Highlights. Reason for report: Initial Coverage

Transcription

1 C a m p a r i G r o u p Primary Exchange - Milan. Index MIDEX (2.52% weight). Bloomberg/Reuters CPR IM/CPR.MI 35,7 Sector Segments Beverage Spirits, Wines, Soft drinks STOCK RATING HOLD PRICE TARGET 38,0 + 6,3% Stock ratings are relative to the expected 12 months performance vs. price target. Stock rating system (see on last page): BUY > ADD > HOLD > NEUTRAL > REDUCE > SELL Reason for report: Highlights The high capacity to generate cash flow and considering the Advertising & Promotion a fundamental driver for the success of Group s business model, we believe that Campari is an investment opportunity in medium-term horizon. Major shareholders 50.99% Alicros S.R.L. 8.57% Morgan Stanley Inv. M. L. Market Capitalisation 1036,44 million 52 Weeks Range 36,50-27,05 Shares outstanding 29,04 million ordinary shares SMAVG on Vol. (25 dd) 0,03949 million We have calculate the exercise of the options deriving from Skyy acquisition and its effects on Campari s value, but we haven t include it in our price target due to excess uncertain respect numerous variables, like the currency exchange rate EUR/USD and the Skyy Spirits net profit s growth rate. Beta vs. MIDEX Beta vs. MIBFOODH Beta vs. MIBTEL Valuation model Check method 0.48 (Source Bloomberg) 0.62 (Source Bloomberg) 0.49 (Source Bloomberg) DCF Market Multiple Given the stability of the Group s business, external growth apart, and the relative predictability of its cash flows in explicit horizon, on the basis of the our consideration and the our valuation system, we believe that a 12 months price target of 38,0 per share (effects Skyy acquisition apart) reflect the reasonable Campari s value, consequently we initiate coverage with HOLD recommendation. Stock Price Performance Fiscal Year Ends (Dec 31) FY01 FY02 A FY03 E FY04 E FY05 E Net sales 494,3 660,6 713,5 749,1 786,6 EBITDA 114,5 160,0 168,0 177,2 187,8 EBITA 100,1 142,4 149,1 158,8 166,8 EBIT 88,6 114,7 121,6 131,8 140,3 PBT 94,0 107,6 138,9 134,1 145,5 Net profit 63,4 86,7 83,0 83,2 91,5 Gross cash flow 89,2 132,0 129,4 128,6 139,0 EPS basic 2,18 2,98 2,86 2,87 3,15 DPS 0,88 0,88 0,88 0,88 0,88 Net financial debt (cash) (96,6) 198,8 157,2 85,3 (30,9) Company description producing and selling beverages in the spirit, wine and Values are in million except for EPS and DPS soft drink segments. It s leader in Italian and Brazilian markets and one of the world's leading alcoholic beverage players.

2 Index Highlights 1 Index 2 Executive summary 3 Company profile 4 Three sectors for a diversified brands portfolio 4 Reference market 4 s position 5 Net sales by region 5 The brands in the segments 6 Consolidated profitability 6 Spirits 7 Wines 7 Soft drinks 8 The South American portfolio 8 Manufacturing & Distribution 9 Manufacturing activities 9 Distibuition: direct, joint ventures and third party 9 Development strategy 10 Market-oriented acquisitions and diversification 10 Skyy Spirits acquisition and Campari Mixx launch 10 Outlook 11 Investment thesis 11 Valuation & Rating 12 Valuation model: discount cash flow 12 Check method: EV/EBITDA market multiple 13 Price target and stock rating 14 Financial tables 15 Disclosures information 17 2/17

3 Executive summary Company profile is one of the world's leading alcoholic beverage players with a leading position in the Italian and Brazilian markets and a presence in the USA, Germany and Switzerland. International sales account today for 50% of total consolidated turnover. The brands in the segments Campari's product portfolio spans three business segments: spirits, wines and soft drinks. Group's brand portfolio includes a combination of international brands, such as Campari, Cinzano, SKYY Vodka and Cynar, and local brands, such as CampariSoda, Crodino, Biancosarti, Sella & Mosca, Zedda Piras - Mirto di Sardegna, Lemonsoda, Oransoda and Pelmosoda in Italy, Ouzo 12 in Greece and Germany, Dreher, Old Eight, Drury's and Liebfraumilch in Brazil and Gregson's in Uruguay. Campari's portfolio includes SKYY Blue and Campari MIXX, leading brands in the new Ready-To-Drink market in the US and Italy respectively. Manufacturing & Distribution The Group's manufacturing activities are concentrated in seven plants - four in Italy, two in Brazil and one in France. The Group also licenses production of Campari to local producers under strict conditions. The manufacture of Cinzano (vermouths and sparkling wines) is outsourced and carefully controlled. The has its own distribution networks in Germany, Switzerland, Brazil and the US, joint ventures in the Netherlands, Belgium and the UK; in February 2003 Campari has established a new joint venture in Spain with Gonzalez Byass. The Group utilizes third party distributors in over 180 other countries of the world. Development strategy Campari's management has created a position of strength based on a clear growth strategy: acquire leading brands and consolidate its presence in emerging markets. The Group's objective is to ensure long-term presence in world markets both competitive and profitable. Investment thesis In our point of view, the high capacity to generate cash flow and considering the Advertising & Promotion a fundamental driver for the success of Group s business model, we believe that Campari is an investment opportunity in medium-term horizon, as we show our valuation. Valuation & Rating Given the stability of the Group s business, external growth apart, and the relative predictability of its cash flows in explicit horizon, we view the DCF model as the most appropriate to valuation and the market multiples as check method. On the basis of the our consideration and the our valuation system, we believe that a 12 months price target of 38,0 per share (we haven t include the options deriving from Skyy acquisition and its effects in our price target) reflect the reasonable Campari s value, consequently we initiate coverage with HOLD recommendation. 3/17

