6 NOV DEC JAN FEV MAR AVR MAI

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1 NOV DEC JAN FEV MAR AVR MAI

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3 Italdesign-Giugiaro is a leading designer and service provider for carmakers; activity is focused on designing, engineering and prototyping, offering from single service to complete turnkey projects. With just 44% of its sales in Italy, the group has an international standing. Advanced technology coupled with an outstanding brand name has supported strong sales growth and an operating margin substantially higher than competitors. Italdesign has realized some of the most successful car models in Europe such as VW Golf, FIAT Punto, SEAT Ibiza, FIAT Panda and Daewoo Matiz. We expect a growing demand for automotive design & engineering driven by the development of new car segments, the increased number of models and a shorter product cycle. In this scenario Italdesign can satisfy the increasingly demanding carmakers need: the time-to-market reduction. We estimate that the actions undertaken will allow a significant net profit improvement in the following years. Strategic guidelines are: International expansion aimed at establishing subsidiaries next to the carmakers, thus increasing the number of turnkey projects and the company s presence in US and Asia. New acquisitions and outsourcing in order to widen both product range and production capacity. Vertical integration to develop other segments of the pre-manufacturing process. In addition, Italdesign plans to extend its engineering services to new sectors, such as railway, motorcycle and aerospace industry. We estimate a sales and earnings CAGR of 15% over 1999/02 (net sales from 130m to 195m), with a mix improvement sustained by the expansion of engineering activity. Operating margin should stabilise at 29/30% regardless possible car market downturn. Net profit will reach 33m in 2002 (from 21 in 1999) despite a rising tax rate. Net debt (10m at end-99 with a gearing of 18%) should turn to net cash thanks to positive cash flow and lower capital expenditures, allowing a substantial growth of ROCE (from 56% in 1999 to 90% in 2002). Italdesign was listed in the Italian Stock Exchange in November 1999 at 7.0 per share. Despite the good share performance (+19.3% relative to BCI index since the listing and +11.3% since year beginning), we believe Italdesign still offers interesting upside. Although the fundamentals are attractive (profitability at 27%) and growth prospects are higher than the automotive sector s (organic growth at 15% p.a. vs 2/3%), multiples are substantially in line with the sector and the competitors. We have valued Italdesign on the basis of DCF and sector P/E multiples obtaining a fair value of 12.2 per share. 2/Outperform.

4 Healthy fundamentals Target price of 12.2 per share After the closing of the public offer (demands exceed 12 times the original offer for the Italian retail tranche and 7 times for institutional investors) the share price has shown a high volatility increasing to 12.5 in the first day of listing (from an IPO price of 7.0) and then trading between 8 and 10 per share. We believe Italdesign is still undervalued: attractive fundamentals and undemanding multiples will drive the share performance in future. With car makers expanding both the range of their models and the number of version they offer, and an extensive order backlog, Italdesign has been able to lower the cyclical nature of the business as well as to offer good visibility on future earnings. Moreover, Italdesign, like Pininfarina, has a sound financial structure (net debt at 10m at end-99, with a gearing of 17.6%) and a low net working capital; this unleveraged balance sheet increases Italdesign s WACC, but offers a solid base to exploit new opportunities and to face eventual market downturn. Attractive earnings and growth prospects, higher than the average of automotive industries, are coupled with undemanding multiples. We have evaluated Italdesign with DCF and on P/E multiples comparison, obtaining a fair value of 12.2 per share (upside +13%). We applied the following assumptions: DCF Valuation Risk-free rate equal to 5.5% (10Y Italian bond yield). Risk premium of 3.5% A beta of 1. We have calculated a WACC of 9.0%, with a perpetual free cash flow growth rate of 3.5%, we have obtained a target price of per share with a potential upside of 15%.

5 We highlight Italdesign is a strong value creator, given its low capital employed. Strong value creation 60% 40 50% % 25 30% 20 20% % 5 0% A 1998A 1999A 2000E 2001E 2002E 2003E 2004E 2005E EVA (EURm) ROIC WACC A difficult comparison A valuation made on the basis of competitors multiples is difficult because there are only few comparable producers listed: Ricardo, a designer specialised in powertrain listed in London, Bertrand, a component and system designer working for Mercedes listed in Germany, Mayflower, a designer that also produces body stamping and busses is listed in London, while Pininfarina and Porsche have their main activity in car assembling. At the current price Italdesign is valued slightly higher than its peer group despite margins that are more than the double of the average. Therefore we believe Italdesign deserves a premium of at least 25% to the P/E multiple to take into account Italdesign s greater profitability, obtaining a valuation of 12.2 with a potential upside of 15%.

