Analyst BODEGAS RIOJANAS. Frederick E. Artesani, EAFI THE COMPANY REPORT OF

Transcription

1 Bodegas Riojanas is a Spanish winery that makes and commercializes wines from the Rioja region, which is protected under its own Designation of Origin (Denominación de Origen, D.O.). This D.O. has the largest market share in Spanish premium wines, which favours domestic market penetration for Bodegas Riojanas since it principally makes premium wines. Furthermore, the only channel showing signs of continued growth is Consumer and Retail, with a growing demand for premium D.O. wines, which is where Bodegas Riojanas concentrates the bulk of its production. Moreover, the company enjoys a high Gross Margin/Sales owing to the fact that aged premium wines have a higher added value. Finally, the company s positioning in quality wines segment makes it well placed to take advantage of an eventual pick up in the cycle. The company s winery infrastructure (presses, tanks, barrels, racks, bottling facilities) has benefited from successive investments, upgrades and increases in capacity. At present this allows Bodegas Riojanas to unfold its strategy of concentrating in the production of quality aged wines without the need for further investments. Its international projection is still low. This is partly explained by the high penetration in Spain of its added value wines. Even so, Bodegas Riojanas is not oblivious of the opportunities that foreign represent and is reinforcing its commercial arm outside Spain. BODEGAS RIOJANAS COMPANY DATA TICKER RIO PRICE (15 OCTOBER 2012) 4,75 SECTOR Alimentación y Bebidas Nº OF SHARES (in 000) CAPITALIZATION (in 000 ) FREE FLOAT 26,7% DAILY VOLUME TRADED LAST 12 MONTHS (in 000 ) MAXIMUM PRICE (LAST 12 MONTHS) MINIMUM PRICE (LAST 12 MONTHS) SHARE PRICE VARIATION LAST MONTH SHARE PRICE VARIATION LAST 3 MONTHS SHARE PRICE VARIATION LAST 12 MONTHS 10,60 5,90 4,25-2,3% -0,8% -19,2% The cost of debt weighs down on results: Even if debt levels do not represent a balance sheet problem, nevertheless financial costs do represent more than half of EBIT. Therefore, we consider the company s objective of a 25% debt reduction between 2011 and 2014 to be a very favourable course of action. Bodegas Riojanas has already started to meet its targets for 2011 and the projections in this report support the planned debt reduction and this without having to either cut their dividend or reduce the current pace of their investments. Year 2012 is a turning point (in fact half yearly results confirm this) and net profits are expected to increase at a faster pace: this will be due to the implementation of the current debt reduction plan and the associated lower financial costs, together with improving Gross Margin to Sales, owing to the coming into the market of stocks of aged wine produced with harvests where grape costs had been very low (2009 and 2010). This is important to note, since Bodegas Riojanas trades basically at Book Value, to a great degree because its return on resources (assets, equity, invested capital) is low when confronted to comparable companies. As sales will translate to a greater degree into profits, with less financial costs and less raw material costs, this return on resources should pick up, and so should the company s stock-price (as well as its P/BV which is well below sector average). Earnings up, stock-price down: Since the end of 2009 (when the sector experienced a severe adjustment) until now, Bodegas Riojanas has increased annually its Sales, Gross Margin/Sales and Net Profit and according to the projections of this report, will continue to do so. In spite of this improved performance the stock-price has fallen by 43% since the end of This report uses two different valuation methods (Discounted Cash Flows and Comparable Multiples) which give an intrinsic value per share for Bodegas Riojanas of 5,67 and 5,97. When compared to the current stock-price of 4,75, this gives an upside between 19% and 26%. K E Y F I N A N C I A L D A T A ( i n ) (e) 2013(e) SALES EBITDA NET RESULT ROE 2,83% 2,96% 3,09% 3,65% NET DEBT P E R S H A R E D A T A ( ) (e) 2013(e) DPS 0,10 0,10 0,10 0,10 EPS 0,128 0,134 0,142 0,170 BVPS 4,53 4,54 4,58 4,65 R A T I O S D E V A L O R A C I Ó N (e) 2013(e) P/E 55,3 x 36,8 x 33,5 x 28,00 x Dividend Yield 1,4% 2,0% 2,1% 2,1% P/BV 1,57 x 1,09 x 1,04 x 1,02 x OCTOBER BODEGAS RIOJANAS 1

2 DESCRIPTION OF BODEGAS RIOJANAS Bodegas Riojanas produces and commercializes wine from the Classified Rioja Wine Region, and in a lesser quantity wine from the Toro Wine Region, both for the domestic market and for the international market. They also maintain agreements with other wine producers of other Classified Regions to commercialize their wine. A great share of the firm s sales corresponds to red wines from the Rioja Designation of Origin (Denominación de Origen -D.O.- ) with ageing (such as Crianza, Reserva and Gran Reserva).Their main brands are Viña Albina, Monte Real and Puerta Vieja. HISTORY OF BODEGAS RIOJANAS Bodegas Riojanas started their activity in 1890 promoted by families of wine tradition from Cenicero and even today their managers are descendants of the original families that founded the firm. Right from the beginning of their activity they have been wine growers, producers and exporters.repeatedly during their business history they have invested in modernization, technology, R&D, quality, capacity in storage and in ageing facilities. They are considered a classical wine producer of the Rioja, but their activity is not limited to the Classified Rioja Region, since in 1999 they started a diversification by producing their own wines in the Classified Wine Region of Toro, and at a later stage by expanding their commercial offer to encompass different classified wine regions, such as Ribera del Duero, Rueda, Rias Baixas, just to mention a few, thanks to various collaboration agreements with other winemakers. MILESTONES OF BODEGAS RIOJANAS 1890: Bodegas Riojanas are founded. 1925: The Classified Rioja Wine Region is created as well as its Regulating Council. 1930: The Firm is registered as a Limited Company. They have 528 vats. Other; 6,4% Toro; 6,9% Chart 1: Bodegas Riojanas - Sales breakdown by Denomination of Origin Red Reserva; 54,9% Chart 2: Rioja; 86,7% Bodegas Riojanas - Sales breakdown by product for Rioja wines Red Crianza; Red 30,1% young; 3,9% White; 4,0% Red Gran Reserva; 7,1% : Bodegas Riojanas becomes a Public Company. During this period the Bodega undertakes the first enlargement of its installations : The second enlargement is undertaken, increasing the capacity of the wine storage to vats : Another enlargement is performed and in particular a strategic change in the firm. The sale of bulk wine and of young wines is stopped, and sales are concentrated on aged and vintage wines. To accomplish this, new premises and deposits are built, the capacity of aged wine is increased to vats, reaching a total of vats and special bottle storage racks for the ageing of an additional bottles are built, reaching a storage capacity of bottles for wine ageing : In 1973 Banco de Santander acquires a capital share. The winery is enlarged again, investing in more warehouses, in more storage space and in the bottling machinery which now reaches a bottling capacity of bottles/hour. Red young; 52,3% Chart 3: Bodegas Riojanas - Sales breakdown by product for Toro wines White; 16,3% Rosé; 12,0% Red Reserva; 4,5% Red Crianza; 14,9% OCTOBER BODEGAS RIOJANAS 2

