Focus on growth divisions

Carr's Group 9 September 2016 Update

Carr's Group

Focus on growth divisions

Disposal of Food division

Consumer staples

9 September 2016

Price

166p

Market cap

£151m

Net debt (£m) end February 2016

27.0

Shares in issue

91.2m

Free float

78%

Code

CARR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

17.1

14.5

3.4

Rel (local)

15.6

5.7

(6.6)

52-week high/low

172.1p

137.0p

Business description

Carr’s Agriculture division serves farmers in the North of England, South Wales, the Borders and Scotland, the US, Germany and New Zealand. The Food division (now sold) mills flour in the UK. The Engineering division offers remote handling equipment and fabrications to the global nuclear and oil and gas industries.

Next event

Prelims

14 November 2016

Analysts

Anne Margaret Crow

+44 (0)20 3077 5700

Roger Johnston

+44 (0)20 3077 5722

Carr's Group is a research client of Edison Investment Research Limited

Carr’s Group is to sell its Food division to Whitworths for £24.9m net cash. The move enables management to focus investment on the Agriculture and Engineering divisions. These are engaged in geographically diverse activities where there is less competition, defensible IP and substantially greater opportunities for growth. While we believe the disposal is advantageous for the group, in the short term it will reduce earnings. We have revised our FY17 and FY18 estimates and cut our indicative valuation from 197p/share to 161p.

Year
end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

08/14

429.0

17.0

13.2

3.4

12.6

2.1

08/15

411.6

18.1

14.0

3.7

11.9

2.2

08/16e

403.2

18.1

13.9

3.8

11.9

2.3

08/17e

332.2

14.6

10.7

21.4**

15.5

12.9

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Including 17.54p special dividend.

Special dividend for shareholders

Whitworths is paying £24.9m net for the Food division, which generated £2.4m in profit before tax in FY15. We estimate this represents 13.7x historical profit after tax, which is a premium to the P/E multiple for the group as a whole. £16.0m of this cash will be returned to shareholders via a special dividend of 17.54p/share. The remainder will be used to strengthen the balance sheet and invest in acquisitions and organic growth.

Food division operating in difficult markets

As discussed in our November note, the UK flour market continues to suffer from overcapacity, despite the closure of three Premier Food mills. Demand for flour is static and bread manufacturers are under constant pressure from supermarkets to reduce prices. Management has addressed these challenges by investing £17m in the state-of-the art mill in Kirkcaldy, upgrading the Silloth mill to meet newer food-handling standards and focusing the Maldon mill on ethnic products. This has raised divisional profit from £0.4m in FY12 to £2.4m in FY15. Under current market conditions, it would have been difficult to increase divisional profits significantly going forward. Moreover, the division was reliant on a relatively small number of customers at some locations, making it vulnerable to them changing supplier. The disposal, which was initiated by Whitworths, frees management to concentrate on the two divisions capable of delivering strong growth.

Valuation: Share price spike from special dividend

Our sum-of-the parts valuation based on our revised estimates is 161p. This ignores any value ascribed to the special dividend. Anticipation of this payment is likely to provide near-term support to the share price. In the longer term, share price appreciation above our indicative level will be predicated on news that management is using cash from the disposal to accelerate growth in the remaining two divisions.

Transaction releases cash for growth

Carr’s has sold its Food division (£80.3m revenue in the year to August 2015, reported PBT £2.4m, gross assets £44.1m on 29 August 2015) for gross proceeds of £36.0m. After adjusting for the carrying value of net debt (£7.9m) and an estimated £3.2m for working capital, net proceeds were £24.9m, payable in cash. Out of this, management proposes a £16.0m special dividend (17.54p/share), payable to shareholders on the register at 16 September. This leaves £8.9m residual cash available for management to invest in growing the Agriculture and Engineering divisions.

Adjustments to our forecasts

We have adjusted our forecasts to reflect the transaction, which management advises was completed immediately before the FY16 year end. Adjustments include:

Removal of an estimated £77.0m and £79.0m Food revenues from FY17e and FY18e, respectively.

Removal of an estimated £2.3m profit before tax attributable to the Food division in both FY17e and FY18e.

£0.8m additional head office costs that were previously netted in with the Food division profit.

£0.2m reduction in interest for FY17e and FY18e to reflect a reduction in debt, though we note that Carr’s Group will continue to incur finance charges on working capital facilities.

Reduction in depreciation of £1.6m in both FY17e and FY18e.

Reduction in capex of £1.0m in both FY17e and FY18e.

Receipt of £24.9m net in respect of the Food division at end FY16e.

Reduction of debt at end FY16e by £7.9m to reflect debt sold with the Food division.

Reduction in working capital of £9.0m at end of FY16e to reflect the disposal of the Food division.

£24.9m reduction in tangible assets at end FY16e.

The impact on the P&L is summarised in Exhibit 1.