6 40% 35%,WDOGHVLJQ 30% 25% 20% 15% 10% 5% Porsche Bertrand Mayflower Sogefi Carraro Valeo Plastic omnium Faurecia Pininfarina Brembo Ducati Ricardo 0% Comparing Italdesign s multiples with both industrial and automotive sector we can notice some differences: P/E is roughly in line with industrial sector s one and lower than automotive sector, while P/CF is substantially higher than sector s multiples. EV/EBITDA is in line with the automotive sector. Considering the bright organic growth for Italdesign in the following years (sales CAGR of 14.5% between 1999 and 2002, compared with 4.5% for the automotive sector), these multiples are undemanding and support our positive view.

7 Italdesign is a leading European designer of cars and a service provider for the automotive industry. It offers a full range service to the carmakers, from the car concept and styling to the assistance in the pre-production phase. Depending on customer s needs, Italdesign provides its services on an individual basis (i.e. design) or through a turnkey project, allowing a reduction of the time-to-market, that is one of the main requirements of the carmakers. The IPO terms A total of 20m shares (dividends payable on 1999), have been offered in November 1999 to investors, of which 4.3m to Italian retailers and 0.3m to employees. The price was set at 7 per share. The free float is 40% while major shareholders are Giugiaro and Mantovani family with 30% each.

8 A growing market... Automotive service market (design, engineering and prototyping) is estimated globally around 5bn. Europe represents one third of the total market and has grown nearly 20% in Following the car registrations, among European countries, Germany represents the largest market (26% of European registrations), followed by Italy (17%) and France (14%). The market is driven by carmakers demand that is strongly growing due to some structural changes in the automotive market:...driven by carmakers demand New segments. Carmakers have begun to enter in new segments in order to extend their product range and to penetrate new niches that can offer a higher profitability. This trend is particularly evident in Europe, where Minivan (MPV), Speciality and Sport Utility Vehicles have increased their weight on total sales (12% in 1999 vs 7.9% in 1997). Moreover, some carmakers are revamping old brands, such as VW with Bugatti or FIAT with Maserati. Entering in new segments boosts the outsourcing of design, as carmakers need originality and new ideas while internal design departments may not have specific expertise and are generally fully booked. Increased number of models. In the recent years carmakers have strongly increased the number of models produced. In Europe models increased from 128 in 1997 to 135 in 1995, while 155 models are expected in Also versions of each model are growing: for example the new Lancia Lybra is produced with 16 different versions vs 4 of the old Dedra. This wider model and version range has led to a higher level of engineering services for the production of each new car. Shorter product cycle. The stronger competition between carmakers has led to a continuous renewal of products, therefore reducing the product cycle; from an average car cycle of 8/10 years in 80s, car industry now stands at 6/8 years. Carmakers claims this trend will continue future and they suggest 5 years for the average product cycle in New entrants in Europe. In the recent years, non-european carmakers have tried to enter in the European market. In particular Japanese and South Korean carmakers are going to increase their market share in Europe. In order to achieve this goal, they need to launch cars with a European style. Moreover, in some Asian countries such as South Korea, China and Malaysia, the demand for a distinctive Western Europe styling is growing. Summing up, Automotive design & engineering industry is less cyclical than car production or component supply sector. Moreover, a slowdown in car registrations should lead carmakers to increase the number of new models. Being near the top of the cycle in terms of volumes in Europe, Italdesign should be considered a perfect tool to face a possible downturn in the automotive sector.

9 Italdesign will benefit from these trends Further growth from acquisitions In this framework, Italdesign has the opportunity to grow by 15/20% p.a. thanks to its main strength: a low time to market. In order to satisfy a differentiate demand and a shorter product cycle, carmakers have reduced their time to market from 4 years in early 90s to 24/36 months in 1999 with the trend towards 24 months. Italdesign has the capability to complete the pre-industrial phase in less than 24 months, satisfying the carmakers needs. Moreover, Italdesign represents a leading brand in terms of style and therefore it benefits from the growing demand from Asian carmakers (It has a long-term co-operation with Daewoo and Lexus and at present it s working in China). Another growth driver might come from the acquisition of other automotive prototyping & engineering companies, which Italdesign does not rule out. We believe acquisitions represent a good tool to increase flexibility and range of services. Strong competition but fragmented Design & engineering sector is very fragmented with several small companies active in single services and countries; some of those are also niche car producer (Porsche and Karmann in Germany, Pininfarina and Bertone in Italy). In addition, there are carmakers internal design departments, such as Idea of FIAT; however, carmakers often outsource design projects to third parties in order to get different solutions available. The industry is more developed in Europe, as Asian and US carmakers tends to use internal styling departments. Nevertheless, this characteristic is changing and now California is becoming one of the more active design districts. The competitive scenario is characterised by significant competition not affected by prices but by the quality of the services offered. In particular there are few players able to offer a full range service, or a turnkey project, from the design to the definitive prototype.