3 : More enlargements take place such as bottle storage, tanks, bottling installations as well as technical improvements throughout. Stainless steel replaces the concrete tanks as the new standard material for the construction and installation of tanks : To coincide with the Centenary of Bodegas Riojanas, the firm undertakes an enlargement of magnitude, doubling the capacity of the winery, installing 60 new stainless steel tanks ( of liters capacity per tank), new pressing systems, implementing new winemaking techniques, adding an ageing capacity of vats, and modernizing the bottling area to increase throughput to bottles/hours. In 1997 Banco de Santander sells its share in the Winery, and the firm decides to quote in the Spanish Stock Exchange, placing 38,5% of its capital and maintaining its status of a family business. After its appearance in the Stock Market, to enhance the actual facilities of elaboration and ageing of Cenicero, they built a new winery in San Vicente de la Sonsierra (also within the Classified Rioja Wine Region) with a capacity for processing one and a half million kilos of grape and with oak vats. This new winery starts operations with the 1999 grape harvest. Bodegas Riojanas obtains the ISO 9002 Certificate issued by AENOR. In 1999 Bodegas Riojanas create Bodegas Torreduero in the Classified Toro Wine Region onwards: Bodegas Riojanas continues consolidating its growth plan and continues investing in modern technology as well as in R&D. Today they have vats of Rioja Classified wine and 600 vats of the Toro Classified wine, with bottle storage for bottles of Classified Rioja and bottles of classified Toro.They have continued to develop their export vocation and opened in 2009 a Commercial Office in the U.S.A. Finally, in their diversification process, they have signed agreements of collaboration with wineries of different Classified Regions such as: Ribera del Duero, Rueda, Rias Baixas, as well as with Cava and Champagne producers. THE WINE SECTOR IN SPAIN: AN EMBLEMATIC SECTOR. The wine sector is Spain is an emblematic sector: Spain is the first country in the world in vineyard extension, representing 14% of the world vineyard and 30% of the European vineyard; and it is the 3rd wine producer in the world (France is the leader with 18,7%, followed by Italy with 15,6% and Spain with 12,9%). In the year 2011, Spain exported around 55% of its production, increasing the exported volume by 26,3% and the value of its exports by 16,7%.( Source: OIV, International Organisation of Vine and Wine). In the last 10 years, Spanish wine exports (measured in millions of hectoliters) increased by 118%. Presently, Spain holds the second position in the world wine export trade with a share of 21,5%. Out of the total of the Spanish exports, still wines (without including sparkling wines) belonging to Classified Regions (D.O.) represented 43,3% of sales. In the export markets, although two thirds of the Spanish exports goes to EU countries, it is worth noting as markets of greater growth: China (+84% in value and +47% in volume), Russia (+45% in value and +30% in volume),canada (+16% in value + 34% in volume, USA (+6% in value + 28% in volume) and Mexico (+10% in value and 24% in volume). During the first quarter of 2012, according to the Spanish Observatory of the Wine Market (OeMV) the exports of Spanish Wine had an increase of 4,8% in volume and 14,7% in value. Still wines from Protected Classified Wine Regions grew by 10,4%, thanks to an increase in the prices since the volume remained stable. More expensive premium wines were those which maintained a bigger level of growth during the quarter. THE WINE SECTOR IN SPAIN: A CHALLENGING SECTOR. But the Spanish Wine sector is facing since decades a situation of excess supply. (This explains undoubtedly, its strong export component). This situation of excess supply is due to various factors: OCTOBER BODEGAS RIOJANAS 3

4 Analyst Demand: A gradual decrease in wine consumption in Spain. The problem of a large capacity of production is compounded by the falling trends in wine consumption. Here we have to distinguish between retail consumption and consumption through the HORECA channel (hotel, restaurant and catering business). Retail channel (stores and homes): Its relative importance has been on the increase, yet unable to compensate the falls in the HORECA channel. The improvement in retail consumption is to a large extent due to a growing population which compensates for a decrease in consumption per capita Chart 4: Total wine consumption in Spain (Millions of litres) This channel is showing a growth in demand for the range of wines with higher added value for the producers: aged wines (through ageing in vats, which is the case of Crianza, Reserva and Gran Reserva wines) produced in regions with Denomination of Origin. The changes in wine consumption habits have reduced the daily consumption of young wines in favour of premium wines, since home consumption has become more of a special occasion where more prestigious and expensive wines from well-established wineries are consumed. Due to this situation, even with a reduction of the volume of consumption per capita in private homes, the total expenditure in the retail channel has gone from 848,39 million Euros in 2003 to 1.060,40 million Euros in 2011 ( an increase of 25% in the global sales figure).this change confirms the winemakers strategies, such as Bodegas Riojanas, of developing more quality wines with time spent ageing in vats. For the producers, this movement offers better operating margins but it also implies a larger investment in ageing capacity and in storage, and a lengthening of the conversion cycle from stock to cash. For this reason, this new system is not affordable to all the wineries. Here Bodegas Riojanas benefits from having made enlargements and successive modernizations all along its history. Moreover, although such investments have implied carrying important debt levels, they have no liquidity issues and also have access to financial credits both for the short and the long term (as can be seen later in the financial debt analysis). Beyond a decrease in the volume of retail consumption, which is more than compensated by the current mix of wines sold, the biggest problem is caused by the strong decreasing trend of volumes (and also in the mix of products from the HORECA channel. HORECA channel (Hotel, Restaurant and Catering business): The consumption of this channel has been falling for the past 7 years. Moreover it shows no sign of recovery since it is very sensitive to the economic crisis. In particular the hotel business depends to a great extent on corporate consumption: with the adverse economic environment the reduction of company meals has been very significant. To this we also have Chart 5: Total wine consumption (Million litres) in Spain Retail Table 1: HORECA Spain: Wine consumption per capita (Litre/habitant/year) TOTAL DO Still Sparkling Other jun-12 9,40 3,10 5,00 0,60 0, ,30 3,10 4,90 0,60 0, ,60 3,09 5,06 0,57 0, ,46 3,00 5,11 0,61 0, ,53 2,94 5,74 0,68 1, ,37 2,98 6,08 0,71 0, ,69 2,64 6,89 0,58 0, ,98 2,59 7,24 0,59 0, ,51 2,47 7,81 0,62 0, ,15 2,16 8,91 0,58 0, ,87 2,11 9,60 0,64 0, ,43 2,11 10,09 0,72 0,51 (Source: Panel de Consumo Alimentario MARM) OCTOBER BODEGAS RIOJANAS 4

5 Analyst to add the impact from a reduction of meals outside their homes by the consumers. In relation to the changes in the consumption patterns of the channel, at least we can notice a strong substitution away from normal table wines into wines with Denomination of Origin. This change in the choice of wines is due to the fact that the consumer considers the wines of Classified Origin of a better quality and at a reasonable extra cos. As a result patrons at restaurants have shifted to consuming Classified Origin wines, considering them a sure choice at a competitive price. This change plays in favour of the wine zones with a well-established Denomination of Origin, such as La Rioja. In fact, 7 out of 10 aged wines sold in the hotel /restaurant business are from the Rioja region (this is based on a study of wine consumption in Spain as published in April 2012 by Nielsen Consultants). Besides the move away from young wines from unclassified regions, the demand in this channel is concentrating in the intermediary aged wines (Crianza), also moving away from wines with lots of ageing (Gran Reserva and even Reserva): in fact, the Hotel/Restaurant business cannot finance stocks and as they try to have the minimum stock possible, they also ensure stock their inventory is not too high on expensive wines. This change in the general demand has given origin to a larger concentration of aged wines and to a lesser extent of vintage wines and to a much lesser extent of great vintage wines. This change validates a strategy focused on producing wines with age, as carried out by Bodegas Riojanas. Nevertheless, the HORECA channel is not exempt of difficulties since even for wines with Denomination of Origin there is a reduction in the volume consumed (in liters) and a shift in the product mix which translates into lower prices per liter purchased. After the consumption changes of the past seven years, at present, for the Rioja Denomination of Origin the volumes on demand correspond on an equal basis to the HORECA channel with 50% and to the retail channel with the other 50% (as per the report presented by the Nielsen Consultants in April 2012). So, in spite of its gradual loss of weight since 2003, the HORECA channel still remains an important buyer and must therefore be adequately serviced by the producers. Chart 6: 100% Annual sales volume split (%) of RIOJA wine through different channels (Source: Nielsen) 80% 60% 52,8 59,6 63,9 63,7 66,9 73,4 73,5 70,5 68,5 70,9 68,9 65,6 63,8 62,5 61,2 57,6 52,3 50,0 40% 20% 0% 47,2 40,4 36,1 36,3 33,1 26,6 26,5 29,5 31,5 29,1 31,1 34,4 36,2 37,5 38,8 42,4 47,7 50,0 Retail HORECA The HORECA channel has also requested a special updating in the presentation of the wineries, demanding a special labeling different from the one presented to the retail sector with the sole purpose of avoiding the use of the same labels for the same wines and thus not revealing to the consumer their sales margin. This request has been accepted by Bodegas Riojanas, which has amended its portfolio of labels creating exclusive bottles for the hotel/restaurant sector. Adapting to HORECA needs is important, since this channel still represents a very powerful way of promoting wineries and their brands. Due to the low loyalty of the HORECA channel to the wineries and to its sensitivity to special pricing and promotions, it is of utmost importance for a producer to have a strong and well developed commercial and marketing department. Finally, although there is no statistic at hand to prove this, it is a general opinion that the hardening of the traffic laws in relation to alcohol limits and drunken driving together with the smoking prohibition in indoor premises have also contributed to exacerbate the reduction of consumption in the HORECA channel. OCTOBER BODEGAS RIOJANAS 5

