Uchumi Supermarkets LimitedValuation

11th December, 2015

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Uchumi Supermarkets Limited – Valuation Summary We recommend an BUY with a target price of Kshs 9.7

We recommend a BUY on Uchumi, with a target price ofKshs 9.7, a 20.2% upside from its current price of Kshs 8.1.Our recommendation is based on:• Turnaround strategy: Uchumi has embarked on a

turnaround strategy to restructure and reposition thecompany to take advantage of the changing marketdynamics. The 3-point strategy involves (i) Stabilization,(ii) Optimization, and (iii) Growth

• Investment property potential: We adjust ourmodel to take into account the value of investmentproperties held by Uchumi. We note that, sale of theland will inject extra cash flows into our model

• Change in Top Management. Uchumi board ofdirectors retired the CEO and CFO for gross misconductin June 2015. CEO position has been filled and weexpect the new office to drive the turn around strategy

1 year share price performance

Recommendation ACCUMULATE

6.0 7.0 8.0 9.0

10.0 11.0 12.0 13.0 14.0

All values in Kshs unless stated otherwise

Target Price 9.7 Current Price 8.1 Upside 20.2%DPS -Total Return 20.2%52 week range 6.40 - 14.00Cost of Equity 20.1%Weighted average cost of capital 18.0%Issued Shares (Mns) 365.0

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Uchumi Supermarkets Limited – Full Year Review The one-off non- recurring expenditure from provision and write-offs suppressed earnings

Uchumi Supermarkets reported Full Year 2015 results• The retailer posted a Kshs 3.4 bn loss after tax compared to a loss after tax of Kshs 364 mn in 2014, on account of

declined revenues and increased operating expenses. Operating income declined 24% to Kshs 2.6 bn from Kshs 3.4 bnposted the previous year, on account of a 10% and 23% drop in turnover and other incomes, respectively

• Operating expenses increased by 33% to Kshs 4.8 bn from Kshs 3.6 bn on account of a one-off Kshs 1.6 bn provisionfor impairment of the recently closed subsidiaries in Tanzania and Uganda. Loss before tax stood at Kshs 3.5 bn drivenby a one-off Kshs 1.0 billion write-off on items related to management misrepresentation

• When we normalize the earnings, taking into account the two non-recurrent items, core loss after tax would be Kshs772 mn, compared to profit after tax of Kshs 364 mn in 2014, against our projection of Kshs 335 mn after tax loss

*Figures in Kshs Millions

Income Statement 2014A 2015A y/y Change 2015ENormalised

2015AVariance from

Normalised

Sales 14,457.7 12,954.6 -10.4% 12,236.3 12,954.6 -5.5%Cost of sales 11,643.6 10,816.8 -7.1% 10,033.7 10,816.8 -7.2%Gross profit 2,814.1 2,137.8 -24.0% 2,202.5 2,137.8 3.0%Other incomes 581.8 450.6 -22.6% 1,101.3 450.6 144.4%Total operating income 3,395.9 2,588.4 -23.8% 3,303.8 2,588.4 27.6%Total operating expenses 3,618.5 4,816.6 33.1% 2,928.0 3,216.6 -9.0%EBITDA (222.6) (2,228.2) 901.1% 375.8 (628.2) -159.8%PBT 432.8 (3,513.1) -911.7% (335.0) (864.0) -61.2%

PAT 364.3 (3,421.4) -1039.1% (335.0) (772.3) -56.6%

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Uchumi Supermarkets Limited – Full Year Review…contThe ongoing strategy is hinged on success of three key pillars

• We note that Uchumi has laggard behind the other retail players in the market, mostly from internal challenges. Anumber of issues are outstanding, albeit being addressed

a) Corporate governance: Uchumi board expressed concerns on the management conflict of interest in therunning of the retailer, consequently firing the top management and making new appointments. Corporategovernance remains a key factor to consider for both public and private companies as it reflects the overalldecision chain for the companies. We expect the new management to drive the three point strategy and returnthe retailer to profitability space. The recent board changes, that have seen the Chairperson and two otherdirectors step down, and subsequent appointment of new Chairperson is expected to bring in new purpose andchange

b) Market Niche: In the past, Uchumi has operated in an undefined market space, serving across all marketlevels. This has put it at a competitive disadvantage against its peers who have specialized in specific marketniche. However, for the first time, Uchumi has defined its market niche, the mass market. Whereas the massmarket space is very competitive, we note that this will help Uchumi to specialize and focus on one market anddeliver best of service

c) Capitalization: The retailer has embarked on sell of its non-operating assets on Langata, Ngong and Thikaroad. The sale expected to injected in sufficient capital that will be used to pay-off suppliers and improve theretailer’s working capital. Ability to pay suppliers is key and fundamental in retail business as they represent themantle of the business chain, an area where Uchumi has struggled for long

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Kenya’s Retail Sector OverviewKenya’s retail sector is on a fast-paced growth lane driven by changes in consumer trends.

