IMPORTANT DISCLOSURE FOR U.S. INVESTORS:

Transcription

1 01 April 2014 Update Renzinomics Right way, wrong speed Renzi s 100-day rollercoaster: tight reforms agenda ahead of May European elections The recently-announced powerful mix of political (electoral law, Senate downgrade and changes to Chapter V of the Constitution) and economic initiatives (job market, tax and spending cuts, consumers boost) have fuelled market expectations that the newly-appointed Prime Minister Renzi could be the long-awaited discontinuity catalyst in Italy. Renzi has shot high in promising delivery ahead of the EU elections, having been forced to put his reputation at stake to overtake seemingly insurmountable hurdles and friendly fire in Rome. Investors should stay constructive on the midterm, in our view, even though we see a risk reality might fall short of expectations in the near-term. Quantifying Renzinomics in search of quick resources to fund tax cuts promises Italy s low growth - low competitiveness trap is Renzi s rightful focus. The latter is addressed via a IRAP tax cut (!2.9bn) and 10% cut to SMEs energy cost (!1.5bn). Some 1% GDP boost could stem from!10bn IRPEF tax cut,!68bn PA arrears and!6.7bn investments. Funding for this program relies on higher tax on financial assets (!2.9bn), Swiss AM disclosure (!4bn), spending cuts and higher VAT from arrears (!6bn). Only the latter, however, is a draft bill for now; with just 30 days of Parliament activity left before the European elections, April is crucial for Renzi to deliver on his promises. Short of!2bn in 2014 and long of!2.5bn in 2015 but only via deficit; beyond EU speed limit On our simulation, sticking with his ambitious May deadline means Renzinomics might be a bit stretched short-term (!8bn extra resources versus!10bn spending promises in 2014), but large in size and with enough capacity medium term (!25bn resources vs!21bn commitments in 2015). In practice though, this is only true when assuming a full margin of maneuvering the deficit: lower interest on debt, 3% deficit and ESA 95 accounting changes make 37% of the 2015 resources we conceded, the usage of which is far from being finalized. Fiscal Compact and balanced budget are disappointing missing items for now In case of no deficit increase, Renzinomics would fall short of roughly!7bn in Indeed, a balanced budget and the Fiscal Compact are likely to constrain 2015 action. Additionally, doubts remain on the PA arrears solution to potentially crystallize higher public debt. The Alert Mechanism Report recently produced by the EC foresees a 5% primary surplus for Italy (twice today s level) if assuming 1% GDP growth in This is consistent with our European Redemption Fund simulation, which forces Italy into a 6% primary surplus in year 1 to comply with the Fiscal Compact. EU will dictate Renzi success; QE and less austerity needed; EU elections the catalyst It will not be easy for Renzi to change Italy s current L-shaped jobless recovery into a V or even U- shaped path with no help from the EU. The market s proactive approach to Italy implies the EU will fulfill the virtuous circle by implementing QE and delaying the Fiscal Compact. We are sympathetic to the market s view, but Renzi needs to speak loud and clear to Frankfurt on softening austerity. The May EU elections could be his catalyst, subject to Renzi securing a solid victory at home as well as the EU being frightened enough by the likely anti-euro success. Publishers and Financials the winners of Renzinomics: L Espresso, RCS, UBI, BPER We estimated the potential annualized impact from the above proposals on our 2014 EPS. The IRAP and IRPEF cuts suggest L Espresso and RCS (+14%) would lead the pack with Mondadori at +7.5% and Cairo at +5%. Banks are less geared into IRPEF, but IRAP and earnings boost from factoring PA arrears point to +11% EPS for UBI, +8% for BPER and more than 5% for ISP, Credem and UCG. Asset gathers are less exposed to tax cuts and arrears, but uniquely geared into assets disclosure: more than!2bn inflows suggest mid-single digit potential EPS impact for Banca Generali and Azimut. The rest of our top 20 winners are stocks exposed to tax cuts (Saras, ERG, GTech, Mediaset), demand boost (Autogrill, Piaggio, Atlantia, Marr), and PA arrears (Finmeccanica, Astaldi and Biancamano). Antonio Guglielmi Equity Analyst antonio.guglielmi@mediobanca.com Javier Suárez Equity Analyst javier.suarez@mediobanca.com Italian Equity Team Alessandro Tortora Alessandro Vinciguerra Andrea Filtri Andrea Scauri Nicolo Pessina Chiara Rotelli Fabio Pavan Gian Luca Ferrari Massimo Vecchio Niccolo Storer Riccardo Rovere Simonetta Chiriotti We thank Edoardo Tagliavini for his contribution to this report Renzinomics Potential EPS impact on our coverage universe from various measures, 2014e assuming annualised impact* IMPORTANT DISCLOSURE FOR U.S. INVESTORS: This document is prepared by Mediobanca Securities, the equity research department of Mediobanca S.p.A. (parent company of Mediobanca Securities USA LLC ( MBUSA )) and it is distributed in the United States by MBUSA which accepts responsibility for its content. The research analyst(s) named on this report are not registered / qualified as research analysts with Finra. Any US person receiving this document and wishing to effect transactions in any securities discussed herein should do so with MBUSA, not Mediobanca S.p.A.. Please refer to the last pages of this document for important disclaimers. IRAP boost IRPEF boost Arrears impact Assets disclosure (2016 EPS) Total L'Espresso 6.8% 7.5% 0.0% 14.3% Finmeccanica 3.7% 0.0% 7.0% 10.7% UBI Banca 3.7% 0.7% 6.0% 10.4% BPER 3.8% 0.6% 4.0% 8.3% Banca Generali 0.0% 0.0% 0.0% 7.2% 7.2% Mondadori 5.0% 2.1% 0.0% 7.1% ISP 2.7% 0.2% 3.0% 5.8% Credem 2.5% 0.2% 3.0% 5.7% UCG 1.1% 0.2% 4.0% 5.3% Autogrill 3.4% 1.6% 0.0% 5.0% Astaldi 0.9% 0.0% 4.1% 5.0% Cairo 2.1% 2.6% 0.0% 4.8% Mediaset 2.2% 2.0% 0.0% 4.3% Atlantia 1.3% 2.6% 0.0% 3.9% Azimut 0.0% 0.0% 0.0% 3.6% 3.6% Saras 3.3% 0.0% 0.0% 3.3% Marr 1.1% 2.2% 0.0% 3.3% ERG 1.7% 1.2% 0.0% 2.9% Piaggio 1.7% 1.2% 0.0% 2.9% GTECH 1.1% 1.6% 0.0% 2.7% Source: Mediobanca Securities, * the impact on asset gatherers from assets disclosure agreement is estimated on 2016 FY numbers due to our probability scenario. RCS not showing up as only stocks with 2014 profits included in the table

2 Contents Executive Summary - In the right direction but in overdrive 3 Allocating resources to tax cuts: IRAP and IRPEF 14 Decrease in energy bills for SMES 28 Funding reforms: tax on financial assets and assets repatriation 33 Fiscal Compact and public debt reduction 45 Spending review: much-needed effort 54 Public administration arrears and the role of CDP April

