Back to pumping growth

Transcription

1 EQUITIES CAPITAL GOODS INTERPUMP OUTPERFORM EUR8.1 TARGET PRICE EUR9.1 (UPSIDE 12%) TARGET PRICE EPS 14e EPS 15e 14% unchanged 1% Back to pumping growth 27 SEPTEMBER 2013 Michele Baldelli (+39) Giuseppe Marsella (+39) A play on improving earnings momentum and possible upside surprises Revisiting our investment case on Interpump has reinforced our confidence in our aboveconsensus numbers (10-12% above on EBIT). This is important as we believe that earnings surprises will be the next focus for investors after the recent multiples expansion. We believe Interpump is a solid play in this respect, offering improving earnings momentum from Q3 13 thanks to the recovery of the US truck market and on Europe and VHPP in Strong recovery of European trucks is next and US cylinders/valves could add EUR0.5 Truck markets in the developed world (36% of group sales) are expected to show sales CAGR of 8% in US truck orders have been growing since February 2013 (+15% YTD). In Europe, most of the major truck makers reported book-to-bill ratios of around 1.2x with their Q2 results. In the US, IP has a negligible presence in cylinders/valves (vs 50% share in PTO), products which it acquired in recent years. This opportunity is not in our core case and could add EUR0.5 to the TP. Water jet: a structural growth story Potential to expand in new markets worth >EUR1.3bn Water jet technology (59% of 13e EBITDA) should grow structurally as its many applications gain popularity in several sectors that are still immature. In addition, IP is gaining share in process pumps. If product development supports it, IP may even enter the very profitable EUR1.3bn pump market for the Oil & Gas industry (25% EBIT margin), potentially adding EUR1 to our TP. Outperform reiterated; TP raised from EUR8.0 to EUR9.1 Following the recent re-rating, IP trades at 2014e EV/Sales of 1.5x for a 16%e EBIT margin, slightly below the trend line for Cap Goods peers. However, we expect the EBIT margin to return to the 2008 level of c.18% by 2017 driven by the recovery in profitability in the Oils division. We raise our TP to EUR9.1/share as we have shifted from a valuation based on historical multiples to a SOTP valuation. The profile of the company has changed substantially over the past years and we believe it is more appropriate to value IP based on its two main divisions (Oils and Water Jet), due to the very different margin profiles and the different level of cyclicality in the end markets. Price (25 September 2013) EUR8.1 Performance (1) 1w 1m 3m 12m Market cap (EURm) 861 Absolute(%) (0) (0) Free float (EURm) 628 Rel. Capital Goods(%) NC NC NC NC EV (EURm) 1,075 Rel. MSCI Small Cap(%) NC NC NC NC 3m avg volume (EURm) 1.8 Reuters / Bloomberg ITPG.MI / IP IM Country / Sub Sector Italy / Industrial Machinery Please refer to important disclosures at the end of this report Financials 12/12 12/13e 12/14e 12/15e Valuation metrics (2) 12/12 12/13e 12/14e 12/15e EPS, Adjusted (EUR) P/E (x) EPS, IBES (EUR) Net yield (%) Net dividend (EUR) FCF yield (%) EV/Sales (x) Sales (EURm) EV/EBITDA (x) EBITA, Adj. (EURm) EV/EBITA (x) Net profit, Adj.(EURm) EV/CE (x) ROCE (%) Net Debt/EBITDA, Adj. (x) Source: Exane BNPP (estimates), Thomson Reuters (consensus) (1) In listing currency, with dividend reinvested (2) Yearly average price for FY ended 12/12

2 INTERPUMP (Outperform) Price at 24 Sep. 13 / 12m Target Price EUR8.1 / EUR % Reuters / Bloom berg: ITPG.MI / IP IM Analyst: Michele Baldelli (+39) Industrial Machinery Capital Goods - Italy Company Highlights EURm Enterprise value 1, Target Price Market capitalisation Free float 629 3m average volume Perform ance (*) 1m 3m 12m Absolute (0%) 27% 40% 4.0 Rel. Sector NC NC NC Rel. MSCI Small Cap (3%) 8% 9% 12m Hi/Lo (EUR) : 8.3-2% / % CAGR 2001/ / EPS restated (**) 5% 19% 1.6 CFPS 3% 15% Price 8.8*CFPS Relative to MSCI Small Cap Price (yearly avg from Dec. 02 to Dec. 12) PER SHARE DATA (EUR) De c. 02 De c. 03 De c. 04 De c. 05 De c. 06 De c. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13e Dec. 14e Dec. 15e No of shares year end, basic, (m) Avg no of shares, diluted, excl. treasury stocks (m) EPS, company definition EPS restated, fully diluted % change (9.1%) (38.4%) 62.5% 47.5% 3.7% 13.7% 8.7% (67.9%) 65.7% 61.4% 28.6% (1.5%) 26.9% 11.6% CFPS Book value (BVPS) (a) Net dividend STOCKMARKET RATIOS Dec. 02 Dec. 03 Dec. 04 Dec. 05 Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13e Dec. 14e Dec. 15e P / E (P/ EPS restated) 13.1x 18.4x 12.5x 10.9x 15.1x 15.6x 10.4x 20.5x 16.7x 13.0x 11.2x 15.6x 12.3x 11.0x P / E relative to MSCI Small Cap 64% 119% 69% 60% 81% 86% 55% 103% 18% 38% 55% 86% 86% P / CF 7.2x 8.3x 10.1x 21.5x 9.4x 16.0x 6.2x 8.9x 9.9x 9.3x 8.1x 11.0x 9.2x 8.3x FCF yield 5.9% 6.5% (3.2%) 14.6% 5.8% 4.5% 1.3% 14.1% 10.5% 5.2% 7.0% 4.4% 6.7% 8.4% P / BVPS 1.79x 1.70x 1.83x 2.42x 3.48x 4.21x 2.50x 1.28x 1.44x 1.66x 1.64x 2.07x 1.86x 1.68x Net yield 8.4% 3.8% 3.7% 18.6% 2.8% 4.8% 0.0% 0.0% 2.8% 2.4% 2.9% 2.2% 2.8% 3.1% Payout 110.0% 69.2% 46.1% NS 41.7% 74.6% 0.0% 0.0% 46.5% 31.4% 32.2% 33.8% 33.9% 34.0% EV / Sales 0.83x 0.84x 0.87x 1.04x 1.69x 1.78x 1.45x 1.43x 1.38x 1.42x 1.34x 1.83x 1.49x 1.33x EV / Restated EBITDA 5.0x 5.6x 6.0x 5.7x 7.8x 8.2x 7.1x 10.4x 7.9x 7.4x 6.7x 9.5x 7.6x 6.5x EV / Restated EBITA 7.2x 8.7x 7.6x 6.9x 8.8x 9.4x 8.1x 16.8x 10.7x 9.2x 8.5x 12.1x 9.3x 8.0x EV / OpFCF 8.6x 8.8x 18.4x 5.4x 9.9x 11.5x 15.6x 9.2x 8.4x 12.2x 10.2x 14.7x 10.3x 8.2x EV / Capital employed (incl. gross goodw ill) 1.2x 1.2x 1.2x 1.7x 2.1x 2.3x 1.5x 1.1x 1.3x 1.5x 1.4x 1.8x 1.7x 1.6x ENTERPRISE VALUE (EURm ) ,076 1, Market cap Adjusted net debt Other liabilities and commitments Revalued minority interests Revalued investments P & L HIGHLIGHTS (EURm ) Dec. 02 Dec. 03 Dec. 04 Dec. 05 Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13e Dec. 14e Dec. 15e Sales Restated EBITDA (b) Depreciation (25.2) (26.1) (16.8) (14.6) (9.4) (12.0) (11.2) (17.8) (19.4) (19.3) (21.8) (24.5) (25.9) (28.0) Restated EBITA (b) (**) Reported operating profit (loss) Net financial income (charges) (9.2) (13.8) (9.7) (8.6) (8.6) (10.8) (13.2) (9.0) (9.2) (8.7) (7.9) (5.6) (6.3) (6.5) Aff iliates 0.0 (0.2) (0.8) (0.1) 0.1 (0.4) (0.1) Other (1.0) (0.2) (6.8) (1.7) Tax (23.3) (17.5) (24.5) (24.9) (25.2) (28.6) (20.6) (6.1) (18.3) (23.0) (22.5) (29.1) (37.1) (41.4) Minorities (5.0) (3.2) (2.9) (1.2) (0.6) (1.6) (0.9) (0.1) (0.9) (1.3) (0.9) (1.1) (1.4) (1.6) Goodw ill amortisation Net attributable profit reported Net attributable profit restated (c) CASH FLOW HIGHLIGHTS (EURm ) Dec. 02 Dec. 03 Dec. 04 Dec. 05 Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13e Dec. 14e Dec. 15e EBITDA (reported) EBITDA adjustm ent (b) Other items (3.0) (5.0) (10.0) (32.0) 11.0 (15.0) Change in WCR 2.4 (0.8) (24.2) 45.0 (15.8) 1.7 (45.8) (20.3) (16.6) (9.1) (14.0) (7.2) Operating cash flow Capex (34.6) (21.2) (18.0) (9.3) (12.3) (14.0) (18.6) (14.5) (9.1) (17.5) (19.2) (31.0) (23.0) (24.5) Operating free cash flow (OpFCF) Net financial items + tax paid (32.5) (31.2) (34.3) (33.5) (33.8) (39.5) (33.8) (15.2) (27.5) (31.7) (30.3) (34.6) (43.4) (47.9) Free cash flow (9.1) Net financial investments & acquisitions (6.4) (18.3) (7.4) (47.1) (20.4) (69.7) 0.0 (5.9) (12.9) (73.7) (5.9) 0.0 Other 2.9 (1.9) (4.1) (4.3) (0.6) (0.5) (0.5) Capital increase (decrease) (3.5) (2.9) 0.2 (8.8) (25.7) (11.2) (8.4) (16.5) Dividends paid (9.5) (24.9) (10.6) (64.6) (12.9) (13.7) (31.4) (10.8) (11.7) (18.5) (19.1) (24.3) Increase (decrease) in net financial debt (0.4) (83.9) (20.9) (59.4) 0.8 (52.4) 54.3 (32.2) (48.4) Cash flow, group share BALANCE SHEET HIGHLIGHTS (EURm ) Dec. 02 Dec. 03 Dec. 04 Dec. 05 Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13e Dec. 14e Dec. 15e Net operating assets WCR Restated capital employed, incl. gross goodwill Shareholders' funds, group share Minorities Provisions/ Other liabilities Net financial debt (cash) FINANCIAL RATIOS (%) Dec. 02 Dec. 03 Dec. 04 Dec. 05 Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13e Dec. 14e Dec. 15e Sales (% change) 19.1% (1.3%) 5.5% (15.1%) (19.2%) 18.6% (1.8%) (19.3%) 23.9% 16.1% 6.9% 11.3% 19.8% 6.6% Organic sales grow th 11.6% 1.2% 5.5% 6.1% 5.5% 6.5% (3.3%) (35.9%) 20.5% 17.1% 0.1% 3.5% 6.8% 6.6% Restated EBITA (% change) (**) 2.6% (17.5%) 23.3% 13.5% 1.6% 17.9% (7.9%) (61.6%) 88.3% 38.4% 9.4% 7.1% 26.5% 11.3% Restated attributable net profit (% change) (**) (3.3%) (34.5%) 63.6% 44.3% 1.1% 13.7% 4.5% (66.8%) 94.8% 64.0% 20.5% 3.1% 27.4% 11.8% Personnel costs / Sales 17.6% 17.1% 16.8% 14.8% 19.5% 19.1% 20.6% 25.3% 24.0% 21.6% 23.1% 23.0% 21.1% 20.4% Restated EBITDA margin 16.6% 14.9% 14.5% 18.5% 21.7% 21.8% 20.5% 13.7% 17.4% 19.3% 19.8% 19.3% 19.7% 20.4% Restated EBITA margin 11.6% 9.7% 11.4% 15.2% 19.1% 19.0% 17.8% 8.5% 12.9% 15.3% 15.7% 15.1% 16.0% 16.7% Tax rate 47.2% 50.0% 55.4% 44.3% 37.7% 40.0% 33.9% 30.7% 40.0% 34.5% 30.1% 35.0% 35.0% 35.0% Net margin 7.0% 5.4% 3.7% 17.6% 11.4% 9.9% 9.5% 4.0% 6.4% 8.8% 9.9% 9.2% 9.8% 10.3% Capex / Sales 6.8% 4.2% 3.4% 2.1% 3.4% 3.2% 4.4% 4.2% 2.1% 3.5% 3.6% 5.3% 3.3% 3.3% OpFCF / Sales 9.7% 9.5% 4.7% 19.3% 17.0% 15.5% 9.3% 15.5% 16.4% 11.6% 13.1% 12.5% 14.4% 16.2% WCR / Sales 19.0% 19.4% 23.0% 17.1% 25.5% 21.1% 32.3% 33.9% 26.2% 26.7% 28.1% 26.8% 24.4% 23.9% Capital employed (excl. gdw./intangibles) / Sales 39.5% 40.4% 43.7% 28.4% 39.7% 34.6% 49.3% 65.2% 50.5% 47.6% 49.5% 59.7% 52.3% 49.5% ROE 12.9% 9.2% 14.5% 22.8% 23.0% 28.0% 24.1% 5.7% 9.3% 14.0% 13.4% 12.7% 14.5% 14.7% Gearing 90% 118% 118% 82% 87% 119% 116% 83% 50% 53% 29% 39% 28% 16% EBITDA / Financial charges 9.2x 5.5x 8.0x 9.7x 9.2x 8.7x 6.6x 5.2x 8.1x 11.0x 13.3x 20.4x 22.0x 23.6x Adjusted financial debt / EBITDA 2.1x 2.7x 2.7x 1.5x 1.7x 1.9x 2.4x 4.3x 2.0x 1.8x 1.1x 1.5x 1.0x 0.6x ROCE, excl. gdw./intangibles 15.6% 12.1% 11.6% 29.8% 30.0% 32.9% 23.9% 9.0% 15.3% 21.1% 22.2% 16.5% 19.9% 21.9% ROCE, incl. gross goodw ill 9.1% 7.0% 7.3% 13.8% 14.9% 15.0% 12.2% 4.5% 7.3% 10.5% 11.4% 9.6% 11.9% 13.1% WACC 8.4% 8.0% 8.2% 9.1% 9.3% 9.1% 8.1% 8.4% 9.9% 9.4% 10.0% 9.2% 9.2% 9.2% Latest Model update: 26 Sep. 13 (a) Intangibles: EUR248.07m, or EUR2 per share. (b) adjusted for capital gains/losses, impairment charges, exceptional restructuring charges, capitalized R&D, pension charge replaced by service cost (c) adj.for capital gains losses, imp.charges, capitalized R&D, am. of intangibles from M&A, exceptional restructuring, (*) In listing currency, w ith div. reinvested, (**) also adjusted for am. of intangibles from M&A, or for am. of gw ill for pre IFRS year Exane BNP Paribas Research Interpump 27 September 2013 page 2

