NOEMALIFE. Tough market in Italy but sound expansion abroad. Hold (maintained) Company Update

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1 NOEMALIFE Company Update Hold (maintained) MARKET PRICE: EUR3.57 TARGET PRICE: EUR3.65 (from EUR3.85) Software for healthcare Data Shares Outstanding (m): 7.6 Market Cap. (EURm): 27.2 Enterprise Value (EURm): 60.6 Free Float (%): 18.8% Av. Daily Trad. Vol. (m): Main Shareholder: Mr. Serra (64.6%) Reuters/Bloomberg: NOEM.MI NOE IM 52-Week Range (EUR) Performance 1m 3m 12m Absolute -2.4% -2.0% 2.5% Rel. to FTSE IT -2.7% -10.4% -4.5% Graph area Absolute/Relative 12 M Next event 14/11/2013 3Q13 results Marco Cristofori marco.cristofori@ubibanca.it Tel Website: Tough market in Italy but sound expansion abroad There were two facets to Noemalife s 1H13 results: while the Italian healthcare market was again weak with sales falling 15% and operating losses, the international market expanded further (+23%, now representing 43% of consolidated revenues), resulting in a slight increase in the company s EBITDA. Net debt fell by about EUR5.6 million, though this was due to the cash inflow from the recent capital increase (EUR3.3 million impact), lower capex and a much greater use of factoring, indicating that there was substantial operating cash absorption in the first half. In addition, we believe market conditions in Italy could remain tough this year which will inhibit the previously expected profitability improvement, despite a new cost cutting plan, which we believe is likely to generate benefits only in the long term. As a result, we maintain our Hold recommendation with a new target price of EUR3.65 per share post capital increase. > In July, Noemalife s EUR5 million rights issue (at EUR3.49 per share) significantly improved its financial ratios (leverage expected to fall to 1.6x at Dec x in 2012, gearing to 0.52x from 0.95x in 2012). The rights issue, fully subscribed with the support of TIP (whose stake rises to 16.3%), increased the number of shares to 7.64 million (from 6.21 million), implying per share dilution of 18.7%, and lowered the free float to about 19%. > We have fine tuned our estimates following a weak second quarter (sales down 12.2%, EBITDA decline to breakeven), with lower expectations for the Italian market, resulting in an average negative impact on revenues (VoP) and EBITDA close to 4% in The reduction at the bottom line, coupled with dilution from the capital increase, implies a reduction in EPS of about 22% in 2014 and 20% in The forecast Net financial position has improved to EUR18 million at Dec-13 (vs. EUR27 million before) due to the successful right issue and the higher recourse to factoring. > Our target price of EUR3.65 per share has been lowered from EUR3.85 pre-capital increase due to dilution from the rights issue (18.7%) and our new estimates. It derives from a DCF and a relative valuation. The DCF method produces a fair value of EUR3.53 per share, while the relative valuation, based on a comparison of multiples, gives a value of EUR4.15 per share. Financials E 2014E 2015E Revenues (EURm) EBITDA (EURm) EBITDA margin (%) 13.8% 16.5% 18.1% 19.8% EBIT (EURm) EPS (EUR) CFPS (EUR) DPS (EUR) Source: Company Data, UBI Banca Estimates Ratios E 2014E 2015E P/E(x) nm nm P/CF(x) P/BV(x) Dividend Yield 0.0% 0.0% 0.0% 0.0% EV/EBITDA(x) Debt/Equity (x) Debt/EBITDA (x) Source: Company Data, UBI Banca Estimates 1

2 Key Financials (EURm) E 2014E 2015E Revenues EBITDA EBIT NOPAT Free Cash Flow Net Capital Employed Shareholders Equity Net Financial Position Key Profitability Drivers E 2014E 2015E Net Debt/EBITDA (x) Net Debt/Equity (x) Interest Coverage (%) nm Free Cash Flow Yield (%) 6.6% 23.9% 13.7% 14.4% ROE (%) -10.9% -5.3% 5.8% 14.7% ROI (%) -1.0% 2.4% 7.8% 13.4% ROCE (%) -0.7% 1.6% 5.3% 9.0% Key Valuation Ratios E 2014E 2015E P/E (x) nm nm P/BV (x) P/CF (x) Dividend Yield (%) 0.0% 0.0% 0.0% 0.0% EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) nm EV/CE (x) Key Value Drivers (%) E 2014E 2015E Payout 0.0% 0.0% 0.0% 0.0% Cost of Equity 9.4% 9.4% 9.4% 9.4% WACC 6.6% 7.4% 7.7% 8.2% NWC/Sales 44.9% 36.2% 31.4% 29.1% Capex/Sales -11.1% -10.6% -10.2% -9.7% 2

