initiating coverage.pdf

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22 December 2014

ANALYSTS Wim Hoste Financial Analyst - Brussels +32 2 429 37 13 [email protected]

THIS DOCUMENT IS NOT PRODUCED BY KBC SECURITIES USA, INC.

kbcsecurities.com Refer to important disclosures, disclaimers and analyst certifications at the end of the body of this research.

TESSENDERLO Shifting into higher gear CHEMICALS CURRENT PRICE 20.25 ACCUMULATE BELGIUM TARGET PRICE 22.50 REINITIATING Performance over 1M 3M 12M FY/e 31.12 2013 2014E 2015E 2016E Absolute -6% -9% 11% Sales ( m) 1,790.1 1,419.6 1,441.6 1,507.5 Rel. BEL20 -8% -11% -4% REBITDA ( m) 116.6 136.1 147.5 167.3 12m Hi/Lo 23.75/18.00 Net earnings ( m) -64.0 45.1 43.9 64.1 Bloomberg TESB BB Diluted adj. EPS () 0.05 1.80 1.13 1.48 Reuters TESB.BR Dividend () 0.00 0.00 0.00 0.00 Market Cap 858m P/E 394.50 11.23 17.99 13.72 Next corporate event EV/REBITDA 10.63 9.16 8.18 6.96 Results FY14: 11 March 2015 Free cash flow yield -1.7% 5.1% 3.5% 4.9% www.tessenderlo.com Dividend yield 0.0% 0.0% 0.0% 0.0% Source: KBC Securities

Following the recently-completed capital increase, we reinitiate coverage today with an Accumulate rating and 22.5 target price. The capital increase significantly strengthened Tessenderlos balance sheet and allows the company to become more ambitious with regards to growing its business. We believe management is betting on the right horse by focussing most capex/M&A initiatives on its Agro business, while we also like the much tighter focus on cost efficiency across the group which we believe has not yet delivered its full potential.

CAPITAL INCREASE ALLOWS FOR MORE AMBITIOUS GROWTH IN AGRO

Renewed growth ambitions focus on Agro after the completed capital increase. The relatively high leverage prior to the capital increase somewhat hampered Tessenderlo in developing new growth initiatives. With the capital increase now completed, Tessenderlo has much more headroom, and the company shed some new light in its prospectus on the pipeline of new growth projects, revealing plans to acquire a crop protection products portfolio and to build an ATS fertilizer plant in Europe. We remind that the company had already announced in recent quarters the planned construction of an additional US ATS plant and a calcium chloride plant in Belgium, which should also allow SOP production to increase again. We suspect Agro is the rightful focus of most of the growth projects and we appreciate that the risk profile of some of the initiatives is lowered by LT raw materials sourcing and/or marketing agreements.

Strong operational efficiency drive. Tessenderlo has in recent quarters significantly improved the groups cost profile. Although management has not given an overall figure of realized or targeted savings on the group level, corporate costs alone were said in the 1H conference call to have been reduced by an impressive 11-12m (or 35-40%), and plenty of other initiatives are underway in the various divisions.

Valuation. Given the different growth and earnings dynamics of the various divisions, we mainly value Tessenderlo by a Sum-of-the-Parts model. Fair value derived is 22.5 per share. Note that at this stage we have not included any value for the tax loss carry forwards ( 398.8m end 2013), which seems conservative.

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COMPANY DESCRIPTION AND BUSINESS UPDATE Founded in 1919, Tessenderlo Group is a diversified chemicals company. The group has undergone a thorough transformation in recent years, involving a series of divestments of activities which the former management team believed to be either too cyclical or commoditized or in which they judged Tessenderlos competitive position to be relatively weak. Divestments include PVC/chloralkali, the UK esters & aromas business, the window profile activities, the Chinese Organic chloride derivatives business and Pharma Ingredients. Today the portolfio is segmented in three key divisions: Agro, Bio-valorization and Industrial Solutions. SALES BY DIVISION* REBITDA BY DIVISION*

Source: Tessenderlo *9M14 Source: Tessenderlo *9M14 Agro Agro is active in the production and marketing of crop nutrients/fertilizers & crop protection products such as herbicides and fungicides. Tessenderlos crop nutrients are mainly sulphur-chemistry based. Sulphur is the fourth plant nutrient besides nitrogen, potash and phosphate and is mostly blended with nitrogen fertilizers. Tessenderlos key products are ammonium thiosulfate (ATS, sold under brand name Thio-Sul), potassium thiosulfate (sold under brand name KTS) and sulphate of potash (SOP). The Thio-Sul and KTS business of Tessenderlos Kerley subsidiary is mainly active in North America, where it is the leading player of sulphur-based thiosulfate fertilizers, well ahead of competitors like Martin Midstream Partners and Poole Chemical. Tessenderlo Kerley currently operates six owned production sites, a 50/50 joint venture with Philips in two production sites and also has some tolling agreements. Furthermore, Tessenderlo Kerley has an extensive logistics network including storage facilities, railcars and trucks. What makes Tessenderlo Kerleys business model difficult to copy is the high degree of upstream integration. Tessenderlo has a number of very long-term contracts with refineries to extract sulphur from the naptha streams. Tessenderlo gets paid for the sulphur extraction service it provides and/or gets the extracted sulphur at a very competitive price. Tessenderlo Kerley has been the main growth driver in the past, and Tessenderlo has just constructed new KTS storage capacity at Hanford, US. The company commented in the conference call organized at the occasion of the capital increase that it is currently running at full capacity for both ATS (ammonia thiosulfate) and KTS (potassium thiosulfate). We remind that Tessenderlo had, prior to the capital increase, already announced two capacity expansions: a new KTS production facility in Hanford, US (scheduled to be operational in the course of 2015) and a new ATS production facility in East-Dubuque, US (scheduled to be operational in 2H16).

