GEFRAN. 1Q16 results in line. Buy (maintained) Company report. 13 May Electrical equipment

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1 GEFRAN Company report Electrical equipment Data Shares Outstanding (m): 14 Market Cap. (EURm): 25 Enterprise Value (EURm): 55 Free Float (%): 33.2% Av. Daily Trad. Vol. (m): 0.01 Main Shareholder: Reuters/Bloomberg: Franceschetti family 81.5% GFRN.MI GE IM 52-Week Range (EUR) Buy (maintained) MARKET PRICE: EUR1.75 TARGET PRICE: EUR2.47 (confirmed) 1Q16 results in line 1Q16 results were broadly in line with our expectations even though non-recurring costs (EUR1.4 million) exceeded our estimate, penalizing both EBITDA and the net result (negative for EUR0.7 million). However, we highlight the improvement in the margins of the Sensors division (26.4% vs. 24.1% in 1Q15), the sound order intake (+7.3% vs. 1Q15, with a book to bill of 1.1 vs. 1.0 last year) and a further reduction in net debt. We believe the ongoing restructuring is starting to bear fruit and that, as soon as the company demonstrates a convincing improvement in profitability, the share price appreciation could be very rapid and very substantial. We confirm our estimates, our EUR2.47 per share target price and reiterate our Buy rating. Performance 1m 3m 12m Absolute 0.2% 22.7% -47.0% Rel. to FTSE IT -0.8% 14.2% -32.3% Graph area Absolute/Relative 12 M Marco Cristofori marco.cristofori@ubibanca.it Tel Website: Financials E Revenues (EURm) EBITDA (EURm) 6 10 EBITDA margin (%) 4.9% 8.0% EBIT (EURm) -1 4 EPS (EUR) CFPS (EUR) E DPS (EUR) Source: Company Data, UBI Banca Estimates > Sales were down 2.6% in 1Q16, mostly due to the slowdown in Asia and Brazil, which penalised revenues in the Automation and Motion controls divisions. EBITDA declined 7.6% but, stripping out the EUR1.4 million of non-recurring costs that mainly related to the closure of the Spanish branch and the restructuring process in Italy (55 redundancies plus temporary lay-off for 480 employees), it would have risen 66% and generated a margin >10%. The company also reported EUR0.5 million of profit from discontinued operations following the disposal of its subsidiary in Spain. Net debt decreased to EUR23.8 million from EUR24.9 million at Dec-15. > Management confirmed its 2016 guidance for sales growth of about 8%, which we believe is feasible despite a sales decrease in 1Q16, and an EBITDA margin approaching 8%, which remains below the level. The EBIT margin is expected to be 3%-3.5%, in line with our estimates, which we have left unchanged. The main drivers of profitability growth would be an improvement in the product mix (a higher weighting of the Sensors division), a recovery in the Motion controls division, which should return to positive EBITDA in 2017, and lower fixed costs resulting from the restructuring actions currently underway. > We confirm our target price of EUR2.47 per share based on the average of EVA and a relative valuation and applying a 20% discount for the low liquidity of the stock. At the target price, Gefran would trade at 5.0x 2017 EV/EBITDA, which is still below the average multiple for our peer sample (8.4x). 2018E % 10.5% Ratios E 2017E 2018E P/E(x) nm P/CF(x) 28.5 P/BV(x) 0.7 Dividend Yield 0.0% 0.0% 0.0% 0.0% EV/EBITDA(x) 13.1 Debt/Equity (x) Debt/EBITDA (x) Source: Company Data, UBI Banca Estimates 1

2 Figure 1 1Q16 results Profitability was hit by non-recurring costs of nearly EUR1.4 million. Stripping out these costs, EBITDA would have been EUR3.08 million and the margin 10.6%, in line with the historical average. The gross margin was 65.9%, in line with (EURm) 1Q15A 1Q16A % Chg. Sales total % EBITDA % % margin 6.1% 5.8% EBIT % Pre tax nm Profit (loss) from assets held for sale Net attributable result nm Net debt/(cash) % Figure 2 1Q16 results by division Despite stable revenues, the sensors division had an improvement in EBITDA margin. The company reported a sound order intake of EUR32.7 million, up 7.3% vs. 1Q15. (EURm) 1Q15A 1Q16A % Chg. Sales Sensors % Sales Automation % Sales Motion controls % EBITDA Sensors % EBITDA Automation nm EBITDA Motion controls nm EBITDA margin Sensors 24.1% 26.4% EBITDA margin Automation 1.2% -1.5% EBITDA margin Motion controls -12.3% -15.3% Figure 3 : Quarterly sales trend by division While sales in the Sensors division remained stable, those of the Automation division declined 3% and those of the Motion controls division 7%, penalized by a tough comparative base (the Motion controls division deteriorated from 2Q15). 18,0 16,0 Figure 4 : Quarterly sales trend by geographical area Asia (mostly China) and South America (Brazil) were very weak in 1Q16 (-18% and -29% respectively), while North America had the highest sales growth (+20%). Italian revenues rose 3% and sales in the rest of the EU rose 1%. 14,00 12,00 14,0 10,00 12,0 10,0 8,00 6,00 4,00 8,0 2,00 6,0 1Q132Q133Q134Q131Q142Q143Q144Q141Q152Q153Q154Q151Q16 Automation Sensors Motion Controls 0,00 1Q132Q133Q134Q131Q142Q143Q144Q141Q152Q153Q154Q151Q16 Italy EU Europe non EU North America South America Asia 2