3 Recent Developments > Noemalife s sales fell 2.3% in the first half of the year with a positive 1Q13 (+10.1%) followed by a weak second quarter (sales down 12.2%). EBITDA was broadly at breakeven, leading to a net loss of EUR3.9 million vs. EUR2.6 million in 1H12. Net debt declined to EUR24.2 million (from EUR29.8 million at Dec-12 and EUR26.5 million at Mar-13) due to higher factoring of receivables, lower capex (EUR3.3 million vs. EUR3.9 million in 1H12) and cash inflow from the capital increase (EUR3.3 million in 1H13). We would stress that the first half of the year is traditionally weak as sales and profitability of licenses, which generate higher margins, are always concentrated in the last quarter of the year. > Given the weakness of the Italian market (-15% in 1H13) which reported operating losses and a slowdown in the order backlog (-7% at EUR74 million of which EUR46 million scheduled for 2014), the company confirmed its strategy of further expansion abroad (international sales in 1H13 rose by 23% to represent ca. 43% of total sales) while it also announced a new cost saving plan, particularly for the parent company. > Noemalife completed a EUR5 million capital increase In July through the issue of 1.43 million new shares at EUR3.49. The rights issue, fully subscribed with the support of TIP (whose stake rises to 16.3%), increased the outstanding number of shares to 7.64 million, implying a per share dilution of 18.7%, and lowering the free float to 19%. > The group recently opened a new subsidiary in Morocco through Medasys to expand its presence in North Africa while it also entered the Algerian and Mexican markets during the first half of the year. The company also won a tender in the US in July to supply its Methis system to Ohio State University Wexner Medical Center. Although the size of this contract may be negligible, it is the company s first contract in the US, a key market for the medical industry. The capital increase The company completed its EUR5 million share capital increase on 3 July. The group issued 1,429,965 new ordinary shares at EUR3.49 per share (vs. EUR3.72 in the capital increase of 2012), which implied a 4% discount to the share price before the announcement). The new shares were offered on the basis of 3 shares for every 13 ordinary shares already owned. Figure 1 Impact of the capital increase The table below illustrates the dilution from the capital increase. Our calculations also include the positive effect of lower financial charges due to the debt reduction. Old share number (million) 6.21 Total amount of the capital increase (EURm) 5.0 Issue Price (EUR) 3.49 New Shares (million) 1.43 Total share post capital increase (million) 7.64 Diluition of the capital increase (%) 18.7% Financial charges savings after taxes (EURm) 0.20 Net profit accreation in 2014 (%) 12.5% Net profit accreation in 2015 (%) 4.4% Net EPS dilution 2014 (%) 6.2% Net EPS dilution 2015 (%) 14.4% Target price before the right issue (EUR) 3.85 Target price after the right issue (EUR)

4 The right issue implies EPS dilution of 18.7%, based on the new number of shares in issue, but including the positive impact of lower financial charges, we estimate total dilution of 6.2% in 2014 EPS and 14.4% in Our new estimates take into account the new number of shares in circulation (7.64 million). Following the right issue, at the conclusion of which 34% of the option rights remained unsubscribed by the market and which were subsequently subscribed by one of the two main shareholders, Ghenos (Mr. Serra) has now a stake of 64.6% (from 68%) and TIP (Mr. Tamburi) 16.3% (from 10%), with the free float now limited at 18.8% of the total shares. The impact of the right issue resulted in a material improvement in the group s financial structure (expected leverage at end-2013 of 1.6x from 2.3x prior to the share capital increase and 3.2x in 2012, gearing of 0.52x from 0.9x prior to the rights issue and 0.95x in 2012). 1H13 results 1H13 sales were slightly below our estimates, particularly in the second quarter (when Services revenues declined by 16% and licenses by 26%), due to continued weakness in Italy (-15% in 1H13, representing 57% of consolidated sales). Government measures to reduce Italian public spending in the health sector led to a fall in new projects and new orders while the benefits arising from the acceleration of payments outstanding from the Public Administration has not yet had any tangible impact, prompting the company to increase its reliance on factoring. Clearly, the huge initial investment to upgrade healthcare systems is unsustainable given current Italian public healthcare budget constraints and we therefore expect no improvement in the second half of the year. The company is reacting to operating losses in its domestic market by successful expansion of sales abroad (+23% in 1H13), while it has also announced a new cost saving plan which should generate benefits in the coming quarters. However, previously stated expectations of improved profitability, made following 1Q13 results, are no longer realistic. Figure 2 2Q/1H13 results 2Q13 was particularly weak, with EBITDA down to breakeven and net losses up to EUR2.2 million. The sharp improvement of the net financial position is due to cash inflow from the right issue, higher levels of factoring and lower capex. (EURm) 2Q12A 2Q13A % Chg. 1H12A 1H13A % Chg. Licenses % % Services and maintenances % % Leases % % Hardware & Software % % Total Sales % % Total Sales (VoP) % % EBITDA % % Ebitda margin (%) 11.1% 1.0% 1.8% 2.5% D&A % % EBIT nm nm EBIT margin (%) -1.2% -14.3% -10.9% -12.2% Financial charges nm nm Pre-Tax Profit nm nm Taxes and minorities nm % Net result nm nm Net Debt % % Source: Company data 4

