Price: 340c Potential to capture more profit in beer ... · Potential to capture more profit in beer; MillerCoors' entry into US cider market a positive; GB premium cider continues

February 8, 2012

Equity Report: Company update

C&C Price: 340c

Potential to capture more profit in beer; MillerCoors' entry into US cider market a positive; GB premium cider continues to grow

www.davy.ie Bloomberg: DAVY<GO> Research: +353 1 6148997 Institutional Equity Sales: +353 1 6792816 Davy Research

Rating: OUTPERFORM Issued 30/06/09

Barry Gallagher [email protected] / +353 1 6149194

Richard O' Donovan [email protected] / +353 1 6148997

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C&C price (c) Price rel E300 beverages (rhs)

Key financials (€m) Year end Feb12E Feb13F Feb14F Revenue 488.5 505.0 529.9EBITDA 133.1 139.1 144.9PBT 108.2 120.3 128.0EPS Basic 28.5 31.7 33.5EPS Diluted (Adj) 27.6 30.5 32.3Cash EPS (Diluted) 34.1 37.0 38.7Dividend 7.2 8.0 8.4NBV 210.2 233.0 257.1Valuation P/E 12.3 11.1 10.5FCF Yld (pre div) (%) 9.7 9.8 10.5Dividend Yield (%) 2.1 2.4 2.5Price / Book 1.6 1.5 1.3EV / EBITDA 7.9 7.0 6.0Group Int. Cover (x) 35.9 N/A N/ADebt / EBITDA (x) N/A N/A N/A

Company data Reuters/Bloomberg/Xetra GCC.I/GCC ID/GCCSector BeverageShares (m) 337.4Daily No. Shares Traded (m) 0.912Free Float (%) 95.052 Week High/Low 369/270Capital Structure Mkt. Cap (€m) 1146.8Net Debt/(Cash) -149.8Deferred consideration/debt-related N/APref Shares/Non Eq Min N/AMinority interests N/AE.V. (€m) 997.0

Recent research and research resources Recent research and financial data on C&C Sector research and data on Beverage

Beer business has grown more than 2x since acquisition; we assess further profit potential in Scotland

• Regional consolidated beer markets offer good profit and margin expansion opportunity. There is considerable room to grow the beer business in Scotland, Northern Ireland and the Republic of Ireland.

• We believe that minimum pricing, if enacted, would be positive for C&C.

International expansion opportunities

• C&C's international cider division is growing 20% and we estimate will account for 8% of overall group EBIT in FY 2013F.

• Australian and US markets look particularly buoyant. MillerCoors has now entered the US cider market, and there is speculation that AB InBev will follow. This could be a catalyst for a step-change in category growth.

• Cider represents a miniscule part of the global long alcoholic drinks (LAD) market. The scale of the opportunity for C&C if cider was to begin to resonate as a beer alternative in the US market and become a larger part of the market is significant. Premium cider grows strongly; new entrants increase the competitive intensity but Magners fares well

• Premium brands such as Magners and Kopparberg continue to grow, but mainstream cider is declining.

• Barriers to entry are low, highlighted by the successful launch of AB InBev's Stella Cidre in 2011. Magners has fared better than its peers, highlighting management's capability and the strength of the Magners brand. Forecasting €111m and €117m in EBIT for February 2012F and 2013F respectively; reiterate 'outperform' rating

• C&C trades on 11x P/E (35% discount to sector) and has a FCF/EV of 10% (versus 6% for the sector). This rating is undemanding.

• We reiterate our 'outperform' stance. Please refer to important disclosures at the end of this report.

J&E Davy, trading as Davy is regulated by the Central Bank of Ireland. Davy is a member of the Irish Stock Exchange, the London Stock Exchange and Euronext. For branches in the UK, Davy is authorised by the Central Bank of Ireland and subject to limited regulation by the Financial Services Authority. Details about the extent of our regulation by the Financial Services Authority are available from us on request. All prices are as of close of business February 6th unless otherwise indicated. All authors are Research Analysts unless otherwise stated. For the attention of US clients of Davy Securities, this third-party research report has been produced by our affiliate, J&E Davy.

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Equity Report: C&C February 8, 2012

2 Davy Research

Contents

Executive summary 3 Growing importance of beer business 3 C&C is showing its intent to focus more on, and accelerate growth in, its export business; big players entering the US market 4 Premium cider continues to grow strongly; Stella Cidre takes share but Magners looks to have fared reasonably well 5 Mid-single-digit EBIT model with growing net cash position for deployment 7 Undemanding valuation 7

Growing importance of beer business 8 Tennent's offers opportunity for excellent returns 8 Irish beer business is growing strongly off a low base; structure of market presents opportunity 11 Potential impact of minimum alcohol pricing on C&C 14

International cider business offers a significant growth opportunity 21 North America – C&C holds 20% share of the nascent US cider market 22 Canada – offers both beer and cider possibilities 24 Australia – provides all the right ingredients for cider's development 25 Iberia 27 Other markets 27

GB cider – premium cider grows strongly, but much of market share is taken by AB InBev's Stella Cidre 28 Trends in GB cider and beer 28 Premium cider growing strongly; Stella Cidre is main driver 29 Private label suffers; premium cider outperforms 34 Pear and fruit flavours represent over one-third of the premium cider category in volume 36

Conclusion – premium cider continues to grow stronger in GB; international expansion opportunities for C&C 38

Ireland – headwinds remain but still a very attractive profit pool 39 C&C holds 80-85% share of Irish cider market 39 Contrasting performance of cider in UK and Ireland in recent years 39 Cider's share of Irish LAD market has remained stable in recent years 40

Mid-single-digit EBIT model with growing net cash position for deployment 41

Forecasts 41

Valuation 43

Appendix: UK alcohol trends 44

Contacts 45

Important disclosures 46


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Executive summary Growing importance of beer business

• The growing importance of C&C's beer business to the overall group is often lost in the excitement emanating from the international growth of cider as well as the focus on the more difficult UK and Ireland consumer markets. The beer business contributed €24m to EBIT in FY February 2011 and is adding value quickly; we expect it to contribute c.€32.5m in FY February 2012.

• We believe C&C's beer business highlights how attractive regional consolidated beer markets (overlooked by the global brewers) can be – offering good profits and margin expansion opportunities, primarily through self-help measures.

Tennent's offers opportunity for excellent returns

• Prior to the deal with AB InBev for Tennent's and the distribution of the AB InBev brands in Scotland, Northern Ireland and the Republic of Ireland, C&C had no presence in the beer market. The newly recruited management team, however, had extensive experience in the sector following their time at Scottish & Newcastle. They have used this experience to not only diversify some of the category-specific and country-specific risks of a pure cider play but also to provide an opportunity to extract excellent returns from what had become an underutilised Tennent's brand in AB InBev's large international portfolio.

• C&C bought Tennent's/AB InBev brands for £180m (€205m) or 8x EBITDA in 2009 and they contributed c.€13m of EBIT in that year. By our estimate of the EBITDA the business will contribute to the group for the full year to end-February 2012, the price paid would now represent c.4.5x EBITDA.

Assessing profit potential in Scotland

• Market structure and competitive intensity are the main determinants of a beer market's profitability. Our analysis suggests that there is considerable room in the Scottish market for Tennent's to capture more of this profit pool over time as it takes back a greater share of brand profits, improves value performance in the off-trade and reinvigorates what was an under-invested brand. C&C has some 40% of the Scottish on-trade (it makes nearly all its profit in this channel) and 25% share of the off-trade, with 32% share overall. The pub market structure in Scotland is more fragmented than the rest of the UK, with independents holding a higher share of the market. Independents, by their very nature, command less bargaining power than the big estates (tenanted/leased and managed pubs) and thus tend to be more profitable for beer producers.


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Significant room for Tennent's profit to increase

• The leading ale in Scotland, Greene King’s Belhaven Best, earned £11m in EBIT in the year to May 2011 (Greene King annual report). According to Greene King’s presentation on the Scottish market in late 2009, it said that Belhaven sold 230,000 hectolitres in Scotland and that it also sold 195,000 hectolitres of Tennent's through its wholesale network. Taking the total volume (Belhaven and Tennent's) of 425,000, this suggests an EBIT per hectolitre of about €27. This is some 50% higher than Tennent’s EBIT per hectolitre in Scotland of around €18, which we estimate for February 2012F. Given that 54% of Greene King’s volume in Scotland is Tennent's, this would suggest that either a considerable amount of Tennent's profit is being captured by Greene King or that the profit per hectolitre for Belhaven is considerable higher than €27.

• Tennent's is likely to capture more of this profit pool. The expiration of some unfavourable distribution agreements set up by AB InBev is allowing C&C to gain better access to this profit pool. We believe that two of the largest wholesale contracts signed under AB InBev expired in calendar Q4, which should aid margin expansion in February 2013F. An opportunity remains to bring further volume back in-house and to service contracts directly over the next few years as more agreements expire. Leveraging the strength of the Scottish portfolio with an appetite for more trade loans could also continue to improve profitability in Scotland.

Alcohol minimum pricing and its potential impact

• While it is unclear if, when and in what form it will be applied, there is a growing political will in the UK and Ireland to stop UK multiples from selling alcohol as a loss-leader to drive footfall.

• We believe that a reversal of the deflationary trend in the off-trade and one that favours the on-trade would be beneficial to C&C for a number of reasons.

C&C’s island of Ireland beer business is growing strongly

• In the Republic of Ireland, the beer division is delivering share growth off a very low base in an extremely profitable market.

• In Northern Ireland, the group is employing similar strategies to Scotland.

C&C is showing its intent to focus more on, and accelerate growth in, its export business; big players entering the US market

• Cider represents a minuscule part of the global LAD market – 17% in the UK, 12% in Ireland and less than 1% in the majority of other international markets. In markets such as the US, Australia and South Africa, cider is the fastest-growing LAD category, is exhibiting more than 20% growth and is premium price positioned.


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• Growth is being driven by leading domestic players. Of potentially greater importance, however, are the first tentative steps being taken by the large global brewers into cider as they look for categories adjacent to beer that offer higher growth and margin opportunities. MillerCoors' craft beer unit, Tenth and Blake, recently purchased Crispin Cider. Crispin, the number-three player, is the fastest-growing company of the main players. Tenth and Blake has approximately 17% share of the US craft beer market. According to trade press reports (Beer Business Daily), AB InBev is preparing to introduce a cider to the market later in the year. There is also noise in the trade that AB InBev will bring Stella Cidre to the US. AB InBev and MillerCoors hold some 80% share of the US beer market. We believe that the more investment in the category, the better for C&C. The scale of the opportunity for C&C if cider was to begin to resonate as a beer alternative in the US market and become a large part of the market is significant.

• Australia (all the right ingredients for growth) and the US (now that large players have entered and will help develop the category) look to hold the largest potential for C&C's export strategy. The geographic split is roughly 50% in North America, 20% Australia, 20% 'other markets' and 10% Iberia. C&C's international cider business is forecast to deliver 8% of group EBIT and 9% of sales in the year to February 2013F. This includes its recent US acquisition of Hornsby's Cider. Magners exports account for 15% of total Magners (1m hectolitres) volume. In the nine months to November 30th, volume grew 25% and underlying revenue rose 27%.

• Tennent's could be an interesting export beer play. There is little to no volume exported at present to markets such as Canada and the US; a decade ago, Tennent's was exporting some 600,000 hl.

• With its recent US acquisition, the in-market relationships agreed in Australia and Canada and the recent appointment of Joris Brams to the newly-created position of Managing Director of its international division, C&C is showing its intent to focus more on, and accelerate growth in, its export business. This heightened focus and the factors stated above can help C&C in its strategy to exploit the international opportunity and aid the international division in accelerating C&C's growth rate and, by extension, its rating.

Premium cider continues to grow strongly; Stella Cidre takes share but Magners looks to have fared reasonably well

• GB cider continues to grow volume and value ahead of beer in the off-trade – recording 4% volume growth (-3% beer) and price/mix 9% (+6% beer). Much of the price/mix is due to higher VAT/excise but underlying mix is strong in GB cider with higher priced premium


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ciders outperforming the market. Private label and Heineken’s Strongbow brand are the biggest losers.

• Off-trade premium cider grew volume by 28% in 2011, but some 90% of this growth was taken by AB Inbev's Stella Cidre. Cidre took significant share at the time of its launch in April/May, but recent trends show that Cidre is losing share and that Magners Apple is regaining share. C&C’s management has shown a strong capability. Of the incumbents in premium cider, C&C looks to have fared better than Heineken. In December, Magners value share of premium apple cider (due to the introduction of Stella Cidre) was 500bps lower year-on-year (yoy) compared to 900bps lower for Bulmers and 600bps lower for other cider. Magners Apple value share in December (36%) was 300bps higher than in May, while Cidre has declined 400bps since that May peak.

