Italian Market: Top Picks for 2016

Transcription

1 Italian Market: Top Picks for 2016 Half-Way to Normality and On Route to the Next Half With a number of reforms already approved or in discussion, a more self-sustainable economic recovery in place and privatisation moving forward, we believe that Italy is progressing fairly well along our anticipated New Normality route. Italy s equity risk premium declined by almost 200bps in 2015 to 6.8%, also thanks to an unusual mix of simultaneous tailwinds (FX, oil prices, QE). Looking ahead to 2016, we believe that the equity premium might further decline to its long-term average at 6.0% (or a +13% market upside in 2016, all else being equal) driven by political stabilisation, the domestic economic recovery gaining steam and improved visibility on earnings market view and valuation. The Italian equity risk premium is currently lower than the other main euro area benchmarks. However, the premium is still rather distant (+250bps) from its pre-crisis level of 4.3% and 80bps above its 15Y average (at around 6.0%). Based on a 2016 market P/E (16.0x), valuations are broadly in line with the 15Y P/E average (15.8x), while on 2017 earnings, valuations are at an 11% discount. Looking ahead at 2016, we believe that conditions are in place for a further step down in Italian ERP, namely to hit its long-term average at 6.0% by YE16, as Italy progresses along its route to normalisation. Drivers should be ongoing political stabilisation (as reforms are being finalised), the economic recovery gaining steam (GDP seen at +1.2% in 2016E, from +0.7% in 2015E) and improved visibility on earnings forecasts. Risks are, in our view, government delays to implementing reforms in Italy, a reigniting of the euro area sovereign crisis, a more pronounced economic slowdown (mainly, China and emerging economies) and a fresh rise in geopolitical risks. Macroeconomic assumptions. While 2015 marked the reversal of the economic cycle in Italy (we expect GDP growth to close at +0.7%), after three and a half years of recession, 2016 could be the year in which growth normalises, returning to levels broadly in line with potential (we see 2016E GDP at +1.2%), with investments expected to take over from consumption as the main recovery driver. We expect the euro area to grow by 1.7% in 2016, accelerating from 1.5% in Above-trend growth is still being fuelled by a mix of positive external shocks (low oil prices, weak exchange rate, and accommodative economic policies). Investment themes: Sector Consolidation and Dividend Yields. We have identified two investment themes, which we believe are consistent with our reference scenario: Sector Consolidation and Dividend Yields. The former should be driven by a combination of macroeconomic (subdued growth and easier monetary conditions) and institutional factors (regulatory changes and declining country risk). The latter should reflect the current environment of historically low interest rates and the search for yield among investors. Top picks for Below, we show our 2016 Top Picks selection, with an eye also on consolidation trends and dividend yields. Italian Market 2016 Equity Strategy Intesa Sanpaolo Research Department Giampaolo Trasi Product Co-ordinator Equity Research Team Corporate Brokerage Research Team Index price performance, -1Y Source: FactSet Top Picks Company Name Target Price (EUR/share) Rating Sector Price (EUR/share) Mkt Cap (EUR M) Atlantia ADD Motorways ,562.8 Autogrill BUY Travel&Leisure ,166.2 Banca Popolare di Milano 1.06 BUY Banks ,697.9 EI Towers ADD Media Services ,580.6 Fiat Chrysler Automobiles ADD Automobiles&Components ,858.0 Finmeccanica BUY Aerospace & Defence ,209.1 Hera 2.70 ADD Multi-Utilities ,619.6 Poste Italiane 8.10 ADD Logistics & Financial Services ,815.5 Prysmian ADD Capital Goods ,095.3 Safilo Group BUY Branded Goods Salini Impregilo 5.40 BUY Construction ,811.2 Unipol 5.65 BUY Insurance ,211.4 Source: Intesa Sanpaolo Research estimates See page 67 for full disclosures and analyst certification

2 Contents Equity Strategy Report A Last Glance at 2015 Market Performance Market Valuation and Earnings Outlook 4 Normalisation in Italy and Country Drivers 10 Investment Conclusions 15 Two Investment Themes: Sector Consolidation and Dividend Yields 16 Italy: Towards a Normalisation of Growth 20 Euro Area: Recovery Continues; Risks are Mostly Political 25 Top Picks and Sector Strategy at a Glance 27 Our Top Picks 28 Airports: Neutral 31 Asset Gatherers: Neutral 31 Auto&Components: Neutral 32 Banks: Neutral 32 Branded Goods: Neutral 33 Construction & Building Materials: Positive 33 Consumer Goods: Positive 34 Industrials: Neutral 35 Insurance: Neutral 35 Motorways: Neutral 36 Oil&Gas Sector: Negative 36 TMT Sector: Positive 37 Utilities Sector: Neutral 38 Mid&Small Caps Sector 39 Top Picks Section 40 The following research analysts contributed to this report: Product Co-ordinator: Giampaolo Trasi Equity Research Team Monica Bosio, Luca Bacoccoli, Antonella Frongillo, Manuela Meroni, Gianluca Pacini, Elena Perini, Bruno Permutti, Roberto Ranieri, Meris Tonin Corporate Brokerage Research Team Alberto Francese, Gabriele Berti, Marta Caprini Macroeconomics Team Anna Maria Grimaldi, Paolo Mameli Priced at market close on 14/12/2015 (except where otherwise indicated). 2 Intesa Sanpaolo Research Department

3 A Last Glance at 2015 Market Performance In the first eleven months of 2015, the global stock market performances have been mixed overall, reflecting concerns about economic growth in Asia, weakness in commodity prices, uncertainties about US monetary policy, and a return of sovereign risk in the euro area. International equity markets started 2015 on a positive note as the sharp EUR depreciation vs. USD favoured euro area equity markets, and in particular export-oriented sectors to the USD area. The start of the ECB quantitative easing in March was welcomed by equity markets, while it further weakened the euro currency. The simultaneous sharp drop in oil prices was positive news for consumers disposable income and, in a medium-term view, for industrial margins, particularly in energy-intensive sectors. The economic recovery gained ground in the euro zone, also sustained by the ECB s accommodative monetary policy, and by a credit cycle recovery in the euro zone. After hitting yearly highs in April, euro area equity markets lost momentum and then declined, as a result of a new heightening of the Greek sovereign debt crisis; moreover, political risk moved back to centre stage, as anti-eu political forces advanced in several European countries. The stalemate in negotiations between Greece and European institutions triggered a more marked correction in equity indices since end-june, together with a temporary rise in bond yields, a spread widening in peripheral countries, and a general rise in investors risk aversion. During the summer months, equity markets declined sharply, due first to rising concerns about growth in China and emerging economies, and to the prolonged weakness in commodity prices; thereafter, due to uncertainties about the timing of the FED rates hike and lastly, the strong impact on the automotive sector from the VW diesel-gate scandal. In the final months of 2015, equity markets mainly moved sideways, awaiting clearer signals on growth trends in the euro area and in the Far East, and monetary policy decisions from the FED and the ECB. A new rise in geopolitical risk constrained equity markets in the euro zone in late On the other hand, expectations for the ECB EAPP extension (subsequently approved in early-december), supported equity markets in the euro area, in sight of more monetary stimulus, together with renewed euro weakness. The 3Q15 reporting season pointed to an ongoing demand recovery and consolidation in industrial margins, particularly for export-led international groups, thus providing support. Giampaolo Trasi Head of Equity & Credit Research [email protected] World equity markets 2015 index performances % Last index price YTD -3M -6M FTSE MIB FTSE Italia All Share FTSE Italia STAR Euro Stoxx CAC DAX IBEX FTSE S&P Nikkei Note: Priced at close on 11 December 2015; Source: Thomson Reuters The legacy of 2015 Intesa Sanpaolo Research Department 3

4 2016 Market Valuation and Earnings Outlook In 2015 not only has the equity risk premium gap between Italy and the main euro area benchmarks (Germany, France, Spain and the Euro Stoxx) fully closed, but the Italian ERP is currently lower than most other euro area main equity markets. Despite the drop to 6.8% in 2015, the Italian ERP gap vs. its pre-crisis level remains substantial (250bps). Based on a 2016 market P/E (16.0x), valuations are in line with the 15Y P/E average (15.8x); on 2017 earnings, valuations are at an 11% discount. While not a clearcut bargain, we expect Italian equities to further incorporate a positive change in paradigm, as long as the country moves ahead on its route to normalisation. Accordingly, we expect ERP to decline towards its long-term average (15Y) at 6.0%. Italian equities vs. historic averages At end-november 2015, the Italian market 2016 P/E stood at 16.0x, broadly in line with the 15Y average (15.8x). Based on a 2017 market P/E (14.1x), valuations are at an 11% discount to the 15Y average (on TF/IBES consensus data). Note that, in the course of 2015, the average monthly P/E has been 17.6x, or at a 12% premium to the long-term average. Valuation at a discount on 2017 P/E Italian equity market An historic comparison Historic x P/E average Italian Equity market Premium/(Discount) to 15Y avg.(%) Premium/(Discount) to 10Y avg. (%) Source: Intesa Sanpaolo Research elaboration on IBES consensus data (as of end-november 2015) Italian equities vs. Euro Stoxx In terms of P/E, Italy trades at an 8% premium to the Euro Stoxx on 2016 figures (16.0x vs. 14.7x) and a 7% premium on 2017 (14.1x vs.13.2x). The Italian ERP is currently lower than the Euro Stoxx (6.8% vs. 7.0%, respectively): compared with end-2014 (Italian ERP: +100bps vs. Euro Stoxx at Dec-14; it was +180bps at end-2013), the gap has not only closed, but Italy is currently perceived as slightly less risky than the average euro zone equity markets. Based on the current EPS growth estimates, the Italian PEG looks more appealing than the Euro Stoxx (1.2x vs. 1.6x) in relative terms. Italian equity market vs. Euro Stoxx A comparative valuation Equity Risk P/E EPS growth (%) x Premium (%) / / /16 PEG (1) Italian Equity market Euro Stoxx (1) PEG calculation is based on current 2015 P/E and 2Y forward EPS growth; Source: Intesa Sanpaolo Research elaboration on IBES consensus data (as of end-november 2015) We note that Italy s 2015 earnings growth (+30.6%) is distorted by the MPS effect (i.e. the bank reported a huge loss in 2014, and is expected to recover profitability in 2015), and by the swing in Eni s 2015 earnings forecasts. These effects, however, should become less significant moving forward to 2016 and 2017 earnings forecasts (see the Earnings Outlook section for details). More attractive on a PEG basis vis-à-vis Euro Stoxx We also highlight that the current 2Y FWD EPS CAGR for Italy (namely, 2016 and 2017) is +15.8% vs % for the Euro Stoxx, and we are now more confident about the delivery of 2016 and 2017 earnings growth for Italian companies. In fact, the domestic economic recovery, which began on the back of exogenous factors (low oil price, EUR depreciation, effects of QE), is now increasingly driven by domestic demand and seems capable of self-sustainment, in our view. Improved earnings visibility on Intesa Sanpaolo Research Department

5 Italian equities vs. Rest of the World We compared the Italian equity market valuation with some international benchmark indices in order to assess the relative attractiveness of Italian equities; we used the FTSE MIB index benchmark for the purpose of this analysis. In particular, we focused on 2016 and 2017 P/E, on EPS growth and on the current Equity Risk Premium levels. According to our elaborations, the Italian benchmark FTSE MIB is trading in line with average group P/E both on 2016 (15.3x vs. 15.0x average) and 2017 (13.2x vs. 13.4x average) earnings, when compared to the other international benchmarks. However, when taking into account EPS CAGR, on a PEG basis, the FTSE MIB looks decidedly more attractively priced than all the other benchmarks in our analysis, together with Spain, backed by a sound EPS growth (+20.0% EPS CAGR in , the highest among peers group), with a PEG at 0.95x. In terms of implied Equity Risk Premium, the FTSE MIB stands at 7.2% slightly higher than the Euro Stoxx (7.0%), broadly in line with Germany (7.3%); both Anglo-Saxon markets (UK and US) are showing an ERP at 5.5%, well below the euro area indexes. Italy s FTSE MIB: in line on P/E but much cheaper on PEG...and in line on ERP Equity market valuation and Equity Risk Premium by country Country Index P/E (x) P/E (x) 2017 P/E (x) EPS CAGR (%) PEG (1) (x) Equity Risk Premium (%) Italy FTSE MIB France CAC Germany DAX Spain IBEX Euro area Euro Stoxx UK FTSE Switzerland Swiss Market US S&P Japan TOPIX (1) PEG calculation is based on current 2015 P/E and 2Y forward EPS growth; Source: Intesa Sanpaolo Research elaboration and IBES consensus estimates (as of end-november 2015) Country-risk and bank-risk in Italy The tight correlation between the Italian banks index and the inverse of the BTP-Bund spread observed in recent years has broken in 2H15. ECB policy actions in 2015 had the effect of defocusing investors from the sovereign debt crisis, returning the economy to centre stage, in our view. True that, during the summer months, the Greek crisis prompted a renewed rise in risk aversion and a return of the correlation between Italian banks and the BTP-Bund spread. However, this proved to be a temporary effect: later in 2015, the BTP-Bund spread declined again, while the trend in Italian banking stocks was broadly de-correlated, mainly driven by banks fundamentals rather than by Italy s country risk. No longer a major issue in 2H15 Intesa Sanpaolo Research Department 5

6 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Equity Strategy Report Italian banks and Italian sovereign risk ( ) /(BTP-BUND) Italian Banks Source: Intesa Sanpaolo Research elaboration on TR data Equity Risk Premium analysis in Italy Sharply down in 2015, beyond our expectations At end-november 2015, the equity risk premium for the Italian market stood at 6.8%, well below the ERP level at year-end 2014 (8.7% at December 2014), and below our expected yearend 2015 target (at December 2014, we had forecast a level of 7.7%, then revised to 7.0% at June 2015). Equity Risk Premium dropped in 2015 in Italy Equity Risk Premium Italian equity market Source: Intesa Sanpaolo Research elaboration on IBES The equity premium in Italy declined sharply in 2015, backed by an unusually favourable mix of tailwinds such as: a) the EUR weakness vs. the USD (potentially benefiting export-oriented sectors towards the USD area); b) the sudden decline in oil prices, with a potential impact on disposable income and industrial margins; c) the QE start, in an already accommodative monetary environment, prompting a credit cycle recovery, and supporting economic recovery expectations in Italy and the euro zone; and d) the drop in 10Y Italian BTP yields and in the BTP-Bund spread. Italy has closed the ERP gap with euro area benchmarks The following two charts show: on the left, the trend in the Equity Risk Premium for a number of international equity benchmarks since the beginning of the financial crisis; on the right, the gap between the current ERP and the pre-crisis ERP level (in terms of bps) for the same equity 6 Intesa Sanpaolo Research Department

7 benchmarks. For the purpose of this analysis, we set the beginning of the credit crisis at June 2007, when the ERP started its long upwards trend in all the main equity markets. Equity Risk Premium - Italy vs. Rest of the World (Nov 2015) ERP gap to pre-crisis levels - Italy vs. Intl equity benchmarks Source: Intesa Sanpaolo Research elaboration on TR/IBES data Source: Intesa Sanpaolo Research elaboration on TR/IBES data In 2015 not only has the equity premium gap between Italy and the main euro area benchmarks (Germany, France, Spain and the Euro Stoxx) fully closed but the Italian ERP is currently, together with France, lower than the other euro area benchmarks. Spain is at present the laggard among euro area benchmarks in terms of equity premium, at 7.5%. Italian ERP now lower than most euro area benchmarks The polarisation between euro area indices and the Anglo-Saxon markets (UK FTSE 100 and US S&P 500) remains evident in relative terms, with both Anglo-Saxon markets trending at a 5.5% ERP, also reflecting a more advanced stage of their economic cycle. Italian ERP remains very distant from its pre-crisis levels: compared to the 4.3% ERP level recorded at June 2007, the ERP gap for Italy at November 2015 is 250bps. Germany and the Euro Stoxx are showing a bps gap. Still a large ERP gap for Italy vs. pre-crisis levels In market terms, it would take a 70% rise in the Italian equity index to drive the Italian Equity risk premium back to its pre-crisis level of 4.3%, all else being equal: namely, the FTSE MIB would need to shoot up to around 36000, a level last seen in January 2008; not a likely event for 2016, and for the foreseeable future, we believe. A brief recap on our valuation metrics While not a clear-cut bargain, we believe that Italian equities may offer upside in a 2016 view, under certain valuation metrics. We recap below our valuation approach. P/E vs. historic averages: based on a 2016 market P/E (16.0x), valuations are in line with the 15Y average (15.8x). Calculated on a 2017 market P/E (14.1x), valuations are at an 11% discount to the 15Y average; P/E vs. EPS growth: the current 2Y FWD EPS CAGR for Italy (namely, 2016 and 2017) is twodigit (+15.8%), but we are now more confident about the delivery of 2016 and 2017 earnings growth for Italian companies. The Italian PEG, currently at 1.20x, is among the lowest among euro area benchmarks, reflecting higher earnings visibility, in our view; Italy vs. Euro Stoxx: in terms of P/E, Italy trades at an 8% premium to the Euro Stoxx on 2016 figures (16.0x vs. 14.7x) and a 7% premium on 2017 (14.1x vs.13.2x). Italy sells at a discount on a PEG basis (1.20x vs. 1.60x), reflecting a more sustained EPS growth in Italy going forward; Equity Risk Premium: Italian ERP is currently slightly lower than most euro area benchmarks. It remains, however, rather distant (+250bps) from its pre-crisis level of 4.3%, and 80bps above its 15Y ERP average (c. 6.0%). Historical P/E: cheap on a 2017 view PEG: relatively attractive, on improved earnings visibility Italy vs. Euro Stoxx: more expensive on P/E, cheaper on PEG ERP: cheap vs. history Intesa Sanpaolo Research Department 7

8 Earnings Outlook in Italy Recent 3Q15 reporting season: a quick recap The 3Q15 reporting season in Italy ended in mid-november. Based on our 3Q15 forecasts, we calculated that, out of the 75 companies in our preview sample, we had 31% results above expectations, 57% in line, and 12% of results below our forecasts. Overall, we judge the 3Q15 reporting season as in line with expectations. 3Q15 reporting season at a glance Moreover, we tracked 29 companies announcements on FY guidance: a vast majority (20 companies, or 69%) confirmed FY guidance; if we add the 5 companies (17%) which lifted their guidance, we have 86% companies pointing to a stable or improving earnings trend outlook which we view as a positive signal also for 2016 expected earnings dynamics. FX continued to play in favour of USD-exposed industrials and consumer-related companies (USD appreciated by almost 20% vs. EUR yoy in 3Q15). The economic recovery in EU is slowly moving ahead, thus supporting final consumer demand. Financials were mixed, with pressure on NII and fee income, balanced by lower LLP, with generally improving capital bases. In 4Q15, the FX effect should remain a tailwind, but its benefit should gradually fade, due to a less favourable yoy base effect, while domestic demand, although subdued both in Italy and in the euro area, should still provide support. For a more detailed sector and company analysis, refer to our report Italian Market: 3Q15 Results of 17 November Preview coverage 3Q15 results vs. our estimates 2015 quarterly results vs. our estimates Source: Intesa Sanpaolo Research estimates Source: Intesa Sanpaolo Research estimates 2016 earnings outlook in Italy Looking ahead to YE16, current IBES consensus earnings for Italy point to a double-digit earnings growth (+18.1%), while the current 2Y FWD EPS CAGR for Italy (namely 2016 and 2017) is +15.8% (vs % for the Euro Stoxx). From a top-down angle, Italian earnings forecasts might present a slightly higher downside risk than the Euro Stoxx, due to the slightly weaker Italian economic environment vs. the average euro area (Italy GDP growth 2016E: +1.2% vs. +1.7% for Euro area 2016E, according to our macroeconomic forecasts). From a bottom-up fundamental angle, however, we are more confident than 12 months ago about the delivery of 2016 and 2017 earnings growth for Italian companies, as the domestic economic recovery (which began on the back of exogenous factors, such as the low oil price, EUR depreciation, effects of QE, supportive fiscal policy), is now being increasingly driven by domestic demand and seems capable of self-sustainment. More confident about the delivery of 2016 and 2017 earnings for Italian companies 8 Intesa Sanpaolo Research Department

9 On top of that, other drivers such as operating leverage (gained through efficiency actions during the crisis period), and the gradual effects of economic stimulus measures implemented in Italy in recent years are also supportive in this respect. Also in 2015, earnings dynamics in the Italian banking sector have materially impacted earnings forecast statistics for Italy, somewhat distorting EPS growth rates for the whole market, all else being equal. Earnings growth forecasts for 2015 in Italy, in particular, have been highly influenced by: a) the MPS effect (i.e. the bank should recover profitability in 2015E, after having reported a huge loss in 2014, based on our and IBES consensus forecasts); and 2) Eni s adj. earnings trend (expected to sharply decline in 2015E vs. 2014, based on our and IBES consensus forecasts) Quantifying the effect of banks earnings on total market earnings Moving forward to 2016 and 2017 earnings forecasts, these factors should lose relevance, and Italy s overall earnings growth trend should no longer be the result of a specific sector trend. This is the key outcome from our simulation below, which quantifies the effect of the earnings dynamics in the Italian banking sector vis-à-vis the rest of Italian equities. First, we calculated the weighting of banks forecast earnings on total market earnings in the forecast period, with the support of available IBES consensus data. We then recalculated Italian earnings growth ex-banks in and, lastly, based on the same set of data, we recalculated the market P/E ex-banks for 2016 and Based on our elaborations, 2016 EPS growth for the Italian market, excluding banks, would be +18.2% vs. +8.5% for the Euro Stoxx. In 2017, EPS growth ex-banks would be +12.0% vs % for Euro Stoxx. Italy 2016 EPS growth above the Euro Stoxx, net of banks Note that the difference between earnings growth with and without banks, both in 2016 and in 2017, is relatively small. We believe that this is signalling a higher quality in expected earnings forecasts: the expected growth rates seem to be more broadly-based and homogeneous among financials and industrials, rather than depending on earnings swings in single sectors and stocks. A more balanced earnings growth trend among sectors In valuation terms, Italy s P/E ex-banks would remain at a slight premium to the Euro Stoxx in 2016, while the gap would almost close going forward to 2017 earnings. The results are shown in the table below. Note that they represent an approximation, as the two IBES sample aggregates used in our simulation (Italian banks and Italian equities) are not fully homogeneous or comparable. Italian Equity Market EPS growth estimates with/without banks % EPS growth P/E (x) PEG (1) 2016/ / (x) Italian Equity Market Italian Banks Italian Equity Market ex-banks Euro Stoxx NM: not meaningful; (1) PEG calculation is based on current 2015 P/E and 2Y forward EPS growth. Source: Intesa Sanpaolo Research elaboration on IBES consensus data (as of end-november 2015) Intesa Sanpaolo Research Department 9