6 Offer-The official subsidies to uproot vineyards and to reduce the planted areas have been offset by the technological improvements in yield and productivity. The vineyard surface in Spain is on the decrease: with the financial aid from the Common Organization of the Wine Market (OCM) for the 2010/2011 campaign, the uprooting of hectares of vineyard. When added to the vineyards uprooted with European aids in the two previous campaigns this gives us a total of hectares completely eliminated in the last three years. To which we should add the vineyards uprooted without official aid or simply abandoned for their low yield and profitability. In fact, from 2002 to 2010 the total vineyard planted area in Spain has gone down by 14%... but the production has gone up by 22%. In fact, as wineries have invested in their structure to improve quality and production they have unwillingly contributed to worsen the situation of excess supply that threatens the sector, since the improvements in quality and production have increased productivity to a point where wine production has increased even after a considerable reduction of planted areas. Additionally, the sector has to face other problems: An excessive atomization and fragmentation of the producers. With 70 Official Denominations of Origin and more than wineries, the Spanish wine sector has a high level of atomization. This is a problem for the stability of the sector and for the faithfulness of the clients (this last point is of vital importance for the small wineries of recent creation) since there are brands and types of wine in excess. It is also certain that this atomization implies the existence of many small producers who can afford with difficulty the investment programmes which are needed to carry out a strategy of quality aged wine. This situation favours in the end wineries with economies of scale in their marketing department and with the capacity to invest in modernization and enlargement of the installations both for increased production and for increased ageing installations. We understand that, without being one of the largest wineries, Bodegas Riojanas has this competitive advantage since during its history they have built the necessary installations to develop their strategy of specializing in aged wines of quality. If we take into consideration the latest data published by the Classified Rioja Region, at Bodegas Riojanas the segments with higher added value, such as vintage (Reserva) and great vintage (Gran Reserva) wines, have registered a better record as can be seen by the sales breakdown per category which follows: Vintage and great vintage wines: 62% (against 14% for the Rioja Region). Aged wines: 30% (against 40% for the Rioja Region). Young wines: 4% (against 46% for the Rioja Region-Includes white and red). White wine: 4%. Imports of cheaper wines: Another factor which has meant an additional threat has been the penetration of more affordable wines produced in new zones (such as Australia or New Zealand) into both the Spanish market and the mature international markets traditionally serviced by Spanish wines. However, since the end of 2009 the growth which was registered in the so called New Countries has been slowing until currently reaching a standstill or even a reduction in production which has also meant a reduction in their exports, thus easing their competitive pressure on Spanish wines. The economic crisis since 2008: Both the available income in private houses and the economic situation in firms have an influence on sales. These have been negatively hit by the economic crisis which started at the beginning of 2008, and so far signs of a recovery are very distant. This decrease in the purchasing power of private houses and of firms has clearly dampened consumption from the HORECA channel, even though part of this adverse phenomenon has been compensated by the substitution which is done by retail consumers when celebrating dinners at home rather than in restaurants. OCTOBER BODEGAS RIOJANAS 6

7 POSITIONING OF BODEGAS RIOJANAS. We consider Bodegas Riojanas to be well placed in the wine market due to the fact that they are mainly a producer of Rioja wines and that they are devoted to a large extent to the elaboration of wines aged in vats (62% of their sales of Classified Rioja are vintage or great vintage wines and 30% of their sales are aged Rioja wines) La Rioja continues to be the Classified Zone with the greatest preponderance and prestige. Market share: It is not the zone with the largest production, but it holds the largest market share, 62% of the total sales in Spain of aged wines from Classified Regions, according to a survey of the Spanish wine market presented by Nielsen Consultants on April Broken down by distribution channels in the year 2011 the red wines aged in vats from the Rioja Classified Region represented 74,7% of the total sales of aged wines from Classified Regions in the HORECA channel and 51,4% in the retail channel. Chart 7: Spanish market share (retail and HORECA) of sales in the segment of aged wines with Denomination of Origin - Source: Nielsen Other D.O.; 38% La Rioja; 62% The Rioja Denomination of Origin projects a strong quality image. As a matter of fact, the Classified Rioja Region has the largest number of officially registered wineries of quality, totaling It is followed by the Classified Region of La Mancha with 276 wineries, and then Ribera del Duero, Cataluña and Penedes. Moreover, retail consumers not only have increased their demand for better wines for home consumption but also,in a climate of economic crisis, they have reduced their desire to experiment with unknown wines thus turning to what they think are sure values, falling back on well-established regions and strong-recognition labels. This situation has played in favour of the Classified Rioja Region. Which explains the high market share in the HORECA channel, as mentioned previously. For Bodegas Riojanas, not only the Classified Rioja Region leads the segment of the wines with higher added value, but the sales of Bodegas Riojanas in this segment display a higher share than the average of all producers of Rioja. STARTEGY OF BODEGAS RIOJANAS. A philosophy based on quality: it produces mainly quality wines aged in vats. This allows Bodegas Riojanas to: i) Maintain higher prices and obtain a higher Gross Margin; ii) generate a greater loyalty from the consumers who have become more selective and who have increased their consumption of aged wines with a Denomination of Origin, an upward trend started in the 90 s; iii) support the commercialization as their wines are rewarded with prizes and awards. OCTOBER BODEGAS RIOJANAS 7

8 The drive to improve quality also requires a strategy focused on wines aged in vats. The introduction of this strategy has not only meant investing in technological improvements and in modernizing the installations, but it has also meant increases in the capacity of grape processing, of ageing and of storage. The development of this type of strategy requires a minimum size for wineries, a high degree of professionalism and a proper business plan to be able to finance the necessary investments by means of internal cash flow generation and / or by securing access to financial credit. By following this path, the winery has reached a position where the quality and the brand can generate customer loyalty. This is important since the HORECA channel has suffered a gradual deterioration, while the retail channel has been increasing its consumption and at the same time increasing the demand for higher added value wines. It is a profitable strategy since once the investments have taken place, the costs related to ageing and storage (including the amortization of the vats, the cleaning of the vats, transfers and other costs related to the storage in vats) is clearly inferior to the average price increase which vintage wines and great vintage wines command. A study of the wine sector elaborated by the Consultants MKF in 2007 for the State of Virginia stated that the viable and profitable wineries showed a Gross Margin/Sales of at least 50%. This report gathered certain key factors such as the capacity to face the necessary investments to develop aged quality wines, a sufficient size to enjoy economies of scale in sales, distribution and marketing. Bodegas Riojanas enjoys these characteristics and as a result it has a high Gross Margin/Sales which exceeds 60%, thus reflecting the advantages of having a sales product mix tilted towards aged wines of quality which command higher margins. A strong focus on commercialization and marketing activities. Even if this activity can represent 30% of the sales costs, it is of primary importance in a fragmented and competitive environment in order to detect changes and opportunities in consumer behaviour, to obtain consumer loyalty and to arrive more directly at the consumer without depending on an excess of intermediaries, as these increase the final cost of the product (thus reducing its competitiveness) and have little or no brand loyalty. The control of the distribution channel and of a dedicated commercial force allows for the final selling price to be less costly for the consumer, a key factor to stabilize demand in an environment of crisis where the consumers are sensitive to price. Only 28,5% of the producers have direct sales and commercialization to the HORECA channel. Bodegas Riojanas controls very clearly this aspect of the wine business and in a certain way it can be said that there are two firms in one: One company engaged in wine production and another organized as a commercializing entity. This, we think, explains in good measure the positive evolution of sales from 2009 to 2011 in spite of an environment of greater weakness in demand. We must also mention, within the retail channel (food chains and supermarkets), what could be named as the alternative channels. By alternative channels we make a special emphasis on the Christmas Campaign: here there are two strong sources of demand, corporate gifts and to the special Christmas promotions and campaigns developed by large department stores. Although it is true that sales related to this activity are accounted under the retail channel, we think (and so does Bodegas Riojanas) that this distribution channel shows a different behaviour from typical home consumption, with strong seasonality (Christmas) and a strong dependence on the prevailing business and economic climate. In the campaigns of the last years since 2009, coinciding with the full brunt of the crisis, the clients of this alternative channel have gradually reduced their orders. But Bodegas Riojanas, thanks to their commercial activity, have been able to compensate this adverse factor with the incorporation of new clients, achieving through the crisis that all the Christmas Campaigns have maintained a stable level and even slight increases in sales. OCTOBER BODEGAS RIOJANAS 8