3 Contents Investment case 4 Valuation 8 EPS surprises in the limelight after recent multiple expansion 8 We have changed our valuation methodology 9 Capital goods multiples: in line with historical levels, pumps historically at a premium 10 Automotive equipment makers in line with historical levels 11 SOTP of the two divisions points to EUR9.1/share 12 Truck markets in recovery mode 17 US truck orders already pointing to a rebound for the market 17 Europe: book-to-bill of truck-makers points to an upturn 19 M&A reinforced its market positioning and increased exposure to EU/US 19 US an option not yet in our estimates 22 Water jetting at very high pressure: highly attractive structural growth23 VHPP: solid market with high entry barriers of technology and quality 23 Water jet VHPP and their applications: a diversified sector exposure 24 Pressure pumping in oil & gas A EUR1.3bn market opportunity 33 Appendices 35 Trends and nature of the commercial vehicle industry are favourable 36 Funding analysis 39 Company profile and financial highlights 43 Exane BNP Paribas Research Interpump 27 September 2013 page 3

4 Investment case Tweet IC: cyclical truck recovery, structural growth in water jet sales and potential entry into new markets should see growth return and sustain upside earnings surprises. After the recent expansion of multiples in the Automotive and Capital Goods arenas, we believe that investors will focus increasingly on earnings momentum and surprises. In this perspective, Interpump is an excellent play due to a cyclical recovery in truck markets and a structural growth story for water jet technology. We have not changed our estimates materially; we were already above consensus on (by 10% and 12%, respectively, on EBIT) but our analysis makes us more confident of the underlying trends and possible earnings surprises. We demonstrate how the evolution of truck orders in the developed markets will support the cyclical recovery of the Oil division and are the first broker to do an in-depth analysis of the structural growth opportunity for (very) high pressure pumps. The growing popularity of VHPP in a broad range of industries should support 5% sales CAGR in the next years. Furthermore we believe the company will move into the higher flow / lower pressure pump segment, a market worth >EUR1.3bn. A trigger to improve visibility and close the consensus gap may be identifiable in the recovery of organic top-line growth which we expect to take place in Q3 13 (c. +7% sales CAGR ). Monthly statistics from the truck industry represent another important catalyst. Figure 1: Exane BNPP expectations of organic sales growth quarter by quarter Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13e Q4 13e Q1 14e Q2 14e Q3 14e Q4 14e Organic sales growth (%) 10.5% 3.6% 1.3% -7.0% -3.9% -1.5% 4.2% 11.5% 8.8% 6.8% 6.7% 6.4% Source: Exane BNP Paribas estimates Interpump has been a great performer, both: 1) YTD (up 44%, outperforming Cap Goods by 19%); and 2) since Dec 11 (up 63%, outperforming Cap Goods by 11%). Since Feb 2013 consensus EBIT (Factset) on FY14 and FY15 has increased by 10% and 14% respectively, but we also note that recent M&A activity will have had an impact. Following the recent re-rating, the stock trades at a 2014e EV/Sales of 1.5x for a 16%e EBIT margin, which is slightly below the trend line for Capital Goods peers (see Fig. 4). However, we expect the Group EBIT margin to almost return to the 2008-level of c. 18% by 2017 driven by the recovery in profitability in the Oils division. We have raised our TP to EUR9.1/share from EUR8.0 as we have shifted from a valuation based on historical multiples to a SOTP valuation of the two divisions based on peers EV/EBIT ratios. The profile of the company has changed substantially over the past years (see figure below) and we believe it is more appropriate to value Interpump based on its two main divisions, Oils (i.e. trucks) and Water Jet. This is due to: 1) their very different margin profiles (in 2012 Oil division EBIT margin was 9.2% vs Water jet at 22%); and 2) different levels of cyclicality in their end markets (trucks are very cyclical). The earnings contributions from the two divisions are more or less similar in size. Exane BNP Paribas Research Interpump 27 September 2013 page 4

