share positions in core businesses through renovation trade channels with a focus on residential homes and a bias towards improving existing homes.

Establishing medium to long term growth options in high growth areas such as Asia: increasing foothold positions in their DGL Camel International business in China and Hong Kong, and DGL International in South East Asia; the strategic focus being on niche coatings and adhesives.

Adjacent category growth: leveraging current business strengths- particularly their established retail and trade channels – to expand their product portfolio in the residential home improvement market.

22/08/2013 3

Business Description

Australia78%

New Zealand

12%

Other Countries

10%

Revenue by Geography FY12

Paints Australia

57%Sellers Yates

22%

Offshore & Other14%

Paints New Zealand

7%

Revenue by Segment FY12

81.02 80.5 77.68

11.92 12.5211.79

7.06 6.98 10.53

0

10

20

30

40

50

60

70

80

90

100

FY 2010 FY 2011 FY 2012

%

Revenue by Geography

Other Countries

New Zealand

Australia

Source: Dulux Annual Report



TeamC2013 CFA Institute Research Challenge: DuluxGroup

Paint and CoatingsThe Australian Paint and Coatings Industry is split into two major segments:

Architectural and Decorative which incorporates 60% of paint sales and includes retail sales, trade sales to tradesmen and master painters. Trade sales are larger and have historically grown faster than retail.

Industrial encompassing 40% of sales which incorporates industrial coatings such as automotive. Dulux exited this business in 1995 but holds a small operation in automotive refinish which contributes to approximately 5% of Dulux sales. Manufacturing continues to leave Australian borders and Dulux is well positioned in that they have slowly exited this market and holds less than its competitors.

The Australian decorative coatings market is mature with slow growth prospects. It is also highly consolidated with the top 4 manufacturers controlling more than 90% of the market. Due to the concentrated market, companies have focused on vertical integration of their business segments to warn off other competitors.

Demand driversEconomic growth and disposable income are leading drivers to demand for paint products. This is particularly true of disposable income to premium paint brands which Dulux encompasses. The Australian economy has been growing at a steady rate of over 2% per year over the last 5 years. As a mature market, paints and coatings grows at a slower rate but is driven by Australian GDP growth.

Australia is still consuming less than average paint per capita compared to other developed nations showing a potential to grow given higher levels of marketing.

Industry sales are expected to grow over the next two years and remain stable going forward.

New housing makes up a significant but lesser proportion of (under 30%) Dulux paint sales which show a strong positive between housing approvals and Dulux paint sales.

Given the rest of Dulux paint sales are through renovation activity (over 70%) Alterations and Additions indicator is positively correlated to Dulux paint sales at .74. Retail turnover also paints a good picture of Dulux sales having a correlation coefficient of .78.

Pricing power of retailers is rising due to a consolidated market with fewer suppliers.

Supply DriversTechnological changes to the paints and coatings industry have been fairly minor as it is a mature industry. Research and development still plays a part but is mainly spent on mix, colour, gloss and consistency of batches.

Other technological improvements are focused on environmentally friendly paints to reduce exposure to environmental liabilities such as remediation at paint manufacturing sites.

Water based paints instead of solvent based paints help to reduce costs and hazards, water based paints now account for 90% of decorative paints globally.

Raw materials account for 70-85% of manufacturing costs and are driven by petrochemical and crude oil prices, these include:Pigments (Titanium Dioxide), Fillers, Solvents, Film formers (acrylics, alkyds, vinyls, polyester), Thinners

Titanium Dixoxide (TiO2) is the key raw inputThe TiO2 Industry is dominated by a few large players accounting for 70% of productionDuPont is the largest supplier, followed by Cristal, Tronox, Huntsman, Kronos

The rise in raw materials have historically been passed onto consumers successfully which minimises the impact on margins

TiO2 is expected to increase at average levels despite the short term volatility and a recent price correction.

20-30% of the raw material suppliers are located in the U.S. giving Dulux exposure to some USD risk

22/08/2013 4

Industry Overview and Competitive Positioning

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

1992

1994

1996

1998

2000

2002

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2006

2008

2010

2012

Australian GDP Growth Rate

0.0200.0400.0600.0800.0

1000.01200.01400.0

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94

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-201

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$M

Hardware, Building and Garden Supplies Retail Turnover

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Additions and Alterations

Source: ABS

Source: ABS

Source: ABS



Dulux has a brand portfolio of over 8 paint brands ranging in price and shelf space including: Dulux, Berger, British Paints, Walpamur, Cabot’s, Intergrain, Feast Watson and AcraTex.

Dulux, the only major Australian competitor, is the dominant leader of market share with 34% of the current market. PPG through its acquisition of Taubman’s has gained significant market share now standing at 26% from Wattyl. Wattyl, now owned by Valspar Holdings, holds 19% of the market. AzkoNobel trails with under 14% whilst all others such as Coates brothers hold less than 7% of market share. Dulux is the only remaining major Australian paint manufacturer after the acquisition of Taubman’s by PPG and Wattyl by Valspar.

Dulux is likely to acquire market share in the short to medium term and maintain it thereafter due to a strong brand position, this is also a protection against price wars between competitors. Historically Dulux has been able to fend off price wars due to an elevated brand name. It will take some time for competitors such as Wattyl and Valspar to establish the same premium brand positioning as Dulux. If major competitors are able to compete at the premium level Dulux will lose a major advantage but will sill have the largest distribution network compared to all other paint manufacturers.

Distribution channels have recently been strengthened at Bunnings with the removal of Dulux products at Master’s Trade stores. As Bunnings is the leading retail hardware store chain in Australia, Dulux will continue to receive large amounts of shelf space and premium brand recognition compared to its competitors. Currently Dulux is estimated to have 60% shelf space at Bunnings stores.

International competition is a potential but low risk threat. However, imports and exports of coatings and paints are small and declining due to higher freight on board costs, strict paint quality regulations and high transport risk.

A substitute for paint and coating products are not a threat as there are no real alternative coating products and the risk of any such product developing a grasp over the paint market is relatively low. The only true substitute comes from pre-painted building materials such as coated steel or fibre cement.

In the trade space, Dulux continues to dominate with its market presence. There is a preference for trade and master painters to choose Dulux over competitors as the paint cost relative to the labour cost of a master painter is low, leading to a preference in a more premium product that is trusted and better satisfies the customer.

Dulux also has the ability to distribute and retail its own paint at Dulux trade stores making the threat from bargaining power of buyers low.

Input cost increases are less of a concern to margins as DLX has 3 different raw materials suppliers, giving some flexibility in terms of pricing and volume. Historically these input cost increases have also been passed onto consumers thus maintaining current margins for Dulux. As a large purchaser, Dulux has a reasonable level of power since its suppliers provide a commoditised product. Dulux Group also has its own manufacturing and in-house resin development capabilities which provide additional leverage when dealing with suppliers.

Although the physical barriers to entry such as production plans and machinery are not significant, new entrants have historically been unsuccessful in the market due to the lack of established brand trust with customers as well as a well placed distribution channel through retail and trade merchants. This is evidenced by international competitor Nippon paint’s unsuccessful attempt to penetrate the Australian paint and coatings market and its exit in 2010.

22/08/2013 5

Industry Overview and Competitive Positioning

DuluxGroup

Rivalry Among

Competitors

High

Threat of Substitutes

Low

Bargaining Power of Buyers

Medium

Bargaining Power of Suppliers

Low

Barriers to Entry

High

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

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2022

Market Share Forecasted

Dulux PPG Azko Nobel Valspar Other

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Source: Team Estimates




Good entry PointWe issue a BUY recommendation for DLX with a target price of 4.94 and 11.8% upsidefrom current price level. DLX has a strong domestic position with further growth prospects internationally and cross selling capabilities through the recent acquisition of Alesco. Investors have reacted enthusiastically to the Alesco acquisition with the share price up 6%. Since its IPO on 13th July 2010 the share price is up 73.8% versus an increase in the ASX200 of 16%. Projected steady growth and advantageous business prospects should enable further strengthening of the Company’s position.

Valuation methodsOur 12 Month target price is weighted 25% to a DCF, 25% to domestic forward P/E and 50% to global forward P/E. We have emphasised P/E as it is the standard measure for Australian small cap industrials, with the DCF providing an alternative cross check.

DLX delivered solid results amidst difficult market conditions: Statutory Net Profit declined 12% in FY12. Difficult market conditions were reflected in the rising input costs and shrinking market size. However we believe input costs will stabilise moving forward. Furthermore, DLX’s ability to grow market share in a shrinking environment indicates strong brand equity.

Consolidation amongst existing businesses and acquisitions to drive earningsPost acquisition will see Dulux focusing on building brand equity and competitive advantages in their current businesses. The company plans on using its market leading position to build brand equity and increase market share of the fragmented garden supplies market. Continued marketing expense coupled with pricing controls will see Paints Australia margins stabilise to 14%. As the new housing market improves Dulux should see further market share gains and increased revenue from their Alescobusinesses. Cross-pollination of products and cost synergies will aid in the earnings recovery as the businesses are integrated.