10 Normalisation in Italy and Country Drivers We monitored the status of our New Normality Paradigm for Italy. With a number of structural/institutional reforms achieved, or in the process of being discussed/approved in Parliament, some major privatisations deals finalised (such as Poste Italiane) and a few market reforms in place (i.e. Popolari banks), a successful EXPO 2015 behind us and an extraordinary Jubilee just starting, we believe that Italy is progressing well along its normalisation route. Looking at 2016, we believe that conditions are in place for further steps forward on this route, possibly prompting a decline in the Italian equity premium towards its 15Y average ( ) at around 6.0% by year-end A short recap We first presented our New Normality paradigm for Italy at the end of 2013, envisaging a three-year (at least) period of normalisation for Italy, an evolutionary process involving politics, economics and financial markets. We expected this period to be characterised by subdued economic growth (both in Italy and the euro area), low interest rates and an accommodative ECB monetary policy, and relative financial stability. New Normality in Italy: time for a second yearly checkup We focused on four country-specific factors: 1. Political stabilisation, as a result of a broad-based structural reform process, also including an electoral system assuring country governability and a faster and more efficient legislative system; Four country-specific factors 2. Privatisation, conducive to investors broader market participation and a diminishing public presence in the economy, and to a gradual decline in risk aversion in the Italian equity market; 3. Corporate governance and market reforms, aimed at improving a historically rather opaque corporate governance in Italy and the resulting conflicts of interest; 4. Special events (such as EXPO Milan 2015 and the Jubilee) which, if successfully finalised, could potentially have a positive influence on investors perception of Italy s country risk. Two years down the road, we monitor the status of our New Normality paradigm: in other words, we re-assess Italy s country risk, so as to better understand the potential developments in the Italian Equity Risk Premium in The next page offers a quick recap of the main goals achieved in 2015 and the key events or challenges we anticipate for Intesa Sanpaolo Research Department

11 The Four Normality Drivers - What s been done in 2015? The Four Normality Drivers - What s next in 2016? Political stabilisation Political stabilisation Renzi has decidedly pushed through his reform agenda, marking important steps in 2015, following the approval of the labour market reform (Jobs Act), at end-2014; A referendum on the Constitutional reforms should take place in 2H16 (likely in October); we expect it to confirm the Parliamentary resolutions; The new electoral law (so-called, Italicum) was approved in May 2015; On Constitutional reforms, the new Senate will end perfect bicameralism in Italy. The rebalancing of local autonomies should reduce overlaps with central government (the Senate has approved the reform; a vote at the Lower House is scheduled on 11 January 2016); On structural reforms, Education, Justice, PA, plus measures on competitiveness and taxation, among others, have either been approved, or are awaiting implementation decrees, or are advancing in Parliament. We expect Renzi to finalise the PA (implementing decrees) and Justice (criminal proceeding, among others) reforms, while a reduction in taxation on corporate and individuals has been postponed to 2017 and 2018, respectively, also due to ongoing budget constraints; In Spring 2016, local elections in main Italian cities (Rome, Milan, Naples, Turin and Bologna, among others) will be a key political test for the government; All in all, we see a relatively low risk of government crisis, or early elections, in 2016 (the end of the current legislature is 1Q18). Privatisation With the Poste Italiane IPO, the government has broadly achieved its privatisation goals for 2015 (0.4% GDP), in addition to asset divestments already finalised in 2014 (see the tables below). Privatisation In 2016, the privatisation pipeline might include, among others, assets like the Italian Railways and ENAV (air control systems), on top of possible disposals of some minority stakes in listed companies. The government has committed to raising around 0.5% GDP from privatisation in both 2016 and Governance and market reforms Governance and market reforms We believe that the approval of the Popolari Banks reform has probably been the main goal achieved in 2015, in terms of governance reforms in Italy, following changes in takeover regulation introduced in In 2016, we anticipate that the Popolari banks reform should lead to a wave of consolidation in the banking sector, possibly leading to the creation of third and fourth Italian champions, able to compete in a more competitive environment. Special situations: EXPO Milan EXPO Milano 2015 took place from 1 May till 31 October It hosted over 21M visitors (over 6M from abroad). EXPO was a successful event, not only for its economic impact, but also in terms of a re-launch of Italy s image abroad: in our view, it contributed to reduce the perceived country risk. Special situations: The Jubilee of Mercy The extraordinary Jubilee of Mercy officially opened on 8 December, and will last until November According to independent sources (Censis), around 33M visitors are expected in Rome during the period (about 70% from abroad); the impact in terms of public works for Italy should, however, be relatively limited. Source: Intesa Sanpaolo Research estimates and elaboration In the next section, we focus on one of our selected country drivers, the Italian Privatisation plan, briefly summarising the state of the art and the prospects for Italian Privatisation plan: an update In 2015, the Italian Treasury moved ahead with its previously-announced privatisation plan. In February, a 5.74% stake in Enel was placed on the market through an ABB, bringing MEF s stake in Enel down to 25.5%, cashing in around EUR 2.2Bn. Italian privatisation plan so far: a recap More importantly, in 4Q15 the Italian Treasury finalised the IPO of Poste Italiane, by selling a 35.3% stake to retail and institutional investors and cashing in around EUR 3.1Bn. Intesa Sanpaolo Research Department 11

12 After an approximate EUR 3.6Bn cashed in 2014, the Italian Treasury booked EUR 5.3Bn in 2015 from the two above-mentioned placements (see below in the report for the actual calculation of the total privatisation cash-in in 2015), and remains committed to a comprehensive privatisation plan in the coming years. Italian privatisation plan (2014) Company Industry Selling shareholder CDP Reti Holding co. (energy transp. networks) Stake Buyer disposed % CDP 40.9 State Grid China/ Cassa Forense/ Foundations Cash-in (EUR Bn) 2.41 Fincantieri Ship building CDP-Fintecna 27.5 IPO 0.36 Rai Way Media broadcasting and transmission Rai 34.9 IPO 0.28 TAG Gas transportation CDP (CDP Gas) 89.2 SNAM 0.51 Source: Intesa Sanpaolo Research elaborations; companies websites; press sources (Il Sole 24 Ore; MF) A recent update of the government s medium-term economic agenda (DEF) pointed to a targeted value of asset privatisations at 0.4% of GDP in 2015, 0.5% in 2016 and 2017, and 0.3% in This could amount to around EUR 30Bn in the period, which is slightly dilutive vs. the target of 0.7% of GDP per year, included in the previous three-year plan. Note that for the purpose of calculating the targeted value of privatisation to GDP (0.4% GDP in 2015, equal to around EUR 6.5Bn), the Italian Treasury also included two additional deals in 2015 (i.e. the related cash-in is strictly destined to reduce public debt, although they are not, strictly speaking, asset disposals): a) the reimbursement of Monti bonds from MPS (EUR 1.1Bn); and b) the extraordinary dividend from ENAV (EUR 0.2Bn), thus meeting the target for 2015 (source: MEF). Italian privatisation plan (2015) Company Industry Selling shareholder Stake disposed % Buyer Cash-in (EUR Bn) ENEL Utilities Power Generation) Italian Treasury 5.7 ABB 2.2 Poste Italiane Logistics & Financial Services Italian Treasury 35.3 IPO 3.1 Source: Intesa Sanpaolo Research elaborations; companies websites; press sources (Il Sole 24 Ore; MF) In the table below, we recap some potential privatisation deals currently in the Italian Treasury pipeline for 2016, based on recent government announcements and bearing in mind the originally announced privatisation plan. The Italian Treasury Minister Padoan, in particular, has recently referred to ENAV and the Italian Railways as the main privatisation goals for What lies ahead in 2016? On top, we include in the table below some selected minority stakes owned by the Treasury (STM and Eni) for which a possible divestment has been discussed in the past; also, plans for a valorisation of Grandi Stazioni Retail (55% owned by Ferrovie dello Stato) are ongoing. Italian privatisation plan Pipeline 2016 Company Industry Selling Shareholder Stake to be disposed % ENAV Air traffic control services Italian Treasury 49 Ferrovie dello Stato Railways Italian Treasury c. 40 Other possible divestments STMicroelectronics Semiconductors Italian Treasury 14 Eni Oil & Gas Italian Treasury 4.3 Grandi Stazioni Retail Retail activities of14 main Ferrovie dello Stato (55%) Italian railways stations EuroStazioni (45%) NA: not available; Source: MEF, Intesa Sanpaolo Research elaboration, press sources (Il Sole 24 Ore; MF) Intesa Sanpaolo Research Department

13 How the New Normality may support Italian equity valuations The path towards a new normality standard in Italy could have a positive influence on investors risk aversion, contributing to reduce Italian country risk in the medium-long term. Starting from an equity risk premium of 8.7% in December 2013, we believe that the full and smooth unfolding of this normalisation scenario could drive Italy s ERP back to its 15Y average ( ), at around 6.0%. New Normality and equity risk premium in Italy With a number of structural reforms achieved, or in the process of being approved in Parliament, a more self-sustainable economic recovery in place (though admittedly weaker than the euro zone average), some major privatisations deals finalised (such as Poste Italiane), a successful EXPO 2015 behind us and an extraordinary Jubilee just getting underway, we believe Italy is progressing well along our New Normality route. The equity premium for Italy has indeed reflected such developments, moving sharply downwards from 8.7% at end-2013 to the current 6.8%, certainly helped by an unusual mix of simultaneous tailwinds in 2015 (FX, oil prices, QE). The benchmark FTSE MIB moved up by around 11% since end Looking ahead at 2016, we believe that conditions are in place for a further step down in the Italian ERP, to hit its long-term average ( ) at approximately 6.0% by year-end 2016, namely -80bps in equity premium. This as a result of political stabilisation (as reforms are being finalised), the economic recovery gaining steam (GDP seen at +1.2% in 2016, from +0.7%), and improved visibility on earnings forecasts. Scope for a further decline in equity premium...in a 2016 horizon In the table below, we show our New Normality country-specific drivers as discussed above, with an assessment of their probability, and the expected impact on the equity risk premium (ERP) in Country-specific drivers: probability and expected impact on ERP in 2016 Driver Probability Impact on ERP in 2016 Reforms and Political stabilisation Medium/High Medium Privatisation Plan proceeding Medium/High Medium/low Consolidation among Popolari banks High Medium/Low Extraordinary Jubilee Open 8 Dec 2015 Low Source: Intesa Sanpaolo Research elaborations Aligning Italy s risk premium to 15Y average ( ) The Equity Risk Premium in Italy currently stands 80bps above its 15Y average (approx. 6.0%, based on our ERP model). In , the Italian ERP ranged from its historical low (1.7% at February 2000, at the height of the Internet bubble) to its historical high (12.0% at June 2012, only a few weeks ahead of Draghi s whatever it takes game-changing statement). Italian ERP back to its 15Y average The average of such a long and highly-diversified period (c. 6.0%) can be regarded, in our view, as a medium-term target for the ERP level in Italy, as long as the economic, financial and political environment moves towards normalisation. As such, we simulate below the implicit upside for Italian equities, assuming Italy s ERP returns to its long-term average of around 6.0%, all else being equal. Intesa Sanpaolo Research Department 13

14 Equity Risk Premium and 15Y average Italian equity market Source: Intesa Sanpaolo Research elaboration on TR/IBES We would obtain a 2016 P/E of 18.0x (or a 14% premium to its 15Y average P/E of 15.6x), and a 2017 P/E of 15.9x (in line with its 15Y average). The PEG would appear to be neutral at 1.35x. The implied market upside from current levels would be approximately 13%. Italy country risk Italian Equity Market back to its ERP average % Equity Risk Implied Index P/E (x) PEG (x) Premium performance Current Italian Equity Market Back to average (6.0%) -80bps Italy ERP-normalised Source: Intesa Sanpaolo Research elaboration on IBES 14 Intesa Sanpaolo Research Department

15 Investment Conclusions In 2015 not only has the equity premium gap between Italy and the main euro area benchmarks (Germany, France, Spain and the Euro Stoxx) fully closed, the Italian ERP is also currently lower than most other euro area main equity markets. Despite the drop to 6.8% in 2015, the Italian ERP gap vs. its pre-crisis level remains among the largest of the main international equity benchmarks (+250bps). With a number of structural reforms achieved, or in the process of being approved in Parliament, a more self-sustainable economic recovery in place, albeit admittedly weaker than the euro zone average, some major privatisations deals finalised (such as Poste Italiane), a completed successful EXPO 2015 and an extraordinary Jubilee now underway, we believe Italy is progressing well along our New Normality route. Looking ahead at 2016, we believe that conditions are in place for a further step downwards in Italian ERP, to return to its long-term average ( ) at around 6.0% by year-end 2016 (namely, -80bps in equity premium), as a result of political stabilisation (as reforms are finalised), the economic recovery gains steam (GDP is seen at +1.2% in 2016, from +0.7%), and improved visibility on earnings forecasts. As such, we set our base-case equity premium at 6.0% at end-2016e, or 80bps below the current ERP level, implying a 13% equity market upside (from the current FTSE MIB level at 21,100) and a 2016 P/E at 18.0x and 2017 P/E at 15.9x, all else being equal. Note that the time horizon for our forecast is end-2016e: we see this upside gradually materialising over the course of next year. No longer the laggard in the euro zone Progress on our New Normality route Conditions are in place for a further decline in equity premium in 2016 Our base case: a 13% upside in a 12-month horizon.. Italian Equity Market in 2016E Expected ERP range and index performance % Equity Risk Premium Implied index performance 2016 P/E (x) 2017 P/E (x) Current valuation levels end ERP target Our base case ERP worst case Source: Intesa Sanpaolo Research elaboration and IBES consensus estimates Risks are, in our view, government delays to implementing reforms in Italy, a reigniting of the euro area sovereign crisis, a more pronounced economic slowdown in global demand (in particular, China and emerging markets) and a fresh increase in geopolitical risks. We note that, during the summer months, the Italian equity market went through a mix of the above factors (namely, concerns about China and emerging markets, the Greek political crisis, and a perceived loss of momentum in Italian government action). The equity premium showed resilience, hanging around the 7% mark; if we add 40bps to the current ERP level (up to 7.2%), the implied downside would be around -7%. with risks attached Intesa Sanpaolo Research Department 15

16 Two Investment Themes: Sector Consolidation and Dividend Yields Looking at Italian equities in 2016 from a bottom-up angle, we have identified two investment themes, which we think are consistent with our above-described reference scenario: Sector Consolidation and Dividend Yields. The former should be driven by a combination of macroeconomic (such as subdued growth and easier monetary conditions) and institutional factors (such as regulatory changes and declining country risk). The latter should reflect the current ongoing environment of historically low interest rates and the consequent search for yield among investors. Consolidation Games Equity Strategy Report We believe that a key investment theme for the Italian equity market in 2016 could be sector consolidation and M&A. In the course of 2015, in fact, we have already witnessed a number of major cross-border M&A deals in the Italian equity market (Pirelli-ChemChina; Hitachi Ansaldo STS/Breda; Dufry-WDF, Heidelberger-Italcementi, Yoox-Net a Porter, Mitsubishi-DeLclima, to name a few). On the other hand, we believe that there are a number of drivers still pushing in the direction of sector consolidation in Some drivers depend on the broader international context, others are, in our opinion, country-specific to Italy. We briefly list below some of them: Consolidation: already underway in but likely to continue in 2016, too Easier credit conditions. Following the ECB s EAPP in March 2015 (extended up to, at least, March 2017 at the December ECB meeting), monetary conditions are likely to stay very accommodative in the euro area in the medium term. Credit availability and ample market liquidity in an historically low interest rates environment would make it easier to finance extraordinary M&A deals; Size and cost efficiency. In general terms, the search for efficiency and market size were among the key drivers behind some of the recently-finalised M&A deals in Italy. In an increasingly competitive environment, the need to cut the cost base is a priority in several sectors, more so as the economic landscape remains shallow in the euro area and in Italy; Regulatory changes in Italy. Some recent decisions/economic policies of the Italian government have had the effect of creating conditions for sector consolidation, with the aim of introducing more efficiency in certain industries. The reform of Popolari Banks is an obvious example as are moves in certain regulated sectors (for instance, the government is pushing to reduce the number of local utilities while in the airports sector, the government is aiming at creating a more integrated system with fewer sector players); Political stability and a declining risk premium. Last, but not least, the ongoing normalisation process in Italy, widely discussed above, also has the beneficial effect of enhancing attractiveness for long-term investments in Italy. Higher political stability (at least by Italy s past standards) and an ongoing reform process should diminish the perceived country risk. The investment horizon should become more visible in the medium term, thus promoting a gradual decline in the equity premium for investors. In the table below, we highlight a few possible consolidation stories in the Italian equity market, indicating the main drivers, and the sectors and stocks potentially involved in them. The table is not intended as a recommended list, rather it should be regarded as special situations to be monitored, in sight of prospective governance and control developments, going forward in 2016 and beyond. 16 Intesa Sanpaolo Research Department

17 Italy - Consolidation Games in 2016 Company Consolidation Driver Comments Anima Holding (ADD) Consolidation in the asset management sector, also related to the M&A scenario for Popolari banks Anima recently presented a non-binding offer (EUR M, in cash and shares, plus an earn-out) for Arca SGR, owned by several Popolari banks, with AuM close to EUR 30Bn (almost 45% of Anima s current AuM). The offer values Arca at a 2014 P/E of 27-31x and % P/AuM (based on October s Assogestioni data). According to the press (Il Sole 24 Ore, MF and Il Messaggero), Arca s shareholders also received other offers and could evaluate a potential IPO process as an alternative. In our view, the final outcome is still uncertain, also depending on the Popolari risiko which, however, could open up additional M&A opportunities for Anima, having BPM and CreVal as shareholders. Azimut Holding (ADD) Banca Generali (HOLD) Fiat Chrysler Automobiles (ADD) Finmeccanica (BUY) Consolidation in the asset management sector, also related to the M&A scenario for Popolari banks Consolidation in the asset gatherers sector (mainly private banks) Reduction of capital requirements and development costs Implementing the One Company strategy While continuing its strategy of foreign expansion, Azimut remains interested in a potential large-sized acquisition in Italy (either a network of financial advisors or an asset management company owned by a bank). Mr Giuliani, the group's CEO, recently said that Azimut could be ready to pay around 12x the earnings of a potential targeted company, also considering the possibility of becoming a shareholder of a cooperative bank, should the deal be value accretive and envisage a distribution agreement of at least 10 years. Mr Motta, the CEO of Banca Generali, recently confirmed that the group is evaluating potential external growth opportunities, given its good capital position (Common Equity Tier 1 of 13.4% at end-september and an excess capital of EUR 187M, up to EUR 201.4M on a fully-loaded basis). He added that Banca Generali s main interest is for small private banks in Italy. Santander s Italian private banking activities (EUR 2.7Bn AuM), recently acquired by UBS Italy, were on the group s radar. Since 1Q15, FCA s CEO has reiterated his view that an aggregation between players would generate value creation within the sector, thanks to the achievement of strong synergies on the development costs side. In this context, on a number of occasions, the manager has highlighted GM as FCA s most suitable partner for a potential aggregation. We believe that 2016 will be the year in which the company will truly begin to benefit from its new organisational structure, which has led to the creation of a One Company model. Consistent with this strategy, along with the steady delivery of efficiency improvements, we think that Finmeccanica is committed to strengthening only those activities where it can effectively stand out, while better valorising its noncore assets through the disposal or switch of assets with other players. Prysmian (ADD) Bolt-on acquisitions As confirmed by the group, we believe that in 2016 Prysmian might finalise bolt-on acquisitions for a size up to EUR 1Bn in order to strengthen its positioning in highervalue segments or key strategic markets. We view bolt-on acquisitions as preferable to a transformational one in terms of capital return and financial sustainability as the group does not plan to seek financing from the market. Safilo Group (BUY) A stable European distribution Different to the statements by the common shareholder Hal Holding, we do would not fully rule out a merger between Safilo and the Dutch listed distribution chain Granvision Combining the retail and production activities would result in a new entity with a solid 70% retail controlled business to better compete in the licensing arena (about EUR 800M managed by Safilo and approx. EUR 2,400M by Luxottica) and to improve the product penetration, maybe with a dedicated good quality new Granvision private label produced in Safilo s Italian plants, characterised by lowering volumes. Capex to improve the stores image would be one of the first issues to address, in our view. Telecom Italia (NO RATING) Wind-3 pending merger, EU TLC consolidation, Brazilian consolidation Telecom Italia should benefit from the Wind-3 merger, if approved (EU clearance expected in 2H16), in terms of stabilisation of the mobile customer base and a potential ARPU increase. Moreover, with Vivendi often stating that TI is key to pursue the ambition of a Southern Europe media/tlc platform (a still unclear strategy in our view), Vivendi s recent entry in TI s Board enhanced TI s prey profile in a forthcoming European telecom sector consolidation. It remains to be assessed if Xavier Niel (long optional position) could play a role going forward. We also recall the long-rumoured TI- Orange press scenario, officially denied by Orange itself and unlikely in our view, given the limited cross-country synergies. Lastly, we highlight the potential impact from a Brazilian consolidation, with Oi-TIM Brazil being a potential scenario following the LetterOne proposal and pending regulation, political and financial variables. Source: Intesa Sanpaolo Research elaborations and estimates Intesa Sanpaolo Research Department 17

18 Italy - Consolidation Games in 2016 Sector Consolidation Driver Comments Airports Structural changes driven by regulation After decades of inertia, the Italian airport sector is undergoing rapid and structural changes driven by more favourable regulation, which: 1) ensure adequate returns on capital; and 2) require increased efficiency, as envisaged by the Piano Nazionale Aeroporti. As a result, on the one hand significant capex plans are being executed by major airports (well exceeding EUR 4Bn in the next 5 years) while, on the other, a consolidation process is beginning to take off (Venice and Verona, Pisa and Florence), which we expect to continue (Milano and Bergamo), potentially involving both listed and non-listed companies. Banks Popolari Banks Reform One year on from the approval of the Popolari banks reform and before the deadline for the transformation into joint-stock companies (December 2016), we believe that the Italian Popolari banks will start the consolidation process in We expect the process to lead to the creation of the third and fourth national champions with the aim of improving their competitive positioning and cost efficiency in an environment that we expect to remain characterised by profitability under pressure due to low interest rates. Insurance New regulation (Solvency II) When presenting its Business Plan and its EUR 500M rights issue (concluded in 4Q14), Cattolica highlighted its interest in M&A transactions. Management, however, recently confirmed that the group is on standby as regards its potential external growth strategy. The new regulatory framework on capital (Solvency II), with its application in January 2016, could also favour M&A in the sector across Europe. Mr. Cimbri, Unipol s CEO, has said in the past that the group could evaluate potential external growth opportunities abroad. The latter s new business plan should be presented in Spring Motorways Rationalisation of motorway concessions and operators Pending the EU approval of the network development plan, the Italian government reiterated that it is willing to rationalise the high number of motorway concessions and operators, so as to increase efficiencies and free up resources to update the domestic network. In our view, an aggregation should focus around the main players, with Atlantia and SIAS controlling 44% and 20% of the Italian toll-roads, respectively. Towers INWIT change of control, Possible spin-off of Wind-3 combined towers, Small M&A The ongoing tender offer on Telecom Italia s stake in INWIT is the key consolidation driver, in our view, with Cellnex/F2i representing the most likely bidders. The bidding price remains the key issue to assess. Moreover, if successful, the Wind-3 merger could also be an opportunity should the combined entity decide to dispose its tower network (around 8,000-9,000 sites in our view). We also flag small M&A deals (telecom and radio) indicated to be on the 2016 radar by EI Towers management on top of those already announced in As for broadcasting towers, we think that a merger between EI Towers and Rai Way remains the most accretive option, although we acknowledge that it may not be on the government s agenda in Utilities M&A among local utilities Given the high number of domestic local operators in the multi-utility sector, the government (led by Mr Renzi) has tried to stimulate mergers by reducing the number of public controlled companies, envisaging incentives for existing entities (also through the recent PA reform, Madia law). While only partially effective so far, we believe that an acceleration in this trend is on the cards: i) implementing decrees related to the PA reform, also introducing penalties for a failure to consolidate; ii) the final start of the gas tenders; iii) the potential assignment of regulatory power in the waste segment to the AEEGSI; iv) the updated regulatory framework in water, driving towards a single operator for each minimum territorial area. In a scenario of a pick-up in in M&A deals, we view domestic local listed multi-utilities (Hera, Acea, A2A and Iren) as the main beneficiaries, each one in its reference area. Source: Company data and Intesa Sanpaolo Research 18 Intesa Sanpaolo Research Department

