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Buy Target price SEK 260

Buy Target price SEK 260. Axfood From soft to hard, to reasonable competition September 14 Presenter: ABGSC Retail & Consumer Research Mattias Karlkjell (+46 8 566 286 27).

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Buy Target price SEK 260

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  1. Buy Target price SEK 260 Axfood From soft to hard, to reasonable competition September 14 Presenter: ABGSC Retail & Consumer Research Mattias Karlkjell (+46 8 566 286 27) This document is for the use of the recipient only and should not be copied or distributed to any other person or entity. Please refer to important disclosures at the end of this presentation.

  2. Investment case The Equity Story • Less new space coming in H2’06e and 07e... • ...as a consequence, less price pressure and negative volume effects • Valuation not demanding... • ...just through share buy-backs and dividend, total return is 40-50% in the coming 3 years. The PE (post share buy-back and dividends) is 8x 08e (20% discount to peers) PE’08e post dividend and share buy-back is 8x

  3. We were right to be fearful - 1 Price development for Food in Sweden by month y-o-y 1999-2006 Speculation about significant capacity increase and price deflation in Nov 2004… …led to increased competition in Swedish municipalities. The largest retailers lost volumes and initiated significant price cuts Source: HUI Space increase* coming from Hypermarket and Hard discount stores in Sweden 2005 Source: ABGSC

  4. We were right to be fearful - 2 Change in competition for Axfood’s concepts in different municipalities since Sep 2004 New competitors in 50% of the municipality Hemköp are present, and app. in 40% of the municipalities Willys are present. Leading to falling LFL... Source: ABGSC Willys LFL development by month 2005-06 Hemköp’s LFL development by month 2005-06 Source: ABGSC Source: Axfood

  5. Less new space coming in from hypermarkets / hard discounters 1 New space* from hypermarket and hard discount segment** in 2005-07e (% of total Swedish food market) • Significantly lower space increase in 2007 compared to 2005 and 2006 • Space forecasts are based on factors like: • Capex forecast from the largest food retailers • Number of municipalities where there are plans for new food retail establishments • Company comments about store expansion plans. Source: ABGSC, * Measured as change in total selling space for food retail in m2, ** Including the following concepts: ICA Kvantum, ICA Maxi, Willys, Coop Forum, City Gross, Lidl, Netto, Willys hemma and Coop Extra

  6. Less new space coming in from hypermarkets / hard discounters 2 Swedish Food retail market – Summary of the largest concepts, 2006 Swedish food retail capacity, 2004-07e Source: ABGSC Source: ABGSC

  7. Long-term negative growth trend for supermarkets, especially for ICA Market share* by food retail segment in Sweden, 2004-07e Although the space decline in 2006-07e will be less than in 2005, the long-term negative growth trend for supermarket segment is intact. Supermarket segment has a very high market share through an international perspective ICA is the dominant actor and is also facing a the largest challenge long-term. ICA has a large part of its stores in smaller cities with a declining shopping capacity. Further, ICA are often present in cities where there is today no other competitor present. Source: ABGSC, * measured by offered selling space. * Supermarket segment Includes concepts like ICA Nära, ICA Supermarket, Coop Konsum, Coop Nära, Hemköp, Vi and AG’s, **the hypermarket segment includes concepts like ICA Kvantum, ICA Maxi, Willys, Coop Forum, City Gross, *** the hard discount segment includes concepts like, Lidl, Netto, Willys hemma, Coop Extra. Market share in the Supermarket segment* in Sweden Store presence by city size, Swedish Supermarket concepts Source: ABGSC, measured in number of square meter food retail selling space. * Supermarket segment Includes concepts like ICA Nära, ICA Supermarket, Coop Konsum, Coop Nära, Hemköp, Vi and AG’s. Source: ABGSC

  8. End of a period of earnings downgrading Axfood’s reported pre-tax and ABGSC’s forecasts, November 2004 (SEKm) Since the end of 2004, the ptp is down 10-15% on 05 and 06e respectively. Now we believe that there is a much lower risk of earnings disappointment Consensus assumes a ptp CAGR 05-08e growth of 6% - This should be achievable in our view. Source: ABGSC ABGSC’s forecasts vs. consensus forecast 2006-08e (pre-tax in SEKm) Source: ABGSC, SME

  9. Main forecast assumptions - 1 Forecast summary (SEKm), 2002-08e Our main forecast assumptions: Sales growth +2% (CAGR 05-08e) - LFL of +1% - Space effect +1% EBITA growth +7% (CAGR 05-08e) - 60% of the improvement from Hemköp - 30% from Willys - Hemköp margins: 0.5% ’05 to 4% 08e - Willys margins: 4.1% ’05 to 3.9% ’08e EPS growth +10% (CAGR 05-08e) - Including share buy-backs, the CAGR 05-08e could be +15% Source: ABGSC EBITA forecasts by division, 2004-08e Source: ABGSC

  10. Axfood’s to-do list Hemköp, ICA Supermarket and ICA Nära stores by city location Why has Hemköp been underperforming within the supermarket segment? 1) Product range not good enough - Mixed quality of private labels - Vegetable and fruit department with no edge - Lack of products - Low quality of manual desk 2) Low degree of personal service - Lack of experience - Lack of knowledge about strategy - Not enough resources 3) Gap between marketing and customer offering 4) Location of stores - Three opportunities; 1) Outperform ICA locally, 2) locate stores where ICA is not present, 3) Close stores in cities with long-term decline population trend. Hemköp’s store presence by city size Source: ABGSC

  11. ...From capital restructuring... Despite increased competition, high capex and high dividend pay-out, Axfood is overcapitalized... Less tough competition in combination with lower expansion should increase motivation for high dividends and share buy-backs. Just through dividends and share buy-backs, investors could get close to 50% return in the coming three years. If we are also right in our assumptions about earnings growth in operations, the total return could be as much as 70%. The PE post buy-back and dividend is 8.6x, i.e. a discount of approx. 30% to European peers (also post dividends and buy back). Expected shareholder return in the next three years Source: ABGSC Forecast P/E post dividend and share buy-back Source: ABGSC

  12. ...and value still untapped Balance sheet structure post dividends and share buy-back Source: ABGSC Capex forecasts, 2002-08e Even in a scenario of in total 46% of current market cap in dividend and share buy-back in the coming three years, the equity ratio will still be 25% (in line with company target) and Net debt to EBITDA of 0.7x (vs industry average of 3x). Source: ABGSC Free cash flow forecasts, 2002-08e Source: ABGSC

  13. Axfoods lfl vs Swedish price inflation Hemköp lfl vs. price inflation in Sweden, by month 2003-06 Willys lfl vs. price inflation in Sweden, by month 2003-06 Source: ABGSC, HUI Source: ABGSC, HUI

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