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TESSENDERLO KERLEY FOOTPRINT We welcome these investments, which will increase capacity in closer proximity to the end market. The new East Dubuque facility, for example, will be located in Illinois, which is in the heart of the US corn industry (Midwest and Great Lakes Area supply over >80% of US corn). The new plant will allow savings on logistics costs (rail costs have risen sharply in recent years) while ammonia supply is secured through a contract with Rentech as the ATS site will be on-site with Rentech. This plant positions Tessenderlo well for future market growth.

Source: Tessenderlo Note that today only approximately half of US corn is produced with ATS blended into the UAN fertilizer, leaving further penetration potential. There is one new ATS plant being built by a competitor, but we still believe Tessenderlo is very well positioned in this market, being not only the largest player but also having good vertical integration. Apart from these announced investments, we remind that Tessenderlo also revealed in the prospectus issued at the occasion of the capital increase that it is contemplating the construction of an ATS plant in Europe. At the conference call that accompanied the capital increase, management said that they are trying to partner either with an oil refinery (in order to secure sulphur supply) or an ammonia producer (in order to secure ammonia). Tessenderlo also sees growth prospects in Europe, where growing awareness about acid rain has led to e.g. lower sulphur emissions by cars/factories and hence also to sulphur depletion of soil. We remind that sulphur is one of the four essential plant nutrients. Besides the ATS/KTS business, Tessenderlo is also a large producer of Sulfate of Potash (SOP), behind market leader K&S. SOP is mainly suitable in dry areas (hence the advantage of the soluble version on which Tessenderlo is placing much emphasis) and for high added-value crops such as flowers, vegetables and fruit. SOP helps to make the plant more resistant to drought, frost and diseases while it also improves the yield. Since the closure of a smaller production facility in Loos, France, Tessenderlos SOP production is focused on its Ham site. This plant has a capacity of 580kt, we believe, but current production is estimated to be well below that number. The reason for that is that the closure of the Ham animal feed phosphates plant at end-2013 (due to the expiry of an environmental permit) means Tessenderlo now has an issue with hydrochloric acid, a by-product of sulphates production. Until end-2013, that hydrochloric acid was used in the phosphates production process, and previously partly also for the internal production of VCM. In order to solve part of this issue (how much is undisclosed), Tessenderlo will construct a calcium chloride plant in Ham, Belgium, which should be operational in the third quarter of 2015. Tessenderlo has teamed up with TETRA Chemicals Europe, which will market the calcium chloride, which is used in the Oil & gas industry as well as in ice and dust control on roads and in refrigeration plants. Unlike most of the large fertilizer producers, Tessenderlo is not integrated upstream in SOP, which we view as a disadvantage. Profitability of the SOP business is currently believed to be excellent however, as the break-up of the Russian-Belarusian BPC cartel has led to much lower raw materials prices, whereas production issues at Tessenderlo and some peers including Great Salt Lake Minerals & K&S have led to a tight market and higher selling prices for SOP. Visibility on how long these benign market conditions may last is limited, but the recent flooding of the large Solikamsk-2 mine from Uralkali will in our opinion lead to further raw materials price increases for Tessenderlos SOP business in 2015.

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Furthermore, Tessenderlo Kerley has over time diversified into non-fertilizer agriculture products through its NovaSource crop protection business. In this field, NovaSource has mainly grown through selective acquisitions, such as: Surround from BASF. Acquired in 2007, sales of less than $ 10m at the time of acquisition. Sinbar and Zobar herbicides from DuPont. Acquisition price not disclosed. Annual sales of products acquired

was less than $ 10m at the time of acquisition (2007). Linuron (Lorox, Linex) from DuPont. Acquisition price not disclosed, acquired business represented less

than $ 20m at the time of acquisition (2009). Purshade from Purfresh. Carbaryl from Bayer Cropscience. Acquired in 2012 and adding an estimated $ 19m revenue annually at the