3 In the right direction but in overdrive Renzi s game in Rome Renzi s 100-day rollercoaster... The government change undertaken in February in Italy saw Mr Renzi, the former mayor of Florence recently appointed as leader of the Democratic party, replacing PM Letta and taking the premiership. This dramatic move fuelled the market s expectations that the young leader could be the long-expected discontinuity catalyst on reforms after Rome s poor track record to-date. Indeed, Renzi made no mystery of his intention to shake up the sleepy giant public administration machine, with the aim of injecting his dynamism into Italy s sputtering economy.... on both political reforms and economic initiatives As such, Renzi unveiled an ambitious reforms plan to be approved in large part during his ongoing first 100 days of mandate, focusing on a mix of political changes and wide-ranging economic initiatives. The former is built on three pillars: change of the electoral law, downgrading of the Senate and changes to the Chapter V of the Constitution; the common goal of these moves being to speed up the decision-making process and ease the bureaucratic bottlenecks burdening central government action. The latter comprises a mix of tax cuts, consumers boost, job market reform and investment projects with the target of accelerating economic growth and helping the country regaining competitiveness. Renzi s reputation at stake is the major market guarantee... Renzi went all-in with his 100-day plan announcement, putting his entire reputation at stake in spite of the hurdles he is clearly facing. Comfortably sitting at Rome s poker table, the new premier knows that a small component of bluff may be needed to get his plan through shortly. Indeed, threatening his resignation and advocating elections in case of no reforms approval now represents his major weapon to force Parliament to stick with his tight agenda, so to prevent his high speed reform train from derailing and avoiding elections that no one has an appetite for in his coalition.... given his high hurdles in Rome Such a strategy looks appropriate given the weak foundations on which his government was built: Not being appointed via national elections forces Renzi to gain electoral consensus in due course. As such, the May 2014 European elections will become an implicit vote on him. Renzi has made no mystery of that, and set the May deadline for his reforms approval on purpose in order to try and secure an electoral success for his party and in turn for himself. However, less than 30 days of Parliamentary time are left between now and the May elections. As such, Renzi needs April to be the busiest and most active month of parliamentary activity ever if he wants a good part of his promises to materialise. Recent events confirm that Renzi does not have full control of his party. In fact, a large majority of the Democratic party s PMs were selected by the previous leader and many of them are an expression of the exact old establishment that Renzi has shown his willing to challenge. As such, we think that friendly fire is the major risk on Renzi s reform road. This is why he has been forced to sit on two different majorities. If the approval of the economic reforms relies on the same parties forming the government coalition, the political reforms need a larger majority and thus rely on the explicit support of Berlusconi s Forza Italia opposition party. This creates an unusual situation in which Renzi needs to prove particularly astute at maneuvering Parliamentary consensus. In addition, as confirmed by the recent Alert Mechanism Report from the European Commission, Italy remains under special care from Europe due to its mix of sluggish growth and high debt. This means that the room for Renzi to fund his economic initiatives remains extremely limited. This forces him to play the carrot and stick austerity game by advocating a softer approach on austerity in Rome, but showing fiscal discipline focus in his Brussels and Frankfurt commitments. 01 April

4 The political reforms The electoral law The main proposals set forth by the new bill include new minimum thresholds at 4.5% for parties in a coalition, 8% for single parties and 12% for coalitions. A majority premium of 15% will reward the coalition that wins at least 37% of the votes in order to secure at least 320 out of the total 630 seats in the House of Deputy. If this 37% threshold is not reached, a second round involving the top two coalitions is proposed to be held. The victor of the second round would effectively secure 53% or 327 of the seats. The downgrade of the Senate The Senate is at present elected regionally such that in securing a regional majority one party can having a majority in the lower house, but not necessarily in the Senate. This situation can clearly impact on the government's ability to pass legislation and ultimately hamper progress on reforms. By restructuring it into a body of regionally-elected mayors and local officials (as is the case with the Bundesrat in Germany) it may be possible to overcome such a bicameral system to make laws without any longer having to pass through the Senate for fiduciary votes. Amendments to chapter V of the Constitution This involves local entities, regions and towns gaining decision-making power and spending autonomy. The result of this shift is heavy bottlenecks due to the limited scope for the central government to step in to make changes at local level. In altering this part of the Constitution, Renzi is targeting the centralising of powers to Rome and in so doing, allowing the government to have a final say on important structural investments and local decisions without the need for regional/provincial approval. The economic reforms The low growth low competitiveness trap has forced Renzi into an ambitious plan comprising job market reform, tax cuts and the boosting of internal demand. Competitiveness Competitiveness is mainly tackled through three measures: 1) some 10% IRAP regional tax cut aimed at reducing the tax wedge (cuneo fiscale); 2) some 10% energy cost cut for SMEs, and 3) labour market reform. The labour market reform is primarily focused on the principle of cutting the excessive protection currently afforded insiders and in so doing providing more opportunity to the young and newcomers generally. It aims to transform the system of apprenticeships and short-term contracts so to enable companies to hire more easily. How this is to be achieved, in terms of increasing flexibility for the companies to set their own wages rather than relying on nationwide agreements is still to be agreed. Simplify layoffs, for example, remains very much subject to debate. And, any such reform is clearly controversial given powerful lobbies and unions that are inevitably affected. Unsurprisingly, Renzi s main opposition lies in his own party. Consumption, investments and GDP growth Consumption and investments foresee: 1) IRPEF personal tax cut for!1,000 net tax reduction per annum on wages below!25k, thus involving some 10m taxpayers; 2) Three key areas of investments: education and school, hydro geological disasters and youth unemployment; 3) And the most important boost to consumption is expected to come from the clearance of!68bn arrears of the public administration. Extra resources to fund economic proposals Obviously identifying resources to cover the above-mentioned commitments remains the most controversial part of Renzinomics. The premier is essentially relying on three sources of funding for his initiatives: 1) higher taxation on financial assets; 2) bilateral agreement with Switzerland on assets disclosure, and 3) the spending review. 01 April