4 Company profile Established in 1860, is one of the world's leading alcoholic beverage players with a leading position in the Italian and Brazilian markets and a presence in the USA, Germany and Switzerland. Production plants are located in Italy, Brazil and France. An established presence in international markets in more than 190 countries. International sales account today for 50% of total consolidated turnover. The Group has over 1,400 employees, and shares of the parent company Davide Campari-Milano S.p.A. have been listed on the MTA of Borsa Italiana S.p.A. since July Three sectors for a diversified brands portfolio Campari's product portfolio spans three business segments: spirits, wines and soft drinks. Group's brand portfolio includes a combination of international brands, such as Campari, Cinzano, SKYY Vodka and Cynar, and local brands, such as CampariSoda, Crodino, Biancosarti, Sella & Mosca, Zedda Piras - Mirto di Sardegna, Lemonsoda, Oransoda and Pelmosoda in Italy, Ouzo 12 in Greece and Germany, Dreher, Old Eight, Drury's and Liebfraumilch in Brazil and Gregson's in Uruguay. Campari's portfolio includes SKYY Blue and Campari MIXX, leading brands in the new Ready-To-Drink market in the US and Italy respectively. Campari also has strong relationships with a number of other leading beverage producers and distributors. They include Jägermeister, Grant's and Glenfiddich distributed in Italy and Brazil, Lipton Ice Tea distributed in Italy, Grand Marnier distributed in Germany, Riccadonna distributed in most parts of the world, and Clan MacGregor sold in Brazil. Reference market The beverage market is a sub-sector of the consumer industry. The three segments in which the Group operates are by no means homogeneous markets. Within each there are numerous sub-segments with unique characteristics and differing competitive scenarios. The market is characterized by a few large global players managing a number of extremely strong brands and a large number of niche players operating successfully in more restricted product or geographical ranges. A highly segmented market The beverage market is strongly diversified and no single description applies to each of its segments. Spirits, wines, soft drinks and mineral waters are very different classes of products, mainly due to differences in demand, consumption occasions, trends, fashions, climatic conditions and other factors all influence consumption patterns, which vary, not only from product to product, but also from country to country. Demand in the spirits, wines and soft drinks segments The consumption of spirits is strongly linked to personal self-image. This involves manufacturers and distributors in considerable investment to promote brand awareness. Soft drinks and wines are subject to more elastic demand. The supply side - strong M&A activity Supply in the beverage sector has been characterized by a marked tendency to concentration: Bacardi, which acquired Martini & Rossi in 1992, Guinness and Grand Metropolitan which merged 1996 to form Diageo and the recent takeover of Seagram 4/17

5 by Diageo itself and Pernod Ricard are only some of the most prominent examples of the M&A activity that has shaken up the sector in recent years. The large operators are buying up brands, either to produce or distribute, in order to consolidate their position in mature markets and create opportunities to penetrate emerging markets. The wine market, although more fragmented than the spirit segment, has seen the emergence of large groups that followed a similar strategy in collecting portfolios of well-known brands. The soft drinks segment is an area dominated by a few global players (Coca Cola, Pepsi Cola and Cadbury Schweppes) with a large number of small-to-medium local operators trailing behind. s position In the premium spirits business, Campari is a leading global competitor and has a strong complementary presence in the international vermouth and sparkling wines market, as well as in the Italian still wines and soft drinks market. The spirits & wines businesses rely upon strong brand identity: this justifies the significant amount of resources invested by the Group in advertising and promotional initiatives to support the brands. The soft drinks market, on the other hand, is characterised by high competition and significant price elasticity. Competitive positioning Global category leadership Portfolio of strong markets or brands Regional, single or niche product powerhouse Local market/secondary brands Table 1. Source: Company data. Diageo A) Pernod Ricard, Allied Domecq, Bacardi B) Brown Forman, V&S, Jim Beam Brands C) Constellation Brands, Eckes, De Kuyper A) Category leadership in aperitifs B) Niche global brands C) Strong local market positions Net sales by region operates in this market with a sales mix that reflects the increasingly international scope of its brands. In fact, the proportion of total overseas sales rose to 53% in Europe (Italy apart) accounted for 19.3% of sales. Americas represented 30.3% and the rest of the world accounted for 3.3%, like showed in the next table. Geographical breakdown FY99 FY00 FY01 FY02A weight on 02 CAGR 99/02 Italy 237,0 249,2 263,5 311,0 47,1% 9,5% Europe 94,6 127,0 131,2 127,3 19,3% 10,4% USA 5,2 138,1 20,9% Brazil 65,0 55,2 8,4% Other countries 6,5 6,9 1,0% Americas 21,6 36,3 76,7 200,2 30,3% 110,0% Rest of the World 12,8 21,5 22,9 22,1 3,3% 20,0% Net sales 366,0 434,0 494,3 660,6 100% 21.8% Table 2. Source: Company data. 5/17