time of acquisition. The acquisition strategy has been to acquire crop protection products serving niche markets from large multinationals that no longer consider these products as core given their small size and established position (i.e. limited growth). By acquiring these products at reasonable prices, optimizing its small sales rep network and continuing to invest in the regulatory reviews, Tessenderlo Kerley has established a relatively small but nevertheless quite profitable crop protection business. Today the company is active in soil fumigants, niche pesticides and some other plant health products. Note that most of the crop protection business is produced under tolling contracts whereby Tessenderlo does not manufacture the product but only holds the licenses and registration data. As mentioned in the prospectus, Tessenderlo intends to acquire (in 4Q14 or 1Q15) a portfolio of crop protection products, including herbicide products. In the conference call held at the time of the capital increase, the CFO declined to comment on potential synergies or pricing (besides the general answer to a question that the Board would not accept acquisitions at EV/EBITDA multiples of 10x). Synergies would include the elimination of dual costs (such as marketing and registration) as well as leveraging on distribution. All in all Novasource is considered by management to be a fairly stable business, growing over time by extensions of the portfolio (by acquisitions) or by expanding registration of existing products in new geographies.

All in all, the excellent SOP market conditions so far this year and the growth of the Kerley business (partly on the back of easy comparables) have led to good earnings growth in 9M14. Out of caution we have assumed that profitability margins will contract somewhat in 2015, on the back of rising raw materials pricing for SOP and what we expect to be a gradual ramp-up in supply in the SOP market after this years technical issues. AGRO

m

FY12

1H13

3Q13

4Q13

2H13

FY13

1H14

3Q14

3Q change

4Q14E

2H14E

FY14E

FY15E

FY16E

Revenue 508.4 307.8 102.7 85.8 188.5 496.4 296.7 121.0 18% 89.6 210.6 507.3 537.7 575.3 REBITDA 60.9 41.2 10.8 8.2 19 60.1 61.1 23.1 114% 11.6 34.7 95.8 90.3 93.8 margin 12.0% 13.4% 10.5% 9.6% 10.1% 12.1% 20.6% 19.1% 13.0% 16.5% 18.9% 16.8% 16.3%

Source: Tessenderlo, KBC Securities forecasts Bio-valorisation Bio-valorisation combines the animal by-products processing business of Akiolis and the gelatine production. Through its Akiolis subsidiary, Tessenderlo is the second largest renderer in France, behind Saria and ahead of Verdannet Monnard. The group collects and treats natural derivatives such as animal by-products (bones, intestines, blood) and other organic by-products such as used cooking oils and bakery products. These are either incinerated for their energetic content or converted into proteins and fats for use in downstream applications such as gelatine, pet food, soaps, detergents, methyl esters for biofuels, fertilizers. Currently, the French rendering market is very competitive and Tessenderlo does not expect a visible improvement in results in the near term.

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The second part of this division relates to the production of gelatine. Gelatin is a purified protein that is produced by the hydrolysis of collagen, which is a major component of the bones and skin of cattle and pigs. As such, gelatin is also one of the downstream markets of Akiolis. Gelatin is used in a number of applications, including Edible (dairy, meat processing, confectionary, soft drinks, beer, etc), pharmaceutical (soft and hard capsules, haemostatic sponges), photographic (X-ray film, colour films, photo paper) and Hydrolysed (taste enhancer, salt reducer, flocculating agent) applications. In gelatine, the company has production facilities in Europe, Asia, North and Latin America. Tessenderlo is the worlds third largest gelatine producer, but far behind market leaders Darling and Gelita, which we believe each have a global market share in the 20-25% range (vs approximately half that for Tessenderlo). Smaller players, which are mostly regional, include ao Nitta Gelatin and Weishardt. Gelatine demand has recently been under pressure in China after a couple of food scandals. In Latin America there has been a shortage of raw materials due to lower slaughtering numbers. Raw material prices in the region have increased and could not be passed through. As mentioned in the prospectus, one of Tessenderlos two Chinese gelatine plants might be expropriated by the government. Negotiations about compensation with the government have begun, but it is too early to have visibility on the outcome. The revenue and REBITDA contribution of that Chinese plant is said to be not material.

Tessenderlo does not intend to make acquisitions or large expansions in the Bio-valorisation division. Instead, the focus is on improving profitability through operational and commercial improvement programs, cost reductions and some investments in process innovation and product valorisation.

When discussing the current business trends in gelatine and Akiolis, it is important to note that Tessenderlo does not offer a breakdown of results for these two parts of the Bio-valorisation division. However, the table below clearly shows both the lower gelatine results and the intense competition in the French animal by-products treatment industry. We assume that cost initiatives will lead to some slight margin improvement in 2015, even though they are expected to stay well below 2012 levels. BIO-VALORISATION

FY12

1H13

3Q13

4Q13

2H13

FY13

1H14

3Q14

3Q change

4Q14E

2H14E

FY14E

FY15E

FY16E

Revenue 524 268.6 123 123 246 514.6 241.3 117.3 -4.6% 121.3 238.6 479.9 484.7 492.0 REBITDA 60.7 22.5 3.6 -3 0.6 23 7.6 0.5 -86.1% -0.3 0.2 7.8 19.4 29.5 margin 11.6% 8.4% 2.9% -2.4% 0.2% 4.5% 3.1% 0.4% -0.2% 0.1% 1.6% 4.0% 6.0%

