CEMBRE (CMB.IM) Initial Coverage: next year won t overturn history. December 17, 2008

Transcription

1 CEMBRE (CMB.IM) BUY Sector: Industrial / Electrical connectors and tools Initial Coverage: next year won t overturn history. December 17, 2008 Investment view Cembre is the Italian leader and one of the European largest producers of electrical connectors and related installation tools. Cembre is vertically integrated and attends to whole the production process, from the design to the marketing of the products. The production is located in Italy and UK but it s efficient and cost competitive. In 2007 the company recorded 93.4M in sales, of which more than 50% invoiced out of Italy. Cembre has always been able to exploit new fast growing niches like the railway sector and, as a consequence, to grow faster than its end markets (the CAGR for the period stands at 13.4%). For the oncoming years the management plans to grow organically thanks to a strengthened presence in the US (6.3% of total sales in H1 08), a deeper penetration in Europe of the cable marking products (6.7% of total sales in H1 08, now growing >30%) and to the development in Europe of a high speed railways network. In the first 9 months of 2008 Cembre s revenues increased 2.8% yoy. The Ebitda margin and the net results before taxes registered a double digit decline (respectively -11.2% and -12.8%) but were still satisfactory as a percentage of sales (respectively 20.9% and 17.3%). Valuation We initiate the coverage with a BUY rating. The current stock price is attractive (0.7x EV/CE08e - 2,8x EV/EBITDA08e - 5,7x PE08e), as it does not account for the track record of Cembre, the quality of its management and the soundness of its financial structure (cash positive at year end). The model we run to value the company, a 5 years DCF, returns a fair value of 5.4 per share. The 16.8% FCF yield we expect in 2008 also support our valuation. Risks As of today, the main risks we see are: the low visibility on the top line development, the exposure of Cembre to the economic cycle and its structural high dependence on the volatile copper price. Forecast 2007A 2008E 2009E 2010E Key Data Price ( ) 3.21 Target Price ( ) 5.39 Upside/(downside)(%) 68% Market cap ( M) 54.6 EV ( M, FY 08e) 53.5 Investment Profile Management Stock data Ticker Bloomberg from 1 worst to 5 best CMB.IM N of shares (M) 17.0 Free float 26.8% Main shareholder Rosani family (71.1%) Daily trading volume Liquidity Valuation Returns Growth ,838 shares Sales ( M) EBIT ( M) All Stars Cembre EPS ( ) Valuation 2007A 2008E 2009E 2010E EV/EBITDA P/E Dividend yield 2.9% 4.4% 5.2% 5.3% ROCE after tax 15.3% 13.3% 10.5% 12.1% EV/CE Share Perf % 3M 6M 1Y Absolute -26.7% -41.5% -49.6% Rel. to All Stars -2.0% -3.8% -1.4% Jacopo Tagliaferri Equity analyst Tel: jacopo.tagliaferri@twice.it Twice Research S.r.L. con Socio Unico - via San Vittore al Teatro 1, Milano Tel ; Fax P.IVA: numero R.E.A.: Capitale sociale: Società soggetta all attività di direzione e coordinamento di Twice SIM S.p.A.