5 Figure 2: Interpump s earnings history EBITDA (EURm) Source: company On our estimates the stock trades at 9.3x 2014e EV/EBIT and 12.2x P/E versus 11.8x and 15.7x for its water jet peers and a median of 8.4x and 12.0x for its truck-agro component-making peers. Interpump offers around 7% FCF yield in e and trades at an EV/CE 2014e of 1.7x (with ROCE 2014e at c. 12%). Figure 3: Multiples on TP On TP Current trading 2014e 2015e 2014e 2015e EV/Sales (x) EV/EBIT (x) P/E (x) Source: Exane BNP Paribas estimates, Priced at 25 September On our new TP, Interpump would trade on 2014e EV/Sales of 1.6x for an EBIT margin of 16%e, still slightly below the sector trend line. Figure 4: Relationship between EV/Sales and EBIT margin (2014e) 3.0 EV/Sales 2014e R 2 = Legrand Atlas Copco Assa Abloy Alfa Laval Neopost Kone Weir Group Smiths Group IMI Invensys Schneider Pfeiffer Vacuum Sandvik Wartsila ABB SKF Interpump Schindler GEA Group Somfy SA Siemens Haulotte Group Philips Lisi Faiveley Gamesa Metso GKN Saft Groupe Vesuvius Bekaert Kion Group Vossloh FLSmidth AG Vestas Electrolux Prysmian Rexel Fluidra Alstom Manitou Nexans 0.0 0% 5% 10% 15% 20% 25% 30% EBITA margin 2014e Source: EBNPP Exane BNP Paribas Research Interpump 27 September 2013 page 5

6 Cyclical upturn for trucks in the US since Feb 13 We expect 8% organic sales growth in 2014/15 in the oil division driven by the recovery of the US and European truck markets (c. 40% of 2013e sales). Usually trucks are one of the early cyclical sectors. Indeed, US class 8 truck orders have already resumed growth since February According to our estimates, this should translate into a recovery for US truck sales (11% of group sales) starting in Q3 13. Figure 5: US class 8 truck (heavy trucks) orders resumed growth since February 2013 US class 8 (heavy truck) orders historical series US class 8 (heavy truck) orders recent trend 250% % 200% 150% 100% 50% 0% (50%) % 250% 200% 150% 100% 50% 0% (50%) (100%) 1.0 (100%) 1.5 Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03 Jan 04 Apr 04 Jul 04 Oct 04 Jan 05 Apr 05 Jan 06 Apr 06 Jul 06 Oct 06 Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 New class 8 truck orders (YoY change) - 6 months forward Interpump outperformance vs EuroStoxx New class 8 truck orders (YoY change) - 5months forward Interpump outperformance vs EuroStoxx Source: ACT, Exane BNP Paribas In Europe, the orders book-to-bills ratios were mostly above 1x for the major truckmakers, pointing to an improvement of demand not only linked to a possible pre-buy activity due to the new Euro V legislation starting in It is worth noting that the European truck market (25% of group sales) is less than 70% of its 2007/08 level and the fleet is aging. Figure 6: Overview of EBITDA and sales breakdown of Interpump main key drivers by product and region 2014e breakdown of EBITDA by end market and product 2013e geographical breakdown of sales VHPP - developed markets 31% VHPP - developing markets 9% HPP - developing markets 3% HPP - developed markets 9% Europe - trucks 25% US - trucks 11% RoW - trucks 12% Rest of the world 18% India 1% Brazil 2% China 3% North America 35% Italy 14% Eastern Europe 5% Western Europe 22% * Trucks relates to products sold by the oil division; High Pressure Pumps (HPP) and Very High Pressure Pumps (VHPP) relates to the Water jet division Source: Exane BNP Paribas Exane BNP Paribas Research Interpump 27 September 2013 page 6

7 Water jet: structural growth and a potential EUR1.3bn market opportunity The water jet technology (47% of 2013 sales and 59% of group EBITDA) is still in a growth phase as its popularity / awareness of it is still increasing. The range of diversified applications and the many different sectors in which it can be employed means that the technology has a very wide addressable universe (ie. Automotive, Chemical, Oil & gas, Mining & steel, shipping, construction, public utilities, energy, etc.). In this report we make a detailed analysis of this opportunity and we conclude that IP water jet sales are destined to grow by at least 5% per year in the near future. Thanks to a very strong track record and positioning in cleaning applications, Interpump was able to invest and expand strongly in complementary applications like the process pumps (from 0% of water jetting division sales in 2006 to 10% in 2012). Beyond this opportunity, we believe that the company may increase its presence in other complementary market niches worth more than EUR1.3bn, for example, in cutting applications (IP has only a marginal presence), the Oil & gas sector where similar pumps are used for drilling, well servicing and fracturing for shale gas and shale oil (IP has no presence). Players like Gardner Denver, Weir and FMC Technologies together hold more than 85% of this market, mainly focused on the Oil & gas sector. To penetrate this market, Interpump will need to step up its R&D efforts to develop new products with engineering characteristics that are slightly different to the pumps historically produced. Figure 7: Overview of the high pressure pump market and Interpump positioning Interpump still lacks product range in applications requiring greater flow of the liquids. Given IP s leadership in pressure applications the shift to flow ones is essential for growth Horse Power = Flow Market size >EUR1.3bn Technological difficulty Interpump positioning negligible X Pressure EUR400m 40% share X Source: Exane BNP Paribas Risks relate to forex, cyclical end markets and commoditization of HPP USD. Interpump is highly exposed to the USD (33% of sales) where the issue is not only a translation one. We estimate that a 10% depreciation of the USD could cut our EBIT estimates by roughly 4%. Cyclical end markets. Interpump operates in cyclical markets such as trucks (its end market in the oil division) and pumps, which is usually capex for its client base. HPP commoditization. In the medium/long-term, we would not rule out the commoditisation of high pressure pumps (12% of 2014e sales and approximately 15% of 2014e EBITDA), given that: 1) they may be replicated easily; 2) the high outsourcing of components (common in the industry); and 3) most end-users do not consider the life-cycle cost of the cleaning machines on which the pumps are installed. In the short term, however, the distribution network acts as a good entry barrier. Interpump s management will attend the STAR conference organized by Borsa Italiana (Italian stock exchange) in London on 1 2 October, We include 10 questions for management in the Appendix of this report. Exane BNP Paribas Research Interpump 27 September 2013 page 7

8 Valuation Interpump started to outperform the MSCI SMID ex financials in early 2010 on the back of an improving outlook for truck sales and a recovery in the structural growth story of VHPP (Very High Pressure Pumps) which drove an upward earnings revision. Only recently, the outperformance of the stock was due to multiple expansion, something common to the industrial sectors such as automotive and capital goods where Interpump operates. Figure 8: Share price performance and EV/EBIT ratio of Interpump against the MSCI Europe ex-financials Share price performance: IP vs. MSCI Europe ex-financials EV/EBIT ratio (x): IP vs. MSCI Europe ex-financials Price (incl. Div) Rel. Price (incl. Div) % 12m EV/EBIT 14.0 Rel. 12m EV/EBIT 130% % % % % % 100% 90% % 90% 80% % % % % % Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Rel. Price (incl. Div) (rhs) Interpump (lhs) M SCI Europe - M id & Small Cap ex Financials rebased (lhs) % Dec 09 Dec 10 Dec 11 Dec 12 Rel. 12m EV/EBIT (rhs) Interpump (lhs) M SCI Europe - M id & Small Cap ex Financials (lhs) Source: Exane BNP Paribas, Factset Estimates, MSCI EPS surprises in the limelight after recent multiple expansion After the recent expansion in multiples, we believe that investors focus should shift increasingly towards stories driven by earnings surprises. In our view these will increasingly be the future drivers of share price performance. After having revisited the investment case we have renewed confidence in our earnings forecasts (c. 9% above consensus EPS on ). Figure 9: Exane BNPP estimates versus consensus reported figures EURm Sales EBITDA EBIT Net profit 2013e 2014e 2015e 2013e 2014e 2015e 2013e 2014e 2015e 2013e 2014e 2015e Exane Consensus Difference (%) 3.4% 8.8% 11.0% 2.4% 8.8% 11.9% 1.6% 9.8% 12.1% 0.8% 8.4% 9.6% Source: Datastream, IBES, Exane BNP Paribas estimates Exane BNP Paribas Research Interpump 27 September 2013 page 8

9 We have changed our valuation methodology Hitherto, we have used historical average multiples to value the company. However, the profile of the company has changed substantially over the past years (see figure below) and we believe it is more appropriate to value Interpump based on its two main divisions (Oils (i.e. trucks) and Water jet). This is due to: 1) their very different margin profiles (in 2012 Oil division EBIT margin was 9.2% vs Water jet at 22%); and 2) different levels of cyclicality in their end markets (trucks are very cyclical). Earnings contributions from the two divisions are more or less similar in size. Figure 10: Interpump s earnings history EBITDA (EURm) Source: company Exane BNP Paribas Research Interpump 27 September 2013 page 9