Source: Tessenderlo, KBC Securities forecasts Industrial solutions Industrial Solutions comprises a range of activities, including the production and sale of plastic pipe systems, water treatment chemicals and mining applications. The largest business in this division is the plastic pipes business. We estimate Tessenderlo is Europes sixth largest producer, with an estimated market share of 7%, well behind Mexichem (15%) and Aliaxis (13%), but closer to Wienerberger, Uponor and Georg Fischer Piping. A key differentiating factor in the pipes operations is that Tessenderlo has a higher degree of downstream integration than most of its competitors, with 69 own distribution centres across Europe. Furthermore, the company also provides broad technical support/advice to its customers. Note that some rivals like Mexichem and Wienerberger also have distribution activities. In its Water treatment business, Tessenderlo supplies coagulants (which make impurities bundle together, thus making them sink) and other chemicals to treat waste water or clean drinking water. The main product is ferric chloride. Tessenderlo is a leading player in France and Belgium and also has a significant market position in the

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UK and the Netherlands. In mining, Tessenderlo recently commissioned a new thiosulfates production facility at Barrick Golds Goldstrike facility in Nevada (US). During the November conference call, we learnt that it is a bit too early to judge the growth potential of this business as it is unsure whether Barrick might want to replicate the technology at some of its other mines. Also it is not sure that all mines are suitable for retrofitting with the CATS leaching technology. As the table below shows, profit margins have grown well in recent quarters, helped to a significant extent by cost management, we believe. We expect some further margin growth on the back of cost efficiencies, the ramp up of the gold leaching plant, and a gradual improvement of the European building market. INDUSTRIAL SOLUTIONS

FY12

1H13

3Q13

4Q13

2H13

FY13

1H14

3Q14

3Q change

4Q14E

2H14E

FY14E

FY15E

FY16E

Revenue 405.6 201.5 101.3 94.4 195.7 397.3 206.5 98.5 -2.8% 94.3 192.8 399.3 419.2 440.2 REBITDA 24.4 9.2 4.5 4.5 9.0 18.2 17.1 7.0 55.6% 6.9 13.9 31.0 37.7 44.0 margin 6.0% 4.6% 4.4% 4.8% 4.6% 4.6% 8.3% 7.1% 7.3% 7.2% 7.8% 9.0% 10.0%

Source: Tessenderlo, KBC Securities forecasts OUTLOOK OVERVIEW P&L OVERVIEW

1H13 3Q13 4Q13 2H13 FY13 1H14A 3Q14 change 4q14e 2H14E FY14E FY15E FY16E

Sales 1029.0 415.0 346.1 761.1 1790.1 775.7 338.7 -18% 305.2 643.9 1419.6 1441.6 1507.5 Agro 307.8 102.7 85.8 188.5 496.4 296.7 121.0 18% 89.6 210.6 507.3 537.7 575.3 Bio Valorization 268.6 123.0 123.0 246.0 514.6 241.3 117.3 -5% 121.3 238.6 479.9 484.7 492.0 Industrial Solutions 201.5 101.3 94.4 195.7 397.3 206.5 98.5 -3% 94.3 192.8 399.3 419.2 440.2 Other 251.0 88.0 42.9 130.9 381.9 31.2 1.8 -98% 0.2 2.0 33.2 0.0 0.0 REBITDA 81.7 25.7 9.2 34.9 116.6 87.1 30.7 19% 18.4 49.1 136.1 147.5 167.3 Agro 41.2 10.8 8.2 19.0 60.1 61.1 23.1 114% 11.6 34.7 95.8 90.3 93.8 Bio Valorization 22.5 3.6 -3.0 0.6 23.0 7.6 0.5 -86% -0.3 0.2 7.8 19.4 29.5 Industrial Solutions 9.2 4.5 4.5 9.0 18.2 17.1 7.0 56% 6.9 13.9 31.0 37.7 44.0 Other 8.9 6.7 -0.4 6.3 15.2 1.2 0.2 -97% 0.0 0.2 1.4 0.0 0.0 REBITDA margin 7.9% 6.2% 2.7% 4.6% 6.5% 11.2% 9.1% 6.0% 7.6% 9.6% 10.2% 11.1% Agro 13.4% 10.5% 9.6% 10.1% 12.1% 20.6% 19.1% 13.0% 16.5% 18.9% 16.8% 16.3% Bio Valorization 8.4% 2.9% -2.4% 0.2% 4.5% 3.1% 0.4% -0.2% 0.1% 1.6% 4.0% 6.0% Industrial Solutions 4.6% 4.4% 4.8% 4.6% 4.6% 8.3% 7.1% 7.3% 7.2% 7.8% 9.0% 10.0% Other 3.5% 7.6% -0.9% 4.8% 4.0% 3.8% 11.1% - - 4.2% - - REBIT 43.9 8.2 -6.3 1.9 45.8 54.7 12.8 56% 1.7 14.6 69.3 77.8 95.6 REBIT margin 4.3% 2.0% -1.8% 0.2% 2.6% 7.1% 3.8% 0.5% 2.3% 4.9% 5.4% 6.3% non recurring items -49.0 -11.0 -4.4 -15.4 -64.4 -2.2 -8.5 -23% -3.5 -12.0 -14.2 -5.0 0.0 EBIT -5.1 -2.8 -10.7 -13.5 -18.7 52.6 4.2 NM -1.8 2.6 55.1 72.8 95.6 Net finance costs -14.6 -6.0 -6.6 -12.6 -27.3 -10.8 8.7 NM -7.4 1.3 -9.5 -7.0 -5.0 Associates 2.7 0.9 0.6 1.5 4.2 1.6 1.3 44% 1.1 2.4 4.0 5.0 5.1 Profit before taxation -17.0 -8.0 -16.6 -24.6 -41.8 43.3 14.3 NM -8.0 6.3 49.6 70.8 95.7 Taxation -18.1 -4.2 -1.0 -5.2 -23.4 -15.7 11.6 NM -0.4 11.2 -4.5 -26.9 -31.6 Net result -35.1 -12.2 -17.7 -29.9 -65.1 27.7 25.8 NM -8.3 17.5 45.1 43.9 64.1 Net result, group share -35 -11.9 -17 -28.9 -64 27.8 26.2 NM -8.7 17.5 45.1 43.9 64.1