6 The brands in the segments Consolidated profitability The consolidated results 2002 showed a impressive CAGR 1999/02 in net sales, gross margin and trading profit of 21.7%, 22.2% and 20%, respectively. ( mln) FY99 FY00 FY01 FY02A CAGR 99/02 Net sales 366,0 434,0 494,3 660,5 21.7% Change % 18,6% 13,9% 33,6% Gross margin 210,7 252,9 282,8 384,2 22.2% Change % 20,0% 11,8% 35,9% Gross margin % 57,6% 58,3% 57,2% 58,2% Trading profit 104,7 122,9 136,5 180,8 20.0% Change % 17,3% 11,1% 32,5% Trading profit % 28,6% 28,3% 27,6% 27,4% Table 3. Source: Company data. The distribution of sales, of Euro 660,5 million, between the different segments in 2002 is 64.6% spirits to Euro 426,6 million, 14.6% wines to Euro 96,6 million and 19.3% soft drinks to Euro 127,2 million. A weight increase in term of net sales in spirits business of 12.5%; a slight decrease of 1.8% in wines and a pronounced decrease in soft drinks of 25.3% due to choice strategy, like showed in next table. Weight net sales by segment FY99 FY00 FY01 FY02A CAGR 99/02 Spirits 59,8% 54,2% 57,4% 64,6% 2.6% Change % -9,3% 5,9% 12,5% Wines 7,1% 15,6% 14,9% 14,6% 27.1% Change % 119,5% -4,8% -1,8% Soft drinks 33,1% 28,6% 25,8% 19,3% -16.5% Change % -13,5% -10,0% -25,3% Other sales 1,5% 1,9% 1,5% Change % 28,3% -20,4% Table 4. Source: Company data. Over the last few years the has expanded dramatically moving from a single brand, single-sector manufacturer to a diversified operation spanning a number of segments, driven by a strong and profitable manufacturing and marketing strategy. The spirits, wines and soft drinks segments form an integrated offering that is able to penetrate new markets and reach new consumers through the acquired brands added to the portfolio. At the same time, the new brands are integrated into the distribution organization, creating economies of scale that translate into negotiating power in consolidated markets and promotional power and opportunities in emerging market contexts. 6/17

7 Spirits Campari, with revenues of Euro 117 million in 2002, is the Group's flagship brand. Campari brand continues to be the focus of substantial investments in media advertising (TV, press and outdoor), and sponsorship (Formula 1 motor racing) at international level. From Campari was developed CampariSoda, a single-shot aperitif with Euro 71 million sales in SKYY Vodka, Cynar, Ouzo 12, Biancosarti and Zedda Piras (Mirto di Sardegna) are the other spirit brands in the portfolio, together with the brands managed by the Group under license: Jägermeister, Grant's, Glenfiddich, Grand Marnier, Clan Mac Gregor and Vodka Gorbatschow. In January 2002 Skyy Spirits, a subsidiary of the, entered the RTDs (Ready-to-Drink) segment with the launch in the US market of SKYY Blue, the new super-premium alcohol malt beverage, in cooperation with Miller Brewing Company. In September 2002 the Group launches Campari MIXX, Campari's new Ready-To- Drink, in Italy and Switzerland and in March 2003 in Germany and Austria. Campari MIXX, based on Campari and fruity flavors, has a unique taste and an innovative packaging. Spirits ( mln) FY99 FY00 FY01 FY02A CAGR 99/02 Net sales 218,8 235,3 283,8 426,6 24.9% Total Inc/Decrease % 7,6% 20,6% 50,3% weight % 59,8% 54,2% 57,4% 64,6% Gross margin 154,0 167,0 191,9 280,1 22.1% Change % 8,5% 14,9% 46,0% weight % 73,1% 66,0% 67,9% 72,9% Gross margin % 70,4% 71,0% 67,6% 65,7% Trading profit 81,8 89,0 101,4 144,2 20.8% Change % 8,8% 13,9% 42,2% weight % 78,1% 72,4% 74,3% 79,8% Trading profit % 37,4% 37,8% 35,7% 33,8% Table 5. Source: Company data. Wines Cinzano vermouths and sparkling wines are a key element in the 's portfolio: Cinzano vermouth, sold in more than 120 countries, is the number two brand worldwide in its category. Cinzano has a history going back nearly 250 years. Founded in 1757, the Company has a product range that includes sparkling wines (Asti Cinzano, Pinot Chardonnay and Principe di Piemonte are the best known) and vermouths (Rosso, Bianco, Rosé and Dry). Their largest market is Argentina, where they are manufactured and distributed under license. Riccadonna (distributed under license by the Campari Group throughout the world) and Henkell Trocken (distributed under license in Switzerland) are the Group's other brands in the wine segment. Sella & Mosca, with total sales of Euro 21 million in 2002 and around 500 hectares of vineyards, is one of Italy's leading wineries with a growing presence in the premium still wines segment. 7/17

