Trevi Finanziaria. First half confirms growth trend. 20 September 2006 Industrials Change in Estimates. Price: 6.65 Target price: 7.

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1 20 September 2006 Industrials Change in Estimates Price: 6.65 Target price: 7.70 Outperform /9/ E 2007E EPS Adj. ( ) DPS ( ) BVPS ( ) S O N D J F M A M J J A S TREVI MILAN MIBTEL - PRICE INDEX Source: DATASTREAM EV/Ebitda(x) P/E adj (x) Div.Yield(%) FCF Yield(%) < First half confirms growth trend Market Data Market Cap ( m) 426 Shares Out. (m) 64 Main Shareholder % Trevisani Fam. 55.9% Free Float (%) 44.1% 52 week range ( ) Rel Perf vs Mibtel (%) -1m 4.5% -3m 1.1% -12m 72.3% 21dd Avg. Vol. ('000) 182 Reuters/Bloomberg TFI.MI / TFI IM Key Financial Data ( m) Turnover EBIT 29 Net Profit 13 Shareholders' Funds 97 Net Debt (-) Cash (+) -126 Gearing % 123.5% Increase in estimates We are increasing our 2006e and 20 EPS by 8.6% and 8.4% respectively following the positive results posted in 1H06. We now expect the group s turnover to reach 649.3m in 2006, +28.1% Y/Y, and 2006 at 87.7m, +58.5% Y/Y, or a 13.5% margin. We expect 2006 net profit to come in at 24m, +87.2% Y/Y, as a result of almost stable D&A costs (+6.5% Y/Y), following the improved profitability of the drilling division (drilling equipment + drilling services), partly offset by forex charges of 3.5m. A potential capital increase The board of directors has been authorised by the extraordinary shareholders meeting to increase the share capital within five years up to a maximum of 10% of the current capital (6.4m ordinary shares with a nominal value of 0.50). The capital increase shall be finalized through an increase completely or partially reserved to Italian or foreign institutional investors, with the exclusion of option rights and/or through the issue of a convertible bond by one of the group s Italian or foreign subsidiary reserved to Italian or foreign institutional investors, entailing no rights issue. Note the potential exclusion of the option rights: in our opinion, the capital increase will be finalised if the Trevi group gains a sizable order in the drilling division. This should allow for the entry into the group s capital of an industrial partner, thus sustaining company growth. Outperform rating confirmed Price target from 7.40 to 7.70 We have updated our sum-of-the-parts (SOP) analysis, based on the group s four divisions, increasing our valuation from 7.40 to A DCF analysis (7.2% WACC and 2.0% perpetual growth rate) points to a fair value of Based on the two valuation approaches, we are increasing our target price to 7.70 per share (from 7.40), showing 20% upside on the current share price. This would imply 5.9x and 16.1x EV/ and P/E respectively, which are not demanding multiples also given the e EPS CAGR of 20.3% and the 0.7 PEG ratio. Andrea Scauri Sales desk mailto:andrea.scauri@mediobanca.it

2 Executive summary We are increasing our 2006e and 20 EPS by 8.6% and 8.4% respectively, as a result of the positive results posted in the first half of the year. We now expect the group s turnover to reach 649.3m in 2006, +28.1% Y/Y, and of 87.7m, +58.5% Y/Y, or a 13.5% margin. Net profit is expected to come in at 24m, +87.2% Y/Y, as a result of almost stable D&A costs (+6.5% Y/Y), following the improved profitability of the drilling division (drilling equipment + drilling services), partly offset by forex charges of 3.5m. Trevi Group: 2006 and 2007 old and new estimates Est. Ch. Est. Ch. Old est. New est. Old est. New est. Turnover % % % % margin 10.9% 13.4% 13.5% 13.6% 13.8% EBIT % % EBIT margin 5.7% 8.4% 9.1% 8.7% 9.4% Charges from Forex 5.6 (0.1) (3.5) n.m. (0.1) (3.5) n.m. Net financial charges (8.9) (8.7) (10.0) +14.9% (8.5) (10.0) +17.6% Pre-tax profit % % Taxes (11.6) (19.1) (20.6) +7.9% (24.3) (26.4) +8.6% Tax rate 45.8% 45.0% 45.0% 45.0% 45.0% Minorities (0.9) (1.2) (1.2) - (1.2) (1.2) - Net profit % % The group s turnover in 1H06 followed a much less volatile and seasonal trend, mainly thanks to the higher contribution of the drilling sector, which grew by around 80% in the period. On the next page, we highlight the group s consolidated results and break down the results by business division. The slowdown in the group s profitability recorded in the second quarter of the year vs Q1 was largely expected and mainly due to: the difficult comparison base between the two quarters. 1Q06 (14.9% margin in Q1 vs. 10.8% in Q2) was exceptional, fuelled by a strong contribution of the drilling service and drilling equipment divisions, with margins of 33% and 10%/12% respectively; the slowdown of activity on the domestic market, which affected the profitability of the foundation works division. Against this backdrop, the management has made efforts to focus on the foundation works business in North America, through its close relationship with the US Army (see the several orders won to refurbish US dams) and to the last USD 12m contract for consolidation work for Diavik Diamond Mines based in Canada, to the detriment of one of the group s main competitors in this business. We expect 2H06 turnover to be in line with that of 1H06, as a result of the lower sales volatility mentioned above, and higher profitability (14.1% vs. 12.9% recorded in H1), thanks to the greater impact of the drilling business in Q3 and Q4. 20 September