Source: Tessenderlo, KBC Securities forecasts

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We remind that Tessenderlo guided at the time of the 3Q trading update for a slightly higher 4Q REBITDA (y/y). Management reconfirmed this guidance in the end-of-November conference call. We forecast a 4Q14 REBITDA of 18.4m, up from 9m in 4Q13. BALANCE SHEET UPDATE AFTER CAPITAL INCREASE AND USE OF FUNDS Tessenderlos net debt at end-3Q14 landed at 210.3m. Notional net debt, which includes factoring, landed at 297.2m at the end of 3Q14. This debt level compares to a group REBITDA over the past twelve months (4Q13 + 9M14) of 126.9m. Hence the net debt/REBITDA ratio at end-September was 1.66x. The notional net debt/REBITDA (including factoring to net debt) was 2.34x. In terms of maturity, 85.2m net financial debt qualified as current at the end of September, while non-current financial debt was 176.1m. Cash & equivalents were 51.0m. The key financing lines are the 150m bond maturing in October 2015 and the 400m syndicated loan facility that matures in April 2016. The company stated at the time of the 3Q14 results release (before the launch of the capital increase) that it expected net financial debt to be slightly below the level at end-2013 ( 258.9m). We remind that gross proceeds of the capital increase are 174.8m (10.59m shares x 16.5 price per share). Net proceeds should be about 172.7m. The pro forma net debt after the capital increase would be an estimated 37.6m (based on end-3Q net debt + net proceeds of the capital increase). Pro forma notional net debt would be 124.5m. With FY14 REBITDA estimated at 136.1m that corresponds to a Net debt/REBITDA ratio of 0.3 or a notional net debt/REBITDA of 0.9x. Whereas Tessenderlo had relatively high leverage, based on the notional net debt/EBITDA multiple prior to the capital increase of 2.34x, the balance sheet after the capital increase looks pretty strong. We believe Tessenderlo now has the firepower to embark on a series of new growth initiatives. In this respect the prospectus related to the Capital Increase highlighted two new intended growth projects:

1. Firstly, Tessenderlo intends to acquire a crop production portfolio, which would further complement and enlarge the existing crop protection business Novasource. The prospectus did not offer any insight in to the size of the acquisition and only stated that the timing is expected to be either 4Q14 or 1Q15.

2. Secondly, Tessenderlo is contemplating the construction of a new Thio-Sul production facility in Europe, possibly along with logistics and distribution facilities. We understood from the conference call that such an investment would preferably occur in a cooperation agreement with raw materials producer which would secure competitive supply for one of Thio-Suls key raw materials.

These projects come on top of three other recent growth investments that were already publicly announced but which are not yet contributing to top & bottom lines:

3. Tessenderlo intends to construct a new Thio-Sul (ATS) production unit in East-Dubuque (US). The advantage of this plant is that it is located in the middle of the US Corn Belt, which will significantly reduce transportation costs. The Midwest and the Great Lakes Area supply over 80% of total US corn production. Note that Tessenderlo has teamed up with Rentech Nitrogen Partners, which will supply ammonia.

4. Tessenderlo is currently constructing a KTS production facility in Hanford (US) which is expected to be

commissioned in the course of 2015.

5. Tessenderlo intends to build a calcium chloride plant in Belgium. The new plant, scheduled to become operational in 3Q15, provides Tessenderlo for another outlet of the Hydrochloric Acid that comes out as a by-product out of the SOP (Sulphate of Potash)-plant.