Main price growth drivers moving forward:Continuing organic growth: increasing current market share positions in core businesses through renovation trade channels with a focus on residential homes and home improvements.Establishing medium to long term growth options in high growth areas such as Asia: increasing foothold positions in their DGL Camel International business in China and Hong Kong, and DGL International in South East Asia; the strategic focus being on niche coatings and adhesives.Adjacent category growth: leveraging current business strengths- particularly their established retail and trade channels – to expand their product portfolio in the residential home improvement market.

Strong financial position and high dividendsDLX has increased net debt significantly from the Alesco acquisition, however lower interest rates have kept interest expenses to a minimum, leaving the company with strong liquidity and cash coverage ratios. As a result of the one-off nature of acquisition costs and debt repayments ,the target D/A Ratio is forecast at 36%. DLX will aim to reinforce its strong financial position and high overall cash generation ability. This will enable the Company to continue its current dividend payout ratio of 70% (divends paid 2012 54.4 2011 38.6). With no more projected outlays for acquisition DLX will able to concentrate resources on the growth of Alesco and offshore businesses while building the strength of core business brands.

Housing market/Industry prospectsPaints and coatings industry has had sluggish but positive revenue growth of 1.4% due to a weaker new housing market over the last 12 months. On the upside renovations revenue growth has outstripped demand for new housing with 6.6% growth over 2012 and is forecasted to remain strong over the next year. Given that 40% of Dulux’s revenue comes from renovations alone this is a positive sign for the upcoming months. The most important input titanium dioxide price has stabilised in the medium term and is expected be steady in the long term. Crude petroleum, another vital input has also had a volatile month peaking at over $100 per barrel but is not expected to rise further in the near future. Gardening supplies retailing, a highly fragmented and competitive industry has had relatively slow growth averaging 1.5% over the last 3 year period, the water restriction ban lifting has helped to lift the industry out of a shrinking position. Growth prospects remain small but positive in Paints and Coatings as well as Gardening supplies.

Possible investment risksAs DLX is a stable business, the immediate risks to the company are small and unlikely. A further drop in new housing construction would have a negative impact on earnings, however this only makes up 20% of earnings, with the rest centred on renovation and additional housing investment. Any spikes in input cost prices can be moved through to customers as seen in the past year, minimising margin damages. However longer term there are distribution channel risks, growth strategy risks and potential changes in the competitive landscape.

22/08/2013 6

Investment Summary

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1998

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2001

Jul-

2004

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2007

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its

New Housing Approvals

Source: ABS

-300.0

-200.0

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DLX Cashflow Breakdown ($m)

Operating Cash Flow

Investing Cash Flow

Financing Cash Flow

0%

20%

40%

60%

80%

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DLX Dividend Payout Ratio

Dividends Paid Payout Ratio




0.0%

2.0%

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14.0%

16.0%

18.0%

0.0

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2011A 2012A 2013E 2014E 2015E 2016E 2017E

DLX Margins

Revenue EBITDA Margin

EBIT Margin NPAT Margin



22/08/2013 7

PE Multiples Valuation

DLX NTM Forward P/E Multiple 17.14x

Median Global Paint Competitors P/E Multiple 16.89x

Implied Premium 1.46%

Expected Premium 10.00%

P/E Multiple 18.579

NTM EPS 0.26

Equity Value (A$m) 1821.207

Target value per share $4.83

0.00x5.00x

10.00x15.00x20.00x25.00x30.00x35.00x

Global Paint Competitors: Forward P/E ratio

0.00x5.00x

10.00x15.00x20.00x25.00x

Domestic Housing-Related Stocks: Forward P/E ratio

PE Multiples Valuation

DLX NTM Forward P/E Multiple 17.14x

Median Domestic Housing-Related Stocks P/E Multiple 13.47x

Implied Premium 21.41%

Expected Premium 30.00%

P/E Multiple 17.511

NTM EPS 0.26

Equity Value (A$m) 1716.517

Target value per share $4.55

We have segregated comparables analysis into two segments: (1) Comparable global paint competitorsAlthough the Dulux, Wattyl and Taubman brands control ~90% of the Australian consumer paints

market, Wattyl is owned by The Valspar Corporation and Taubman is owned by PPG Industries, both offshore companies listed on the NYSE. As most of DLX’s other competitors are also listed overseas, we grouped and compared multiples across global paint companies as part of our comparables valuation.

(2) Domestic housing-related stocksWe made comparisons to domestic housing related stocks as we view them as an indirect comparison to

DLX in terms of their operations in housing-related products.

Factors to consider when comparing DLX to global paint competitors:They have different business compositions with varying end-markets, product ranges, mix between retail

and industrial consumers, and capital structures.They are at different points in their respective business cycles; the US housing market is recovering from

a cyclical trough, whilst the Australian housing market is at a cyclical low with near-to-medium growth prospects (eg. Australian renovation expenditure is growing faster than new housing).

DLX operates in a coatings industry that is highly consolidated and mature; 90% of the market is dominated by three main competitors, and there has been a history of mergers between companies being rejected by the ACCC (Wattyl and Taubmans merger was unsuccessful in 1996).

Factors to consider when comparing DLX to domestic housing-related stocks:We believe DLX has a longer business cycle with less volatility than domestic housing-related companies

as the majority (64%) of their revenue is driven by maintenance and home renovation end-consumers rather than new housing expenditure, which only accounts for 16% of the end market sales post-acquisition of Alesco.

DLX also has a dominant lead in market share, owning ~40% of the market share in consumer paints, which isn’t reflected in similar fashion by domestic housing-related stocks.

Key justifications for why DLX is trading at a premium to comparable companies:Leading market position: DLX has the number one position in terms of market share across its key

market segments (decorative coatings, woodcare coatings, powder coatings, DIY adhesives, consumer garden care products) in Australia and New Zealand. The group has gained market share in its core Australian decorative paints business every year since 2005. It is estimated DLX holds 40% of the market share in architectural and decorative paints alone. These factors give DLX significant scale and ability to outspend competitors on marketing, research and development and innovation.

Strong brand equity: DLX has a competitive brand name; with 80% recognition in the consumer paints markets. This allows DLX to maintain high market share, pass on high input costs to consumers, and maintain profitability due to the loyal and trusted image painted in consumer’s minds. However, it should be noted that international expansion can only able to be carried out through acquisition or creating a new brand as Akzo Nobel NV own the Dulux brand name offshore.

Established relationships with retail distribution channels: DLX holds ~60% shelf-space in Bunnings, and with DLX’s recent decision to sever their tie with Masters, it is expected that they will be able to leverage their existing relationship with Bunnings and garner more shelf-space for distribution. The decision to withdraw from Masters’ and Danks’ corporate stores demonstrates DLX’s significant market power and brand strength

Higher profitability: DLX’s scale and market dominance have allowed the company to generate competitive profit margins, being 7.5% last year and in the year prior to that – higher than AzkoNobel’s profit margins of 6.5% and more than double Taubman’s profit margins of 2.99%.

Stability of earnings: DLX has had an average revenue growth of 8% over the last three years, and exposure to the new housing development and construction is not exceedingly high, increasing from 10% to only 20% following the acquisition of Alesco. Revenue is driven mainly by housing renovations, which is much less volatile than new housing development and construction. In our opinion, this translates into DLX offering greater earnings certainty.

Valuation – Peer Group Analysis

Valuation

We valued DuluxGroup by utilising two standard approaches: Multiples Analysis and Discounted Cash Flow Analysis. The primary weighting is given to forward PER as it is the standard approach used for Australian small-cap industrial companies and takes into account the capital structure, and dividend policy of the firm for which we believe is appropriate in assessing DLX’s forward market value.

The incorporation of the DCF valuation provides a secondary valuation technique which we believed was necessary as DLX’s future cash flows are relatively stable and capable of being accurately captured. The DCF also provides an alternative cross-check that enables us to neutralise the distortion that using a pure P/E ratio might have, as different companies have different funding structures.

Currently, DLX trades at a NTM forward P/E multiple of 17.14x, which is a 1.46% premium over the median global paint competitors’ P/E multiple, and a 21.41% premium over the median domestic housing-related stocks P/E multiple. We believe that, after weighing up factors mentioned below, it is justified for DLX to trade at 10% and 30% premiums to the comparable sets respectively.

Valuation $ Weighting

Current Share Price $4.42

DCF $5.55 25%

Forward PE (Global Paint Competitors) $4.83 50%

Forward PE (Domestic Housing-related stocks) $4.55 25%

Blended (target price) $4.94





22/08/2013 8

Valuation – DCF

Forecasting assumptions:Revenue growth was forecasted by business segment with consideration to industry and macroeconomic factors. We have assumed EBIT margins to remain relatively stable. However the paints businesses will have slightly reduced margins as we have forecasted higher raw material input costs. Alesco margins have also been forecasted to improve as DLX management has identified Alesco as an area of improvement.

Capex has been forecasted to remain close to historical levels in proportion to revenues. Apart from the Alesco acquisition completed in January, there does not seem to be any other major acquisitions in the pipeline. While international acquisitions may be a possibility, it appears unlikely in the short to medium term as management is still focused on turning around performance of DGL Camel – the most recent international acquisition of DLX.

