Trevi Finanziaria. Growth driven by Middle East and US. 12 October 2007 Industrials Change in Estimates. Price: Target price: 16.

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1 12 October 2007 Industrials Change in Estimates Price: Target price: Outperform /10/ EPS Adj. ( ) DPS ( ) BVPS ( ) O N D J F M A M J J A S O TREVI MILAN MIBTEL - PRICE INDEX Source: DATASTREAM Market Data Market Cap ( m) 1,020 Shares Out. (m) 70 Main Shareher Trevisani Fam.55.9% Free Float (%) 44.1% 52 week range ( ) Rel Perf vs Mibtel (%) -1m 11.6% -3m 5.7% -12m 92.3% 21dd Avg. Vol. ('000) 239 Reuters/Bloomberg TFI.MI / TFI IM Key Financial Data ( m) Turnover 674 EBITDA 86 EBIT 58 Net Profit 27 Sharehers' Funds 122 Net Debt (-) Cash (+) -176 Gearing % 138.2% EV/Ebitda(x) P/E adj (x) Div.Yield(%) FCF Yield(%) 7.9 < Growth driven by Middle East and US Estimates finetuned We are increasing our 2007 and 2008 EPS forecasts by 5.5% and 8.0% respectively: We are finetuning our 2007 EBITDA, from 120.7m to 114.6m (-5.1%), more than offset by a lower tax rate expected (from 45% to 36% in 2007), thanks to deferred tax assets in the US coupled with the positive impact of the group s manufacturing plants in the tax-free area in Dubai. We are leaving unchanged our 2008 EBITDA and pre-tax profit forecasts ( 148.8m and 105.6m respectively). While deferred tax assets should be a one-off in 2007, given the group s presence in Dubai, we assume a 39% normalised tax rate in 2008 going forward. Growth opportunities in the Middle East and the US Trevi should benefit from the consolidated presence in the Middle East region of both its ground engineering and drilling divisions. Saudi Arabia and the UAE should represent the next growth drivers in the region over the next 4/5 years, replacing Dubai. In the US, the government s greater focus on repairing and consolidating existing infrastructure might lead to additional orders in dams. We remind investors that the group received the US Army Corp of Engineers award as best contractor in repairing a dam in OUTPERFORM recommendation confirmed. TP increased to We are increasing our target price to (from per share) resulting from a SOP based on 2008 forecasts, supported by a DCF model ( per share). Further upside to our - forecasts might come from orders in both the ground engineering and drilling divisions, currently under negotiation. We highlight the dilution effect from the conversion of the 70m convertible bond that we already factored in, being deeply in the money ( strike price vs current share price). The stock is currently trading at 16.7x P/E (fully diluted), a still cheap multiple considering the EPS CAGR of almost 30% between and. Andrea Scauri Sales desk Equity Analyst mailto:andrea.scauri@mediobanca.it

2 Estimates finetuned Below, we summarize our and new - consolidated and by business division forecasts. Note: the 36.1% tax rate, benefiting from one-off deferred tax assets in the US, coupled with the positive impact of the group s plants in the tax-free area in Dubai; the normalised 39% tax rate in going forward; the expected increase in minorities in (from 1.5m in to 3.5m), as a result of the joint venture with Repsol. We remind investors that the JV should lead to the manufacture and delivery of five rigs by Drillmec (the drilling equipment division) in Repsol should make a down-payment of around 50% to Drillmec. The rigs will be managed in commodatum by the JV (60% owned by Trevi and 40% by