2 Investment case Cembre is the leader in Italy and in Europe for electrical connectors and related installation tools. This position has been built on: a competitive cost base. Cembre s two plants are located in high wage countries but benefit from the scale reached and from the industrial knowledge acquired in many years of activity (the company, founded in 1969, also manufactures internally some machineries); a technological edge. Constant investments in R&D (around 2% of sales per year) lead to a continuous introduction of innovative products, many of which are protected by patent. Today Cembre benefits from high barriers to entry (as reflected in its returns: on average the ROCE was 10.1% in the period ). The competitive advantages rely on: an extensive product range (>9K SKU) and an automated warehouse. The electrical wholesalers, who control the distribution, are reducing the number of supplier and privilege the counterparties able to keep a wide stock (on average 33.4% of sales for Cembre) and to guarantee a rapid delivery to market; a commercial network consisting of own employed salespeople (nearly 70), located in Italy, Europe and in the USA. This direct presence on the ground guarantees a daily relationship with both end users and distribution groups. The salespeople also redirect the client s inputs toward Cembre research department. Cembre has a history of growth. The company has always been able to exploit new fast growing niches (e.g. railways, energy) and thus to grow more than its end markets (the CAGR for the period stands at 13.4%). The management for the oncoming years plans to grow organically thanks to: a strengthened presence in the US (6.3% of total sales in H1 08) with some new salespeople. The railways products will lead the penetration of this important market; a deeper penetration in Europe, after a long period of integration, of the cable marking products (6.7% of total sales in H1 08, now growing >30%); the development in Europe of a high speed railways network. This niche (17.7% of Cembre s sales in H1 08) guarantees a good visibility and recurrence of sales. Cembre s stock is underpriced. We initiate the coverage with a BUY rating. In order to evaluate Cembre we run a 5-year DCF. Our model returns a fair value of 5.4 per share, granting a 68% upside from last close price. The stock price doesn t account for the impressive track record of the company (never a loss reported), the quality of the management and the soundness of the balance sheet (we expect 4.6M of cash at year end). Risks. Notwithstanding our positive investment case, there are still some potential threats: Cembre has a low visibility on its sales (less than one month); the markets served by the company are mature and partially depends on the economic cycle; Cembre s dependence on copper exposes the company to the volatility of its price. If the economic slowdown is long lasting and the sales decline deepens, there will be a significant operating deleverage. 2

3 Table: SWOT analysis Strengths Weaknesses - Italian and European leadership - Mature and small sector - Competent management - Dependence on copper price - Significant barriers to entry - Some currency exposure Opportunities Threats - Expansion of the US market - Long lasting economic crisis - Penetration into the Asian market - Operating deleverage - High speed railways development in Europe - Diversification into less profitable niches Source: Twice Research. Company description Cembre is one of the largest worldwide producers of electrical crimp type connectors, terminal blocks and related installation tools. The company, established in 1969, is headquartered in Brescia, Italy. Short history: 1969: Cembre s foundation. 1986: Foundation of the English subsidiary, where a second production plan is located. 1988: Foundation of the French subsidiary. 1994: Foundation of the Spanish subsidiary. 1995: Foundation of the Norwegian subsidiary to distribute Cembre s products in the Scandinavian market. 1997: Foundation of the German subsidiary; Cembre is listed on the Italian stock exchange (All Stars segment). 1999: Foundation of the American subsidiary in New Jersey. Acquisition of Oelma Srl. 2002: Acquisition of General Marking Srl. Integration of Cembre and Oelma. 3

4 The company historic focus is on the development, engineering, production and distribution of electrical connectors and installation tools for industrial and civil plants. Notwithstanding this fact, Cembre has been able to successfully enter new markets, like the railway one, with dedicated electrical connectors and installation tools. In 2007 the company achieved a turnover of 93.4M, with a geographically well diversified sales mix and less than 50% of sales invoiced in Italy. Chart: net sales by geographic area, in % of 1H 08 total sales Rest of the world 5.3% USA 6.3% Italy 42.0% Europe 46.4% Source: Cembre. The historic growth achieved by Cembre (the CAGR for the period stands at 13.4%) is mainly organic and driven by the constant introduction of new products. Nevertheless, during its history Cembre also performed a couple of small acquisitions. In 1999 the company acquired Oelma Srl for 2.0M, thus widening its products portfolio with cable glands. In 2002 Cembre acquired General Marking Srl for 2.8M, active in the manufacturing of products to mark cables and electrical components. As a result, the sales mix by product category is today well diversified. Chart: net sales by product, in % of 1H 08 total sales. Industrial marking 6.7% Others 4.6% Railway products 17.7% Electrical connectors 39.3% Terminal blocks 2.6% Tools 22.2% Cable glands 6.9% Source: Cembre. 4