19 The hunt for dividend yields In the current environment of historically low interest rates in the euro area, and in the light of our expectations of this lasting into 2016 and possibly beyond, we believe that investors should continue to rank dividend yields rather high in their stock selection criteria. Italy Dividend yield vs. 10Y BTP yield Source: Intesa Sanpaolo Research elaboration on Factset As such, we have revised our large-caps equity coverage to identify those stocks presenting higher 2015E dividend yields (to be distributed in Spring 2016) and 2016E (to be distributed in Spring 2017), taking duly into account visibility on dividends, i.e. potential earnings risks. In the following table, we show a selection of large Italian stocks under our coverage (belonging to FTSE MIB, plus other selected names), based on our expected dividend yields E. Selected Italian Large Caps E dividend yields Company Name Dividend Yield Dividend Yield 2015E (%) 2016E (%) Price (EUR/share) Mkt Cap (EUR M) Rating UnipolSai ,150.5 HOLD Azimut Holding ,101 ADD Eni ,770 HOLD Cattolica Assicurazioni ,189 ADD Snam ,774 HOLD Poste Italiane ,816 ADD Unipol ,211 BUY Generali ,595 BUY Mediolanum ,269 ADD Terna ,125 HOLD Enel ,300 BUY Banco Popolare ,208 BUY Atlantia ,563 ADD Tenaris ,514 HOLD Hera ,620 ADD Banca Popolare di Milano ,698.0 BUY Priced at 14/12/2015; Note: Companies ranked on 2015E Dividend Yields; Source: Company data and Intesa Sanpaolo Research Intesa Sanpaolo Research Department 19

20 Italy: Towards a Normalisation of Growth In Italy, as expected a year ago, 2015 marked the reversal of the cycle. After three and a half years of recession, economic activity has perked back up starting in the first quarter of the year, driven by the tailwinds generated by the shocks in financial markets (interest rates, exchange rate, oil prices), as well as by the effects of the ECB s Quantitative Easing. Paolo Mameli - Economist [email protected] However, the recovery has lost steam in the course of 2015, as the rebound in investments at the beginning of the year (in the means of transport and construction sectors) proved shortlived, and the summer brought signs of a significant slowdown in foreign trade; accelerating consumer spending only offset these adverse trends in part. As a result, the pace of GDP growth, faster than expected at the beginning of the year (0.4% qoq in 1Q and 0.3% qoq in 2Q) slowed to 0.2% qoq, falling short of expectations in the summer quarter. Therefore, average annual growth in 2015 should level-off at 0.7%, above the rate estimated one year ago (0.4%), but one tenth lower than our latest forecast (0.8%, in any case at the most cautious end of consensus estimates). However, annual GDP unadjusted by workdays (three more than last year), which is an important variable in drawing up public finance reports, should reach the 0.8% target. As elsewhere in Europe, at the moment the economic recovery is being driven by consumption, as shocks on domestic demand coming from energy and interest rates seem to be proving more effective ex post (than ex ante based on the econometric models), and stronger than the effect on exports of the exchange rate, also considering that this latter effect was balanced by a downturn in global demand (in particular from emerging countries). Consumption was also supported by the effects on disposable income of the Irpef bonus, which came fully into force starting in 3Q14 (and which according to the Bank of Italy 1 was 90% spent), as well as by the recovery in employment, which began last year and strengthened in 2015 (also spurred on by government incentives, according to the Bank of Italy surveys 2 ). Low interest rates (and the improvement of credit conditions) also seem to have played a role, as indicated by the robust growth (by around 7% yoy) of durable goods consumption. As has regularly been the case in the past few years, once again the indications provided by sentiment surveys tended to overestimate the pace of growth. Based on Istat data, in November consumer confidence hit a long-term high (for the past 20 years at least) and business sentiment surged to its highest level in eight years; however, increased optimism among economic operators was reflected only in part by the spending of consumers and, especially, corporates. In all likeliness, the depth of the crisis experienced over the past few years has depressed the expectations of economic operators to such an extent that even a marginal improvement is perceived as being very significant; another explanation may lie in the polarisation of the economic situation of households and businesses (markedly negative queues in retail), as well as in the effects of business bankruptcies on the survey sample. This suggests caution in drawing overly optimistic indications on the growth trend from the evolution of survey data. Going forward, after a 0.7% growth in 2015, we confirm our latest forecast for an acceleration to 1.2% in The estimate is compatible with a quarterly GDP growth still in the 0.3% qoq area throughout 2016, in line with the average level recorded in 2015 (in other words, economic activity is not seen to accelerate significantly). After having grown (0.9%) more than GDP in 2015, consumption should accelerate to 1.2% in The rebound in the real disposable income of households recorded in 2015 (the first after a string of seven years on the decline) is expected to strengthen in the course of next year (to 1.5% from 0.9%, based on our estimates). The recovery in purchasing power is mostly driven by higher employment: we forecast a 0.8% increase in employment numbers in 2016, in line with 2015 (based on our estimates, the unemployment rate could approach 11% in average 2016 terms). 1 Annual Report on See Hirings: the effects of the labour market measures as reflected in the administrative data, Economic Bulletin 4/ Intesa Sanpaolo Research Department

21 In 2016, investments could take over from consumption as the main driver of the recovery. After growing modestly in 2015 (0.6%), investments should accelerate to 1.6% in While investments in means of transport picked up already this year (+35% based on our estimates, albeit due to an anomalous surge at the beginning of the year), the important development in 2016 should be the recovery of investments in machinery and equipment, which are expected on the increase by 2.8% in 2016, after the surprise -0.8% slide (for the fifth consecutive year, the seventh out of the past eight) seen in Businesses should resume investing thanks to persistently ultra-accommodative financial conditions, and to the fact that final demand has already reversed (this should at least ease the caution of enterprises in taking capex investment decisions). The expansionary measures contained in the 2016 Budget, and in particular the possibility of a maxi-amortisation (of 140%) on new investments implemented between 15 October 2015 and 31 December 2016, will also help. The construction sector must be discussed separately. The contraction of the industry (for the ninth year in a row) in 2015 (-1%, based on our estimates) came as no surprise. The industry was the hardest hit by the crisis, and is the last in exiting the recession, indeed at a very sluggish pace. Only in the past few months, the signals of a recovery in transactions on the existing homes market, the recovery in the affordability ratio, the demand for mortgages by home purchasers, and the sharp rebound in builders confidence, have become compatible with a reversal in the industry. However, in 2016 we expect little more than a stabilisation (+0.3%), ahead of a stronger recovery over the following years. Public spending rebounded surprisingly (+0.3%) in 2015 (after four negative years on the run), but is expected to dip back down in the course of 2016 (-0.1%) as a result of the cuts provided for by the latest Stability Laws. In 2016 as well, public spending will definitively not be among the main drivers of the economic cycle. Foreign trade could make a negative contribution to growth in 2016 as well. We expect trade flows in both directions to slow, although in 2016 imports are estimated to grow more than exports (3.9% vs. 3.2%), as it was the case in The slowdown in exports (from 3.9% in 2015) is explained by the smaller additional impact of the exchange rate shock. Sales to the United States and to other European countries (United Kingdom, Spain, some Eastern European countries) should continue to prove rewarding, as opposed to a negative contribution from the emerging markets (Russia, China, Latin America, OPEC countries); however, based on forwardlooking indicators, demand from emerging countries may also have bottomed out late in the summer of 2015, and signs of a recovery could start to come in the course of In 2016, as in 2015, we expect economic policies to positively impact the cycle, albeit not decisively (a few tenths of a point): The Quantitative Easing programme implemented by the ECB in 2015 was effective in unblocking the monetary policy transmission mechanism, as the sharp drop in government bond yields translated into an easing of credit conditions and into a significant decline in the interest rates applied by banks to businesses and households (currently both more favourable in Italy on average than in the rest of the euro area); in this sense, the extension to beyond September 2016 of the asset purchase programme, announced by the ECB on 3 December (together with the further deposit rate cut) may have a further positive impact on growth, which however will not be decisive, as the decision failed to aid a further drop in interest rates or a depreciation of the euro s exchange rate (both of which, in fact, moved in the opposite direction); on the whole, we believe that the Quantitative Easing programme may have an impact (through the changes triggered on the interest rate and exchange rate trends) of around 0.7% on Italian GDP growth in the biennium (of which % in 2016); In 2016, fiscal policy, as was also the case in , will be slightly accommodative, thanks to the measures included in the Stability Law (change in the cyclically-adjusted primary balance: at least -0.4% next year, in line with this year); the 2016 budget is expansionary, but only if compared to a scenario under current legislation which priced in the triggering of safeguard clauses, with automatic hikes in indirect taxes; in general, we estimate a theoretical impact of fiscal policy on GDP growth in 2016 of one to two tenths. In essence, after the 2015 reversal, 2016 could be the year in which growth normalises, Intesa Sanpaolo Research Department 21

22 returning to levels broadly in line with potential (although it will take years to close the output gap which has opened up since 2007). Inflation, on the other hand, is still not expected to normalise : after two years of stagnation (0.2% in 2014 and 0.1% in 2015), the CPI is forecast to rise back only slightly in 2016, to 0.8% in our estimate, therefore well below the levels considered as normal (our baseline scenario sees inflation staying below the ECB target in 2017 as well, at 1.6%). Risks to the inflation scenario remain skewed to the downside in any case. Such low levels of inflation is weighing on corporate revenues and margins, but for the time being at least it does not seem to be affecting households spending decisions: in fact, the typically negative correlation between perceived/expected inflation and consumers spending intentions seems to be in place: low inflation, at least for now, seems to be proving more of a support for the disposable income of households, than a drag for the economic cycle. On the political front, we see limited risks of a government crisis or of a return to the polling stations in After focusing this year on the reform of the labour market and of the education system, in 2016 the government should concentrate on three fronts: completion of the judicial system reform and the issuing of the decrees provided for by the delegating law on the public administration and tax system reforms. The main test of the government s resilience, in addition to the round of local elections due in the spring (involving major municipalities such as Rome, Milan, Turin, Bologna, Naples), will come with the completion of the constitutional reform, with the likely calling of a popular referendum (probably to be held in the autumn of 2016). Implementing the additional significant tax cuts promised for also seems challenging, as the residual safeguard clauses will have to be covered, and the correction needed to achieve the European structural balance and debt targets will have to be implemented; significant savings on interest expenditure will help, but will not be enough. Italy Main macroeconomics forecasts GDP (constant prices, yoy) q/q Private consumption Fixed investments Public spending Exports Imports Inventories chg (contrib., % GDP) Current account (% GDP) Public deficit (% GDP) Public debt (% GDP) CPI (yoy) Industrial output Unemployment (%) Y rate Effective Exch. rate (2010=100) Note: percentage changes annualised vs. previous period unless indicated otherwise. Source: Thomson Reuters-EcoWin, Intesa Sanpaolo 22 Intesa Sanpaolo Research Department

23 Consumer confidence at historical highs, business confidence at its highest in around 8 years Business sentiment improving sharply across sectors Source Thomson Reuters-Datastream Source: Thomson Reuters-Datastream Consumer confidence and spending driven by the recovery in purchasing power, expected to strengthen in Source: ISTAT, Intesa Sanpaolo elaborations and estimates Lower interest rates also seem to have played a role, given the boom in durable goods consumption 10 Cons.dur.goods y/y Int.rate cons.credit,rhs inv Sep-05 Sep-07 Sep-09 Sep-11 Sep-13 Sep-15 Source: Thomson Reuters-Datastream Consumer spending also supported by the recovery in employment, which outpaced GDP growth d-05 d-07 d-09 d-11 d-13 d-15 Source: ISTAT, Intesa Sanpaolo elaborations and estimates Employment y/y GDP y/y and in particular the share of permanent employment, up since the beginning of 2015, when the government incentives came into force O-13 J-14 A-14 J-14 O-14 J-15 A-15 J-15 O-15 Source: ISTAT, Intesa Sanpaolo elaborations and estimates Intesa Sanpaolo Research Department 23

24 The main development in 2016 should be the recovery of investments in machinery and equipment, which could be spurred on by stronger business sector optimism on demand as well as by the further easing of financial conditions (at a pace unprecedented in the past decade) Source: ISTAT, Intesa Sanpaolo elaborations and estimates Source: ISTAT, Intesa Sanpaolo elaborations and estimates Exports benefited from the exchange rate shock, as proven by the boom in auto sales to the United States. However, the additional impact is waning and the slowdown in demand from the emerging countries has reaped its effects in the past few months Source: Thomson Reuters-Datastream In any case, the share of sales to higher risk countries is limited on the whole Source: Thomson Reuters-Datastream Source: Thomson Reuters-Datastream and the recovery of domestic demand should be able to balance, in 2016 even more so than in 2015, the negative contribution made by foreign trade Source: Thomson Reuters-Datastream Final dom. demand y/y Net Export (contrib. to GDP) yy Intesa Sanpaolo Research Department

25 Euro Area: Recovery Continues; Risks are Mostly Political We expect the euro area to grow by 1.7% in , accelerating from 1.5% in The above-trend growth is still being fuelled by a mix of positive external shocks, such as low oil prices, the weak exchange rate, and accommodative economic policies. Anna M. Grimaldi - Economist [email protected] In 2015, euro area GDP growth was boosted by the acceleration in the periphery, mostly by Spain and Ireland, where however the peak has now been reached. In 2016, growth should pick up mostly in Italy (to 1.2% from 0.7% in 2015). In Germany, GDP will progress at 2.0%, from 1.7% in 2015, whereas the recovery in France is still struggling to take off. In our forecast horizon, growth will continue to be driven by domestic demand more than by net exports. After the surge in private consumption, 2016 should see a stronger contribution from investments, which so far grew by less than in previous recoveries. After the deceleration in mid-2015, construction spending should grow, supported by highly accommodative financial conditions. Risks to the euro area growth are now more balanced. The slowdown of international trade seems to have bottomed out. Moreover, the lower oil price, combined with accommodative monetary and fiscal policies should contribute to the normalisation of the recovery. The main risks are now political. After the populist drift in Portugal and France, albeit for different reasons, there is a risk of protest movements gaining consensus in Spain at the general election of 20 December will be a challenging year for member states ability to cooperate on immigration and to manage European borders. Moreover, the political scenario will be shaped by the high geopolitical uncertainty after the tragic terrorist attacks in Paris. The continued downward surprises in oil prices will limit the rise of inflation to 0.9% in 2016 and to 1.5% in The gradual increase in consumer prices over the forecast horizon remains uncertain, as it is almost entirely dependent on the response of domestic prices to the reduction of aggregate excess supply. Risks to the inflation scenario are still skewed to the downside, given the uncertain trajectory of oil prices. Fiscal policy will be slightly expansionary in The structural deficit may worsen by 0.3 points of GDP, due in part to the effects of higher spending to face the unprecedented inflow of refugees. Furthermore, given the current delicate political juncture, the commission will likely let member states make use of the utmost flexibility in managing public finances. The markets reacted very negatively to the announcement of the ECB s measures on 3 December, as they expected the deposit rate to be cut by more than 10bps, and the monthly purchases to be increased and not only extended at the current pace until March However, in our assessment the package is actually quite a significant one, as it extends the central bank s accommodative stance for a very long period of time, and in any case until inflation returns to target. The official statement did not rule out new accommodative measures in the future, if needed. In our view, at the beginning of 2016, the ECB will remain vigilant to assess the evolution of data and will resort to communication to buffer the damage caused by the markets disappointment. In March, the first set of growth and inflation forecasts for 2018 will send a signal on the probability of new moves in the course of Intesa Sanpaolo Research Department 25

26 Euro area - Main macroeconomic forecasts GDP (constant prices, yoy) q/q Private consumption Fixed investments Public spending Exports Imports Inventories chg (contrib., % GDP) Current items (% GDP) Public deficit (% GDP) Public deficit (% GDP) CPI (yoy) Industrial output Unemployment (%) month Euribor EUR/USD Note: percentage changes annualised vs. previous period unless indicated otherwise. Source: Datastream, Intesa Sanpaolo 26 Intesa Sanpaolo Research Department

27 Top Picks and Sector Strategy at a Glance Top Picks Company Name Target Price (EUR/share) Rating Sector Price (EUR/share) Mkt Cap (EUR M) Atlantia ADD Motorways ,562.8 Autogrill BUY Travel&Leisure ,166.2 Banca Popolare di Milano 1.06 BUY Banks ,697.9 EI Towers ADD Media Services ,580.6 Fiat Chrysler Automobiles ADD Automobiles&Components ,858.0 Finmeccanica BUY Aerospace & Defence ,209.1 Hera 2.70 ADD Multi-Utilities ,619.6 Poste Italiane 8.10 ADD Logistics & Financial Services ,815.5 Prysmian ADD Capital Goods ,095.3 Safilo Group BUY Branded Goods Salini Impregilo 5.40 BUY Construction ,811.2 Unipol 5.65 BUY Insurance ,211.4 Source: Intesa Sanpaolo Research estimates 2016 Sector views Positive Neutral Negative Consumer Goods Airports Oil Integrated Construction Asset Gatherers Oil Refiners Utilities: Local Auto&Components Oil Field Services TMT Banks Branded Goods Industrials Insurance Motorways Utilities: Regulated Utilities: Liberalised (Gas & Electricity) Source: Intesa Sanpaolo Research estimates Our Top Picks Key 2016 drivers Company Name M&A Yield Drivers Special situations Investment Features Value Growth Atlantia X X Jubilee X Autogrill Jubilee X Banca Popolare di Milano X Popolari Banks Consolidation X EI Towers X X Releveraging X Fiat Chrysler Automobiles X Corporate actions X Finmeccanica X Corporate actions X Hera X X Corporate actions X Poste Italiane X Turnaround Mail & Parcels X Prysmian X Efficiency /Corporate actions X Safilo Group X Licences renewals X Salini Impregilo Receivables recovery X Unipol X Lower holding discount X A: actual; E: estimates; Source: Company data and Intesa Sanpaolo Research Intesa Sanpaolo Research Department 27

28 Our Top Picks 2016 Top Picks Company Atlantia (Motorways) Autogrill (Consumer) Banca Popolare di Milano (Banks) EI Towers (TMT) Fiat Chrysler Automobiles (Consumer) Equity Story We keep a positive stance on Atlantia, sustained by a positive outlook in both domestic motorways and aviation activities, the low regulatory risk, given the long and clear concession terms both at ASPI (2038) and ADR (2043), coupled with its strong financial flexibility. In our view, the positive FCF generation and solid credit metrics (net debt/ebitda at 3.3x), should allow a gradual increase in DPS, respectively, also in the light of the new dividend policy (from a 5% annual growth to a 80-90% pay-out ratio on net ordinary income). Potential upside should come from external growth, mainly international deals, with our estimates currently including only the exercise of the call on the Brazilian Rodoanel asset from 2017E. We have a BUY rating on AGL for the following reasons: macros remain favourable with the Italian economy in a recovery phase, still-supportive FX (USD at worst for Autogrill should remain on avg. at the same level as 2015, according to our economists), input costs further decreasing and the oil price remaining low (potentially decreasing further) with positive repercussions on traffic both for motorways and airports. In addition, self-help initiatives have started to show their positive effects on margins expansion (i.e. SP1 in Italy) as well as on topline growth (i.e. initiatives to restore outperformance in US airports) with further benefits expected in Finally, an aggressive but selective expansion in new geographies is accelerating group growth with still-ample opportunities to exploit in emerging markets (since the de-merger AGL has won new contracts worth EUR 280M sales/year). An attractive valuation (AGL trades at 30% discount vs. sector avg.) also supports our positive view. We consider BPM as the best way to play the consolidation process in the Italian banks sector, thanks to the industrial fit with many other popolari banks and the company s positive stance towards consolidation. BPM is well placed to capture the economic recovery, thanks to its unique geographic positioning, which has allowed the bank to outperform the market on loans growth (+4.1% as of September 2014 vs. -0.3% at the sector level). The already strong capital base (CET1 at 12.1% FL as of September 2015) could benefit from the validation of the AIRB models expected in 1H16, with a potential positive impact of 150bps, which would leave the bank with significant excess capital (CET1 FL above 13.5%), which the company could invest or distribute to shareholders. The stock is trading at 0.8x 2015E P/TBV and we see upside potential both on a stand-alone basis (our stand-alone fair value is EUR 0.95/share) and from the potential synergies from an M&A deal. While sharing the company s view that industrial releveraging should be preferred to financial releveraging, we do not see transformational deals materialising in the short term (INWIT, Wind- 3 towers, Rai Way). We would therefore assume a standalone releveraging of EIT s balance sheet to 2.5x in terms of net debt/ebitda ratio with the approval of 2015 results in April 2016 (vs. 1.27x at end-december 2015E). We assume that it could be achieved with bolt-on acquisitions (completion of the small M&A pipeline announced in 2015 and additional small deals mentioned to be on the 2016 radar by management) and complemented by a distribution of an extra dividend on top of the ordinary dividend already included in our and consensus estimates. According to our simulation, this scenario could potentially lead to an attractive dividend yield of 6.3%, of which 2.4% ordinary and 3.9% extraordinary. Looking forward, a merger with Rai Way remains the best consolidation options, in our view, although we acknowledge that it may not be on the government s agenda in Following the spin-off of Ferrari, we believe that in 2016 FCA s main stock catalysts will be: 1) the implementation of the BP, where Jeep will play a central role. The company recently enhanced its volumes target for Jeep from 1.9M to 2M units in 2018 versus 1.2M units expected by 2015, confirming its intention to reduce its capex and R&D for Alfa and the delay of the plan to Thanks also to the elimination of Chrysler notes ring-fencing the group targets to reduce its financial charges from above EUR 2Bn to EUR 1.3Bn in 2018 and plans to be industrial cash positive for EUR 2Bn in 2018 while in 2015, thanks to the EUR 900M cash-in following Ferrari s listing, FCA s net debt will decrease to EUR Bn; and 2) the commitment to finalise an aggregation with a big car player (with GM indicated as the most suitable partner) which, according to FCA s CEO, would yield benefits of EUR Bn per year, a level which we view as too appealing to be ignored by stakeholders Source: Intesa Sanpaolo Research estimates 28 Intesa Sanpaolo Research Department