5 Quantifying Renzinomics MB estimates assessment Ideas aplenty but only a few draft bills for now In spite of Renzi s tangible energy and motivation in getting things delivered, not many of the above-mentioned mooted reforms can yet considered to be done or even pending for approval. The tight end-of-may deadline imposed by Renzi exposes him to risk of delivery and friendly fire. As we write this comment, little is available in terms of draft bill proposals and resources to cover them. As such, the level of political uncertainty remains high. We think investors should maintain a realistic approach today on what can be achieved in the short term, in order not to fall short of expectations tomorrow. Surely the quickest way for Renzi to start securing some short-term victories in April will be via government decrees, but that means the Parliament will have to convert decrees into bills over the following two months, which is when Italian politics has to-date tended to disappoint. In search of resources and actionable ideas There is no doubt that Renzinomics is pointing in the right direction. However, there is equally high uncertainty on the resources available for him to support his promises. This is one of the two goals of this research. In the six chapters that follow, we analyse the rationale behind his economic proposals, we try and estimate the impact on the Italian economy, and we search for realistic resources to fund such initiatives. The second goal of our research is to search for actionable ideas amongst our coverage universe. A reality check: Renzinomics a la carte The page that follows shows the key top-down findings of our research. We quantify the impact of Renzi s proposal and search for capacity in funding them over the next 18 months time horizon. Tax on financial assets (chapter 3): we simulate increasing the average tax on assets held by individuals to 26% from 20%, more in line with the EU average. The gross versus net earners tax treatment means banks and corporates will not be affected. Also, we do not include government bonds, banking and postal deposits. This leaves us with!2.6trn taxable assets. Assuming the bill will be passed in May, we take only eight months impact for 2014 (!1.9bn extra resources) and roll over the full recurring estimated impact of!2.9bn extra resources in Assets repatriation (chapter 3): assuming a bilateral agreement with Switzerland to be implemented soon as anticipated by the government, our probability-weighted base case scenario benchmarked on the scudo fiscale suggests!25bn assets to be disclosed. Government indications of 15-20% tax treatment (versus 5% in the previous scudo fiscale) would generate some!4bn one-off extra taxes allocated to our 2014 scenario alone. Spending review (chapter 5): the plan presented by former IMF director Cottarelli envisages!7bn spending cuts in 2014,!12bn in 2015 and!34bn in After reviewing the plan, and after considering the many political hurdles on its implementation, we concluded by rolling it over by one year. As such, we give full credit to the!7bn cuts for year one, but starting from 2015 and allocate just!1bn spending cuts available for Public administration arrears (chapter 6): according to the draft law bill that we have consulted, arrears could be factored by banks and other financial players, that could in turn sell the credit to CDP within a given limit. A State guarantee of last resort should make the whole scheme palatable for banks, in our view. As such, we give full credit to this bill being implemented and assume the government will manage to overtake the farfrom-easy problems related to the crystallising of higher public debt and the risk of higher cost of funding for CDP, which has been anticipated by rating agencies. The result is!1.4bn higher VAT in 2014 from last year s!22bn arrears, which becomes!6bn in 2015 should Renzi deliver on the promise of releasing the estimated remaining arrears by September this year. 01 April

6 Renzinomics a la carte : From 2014 realistic targets to 2015 optimal goals*,!bn 22.0 From 2014 realistic targets to 2015 optimal goals Tax on financial assets (8 months) Bilateral agreement with Switzerland on assets repatriation (one off) Spending review Extra VAT from 2013 PA arrears (FY impact) IRAP tax cut (8 months) 10% SME energy price cut (8 months) IRPEF cut (8 months) Tax on financial assets (full year) Spending review Lower interest on spread Exploiting Total VAT on PA % deficit arrears treshold ESA 95 higher deficit IRAP tax cut (Full year) 10% SME energy price cut (full year) IRPEF cut (full year) investment in Hydro geological Youth education and schools disasters unemployment Buffer left Source: Mediobanca Securities, * red bar signals controversial step April

7 IRAP regional tax cut (chapter 1): IRAP represents some 7% of the total tax revenues, i.e. c.!30bn annual IRAP tax collection. Prime Minister Renzi has committed to some 10% cut by May As such, we calculate!1.9bn lower IRAP tax in 2014 (eight months impact) and take the full!2.9bn impact for This represents less than 10% of the total tax cut required to close the unit labour cost gap between Italy and Germany (estimated in the region of!40bn). This is therefore a small step in the right direction, but much more is needed to reduce the tax wedge currently penalising Italian competitiveness. IRPEF personal tax cut (chapter 1): Renzi s most appealing electoral reform involves a!10bn IRPEF tax cut, i.e. 7% of total IRPEF tax collection, for annual gross incomes below!25,000. As anticipated by the government, this should result in!1,000 annual net savings for roughly 10m taxpayers. Our simulation suggests that this will only be possible if gross incomes below!15,000 are excluded (or below!8,000 if assuming a progressive rather than!1,000 flat approach to IRPEF deductions). Otherwise, the total cost of this reform could amount to!14-15bn compared with the targeted!10bn. Assuming delivery by May, as promised, would result in circa!7bn lower tax collection in the remaining eight months of 2014 and!10bn in A tax cut for low earners will not as we see it boost business competitiveness, but should reignite GDP growth via consumer demand. However, we estimate low competitiveness means that roughly one-third of the extra!10bn consumption will end up in imports, thus denting the current account surplus painfully rebuilt via the recent austerity. Cutting SMEs energy cost (chapter 2): Most recent figures show a total energy bill in Italy of!50bn. The SME component is estimated to be in the region of!15bn. As such, the 10% promised reduction in the electricity price paid by the Italian SMEs should cost roughly!1.5bn in 2015 and!1bn in 2014 assuming May approval. We welcome Renzi s commitment to tackle the high energy price in Italy as a means to improve competitiveness. Indeed, a recent Eurostat report found electricity prices in Italy to be some 65% above the EU 27 average including some 90% higher in the small businesses and 31% higher in the SMEs. Investments: the three key investment promises of the Prime Minister amount to roughly!6.7bn:!3.5bn devoted to restructuring/refurbishing schools,!1.5bn to assist hydro geological disasters, and!1.7bn devoted to assist youth unemployment. Missing any specific timetable guidance, we have been forced to allocate such investments to 2015 being otherwise short of resources in 2014 as per the landscape table in the previous page. Good intentions but ambitious timetable and Fiscal Compact conundrum Short of!2bn in Our exercise shows that although ambitious, Renzinomics is doable. Our 2014 calculations leave us short of roughly!2bn if Renzi wants to stick with his May deadline on an IRPEF cut. Assuming government timetable guidance, and based on our assumptions, we are sitting on roughly!8bn of extra resources in 2014 versus!10bn spending promises. Admittedly, this is exactly the gap between our!1bn spending cut review assumption for 2014 and Renzi s!3bn guidance. Only a non specified part of the spending cuts will be allocated to funding lower taxes, the rest having to support a deficit reduction. Time is running fast though. We think Renzi should give priority in April to the key three sources of funding (higher taxes on financial assets, agreement with Switzerland and spending review) in order to secure the resources to deliver his tax cuts promises. This is where the May deadline, although justified by electoral reasons, could prove overly optimistic to us.... and long of!2.5bn in However, when looking at 2015 our numbers even show some room for extra capacity. Indeed, an all-included approach suggests!25bn resources versus!21bn commitments, leaving it with a!2.5bn buffer after covering the potential IRPEF shortfall in As such, in theory, Renzinomics looks a bit stretched but manageable short term and large in size and with enough capacity medium term.... but only tinkering with the deficit... In practice though our exercise shows enough capacity only when assuming a full margin of manoeuvering from Europe within the 3% deficit. Indeed, our numbers square only when taking 01 April