10 Capital goods multiples: in line with historical levels, pumps historically at a premium Currently the capital goods sector has traded almost in line with the historical average valuation levels at 10x EV/EBIT and c. 14x P/E. Figure 11: Capital Goods (avg. 10x EV/EBIT and 13.9x P/E) 12m P / E m EV/EBIT Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 EV / EBIT (rhs) P/E (lhs) 5.0 Source: Exane BNP Paribas, Factset Estimates, MSCI However, taking a closer look, we noted that the sub-segment of the pump producers (i.e. Flowserve, Weir, Idex and Aalberts) during the same time period traded at slightly higher average multiples on the EV/EBIT metrics (approx. 11x). Figure 12: Capital goods peers (pump makers) historical EV/EBIT ratio Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Flowserve Weir group Sector average EV/EBIT (x) Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Idex Aalberts inds. Jan-12 Jul-12 Jan-13 Jul-13 Source: IBES, Datastream Exane BNP Paribas Research Interpump 27 September 2013 page 10

11 Automotive equipment makers in line with historical levels Excluding the year 2009, when multiples in the automotive industry reached peak levels due to the exceptionally depressed level of profitability, the automotive equipment makers have historically traded at an average EV/EBIT multiple of 7.5x and a P/E ratio of 10.5x. Figure 13: Automotive equipment makers historical valuation multiples 12m P / E m EV/EBIT Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 EV / EBIT[e] (rhs) P/E[e] (lhs) 4.0 Source: Exane BNP Paribas, Factset Estimates, MSCI Moreover, the segment where Interpump is positioned is characterized by a higher multiple than the overall sector. Indeed, the producers of components for trucks and agricultural equipment, comparable to the oil division (ex-hydraulic), like SAF-Holland, Arvin Meritor, Haldex and Carraro, traded at an average of 10x EV/EBIT (9.5x excluding the highest one, Carraro). Also in this case we exclude the year 2009 due to the upward impact on multiples of the deep crisis. Figure 14: Truck component maker peers historical EV/EBIT ratio (x) Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Carraro Saf-Holland Historical average EV/EBIT (x) Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Haldex Meritor Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Source: Exane BNP Paribas, IBES, Datastream Exane BNP Paribas Research Interpump 27 September 2013 page 11

12 SOTP of the two divisions points to EUR9.1/share Our new SOTP valuation methodology based on the peers EV/EBIT multiples of the two divisions (vs. the average between the peak and the historical average EV/EBIT multiple that we used previously) points to EUR9.1/share. Figure 15: SOTP of the two divisions EURm Peer EV/EBIT 14e (x) EBIT 14e EV EBIT margin (%) Oil division % Waterjetting division % Group % EV adjustments Equity value 972 Equity/share (EUR) 9.1 Ratio (x) EV/EBIT EV/EBITDA P/E EV/CE ROCE 9.6% 11.9% 13.1% 13.9% * The Oil division covers products equipping mainly trucks; the Water jet division includes the pump business Source: Exane BNP Paribas estimates For the sake of representation and transparency, below we feature the peers multiples that we use and the description of their activity. Figure 16: Oil division s peers Selected peers in the production of component for trucks Currency Price Market cap EV/EBIT (x) P/E (x) EV/Sales (x) EV/EBITDA (x) HALDEX SEK x 8.4x 6.5x 21.5x 12.4x 9.9x 0.69x 0.62x 0.57x 9.8x 6.1x 4.7x CARRARO EUR x 16.7x 10.4x 81.3x 17.9x 11.7x 0.38x 0.34x 0.36x 6.7x 5.6x 4.9x SAF-HOLLAND EUR x 7.5x 6.6x 12.3x 9.7x 8.8x 0.60x 0.54x 0.50x 7.1x 5.9x 5.2x MERITOR USD x 8.5x 7.2x 23.0x 11.6x 9.0x 0.43x 0.42x 0.40x 6.6x 5.9x 5.3x Sector average 13.3x 10.3x 7.7x 34.5x 12.9x 9.9x 0.5x 0.5x 0.5x 7.6x 5.9x 5.0x Sector median 12.3x 8.4x 6.9x 22.3x 12.0x 9.4x 0.5x 0.5x 0.5x 6.9x 5.9x 5.1x INTERPUMP EUR x 9.3x 8.0x 15.6x 12.3x 11.0x 1.8x 1.5x 1.3x 9.5x 7.6x 6.5x Source: Datastream, IBES, Exane BNP Paribas estimates Haldex: the company is involved in the production of innovative technology for commercial vehicles with a focus on brake and suspension products. The company has 9 production facilities with 2.2k employees and has a turnover of SEK3.9bn (EUR450m). Carraro: with a consolidated turnover of over EUR874m in 2012, it is a global leader in highly efficient and eco-friendly power transmission systems for construction equipment, agriculture and the automotive sector. The company operates through its three distinct business lines: 1) transmission systems, gears and components (85% of sales); 2) tractors (10%); 3) power electronics (5%) SAF-Holland: With EUR860m of sales in 2012, it is one of the leading global manufacturers and suppliers of high-quality systems and components for commercial vehicles (trucks and trailers) as well as buses and recreational vehicles. The product range primarily comprises axle systems, fifth wheels, landing legs and kingpins. Meritor: With USD4.4bn sales in 2012, it is a leading global supplier of a broad portfolio of axle, brake and suspension solutions to commercial truck, trailer, off-highway, defence, specialty and aftermarket customers in more than 70 countries Exane BNP Paribas Research Interpump 27 September 2013 page 12

13 Figure 17: Water jet division s peers selected peers in the production of pumps Company Currency Market Cap EV / Sales (x) EV / EBITDA (x) EV / EBIT (x) P / E (x) LC FLOWSERVE USD IDEX USD WEIR GROUP BPN AALBERTS INDUSTRIES EUR Sector average INTERPUMP GROUP EUR Source: Datastream, IBES, Exane BNP Paribas estimates Flowserve: With USD4.75bn of sales in 2012, the company operates through three main divisions. The engineered product division (EPD, 50% of sales) is involved in the production and sales of highly-engineered pumps, seals and systems, the Industrial Product Division (IPD, 19%) in pre-configured pumps and systems and the Flow Control Division (FCD, 31%) in industrial valves and automation solutions. The main industries served are similar to those of Interpump: oil & gas (41% of sales), power (14%), chemical & pharma (19%), water (4%) and general industries (22%). IDEX: this is a diversified, engineered products entity engaged in the development, design, and manufacture of fluidics systems and specialty engineered products. IDEX Corporation's products, which include pumps, clamping systems, flow meters, optical filters, hydraulic rescue tools, and fire suppression equipment, are used in a variety of industries ranging from agriculture to semiconductor manufacturing. In 2012, the company recorded USD1,95bn of sales within its divisions fluid & metering technologies (42% of 2012 sales), health & science technologies (35%) and fire & safety (23%). Weir Group: With GBP3.7bn sales the group operates in three main sectors: Minerals, Oil & Gas and Power. In each of these end markets, Weir is a supplier of original equipment and aftermarket spares and services. The majority of the group's EBIT is generated by Weir Minerals (54% of sales) and the upstream oil and gas asset, SPM (34% of sales); each holds number one or two positions in their key end markets. Aalberts Industries: Having reported 2012 sales of EUR2bn, Aalberts Industries is an international industrial group with two core activities, industrial services (30% of 2012 sales) and flow control (70% of 2012 sales). Clients are located throughout the world and fall into the following categories: wholesale trade, OEMs, utilities and other general industries. On our estimates the stock trades at 9.3x 2014e EV/EBIT and 12.3x P/E versus 11.8x and 15.7x for its water jet peers and a median of 8.4x and 12.0x for its truck-agro component-making peers. Interpump offers around 7% FCF yield in e and trades at an EV/CE 2014e of 1.7x (with ROCE 2014e at c. 12%). Figure 18: Multiples on TP On TP Current trading 2014e 2015e 2014e 2015e EV/Sales (x) EV/EBIT (x) P/E (x) Source: Exane BNP Paribas estimates, Priced at 25 September On our new TP Interpump would trade on 2014e EV/Sales of 1.6x for an EBIT margin of 16%e, still slightly below the sector trend line. Exane BNP Paribas Research Interpump 27 September 2013 page 13

14 Figure 19: Relationship between EV/Sales and EBIT-margin (2014e) 3.0 EV/Sales 2014e R 2 = Legrand Atlas Copco Assa Abloy Alfa Laval Neopost Kone Weir Group Smiths Group IMI Invensys Schneider Pfeiffer Vacuum Sandvik Wartsila ABB SKF Interpump Schindler GEA Group Somfy SA Siemens Haulotte Group Philips Lisi Faiveley Gamesa Metso GKN Saft Groupe Vesuvius Bekaert Kion Group Vossloh FLSmidth AG Vestas Electrolux Prysmian Rexel Fluidra Alstom Manitou Nexans 0.0 0% 5% 10% 15% 20% 25% 30% EBITA margin 2014e Source: EBNPP What valuation if Interpump or a division were to become prey? IP has not been linked to any particular M&A speculation. However, given that its main shareholder holds only 27% and its product portfolio is very appealing we believe it is probably a regular feature on the radar screens of potential investors. Interpump would be a tempting target for an industrial company or for a private equity firm. Furthermore, the vastly different nature of the two divisions (components for trucks and agro machinery vs high pressure pumps and very high pressure pumps) means there are many ways to exit from any of them. This was the case in 2005 when the group disposed of the cleaning business to focus on VHPP with the acquisition of Hammelmann and NLB. For this reason we take a look at past transactions in the sector and value each business division in the event of M&A. We conclude that a predator may be willing to pay up to EUR11.0/share (+35% upside, 2014 EV/EBIT of 11.5x, 16.5x P/E) in the event of a public tender offer on the group. Oil division: In 2010 there was a significant M&A deal in the industry with implications for Interpump s oil division. The private equity firm 3i sold the company called Hyva, a producer of cylinders, to another Hong Kong-based PE fund called Unitas Capital. Figure 20: Details of 3i s sale of Hyva to a PE player called Unitas Capital EURm, 2010 Sales EBITDA EBITA Net debt Equity EV EV/sales EV/EBITDA EV/EBIT HYVA Source: Exane BNP Paribas estimates In the following table we have simulated an M&A deal whereby Interpump sells its oil division at the same multiples paid for Hyva. The EV of the oil division would range between EUR600m and EUR750m. This would imply that the remaining business, i.e. the water-jetting division, trades on cheap multiples. Exane BNP Paribas Research Interpump 27 September 2013 page 14