10 Italdesign answer: focus on turnkey projects & internationalization Italdesign has already increased the number of its turnkey projects to more than 60% of total sales and has a capacity to develop 5/6 turnkey projects in the same time. This characteristic is unique within the industry and increase Italdesign s visibility on sales, as turnkey projects lasts 24/36 months. Moreover, Italdesign is one of the few designer with an extensive activity abroad: Italy represents 44% on 1999 sales, Western Europe 30%, US 6% and Asia 20%....being supported by an outstanding model track record The brand name represents one of Italdesign s greatest strength, and is supported by an outstanding model truck record. Over 30 million cars were built based on Giugiaro s design (see Appendix for details) in the past 30 years, with more of 50 cars styled, engineered and prototyped. This number represents only the disclosed projects (around 60% of total sales is subject to confidential agreements). Italdesign activities may be grouped into four families : Four product families 1. Design represents 18% of 1999 sales and is the best known activity of Italdesign. Activities include styling, creation of concept cars for exhibition, building interior and exterior models and conducting feasibility studies. With 104 employees, design has a profitability in line with the group average. The main strength of Italdesign is the Giugiaro brand name and the outstanding reputation of Giugiaro style, while the main weakness is the risk of a possible Mr. Giugiaro resignation. However, the presence of the son of Mr. Giugiaro as head of design department, prevents Italdesign from this risk. We highlight the strong commitment of Italdesign in design R&D; in particular Italdesign adopts CAS, a software that allow the creation of virtual three dimensional models, avoiding the construction of prototypes. Design is the first step of every turnkey project and still represents the showcase for the company. 2. Engineering, 38% of 1999 sales, is the core business of Italdesign and the key to the company s success, as all the reduction of time to market comes from this department. 268 employees, mainly engineers, are working in this sector, that is growing faster than the group s average and presents an outstanding profitability (over 30%). Two subsidiaries, in Spain and California, were established in the past years. Activities include body engineering (both interior and exterior), mechanical engineering, installation of electronic systems and conducting feasibility studies. Engineering projects generally required 24 months, therefore offering a good visibility on sales. Italdesign outsources partially its engineering activities (we estimate around 30%), in particular the less technically complicated parts, in order to increase its flexibility. Other designers, as Pininfarina, are trying to enter in engineering market, given the high rate of growth and the appealing profitability of this business.

11 3. Prototyping represents 36% of 1999 sales; it has 165 employees and a production capacity of 150 prototypes per annum. Activities include construction of master models, prototype components (both metal and mechanical) and tools; only prototypes of engines are excluded. Profitability is slightly lower than the group s average, due to the nature of the business (labour intensive activity and higher material costs) and to the growing outsourcing. Italdesign is extending the range of its services to the testing assistance of prototypes as well as to the pre-production phase. Moreover, it s developing project management activity, that is applied to turnkey projects and is fundamental to reduce the time to market as well as to integrate components suppliers into the production line, developing in the mean time co-design activities. 4. Industrial Design, that was acquired in H1-99 for 10m (company name: Giugiaro Design), provides industrial design services (engineering and prototyping of non-automotive products). It represents just 7.4% of 1999 sales with a low profitability (we estimate 1% vs an operating loss in 1998) and 39 employees, but in the future is expected to grow at a faster rate than the rest of the group. In particular, the Italdesign s target is to develop engineering and design activities for railways and aircraft. Other activities 7.4% Design 18.4% Prototyping 35.8% Engineering 38.3%