8 three extra sources of deficit-related funding into account, which we concede to Renzi although being far from certain (as we discuss in chapters 4 and 6):!2.4bn savings on interest on debt due to lower-than-expected government bonds spread;!6bn from fully exploiting the 3% deficit threshold versus 2.6% currently;!0.9m stemming from abandoning the ESA95 accounting rules in September 2014 on the way EU calculates its GDP so to realign it to the Accounts 2010 rules used in the US; this could result in rebasing higher the Italian GDP, and in turn offering higher deficit room.... i.e. ignoring Fiscal Compact and Constitutional requirement on balanced budget... In the absence of the three above buffers, Renzinomics would fall short of roughly!7bn in This identifies the crucial point of Renzinomics: will Italy be allowed to follow Spain and France not even in exceeding the 3% deficit, but in just fully exploiting it? Or will its high public debt continue to represent an insurmountable reason not to soften the fiscal discipline stance? These unanswered questions are the reason for the slowdown of the Renzinomics process imposed by Napolitano in order to be sure there will be sufficient resources to cover the measures and to negotiate this with Europe. Clearly we think a stronger focus on labour market reforms would make it easier for Europe to agree extra borrowing for Italy. However, two constraints are here to stay for now: The article 81 of the Italian Constitution, as modified during the Monti government, requires a balanced budget for Italy. The difference between 3% and 0% deficit means roughly!45bn to be found. The Fiscal Compact is fast approaching. As we calculate in chapter 4 the Fiscal Compact forces Italy into a 6% primary surplus (i.e. roughly twice current surplus levels) with initial tranches of debt reduction amounting to!67bn from which are the two most disappointing missing items on Renzinomics agenda Our findings are consistent with the recent Alert Mechanism report of the European Commission that estimates that an average 1% GDP growth over the period would force Italy into some 5% primary surplus in order to put debt-to-gdp on a solid downward trajectory. The Letta government tackled the above issues in his proposed agenda for the Italian leadership of the European semester in 2H 2014 re-launching two key proposals: Eurobills and the European Redemption Fund (which we analyse in chapter 4). The lack of reference to the Fiscal Compact constraint represents the main disappointment of Renzinomics to us, confirming this is as a somewhat unpalatable topic. This in turn puts under discussion the overall promises of Renzinomics, and in so doing forces us to attach a relatively high execution risk to his plan for now. Conclusion: It will be the European events to dictate Renzi s room for success The conclusion from the above is quite straightforward: it will be for Europe to decide the success of Renzi, and in turn the future of the Italian growth. As we see it today, it will be difficult for Renzi to transform Italy s current L-shaped jobless recovery into a V-shaped path (or even U- shaped) without a significant change of the European stance on Italy. If the Fiscal Compact is really here to stay, then a painful reality check might be in sight soon, made up of even tougher austerity and probably a wealth tax (see chapter 4). This is clearly not the market s view based on the assumption that pending QE from Draghi and no implementation/or delay in the Fiscal Compact will accelerate Italy getting out of its woods. We certainly have sympathy with this view, which we think could be triggered after the European elections when it will be clear that in the absence of a more Keynesian approach to peripheral Europe the anti-euro sentiment will keep mounting, as recently confirmed in the French local elections. The market is showing a very proactive approach to Italy, implicitly putting pressure on politics to keep fulfilling a virtuous circle. It is up to Renzi now to give a loud and clear message to Frankfurt on softening austerity. This will probably only happen after the May elections subject to two outcomes happening at the same time: Renzi securing a solid victory at home, and the anti- Euro success frightening enough the European establishment. 01 April

9 The MB Italian Pulse Index suggests accelerating momentum The implementation of Renzi economic reforms could have a significant boost to the Italian GDP, which we estimate in the region of 1p.p. The PA arrears would be the key building block to get there. This is why we think that executing on such front by September, as promised by Renzi, would be the most important step of his economic agenda. Indeed, our Mediobanca Italian Pulse index launched last October signals room for increasing momentum. As already in January, also in February the index suggested a slight improvement of the GDP in 1Q14 over the already slightly positive performance registered in 4Q13; therefore the improvement of the underlying trend started at the end of 2012 is confirmed and the +0.1% QoQ figure released by ISTAT for 4Q13 is in line with the improvement of the index witnessed in December (-0.19 vs of November). In the rhs chart below we compare our Italian Pulse Index with the Italian manufacturing and service PMI surveys, and see a similar trend in their directions. Mediobanca Italian Pulse index and Italian real GDP QoQ Mediobanca Italian Pulse Index with Manufacturing and Services PMI surveys % % % % % Real GDP Growth q/q (lhs) Source: Mediobanca Securities Mediobanca Italian Pulse Index (rhs) Italy Manufacturing PMI Survey (lhs) Italy Services PMI Survey (lhs) Mediobanca Italian Pulse Index (rhs) Source: Mediobanca Securities These are the indicators we include in the calculation of the index. Mediobanca Italian Pulse index indicators Sector Indicator Weighting Dec 2013 Jan 2014 Jan 2014 Automotive Total Vehicles Registered Monthly Growth 3% 3.0% 3.0% 3.0% Automotive Total 2 Wheelers Registered Monthly Growth 3% 3.0% 3.0% 3.0% Banks Corporate Loans Growth 32% 32.0% 32.0% 32.0% Banks Corporates Into Liquidation / Bankruptcy Growth 2% 2.0% 2.0% 2.0% Cement Cement Shipping Monthly Growth 2% 2.0% 2.0% 2.0% Cement Order Book Monthly Growth 3% 3.0% 3.0% 3.0% Infrastructure Motorway Traffic Monthly Growth 5% 5.0% 5.0% 5.0% Media Advertising Spending Monthly Growth 7% 7.0% 7.0% 7.0% Utilities Gas Consumption Monthly Growth 7% 7.0% 7.0% 7.0% Utilities Electricity Production Demand Monthly Growth 7% 7.0% 7.0% 7.0% Real Estate Residential Nominal Price Index Growth 6% 6.0% 6.0% 6.0% Real Estate Residential Number Of Transactions Growth 7% 7.0% 7.0% 7.0% Macro Consumer Confidence Monthly Growth 8% 8.0% 8.0% 8.0% Macro Unemployment Rate Monthly Change 4% 4.0% 4.0% 4.0% Macro Current Account Change 2% 2.0% 2.0% 2.0% Macro FX competitiveness 2% 2.0% 2.0% 2.0% Mediobanca Italian pulse Index Source: Mediobanca Securities 01 April