• Some 40% of the premium cider market is pear and fruit variants (split broadly evenly). Magners Pear has been very successful since its late introduction to the category, growing 4x in three years and up 61% in value in 2011 compared to the sector at 15%. The brand equity associated with Magners is clearly substantial, as is evident by the growth of Magners Pear. The fruit-flavoured sector has grown 50% in 2010 and 2011. Magners Specials have taken 8% share annualised of the off-trade premium fruit cider segment since their launch in October, and we see an opportunity for growth here. Magners holds c.33% of the apple and pear premium off-trade cider.

• The barriers to entry in cider are low. This fact, together with the power held by the big beer players, was underlined by the performance of AB InBev's Stella Cidre. However, brand equity will remain an important driver of consumption. Magners and Kopparberg jointly hold the top spot as cider drinkers' most preferred cider (Davy UK survey) and both brands grew strongly in 2011 (Magners volumes grew 19% and Kopparberg rose 59% in the GB off-trade) despite a host of new competition and the entrance of the world's largest brewer into the category. These performances shows that focused smaller brands/companies can compete with the larger brewers.

• As cider expands as part of the LAD market globally, it provides C&C with a significant opportunity for international expansion in markets outside the UK and Ireland. As this happens, it is also likely to increase competition in the UK and Ireland. To date, C&C has shown a capability to protect and grow its home markets despite heighted competitive intensity.


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Mid-single-digit EBIT model with growing net cash position for deployment

• We view C&C as a model that can generate mid-single-digit organic operating profit growth over the next number of years while generating €110m+ free cash flow each year. This can be invested in accretive deals to accelerate underlying growth or can be returned to shareholders. C&C will have a net cash position of €150m (15% of the current market cap) in 12 months time assuming that there are no deals or cash returns to shareholders in the interim. We view this as unlikely. We see both value-creating acquisitions and increased cash return to shareholders (progressive dividend policy or share buybacks) as viable options and not mutually exclusive.

• In C&C's most recent IMS (January 17th), it stated that it expected operating profit of c.€110m for February 2012F. We forecast operating profit of €111m and €117m for February 2012F and 2013F respectively.

Undemanding valuation

• C&C trades on a 11x (February 2013F) and 6.7x EV/EBITDA versus the Euro Stoxx food and beverage index on 15x P/E and 8x EV/EBITDA.

• Its unleveraged free cash yield (FCF/EV %) is close to twice that of its brewing peers (10% versus 6%), highlighting the cash generative nature of the business and its unleveraged balance sheet structure. This is an undemanding valuation.


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Growing importance of beer business The growing importance of C&C's beer business to the overall group has often been lost in the excitement emanating from the international growth of cider as well as the focus on the more difficult UK and Ireland consumer markets. The beer business contributed €24m to EBIT in FY February 2011 and is adding value quickly, and we expect it to contribute c.€32.5m in FY February 2012. C&C's beer business highlights how attractive regional consolidated beer markets, overlooked by the global brewers, can be – offering good profits and margin expansion opportunities.

Tennent's offers opportunity for excellent returns

Prior to the deal with AB InBev for Tennent's and the distribution of the AB InBev brands in Scotland, Northern Ireland and the Republic of Ireland, C&C had no presence in the beer market. The newly recruited management team, however, had extensive experience in the sector following their time at Scottish & Newcastle. They have used this experience to not only diversify some of the category-specific and country-specific risks of a pure cider play but also to provide an opportunity to extract excellent returns from what had become an underutilised Tennent's portfolio in AB InBev's large international portfolio of brands.

C&C paid 8x EBITDA in 2009 but looks more like 4.5x EBITDA today C&C bought Tennent's/AB InBev brands for £180m (€205m) or 8x EBITDA in 2009 and they contributed c.€13m of EBIT in that year. By our estimate of the EBITDA the business will contribute for the full year to end-February 2012, the price paid would now represent c.4.5x EBITDA.

Assessing profit potential in Scotland Market structure and competitive intensity are the main determinants of a beer market's profitability. Our analysis suggests that there is considerable room in the Scottish market for Tennent's to capture more of this profit pool over time as it takes back a greater share of brand profits; improves value performance in the off-trade; and reinvigorates what was an under-invested brand. C&C has some 40% of the Scottish on-trade (it makes nearly all its profit in this channel) and 25% share of the off-trade, with 32% share overall. The pub market structure in Scotland is more fragmented than the rest of the UK, with independents holding a higher share of the market. Independents, by their very nature, command less bargaining power than the big estates (tenanted/leased and managed pubs) and thus tend to be more profitable for beer producers.

Significant room for profits to increase The leading ale in Scotland, Greene King’s Belhaven Best, earned £11m in EBIT in the year to May 2011 (Greene King annual report). According to Greene King’s presentation on the Scottish market in late 2009, it said that Belhaven sold 230,000 hectolitres in Scotland and that it also sold 195,000 hectolitres of Tennent's through its wholesale network. Taking the total volume (Belhaven and Tennent's) of 425,000, this suggests an EBIT per hectolitre of about €27. This is some 50%

Figure 1: EBIT Feb 2012F

Beer business29.3%

UK cider27.7%

Irish cider37.3%

International5.8%

Source: Davy; company reports


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higher than Tennent’s EBIT per hectolitre in Scotland of around €18, which we estimate for February 2012F. Given that 54% of Greene King’s volume in Scotland is Tennent's, this would suggest that either a considerable amount of Tennent's profit is being captured by Greene King or that the profit per hectolitre for Belhaven is considerable higher than €27. Tennent's is likely to capture more of this profit pool. The expiration of some unfavourable distribution agreements set up by AB InBev is allowing C&C to gain better access to this profit pool. We believe that two of the largest wholesale contracts signed under AB InBev expired in calendar Q4, which should aid margin expansion in February 2013F. An opportunity remains to bring further volume back in-house and to service contracts directly over the next few years as more agreements expire. Leveraging the strength of the Scottish portfolio with an appetite for more trade loans could also continue to improve profitability in Scotland.

Alcohol minimum pricing and its potential impact While it is unclear if, when and, in what form it will be applied, there is a growing political will in the UK and Ireland to stop UK multiples from selling alcohol as a loss-leader to drive footfall. We believe that a reversal of the deflationary trend in the off-trade and one that favours the on-trade would be beneficial to C&C. Under minimum pricing, the average price of beer will increase by 22% in the off-trade yet would see no increase in the on-trade where Tennent's is the dominant lager brand. In addition, while price increases in the off-trade will lead to some volume declines, the increase in price will accrue to retailers and producers only. We further anticipate that low alcoholic beverages will do better on a relative basis than higher ABV products.

Table 1: C&C beer portfolio by country

Scotland Northern Ireland Republic of Ireland

Tennent's Tennent's Tennent's

Non-exclusive distributor for on-trade

Exclusive distributor on- and off-trade

Exclusive distributor on- and off-trade

Budweiser Budweiser (packaging only)

Stella Artois Stella Artois Stella Artois

Beck's Beck's Beck's

Beck's Vier Beck's Vier Beck's Vier

Hoegaarden Hoegaarden Hoegaarden

Leffe Leffe Leffe

Staropramen Staropramen Staropramen

Boddingtons Boddingtons Boddingtons

Bass Bass Bass

Source: Company data

Scotland – Tennent's has 30% of market We estimate that Tennent's has a c.32% share of the Scottish market, which we believe to be about 3.4m hl in size. The beer market in Scotland remains slightly indexed to the on-trade, with c.53% of volumes sold in this channel. Tennent's is, however, primarily an on- trade brand and sells c.67% of volumes in this channel.


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Re-investing in the brand After acquiring the Tennent's portfolio, management has re-invested in the brand, launching sponsorships with Scottish football clubs Rangers and Celtic while also continuing the sponsorship of popular music events such as "T in the Park". These moves have greatly improved the brand's health score. It is important to note that Tennent's is priced above Carling, Carlsberg, Foster's etc yet is growing share significantly in the on-trade, highlighting Tennent's brand strength in Scotland. This brand improvement as well as the introduction of new SKUs (e.g. bottled Tennent's is being introduced following the move of a dormant bottling line at Clonmel to Wellpark) has allowed C&C to begin to place the brand in a more premium position than it had in recent years, a move that should prove beneficial.

Increased pricing in off-trade Tennent's was a loss-leading brand in the off-trade under AB InBev ownership. C&C has increased pricing of Tennent's in the off-trade. The retail selling price in Scottish multiple grocers has risen by as much as 15% in the last year. However, off-trade volumes have declined as the group has sought to rebuild Tennent's value (note that this decline is primarily due to retailers giving it less shelf space/promotional profile rather than the consumer switching from the brand). Having said this, all together this return to value has been a big contributing factor to increased profitability for the brand. An increase in third-party contracted brewing, taking place at the Wellpark Brewery, as well as the flow-through of some synergies have led to margin expansion.

Further opportunities About 60% of the Scottish on-trade is free trade. Free trade is the largest profit pool. C&C currently services 2,200 accounts directly, with the remainder receiving their Tennent's from one of four or five wholesalers. The expiration of some unfavourable distribution agreements set up by AB InBev has allowed C&C to gain better access to the profit pool, again leading to increased profitability. We believe that two of the largest wholesale contracts signed under AB InBev expired in calendar Q4, which should aid margin expansion in February 2013F. An opportunity remains to bring further volume back in-house and to service contracts directly over the next few years as more agreements expire. Leveraging the strength of the Scottish portfolio with an appetite for more trade loans could also continue to improve profitability in Scotland.

Figure 2: Scottish beer market on/off split

On53%

Off47%

Source: Davy; company presentations

Figure 3: Tennent's on/off split in Scotland

On67%

Off33%

Source: Davy; company presentations


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Figure 4: EBIT per hl – H1 2012

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Two strategies for value extraction Value continues to be extracted from the brand in two key ways. In the island of Ireland, the strategy has been about growing market presence and gaining some share in what continues to be a highly profitable market. In Scotland, the strategy has been based on capturing more of the profit pool, taking out cost and reinvigorating as well as mildly repositioning what C&C regarded as an under-invested brand.

Irish beer business is growing strongly off a low base; structure of market presents opportunity

C&C has a very similar beer portfolio across the island of Ireland, with the main difference being the packaging rights held for Budweiser in Northern Ireland versus no such agreement in the Republic (Diageo contract brews Budweiser in the Republic of Ireland). C&C's beer business has grown strongly in the Republic of Ireland (ROI) since it acquired the Tennent's business from AB InBev and agreed a 20-year deal to distribute the AB InBev brands (ex-Budweiser and transnational off-trade). The Irish beer market is very profitable, primarily due to the structure of the market: Diageo and Heineken hold over 60% of the total beer market and have clear leading positions in their respective segments of stout and lager (as C&C does in the cider category). We do not have the exact revenue or EBIT figures per hl for Diageo or Heineken, but we would expect them to be higher than that for C&C's beer business in Ireland – EBIT per hl for C&C's Irish beer business in H1 was €26. This is comparable to the profitable US beer market, which is about €25 per hl (AB InBev and MillerCoors control 80% of the US


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beer market) and well above the €8-10 per hl earned for the UK beer market. C&C's cider business in Ireland earns some €80 EBIT per hl. While the economic backdrop and the switch from the on-trade to the off-trade are headwinds to this broader profit pool, it is still primarily market structure that influences returns. If C&C can continue to grow its share in beer, this profitable market may help to offset the negative top-line trends in its Irish cider business. The Irish beer market is 4.6m hl. C&C's Irish beer business sold 46,000 hl in the six months to August (H1) – this suggests that it has a circa 2% share of the Irish beer market. H1 revenue (€5.3m) and profit (€1.2m) for the Irish beer division were up 15% and 23% respectively in H1. With the cider business under pressure from deflation and falling volumes, C&C's Irish beer business may offset some of this if it can take further market share. Roughly every 1% share gain would add about €1-1.5m in EBIT. In the ROI, a distribution drive and some regional advertising (primarily focused behind the Tennent's and Beck's Vier brands) began in mid 2010. The strength of the off-trade beer portfolio as well as the ability to leverage on existing distribution capability for Bulmers has meant that C&C has been able to gain an estimated 2% of the highly profitable Irish beer market since the roll-out began. We believe there is about a 50/50 split between the Tennent's brand and the AB InBev brands for Irish beer volumes. Beer volumes in the ROI are +23% for the first nine months of the year, and we estimate that ROI beer will have full year volumes of c.100,000 hl for FY2012 on this basis.