15 Figure 21: Valuation of the oil division in an M&A scenario and implied valuation of the remaining business at current market price EURm, 2014 Sales EBITDA EBITA IP oil division (P&L figures) M&A multiples (x) EV of oil division Current group EV Implied EV of the water jetting division IP water jetting division (P&L figures) Implied EV/sales ratio of water jetting division (x) Implied EV/EBITDA ratio of water jetting division (x) Implied EV/EBIT ratio of water jetting division (x) Source: Exane BNP Paribas estimates, Priced at 23 September If we take into consideration the M&A valuation multiples paid by Interpump for its past acquisitions in the oil division (between 5x and 8x EV/EBITDA), we derive an EV for the oil division of between EUR330m and EUR520m. Figure 22: Valuation of the oil division based on multiples paid by Interpump for its past acquisitions (EURm) M&A EV/EBITDA multiple (x) EV of the Oil division Group EV ex-oil division (i.e. water jetting division) Implied EV/sales ratio of water jetting division (x) Implied EV/EBITDA ratio of water jetting division (x) Implied EV/EBIT ratio of water jetting division (x) Source: Exane BNP Paribas estimates Water jet division: In the last 10 years the average EV/EBITDA multiple paid in M&A deals in the US market has been 10x. This multiple is also in line with one of the last significant transactions in the segment Interpump is present in. In 2011 Gardner Denver (involved in the production of highly engineered compressors, blowers, pumps and other fluid transfer equipment), a competitor of Interpump in the Very High Pressure Pumps business, acquired Robuschi (market leader in blowers and pumps) from a private equity firm called Askia Group for a multiple of 10x EV/EBITDA (and 2.2x EV/sales). If we apply this ratio to our 2014e EBITDA estimate for the water jetting division we would get an EV of around EUR720m, which would imply cheap multiples for the oil division (see table below). Figure 23: Implied multiples of the oil division in the event of a sale of the water jet division EURm, 2014 Sales EBITDA EBITA IP water jetting divisions (P&L figures) Multiple used (x) EV of water jetting division Implied EV of the oil division IP oil division (P&L figures) Implied EV ratio of oil division (x) Source: Exane BNP Paribas estimates, Priced at 23 September Exane BNP Paribas Research Interpump 27 September 2013 page 15

16 Figure 24: EV/EBITDA multiple paid on M&A deals on average in the US pump market (10-year average: 10x) Source: Dealogic, Hydraulic institute Our P&L forecasts by division can be found in the table below. Figure 25: P&L by division EURm e 2014e 2015e 2016e 2017e Oil division sales % YoY growth 12.1% 21.4% 32.6% 7.6% 4.0% 3.7% % YoY organic growth -2.4% 2.7% 8.2% 7.6% 4.0% 3.7% % on total sales 48.9% 53.3% 59.1% 59.6% 59.4% 59.6% High pressure pumps % YoY growth -0.1% 0.0% 1.5% 1.5% 1.0% 1.0% Very high pressure pump % YoY growth 18.6% 2.5% 7.0% 7.0% 7.0% 3.5% Others % YoY growth -3.4% 0.0% 0.0% 0.0% 0.0% 0.0% Water jet division sales % YoY growth 11.2% 1.6% 5.1% 5.1% 5.1% 2.7% % YoY organic growth 11.2% 1.6% 5.1% 5.1% 5.1% 2.7% % on total sales 51.1% 46.7% 40.9% 40.4% 40.6% 40.4% Group sales % YoY growth 6.9% 11.3% 19.8% 6.6% 4.4% 3.3% % YoY organic growth 0.1% 3.5% 6.7% 6.6% 4.4% 3.3% Oil division EBITDA % YoY growth 11.6% 27.1% 42.1% 16.1% 7.9% 7.0% EBITDA margin (%) 14.2% 14.9% 16.0% 17.2% 17.9% 18.5% % on total EBITDA 35.1% 41.2% 48.0% 50.3% 50.9% 51.9% Water jet division EBITDA % YoY growth 12.0% -2.1% 8.1% 5.6% 5.5% 2.7% EBITDA margin (%) 25.2% 24.3% 25.0% 25.1% 25.2% 25.2% % on total EBITDA 64.9% 58.8% 52.0% 49.7% 49.1% 48.1% Group EBITDA % YoY growth 10.2% 8.1% 22.1% 10.6% 6.7% 4.9% EBITDA margin (%) 19.8% 19.3% 19.7% 20.4% 20.9% 21.2% Oil division EBIT % YoY growth 6.3% 34.2% 57.9% 18.9% 8.5% 8.1% EBIT margin (%) 9.2% 10.1% 12.1% 13.3% 13.9% 14.5% % on total EBIT 28.5% 35.7% 44.6% 47.6% 48.3% 49.6% Water jet division EBIT % YoY growth -3.7% 9.1% 5.1% 5.6% 2.4% 2.7% EBIT margin (%) 22.0% 20.8% 21.6% 21.6% 21.7% 21.7% % on total EBIT 71.5% 64.3% 55.4% 52.4% 51.7% 50.4% Group EBIT % YoY growth 9.4% 7.1% 26.5% 11.3% 7.0% 5.1% EBIT margin (%) 15.7% 15.1% 16.0% 16.7% 17.1% 17.4% Source: Exane BNP Paribas estimates Exane BNP Paribas Research Interpump 27 September 2013 page 16

17 Truck markets in recovery mode Trucks (c.50% of EBITDA and 60% of sales) will be the first and main cyclical driver of the top-line recovery (7% CAGR in 13-15) and margin expansion (16.7% EBIT margin in 2015e vs. 15.1% in 2013e). Truck markets in developed countries (40% of 2013e sales) are expected to see 8% CAGR in IP produces components and systems including power take-offs, hydraulic pumps, valves, cylinders and tanks which are for the time being mounted almost entirely on trucks. Figure 26: Overview of our estimates of the Oil division s P&L figures EURm e 2014e 2015e Oil division sales % Y/y growth 21.4% 32.6% 7.6% % Y/y organic growth 2.7% 8.2% 7.6% % on total sales 48.9% 53.3% 59.1% 59.6% Oil division EBITDA % Y/y growth 27.1% 42.1% 16.1% EBITDA margin (%) 14.2% 14.9% 16.0% 17.2% % on total EBITDA 35.1% 41.2% 48.0% 50.3% Oil division EBIT % Y/y growth 34.2% 57.9% 18.9% EBIT margin (%) 9.2% 10.1% 12.1% 13.3% % on total EBIT 28.5% 35.7% 44.6% 47.6% Source: Exane BNP Paribas estimates US truck orders already pointing to a rebound for the market US Class 8 truck orders started growing again in February 2013 (+14% YTD). This should sustain the sales momentum in the next few months as there is a time lag of approximately six months between orders and sales. The oil division should see a 12% increase in sales in 2014 in the US, on our estimates (around 13% of group sales are exposed to the US truck market). Figure 27: US class 8 truck (heavy trucks) orders started growing again in February 2013 US class 8 (heavy truck) orders historical series US class 8 (heavy truck) orders recent trend 60,000 50,000 40,000 30,000 20,000 10, US class 8 orders Source: ACT, Exane BNP Paribas % change YoY 350% 300% 250% 200% 150% 100% 50% 0% (50%) (100%) 360% 39, % 300% 32, % 240% 26, % 180% 19, % 120% 13,000 90% 60% 6,500 30% 0% 0-30% -60% -6,500 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 US class 8 orders % change YoY Exane BNP Paribas Research Interpump 27 September 2013 page 17

18 In addition we note that stocks at dealers are still at normal levels and thus do not pose an issue for the recovery of the entire truck market in the US. Figure 28: historical series of US and Canadian dealer stock inventory of Class 4-8 trucks (medium and heavy duty trucks) Source: Navistar US truck orders are an important leading indicator for the stock too As we have detailed in our earlier notes, the trend of US truck orders may indicate how Interpump shares will perform relative to the Eurostoxx. Indeed, an acceleration in the growth in US truck orders usually leads to the stock outperforming, with a 4-6 month lag. Figure 29: US class 8 truck (heavy trucks) orders started growing again in February 2013 US class 8 (heavy truck) orders historical series US class 8 (heavy truck) orders recent trend 250% % 200% 150% 100% 50% 0% (50%) % 250% 200% 150% 100% 50% 0% (50%) (100%) 1.0 (100%) 1.5 Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03 Jan 04 Apr 04 Jul 04 Oct 04 Jan 05 Apr 05 Jan 06 Apr 06 Jul 06 Oct 06 Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 New class 8 truck orders (YoY change) - 6 months forward Interpump outperformance vs EuroStoxx New class 8 truck orders (YoY change) - 5months forward Interpump outperformance vs EuroStoxx Source: ACT, Exane BNP Paribas Exane BNP Paribas Research Interpump 27 September 2013 page 18