• The retail sector is one of the fastest growing sectors of the economy in Eastern Africa. The wholesale and retail sectorhas over the last 4 years grown by a CAGR of 7.7% faster than the overall GDP which has grown by 5.4%, indicating amuch more vibrant sector

• The Kenyan Retail chain market is made of 5 key players namely; Uchumi, Nakumatt, Tuskys and Naivas Supermarkets.The players have all embarked on expansion strategy driven by the need to capture the fast growing Kenyan consumerspace

• The market has remained attractive to global players, with the recent entry of GAME Stores, Carrefour and Choppies,among other major stores which have shown interest in entering the Kenyan market

• Per Capita income is expected to increase driven by growth in disposable income and consequently a growth in averagefood basket. Changing consumer taste will drive the retail market for a going forward

• However, challenges remain rife in the Kenyan retail market. High foods costs driven by high energy related productioncosts, poor infrastructural networks continue to hamper affordability of food and non food essential items. This has anegative effect on the purchasing power of local consumers

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Projections

Jun-16 Jun-17 Jun-18 Jun-19 Jun-20Terminal

Ass.Revenue 12,835.9 13,840.9 14,671.4 15,551.6 16,484.7 17,309.0 EBITDA 420.5 598.0 716.6 727.9 738.9 EBIT 420.5 526.8 612.6 638.9 635.1 666.8 After Tax Operating Income 294.3 368.7 428.8 447.2 444.6 466.8

Full year free cashflow - 434.2 355.1 323.4 352.7 247.1

Discounting factor 0.9 0.8 0.7 0.6 0.5 Terminal value 2,493.3 Present value of cashflows 401.4 278.1 214.6 198.3 1,304.5 PV of cash flows 2,396.8 Add cash 767.9 Value of Land 1,430.0 Less debt (1,082.8)PV of equity 3,511.9 Outstanding shares 365.0 Intrinsic value 9.6 Current price 8.1 Upside/(Downside) 19.5%

We obtain an intrinsic valuation of Kshs. 9.6 per share, representing a 19.5% upside

Intrinsic Valuation- Discounted Cash Flows

Valuation AssumptionsRisk Free Rate 12.0%Risk Premium 6.0%Beta (regressed with NASI) 0.76 Cost of Equity 20.1%Terminal Growth Rate 5.0%Mature Company Beta 100.0%Weighted average cost of capital 18.0%Termimal WACC 16.5%*Target Debt/Equity ratio of 30%

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Uchumi trades at much lower multiples compared to the peers

Relative Valuation

EV/EBITDA P/E

Company 2011 2012 2013 2014 2015 2016e 2011 2012 2013 2014 2015 2016e

Uchumi 5.5x 7.4x 7.6x 5.5x -1.7x 8.8x 7.8x 15.4x 14.7x 8.5x -0.9x 35.5x

Labell Vie 14.7x 14.7x 17.8x 15.1x 10.5x 9.4x 72.1x 28.4x 64.8x 41.2x 33.9x 24.1x

Choppies Enterprises 0.0x 8.5x 12.5x 14.3x 10.8x 9.3x 0.0x 14.2x 23.0x 29.4x 23.1x 23.7x

Rami Levy Chain Stores 10.5x 10.8x 14.6x 11.3x 15.3x 12.6x 16.7x 15.7x 21.3x 20.8x 33.5x 19.5x

Al Meera Consumer Goods 32.6x 20.6x 19.1x 19.2x 15.8x 12.8x 19.5x 14.9x 13.0x 17.7x 19.9x 16.1x

Pick n Pay Stores 10.7x 10.0x 13.3x 11.3x 11.9x 9.9x 28.2x 30.2x 40.8x 32.6x 33.3x 24.7x

Spar Group 10.7x 12.9x 11.6x 11.9x 11.3x 10.3x 17.3x 20.8x 17.4x 16.1x 20.7x 16.7x