Irish bar sales down 30% since 2007; trend likely to continue but decline to moderate Irish bar sales are down 30% since 2007, although the decline has slowed to mid-single-digits this year from double-digits in 2009 and 2010. Given the 2.5x pricing differential between the on-trade and the off-trade (according to Irish CSO data) and the difficult consumer environment, this trend is unlikely to alter unless there is some change in regulation (as we discuss later) in off-trade pricing or Irish consumer sentiment improves.

• If C&C can continue to grow its share in beer, this profitable market may help to offset the negative top-line trends in its Irish cider business


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The growing influence of the large UK multiples in the Irish market could exert more downward pressure on off-trade pricing. In the UK, some 60% of all alcohol is sold on promotion compared to 30% in Ireland.

Northern Ireland – C&C has over 25% share of LAD market Although the only physical difference between the beer portfolios in the ROI and in Northern Ireland is the packaging agreement for Budweiser in Northern Ireland, the Northern Ireland portfolio is in reality greatly helped by the existing strength of the Tennent's brand there. The Tennent's brand has a long history in Northern Ireland and benefits from close links and affinity with Scotland. Tennent's currently has about 15% share of the Northern Ireland beer market. We estimate the Northern Ireland beer market to be about 1.5m hl in size, implying Tennent's volumes of c.225,000 hl for the full year to February 2012. We estimate that C&C's AB InBev portfolio has an additional 6-7% share of the Northern Ireland beer market, adding a further 100,000 hl in volume. We believe that there is a 40%/60% on/off split in the Northern Ireland beer market, with Tennent's divided broadly in line with the market.

Figure 5: Irish bar sales yoy (%)

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Source: Irish CSO


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Trade loans can expand influence in Ireland While we have already acknowledged that the opportunity in beer on the island of Ireland is largely share based, we would also point out the potential on-trade opportunity, particularly in the ROI. Similarly to Scotland, there exists a significant amount of trade loans in the on-trade market in Northern Ireland. This is effectively an agreement whereby a brewer lends financial support to on-trade outlets in exchange for the exclusive use of the brewer's portfolio of products. With a strong portfolio of brands in the North, C&C has about a 20% share of on-trade outlets with a possible opportunity to expand this presence slowly as agreements expire. In the ROI, however, the practice of trade loans barely exists. While the ROI portfolio remains too underdeveloped to be utilised in this fashion for now, if the beer business continues to grow and a few additions are made to the portfolio, this could offer an opportunity in the longer term.

Potential impact of minimum alcohol pricing on C&C

Scotland's attempt to introduce minimum pricing for alcohol The Alcohol (Minimum Pricing)(Scotland) Bill is the second attempt by the Scottish Nationalist Party (SNP) to provide minimum pricing legislation for alcohol (i.e. to set a price below which a unit of alcohol cannot be sold). The latest proposal follows the implementation of the Alcohol etc. (Scotland) Act 2010, which came into effect at the beginning of October 2011. A number of social policies were enacted with this bill to help curb the continued problems of excessive alcohol consumption in Scotland.

• Bans were introduced on irresponsible promotions as well as on multi-product offerings providing a discount to the price of the individual product (i.e. if a bottle of wine costs £10, then three bottles of the same wine can cost no less then £30).

Figure 8: Tennent's share of NI on trade

0%

2%

4%

6%

8%

10%

12%

14%

16%

Tennents Magners Budweiser Bass StellaArtois

Becks

Source: Company reports

Figure 6: Percentage of on-trade outlets NI 2010 (tied by loan)

TNI20%

Diageo31%

Free49%

*TNI is Tennent's Northern Ireland Source: Company reports

Figure 7: Manufacturers' share of on-trade beer and cider - NI 2010

Molson Coors5%

TNI29%

Diageo61%

All others5%

Source: Company reports


15 Davy Research

• The act also contains the option to impose a social responsibility charge on large retailers of alcohol and tobacco.

However, under the earlier act, no formal action was taken on minimum pricing after Health Minister Nicola Sturgeon failed to persuade opposition parties on the merits of the policy during the previous parliamentary session. With the SNP now in majority government, this barrier has been lifted – leaving the door open for minimum pricing to be formally introduced in the immediate future. Published in early January, this latest bill, issued by the Scottish Parliament, contains a broad discussion on the key issues surrounding the planned implementation of minimum pricing. These include the rationale behind the policy, some thoughts on possible unintended consequences of the proposal and a discussion pertaining to the question of legality for the planned implementation. The proposed minimum price is not specified in the bill. Research conducted at the University of Sheffield into the likely outcomes following the introduction of minimum pricing models for a 45p per unit of alcohol minimum price. A more recent study from Sheffield suggests 55p as a potential minimum price.

What this legislation would mean for C&C For every adult in Scotland, 11.8 litres of pure alcohol are sold each year (an 11% increase since 1994, although broadly stable since 2005). By comparison, consumption in England stands at 9.6 litres per adult per year, 23% lower than in Scotland. A declining proportion of alcohol is also sold in the on-trade in Scotland, with 67% of all alcohol sales now conducted in the off-trade, where the average price of a unit sold is 45p compared to £1.34 per unit in the on-trade. Minimum pricing as a policy therefore has the potential to not only reduce overall consumption levels in Scotland but also to encourage some migration of consumers back to the on-trade by narrowing the price gap between a unit of alcohol sold in each channel. As the largest player in the Scottish beer market (c.32% share), the impact of minimum pricing legislation would be material for C&C. The Scottish beer market, in contrast to the overall alcohol market, remains slightly skewed to the on-trade, with 53% of volumes sold in this channel. Overall, Tennent's remains an on-trade focused brand, selling about 63% of its Scottish volumes in this channel. We understand that C&C makes the majority of its Scottish beer profits in the on-trade. By our estimation, Tennent's has a 39% share of the on-trade versus only 25% in the more fragmented off-trade. Within the off-trade, however, beer is the category in which the greatest number of branded products are currently sold below the often-mooted minimum price threshold of 45p. Brands that often retail below this threshold in various multi-pack variants include Tennent's as well as premium brands in other markets such as Budweiser, Carlsberg and Stella Artois. For cider and spirits, only a small share of branded products and private label are priced below this minimum threshold. Currently in Scotland, the average price of a unit of alcohol sold is three times more expensive in the on-trade than in the off-trade. As shown by

• Minimum pricing as a policy has the potential to not only reduce overall consumption levels in Scotland but also to encourage some migration of consumers back to the on-trade by narrowing the price gap between the off-trade and on-trade

Figure 9: Litres of pure alcohol sold per adult per annum

11.8

9.6

0

2

4

6

8

10

12

14

Scotland England

Source: Scottish Parliament


16 Davy Research

our calculations therefore, minimum pricing would force the average price of a pint in the off-trade to rise but would not affect pricing in the on-trade. A reduction in the pricing disparity between the off-trade and the on-trade should therefore offer some small encouragement for consumers to return to the on-trade where, as we have stated, the Tennent's brand makes most of its money. It is our understanding that C&C has been actively pushing through price increases for the Tennent's brand in the past year to 18 months in an effort to premiumise the brand ahead of the implementation of minimum pricing. The retail selling price in Scottish multiple grocers has increased by as much as 15% in the past year. This has led to some steep volume declines for the brand but will prove increasingly beneficial in terms of profitability if and when minimum pricing is enacted. We would also point out that Tennent's is quite a low-strength alcoholic drink (an ABV of 4%); although this is in line with Carlsberg and Carling, it is below other popular off-trade brands such as Budweiser and Heineken (5%). Stella Artois, the UK's leading off-trade brand, comes in 4% and 5% variants. Evidence from Canada, where different forms of minimum pricing have been in place across the various provinces for over two decades, shows that minimum pricing has been most effective when paired with a policy of incentivising consumers to drink lower-strength alcoholic beverages (see page 19). If a low ABV threshold is implicitly encouraged by the Scottish government, C&C may be better placed than other brewers to adjust its alcohol content. With Scotland easily the brand's largest market (c.70% of volumes), it would make sense for the group to adjust its production lines to suit new specific alcohol percentage points in a way that would not make as much commercial sense for bigger international brewers.

Legal proceedings likely to delay implementation of legislation It is likely, however, that legal proceedings will hold up the implementation of minimum pricing in Scotland. We do not expect the policy (if allowed by the EU) to be operational in the market until possibly early 2013. If the policy is implemented, we would see a negative impact for C&C only if a prominent parallel trade was to develop with Northern England. Tennent's naturally does not have the same degree of representation (in terms of shelf space) across the border as it does in Scotland, and so lost Scottish volumes would not be equally replaced in England were this trend to emerge. While there may be legal issues going down the minimum pricing route, rather than the route of higher taxes, the counterpoint to this (and presumably why Nicola Sturgeon remains confident that her bill will succeed) is that Scotland already has one of the highest excise rates in the world on alcohol and this does not prevent cheap off-trade sales from becoming increasingly prevalent. If anything, increased excise is more likely to push consumers out of pubs and into supermarket aisles to purchase their alcohol.

Potential positive impact for C&C if law is passed While we will not comment on whether we believe the law will eventually be passed (and, if not, on what taxation measures could be

• It is our understanding that C&C has been actively pushing through price increases for the Tennent's brand in the past year to 18 months in an effort to premiumise the brand ahead of the implementation of minimum pricing


17 Davy Research

passed instead), we believe that the policy will not be a negative for C&C as many expect and could end up being a positive.

Figure 10: Excise duty for beer in Europe (€/hl)

0

50

100

150

200

250

300

Rom

ania

Bulg

aria

Ger

man

y

Luxe

mbo

urg

Spai

n

Lith

uani

a

Fran

ce

Latv

ia

Cze

ch R

epub

lic

Port

ugal

Serb

ia

Mal

ta

Switz

erla

nd

Slov

akia

Belg

ium

Cyp

rus

Pola

nd

Aus

tria

Esto

nia

Cro

atia

Hun

gary

Italy

Russ

ia

Gre

ece

Net

herla

nds

Den

mar

k

Slov

enia

Irela

nd

Swed

en UK

Turk

ey

Finl

and

Nor

way

Source: The Brewers of Europe Sept ember 1st 2011, Russia from January 12th

England, Northern Ireland and ROI may follow suit Having said this, however, we note that there has been a lot of recent speculation from outside Scotland regarding the possibility of other governments following the SNP's lead on minimum pricing. As was the case when Ireland introduced the first smoking ban, it is usually not long before other jurisdictions follow suit. If minimum pricing was to be implemented across the UK and Ireland, then the prospect of parallel trading disappears. UK Prime Minister David Cameron has already been rumoured to be formulating plans to copy the SNP's proposal, while health authorities in the ROI and Northern Ireland are collaborating on a cross-border minimum pricing proposal with a preliminary deadline of December 2012 for the agreement of a minimum price. Tennent's has an estimated 25% share of the Scottish off-trade beer market. We understand that Tennent's, after recent price increases, is now priced above the average price of standard lager (c.41% of off-trade beer). Commodity lager is less than 1% of the off-trade and would presumably fall out of the market once minimum pricing is enacted. The tables below imply that, under a 55p minimum price, Tennent's would require a 25% increase in pricing compared to 44.9% for standard lager. Even premium lager would require its average price to increase by 9% at this level. We would therefore expect Tennent's volumes to hold up on a relative basis. How the extra revenue generated is shared between the producer and retailer will further determine the effects on profitability.