Repsol) and consolidated in Petreven s figures (the drilling service division). Trevi Group:, and and new forecasts Revenues % % 1, , % Others n.m % % Turnover % % 1, , % EBITDA % % % EBITDA margin 14.3% 13.7% 15.3% 14.9% 15.8% 15.1% D&A (30.3) (28.0) -7.6% (33.4) (32.3) -3.3% (36.7) (34.8) -5.2% EBIT % % % EBIT margin 10.7% 10.3% 11.8% 11.7% 12.4% 12.0% Income (charges) from Forex 0.0 (2.5) Net financial charges (13.6) (12.7) -6.6% (10.9) (10.9) (10.0) (10.0) Pre-tax profit % % % Taxes (35.5) (25.8) -27.3% (47.1) (41.2) -12.5% (56.8) (47.8) -15.8% Tax rate 45.0% 36.1% -19.8% 45.0% 39.0% 45.0% 39.0% Minorities (1.6) (1.5) -6.3% (1.2) (3.5) n.m. (1.2) (1.2) Net profit % % % Trevi Group:, and and new forecasts by division Foundation works (Trevi) % % % EBITDA % % % EBITDA margin 15.0% 15.3% 15.0% 15.5% 15.0% 15.5% Drilling services (Petreven) % % % EBITDA % % % EBITDA margin 33.0% 30.0% 33.0% 33.0% 33.0% 33.0% Trevipark % % % EBITDA % % % EBITDA margin 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% Foundation equip. (Soilmec) % % % EBITDA % % % EBITDA margin 12.0% 12.6% 12.0% 13.6% 12.0% 13.6% Drilling equipment (Drillmec) % % % EBITDA % % % EBITDA margin 11.0% 11.3% 14.0% 11.6% 16.0% 11.6% Total revenues % % 1, , % Total EBITDA % % % 12 October

3 Valuation including the dilution effect of the convertible bond We updated our group s valuation through a Sum-Of-the-Parts and a DCF model. Our SOP points to a fair value of per share and is based on: a 20% premium on the group s closest peer in the ground engineering division (Trevi plus Soilmec), i.e. the German Bauer. We believe that such a premium is reliable taking into account the higher top line growth and operational leverage expected in (EBITDA of Trevi s ground engineering divisions increasing by 24.7% vs. 10.2% of Bauer); Trevi group: ground engineering divisions growth rates vs. Bauer Sales Sales % ch. EBITDA EBITDA % ch. Bauer % % EBITDA margin 14.5% 14.4% Trevi and Soilmec % % EBITDA margin 14.1% 14.7% Source: Datastream, Mediobanca Securities Bauer current multiples Mkt cap EV/Sales Bauer x 6.5x 20% premium 1.1x 7.8x Source: Datastream, Mediobanca Securities a 8.5x for the drilling divisions (Drillmec and Petreven). In line with our previous approach (see our report published on 4 May), we believe this to be a fair multiple taking into account their estimated - profitability CAGRs (21.9% and 42.4% respectively). Such a multiple was confirmed by the rumoured tender offer on the British Abbot Group, one of the closest peer of drilling divisions of Trevi. According to press 3i Group Plc, the U.K. buyout and venture-capital company, is studying an offer on Abbot Group Plc of GBP per share. The Scottish-based company is one of the largest international land drilling contractors outside the Americas, the largest offshore platform drilling contractor in the North Sea and the world leader in drilling rig design and construction. The offer values Abbot Group GBP 870m ( 1.26bn), implying M&A multiples of 8.8x and 17.0x P/E (see the chart below). Implied multiples of the rumoured offer on Abbot Group EV/Sales EV/Sales P/E P/E 1.9x 1.7x 10.7x 8.8x 24.2x 17.0x 12 October