3 Trevi Group: 2006 forecasts and implied 2H06 estimates 1Q06a % Ch. 2Q06a % Ch. 1H06a % Ch. 2H06e % Ch. 2006e % Ch. Turnover % % % % % % % % % % margin 14.9% 10.8% 12.9% 14.1% 13.5% EBIT % % % % % EBIT margin 9.8% 7.6% 8.7% 9.6% 9.1% Charges from Forex (1.2) n.m. (2.3) n.m n.m % (3.5) n.m. Net financial charges (2.2) 16.7% (2.9) 43.4% (5.1) 30.7% (4.9) -1.5% (10.0) 12.7% Extraordinary items Pre-tax profit % % % % % Taxes (5.8) 271.9% (0.7) -77.8% % (14.1) 103.3% (20.6) 78.1% Tax rate 45.9% 10.3% 33.7% 53.3% 45.0% Minorities (0.4) 21.7% 0.0 (0.4) -4.4% (0.8) 73.1% (1.2) 37.1% Net profit % % % % % Trevi Group: 2006 forecasts and implied 2H06 estimates (by business line) 1Q06a % Ch. 2Q06a % Ch. 1H06a % Ch. 2H06e % Ch. 2006e % Ch. Foundation Works % % % % % % margin 16.5% 12.4% 14.6% 14.4% 14.5% Drilling Services % % % % % % margin 33.0% 33.0% 33.0% 33.0% 33.0% Trevipark % % % % % % margin 12.0% 12.0% 12.0% 12.0% 12.0% Foundation Equipment % % % % % % margin 12.0% 7.1% 9.6% 10.1% 9.8% Drilling Equipment (Drillmec) % % % % % % margin 11.0% 11.0% 11.0% 11.0% 11.0% Total sales % % % % % Other sales Turnover Group's % margin 14.7% 11.0% 12.9% 14.1% 13.5% As for cash flow, strong top-line growth in the first half led to a sound increase in net working capital as a percentage of sales (from 12.8% at the end of 2005 to 15.3%). Net debt increased by some 22.4m (from 126m as of 31/12/05 to 148.4m). We expect operating free cash flow generation in 2H06 of some 17m, leading to a net financial position of 131.4m, as a result of: capex of 22m in H2 ( 40m for the full year); an improvement in net working capital as a percentage of sales from 15.3% to 13.0%. 20 September

4 Assuming net working capital remains stable as a percentage of sales from 2007 going forward, Trevi should start to generate cash from 2007 (some 20/30m per year). Trevi Group: Cash Flow highlights 2005a 2006e e Net Profit (reported) and Minorities Non-cash items Cash Flow Change in Net Working Capital 18.3 (12.1) (13.8) (12.9) Capex (40.0) (40.0) (30.0) (30.0) Operating Free Cash Flow Net Financial Investments Dividends (1.0) (4.2) (7.7) (9.6) Others (incl. Capital Increase) 4.3 (2.7) (4.2) (5.0) Free Cash Flow 22.0 (5.4) Net Debt Debt / Equity 1.2x 1.1x 0.8x 0.6x A potential capital increase The board of directors has been authorised by the extraordinary shareholders meeting to increase the share capital within five years up to a maximum of 10% of the current capital (6.4m ordinary shares with a nominal value of 0.50). The capital increase shall be finalized through an increase completely or partially reserved to Italian or foreign institutional investors, with the exclusion of option rights and/or through the issue of a convertible bond by one of the group s Italian or foreign subsidiary reserved to Italian or foreign institutional investors, entailing no rights issue. Note the potential exclusion of the option rights: in our opinion, the capital increase will be finalised if the Trevi group gains a sizable order in the drilling division. This should allow for the entry into the group s capital of an industrial partner, thus sustaining company growth. 20 September