8 Wines ( mln) FY99 FY00 FY01 FY02A CAGR 99/02 Net sales 26,1 67,9 73,6 96,6 54.7% Total Inc/Decrease % 160,3% 8,4% 31,3% weight % 7,1% 15,6% 14,9% 14,6% Gross margin 6,4 30,1 30,9 44,6 90.7% Change % 368,2% 2,7% 44,3% weight % 3,1% 11,9% 10,9% 11,6% Gross margin % 24,6% 44,3% 42,0% 46,2% Trading profit 4,7 13,5 11,4 11,9 11.3% Change % 188,7% -15,6% 4,4% weight % 4,5% 11,0% 8,4% 6,6% Trading profit % 17,9% 19,9% 15,5% 12,3% Table 6. Source: Company data. Soft drinks Crodino is Italy's leading single-shot aperitif, generating sales of Euro 57 million in Sparkling fruit-based drinks Lemonsoda, Oransoda and Pelmosoda are sold mainly in the domestic market, but international sales are growing. These are all brands belonging to the. Lipton Ice Tea, on the other hand, is distributed in Italy under license from Unilever. Soft drinks ( mln) FY99 FY00 FY01 FY02A CAGR 99/02 Net sales 121,2 124,3 127,4 127,2 1.6% Total Inc/Decrease % 2,6% 2,5% -0,2% weight % 33,1% 28,6% 25,8% 19,3% Gross margin 50,3 54,0 58,2 57,6 4.6% Change % 7,4% 7,8% -1,0% weight % 23,9% 21,4% 20,6% 15,0% Gross margin % 41,5% 43,4% 45,7% 45,3% Trading profit 18,3 18,6 21,9 22,9 7.8% Change % 1,8% 17,7% 4,6% weight % 17,4% 15,1% 16,0% 12,7% Trading profit % 15,1% 15,0% 17,2% 18,0% Table 7. Source: Company data. The South American portfolio The recent acquisition further extended the Group's presence in Brazil and Uruguay. In the spirits sector the Group acquired Dreher (the leading aguardente brand with a 32.5% market share - Source: Nielsen DG 2001 conahque category), Old Eight and Drury's, the second and third whisky brands in the Brazilian market with 17.9% and 9.1% share respectively (Source: Nielsen DG 2001 whisky category), as well as Gregson's, the number one whisky in Uruguay, with a market share of 22.9% (Source: Radar DG 2001 national whisky category). Another acquisition is the Liebraumilch local wine brand which lies seventh in the Brazilian market (Source: Nielsen DG 2001 white wine category). 8/17

9 Manufacturing & Distribution Manufacturing activities The Group's manufacturing activities are concentrated in seven plants - four in Italy, two in Brazil and one in France. The Italian plants are Sesto San Giovanni near Milan, Crodo in the Piedmont, Sulmona near L Aquila, Termoli and Alghero were are produced Sella & Mosca wines. In December 2001, the Group started the building of a near bottling factory at Novi Ligure (in the Piedmont) for the Cinzano brands. The plant is expected to start operations at the end of The Group's production facility in France is in Nanterre, ensuring Campari's production needs for a number of European and African markets. Sorocaba e Jaboatao are the locations of the Group's Brazilian plants. The Group also licenses production of Campari to local producers under strict conditions (licensees must obtain the base preparation from the Group and undergo constant quality controls by the Group's inspectors). Cinzano - specialized production and distribution The manufacture of Cinzano (vermouths and sparkling wines) is outsourced and carefully controlled. The Group is closely involved in the selection and purchase of grapes and works closely with the growers. The production of Cinzano sparkling wines (Pinot-Chardonnay Cinzano, Asti Cinzano, Gran Cinzano and Cinzano Bon Sec) and vermouth is mainly carried out by selected suppliers. Distibuition: direct, joint ventures and third party The Group's distribution organization has two divisions: one for domestic sales and one for international sales. In overseas markets, depending on their size and economies of scale, distribution may be carried out by internal network, external network or through joint ventures. The has its own distribution networks in Germany, Switzerland, Brazil and the US, joint ventures in the Netherlands, Belgium and the UK; in February 2003 Campari has established a new joint venture in Spain with Gonzalez Byass. The Group utilizes third party distributors in over 180 other countries of the world. Each market is divided into two channels: 'on trade' (outlets where beverages are sold for on-premise consumption) and 'off trade' (outlets where brands are only purchased, such as supermarkets, hypermarkets, off-licenses, etc.). 9/17