10 Publishers and Banks the winners of Renzinomics L Espresso, Mondadori, RCS, UBI, BPER, Banca Generali the winners Our bottom-up approach to Renzinomics attempts to estimate the potential impact of the above initiatives in our coverage universe. Given the many question marks, caveats and pending uncertainties, we urge our readers to take our findings with a pinch of salt. Although we forced ourselves to quantify such impact on our 2014 EPS, we think it more relevant to look at the relative positioning of our simulations. As such, there is no doubt that the two sectors that are bestpositioned for a low hanging fruit reward from Renzi initiatives are publishers (L Espresso, Mondadori, RCS, Cairo) and financials (UBI, BPER, Banca Generali, Credem, ISP and UCG) with potential high-single digit / low-double digit EPS impact (we are restricted and the other domestic banks). Importantly, our simulations assume annualised EPS impact on 2014, partially overestimating the fact that the above measures will hit only eight months of the current year if undertaken by May as promised by the Prime Minister. IRAP cut: up to 7-8% EPS boost for RCS and l Espresso We estimate that the companies populating our Italian coverage are expected to contribute to a total 2014 IRAP of roughly!2.9bn at current IRAP rates. Some 55% of such an amount comes from financials followed by utilities (19%) and the TMT/Publishing sector (12). Our estimates assume a 4.8% IRAP tax rate for industrial stocks, a 5.5% rate for Banks, and a 6.8% rate for Insurers. Some 10% IRAP cut would therefore generate some!288m of tax savings in our coverage, with an average overall positive impact on 2014 EPS of 1%. L Espresso, Mondadori and RCS could end up in the highsingle digit EPS boost, followed by UBI, BPER, Finmeccanica and Autogrill in the 3-4% region. Estimated Impact on 2014 EPS from 10% IRAP tax reduction * 7.0% 6.0% 5.0% Impact on EPS 4.0% 3.0% 2.0% 1.0% MB Coverage 0.92% 0.0% L'Espresso Mondadori BP Emilia Romagna UBI Banca Finmeccanica Autogrill Saras Intesa Sanpaolo Credem Hera Mediaset Cairo Safilo Trevi Fin. Amplifon Unipol-SAI ERG Piaggio Telecom Italia Cattolica Assi.ni EI Towers Emak Atlantia Terna Marr GTECH Enel Banca Generali Snam Maire Tecnimont Astaldi Sorin Unicredit Fiat Brembo Generali Italcementi Eurotech Ansaldo STS Azimut Holding Saipem Enel Green Power Brunello Cucinelli Indesit Company Delclima Danieli Yoox Recordati Campari Eni Tod's Moncler Interpump Group De' Longhi Nice Sogefi CNH Industrial Ferragamo Tesmec Moleskine Diasorin Pirelli & C. Prysmian Buzzi Unicem Tenaris Mediolanum Cementir Luxottica Source: Mediobanca Securities, * RCS not showing up due to expected net loss in On an adjusted basis the impact would be 8%. Biancamano would also end up in the 10% region on a 2015 scenario IRPEF cut: L Espresso leading the pack again We have developed our proprietary model aimed at capturing the impact of!10bn IRPEF cut on our stocks taking into account cyclicality, elasticity of demand and exposure to the domestic markets. As such, we estimate less than a!1bn IRPEF cut will hit our coverage via higher revenues. The impact is estimated by taking into account the revenues generated by each company in Italy, their market share in 01 April

11 their respective sector within the Italian market, the weight assigned by Istat to each sector for the CPI Basket calculation, and the IRPEF tax rate cut per se. Our conclusions suggest an EPS boost in the 0.26% region for our coverage. Consumers, TMT and certain Infrastructures are best placed to gain the most out of it. We highlight amongst the top-impacted stocks the 7.5% EPS change of L Espresso followed by Atlantia and Cairo with 2.6% EPS impact. The IRPEF cut should also have a positive second derivative effect on the companies exposed to the recovery and the internal consumption boost such as Autogrill, Campari, De Longhi and Indesit. Estimated Impact on 2014 EPS from IRPEF tax reduction Impact on EPS 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% MB Coverage 0.26% L'Espres Atlantia Cairo Marr Mondad Mediaset Aeffe Autogrill GTECH Italcem ERG Piaggio Buzzi Sogefi UBI Record Teleco Cementir BP Amplifon Indesit De' Campari Diasorin Tod's Moncler Yoox Banca Unicredit Credem Moleski Fiat Mediola Intesa Azimut Brunell Eni Cattolic Ferraga Unipol- Brembo Emak Safilo Enel Pirelli Generali Source: Mediobanca Securities Cut in SMEs energy bills: ENEL a question mark The government has still not clarified how to achieve a 10% reduction in the energy bills of SMEs, which we have estimated in!1.5bn, but here are three possible scenarios we can think of and how these might impact Enel: A re-modulation of the premiums paid to renewables through the extension of their duration with a net present value neutral impact (the majority of which are paid to Photovoltaic Plants), something that would have a marginal impact on Enel (Enel Green Power s exposure to premiums is very limited and represents only 10% of its revenues) or, more likely, a cut of the overall costs of the other premiums (e.g. cost of nuclear decommissioning, promotion of energy efficiency, and R&D). A reduction of the regulated part of the bill (electricity transmission and distribution), something we, however, see as very unlikely since these tariffs are set by the Energy Regulator for a given regulatory period. Also, in a worst case scenario, if the government was to allocate all of the burden on the power generation, through for example a taxation, we could expect, with Enel having a 25% market share in Italy, a negative impact of roughly 350m, which would represent 2% of the company s EBITDA (EUR 17,011m) and c.7% at the Net Income line. Assets repatriation: Banca Generali is the name Learning from the previous experience on the so-called scudo fiscale and given the lack of details on the current framework, we based our exercise on a probability-weighted base case of!25bn assets to be disclosed. Previous experience suggests that based on our assumptions the three Italian 01 April

12 assets gatherers under our coverage could benefit from more than!2bn inflows, with Banca Generali taking the lion s share with around!1.2bn inflows. Depending on assumptions on assets repatriation and reinvestment into AuM, our estimate impact for 2016 EPS ranges from +3.2% to +7.2% for Banca Generali, +1.6% to +3.6% for Azimut and less than 1% for Banca Mediolanum Impact to the P&L of assets repatriated with voluntary disclosure assuming all assets reinvested in AuM, 2016e Inflows Gross mgmt fee Payout Perf.fees Tax rate Additional earnings Impact on 2016E EPS Banca Generali 1, % 35% 0.44% 22% % Azimut % 40% 0.53% 15% % Mediolanum % 35% 0.55% 27% % Source: Mediobanca Securities Public administration arrears: Banks and PA receivables exposed stocks Assuming the entire!68bn arrears to be factored with the banks, we allocated them by market share in factoring. Based on our assumptions of 2% revenue margin, 24% C/I ratio and 60 bps LLP, we estimate a total post-tax net profit pot for the banks in the region of!360m. Allocating such profits by market share would identify a mid-single digit EPS annualised impact on our Italian coverage universe ranging from 3% at ISP and Credem to 6% at UBI. Estimating the impact of!68bn PA arrears on banks via higher factoring, 2014e Market Factoring Group Share factoring PA arrears Revenues Costs LLPs Taxes 100% 68,000 40% Net Profit Impact 2014E Earnigs 2014E EPS Impact Mediofactoring ISP , ,020 +3% UCG Factoring UCG , ,232 +4% UBI Factor UBI , % Factorit BPS , na na MPS L&F Mps , * N.M. EMIL-RO Factor BPER , % Credem Factor Credem % Source: Mediobanca Securities, * MPS 2014 consensus estimates If the banks benefit would mainly come from higher exposure to the factoring business, the winners in our corporates coverage (healthcare-related business, government licensees, receivables towards the PA) would mainly benefit from higher cash flow and lower cost of debt. Based on our simulation, Biancamano would stand up with 22% EPS impact followed by Finmeccaninca (7%), Astaldi (4%) and Impregilo (2%). Estimating the impact of!68bn PA arrears on corporates via lower cost of debt, 2014e!mn Total receivables FY 2013 Receivables towards Italian PA From!68bn PA arrears receivables as % EV cost of debt Lower financial charges net of taxes impact per share Rercordati % 4.0% 0 0% Diasorin % 3.5% 1 0.8% Sorin % 3.5% 0 0% Finmeccaninca % 7.6% 23 7% Biancamano % 5.8% % Astaldi % 6.5% % Ansaldo % n.m. n.m. n.m. Impregilo % 5.0% % Source: Mediobanca Securities 01 April