5 Valuation We updated our sum-of-the-parts (SOP) analysis based on the group s four divisions (Foundation works, Foundation equipment, Drilling service and Drilling equipment), increasing our valuation from 7.40 to A DCF analysis based on a 7.2% WACC and a 2.0% perpetual growth rate points to a fair value of 7.80, confirming our SOP valuation. Note that our DCF model discounts a 200 bps drop in the exit margin compared to the 13.5% expected in 2006, reflecting the cyclicality of the main reference markets. Based on the two valuation approaches, we increase our target price to 7.70 per share (from 7.40), showing a 16% upside on the current share price. This would imply 5.9x and 16.1x EV/ and P/E respectively, which are not demanding multiples, also given the 06e-08e EPS CAGR of 20.3% and the 0.7 PEG ratio. Our SOP: a peers multiple comparison by business line We used the following specific peer multiples for each business line: Foundation works (also including the parking unit Trevipark): we applied to the group s core business (50.3% of 20 group sales), the 5.3x EV/ consensus average multiple of Keller and Bauer, the closest peers in this business division. Trevi Group: Foundation works profitability vs. peers Sales margin Keller (GBP m) % Bauer (EUR m) % Trevi - Foundation works % Trevi Group: Foundation works peer multiples EV/Sales EV/ Keller 0.5x 5.9x Bauer 0.5x 4.2x Average 0.5x 5.1x 20 September

6 Foundation equipment (Soilmec 20.0% of 20 group sales): we applied the EV/ consensus average of the US machinery producers Caterpillar, the British group FKI and Swedish companies Atlas Copco and Sandvik. Trevi Group: Foundation equipment profitability vs. peers Sales margin Caterpillar (USD m) 42, , % Atlas Copco (SK m) 63, , % FKI (GBP m) 1, % Sandvik (SK m) 74, , % Trevi - Foundation equip % Trevi Group: Foundation equipment peer multiples EV/Sales EV/ Caterpillar (USD m) 1.2x 7.6x Atlas Copco (SK m) 1.3x 5.2x FKI (GBP m) 0.6x 5.8x Sandvik (SK m) 1.5x 7.4x Average 1.2x 6.5x Drilling services (Petreven 7.1% of 20 total group sales): due to the lack of comparables, we applied the 10.6x EV/ consensus multiple of Socotherm discounted by 20% because of the size difference. Trevi Group: Drilling service profitability vs. peers Sales margin Socotherm (EUR m) % Trevi Drilling service % Trevi Group: Drilling service peer multiples EV/Sales EV/ Socotherm 1.6x 8.7x 20% discount 1.3x 8.4x Drilling equipment (Drillmec 22.6% of 20 total group sales): we applied the 6.8x EV/ consensus average of the main US drilling equipment player National Oilwell, with no discount. Such an approach might be considered too optimistic, but we did not apply any discount because: 20 September

7 1. Drillmec is the only Italian manufacturer of drilling equipment; 2. the significant difference in profitability is mainly justified by the fact that the company is still in its start-up phase; 3. the superior technological level of the subsidiary s equipment compared to the competitors average, allowing better performances (in the range of 30%- 40%) of the group s products; 4. the excellent feedback from the major US drilling operators on Drillmec equipments after the start-up period. This explains the recent orders gained by the subsidiary. Trevi Group: Drilling equipment profitability vs. peers ( m) Sales margin National Oilwell (USDm) 8, , % Drilling division % Trevi Group: Drilling equipment peer multiples EV/Sales EV/ National Oilwell 1.3x 6.8x Our 20 assumptions (see table below) point to an enterprise value of 277.2m for the Foundation works division, 97.7m for the Foundation equipment division, 121.3m for Petreven (Drilling service) and 126.8m for Drillmec (Drilling Equipment). Trevi Group: 20 forecasts by business division ( m) Foundation works Foundation equipment Drilling service Drilling equipment Sales margin 14.5% 10.0% 33.0% 11.0% Trevi Group: Sum-of-the-Parts valuation % owned EV EV/Sales EV/ Foundation works 100% x 5.1x Foundation equip. (Soilmec) 100% x 6.5x Drilling services (Petreven) 100% x 7.0x Drilling equipment (Drillmec) 100% x 6.8x Total NFP (20) (121.1) Minorities (20) (16.7) Equity Value Shares Outstanding (m) 64.0 FAIR VALUE September