Inventory, receivables and payables have been forecasted at historical levels of revenues to calculate working capital balances.The terminal growth rate was calculated with the standard industry growth rate and long term average forecasted revenue growth for DLX. Consideration was also given to DLX’s relatively limited international organic growth prospects.

Our earnings estimates are shown below:

Estimates (A$m)

Year End 2013E 2014E 2015E 2016E 2017E

Revenue

Paints Australia 639.7 658.9 672.1 688.2 706.8

Paints NZ 82.2 88.5 92.9 95.8 97.1

Selleys/Yates 253.9 261.5 268.8 273.7 279.7

Garage Doors & Openers (pro-forma) 161.2 165.4 168.7 173.4 176.9

Parchem (pro-forma) 121.1 124.2 127.6 130.7 134.6

Lincoln Sentry (pro-forma) 168.2 174.5 177.4 182.8 187.1

Offshore & Other 162.8 173.4 181.4 189.1 196.6

Eliminations -27.1 -28.2 -28.9 -29.7 -30.5

Total Revenue 1562.0 1618.1 1660.0 1703.8 1748.3

EBITDA 220.7 231.9 238.2 244.0 250.8

EPS (cents) 29.4 31.6 33.0 34.1 35.5

WACC:The cost of equity was calculated using the CAPM. The model assumes a risk free rate of 5.0 % as a long-term estimate for the 10 Year Australian Government Bond rate, a market risk premium of 5.8% sourced from A. Damodaran’s calculations and a levered beta of 0.71. The cost of debt is 6.3% which is DLX’s average interest rate on borrowings. The tax rate is 30%. These assumptions give us a WACC of 7.80%

DCF Valuation:Using the assumptions stated above our DCF values DLX at A$5.55 per share. This values DLX at a forward P/E of 18.9x for financial year ending 2013.



Alesco AcquisitionThe acquisition of Alesco saw the net debt-equity ratio increase to 2.5 in 2013 from 1.26 in 2012, which will distort ROE moving forward. As this debt ratio is higher than historical periods (2010: 2.41) we predict deleveraging moving forward as debt is paid off. Management has reported that cost synergies from the acquisitions are greater than expected due to improvement in raw material and freight cost procurement. We expect these acquisitions to begin to have material positive impact on earnings going forward due to abovementioned cost synergies and the accompanying revenue growth when the housing market rebounds.

Cash Flows:OperationsDLX has a strong capacity to generate cash flows from operations, with free cash conversion forecasted to stabilise at over 60% in the long term (2017E:64.3%). In the analysed historical period DLX has presented positive operating cash flow. Investing cash flow was negative last period due to higher investments (Alesco), while capex dropped significantly. Historically capex has been relatively low, with spending coming in lumps. DLX presented negative financing cash flow which was due to high level of dividends.Cash flow coverageDLX has been unable to internally generate all the necessary cash for covering investments and paying out consistently increasing dividends. In previous years DLX has used outside sources of funding for any company needs where cash flows are insufficient .Therefore DLX may potentially have trouble paying consistent dividends at the planned payout ratio of 70% with operating cash, although we do believe this is unlikely. Unlike this year they will have no acquisition to fund. Operating cash flow has risen and with the acquisition completed, cash flow will go to paying dividends and repaying debt. We predict the strong cash flow generating capacity of DLX will be able to support the additional interest payments, its balance sheet, and also the dividend outlook. Overall cash sufficiency will be above 1 moving forward (2017E:1.52), enough to cover financing and capital maintenance. DLX liquidity ratios remained at relatively high levels (Current ratio 2012: 1.4 2011:1.47 ). We expect future level of liquidity ratios to be sufficient in the projected period (Current ratio 2013E: 1.47) in the case that possible external sources of financing will be needed for sustaining robust dividend policy. Earnings quality indicator has now moved above one and we forecast it to stay stable in the future.

MarginsIndustry MarginsDLX margins have been considerably stable over the long term, as well as significantly higher than peers, indicating strong brand equity. Dulux has been resilient in the face of price competition and the efforts of international brands (e.g Nippon Paints), as it continues to gain market share. Pricing PowerWhile on paper DLX profit margins declined from 9.4% to 8.4%, the previous year’s profit included an insurance uplift, with like for like profit margins only dropping from 7.47% to 7.46%. Furthermore, the gross margin (2012: 59.8%, 2011: 58.1%) actually increased. The stability of margins during adverse market conditions and rising input costs indicate the extent of DLX’s pricing power and the ability to pass on costs to consumers. While input costs have trended upward DLX has kept margins stable, indicating the pattern of Tio2 prices in the future should have a minimal effect on profit margins. We expect EBITDA margins to stabilise at 14%, due to the flow on of input costs, continued marketing effort and stabilising cost inputs.Segment MarginsHowever EBIT margins for the segments differ vastly . The Paints Australia division has a stable EBIT margin of 17%, while NZ has stayed around 12%, Selleys Yates dropped from 12% to 10% this year, and the Offshore businesses experienced a slight drop from 7% to 6%. We believe Selleys Yates will contribute to the margin increases as they become less reliant on low margin products and Bunning’s increases shelf space due to range reviews.

DuPont RatioWithin the analysed period, Dulux has earned a high return on equity (2012: 43.5%, 2011: 53.7%). The decrease in ROE can be attributed to the slight drop in profit margins and leverage from 2011 to 2012. The stability of sales turnover indicates that leverage and profit margins will have the most significant impact on future ROE. The acquisition of Alesco has increased leverage and therefore lifted ROE in the interim, however we believe DLX will deleverage moving forward. As the Alesco debt is paid off and operating cash flow increases, we expect leverage to drop and therefore ROE to decrease. Our analysis indicate ROE forecasts 2013E: 66.3% to 2017E: 41.8%. ROIC has followed a similar path to ROE dropping from 2011: 26.7% to 2012: 22.1%, however it is still comfortably higher than the cost of capital (7.8%) indicating the company is creating value for shareholders.

$230M New Debt from Alesco Acquisition: The all cash acquisition of Alesco will increase DLX’s leverage significantly, lifting Net Debt/EBITDA from 2012: 1.52 to 2013: 2.20. However, interest payments have only slightly increased for the half (13.3 to 10.6) due to the lower interest rates on new debt. EBITDA and Profit coverage ratios are still strong enough to cover the increased interest expense. Strong cash flow derived from the business negates the possibility of liquidity issues from the increased debt, with cash flow more than adequate to cover interest payments. Although cash flow will be estimated to drop in 2013 this is due to net working capital movements from the merger. Therefore while leverage has increased, due to the low cost of debt, predicted margin strength and stable coverage ratios, DLX will most likely be able to begin paying off debt.

22/08/2013 9

Financial Analysis

ROE 43.53%

ROA 11.22%

Profit Margin 7.46%

Asset Turnover

1.51%Asset/Equity

3.88

DuPont Ratio 2012

0.00

0.50

1.00

1.50

2.00

2.50

3.00

2011A 2012A 2013F 2014F 2015F 2016F 2017F

Debt to Equity Ratio

Net Profit Margins

Dulux PPG Azko Nobel

2010 7.13% 5.15% 7.28%

2011 7.47% 3.62% 7.16%

2012 7.46% 2.98% 6.50%

Gross Profit Margins

Dulux PPG Azko Nobel

2010 69% 48% 43%

2011 58% 48% 42%

2012 60% 51% 44%


Source: Annual Reports





22/08/2013 10

Corporate Governance and Social Responsibility

ManagementThe management team is composed of:Patrick Houlihan: the CEO of DLX since 2007, has been with DLX for 24 years.Stuart Boxer: CFO of DLX since 2008, and the five divisional general managers, with an average of 10 years’ tenure at DLX.Given the time spent and expertise in the industry across the management team, we believe DLX is well managed. In addition to the management team, DLX has also introduced the Company’s own audit and risk, remuneration, and safety and sustainability committees, and provides high quality, transparent, and detailed annual reports, indicating that DLX values its communication relationship with stakeholders.

Board5 of DLX’s 7 board members are non-executive directors, indicating board independence is maintained. In addition, the board Chairman is a non-executive director; in accordance with the Board Charter, non-executive directors on the board must be free from any business that interferes with their ability to remain impartial, and that fetters or materially affects the judgment of their decisions. We believe the Board’s adherence to the ASX principles and Board Charter, the company’s own code of ethics, show that DLX values board independence and a firm relationship with shareholders, employees, and clients in every decision made.

RemunerationRemuneration of non-executive directors, executive directors, and other key management personnel is composed of a fixed and ‘at-risk’ component to ensure incentives are aligned with shareholders best interests. The fixed component is based on skills, knowledge, experience, individual performance, and the market median. Non-executive fixed pay was increased 3% last year, with the maximum aggregate amount constant at $1.5m. The at-risk component rewards managers for achieving financial and business targets linked to the company’s annual business objectives and increasing shareholder value through quantitatively measured hurdles, comprising both a short-term and long-term equity incentive plan. The short-term incentive (STI) requires that DLX’s NPAT is higher than a threshold figure, in 2012 the minimum performance level was set at adjusted NPAT $77.6m. The long-term equity incentive plan (LTEIP) requires share price appreciation (TSR) and an EPS gateway to be achieved. The gateway for the LTEIP in 2012 was for EPS growth over a 3 year period to equal or exceed 4% per annum. The reward is paid out as in interest-free, vesting, non-recourse loan to purchase shares.Given the structure of remuneration at DLX, it is likely management and directors will act in a manner that does not conflict with the interest of shareholders and employees.