5 EBITDA reached EUR0.7 million due to lower service costs (from 30% of sales to 25.7%) partially offset by higher labour costs (now accounting for 67.6% of sales). It should be noted that first half EBITDA is not representative of the expected full year result, given the weight of the licenses in the last quarter of the year. EBIT, negative for EUR3.7 million, was also due to higher D&A. The net loss, which increased to EUR3.9 million (of which EUR2.2 million reported in 2Q13) was also affected by a sharp decline of the positive fiscal impact (broadly zero in 1H13 vs. EUR1.0 million last year). Net debt declined to EUR24.2 million from EUR29.8 million at Dec-12 being positively impacted by the greater non-recourse sale of receivables (EUR21.7 million, more than the double the level of 1H12 and nearly equal to EUR24.7 million reported in the full 2012), the cash inflow from the capital increase (EUR3.3 million up to the end of June) and lower capex, which together more than offset the operating cash burn. Figure 3 Quarterly trend Sales and profitability traditionally peak in the last quarter of the year, when most new licenses, which have higher margins, are sold. Source: Company data 5

6 Financial Projections > Following lower than expected results in 2Q13, we have fine-tuned our estimates, further lowering the prospects for the Italian market, with an average negative impact on revenues (VoP) and EBITDA close to 4% in The reduction at the bottom line, coupled with dilution from the capital increase, implies a reduction in EPS of about 22% in 2014 and 20% in > Nevertheless, our estimates imply strong sales growth CAGR (+10.4% up to 2015) due to considerable potential from rising exposure to markets outside Italy. Our forecasts also include a sizeable improvement in the EBITDA margin (close to 20% in 2015 compared with 13.8% in 2012) supported by cost streamlining initiatives by Noemalife (reduction of services costs), synergies with Medasys, and the high profitability generated by new licenses. > The Net financial position has strongly improved following the successful rights issue and higher levels of factoring. Net debt is expected to fall to EUR18.3 million at Dec-13 with gearing of 0.52x vs in 2012 (also supported by the higher net equity) and a net debt/ebitda ratio of 1.6x vs. 3.2x last year. Figure 4 New vs. old estimates Our sales and EBITDA estimates reduction in (-4% on average) translate to lower net profit estimates with reductions of 25% in 2014 and 8% in The cuts in EPS are much higher due to the dilution from the recent right issue. (EURm) 2012A 2013E 2014E 2015E Old New Old New Old New Sales % change -4.8% -3.8% -2.7% VoP % change -4.7% -3.7% -2.7% EBITDA % change -5.2% -4.0% -2.9% Net profit % change nm -4.6% -1.1% Net Debt % change -32.5% -37.0% -35.9% EPS % Change nm -22.3% -19.5% 6