8 Our DCF points to 7.80 per share Our DCF analysis based on a 7.2% WACC and a 2% perpetual growth rate points to a fair value of Note that our DCF model discounts: a 200 bps drop in the end-of-period margin compared to 13.5% expected in 2006, thus reflecting the cyclicality of the main reference markets; based on an academic approach, we set capex projections equal to depreciation and provisions in 2009e and 2010e. We assumed a WACC of 7.2%, based on the following assumptions: a risk-free rate at 4.5%; beta at 1.2 (the level we tend to apply to small/mid caps in the light of these stock s modest liquidity); cost of debt (gross) of 6%; debt-to-total-capital employed of 60%, reflecting a 2006e 1.1x debt to equity ratio; The tables below summarises our free cash flow projections and our DCF analysis: Trevi Group: free cash flow projection ( m) 2006e e 2009e 2010e EBITA Taxes Tax-rate 45.0% 45.0% 45.0% 45.0% 45.0% NOPLAT Depreciation & other provisions Operating Cash Flow Capex Change in Net Working Capital Operating free cash flow Trevi Group: DCF valuation ( m) WACC 7.2% 7.2% 7.2% 7.2% 7.2% Discount rate Discounted Operating Free Cash Flow Cumulated DFOCF September

9 Trevi Group: DCF analysis ( m) Perpetual Growth Rate 2.0% WACC 7.2% Terminal value as of 31/12/ Discounting rate of terminal value 0.76 Discounted terminal value ( m) Cumulated DFOCF Enterprise value ( m) Net financial debt as of 31/12/06e (131.4) Minorities market value as of 31/12/06e (18.8) Equity Value ( mn) Value per share ( ) September

10 Profit & Loss account ( m) E 2007E Turnover Turnover growth % margin (%) growth (%) Depreciation & Amortization EBIT EBIT margin (%) EBIT growth (%) nm 21.5 Net Fin.Income (charges) Non-Operating Items Extraordinary Items Pre-tax Profit Tax Tax rate (%) Minorities Net Profit Net Profit growth (%) 63.5 n.m Adjusted Net Profit Adjusted Net Profit growth (%) 13.6 n.m Balance Sheet ( m) E 2007E Working Capital Net Fixed Assets Total Capital Employed Shareholders' Funds Minorities Provisions Net Debt (-) Cash (+) Cash Flow Model ( m) E 2007E Cash Earnings Working Capital Needs Capex (-) Financial Investments (-) Dividends (-) Other Sources / Uses Ch. in Net Debt (-) Cash (+) Multiples E 2007E P/E Adj P/CEPS P/BV EV/ Sales EV/ EV/EBIT EV/Cap. Employed Yield (%) FCF Yield (%) < Per Share Data ( ) E 2007E EPS EPS growth (%) 63.5 n.m EPS Adj EPS Adj. growth (%) 13.6 n.m CEPS BVPS DPS Ord Key Figures & Ratios E 2007E Avg. N of Shares (m) EoP N of Shares (m) Avg. Market Cap. ( m) Enterprise Value ( m) Labour Costs/Turnover (%) 19% 16% 15% 14% Depr.&Amort./Turnover (%) 6% 5% 4% 4% Prod. Ratio (Turn./Op.Costs) Gearing (Debt / Equity) (%) 181% 123% 107% 83% / Fin. Charges >10 Cap.Employed/Turnover (%) 67% 50% 43% 39% Capex / Turnover (%) 8% 8% 6% 4% Pay out (%) 38% 32% 32% 31% ROE (%) 3% 13% 21% 22% ROCE (%) (pre tax) 7% 11% 21% 24% ROCE (%) (after tax) 2% 6% 12% 13% THIS PUBLICATION IS ISSUED BY MEDIOBANCA. IT IS NOT INTENDED TO BE AN OFFER TO BUY OR SELL, OR A SOLICITATION OF AN OFFER TO BUY OR SELL, ANY SECURITIES. 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 CONSIDERS IT TO BE FAIR AND NOT MISLEADING. MEDIOBANCA AND ITS 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 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. MEDIOBANCA 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 AND ANY OTHER DISCLAIMERS, PLEASE REFER TO THE MB SECURITIES SECTION OF THE MEDIOBANCA 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 WEBSITE AT