10 Development strategy Campari's management has created a position of strength based on a clear growth strategy: acquire leading brands and consolidate its presence in emerging markets. The Group's objective is to ensure long-term presence in world markets both competitive and profitable. Through an extensive distribution network managed partly directly and partly through joint ventures or third party distributors, the Group enjoys a truly global presence. Further penetration is driven by substantial advertising investments in support of its brands in world markets. In spirits segment, It has the objective to conquer the Ready-To-Drink fast growing market, aimed at young people as an alternative to beer. In wines segment, the Sella & Mosca acquisition represents the first step in the creation of a strong portfolio of premium Italian wines, a segment where the Group sees high growth potential. Market-oriented acquisitions and diversification The pursues a growth strategy, thanks to strong financial position capable of supporting acquisition strategy, through selective acquisitions in the target sector with special focus on the spirits & wines markets, combined with organic growth through development of the existing portfolio, and partnerships with third parties for the distribution of its brands wherever the Group is not present with its own sales organisation. This programme of acquisitions, involving substantial investments, has now placed the in sixth position in the global branded spirits sector (Source : IMPACT Databank, February 2003). Skyy Spirits acquisition and Campari Mixx launch Skyy Spirits, based in San Francisco, California, is the owner of the SKYY Vodka brand. SKYY Vodka, invented and launched in the US, is one of the fastest growing brands in the premium vodka market, itself one of the most dynamic segments within the spirits industry. In December 2001 Campari, which had already acquired a minority stake in November 1998, acquired an additional 50% stake in Skyy Spirits LLC, thereby becoming the company's controlling shareholder with a 58.9% stake, i.e. the absolute majority. The deal's value is USD million (Euro million). This acquisition is a significant step in Campari's international expansion strategy, particularly in the US, a crucial market for the Group, and further enhances the Group's presence in the spirits market premium segment with SKYY Vodka, a leading brand in the North American premium vodka market. Ready-To-Drink (RTD) and Premium Packaged Spirits (PPS) constitute the latest trend in alcohol product consumption patterns of young consumers worldwide. Campari Mixx is a refreshing Campari-based drink; low in alcohol (6.5%); it can be drunk straight from the bottle, making it a trendy alternative to beer, fit for different occasions throughout the day. In the summer of 2002 the introduced Campari Mixx in Italy and Switzerland and Cinzano Five in South Africa. In March 2003 Campari Mixx was introduced also in the German and Austrian markets. In June 2003 the line extension Campari Mixx Orange was launched in Italy. 10/17

11 Outlook declared the next points in the last conference call on the 1H 2003 results (8 September): German business to continue to recover slightly throughout 2H Soft drinks sales to be helped by good summer weather, but Campari Mixx to suffer from tougher competition in second half - year. US business to benefit from good performance of SKYY, but competition in premium vodka market is increasing. Negative currency impact to reduce overall if exchange rates become more stable in 2H Investment thesis The beverage market, a sub-sector of the consumer industry, is a mature market with single digit growth annual rate. This characteristic is to the base of the increasing process of concentration and diversification which the has expanded dramatically moving from a single brand, single-sector manufacturer to a diversified operation, thanks to segments high profitability and than strong financial position capable of supporting external growth and organic growth through development of the existing portfolio. The composition of the portfolio allow to the Group to maintain a business mix that is well balanced both in geographical as well as segmental terms. The partnerships with third parties for the distribution of its brands wherever the Group is not present with its own sales organisation and the relationships with a number of other leading beverage producers and distributors, provide the Group with access to attractive third-party brands to complement the Group's product offerings. At the same time, the new brands are integrated into the distribution organization, creating economies of scale that translate into negotiating power in consolidated markets and promotional power and opportunities in emerging market contexts. On the other hand, this process of concentration and diversification, to involve that Campari s international sales account today for 50% of total consolidated turnover. In fact, the 1H 2003 net sales growth was partly off-set by strong negative impact of currency exchange rates: 16.7% at constant exchange, while 8.5% at data of 1H 03. In our point of view, considering observation above, the high capacity to generate cash flow and considering the Advertising & Promotion (A&P investments up to 20.8% of sales, in 1H 2003) a fundamental driver for the success of Group s business model, we believe that Campari is an investment opportunity in medium-term horizon, as we show our valuation. 11/17

