Reuters Bloomberg Exchange Ticker PECI.MI PC IM MIL PECI

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1 Deutsche Bank Markets Research Rating Hold Europe Italy Autos Premium tires Company Reuters Bloomberg Exchange Ticker PECI.MI PC IM MIL PECI ADR Ticker PPASY ISIN US Feedback from roadshow with management We hosted a roadshow with the CEO. All the meetings focused on Premium tires, which generate stronger top line growth and higher margins. Our estimates remain unchanged. Maintained Hold on valuation. Premium tires drive earnings growth Management is entirely focused on Premium tires where the margin is high (EBIT margin in the 22% range), growth rate is strong (+15% p.a over the last 2 years) with a mid term volume growth trend of +/%. Almost all the group s earnings growth is coming from Premium tires. On our estimates, in 2014 premium tires represented 41% of revenues, 63% of EBIT (see p4) and we expect them to represent 45% of revenues and almost 70% of EBIT in Our earnings estimates unchanged We leave unchanged our earnings estimates which are in line with consensus for 2014e and 2015e, and 5% below consensus for 2016e. In theory our 2015 estimates could be slightly too optimistic due to the deconsolidation of the steel cord business (sold to Bakaert, negative impact on EBIT of Euro 30m). However, this could be offset by a small raw material tailwind Raw materials price When looking at natural rubber and oil prices, the gross tailwind is potentially big at Euro 200m (see p 9-). However, our 2015 estimates are based on a neutral raw mat effect (net of Price & Mix). This could be conservative. However industry volume growth should be limited this year, and the implementation of duty tariffs on Chinese imports in North America could increase pricing pressure in other regions. Valuation/Risk Our TP is based on the average of 2015E P/E of x and EV/EBITDA of 6x, in line with what we use for other tire companies. Tire companies enjoy a valuation premium versus auto part companies as they are more involved in the less cyclical aftermarket business. Key downside risks are: i) surge of raw material price increases (mostly natural rubber) ii) an aggressive price war initiated at the entry-level segment, leading Pirelli to give back to customers a high percentage of savings, limiting margin improvement. Upside risk; stronger growth in premium tires where the group generates very high margins. Date January 2015 Company Update Price at 9 Jan 2015 (EUR).79 Price Target (EUR) week range (EUR) Gaetan Toulemonde Research Analyst (+33) gaetan.toulemonde@db.com Price/price relative / 7/ 1/13 7/13 1/14 7/14 DJ (.STOXXE) (Rebased) Performance (%) 1m 3m m Absolute DJ (.STOXXE) Forecasts And Ratios Year End Dec 31 20A 2013A 2014E 2015E 2016E DB EPS (EUR) P/E (DB EPS) (x) DPS (EUR) Yield (%) estimates, company data Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 148/04/2014.