5 Products CMB Cembre is vertically integrated: in 2007 the company employed 525 people of whom 255 are involved in the production process. The production is located in Italy (the Brescia plant covers an area of 115k sqm) and in the UK (Birmingham); whereas the group has distribution subsidiaries in the main European countries (France, Spain, Germany and Norway). The English subsidiary is primarily focused on serving the UK market, but it also supports other group operations (e.g. France and Germany). The company is also present in the USA, where it has set up a distribution subsidiary in New Jersey (Edison). The penetration of the protectionist US market is firstly driven by the railway products. Chart: Group structure as of December Source: Cembre. Cembre employs its own salespeople in all the countries where it has established a subsidiary. In the rest of the world the distribution and the after sale assistance is entrusted to a network of importers and independent agents. Cembre sells around 60% of its total revenues to wholesalers of electrical material; energy utilities and railway companies account for the remaining 40% of sales. The group has only a marginal exposure to the automotive and white goods sectors, thus limiting its exposure to the economic cycle. Even the exposure to the real estate market, through the terminal blocks segment, is limited to less than 3% of revenues. Chart: products / end markets matrix Electrical Connectors YES YES YES FEW FEW Tools & Accessories YES YES YES FEW FEW Railway Products NO NO YES NO NO Electrical wholesalers Energy transmission Railways End markets Automotive sector White goods Source: Twice Research. 5

6 Competition analysis End markets: size and trends Cembre operates in a specific niche of the whole electrical market that is composed of different sub-segments with specific technological contents. Overall the reference market for Cembre s products remains small, mature and with low growth rates. Nevertheless Cembre, thanks to the constant introduction of new products into the market, has been able to achieve a good growth rate (the CAGR for the period stands at 10.6%). Looking at the size, the European market accounts for about 350M, the US market accounts for M and the Asian market is worth another 300M. Cembre acts on a global scale; its market share is estimated at 45% in Italy and 20% in Europe while the presence in USA and Asia is still marginal. (Source: Cembre, Twice Research). Market structure Cembre is active in the market for electrical connectors and related installation tools. The market of tools for installing and crimping connectors is concentrated, Cembre is the European leader and competes with 2/3 worldwide producers. Instead the world electrical connectors market has a local nature and is still fragmented (a number of companies operates in each country). The competitors with a global footprint exist but are large companies active in the whole electrical sector with just a small division covering Cembre s niches (e.g. Tyco Electronics, Textron). Finally in the industrial marking market Cembre has two competitors: Grafoplast and ModernoTecnica (now part of Brady Group). The company is trying to overcome the leadership position of its competitors. Factors of production The two principal factors of production are raw materials, especially copper (in the form of ribbon and bobbin), and labour. Copper is a commodity, easily available on the market. In 2007 its cost was close to 43% of revenues but it s expected to decline because of the economic slowdown. The labour cost represented little more than 26% of revenues in 2007; the workforce is split between factory workers (49% of total employees) and salespeople (45%). Suppliers The major copper producers in the world are Chile, Canada, US, Indonesia, Australia and Zambia. Chile is the most important; it holds 40% of the worldwide production and it s also the main exporter. During the last years the copper price has increased significantly, reaching an all-time high price in April 2008 (8730$/ton). Nevertheless the current crisis is impacting on the demand side, consequently affecting the price: from July to date the copper price has halved (down to 3315$/ton as of December 16). Cembre has a consolidated relationship with the biggest European suppliers; the company is used to buying on the spot market and does not hedge its raw materials purchases. 6