Exhibit 1: Changes to estimates

Year end 31 August

FY16e

FY17e

FY18e

Old

New

%

Old

New

%

Old

New

%

Group revenues (£m)

403.2

403.2

0.0

409.2

332.2

-18.8

415.0

336.0

-19.0

Group EBITDA (£m)

22.5

22.5

0.0

22.0

17.1

-22.3

22.3

17.4

-22.0

Group adjusted PBT (£m)

18.1

18.1

0.0

17.7

14.6

-17.5

18.1

15.0

-17.1

Group adjusted EPS (p)

13.9

13.9

0.0

13.3

10.7

-19.5

13.6

11.0

-19.1

Group DPS (p)

3.8

3.8

0.0

3.9

21.4*

+449*

4.0

4.0

0.0

Net (debt)/cash (£m)

(21.7)

11.1

N/A

(7.4)

0.8

N/A

1.5

6.5

+333%

Source: Edison Investment Research. Note: *Including 17.54p special dividend.

Valuation

We continue to use a sum-of-the parts calculation to value this stock. We apply a weighted average prospective P/E multiple of 14.9x to our EPS estimate for FY16e, adjusted as though the Food division was not part of the group during this period. We note that the mean P/E for our sample of agricultural supply companies has increased significantly from the 13.4x in our April note. This improvement is probably related to a stabilisation in farm-gate milk prices, a factor which benefits Carr’s Group as well as NWF and Wynnstay. It is therefore reasonable to apply an increased multiple to Carrs’ agricultural activities as well. This calculation gives an indicative value of 161p.

Exhibit 2: Sum-of-the-parts calculation

% Year 1 PBT

Year 1
P/E

Comment

Agriculture including JVs and associates

80.6%

14.5x

Average for sample of agricultural supply companies

Engineering

19.4%

16.8x

Sector average for German industrial companies

Weighted

14.9x

Normalised year 1 EPS

10.8p

Adjusted as though Food division was not part of the group during FY16e

Indicative value

160.8 p

Source: Bloomberg, Edison Investment Research. Priced at 6 September 2016.

If we adopt this indicative value and compare the resultant multiples for those of our sample of agricultural supply stocks, annualised for an August year-end, Carr’s EV/EBITDA multiples are in line with the sector mean. This validates our calculation of value. Carr’s P/E multiples are slightly above the sector mean. We believe this is appropriate given the higher operating margins potentially obtainable from an engineering business compared with an agricultural supply business. We note that for Carr’s Group, the operating margin for the Agriculture division in FY15 was 3.5%, compared with 3.0% for the Food division and 9.2% for the Engineering division. The difference has been more pronounced historically. FY15 was not a good year for the Engineering division, as weakness in the oil and gas sector led to under-utilisation in the Chirton Engineering business. In FY14, the Engineering division had an operating margin of 13.8%

Exhibit 3: Multiples of listed agricultural supply stocks

Market
cap

EV/EBITDA
FY17

EV/EBITDA
FY18

P/E
FY17

P/E
FY18

BayWa

£881.0m

10.3x

10.0x

13.9x

12.8x

NWF

£75.9m

5.2x

4.9x

11.3x

11.2x

Origiin Enterprises

£602.6m

9.4x

8.5x

13.1x

12.2x

Wynnstay Group

£105.5m

7.3x

7.0x

17.5x

17.2x

Mean

8.0x

7.6x

14.0x

13.4x

Carr's Group at 161p

£146.8m

8.2x

7.7x

15.1x

14.7x

Source: Bloomberg, Edison Investment Research

We believe it is likely that the share price will see support ahead of 16 September, which is the record date for shareholders to receive the special dividend. What happens after that point depends on whether investors appreciate the difference that this disposal makes to the Group’s opportunities for profit growth. Historically, Carr’s Group has traded at a discount to the mean of the listed peers in our sample of stocks involved in agricultural supply (BayWa, Origin, NWF Group and Wynnstay Group). We believe that this discount was linked to concerns about the severe margin pressures in the UK flour market and consequent risks to profits. This is reflected in the Food division having the lowest operating margin of the three divisions in FY15. Before the Kirkcaldy mill came on stream the divisional operating margin was much lower: only 0.5% in FY12. This reservation concerning potential performance of the Food division is now removed. In our opinion this makes it more likely that the share price will settle on a P/E multiple that is closer to the mean for the sector, as reflected in our indicative share price, rather than significantly discounted, as has been the case for at least a decade. After that, any share price appreciation will be predicated on newsflow confirming that management is using cash from the disposal to accelerate growth in the remaining two divisions.

Management has given some top-level guidance on how this cash may be used. We believe it is likely that the cash will be used to continue the programme of bolt-on acquisitions to expand the Country Store network; to increase feed-block production capacity overseas, possibly in new territories such as New Zealand or Latin America; and to acquire complementary engineering businesses, strengthening the division’s offer in the nuclear, aerospace and defence and oil and gas sectors. Investment in both feed-block production and engineering activity would potentially have a beneficial impact on margins, helping support further upwards re-rating.