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All in all, Tessenderlo has hinted that out of the net proceeds of the capital increase of about 172.7m, about three quarters (or about 130m) will be spent on the above-mentioned growth projects as well as operational investments, investments linked to compliance with new regulation and certain historical non-recurring cash-outs. About one quarter (or 43m) was said to be targeted for strengthening the balance sheet. The table below gives an overview of our estimates on the various uses of the capital increase funds. Note that the above-mentioned investments and cash-outs will occur gradually in the coming years, which explains why the balance sheet should remain very strong in the coming years. USE OF FUNDS FROM THE CAPITAL INCREASE

Project Completed by estimated Capex ( m)*

Growth investments 75 KTS production facility in Hanford (US) in the course of 2015 15 ATS production facility in East-Dubuque (US) 2H16 20 Calcium Chloride plant in Ham (Belgium) 3Q15 8 Intended acquisition of crop protection portfolio 4Q14/1Q15 12 contemplated ATS production facility in Europe NA 20 Operational investments & investments linked to compliance with new regulation

52

Electrolysis conversion to membrane in Loos (France) 2017 48 other programs NA 4 Historical non-recurring cash outs NA 3 Strengthening of Balance sheet 43

Source: KBC Securities estimates SHAREHOLDER STRUCTURE At the time of the announcement of the launch of the Capital Increase (26 November), Verbrugge NV and Symphony Mills NV, which are affiliated entities, held respectively 27.517% and 1.016% of Tessenderlo, which means a combined stake of 28.76%. Verbrugge NV and Symphony Mills had made a commitment to Tessenderlo that they would, subject to certain conditions, exercise all of their respective Preferential rights to subscribe to new shares. As per a transparency declaration posted on the website of the FSMA, Verbrugge NV bought 71,877 additional shares (0.23%) on 27 November. Along with additional rights purchased during the Rights Subscription Period and some scrips purchased in the Scrip Private Placement, Verbrugge NV and Symphony Mills NV announced that following the capital increase they now hold respectively 30.2% and 1.5% of the Issuers capital. Note that pursuant to Article 52, 1, 5 of the Takeover Royal Decree, a passing of the 30% shareholding threshold by acquiring or exercising Preferential Rights in the Rights Subscription Period and/or acquiring Scrips in the Scrips Private Placement, does not give rise to a mandatory public takeover bid. As per the Takeover Royal Decree, any subsequent acquisition will not trigger a mandatory public takeover either.

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VALUATION DCF Model Our DCF model integrates a WACC of 7.4% and a LT FCF growth of 1.5%. The fair value derived is 22.7 DCF-MODEL

OCF CAPEX WCR FOCF Disc. FOCF

2015E 122 -85 1 38 35 2016E 136 -85 -5 46 40 2017E 147 -80 -5 62 50 2018E 151 -78 -5 68 51 2019E 158 -80 -5 73 51 2020E 165 -81 -5 79 51 2021E 169 -83 -4 82 50 2022E 173 -84 -3 85 48 Residual value (LT growth = 1.5%) 949 Total value 1325 Net debt -133 Minorities -3 Pension & other provisions -212 Financial assets 7 Deferred tax -24 Value of equity 959 Value per share 22.7

Source: KBC Securities forecasts SUM-OF-THE-PARTS MODEL SUM-OF-THE-PARTS MODEL

Division EBITDA15E multiple EV Comment

Agro 90.3 9.5 858 Crown jewel of the group and key growth driver Biovalorization 19.4 10.0 194 Multiple fairly high but takes into account current low

profitability Industrial Solutions 37.7 7.0 264 In line with M&A multiples in industry in past years Total 147.5 8.9 1,316 Net debt -133 Notional net debt estimate end 2014 Minorities -3 estimate end 2014 Pension & other provisions -212 estimate end 2014 Financial assets 7 estimate end 2014 Deferred tax -24 estimate end 2014 Equity value 950 Equity value per share 22.5