7 Clients Cembre customer s portfolio is well diversified and it doesn t show any concentration: the two biggest clients count each for 1.5% of total sales. It sells primarily to electrical wholesalers (e.g. Rexel, Sonepar) and as a consequence, has only a marginal contact with the final clients. On the contrary, Cembre keep a direct relation with big clients like energy utilities and railways companies. Barriers to entry Cembre s business enjoys important barriers to entry. Many Cembre products are protected by patents: it s especially true for the railways tools. Cembre has a wide product catalogue (in 2007 the company sold 9,000 different products); as a consequence the electrical wholesalers benefit from having just one counterpart. The company automated warehouse guarantees a rapid delivery of the products helping the electrical wholesalers from keeping the stock in house. Cembre has a capillary commercial presence in Italy and abroad (in 5 countries in Europe and in the USA) and with its own employed salespeople is able to stay in touch daily with the clients. New entrants For the reason highlighted above it s unlikely that new players could easily enter the market for electrical connectors and related tools. The size and the growth rate of these markets prevent a bigger and more diversified player from entering this niche. Last but not least, the deep relationship between producers and electrical wholesalers makes it difficult for the latter to switch to other suppliers. When it comes to the railway market the high safety standard required and the average long term duration of the contracts prevent the entrance of new players. 7

8 CEMBRE business model and strategic positioning Cembre is vertically integrated. The company attends to the whole production process, from the design to the marketing of its products. Cembre invests every year approximately 2% of its revenues in the R&D function, where the company employs 12 technical designers. As a result, Cembre has always been able to introduce new products into the market; many of which are protected by registered patents. The manufacturing plants run by Cembre, even if located in high wage countries (Italy and UK), are cost competitive (e.g. Cembre sells also in China). The company has developed a strong industrial expertise. Some machines are now designed and assembled in house, thus granting the company a technological edge and a benefit from its scale. The outsourcing of the production to low wage countries isn t an option: the transport costs would exceed the savings in labour costs, the quality would not be enough guaranteed and the technological know-how would be hard to protect. Cembre has a wide catalogue and, as a consequence, keeps a significant level of stock. The IT system in place (from last May it s SAP) and the automated warehouse guarantee that the rights inputs are sent to the production and a short delivery to the electrical wholesalers. The marketing of its product is also a strategic function for Cembre. The company sells mainly through electrical wholesalers but has decided to have a network of own employed salespeople (25 in Italy, 30 in Europe, 8 in US). This network guarantees a daily presence on the ground and stimulates the final clients demand towards Cembre s products and tools. The salespeople also redirect the client s inputs toward Cembre research department. In the energy and railway sector Cembre enjoys always a direct relationship with the final client (energy utilities and railways operator). 8

9 Corporate profile Shareholders: concentrated. The major stake of the company is held by the founder Carlo Rosani. He owns a 6.1% stake directly and another 53.3% stake through his holding, Lysne Spa. All together other members of the family hold another 12% of the outstanding shares. Aldo Bottini Bongrani, the Sales and Marketing Director, holds a 2% stake. As a result the free float represents 27% of the outstanding shares. None financial institution owns more than 2% of the shares. (Source: Consob, as of December 16, 2008) Chart: shareholders structure Free Float 27% Rosani Sara 3% Rosani Giovanni 3% Bottini Bongrani Aldo 2% Onofri Anna Maria 6% Rosani Carlo 6% Lysne Spa 53% Source: Consob, as of December 16, 2008 Management: belongs to the family. Carlo Rosani, the founder, is the President of Cembre; he s still involved in the definition of the strategy and in the key decisions. Giovanni Rosani, the son, is the CEO of the company with full responsibility for the daily operations. Together with the Rosani family, there are professional managers with important responsibilities. Claudio Bornati is the CFO and Investor Relator. Aldo Bottini Bongrani is the Sales and Marketing Director. The management track record is impressive; since its foundation Cembre has never posted a loss, the acquisitions carried out and the expansion abroad have both proven successful. Disclosure: fair. Cembre is listed on the Italian Stock Exchange since 1998 so that there is a long track record available about the company financial performance. Unfortunately, the segment reporting is only by country and not by product category, thus limiting the usefulness of the information. The management periodically communicates to the market all the relevant decisions and every fact regarding the company. 9