Exhibit 4: Financial summary

£m

2014

2015

2016e

2017e

2018e

Year-end Aug

PROFIT & LOSS

Revenue

 

429.0

411.6

403.2

332.2

336.0

EBITDA

 

20.9

22.2

22.5

17.1

17.4

Operating Profit (pre amort. of acq intangibles & SBP)

15.8

17.0

17.1

13.2

13.6

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

0.0

Share-based payments

(0.4)

(0.6)

(0.6)

(0.6)

(0.6)

Exceptionals

0.0

0.0

0.0

0.0

0.0

Operating Profit

15.4

16.4

16.5

12.7

13.0

Net Interest

(1.4)

(1.2)

(1.0)

(0.6)

(0.6)

Share of post-tax profits in JVs and associates

2.5

2.3

2.0

2.0

2.0

Profit Before Tax (norm)

 

17.0

18.1

18.1

14.6

15.0

Profit Before Tax (FRS 3)

 

16.6

17.5

17.5

14.1

14.4

Tax

(3.7)

(3.8)

(3.8)

(3.2)

(3.3)

Profit After Tax (norm)

13.3

14.3

14.2

11.4

11.7

Profit After Tax (FRS 3)

12.9

13.7

13.6

10.9

11.1

Post tax profit (loss) relating to discontinued operations

0.0

0.0

0.0

0.0

0.0

Minority interest

(1.5)

(1.7)

(1.7)

(1.7)

(1.7)

Net income (norm)

11.8

12.6

12.5

9.7

10.0

Net income (FRS 3)

11.4

12.0

11.9

9.2

9.4

Average Number of Shares Outstanding (m)

89.0

89.6

90.1

91.2

91.2

EPS - normalised (p)

 

13.2

14.0

13.9

10.7

11.0

EPS - normalised fully diluted (p)

 

12.8

13.6

13.4

10.3

10.6

EPS - FRS 3 (p)

 

12.3

13.4

13.3

10.0

10.3

Dividend per share (p)

3.4

3.7

3.8

21.4*

4.0

EBITDA Margin (%)

4.9

5.4

5.6

5.2

5.2

Operating Margin (before GW and except.) (%)

3.7

4.1

4.2

4.0

4.0

BALANCE SHEET

Fixed Assets

 

83.4

86.5

65.4

64.9

64.5

Intangible Assets

10.3

11.3

11.1

10.9

10.9

Tangible Assets and Deferred tax assets

73.1

75.2

54.3

54.0

53.7

Current Assets

 

114.3

116.9

109.6

98.4

102.8

Stocks

33.3

35.0

31.4

32.4

33.0

Debtors

63.7

65.3

55.1

56.1

57.1

Cash

17.3

16.5

23.2

10.0

12.7

Current Liabilities

 

(75.6)

(70.2)

(60.8)

(58.9)

(56.7)

Creditors including tax, social security and provisions

(55.9)

(55.0)

(48.7)

(49.7)

(50.5)

Short term borrowings

(19.7)

(15.2)

(12.2)

(9.2)

(6.2)

Long Term Liabilities

 

(32.3)

(34.2)

(8.5)

(8.5)

(8.5)

Long term borrowings

(22.2)

(25.7)

0.0

0.0

0.0

Retirement benefit obligation

0.0

0.0

0.0

0.0

0.0

Other long term liabilities

(10.1)

(8.5)

(8.5)

(8.5)

(8.5)

Net Assets

 

89.8

99.0

105.8

96.0

102.1

Minority interest

(10.2)

(11.9)

(11.9)

(11.9)

(11.9)

Shareholders’ equity

 

79.7

87.1

93.8

84.1

90.2

CASH FLOW

Operating Cash Flow

 

17.1

15.1

20.3

16.2

16.5

Net Interest

(1.4)

(1.2)

(1.0)

(0.6)

(0.6)

Tax

(3.2)

(4.0)

(3.8)

(3.2)

(3.3)

Investment activities

(7.5)

(4.0)

(8.4)

(3.4)

(3.4)

Acquisitions/disposals

(3.6)

(1.7)

23.9

0.0

0.0

Equity financing and other financing activities

(4.1)

(1.8)

7.9**

0.0

0.0

Dividends

(2.9)

(3.1)

(3.3)

(19.2)

(3.6)

Net Cash Flow

(5.7)

(0.7)

35.5

(10.2)

5.7

Opening net debt/(cash)

 

22.1

24.6

24.4

(11.1)

(0.8)

HP finance leases initiated

(2.3)

0.0

0.0

0.0

0.0

Other

(5.5)

(0.9)

0.0

0.0

0.0

Closing net debt/(cash)

 

24.6

24.4

(11.1)

(0.8)

(6.5)

Source: Edison Investment Research. Note: *Including 17.54p Special Dividend. **£7.9m debt sold with Food division.

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Carr's Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
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Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Carr's Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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