Source: KBC Securities

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FINANCIAL DATA Income statement ( m) 2012 2013 2014E 2015E 2016E Sales 2,129.6 1,790.1 1,419.6 1,441.6 1,507.5 Gross profit 420.0 359.3 283.9 288.3 301.5 EBIT -162.5 -18.7 55.1 72.8 95.6 Pre-tax earnings -186.8 -45.9 45.6 65.8 90.6 Net earnings -197.9 -64.0 45.1 43.9 64.1 EBITDA 161.1 116.6 121.9 142.5 167.3 REBITDA 161.1 116.6 136.1 147.5 167.3 REBITA 75.9 45.8 69.3 77.8 95.6 Balance sheet ( m) 2012 2013 2014E 2015E 2016E Intangible assets 97.2 87.0 87.0 87.0 87.0 Tangible assets 471.8 436.7 454.9 470.3 483.6 Financial assets 26.2 28.3 25.3 25.3 25.3 Net other assets & liabilities 39.0 -11.9 -14.4 -13.9 -12.4 Net working capital 242.2 174.9 159.9 158.1 165.3 Net debt 314.0 258.8 42.7 12.8 -29.2 Provisions 178.4 216.3 212.3 212.3 212.3 Minorities 4.5 3.3 3.3 3.3 3.3 Equity 379.5 236.6 454.4 498.3 562.4 Capital employed 936.0 805.8 820.5 824.5 846.6 TOTAL ASSETS 1,288.2 1,089.9 1,241.2 1,138.3 1,182.0 Cash flow statement ( m) 2012 2013 2014E 2015E 2016E Cash flow from operations 29.8 88.1 128.4 114.9 127.1 Net capital expenditure -117.9 -99.2 -85.0 -85.0 -85.0 Free cash-flow -88.1 -11.1 43.4 29.9 42.1 Acquisitions / disposals -13.4 0.0 0.0 0.0 0.0 Dividend payments -19.8 -22.2 0.0 0.0 0.0 Shares issues 0.8 1.2 172.7 0.0 0.0 New borrowings / reimbursements 91.0 -37.6 -5.0 -150.0 -30.0 Other 29.3 83.9 0.0 0.0 0.0 CHANGE IN CASH & EQUIVALENTS -0.2 14.2 211.1 -120.1 12.1 Performance criteria 2012 2013 2014E 2015E 2016E Sales growth 0.2% -15.9% -20.7% 1.6% 4.6% Gross margin 19.7% 20.1% 20.0% 20.0% 20.0% REBITDA margin 7.6% 6.5% 9.6% 10.2% 11.1% REBITA margin 3.6% 2.6% 4.9% 5.4% 6.3% EBIT margin -7.6% -1.0% 3.9% 5.1% 6.3% Net debt / Equity + Minorities 81.8% 107.9% 9.3% 2.6% -5.2% Net debt / EBITDA 1.95 2.22 0.35 0.09 -0.17 EBITDA / net interest 6.63 4.29 12.83 20.35 33.46 Pay-out ratio -20.8% 0.0% 0.0% 0.0% 0.0% = Return on Equity (avg) -40.4% -20.8% 13.0% 9.2% 12.1% Return on Capital Employed -11.8% -1.5% 4.7% 6.2% 8.0% Per share data () 2012 2013 2014E 2015E 2016E weighted average # shares, diluted 30,925,934 32,437,535 32,871,257 43,463,522 43,463,522 Basic EPS -6.42 -2.01 1.42 1.04 1.51 Diluted EPS -6.40 -1.97 1.37 1.01 1.48 Diluted, adjusted EPS 0.95 0.05 1.80 1.13 1.48 Net book value / share 12.88 7.45 10.72 11.76 13.27 Free cash flow / share -2.86 -0.35 1.37 0.70 0.99 Dividend () 1.33 0.00 0.00 0.00 0.00 Valuation data 2012 2013 2014E 2015E 2016E Reference share price () 22.59 20.68 20.25 20.25 20.25 Reference market capitalisation 665.8 656.9 857.8 857.8 857.8 Enterprise value ( m) 1,224.2 1,239.8 1,246.0 1,206.2 1,164.1 P/E 23.7 394.5 11.2 18.0 13.7 EV/sales 0.6 0.7 0.9 0.8 0.8 EV/EBITDA 7.6 10.6 10.2 8.5 7.0 EV/Capital employed 1.3 1.5 1.5 1.5 1.4 P/ NBV 1.8 2.8 1.9 1.7 1.5 Free cash flow yield -13.2% -1.7% 5.1% 3.5% 4.9% Dividend yield 5.9% 0.0% 0.0% 0.0% 0.0% Source: KBC Securities *Historic valuation data are based on historic prices

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DISCLOSURE & DISCLAIMER SECTION The company disclosures can also be consulted on our website http://www.kbcsecurities.be/disclosures. KBC Securities uses an absolute rating system including terms such as Buy, Accumulate, Hold, Reduce and Sell (see definitions below). Definition

BUY Expected total return (including dividends) of 10% or more over a 6-month period

ACCUMULATE Expected total return (including dividends) between 0% and 15% over a 6-month period

HOLD Expected total return (including dividends) between -5% and 5% over a 6-month period

REDUCE Expected total return (including dividends) between 15% and 0% over a 6-month period

SELL Expected total return (including dividends) of -10% or worse over a 6-month period Due to external factors and in exceptional cases, KBC Securities allows the use of ratings such as Accept the Offer, Black Out, No Recommendation or Suspended. Our analysts assign one of those ratings based on their investment outlook and valuation for the concerned stock. The valuation can be based on different methodologies such as DCF (discounted cash flow), absolute multiples, peer group multiples, sum-of-parts or NAV (Net Asset Value). The valuation is reflected in a 6-month target price. Occasionally, the expected total return may fall outside of these ranges because of price movement and/or volatility. Such deviations will be permitted but will be closely monitored. Investors should carefully read the definitions of all ratings used in each research report. In addition, since the report contains more complete information concerning the analysts view, investors should carefully read the entire report and not infer its contents from the rating alone. KBC Securities may disclose the drafts of its reports to the issuers before their dissemination for the purpose of verifying the accuracy of factual statements, except when the draft includes a rating or a target price. In case the draft has been amended following this disclosure, such amendments will be indicated in the concerned report.