12 Valuation & Rating It is difficult to value Campari on the basis of market multiples because: ❹ ❹ ❹ in dimension terms, the are no listed really comparable for Campari; the revenues mix is highly relevant, present different margins and growth rates; there are no specialists operating in a single segment, then it is difficult to identify suitable multiples for each Group s business. Given the stability of the Group s business, external growth apart, and the relative predictability of its cash flows in explicit horizon, we view the DCF model as the most appropriate to valuation and the market multiples as check method. Valuation model: discount cash flow We have assumed a growth rate to infinity (g) of 0.5%, which factors in the maturity and stability of the beverage markets. We have employed a two year historical beta of 0.48 vs. Milan Mid-Cap Index (Midex) by Bloomberg. The DCF valuation that follows is calculated using a terminal WACC of 7.9%. The WACC is also based on a risk free rate of 4.2% (current Italian long term Bond rate 10Y) and a estimate risk premium of 4.0%. The long-term EBIT margin used in the calculation is 19.5% and reflects our underlying revenues assumptions of compound growth in revenues of 5.7% (external growth apart) over the period 2003 to 2008 and a improvement in profitability over the same period, with a EBITDA margin rising towards 25% by the end of the forecast period from 23.5% in the current year. The key assumptions underlying our DCF model are summarised in the table below, while the model complete is situated at the financial tables paragraph. Cost of equity and capital estimates Stable Phase FIRM VALUATION EUR million Market risk premium 4.0% Growth Rate 0.5% Present Value of FCFF First Phase % Risk free rate 4.2% FCFF ( million) 90 Present Value of Terminal Value % BETA first phase 0.48 Cost of Equity 8.2% Value of the firm 1, % Estimated Cost of Debt 6.10% After-tax Cost of Debt 2.6% - Book Value of Net Debt (E FY03) 157,2 Table 8. Source: Studio M. Mortari estimates. Debt/ (Equity + Debt) 4,8% Value of the Equity 1,097 Cost of Capital 7.9% Shares outstanding (million) 29,04 Value of the Equity per share 37,8 Weight 12/17

13 Check method: EV/EBITDA market multiple Due to Campari s small market capitalisation respect to a few large global players, it s difficult to find similar competitors with the same dimension. Consequently, listed companies selection is making on the basis of the belonging to market beverage and to the similar profitability in term of EBITDA margin on sales, as show table below: Company market cap YTD Avg. GBP/EUR Market Cap. multiples EBITDA% 2003 E Allied Domecq 4.216,2 1,4792 6,1 x 20,4% Diageo ,1 1, ,4 x 24,7% Pernod Ricard 5.762,1-8,3 x 24,3% Remy Cointreau 1.234,5-1,8 x 24,2% Average 11,4 x 23,4% CAMPARI Group 1.022,2-1,0 x 24,2% Table 9. Source: Studio M. Mortari estimates and JCF data 01/10/2003. We choosing EV/EBITDA multiple because it isn t to feel the accounting and tax effects due to difference principles and laws in respective countries. Company EV/EBITDA 2001 EV/EBITDA 2002 EV/EBITDA 2003 E EV/EBITDA 2004 E EV/EBITDA 2005 E Allied Domecq 10,4 x 9,8 x 9,0 x 8,4 x 8,7 x Diageo 13,9 x 10,7 x 10,8 x 10,2 x 9,2 x Pernod Ricard 14,8 x 9,3 x 9,6 x 8,5 x 7,5 x Remy Cointreau 9,1 x 8,0 x 8,5 x 7,7 x 7,8 x Average 12,0 x 9,4 x 9,5 x 8,7 x 8,3 x Table 10. Source: Studio M. Mortari estimates and JCF data 01/10/2003. We have obtained Campari s EV/EBITDA multiple through the average by a range discount applied to comparable multiples, like showed in the next table. We have calculated also the Campari s implicit multiple on the basis of ratio enterprise value from our estimates EV and EBITDA We have observe that market multiples are in line with implicit multiple as we showing in the last table below, then we deduce that our DCF valuation is reasonable. EV/EBITDA 2003 E EV/EBITDA 2004 E EV/EBITDA 2005 E CAMPARI Market multiples 9,5 x 8,7 x 8,3 x Discount 20,0% 7,6 x 7,0 x 6,6 x 38,3 25,0% 7,1 x 6,5 x 6,2 x 35,6 30,0% 6,6 x 6,1 x 5,8 x 32,9 Average relative valuation 35,6 % over/(under) valuation -1,2% CAMPARI Implicit multiples 7,5 x 6,7 x 6,0 x Price due to DCF model 37,8 % over/(under) valuation -6,8% Current price to 01/10/ ,2 Table 11. Source: Studio M. Mortari estimates and JCF data. 13/17

14 Price target and stock rating We have calculate the exercise of the options deriving from Skyy acquisition and its effects on Campari s value, but we haven t include it in our price target due to excess uncertain respect numerous variables, like the currency exchange rate EUR/USD and the Skyy Spirits net profit s growth rate. Discount Flow (EUR mln) 2002E 2003E 2004E 2005E 2006E 2007E Average exchange /$ 52 Wk year to date 1,086 Estimates Net profit Skyy Spirits (USD mln) 36,0 45,4 52,6 59,5 66,0 71,9 Sum Out Flow Growth 26,0% 16,0% 13,0% 11,0% 9,0% Skyy Spirits' Option put and Campari's call Exercise multiple equal to 10x 10x Net Profit 2004E 52,6 Skyy s share 30,1% Payable to Skyy Spirits (USD mln) 158,4 Payable to Skyy Spirits (EUR mln) 145,9 Management s' Option put and Campari's call Exercise multiple between 7x and 15x 15x Average Net profit ,9 Management s share 11,0% Payable to management (USD mln) 85,6 Payable to management (EUR mln) 78,9 Gross Out Flow 145,9 78,9 Cumulative WACC 1,05 1,11 1,17 1,24 1,30 Present value 124,4 60,5 185,0 Table 12. Source: Studio M. Mortari estimates and Bloomberg data. The effect on Campari s value is summarised in table below: FIRM VALUATION EUR million Present Value of FCFF First Phase 530 Present Value of Terminal Value 724 Value of the firm 1,254 - Book Value of Net Debt 157,2 Value of the Equity 1,097 Shares outstanding (million) 29,04 Value of the Equity per share 37,8 - Value of Stock Option SKYY SPIRITS 185,0 Value of the Equity per share 31,4 Table 13. Source: Studio M. Mortari estimates. On the basis of the consideration above and the our valuation system, we believe that a 12 months price target of 38,0 per share reflect the reasonable Campari s value, consequently we initiate coverage with HOLD recommendation. 14/17