29 2016 Top Picks Company Finmeccanica (Aerospace & Defence) Equity Story The delivery of a better-than-expected 3Q15A adj. EBITA result (also net of FX) confirmed, in our view, that the company is on track with the execution of its industrial plan and the creation of a One Company based on a divisional model, which should pave the way for a further recovery in profitability in After raising its FY15 guidance, Finmeccanica will release its FY16 guidance on occasion of the FY15 results. We expect the group to announce robust targets. We do not rule out also possible earnings surprises from the likely signing of the Kuwait Eurofighter order and from a potential increase in Defence Budgets in the main European countries and above all in Italy. The above trends, together with M&A actions or disposals, which would allow Finmecccanica to free-up resources to further strengthen those areas where it could effectively stand out, represent a strong catalyst for the stock, in our view. Hera (Utilities) Poste Italiane (Logistics & Financial Services) Prysmian (Capital Goods) Safilo Group (Branded Goods) We continue to view Hera as an attractive investment, in light of: i) its resilient business mix with regulated networks contributing for approximately 50% of EBITDA (EUR 3Bn RAB), lowering the overall risk profile thanks to a supportive framework designed by the AEEGSI, and, among unregulated businesses, a prevailing exposure to growing waste activities (29% EBITDA, the first domestic player); ii) well-positioned to benefit from an acceleration in M&A, endorsed by the government via potential incentives, benefitting, in our view, from its solid external growth track record and its efficient corporate governance model; iii) the new 5Y BP as a positive catalyst (due out on 11 January), which should confirm an enhanced focus on external growth (smaller deals in waste, consolidation through the start of gas tenders, a potentially favourable outcome on AIMAG); iv) the solid credit metrics; and v) a high visibility on the dividend policy (EUR 0.09/share), equivalent to a 3.8% yield at the current share price. Thanks to its nationwide network of 13k post offices and a trustworthy and well-known brand, Poste Italiane holds a powerful distribution machine through which it offers postal logistics, savings and investments, payments, insurance and digital communication services. The company is committed to an at least 80% payout in 2015 and 2016, which implies an attractive dividend yield of an average 4.8% in the two years. The group can rely on the profitable Financial Services and Insurance businesses while value creation potential is offered by the planned turnaround of the Mail&Parcels business, allowing the company to generate earnings in each year of our estimates horizon period. In the capital goods sector, Prysmian meets all the requirements of our top picks criteria: a sound mid-digit organic growth, commitment to efficiency gains and a potential group strengthening through M&A deals thanks to important bolt-on acquisitions. By year-end, the group sees an organic growth in the region of +5%, with telecoms at +7%. We expect a similar growth rate also for the next year driven by Energy Projects and Telecoms, where the group should be able to extract significant efficiencies. We view the finalisation of a bolt-on acquisition (or 2/3 acquisitions) for a total size up to EUR 1Bn as important, either to include value-added activities in the perimeter or to strengthen the group s geographical market positioning. While no M&A is in sight in the very short term, we are convinced that the company might finalise some deals by This, together with an undemanding valuation should support the stock s upside potential ahead. Safilo is a company in a re-launch phase, with 3Q15 bringing the first positive signals of the turnaround. In fact, stripping out the extraordinary provisions, COGS savings are starting to pay off. In 2016 we expect to see the initial effects of the new signed licences (Givenchy and Havaianas) and the renewal of the fast-growing LVMH licence Celine. We think the decision on this latter licence would add some visibility on the potential renewal of the other LVMH big agreements: Dior (approx. 20% of sales, expiring in 2017) will be the first year of full focus on the owned brands with an acceleration in A&P expenditure to endorse the promising, repositioned Carrera, Polaroid and Smith brands. The strengthened balance sheet now looks consistent with the plans to acquire a new brand to increase the weighting of the more stable own-brand business. On profitability, we expect the exit of the Gucci licence decided by Kering to gradually reduce sales and margins in 2017E, followed by a further reduction in volumes in 2019E and a small negative impact in 2021E. Source: Intesa Sanpaolo Research estimates Intesa Sanpaolo Research Department 29

30 2016 Top Picks Company Salini Impregilo (Construction) Equity Story Good 2016E-17E earnings visibility, a sound balance sheet, a potential construction industry recovery in Italy and an undemanding valuation are, in our view, the key points of the Salini Impregilo equity story. In addition, by January 2016, the group should close the Lane deal in the US (USD 1.3Bn 2014 revenue and a USD 2Bn backlog) for a total transaction value of approx. USD 406M. The acquisition should allow Salini Impregilo to: enter the US East Coast construction market where the Italian group has a limited presence, to better balance its exposure between developed and emerging markets and to reap the benefits of the justapproved FAST Act (USD 305Bn investments in 5 years). Last but not least, we highlight some extra opportunities, not factored into our current numbers, including management s actions to recover receivables related to FIBE (EUR M). Unipol (Insurance) The insurance results of the Unipol group are mainly driven by the controlled company UnipolSai, while we believe that the improving picture for the banking business (which recorded an annualised cost of risk of approximately 100bps in 9M15 in the low-end of the bp guidance outlined by the company at the beginning of the year we estimate 123bps in FY15E), together with its medium-term potential valorisation in the sector s consolidation process, should: i) contribute to a higher dividend distribution (we forecast EUR 0.21/share in 2015E, a 4.7% yield at the current market price vs. EUR 0.17/share in FY14A); and ii) help to reduce the holding discount applied by the market. As a result, we maintain a holding discount of 15% in our SOP model vs. the 23% expressed by the current market prices of UnipolSai and Unipol. We highlight that the new business plan (to be presented in the Spring next year) could be a catalyst for the share price. Source: Intesa Sanpaolo Research estimates 30 Intesa Sanpaolo Research Department

31 Airports: Neutral Sector view, drivers and valuation After 2 years of solid pax growth (FY14: +4.5%, Jan-Oct %), we see traffic still growing in 2016 in Italy, at a slower pace, supported by economic recovery, the Jubilee (offsetting EXPO one-off) and the network expansion planned by airports. Uncertainty on the effects of the terrorist attacks and increased geopolitical risks may limit movements. Traffic, still on the move. By merely using the historical GDP multiplier, Italian traffic next year should grow by about 3.6%, which seems coherent with the 3.8% growth projected by Boeing for the whole of Europe. The outbound traffic should be supported by Italians growing stance to spend while the inbound traffic should benefit from the Jubilee. We currently expect SAVE and ADB to grow by 5.3% and 4.7%, respectively, thus outperforming the Italian traffic thanks to the additional routes/frequencies and carriers already planned; Tariffs still supportive. Tariffs will continue to underpin sales and profitability for SAVE and will boost ADB s performance as we expect average tariffs to increase by about 10% for the former and about 6% for the latter. However, 2016 is crucial for SAVE as the group will start negotiating with ENAC for the second regulatory period, which we expect will lead to a reduction of the allowed WACC (to 8.2%, from 12.2%) and tariffs from 2017; External factors potentially undermining growth. On the back of the above, the major concern relates to the increasing geopolitical tensions and travellers fear to fly to Paris as the result of the terrorist attacks. Although disruptions are short-lived based on past experience, we highlight that France is the second most flown destination for the Venice airport, while Paris itself is the most important route from/to Bologna (about 7.5% of FY14A traffic); Sector consolidation. The approval of the Piano Nazionale Aeroporti should inevitably accelerate a consolidation process as airports will look for increased operational efficiency. However, corporate governance remains the major hurdle as companies are still controlled by public shareholders. For this reason, we see unlikely important transactions involving listed players, in the short term. View and Valuation. We have a Neutral stance on the airport sector due to the risks of a reduction in the allowed WACC going forward and the hefty valuations of both SAVE and ADB, both trading in line with the sector at 9x 2016 EV/EBITDA. Asset Gatherers: Neutral Sector view, drivers and valuation We have a Neutral view on the sector as we expect our covered companies 2016 adj. EPS to decline (or, at best, remain stable) yoy, essentially due to lower performance fees after a booming M&A could be a potential trigger, especially for Anima, while, as regards the outcome of ESMA consultation on UCITS remuneration guidelines, market eyes are on Azimut and Mediolanum, due to their high exposure to performance fees. Luca Bacoccoli Research Analyst [email protected] Elena Perini Research Analyst [email protected] Net inflows: According to Assogestioni quarterly data, in 9M15 the Italian asset management industry recorded a total net inflow of almost EUR 121Bn, of which approx. 85Bn in mutual funds (20% gathered by FA networks vs. 22% in FY14), already very close to the EUR 91.5Bn recorded in Our 2016E estimates factor in a slowdown (although not dramatic) of net inflows for the companies we cover, after three years (2013, 2014 and 2015) of annual results beating the previous year; Performance fees (regulation): In July this year ESMA launched a consultation on UCITS remuneration guidelines, including a definition of performance fees and should issue new rules by March We highlight that Azimut has the highest exposure to performance fees, followed by Mediolanum. We also point out that Anima s calculation of performance fees on Luxembourg funds uses a high water mark; Consolidation: We believe that M&A could be a potential driver for the sector in 2016, also considering the Popolari banks consolidation process, which could involve their controlled or participated asset management companies. View and Valuation: After the positive price performance YTD (+85.5%, +35.1%, +20.1%, +15.7% for Anima, Mediolanum, Azimut and Banca Generali, respectively), the companies we cover trade at an average 2016 P/E of 15.2x vs. 14.5x for their European peers. Our 2016E estimates factor in an yoy decline in adj. EPS, driven by lower performance fees. Neutral view. Intesa Sanpaolo Research Department 31

32 Auto&Components: Neutral Sector view, drivers and valuation While we confirm our Neutral stance on the sector given the not particularly appealing valuations for auto suppliers, the ongoing concerns on Latam and an expected slowdown in growth rates in China, we believe that in 2016 the name of the game for the auto & components industry is consolidation. Despite the execution risk, we think consolidation would make the industry more efficient, leading to higher returns on capital. Monica Bosio Research Analyst Mixed scenario by country. From a top-down standpoint, we see a mixed scenario as regards automotive demand with a recovery in the Western European market (+5%-6% in our 2016E projections) and a still sound trend in NAFTA (+3% in our estimates). By contrast, demand should be penalised by the ongoing weakness in Latam (where we expect an overall decrease of 7%, mainly due to Brazil) and a slowdown in growth for the Chinese market; Rising recall and development costs. Following VW s diesel-gate we expect a tightening of air quality standards (in terms of Nox and Co2 limits) from governments. Overall, we envisage a rising cost structure and higher capital requirements for auto players on the back of: 1) new technological challenges; 2) rising development costs for new models; and 3) higher recall campaign costs. In our view, all these trends compress OEM s returns on capital; Consolidation is the name of the game. As a result, we share FCA s view according to which an aggregation between players would allow the sharing of products component for up to an undiscernible 40%-50%, thus reducing development costs, which in turn would yield significant benefits. In our view, aggregation could also help resolve the excess production capacity in certain geographical areas. View and Valuation: While we view the auto components current valuations as a bit stretched compared with the 10Y average EV/EBITDA and P/E multiples (P/E FY1 10.5x, Factset), we highlight that the OE segment is still trading below the 10Y levels (Avg. P/E 12.9X). Given the potential downside risks from emerging markets and negative spill-over effects following dieselgate, we remain Neutral on the sector. Banks: Neutral Sector view, drivers and valuation In 2016E, we expect the profitability of Italian banks under our coverage to remain under pressure and below the cost of equity, despite the materialisation of the first signs of an economic recovery that would translate into loans growth (albeit limited) and an improvement in the cost of risk. We believe the main driver for the sector will be the consolidation process among popolari banks, which we expect to start in Consolidation process among popolari banks: One year after the approval of the Popolari banks reform and before the deadline for the transformation into joint-stock companies (December 2016), we believe that the Italian Popolari banks will start the consolidation process in We expect the process to mainly involve the major Italian Popolari banks and to lead to the creation of the third and fourth national champions; Profitability still under pressure: We expect the Italian banks under our coverage to report an average ROTE of 5.2% in 2016E, still below the cost of equity. While we expect the first signs of the economic recovery to materialise into a mild increase in customer loans and a reduction in the cost of risk, we expect NII to be penalised by the pressure on the asset spread (due to the intense competition) and the lower contribution of the carry trade activity. We expect increasing commission income to be offset by weak trading income; Regulation and capital: We expect Italian banks to maintain a significant buffer over the minimum SREP requirement to be prepared to offset the potential negative impact from changes in regulation (Basel 4, IFRS9). Manuela Meroni Research Analyst [email protected] View and Valuation: Italian banks under our coverage are trading at 0.67x 2015E tangible book value, coherent with an expected ROTE of 6.3% in 2017E. After an 11% YTD market performance of the FTSE Italy All-Share Bank Index in 2015,we believe that the main driver for the sector performance in 2016 will be the consolidation process among popolari banks. Popolari banks are trading at 0.65x 2015E P/TBV and current market prices do not fully incorporate the value of synergies achievable in a consolidation process, in our view. We have a Neutral view. 32 Intesa Sanpaolo Research Department

33 Branded Goods: Neutral Sector view, drivers and valuation After the positive performance by the Branded Goods sector in 1H15, in July we moved our stance on the sector to Neutral from Positive. Slowdown in emerging markets: In a normalising scenario, with sales growth in emerging markets declining towards a mid-single digit rate, and some doubts related to the debt exit strategies in mature markets, the global luxury players results confirmed the expected stabilisation. In detail, the 2Q15 like-for-like performance was stable overall compared to the weakness recorded since 2Q14. During the 3Q mid-november reporting season this important ratio moved in a negative area for the vast majority of the sector companies. The release of 3Q results again resulted in a fine-tuning of our estimates. We highlight that overall management guidance is rather vague for year-end, implying that a positive Christmas season will be crucial to fully meet targets; Gianluca Pacini Research Analyst [email protected] Margin squeeze: The typical high fixed-cost structure related to the increased retail activity, coupled with the significant investments of the past years, should keep margins under pressure; Brand awareness and cost control: Considering the resilience of the well-recognised, high-end brands we continue to expect the hard luxury players to perform better than the soft ones. We forecast nonetheless a slowdown in both sub-sectors in 2015E with no substantial improvement in 2016E. Moving down the P&L, we also expect a further margins squeeze. Cost containment and in particular the reduction of store openings are crucial factors for a rebound in View and Valuation: We believe the apparently inexpensive multiples could be driven up in the direction of the higher historical ratios following further likely downwards consensus estimates revisions. A further threat could come from the reduced Chinese tourists flows for the New Year, celebrated in the first week of February. We confirm our Neutral view on the sector. Construction & Building Materials: Positive Sector view, drivers and valuation We adopt a positive view on the sector for 2016 as we expect European countries to try to accelerate investments to fully exploit the gradually improving economic framework, a potential turnaround in Italy and a still fairly strong USA. Salini Impregilo is our top pick but we have a positive stance also on Astaldi and Buzzi Unicem. Bruno Permutti Research Analyst [email protected] Positive signals from Europe and the USA: Despite the commitment to keeping public deficits under control, in 2016 we expect the European countries to focus on how to accelerate investments to fully exploit the ongoing European quantitative easing programme, the gradually improving economic framework for the Euro area GDP (from +1.5% yoy in 2015 to +1.7% yoy in 2016, according to ISP estimates) and the potential investment opportunities related to the so-called Juncker Plan. We expect all these factors to support the recovery of the Southern European construction markets, while we expect the moderately positive growth to continue in Germany and in some Central-Eastern European countries. In the USA, the macroeconomic environment should remain quite strong in 2016 (GDP +2.6% yoy, according to our economists) and the construction activity, which in the last few years was driven by the private residential and commercial segments, could also start to benefit from the recent approval of the FAST (Fixing America s Surface Transportation) Act approved at the beginning of December (USD 305Bn in 5 years); Possible turnaround in Italy: Following the decline of the period (-32%, source: ANCE) and the substantial stabilisation in 2015 (+0.5% yoy, source CRESME), in 2016 construction investments in the domestic market should mark a turning point with an estimated 2.2% yoy growth (source: CRESME) driven by public works (+4.2% yoy) and private non-residential properties (+2.2% yoy). Infrastructure investments growth should be driven by the high-speed railway and road (ANAS) projects; Intesa Sanpaolo Research Department 33

34 View and Valuation: Among the companies under our coverage, we are positive on the Italian cement companies, where we see Buzzi Unicem as potentially favoured by the strong North American market and the gradually improving price environment in Italy. A question mark comes, however, from the still high geopolitical risk in Russia and the Ukraine. The expected consolidation of the Italian cement market over the last few months, aimed at reducing the excess production capacity, has started to materialise and we expect this to continue as, in our opinion, it would appear to be a necessary step to recover profitability in Italy. For the general contractors, we are positive on both Astaldi and Salini Impregilo, which should benefit from their international footprint. In addition, Astaldi has managed to lengthen its debt maturity and is now focused on the disposal of some concessions (a first deal is expected by mid-2016), while Salini offers good earnings visibility for 2016E, attractive market multiples and should benefit from the Lane deal to be finalised by next January. By contrast, we are more cautious on Trevi and Tenaris due to their exposure to the major oil companies investment decisions. Overall, considering the gradually improving construction market scenario in Italy and the rest of Europe and the consolidation of growth in the USA, we move to a Positive view on the sector. Consumer Goods: Positive Sector view, drivers and valuation With the exception of Parmalat and Zanetti, all the stocks under our Consumer Coverage performed well this year, with DLG (+63%), CPR (+38%) and AGL (+26%) strongly outperforming the FTSE All Share and experiencing a significant multiples expansion. The outlook seems brighter as macros are more supportive although the emerging markets (EM) slowdown adds to unforeseeable risks stemming from increased geopolitical tensions and terrorism threats. Luca Bacoccoli Research Analyst [email protected] Consumer spending. Consumer confidence at an historical high (at in November) and a declining unemployment rate are supportive for a further improvement in retail sales in Italy in the coming months, as seen in the most recent data available (+0.9% in 9M15). This suggests that companies reactive to a recovery in the local economy, such as OVS (100% of sales) and AGL (exposed to the motorways traffic) may benefit from a rosier scenario. The outlook also remains positive in North America (+2.9% consumption) while it is worsening in EM, potentially affecting the most exposed stocks, such as Parmalat (34% of sales) and Campari (25%); Raw material prices. A persistent low oil price vs. other commodities, in some cases at a historical trough (i.e. metals), will keep the cost base under control for many companies, while certain names could even benefit from lower sourcing costs, such as De Longhi (metals and components), AGL (food costs) and Parmalat (milk) and, on a smaller scale, OVS (cotton). By contrast, Zanetti could suffer (from 2H16) as the green coffee price could increase once translated in EUR terms; FX: After a strong appreciation in 2015, the USD should play a more neutral role in 2016 earnings. However, due to the hedging policy neutralising the effects on 2015 performances, DLG and, to a smaller extent OVS, could face strong headwinds in 2016 requesting prompt list price revisions. View and Valuation: We change our stance on the sector to Positive as the outlook is becoming rosier although there are some risks looming ahead. Valuation-wise, several stocks under our coverage are trading at their historical high with multiple well ahead their past average (i.e. De Longhi, Campari). By contrast, we are positive on AGL and OVS as we think that current prices are not fully capturing the potential earnings upside. 34 Intesa Sanpaolo Research Department

35 Industrials: Neutral Sector view, drivers and valuation While we expect a mixed scenario for Italian Industrial Italian stocks in 2016, we outline the following trends by industry segment: Still looking for efficiencies in capital goods. In the capital goods segment, we expect the negative AG cycle to continue, albeit with a more limited downturn vs. the previous one. The truck industry, while benefitting from a positive cycle in EMEA, should continue to be penalised by the contraction in Latam. In this context, the achievement of further efficiencies remains key for capital goods players. This is also valid for companies relying on capex from the utilities and oil&gas segment, where we see a still-depressed market. Efficiency gains remain important also in areas where demand is still positive, such as Telecom cables. For the more cyclical businesses, such as T&I and power distribution cables, we believe excess production capacity is still too high to envisage a strong upturn in the pricing outlook. Overall, in the longer term, better macroeconomic conditions could translate into a volumes increase with positive spill-over effects on pricing; Transformational or bolt-on acquisitions? In such a mixed scenario, we view as possible some M&A deals in the capital goods segment. Transformational deals might trigger significant cost synergies on the one hand and increase the cyclicality of companies operating in the capital goods segment on the other. In this light, as the search for efficiencies is already underway, we do not exclude that capital goods companies might opt for bolt-on acquisitions in higher value segments; Sector consolidation in A&D?. We are convinced that, from 2016, the A&D industry could undergo a consolidation process, which might allow some significantly diversified groups, such as Finmeccanica, to concentrate on those businesses where they can effectively stand out. Monica Bosio Research Analyst [email protected] View and Valuation: We have a Neutral stance, especially on Italian Industrial stocks, whose business models rely on the capex discipline of Utilities, Oil&Gas and Basic Resources companies. Insurance: Neutral Sector view, drivers and valuation In 2016 Italian insurance companies could face some risks on profitability from pressures on the average motor premium level and an unfavourable low interest rate environment in life. However, we believe that they should be generally well-equipped to face those challenges, as well as the introduction of Solvency II rules on capital. We have a Neutral view on the sector, also given that the Italian insurance sector trades broadly in line with major European players multiples. Premiums. According to ANIA, total life premiums for 9M15 amounted to EUR 86.1Bn (+4.5% yoy), boosted by unit-linked (up 61.2% to EUR 24.4Bn), with traditional policies (Class I) down 8% yoy to EUR 57.75Bn, while non-life recorded a 2.3% yoy decline to EUR 22.6Bn. P&C premiums were dragged down by motor (-5.4% yoy). Non-motor premiums were up 1.9% vs. 9M14; Profitability. For 2016, we still see pressure on the average motor premium level, being offset, in terms of technical profitability, by a low frequency of claims and related costs remaining under control. At the same time, we expect non-motor premiums to continue the current path of single-digit yoy growth. We see a nil or negligible growth for life premiums, with a switch from traditional policies to unit-linked, to defend profitability in the current low-yield environment; Solvency II. The switch from traditional policies to unit-linked could also help companies to prepare for Solvency II, which will start to be implemented from 1 January At the moment, among the listed insurance Italian companies, Generali disclosed figures on capital positions under Solvency II, based on the groups internal models: 196% at end-september 2015, from 186% at end-2014 and 200% at end-june Elena Perini, CFA Research Analyst [email protected] View and Valuation: We believe that Italian listed insurance companies should generally be wellequipped to face the introduction of the new Solvency II rules, taking into account their diversified mix in P&C and the close ALM mismatch. However, a potential introduction of a capital charge on government bonds could be a risk for companies applying the standard formula. We have a Neutral view on the sector. Italian insurance companies trade at an average 9.1x adj. 2016E P/E, in line with the average of selected continental Europeans(Allianz, Axa, Zurich, Aegon, Vienna Insurance group, Mapfre and Munich Re). Intesa Sanpaolo Research Department 35

36 Motorways: Neutral Sector view, drivers and valuation Whilst expecting an overall positive trend in domestic traffic supported by a recovery in domestic GDP, lower fuel prices, and the Jubilee event, we expect tariff increases for 2016E to also be affected by both lower inflation and capex for Atlantia, and regulatory risks for SIAS. However, the approval of next year tariffs could be an opportunity for the government to face pending issues, in our view. Meris Tonin Research Analyst [email protected] Still a positive traffic trend: After a positive rebound this year, we still see growing domestic traffic also for 2016E, supported by a stronger GDP recovery, lower oil and fuel prices, together with the Jubilee event in Rome. We currently expect both Atlantia and SIAS to benefit from a 1.5% traffic growth for 2016E, after our estimates for a 2.3% and 2.1% for the current year, respectively tariffs affected by regulatory risk for SIAS: Due to be approved by the MIT within year-end, we see Atlantia tariff increases for 2016E down to 1.1% from 1.46% last year, weighed by both lower inflation and capex. Conversely, after the 1.5% cap applied last year, SIAS is still facing uncertainty on the size of final tariffs. Pending the EU decision on the network development plan, we estimate an average 4.9% increase in 2016E, factoring in old financial plans (except for A4 Turin-Milan) and the recovery of last year s remuneration shortfall. Sector consolidation: The Italian government is willing to rationalise the high number of motorway concessions and operators to increase efficiencies and free up resources to update the domestic network. In our view, this should benefit the aggregation around major players, with Atlantia and SIAS controlling respectively a 44% and 20% of the Italian toll-roads and willing to exploit their available financial flexibility. View and Valuation: We have a neutral stance on domestic motorways, with a positive traffic dynamic clouded for SIAS by regulatory uncertainty on 2016E tariff increases and the stalemate for the extension in current concession terms for SIAS. While we see Atlantia as a safe investment opportunity, not affected by regulatory risks given long and clear concession terms (2038 for ASPI main concession) and potentially benefitting from an increasing dividend yield thanks to its positive FCF generation, for SIAS the main catalyst is represented by a final regulatory outcome, justifying its undemanding valuation with a 36% upside vs. our TP. Oil&Gas Sector: Negative Sector view, drivers and valuation We have a Negative stance on the sector overall, across the different sub-sectors of our coverage universe: E&P and Integrated Oils, Engineering and Oil Field Services (OFS) and Refining business, due to the expected weak oil price scenario, lower upstream capex and possible overcapacity in the refining business. Roberto Ranieri Research Analyst [email protected] Oil price to affect O&G producers sub-sector: The outcome from the 4 December OPEC meeting negatively surprised the market, leading the crude oil benchmarks to punch the bottom of the recent-past price range and the Brent price to the August minimum YTD levels. According to IEA, global demand growth is forecast to slow to 1.2 mbbl/d (million barrels per day) in 2016 after surging to a five-year high of 1.8 mb/d in The global oil market should remain in an oversupply condition, in our view, exacerbated by the OPEC cancellation of a production cap. Non-OPEC output is forecast to contract by more than 0.6 mbbl/d next year. US light tight oil (LTO), the driver of non-opec growth, is expected to decline by 0.6 mbbl/d in We expect the oil price to remain weak in the next few months: our current estimates point to an average price of around USD 44/bbl in 1H16 and roughly USD 56/bbl in 2H16 for Brent, which compares with a YTD average price of around USD 53/bbl. This will have a negative effect on O&G upstream profitability, partially offset by the USD/EUR forex for European players, and higher efficiency in operating costs and capex; 36 Intesa Sanpaolo Research Department