Shoprite Holdings 11.1x 14.0x 15.5x 11.6x 8.7x 7.7x 20.1x 24.8x 27.5x 22.1x 17.7x 15.2x

Victory Supermarkets 6.5x 5.0x 8.4x 7.2x 10.7x 8.7x 12.0x 9.5x 15.8x 12.9x 21.7x 15.1x

High 32.6x 20.6x 19.1x 19.2x 15.8x 12.8x 72.1x 30.2x 64.8x 41.2x 33.9x 35.5x

Average 11.4x 11.6x 13.4x 11.9x 10.4x 9.9x 21.5x 19.3x 26.5x 22.3x 22.6x 21.2x

Median 10.7x 10.8x 13.3x 11.6x 10.8x 9.4x 17.3x 15.7x 21.3x 20.8x 21.7x 19.5x

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Uchumi is undervalued based on peer comparison, at a target price of Kshs 9.7

Relative Valuation

Football FieldValuation Summary: Implied Price Weighting

Weighted Value

DCF 9.6 80.0% 7.7

EV/Ebitda Multiple 1.3 10.0% 0.1

P/E Multiple 18.5 10.0% 1.8

Fair Value 9.7

Current Price 8.1

Upside/(Downside) 20.2%

1.3

18.5

9.7

9.6

1.3

-

18.5

7.9

14.0

- 5.0 10.0 15.0 20.0 25.0 30.0 35.0

Valuation Range

Target Valuation

DCF Based

EV/Ebitda based

EV/Sales based

P/E based

Current Price

52-week Range

EV/Ebitda Multiple 2011 2012 2013 2014 2015 2016e AverageImplied metric 11.4x 11.6x 13.4x 11.9x 10.4x 9.9xImplied share price 24.3 25.1 37.1 (15.3) (65.3) 1.8 1.3

P/E Multiple 2011 2012 2013 2014 2015* 2016e AverageImplied metric 21.5x 19.3x 26.5x 22.3x 22.6x 21.2xImplied share price 31.6 19.9 35.6 30.7 5.1 1.1 18.5 *Normalized PE based on average ROE

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AppendixIncome Statement and Balance Sheet Summary

Balance sheet (Kshs Mns) 2012A 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E

Total non-current assets 3,347.7 3,848.2 4,964.8 4,525.0 4,339.3 4,329.4 4,457.1 4,592.6 4,736.1

Total current assets 1,594.1 1,726.5 1,954.0 1,777.3 1,703.5 2,108.4 2,436.8 2,757.9 3,113.0

Total assets 4,941.9 5,574.8 6,918.8 6,302.2 6,042.8 6,437.7 6,893.9 7,350.5 7,849.1

Shareholders equity 2,657.8 2,925.4 3,337.3 739.4 758.7 903.5 1,141.8 1,377.7 1,620.4

Total current liabilities 2,203.8 2,448.1 3,404.1 5,179.9 3,953.5 4,203.6 4,421.5 4,642.2 4,898.1

Total liabilities and equity 4,941.9 5,573.5 6,918.8 6,302.2 6,042.8 6,437.7 6,893.9 7,350.5 7,849.1

Income Statement (Kshs Mns) 2012A 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020ESales 13,918.5 14,368.6 14,457.7 12,954.6 12,835.9 13,840.9 14,671.4 15,551.6 16,484.7 Cost of sales 11,407.2 11,600.1 11,643.6 10,816.8 10,397.0 11,211.1 11,957.2 12,713.5 13,517.5 Gross profit 2,511.3 2,768.5 2,814.1 2,137.8 2,438.8 2,629.8 2,714.2 2,838.2 2,967.3 Other incomes 628.4 910.7 581.8 450.6 770.2 830.5 880.3 933.1 989.1 Total operating income 3,139.7 3,679.2 3,395.9 2,588.4 3,209.0 3,460.2 3,594.5 3,771.3 3,956.3 Total operating expenses 2,520.5 2,893.4 3,618.5 4,816.6 2,788.5 2,862.2 2,877.9 3,043.4 3,217.5 EBITDA 619.2 785.8 (222.6) (2,228.2) 420.5 598.0 716.6 727.9 738.9 EBIT 428.4 502.0 (222.6) (2,228.2) 349.3 494.0 627.6 624.1 633.9 PAT 274.0 357.0 364.3 (3,421.4) 19.3 144.8 238.3 235.9 242.7

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