• There has been a lot of recent speculation from outside Scotland regarding the possibility of other governments following the SNP's lead on minimum pricing


18 Davy Research

Table 2: SNP proposal off-trade effects (50p per unit)

Current price ABV Volume Units Per unit Cost

Pint of Tennent's 4.0% 0.568 2.27 0.44 1

An average pint of beer 4.5% 0.568 2.56 0.45 1.15

An average pint of commodity lager 4.5% 0.568 2.56 0.26 0.66

An average pint of premium lager 4.5% 0.568 2.56 0.5 1.29

An average pint of standard lager 4.5% 0.568 2.56 0.38 0.97

Under 50p per unit min pricing Increase required

Pint of Tennent's 4.0% 0.568 2.27 0.5 1.14 13.6%

An average pint of beer 4.5% 0.568 2.56 0.5 1.28 11.1%

An average pint of commodity lager 4.5% 0.568 2.56 0.5 1.28 93.6%

An average pint of premium lager 4.5% 0.568 2.56 0.5 1.28 0.0%

An average pint of standard lager 4.5% 0.568 2.56 0.5 1.28 31.8%

Source: Nielsen; Davy estimates

Table 3: SNP proposal off-trade effects (55p per unit)

Current price ABV Volume Units Per unit Cost

Pint of Tennent's 4.0% 0.568 2.27 0.44 1

An average pint of beer 4.5% 0.568 2.56 0.45 1.15

An average pint of commodity lager 4.5% 0.568 2.56 0.26 0.66

An average pint of premium lager 4.5% 0.568 2.56 0.5 1.29

An average pint of standard lager 4.5% 0.568 2.56 0.38 0.97

Under 55p per unit min pricing Increase required

Pint of Tennent's 4.0% 0.568 2.27 0.55 1.25 25.0%

An average pint of beer 4.5% 0.568 2.56 0.55 1.41 22.2%

An average pint of commodity lager 4.5% 0.568 2.56 0.55 1.41 113.0%

An average pint of premium lager 4.5% 0.568 2.56 0.55 1.41 9.0%

An average pint of standard lager 4.5% 0.568 2.56 0.55 1.41 44.9%

Source: Nielsen; Davy estimates


19 Davy Research

How does minimum pricing offer upside for C&C – the Canadian example

The Canadian experience on minimum pricing offers some insight into the potential for Scotland (and possibly the rest of the UK and Ireland). Canada has imposed minimum pricing for over two decades, albeit in many different forms (each Canadian province applies its own specific rules). In Canada, minimum pricing is used as a mechanism to ensure overall consumption is not incentivised to rise (by raising the minimum price as purchasing power increases) while also in some provinces incentivising consumers to choose lower-strength alcoholic products over higher-strength ones. As previously stated, Tennent's – at 4% ABV and with the capabilities to adjust the alcohol content to suit any favoured alcoholic content point – could benefit were a similar policy to be followed in Scotland. A recent academic study, currently being referenced by Health Minister Nicola Sturgeon, "Does minimum pricing reduce alcohol consumption? /The experience of a Canadian province", makes clear that the effects of increased prices lead to a decline in overall consumption. Importantly from C&C's point of view, the study also suggests that minimum pricing is most effective when it is index-linked and when it is accompanied by other policies such as incentives for low-alcohol products. In British Columbia, where over 20 years of data exist, only spirits prices have been updated in line with the cost of living. Here, a 10% increase in the minimum price has shown decreases in ethanol consumption ranging from 1.5% for beer to 8.9% for wine and 3.4% for all drinks. In the Canadian province of Saskatchewan, however, which adjusts minimum prices to take into account inflation and which prices high-strength alcohol more prohibitively, a 10% increase led to an overall decline in consumption of 5.2%. In addition, a reduced tax on low-alcohol (up to 4%) beers means that these categories have increased their share of the beer market. As a caveat, however, we acknowledge that the proposition of lower-strength alcoholic drinks being incentivised as part of any proposal is complicated by the presence of the Scotch whiskey industry, which represents one-quarter of all British food and drink exports. The Scotch Whiskey Association (SWA) has been airing concerns not only about job losses if minimum pricing is introduced but also about how the policy would be interpreted with regard to protectionism in markets where the SWA has been campaigning to have import tariffs on liquor imports lowered. In addition, we point out another possible positive for C&C if minimum pricing is implemented. Contextually, the circumstances for minimum pricing are not the same in Canada as they would be in the UK. Much like several US states as well as even some European countries like Sweden, Canada has a state monopoly on alcohol – meaning that competition, particularly from large multiple retailers, has never driven the cost of a unit of alcohol down to the occasional below cost levels seen in Scotland and other similar jurisdictions. This also means that consumers' incentive to


20 Davy Research

abandon the more expensive on-trade is not as strong as it is in markets where retail monopolies do not exist.

EU legality could prove to be a stumbling block to passage of legislation In March 2010, the European Court ruled that the fixing of minimum prices for tobacco products by France, Austria and Ireland infringed EU law, pointing out that increased taxation could legitimately be deployed to discourage consumption and thereby protect public health. Scottish health minister Nicola Sturgeon insists her government's position is supported by legal advice, but many EU law specialists have publically disagreed. In addition, UK public health minister Anne Milton told a Westminster committee that, according to her advice, minimum pricing legislation was likely to contravene European free trade legislation. All these points are made in the previously mentioned Scottish parliamentary briefing. The relevant EU provisions in this matter are Articles 34 and 36 of the Treaty on the Functioning of the European Union 13. Article 34 prohibits member states from engaging in strategies that have the effect of restricting the free flow of goods between member states. It may be construed that Article 34 has been breached when a state treats its own goods in a more favourable way than those coming from outside the state. However, even when rules apply to both domestic and imported goods, if the rule impedes the free flow of goods across borders, it may still be construed that the article has been breached. Article 36 allows a public health defence to breaches of Article 34, but the burden is on the member state to show that the measure is proportionate and not arbitrary discrimination. As one of the unintended consequences of the provision is for retailers and producers of alcoholic products to benefit from the increased revenues, this provision could prove to be a stumbling block to the proposal. There is a great deal of case law and legal opinions put forward in the briefing, but what stands out for us is the judgment on minimum tobacco pricing, where the European Court of Justice, in considering the public health defence, stated the following: “…in so far as the protection of public health can be ensured by imposing high selling prices for manufactured tobacco, that objective can be fully achieved by appropriate taxation policies. Public health considerations played a role in the drafting and amendment of the Community directives on harmonisation in the field of excise duty on tobacco products, but the principle of the free determination of prices was not revoked. By contrast, a system of minimum prices is capable of producing damaging effects for public health because, by protecting producer's margins, that system provides them with extra revenue which can be invested to increase sales of manufactured tobacco”.


21 Davy Research

International cider business offers a significant growth opportunity Cider represents a minuscule part of the global LAD market – 17% in the UK, 12% in Ireland and less than 1% in the majority of other international markets. In markets such as the US, Australia and South Africa, cider is the fastest-growing LAD category, is exhibiting more than 20% growth and is premium price positioned. Cider is demonstrating many of the same characteristics as craft beer. Interestingly, growth is being driven by leading domestic players (Green Mountain Beverage in the US, Foster's in Australia and Distell in South Africa). Of potentially greater importance are the first tentative steps being taken by the large global brewers into cider as they look for categories adjacent to beer that offer higher growth and margin opportunities. These factors can help C&C in its strategy to exploit the international opportunity and aid the international division in accelerating C&C's growth rate and, by extension, its rating. C&C's international cider business is forecast to deliver 8% of group EBIT and 9% of sales in the year to February 2013F; this is up from 5-6% of group in February 2012F. This includes its recent US acquisition of Hornsby's Cider. Magners exports account for 15% of total Magners (1m hl) volume. In the nine months to November 30th, volume grew 25% and underlying revenue rose 27%.

Double-digit growth rate possible in medium term A continuation of double-digit growth looks achievable in the medium term given a number of favourable factors. This division could therefore significantly accelerate the group's underlying medium-term growth prospects. With its recent US acquisition, the in-market relationships agreed in Australia and Canada and the recent appointment of Joris Brams to the newly-created position of Managing Director of its international

• In markets such as the US, Australia and South Africa, cider is the fastest-growing LAD category

• C&C is showing its intent to focus more on, and accelerate growth in, its export business

Figure 11: International cider growth, 9 mths to end-November

24%

25%

25%

26%

26%

27%

27%

28%

Volume growth Underlying revenue growth


Figure 12: International geographic split

Other markets23%

Australia17%

Iberia8%

North America52%



22 Davy Research

division, C&C is showing its intent to focus more on, and accelerate growth in, its export business.

Geographic split The geographic split is roughly 50% in North America, 20% Australia, 20% 'other markets' and 10% Iberia. North America – C&C holds 20% share of the nascent US cider market

C&C has a 20% share of the US cider market through Magners (50,000 hl) and the recently acquired Hornsby's (60,000 hl). The US cider market is just 0.2% of the US beer market and is growing at some 20%. Magners depletions are running at 25%. Hornsby's is growing low single digit. C&C acquired Hornsby's, the number-two domestic US cider brand, from E&J Gallo Winery for an initial cash consideration of €16.4m, with an additional €3.6m payable subject to the performance of the business in the period to April 2012.

C&C believes it can improve Hornsby's brand performance With Hornsby's having been underutilised within the extensive wine portfolio of E&J Gallo, C&C believes that it can improve the brand's performance by leveraging its expertise as an exclusively cider-and-beer-focused company as well as by exploiting some of the key trends in the US LAD market such as the emergence of craft products and the growing interest in sweet-flavoured drinks. The broader portfolio benefits of acquiring a domestic US cider brand with a strong presence on the west coast and in the off-trade market (80% of cider volumes go through this channel) and pairing it with a premium Irish cider such as Magners (which has its strongest presence on the east coast and in the on-trade) is also interesting looking forward.

Figure 13: Cider's share of overall beer and cider market

12.0%

17.0%

0.2%0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Ireland UK USA

Source: Davy; UK and Irish Revenue; IMPACT

• C&C believes that it can improve the brand's performance by leveraging its expertise as an exclusively cider-and-beer-focused company as well as by exploiting some of the key trends in the US LAD market


23 Davy Research

Hornsby's currently produces two flavour variants – Amber Draft and Crisp Apple – but this could be expanded over time as management looks to innovate and maximise the brand potential.

Big players may be entering US cider market Cider has seen a growing interest from craft brewers (The Boston Beer Company launched a brand called Angry Orchard in October 2011), and the US domestic players continue to innovate and invest (US cider market leader Green Mountain Beverage, which has some 50% share of the category, is expanding capacity). But what may cause a step-change in growth is the fact that the large brewers are entering the US cider category. MillerCoors' craft beer unit, Tenth and Blake, recently purchased Crispin Cider. Crispin, the number-three player, is the fastest-growing company of the main players. Tenth and Blake has approximately 17% share of the US craft beer market. According to trade press reports (Beer Business Daily), AB InBev is preparing to introduce a cider to the market later in the year. The brand is reportedly called 'Evolve'. In addition, it is reported that AB InBev is looking at launching a cider under the Michelob beer brand name. There is also noise in the trade that AB InBev is to bring Stella Cidre to the US later in the year or next year. AB InBev's recent moves such as buying Goose Island and launching Shock Top highlight the growing interest of mainstream players in more vibrant, niche categories. AB InBev and MillerCoors hold 80% share of the US beer market. We believe that the more investment in the category, the better for C&C. The scale of the opportunity for C&C if cider was to begin to resonate as a beer alternative in the US market and become a large part of the market is significant.

Cider category growth in the US would be very meaningful for C&C We estimate that C&C will earn c.€25m in sales and €5m in EBIT in its US cider division in FY 2012/2013 (this assumes that it holds its 20% share of a cider market that has c.0.2% share of the US beer market). For illustrative purposes, if we were to assume cider reached 2% of the US beer market in time and C&C held its share (all else equal), it would put US cider EBIT at some €50m. This is not a forecast but merely highlights how meaningful the expansion in cider in such markets could be for C&C. The group forecast EBIT for February 2012 is €111m.

• We believe that the more investment in the category, the better for C&C


24 Davy Research

Table 4: US beer and cider market

Magners International Feb 2012F Feb 2013F Feb 2014F Feb 2015F Feb 2016F

Beer market size 24524 24524 24524 24524 24524

North America cider market 50 60 72 86.4 103.7

Growth % 20% 20% 20% 20% 20%

Cider share of beer market 0.20% 0.24% 0.29% 0.35% 0.42%

Magners share of cider 10% 20% 20% 20% 20%

Source: Davy; IMPACT

Was Sam Adams a cider drinker?