4 Note that: our valuation includes the dilution effect from the conversion of the 70m convertible bond (issued in November 2006 and expiring in 2011), being deeply in the money ( strike price vs current share price); we have increased our capex assumptions on both 2007 and 2008 from 30m to 50m and 35m respectively. We are assuming an improvement in 2007 working capital thanks to the downpayments from Repsol. Trevi group Sum-Of-the-Parts EV EV/ Sales Ground engineering divisions (Trevi and Soilmec) x 7.8x Drilling services (Petreven) x 8.5x Drilling equipment (Drillmec) x 8.5x Total NFP (113.0) NFP adjusted by the convertible bond (43.0) Equity Value (SOP) Number of shares (outstanding millions) 64.0 Number of shares (fully diluted) FAIR VALUE Our DCF model (8.4% WACC and 2.0% perpetual growth rate) identifies a fair value of Based on the two valuation approaches, we are increasing our target price to (from per share). Further upside to our - forecasts might come from orders in both the ground engineering and drilling divisions, currently under negotiation. Trevi should benefit from the consolidated presence in the Middle East region of both its ground engineering and drilling divisions. Saudi Arabia and the UAE should represent the next growth drivers in the region over the next 4/5 years, replacing Dubai. In the US, the government s greater focus on repairing and consolidating existing infrastructure might lead to additional orders in dams. We remind investors that the group received the US Army Corp of Engineers award as best contractor in repairing a dam in The stock is currently trading at 16.7x P/E (fully diluted), a still cheap multiple considering the EPS CAGR of almost 30% between and. 12 October

5 THIS RESEARCH REPORT IS ISSUED BY MEDIOBANCA - BANCA DI CREDITO FINANZIARIO S.P.A. (MEDIOBANCA S.P.A.) AUTHORIZED BY BANK OF ITALY TO PROVIDE FINANCIAL SERVICES. THIS RESEARCH REPORT IS PROVIDED FOR INFORMATION PURPOSES ONLY AND DOES NOT CONSTITUTE OR SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL, OR A SOLICITATION OF AN OFFER TO BUY OR SELL, ANY SECURITIES. IT IS NOT INTENDED TO REPRESENT THE CONCLUSIVE TERMS AND CONDITIONS OF ANY SECURITY OR TRANSACTION, NOR TO NOTIFY YOU OF ANY POSSIBLE RISKS, DIRECT OR INDIRECT, IN UNDERTAKING SUCH A TRANSACTION. THE INFORMATION CONTAINED HEREIN, INCLUDING ANY EXPRESSION OF OPINION, HAS BEEN OBTAINED FROM OR IS BASED UPON SOURCES BELIEVED TO BE RELIABLE BUT IS NOT GUARANTEED AS TO ACCURACY OR COMPLETENESS ALTHOUGH MEDIOBANCA S.P.A. CONSIDERS IT TO BE FAIR AND NOT MISLEADING. SAVE AS OTHERWISE PROVIDED IN THE RESEARCH REPORT, MEDIOBANCA S.P.A. HAS NO OBLIGATION TO UPDATE, MODIFY OR AMEND THIS REPORT AND INFORM THE READER ACCORDINGLY. ALL PRICES ARE MARKET CLOSE PRICES UNLESS DIFFERENTLY SPECIFIED. MEDIOBANCA S.P.A. AND ITS NON U.S. AFFILIATED COMPANIES MAY FROM TIME TO TIME DEAL IN, HOLD OR ACT AS MARKET-MAKERS OR ACT AS ADVISERS, BROKERS OR BANKERS IN RELATION TO THE SECURITIES, OR DERIVATIVES THEREOF, OF PERSONS, FIRMS OR ENTITIES MENTIONED IN THIS DOCUMENT, OR BE REPRESENTED ON THE BOARDS OF SUCH PERSONS, FIRMS OR ENTITIES, EMPLOYEES OF MEDIOBANCA S.P.A. AND ITS AFFILIATED COMPANIES, OR INDIVIDUALS CONNECTED TO THEM MAY FROM TIME TO TIME HAVE A POSITION IN OR BE HOLDING ANY OF THE INVESTMENTS OR RELATED INVESTMENTS MENTIONED IN THIS REPORT. TREVI FINANZIARIA INITIAL COVERAGE AS OF 06/03/2006.MEDIOBANCA S.P.A. AND ITS AFFILIATED COMPANIES, OR INDIVIDUALS CONNECTED TO THEM ARE UNDER NO OBLIGATION TO DISCLOSE OR TAKE ACCOUNT OF THIS DOCUMENT WHEN ADVISING OR DEALING WITH OR FOR THEIR CUSTOMERS. FOR FURTHER INFORMATION REGARDING QUARTERLY RATING STATISTICS AND DESCRIPTIONS, CHINESE WALL MECHANISMS PUT IN PLACE BY MEDIOBANCA S.P.A. AND ANY