2 Model updated: January 2015 Running the numbers Europe Italy Reuters: PECI.MI Hold Bloomberg: PC IM Price (9 Jan 15) EUR.79 Target Price EUR Week range EUR Market Cap (m) EURm 5,266 Company Profile USDm 6,231 Based in Italy,. SpA is the world's fifth largest tyre maker by revenues and has operations all over the world with over 20 manufacturing plants and a wide distribution network spread across the globe. Pirelli generates most of the revenues from emerging markets of Latin America, Russia, Middle East, Africa and Asia Pacific. The main segments of tyres consist of consumer (~73% of tyre revenues) and industrial business. Almost half of the consumer tyres are in the premium segment hence generates a much higher margin for the group. Price Performance Jan Jul Jan 13 Jul 13 Jan 14 Jul 14 Margin Trends DJ (.STOXXE) (Rebased) E 15E 16E EBITDA Margin Growth & Profitability Solvency EBIT Margin E 15E 16E Sales growth (LHS) ROE (RHS) E 15E 16E Fiscal year end 31-Dec E 2015E 2016E Financial Summary DB EPS (EUR) Reported EPS (EUR) DPS (EUR) BVPS (EUR) Weighted average shares (m) Average market cap (EURm) 3,083 4,077 4,573 5,266 5,266 5,266 Enterprise value (EURm) 3,821 5,282 5,896 6,342 6,115 5,898 Valuation Metrics P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) nm nm Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement (EURm) Sales revenue 5,655 6,072 6,146 6,082 6,390 6,780 Gross profit 835 1,091 1,5 1,207 1,315 1,405 EBITDA 835 1,091 1,5 1,207 1,315 1,405 Depreciation Amortisation EBIT ,040 Net interest income(expense) Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) Profit before tax Income tax expense Minorities Other post-tax income/(expense) Net profit DB adjustments (including dilution) DB Net profit Cash Flow (EURm) Cash flow from operations Net Capex Free cash flow Equity raised/(bought back) Dividends paid Net inc/(dec) in borrowings Other investing/financing cash flows Net cash flow Change in working capital Balance Sheet (EURm) Cash and other liquid assets Tangible fixed assets 2,357 2,623 2,608 2,741 2,741 2,741 Goodwill/intangible assets 934 1,022 1,014 1,048 1,048 1,048 Associates/investments ,014 1,014 1,014 Other assets 2,368 2,763 2,364 2,460 2,460 2,460 Total assets 6,714 7,593 7,360 7,474 7,474 7,474 Interest bearing debt 1,455 2,1 2,250 1,287 1, Other liabilities 3,068 3,094 2,673 2,641 2,868 3,085 Total liabilities 4,523 5,203 4,924 3,928 3,928 3,928 Shareholders' equity 2,146 2,337 2,376 3,236 3,236 3,236 Minorities Total shareholders' equity 2,192 2,389 2,437 3,546 3,546 3,546 Net debt 737 1,205 1,322 1, Key Company Metrics Sales growth (%) DB EPS growth (%) EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) Source: Company data, Deutsche Bank estimates Net debt/equity (LHS) Net interest cover (RHS) Gaetan Toulemonde gaetan.toulemonde@db.com Page 2

3 Pirelli on a page Figure 1: Breakdown of revenues (9M 14) Figure 2: Breakdown of EBIT (9M 14) Industrial business, 23% Industrial business, 21% Consumer business, 77% Consumer business, 79% Source: Pirelli (Industrial tires= truck +Agro when Consumer tires= pass tires + moto) Source: Pirelli (Industrial tires= truck +Agro when Consumer tires= pass tires + moto) Figure 3: Breakdown of revenues by region (2014e) Figure 4: Breakdown of EBIT by region (2014e) MEA, 8% MEA, 9% Asia Pacific, 9% Asia Pacific, 11% Europe, 38% Nafta, % Europe, 35% Nafta, % South America, 32% Russia, 4% South America, 28% Russia, 2% Figure 5: Mix effect in Pass tires standard PremiumSuper Prestige Sum Premium Size (Seat) <17" 17" >18" % Volumes 60% 19% 21% 1% 0% % Revenues 41% 24% 30% 4% 0% % EBIT 13% 28% 52% 8% 0% EBIT margin 5% 18% 26% 29% 15% estimates (not disclosed by Co) Figure 6: Shareholders Source: Pirelli Institutional Investors, 47% Camfin, 26% Malacalza, 7% Edizione, 5% Mediobanca, Retail 5% investors, % Note: Camfin is 50% owned by Rosfnet and 50% by a holding Co controlled by Nuove Partecipazioni (controlled by CEO Tronchetti Provera). Page 3