In the face of recent speculation that the two largest beer players in the US (AB InBev and MillerCoors) may enter the US cider market, we decided to explore why cider – the preferred alcoholic beverage 150 years ago (a position beer currently has) – now holds only a very small part of the US drinks market. The irony is not lost on us that founding father Sam Adams (also the name of the leading craft beer in the US) was probably a cider drinker. The contributing factors that led to cider's demise from its leading position in the US as a preferred alcoholic beverage in the 1840s are highlighted in an academic paper (see link below to the full article). "the temperance movement remains as a major culprit responsible for the decline of cider consumption in the U.S., but the association of cider with rural WASP culture was the added factor which distinguishes cider from beer or wine. Add to this the economics of beer production, growing urbanization, German immigration, a predatory beer industry, and a substitute drink in coca-cola, and there seems to be enough factors working together to explain why and how cider so completely disappeared." http://mason.gmu.edu/~drwillia/cider.html

Canada – offers both beer and cider possibilities

Canada represents 15% of North American volumes. Magners is growing by 50% in this market. The Canadian beer market, dominated by Molson and AB InBev (Labatt), is 22m hl. However, there are few data available on the size of the Canadian cider market. C&C signed a five-year partnership agreement last year with Moosehead in Canada. Moosehead holds the number-three position in the Canadian beer market. The agreement sees C&C teaming up with a local player that has good knowledge and distribution of the domestic market (the Canadian alcohol market is strongly regulated with high levels of government control) and a strong sales and marketing team. While there are good growth opportunities for cider, the Canadian market may hold more of an opportunity for C&C's Scottish beer brand, Tennent's –

http://mason.gmu.edu/~drwillia/cider.html


25 Davy Research

some 5m Canadians claim full or partial Scottish descent. A decade ago, Tennent's exported 600,000 hl globally; currently there are virtually no exports of Tennent's. So an opportunity in Canada may therefore exist given the cultural background. Australia – provides all the right ingredients for cider's development

Cider continues to be the fastest-growing alcohol category in Australia. In the 12 months to November 2011, Nielsen recorded off-trade cider sales growing 53% in value. Magners Australia volumes are expected to increase some 70% in February 2012F. Magners Australia represents c.20% of Magners' international volumes. We estimate that the Australian cider market is some 40m litres (400,000 hl) with Magners holding a 7-8% share. Cider accounts for just 2% of the overall beer market in Australia in volume terms and 3% in value sales.

Table 5: Market size – beer, cider and Magners

Hl

Australian beer market 18,000,000

Cider 400,000

Share 2.2%

Magners volume 29000

Magners share 7.3%

Source: Nielsen; Davy; Foster's

Foster's/SABMiller holds 70% share of the cider category. Foster's key brands are Strongbow, Bulmers and Mercury. Strongbow is the number-one cider brand. Foster's owns the Strongbow brand in Australia (Heineken owns the Strongbow brand in most other countries). Lion Nathan (Kirin), the number-two brewer, owns the cider brand Tooheys 5 Seeds. Local craft brewers are introducing a host of new

• Cider continues to be the fastest-growing alcohol category in Australia

Figure 14: Australian cider market share

Foster's71%

Others15%

Lion Nathan/ Kirin14%

Source: Foster's; Nielsen

Figure 15: Share of Australian alcohol market

Spirits3%

Cider1%

Beer70%

Wine15%

RTDs11%

Source: Kirin


26 Davy Research

ciders. Swedish ciders such as Kopparberg and Rekorderlig are also present in the market and are performing extremely well. The Magners brand is distributed and marketed in Australia by Suntory (the Japanese spirits player), which has a strong on- and off-trade presence in the market. It has a five-year agreement with C&C. There was a recent change in the nature of the relationship – we understand that this improves the incentives and security of the contract between Suntory and C&C. At present, Magners is shipped directly to Australia. Magners has recently introduced a number of new SKUs: its flavoured variants, Specials (called Selections in Australia), draught cider and 440ml cans. We understand that there may be an opportunity to introduce the Gaymers brand with the potential to build a relationship with some of the larger retailers. Tennent's was recently introduced into the market; as in Canada, there is also an opportunity in Australia for Tennent's to play the 'Scottish card'. Flavoured cider and pear cider are the fastest-growing part of the market. The Australian drinks consumer has a strong leaning towards sweet flavoured drinks; for instance, the ready-to-drink category is still a significant part of the market (despite significant tax increases) and Australia is the second-largest bourbon market in the world. As Australia become more meaningful to C&C, it offers an offset for some of the seasonality of the GB/Irish cider business. The peak trading period in Australia is October to February.

Australian cider market today may bear some similarities to Irish market of 15 years ago It is our view that the Australian consumer is more familiar with the proposition of cider compared to the US consumer. Arguably, the Australian and UK/Irish consumers are more entwined on a cultural level (heritage, sport, travel). The Australian cider market today may bear some similarities to the Irish cider market of 15 years ago (Ireland was also a market that, historically, consumed little cider relative to other alcohol such as whiskey/beer). The following chart shows how cider has evolved in Ireland over the past 20 years.


27 Davy Research

Iberia

Iberia represents 10% of Magners International volumes, down from a 30% share in 2007. The brand is primarily focused on tourist areas of Spain and Portugal. Volume was flat last year. C&C recently changed its distribution relationships in Spain. It is now dealing with just one main distributor who will give the brand more focus. This should also allow C&C to take out some overheads and to allocate capital to faster-growing parts of the international business. Other markets

While North America and Australia are the drivers of growth for C&C International, the Magners brand is growing strongly in 'other markets'. 'Other markets' represent 20% of Magners International volumes and grew by over 40% in H1. Magners is exported to over 30 markets globally. After Ireland and the UK, Scandinavian countries have the highest per capita consumption of cider in Europe. For instance, cider is 6% of the LAD market in Finland. Small local players such as Olvi, Kopparberg and Rekorderlig have enjoyed good growth in these markets.

Figure 16: Irish share of LAD long term

2.9%

3.6%

4.2%

5.0%

5.6%

7.1%7.5%

8.1%

8.9%

10.1%

11.6%

12.6%

11.4%11.8%

12.5%13.0%

12.2% 12.1%12.0% 12.1%

12.3%12.5%

0%

2%

4%

6%

8%

10%

12%

14%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Irish Revenue; Davy

• After Ireland and the UK, Scandinavian countries have the highest per capita consumption of cider in Europe


28 Davy Research

GB cider – premium cider grows strongly, but much of market share is taken by AB InBev's Stella Cidre C&C's GB cider division represents 36% of group sales and 25% of group EBIT. Since its launch in the GB market in 2006, the Magners brand has been a primary focus when looking at the performance of C&C. Arguably, Magners sparked off the growth that has been evident in the GB premium cider category. Magners represents 22% of group sales and 18% of group EBIT. The lower-margin Gaymers cider business accounts for 14% of sales and 7% of group EBIT.

Trends in GB cider and beer

Although imperfect, the Nielsen data (Scantrack) for the GB off-trade provide the best insight into trends in the cider and beer markets. The off-trade channel represents some 60% of GB cider volumes. We examine the trends over recent years.

Cider continues to grow; beer share declines Cider has continued to grow its share of the off-trade Long Alcoholic Drinks (LAD) market (from 13% in 2006 to 20% in 2011). Meanwhile, beer has lost share. From 2009 to 2011, it lost 2.5% points of value share with cider and flavoured alcoholic beverages gaining 2.0% and 0.5% respectively. We look at UK alcohol trends over the past 20 years (see Appendix). This shows that cider has taken share not only from beer but also from spirits, wines and RTDs.

Figure 17: UK cider growth yoy (% MAT) total market

-10%

-5%

0%

5%

10%

15%

20%

25%

Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10

Magners initial rollout in Scotland 2004

Magners London rollout

Full GB rollout 2006

Source: UK Customs and Excise

Figure 18: UK beer and cider volumes (m hl) total market

40

45

50

55

60

65

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

4

5

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10

UK Beer volumes (LHS) UK Cider volumes (RHS) Source: UK Customs and Excise


29 Davy Research

In both value and volume terms, cider was the fastest-growing category in 2011. Volume grew 4% and price/mix was 9%, driving 13% value sales growth. VAT increases, the mix effect (as premium cider outperformed standard cider) and the removal of all cider with less then 35% apple or pear juice from the market provided a boost to category price/mix.

Premium cider growing strongly; Stella Cidre is main driver

We segment the cider market according to standard cider (below £2.20 a litre, as measured by Nielsen) and premium cider (above £2.20 a litre) and according to flavour (apple, pear and fruit variants). The average price for premium or 'modern' ciders is approximately £2.30 a litre. These ciders include Magners, Heineken's Bulmers, AB InBev's Stella Cidre, Kopparberg, Westons and Aspall.

• In both value and volume terms, cider was the fastest-growing category in 2011

Figure 19: Cider value share of LAD in GB off-trade (%)

13.2%

15.2%

16.5%

18.5%

19.2%

20.4%

10%

12%

14%

16%

18%

20%

22%

2006 2007 2008 2009 2010 2011

Source: Nielsen; Davy

Figure 20: Value and volume share movement 2009-2011

-2.5%

-1.6%

-0.7%

-0.2%

0.5%

2.0%

-2.1%

-1.4%

-0.6%

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1.8%

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0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Total beer Total lager Total ale Total stout Total FABs Total cider

Value share Volume share Source: Nielsen; Davy

Figure 21: Volume growth GB off-trade yoy % 2010 & 2011

1%

-4%

-1% 0%

1%

13%

5%

-9%

-3% -3% -3%-2%

0%

4%

-10%

-5%

0%

5%

10%

15%

Total stout Total ale Total beer Total lager Total offtrade LAD

Total FABs Total cider

Volume 2010 Volume 2011 Source: Nielsen; Davy

Figure 22: Value growth GB off-trade yoy % 2010 and 2011

1%

-2%

1% 1%2%

12%

7%

-3%

3% 3% 4%

5%

7%

13%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Total stout Total ale Total beer Total lager Total offtrade LAD

Total FABs Total cider

Value 2010 Value 2011 Source: Nielsen; Davy


30 Davy Research

On this basis, premium cider represents 29% of the market in volume terms and 42% in value terms. This compares with 22% volume share and 34% value share in 2009.

The total off-trade cider category rose 4.6% in volume in 2010 and slowed moderately to 3.6% in 2011. The standard category (as defined above) was up 2.4% in 2010 and down 3.8% in 2011. The premium category rose 12.8% and 28% respectively in 2010 and 2011.

Table 6: Premium cider versus standard cider

Volume Volume Value Value Price/Mix Price/Mix

2010 vs 2009

2011 vs 2010

2010 vs 2009

2011 vs 2010

2010 vs 2009

P/M 2011 vs 2010

Total cider category 4.6% 3.6% 6.7% 13.2% 2.1% 9.6%

Premium cider 12.8% 28.0% 12.6% 31.2% -0.2% 3.1%

Standard cider 2.4% -3.8% 3.6% 3.0% 1.2% 6.8%


Of the main premium brands, Magners grew by 17% in value in 2011 (volume +19%), Bulmers rose by 11% (0% volume) and Kopparberg by 65% (59% volume). But the main driver of growth in the premium category was AB InBev's Stella Cidre. Note that all Magners GB growth is coming from the off-trade. Magners GB volume growth in the nine months to end-November is 3.6%; we estimate 5% growth for FY February 2012F. Nielsen off-trade data show Magners volumes up some 20% to December 2011. Assuming that Nielsen is an accurate read, this would imply a mid-teen decline in the on-trade.

• The premium category rose 12.8% and 28% respectively in 2010 and 2011

• The main driver of growth in the premium category was AB InBev's Stella Cidre

Figure 23: Standard and premium cider volume split off-trade

Standard cider71%

Premium cider29%


Figure 24: Standard and premium cider value split off-trade

Premium cider42%

Standard cider58%



31 Davy Research

Figure 25: Premium brand value growth 2011 off-trade (yoy %)

16.7%

31.2%

10.8%

65.0%

0%

10%

20%

30%

40%

50%

60%

70%

Magners Premium Cider Bulmers Kopparberg


Over the past three years, Magners has marginally grown its value share in the total GB off-trade; Kopparberg has been a very strong performer; and Stella Cidre has had a successful introduction. Private label and Strongbow have been losing share.

Table 7: Share of GB off-trade cider in value

2009 2010 2011

Strongbow 32.1% 31.6% 28.9%

Magners 10.0% 10.3% 10.6%

Private label 9.4% 8.7% 8.1%

Bulmers 8.7% 8.1% 7.9%

Kopparberg 2.8% 3.8% 5.6%

Stella Cidre n/m n/m 5.3%

Frosty Jack 3.3% 3.7% 4.5%

Other brands 33.6% 33.7% 29.0%

Total 100% 100% 100%


However, Magners share has declined in premium cider.

Table 8: Share of total premium cider GB off-trade

2009 volume

2010 volume

2011 volume

2009 Value

2010 Value

2011 Value

Bulmers 29.9% 26.8% 21.0% 25% 22% 19%

Magners 30.6% 31.7% 29.5% 29.2% 28.3% 25.2%

Stella Cidre n/a n/a 12.8% n/a n/a 10.9%

Kopparberg 6.6% 8.4% 10.4% 8.2% 10.6% 13.3%

Others 33% 33% 26% 37% 39% 32%

Total 100% 100% 100% 100% 100% 100%



32 Davy Research

Apple cider accounts for 60% of premium market Premium apple cider rose 28% in volume in 2011, while premium pear cider increased 14% and premium fruit-flavoured cider volume was 50% higher. Of the premium category, apple represents 64% of volume, pear 20% and fruit 16%. In value terms, apple represents 59%, pear 19% and fruit 22%.