9 A renewed effort to continue boosting up sales in the international markets: Aware of the importance of the export activity, and aiming at strengthening the distribution in the U.S.A., Bodegas Riojanas constituted in 2010 the firm Bodegas Riojanas USA Corporation, with Head Office in New Jersey. Presently, sales in the USA represent for Bodegas Riojanas 15% of their total exports. Still today the more mature markets (mainly Europe, particularly Germany and Northern Europe, which are showing strong increases) represent the greatest share of exports, with 33% sold to the United Kingdom: The UK however shows the problem that 80% of the volume corresponds to aged wines which are sold through hard discount, and even if there is still a market for Vintage and Great Vintage wines, the average price continues to drop. The actual level of exports is 9% of total sales, which is low compared to the Classified Rioja Region, where exports exceed 30% of production, but this difference is mainly explained by the high rate of penetration of the brands Bodegas Riojanas for aged, vintage and great vintage wines in the domestic market. We think that due to the specialization of Bodegas Riojanas in quality wines, their export activity should gradually benefit from the clear world growth in the demand of such wines, particularly in the segments of Premium and Super Premium wines. Confirming this move towards wines of added value, during the first quarter of 2012, although the exports of the Rioja wines fell by 2,5% in volume, they grew in value (Euros) by 4,9% (according to the Spanish Wine Market Observatory- OeMv) Finally, it is important to mention that Bodegas Riojanas maintain their decided objective to develop the international market, by opening at the beginning of 2012 commercial offices in China and Germany to be added to their commercial offices in the United Kingdom and Mexico. Diversification to keep a continued presence in the young wines market: In 1999 the group started a new winery in Toro. This was part of their will to maintain a competitive presence in the segment of young wines with little or no ageing. The diversification took place when the price of the grape shot up significantly (400 Pesetas per kilo = 2,50 Euros approx.) for the prestigious Classified Regions (Rioja and Ribera del Duero) which prevented them to compete in the young and aged wines (Crianza) market. Their new venture in Toro meant being able to continue to compete and be present in these segments. Since then, excesses in the prices of Rioja grapes have been corrected and the problem experienced in 1999 has disappeared, thus allowing them to compete again in the young Rioja wines. Their production in Toro concentrates 87% of sales in young wines, a very similar proportion to the Toro wine producers aggregate, which is 86%. FINANCIAL ANALYSIS Profit & Loss account. The yearly data for Sales, Gross Margin, EBITDA etc. point to a turnaround in 2009 from which all P&&L magnitudes have initiated a recovery. Table 2 Relevant Data from the P&L Account OCTOBER BODEGAS RIOJANAS 9

10 Bodegas Riojanas is facing a complicated environment where revenue is threatened both by lesser unit sales by final price reductions in Spain. And yet it is experiencing a growth in Sales and higher Operating Margins: this is the result of a change in consumption patterns in the retail channel where consumers are moving towards wines with a Denomination of Origin, and with some ageing in vats. It is also a consequence of having reactivated at the end of 2009 their commercial activity, with the creation of new Marketing and Public Relations departments. Balance Sheet: Debt: The strategy focused on wines of higher added value has needed various efforts in investment in technology, in quality and in increases in capacity both in the ageing process in vats and in the bottle storage in racks. All this has given rise to a debt level which is high although it does not represent a problem of liquidity nor does it stretches the Balance Sheet: however, the financing of this debt is a heavy burden in the company s results. (See table 3, 4, 5 & 6 where Bodegas Riojanas is compared to similar wineries). This causes a problem since the high level of the debt implies a high financial cost which reduces profits (After Financial Costs of the profit before taxes is ). It limits the potential dividend and it also penalizes the valuation of the firm measured by multiples, since as a result of a lower EPS Bodegas Riojanas is relatively expensive in terms of PE ratio or EV/EBITDA. In spite of this situation, the firm has no liquidity or cash problems, being in line with the sector as far as its liquidity ratio is concerned. (See table 7) Additionally, Bodegas Riojanas has never had any difficulties to finance itself, be it internally through working capital or externally through credit lines and banking loans. Bodegas Riojanas always manages to finance with ease the increases in costs tied to the seasonality of their business with increases in its Short Term Debt (normally this item increases systematically every year about 3 million Euros in the 4th quarter, then to be reduced during the first quarter). Moreover they have million Euros in unused Credit Facilities. Furthermore, they have recently negotiated with their bankers the restructuring of their debt, transforming part of their short term debt into long term debt, closing in the year 2011 eight new loans with maturities of 2016 or longer for a total amount of 3,07 million Euros. This last point deserves an additional consideration. Bearing in mind that the annual rotation of stocks is equal to 20%, i.e. five years are needed to rotate the total stock, we deem it wiser and more cautious to obtain financing on a long term basis, matching more closely assets with liabilities. For this reason we value this change favourably. Presently, the average cost of debt for Bodegas Riojanas is around 5,8%. OCTOBER BODEGAS RIOJANAS 10

11 At present Bodegas Riojanas has started a debt reduction programme started in 2011 in order to reduce the total debt by 5 million Euros in 4 years, their target being to have total debt under 15 million Euros by In the fiscal year 2011 the debt consideration was reduced by 1,12 million Euros, in line with their initiative. Our Free Cash Flow forecasts for the next years avail the debt reduction strategy of the winery. Free Cash Flow: Table 8 CASH FLOW FORECAST (in 000 ) e 2013e 2014e EBIT EBIT after taxes (+) Amortization (-) Variation in Working Capital (-) Capex Free Cash Flow Dividends Available for Debt reduction Based on our Cash Flow forecast, Bodegas Riojanas can, without any problem, maintain both its dividends policy and its investment plans while at the same time proceeding with the debt reduction projected. Capex: Bodegas Riojanas spent Euros in investments (the replacement of the vast represents 50% of this investment) and they expect to maintain this rate of investments for the years 2012 & Dividends: During the year 2009 the dividend per share (DPA) was reduced from 0,17 to 0,10. Since then it has remained unaltered. Currently, the payout is in 74,5% (at the closing of year 2011). Although it is a fact that the firm would like to reach a payout level of 50%, we do not think that they intend to reduce the present DPA. We are of the opinion that as earnings grow, this payout will be possible with a DPA similar to the actual one of 0,10 ( or even slightly higher) as from the year 2015, when the total debt will have been reduced (and its associated financial costs also) in accordance with the financial plan of the firm. The dividend yield at actual prices is 2,1%. Which is reasonable since this is a sector which does not show a very high dividend yield. Table 9 Dividend Yield (%) (Dividend of last 12 months and prices as of 15 October 2012) Bloomberg Wine & Cheese Index 1,98% Bloomberg Wine & Beverages Index 1,89% Bodegas Riojanas 2,10% Source: Bloomberg OCTOBER BODEGAS RIOJANAS 11