12 Italdesign has only one manufacturing plant in Italy, which is in Moncalieri, Turin province; it has 637 employees, 91 of which are in production and 37 are managers. The Spanish branch has 44 employees and the Californian one 50. Few customers but wide geographical breakdown Italdesign has always worked with different carmakers, mainly European; however, there is a high concentration among Italdesign s clients. We estimate the first customer, FIAT, account for roughly one third of total sales, and the second one, Volkswagen, around 17%. Together with the third customer, Daewoo, in 1999 turnover from Italdesign s top three clients accounted for approximately 65/70% of total sales. This high concentration is mainly due to turnkey projects that represents 60% of total sales. At present the company is working on 6 turnkey projects: 2 in engineering (started in 1998 and 1999), 2 complete turkeys (both started in 1999) and 2 in engineering & prototyping, just started. Although the high concentration of customer represents a risk for Italdesign, we believe the presence of new turnkey projects offset this risk, given the recent starting date. Moreover, we highlight the wide geographical breakdown of Italdesign that is the only international designer in the market, together with Porsche and Hawtal Whiting. In future we expect a slowdown of Italian sales (from 44% in 1999 to 35% in 2002), stable sales in Asia and strong improvement both in US and Western Europe; company s target is to reach 1/3 of sales in Italy, 1/3 in Europe and 1/3 in the rest of the world. Asia 20.1% North America 5.8% Italy 44.0% Rest of Europe 30.2% Contract conditions Italdesign s contracts have duration from a minimum of 4 months for pure design projects to 36 months for a complete turnkey project. In this context, prices are based on fixed consideration, with advance payments from a minimum of 10% (for long-term contracts) to 30% for short style projects. On long term contracts Italdesign is paid every 2/3 months on the basis of the progress made. We underline that, despite agreements contain penalties on possible delays, till now the company has never had to pay penalties.

13 The strengths of management product pipeline are: High degree of flexibility coupled with focus on outsourcing Outsourcing. In H1-99, it has achieved 19.5% of total costs (16.9% in H1-98) with a strong increase in the last two years. It s important to underline that only single phases of the total production process are given in outsourcing in order to maintain in-house the core activities. We believe that a growing outsourcing trend can add capacity and flexibility to Italdesign while limiting fixed costs. Strict cost control on single projects. Every project is continuously checked from the beginning in order to take under control the profitability of every work in progress. The result is an immediate reaction if projects don t fit with the conditions required. Strong commitment in technology. Italdesign has strongly invested in R&D in order to upgrade its technological devices: now there are about 400 workstation (on 760 employees) using CAD, CAS and CAM, three systems that allow virtual design and engineering, saving costs and time. In addition, highly specialised workforce makes Italdesign one of the most technological advanced companies within automotive service industry % 30% 25% 20% 15% 10% 5% 0 0% Design Engineering Prototyping Other activities Official targets are: The company s targets... raising sales by 15% p.a. over the next three years; operating margins stable or with moderate growth (physiological 30%); Pay out ratio higher than 50%; Strong growth of net profit. In order to reach its objectives, Italdesign-Giugiaro s strategy aims to enlarge its turnover thanks to the followings:...can be reached following three drivers International expansion. Italdesign plans to further expand its core businesses establishing subsidiaries next to the carmaker, in order to develop long-term co-operation through codesign, technical assistance and project management. The main target is to increase the number of turnkey projects that offer a higher profitability. A branch has been opened in France (near PSA) while significant developments are expected in Germany and China; in the latter Italdesign has already started designing for a market that craves European styling skills (a full-sized car for the domestic market will be completed this year, while an MPV vehicle should follow in 2001). Moreover, Italdesign is developing its Californian branch (sales at 6m in 1999, with profitability at break-even): new projects include a prototype for Honda and one for Ford. In US the company aims to increase its co-operation with the big three (GM, Ford and Daimler-Chrysler) rising its sales by 50% in 2000.