37 Upstream capex and fleet rates to remain potentially under pressure: We expect oil E&P companies to struggle to defend their cash flow generation through opex improvements (even service costs) and capex reduction or disposals. We believe that the greatest risk to capex service costs remains in the large-size upstream projects (mainly offshore) and drilling activities. This could translate into lower day-rates and new contract values and/or renegotiation of existing contracts by involving lower prices vs. longer duration. E&C services for downstream activities should remain relatively safe for 2016E, in our view; Risks of refined products oversupply from refining overcapacity: We do not expect refining margins to replicate the record levels of 2H15. While we acknowledge that oil could remain in oversupply, we believe the refining capacity increase could put refined products crack spreads under pressure from 2016E (the IEA expects a refinery capacity addition of 2.4mmbpd in ). View and Valuation: We have a Negative view on the sector, with the E&P (upstream) activities suffering from the weak oil price in 2016E. This could push the E&P companies to continue to reduce their opex and capex plans in 2016E in support of cash generation and dividend support. This could affect E&C companies, with the Oil Service companies operating in the downstream segment still relatively shielded in While refining margins could remain profitable in the next few months, they will not replicate the record level registered in the summer 2015, in our view. TMT Sector: Positive Sector view, drivers and valuation We think that the structural evolution of the TMT sector will continue in 2016, driven by increasing data demand, telecom/media convergence, consolidation and releveraging (where applicable). Telecoms: In terms of fundamentals, 2016 should be the year of stabilisation for the domestic mobile sector (driven by data) and, with regards to Telecom Italia (TI), also for the domestic profitability (adj. for non-recurring items) according to the company s business plan could also see the long-awaited consolidation of the mobile sector (EU clearance of the Wind- 3 merger expected in 2H16) and, hopefully, some constructive steps in the long-standing debate on ultrabroadband development. The evolution of TI s shareholding structure and the implications of the new governance after Vivendi s recent entry on the Board will continue to be the sector s key speculative driver, in our view; Antonella Frongillo Research Analyst [email protected] Towers: The ongoing tender offer on TI s stake in INWIT is the key consolidation driver, in our view, with Cellnex/F2i representing the most likely bidders. The bidding price remains the key issue to assess. As for broadcasting towers, we think that a merger between EI Towers and Rai Way remains the most accretive option, although we acknowledge that it may not be on the government s agenda in In terms of fundamentals, the development of small cells and the Internet of Things remains the key long-term secular drivers; Media: While excluding a structural recovery in the advertising trend for traditional media, we believe that 2016 could benefit from a cyclical recovery driven by an expected improving Italian GDP, albeit already included in consensus estimates, in our view. In 2016 we also expect to see the first tangible results of the convergent agreements signed in 2015 between telecom operators and content providers should also provide full visibility on the evolution of Mediaset Premium subscribers and the implications of the Netflix arrival. View and Valuation: We remain positive on all Italian listed tower companies, with EI Towers as our best pick thanks to a combination of short-term financial releveraging options plus long-term consolidation prospects, while Telecom Italia remains a speculative call in our view. We remain cautious on Mediaset due to fundamental issues (no signs of a structural recovery of advertising and challenging costs for TV rights), not convincingly offset by potential M&A scenarios (Vivendi?). Intesa Sanpaolo Research Department 37

38 Utilities Sector: Neutral Sector view, drivers and valuation After a steady downwards trend in the past years, we see a stabilisation in liberalised margins from less volatile power prices, consolidation in generation capacity and a firming demand, while for regulated activities the updated framework, already approved for gas networks and under finalisation for water and electricity networks, should prove supportive overall. The main growth driver should be represented by an acceleration in M&A deals among local utilities, in our view. We confirm a Neutral view on the liberalised sub-sectors (power and gas): After the sharp contraction of recent years, we expect a stabilisation in power prices in Italy close to current spot prices (less than EUR 50/MWh), benefitting from our expectations for: i) a flat trend in commodity prices; ii) contracting reserve margins given the ongoing consolidation of thermal capacity in Italy, coupled to a slowdown in the growth pace of renewables due to the gradual tightening in allowed incentives; and iii) a firming electricity demand. Awaiting the final start of an effective capacity market, with first auctions expected in 2H16, negative downside risks should be mitigated by the generating companies hedging policies through forward sales, and a steady focus on cost-cutting actions aimed at reducing fixed costs. Roberto Ranieri Research Analyst [email protected] Meris Tonin Research Analyst [email protected] For regulated Italian activities, we assign a Neutral (to Positive) view: The final document for gas and electricity WACCs, with reduced cuts to final allowed returns vs. market expectations, has confirmed overall supportive despite changes in the adopted methodology. Awaiting the final framework for the new regulatory period on water and electricity activities, we continue to see the WACC reduction and the progressive push on efficiency requirements as sufficient to ensure cost coverage for network operators, although this already looks largely factored into current stock prices. The regulatory framework recently approved for gas networks and being finalised for the electricity sector should also be supportive for regulated companies dividend policy, in our view. We are Positive on the domestic local utilities as a sub-sector overall, with the major driver being the final start of the sector consolidation process. Though an integrated framework across all sectors is still missing, with fragmented government legislative interventions so far, further support should come from: i) the implementation decrees related to the public administration review; ii) the kick-off of gas tenders expected to push towards a strong reduction in the number of gas distributors; iii) the regulatory review for water activities, envisaging a single operator for each single ATO; and iv) the current discussion for the assignment to the AEEGSI of regulatory tasks for waste activities. We view all listed local utilities Hera, A2A, Iren and ACEA as the main beneficiaries from the sector consolidation, each one in its reference territory; View and Valuation: We see a stable outlook for Italian utilities, reflecting the supportive regulatory regime and a stabilisation of profitability from unregulated businesses. In this context, growth could come from M&A opportunities, mainly for local utilities. We have a Neutral view on the sector overall, with a Positive stance on the Local Utilities sub-sector. 38 Intesa Sanpaolo Research Department

39 Mid&Small Caps Sector Sector view, drivers and valuation The FTSE STAR index, our reference index for the Italian Mid & Small Caps universe, grew by around 127% from 2013 to date and by around 33% in We now view the FTSE STAR as only moderately appealing compared to its average P/E values and equally attractive versus the Stoxx Small 200 on a PEG basis. Leadership and low valuations: As we have outlined on numerous occasions in our small caps reports, we believe that the two key drivers in selecting small caps are leadership and/or low valuations. Leadership, supports valuations at a premium vs. peers, while usually granting better visibility on EPS/free cash flow, given the generally lower threat from competition and ability to capture new business potential. Among those small caps not belonging to a specific sector, we highlight a few companies which are leaders in their reference markets, such as Biesse, Elica, Esprinet, F.I.L.A., IVS and La Doria. Regarding the valuations, we highlight that Irce, SeSa, Prima Industrie, Elica and Esprinet have the lowest 2016E P/E in our universe, while Irce, Panaria, Prima Industrie, Noemalife and Fidia have the lowest E PEG. Alberto Francese Research Analyst [email protected] Gabriele Berti Research Analyst [email protected] Marta Caprini Research Analyst [email protected] Consolidation/M&A: The companies in our universe are part of a number of industrial/financial sectors, often operating in niche segments. Looking for consolidation/m&a opportunities, we highlight: 1) Banca Finnat: the company owns the second real estate SGR in Italy (Investire Immobiliare), a sector potentially open to a consolidation process, considering its current high fragmentation (only 4 players have a market share greater than 10%); 2) IVS: by 1 January 2017, the electronic storage and the submission of daily sales to the fiscal offices (Agenzia delle Entrate) will be mandatory. We believe this will trigger a consolidation process in the sector, due to the technical/managerial complexity of such a daily obligation for small players; 3) Esprinet could continue to take advantage of its highly-fragmented reference markets (Italy and Spain) in order to improve its leadership positions; 4) Cerved has recently proposed a share capital increase (up to 10% of the existing capital, without pre-emption rights for existing shareholders) to the EGM with the objective of financing potential acquisitions in a speedy and efficient manner; and 5) F.I.L.A. is still seeking good M&A opportunities to reinforce its geographical and/or product positioning. We recall that the M&A focus is on well-known brands (with a leading positioning in their reference markets) and with their own internal production processes. Dividend yield: As stated above, we believe that investors select small caps companies for their leadership, or faster revenue/ebitda/eps growth, or relatively low valuations, rather than for their dividend yields. However, we highlight a number of small caps in our universe which have yields above 3%, offer a good return in times of low risk-free rates (1.75% assumed in our DCF model), namely: d Amico (5.0%), Zignago Vetro (3.9%), MARR (3.3%), Banca Finnat (3.7%) and Cerved (3.1%). View and Valuation: In our general overview of the Italian Mid & Small Caps universe, we use the FTSE STAR index as a reference point. We highlight that after the Italy risk period (mid-2009 to 2012), when the Italian equity risk premium hit 12.0%, from 2013 to date, the FTSE STAR index grew by around 127%, strongly outperforming the Stoxx Small 200 (an around 38% growth in the same period). In 2015, the FTSE STAR has grown by around 33.1%, once again outperforming the Stoxx Small 200 (+9.2%) and the FTSE IT All Shares (+10.4%). We now see the FTSE STAR as being only moderately appealing compared to its average P/E values (2015E P/E at 16.9x vs. a average of 17.0x) and as appealing as the Stoxx Small 200 on a PEG basis (FTSE STAR at 1.41x vs. Stoxx Small 200 at 1.21x). Intesa Sanpaolo Research Department 39

40 Top Picks Section Atlantia 41 Autogrill 43 Banca Popolare di Milano 45 EI Towers 47 Fiat Chrysler Automobiles 49 Finmeccanica 51 Hera 53 Poste Italiane 55 Prysmian 57 Safilo Group 59 Salini Impregilo 61 Unipol Intesa Sanpaolo Research Department

41 Atlantia Motorways Top Pick 2016 ADD Target Price: EUR Investment Case Positive outlook for domestic motorways. After a +2.6% in 9M15A and our estimate for a +2.3% in FY15E, we continue to expect a positive domestic traffic equal to 1.5% in 2016E, supported by a stronger GDP recovery (+1.2% in 2016E, according to our economists, vs. 0.7% in 2015E), lower oil and fuel prices, together with the Jubilee event in Rome. We also appreciate the limited regulatory risks stemming from: i) clear tariff hikes, fixed by the MIT by YE15 and effective from January 2016, which we estimate at 1.1%, to remunerate approx. EUR 800M annual capex; and ii) the long term of the main ASPI concession, expiring in ADR sustained by both a solid traffic trend and sizeable tariff increases. Following a positive traffic trend in 10M15 (+6.6% yoy), we see aviation traffic growing by 7% in 2015E, followed by a 6% in 2016E, also thanks to an expected pick-up in international pax for the Jubilee event. We also consider as supportive the approval by the ENAC regulatory authority of 2016 ADR tariffs (to be implemented as of 1 March 2016), set at: EUR 32.9 (+10.4% yoy) per paying PAX at Fiumicino and EUR 19.9 (+5.9% yoy) at Ciampino, with a weighted average of approx. EUR 30.5, according to our traffic estimates. Aviation margins should also be sustained by a ramp-up in 2016E-17E capex (EUR M) at Fiumicino airport, remunerated at a 11.1% real pre-tax WACC, albeit subject to regulatory risk from next year s review. Potential upside from M&A deals. As confirmed by the group, Atlantia is looking for potential external growth opportunities in infrastructure activities, mainly abroad, in order to diversify its geographical presence and to exploit its financial flexibility. After the A12 Livorno- Civitavecchia acquisition and awaiting the winner of the A3 Naples-Salerno tender, among the confirmed international dossiers are: an interest in London City and Nice airports, and the Brazilian Ecorodovias group activities (one of the major motorways operators in Brazil) through the acquisition of the entire 64% stake in the holding Primav, owned by the Almeida family. Low regulatory risk. Low regulatory risk relates to the very long and clear concession terms for both ASPI, expiring in 2038, and ADR, expiring in 2043, reducing the risks on the group s capex plan and on related tariff hikes. Headroom for higher DPS. In our view, Atlantia s positive FCF generation and solid credit metrics (net debt/ebitda at 3.3x), should allow a gradual increase in DPS, respectively, also in the light of the new dividend policy (from a 5% annual growth to a 80-90% pay-out ratio on net ordinary income). Valuation Whilst not including potential upside from M&A deals (except for Rodoanel), we see a 2014A- 18E EBITDA CAGR at 4.7% and a EPS CAGR at 16.2%. On the basis of a SOP valuation, we reiterate our EUR 28.0/share TP and our ADD rating. In terms of EV/EBITDA, although the stock is trading at roughly 9x in 2016E (Factset), it is still at a slight discount vs. its 10Y EV/EBITDA average (10.2x), with a 10.3x implied 2016E EV/EBITDA at our TP. Key Risks The key risks, in our view, are: i) negative correlation to interest rates (0.5% change in rates translating into an approx. 5.5% chg. in our TP; ii) tariff exposure to inflation and capex, threating tariff hikes; and iii) regulatory review for aviation tariffs from March 2017 (from current 11.9% real pre-tax WACC). See page 67 for full disclosures and analyst certification Italy/Motorways Top Picks Selection Intesa Sanpaolo Research Department Meris Tonin Research Analyst [email protected] Price performance, -1Y 14/12/ D J F M A M J J A S O N D Atlantia Source:FactSet FTSE IT All Sh - PRICE INDEX Data priced on Target price ( ) Target upside (%) Market price ( ) Wk range ( ) 25.6/18.4 Market cap ( M) 19,562.8 No. of shares Free float (%) 47.8 Major shr Sintonia SpA (%) 45.6 Reuters ATL.MI Bloomberg ATL IM FTSE IT All Sh Performance % Absolute Rel. to FTSE IT All Sh -1M M 4.0-3M 0.9-3M M M 12.5 Source: FactSet and Intesa Sanpaolo Research estimates

42 Atlantia - Key data Rating Target price (EUR/sh) Mkt price (EUR/sh) Sector Free float (%) Reuters Code ADD Ord Ord Other Utilities 47.8 ATL.MI Values per share (EUR) 2013A 2014A 2015E 2016E 2017E No. ordinary shares (M) No. NC saving/preferred shares (M) Total no. of shares (M) Market cap 11, , , , ,543.3 Adj. EPS CFPS BVPS Dividend ord Dividend SAV Nc Income statement (EUR M) 2013A 2014A 2015E 2016E 2017E Revenues 4, , , , ,790.4 EBITDA 2, , , , ,623.2 EBIT 1, , , , ,536.9 Pre-tax income 1, , , , ,023.4 Net income , ,178.4 Adj. net income , ,178.4 Cash flow (EUR M) 2013A 2014A 2015E 2016E 2017E Net income before minorities , , ,295.0 Depreciation and provisions , , ,086.4 Others/Uses of funds Change in working capital Operating cash flow 1, , , , ,723.6 Capital expenditure -1, , , , ,300.0 Financial investments Acquisitions and disposals Free cash flow , , ,423.6 Dividends ,001.7 Equity changes & Other non-operating items Net cash flow Balance sheet (EUR M) 2013A 2014A 2015E 2016E 2017E Net capital employed 18, , , , ,042.0 of which associates Net debt/-cash 10, , , , ,606.2 Minorities 1, , , , ,069.9 Net equity 6, , , , ,365.9 Minorities value 5, , , , ,615.8 Enterprise value 27, , , , ,610.8 Stock market ratios (x) 2013A 2014A 2015E 2016E 2017E Adj. P/E P/CFPS P/BVPS Payout (%) Dividend yield (% ord) FCF yield (%) EV/sales EV/EBITDA EV/EBIT EV/CE D/EBITDA D/EBIT Profitability & financial ratios (%) 2013A 2014A 2015E 2016E 2017E EBITDA margin EBIT margin Tax rate Net income margin ROCE ROE Interest cover Debt/equity ratio Growth (%) 2014A 2015E 2016E 2017E Sales EBITDA EBIT Pre-tax income Net income Adj. net income NM: not meaningful; NA: not available; A: actual; E: estimates; Source: Company data and Intesa Sanpaolo Research 42 Intesa Sanpaolo Research Department

43 Autogrill Travel&Leisure Top Pick 2016 BUY Target Price: EUR Investment Case A new dawn after the de-merger. After the de-merger of WDF in 2013, AGL s targets were to: 1) develop the airport channel; 2) gradually reduce exposure to its local market; 3) improve EBITDA margin of HMSH and Europe to 12% and 10%, respectively; and 4) exploit the potential of emerging markets and N. Europe, targeting the profitable airport/railways channels. Two years down the line, the group is delivering the targeted EBITDA in N. America and business development in new areas, while it is one year behind schedule in Italy. Italy: a turn-around story. In the wake of the long recession in Italy (from 2008), AGL activated an in-depth reshaping of the Italian business model, to: 1) improve profitability; 2) reduce capex requirements to increase operational flexibility (SP1 project); 3) strengthen resilience to volatile market conditions; and 4) optimise motorways network. After delays to the expected positive results, from 2015, AGL has begun delivering margin expansion which should gain further momentum in as: i) the SP1 and new labour agreement unfold their full effects; and ii) the concessions renewal (2015E-16E concessions under renewal worth EUR 300M in sales, approx. 30% of Italian turnover) will allow the group to exit unprofitable locations and, hopefully, to renew the strategic ones at better rents. North America: a profitable growth story. After several years of declining margins, the North American profitability resumed a recovery trajectory in Further improvements in margins are expected thanks to: the solid economy pushing air traffic, a decline in input costs (dairy products, meats, oil & fat etc.), savings on sourcing costs and a roll-out of new initiatives improving pax capturing. In addition, risks from fracturing have abated while additional sales from the contracts potentially to be won in mid/small airports are not yet in consensus. Emerging markets and Northern Europe: the new growth engine. In the last two years Autogrill has won many contracts in emerging markets (Vietnam, Indonesia, Turkey, China, Middle East, Russia) and N. Europe (Dusseldorf, East Midlands, Eurotunnel, Helsinki, Oslo and Dutch railways), which we expect to generate EUR 280M additional sales at full speed. Given the airports under construction (or increasing capacity) in emerging markets, we believe that AGL still has significant opportunities to further expand its business winning new contracts. Conditions remain supportive in 2016, barring geopolitical tensions. The picture for AGL is still favourable with macros still underpinning earnings growth as: 1) USD/EUR should not change much (possibly moving in the right direction for Autogrill in the short term); 2) the oil price will remain low, favouring motorways traffic (in US and Italy) and shoring up airlines balance sheets, further developing air traffic as they potentially increase capacity; 3) food costs should remain stable or even slightly decrease (FAO Food Price Index is 18% below last year s level). Valuation Despite the YTD performance, AGL still trades at substantial discount on 2016E EV/EBITDA of about 30% vs avg. sector (7.0x vs. 10.4x). Given the earnings momentum and the overall supportive conditions, we confirm our BUY rating with an EUR 11.60/share TP. Key Risks The main risks relate to the heightened geopolitical tensions which combined with growing fears of possible terrorists incidents may slow travellers flows. However, past experience (attacks at Madrid railway station and London underground) suggest that disruption is short-lived and flows normalise after a few months. See page 67 for full disclosures and analyst certification Italy/Travel&Leisure Top Picks Selection Intesa Sanpaolo Research Department Luca Bacoccoli Research Analyst [email protected] Price performance, -1Y Source:FactSet 14/12/ D J F M A M J J A S O N D Autogrill FTSE IT All Sh - PRICE INDEX Data priced on Target price ( ) Target upside (%) Market price ( ) Wk range ( ) 9.32/5.87 Market cap ( M) 2,166.2 No. of shares Free float (%) NA Major shr Edizione Holding (%) 51.0 Reuters AGL.MI Bloomberg AGL IM FTSE IT All Sh Performance % Absolute Rel. to FTSE IT All Sh -1M 1.9-1M 8.0-3M 5.0-3M M M 25.7 Source: FactSet and Intesa Sanpaolo Research estimates

44 Autogrill - Key data Rating Target price (EUR/sh) Mkt price (EUR/sh) Sector Free float (%) Reuters Code BUY Ord Ord 8.52 Travel&Leisure - AGL.MI Values per share (EUR) 2013A 2014A 2015E 2016E 2017E No. ordinary shares (M) No. NC saving/preferred shares (M) Total no. of shares (M) Market cap 1, , , , ,166.2 Adj. EPS CFPS BVPS Dividend ord Dividend SAV Nc Income statement (EUR M) 2013A 2014A 2015E 2016E 2017E Revenues 3, , , , ,618.9 EBITDA EBIT Pre-tax income Net income Adj. net income Cash flow (EUR M) 2013A 2014A 2015E 2016E 2017E Net income before minorities Depreciation and provisions Others/Uses of funds Change in working capital Operating cash flow Capital expenditure 1, Financial investments Acquisitions and disposals Free cash flow 1, Dividends Equity changes & Other non-operating items Net cash flow Balance sheet (EUR M) 2013A 2014A 2015E 2016E 2017E Net capital employed 1, , , , ,199.1 of which associates Net debt/-cash Minorities Net equity Minorities value Enterprise value 2, , , , ,806.0 Stock market ratios (x) 2013A 2014A 2015E 2016E 2017E Adj. P/E P/CFPS P/BVPS Payout (%) Dividend yield (% ord) FCF yield (%) EV/sales EV/EBITDA EV/EBIT EV/CE D/EBITDA D/EBIT Profitability & financial ratios (%) 2013A 2014A 2015E 2016E 2017E EBITDA margin EBIT margin Tax rate Net income margin ROCE ROE Interest cover Debt/equity ratio Growth (%) 2014A 2015E 2016E 2017E Sales EBITDA EBIT Pre-tax income NM Net income NM Adj. net income NM NM: not meaningful; NA: not available; A: actual; E: estimates; Source: Company data and Intesa Sanpaolo Research 44 Intesa Sanpaolo Research Department

