Trevi Finanziaria. Debt worries seem excessive. 19 February 2009 Capital Goods Change in Estimates. Price: 5.07 Target price: 6.

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1 19 February 2009 Capital Goods Change in Estimates Price: 5.07 Target price: 6.90 Outperform /2/09 EPS Adj. ( ) DPS ( ) BVPS ( ) F M A M J J A S O N D J F TREVI FIN INDUSTRIALE MILAN MIBTEL - PRICE INDEX Source: DATASTREAM Market Data Market Cap ( m) 356 Shares Out. (m) 70 Main Shareholder Trevisani Fam. (55.9%) Free Float (%) 44.1% 52 week range ( ) Rel Perf vs Mibtel (%) -1m -22.1% -3m -35.7% -12m -7.7% 21dd Avg. Vol. ('000) 216 Reuters/Bloomberg TFI.MI / TFI IM Key Financial Data ( m) Turnover 874 EBITDA 129 EBIT 99 Net Profit 56 Shareholders' Funds 156 Net Debt (-) Cash (+) -143 Gearing % 87.3% EV/Ebitda (x) P/E adj (x) Div.Yield (%) FCF Yield (%) 7.1 < Source: Mediobanca Securities Debt worries seem excessive 2008E net debt above 300m. Is it a concern? Not in our view We forecast 2008E net debt above 300m. This would imply some 148m free operating cash burn in 2008, or net debt more than double the figure of 143m posted in Is this a concern? Not in our view. The reason lies in the significant capex plan implemented during the year ( 100m) and the sharp increase in net working capital (some 50m) related to the manufacture of conventional rigs without down-payments to be delivered only in 1H09 to the Iraqi national oil authority, but guaranteed by irrevocable letters of credit. What is worrying is the increase in inventories related to Soilmec (foundation equipment), where we expect sales to be down by 14% in 2009E. There are some reassuring factors We remind investors that 75% of the gross debt is long-term with just 35m to be repaid by year-end (approx. 1/3 of monthly turnover). In addition, the company has some 100m undrawn, irrevocable credit lines, negotiated over six months ago. This means a cost of debt at Euribor + 35/65 bps, well below the current level if theoretically re-negotiated. FY 2008E debt/ebitda ratio should stand at 1.8x, much lower than the 3.5x of the covenants. Investing in the business to be ready for potential new intake Trevi is still investing despite the current macro scenario, as shown by the three small acquisitions recently announced. Why is this? The balance sheet is not under strain, first of all, and secondly, they are conviced of a recovery in the service business (ground engineering). While we agree with this view (see our report on capital goods, i.e. new intake coming from the US, published in December 2008), we discount the negative outlook for Soilmec in our forecasts. For this reason, we cut our 2009E EPS by 26.8%, coupled with lower margins. Time to re-invest in Trevi. Target price set at 6.90 (from 11.30) We have based our valuation on peer multiples (4x EV/EBITDA applied to the ground engineering divisions and 4.5x to the drilling subsidiaries) pointing to 6.90 target price (from 11.30, 36% potential upside). At the same time, we reckon that the potential intake in 2009, impacting 2010 figures, is key to valuing Trevi, widening the implied upside. Andrea Scauri Sales desk Equity Analyst mailto:andrea.scauri@mediobanca.it

2 Cash flow analysis. Net debt to double for capex and increasing inventories The table below summarises our cash flow assumptions, pointing to 304m net debt in 2008E and a slight improvement in 2009E to 287m, doubling the 142m posted in This relates to two key points, which substantially represent the bet that the management of Trevi group is taking for the future. We refer to: The significant capex plan implemented in 2008 (some 100m vs. 50m posted in 2007) related to an increase in the production capacity. This level should be maintained in 2009 ( 84m expected) broken down as follows: 1) 30m maintenance capex; 2) 30m for the acquisition of new buildings and factories and 3) 24m for the acquisition of three local players (Watson - US; Arabian Soil Contractors Saudi Arabia; Galante - Colombia). Trevi is still investing despite the current macro scenario. Is this the right decision? We believe it is, given that 1) the balance sheet is not under strain and 2) we share their conviction of a sharp recovery in the service business (ground engineering). Trevi group cash flow assumptions The sharp increase in net working capital (some 165m) in 2008E. A portion of this ( 50m) relates to the manufacture of conventional rigs without down-payments to be delivered only in 1H09 to the Iraqi national oil authority, but guaranteed by irrevocable letters of credit. The remaining stake refers to the increase in inventories of Soilmec (foundation equipment). In this regard, we are sceptical of the group s possibility to clear these stocks since we expect Soilmec s sales to be down by 14% in 2009E. We remind investors that, unlike in the case of the other business units, the visibility on Soilmec s turnover is much reduced (three months vs. one year). Ongoing difficult conditions in selling this equipment over the whole of 2009 might lead to a write-down of the stock, further increasing the cash burn effect. However, the company will be able to deal with the European market s needs if there is a recovery in the second half of the year. ( m) Net profit and minorities Non cash items Cash flow Change in net working capital Capex Free operating cash flow Dividends Others Free cash flow Net debt Debt/EBITDA 1.1x 1.8x 1.6x 1.2x Source: Company data, Mediobanca Securities We remind investors that 75% of the gross debt is long-term with just 35m to be repaid by year-end (approx. 1/3 of monthly turnover). In addition, the company has some 100m undrawn, irrevocable credit lines, negotiated over six months ago. This means a cost of debt at Euribor + 35/65 bps, well below the current level if theoretically re-negotiated. FY08E debt/ebitda ratio should be 1.8x, much lower than the 3.5x of the covenants. 19 February