Social ResponsibilityDLX has a proven track record of being involved in improving the corporate , environmental landscape through their focus on social responsibility. DLX was the first to introduce water-based paints in the 1960s; offer low-VOC (volatile organic compounds) paint in the early 1990s; and the first to manufacture a line of carbon neutral paints certified by the Australian Greenhouse office; all due to major environmental considerations in the paints manufacturing industry outlined by the Australian Paints Manufacturing Federation.The move from solvent-based chemicals to water based chemicals has been a proven success, as DLX is currently the largest manufacturer of water-based paints in Australia.To compensate for waste production, DLX also realises the importance of allowing for an environmental provision in their balance sheet. DLX’s exposure to environmental liabilities is assessed with estimation to their remediation of soil and untreated waste. DLX also has a safety and sustainability committee to monitor operations and keep DLX’s business practices aligned with broader environmental concerns and making sure social impacts are being mitigated. There are several external regulatory bodies that also ensure compliance to legislation is being met. In light of the strong support that DLX has in maintaining social responsibility, in addition to their historic actions reflective upon their environmental concerns, we believe DLX’s future operations will always reflect sustainable practices in support of its vision of ‘a future without harm’.



MARKET: Unexpected downturn in renovation spend: 64% of DLX’s sales are driven by maintenance and home improvement, making it the key driver of the business. However, the RBA has recently cut the cash rate by 25 basis points to 2.5%, which could see a rise in new housing as well as renovations spending, which would contribute to DLX sales.

MARKET: Decline in consumer confidence: a drop in consumer confidence will result in a drop in revenues of Dulux’ major segments as consumers will be less inclined to purchase housing improvement products, hardware, and garden supplies. Major purchases and renovations will decline as consumers will be less likely to spend disposable income.

OPERATIONAL: Distribution risks: the recent decision in withdrawing DLX’s premium paint and woodcare products out of Masters’ and Danks’ corporate stores could negatively impact market position and overall sales. This may be justified by DLX’s reduction in Masters and Danks stores’ servicing costs in, and the re-allocation of time and resources on improving focus on existing distributors (namely Bunnings, Mitre 10, DLX trade centres, 3D inspiration).

OPERATIONAL: Key personnel risk: DLX’s price could take an unfavorable plunge if any of the key personnel were to leave their respective positions. The fact that key management personnel have all been long serving industry professionals (current CEO has been at DLXfor over 20 years and other key management personnel have been at DLX for an average of 10 years each) is indicative of their loyalty to the firm and highlights the unlikelihood that they will leave the Group.

FINANCIAL: Fluctuation in exchange rates: a portion of DLX’s raw material inputs are imported from overseas, making DLX particularly vulnerable to a fall in the AUD/USD. DLX’s revenues are also sensitive to NZD, PGK and RMB exchange fluctuations through their Paints NZ segment and operations in Papa New Guinea and China.

FINANCIAL: Change in market interest rates: DLX has exposure to interest rate risk primarily on their outstanding interest-bearing liabilities. DLX’s net financial liabilities are currently estimated to be in excess of $450m.

FINANCIAL: Rise in input costs: DLX is susceptible to commodity price risk. The main ingredients influencing the cost of paint are titanium dioxide, latex and resin. Increase in key inputs such as TiO2 (25% of DLX’s paint production costs) and crude petroleum can negatively influence margins if costs cannot be passed onto customers. Historically, as a premium paint brand DLX has been able to pass these costs on to consumers and their position in the market allows for a higher pricing structure leaving DLX’s competitors more susceptible to this risk. Furthermore, DLX has a diversified range of suppliers domestically and internationally, increasing the breadth of their input cost options, thereby further decreasing the financial burden of the risk. However, it should be noted that in recent months titanium dioxide prices have eased, falling ~10% on average in FY13.

OTHER: Entry of new global player either domestically or from abroad: As seen by Nippon paints, there have been attempts from foreign paint companies to break into the Australian paints market with little success, even though physical barriers to entry are low, there is a high barrier to success in the coatings market, as it is difficult to compete without an existing and active brand name that is trusted and well-developed by consumers.

If the impact of any of the risks highlighted above is more adverse than predicted, the stock will have some difficulty in achieving our target price. Conversely, if the risks prove to be less than anticipated, the stock could trade above the target price we expect.

DLX’s principal risks are financial risks, and are mitigated by policies introduced by the Treasury department and approved by DLX’s Board of Directors. They mainly involve investing excess liquidity, and using derivative and non-derivative financial instruments to hedge against price and rate movements. We believe many of the financial risks are inherent in all globally diversified business settings and are non-Dulux-specific.

22/08/2013 11

Investment Risks

Entry of new global player

either domestically


either domestically

Fluctuation in exchange rates

Rise in input costs


either domestically

Change in market interest rates

Unexpected downturn in

renovations spend


either domestically


either domestically

Decline in Consumer confidence

Distribution Risk


either domestically

Entry of new global player either abroad

Key personnel Risk

Market risk Operational risk Financial risk Other risk

insignificant moderate severe

IMPACT

low

mo

der

ate

hig

h

PR

OB

AB

ILIT

Y

RISK MATRIX



22/08/2013 12

Appendix I - Financials

Profit & Loss (A$m)

Year End 2011A 2012A 2013E 2014E 2015E 2016E 2017E

Revenue 996.4 1067.8 1562.0 1618.1 1660.0 1703.8 1748.3

EBITDA (excl significant items) 154.7 151.7 220.7 231.9 238.2 244.0 250.8

Depreciation & Amortisation 20.0 23.3 30.6 31.7 32.6 33.4 34.3

EBIT (excl significant items) 134.7 128.4 190.1 200.2 205.7 210.6 216.5

Net Interest 23.1 21.4 31.6 30.0 28.2 26.7 25.4

Pre-Tax Profit 111.6 107.0 158.5 170.2 177.5 183.9 191.1

Tax Expense 34.0 24.1 47.5 51.1 53.2 55.2 57.3

NPAT (incl significant items) 74.4 89.5 103.0 119.2 1.0 128.7 133.8

ESP cents (incl significant items) 25.7 24.3 27.3 31.6 0.3 34.1 35.5

NPAT (excl significant items) 74.4 79.6 110.9 119.2 124.2 128.7 133.8

EPS cents (excl significant items) 21.4 22.0 29.4 31.6 33.0 34.1 35.5

Sales Growth 3.4% 7.2% 46.3% 3.6% 2.6% 2.6% 2.6%

EBITDA Growth -0.8% -1.9% 45.5% 5.1% 2.7% 2.4% 2.8%

NPAT Growth (excl significant items) -14.5% 7.0% 39.3% 7.4% 4.3% 3.6% 3.9%

EPS Growth 26.6% 12.1% 22.6% 7.4% 4.3% 3.6% 3.9%

EBITDA Margin 15.5% 14.2% 14.1% 14.3% 14.4% 14.3% 14.3%

EBIT Margin 13.5% 12.0% 12.2% 12.4% 12.4% 12.4% 12.4%

NPAT Margin (excl significant items) 7.5% 7.5% 7.1% 7.4% 7.5% 7.6% 7.7%

Intereset Coverage - EBIT 5.1 7.2 5.4 6.7 7.3 7.9 8.5

Tax Rate 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0%

Return on Equity 53.7% 43.5% 66.3% 58.6% 51.6% 46.1% 41.7%

Return on Total Assets 11.1% 11.2% 11.1% 11.7% 12.1% 12.2% 12.4%

ROIC 26.7% 22.1% 24.4% 21.1% 21.4% 21.6% 21.7%

Cash Flow Statement (A$m)

Year End 2011A 2012A 2013E 2014E 2015E 2016E 2017E

EBITDA 154.7 151.7 220.7 231.9 238.2 244.0 250.8

Changes in Working Capital -36.6 11.8 -50.1 -5.6 -4.1 -4.2 -4.3

Net Interest Received / (Paid) -26.2 -17.8 -35.2 -30.0 -28.2 -26.7 -25.4

Tax Paid -25.6 -27.5 -47.5 -51.1 -53.2 -55.2 -57.3

Other 19.7 -1.7 -14.0 0.0 0.0 0.0 0.0

Operating Cash Flow 86.1 116.5 73.9 145.3 152.7 157.9 163.7

Maintenance Capex -23.1 -18.2 -39.1 -40.5 -41.5 -42.6 -43.8

Net acquisitions/Growth Capex -42.9 -11.3 -258.0 0.0 0.0 0.0 0.0

Other 0.2 -34.5 35.0 0.0 0.0 0.0 0.0

Investing Cash Flow -65.9 -64.0 -262.1 -40.5 -41.5 -42.6 -43.8

Dividends Paid -38.6 -54.4 -77.3 -82.9 -86.7 -90.5 -92.4

Equity Issued 1.3 4.6 0.9 0.0 0.0 0.0 0.0

Net Borrowings 11.1 -6.3 250.0 -30.0 -30.0 -25.0 -20.0

Other 0.0 -7.1 0.0 0.0 0.0 0.0 0.0

Financing Cash Flow -26.2 -63.2 173.6 -112.9 -116.7 -115.5 -112.4

Effect of FX Translation 0.9 -0.3 0.0 0.0 0.0 0.0 0.0

Net change in cash -5.1 -11.0 -14.6 -8.2 -5.5 -0.2 7.6

Dividends

Dividends per share (cents 15.0 15.5 20.5 22.0 23.0 24.0 24.5

Payout ratio 70.1% 64.6% 69.7% 69.9% 70.1% 70.6% 69.3%

Dividend Cover 1.4 1.4 1.4 1.4 1.4 1.4 1.4

Yield 3.3% 3.4% 6.7% 7.1% 7.4% 7.7% 8.0%

PE Ratio 21.5 21 16.2 14.0 13.5 13.0 12.5



22/08/2013 13

Appendix II - Financials

Divisional Analysis (A$m)