Stock rating % of covered universe % of covered universe with investment banking relationship during last year

BUY 22.90% 0.00%

ACCUMULATE 35.60% 0.00%

HOLD 38.10% 0.00%

REDUCE 1.70% 0.00%

SELL 1.70% 0.00% Tessenderlo is a mainly European midcap chemicals group with three divisions: Chemicals, Specialties and Converting. The price target for Tessenderlo is based on following parameters: Discounted Cash Flow (DCF), Absolute Multiples, Peer Group Multiples The risks which may impede the achievement of our price target are: Raw materials and energy price volatility, currency effects, industry capacity additions disrupting market equilibriums, stricter environmental legislations, cartel investigations Any reference made to a DCF valuation for Tessenderlo is based on the following parameters: a forecast period from 2014 until 2022, a perpetual growth rate of 1.5% and a calculated WACC of 7.4%. Below is an overview of the stock ratings and target price history in the last 12 months for the stock described in this report.

Date Rating Target price

2014-12-22

2014-09-18

2014-08-27

2014-04-30

Accumulate

Suspended

Hold

Hold

22.50

-

24.00

21.00 KBC Securities will provide periodic updates on companies/industries based on company-specific developments or announcements, market conditions or any other publicly available information.

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CONTACT DETAILS

ANALYST TEAM Analyst Contact Coverage

Wouter Vanderhaeghen (Head of Research) +32 2 429 37 30 Shipping & Industrials Jan De Kerpel +32 2 429 84 67 Biotech & Pharma Ruben Devos +32 2 429 58 43 Telco & Media Matthias De Wit +32 2 429 37 17 Financials Yves Franco +32 2 429 45 04 Holdings & Staffing Dieter Furniere +32 2 429 18 96 Engineering, Transport & Utilities Wim Hoste +32 2 429 37 13 Chemicals & Breweries Guy Sips +32 2 429 30 02 Small & Midcaps Benelux Koen Overlaet-Michiels +32 2 429 37 21 Real Estate Alan Vandenberghe +32 2 429 18 06 Credit Research Dirk Verbiesen +32 2 429 39 41 Oil Services & Construction Pascale Weber +32 2 429 37 32 Retail & Food Producers EQUITY SALES TEAM Sales Contact

Sebastien Fuki (Head of Sales) +32 2 417 53 43 Stefaan De Lathouwer +32 2 417 44 68 Xavier Gossaert +32 2 417 53 68 Margo Joris +32 2 417 25 66 Kris Kippers +32 2 417 28 08 Augustin Lanne +32 2 417 51 45 Tim Leemans +32 2 417 32 28 Marco Miserez +32 2 417 36 81 Sales (US) Hubert Dubrule (Head of US Sales) +1 212 845 22 74 Sebastiaan Pol +1 212 845 20 52 Sofie Van Gijsel +1 212 541 06 48 Sales Trading Isabel Sebreghts +32 2 417 63 63 Tim Leemans +32 2 417 32 28 Marco Miserez +32 2 417 36 81 Loc De Smet +32 2 417 36 99 BOND SALES TEAM Sales Contact

Alexander Lehmann (Head of Sales) +32 2 417 46 25 Maurizio Bartolo +32 2 417 48 02 Bert Beckx +32 2 417 31 57 Toon Boyen +32 2 417 25 65 Valentin Checa +32 2 417 25 40 Alban Kerdranvat +32 2 417 25 45 Bart Mathijssen +32 2 417 57 12 Koen Princen +32 2 417 44 65

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Copyright 2014 KBC Securities

The company disclosures can be consulted on our website http://www.kbcsecurities.com/disclosures.

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Page 1Table Title: Sales InformationTable Title: Stock/Market InformationOverview

Page 2COMPANY DESCRIPTION AND BUSINESS UPDATEGraphics Title: SALES BY DIVISION*Graphics Title: REBITDA BY DIVISION*

Page 3Graphics Title: TESSENDERLO KERLEY FOOTPRINTCOMPANY DESCRIPTION AND BUSINESS UPDATE (CONT)

Page 4COMPANY DESCRIPTION AND BUSINESS UPDATE (CONT)Table Title: AGRO Revenue/Earnings Information

Page 5COMPANY DESCRIPTION AND BUSINESS UPDATE (CONT)Table Title: BIO-VALORISATION

Page 6COMPANY DESCRIPTION AND BUSINESS UPDATE (CONT)Table Title: INDUSTRIAL SOLUTIONSOUTLOOK OVERVIEWTable Title: P&L OVERVIEW

Page 7OUTLOOK OVERVIEW (CONT)BALANCE SHEET UPDATE AFTER CAPITAL INCREASE AND USE OF FUNDS

Page 8BALANCE SHEET UPDATE AFTER CAPITAL INCREASE AND USE OF FUNDS (CONT)Table Title: USE OF FUNDS FROM THE CAPITAL INCREASESHAREHOLDER STRUCTURE

Page 9VALUATIONTable Title: DCF-MODELTable Title: SUM-OF-THE-PARTS MODEL

Page 10Table Title: FINANCIAL DATA

Page 11DisclosureTable Title: Report KeyTable Title: Price/Rating Analysis

Page 12Table Title: Broker/Analyst Information

Page 13Disclosure (CONT)

initiating coverage.pdf

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