15 Financial tables History Explicit Horizon Implicit Horizon Stable Phase ESTIMATED CASH FLOWS ( mln) FY02 FY03 FY04 FY05 FY06 FY07 FY08 TV Net sales Operating Expenses EBITDA Depreciation & Amortisation (45) (46) (45) (48) (46) (49) (52) (52) EBIT EBIT * t EBIT (1-t) Depreciation & Amortisation Capital Expenditure (58) (32) (11) (12) (23) (18) (26) (57) - Chg. Net Working Capital (7) (24,2) (10,2) (10,9) (11,2) (18,0) (11,3) (1,0) Free CF to Firm Terminal Value Present Value Table 14. Source: Studio M. Mortari estimates. Consolidated Income Statement ( million) FY00 FY01 FY02 FY03 E FY04 E FY05 E CAGR 99/02 Net sales 434,0 494,3 660,6 713,5 749,1 786,6 21,8% 5,0% Cost of materials (146,6) (170,0) (230,4) (249,7) (262,2) (275,3) Production costs (34,6) (41,5) (45,9) (46,4) (45,7) (47,2) Gross margin 252,9 282,7 384,3 417,4 441,2 464,1 22,0% 5,4% Advertising and promotion expenses (79,6) (91,3) (130,8) (143,4) (151,3) (159,7) Selling and distribution expenses (50,5) (55,0) (72,7) (78,5) (82,4) (86,5) Trading profit 122,8 136,5 180,8 195,5 207,5 217,9 19,7% 5,6% General and administrative expenses (28,5) (30,8) (43,3) (46,4) (48,7) (51,1) Other operating revenues - - 5, Goodwill and trademark amortisation (7,9) (11,4) (27,8) (27,5) (27,0) (26,5) Operating income (EBIT) before non recurring costs 86,4 94,2 115,5 121,6 131,8 140,3 Non-recurring expenses (1,1) (5,6) (0,8) Earnings before interest and taxes (EBIT) 85,3 88,6 114,7 121,6 131,8 140,3 19,7% 7,4% Net financial income (expenses) 5,3 3,2 (6,1) (9,5) 2,2 2,4 Exchange gain (losses), net 0,1 (3,9) 8,2 7,1 3,7 3,9 Other non operating income (expenses) 6,7 6,1 6,7 34,0 7,5 7,9 Income before taxes 97,4 94,0 123,4 153,2 145,3 154,4 Minority interests 0,1 0,0 (15,8) (14,3) (11,2) (8,9) Group income before taxes 97,5 94,0 107,6 138,9 134,1 145,5 11,3% 2,3% Taxes (44,6) (30,6) (20,9) (55,9) (50,9) (54,0) Net income 52,8 63,4 86,7 83,0 83,2 91,5 16,8% 5,0% Gross cash flow 72,2 89,2 132,0 129,4 128,6 139,0 EBITDA before non recurring costs 105,7 120,0 160,8 168,0 177,2 187,8 EBITDA 104,7 114,5 160,0 168,0 177,2 187,8 22,8% 5,7% EBITA before non recurring costs 94,3 105,7 143,2 149,1 158,8 166,8 EBITA 93,2 100,1 142,4 149,1 158,8 166,8 23,9% 5,8% Table 15. Source: Company data, Studio M. Mortari estimates. CAGR 03/05 15/17