45 Banca Popolare di Milano Banks Top Pick 2016 BUY Target Price: EUR 1.06 Investment Case Best play in the consolidation process. We believe that BPM will be the first bank to be involved in the consolidation process, thanks to the industrial fit of the bank with many other popolari banks and the company s positive stance towards consolidation (the first bank to appoint an advisor to evaluate M&A opportunities). We believe that BPM could play the consolidation process starting from a strong position, thanks to its positive operating performance (NII already up by 0.8% yoy in 9M15 and 0.6% qoq, excluding one-offs) and the strong capital position. We see potential cost synergies achievable in an integration process, the value of which is not incorporated in current market prices. Well placed to capture the economic recovery. Thanks to its unique geographical positioning (more than 60% of branches are located in Lombardy), we believe that BPM will be among the first banks to benefit from the economic recovery. As of September 2015, total loans already increased by 4.1% yoy, compared with -0.3% at the sector level. In 2016E BPM could benefit from a significant reduction in the cost of funding, thanks to the maturity of EUR 4.5Bn of expensive funding (including term deposits, retail and institutional bonds, with a cost over 2/300bps), which together with loans growth (we incorporate a +5% yoy loan growth in our estimates) should lead to an improvement in NII. Already strong capital base to benefit from the validation of the AIRB models. As of September 2015, the CET1 FL reached 12.1%, well above the 9% required by the ECB under the SREP. The capital base is expected to be positively impacted by 150bps from the validation of the Advanced models, which the company expects to be approved in either 1Q16 or 2Q16. The validation of the advanced models would leave the bank with significant excess capital (CET1 FL above 13.5%), which management said could be invested or distributed to shareholders. Valuation We believe that BPM is the best choice to play the consolidation process as we expect it to be the first popolare bank to be involved in M&A, and among the first Italian banks to benefit from the economic recovery, thanks to its unique geographical positioning. The stock is trading at 0.8x 2015E P/TBV, and we see an upside potential both on a stand-alone basis (our stand-alone fair value is EUR 0.95/share), and considering that the potential synergies from an M&A deal would provide additional upside. Our target price of EUR 1.06/share includes an EUR 11/cent M&A premium, corresponding to 75% of the value of the potential cost synergies achievable in a generic integration process. We have a BUY recommendation on the stock. Key Risks In our view, the key risks include a deterioration/improvement in the macroeconomic scenario; unexpected changes in interest rates; a potential deterioration of the asset quality; a drop/increase in government bond prices; regulatory risks; business plan execution risks; and dilutive corporate actions See page 67 for full disclosures and analyst certification Italy/Banks Top Picks Selection Intesa Sanpaolo Research Department Manuela Meroni Research Analyst [email protected] Financial Team Manuela Meroni Elena Perini, CFA Price performance, -1Y 14/12/ D J F M A M J J A S O N Banca Pop Milano Source:FactSet FTSE IT All Sh - PRICE INDEX Data priced on Target price ( ) 1.06 Target upside (%) Market price ( ) Wk range ( ) 1.02/0.52 Market cap ( M) 3,697.9 No. of shares 4,391.8 Free float (%) 90.2 Major shr Athena Capit (%) 5.7 Reuters PMII.MI Bloomberg PMI IM FTSE IT All Sh Performance % Absolute Rel. to FTSE IT All Sh -1M M 0.3-3M M M M 42.8 Source: FactSet and Intesa Sanpaolo Research estimates

46 Banca Popolare di Milano - Key data Rating Target price (EUR/sh) Mkt price (EUR/sh) Sector Free float (%) Reuters Code BUY Ord 1.06 Ord 0.84 Banks 90.2 PMII.MI Values per share (EUR) 2013A 2014A 2015E 2016E 2017E No. of outstanding shares (M) 3, , , , ,391.8 No. of f.d. shares (M) 4, , , , ,391.8 Market cap 1, , , , ,697.9 Adj. EPS TBV PS PPP PS Dividend ord Income statement (EUR M) 2013A 2014A 2015E 2016E 2017E Net interest income Net commission/fee income Net trading income Total income 1, , , , ,729.0 Total operating expenses Gross operating income Provisions for loan losses Pre-tax income Net income Adj. net income Composition of total income (%) 2013A 2014A 2015E 2016E 2017E Net interest income Trading income Commission income Balance sheet (EUR M) 2013A 2014A 2015E 2016E 2017E Total assets 49, , , , ,001.5 Customer loans 33, , , , ,781.6 Total customer deposits 36, , , , ,666.5 Shareholders' equity 3, , , , ,057.3 Tangible equity 3, , , , ,961.1 Risk w eighted assets 42, , , , ,024.5 Stock market ratios (X) 2013A 2014A 2015E 2016E 2017E Adj. P/E P/TBV P/PPP Dividend yield (% ord) Profitability & financial ratios (%) 2013A 2014A 2015E 2016E 2017E ROE Adj. ROTE RoRWA Leverage Cost income ratio Cost of risk (bps) Tax rate Dividend payout Other (%) 2013A 2014A 2015E 2016E 2017E ct1/cet1 ratio ct1/cet1 ratio fully loaded NA Net impaired loans ratio Net impaired loans on TBV Growth (%) 2013A 2014A 2015E 2016E 2017E Total income Gross operating income Net income NM NM Adj. net income NM BS growth (%) 2013A 2014A 2015E 2016E 2017E Customers' loans Customers' deposits Shareholders' funds Structure (no. of) 2013A 2014A 2015E 2016E 2017E Branches Employees 7,846 7,754 7,740 7,740 7,740 NM: not meaningful; NA: not available; A: actual; E: estimates; Source: Company data and Intesa Sanpaolo Research 46 Intesa Sanpaolo Research Department

47 EI Towers TMT Top Pick 2016 ADD Target Price: EUR Investment Case A releveraging/consolidation story. Our decision to include EI Towers in our Top Picks list reflects its defensive profile (cash flow visibility and a low downwards earnings risk) on the one hand and its consolidation/releveraging appeal on the other. A sub-optimal capital structure. Following its so far unsuccessful consolidation attempts (Wind towers and Rai Way), EI Towers balance sheet remains inefficient, in our view. According to our estimates, EIT should have a net debt/ebitda ratio of 1.27x at end-december 2015 or 1.36x if adjusted for the 2016 tail of the bolt-on acquisitions announced in Recently, management confirmed its commitment to a more efficient capital structure: net debt/ebitda ratio up to 5.0x in the case of a transformational deal or 2.5x on a standalone basis. In this respect, they did not to rule out financial releveraging options, on which they are committed to providing an update within the approval of FY15 results depending on the M&A pipeline. Short-term transformational deals are unlikely, in our view. In terms of external growth, there are many scenarios up in the air: INWIT, the Wind-3 towers and international expansion aside from the still actual and long-awaited merger with Rai Way. However, we remain cautious on these scenarios. Firstly, we assign a low probability to an EIT-INWIT scenario given INWIT s higher multiples, the limited synergies between telecom and broadcasting towers and the strong bid competition (i.e. Cellnex). Secondly, the Wind-3 opportunity should not occur before 2H16 according to the merger timetable and remains subordinated to the EU clearance. Furthermore, we think that, while the international expansion does not look material and is not risk immune, room for additional small M&A deals in the Italian telecom towers sector should have narrowed given the decommissioning risk from a potential sector consolidation. In summary, we continue to view a business combination with Rai Way as the most accretive and less risky consolidation option, although we acknowledge that it may not be on the government s agenda in Incidentally, we also argue that, while awaiting a merger with Rai Way, EIT s telecom towers could become an acquisition target within the telecom tower sector consolidation. Financial releveraging to possibly complement small M&A. With no transformational deals in sight we would rather bet on a standalone releveraging with the approval of 2015 results in April We assume that it could be achieved with bolt-on acquisitions (completion of the small M&A pipeline announced in 2015 and additional small deals reported to be on the 2016 radar) and complemented by a distribution of an extra dividend on top of the ordinary dividend already included in our and consensus estimates. Valuation Our standalone valuation points to EUR 58.2/share and is based on a DCF model (10-year rolling WACC to 5.3% and g 1%). Our TP of EUR 63.4/share also includes our preliminary calculation of the synergies from a business combination with Rai Way (EUR 5.21/share), whose value we assume to be equally split between EI Towers and Rai Way s shareholders. We also highlight that, by assuming a 2.5x net debt/ebitda at April-2016E, we calculate a potential dividend payout of EUR 100M, of which EUR 38M would be ordinary (we assume 90% of 2015E net profit) and EUR 62M extraordinary. At the current share price, these calculations lead to a potential dividend yield of 6.3%, of which 2.4% ordinary and 3.9% extraordinary. ADD. Key Risks We believe that the main risks are: i) a deflationary environment; ii) sales concentration (77% from the Mediaset contract); iii) political and regulatory variables on the sector consolidation; and iv) long-term threats from IPTV/OTT on DTT. See page 67 for full disclosures and analyst certification Italy/TMT Top Picks Selection Intesa Sanpaolo Research Department Antonella Frongillo Research Analyst [email protected] Price performance, -1Y 14/12/ D J F M A M J J A S O N D EI Towers Source:FactSet FTSE IT All Sh - PRICE INDEX Data priced on Target price ( ) Target upside (%) Market price ( ) Wk range ( ) 59.1/39.9 Market cap ( M) 1,580.6 No. of shares Free float (%) 59.8 Major shr Mediaset (%) 40.0 Reuters EIT.MI Bloomberg EIT IM FTSE IT All Sh Performance % Absolute Rel. to FTSE IT All Sh -1M 0.1-1M 6.1-3M 1.4-3M M M 21.2 Source: FactSet and Intesa Sanpaolo Research estimates

48 EI Towers - Key data Rating Target price (EUR/sh) Mkt price (EUR/sh) Sector Free float (%) Reuters Code ADD Ord Ord Media Services 59.8 EIT.MI Values per share (EUR) 2013A 2014A 2015E 2016E 2017E No. ordinary shares (M) No. NC saving/preferred shares (M) Total no. of shares (M) Market cap , , , ,580.6 Adj. EPS CFPS BVPS Dividend ord Income statement (EUR M) 2013A 2014A 2015E 2016E 2017E Revenues EBITDA EBIT Pre-tax income Net income Adj. net income Cash flow (EUR M) 2013A 2014A 2015E 2016E 2017E Net income before minorities Depreciation and provisions Others/Uses of funds Change in working capital Operating cash flow Capital expenditure Financial investments Acquisitions and disposals Free cash flow Dividends Equity changes & Other non-operating items Net cash flow Balance sheet (EUR M) 2013A 2014A 2015E 2016E 2017E Net capital employed of which associates Net debt/-cash Minorities Net equity Minorities value Enterprise value , , , ,673.7 Stock market ratios (x) 2013A 2014A 2015E 2016E 2017E Adj. P/E P/CFPS P/BVPS Payout (%) Dividend yield (% ord) FCF yield (%) NA EV/sales EV/EBITDA EV/EBIT EV/CE D/EBITDA D/EBIT Profitability & financial ratios (%) 2013A 2014A 2015E 2016E 2017E EBITDA margin EBIT margin Tax rate Net income margin ROCE ROE Interest cover Debt/equity ratio Growth (%) 2014A 2015E 2016E 2017E Sales EBITDA EBIT Pre-tax income Net income Adj. net income NM: not meaningful; NA: not available; A: actual; E: estimates; Source: Company data and Intesa Sanpaolo Research 48 Intesa Sanpaolo Research Department

49 Fiat Chrysler Automobiles Automobiles & Components Top Pick 2016 Investment Case The advantages of aggregation in the Auto industry. After presenting its BP in 2014, at the time of 3Q15 results, FCA s CEO clearly expressed his view that the automotive industry is subject to rising product development costs (on the back also of increasing technological challenges) which absorb value at a much faster rate than in other industries, ultimately leading to structurally low and volatile returns. The CEO highlighted that an aggregation between OEM players would allow companies to share up to 45-50% of development costs related to components and technologies (undiscernible to customers), ultimately generating benefits of up to EUR 2Bn on vehicle investments. The CEO also stated that a combination of FCA with another large OEM would yield benefits of EUR Bn pa. GM: the most suitable partner. In September, FCA stated that a merger with GM would imply a combined EBITDA of USD 30Bn. Based on the expected EBITDA (Bloomberg and IMI) for the two groups and the potential synergies to be extracted from an aggregation (up to EUR 4.5Bn), we view FCA s CEO indications as consistent. According to the CEO, on these projections, an aggregation would be too appealing to be ignored and an alliance with GM would be the best option, despite potential alternative opportunities of aggregations with other car makers. So far all attempts by FCA to open a dialogue with GM have been refused and we believe that a hostile offer is not on FCA s radar, preferring to get the consensus of GM s shareholders and to finalise an aggregation through a share swap. The latter would allow EXOR to dilute its stake in the new combined entity, remaining an important shareholder in any case. Moving on with the BP after the Ferrari spin-off. In the case that an aggregation with GM is not feasible, FCA declared that it would pursue other options even if the company confirmed that an aggregation is not a matter for survival. While we believe that on the back of rising development costs and recall costs (especially after diesel-gate), an aggregation among car makers is unavoidable, in a recent presentation in London, FCA confirmed its 2018 (challenging in our view) BP targets. In addition, FCA:1) confirmed its target to reduce financial charges from above EUR 2Bn to EUR 1.3Bn in 2018 and its intention to be industrial cash positive for EUR 2Bn in 2018; 2) increased its volumes target for Jeep from 1.9M to 2M units in 2018 versus 1.2M units expected by 2015; 3) confirmed its intention to reduce capex and R&D for Alfa and a delay of the plan to While these last statements could be viewed negatively, we would not rule out that a delay in the capex plan for Alfa along with a postponement of the launch of Maserati s models (the Maserati Alfieri) can be explained by the plans to develop such models with a potential partner. Valuation Following diesel-gate, which impacted some premium brands, we updated our valuation based only on our SOP by country analysis, obtaining a TP of EUR 15.67/share or EUR 10.47/share post-ferrari spin-off. Our TP does not take into account a potential premium from an aggregation deal which may valorise FCA s key strategic brands, such as Jeep, Maserati and Alfa Romeo. ADD rating. Key Risks The main risks to our ADD rating and TP are: 1) a halt to the US car market growth, deflation and a further slowdown in the growth pace of the Chinese car market; 2) a further deterioration of the Brazilian car market and a general worsening of the macro scenario; 3) a potential increasing cash impact from recall campaign costs; 4) a higher than expected cash absorption from the implementation of the BP; 5) GAAP application, penalising EPS; and 6) a rise in interest rates. See page 67 for full disclosures and analyst certification ADD Target Price: EUR (TP post-ferrari spin-off EUR 10.47) Italy/Automobiles & Components Top Picks Selection Intesa Sanpaolo Research Department Monica Bosio Research Analyst [email protected] Price performance, -1Y 14/12/ D J F M A M J J A S O N D FCA Source:FactSet FTSE IT All Sh - PRICE INDEX Data priced on Target price ( ) Target upside (%) Market price ( ) Wk range ( ) 15.8/9.1 Market cap ( M) 17,858.0 No. of shares 1,507.0 Free float (%) 65.0 Major shr Exor (%) 29.2 Reuters FIA.MI Bloomberg F IM FTSE IT All Sh Performance % Absolute Rel. to FTSE IT All Sh -1M M M M M M 15.7 Source: FactSet and Intesa Sanpaolo Research estimates

50 Fiat Chrysler Automobiles - Key data Rating Target price (EUR/sh) Mkt price (EUR/sh) Sector Free float (%) Reuters Code ADD Ord Ord Automobiles & Components 65.0 FIA.MI Values per share (EUR) 2013A 2014A 2015E 2016E 2017E No. ordinary shares (M) 1, , , , ,507.0 No. NC saving/preferred shares (M) Total no. of shares (M) 1, , , , ,507.0 Market cap 6, , , , ,858.0 Adj. EPS CFPS BVPS Dividend ord Dividend SAV Nc Income statement (EUR M) 2013A 2014A 2015E 2016E 2017E Revenues 86, , , , ,491.5 EBITDA 7, , , , ,970.0 EBIT 3, , , , ,473.0 Pre-tax income 1, , , , ,886.3 Net income , ,638.6 Adj. net income , , ,738.6 Cash flow (EUR M) 2013A 2014A 2015E 2016E 2017E Net income before minorities 1, , ,638.6 Depreciation and provisions 4, , , , ,497.0 Others/Uses of funds , Change in working capital Operating cash flow 6, , , , ,223.0 Capital expenditure -7, , , , ,499.0 Financial investments Acquisitions and disposals Free cash flow , , Dividends Equity changes & Other non-operating items 0 2, , Net cash flow Balance sheet (EUR M) 2013A 2014A 2015E 2016E 2017E Net capital employed 19, , , , ,503.3 of which associates Net debt/-cash 7, , , , ,861.4 Minorities 4, Net equity Minorities value Enterprise value 24, , , , ,537.5 Stock market ratios (x) 2013A 2014A 2015E 2016E 2017E Adj. P/E P/CFPS P/BVPS Payout (%) Dividend yield (% ord) Dividend yield (% sav) FCF yield (%) EV/sales EV/EBITDA EV/EBIT EV/CE D/EBITDA D/EBIT Profitability & financial ratios (%) 2013A 2014A 2015E 2016E 2017E EBITDA margin EBIT margin Tax rate NM Net income margin ROCE ROE NM NM NM NM NM Interest cover Debt/equity ratio , , , ,820.0 Growth (%) 2014A 2015E 2016E 2017E Sales EBITDA EBIT Pre-tax income NM 45.2 Net income NM 45.2 Adj. net income NM: not meaningful; NA: not available; A: actual; E: estimates; Source: Company data and Intesa Sanpaolo Research 50 Intesa Sanpaolo Research Department

51 Finmeccanica Aerospace & Defence Top Pick 2016 BUY Target Price: EUR Investment Case Results above expectations: The delivery of a better than expected 3Q15 adj. EBITA result (also net of FX) confirmed, in our view, that the company is on track with the execution of its industrial plan and the creation of a One Company based on a divisional model, which should pave the way for a further recovery in profitability in Waiting for 2016 guidance. After raising its FY15 guidance, Finmeccanica will release its FY16 guidance at the time of FY15 results. We expect the group to announce robust targets on the back of: 1) restructuring actions across the group; 2) the step-up in profitability at Selex, supported by the national naval systems programme; and 3) the improvement in performance by DRS. With regards to the critical issues at the Helicopters Division and those operations related to the Oil&Gas industry, management outlined a roughly (or even below) 15% exposure to the Oil&Gas business of the Helicopter business revenues. Going forward, management sees a slowdown in the ramp-up of the AW169 and AW189 given the Oil & Gas market scenario: we believe, however, that the helicopter division could maintain a double-digit profitability also in 2016E and going forward. While confirming a EUR M of restructuring charges below the EBITA line for 2015, restructuring charges are expected to decrease in the next two years thus supporting earnings along with a progressive decrease in financial charges. Potential earnings surprises in 2016? We believe that current Bloomberg consensus is still not fully incorporating either the potential upside in earnings coming from the likely signing of the Kuwait Eurofighter order (which would add roughly EUR 2-3Bn out of our current estimated order intake of EUR 13Bn) or benefits from a potential increase in Defence Budgets in the main European countries and above all a possible EUR 500M of additional expenses in defence and security by the Italian government. M&A to unlock the value of some assets. We believe that the robust FY16 targets together with M&A actions or disposals, which would allow Finmecccanica to free up resources to further strengthen those areas where it could effectively stand out, could represent a strong catalyst for the stock. Valuation As the One Company project is still at an early stage and considering that the group is keen to strengthen only those areas where it enjoys a leadership while better valorising non-strategic assets, such as its stake in MBDA and ATR through M&A deals, we believe that the SOP analysis is still the most suitable way to look at the group s potential value. We have a target price at EUR 16.00/share and a BUY rating. Key Risks The main risks to our rating and TP are: 1) the failure to achieve the BP guidance, especially at the FOCF level; 2) a lower/higher impact from forex; 3) the lack of focus on core assets and the ongoing inclusion of less/non-core profitable businesses; and 4) potential pressure from the oil price and a strong deterioration in the macro scenario See page 67 for full disclosures and analyst certification Italy/Aerospace & Defence Top Picks Selection Intesa Sanpaolo Research Department Monica Bosio Research Analyst [email protected] Price performance, -1Y 14/12/ D J F M A M J J A S O N D Finmeccanica Source:FactSet FTSE IT All Sh - PRICE INDEX Data priced on Target price ( ) Target upside (%) Market price ( ) Wk range ( ) 13.7/7.2 Market cap ( M) 7,209.1 No. of shares Free float (%) NA Major shr Government of Italy (%) 30.2 Reuters SIFI.MI Bloomberg FNC IM FTSE IT All Sh Performance % Absolute Rel. to FTSE IT All Sh -1M 2.2-1M 8.4-3M 0.4-3M M M 48.2 Source: FactSet and Intesa Sanpaolo Research estimates

52 Finmeccanica - Key data Rating Target price (EUR/sh) Mkt price (EUR/sh) Sector Free float (%) Reuters Code BUY Ord Ord Aerospace & Defence - SIFI.MI Values per share (EUR) 2013A 2014A 2015E 2016E 2017E No. ordinary shares (M) No. NC saving/preferred shares (M) Total no. of shares (M) Market cap 2, , , , ,209.5 Adj. EPS CFPS BVPS Dividend ord Dividend SAV Nc Income statement (EUR M) 2013A 2014A 2015E 2016E 2017E Revenues 16, , , , ,269.9 EBITDA 1, , , , ,970.7 EBIT , ,087.0 Pre-tax income Net income Adj. net income Cash flow (EUR M) 2013A 2014A 2015E 2016E 2017E Net income before minorities Depreciation and provisions Others/Uses of funds Change in working capital Operating cash flow , , ,143.3 Capital expenditure Financial investments Acquisitions and disposals Free cash flow Dividends Equity changes & Other non-operating items Net cash flow Balance sheet (EUR M) 2013A 2014A 2015E 2016E 2017E Net capital employed 7, , , , ,597.1 of which associates Net debt/-cash 3, , , , ,756.7 Minorities Net equity 3, , , , ,382.5 Minorities value Enterprise value 6, , , , ,719.4 Stock market ratios (x) 2013A 2014A 2015E 2016E 2017E Adj. P/E Neg P/CFPS P/BVPS Payout (%) Dividend yield (% ord) FCF yield (%) EV/sales EV/EBITDA EV/EBIT NM EV/CE D/EBITDA D/EBIT Profitability & financial ratios (%) 2013A 2014A 2015E 2016E 2017E EBITDA margin EBIT margin Tax rate Net income margin ROCE ROE Interest cover Debt/equity ratio Growth (%) 2014A 2015E 2016E 2017E Sales EBITDA EBIT NM Pre-tax income NM Net income NM NM Adj. net income NM NM NM: not meaningful; NA: not available; A: actual; E: estimates; Source: Company data and Intesa Sanpaolo Research 52 Intesa Sanpaolo Research Department