Year End 2011A 2012A 2013E 2014E 2015E 2016E 2017E

Revenue

Paints Australia 580.6 613.9 639.7 658.9 672.1 688.2 706.8

Paints NZ 82.5 72.3 82.2 88.5 92.9 95.8 97.1

Selleys/Yates 248.9 244.6 253.9 261.5 268.8 273.7 279.7




Offshore & Other 113.8 154.6 162.8 173.4 181.4 189.1 196.6

Change in Revenue

Paints Australia 4.3% 5.7% 4.2% 3.0% 2.0% 2.4% 2.7%

Paints NZ 3.9% -12.4% 13.7% 7.6% 5.0% 3.1% 1.4%

Selleys/Yates 7.8% -1.7% 3.8% 3.0% 2.8% 1.8% 2.2%

Garage Doors & Openers (pro-forma) 2.6% 2.0% 2.8% 2.0%

Parchem (pro-forma) 2.6% 2.7% 2.4% 3.0%

Lincoln Sentry (pro-forma) 3.7% 1.7% 3.0% 2.4%

Offshore & Other -7.9% 35.9% 5.3% 6.5% 4.7% 4.2% 4.0%

EBIT

Paints Australia 102.4 101.0 106.8 109.4 110.2 112.2 115.2

Paints NZ 9.7 8.1 9.5 10.0 10.5 10.8 11.2

Selleys/Yates 30.5 24.9 30.7 32.7 33.6 34.2 35.0




Offshore & Other 7.7 9.8 11.4 12.1 12.7 13.2 13.8

EBIT Margins

Paints Australia 17.6% 16.5% 16.7% 16.6% 16.4% 16.3% 16.3%

Paints NZ 11.8% 11.2% 11.5% 11.3% 11.3% 11.3% 11.5%

Selleys/Yates 12.3% 11.0% 12.1% 12.5% 12.5% 12.5% 12.5%

Garage Doors & Openers (pro-forma) 14.7% 15.2% 15.3% 15.3% 15.3%

Parchem (pro-forma) 11.0% 12.0% 12.4% 12.4% 12.4%

Lincoln Sentry (pro-forma) 6.0% 6.5% 7.0% 7.0% 7.0%

Offshore & Other 6.8% 6.3% 7.0% 7.0% 7.0% 7.0% 7.0%



22/08/2013 14

Appendix III - Financials

Balance Sheet (A$m)

Year End 2011A 2012A 2013E 2014E 2015E 2016E 2017E

Assets

Current Assets

Cash 39.5 28.5 13.9 15.3 14.2 13.5 20.6

Net Recievables 169.7 170.7 238.5 247.1 253.5 260.2 267.0

Inventories 135.7 129.2 186.9 193.1 198.1 203.4 208.6

Other 3.3 3.6 3.6 3.6 3.6 3.6 3.6

Total Current Assets 348.2 332.1 442.9 459.1 469.4 480.7 499.8

Non-current Assets

Property, Plant and Equipment 196.4 199.1 285.4 297.0 308.9 321.1 333.6

Intangibles 87.0 96.8 225.7 222.9 220.0 217.0 213.9

Other 37.1 81.8 46.1 46.1 46.1 46.1 46.1

Total Non-Current Assets 320.5 377.7 557.2 566.0 574.9 584.2 593.6

Total Assets 668.7 709.8 1000.1 1025.1 1044.3 1064.9 1093.5

Liabilities

Current Liabilities

Accounts Payable 193.4 199.7 275.1 284.3 291.6 299.4 307.1

Borrowings 15.7 13.5 13.5 13.5 13.5 13.5 13.5

Provisions/Other 28.5 24.4 24.4 24.4 24.4 24.4 24.4

Total Current Liabilities 237.6 237.6 313.0 322.2 329.5 337.3 345.0

Non-current Liabilities

Borrowings 245.9 245.2 495.2 475.2 450.2 425.2 405.2

Provisions/Other 46.7 44.1 24.4 24.4 24.4 24.4 24.4

Total Non-current Liabilities 292.7 289.3 519.6 499.6 474.6 449.6 429.6

Total Liabilities 530.3 526.9 832.6 821.8 804.1 786.9 774.6

Equity

Shareholder Capital 175.6 172.7 173.6 173.6 173.6 173.6 173.6

Reserves/Retained Profts -105.2 -105.3 -105.3 -105.3 -105.3 -105.3 -105.3

Retained Profits 68.1 102.5 86.3 122.0 159.0 196.7 237.6

Outside Equity Interests 0.0 13.0 13.0 13.0 13.0 13.0 13.0

Total Equity 138.5 182.9 167.5 203.3 240.2 277.9 318.8

Total Liabilities and Equity 668.7 709.8 1000.1 1025.1 1044.3 1064.9 1093.5



22/08/2013 15

Appendix IV - Financials

Cash Flow Ratios

Internal Financing of Capex (CFO/CAPEX) 1.79 4.70 0.80 4.71 4.82 4.83 4.83

Overall Ratio of Cash Sufficiency 0.85 1.40 0.37 1.60 1.61 1.57 1.52

Earnings Quality CFO(NI+DA+ΔNWC) 0.90 1.52 1.26 1.24 1.25 1.24 1.23

Free Cash Flow Conversion -7.09% 79.71% -127.62% 60.49% 62.98% 63.53% 63.99%

Cash Flow Conversion (CFO/EBITDA) 76.16% 91.30% 109.64% 83.62% 84.49% 84.53% 84.57%

Operating Cash Flow to NPAT 1.11 1.30 0.72 1.22 1.23 1.23 1.22

Key Financial Ratios

Year End 2011A 2012A 2013E 2014E 2015E 2016E 2017E

Liquidity Ratios

Cash Ratio 0.17 0.12 0.04 0.05 0.04 0.04 0.06

Quick Ratio 0.89 0.85 0.82 0.82 0.82 0.82 0.84

Current Ratio 1.47 1.40 1.41 1.42 1.42 1.42 1.45

Efficiency Ratios

Asset Turnover 1.49 1.51 1.56 1.58 1.59 1.60 1.60

NWC Turnover 9.01 11.34 13.67 13.40 12.87 12.31 11.73

Accounts Receivable Turnover 6.45 6.27 7.63 6.66 6.63 6.63 6.63

Days Receivable Outstanding 62.16 58.35 55.74 55.74 55.74 55.74 55.74

Accounts Payable Turnover 2.54 2.19 2.70 2.38 2.37 2.37 2.37

Days Payable Oustanding 83.86 79.57 74.87 74.87 74.87 74.87 74.87

Cash Cycle 37.14 30.26 31.72 31.72 31.72 31.72 31.72

Profitability Ratios

Gross Profit Margin 58.05% 59.77% 58.91% 58.91% 58.91% 58.91% 58.91%

EBITDA Margin 15.5% 14.2% 14.1% 14.3% 14.4% 14.3% 14.3%

EBIT Margin 13.5% 12.0% 12.2% 12.4% 12.4% 12.4% 12.4%

NPAT Margin (excl significant items) 7.8% 7.5% 7.1% 7.3% 7.5% 7.5% 7.6%

Assets/Equity (Leverage Financing) 4.83 3.88 5.98 5.05 4.35 3.83 3.43

Return on Equity 56.0% 43.5% 66.3% 58.5% 51.5% 46.2% 41.8%

Return on Total Assets 11.6% 11.2% 11.1% 11.6% 11.8% 12.0% 12.2%

ROIC 26.7% 22.1% 24.4% 20.9% 21.0% 21.2% 21.2%

Solvency Ratios

Debt Ratio (Liabilities/Assets) 0.79 0.74 0.83 0.80 0.77 0.74 0.71

Debt/Assets Ratio 0.39 0.36 0.51 0.48 0.44 0.41 0.38

Debt to Equity Ratio 1.89 1.41 3.04 2.41 1.93 1.58 1.31

Net Debt to Equity Ratio 1.60 1.26 2.96 2.33 1.87 1.53 1.25

Net Debt to EBITDA 1.44 1.52 2.24 2.04 1.89 1.74 1.59

Times Interest Earned Ratio (EBIT) 5.83 6.00 6.01 6.54 7.09 7.67 8.27

Times Interest Earned Ratio (EBITDA) 5.90 8.52 6.27 7.58 8.22 8.89 9.58

Cash Flow Interest Coverage Ratio 5.1 6.47 7.5 6.43 7.18 7.8 8.44

Profit Interest Coverage Ratio 3.36 3.72 3.51 3.88 4.26 4.67 5.09

Debt to Operating Cash Flow 3.04 2.22 6.88 3.37 3.05 2.79 2.57



22/08/2013 16

Appendix V – DCF Valuation

Discounted Cash Flows - DuluxGroup (A$m)