16 Balance Sheet ( million) FY99 FY00 FY01 FY02A FY03E FY04E FY05E NWC 76,8 71,4 86,0 93,5 128,4 138,6 149,5 Fixed assets 222,6 210,1 315,2 640,7 621,1 595,9 533,9 Other net current assets (liabilities) (35,5) (53,6) (54,3) (33,3) (74,4) (86,8) (103,0) Invested capital 263,9 227,9 346,9 700,9 675,1 647,7 580,4 Severance fund (11,6) (12,5) (10,9) (13,1) (13,6) (14,8) (16,1) Net invested capital 252,3 215,4 336,0 687,7 688,8 662,5 596,4 Group's net equity 368,8 398,7 430,3 478,9 523,7 568,7 618,1 Minorities 5,0 5,0 2,3 10,0 7,9 8,5 9,3 Net financial debt (cash) (121,6) (188,3) (96,6) 198,8 157,2 85,3 (30,9) Table 16. Source: Company data, Studio M. Mortari estimates. Balance Sheet ( million) FY99 FY00 FY01 FY02A FY03E FY04E FY05E NWC 76,8 71,4 86,0 93,5 128,4 138,6 149,5 Fixed assets 222,6 210,1 315,2 640,7 621,1 595,9 533,9 Other net current assets (liabilities) (35,5) (53,6) (54,3) (33,3) (74,4) (86,8) (103,0) Invested capital 263,9 227,9 346,9 700,9 675,1 647,7 580,4 Severance fund (11,6) (12,5) (10,9) (13,1) (13,6) (14,8) (16,1) Net invested capital 252,3 215,4 336,0 687,7 688,8 662,5 596,4 Group's net equity 368,8 398,7 430,3 478,9 523,7 568,7 618,1 Minorities 5,0 5,0 2,3 10,0 7,9 8,5 9,3 Net financial debt (cash) (121,6) (188,3) (96,6) 198,8 157,2 85,3 (30,9) Capex 14,8 58,2 32,1 11,2 11,8 Capex/Sales 3,0% 8,8% 4,5% 1,5% 1,5% ROE 14,6% 13,1% 14,7% 17,7% 15,6% 14,4% 14,6% Net profit 54,4 52,8 63,4 86,7 83,0 83,2 91,5 Shareholders equity 373,9 403,7 432,6 488,9 531,6 577,2 627,3 Table 17. Source: Company data, Studio M. Mortari estimates. Dividend FY99 FY00 FY01 FY02A FY03E FY04E FY05E Dividend per share 0,88 0,88 0,88 0,88 0,88 0,88 0,88 Number share 29,04 29,04 29,04 29,04 29,04 29,04 29,04 Treasury Stock 1,00 1,00 1,00 1,00 1,00 1,00 1,00 Net dividend 24,6 24,6 24,7 24,7 24,7 24,7 24,7 Gross dividend 25,5 25,5 25,6 25,6 25,6 25,6 25,6 Pay out Ratio net treasury 45,2% 46,6% 39,0% 28,5% 29,7% 29,6% 27,0% Pay out Ratio 46,8% 48,3% 40,4% 29,5% 30,8% 30,7% 27,9% Dividend yield to 01/10/2003 2,5% 2,5% 2,5% 2,5% 2,5% 2,5% 2,5% Table 18. Source: Company data, Studio M. Mortari estimates. 16/17

17 Disclosures information Stock Rating System Effective September 01, 2003, Studio di Analisi Fondamentale Massimo Mortari will utilise a Rating System which consists of a Recommendation and Predictability Level: The Rating will be Buy, Add, Hold, Neutral, Reduce, Sell. The Recommendations are based on the predicted excess return, determined by the target price assigned. The target price is used to generate an excess return potential 1 according to the following formula: (Price target divided by Current Price) 1 + (Gross Dividend Yield 12 months Interest Rate 2 ) The Predictability will be Higher (1) and Lower (2): analyst must determine whether there is a higher or lower predictability in the stock s forecasted target price. Rating BUY ADD HOLD NEUTRAL REDUCE SELL Definition (1) Excess return potential > 15%, smaller range around price target (2) Excess return potential > 15%, larger range around price target (1) Excess return potential between -15% and 15%, smaller range around price (2) Excess return potential between -15% and 15%, larger range around price target (1) Excess return potential < -15%, smaller range around price target (2) Excess return potential < -15%, larger range around price target 1 Excess return potential is the return in excess of the risk-free rate months Interest Rate is that of the subject company s country of incorporation, in the same currency as the predicted return. This publication has been prepared by Donatello Caggiano in his quality as a member of A.I.A.F (Italian association of financial analysts). The information contained in this publication is based on sources believed to be reliable. Although Studio Massimo Mortari makes every reasonable endeavour to obtain information from sources that it deems to be reliable, it accepts no responsibility or liability as to the completeness, accuracy or exactitude of such information. Studio Massimo Mortari has adopted internal procedures able to assure the independence of its financial analysts and that establish appropriate rules of conduct for them. The purpose of this publication is merely to provide information that is up to date and as accurate as possible. The publication does not represent to be, nor can it be construed as being, an offer or solicitation to buy, subscribe or sell financial products or instruments, or to execute any operation whatsoever concerning such products or instruments. Studio Massimo Mortari does not guarantee any specific result as regards the information contained in the present publication, and accepts no responsibility or liability for the outcome of the transactions recommended therein or for the results produced by such transactions. Each and every investment/divestiture decision is the sole responsibility of the subject receiving the advice and recommendations, who is free to decide whether or not to implement them. Therefore, Studio Massimo Mortari and/or the author of the present publication cannot in any way be held liable for any losses, damage or lower earnings that the subject using the publication might suffer following execution of transactions on the basis of the information and/or recommendations contained therein. The estimates and opinions expressed in the publication may be subject to change without notice. Studio Massimo Mortari dose not guarantee continuos coverage of the studies published. Studio Massimo Mortari is authorised to publish information and statistical data to the public and could have a direct interest in the company in examination or to the operations under study. 17/17