53 Hera Multi-Utilities Top Pick 2016 ADD Target Price: EUR 2.70 Investment Case A resilient business mix. Hera has a resilient business mix with: 1) regulated networks contributing for approximately 50% EBITDA (EUR 3Bn RAB), and lowering the overall risk profile thanks to a supportive framework designed by the AEEGSI (albeit still partially under revision); 2) liberalised activities featuring a prevailing exposure to waste (29% EBITDA, being the first domestic player in terms of volumes); and 3) energy activities (mainly gas and electricity supply to retail customers for approximately 22% of EBITDA), with a very limited exposure to power generation. Well-positioned to benefit from M&A. Endorsed by the government via potential incentives to consolidate the Italian fragmented multi-utility market, we think Hera should be able to take advantages from its solid external growth track record, mainly executed through equity swaps and EPS accretive since the beginning, thanks to a historical 20-25% synergies extraction over a 4Y period. New BP as a positive catalyst. Hera announced that it will present a new 5Y BP on 11 January, once all regulatory frameworks have been defined, representing a potential positive driver for the stock. While we expect FY15A results to be largely driven by organic growth and efficiencies, our perception is that management is now ready to enhance its focus on external growth in the coming months, starting from smaller deals in waste activities (two of which are due to be concluded by YE15) and a potentially favourable outcome on the controversial AIMAG consolidation (already owing a 25% stake). Solid credit metrics, with a neutral FCF after capex and dividends over the old BP horizon ( ), granting financial flexibility for small debt-financed operations, supportive for dividends and a gradual deleveraging. Stable and high visibility on the dividend policy (EUR 0.09/share), equivalent to a 3.8% yield at the current share price. A unique and efficient corporate governance model, supportive of sector consolidation. Valuation While not including the potential M&A upside in our estimates (approx. EUR 75M in Hera s old BP), we estimate a 2013A-18E EBITDA growth equal to 2.8%, mainly driven by organic growth in networks and waste, on top of a further synergies extraction. At the bottom line, thanks to a lower tax rate and a reduced cost of debt, we see adj. EPS growing at a 8% CAGR over 2013A- 18E. Ahead of the new BP, on the basis of a SOP valuation, we reiterate our target price of EUR 2.70/share and our ADD rating. Key Risks The key risks to Hera s investment case are: i) failure to deliver on M&A deals or an excessive dilution from M&A-related equity increases; ii) full domestic exposure; and iii) volumes and margin risks in liberalised activities. See page 67 for full disclosures and analyst certification Italy/Multi-Utilities Top Picks Selection Intesa Sanpaolo Research Department Meris Tonin Research Analyst [email protected] Energy & Utilities Team Roberto Ranieri Meris Tonin Price performance, -1Y Source:FactSet 14/12/ D J F M A M J J A S O N D Hera FTSE IT All Sh - PRICE INDEX Data priced on Target price ( ) 2.70 Target upside (%) Market price ( ) Wk range ( ) 2.46/1.92 Market cap ( M) 3,619.6 No. of shares 1,489.5 Free float (%) 41.1 Major shr City of Bologna (%) 9.7 Reuters HRA.MI Bloomberg HER IM FTSE IT All Sh Performance % Absolute Rel. to FTSE IT All Sh -1M 1.7-1M 7.8-3M 6.0-3M M M 10.2 Source: FactSet and Intesa Sanpaolo Research estimates

54 Hera - Key data Rating Target price (EUR/sh) Mkt price (EUR/sh) Sector Free float (%) Reuters Code ADD Ord 2.70 Ord 2.43 Multi-Utilities 41.1 HRA.MI Values per share (EUR) 2013A 2014A 2015E 2016E 2017E No. ordinary shares (M) 1, , , , ,489.5 No. NC saving/preferred shares (M) Total no. of shares (M) 1, , , , ,489.5 Market cap 2, , , , ,619.6 Adj. EPS CFPS BVPS Dividend ord Dividend SAV Nc Income statement (EUR M) 2013A 2014A 2015E 2016E 2017E Revenues 4, , , , ,961.3 EBITDA EBIT Pre-tax income Net income Adj. net income Cash flow (EUR M) 2013A 2014A 2015E 2016E 2017E Net income before minorities Depreciation and provisions Others/Uses of funds Change in working capital Operating cash flow Capital expenditure Financial investments Acquisitions and disposals Free cash flow Dividends Equity changes & Other non-operating items Net cash flow Balance sheet (EUR M) 2013A 2014A 2015E 2016E 2017E Net capital employed 4, , , , ,328.9 of which associates Net debt/-cash 2, , , , ,729.5 Minorities Net equity 2, , , , ,477.5 Minorities value Enterprise value 4, , , , ,347.6 Stock market ratios (x) 2013A 2014A 2015E 2016E 2017E Adj. P/E P/CFPS P/BVPS Payout (%) Dividend yield (% ord) FCF yield (%) EV/sales EV/EBITDA EV/EBIT EV/CE D/EBITDA D/EBIT Profitability & financial ratios (%) 2013A 2014A 2015E 2016E 2017E EBITDA margin EBIT margin Tax rate Net income margin ROCE ROE Interest cover Debt/equity ratio Growth (%) 2014A 2015E 2016E 2017E Sales EBITDA EBIT Pre-tax income Net income Adj. net income NM: not meaningful; NA: not available; A: actual; E: estimates; Source: Company data and Intesa Sanpaolo Research 54 Intesa Sanpaolo Research Department

55 Poste Italiane Logistics & Financial Services Top Pick 2016 ADD Target Price: EUR 8.10 Investment Case Poste Italiane is the largest services infrastructure organisation in Italy. Thanks to its nationwide network of 13k post offices located in 96.5% of Italian municipalities and a trustworthy and well-known brand, we believe that Poste Italiane holds a powerful distribution machine in Italy in terms of capillarity and proximity to clients. The company offers postal logistics, savings and investments, payments, insurance and digital communication services. Improving earnings generation could support a sustainable and rewarding dividend policy. In the next five years, we expect the group to generate a cumulated net profit in excess of EUR 3.9Bn, potentially supporting a sustainable and rewarding dividend policy in the next few years, in our view. Management is committed to an at least 80% payout in 2015 and 2016, which, on the basis of our forecasts, would imply an attractive dividend yield of an average 4.8% in the two years. The group can rely on the profitable Financial Services and Insurance businesses while value creation potential is offered by the planned turnaround of the Mail&Parcels business. The Financial Services segment ensures resilient earnings generation, thanks to a business model based on asset gathering and transaction banking, a limited risk profile (no credit risk) and cross-selling/up-selling on an extensive and underpenetrated customer base of 33M clients. Moreover, Poste Italiane is well placed to capture the positive macroeconomic and demographic trends in the asset management business, life and non-life business and e-commerce business. The restructuring of the Mail&Parcels division offers value creation potential, with a more favourable new regulation in the mail market and a volumes increase in e-commerce to underpin the turnaround of the division, which we see at EBIT breakeven in FY19E. PosteMobile, with its leading position in the Italian MVNO market, looks well placed to benefit from the forthcoming sector consolidation. Valuation We believe that a Sum-of-the-Parts (SOP) valuation approach is an appropriate method to value Poste Italiane: our SOP yields a valuation of EUR 8.1/share. We recently initiated coverage of Poste Italiane with an ADD rating. Key Risks We see the main risks to Poste Italiane s investment case as: 1) the Mail&Parcels turnaround implies high restructuring charges and could be delayed by labour unions intervention; 2) the compensation for the Universal Service Obligation (USO) is insufficient to cover effective costs; 3) the Financial Services and Insurance Services divisions hold a EUR 119Bn government bond portfolio (almost entirely Italian) as of September 2015, exposing the group to sovereign risk and to potential additional capital requirements following possible regulatory revisions; 4) the transaction banking business is subject to intense competition; 5) the execution of the new business model implies a cultural switch in the relationship with the group s customers; and 6) a possible adverse evolution of the economic trend in Italy. See page 67 for full disclosures and analyst certification Italy/Logistics & Financial Services Top Picks Selection Intesa Sanpaolo Research Department Manuela Meroni Research Analyst [email protected] Price performance, -1M O Poste Italiane Source:FactSet 14/12/2015 Source: FactSet and Intesa Sanpaolo Research estimates N FTSE MIB - PRICE INDEX Data priced on Target price ( ) 8.10 Target upside (%) Market price ( ) Wk range ( ) NA/NA Market cap ( M) 8,815.5 No. of shares 1,306.0 Free float (%) 34.7 Major shr Government of Italy (%) 65.3 Reuters PST.MI Bloomberg PST IM FTSE MIB Performance % Absolute Rel. to FTSE MIB -1M 0.0-1M 6.5-3M NA -3M NA -12M NA -12M NA

56 Poste Italiane - Key data Rating Target price (EUR/sh) Mkt price (EUR/sh) Sector Free float (%) Reuters Code ADD Ord 8.10 Ord 6.75 Logistics & Financial Services 34.7 PST.MI Values per share (EUR) 2013A 2014A 2015E 2016E 2017E No. ordinary shares (M) 1, , , , ,306.0 No. NC saving/preferred shares (M) Total no. of shares (M) 1, , , , ,306.0 Market cap NA NA 8, , ,815.5 Adj. EPS CFPS BVPS Dividend ord Dividend SAV Nc Income statement (EUR M) 2013A 2014A 2015E 2016E 2017E Revenues 26, , , , ,955.1 EBITDA 1, , , , ,636.6 EBIT 1, ,024.2 Pre-tax income 1, ,066.6 Net income 1, Adj. net income Cash flow (EUR M) 2013A 2014A 2015E 2016E 2017E Net income before minorities 1, Depreciation and provisions Others/Uses of funds Change in w orking capital , Operating cash flow 1, , , ,179.2 Capital expenditure Financial investments -1, Acquisitions and disposals 2, , Free cash flow 1, , , Dividends Equity changes & Other non-operating items Net cash flow 1, , , Balance sheet (EUR M) 2013A 2014A 2015E 2016E 2017E Net capital employed 3, , , , ,952.6 Net debt/-cash -3, , , , ,054.1 Minorities Net equity 7, , , , ,006.8 Minorities value Enterprise value NA NA 2, , ,059.9 Stock market ratios (x) 2013A 2014A 2015E 2016E 2017E Adj. P/E NA NA P/CFPS NA NA P/BVPS NA NA Payout (%) Dividend yield (% ord) NA NA FCF yield (%) NA NA EV/sales NA NA EV/EBITDA NA NA EV/EBIT NA NA EV/CE NA NA D/EBITDA Neg. Neg. Neg. Neg. Neg. D/EBIT Neg. Neg. Neg. Neg. Neg. Profitability & financial ratios (%) 2013A 2014A 2015E 2016E 2017E EBITDA margin EBIT margin Tax rate Net income margin ROCE ROE Interest cover Debt/equity ratio Growth (%) 2014A 2015E 2016E 2017E Sales EBITDA EBIT Pre-tax income Net income NM Adj. net income NM: not meaningful; NA: not available; A: actual; E: estimates; Source: Company data and Intesa Sanpaolo Research 56 Intesa Sanpaolo Research Department

57 Prysmian Capital Goods Top Pick for 2016 ADD Target Price: EUR Investment Case Our preferred stock in the Capital Goods industry. Prysmian meets all our top picks requirements: a sound single/mid-digit organic growth, a commitment to efficiency gains and a potential group strengthening through M&A deals via important bolt-on acquisitions. Growth drivers. Despite the recent softening of the guidance due to a lower impact from forex fluctuations, by year-end the group expects an organic growth at around +5%, with telecoms at +7%. We expect a similar growth rate (ex metals) also for next year, once again driven by: 1) Energy projects, especially in the submarine business, for which we see an organic growth of around 8-10% also thanks to the potential implementation of some wind farms in France; 2) Telecom business, where the lower expected growth in 2H15 has been confirmed as a temporary situation, mainly due to a destocking process from customers. We expect Prysmian's TLC business unit to continue to be a growth driver, with a FY16E organic growth at around 5-10%. Several important projects, such as the realisation of Google s own broadband network and future Italian broadband network development (amounting to EUR 10Bn in total) could further underpin this growth. In our view, the TLC business also offers ample scope for efficiency extractions. We would not rule out a profitability margin at Prysmian's cable division rising to roughly 15% over the next three years; and 3) Energy Products: In E&I pricing is stabilising, although a strong price recovery would likely only be possible in the case of a significant upside in volumes allowing an increase in production capacity utilisation. While it is too early to see a positive pricing cycle, volumes prospects now look more favourable thanks to better macro conditions. In Industrials, we expect weakness in Oil&Gas activities, while the Automotive business should benefit from a more favourable comparison base. In the Industrial segment, the group might also continue to lever on some profitable niches, such as elevators. Efficiency actions to support adj. EBITDA. The above considerations go hand in hand with the group s ongoing commitment to efficiency gains through the rationalisation of plants and production, especially in Telecoms. We thus see as achievable an improvement in the group s FY16 adj. EBITDA by 7.3% to EUR 665M from the EUR 620M expected in FY15E. Important bolt-on deals. Prysmian has, on various occasions, stated its intention to finalise up to 2 or 3 bolt-on acquisitions for a total of up to EUR 1Bn. The acquisition/s should not be dilutive in terms of multiples compared with Prysmian's ones, although we cannot exclude a premium as the group is keen to acquire value-added activities, which would smooth its cyclicality. Alternatively, the acquisitions might also be finalised to increase the group's exposure in some specific country areas. While we feel that no M&A is in sight in the very short term, we believe that the company could finalise some deals by the end of We also positively view the fact that, if no acquisition opportunities materialise, an extra dividend could be possible, although management confirmed that this is not a planned option at the moment. Valuation With a FY16E EV/EBITDA at 8.1x and a FY16E EV/EBIT at 10.8x, we view Prysmian s valuation as undemanding, trading at a discount to its sector average of 9.2% and 16.4%, respectively. ADD and target price at EUR 22.5/share. Risk The main risks to our rating and target price are: 1) a lack of a pricing recovery for the more cyclical businesses and a stronger-than-expected slowdown in China; 2) value-destructive acquisitions; 3) a weaker-than-expected trend in Telecoms, with a sharp downturn in HV; and 4) a poor (or better-than-expected) execution in extracting additional savings. See page 67 for full disclosures and analyst certification Italy/Capital Goods Top Picks Selection Intesa Sanpaolo Research Department Monica Bosio Research Analyst [email protected] Price performance, -1Y Source:FactSet 14/12/ D J F M A M J J A S O N D Prysmian FTSE IT All Sh - PRICE INDEX Data priced on Target price ( ) Target upside (%) Market price ( ) Wk range ( ) 22.2/14.1 Market cap ( M) 4,095.3 No. of shares Free float (%) 86.9 Major shr Clubtre SpA (%) 5.8 Reuters PRY.MI Bloomberg PRY IM FTSE IT All Sh Performance % Absolute Rel. to FTSE IT All Sh -1M 0.0-1M 6.0-3M M M M 17.6 Source: FactSet and Intesa Sanpaolo Research estimates

58 Prysmian - Key data Rating Target price (EUR/sh) Mkt price (EUR/sh) Sector Free float (%) Reuters Code ADD Ord Ord Capital Goods 86.9 PRY.MI Values per share (EUR) 2013A 2014A 2015E 2016E 2017E No. ordinary shares (M) No. NC saving/preferred shares (M) Total no. of shares (M) Market cap 3, , , , ,095.3 Adj. EPS CFPS BVPS Dividend ord Dividend SAV Nc Income statement (EUR M) 2013A 2014A 2015E 2016E 2017E Revenues 7, , , , ,777.0 EBITDA EBIT Pre-tax income Net income Adj. net income Cash flow (EUR M) 2013A 2014A 2015E 2016E 2017E Net income before minorities Depreciation and provisions Others/Uses of funds Change in working capital Operating cash flow Capital expenditure Financial investments Acquisitions and disposals Free cash flow Dividends Equity changes & Other non-operating items Net cash flow Balance sheet (EUR M) 2013A 2014A 2015E 2016E 2017E Net capital employed 2, , , , ,027.2 of which associates Net debt/-cash Minorities Net equity 1, , , , ,536.8 Minorities value Enterprise value 4, , , , ,626.7 Stock market ratios (x) 2013A 2014A 2015E 2016E 2017E Adj. P/E P/CFPS P/BVPS Payout (%) Dividend yield (% ord) FCF yield (%) EV/sales EV/EBITDA EV/EBIT EV/CE D/EBITDA D/EBIT Profitability & financial ratios (%) 2013A 2014A 2015E 2016E 2017E EBITDA margin EBIT margin Tax rate Net income margin ROCE ROE Interest cover Debt/equity ratio Growth (%) 2014A 2015E 2016E 2017E Sales EBITDA EBIT Pre-tax income Net income Adj. net income NM: not meaningful; NA: not available; A: actual; E: estimates; Source: Company data and Intesa Sanpaolo Research 58 Intesa Sanpaolo Research Department

59 Safilo Group Branded Goods Top Pick 2016 BUY Target Price: EUR Investment Case Safilo is a company in a re-launch phase. The 2020 BP presented by the new management last year seems to be yielding the first positive signals. In 3Q15, the proprietary brands Carrera, Polaroid and Smith posted a performance aligned with the development strategy as did the so-called Rocket brands (Fendi, Celine, J.Choo). Stripping out the extraordinary provisions (obsolescence related to the expired Kering licences and forex), COGS savings are starting to pay off with a 30/40bps reduced weighting on sales with an adj. EBITDA margin up 110bps; In 2016 we expect to see the initial effects of the new signed licences (Givenchy and Havaianas) and the renewal of the fast-growing LVMH licence Celine. We think this decision could add some visibility on the potential renewal of the other LVMH big agreements: Dior (approx. 20% of sales, expiring in 2017). We highlight that in 2013 the French group signed a very long licence for Fendi (exp. 2023) and Marc Jacobs (2024); Italy/Branded Goods Top Picks Selection Intesa Sanpaolo Research Department Gianluca Pacini Research Analyst [email protected] 2016 will be the first year of full focus on the owned brands with an acceleration in A&P expenditure and dedicated promotional campaigns and testimonials to endorse the promising, repositioned Carrera, Polaroid and Smith brands. The strengthened balance sheet now looks consistent with the plans to acquire a new brand to increase the weighting of the more stable own-brand business (EUR 200M is our estimate of a potential cash-out). Valuation Our forecasts now fall below managements key targets mostly due to our lower mid-single digit sales growth assumption for both developed and emerging markets in the coming years. On profitability, we expect the exit of the Gucci licence decided by Kering to gradually reduce sales and margins in 2017E, followed by a further reduction in volumes in 2019E and a small negative impact in 2021E. Our calculations are based on our assumption of a significant scale effect of own brands volumes, which would allow the related EBITDA margin to move towards 15% (at a similar level to Polaroid at the time it was acquired in 2012). Overall, our 2015/16E estimates are in line with consensus except for an around 10% lower EPS. Given the long-term volatility related to the Gucci exit, we now prefer to value Safilo solely on the more conservative Luxottica discounted 2016E multiples. Adding the present value of the remaining Kering repayment in 2018E or EUR 0.32/share, we set a target price of EUR 13.24/share and we confirm our BUY rating. Taking the average 2013/2014 and YTD 2015 share price, we calculate a fair historical EV/EBITDA ratio of 9.7x in the three year period. Our target price implies the same ratio in 2017E and again in the future stress years (2019/2021) of the Gucci transition in our sensitivity analysis. As a double check, our DCF valuation returns an equity value of EUR 16.20/share in a maturing business phase. Key Risks Assuming a stable licensing scenario, the key risks in buying the shares relate to a significant slowdown in the emerging luxury markets and the US, and the failure to achieve the brand building targets for the proprietary portfolio, in our view. See page 67 for full disclosures and analyst certification Price performance, -1Y 14/12/ D J F M A M J J A S O N D Safilo Source:FactSet FTSE IT All Sh - PRICE INDEX Data priced on Target price ( ) Target upside (%) Market price ( ) Wk range ( ) 15.1/10.0 Market cap ( M) No. of shares Free float (%) 49.2 Major shr Hal Holding (%) 41.7 Reuters SFLG.MI Bloomberg SFL IM FTSE IT All Sh Performance % Absolute Rel. to FTSE IT All Sh -1M M M M M M Source: FactSet and Intesa Sanpaolo Research estimates

60 Safilo Group - Key data Rating Target price (EUR/sh) Mkt price (EUR/sh) Sector Free float (%) Reuters Code BUY Ord Ord 9.96 Branded Goods 49.2 SFLG.MI Values per share (EUR) 2013A 2014A 2015E 2016E 2017E No. ordinary shares (M) No. NC saving/preferred shares (M) Total no. of shares (M) Market cap Adj. EPS CFPS BVPS Dividend ord Dividend SAV Nc Income statement (EUR M) 2013A 2014A 2015E 2016E 2017E Revenues 1, , , , ,348.3 EBITDA EBIT Pre-tax income Net income Adj. net income Cash flow (EUR M) 2013A 2014A 2015E 2016E 2017E Net income before minorities Depreciation and provisions Others/Uses of funds Change in working capital Operating cash flow Capital expenditure Financial investments Acquisitions and disposals Free cash flow Dividends Equity changes & Other non-operating items Net cash flow Balance sheet (EUR M) 2013A 2014A 2015E 2016E 2017E Net capital employed 1, , , , ,169.6 of which associates Net debt/-cash Minorities Net equity , , ,106.6 Minorities value Enterprise value 1, , Stock market ratios (x) 2013A 2014A 2015E 2016E 2017E Adj. P/E P/CFPS P/BVPS Payout (%) Dividend yield (% ord) FCF yield (%) EV/sales EV/EBITDA EV/EBIT EV/CE D/EBITDA D/EBIT Profitability & financial ratios (%) 2013A 2014A 2015E 2016E 2017E EBITDA margin EBIT margin Tax rate NM Net income margin ROCE ROE Interest cover Debt/equity ratio Growth (%) 2014A 2015E 2016E 2017E Sales EBITDA EBIT Pre-tax income Net income NM NM Adj. net income NM NM: not meaningful; NA: not available; A: actual; E: estimates; Source: Company data and Intesa Sanpaolo Research 60 Intesa Sanpaolo Research Department

61 Salini Impregilo Construction Top Pick 2016 BUY Target Price: EUR 5.40 Investment Case Good 2016E-17E earnings visibility. According to management, the group s current backlog covers 98% and 82%, respectively, of the 2016 and 2017 budgeted revenues. Furthermore, the order inflow is set to remain strong in 2015: EUR 4.5Bn in 9M15 and should hit the EUR 6.9Bn target for the FY. Sound balance sheet. According to our current forecasts, ex-acquisition, the consolidated 2015E net debt should amount to EUR 169M with a 2015E EBITDA of EUR 493M and a group 2015E net equity of approximately EUR 1.2Bn. Moreover, we would expect a positive free cash flow of EUR 41M and EUR 110M in 2016E and 2017E, respectively. Therefore we believe that the group has substantial financial flexibility, which should allow the pending acquisition of Lane Industries in the US to be easily financed and the actions for a further reduction of the overall cost of debt to continue. The Italian construction industry recovery should accelerate in 2016 (+2.2% yoy, source: CRESME) following the stabilisation seen in 2015 (+0.5% yoy). Public works and nonresidential investments should drive the growth in 2016 (+4.2% yoy and 2.2% yoy, respectively). Salini Impregilo should be able to benefit from the expected domestic market recovery as it is involved in two big high-speed railway projects, the Milano-Genoa (68.25% of a total amount of EUR 4.5Bn) and the Verona-Padova (approximately EUR 1.7Bn). By Jan 2016, the group should close the Lane deal in the US (USD 1.3Bn 2014 revenue and a USD 2Bn backlog) for a total value of approx. USD 406M. The acquisition should allow Salini Impregilo to: i) enter the US East Coast construction market where the Italian group has a limited presence; ii) gain access to a much larger pool of projects; and iii) better balance its exposure between developed and emerging markets pro-forma figures should show Salini Impregilo/Lane revenue at around EUR 6Bn with an EBITDA at EUR 560M (proportionally including JVs). We believe that Salini Impregilo did not overpay for Lane and, based on preliminary data, we see the acquisition as EPS accretive. Extra opportunities, not factored in our current numbers, relate to management s actions to recover receivables related to FIBE (EUR M). Valuation We believe that the recent business developments are consistent with the strategic guidelines and financial targets outlined in the BP and should contribute to enhance management s track record and investors trust in the company. As for the US acquisition, we think it makes sense from a strategic point of view, it is financially sustainable and was not overpriced. We would therefore expect the group s industrial value to gradually emerge. How fast this occurs is likely to depend on management s ability to gain investors trust, step-by-step, by meeting its announced economic and financial targets. Based on our forecasts, on the sector multiples and on the 2016E EV/sales- EBIT margin value map analysis, we set our target price at EUR 5.40/share, obtained applying a discount of 30% to the company valuation resulting from the equation of the interpolating lines of the 2016E EV/sales-EBIT margin construction players value maps. We consider a 30% discount as a reasonable requirement from investors to participate in management s project. We rate the stock a BUY. Risk Among the possible risks, we highlight that while the company has a wide geographical diversification, the group has a significant order backlog in areas characterised by a certain instability, such as Venezuela, Nigeria and Libya. Lastly, the outcome of the Panama Canal arbitration remains pending. See page 67 for full disclosures and analyst certification Italy/Construction Top Picks Selection Intesa Sanpaolo Research Department Bruno Permutti Research Analyst [email protected] Price performance, -1Y Source:FactSet 14/12/ D J F M A M J J A S O N D Salini Impregilo FTSE IT All Sh - PRICE INDEX Data priced on Target price ( ) 5.40 Target upside (%) Market price ( ) Wk range ( ) 4.54/2.74 Market cap ( M) 1,811.2 No. of shares Free float (%) 43.7 Major shr Salini Costruttori (%) 56.3 Reuters SALI.MI Bloomberg IPG IM FTSE IT All Sh Performance % Absolute Rel. to FTSE IT All Sh -1M M M M M M 13.8 Source: FactSet and Intesa Sanpaolo Research estimates