10 Corporate governance: good. The Board of Directors is composed of 8 members, of which 4 family members. The independent members are Mario Comana and Paolo Lechi di Bagnolo. Other members are Giovanni De Vecchi and Aldo Bottini Bongrani, the Sales and Marketing Director. The overall compensation received by the Members of the Board equaled 646K in Cembre adopts, as corporate governance model, the traditional system composed by a Board of Directors and a Board of Statutory Auditors. Financial Communication: open. Cembre regularly updates and publishes its financial statements and it readily communicates to the market all the relevant and necessary information. The management regularly meets with the financial community but does not disclose its business plan. Auditors Reconta Ernst & Young is auditing Cembre s financial statements. The contract expires on 31 December The remuneration of the auditors was 123k in

11 Valuation The model we used to value Cembre, a 5-year DCF with detailed estimates for the period , returns a fair value of 5.4. We made the following assumptions: Sales will increase 1.5% in Due to the global economic crisis, revenues will drop 5% in 2009, thus being 2009 the worst year in Cembre history. In 2010 sales will bounce back 3%; The net operating margin will slightly decrease to 17% in We estimate a further decline in 2009 down to 14.3% of sales because of the operating deleverage. The company has room to cut costs in the order of 2M but the effects will be more visible in We set the long term margin at 16% of revenues; The Capex will remain important, at around 5% of sales, in order to keep the plants up to date and the production process efficient; In 2009 there will be a slight deterioration in the working capital, already at a high level to sales. Due to the stressed market conditions it will increase to 42.1% of revenues. In the long-term we set it equal to 40% of revenues; The company will close 2008 with a positive net financial position (we expect 1.1M at year end). Cembre will generate an important cash flow (on average the FCF/sales ratio equal 8.3% in the period ) thus we expect the company to increase its cash pile. Discounted Cash Flow FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 Sales Sales growth 1.5% -5.0% 3.0% 3.0% 1.0% EBIT Margin 17.0% 14.3% 16.4% 16.0% 16.0% Taxes Tax rate -40.0% -40.0% -40.0% -40.0% -40.0% NOPAT Depreciation % of sales 3.4% 3.7% 3.7% 4.0% 4.2% Capex % of sales -5.1% -5.2% -4.9% -4.6% -4.2% Var. Working Capital Free Cash Flow PV of FCF Enterprise Value ( M) Debt Net (30 June 2008) ( M) 5.1 Minorities ( M) 0 Pensions (i.e. TFR; M) 3.5 Equity value ( M) 91.6 Number of Shares (M) 17.0 Equity value per share ( ) 5.39 Upside 68% 11

12 WACC CMB Risk free rate 4.8% Market premium 4.5% Unlevered Beta 1.1 Ke : cost of equity 9.8% Kd : cost of debt 5.5% Tax rate 27.5% Cost of debt after tax 4.0% Market cap 54.6 Net debt (as of June 2008) 8.6 Sustainable Debt / EV 10.0% WACC 9.2% g 1% Sensitivity analysis Long-term growth rate -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 7.7% % % % % % %