19 Europe: book-to-bill of truck-makers points to an upturn In Europe visibility over the cyclical upturn is lower but we expect it to progressively improve. The truck market has an early cyclical behaviour and should be one of the first sectors to benefit from this. Major truck makers such as Daimler, Volvo and Scania all reported book-to-bills of over 1.2x in Europe in Q2 and order growth ranging from +13% to +25% y/y. Only Man reported a book-to-bill of around 1x. We expect the European sales of the oil division to be up +8% in 2014e (25% of group sales). According to Daimler and Volvo, the new Euro V legislation is not expected to fuel considerable pre-buy activity at the end of Figure 30: US class 8 truck (heavy trucks) orders started growing again in February 2013 Book-to-bill of the main truck manufacturers in Europe Growth in the order intake (Y/y change %) % % % % 1.0 0% 0.8 (20%) 0.6 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 (40%) Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Volvo (Europe) Daimler (W. Europe) MAN (Truck & Bus) Scania (Europe) Volvo (Europe) Daimler (W. Europe) MAN (Truck & Bus) Scania (Europe) Source: ACT, Exane BNP Paribas M&A reinforced its market positioning and increased exposure to EU/US M&A is a large part of the Interpump story (more than 30 deals since the IPO in 1996). In the 90s the company entered the oil (ex-hydraulic) business and, after a series of deals, became the world leader in the power take-offs market (50% market share). After a reshuffle of the business mix in the cleaning/water jetting division in , the company s focus returned to the oil division. Since Interpump has acquired 12 companies involved in the production of components for trucks and agricultural equipment. Figure 31: Interpump has been on an acquisition spree since 2008 to become a full system supplier (EURm) Year Company Sales EBITDA EBITDA margin (%) Net debt Equity Multiple Business EV EV/EBITDA (x) EV/Sales (x) 2013 IMM Group % year fwd Hydraulic hoses, pipes and valves Hydrocontrol % Trailing Hydraulic control valves and accessories/components 2012 Galtech % Trailing Hydraulic control valves and 7.9 NM 0.5 accessories/components 2012 MTC % Trailing Hydraulic control valves Takarada % NA NA Trailing Power take-off + components American Mobile Power % Trailing Hydraulic tanks ITCO % Trailing Hydraulic cylinders NA NA NA 2009 HS Penta % Trailing Hydraulic cylinders Contarini % NA NA Trailing Hydraulic cylinders Modenflex % NA 2.7 Trailing Hydraulic cylinders Cover % 0.7 NA 1-year fwd Hydraulic cylinders Panni % Trailing Hydraulic cylinders Source: Exane BNP Paribas estimates Exane BNP Paribas Research Interpump 27 September 2013 page 19

20 The acquisitions are made with the aim of becoming a full system supplier capable of offering a full product range to existing customers, including to those of the power takeoffs and hydraulic pumps businesses, where the company has a clear market leadership. In our view becoming a full system supplier should further raise the already high entry barriers enjoyed by Interpump (i.e. fragmented client base, vast product range, need to co-develop the products with OEMs, quality). We expect the company to continue pursuing this goal through M&A as the current market share and product offer in cylinders and valves are not yet fully consolidated in our view. In addition, the new product range may enable IP to expand into other markets such as agricultural. Figure 32: Overview of the hydraulic system on a construction truck Newly acquired since 2009 Interpump historical portfolio of products Source: company, EBNPP Exane BNP Paribas Research Interpump 27 September 2013 page 20

21 Figure 33: Recent acquisitions widen the addressable market to the agro sector Source: Interpump Exane BNP Paribas Research Interpump 27 September 2013 page 21

22 US an option not yet in our estimates Interpump has been present in the US truck market since 2000, selling power take-offs and hydraulic pumps through its subsidiary Muncie, which it acquired in The company has a market share of >50% and we believe that its distribution network could easily be used to cross-sell cylinders and valves, two products that until 2012 were not included in the US offer as they come from entities acquired since We believe penetration of the US cylinders and valve market could represent a strong opportunity for Interpump. Even though we have not yet included this opportunity in our estimates as visibility on the timing and success is still low, we have done a DCF valuation of this expansion plan so as to value this option. We have used the following assumptions: Addressable market: We assumed that the cylinders and valves markets are both as large as the one for power take-offs (PTOs) and hydraulic pumps, the products currently offered to US clients. Market share: We expect a gradual increase in market share to 18% by 2019e, less than half that of other products offered locally (around 50%). Profitability: EBITDA margin is forecast to grow from 10% (2014e) to 21% (normalised level reached in 2017e). Figure 34: Assumptions used to value the US expansion plan EURm TV Market share 1% 2% 5% 8% 13% 18% Revenues Y/y growth (%) 100% 138% 57% 66% 41% 2% EBITDA EBITDA margin (%) 10% 17% 19% 21% 21% 21% D&A EBIT EBIT margin (%) 6.0% 13.0% 15.0% 17.0% 17.0% 17.0% 17.0% Tax rate (%) 30% 30% 30% 30% 30% 30% 30% NOPAT D&A Capex NWC variation Operating FCF Discounted FCF WACC@9.6% FCF 1.5 TV 53.8 Enterprise value 55.3 EV/share 0.5 % of TP 6.0% Source: Exane BNP Paribas estimates Assuming a 9.6% WACC, in line with the group s, we arrive at an enterprise value of EUR55m, equal to a value per share of EUR0.5 (6% of our current TP). A sensitivity analysis shows the valuation can go up to EUR1.3/share (15% of TP) if Interpump s market share hits the same level as that of the other products sold in the US (50%). Figure 35: Sensitivity of our DCF valuation to the US expansion plan EUR/share 2019 EBITDA margin (%) 2019 share in the US cylinders and valves market 8.00% 18.00% 28.00% 38.00% 50.00% 15.0% % % % Source: Exane BNP Paribas estimates Exane BNP Paribas Research Interpump 27 September 2013 page 22

23 Water jetting at very high pressure: highly attractive structural growth Beyond the cyclical story of trucks, we believe that long-term investors may be even more tempted by the structural growth story of the water jet technology and Interpump s capability to expand and gain share in new segments and industries that use such technology. Indeed, in the last few years, IP has been able to gain a substantial position in process pumps. Today additional growth opportunities may be identified in the water jet cutting applications and in the Oil & gas industry, where there is a widespread use of well service, drilling or fracturing pumps. Since late 2012, Interpump has started to expand by 50% the production capacity of Hammlemann, its German subsidiary. This should enable the group to add a further EUR60m in sales after completion (2015). Water jet represents today more than 50% of group EBITDA and we believe that a growth rate of 5-7% is sustainable in the next few years as awareness increases and more sectors and players start to employ the technology (5.5% sales CAGR in and 8.5% sales CAGR for the very high pressure pumps, VHPP, in ). Our estimates point to a sales CAGR of c.+5%. Figure 36: Historical P&L items and estimates of the water jet division EURm e 2014e 2015e 2016e 2017e Water jet division sales % Y/y growth 4.51% % 21.71% 15.51% 11.17% 1.60% 5.06% 5.13% 5.06% 2.70% % Y/y organic growth 4.51% % 21.71% 15.51% 11.17% 1.60% 5.06% 5.13% 5.06% 2.70% % on total sales 51.01% 50.29% 49.38% 49.13% 51.11% 46.66% 40.93% 40.38% 40.62% 40.39% Water jet division EBITDA % Y/y growth -0.7% -38.3% 53.2% 20.5% 12.0% -2.1% 8.1% 5.6% 5.5% 2.7% EBITDA margin (%) 24.6% 19.1% 24.0% 25.0% 25.2% 24.3% 25.0% 25.1% 25.2% 25.2% % on total EBITDA 61.2% 70.1% 67.9% 63.9% 64.9% 58.8% 52.0% 49.7% 49.1% 48.1% Water jet division EBIT % Y/y growth % 65.36% 24.23% 14.49% -3.71% 9.08% 5.13% 5.59% 2.41% 2.73% EBIT margin (%) 21.3% 14.6% 19.8% 21.3% 22.0% 20.8% 21.6% 21.6% 21.7% 21.7% % on total EBIT 60.90% 86.67% 76.13% 68.34% 71.52% 64.30% 55.43% 52.38% 51.71% 50.37% Source: Exane BNP Paribas estimates VHPP: solid market with high entry barriers of technology and quality Entry barriers are high in the water jet market in our view, particularly in the market for very high pressure pumps (VHPP). The main barriers enjoyed by Interpump include the fragmented client base, the hi-tech nature of the products, brand awareness and quality and, and aftermarket support. Fragmented professional client base. Given the nature of these clients, the total life cycle cost of a pump is the main consideration. Exane BNP Paribas Research Interpump 27 September 2013 page 23