7 Valuation > Our revised estimates indicate a new target price of EUR3.65 per share, down from EUR3.85 per share before the rights issue but up 17% compared to the target price post capital increases (EUR3.13), which derives from both a DCF method (80% weight) and a multiple comparison (20% weight). Our relative valuation benefits from the strong sector re-rating of the past few months while DCF has risen as the free risk rate has fallen. Our DCF model generates a fair value of EUR3.53 per share. Our multiples valuation (based on EV/EBITDA and P/E comparisons) delivers a fair value of EUR4.15 per share. > Our valuation incorporates the impact of the costs of securitization and sale of receivables to factoring companies, which amounted to EUR21.7 million in 1H13. We estimate that Noemalife is paying ca. EUR0.8 million in financial charges on top of its average net debt throughout the year (related to the sale of receivables). These additional costs (multiplied by 7.1x which is the average EV/EBIT multiple of the sector) reduce our valuation by ca. EUR5.6 million (or EUR0.73 per share). > At our target price Noemalife would trade at an attractive 2014 EV/EBITDA multiple (3.0x) but would be demanding on P/E (18.4x). This is due to the strong impact of D&A costs, tied to the capitalization of R&D costs. Figure 5 Valuation summary Valuation Fair value (EUR) 1 DCF (80%) Relative valuation (20%) 4.15 Source: UBI Banca estimates Average 3.65 current market price 3.57 upside /(downside ) potential 7.6% Figure 6 - P/E and EV/EBITDA multiples compared to those of its main peers We have not considered 2013E multiples given the net loss we expect for Noemalife. The company trades at an average discount on EV/EBITDA14-15E of about 22%. P/E EV/EBITDA (x) 2014E 2015E 2014E 2015E McKesson Siemens Agfa Tieto Exprivia Engineering Average Noemalife Premium/(discount) 87.9% -33.4% -14.5% -30.0% Source: Factset, UBI Banca estimates for Noemalife and Exprivia 7

8 Income Statement (EURm) E 2014E 2015E Net Revenues EBITDA EBITDA margin 13.8% 16.5% 18.1% 19.8% EBIT EBIT margin -1.0% 2.3% 6.0% 8.7% Net financial income /expense Associates & Others Profit before taxes Taxes Minorities & discontinuing ops Net Income Balance Sheet (EURm) E 2014E 2015E Net working capital Net Fixed assets M/L term funds Capital employed Shareholders' equity Minorities Shareholders' funds Net financial debt/(cash) Cash Flow Statement (EURm) E 2014E 2015E NFP Beginning of Period Group Net Profit Minorities D&A Change in Funds & TFR Gross Cash Flow Change In Working Capital Other Operating Cash Flow Net Capex Other Investments Free Cash Flow Dividends Paid Other & Chg in Consolid. Area Chg in Net Worth & Capital Incr Change in NFP NFP End of Period

9 Financial Ratios (%) E 2014E 2015E ROE -10.9% -5.3% 5.8% 14.7% ROI -1.0% 2.4% 7.8% 13.4% Net Fin. Debt/Equity (x) Net Fin. Debt/EBITDA (x) Interest Coverage nm NWC/Sales 44.9% 36.2% 31.4% 29.1% Capex/Sales -11.1% -10.6% -10.2% -9.7% Pay Out Ratio -0.0% 0.0% 0.0% 0.0% Per Share Data (EUR) E 2014E 2015E EPS DPS Op. CFPS Free CFPS BVPS Stock Market Ratios (x) E 2014E 2015E P/E nm nm P/OpCFPS P/BV Dividend Yield (%) 0.0% 0.0% 0.0% 0.0% Free Cash Flow Yield (%) 6.6% 23.9% 13.7% 14.4% EV (EURm) EV/Sales EV/EBITDA EV/EBIT nm EV/Capital Employed Growth Rates (%) E 2014E 2015E Growth Group Net Sales 39.7% 2.4% 12.9% 16.5% Growth EBITDA 2.9% 21.9% 23.9% 26.8% Growth EBIT nm nm 199.6% 68.0% Growth Net Profit nm nm nm 196.4% 9