13 Last results 2008: 9 months results The effects of the financial crisis are beginning to be visible in the real world. Cembre s revenues are still growing but the decline in the margins and in the net result are double digits. The revenues grew 2.8% yoy to 72.5M ; the positive result is mainly driven by the Italian market (+7.7% yoy). The Ebitda margin decreased 11.2% yoy down to 20.9% of revenues. The Ebit margin, equal to 17.7% of revenues, a decrease of 12.4%. The net result before taxes decreased 12.8% to 12.6M. The net financial position is improving fast: it s negative for 0.8M from -5.1M in June : first semester results Cembre registered a further revenues increase. The margins declined due to the increase of raw material costs, the increase of labor costs and an accounting change (related to the reclassification of the stock). The revenues grew 2.2% yoy to 50.1M. The sales in Italy increased 5.1% instead the international revenues remained unchanged. The Ebitda decreased to 10.7M, down to 21.2% of revenues. The Ebit, reflecting the trend, decreased to 9.1M or 18.2% of revenues. Cembre closed the 1H 08 financials with a 6.3M net result, down 14.4% yoy. The net financial position was negative (debt) for 5.1M due to dividends payment released in May 2008 (4.4M ). 2007: full year results In 2007 Cembre registered a satisfactory increase in revenues in spite of an anomalous year, characterized by a first semester of growth and a stagnant second part of the year. Despite another increase in the copper price (after the spike of 2006) Cembre has been able to increase its margins. The revenues increased 11.4% yoy to 93.4M. 42% of revenues were realized in Italy and 58% in the rest of the world. The Ebitda margin was equal to 23.2%, thus increasing 13.5% yoy to 21.7M, in spite of the growing copper price. Without the positive non recurrent reclassification of the pension fund the margin would have been slightly lower than in The Ebit margin increased 15.6% to 19.7% of revenues. Cembre closed the FY 07 financials with an 11.9M net result, up 27.5% yoy. The net financial position at the end of FY 07 was negative (debt) for 1.7M ; in FY 06 it was positive (cash) for 1.1M. The increase is related to the stock increase and to the dividends payment. 13

14 Share Price Chart: CEMBRE share price over the last 12 months All Stars Cembre Source: Twice Research. Liquidity: poor. Cembre is listed on the Italian Stock Exchange since It belongs to the All Stars segment. The current share price (as of 16 December 2008) is 3.2 per share and the market capitalization equals 54.6M. Since the beginning of the year the shares have lost 47.0%. The performance of the stock is affected by the poor financial market condition and the lack of liquidity that is particularly visible in the small caps universe. The free float represents 27% of the outstanding shares. The average daily volume exchanged during the last 3 months equals only 14K shares. At this pace, in a year less than 20% of the share capital will be exchanged. 14

15 Questions and Answers Q: Does the business have high capital intensity? A: Yes, it does. Cembre is vertically integrated and realizes internally nearly the whole production. As a consequence, the ratio capital employed/sales was high at 77% in 2007 (it was on average 86% in the period ). Cembre long lived assets are mainly made of land and buildings (21.3M in 2007) more than plants and machineries (6.2M ). The overall depreciation rate is today just above 52%. The working capital needs are also high at 42% of sales in Q: Does the future growth require high capital expenditures? A: No, it doesn t. Cembre has still unexploited capacity (around 20%) and at present it doesn t need capital expenditure out of the ordinary maintenance. Cembre s operating cash flow (on average 6.9M in the period ) is more than enough to pay for the investments (4.6M in the same period). Q: Is there a heavy operating leverage? A: Yes, there is. Cembre manufactures internally all products. The fixed costs represent nearly 50% of revenues. In order to mitigate the fall in demand it is projected to act on the labour costs (cutting in temporary workforce and in overtime) and with the internalisation of some external works. Anyway these actions would only mitigate the margin s decrease. Q: What is the working capital composition? A: The incidence of the working capital on sales is historically high (it was on average 45% in the period ) because of Cembre s business model. In 2007 the trade receivables were 26.4M or 28.3% of revenues; the inventories were 31.7M or 34% of revenues; the trade payables 11M or 11.8% of revenues. We don t see room to cut the working capital outflows, especially in Q: Does Cembre have a good pricing power? A: Yes, it does. Cembre is able to transfer copper price increases to its clients (electrical wholesalers). There is less easiness with direct clients like energy utilities and railway operators. The gross margin reflects this power: it was on average 65.4% in the period and it s expected to be 57.5% in the period Q: What is the company cost structure? A: The two major cost items are raw materials (42% of sales in 2007) and labour costs (26%). Annually Cembre purchases about 2K tons of copper. The cost for services (14%) is mainly variable and made of costs for low value external works that could be easily internalized in case of a slowdown. Q: Is the financial structure healthy? A: Yes, it is. At the end of 2007 the Net Debt/EBITDA ratio was 0.2x. At the end of 2008 we expect the company to be cash positive. Cembre s healthy financial position allows: paying copper supplies in cash thus obtaining a discount of 2.5% and guaranteeing the shareholders an important yield (we expect 5.3% in 2008). 15