4 Premium tires Introduction Figure 7: Breakdown of revenues Figure 8: Breakdown of EBIT Figure 9: Premium tires by region Latin America, 6% APAC, 15% Other, 59% Premium, 41% Other, 38% Premium, 62% MEA, 4% Russia, 2% Europe, 50% North America, 23% estimates estimates Source: Pirelli Characteristics of premium tires: Premium tires are 17 and above (same definition used by Michelin and Continental). Pirelli has said that when the world pass tire is expected to grow by +4% p.a, the premium segment is expected to grow 2x faster or +7% p.a. 50% of premium volumes at Pirelli are 17 tires (average selling price of Euro 85) while 50% of premium volumes are 18 and above (average selling price of Euro 1 including prestige tires), see Fig 14 below. Thus, there is an important mix effect inside the premium segment. The bulk of the group premium tire volumes (73%) are in mature markets (50% Europe, 23% Nafta), which enjoy higher selling prices. Pirelli is relatively stronger in OE. 50% of premium tires are sold in OE and 50% in RT (Replacement). Thus, penetration of premium tires is today higher in OE (32%) than in RT (19%), giving some visibility on the growth outlook. Premium tires represent 40% of the group s consumer volumes (or 25m units in 2014e) for 60% of revenues (or Euro 2,470m), giving an average selling price of around Euro 0/tire. By deduction, standard tires generate an average selling price of Euro 46. Since premium tires generate 80% of the EBIT of the consumer division (DBe), the average EBIT margin of premium tires reached 22% last year, or Euro 22/tire. By difference, standard tires generated an EBIT margin of only 4% or Euro 2/tire. In our estimates, we have assumed the premium tires margin in the future will stay unchanged at 22%, which we think is probably close to the limit (at constant mix). We expect the world tire market grow by +3/4% p.a of which Pirelli estimates +7% will come from Premium tires (+6% in mature markets, +% in emerging markets). Pirelli expects to grow 2x faster or +% p.a. in premium and 2014 showed stronger growth for Premium tires (+15% and +17%) than the mid term trend of +%. When Pirelli has a 4% world tire market share, we estimate it has almost a 2x higher market share in Premium or 7% (25m Pirelli vs 350m market for premium on our estimates). Page 4

5 Management is targeting a premium volume growth trend of +% p.a (or +3m tires p.a). Based on incremental EBIT of Euro 22/tire, this is equivalent to an incremental EBIT of Euro 70m p.a., and the majority of the group s EBIT growth Figure : Premium volume growth rate (YoY) (YoY) Q1 13 Q2 13 Q3 13 Q Q1 14 Q2 14 Q3 14 Q4 14e 2014ez Premium volume growth +4% +13% +19% +28% +15% +22% +21% +17% +8% +17% Source: Company data, Deutsche Bank By 2017, management is to increase capacity of premium tires by 18m units (to 51m tires), or by +6m tires p.a. This growth rate is equal to 2x the growth of sales (+3m), based on +%. Thus, when capacity utilization (CUR) on premium tires is 76% today (25/33m), it will drop to 67% in 2017 (34/51m). At the same time, capacity of standard tires will be reduced by 8m units (to 30m tires). The group is focusing even more on premium tires. Figure 11: Capacity Utilization Rate (CUR) of Premium & Standard tires 2014 Unit sold Capacity CUR 2017 Unit sold Capacity CUR Premium % % Standard % % Sum % % Mix is key Definition of Premium tires Figure : Retail price in Europe by size (Euro) Summer Winter Bridgestone Continental Goodyear Hankook Michelin Nokian Pirelli Average 7 brands Source: Com0pany data, Deutsche Bank Methodology: Average price from 5 websites (3pneus, ReifenDirekt,Tyres pneus UK, Allopneus and Mytyres UK). Note: retail price above includes VAT and relates to replacement markets, RT when OE markets (Original Equipment) have a selling price 30% lower. This explains why the average selling price in the table 14 below (OE+RT excl VAT) is lower than on table above. OE= Original Equipment RT= Replacement Tire market Premium tires are tires of 17 and above (same definition used by Michelin and Continental). 50% of Premium volumes at Pirelli in 2013 were 17 tires (average RT retail price of Euro 0, see Fig 13 above) while 50%+ of volumes were 18 and above (called Super premium by Pirelli with a RT retail price of Page 5