Stella Cidre takes 21% value share of premium apple cider category The most significant development in the GB cider category in the past 12 months was the entrance of AB InBev. The world's largest brewer launched Stella Artois Cidre in April 2011, backed by a heavyweight marketing campaign. By May 2011, the brand had taken 6.8% value share of the off-trade cider market. If we look at only the premium apple variety, we see that Stella Cidre has taken 21% value share of this segment of the market on an annualised basis. The Cidre brand does not have variants in pear or fruit-based ciders at present. Magners and Bulmers apple variants and other apple ciders all lost value and volume share (see table below).

Table 9: Share of premium apple cider volume

2009 2010 2011

Bulmers 26.2% 24.6% 17.0%

Magners 42.2% 41.5% 34.5%

Stella Cidre* 0.0% 0.0% 20%

Others 32% 34% 28%

Total 100% 100% 100%

*Stella Cidre annualised share 25% Source: Nielsen; Davy

• For 2011 versus 2010, Magners Apple lost 700bps of volume share and 800bps of value.

• Bulmers Apple lost 800bps of volume share and 600bps of value. • Other ciders lost 600bps of volume share and 500bps of value.

Figure 26: 2011 volume growth premium cider yoy (%) off-trade

28.3%

14%

53.0%

0%

10%

20%

30%

40%

50%

60%

Premium Apple Premium Pear Fruit and apple variants


Figure 27: Premium volume split by segment (%) off-trade

Fruit16%

Pear20% Apple

64%



33 Davy Research

Table 10: Share of premium apple cider value

2009 2010 2011

Bulmers 23.7% 21.7% 15.9%

Magners 42.6% 39.6% 31.5%

Stella Cidre* 0.0% 0.0% 18.6%

Others 33.7% 38.7% 34.0%

Total 100.0% 100.0% 100.0%

*Stella Cidre annualised share 21% Source: Nielsen; Davy

It is interesting to note that while Stella Cidre expanded the premium apple cider (+28%) category, it took 90% of that growth for itself. Volume growth for the premium apple category excluding Stella Cidre was just 2.5% (compared to 28% growth including the Cidre brand). This 2.5% growth excluding Cidre is a deceleration from the 7.1% volume growth achieved in the premium apple category in 2010.

However, it is important to note that Magners continued to grow in 2011 despite the loss of share. In 2011, Magners Apple value growth was 4.3% (6.6% volume and -2.4% price/mix). This is a strong improvement on 2010 when Magners Apple declined 0.4% (5.4% volume; -5.8% pricing). Heineken's Bulmers Apple declined 4.1% in value with volume down 11.4% and price/mix 7.3% higher in 2011. Bulmers Apple volume was flat in 2010 and price/mix was a negative 2%. Magners Apple was one of the few premium brands not to achieve positive price/mix in both 2010 and 2011. Magners price per litre in 2011, at £2.26, was lower than the 'copycat' brand Bulmers (£2.32). Stella Cidre was priced at £2.30.

Figure 28: Apple volume growth 2011 yoy (%)

2.4%

28.3%

-2.7%

2.5%

-3.7%

-11.4%

6.6%

-4.4%

-14.2%

8.2%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

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30%

35%

Tota

l Ap

ple

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idre

Stro

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Bulm

ers

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Tota

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Figure 29: Apple value growth 2011 yoy (%)

11.3%

31.1%

4.5%6.7%

3.5%

-4.1%

4.3%2.3%

-7.2%

18.0%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%To

tal A

pple

Prem

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34 Davy Research

Previous Stella brands have disappointed after strong starts; will Stella Cidre be different? The power of AB InBev's portfolio, distribution (18% share of the UK beer market) and its Stella Artois brand (the leading off-trade beer) undoubtedly aided Cidre's launch. However, the Stella Artois Cidre brand's share has declined since its introduction. In December, off-trade value share was 5.3% of the total off-trade category (down from 6.8% in May). Cidre's share of premium apple was 19.9% in December compared to 23.7% at peak in May. Cidre has lost 370 bps since that time; over the same period, Magners had gained 300 bps. Bulmers increased its share by 70bps, and all other ciders are flat. The Cidre brand has had to deal with some issues (supply constraints and exploding bottles), but there may be other contributing factors responsible for the loss in share.

Table 11: Premium apple value share, GB off-trade

May December Share change

Magners share 33.0% 36.0% 3.0%

Stella Cidre share 23.7% 19.9% -3.7%

Bulmers share 15.1% 15.7% 0.7%

Other 28.2% 28.3% 0.1%

Total 100% 100% 0.0%


A look at Stella's Artois brand extensions in the UK (the failures of Artois Bock/Peeterman Artois aside) shows that, in the instances of Stella Black and Beck's Vier, the brands did very well post launch, aided by high trialling and the support from the AB InBev powerhouse (promotions, A&P, distribution etc), but that both brands began to lose share after 12 months. Whether Stella Cidre's stamina will wane remains to be seen, but recent history tells us that extensions under the Stella Artois brand umbrella are not always as successful as they first seem. Private label suffers; premium cider outperforms

The amendment to the definition of cider for excise duty purposes has been a significant event in the GB cider market. Cider must now include a minimum of 35% apple or pear juice in the final product. This has resulted in some value brands below this level raising the apple/pear content above this minimum and increasing pricing to offset the extra cost. This has been a significant driver of price/mix in the category. The following table shows that private label cider pricing rose by 16% and recorded the largest absolute volume decline in the overall off-trade cider category (-10% yoy) in 2011. The other significant volume declines in the category came from value or standard ciders. The table also highlights the growth in premium ciders. Eight of the top ten ciders in terms of absolute volume share gains were premium or modern ciders.

• The amendment to the definition of cider for excise duty purposes has been a significant event in the GB cider market


35 Davy Research

Table 12: Off-trade cider volume top ten change in volume – winners and losers

Winners Price 2011 per litre

Price 2010 per litre

Price yoy % Vol yoy %

Absolute volume move

1 Stella Cidre 2.30 n/a n/m 16.86

2 Frosty Jack 1.20 1.14 6% 32% 7.75

3 Value Hawksridge cider 0.72 0.66 10% 711% 6.44

4 Magners Pear* 2.31 2.47 -7% 72% 3.94

5 Kopparberg Mixed Fruit 3.97 3.86 3% 123% 2.29

6 Bulmers No.17 2.32 2.14 8% n/m 2.28

7 Brothers Cider 2.72 2.87 -5% 82% 2.17

8 Magners Original* 2.26 2.31 -2% 7% 1.94

9 Thatchers Cider 2.38 2.55 -7% 44% 1.80

10 Weston's Cider 2.92 2.76 5% 16% 0.97

Losers Price 2011 per litre

Price 2010 per litre

Price yoy % Vol yoy %

Absolute volume move

1 Private Label 1.27 1.09 16% -10% -5.86

2 Strongbow 1.63 1.51 7% -4% -5.70

3 Gaymers Pear* 1.85 1.68 10% -66% -4.88

4 Blackthorn* 1.54 1.33 16% -31% -4.37

5 Gaymers Original* 1.82 1.69 8% -61% -3.57

6 Olde English* 1.46 1.40 4% -20% -1.89

7 Orchard Mill* 1.01 0.95 6% -66% -1.73

8 Old Somerset* 0.95 1.01 -5% -61% -0.77

9 Diamond White* 2.02 1.93 5% -17% -0.71

10 Value Natch* 1.81 1.89 -4% -57% -0.33

Cider category average 1.84 1.68 10%

*Denotes a C&C brand Source: Nielsen; Davy

Volumes of leading Strongbow brand fall but pricing stronger Strongbow, Heineken's mainstream cider and the largest brand in the market (volume share of 33%), declined 3.7% in 2011, but pricing was robust at 7.1%. The Strongbow brand is arguably suffering from a similar trend to what is taking place in the mainstream beer market. Undifferentiated, mainstream cider/beer brands are declining whereas greater interest/differentiated or new/novel/craft brands are growing. This is occurring despite the higher pricing of the latter.

Gaymers brands decline significantly C&C's Gaymers portfolio volumes have declined significantly (-33% in volume and -23% in value in 2011). Eight of the ten declining brands in 2011 were Gaymers brands – all priced in the 'standard' cider category. However, C&C points out that while Gaymers volumes have halved since it acquired the brand, the profitability of the business has doubled with a focus on value over volume and some re-allocation of marketing investment to Magners. C&C has walked away from low-profit, private label deals. C&C has been able to control 'less profitable' volume in the category. We note that Magners EBIT per hectolitre (hl) is 6x that of Gaymers.


36 Davy Research

Pear and fruit flavours represent over one-third of the premium cider category in volume

Pear and fruit-flavoured ciders represent 36% of the volume of the premium cider category and 41% of its value.

The GB off-trade premium pear category has grown volume by 15% and 14% in 2010 and 2011 respectively; value growth was 11% and 15% respectively.

Magners Pear very successful Magners Pear was late to enter the pear category. Pear cider as a sub-category was already over 20% of total off-trade premium cider when the brand was introduced in the spring of 2009. However, since its arrival, Magners Pear has been very successful. The brand equity associated with Magners is clearly substantial, with Magners Pear growing fourfold in three years. Magners Pear now holds the leading position with that of Heineken's Bulmers Pear. Magners Pear grew by 72% in volume and by 61% in value in the GB off-trade in 2011.

Table 13: Share of off-trade premium pear cider in value

Share of pear premium 2009 2010 2011

Kopparberg 28% 31% 31%

Magners 13% 24% 33%

Bulmers 49% 40% 34%

Other 10% 5% 2%

Total 100% 100% 100%


However, C&C's other main pear cider brand, Gaymers Pear, has declined substantially. The absolute volume decline in Gaymers is close to that of the gain in Magners Pear. Importantly, Magners Pear price per litre is £2.30 compared to Gaymers Pear at £1.85.

Fruit-flavoured cider fastest-growing segment of cider market Fruit-flavoured cider is the fastest-growing part of the cider market. This segment grew volume by 44% and 53% in 2010 and 2011 respectively. Swedish cider Kopparberg, which holds some 30% of the fruit and apple variant category, grew by over 100% in both years.

Figure 30: GB off-trade premium split % – apple, pear, fruit

64%

20%16%

59%

19%23%

0%

10%

20%

30%

40%

50%

60%

70%

Apple Pear Fruit

2011 volume 2011 value


Figure 31: Magners share of pear cider – GB off-trade

10.7%

23.7%

35.9%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2009 2010 2011



37 Davy Research

Much of Bulmers' overall growth has been driven by its berry variant (Bulmers No.17). The No. 17 brand grew 3x in 2011 and has 18% volume share (14% value share) of this sub-segment. Magners Specials (its flavoured variants) were launched in October. On an annualised basis, Magners Specials had 7.5% volume share and 8.2% value share.

Table 14: Share of premium fruit-flavoured cider value – GB off-trade

2009 2010 2011

Kopparberg 13% 20% 33%

Magners* 0% 0% 2%

Bulmers 0% 5% 14%

Rekorderlig 2% 4% 7%

Other 85% 71% 43%

Total 100% 100% 100%

* Annualised Magners 8.2% Source: Nielsen; Davy

We note that the price per litre for fruit-flavoured ciders is higher than apple- or pear-based ciders due to the fact that these ciders fall into a higher excise bracket (Magners Specials are apple-based with flavours added and fall under the apple/pear excise tax band).

Fruit-flavoured cider has allowed cider producers to extend the boundaries of traditional apple cider In our consumer survey of the UK beverages market, we explored a number of themes. The findings revealed that drinkers have embraced novelty, differentiated and limited edition products. The corollary is that drinkers have also increased their repertoires and are now far less loyal to specific brands/categories. While fruit-flavoured cider has allowed cider producers to extend the boundaries of traditional apple cider and innovate, this does not come without its risks (recall the rise and fall of the Alcopops, 1994-2002). In addition, there is also the risk of tripping the gender balance within cider consumption (currently 50/50% male/female) to lower-frequency, female consumers.