16 Q: Is there a credit risk? A: No, there isn t. In 2007 the account receivables were 28% of total sales or 27M. The allowance for bad debt stands at only 2.4% of total account receivables or 648k and fully covers all the credits overdue over one year (224k ) and in litigation (409k ). Q: Are there any off-balance risks? A: No, there aren t. Q: Are there any write off risks? A: No, there aren t. The stock doesn t deteriorate and there is no goodwill. Q: Is the profitability satisfactory? A: Yes, it is. In 2007 the firm EBIT margin was 19.7%. We foresee a deterioration of the margin due to a negative operating leverage, down to 14.30% in 2009 but in line with the average of 14.2% for the period Cembre has room to cut in the cost base (around 2M or 200 bps) thus limiting the downside. Q: Is the share price fair? A: No, it isn t. The share, penalized by the current financial crisis and by a lack of liquidity, does not reflect the impressive track record of the company, the quality of the management and soundness of the financial structure. The current valuation, at 0.8x EV/CE, is unfair for a company with a 13.3% ROCE and a FCF/yield of 16.8% in

17 FINANCIALS Income statement ( M) 07A 08E 09E 10E Balance sheet ( M) 07A 08E 09E 10E Sales COGS LONG LIVED ASSETS Gross Profit WC EBITDA CAPITAL EMPLOYED Depreciation, Amortization EBIT EQUITY Net Financial Results MINORITY INTEREST Income tax PROVISIONS Net result PENSIONS (e.g. TFR) NET DEBT (cash) 1.7 (4.6) (8.9) (14.3) EPS ( ) CAPITAL INVESTED DPS ( ) Margin (%) 07A 08E 09E 10E Ratios 07A 08E 09E 10E Gross Margin 57.2% 57.7% 57.7% 57.7% ROCE after tax 15.3% 13.3% 10.5% 12.1% EBITDA Margin 23.2% 20.4% 18.0% 20.1% ROE 17.8% 13.1% 10.1% 11.2% EBIT Margin 19.7% 17.0% 14.3% 16.4% Capital Turnover Net Margin 12.7% 10.1% 8.8% 10.3% Net Debt / EBITDA Gearing 7.6% -1.5% -6.8% -12.6% Growth (%) 07A 08E 09E 10E WC / Sales 42.0% 40.1% 42.1% 41.1% Sales growth 11.1% 1.5% -5.0% 3.0% Amortization / Sales 3.5% 3.4% 3.7% 3.7% EBIT growth 15.7% -12.4% -20.1% 18.1% Capex / Sales 5.3% 5.1% 5.2% 4.9% Net growth 27.9% -19.3% -17.0% 20.3% Cash Flow statement ( M) 07A 08E 09E 10E Valuation 07A 08E 09E 10E Cash Flow EV/Sales /- Var. Working Capital EV/EBITDA Operating Cash Flow EV/EBIT Op. Cash Flow / Sales 7.2% 14.8% 12.6% 13.8% P/E Capex P/B FCF EV/CE FCF / Sales 1.9% 9.7% 7.4% 8.9% P/FCF FCF Yield 1.8% 16.8% 12.2% 15.1% Stock data 07A 08E 09E 10E Dividend yield 2.9% 4.4% 5.2% 5.3% Number of Shares (M) Avg. share price ( ) Market cap ( M) See Legend for all definitions Enterprise Value ( M) Source: Company data, Twice Research estimates 17

