04 April 2014

Summary company financials ($m)

Year end December FY2011 FY2012 FY2013 FY2014E
Price 35.22 Revenue 35,810.0 35,015.0 35,299.0 32,458.0
Market cap ($m) 59,008.6 13.7% -2.2% 0.8% -8.0%
Enterprise value ($m) 63,125.2 EBITDA 5,181.0 5,352.0 5,589.0 5,530.0
14.5% 15.3% 15.8% 17.0%
Free float 100% Net income 3,554.0 3,067.0 3,915.0 2,894.6
Daily val traded ($m) 15.49 Net debt (cash) 25,439.0 14,902.0 14,222.0 4,116.6
EV/Sales 1.83 2.26 2.02
EV/EBITDA 11.9 14.3 11.8
PE 14.8 16.1 20.4
Mondelez International, Inc.
Revenue growth
EBITDA margin
Mondelez comprises the "growth" businesses of Kraft Inc, after Kraft Foods Group Inc assets were spun off from the parent in October 2012.
Mondelez's primary segments are Biscuits (32% of group revenue), Chocolates (27% of revenue), Gum & Candy (15% of revenue), Beverages
(17% of revenue) and Cheese & Grocery (10% of revenue). The company is led by Irene Rosenfeld, previously CEO of Kraft Foods Group Inc.
Activist shareholder Nelson Peltz has a 2.5% stake in the company and a seat on the board.

Mondelez serves markets in the US (20% of sales), Europe (40% of sales), and Emerging Markets (40% of sales). The Mondelez portfolio
includes nine billion dollar brands Oreo , Nabisco and LU biscuits; Milka , Cadbury Dairy Milk and Cadbury chocolates; Trident gum; Jacobs
coffee and Tang powdered beverage. Moreover, Mondelez has an overall number 1 market position in biscuits, chocolate, candy, powdered
beverages, and number 2 in gum and coffee. In 2013, nearly 70% of Mondelez's total revenue gained or held market share. Mondelez has
also performed in terms of innovation - in 2013, 13% of revenue came from new product innovations, and in US biscuits, for example,
Mondelez had 14 of the top 20 new lines launched in the category, and these lines represented more than 100% of total market category
growth. Mondelez had organic revenue growth in FY 2013 of 3.9%.

Mondelez's focus on snacks provide potentially higher margins than many other food products. Because, in general, private label has lower
penetration in Gum, Chocolate and Biscuits. However, despite the strong market positions , Mondelez's operating margins are currently low.
In FY 2013, Mondelez delivered a 12.8% EBIT margin, 250 basis points below the weighted average divisional margin (15.2%) in Mondelez's
peer group, and 465 basis points below the weighted divisional margin (17.4%) of peer group companies with comparable #1 or #2 market
positions, according to our research.

Mondelez trades at 18x 2014E earnings per share, a reasonably high multiple. Therefore, to determine whether an attractive absolute return
is achievable from Mondelez equity at these levels, we have focused our research on the company's stated efforts to expand their EBIT
margin, as well as other initiatives such as rate of organic revenue growth and share buy backs.

Mondelez has inititated "significant cost reduction plans in both supply [chain] and overhead to drive margin expansion", according to the
CEO Irene Rosenfeld at the CAGNY conference, February 18, 2014. In terms of the supply chain, the company states they have restructured
30 of their production plants, and announced net savings of 2.5% of revenue to be saved from supply chain "reinvention". In addressing
overheads, the company has hired Accenture to help it implement a its zero based budgeting cost-control system. Weve watched the work
that 3G has done with AB InBev and Heinz Accenture was the partner with them and we believe they can be of great help to us, Irene
Rosenfeld, chief executive of Mondelez, told the Financial Times. She added that Accenture would help Mondelez rapidly take out
[overhead] costs. Whilst the company has not guided as to the quantum of overhead reduction, Mondelez's presentation at the CAGNY
Conference indicated that "marketing, general, administration and other" costs (excluding advertising costs) were in the region of 6.8% of
revenue. We would expect the bulk of overhead savings to come from further reduction in this figure.

Activist shareholder and board member Nelson Peltz is also pushing the cost reduction agenda. At the Seeking Alpha Conference, July 2013,
he stated: "the margins are too low, I believe that she [Irene Rosenfeld] will find a way to get them up. If she doesn't then we've got a
problem, but she's gotta get those margins up". So far, the company has announced a target EBIT margin of 14-16%, which we would view as
conservative, compared to the comparable margin of 17.4% of the higher market position comps. This would appear to be a view shared by
Peltz, who stated also stated at the Seeking Alpha Conference, "and Cadbury said, in '10, that they were going to get to 18%, so they were
going to get the 1,000 basis points that we said they needed to get, and now they're back to 12%." Cadbury was subsequently acquired by
Mondelez.

There is additionally the potential for the revenue growth at Mondelez to accelerate. Mondelez's current organic revenue growth of 3.9% is
at just the average of its blended peer group. But, again, if we take the divisional growth rates in the peer group with the #1 or #2 market
positions and consider their blended revenue growth, a figure of 6.5% revenue growth is apparent. This potential higher revenue growth
appears to be a view shared by CEO Irene Rosenfeld, who said during the CAGNY conference: "Historically our categories have grown rates of
around 6% or more. And although our categories have slowed recently due to macroeconomic headwinds, we expect that growth rates for
snacks will return to historical levels."

In summary, therefore, the expected return from Mondelez equity depends on the margin and revenue growth rates assumed. Taking a
conservative view, and including the $1-2bn of annual equity repurchases flagged by the company, if we assume Mondelez achieves an
average of peer group 15.2% EBIT margin in FY 2016, on revenue growth of 3% per annum, Mondelez trades on 14.3x 2016 earnings per
share. However, if the company is achieves higher targets, albeit on the basis of our research, reasonable, of 17.4% EBIT margin and assume
5% revenue growth, then the equity will trade on 11.5x 2016 earnings per share. Whilst either metric may provide an attractive absolute
return relative to the current PE of comps such as Hershey (25x PE), Lindt (29x PE) and Dr Pepper (17x PE), it is clearly the execution of the
higher margin targets that makes the potential equity investment the compelling play.