12 RESULTS AT THE END OF THE FIRST SEMESTER 2012 Due note must be taken of the seasonal trends of the wine business. In fact, the conventional closing of the balance sheet of a winery (as at 31st December) shows more adverse financial data: this is due to the fact that in the last quarter the winery disburses the second and bigger payment for the supply of the acquired grapes, as well as the expenses of elements needed for the sale, such as bottles, labels, carton boxes etc. and at the same time experiences the bulk of marketing and commercialization costs for the new campaign. On the other hand, it is only towards the end of the next first quarter when most of the sales proceeds are collected (including the promotional Christmas campaign which represents between 30% and 40% of the total annual turnover), generating an important cash inflow. Consequently, the annual balance sheet at year end shows an irregular snapshot: with a concentration of expenses associated to the harvest, and with greater needs of short term financing, which always result in a seasonal increase in both short term debt and working capital. Since Bodegas Riojanas has recently published the results of the first semester of 2012, we analyze the accumulated data of the last twelve months, from 1st July to 30 June of the following year. We think these figures offer a better picture of the evolution of a winegrower s business, since they contain in the same period of analysis the expenses of a campaign, started in the 4th quarter of the previous year, as well as the cash income of the first quarter directly derived from this campaign. TABLE 10 Profit & Loss account (in 000 EUROS) 12m to 1H m to 1H012 Net Sales Other Income TOTAL INCOME Raw material costs GROSS MARGIN Labour costs Other EBITDA Amortizations Provisions 0 0 EBIT Participated companies 0 0 Net financial results Other 0 0 PBT Taxes NET PROFIT BEFORE MINORITIES Minorities 0 0 NET PROFIT P&L ANNUAL VARIATION (%) 2011/ /2011 TOTAL INCOME -5,9% 3,2% EBITDA 0,4% 13,4% EBIT 3,9% 24,6% Net Financial Result 30,7% 31,3% PBT -13,4% 18,0% NET PROFIT -15,4% 22,4% OCTOBER BODEGAS RIOJANAS 12

13 OPERATING PROFITABILITY 12m to 12m to 1S2011 1S2012 Gross Margin / Total Income 61,9% 63,0% EBITDA / Total Income 20,1% 21,5% EBIT / Total Income 11,6% 13,6% Net Profit / Total Income 4,5% 5,2% The last 12 months of operation show very favourable data with a good evolution in sales and a marked improvement in operating margins. The impact of the sale of stock corresponding to the 2009 harvest, which registered a significant drop in the supply costs (low grape prices) is starting to show in higher Gross Margin/Sales. Even if Total Debt is reduced thanks to the generation of higher cash flows, financial costs for the period go up due mainly to the one-off reorganization of debt, after changing Short Term Debt into Long Term Debt, with carries a higher financial cost but, as noted before, this allows for a more balanced financing structure, correcting what in our view was excessive reliance on short term financing. The new debt structure makes more sense due to the nature of the business and the necessary financing of the assets (such as the stocks of aged wines) on a long term basis. Even with the increase of financial costs, the net result for the period shows a spectacular growth of 22,4%. TABLE 11 - BALANCE SHEET (in 000 EUROS) 12m to 1S m to 1S2012 Total non-current assets Fixed assets Other non-current assets Total current assets Inventories Receivables Other current assets Cash and cash equivalents TOTAL ASSETS Equity Non-current liabilities Interest bearing liabilities Other non-current liabilities Current Liabilities Interest bearing liabilities Trade and other payables Other current liabilities TOTAL LIABILITIES Net Debt Working Capital OCTOBER BODEGAS RIOJANAS 13

14 BALANCE SHEET RATIOS 12m to 12m to 1S2011 1S2012 Net Debt / EBITDA 698% 567% Net Debt / Equity 84% 78% Net Debt /(Net Debt + Equity) 46% 44% Net Financial Results / EBIT -50% -52% Liquidity ratio 233% 278% Quick ratio (without inventory) 28% 37% Inventory turnover 18% 19% BALANCE SHEET PROFITABILITY RATIOS 12m to 1S m to 1S2012 ROA 1,36% 1,70% ROE 2,71% 3,34% ROIC 2,04% 2,38% We notice a reduction in the financing needs both in working capital and in total financial debt. The return on resources increases (on Assets, on Invested Capital, on Equity). Meanwhile, during the same period, the price of the stock has fallen by 29% from 6,46 to 4,58 per share, which is hardly justifiable bearing in mind the positive evolution of the results of Bodegas Riojanas. FORECASTS Working hypothesis. Sales: (in 000 ) TABLE 12 - WORKING HYPOTHESIS FOR SALES FORECASTS IN PERIODS 2012 Y Forecast: Working hypothesis Sales channels Sales 2011 % sales var price var units price 12 vs. 11 units 12 vs. 11 sales 12 vs. 11 Sales 2012e var 12/13 HORECA ,93% 0,00% -5,00% 100,00% 95,00% 95,00% ,0% Retail ,22% 1,00% 7,00% 101,00% 107,00% 108,07% ,1% Alternative / Xmas campaign ,85% 0,00% -5,00% 100,00% 95,00% 95,00% ,0% International (growth countries) 580 3,60% 5,00% 10,00% 105,00% 110,00% 115,50% ,5% International (mature countries) 870 5,40% -5,00% -5,00% 95,00% 95,00% 90,25% 785-9,8% Total ,00% ,5% (in 000 ) 2013 Forecast: Working hypothesis Canales de venta Sales 2012e % sales var price var units price 13 vs. 12 units 13 vs. 12 sales 13 vs. 12 Sales 2013e var 13/12 HORECA ,79% 0,00% -5,00% 100,00% 95,00% 95,00% ,0% Retail ,11% 1,00% 7,00% 101,00% 107,00% 108,07% ,1% Alternative / Xmas campaign ,11% 0,00% -5,00% 100,00% 95,00% 95,00% ,0% International (growth countries) 670 4,14% 5,00% 12,00% 105,00% 112,00% 117,60% ,6% International (mature countries) 785 4,85% -3,00% -3,00% 97,00% 97,00% 94,09% 738-5,9% Total ,00% ,3% Margins: We take into account, on the basis of information provided by the firm, that as from the end of 2011 Bodegas Riojanas is beginning to sell stocks with less built-in costs, corresponding to the 2009 harvest, where the price of the grape had fallen by OCTOBER BODEGAS RIOJANAS 14

15 42% (since then prices have remained fairly similar). For this reason we forecast an improvement in the Gross Margin. Other Assumptions: We maintain the DPS constant in future years at 0,10 and as from 2015 on the increase while keeping a payout target of 50%. We apply investments (Capex) of euros to euros per year. We assume that the free Cash Flow (after investments and dividends) will be entirely used to reduce the debt. We assume that the reductions of the debt will be first allocated to the Short Term Debt, keeping the Long Term Debt around 9 million euros, which is the level at which Bodegas Riojanas closed the first semester of Forecasts: TABLE 13 PROFIT & LOSS ACCOUNT AND BALANCE SHEET FORECASTS AND RATIOS (2012 AL 2016) PROFIT & LOSS ACCOUNT (in 000 EUROS) e 2013e 2014e 2015e 2016e Net Sales Other Income TOTAL INCOME Raw Materials Costs GROSS MARGIN Labour costs Other operating results EBITDA Amortizations Provisions EBIT Particip. in resultados of associated companies Net financial results Other PBT Taxes NET PROFIT BEFORE MINORITIES Minorities NET PROFIT BALANCE SHEET (in 000 EUROS) e 2013e 2014e 2015e 2016e Total non-current assets Fixed assets Other non-current assets Total current assets Inventories Receivables Other current assets Cash and cash equivalents TOTAL ASSETS Equity Non-Current Liabilities Long term interest bearing financial liabilities Other non-current liabilities Current Liabilities Short term interest bearing financial liabilities Trade and other payables Other current liabilities TOTAL LIABILITIES Net Debt Working Capital ICMV (Invested capital at market value) OCTOBER BODEGAS RIOJANAS 15