14 New acquisitions. Management plans to expand its operations by acquiring small and medium sized companies active in engineering and prototyping. The first step in this direction was the acquisition of 60% of Studeo (March 2000), a Turin-based company specialized in engineering with a turnover of EUR3m (2% on Italdesign sales). We expect further acquisitions in the coming months as well as growing outsourcing for prototyping. Increase vertical integration. The last pillar of Italdesign s strategy is the developments of other segments of the pre-manufacturing process in order to offer a wider product range and to exploit its expertise in new niches & markets. In particular the company wants to develop testing and dashboard engineering. Moreover, Italdesign plans to extend its engineering services to new sectors, such as railway, motorcycle and aerospace industries (through Giugiaro Design), which use a similar technical approach in product development. With over 30m cars produced, Italdesign has a leadership position in design, engineering and prototyping cars, with a strong growth (23% p.a. in the last five years) sustained by the increasing number of car models and outsourcing from carmakers. Therefore Italdesign is less cyclical than other automotive companies. Italdesign can be considered more as a service company than an industrial one. Therefore, profitability is outstanding (operating margin at 28% in 1999) compared to industrials and benefits from high flexibility and a low break-even point. Strong financial structure, with low net debt, and net working capital. Therefore, Italdesign is in the position of picking up any opportunity in the market. Possible expansion in car prototyping and engineering through acquisitions or international alliances. High barrier to entry, thanks to specialized workers (on 761 employees at end-99, 100 are designers and 300 working in engineering). Management s strong commitment backed by a stock option plan (in process) and the direct involvement of the property. High dividends yield (3%), that will be maintained in the next years. Low sales visibility, due to the modest order backlog and the confidential agreements with some carmakers. Sales driven by few customers (the first three clients account for 60/70% of total sales). Having reached a top level of operating margin, will be difficult to increase the profitability. Italdesign has grown because of the vision and energy of Messrs. Giugiaro and Mantovani, rising the question as to whether their sons will be as adept when they take the helm. High exposure to certain key suppliers, due to high level of outsourcing. Excessive volume growth and penetration in new segments could damage the brand name. Possible interruption of projects.

15 We underline trend of sales is highly seasonal: it is generally lower in H1, when carmakers plan new models, that are realized in H2. Therefore, quarterly data give limited indications and can be misleading in term of operating margin. Strong sales growth but low visibility Italdesign reported sales at 130m (+24.2%), in line with our estimates, sustained by the strong growth of prototyping activities (+72.3%) and design (+10.2%); on the opposite engineering activities dropped by 7.2%. This different growth range is due to some long term turnkey projects that have developed engineering activities in For we are expecting a conservative sales CAGR of 14.5%, far below the CAGR of 26.4%, despite the faster growing outsourcing trend from carmakers. The major driver will be engineering, that, together with a rising number of turnkey projects (6 at present), will improve the mix and should increase the visibility of Italdesign sales. We highlight the low visibility on future sales: order backlog is limited (8/9 months, slightly higher than the average 7 months record) while the presence of numerous confidential agreements with carmakers prevent from a full visibility on sales. Sales of other products, mainly industrial design and the Californian branch, will grow more rapidly than sales of the core business. For 2002, we have forecast a 11% impact on sales compared to 7% in Design Engineering Prototyping Other activities Slightly growing operating profit thanks to mix improvements 1999 closed with an EBITDA on sales of 32.5% and an operating margin of 27.2% showing a slowdown vs 1998 (39.3% and 34.4% respectively) due to the different mix of Giugiaro activities (engineering is the sector with the higher profitability) and to the start-up costs of the Californian branch that should reach the breakeven this year. In the future, growing margins are expected. The growing number of turnkey projects and more focus on engineering should allow a profitability improvement. The EBITDA margin will rise slightly (from 32.5% in 1999 to 35.5%, forecast for 2002) while amortisation costs will increase due to the goodwill on the new acquisitions. As a whole, operating margin should grow only moderately in the years to come (from 27.2% in 1999 to 30.1% in 2002).

16 Strong EPS growth & high dividend yield 1999 net result reached 21.5m (+9.8%) thanks to higher financial income and to a lower tax rate (1.3m of positive impact from IRAP), allowing a DPS of 0.43 (+9.8%), slightly higher than our estimate. In the future, EPS should grow in line with turnover, despite lower financial income and a higher tax rate. Dividend should grow accordingly (after in 1999) with a stable payout ratio at 60/65% and a yield at 3%. Low gearing & an outstanding ROCE Net debt, which has reached 9.5 at year-end 1999, with a gearing of 18%, due to the acquisition of Giugiaro Design, will improve considerably in 2000 to a net cash of 4m thanks to positive cash flow, driven by a net profit increase. Capital expenditures should be between 30/35m, declining from 1999, while net working capital, with an average impact below 8% on sales, should free resources. In addition we underline that Italdesign in the past posted a provision of 4.8m following assessments filed by the Income Tax Office; having won all appeals lodged to date, we can consider this provision as a free reserve, therefore reinforcing Italdesign s financial structure. The growing operating profit and a lower invested capital (impact on sales should change from 56% in 1999 to 40% in 2001) should allow for a slight ROCE increase (from 68% in 1999 to 79% in 2001).

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