2013 2014 2015 2016 2017 2018

EBITDA 220.7 231.9 238.2 244.0 250.8 255.1

Less: Depreciation and Amortisation (30.6) (31.7) (32.6) (33.4) (34.3) (35.2)

EBIT 190.1 200.2 205.7 210.6 216.5 219.9

Less: Taxes (47.5) (50.9) (53.0) (54.9) (57.1) (58.5)

Add: Depreciation and Amortisation 30.6 31.7 32.6 33.4 34.3 35.2

Less: Change in Net Working Capital (50.1) (5.6) (4.1) (4.2) (4.3) (4.2)

Less: Capex (262.1) (40.5) (41.5) (42.6) (43.8) (44.9)

Unlevered free cash flow to firm (139.0) 134.9 139.6 142.2 145.7 147.5

Discount Period 0.05 1.05 2.05 3.05 4.05 5.05

Discounted Cash Flows (14.4) 124.8 119.9 113.4 107.8 101.4

DLX- DCF Assumptions and Output

Discount Rate (A$m) 7.71%

Terminal Growth Rate 2.50%

Terminal Value (A$m) 2905

PV of Terminal Value (A$m) 1,996

Sum of PV of Cash Flows (A$m) 553

Enterprise Value (A$m) 2,549

less Net Debt (A$m) (457)

Implied Equity Value (A$m) 2,092

Shares Outstanding (m) 377

Implied Share price (A$) 5.55

WACC Calculation

Target Capital Structure

Debt weighting 30%

Equity weighting 70%

Cost of Debt

Cost of Debt 6.30%

Tax rate 30%

After-tax cost of debt 4.41%

Cost of Equity

Risk-free rate 5.00%

Equity market risk premium 5.80%

DLX levered beta 0.71

Cost of Equity 9%

WACC 7.71%

DLX DCF Sensitivity Analysis (A$)

WACC

5.55 6.30% 6.80% 7.30% 7.80% 8.30% 8.80% 9.30%

Term

inal

Gro

wth

R

ate

1.50% 6.40 5.67 5.07 4.57 4.14 3.77 3.44

2.00% 7.14 6.26 5.55 4.96 4.47 4.05 3.68

2.5% 8.07 6.99 6.13 5.43 4.86 4.37 3.96

3.00% 9.29 7.91 6.84 6.00 5.32 4.75 4.28

3.50% 10.95 9.10 7.74 6.70 5.88 5.20 4.65

y = 0.7135x

-0.04

-0.03

-0.02

-0.01

0

0.01

0.02

0.03

0.04

0.05

0.06

-0.03 -0.01 0.01 0.03

Sto

ck R

etu

rn

Market Return

Beta Regression of DLX on ASX200



22/08/2013 17

Appendix VI – Dulux’s Brand Portfolio

Source: Dulux website

Coatings

Home Improvement

Construction Products & Equipment

Garage Doors & Openers

Garden Care

Cabinets, Window Products & Appliances


http://www.dulux.com.au/

http://www.dulux.com.au/specifier/our-brands/dulux-acratex

http://www.dulux.com.au/specifier/our-brands/dulux-powder-coatings

http://www.duluxprotectivecoatings.com.au/

http://www.dulux.com.au/specifier/our-brands/dulux-refinish

http://www.dulux.com.au/specifier/our-brands/dulux-envirosolutions

http://www.cabots.com.au/

http://www.feastwatson.com.au/

http://www.intergrain.com.au/

http://www.britishpaints.com.au/

http://www.berger.com.au/

http://www.duluxgroup.com.au/Our-Brands/Our-Brands/default.aspx

http://www.opelpaint.com/

http://www.levenepaint.com/

http://www.selleys.com.au/

http://www.rotacota.com.au/

http://www.hillmark.com.au/

http://www.polyglaze.com.au/

http://www.poly.com.au/

http://www.parchem.com.au/

http://www.concreteplus.co.nz/

http://www.bnd.com.au/

http://www.ata-aust.com.au/

http://www.garador.co.nz/

http://www.dominator.co.nz/

http://www.yates.com.au/

http://www.hortico.com.au/

http://www.duluxgroup.com.au/Our-Brands/Our-Brands/default.aspx

http://www.ratsak.com.au/

http://www.lincolnsentry.com.au/

http://www.robinhood.co.nz/


22/08/2013 18

Appendix VII – Dulux’s Asia Pacific Reach

Source: Dulux Presentation



The Australian economic outlook is an important factor to consider when looking to invest in Dulux. Dulux segment revenues are all closely related and are impacted by economic growth, inflation and employment. It is less sensitive to global market forces as the majority of its segments are positioned and focused in the Australian and New Zealand area. It is to be noted however, that the input costs for many of Dulux’s major segments are in USD and there is a risk of further AUD drops leading to higher costs.

Australian GDPThe Australian economy is still growing at below historical rates at 2.4% over 2012 but is showing signs of acceleration growing 2.6% for 2013 up to June. The rate cuts have been an attempt by the RBA to attract increase international competitiveness and continue the expansion of Australia’s output.

InflationThe June inflation numbers of 2.4% CPI signalled that inflation is well contained as price levels have stabilised this year. This is further evidenced by the cutting of the target cash rate in August.

EmploymentThe labour force is relatively unchanged with participation rates not dropping blow 65% and unemployment edging higher up to 5.7% in July. If unemployment continues to move upward, it will be a focus for the RBA to target a more active labour force along with a growing economy.

Availability of Credit and Exchange RateWith the target cash rate at 2.5% an all time low, the RBA is taking a highly expansionary monetary policy to target spending in interest sensitive spending. The repercussions of this have also been felt in the AUD dropping 15% since April. The decision to leave the cash rate at 2.5% may lead to a further drop which may incentivise growth in exports and other domestic investment.

More specifically Dulux sales are particularly sensitive to:

The building and approvals of new dwellingsDwelling approvals have been stable and on the rebound after a substantial hit in mid 2012. Although it is yet to hit the levels at Dulux’s IPO, it is a positive sign of recovery on the housing market as a whole.

Disposable IncomeAs inflationary pressures stabilise and interest rates are lowered to all time lows, disposable income has eased and is at it’s highest index point showing that consumers are more willing to spend on renovations or other discretionary purchases including paint, gardening products and other home renovation products.

Renovation ActivityWith the RBA’s target cash rate at all time lows, the housing market has seen major improvements and it is likely that further capital will move to property in the form of building and renovation of houses. Given that the majority of DuluxGroup’s revenue arises from new housing and renovations alone, this is seen as a potential driver of new and growing demand for paint products, gardening products, home maintenance, garden care, garage doors and openers, cabinets, windows & appliances, and specialty coatings.

Consumer SentimentWestpac’s consumer sentiment index has hit 105.7 as of August 14th 2013, 4 points above the 3 year average, showing in particular that households are 23% more confident about their finances in the upcoming 12 months compared to last year, and are 14.7% more confident in buying a dwelling compared to August last year. This is a positive sign for Dulux’s coming year as consumers are more willing to spend in general particularly housing due to financial security

22/08/2013 19

Appendix VIII - Economic Outlook

Westpac Consumer Sentiment ReportAverage Aug-11 Aug-12 Jul-13 Aug-13 % Month % Year

Consumer Sentiment Index 101.7 89.6 96.6 102.1 105.7 3.5 9.4Family Finances a year ago 89.8 71.8 78.2 78.6 88.8 13 13.5

Family Finances next 12 months 108.5 87 91.8 103 113 9.7 23

Economic Conditions next 12 months 90.4 73.2 92.8 95.1 100.3 5.5 8

Economic Conditions next 5 years 90.9 88.3 94.9 103 102.5 -0.4 8

Time to buy a major household item 128 127.7 125.4 131.1 123.9 -5.5 -1.2Time to buy a dwelling 123.2 114.6 118.5 131.3 136.2 3.7 14.9Time to buy a vehicle 122.5 120.8 126.3 124.2 130.9 5.4 3.7

Key Economic Information

Target Cash Rate 2.50%

Inflation Rate 2.40%GDP Growth 2013 to date 2.60%

Unemployment Rate 5.70%

LFPR 65.10%

Exchange Rate AU/US $ 0.8991

M1 as of July 2013 ($B) 276.6

M3 as of July 2013 ($B) 1572.7

0

500

1,000

1,500

2,000

Weekly Average Equivalised Disposable Income

Lowest quintile

Second quintile

Third quintile

Fourth quintile

Highest quintile

02000400060008000

10000

Jul-

2010

No

v-20

10

Mar

-201

1

Jul-

2011

No

v-20

11

Mar

-201

2

Jul-

2012

No

v-20

12

Mar

-201

3

Number of New Dwellings Approved since Dulux's IPO

Source: RBA

Source: ABS

Source: ABS

Source: Westpac


TiO2The most significant input into the paint creation process is Titanium Dioxide. In its purest form, Titanium Dioxide is a bright white pigment that is ideal for the paint mixing process as colour and mix can be changed according to production needs. TiO2 is manufactured from the minerals ilmenite, rutile and, in smaller quantities, leucoxene, which are primarily sourced from mineral sand deposits, but also can be processed from hard rock deposits.TiO2 pigment is a mature industry which has been developed by the chemicals industry. While North America and Europe host the majority of plants, new plants under construction in China are starting to readdress this imbalance.