16 ANNUAL VARIATION IN P&L ACCOUNT (%) 2008/ / / / / /2012 TOTAL INCOME -3,1% -15,9% 8,8% 0,5% 0,33% 1,35% 1,00% 1,00% 1,00% Gross Margin -2,0% -8,2% 2,7% 5,8% 4,05% 1,73% 1,03% 1,03% 1,03% EBITDA -12,9% -16,8% -2,9% 10,1% 3,91% 2,11% 2,28% -0,28% 0,69% EBIT -23,6% -26,5% -0,3% 21,5% 6,55% 4,31% 4,46% 0,46% 1,03% Net financial results 13,9% -32,2% -10,5% 47,1% 6,31% -9,89% -9,09% -8,31% -9,57% PBT -43,8% -20,4% 9,1% 2,0% 6,82% 19,81% 15,59% 6,13% 6,95% NET PROFIT -39,4% -18,5% 6,1% 4,4% 5,57% 19,81% 15,59% 6,13% 6,95% MARGINS / SALES e 2013e 2014e 2015e 2016e Gross Margin/Total Income 56,9% 57,5% 62,9% 59,3% 62,5% 64,8% 65,1% 65,1% 65,1% 65,1% EBITDA/Total Income 23,9% 21,5% 21,3% 19,0% 20,8% 21,5% 21,7% 22,0% 21,7% 21,6% EBIT / Total Income 16,8% 13,2% 11,6% 10,6% 12,8% 13,6% 14,0% 14,5% 14,4% 14,4% Net Profit / Total Income 7,9% 4,9% 4,8% 4,6% 4,8% 5,1% 6,0% 6,9% 7,2% 7,6% BALANCE SHEET RATIOS e 2013e 2014e 2015e 2016e Net Debt / EBITDA 527% 614% 763% 803% 697% 617% 544% 484% 445% 399% Net Debt / Equity 87% 89% 92% 93% 89% 81% 72% 64% 57% 51% Net Debt /(Nebt Debt + Equity) 47% 47% 48% 48% 47% 45% 42% 39% 36% 34% Net Financial Results / EBIT -35% -52% -48% -43% -52% -52% -45% -39% -36% -32% Liquidity ratio 147% 156% 179% 190% 194% 248% 272% 301% 332% 385% Quick ratio (without inventories) 41% 36% 41% 50% 54% 68% 75% 84% 90% 101% Inventory Turnover 26% 24% 17% 21% 20% 19% 20% 20% 20% 20% PROFITABILITY RATIOS e 2013e 2014e 2015e 2016e ROA 2,46% 1,52% 1,26% 1,30% 1,38% 1,50% 1,84% 2,16% 2,33% 2,54% ROE 5,45% 3,32% 2,69% 2,83% 2,96% 3,09% 3,65% 4,13% 4,29% 4,49% ROIC 4,89% 2,88% 2,19% 2,21% 2,33% 2,23% 2,64% 3,00% 3,14% 3,30% MARKET RATIOS e 2013e 2014e 2015e 2016e Stock-price at year end 9,00 8,60 7,39 7,10 4,94 4,79 4,79 4,79 4,79 4,79 PE 36,65 57,83 61,00 55,26 36,81 33,81 28,22 24,41 23,00 21,51 EV/EBITDA 17,34 19,37 21,30 21,55 15,52 14,14 13,25 12,47 12,10 11,60 P/BV 2,00 1,92 1,64 1,57 1,09 1,05 1,03 1,01 0,99 0,97 P/ICMV 1,79 1,67 1,33 1,22 0,86 0,75 0,74 0,73 0,72 0,71 DIVIDEND e 2013e 2014e 2015e 2016e DPS (ordinary) 0,17 0,17 0,10 0,10 0,10 0,10 0,10 0,10 0,105 0,112 Dividend Yield 1,9% 2,0% 1,4% 1,4% 2,0% 2,1% 2,1% 2,1% 2,2% 2,3% Payout 69,2% 114,3% 82,5% 77,8% 74,5% 70,6% 58,9% 51,0% 50,4% 50,3% VALUATION The market capitalization of Bodegas Riojanas at present is not very different from its Book Value (see table 14). The Book Value per share is 4,42 (with data of the first half of 2012) and the last quoted price per share is 4,75 (at 15 October 2012). Table 14 PRICE / BOOK VALUE P/BV BODEGAS RIOJANAS SA 1,03 TREASURY WINE ESTATES LTD 1,04 WILLAMETTE VALLEY VINEYARDS 1,05 ANDREW PELLER LTD 1,16 BARON DE LEY 1,16 VINA CONCHA Y TORO SA 1,73 Bloomberg Wine & Cheese Index 2,36 CONSTELLATION BRANDS INC 2,54 Average excluding Bodegas Riojanas 1,58 Source: Bloomberg OCTOBER BODEGAS RIOJANAS 16

17 Shares which trade around or below their book value, unless there are factors justifying this (such as expected adverse news or projected falling results), which is not the case for Bodegas Riojanas, can be considered undervalued and this offers an investment opportunity. Table 15 RETURN ON ASSETS OCTOBER BODEGAS RIOJANAS 17 ROA EBIT/Assets BODEGAS RIOJANAS SA 1,4% 3,7% TREASURY WINE ESTATES LTD 2,4% 3,0% WILLAMETTE VALLEY VINEYARDS 3,5% 6,2% BARON DE LEY 3,5% 7,5% ANDREW PELLER LTD 4,6% 8,7% CONSTELLATION BRANDS INC 6,3% 7,6% VINA CONCHA Y TORO SA 6,5% 7,8% AVERAGE excluding Bodegas Riojanas 4,5% 6,8% Source: Bloomberg We understand that this market valuation to a large degree is due to the low return on resources currently exhibited by Bodegas Riojanas when compared to other similar companies (See table 15).But Bodegas Riojanas is a viable firm, with more than 100 years in existence, which generates profits and distributes dividends (with a yield of 2,1%). Moreover, since year 2009, when the wine sector underwent serious adjustments (note that in spite of this Bodegas Riojanas never ceased generating profits), Bodegas Riojanas has increased its Sales, its Gross Margin/Sales and its Net Profit. And now, after three years of recovery since 2009, we are of the opinion that the year 2012 represents a turning point where the returns on resources will start to improve, as profits and free cash flows accelerate their uptrend. We shall now proceed to calculate the theoretical value of the share in order to determine its undervaluation and its potential upside. For this we shall use two valuation methods: discount cash flows and multiples based on comparable companies. Valuation using Discounted Cash Flows (DCF): We cannot recommend a valuation based on assets, bearing in mind the nature of the exploitation of the business, with a balance sheet with material assets such as machinery for elaboration, ageing, bottling and storage but with few hectares of vineyard in ownership (Bodegas Riojanas buys 90% of the grape they need in the Rioja region and 60% in the Toro region). As we consider that the value of the firm is based more on its processing and ageing capacity rather than in the ownership of agricultural vineyard assets, we are inclined to use the method of discounted cash flows. As from the year 2012, we incorporate in our forecasts the fact that Bodegas Riojanas have started selling stocks of aged wines with a lower supply cost (In the second half of 2011 they started selling bottles from the 2009 campaign, when the price of the grape fell by 42%, and this stock should come out over five years).this will improve gradually the Gross Margin and will generate a larger operating cash flow.with a stable dividend and with provisions for capital investments also stable nearing euros, Bodegas Riojanas should obtain, as shown in the forecast table, a larger free cash flow which we foresee will be applied to a large extent to reduce debt. The objective of the company of reducing debt in 5 million euros in the next 4 years is feasible based on our forecast numbers. This feeds a virtuous cycle for the firm since a lesser debt means incurring lesser financial costs, and this leads to a better net result. It is another reason why we think appropriate to use a valuation which takes into account the expected free cash flow growth for Bodegas Riojanas. Due to the difficulty in making forecasts on a long term basis in a sector which is cyclical, seasonal, competitive and largely dependent on uncontrollable factors such as the macro economy and climatic conditions, the use of the cash flow discount method could be considered less reliable over a too long a period. And that is why we have used a forecast model which covers five years of expectations, the present year 2012 and four years more. (Thereafter we have assumed a constant lower growth for the following years, from which we obtain a residual value). With this method we obtain a company value of 5,97 per share. This means an upside potential of 26% from the actual stock market price of 4,75. We now provide the detailed DCF model for Bodegas Riojanas:

18 CASH FLOW ANALYSIS (000 ) 2012e 2013e 2014e 2015e 2016e NOPAT = EBIT*(1-t) (+) Amortizations (-) Change in Working Capital (-) Capex Free Cash Flow Adjustment factor 0, , , , ,73348 Present Value of Free Cash Flow Present Value of sum of Free Cash Flows 2012 to Calculating leveraged Beta Implicit Beta versus IBEX Small Caps (Bloomberg) 0,498 t = Tax rate 22,00% 1-t 78,00% Debt / Equity (1S 2012) 78,00% Adjustment to lever Beta 0,30 Leveraged Beta 0,801 Calculating WACC (Weighted Average Cost of Capital) Risk free rate (Average of Spanisg and German 10 year Bonds) 3,62% 3,62% 1,44% 5,80% Leveraged Beta 0,801 Equity Risk Premium (estimated) 5,70% t (Tax rate) 22,00% Coste of Equity 8,19% Average cost of Debt (before applying t) 5,81% Average cost of Debt (after tax effect) 4,53% Capital structure (% of Equity in the Balance Sheet as of 1H 2012) 51,00% WACC 6,40% Calculating constant growth "g" of Free Cash Flow to obtain Terminal Value 2012e 2013e 2014e 2015e 2016e Growth rate of Free Cash Flow 20,22% 0,89% -10,65% -7,94% 4,13% Simple arithmetic average of annual growths 1,33% g (grow of Free Cash Flows to obtain Terminal Value) 1,33% Terminal Value of Free Cash Flows TV of Cash Flows post Adjustment factor 0,73348 Present Value of TV of Cash Flows post VALUATION OF BODEGAS RIOJANAS (in 000) (+) Present Value of Cash Flows for estimated period (+) Present Value of Terminal Value of Cash Flows post (+) Cash in Balance Sheet (1H 2012) 100 (-) Total Net Debt in Balance Sheet (1H 2012) = Intrinsic Value of the company nº of shares = Intrinsic Value per share 5,97 OCTOBER BODEGAS RIOJANAS 18

19 Comparable Multiples: There are not many quoted companies which can easily be considered comparable to Bodegas Riojanas (in Spain we only have Baron de Ley) and our selection of peers spans across USA, Chile, New Zealand, Australia because of the difficulty to find wineries which combine both winemaking and sales & marketing and which only produce wine. Even so, the business models of the chosen companies are quite diverse, and there is some significant dispersion. Owing to this, if we look at PE and EV/EBITDA ratios, Bodegas Riojanas trades at a premium, while on the other hand if we look at P/FCF or P/BV then it trades with a significant discount. We have also opted to use Bloomberg sector indices which give us a fair approximation, such as the Wine & Cheese Index and the Global Wine & Beverages Index : here, what is lost through the inclusion of companies which are not purely wineries is gained through the amplitude of the spectrum of its components. When valuing Bodegas Riojanas through the method of Comparable Multiples, we have opted to include the following ratios: PE, EV/EBITDA, P/FCF and P/BV. Following this method, we obtain a target value of 5,48 per share for Bodegas Riojanas. (See Tables 12 to 16 where Bodegas Riojanas is compared to similar companies in the winemaking sector). Table 16 - PER (Prices at 15 October 2012) PER ANDREW PELLER LTD 10,42 BARON DE LEY 11,20 WILLAMETTE VALLEY VINEYARDS 14,80 VINA CONCHA Y TORO SA 15,20 CONSTELLATION BRANDS 16,00 Bloomberg Wine & Cheese Index 17,23 Bloomberg Wine & Beverages Index 17,89 TREASURY WINE ESTATES LTD 38,20 Average excluding Bodegas Riojanas 17,62 Bodegas Riojanas 34,60 Source: Bloomberg Table 17 EV/EBITDA (Prices at 15 October 2012, Net Debt at close of 1st Half 2012) EV/EBITDA BARON DE LEY 5,20 WILLAMETTE VALLEY VINEYARDS 6,60 ANDREW PELLER LTD 7,90 Bloomberg Wine & Cheese Index 9,02 VINA CONCHA Y TORO SA 12,60 CONSTELLATION BRANDS 16,30 Bloomberg Wine & Beverages Index 16,69 TREASURY WINE ESTATES LTD 19,20 Average excluding Bodegas Riojanas 11,69 Bodegas Riojanas 13,70 Source: Bloomberg OCTOBER BODEGAS RIOJANAS 19

20 Table 18 Price / Free Cash Flow (Prices at 15 October 2012, Cash Flow at close of 1st Half 2012) P/CFL Bloomberg Wine & Cheese Index 10,24 CONSTELLATION BRANDS 11,60 WILLAMETTE VALLEY VINEYARDS 11,72 BARON DE LEY 14,10 TREASURY WINE ESTATES LTD 27,76 VIÑA CONCHA Y TORO SA 29,10 ANDREW PELLER LTD n.a. (CFL=0) Average excluding Bodegas Riojanas 17,42 BODEGAS RIOJANAS 10,10 Source: Bloomberg Table 19 Price / Book Value (Prices at 15 October 2012, Equity at close of 1st Half 2012) P/BV TREASURY WINE ESTATES LTD 1,04 WILLAMETTE VALLEY VINEYARDS 1,05 ANDREW PELLER LTD 1,16 BARON DE LEY 1,16 VINA CONCHA Y TORO SA 1,73 Bloomberg Wine & Cheese Index 2,36 CONSTELLATION BRANDS INC 2,54 Average excluding Bodegas Riojanas 1,58 BODEGAS RIOJANAS 1,03 Source: Bloomberg We think that after the 2009 crisis of the sector in Spain and with the gradual recovery of Bodegas Riojanas observed since then, in particular with forecasts of debt reduction from 2011 to 2014, it would be more appropriate to use for Bodegas Riojanas the ratios of a normalized year when establishing comparisons. As a result we have opted for the utilization of forecast data of year 2016; we now show in Table 20 the Present Value of each magnitude after applying the necessary adjustment factor. Table 20 Present Value of 2016 data used for valuation by the method of comparable multiples (in 000 ) PV of 2016e data Adjustment factor 2016e Net Profit 888 0, Net Debt , EBITDA , Free Cash Flow , Book Value , OCTOBER BODEGAS RIOJANAS 20

21 With this data, we obtain the following valuation: Table 21 Valuation using Comparable Multiples Applying adjusted data (Present values) of year 2016 Ratio to be applied Intrinsic Value (000 ) Intrinsic Value per share Por PER de comparables 17, ,88 Por EV/EBITDA de comparables 11, ,56 Por P/CF de comparables 17, ,52 Por P/VC de comparables 1, ,75 MEDIA de los cuatro ratios ,67 SUMMARY OF VALUATIONS: Table 22 Summary of Valuations Método de valoración Intrinsic Value per share Intrinsic Value of Bodegas Riojanas (000 ) Current market capitalization (000 ) Potencial upside DCF 5, % Comparable multiples 5, % CONCLUSION AND INVESTMENT THESIS: Bodegas Riojanas is a well-managed firm located in a sector which is threatened by the gradual decrease of the consumption in the domestic market. The forecasts for the generation of cash flow, supported by a forecast of stable or slightly higher sales and by improving margins over sales for the coming years support the firm s objective to reduce its indebtedness. This reduction of debt is a turning point which has an overall favourable impact on the company s results. In spite of the difficulties of the sector, the sales of Bodegas Riojanas are on the increase thanks to their high rate of penetration in the Spanish market, supported by a product of quality, by their belonging to a preponderant well perceived Classified Region, as well as by a well-known brand portfolio and by a renovated drive in their Sales & Marketing departments, both at home and abroad. The margins over sales have begun to improve by selling the stocks of wines which were elaborated with the 2009 harvest where the price of the grape had fallen by 42%. All this, while keeping a stable level of investments and a stable dividend. The valuation methods used (DCF and comparable multiples)point to an intrinsic value which sets an objective price per share higher 19% and 26% over the actual price of the share. Based on these facts, and in spite of the risks inherent to the sector, we understand that Bodegas Riojanas offers an important investment opportunity to invest, particularly since its capacity to reduce debt (and at the same time reduce its financial costs) will allow them to obtain an even larger profit on sales. OCTOBER BODEGAS RIOJANAS 21