OTHER DISCLAIMERS, PLEASE REFER TO THE MB SECURITIES SECTION OF THE MEDIOBANCA S.P.A. WEBSITE AT TO ACCESS PREVIOUS RESEARCH NOTES AND ESTABLISH TRENDS IN RATINGS ISSUED, PLEASE SEE THE RESTRICTED ACCESS PART OF THE MB SECURITIES SECTION OF THE MEDIOBANCA S.P.A. WEBSITE AT ADDITIONAL NOTES TO U.S. INVESTORS: THIS RESEARCH REPORT IS PREPARED BY MEDIOBANCA - BANCA DI CREDITO FINANZIARIO S.P.A. AND DISTRIBUTED IN THE UNITED STATES BY MEDIOBANCA SECURITIES USA LLC, A FINRA MEMBER FIRM. THIS INFORMATION PROVIDED IN THIS COMMUNICATION IS FOR DISCUSSION AND IS NOT BINDING ON MEDIOBANCA SECURITIES USA LLC OR ANY OF ITS AFFILIATES. MEDIOBANCA SECURITIES USA LLC IS AN AFFILIATE OF MEDIOBANCA - BANCA DI CREDITO FINANZIARIO S.P.A.. MEDIOBANCA - BANCA DI CREDITO FINANZIARIO S.P.A. HAS NO OBLIGATION TO UPDATE, MODIFY OR AMEND THIS REPORT AND INFORM THE READER ACCORDINGLY, EXCEPT WHEN TERMINATING COVERAGE OF THE ISSUER OF THE SECURITIES DISCUSSED IN THIS REPORT. THIS DOCUMENT IS NOT INTENDED TO REPRESENT THE CONCLUSIVE TERMS AND CONDITIONS OF ANY SECURITY OR TRANSACTION, NOR TO NOTIFY YOU OF ANY POSSIBLE RISKS, DIRECT OR INDIRECT, IN UNDERTAKING SUCH A TRANSACTION. THE ATTACHED TERMS ARE INDICATIVE AND CONSTITUTE NEITHER AN OFFER TO SELL NOR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY. WE WILL ASSUME, UNLESS YOU NOTIFY US OTHERWISE, THAT YOU HAVE SUFFICIENT KNOWLEDGE, EXPERIENCE AND/OR PROFESSIONAL ADVICE TO UNDERTAKE YOUR OWN ASSESSMENT. ALL OF THE VIEWS EXPRESSED IN THIS RESEARCH REPORT ACCURATELY REFLECT THE RESEARCH ANALYST'S PERSONAL VIEWS REGARDING THE SUBJECT COMPANY. NO PART OF ANALYST COMPENSATION WAS, IS OR WILL BE, DIRECTLY OR INDIRECTLY RELATED TO THE SPECIFIC RECOMMENDATIONS OR VIEWS EXPRESSED IN THIS RESEARCH REPORT. MEDIOBANCA SECURITIES USA LLC ACCEPTS RESPONSIBILITY FOR THE CONTENT OF THIS REPORT. ANY US PERSON RECEIVING THIS REPORT AND WISHING TO EFFECT ANY TRANSACTION IN ANY SECURITY DISCUSSED IN THIS REPORT SHOULD CONTACT MEDIOBANCA SECURITIES USA LLC AT 001(212) PLEASE REFER TO THE CONTACT PAGE FOR ADDITIONAL CONTACT INFORMATION. 12 October

6 Profit & Loss account ( m) Turnover ,000 Turnover growth % EBITDA EBITDA margin (%) EBITDA growth (%) Depreciation & Amortization EBIT EBIT margin (%) EBIT growth (%) 55.8 nm Net Fin.Income (charges) Non-Operating Items Extraordinary Items Pre-tax Profit Tax Tax rate (%) Minorities Net Profit Net Profit growth (%) n.m n.m Adjusted Net Profit Adjusted Net Profit growth (%) n.m n.m Multiples P/E Adj P/CEPS P/BV EV/ Sales EV/EBIT EV/Cap. Employed Yield (%) FCF Yield (%) 7.9 < Per Share Data ( ) EPS EPS growth (%) n.m n.m EPS Adj EPS Adj. growth (%) n.m n.m CEPS BVPS DPS Ord Balance Sheet ( m) Working Capital Net Fixed Assets Total Capital Employed Sharehers' Funds Minorities Provisions Net Debt (-) Cash (+) Cash Flow Model ( m) Cash Earnings Working Capital Needs Capex (-) Financial Investments (-) Dividends (-) Other Sources / Uses Ch. in Net Debt (-) Cash (+) Key Figures & Ratios Avg. N of Shares (m) EoP N of Shares (m) Avg. Market Cap. ( m) ,020 1,020 Enterprise Value ( m) ,168 1,133 Labour Costs/Turnover (%) 16% 13% 12% 12% Depr.&Amort./Turnover (%) 5% 4% 3% 3% Prod. Ratio (Turn./Op.Costs) Gearing (Debt / Equity) (%) 123% 138% 86% 50% EBITDA / Fin. Charges >10 Cap.Employed/Turnover (%) 50% 49% 41% 37% Capex / Turnover (%) 8% 8% 6% 4% Pay out (%) 12% 12% 13% 13% ROE (%) 13% 22% 27% 28% ROCE (%) (pre tax) 11% 18% 25% 31% ROCE (%) (after tax) 6% 12% 16% 19%