24 Figure 37: Life Cycle Cost breakdown by expense The economics of a pump are one of the key factors behind a customer s choice Disposal 1% Installation 4% Operation 5% Shut down 9% Environment 1% Maintenance 13% Energy 48% Investment (pump) 19% Source: Hammelmann Technology. Fundamental to raise high pressure efficiency and gain a competitive edge via the reduction of the overall life cycle cost of a pump. Brand awareness and quality. Brand reputation and quality are fundamental and it takes time to create a successful track record. Aftermarket service. The ability to deliver spare parts to almost anywhere in the world within 24 hours makes is a tough challenge for newcomers. Aftermarket is a primary value driver of the VHPP business In our view one of the key attractions of investing in the VHPP technology is the aftermarket opportunity. Aftermarket, being less cyclical than OE, can reduce business risks and is a significant share of the total business (between 33-50% of the market). This is a market where profitability is very strong (we estimate EBIT margin of above 30%), so much so that sometimes manufacturers may be willing to have zero margin on the OE sales if they have secured the aftermarket business. Water jet VHPP and their applications: a diversified sector exposure The very high pressure pump (VHPP) technology used to create high-velocity water jets was developed in the 1970s. This technology gained popularity only in the 90s and is still in a growth phase thanks to a widening of the application range. Interpump entered this market through the acquisitions of Hammelmann (2005) and NLB (2007), gaining 40% of the market for very high pressure plunger pumps. Water jetting is used to handle cleaning, cutting, surface preparation problems and other activities in a variety of industrial applications. It is an environmentally-safe method as water is recycled and fumes and contaminants released are reduced. Furthermore, it has been proven effective for use with materials as diverse as rubber, composites, metals and foodstuffs. Exane BNP Paribas Research Interpump 27 September 2013 page 24

25 Figure 38: Applications of very high pressure pumps Aluminium Industry Automobile Industry Construction industry Mining Chemical / Petrochemical Iron and steel industry Energy industry General industrial works Public utilities Offshore industry Ship repair industry Cutting technology Removal of extremely hard scaling from various production tanks, vessels and product build-up from pipelines; Continuous process integrated cleaning of rollers De-burring engine blocks, cylinder heads, gearbox housings, intake manifolds; Overspray removal from paint booth grids; Cutting bodywork, seal linings; Reprocessing engine blocks, bodywork panels; De-burring fuel injection components Selective removal of surfacing e.g. spalling concrete, plaster, rendering, asphalt; Reinforcing bar exposure; Removal of all types of coatings from walls and floors, e.g. paints, bitumen, plastics, growths, corrosion; Cutting doorways, access ways in tunnels and concrete structures Hydraulic face support; Water jet assisted coal extraction; Dust suppression at open cast mines; Cleaning filter units, filter presses, filter sieves; Cleaning machinery, gearboxes, pit pipes, plate filters, cylindrical sieves, conveyor and transport equipment Internal cleaning of autoclaves, reactors, pressure vessels, agitator tanks, oil storage tanks, distillation towers; Cleaning heat exchangers and process coolers; Cleaning filtration units, condensate drums, boilers, evaporators etc. Pressure testing vessels, pipe lines and valves Primary and secondary de-scaling stations from profiled and flat steels; De-coring casting moulds; Cleaning heat exchangers, sieves, filters, sewers, coking ovens, etc. Decontaminating tanks, pipes etc.; Decommissioning production plant; Cleaning cooling towers, sewers, air pre-heaters; Cleaning and stripping flue gas lines, flue gas washers, flue gas desulphurisation plant; Boiler feed pumps for small power plants and refuse burning units. Rust, paint and coating removal from metal and concrete surfaces; Cleaning heat exchangers, condensers, coolers, vessels, reactors, autoclaves, tanks production and transportation equipment, machine parks, storage areas, contaminated flooring, heat exchangers Airport runway and apron cleaning; Cleaning and renovating water mains, water towers, inspection chambers, reservoirs etc.; Rail track cleaning; Cleaning drain and sewer networks, running tracks, pedestrian zones Injection of methanol, glycol, reservoir water, anti corrosion fluid, crude oil, sea and wash water; Weld preparation; Underwater removal of maritime growth from welds and bolted joints for inspection purposes; Surface preparation Surface preparation for re-coating the hull above and below the water line; Rust removal and surface preparation in ballast tanks in dock or at sea; Cleaning and surface preparation works on superstructure, deck machinery, winches, gangways and anchor chains; Removing burnt primer from weld seams; Removing anti skid coatings from carrier decks and helipads 4000 bar ultra high pressure pump units for cutting table applications; Cold cutting reinforced concrete, stone, metals, laminates, GRP, carbon reinforced plastics, glass, munitions, foodstuffs etc. Source: Wikipedia Exane BNP Paribas Research Interpump 27 September 2013 page 25

26 Interpump is one of the leaders in the water jet technology business, producing high and very high pressure plunger pumps. The company claims to have 50% of the market for pumps with horsepower of between 2 and 25 (HPP, high pressure pumps, c.15% of group sales) and roughly 40% of the market for pumps with horsepower of between 25 and 1500 (VHPP, Very High Pressure Pumps, c.33% of group sales). Interpump s main competitors are Gardner & Denver (USA), Water Jet (USA), Woma (Germany), Kamat (Germany) and Uraca (Germany). Players like Flow, Jetstream and Dardi are more focused on cutting applications and are system integrators. Figure 39: Different applications for water-jet technology and Interpump s exposure to the different sectors The pump s end use is determined by its flow, pressure and Breakdown of VHPP sales by industry supplied power (bars) Enamel stripping (single-pack enamel/with solvents) Enamel stripping (two-pack enamel/ with solvents) Enamel stripping (water enamel) Oil&gas 6% Mining/constr uction 10% Sewer truck 3% Contractors 34% Deburring up to 200 Dealers 21% Moulding and removal Reconditioning Jet cutting Industry (Aluminia, chemical, steel, ship, automotive) 26% Source: Woma, Exane BNP Paribas Cleaning and surface preparation an application where IP is the leader Interpump s leadership (40% share of very high pressure pumps of up to 1500HP) is particularly skewed toward cleaning applications. Indeed, very high pressure pumps are used in the cleaning sector to clean pipes, ship hulls, runways (rubber deposits are removed to improve safety in the braking of vehicles), removing rust and paint with water, heat exchanger cleaning, tank cleaning, grate and floor cleaning, automotive paint booth cleaning, underwater cleaning, kiln cleaning, stack cleaning and cooling tower cleaning and tube and tube bundle cleaning. In addition VHPP may be used to prepare surfaces for successive processes such as fast coating removal. This method boasts a lower total cost per project than grit blasting as it eliminates the need for the collection, containment and disposal of abrasive materials as only pure water is used. Furthermore other activities such as welding, mechanical and electrical work or painting may be performed concurrently with water jet industrial cleaning, which means projects can be completed in less time with fewer environmental concerns than under traditional methods such as sandblasting. Exane BNP Paribas Research Interpump 27 September 2013 page 26

27 Process pumps 10% of divisional sales, up from almost zero in 2006 Another segment where IP has gained traction in the last few years but is not yet a clear leader is process pumps (>EUR25m sales in 2012 vs. EUR0m in 2006). Process pumps are used in a large number of applications: offshore injection pumps (methanol and glycol injection, asphaltene inhibitor, paraffin, corrosion and scale inhibitor), water injection pumps (sea water, produced water), chemical industry (dosing co-monomers during LDPE manufacture, high pressure extraction in the fatty alcohol process, wet oxidation, CO2 extraction boiler feed pumps), pumps for mill scale removal, pumps for non-woven fabrics, hydraulic power unit pumps and many, many more. Figure 40: Example of an offshore application of the process pump technology Source: Interpump Cutting Addressable market of >EUR100m and where IP is still small The very high pressure water jet created by a pump (or intensifier) via the ejection of water through a very small nozzle can be used to cut all kinds of material. In this application IP is still in its infancy, with only few million euros of sales in We estimate that the market for water jet cutting systems is worth EUR500m and that the addressable market for IP related to VHPP for this application may be worth EUR100m-150m. Water jets can be used to cut soft materials such as food, paper products, cloth, leather, wood, fiberglass, and some aerospace composites. By adding abrasives, however, water jets are able to cut all kinds of material and may even outperform competing technologies such as laser, EDM and plasma according to the studies by the producers of water jet cutting machines. Exane BNP Paribas Research Interpump 27 September 2013 page 27

28 Figure 41: Overview of the cutting performance of the various technologies Source: Flow Water jetting has the advantage of being easily automated, able to cut very thin kerf widths with little material loss and is a cold cutting process (zero thermal distortions are essential in many industries such as food and steel). For example, glass and ceramic materials can be machined to complex shapes without the sub-surface flaws created during grinding. Figure 42: Water jet cutting machines are expected to outperform the other competing technologies Source: Flow Exane BNP Paribas Research Interpump 27 September 2013 page 28

29 In addition water jet cutting may not require as many secondary operations on the material cut, is faster than the other methods and is environmentally friendly (waste water and abrasives can be recycled, dust and toxic fumes are minimized). Figure 43: Key differences among the various technologies Water jet cutting has the lowest capital investment, one of the highest accuracy and the greatest flexibility in terms of material to be cut, machine setup and thickness of the material Source: Flow More recently, industries such as automotive, aerospace, and electronics have been aggressive adopters of water jet technology. Exane BNP Paribas Research Interpump 27 September 2013 page 29