Figure 32: Fruit-flavoured cider growth yoy % – GB off-trade

44.1%

53.0%

34.9%

48.6%

0%

10%

20%

30%

40%

50%

60%

2010 2011

Value Volume

Source: Davy; Nielsen

http://www.davy.ie/content/articles/ukconsbev20111020.pdf


38 Davy Research

Conclusion – premium cider continues to grow stronger in GB; international expansion opportunities for C&C

The premium cider market continues to grow stronger in its main channel and to outperform in the LAD market. The factors contributing to this growth may be the higher A&P investment relative to beer, the greater differentiated focus and continued innovation (beer has been more limited in this regard), the host of new and novel brand offerings/extension and the broader unisex market appeal. While somewhat subjective, cider is seen as having a less challenging taste profile than beer – a key factor in the recruitment of new, younger drinkers. Furthermore, the sweet taste of cider plays into the consumer trend of moving away from savoury-tasting products to sweet-tasting ones. Cider also has key attributes such as naturalness, heritage and craft. The barriers to entry (production, distribution, marketing) are low in the GB cider market. This fact, together with the power held by the big beer players, was underlined by the performance of AB InBev's Stella Cidre, which took 20% share of the premium apple category in 2011. However, brand equity will continue to be an important driver of consumption. Magners and Kopparberg jointly hold the top spot as cider drinkers' most preferred cider (Davy UK survey) and both brands grew strongly in 2011 (Magners volumes grew 19% and Kopparberg rose 59%) despite a host of new competition and the entrance of the world's largest brewer into the category. These performances show that focused smaller brands/companies can compete with the larger brewers. With beer volumes in decline in mature markets and with underlying consumer trends driving a switch away from beer to other categories (spirits and wines), global brewers are looking for opportunities in categories adjacent to beer. The growth opportunities, premium positioning, higher margin and profitability per hl of cider are obvious attractions. As cider expands as part of the LAD market globally, it provides C&C with a significant opportunity for international growth in markets outside the UK and Ireland. As this happens, it is also likely to increase competition in the UK and Ireland. C&C will have to continue to protect and grow its home markets to drive growth in the business and to fund this international expansion opportunity.

• Brand equity will continue to be an important driver of consumption

• As cider expands as part of the LAD market globally, it provides C&C with a significant opportunity for international growth in markets outside the UK and Ireland


39 Davy Research

Ireland – headwinds remain but still a very attractive profit pool We estimate that C&C's Irish cider business will represent 20% of sales and 37% of EBIT in the year to February 2012. C&C is forecast to earn €92m (€100m February 2011) in revenue and €41m (€43m February 2011) in EBIT. This represents an 8% decline in revenue and a 5% fall in EBIT year-on-year. Offsetting this decline will be a €2.5m contribution from C&C's growing beer business (AB InBev beer brands and Tennent's) in Ireland. C&C holds 80-85% share of Irish cider market

C&C holds 80-85% share of the Irish cider market. Since 2007, C&C's cider business revenue line has been hit by negative channel switch, deflation and declining volume. Operating margins are broadly flat as costs have been managed. Since February 2008, C&C's revenue and operating profit are down some 30% (2008: Irish net sales of €137m and €55m in operating profit).

Contrasting performance of cider in UK and Ireland in recent years

Since the peak in the Irish economy in 2007, beer and cider market volumes have declined by 15% and 21% respectively. Interestingly, UK beer volumes have also fallen by 15%. This is despite a more severe economic situation in Ireland over the period. However, the performance in UK cider was quite different: UK cider volumes were up 15% in the same period. In the UK, cider's share of the combined beer and cider market is now 16.7% – this compares to 12.2% for cider in Ireland.

• Since the peak in the Irish economy in 2007, beer and cider market volumes have declined by 15% and 21% respectively

Figure 33: UK and Irish beer volumes rebased to 100 (Jan 2001)

70

75

80

85

90

95

100

105

110

Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11

ROI UK

Source: Irish and UK Excise

Figure 34: UK and Irish cider volumes rebased to 100 (Jan 2001)

60

80

100

120

140

160

180


Cider ROI Cider UK

Source: Irish and UK Excise


40 Davy Research

Cider's share of Irish LAD market has remained stable in recent years

Over the last decade, cider's share of beer and cider in Ireland has averaged 12.4%; the current share is therefore broadly in line with the average. While C&C lost share to imported ciders from 2000-2007, its share of the cider market has only marginally declined since then. Imported cider represents 14% of the cider market by volume.

Figure 35: ROI cider volume share (%)

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

16%


Import share of cider in ROI Cider share of beer and cider in ROI Source: Irish Excise; Davy


41 Davy Research

Mid-single-digit EBIT model with growing net cash position for deployment We view C&C as a model that can generate mid-single-digit organic operating profit growth over the next number of years while generating €110m+ free cash flow each year. This can be invested in accretive deals to accelerate underlying growth or be returned to shareholders. C&C will have a net cash position of €150m (15% of the current market cap) in 12 months time assuming that there are no deals or cash returns to shareholders in the interim. We view this as unlikely. We see both value-creating acquisitions and increased cash return to shareholders (progressive dividend policy or share buybacks) as viable options and not mutually exclusive.

Forecasts In C&C's most recent IMS (January 17th), it stated that it expected operating profit of c.€110m for February 2012F. We forecast operating profit of €111m and €117m for February 2012F and 2013F respectively. Our broad assumptions for February 2012F and 2013F are:

• Bulmers: 8% revenue decline in February 2012F with a 5% reduction in EBIT. A similar EBIT decline of 5-6% is expected in 2013F.

• Magners GB: 2% top-line growth in February 2012F and 3% top-line growth in 2013F, benefiting from continued growth in premium cider.

• International: 20-25% volume growth, driven by the US and Australia. International cider will account for 8% of group EBIT in February 2013F.

• Total beer: continued improvement in profitability in Scotland as the focus on value in the off-trade and share gains in the on-trade help price mix and margin. The expiry of long-term distribution contracts set up by AB InBev will aid operating margin expansion as Tennent's captures more of the profit pool.

• Magners Northern Ireland: concentrated market should enable the defence of profits.

• Gaymers: significant top-line decline to slow. We have factored in no profit growth.

• Balance sheet/cash flow: strong free cash flow generation and little capex requirements; €110m per annum will see net cash build unless returned to shareholders.

• A beneficial foreign exchange movement of €1.5m as well as a €2.2m contribution from the Hornsby's acquisition will add €3.7m of the €6m EBIT growth we expect to FY February 2013.

• We forecast operating profit of €111m and €117m for February 2012F and 2013F respectively


42 Davy Research

Table 15: C&C forecasts

Feb 2012F Feb 2013F

Divisional sales

Cider ROI 92 87

GB Cider 176 175

Magners 107 110

Gaymers 69 66

Cider NI 12 12

Cider International 29 42

Tennent's Scotland 79 81

Tennent's Ireland 18 19

Third-party brands 83 88

Total net sales 489 505

Divisional EBIT Feb 2012 Feb 2013

Cider ROI 41.4 38.9

GB Cider 27.5 31.0

Magners 20.3 23.8

Gaymers 7.2 7.2

Cider NI 3.1 3.1

Cider International 6.4 9.4

Tennent's Scotland 19.0 20.0

Tennent's Ireland 5.2 5.6

Third-party brands 8.7 9.4

Total EBIT 111.3 117.3

Divisional EBIT margin

Cider ROI 45.1% 44.7%

GB Cider 15.7% 17.7%

Magners 19.1% 21.6%

Gaymers 10.4% 11.0%

Cider NI 26.5% 26.5%

Cider International 22.2% 22.3%

Tennent's GB 24.1% 24.6%

Tennent's Ireland 28.4% 28.9%

Third party brands 10.4% 10.6%

Total margin 22.8% 23.2%

Source: Davy


43 Davy Research

Valuation C&C trades on a 11x P/E (February 2013F) and 6.7x EV/EBITDA versus the Euro Stoxx Food and beverage index on 15x P/E and 8x EV/EBITDA. Its unleveraged free cash yield (FCF/EV %) is close to twice that of its brewing peers (10% versus 6%), highlighting the cash generative nature of the business and its unleveraged balance sheet structure. This is an undemanding valuation.

Figure 36: C&C forward P/E relative to Euro Stoxx food and beverage

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

Jan

07

Apr

07

Jul 0

7

Oct

07

Jan

08

Apr

08

Jul 0

8

Oct

08

Jan

09

Apr

09

Jul 0

9

Oct

09

Jan

10

Apr

10

Jul 1

0

Oct

10

Jan

11

Apr

11

Jul 1

1

Oct

11

Jan

12

Average 20% discount

Current discount

25%

Source: Factset

Figure 37: Beverages – leveraged FCF yield % (FCF/EV) –12 month forward

5.8%

7.2%

5.1%

4.3%

6.6%

3.6% 3.8% 3.9% 4.0%

10.1%

0%

2%

4%

6%

8%

10%

12%

AB

InBe

v

Car

lsbe

rg

Cam

pari

Dia

geo

Hei

neke

n

Pern

od R

icar

d

Rem

y C

oint

reau

SABM

iller

Britv

ic

C&

C

Source: Factset


44 Davy Research

Appendix: UK alcohol trends

Table A1: Percentage share by type of drinks based on alcohol content

Beer Cider Wine RTDs Spirits Total % Comment

1990 56.7 3.6 18.0 0.2 21.6 100

1991 57.0 3.8 18.2 0.3 20.8 100

1992 56.0 4.7 18.9 0.5 19.9 100

1993 54.5 4.9 19.8 0.5 20.3 100

1994 54.0 5.2 19.8 0.6 20.5 100

1995 54.8 6.3 19.8 1.0 18.1 100

1996 53.3 6.2 20.9 1.8 17.8 100

1997 52.9 6.0 22.0 1.2 18.0 100

1998 52.1 6.2 23.3 1.3 17.2 100

1999 49.7 6.3 23.5 1.7 18.8 100

2000 48.0 6.2 24.4 2.7 18.7 100

2001 47.1 5.7 25.0 3.4 18.8 100

2002 46.0 5.5 26.3 3.4 18.8 100

2003 45.8 5.4 26.8 2.6 19.4 100

2004 43.9 5.4 28.7 2.4 19.5 100

2005 42.5 5.7 29.9 2.0 19.9 100

2006 42.6 6.9 29.7 1.6 19.1 100

2007 40.0 7.2 31.4 1.5 19.9 100

2008 39.0 7.7 31.8 1.3 20.2 100

2009 37.7 9.1 31.6 1.2 20.4 100

Movement in share (%)

1990-2009 -19.0 5.5 13.6 1.0 -1.2 Beer secular decline, wine wins, cider growth, spirits/RTDs share flat

1994-2003 -8.0 0.3 6.5 2.8 -1.7 The 'Alcopop years' - cider growth slows, but it appears that RTDs took share from traditional spirits

2005-2009 -4.8 3.4 1.7 -0.8 0.5 Cider takes from beer, wine growth slows, spirits/RTDs steady share