13 Conclusion: publishers and banks The table below combines the above findings, and attempts to show some all inclusive results. The combined effect of IRAP and IRPEF cuts point to publishers as the key winners. L Espresso could potentially benefit from more than a 14% EPS boost. This is in line with the impact on RCS, which is not showing on the chart only because it is not expected to report profits in Banks are much less geared than publishers to IRPEF cut. Nevertheless, the earnings boost expected to come from factoring PA arrears and the benefit from IRAP cut position UBI and BPER in the high-single digit EPS boost region followed by UCG, ISP and Credem with more than 5%. Asset gathers are least poised to capture the tax cuts and arrears themes, but are obviously fully and uniquely geared into the assets repatriation topic, which although on a longer time horizon could impact Banca Generali and Azimut earnings by mid-single digit. The rest of our top 20 winners ranking is a combination of stocks exposed to demand boost (Autogrill, Piaggio, Atlantia, Marr) and/or to receivables towards the Italian PA (Finmeccanica, Astaldi). Small cap Biancamano would lead the pack with more than a 30% EPS boost from the IRAP cut and the PA arrears theme. Renzinomics Potential EPS impact on our coverage universe from various measures, 2014e assuming annualised impact* Bilateral agreement with Switzerland (2016 EPS impact) Arrears impact IRPEF boost IRAP boost 14.0% 12.0% Impact on EPS 2014 e 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% L'Espresso Finmeccanica UBI Banca BPER Banca Generali Mondadori ISP Credem UCG Autogrill Astaldi Cairo Mediaset Atlantia Azimut Saras Marr ERG Piaggio GTECH Source: Mediobanca Securities, * the impact on asset gatherers from assets disclosure agreement is estimated on 2016 FY numbers due to our probability scenario. Only stocks with 2014 profits showing up 01 April

14 Allocating resources to tax cuts: IRAP vs IRPEF Tax cuts is a mandatory road for Italy to travel. As such, we welcome Prime Minister Renzi s commitment to a 10% IRAP cut and!10bn IRPEF cut. The former is, we believe, the right approach in order to regain competitiveness, although the cut represents less than 10% of the total tax cut required to close the unit labour cost gap between Italy and Germany (!40bn). The latter is, in our view, the best way to reignite short-term GDP growth via consumer demand, albeit that one-third of it will end up in imports, thus denting the current account surplus that has been painfully rebuilt via austerity in recent years. IRAP represents some 7% of the total tax revenues, i.e. c.!30bn annual tax collection. Our simulation suggest an EPS boost in the region of 1% for our coverage universe with Media, Banks and certain Industrials best-positioned to gain the most out of the 10% IRAP cut plan: L Espresso, Mondadori and RCS could end up in the high-single digit EPS boost, followed by UBI, BPER, Finmeccanica and Autogrill in the 3-4% region. The IRPEF s!10bn cut represents around 7% of total IRPEF collection, but this is expected to be concentrated only in the less than!25k gross annual income space. Our reality check suggests that this is only possible if gross income below!15k is excluded (or below!8k with a progressive approach to IRPEF deductions), otherwise the total tax cut would amount to!14-15bn. We have developed our proprietary model aimed at capturing the impact of IRPEF cut on our stocks taking into account cyclicality, elasticity of demand and exposure to the domestic markets. The impact is estimated taking into account the revenues generated by each company in Italy, their market share in their respective sector within the Italian market, the weight assigned by Istat to each sector for the CPI Basket calculation, and the IRPEF tax rate cut per se. Our conclusions suggest an EPS boost in the 0.26% region for our coverage with Consumers, TMT and certain Infrastructures best placed to gain the most out of the 7% IRPEF cut plan: L Espresso, Atlantia and Cairo could we believe end up as the most impacted stocks by a change in the IRPEF tax rate. As such, accordingly to our simulations, the combination of IRAP and IRPEF cuts points to the publishing sector as the key winner, with L Espresso standing up with total combined EPS boost in the 14% region followed by Mondadori at 7%. IRAP: the long-awaited cut of a peculiar tax The regional tax on productive activities (IRAP) was introduced in 1998 to replace seven different taxes, including the local income tax. IRAP is levied on the value of production generated in each Italian region, and it applies to companies as follows: Non-financial companies The taxable base is the net value of the production in each region, calculated as the difference between the value of the production in the tax year and the cost of the production, with the exception of labour costs and interest and financial charges. The Italian fiscal regulation allows a lump sum deduction of c.!4,600 per year per each permanent employee. Banks The IRAP taxable income is calculated as revenues (including 4% of interest expenses, which are not fiscally deductible) minus 90% of other administrative expenses and depreciation of tangibles and intangibles. In other words, neither staff costs nor loan losses can be deducted from the IRAP taxable income. Insurers The taxable income is calculated as the sum of life and non-life technical accounts minus 90% of other administrative expenses and depreciation of tangibles. Some 50% of dividends are added back to the taxable income. As with banks, staff costs and impairments are not deductible. Banks suffer the heavier tax burden The IRAP tax burden is particularly heavy for banks. Not only is banking a labour-intensive sector, but unlike most of the manufacturing activity, retail banking business cannot be delocalised. In addition, banks cannot deduct staff costs (like all sectors) and loan losses, as credit impairment is an intrinsic part of the banking operations. Insurers cannot deduct impairments too, but these have little relevance in the insurance business. Also, other sectors cannot deduct financial charges, but 01 April

15 at least for the largest companies the issuance of debt can be carried out by companies located in countries other than Italy. Italy IRAP Bracket by Sector, 2013 National Base Bracket Regional Discretion Ordinary Base Bracket 3.90% Max +1% Industrials 3.90% Max +1% Concession Businesses (excluding motorways) 4.20% Max +1% Banks 4.65% Max +1% Insurers 5.90% Max +1% Public Administration and Public Entities 8.50% Max +1% Source: Agenzia delle Entrate, Mediobanca Securities analysis Financials make 55% of IRAP tax revenues in our coverage universe Based on our coverage, we calculate that approximately 55% of the IRAP tax revenues come from the Financial, followed by Utilities and TMT sectors as shown below. MB Italian Coverage Estimated Breakdown of IRAP Taxation, 2014E Branded Goods 0.8% Consumers 1.9% Utilities 19.1% Real Estate 0.5% Pure Industrial 4.9% Oil 0.6% Infrastructures 5.1% TMT 11.9% Healthcare 0.7% Financials 54.6% Source: Mediobanca Securities estimates Renzi s government committed to 10% IRAP cut Cutting taxes is a must for Italy Prime Minister Renzi announced on 12 March his intention to reduce IRAP by 10% starting from May The resulting circa!3bn tax revenues shortfall is expected to be funded with an increase in the taxation on financial assets from 20% to 26% as we will detail in the following chapter. We welcome such a commitment given the very high tax burden penalising consumption and growth in Italy. The tax pressure calculated on the one euro of legally-declared product, is estimated in the 55% region, while the manifest fiscal pressure, given by the tax return versus GDP ratio, stands at almost 46%. In spite of political promises, major taxes have only increased over the last few years, some of them by much more than the GDP growth. As shown below, VAT, IRAP, IRPEF and IRPEG have always accounted for more than 60% of the total tax return on average. 01 April