30 Oil & gas a highly promising sector with high pressure pumps for fracturing, drilling, well servicing and subsea applications We believe that the oil & gas industry may represent one of the greatest opportunities for Interpump. High pressure pumps are used in both offshore and onshore fields and the up and downstream segments. The main pump manufacturers in this space include FMC Technologies, Weir, Gardner Denver and Flowserve. Figure 44: Overview of the types of pumps used in the Oil & gas sector Source: FMC, Weir Figure 45: Pressure pumping supply chain and customer base in the US market Pump manufacturer Source: Weir Exane BNP Paribas Research Interpump 27 September 2013 page 30

31 Interpump sells process pumps and VHPP for cleaning purposes to players in the oil & gas industry, which account for 6% of VHPP sales, but we believe the company has scope to expand its product range to: Well service pumps: Well servicing operations include general workover service, completions (bringing wells into production after drilling), and the plugging and abandonment of wells. VHPP pumps are used in cementing, acidizing and coiled tubing applications. Drilling: shallow drilling, which includes water well drilling, seismic drilling and mineral exploration. Subsea pumps: Subsea multiphase pumping is an effective means to improve the economics by reducing backpressure on the reservoir, which increases well flow rates and total recoverable reserves. Figure 46: Subsea pumping applications Source: Flowserve, Weir However, subsea pumping has been limited to applications in shallower water with shorter tieback distances. This is primarily because of the limitations in the pumping technology itself. To date, multiphase pump projects have been limited to 700 psi (50 bar) of drawdown. Deepwater or long tiebacks require much higher pressures. This is favourable for VHPP as production from deeper water is expected to strongly increase in the near future. Exane BNP Paribas Research Interpump 27 September 2013 page 31

32 Figure 47: Deepwater production water depth (mt) Source: Flowserve, Exane BNP Paribas Hydraulic fracturing for shale oil and shale gas: Developed in the early 20th century and made commercially viable mid-century, hydraulic fracturing is a vital process in the production of oil and natural gas. The pumping equipment used to transmit the fluid media down the well bore is key to the success of the hydraulic fracturing process. Reciprocating plunger pumps have been used for decades to propel a mixture of water, sand and chemicals into a well at pressures as high as 15,000 psi (1,000 bar), and flow rates at times above 100 barrels per minute. Up to the early 2000s, there were traditionally two types of frac pumps, triplex or quintuplex (the same type produced by Interpump), with horsepower capacity ranging from 1,300 to 2,000 bhp (IP has pumps with HP of up to 1,000 that are thus not capable of addressing this market whereas Weir for example has 2,250-3,500 HP pumps addressing this market). The frac pump has evolved over time to grow in size, horsepower rating and pressure capabilities so as to meet the increasing demand of pressure pumping service companies as US energy requirements pushed drilling into more and more complex geological formations. The challenge today is to provide greater reliability (high pressure and abrasives cause parts to wear out faster) and maintenance predictability, reducing the product downtime at fracturing sites and the user's need to have significant excess pumping equipment available to ensure continuity of pumping in the event of equipment failures. To gain a substantial presence in this market, newcomers like Interpump will need to step up against the competition (i.e. Weir, FMC, Gardner Denver) by providing a product that is more efficient, more reliable, has a lower Life Cycle Cost and offer a high level of service in the aftermarket (where more than half of the value of the market is today). Exane BNP Paribas Research Interpump 27 September 2013 page 32

33 Figure 48: Weir s pressure pumping upstream business (USD800m in 2012) Source: Weir Pressure pumping in oil & gas A EUR1.3bn market opportunity We estimate that the addressable market of high pressure pumps for the oil & gas industry is worth around EUR1.3bn. The three biggest players Weir, Gardner Denver and FMC Technologies dominate the market with a combined market share of c. 85%. This market structure and the highly specialised technology enable the leading players to enjoy strong profitability. Indeed, Weir has an EBIT margin of around 25%, a level similar or even slightly higher than that of IP s VHPP business. This would mean that every 1% market share IP is able to get would generate additional EBIT of EUR3.2m (3% of group EBIT). In a bull case scenario where IP wins 5% of the market by 2020 (0% in the core case scenario), our TP could be raised by a further EUR1 (10% of TP). Figure 49: Pumps and fluid market share in the oil & gas industry Other 15% Gardner Denver 23% Weir 54% FMC 8% Source: Weir Exane BNP Paribas Research Interpump 27 September 2013 page 33

34 To be able to compete in this market IP will need to develop pumps using different engineering than that in the historical range, which was heavily focused on best-inclass pressure capability (up to 55,000psi vs. a max of 30,000psi for these three players). Flow and horsepower will be much more important factors, as the product portfolio of the main players demonstrate. Indeed, their products have flow of 2,500-3,000gpm (vs. 800gpm for IP) and HP of 3k-4k (vs. 1.5k for IP). We believe that the technology in these pumps, which are focused more on flow performance, is more scalable than that in pumps requiring heavy pressure standards. This means that the entry barriers are lower for new entrants. This relates to the high stress that the pump undergoes with high pressure while with greater flows engineering and product characteristics are much simpler. Figure 50: The pumps produced by Weir and Hammelmann (IP subsidiary) are very similar Weir s very high pressure pumps Hammelmann s very high pressure pump Source: ACT In addition Interpump should be able to offer: 1) a high level of service in the aftermarket (proximity to the client, rapid delivery of spare parts, etc.), 2) pumps with low life cycle costs (i.e. Weir introduced a steel pump instead of using more expensive stainless steel so as to lower the LCC), 3) pumps with high quality, efficiency and reliability and 4) a good product range. We believe our estimates are on the cautious side and there s room for upside surprises Given the structural growth trend of the water jet technology and the potential new addressable markets for Interpump, we believe that our estimates are on the conservative side. However, we prefer to stay on the cautious side as execution risk is always a threat and the move into new segments of the pump market may take longer than expected. In the next three years we expect top-line growth of 5% and margins to be largely stable around 25% EBITDA margin. Exane BNP Paribas Research Interpump 27 September 2013 page 34

35 Appendices Interpump s management will attend the STAR conference organized by Borsa Italiana (Italian stock exchange) in London on 1 2 October, questions to management Interpump s management will attend the STAR conference organized by Borsa Italiana (Italian stock exchange) in London on 1 2October, In addition, both CFO and CEO will join our Exane BNPP Mid Cap forum in London on 19 November. We pose below ten questions that we wouild like management to address. 1) Is the high pressure pump business a commodity business? If so, how will you sustain the margin of this product? 2) What new applications are you developing with the very high pressure pumps? What sales growth you expect from this division? 3) Have you entered non-historical markets with the new acquisitions? For example the cylinder business opened the agro sector, what else? 4) How much do you aim to spend on acquisitions in the coming years and what sales do you target by 2016? EUR1bn? 5) What segments and products will future acquisitions be in? 6) Make or buy? What percentage of your cost of goods sold is made of components purchased from third parties and how much relates to in-house manufacture from the raw materials? Are you planning to increase vertical integration? Why? 7) What is your strategy to increase sales of valves and cylinders in the regions where these products have a low market share? For example, what are your US expectations from cross-selling cylinders/valves? 8) How likely is the Oil division to return to its historical 20% EBITDA margin? 9) What percentage of sales in the various divisions is spare parts/aftermarket? What is the profitability of this part of the business? 10) How does the current backlog in very high pressure pumps compare with the level one year ago? Exane BNP Paribas Research Interpump 27 September 2013 page 35

36 Figure 51: An example of a truck in which almost the whole spectrum of Interpump Group products are installed Source: Interpump Trends and nature of the commercial vehicle industry are favourable Figure 52: Very low risk of concentration of clients, OEM concentration not a risk The activity of garages to fit the trucks for the specific uses is fragmented in nature (local) and done on only a portion of trucks produced, thus unlikely truck-makers will in-source this activity Source: Institute for Automotive Research Exane BNP Paribas Research Interpump 27 September 2013 page 36

37 Figure 53: Overview of the VHPP product and of a complete very high pressure pump system Very High Pressure Plunger Pump Overview of the various components in a VHPP system Source: Hammelmann Figure 54: Performance of the VHPP of Interpump by pressure and flow Source: Hammelmann Exane BNP Paribas Research Interpump 27 September 2013 page 37

38 Figure 55: Market share in the pressure pumping market where Weir is present Source: Weir Acidizing This involves the injection of chemicals to eat away at any skin damage, "cleaning up" the formation, thereby improving the flow of reservoir fluids. A strong acid (usually HCl) is used to dissolve rock formations, but this acid does not react with the Hydrocarbons. As a result the Hydrocarbons are more accessible. Acid can also be used to clean the wellbore of some scales that form from mineral laden produced water. Fracturing This means creating and extending fractures from the perforation tunnels deeper into the formation, increasing the surface area for formation fluids to flow into the well, as well as extending past any possible damage near the wellbore. This may be done by injecting fluids at high pressure (hydraulic fracturing), injecting fluids laced with round granular material (proppant fracturing), or using explosives to generate a high pressure and high speed gas flow (TNT or PETN up to 1,900,000 psi [13,000,000 kpa] and propellant stimulation up to 4,000 psi [28,000 kpa]). Acidizing and fracturing (combined method) This involves the use of explosives and injection of chemicals to increase acid-rock contact. Exane BNP Paribas Research Interpump 27 September 2013 page 38