Source: UK Revenue and Customs; National statistics; BB&PA; Davy

45 Davy Research


45 Davy Research

SUMMARY ACCOUNTS Feb10 Feb11 Feb12E Feb13F Feb14F I N C O M E S T A T E M E N T ( € M ) Revenue 568.7 529.6 488.5 505.0 529.9 EBITDA 104.5 121.8 133.1 139.1 144.9 Depreciation 15.0 21.3 21.8 21.8 21.8 Amortisation of intangibles 0.0 0.0 0.0 0.0 0.0 Operating profit 89.5 100.5 111.3 117.3 123.1 Other income from operations 0.0 0.0 0.0 0.0 0.0 Share of associate / JV after-tax profits 0.0 0.0 0.0 0.0 0.0 PBIT before exceptionals 89.5 100.5 111.3 117.3 123.1 Group net interest -7.2 -9.4 -3.1 3.0 4.9 Other finance costs 0.0 0.0 0.0 0.0 0.0 Total finance costs -7.2 -9.4 -3.1 3.0 4.9 Exceptionals -3.5 -9.1 0.0 0.0 0.0 PBT 78.8 82.0 108.2 120.3 128.0 Tax -8.9 -11.1 -16.2 -18.0 -19.8 Minorities (incl. pref. divs.) 0.0 0.0 0.0 0.0 0.0 Earnings (basic) 69.9 70.9 92.0 102.3 108.2 Average no. of shares (m) - basic 316.8 321.6 323.0 323.0 323.0 Average no. of shares (m) - diluted 323.8 330.1 333.6 335.5 335.5 P E R S H A R E D A T A ( C ) EPS Basic 22.1 22.0 28.5 31.7 33.5 EPS Diluted (Adj) 22.7 24.2 27.6 30.5 32.3 Cash EPS (Diluted) 27.3 30.7 34.1 37.0 38.7 Dividend 6.0 6.6 7.2 8.0 8.4 NBV 98.6 190.9 210.2 233.0 257.1 NBV (incl. amortisation of intangibles) 117.5 209.6 228.9 251.7 275.9 C A S H F L O W ( € M ) EBITDA 104.5 121.8 133.1 139.1 144.9 Change in working capital 33.7 31.5 3.0 -1.8 -2.0 Share-based payments 0.0 0.0 0.0 0.0 0.0 Other operating cashflows 1.8 4.5 -3.5 1.8 2.0 Cash generated from operations 140.0 157.8 132.6 139.1 144.9 Net capital expenditure -5.4 -21.1 -14.0 -15.0 -15.0 Operating cashflow 134.6 136.7 118.6 124.1 129.9 Net interest -7.0 -8.0 -2.4 5.0 8.0 Tax -4.7 -8.4 -5.5 -17.2 -17.8 Dividends from associates 0.0 0.0 0.0 0.0 0.0 Dividends to minorities 0.0 0.0 0.0 0.0 0.0 Free cash flow 122.9 120.3 110.7 111.9 120.1 Dividends to shareholders -22.0 -12.1 -26.9 -25.4 -26.9 Acquisitions & investments -224.5 263.9 -11.7 -4.0 0.0 Business disposals 0.0 0.0 0.0 0.0 0.0 Share Issues / (Buybacks) 0.0 0.0 0.0 0.0 0.0 Translation differences 0.0 0.0 0.0 0.0 0.0 Other -15.1 -13.5 -0.8 2.2 1.9 Change in net cash / debt -138.7 358.6 71.4 84.7 95.0 B A L A N C E S H E E T ( € M ) Property, plant & equipment 187.2 187.2 151.4 114.6 104.7 Intangible assets 507.7 466.3 490.1 521.0 521.0 Investments in associates / jv's 32.1 20.0 28.3 28.5 28.5 Working capital 16.5 7.1 4.7 6.5 8.5 Other 0.0 0.4 0.0 0.0 0.0 Capital Employed 743.5 681.0 674.5 670.6 662.7 Financed by Equity capital & reserves 329.4 643.7 708.8 785.8 867.1 Minority interests 0.0 0.0 0.0 0.0 0.0 Preference shares 0.0 0.0 0.0 0.0 0.0 Net Debt/(Cash) 364.9 6.3 -65.1 -149.8 -244.8 Deferred consideration/debt-related 0.0 0.0 0.0 0.0 0.0 Retirement benefit obligations 21.2 15.3 15.3 15.3 15.3 Net deferred tax 0.0 -2.8 -2.8 -2.8 -2.8 Other long-term liabilities 28.0 18.5 18.3 22.1 27.9 Capital Employed 743.5 681.0 674.5 670.6 662.7 Intangibles amortised 63.1 63.1 63.1 63.1 63.1 Capital employed inc. intangibles 806.6 744.1 737.6 733.7 725.8 Invested capital inc. intangibles 757.4 713.1 706.8 699.1 685.4

DIVISIONAL ANALYSIS Feb12E Feb13F Feb14F Feb12E Feb13F Feb14F Revenue (€m) Op. Profit (pre am.) (€m)

Irish Cider 91.7 87.2 87.1 41.4 38.9 38.7 UK and International Cider 216.4 229.2 245.5 37.1 43.5 47.3 Distribution 83.3 88.2 93.5 8.6 9.4 9.9 Tennent's 97.1 100.4 103.8 24.2 25.5 27.2 Total 488.5 505.0 529.9 111.3 117.3 123.1

CALENDAR Date Ex-Div Interims 19-10-11 26-10-11 Finals 16-05-12 25-05-11 AGM 27-06-12 Updated 07-02-12

VALUATION Feb12E Feb13F Feb14F Dec11E Dec12F Dec13F

Rel to Sector P/E 12.3 11.1 10.5 0.8 0.8 0.8 Dividend Yield (%) 2.1 2.4 2.5 0.9 0.9 0.9 Free Cash Flow Yield (pre divs) (%) 9.7 9.8 10.5 Price / Book 1.62 1.46 1.32 0.7 0.7 0.7 EV / Revenue 2.16 1.92 1.65 EV / EBITDA 7.9 7.0 6.0 EV / EBITA 9.5 8.3 7.1 EV / Operating Cashflow 8.9 7.8 6.7 EV / Invested Capital 1.53 1.43 1.32 PEG (Hist P/E/4yr gwth) 1.34

PRICE PERFORMANCE (%)

1 Wk 1 Mth 3 Mths 6 Mths YTD 1 Yr

Absolute 8.2 16.0 14.4 4.6 18.4 -4.5 Rel to ISEQ 3.0 6.8 -2.9 -16.5 9.5 -9.2 Rel to E300 3.6 9.4 4.3 -5.2 10.3 3.5 Rel to E300 Beverages 3.9 11.2 -2.1 -13.4 11.9 -15.8

PRICE AND P/E HISTORY Price Hist P/E High Low Yr End High Low Average

2012 340 281 14.0 11.6 12.9 2011 369 270 287 15.9 11.1 13.8 2010 360 266 338 16.3 12.1 14.1 2009 320 78 301 14.5 2.6 8.4 2008 540 102 145 17.7 3.4 8.4 2007 1390 367 410 46.7 6.8 22.5

KEY RATIOS Feb10 Feb11 Feb12E Feb13F Feb14F G R O W T H

EPS Diluted (Adj) (%) 2.3 6.9 13.8 10.6 5.8 Dividend (%) -33.3 10.0 9.1 11.1 5.4 Revenue (%) 10.5 -6.9 -7.8 3.4 4.9 EBITDA (%) -4.7 16.6 9.3 4.5 4.2 P R O F I T A B I L I T Y / A C T I V I T Y

EBITDA margin (%) 18.4 23.0 27.2 27.5 27.3 EBITA margin (%) 15.7 19.0 22.8 23.2 23.2 Revenue / Capital Employed (x) 0.83 0.71 0.68 0.71 0.76 R E T U R N

ROCE (before tax, ex. invs) (%) 13.0 13.4 15.5 16.6 17.6 ROE (after tax) (%) 20.8 14.6 12.4 12.6 12.2 Ret. on Inv. Cap. (after tax) (%) 12.3 12.0 13.3 14.2 15.0 WACC (%) 7.3 8.7 N/A 8.9 9.2 F I N A N C I A L / G E N E R A L

EBITDA Int. Cover (x) 14.5 13.0 42.9 N/A N/A Group Interest Cover (x) 12.4 10.7 35.9 N/A N/A Debt / EBITDA (x) 3.5 0.1 N/A N/A N/A Debt / Equity (%) 110.8 1.0 N/A N/A N/A Debt / Free Cash Flow (x) 3.0 0.1 N/A N/A N/A Avg. Cost of Debt (before tax) (%) 2.4 5.1 N/A N/A N/A Ret. benefits deficit / market cap (%) 2.3 1.3 1.3 1.3 1.3 Dividend Cover (x) 3.8 3.7 3.8 3.8 3.8 Working Capital / Revenue (%) 2.9 1.3 1.0 1.3 1.6 Net Capex / Depreciation (%) 36.0 99.1 64.2 68.8 68.8 Tax rate (%) (unadjusted) 11.3 13.5 15.0 15.0 15.5

CAGR(%) 5 Year 10 Year MAJOR SHAREHOLDERS % Revenue (%) -13.0 -4.4 Invesco 8.2 EBITDA (%) -10.4 -1.3 Independent Franchise Partners 7.0 EPS Diluted (Adj) (%) -12.6 6.6 MassMutual 5.9 Cash EPS (Diluted) (%) -10.5 5.6 Southeastern Asset Management 5.4 Dividend (%) -23.2 N/A JP Morgan Chase & Co 4.2

Price (c) Shares (m) Mkt. Cap (€m) E.V. (€m) Mkt. Cap. / EV (%) Mkt. Weight (%) Free Float (%) Daily No. Shares Traded (m) Daily Value Traded (€m) 340 337.4 1146.8 997.0 115.0 2.4 95.0 0.885 2.637

46 Davy Research

Important disclosures

Analyst certification Each research analyst primarily responsible for the content of this research report certifies that: (1) the views expressed in this research report accurately reflect his or her personal views about any or all of the subject securities or issuers referred to in this report and (2) no part of his or her compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this report.

Investment ratings definitions Davy ratings are indicators of the expected performance of the stock relative to its sector index (FTSE E300) over the next 12 months. At times, the performance might fall outside the general ranges stated below due to near-term events, market conditions, stock volatility or – in some cases – company-specific issues. Research reports and ratings should not be relied upon as individual investment advice. As always, an investor's decision to buy or sell a security must depend on individual circumstances, including existing holdings, time horizons and risk tolerance. Our ratings are based on the following parameters: Outperform: Outperforms the relevant E300 sector by 10% or more over the next 12 months. Neutral: Performs in-line with the relevant E300 sector (+/-10%) over the next 12 months. Underperform: Underperforms the relevant E300 sector by 10% or more over the next 12 months. Under Review: Rating is actively under review. Suspended: Rating is suspended until further notice. Restricted: The rating has been removed in accordance with Davy policy and/or applicable law and regulations where Davy is engaged in an investment banking transaction and in certain other circumstances.

Distribution of ratings/investment banking relationships Investment banking services/Past 12 months

Rating Count Percent Count Percent

Outperform 50 53 28 77

Neutral 28 30 6 16

Underperform 11 11 0 0

Under Review 3 3 1 2

Suspended 0 0 0 0

Restricted 1 1 1 2

This is a summary of Davy ratings for all companies under research coverage, including those companies under coverage to which Davy has provided material investment banking services in the previous 12 months. This summary is updated on a quarterly basis. The term 'material investment banking services' includes Davy acting as broker as well as the provision of corporate finance services, such as underwriting and managing or advising on a public offer.

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47 Davy Research

Share ownership policy Davy allows analysts to own shares in companies they issue recommendations on, subject to strict compliance with our internal rules governing own-account trading by staff members. We are satisfied that our internal policy on share ownership does not compromise the objectivity of analysts in issuing recommendations.

Conflicts of interest Our conflicts of interest management policy is available at www.davy.ie/ConflictsOfInterest. Davy acts as stockbroker to C&C. Investors should be aware that this research has been disclosed to the issuer(s) in advance of publication in order to correct factual inaccuracies. We are satisfied that this has not compromised the report's objectivity. The remuneration of the analyst(s) who prepared this report is based on various factors including company profitability, which may be affected to some extent by revenues derived from investment banking. Davy is a registered market-maker in the securities of C&C on the Irish Stock Exchange. Davy is a registered market-maker in the securities of C&C on the London Stock Exchange. Davy may have acted, in the past 12 months, as lead manager/co-lead manager of a publicly disclosed offer of the securities in C&C. Investors should be aware that Davy may have provided investment banking services to, and received compensation from, C&C in the past 12 months or may provide such services in the future. The term investment banking services includes acting as broker as well as the provision of corporate finance services, such as underwriting and managing or advising on a public offer. From time to time, Davy may hold a position or deal in the securities referred to in this report. Should an instance arise where Davy has a holding that exceeds 5% of the issued share capital of a company, this will be disclosed in this report.

Other important disclosures A description of this company is available at www.davy.ie/RegulatoryDisclosures. A summary of our standard valuation methods is available at www.davy.ie/ValuationMethodologies. All prices used in this report are as of close business February 6th unless otherwise indicated. A summary of existing and previous ratings for each company under coverage, together with an indication of which of these companies Davy has provided investment banking services to, is available at www.davy.ie/ratings. The data contained in this research note have been compiled by our independent analysts, based on a combination of publicly-available information and the analysts assumptions and modelling. Further information is available upon request. This document does not constitute or form part of any offer, solicitation or invitation to subscribe or purchase any securities, nor shall it or any part of it form the basis of, or be relied upon in connection with, any contract or commitment whatsoever. Any decision to purchase or subscribe for securities in any offering must be made solely on the basis of the information contained in the prospectus or other offering circular issued by the company concerned in connection with such an offering. This document has been prepared by its authors independently of the company or companies covered. Davy has no authority whatsoever to give any information, or make any representation or warranty on behalf of the company or companies. In particular, the opinions, estimates and projections expressed in it are entirely those of the analysts and are not given as an agent or financial adviser of the company or companies. In the UK this document is restricted to (i) persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the "Order") or (ii) high net worth entities falling within Article 49(2)(a) to (d) of the Order. Please note that in accordance with the Central Bank of Ireland's Market Abuse Rules, no person, other than a market-maker, may enter into any transaction or arrangement which would have the effect of generating a net economic benefit arising from a fall in the price of the following shares: the Governor and Company of Bank of Ireland, Allied Irish Banks plc, Irish Life & Permanent plc and Anglo Irish Bank Corporation plc. Please refer to the Market Abuse Rules for full details.

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