22 Strenghts of Bodegas Riojanas Market positioning: i) Bodegas Riojanas produces mainly red wines of the Classified Rioja Region, which is the wine segment with the largest penetration in the domestic market. ii) Bodegas Riojanas elaborates mainly quality aged wines which enjoy presently the largest increase in domestic demand. (Most of this increase in demand comes from the retail channel). Productive structure: Bodegas Riojanas has already disbursed the main investments in elaboration capacity, bottling plants, ageing techniques and storage which are absolutely necessary to carry out its strategy of specialization in aged wines, vintage and great vintage wines. High penetration of the domestic market: In the domestic market Bodegas Riojanas has a high rate of penetration due to their specialization in the most demanded segment of Premium wines with Classified Origin and in particular form the Rioja. Competitive advantage: The management of Bodegas Riojanas is divided between two main axes: Production and Sales & Marketing. Only 28% of the wineries have their own marketing and commercial teams. Risks and weaknesses of Bodegas Riojanas Supply risk: Bodegas Riojanas buys 90% of the grape for the elaboration of its Rioja wines. This makes them quite dependent on the supply costs associated with the fluctuation in the price of the raw material, which in turn can be affected by uncontrollable factors such as the climate. It also poses other problems: how to secure the supplies and how to secure the quality of the grape. The sales of Bodegas Riojanas are dependent in excess on the alternative channel of the Christmas Campaign which represents each year between 30% and 40% of their turnover. Debt: The Bodegas Riojanas debt is high and the firm is penalized mainly by the weight of the cost of financing the debt as shown in the Profit & Loss Account. Low yield on resources (assets, equity, invested capital) when compared to other firms. Palliative: Bodegas Riojanas has long term agreements with a group of chosen wine growers. These agreements comprise various factors which solve many uncertainties: Bodegas Riojanas determines the technological and phytosanitary investments needed to guarantee the quality of the soil and of the grape. In this manner, if all the requirements are met, they commit to purchase the harvest. With this system long term agreements are beneficial to both parties, with winegrowers guaranteeing their sales and with Bodegas Riojanas obtaining a greater stability in the supply, and a thorough control of the levels of quality needed to elaborate Premium wines. Palliative: The commercial and marketing teams of Bodegas Riojanas are in charge of maintaining and strengthening these relations. In fact, during the last two campaigns (2010 and 2011), in the thick of the economic crisis, sales in this channel were stable, even slightly higher. Thanks to their efforts, new clients were obtained, compensating the fact that the volume demanded by client turned out to be less than in previous years. Palliative: With the 2011 Cash Flow and with the cash flow forecasts for the coming years, Bodegas Riojanas has begun to reduce the level of the debt and should be able to comply with its plan to reduce its debt throughout This will generate less financial costs and therefore will allow for a better translation of sales into profits. At the same time the yield on resources will improve. Flow Back risk in the short term: On the 28th September of this year, the Real Estate Company Libertas 7, the biggest shareholder of the winery with 12,7% of the capital ( shares), transferred all of its shares to Banco de Valencia to settle a debt with this bank, establishing a transaction value of 4,69 per share (on the basis of the stock market value of the share at 26 September at closing time).banco de Valencia is a nationalized bank which is under the control of the Fondo de Reestructuración Ordenada Bancaria (FROB). It is therefore to be expected that the FROB will try to sell all these shares of Bodegas Riojanas in the near future. Risks and weaknesses of the wine sector Consumption habits: The wine sector is vulnerable to changes in consumption habits. For example the shift from wine to beer, fruit juices, soft drinks and even bottled mineral waters, and a reduction of liters of wine consumed in Spain per person. Wine production is entirely dependent on its raw material, grapes, and thus depends on the quality and the productivity of each harvest. This also depends on various uncontrollable factors: in particular the climate, and also on what the other producers will do with their vineyards (abandon them, uproot them, invest in better quality soil, improve the irrigation systems, or change the variety of the planted grape). OCTOBER BODEGAS RIOJANAS 22

23 AUTHOR OF THE REPORT: This Report, together with the data, opinions, estimates, forecasts and recommendations it contains has been researched and written by. The content of this Report is based on information provided by Bodegas Riojanas and by information deemed public and generally available, obtained from sources considered to be reliable. The information obtained has not been independently verified by Frederick E. Artesani, EAFI so no guarantee is provided, implicit or explicit, as to the precision, integrity and accuracy of said information. does not assume any liability or responsibility with relation to any use of the information contained in this Report from any person or company who might have had access to the Report, in part or as a whole, through any method or system of distribution and diffusion. The research and writing of this Report does not include a revision or an evaluation of the fiscal or legal situation of the company analyzed, nor of its accounting, nor of its compliance with labour regulations. Consequently, should any risk arise from such situations, it has not been taken into account when calculating the company valuation. All the opinions, estimates, forecasts and recommendations contained in the present Report constitute the personal technical opinion of the Analyst at the date of publication, and are subject to subsequent modification, without any obligation from the Analyst to publish or communicate such modifications, nor to update the content of the present Report. This Report, under no circumstance, should be construed as an investment recommendation, nor does it represent from the Analyst an offer, a solicitation or an obligation to engage in any operation or transaction in the shares or the financial instruments covered in the Report. does not assume any responsibility, direct or indirect, which might derive from any investment realized taking this Report into consideration, nor does it assume any responsibility or liability in any loss or damage incurred by any person or entity who might have materialized operations and transactions on the basis of this Report. In particular, Frederick E. Artesani does not assume any responsibility or liability for any financial loss, nor for any decision, incurred directly or indirectly, that was based on the use of the information contained in this Report. Any investor accessing this Report must be fully aware that the shares, financial instruments and the investments referred to in this Report might not be adequate for his specific investment objectives, his financial situation or his risk profile since these have not been taken into account for the elaboration of this Report. Consequently, any investor accessing this Report must adopt his investment decisions taking into account such personal circumstances and must necessarily seek prior specific and specialized advice. is an independent financial advisory company, approved, supervised and regulated by the Spanish Comisión Nacional del Mercado de Valores (the CNMV) and is constituted under Spanish legislation, and is not a member of the New York Stock Exchange (NYSE) nor of the National Association of Securities Dealers (NASD). Any person involved in the elaboration of this Report is not a member of the New York Stock Exchange (NYSE) nor of the National Association of Securities Dealers (NASD) and therefore is not subject to the normative and legislative conditions which regulate such members. This report, partially or as a whole, cannot be reproduced, distributed or disseminated in the United States of America nor can it be made available to persons or entities resident in the United States of America. This Report can only be accessed in the United Kingdom by those who can be recipients of such information under the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 and is not for reproduction, distribution or dissemination, direct or indirect, to any other person or entity. In particular, this report can only be made available to persons or entities which are (i) outside the United Kingdom, (ii) with professional experience in matters of investments as per Article 19(5) of the said Order 2001, (iii) High Net Worth entities and (iv) to any other person or entity to whom the content of this Report can be made legally available, as included in Article 49(1) of said Order can have an interest or a position, directly or indirectly, in any of the shares and financial instruments referred to in this Report, or in any related financial instruments. can be engaged in providing advisory services, or any other services, to the issuer of said shares and financial instruments, or to related companies, or to their shareholders, employees or Directors, prior or after the publication of the present report, always within what is permitted by the laws applying to Frederick E. Artesani, EAFI. The Spanish Financial Analysts Institute (Instituto Español de Analistas Financieros, hereinafter: "IEAF") provides the IN RESEARCH service in collaboration with Bolsas y Mercados Españoles Sistemas de Negociación S.A. (hereinafter, "BME"). Neither BME nor IEAF have participated in the preparation of this report, which they recognise belongs to the issuer of the security or financial instrument analysed and/or the subscribing analyst or company. Therefore, BME and IEAF decline any responsibility in relation to any investment decisions made based on the report and/or any direct or indirect damages or losses incurred by anyone formalising operations based on said report. This report does not constitute an investment recommendation, nor an invitation offer, request or obligation on the part of BME or IEAF to carry out any operation or transaction in respect of the security or financial instrument analysed in the report. Neither BME nor IEAF are responsible for the content, accuracy or veracity of the report or for any financial loss or decision taken based on the information contained in the report. Neither BME nor IEAF, their directors, representatives, partners, subsidiary companies, managers, shareholders, employees or advisors assume any responsibility in respect of the information contained in the report, or any use made thereof. OCTOBER BODEGAS RIOJANAS 23