3 Income Statement (EURm) E 2017E 2018E Net Revenues EBITDA EBITDA margin 4.9% 8.0% 9.7% 10.5% EBIT EBIT margin -0.5% 3.1% 5.3% 6.3% Net financial income /expense Associates & Others Profit before taxes Taxes Minorities & discontinuing ops Net Income Balance Sheet (EURm) E 2017E 2018E Net working capital Net Fixed assets M/L term funds Capital employed Shareholders' equity Minorities Shareholders' funds Net financial debt/(cash) Cash Flow Statement (EURm) E 2017E 2018E NFP Beginning of Period Group Net Profit Minorities D&A Change in Funds & TFR Gross Cash Flow Change In Working Capital Other Operating Cash Flow Net Capex Other Investments Free Cash Flow Dividends Paid Other & Chg in Consolid. Area Chg in Net Worth & Capital Incr Change in NFP NFP End of Period

4 Financial Ratios (%) E 2017E 2018E ROE -7.6% 1.0% 3.4% 5.6% ROI -0.6% 4.0% 7.3% 9.1% Net Fin. Debt/Equity (x) Net Fin. Debt/EBITDA (x) Interest Coverage NWC/Sales 27.7% 28.3% 28.5% 27.6% Capex/Sales 4.5% 3.5% 3.6% 3.5% Pay Out Ratio 0.0% 0.0% 0.0% 0.0% Per Share Data (EUR) E 2017E 2018E EPS DPS Op. CFPS Free CFPS BVPS Stock Market Ratios (x) E 2017E 2018E P/E nm P/OpCFPS P/BV Dividend Yield (%) 0.0% 0.0% 0.0% 0.0% Free Cash Flow Yield (%) -6.6% nm 0.7% 16.1% EV (EURm) EV/Sales EV/EBITDA EV/EBIT EV/Capital Employed Growth Rates (%) E 2017E 2018E Growth Group Net Sales -11.0% 8.1% 8.2% 5.4% Growth EBITDA -59.2% 74.5% 31.8% 14.3% Growth EBIT nm nm 83.6% 26.3% Growth Net Profit nm nm 235.4% 75.4% 4

5 Disclaimer Analyst Declaration The analyst who prepared this report, and whose name and role appear on the front page, certifies that: a. the views expressed on the Company mentioned herein accurately reflects his personal views. It does not represent the views or opinions of the management of UBI Banca or any other company in or affiliated to the UBI Banca Group. It is possible that individuals employed by UBI Banca, or any other company in or affiliated to the UBI Banca Group, may disagree with the views expressed in this report; b. no direct or indirect compensation has been or will be received in exchange for any views expressed; c. the analyst does not own shares of the Company; d. neither the analyst nor any member of the analyst s household serves as an officer, director or advisory board member of the Company; e. the analyst does not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions. About UBI Banca This document has been prepared by UBI Banca, a bank authorized by the Bank of Italy to provide investment services pursuant to Article 1, Paragraph 5, letter a), b), c), c-bis), e) and f) of Legislative Decree, 24 February 1998, n 58. General warning This document is for information purposes only. This document (i) is not, nor may it be construed, to constitute, an offer for sale or subscription of or a solicitation of any offer to buy or subscribe for any securities issued or to be issued by the Company, (ii) should not be regarded as a substitute for the exercise of the recipient s own judgement. In addition, the information included in this document may not be suitable for all recipients. Therefore the recipient should conduct his own investigations and analysis of the Company and securities referred to in this document and make his own investment decisions without undue reliance on its contents. 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6 Ranking system UBI Banca s analysts use an absolute rating system, not related to market performance. The explanation of the rating system is listed below: Buy: if the target price is 10% higher than the market price. Hold: if the target price is 10% below or 10% above the market price. Sell: if the target price is 10% lower than the market price. Target price: the market price that the analyst believes that the share may reach within a one-year time horizon. Market price: closing price on the day before the issue date of the report, appearing on the first page. Distribution This document is intended for distribution only by electronic and ordinary mail to Professional Clients and Qualified Counterparties as defined in Consob Regulation n dated This document may be distributed in the USA by a United States Securities and Exchange Commission ( SEC ) registered broker dealer. This document may not be distributed in Canada, Japan or Australia. Copyright This document is being supplied solely for the recipient s information and may not be reproduced, redistributed or passed on, directly or indirectly to any other person or published, in whole or in part, for any purpose without prior written consent by UBI Banca. The copyright and intellectual property rights on the data are owned by UBI Banca Group, unless otherwise indicated. The data, information, opinions and valuations contained in this document may not be subject to further distribution or reproduction, in any form or via any means, even in part, unless expressly consented by UBI Banca. By accepting this document the recipient agrees to be bound by all of the forgoing provisions. Distribution of ratings For further information regarding quarterly rating statistics and descriptions, please refer to Historical ratings and target prices Date Rating Target Price (EUR) Market Price (EUR) 14 March 2016 BUY