16 Tax stream breakdown 100% 90% 80% Others IMU IRAP VAT IRES IRPEF % 60% 50% 40% 30% 20% 4% 20% 5% 19% 7% 6% 20% 8% 8% 20% 7% 8% 22% 8% 8% 21% 8% 7% 22% 8% 6% 20% 8% 6% 21% 8% 8% 21% 9% 8% 21% 9% 10% 21% 8% 9% 20% 8% 8% 19% 7% 8% 22% 7% 8% 21% 7% 8% 20% 7% 20% 10% 32% 32% 32% 33% 34% 33% 34% 34% 34% 35% 35% 34% 35% 37% 37% 39% 33% 32% 0% Source: Mediobanca Securities on Eurostat data IRAP vs IRPEF: competitiveness vs internal demand If cutting taxes remains a mandatory road to travel for Italy, and we believe it does, then allocating such cuts to IRAP or IRPEF is not an obvious call. Reducing the tax wedge is unanimously considered the best way for Italy to regain competitiveness. Cutting IRAP would tick such a box, but the estimated tax wedge reduction needed in order for Italy to close the competitiveness gap versus Germany amounts to roughly!40bn. As such, although Renzi s stated commitment is a move in the right direction, the amount of the effort he can put on the table given the limited resources do not even close 10% of such a gap. This can thus hardly be considered a gamechanger. Cutting IRPEF means boosting internal demand. In theory this should be the right receipt to support short-term GDP growth. However, the reduced competitiveness of the country runs the risk of diverting the freed-up resources towards imports, which in turn could end up penalising the current account surplus generated after three years of austerity. Indeed, we estimate that only 60% of IRPEF cut will be allocated to Italian goods. IRAP represents 7% of total tax revenues The IRAP collected in 2012 amounted to!33bn, representing c.2.1% of the Italian GDP. The last available data on the tax collection breakdown in Italy shows IRAP represents roughly 7% of the total tax revenues as shown below. Tax revenue breakdown,!bn! bn VAT % IRAP % IRPEF % IRES % IMU % Others % Total % GDP 947 1,004 1,049 1,091 1,127 1,191 1,249 1,295 1,335 1,392 1,429 1,485 1,546 1,568 1,520 1,549 1,559 1, % CAGR Source: Mediobanca Securities, MEF, Istat Some 10% IRAP cut means!2.9bn to be funded with higher taxation on financial assets We estimate that the companies populating our Italian coverage are expected to contribute to a total 2014 IRAP of roughly!2.9bn at current IRAP rates. Assuming total IRAP revenues equal!29bn in 2014, it follows that only 10% of this amount is gathered from the big Italian companies under our coverage. This implies that the Italian SMEs along with the public administrations have to bear the burden of the other slice of the pie. 01 April

17 Our estimates assume a 4.8% IRAP tax rate for industrial stocks, a 5.5% rate for Banks, and a 6.8% rate for Insurers. A reduction of 10% on the total IRAP revenues would translate into!288m of savings on taxes awarded to the companies under our coverage, with an overall positive impact on 2014 EPS of 1% ranging from no impact on Luxottica to almost 7% EPS impact on Espresso. Financials and TMT would be the sector to benefit the most on 2014 EPS in the region of, respectively 1.6% and 1.7%. In absolute values, the above-mentioned sectors would register IRAP savings in the order of!157m and!34m. We estimate that 10% drop in the IRAP tax revenues represents roughly 50bps average cut in the bracket for each sector. In our simulation below, we have assumed no distinction between regions, thus keeping the regional discretional mark-up (addizionale regionale). Media companies: Espresso, Mondadori and RCS with mid/high single-digit EPS impact Espresso, Mondadori and RCS will visibly benefit from a possible IRAP reduction as the industry is extremely labour intensive. Moreover, the impact on 2014 figures would be extremely visible with the earnings of the industry being depressed significantly. RCS is not visible in the following chart, as the company is expected to report a net loss in 2014, but on an adjusted basis (without the impact of the!40m non-recurring costs) the impact on earnings would be in the 8% region. Banks: UBI and BPER almost 4% EPS impact We calculate an average EPS impact of 2.7%. This is well above the average of the Italian corporations due to the higher bracket (approximately 5.5% for banks versus approximately 4.8% for corporate, slightly below only the insurers one, i.e. 6.8%), and to the relatively higher incidence of staff costs on profitability. UCG would obviously be the least impacted, as the group generates just a portion of the profits in Italy (c.40% of revenues and c.35% of operating costs allocated to Italy). Among pure Italian players, UBI and BPER come out as the most positively impacted due to the relatively higher impact of staff costs on the overall profitability of the group (staff costs account for c.2.3x of the stated profit before tax in 2014E). Industrials: Finmeccanica and Autogrill in the 3.5% EPS region Finmeccanica emerges as a clear winner due to its share of Italian production being higher than its share of Italian revenues (i.e. Italian plants export abroad) and therefore the Italian labour costs are of a significant size. The net profit particularly depressed helps amplifying the bottom-line impact. Autogrill benefits from the fact that food and beverage business usually has a high labour intensity due to the presence of staff in the back office and sales people in the stores. Moreover, in Italy labour costs account for an even higher impact on total opex (>30%), due to low labour flexibility. Based on our calculations, a 10% reduction of IRAP would have a positive impact of c.3.5%. Biancamano: a significant 10% EPS impact but only on 2015 numbers IRAP cut would have a strong impact on Biancamano due to labor cost at 54% of revenues and amortisations at 7%. With a 10% cut in IRAP we estimate that Biancamano would close 2014 at breakeven vs. our current loss of!0.4m while the impact on 2015 would be around 10%. IRAP Model MB Sectors, 2014e,!m SECTOR IRAP - taxable income IRAP 2014 Net Profit after a reduction in IRAP % Change in EPS BRANDED GOODS , % CONSUMERS 1, % FINANCIALS 24,767 1,563 9, % HEALTHCARE % INFRASTRUCTURES 3, , % OIL , % PURE INDUSTRIAL 2, , % TMT 7, , % UTILITIES 11, , % MB COVERAGE 51,842 2,863 30, % Source: Mediobanca Securities 01 April