6 Euro0 and above) showing an important mix effect in the Premium segment. For 9M 14, Super premium tires increased much faster at +23/25%. Mix effect on Pirelli revenues Figure 13: Premium revenues (Euro m) 2013 Q1 14 Q2 14 Q3 14 Q4 14e 2014e Premium revenues (Euro m) 2, ,455 YoY growth (%) +7% +13% +13% +11% +4% +11% o/w Volumes (%) +15% +22% +21% +17% +% +17% o/w Forex (%) -4%e -3% -3% -3% -3% -3% o/w Price &Mix (by difference) -4%e -5% -4% -3% -3% -4% Source: Company data, Deutsche Bank Negative Price & Mix in Premium. Despite stronger growth in 18 tires, the Price & Mix effect is negative (see Fig 13 above). It is mostly attributable to a negative country mix (lower selling price in Russia, APAC, LatAm ) and to a lesser extent negative prices (pass through agreements mostly in OE). This negative Mix effect has limited negative impact on EBIT since the cost structure in these countries is lower. This explains the high 60% fall through of the Price & Mix effect on revenues to EBIT (9M 14). Impact of the mix effect on Pirelli results Figure 14: Breakdown of the pass tire division by segment Standard <17 Premium 17 Super Premium >18 Prestige Volume (m units) Sum % Volumes 60% 19% 21% 1% 0% Average selling price (Euro) Revenues (Euro m) 1,750 1,020 1, ,220 % revenues 41% 24% 30% 4% 0% EBIT per tire (Euro) EBIT (Euro m) EBIT margin (% Revenues) 5% 18% 26% 29% 15% Source: Company data, Deutsche Bank % EBIT % 31% 49% 8% 0% Pirelli management does not disclose this level of granularity in its pass tire division breakdown. However, following numerous meetings with management we think the table above gives a good idea of the profitability of Premium tires by seat size. This table tells us the followings: Standard tires (60% of volumes, 41% of revenues, % of EBIT, all DBe) are marginally profitable. We estimate their EBIT at a meager Euro 2/tire and therefore expect management to continue to reduce exposure to these tires. However premium tires (40% of volumes, 59% of revenues and 88% of EBIT, all DBe) are significantly more profitable. We estimate their EBIT margin at 23%. The Premium segments can be broken down in 3 sub segments: Premium tires (17 tires) are probably generating an average selling price of Euro 85 and an EBIT margin of 18% (both DBe). Super Premium tires (18 and above). We estimate these tires are generating a selling price of almost Euro 0 and an EBIT margin of Page 6

7 26%. For the first time in 2014, volumes of super Premium (13m tires) exceed those of Premium tires (m units). Prestige tires represent less than 1% of volumes, but 4% of revenues and probably 8% of EBIT. Premium growth At the capital market day in Nov 2013, management was guiding for a Premium growth trend of +7% (2x the growth rate of the overall tire market) and for a growth rate of Pirelli in Premium of +% p.a or almost 2x the performance of the segment In 2014, the Premium segment grew by +% (source Pirelli). and Pirelli by 17%, maintaining its strong outperformance. In coming years we expect premium volumes to increase by +11% p.a, less than the capacity increase the group is building of +16% p.a. (see Fig 11 page 5). The table below summarizes our volume assumptions, and shows that 0% of the growth in coming years should come from Premium tires, while we expect the volume of standard tires to decrease and truck tire volumes to stay more or less unchanged. Figure 15: Volume growth trend (m units) e 2015e 2016e 2017e 2017e/13 Standard tires % Premium tires % Sum pass tires % Truck tires % Source:Company data, Deutsche Bank In summary, Premium tires currently represent 40% of group revenues and 63% of group EBIT. In 2016, premium tires should represent 45% of revenues and almost 70% of EBIT. Page 7