10 Disclaimer Analyst Declaration The analyst who prepared this report, and whose name and role appear on the front page, certifies that: a. the views expressed on the Company mentioned herein accurately reflects his personal views. It does not represent the views or opinions of the management of UBI Banca or any other company in or affiliated to the UBI Banca Group. It is possible that individuals employed by UBI Banca, or any other company in or affiliated to the UBI Banca Group, may disagree with the views expressed in this report; b. no direct or indirect compensation has been or will be received in exchange for any views expressed; c. the analyst does not own shares of the Company; d. the analyst does not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions. About UBI Banca This document has been prepared by UBI Banca, a bank authorized by the Bank of Italy to provide investment services pursuant to Article 1, Paragraph 5, letter a), b), c), c-bis), e) and f) of Legislative Decree, 24 February 1998, n 58. General warning This document is for information purposes only. This document (i) is not, nor may it be construed, to constitute, an offer for sale or subscription of or a solicitation of any offer to buy or subscribe for any securities issued or to be issued by the Company, (ii) should not be regarded as a substitute for the exercise of the recipient s own judgement. In addition, the information included in this document may not be suitable for all recipients. Therefore the recipient should conduct his own investigations and analysis of the Company and securities referred to in this document and make his own investment decisions without undue reliance on its contents. Neither UBI Banca, nor any other company of the UBI Banca Group, nor any of its directors, managers, officers or employees, accepts any liability whatsoever (in negligence or otherwise), and accordingly no liability whatsoever shall be assumed by, or shall be placed on, UBI Banca, or any other company of the UBI Group, or any of its directors, managers, officers or employees, for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection with this document. The information provided and the opinions expressed in this document are based upon information and data provided to the public by the Company or news otherwise public and refers to the date of publication of the document. The sources (press publications, financial statements, current and periodic release, as well as meetings and telephone conversations with Company representatives) are believed to be reliable and in good faith, but no representation or warranty, express or implied, is made by UBI Banca as to their accuracy, completeness or correctness. Past performance is not a guarantee of future results. Any opinions, forecasts or estimates contained herein constitute a judgement as at the date of this document, and there can be no assurance that the future results of the Company and/or any future events will be consistent with any such opinions, forecasts or estimates. Any information herein is subject to change, update or amendment without notice by UBI Banca subsequent to the date of this document, with no undertaking by UBI Banca to notify the recipient of this document of such change, update or amendment. Organizational and administrative arrangements to prevent conflicts of interests UBI Banca maintains procedures and organizational mechanisms (physical and non-physical barriers designed to restrict the flow of information between Business Analysis Unit and the other areas/departments of UBI Banca) to prevent and professionally manage conflicts of interest in relation to investment research. For further information please see Meccanismi organizzativi ed amministrativi posti in essere per prevenire ed evitare conflitti di interesse in rapporto alle Ricerche. Disclosure of potential conflicts of interest The outcome of the checks carried out is reported below: > UBI Banca acts as Specialist for Noemalife S.p.A. Frequency of updates UBI Banca aims to provide continuous coverage of the companies in conjunction with the timing of periodical accounting reports and any exceptional event that occurs affecting the issuer s sphere of operations and in any case at least twice per year. The companies for which UBI Banca acts as Sponsor or Specialist are covered in compliance with regulations of the market authorities. Valuation methodology UBI Banca s analysts value the Company subject to their recommendations using several methods among which the most prevalent are: the Discounted Cash Flow method (DCF), the Economic Value Added method (EVA), the Value map method, the Multiple comparison method. For further information please refer to Ranking system UBI Banca s analysts use an absolute rating system, not related to market performance. The explanation of the rating system is listed below: Buy: if the target price is 10% higher than the market price. Hold: if the target price is 10% below or 10% above the market price. Sell: if the target price is 10% lower than the market price. Target price: the market price that the analyst believes that the share may reach within a one-year time horizon. Market price: closing price on the day before the issue date of the report, appearing on the first page. 10

11 Distribution This document is intended for distribution only by electronic and ordinary mail to Professional Clients and Qualified Counterparties as defined in Consob Regulation n dated This document may be distributed in the USA by a United States Securities and Exchange Commission ( SEC ) registered broker dealer. This document may not be distributed in Canada, Japan or Australia. Copyright This document is being supplied solely for the recipient s information and may not be reproduced, redistributed or passed on, directly or indirectly to any other person or published, in whole or in part, for any purpose without prior written consent byubi Banca. The copyright and intellectual property rights on the data are owned by UBI Banca Group, unless otherwise indicated. The data, information, opinions and valuations contained in this document may not be subject to further distribution or reproduction, in any form or via any means, even in part, unless expressly consented by UBI Banca. By accepting this document the recipient agrees to be bound by all of the forgoing provisions. Distribution of ratings For further information regarding quarterly rating statistics and descriptions, please refer to Historical ratings and target prices Date Rating Target Price (EUR) Market Price (EUR) 10/11/2011 HOLD /07/2012 HOLD /11/2012 HOLD /04/2013 HOLD