62 Salini Impregilo - Key data Rating Target price (EUR/sh) Mkt price (EUR/sh) Sector Free float (%) Reuters Code BUY Ord 5.40 Ord 3.68 Construction 43.7 SALI.MI Values per share (EUR) 2013A 2014A 2015E 2016E 2017E No. ordinary shares (M) No. NC saving/preferred shares (M) Total no. of shares (M) Market cap 1, , , , ,826.6 Adj. EPS CFPS BVPS Dividend ord Dividend SAV Nc Income statement (EUR M) 2013A 2014A 2015E 2016E 2017E Revenues 3, , , , ,546.6 EBITDA EBIT Pre-tax income Net income Adj. net income Cash flow (EUR M) 2013A 2014A 2015E 2016E 2017E Net income before minorities Depreciation and provisions Others/Uses of funds Change in working capital Operating cash flow Capital expenditure Financial investments Acquisitions and disposals Free cash flow Dividends Equity changes & Other non-operating items Net cash flow -1, Balance sheet (EUR M) 2013A 2014A 2015E 2016E 2017E Net capital employed , , , ,817.8 of which associates Net debt/-cash Minorities Net equity , , , ,524.2 Minorities value Enterprise value 2, , , , ,982.4 Stock market ratios (x) 2013A 2014A 2015E 2016E 2017E Adj. P/E P/CFPS P/BVPS Payout (%) Dividend yield (% ord) Dividend yield (% sav) FCF yield (%) EV/sales EV/EBITDA EV/EBIT EV/CE D/EBITDA D/EBIT Profitability & financial ratios (%) 2013A 2014A 2015E 2016E 2017E EBITDA margin EBIT margin Tax rate Net income margin ROCE ROE Interest cover Debt/equity ratio Growth (%) 2014A 2015E 2016E 2017E Sales EBITDA EBIT Pre-tax income Net income Adj. net income NM: not meaningful; NA: not available; A: actual; E: estimates; Source: Company data and Intesa Sanpaolo Research 62 Intesa Sanpaolo Research Department

63 Unipol Insurance Top Pick 2016 BUY Target Price: EUR 5.65 Investment Case Unipol is the first P&C insurance group in Italy, with a 23.88% market share in 2014 and more than a 29% market share in motor (source: ANIA). The group is working on the strategic guidelines of the new business plan (to be presented in Spring 2016), which could represent a catalyst for the share price, in our view. In 3Q/9M15 results conference call, Mr Cimbri, Unipol group s CEO, stated that the new plan could include additional incentivised personnel exit, while adding that a potential merger between UnipolSai and Unipol has never been taken into account. We believe that such a move (currently not envisaged by management) would completely eliminate the holding discount vs. UnipolSai, which is currently at 23%. We cannot rule out that the group could evaluate potential external growth opportunities abroad, which in the past Mr Cimbri sometimes qualified as an option once the business plan was completed. We believe that the improving picture for the banking business (which recorded an annualised cost of risk of approximately 100bps in 9M15 in the low-end of the bps guidance provided by the company at the beginning of the year we estimate 123bps for FY15E), together with its medium-term potential valorisation in the sector s consolidation process, should help to reduce the holding discount applied by the market. Unipol offers an attractive dividend yield. Our 2015E estimates point to a EUR 0.21 DPS, implying a yield of 4.7% at the current market price. Our forecast factors in a significant growth vs. the FY14 level (EUR 0.17/share). We also highlight that, in the 4Q/FY14 results conference call, Mr Cimbri provided a guidance for growing dividends but at a progressive rate. We point out that the Unipol dividend is paid by Unipol Holding, for which we forecast a net profit of approx. EUR 190M in FY15E and a pay-out close to 80%. Our estimate on Unipol Holding s net profit is based on a dividend estimate of EUR 0.15/share on UnipolSai (implying a 6.8% yield at the current market price of UnipolSai) and EUR 45M of banking provisions on the holding s accounts (EUR 20M already recorded in 9M15). Valuation We value Unipol with a Sum-of-the-Parts (SOP) model, with a separate valuation of the 61.08% stake in UnipolSai s ordinary capital (factoring in our target price of EUR 2.55/share), the banking business and other insurance activities. Our valuation model also takes into account the net debt of the UGF holding company which we currently estimate at EUR 350M. We apply a 15% holding discount to our SOP fair value vs. 23% expressed by the current market prices of Unipol and UnipolSai. BUY and EUR 5.65/share target price. Key Risks We see the main generic risks to our valuation as being: 1) a slower than expected macroeconomic recovery in Italy; 2) changes in short-term interest rates; 3) a drop in government bond prices; and 4) regulatory changes either on capital (Solvency II) or affecting the operational and competitive scenario in the Italian insurance sector. In our view, the specific risks relate to: a) a potentially negative impact on the solvency ratio coming from possible losses on assets; b) the issue represented by Unipol Banca s credit quality; and c) potential legal issues related to the former Fon-SAI accounts and management and the merger with Unipol. See page 67 for full disclosures and analyst certification Italy/Insurance Top Picks Selection Intesa Sanpaolo Research Department Elena Perini, CFA Research Analyst [email protected] Financial Team Manuela Meroni Elena Perini, CFA Price performance, -1Y Source:FactSet 14/12/ D J F M A M J J A S O N Unipol FTSE IT All Sh - PRICE INDEX Data priced on Target price ( ) 5.65 Target upside (%) Market price ( ) Wk range ( ) 5.31/3.83 Market cap ( M) 3,211.4 No. of shares Free float (%) 44.1 Major shr FinSOE (%) 31.4 Reuters UNPI.MI Bloomberg UNI IM FTSE IT All Sh Performance % Absolute Rel. to FTSE IT All Sh -1M 0.0-1M 6.0-3M 6.9-3M M M -3.2 Source: FactSet and Intesa Sanpaolo Research estimates

64 Unipol - Key data Rating Target price (EUR/sh) Mkt price (EUR/sh) Sector Free float (%) Reuters Code BUY Ord 5.65 Ord 4.48 Insurance 44.1 UNPI.MI Values per share (EUR) 2013A 2014A 2015E 2016E 2017E No. ordinary shares (M) Total no. of shares (M) Market cap 2, , , , ,211.4 Adj. EPS BVPS NAVPS DPS-ordinary shares Dividend payout (%) NM Income Statement (EUR M) 2013A 2014A 2015E 2016E 2017E Total premiums 16, , , , ,244.1 Non-life underwriting result Pre-tax income ,098.4 Non-life pre-tax income , Life pre-tax income Investment income 1, , , , ,129.6 Net income Adjusted net income Balance sheet and other (EUR M) 2013A 2014A 2015E 2016E 2017E Net investments 69, , , , ,886.8 Net technical reserves 56, , , , ,224.7 Net technical reserves non-life 18, , , , ,850.0 Net technical reserves life 38, , , , ,374.7 Life net inflows , , , ,250.0 Excess of investments 12, , , , ,662.1 Net invested capital 10, , , , ,681.4 Financial debt 3, , , , ,432.0 Shareholders' net equity 5, , , , ,169.7 Excess capital 1, , , , ,794.2 Stock Market Ratios (x) 2013A 2014A 2015E 2016E 2017E P/E Neg Adj. P/E Neg P/BVPS P/NAV Dividend yield (% ord) Profitability & financial ratios (%) 2013A 2014A 2015E 2016E 2017E Gross premiums life/total premiums Net retention total business Net loss ratio (non life) Net expense ratio (non-life) Net combined ratio Cover ratio Life expense ratio Tax rate ROE Neg RONAV Neg Net profit/total reserves Neg Solvency Leverage Revenues breakdown (EUR M) 2013A 2014A 2015E 2016E 2017E Non-life premiums 9, , , , ,824.7 Life premiums 6, , , , ,419.4 Growth (%) 2014A 2015E 2016E 2017E Adj. EPS NM NM Non-life premiums Life premiums Non-life reserves Life reserves NM: not meaningful; NA: not available; A: actual; E: estimates; Source: Company data and Intesa Sanpaolo Research 64 Intesa Sanpaolo Research Department

65 Notes Intesa Sanpaolo Research Department 65

66 Notes 66 Intesa Sanpaolo Research Department

67 Disclaimer Analyst certification The financial analysts who prepared this report, and whose names and roles appear within the document, certify that: Equity Strategy Report 1. The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; 2. No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures 1. Neither the analysts nor any member of the analysts' households have a financial interest in the securities of the Companies. 2. Neither the analysts nor any member of the analysts' households serve as an officer, director or advisory board member of the Companies. 3. Some of the analysts named in the document are members of AIAF 4. The analysts named in this document are not registered with or qualified by FINRA, the U.S. regulatory body with oversight over Banca IMI Securities Corp. Accordingly, the analysts may not be subject to FINRA Rule 2241 and NYSE Rule 472 with respect to communications with a subject company, public appearances and trading securities in a personal account. For additional information, please contact the Compliance Department of Banca IMI Securities Corp at The analysts of this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions. 6. The research department supervisors do not have a financial interest in the securities of the Companies. This research has been prepared by Intesa Sanpaolo SpA and distributed by Banca IMI SpA Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and FINRA). Intesa Sanpaolo SpA accepts full responsibility for the contents of this report and also reserves the right to issue this document to its own clients. Banca IMI SpA and Intesa Sanpaolo SpA, which are both part of the Intesa Sanpaolo Group, are both authorised by the Banca d'italia and are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business. Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor. This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. 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Intesa Sanpaolo SpA has formalised a set of principles and procedures for dealing with conflicts of interest ( Research Policy ). The Research Policy is clearly explained in the relevant section of Intesa Sanpaolo s web site ( Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo SpA issues and circulates research to Major Institutional Investors in the USA only through Banca IMI Securities Corp., 1 William Street, New York, NY 10004, USA, Tel: (1) Residents in Italy: This document is intended for distribution only to professional clients and qualified counterparties as defined in Consob Regulation no of , as subsequently amended and supplemented, either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA. US persons: This document is intended for distribution in the United States only to Major US Institutional Investors as defined in SEC Rule 15a-6. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above). Coverage policy and frequency of research reports The list of companies covered by the Research Department is available upon request. Intesa Sanpaolo SpA aims to provide continuous coverage of the companies on the list in conjunction with the timing of periodical accounting reports and any exceptional event that affects the issuer s operations. The companies for which Banca IMI acts as sponsor or specialist or other regulated roles are covered in compliance with regulations issued by regulatory bodies with jurisdiction. In the case of a short note, we advise investors to refer to the most recent company report published by Intesa Sanpaolo SpA s Research Department for a full analysis of valuation methodology, earnings assumptions, risks and the historical of recommendation and target price. In the Equity Daily note the Research Department reconfirms the previously published ratings and target prices on the covered companies (or alternatively such ratings and target prices may be placed Under Review). Research is available on Banca IMI s web site ( or by contacting your sales representative. Intesa Sanpaolo Research Department 67

68 Valuation methodology (long-term horizon: 12M) The Intesa Sanpaolo SpA Equity Research Department values the companies for which it assigns recommendations as follows: We obtain a fair value using a number of valuation methodologies including: discounted cash flow method (DCF), dividend discount model (DDM), embedded value methodology, return on allocated capital, break-up value, asset-based valuation method, sum-of-the-parts, and multiples-based models (for example PE, P/BV, PCF, EV/Sales, EV/EBITDA, EV/EBIT, etc.). The financial analysts use the above valuation methods alternatively and/or jointly at their discretion. The assigned target price may differ from the fair value, as it also takes into account overall market/sector conditions, corporate/market events, and corporate specifics (ie, holding discounts) reasonably considered to be possible drivers of the company s share price performance. These factors may also be assessed using the methodologies indicated above. Equity rating key: (long-term horizon: 12M) In its recommendations, Intesa Sanpaolo SpA uses an absolute rating system, which is not related to market performance and whose key is reported below: Equity rating key (long-term horizon: 12M) Long-term rating Definition BUY If the target price is 20% higher than the market price ADD If the target price is 10%-20% higher than the market price HOLD If the target price is 10% below or 10% above the market price REDUCE If the target price is 10%-20% lower than the market price SELL If the target price is 20% lower than the market price RATING SUSPENDED The investment rating and target price for this stock have been suspended as there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and target price, if any, are no longer in effect for this stock. NO RATING The company is or may be covered by the Research Department but no rating or target price is assigned either voluntarily or to comply with applicable regulations and/or firm policies in certain circumstances, including when Intesa Sanpaolo is acting in an advisory capacity in a merger or strategic transaction involving the company. TARGET PRICE The market price that the analyst believes the share may reach within a one-year time horizon MARKET PRICE Closing price on the day before the issue date of the report, as indicated on the first page, except where otherwise indicated Historical recommendations and target price trends (long-term horizon: 12M) Atlantia Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 16-Dec-15 ADD Nov-15 ADD Sep-15 ADD Mar-15 HOLD Mar-15 UNDER REVIEW U/R Dec BUY ATL-IT Target Price Autogrill Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 15-Dec-15 BUY Nov-15 BUY Nov-15 BUY Mar BUY AGL-IT Target Price 68 Intesa Sanpaolo Research Department

69 Anima Holding Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 11-Dec-15 ADD Apr-15 ADD Mar ADD ANIM-IT Target Price Azimut Holding Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 08-May-15 ADD Mar-15 ADD Mar UNDER REVIEW U/R AZM-IT Target Price Banca Generali Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 05-Nov-15 HOLD May-15 HOLD Feb HOLD BGN-IT Target Price Banca Popolare di Milano Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 11-Nov-15 BUY Aug-15 ADD Feb-15 BUY Dec BUY PMI-IT Target Price Intesa Sanpaolo Research Department 69

70 Banco Popolare Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 11-Nov-15 BUY Aug-15 ADD Jun-15 ADD Feb-15 ADD Dec HOLD BP-IT Target Price Cattolica Assicurazioni Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 24-Nov-15 ADD May-15 ADD Feb ADD CASS-IT Target Price EI Towers Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 14-Dec-15 ADD Sep-15 ADD Mar ADD EIT-IT Target Price Enel Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 16-Dec-15 BUY Nov-15 HOLD Mar HOLD ENEL-IT Target Price 70 Intesa Sanpaolo Research Department

71 Eni Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 11-Nov-15 HOLD Mar-15 HOLD Jan HOLD ENI-IT Target Price Fiat Chrysler Automobiles Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 30-Oct-15 ADD Oct-15 ADD Apr-15 BUY Jan BUY U/R FCA- Target Price Finmeccanica Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 06-Nov-15 BUY Aug-15 BUY Aug-15 BUY U/R Mar-15 BUY Jan BUY FNC-IT Target Price Generali Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 11-Dec-15 BUY May BUY G-IT Target Price Intesa Sanpaolo Research Department 71

72 Hera Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 16-Sep ADD HER-IT Target Price Mediolanum Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 09-Nov-15 ADD May-15 ADD Apr-15 UNDER REVIEW U/R Feb ADD MED-IT Target Price Poste Italiane Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 15-Dec-15 ########### ADD PST-IT Target Price Prysmian Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 11-Nov-15 ADD Nov-15 ADD U/R Aug-15 ADD May-15 ADD Mar ADD U/R PRY-IT Target Price 72 Intesa Sanpaolo Research Department

73 Safilo Group Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 11-Nov-15 BUY Sep-15 BUY U/R Mar-15 BUY Mar UNDER REVIEW U/R SFL-IT Target Price Salini Impregilo Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 13-Aug BUY SAL-IT Target Price Snam Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 27-Mar HOLD SRG-IT Target Price Telecom Italia Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 22-Dec NO RATING 0.89 TIT-IT Target Price Intesa Sanpaolo Research Department 73

74 Tenaris Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 18-Nov-15 HOLD Oct-15 HOLD U/R Mar-15 HOLD Feb UNDER REVIEW U/R TEN-IT Target Price Terna Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 12-Nov-15 HOLD Apr HOLD TRN-IT Target Price Unipol Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 18-Nov-15 BUY Aug-15 BUY May-15 BUY Feb-15 BUY Dec BUY UNI-IT Target Price UnipolSai Target price and market price trend (-1Y) Historical recommendations and target price trend (-1Y) Date Rating TP Mkt Price 18-Nov-15 HOLD Aug-15 HOLD May-15 HOLD Feb ADD US-IT Target Price 74 Intesa Sanpaolo Research Department

75 Equity rating allocations (long-term horizon: 12M) Intesa Sanpaolo Research Rating Distribution (at November 2015) Number of companies considered: 97 BUY ADD HOLD REDUCE SELL Total Equity Research Coverage % of which Intesa Sanpaolo s Clients % (*) (*) Companies on behalf of whom Intesa Sanpaolo and the other companies of the Intesa Sanpaolo Group have provided corporate and Investment banking services in the last 12 months; percentage of clients in each rating category Valuation methodology (short-term horizon: 3M) Our short-term investment ideas are based on ongoing special market situations, including among others: spreads between share categories; holding companies vs. subsidiaries; stub; control chain reshuffling; stressed capital situations; potential extraordinary deals (including capital increase/delisting/extraordinary dividends); and preys and predators. Investment ideas are presented either in relative terms (e.g. spread ordinary vs. savings; holding vs. subsidiaries) or in absolute terms (e.g. preys). The companies to which we assign short-term ratings are under regular coverage by our research analysts and, as such, are subject to fundamental analysis and long-term recommendations. The main differences attain to the time horizon considered (monthly vs. yearly) and definitions (short-term long/short vs. long-term buy/sell ). Note that the short-term relative recommendations of these investment ideas may differ from our long-term recommendations. We monitor the monthly performance of our short-term investment ideas and follow them until their closure. Equity rating key (short-term horizon: 3M) Equity rating key (short-term horizon: 3M) Short-term rating LONG SHORT Definition Stock price expected to rise or outperform within three months from the time the rating was assigned due to a specific catalyst or event Stock price expected to fall or underperform within three months from the time the rating was assigned due to a specific catalyst or event Company specific disclosures Intesa Sanpaolo S.p.A. and the other companies belonging to the Intesa Sanpaolo Banking Group (jointly also the Intesa Sanpaolo Banking Group ) have adopted written guidelines Modello di Organizzazione, Gestione e Controllo pursuant to Legislative Decree 8 June, 2001 no. 231 (available at the Intesa Sanpaolo website, webpage along with a summary sheet, webpage setting forth practices and procedures, in accordance with applicable regulations by the competent Italian authorities and best international practice, including those known as Information Barriers, to restrict the flow of information, namely inside and/or confidential information, to prevent the misuse of such information and to prevent any conflicts of interest arising from the many activities of the Intesa Sanpaolo Banking Group which may adversely affect the interests of the customer in accordance with current regulations. In particular, the description of the measures taken to manage interest and conflicts of interest related to Articles 69-quater and 69-quinquies of the Issuers Regulation issued by Consob with Resolution no of as subsequently amended and supplemented, Article 24 of Rules governing central depositories, settlement services, guarantee systems and related management companies issued by Consob and Bank of Italy, FINRA Rule 2241 and NYSE Rule 472, as well as the FCA Conduct of Business Sourcebook rules COBS and COBS between the Intesa Sanpaolo Banking Group and issuers of financial instruments, and their group companies, and referred to in research products produced by analysts at Intesa Sanpaolo is available in the "Research Rules" and in the extract of "A business model for managing privileged information and conflicts of interest" published on the website of Intesa Sanpaolo S.p.A. At the Intesa Sanpaolo website, webpage you can find the archive of Intesa Sanpaolo Banking Group's conflicts of interest. Furthermore, in accordance with the aforesaid regulations, the disclosures of the Intesa Sanpaolo Banking Group s conflicts of interest are available through the above-mentioned webpage. The conflicts of interest published on the internet site are updated to at least the day before the publishing date of this report. We highlight that disclosures are also available to the recipient of this report upon making a written request to Intesa Sanpaolo Equity & Credit Research, Via Manzoni, Milan - Italy. Intesa Sanpaolo Research Department 75

76 Intesa Sanpaolo Research Department Head of Research Department: Gregorio De Felice Head of Equity & Credit Research Giampaolo Trasi Equity Research Monica Bosio Luca Bacoccoli Antonella Frongillo Manuela Meroni Gian Luca Pacini Elena Perini Bruno Permutti Roberto Ranieri Meris Tonin Corporate Broking Research Alberto Francese Gabriele Berti Marta Caprini Technical Analysis Corrado Binda Sergio Mingolla Banca IMI SpA Largo Mattioli, Milan, Italy Tel: Banca IMI Securities Corp. 1 William Street New York, NY, USA Tel: (1) Banca IMI London Branch 90 Queen Street London EC4N 1SA, UK Tel Research Clearing & Production Anna Whatley [email protected] Bruce Marshall [email protected] Annita Ricci [email protected] Wendy Ruggeri [email protected] Elisabetta Bugliesi (IT support) [email protected] Banca IMI SpA Institutional Sales Catherine d'aragon [email protected] Carlo Cavalieri [email protected] Stefan Gess [email protected] Francesca Guadagni [email protected] Federica Repetto [email protected] Daniela Stucchi [email protected] Marco Tinessa [email protected] Mark Wilson [email protected] Corporate Broking Carlo Castellari [email protected] Laura Spinella [email protected] Sales Trading Emanuele Mastroddi [email protected] Lorenzo Pennati [email protected] Equity Derivatives Institutional Sales Emanuele Manini [email protected] Umberto De Paoli [email protected] Enrico Ferrari [email protected] Francesca Dizione [email protected] Banca IMI SpA Head of Market Hub: Gherardo Lenti Capoduri E-commerce Distribution Alessandra Minghetti [email protected] Francesco Riccardi [email protected] Umberto Menconi [email protected] Filippo Besozzi [email protected] Fabio Del Gobbo (London Office) [email protected] Brokerage & Execution Sergio Francolini [email protected] Banca IMI Securities Corp. US Institutional Sales Larry Meyers [email protected] Barbara Leonardi [email protected] Greg Principe [email protected] 76 Intesa Sanpaolo Research Department