3 The bet is on 2010 We expect 2008E net profit to be in the region of 74m, following the recording of provisions of some 10m in the last quarter of We are cutting our 2008E EPS by 8.5%. As for 2009, we are assuming net sales increasing by 8.6% Y/Y to 1,158.4m (see our top-line and profitability assumptions by business division on page 4) and 135.8m EBIT, +5.2% y/y, reflecting a decrease in profitability (11.7% of the EBIT margin vs. 12.1% expected in 2008E). Finally, we discount an increase in financial charges, leading to 74m net profit (-0.1% y/y). Trevi group 2008E and 2009E forecasts ( m) 2007 % 2008E % 2009E % Backlog % % % Intake , ,159.9 Net sales % 1,067.2* +27.4% 1, % Other revenues % Work done % 1, % 1, % EBITDA % % % EBITDA margin 15.5% 15.8% 15.1% D&A (26.4) +10.4% (33.1) +25.4% (34.3) +3.4% Provisions (3.6) (6.5) +78.5% (5.0) -23.1% EBIT % % % EBIT margin 11.9% 12.1% 11.7% Forex % Net financial income (charges) (13.7) +31.0% (17.7) +29.7% (19.0) +7.3% Pre-tax profit % % % Taxes (28.1) +91.3% (39.5) +40.9% (39.7) +0.4% Tax rate 32.7% 33.8% 34.0% Minorities (2.0) +72.1% (3.2) n.m. (3.0) -7.0% Net profit % % % *Already disclosed at 1,050m Source: Company data, Mediobanca Securities As already mentioned in the previous section, the bet is on a sharp recovery in the ground engineering market, especially in the US, South America (Colombia and Panama) and Africa. If this is the case, our 2009E backlog of 900m might be under-estimated, giving scope to increase profits and cash flows in Finally, note that our 2009 assumptions have been finalised using a USD/EUR exchange rate of Assuming the current spot level (1.27) for the whole of 2009, our 2009E EPS would be positively impacted by more than 5%. 19 February

4 Service divisions budget already covered. Soilmec down by 14% Below, we summarise our top-line and profitability assumptions by business division. Note that the service divisions budget is already 100% covered by the current backlog. We refer to: Trevi (foundation services) we expect a 2009E turnover of 495m, +12% y/y and profitability stable in the region of 16.5% of the EBITDA margin; Petreven (Oil services) 2009E turnover should be up by 40%. This is thanks to the positive contribution of five additional rigs operated in South America for Repsol (spread over the year), increasing the number of rigs from 10 to 15. As for profitability, we see the margin decreasing by 230 bps (to 20%) due to inefficiencies in labour cost management. Drillmec (equipment for the oil industry) the 2009 budget is covered by more than 70%. We expect an increase in turnover to 317m (+25.0% y/y) thanks to ongoing negotiations with the Emirates government. This should be partly offset by a contraction in profitability, pointing to an EBITDA margin of 14.0%. The real problem concerns Soilmec, where we see turnover dropping by 14% to 270m, coupled with profitability down by 150 bps (to 12.5% of the EBITDA margin). Visibility is now close to zero and there are no signs of better market conditions. We do not rule out the fact that our assumption might be revised downward in the near future if the current market conditions persist. If this is the case, as already mentioned, 2009 cash flows would be negatively impacted, as well as our 2009E net debt of 287m. Trevi group top line and profitability assumptions by business divisions ( m) 2007 % ch. 2008E % ch. 2009E % ch. Foundation works (Trevi) % % % EBITDA % % EBITDA margin 16.4% 16.9% 16.5% Drilling services (Petreven) % % % EBITDA % % EBITDA margin 22.0% 22.3% 20.0% Foundation equipment (Soilmec) % % % EBITDA % % EBITDA margin 13.5% 13.9% 12.5% Drilling equipment (Drillmec) % % % EBITDA % % EBITDA margin 13.6% 15.0% 14.0% Total sales % % % Inventories and others % 97.3 Turnover % % Group's EBITDA % % % EBITDA margin 15.4% 15.8% 15.1% Source: Company data, Mediobanca Securities 19 February

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. 19 February

6 Profit & Loss account ( m) Turnover 874 1,164 1,256 1,318 Turnover growth % EBITDA EBITDA margin (%) EBITDA growth (%) Depreciation & Amortization EBIT EBIT margin (%) EBIT growth (%) Net Fin.Income (charges) Non-Operating Items Extraordinary Items Pre-tax Profit Tax Tax rate (%) Minorities Net Profit Net Profit growth (%) n.m Adjusted Net Profit Adjusted Net Profit growth (%) n.m Balance Sheet ( m) Working Capital Net Fixed Assets Total Capital Employed Shareholders' 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 (+) Multiples P/E Adj P/CEPS P/BV EV/ Sales EV/EBITDA EV/EBIT EV/Cap. Employed Yield (%) FCF Yield (%) 7.1 < Per Share Data ( ) EPS EPS growth (%) EPS Adj EPS Adj. growth (%) CEPS BVPS DPS Ord Key Figures & Ratios Avg. N of Shares (m) EoP N of Shares (m) Avg. Market Cap. ( m) Enterprise Value ( m) Labour Costs/Turnover (%) 11% 11% 11% 0% Depr.&Amort./Turnover (%) 3% 3% 3% 3% Prod. Ratio (Turn./Op.Costs) Gearing (Debt / Equity) (%) 87% 132% 96% 58% EBITDA / Fin. Charges >10 Cap.Employed/Turnover (%) 37% 48% 49% 47% Capex / Turnover (%) 6% 9% 7% 3% Pay out (%) 13% 9% 9% 10% ROE (%) 36% 33% 25% 23% ROCE (%) (pre tax) 30% 23% 22% 24% ROCE (%) (after tax) 21% 15% 15% 16%