8 Earnings estimates Summary of our estimates Figure 16: Summary of our estimates (Euro m) H1 13 H H1 14 H2 14e 2014e 2015e 2016e Revenues 3,131 3,016 6,146 2,987 3,095 6,082 6,390 6,780 YoY variation (%) +4% -1% +1% -5% +3% -1% +5% +6% EBIT after restructuring ,020 % Sales.2% 13.6%.9% 14.3% 13.7% 14.0% 14.9% 15.0% EPS Net debt 1,733 1,322 1,935 1, Source: Company data, Deutsche Bank Our earnings estimates remain unchanged and are based on the following: Revenues growth of +6% p.a of which Premium +11/% and others +3%. In 2015E, the deconsolidation of the steel-cord business should have a 1% negative impact on revenues (or Euro 90m) Stable profit contribution of standard tires, which is negligible Marginal profit contribution increase from industrial tires. It looks like this business unit is not strategic anymore. Management has said that it is ready to tie it up with a competitor in order to get economies of scale. The deconsolidation of the steel-cord business (sold to Bakaert) should have a negative impact on revenues of Euro 90m in 2014 (and an additional Euro 90m in 2015) and a negative impact on EBIT of Euro m in 2014 (and an additional Euro 30m in 2015). Therefore, our EBIT estimate for 2015, unchanged, could be in theory Euro 30m too optimistic. However, it could be offset by a better raw mat environment (see page 9-) if pricing discipline stays under control The bulk of the profit growth we expect in the coming years should come from the Premium tire segment. DB versus consensus Figure 17: DBe versus consensus (source Pirelli) (Euro m) e DBe Consensus 2015e DBe Consensus 2016e Mgt target 2016e DBe Consensus (CMD Nov 13) Revenues 6,146 6,082 6,0 6,390 6,500 6,780 6,9 7,320 EBIT before restruct ,040 1,060 1,090 % Sales 13.3% 14.8% 14.6% 15.2% 14.9% 15.3% 15.3% 14.9% EBIT after restruct ,020 1,030 1,070 Net Profit NA Net debt 1,322 1,090 1, , Company compiled consensus estimates Our earnings estimates are unchanged. As shown in the table above, our estimates are in line with consensus for 2015 and slightly lower for This is also the case with management targets (announced in Nov 13 at the company s Capital Market Day restated from the disposal of the steel-cord). Page 8

9 Raw materials Breakdown of raw materials and price trend of Natural & Synthetic rubber Figure 18: Raw materials (35% of sales) (9M14) Figure 19: Natural & Synthetic rubber prices Textile, % Chemicals, 19% Carbon black, 14% Steel cord, 7% Natural rubber, 21% Synthetic rubber, 27% Q Q2 Q Q4 4.3 Q Q2 11 Q Q4 11 Natural rubber price (USD/kg) Q Q2 Q3 Q4 2.9 Q1 13 Q Q3 13 Q Q1 14 Q2 14 Synthetic rubber price (USD/kg) Q3 Q e Source: Pirelli Impact of recent raw material price decline Our 2015 estimates are based on a neutral raw mat effect (net of Price & Mix), due to the full year effect of 2014 negative prices. However, when looking at natural rubber and oil prices, the gross tailwind could be bigger than we have estimated. Raw materials represent a high 35% of revenues at Pirelli. Main raw materials used are natural rubber (21%) and oil derivative products such as synthetic rubber (27%) and carbon black (14%). In 14, raw material prices have declined by 8%, mostly driven by the natural rubber price which has dropped by almost 30%. Most tire Co are recording a tailwind such as Michelin (Euro 500m), Continental (Euro 160m), Pirelli (Euro 170m) and Nokian (Euro 50m) on our estimates. However, the net impact (after factoring pass through in OE and negative prices in Replacement) has been more limited (see Fig 21 below). Figure 20: Raw mat net impact 2013 Q1 14 Q2 14 Q3 14 Q414e 2014e Raw mat (at constant Forex) Forex (1) (36) (56) (45) (38) (175) = Raw mat (at current Forex) (23) (5) Net prices (25) Raw mat net of prices (23) (5) Source: Company data, Deutsche Bank In 15, industry should benefit from an incremental raw material tailwind: Natural rubber price is currently at USD1.6/kg, or 15% less than what tire Co have paid on avg in 14 (USD 1.9/kg). Due to a 3M to 6M lag Page 9