Leading producers include: DuPont, Cristal Global, Huntsman Corp.,Kronos Worldwide and Tronox.

In terms of mineral production, Australia and South Africa are leading producers. Since 2008/09, new African sources have come online in Mozambique and Madagascar.

In terms of tonnages, ilmenite is by far the largest mined TiO2 mineral. On average it has between 52-54% TiO2 content and is purchased, in the main, by those that manufacturer sulphate TiO2.

Rutile has almost double the TiO2 content at 92-95% TiO2 but is less abundant than ilmenite. The biggest commercially active sources are in Australia and Sierra Leone.

Leading producers of TiO2 minerals include: Iluka Resources (Australia), Exxaro Resources (South Africa), Rio Tinto (Australia), Kenmare Resources (Ireland/Mozambique), Bemax Resources (Australia), Consolidated Rutile (Australia) and Titanium Resources Group (UK/Sierra Leone).

Crude OilDulux input costs are also dependant on crude oil prices due to the reliance of chemical products such as Fillers, Solvents, Film formers (acrylics, alkyds, vinyls, polyester) and thinners to produce specific batches of colour or finish.

The price of crude oil has recently been volatile due to increased concerns in Syria and other oil producing regions. Crude Brent oil almost hit 2 year highs reaching over $115 per barrel whilst TWI oil indexes also touched highs of $109 per barrel.

This short term volatility in oil is expected to calm and oil prices to normalise in the medium to long term as political environments stabilise and normal output continues.


The production of paint requires the physical mixing of various ingredients in a predetermined ratio and quantity to achieve the correct consistency and colour. The ingredients are commonly tints, thinners, resins, oils and pigments. TiO2 is the purest and most common form of pigment currently being used in the paints and coatings industry. Dulux focuses on strict quality control through adhering to tested and experimented recipes to achieve a high quality mix. Some paint batches are specific and have certain requirements such as colour, weather resistance, washability, hiding power, gloss, metal anti-corrosion, and consistency, applicative purposes such as (brushing, dipping, spraying or roller coating). For this reason there are many different ingredients due to the formulation of each batch and a sophisticated tank farm is critical for success.

The process involves a combination of raw materials being mixed into a premix tank including dry pigments. Then the batches are grinded and mixed before being put through a dispersion mill. This process grinds down the pigment for colour characteristics. The batch is then recirculated to complete the mixing process.

The dilution process requires tinting and further thinning with solvents is achieved through an agitated tank. Imperfections are filtered through a straining process into a transfer tank. Before the paint is packed there is also a final check using centrifuges, screens or pressure filters to remove un-dispersed pigments. Finally the paint is packed into cans, buckets or drums and moved to storage or distribution.Source: Emerson Process Management

22/08/2013 20

Appendix IIX – The Paint Creation Process

Paper and Pulp14%

Plastics24%Paint, Pigment

and Coatings62%

TiO2 Consumption by end market

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

1950

1956

1962

1968

1974

1980

1986

1992

1998

2004

2010

Ton

nes

TiO2 Production v Consumption

Production

Apparent consumption

Appendix IX – Input Costs

Source: Industrial Minerals

Source: Industrial Minerals



22/08/2013 21

Appendix X – Porter’s Five Forces Analysis

0

1

2

3

4

5

Threat of New Entrants

Barganing Power of Suppliers

Barganing Power of Buyers

Rivary Among Competitors


Total Score of 2.4

Rivalry Among

Competitors

High


Very Low

Bargaining Power of

Buyers

Medium

Bargaining Power of

Suppliers

Low

Threat of New Entrants

Low

In the mature markets

which Dulux participates,

competition is extremely

high.

Paints and coatings is a

slow growing highly

concentrated market with

the top 4 players

contributing to more than

90% of all existing paint.

A premium brand is what

distinguishes Dulux from

all other paint brands

allowing for higher margins

and superior market share.

There is always a threat of

price wars and other paint

brands establishing similar

footing on the Australian

paint market giving this a

HIGH rating

There are no real

alternative coating

products in widespread use

and the risk of any such

product developing a

meaningful position in the

short to medium term

appears low.

Some risk from a shift to

pre-painted building

materials such as coated

steel or fibre cement.

A lack of true substitute

but the potential of a

future product that could

diminish paint sales gives

this threat a LOW rating

Hardware retailers such as

Bunnings, Masters and

other independent

retailers together control

>70% of the retail market

and thus have significant

buyer power.

In Bunnings, Dulux Group

enjoys premium

positioning on the shelves

and its share of the paint

category is estimated to be

as high as 60 per cent.

Given the recognition of

Dulux brands all across

Australia in most retail and

trade hardware stores it is

unlikely that Dulux

products would cease to be

purchased, however, the

significant power that

Bunnings holds over

distribution gives this

threat a MEDIUM rating

As a large purchaser, Dulux

has a reasonable level of

power since its suppliers

provide a commoditised

product.

DuluxGroup maintains 3

suppliers in each key

coatings product category

(resin, titanium dioxide and

packaging) in order to

provide alternatives and

competition between

suppliers.

DLX also has a competitive

advantage over

competitors as the major

resin producers provide

the firm with certain

proprietary products on an

exclusive basis.

Given the purchasing

power of DuluxGroup this

threat is given a LOW

rating

The physical barriers to

entry such as building a

paint mixing plant are not

significant.

However as seen by

Nippon paint’s short lived

presence in Australian

markets, brand recognition

and trust plays a large

factor in success.

New international or

domestic entrants are

unlikely due to the inability

to establish a marketable

brand with the same level

of history and customer

recognition as Dulux and

its competitors giving this

threat a LOW rating



22/08/2013 22

Appendix XI – Valuation: Peer Group Analysis

When observing comparable companies across different trailing and forward multiples, it can be observed that DuluxGroup consistently trades at a premium over the median for both global paint competitors and domestic housing-related stocks. This can be justified on the basis of their leading market position, strong brand equity, established relationships with retail distribution channels, higherprofitability, and higher stability of earnings.

When weighing the factors above, we believe that a 10% premium over global paint competitors’ median forward P/E, and a 30% premium over domestic housing-related stocks median forward P/E can be justified in our final target price valuation.

Global Paint CompetitorsLTM

EV/RevenueNTM

EV/RevenueLTM

EV/EBITDANTM

EV/EBITDA LTM EV/EBITLTMP/E

NTM Forward P/E

Akzo Nobel NV (ENXTAM:AKZA) 0.90x 0.93x 8.00x 7.90x 12.40x - 21.03x

Asian Paints Limited (BSE:500820) 3.50x 3.01x 22.60x 18.40x 24.70x 36.10x 29.06x

Clariant AG (SWX:CLN) 1.10x 1.09x 8.30x 7.80x 12.90x 19.30x 11.08x

Kansai Paint Co. Ltd. (TSE:4613) 1.00x 0.92x 8.30x 7.90x 11.00x 15.00x 14.91x

Nippon Paint Co., Ltd. (TSE:4612) 1.40x 1.34x 8.60x - 10.20x 14.60x 12.60x

PPG Industries Inc. (NYSE:PPG) 1.60x 1.57x 9.90x 10.60x 12.40x 19.10x 18.24x

RPM International Inc. (NYSE:RPM) 1.40x 1.33x 11.80x 10.20x 14.30x 46.50x 16.89x

The Sherwin-Williams Company (NYSE:SHW) 1.90x 1.76x 15.20x 12.00x 17.90x 26.50x 20.38x