18 IRAP Model MB Coverage NAME SECTOR IT TAXABLE SALES (%) DEPRECIATION IT/TOT (%) EBITDA IT/TOT (%) LABOUR COSTS IT/TOT (%) IRAP - taxable income IRAP 2014 Net Profit after % Change a reduction in EPS in IRAP Aeffe Branded Goods 41% 78% 47% 8% % Amplifon Healthcare 27% 27% 50% 50% % Ansaldo STS Infrastructures 28% 28% 28% 37% % Astaldi Infrastructures 36% 36% 36% 36% % Atlantia Infrastructures 88% 88% 88% 88% 2, % Autogrill Consumers 28% 45% 20% 22% % Biancamano Pure Industrial 100% 100% 100% 100% nm nm Brembo Pure Industrial 41% 50% 30% 60% % Brunello Cucinelli Branded Goods 25% 20% 10% 75% % Buzzi Unicem Pure Industrial 15% 18% 0% 17% % Cairo Communication TMT 100% 100% 100% 100% % Campari Consumers 25% 25% 25% 25% % Cementir Pure Industrial 12% 25% 4% 12% (2) % CNH Industrial Pure Industrial 4% 4% 4% 4% , % Danieli Infrastructures 7% 7% 7% 7% % De' Longhi Consumers 13% 20% 10% 25% % Delclima Pure Industrial 17% 17% 17% 17% % Diasorin Healthcare 8% 8% 9% 10% % EI Towers Infrastructures 100% 100% 100% 100% % Emak Pure Industrial 22% 55% 55% 55% % Enel Utilities 43% 43% 50% 43% 6, , % Enel Green Power Utilities 50% 50% 50% 50% % Eni Oil 0% 0% 0% 0% , % ERG Utilities 100% 100% 100% 100% % Eurotech TMT 5% 25% 25% 25% % Ferragamo Branded Goods 10% 10% 10% 23% % Fiat Pure Industrial 7% 40% 8% 30% 1, % Finmeccanica Pure Industrial 19% 30% 50% 50% 1, % Geox Branded Goods 35% 70% 20% 46% nm nm GTECH Consumers 55% 55% 55% 55% % Hera Utilities 100% 100% 100% 100% % Indesit Company Consumers 11% 15% 10% 15% % Interpump Group Pure Industrial 14% 14% 14% 14% % Italcementi Pure Industrial 15% 22% 5% 19% % Landi Renzo Pure Industrial 22% 22% 22% 22% nm nm L'Espresso TMT 100% 100% 100% 100% % Luxottica Branded Goods 5% 43% 5% 9% (2) % Maire Tecnimont Oil 10% 10% 10% 10% % Marr Consumers 100% 100% 100% 100% % Mediaset TMT 77% 77% 77% 77% % Moleskine Branded Goods 10% 5% 10% 10% % Moncler Branded Goods 27% 10% 20% 45% % Mondadori TMT 76% 76% 76% 76% % Nice Consumers 15% 20% 13% 20% % Piaggio Pure Industrial 60% 75% 33% 75% % Pirelli & C. Pure Industrial 5% 5% 6% 5% % Prelios Real Estate 52% 52% 52% 52% nm nm Prysmian Infrastructures 4% 4% 4% 5% % RCS Mediagroup TMT 74% 74% 74% 74% nm nm Recordati Healthcare 24% 26% 24% 30% % Safilo Branded Goods 12% 80% 12% 70% % Saipem Oil 0% 0% 0% 0% % Saras Oil 100% 100% 100% 100% % Snam Utilities 100% 100% 100% 100% 2, % Sogefi Pure Industrial 6% 6% 6% 6% % Sorin Healthcare 10% 15% 20% 50% % Telecom Italia TMT 80% 80% 80% 80% 5, , % Telecom Italia Media TMT 76% 76% 76% 76% nm nm Tenaris Oil 5% 5% 5% 5% 172-1, % Terna Utilities 100% 100% 100% 100% 1, % Tesmec Infrastructures 6% 6% 6% 6% % Tod's Branded Goods 28% 38% 11% 50% % Trevi Fin. Infrastructures 6% 6% 6% 6% % Yoox Branded Goods 16% 99% 16% 88% % NAME SECTOR SALES IT/TOT (%) COSTS IT/TOT% LABOUR COSTS IT/TOT (%) IRAP - taxable income IRAP 2014 Net Profit after % Change a reduction in EPS in IRAP Azimut Holding Financials 93% 93% 93% % Banca Generali Financials 100% 100% 100% % BP Emilia Romagna Financials 100% 100% 100% 1, % Cattolica Assi.ni Financials 100% 100% 100% % Credem Financials 100% 100% 100% % Generali Financials 28% 28% 28% , % Intesa Sanpaolo Financials 87% 14% 88% 14, , % Mediolanum Financials 92% 92% 92% (179) % UBI Banca Financials 100% 100% 100% 2, % Unicredit Financials 39% 35% 35% 4, , % Unipol-SAI Financials 100% 100% 100% % Source: Mediobanca Securities 01 April

19 Estimated Impact on 2014 EPS from 10% IRAP tax reduction (% on current MBe) 7.0% 6.0% 5.0% Impact on EPS 4.0% 3.0% 2.0% 1.0% MB Coverage 0.92% 0.0% L'Espresso Mondadori BP Emilia Romagna UBI Banca Finmeccanica Autogrill Saras Intesa Sanpaolo Credem Hera Mediaset Cairo Safilo Trevi Fin. Amplifon Unipol-SAI ERG Piaggio Telecom Italia Cattolica Assi.ni EI Towers Emak Atlantia Terna Marr GTECH Enel Banca Generali Snam Maire Tecnimont Astaldi Sorin Unicredit Fiat Brembo Generali Italcementi Eurotech Ansaldo STS Azimut Holding Saipem Enel Green Power Brunello Cucinelli Indesit Company Delclima Danieli Yoox Recordati Campari Eni Tod's Moncler Interpump Group De' Longhi Nice Sogefi CNH Industrial Ferragamo Tesmec Moleskine Diasorin Pirelli & C. Prysmian Buzzi Unicem Tenaris Mediolanum Cementir Luxottica Source: Mediobanca Securities 01 April

20 Reduction in taxes on citizens - IRPEF Personal Income Tax: 3% of the population pays 31% of total tax The tax on personal income represents roughly 32% of the total!477bn tax income collection in From the table below, we see that there are 41.5m taxpayers whose income is taxed for a total amount of!149bn. Among the different classes, we note that 65% of Italian taxpayers declare an income below!20,000 and only 3% of taxpayers declare an income greater than!60,000. Net Personal Income Tax (Irpef) paid by income class Income classes! # payers Amount paid! m from 0 to ,019,392 23,775 from to ,436,469 56,323 from to ,756,914 21,820 from to ,159 12,750 from to ,771 8,422 from to ,328 15,239 > ,195 11,114 Total 41,547, ,443 Source: MEF However, this 3% accounts for almost 31% of the total Irpef proceeds. On the contrary, as we show below, only 16% of the total amount comes from the taxpayers belonging to the lowest income bracket (!0-20,000). The biggest share belongs to the taxpayers that declare an income within the!20,000-40,000 bracket. These represent 28% of the taxpayers with a total amount paid of over 35% of the total. Irpef taxpayer breakdown by income class (lhs) and Irpef taxpayer breakdown by amount paid (rhs), 2012 fro m to % fro m to % > % fro m 0 to % fro m to % fro m to % fro m to % > % fro m to % fro m 0 to % fro m to % Source: Mediobanca Securities on MEF data 01 April