10 effect, it will have a positive impact on 15 results. Since Pirelli buys approx 200k tons p.a, the gross tailwind could reach USD 60m. The oil price has recently dropped by a high 50%, USD50/bbl. While this could mean people will in due course start to drive more, more importantly, both synthetic rubber and carbon black are oil derivatives. Management estimates that every USD fall in the oil price translates into a gross tailwind of USD35m for Pirelli. Therefore, the gross tailwind could reach USD 175m. Overall, the gross raw mat tailwind could exceed Euro 200m in 2015 after Euro +170m in However, net of selling prices (negatives), the net tailwind should be neutral to slightly positive, no more. Figure 21: Raw material impact on EBIT: gross and net of Price & Mix effect (Euro m) Continental e 2015e Michelin e 2015e Nokian e 2015e Pirelli e 2015e Gross impact Net of Price & Mix 0 (20) 0/ / /+ 1 (5) 0/+ Note: as shown in the table above, the impact can differ significantly from one Co to another. This is mainly due to the lag effect which is very different from one Co to another. However, on 2 years ( e), the overall impact becomes more comparable In summary, our 2015 estimates are based on a neutral raw material effect (net of Price & Mix). This could be conservative and could end in a small net positive effect. The gross impact should be significantly positive and higher than in However, the volume environment remains difficult with a low growth expected in 2015 in Europe (destocking of winter tires) and in the US (destocking of Chinese imported tires). And the consequence of the implementation of import duty tariffs in the US on Chinese imports could have negative pricing implications for the industry (outside the US). This explains our conservatism in our estimates. Page

11 Sep- Dec- Mar-11 Jun-11 Sep-11 Dec-11 Mar- Jun- Sep- Dec- Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Sep- Dec- Mar-11 Jun-11 Sep-11 Dec-11 Mar- Jun- Sep- Dec- Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 January 2015 Valuation Historical valuation Pirelli currently has an EV of Euro 6.9bn, of which a market cap of Euro 5.4bn (488m shares x Euro 11), a net debt of Euro 1.0bn (end of 2014e) and pension liabilities of Euro 0.5bn. Figure 22: P/E contours of.0x,.0x and 14.0x Figure 23: EV/EBITDA contours of 4.0x, 5.0x and 6.0x PE contours of.0x,.0x and 14.0x.0x.0x 14.0x 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 EV/EBITDA contours of 4.0x, 5.0x and 6.0x 4.0x 5.0x 6.0x As shown in the tables above, current multiples are at the high end of recent years trends (justified by good results) and at the high end of the multiples we use to evaluate tire Co (P/E of x and EV/EBITDA of 6x). Pirelli versus European peers Figure 24: Valuation of Pirelli versus peers (08 Jan 2015) Price TP P/E 2014e 2015e Yield P/Book EV/ EBITDA 2014e 2015e Continental (Buy) % Michelin (Buy) % Nokian (Hold) % Pirelli (Hold) % Bridgestone (Buy) 4,186 4, % Goodyear (Hold) % Hankook (Buy) 49,200 66, % Non Weighted average % As shown in the table above, versus the sector Pirelli multiples are: higher than peer groups on P/E and lower on EV/EBITDA. Page 11

12 Appendix 1 Important Disclosures Additional information available upon request Disclosure checklist Company Ticker Recent price* Disclosure PECI.MI.79 (EUR) 9 Jan 15 6,14 *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes. 6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company calculated under computational methods required by US law. 14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year. Important Disclosures Required by Non-U.S. Regulators Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes. 6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company calculated under computational methods required by US law. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Gaetan Toulemonde Page

13 Security Price January 2015 Historical recommendations and target price: (PECI.MI) (as of 1/9/2015) Previous Recommendations Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating 8.00 Current Recommendations Buy Hold Sell Not Rated Suspended Rating 2.00 *New Recommendation Structure as of September 9, Jan Apr Jul Oct Jan 13 Apr 13 Jul 13 Date Oct 13 Jan 14 Apr 14 Jul 14 Oct /03/20: Buy, Target Price Change EUR /11/2013: Hold, Target Price Change EUR /01/2013: Downgrade to Hold, EUR /04/2014: Hold, Target Price Change EUR /05/2013: Hold, Target Price Change EUR9.50 Equity rating key Buy: Based on a current - month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ), we recommend that investors buy the stock. Sell: Based on a current -month view of total shareholder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock -months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes: 1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of % or more over a -month period Hold: Expected total return (including dividends) between -% and % over a - month period Sell: Expected total return (including dividends) of -% or worse over a -month period Equity rating dispersion and banking relationships % 54 % 47 % 39 % Buy Hold Sell Companies Covered European Universe 7 % 30 % Cos. w/ Banking Relationship Page 13

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