18 LEGEND EV or Enterprise Value = Market capitalization + Minorities + Net Debt CE or Capital Employed = Fixed Assets + Working Capital Fixed Assets = Tangible + Intangible + Financial assets WC or Working Capital = Stocks + Trade Accounts Receivables + Other current assets + Deferred and prepayment Trade Accounts Payables - Other current liabilities - Deferred and prepayment Net Debt = Interest Bearing Liabilities Cash Securities IC or Invested Capital = Shareholders Equity + Minorities + Net Debt + Pension (i.e. TFR) DA = depreciation and amortization CF or cash flow = net result + depreciation and amortization FCF = free cash flow NOPAT = net operating profit after tax COGS = cost of goods sold Gross Profit Margin = net sales cost of goods sold EBITDA = Earning before interests, taxes, depreciation and amortization EBIT = Earning before interests, taxes ROCE = return on capital employed after tax ROE = return on equity ROA = return on assets Capital Turnover = Sales / Capital Employed Gearing = Net Debt / Shareholders equity PE = price to earnings PB = price to book FCF yield = FCF / market capitalization EPS = Earnings per share (fully diluted) DPS = dividend per share (fully diluted) Risk free rate = 10 years Italian Government Bond (e.g. BTP) Unlevered Beta = Beta / [ 1 + ( 1 t ) ( D / E ) ] WACC = Ke * E / EV + Kd ( 1 t ) * D / EV 18

19 DISCLAIMER Analyst Certification The analysts who prepared this report write their own opinions and their remuneration has not been, and will not be, geared to the recommendations or views expressed in this study, neither directly nor indirectly. The financial analysts or their relatives are not manager, company director or adviser of the Issuer. TWICE SIM S.P.A. and TWICE RESEARCH Srl have adopted internal procedures to ensure the independence of their financial analysts and to prescribe appropriate rules of conduct. Disclaimer This recommendation has been prepared by TWICE RESEARCH Srl s financial analysts. This analysis is based on information deemed to be reliable and originating from the company under analysis or other reliable sources, for the completeness and accuracy of which TWICE RESEARCH Srl assume no liability. TWICE RESEARCH Srl is used to show a draft of the study to the Investor Relations Office of the Issuer to check the information contained, not to valuating them. The financial instruments herein are valorized at the reference price of the day before the publication, where the valorization is different it is indicated. Coverage policy TWICE RESEARCH Srl intends to provide continuous coverage of the financial instrument analyzed in this document and to produce additional reports in conjunction with the release of periodic financial data and related significant company and market events occurring within the sphere of activities of the issuing company. During the last 12 months TWICE RESEARCH Srl did not draw recommendations about the instrument as far as this report is an initial coverage. Specific disclosures Pursuant to Article 69-quarter and 69-quinquies of CONSOB regulation no /99 we hereby declare that TWICE GROUP has a specific interest in the issuing company, as well as the financial instruments and transactions mentioned in the analysis, as a result of: - Issuing of recommendation; - Business relations; - Its occasional long and short positions in the financial instruments mentioned in the analysis or the execution of related transactions. The analysis is drawn up with care, clearness and disclosure. It is released solely for information purposes and is in no way to be considered an offer to sell, underwrite, or trade, or a recommendation of any kind to purchase, underwrite, or trade financial instruments or, in general, to invest in the related securities. TWICE RESEARCH Srl may not be held liable for any effects resulting from the use of this report. In particular, and in consideration of the fact that past performance is not an indicator of future earnings, TWICE RESEARCH Srl provides no guarantee that investments goals will be met, nor does the company assume responsibility for any imprecision in the data report and/or elaborated upon in the report. Any reproduction, in whole or in part, of this report without the express written consent of TWICE RESEARCH Srl is prohibited. It is not intended for and should in no way be transmitted or otherwise distributed neither in the United States, Canada, Australia, or Japan, nor in any other nation in which distribution requires prior authorization by the proper authorities. Valuation methodology Company valuations are based on the following valuation methods: discounted cash flow method (DCF), asset-based evaluation method and multiplesbased models (for examples PE, P/BV, PCF, EV/Sales, EV/EBITDA, EV/EBIT etc.). The financial analyst chooses the valuation method that prefers. 19