The Valspar Corporation (NYSE:VAL) 1.70x 1.50x 10.90x 9.60x 12.80x 19.40x 15.56x

Average Global Multiple 1.61x 1.49x 11.51x 10.55x 14.29x 24.56x 17.75x

Low 0.90x 0.92x 8.00x 7.80x 10.20x 14.60x 11.08x

Median Global Multiple 1.40x 1.34x 9.90x 9.90x 12.80x 19.35x 16.89x

High 3.50x 3.01x 22.60x 18.40x 24.70x 46.50x 29.06x

DuluxGroup Limited (ASX:DLX) 1.70x 1.37x 14.10x 10.40x 17.30x 22.10x 17.14x

Premium/Discount to median 17.65% 2.19% 29.79% 4.81% 26.01% 12.44% 1.46%

Domestic Housing-Related StocksLTM

EV/RevenueNTM

EV/RevenueLTM

EV/EBITDANTM

EV/EBITDA LTM EV/EBIT LTM P/ENTM Forward

P/E

Adelaide Brighton Ltd. (ASX:ABC) 2.00x 1.91x 8.80x 8.40x 11.60x 14.40x 13.47x

Bradken Limited (ASX:BKN) 1.10x 1.11x 7.80x 6.60x 11.60x 14.60x 10.59x

Cardno Limited (ASX:CDD) 0.90x 0.87x 5.80x 7.30x 6.70x 11.70x 11.88x

CSR Limited (ASX:CSR) 0.70x 0.70x 8.10x 6.50x 19.40x - 19.38x

GWA Group Limited (ASX:GWA) 1.80x 1.67x 13.30x 10.20x 18.20x 26.00x 17.79x

Average Domestic Multiple 1.30x 1.25x 8.76x 7.80x 13.50x 16.68x 14.62x

Low 0.70x 0.70x 5.80x 6.50x 6.70x 11.70x 10.59x

Median Domestic Multiple 1.10x 1.11x 8.10x 7.30x 11.60x 14.50x 13.47x

High 2.00x 1.91x 13.30x 10.20x 19.40x 26.00x 19.38x

DuluxGroup Limited (ASX:DLX) 1.70x 1.37x 14.10x 10.40x 17.30x 22.10x 17.14x

Premium/Discount to median 35.29% 18.98% 42.55% 29.81% 32.95% 34.39% 21.41%



22/08/2013 23

Appendix XII – Valuation: Peer Group Analysis

0.00x

1.00x

2.00x

3.00x

4.00x

Global Paint Competitors EV/Revenue

LTM EV/Revenue Forward EV/Revenue

0.00x5.00x

10.00x15.00x20.00x25.00x

Global Paint Competitors EV/EBITDA

LTM EV/EBITDA Forward EV/EBITDA

0.00x

10.00x

20.00x

30.00x

40.00x

50.00x

Global Paint Competitors P/E

LTM P/E Forward P/E

0.00x

0.50x

1.00x

1.50x

2.00x

2.50x

Adelaide Brighton

GWA Group Limited

Bradken Limited

Cardno Limited CSR Limited DuluxGroup Limited

(ASX:DLX)

Domestic housing-related stocks EV/Revenue

LTM EV/Revenue Forward EV/Revenue

0.00x

5.00x

10.00x

15.00x

CSR Limited Adelaide Brighton

Cardno Limited GWA Group Limited

Bradken Limited

DuluxGroup Limited

(ASX:DLX)

Domestic housing-related stocks EV/EBITDA

LTM EV/EBITDA Forward EV/EBITDA

0.00x

5.00x

10.00x

15.00x

20.00x

25.00x

30.00x

GWA Group Limited

Bradken Limited

Adelaide Brighton

CSR Limited Cardno Limited DuluxGroup Limited

(ASX:DLX)

Domestic housing-related stocks P/E

LTM P/E Forward P/E



22/08/2013 24

Appendix XIII – Relative Multiples Analysis: DuluxGroup

We did not rely on relative multiples in our final valuation due to:

i. the lack of time DLX has been listed on the marketii. The general market performance in recent times

Following the relative multiple analysis, we observed that DLX is currently trading at a premium across historic multiples averages.

DLX historic PER: Over the last three years, DLX has had an average PER of 14.95x. Currently, DLX trades at 22.14x, a 32.47% premium to historic averages.

DLX historic EV/Revenue: DLX is currently trading at an EV/Revenue multiple of 1.71x, a 15.03% premium to the three year average of 1.45x.

DLX historic EV/EBIT: DLX’s three year EV/EBIT historic average is 14.93x, as opposed to the 13.72% premium of 17.31x that DLX currently trades at.

DLX historic EV/EBITDA: DLX is currently trading at an EV/EBITDA multiple of 14.07x, a 10.94% premium to the three year average of 12.21x.

We believe this is not evidence suggesting DLX stock is currently overvalued. The recent high multiples DLX trades at can be justified as DLX has recently completed an acquisition of Alesco Corporation Limited, which became delisted 28 December 2012, and has been projected to provide substantial cost and revenue synergies for the Group. Furthermore, the industry and market performance of the global paints sector in general shows signs of recovery from the recent months of subduedness (see competitors relative multiple analysis for Valspar, PPG Industries, and Akzo Nobel), with DLX’s major global paint competitors also trading above historic multiple averages.

0.00x

5.00x

10.00x

15.00x

20.00x

25.00x

30.00x

35.00x

40.00x

DLX Historic PER

P/E Average

0.00x

0.20x

0.40x

0.60x

0.80x

1.00x

1.20x

1.40x

1.60x

1.80x

2.00x

DLX Historic EV/LTM Revenue

EV/Revenue Average

0.00x

2.00x

4.00x

6.00x

8.00x

10.00x

12.00x

14.00x

16.00x

DLX Historic EV/LTM EBITDA

EV/EBITDA Average

0.00x2.00x4.00x6.00x8.00x

10.00x12.00x14.00x16.00x18.00x20.00x

DLX Historic EV/LTM EBIT

EV/EBIT Average



22/08/2013 25

Appendix XIV – Relative Multiples Analysis: Competitors (Valspar)

0.00x

0.20x

0.40x

0.60x

0.80x

1.00x

1.20x

1.40x

1.60x

1.80x

Valspar historic EV/Revenue

EV/Revenue Average

0.00x

5.00x

10.00x

15.00x

20.00x

25.00x

Valspar historic P/E

P/E Average

0.00x

2.00x

4.00x

6.00x

8.00x

10.00x

12.00x

Valspar historic EV/EBITDA

EV/EBITDA Average

0.00x

2.00x

4.00x

6.00x

8.00x

10.00x

12.00x

14.00x

16.00x

Valspar historic EV/EBIT

EV/EBIT Average

The Valspar Corporation is a global manufacturer and distributer of a wide range of coatings, paints and related products with primary paint operations in Australia through ownership of the Wattyl brand. Together, Dulux ,Wattyl and Taubmans dominate ~90% of the Australian paints market share. The company was founded in 1806 and is headquartered in Minneapolis, Minnesota.

Observing the charts above, it can be seen that as of late, Valspar has also been trading at a premium to the 3 year average relative multiples, indicating DLX’s current multiples aren’t an overvaluation of the stock. This highlights that analysis of DLX’s current multiples being above historic averages is not unwarranted, and is in fact a world-wide trend, due to favourable macro-economic factors underpinning demand and cost drivers for the paints industry as aforementioned in the report.



22/08/2013 26

Appendix XV – Relative Multiples Analysis: Competitors (PPG Industries)

0.00x

0.20x

0.40x

0.60x

0.80x

1.00x

1.20x

1.40x

1.60x

1.80x

PPG historic EV/Revenue

EV/Revenue Average

0.00x

2.00x

4.00x

6.00x

8.00x

10.00x

12.00x

PPG historic EV/EBITDA

EV/EBITDA Average

0.00x

2.00x

4.00x

6.00x

8.00x

10.00x

12.00x

14.00x

PPG historic EV/EBIT

EV/EBIT Average

0.00x

5.00x

10.00x

15.00x

20.00x

25.00x

30.00x

PPG historic P/E

P/E Average

PPG Industries is a globally diversified coatings and specialty chemical products company with major Australian operations through the Taubmans brand. Together, Dulux ,Wattyl and Taubmans dominate ~90% of the Australian paints market share. The company was founded in 1883 and is headquartered in Pittsburgh, Pennsylvania.

Observing the charts above, it can be seen that as of late, PPG Industries has also been trading at a premium to the 3 year average relative multiples, indicating DLX’s current multiples aren’t an overvaluation of the stock, and the premium analysed is actually industry-wide due to recent favourable macro-economic factors.



22/08/2013 27

Appendix XVI – Relative Multiples Analysis: Competitors (Akzo Nobel)

0.00x

0.10x

0.20x

0.30x

0.40x

0.50x

0.60x

0.70x

0.80x

0.90x

1.00x

Akzo Nobel historic EV/Revenue

EV/Revenue Average

0.00x

1.00x

2.00x

3.00x

4.00x

5.00x

6.00x

7.00x

8.00x

9.00x

10.00x

Akzo Nobel historic EV/EBITDA

EV/EBITDA Average

0.00x

2.00x

4.00x

6.00x

8.00x

10.00x

12.00x

14.00x

16.00x

18.00x

Akzo Nobel historic EV/EBIT

EV/EBIT Average

0.00x

5.00x

10.00x

15.00x

20.00x

25.00x

30.00x

35.00x

Akzo Nobel historic P/E

P/E Average

Akzo Nobel is a global specialty chemicals business, specialising in decorative paints and performance coatings founded in 1911 inAmsterdam, the Netherlands. Akzo Nobel owns the Dulux brand offshore, so we have used it as a comparable to mirror Dulux’s brand function overseas.

Observing the charts above, it can be seen that as of late, Akzo Nobel has also been trading at a premium to the 3 year average relative multiples, indicating DLX’s current multiples aren’t an overvaluation of the stock, but in fact a world-wide industry trend.


CFA Institute Research Challenge

Disclosures: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 informationis 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 Melbourne, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

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