20 July 2009 Indra LAST PRICE Hold 15.95 CHANGE IN RECOMMENDATION Bloomberg IDR SM Reuters IDR.MC Share price Target price 15.95 17.05 Market Cap N. Shares 2.68bn 164.1m Main Shareholders CajaMadrid 19.8% CF ALBA 10.0% Casa Grande de Cartagena 6.5% Gas Natural 5.0% Caja Astur 5.0% Free-float 52.7% Analyst Adrian Zunzunegui +3491 7879110 a.zunzunegui@ibequities.com Share Price (3-yr) 20 19 18 17 16 15 Basic Data 2007 2008 2009E 2010E 2011E Revenues ( m) 2,168 2,380 2,520 2,658 2,801 EBITDA ( m) 258 308 326 349 376 EBIT ( m) 224 271 284 301 322 Net profit ( m) 148 182 191 205 226 EPS ( ) 0.90 1.11 1.16 1.25 1.38 DPS ( ) 0.50 0.62 0.64 0.69 0.76 BVPS ( ) 4.50 5.02 5.52 6.00 6.54 EBITA margin (%) 10.3% 11.4% 11.3% 11.3% 11.5% Gearing (%) 20.2% 17.9% 19.7% 17.0% 13.8% Main Ratios 2007 2008 2009E 2010E 2011E P/E (x) 17.6 14.4 13.7 12.8 11.6 P/BV (x) 3.5 3.2 2.9 2.7 2.4 Dividend Yield (%) 3.1% 3.9% 4.0% 4.4% 4.8% EV/Sales (x) 1.3 1.2 1.1 1.0 1.0 EV/EBITDA (x) 10.7 9.0 8.6 8.0 7.4 EV/EBITA (x) 12.3 10.2 9.9 9.2 8.6 2Q results to come out next week Indra will release 1H 09 results next week, Wednesday July 29th at the market closing. We look for 2Q 09 revenues to grow by 5.7% y-o-y to 703m (below the 10% growth seen to March, and within the FY 09E provided guidance of between 5% and 7% growth). At the EBIT level, we look for 4% y-o-y growth to 82.3m (+7% to March). EBIT margin in the quarter should stand at 11.7%, slightly below the 11.9% seen in the same period last year, although higher than the 10.8% seen in 1Q 09 (which was flat y-o-y). Finally, we expect net profit to grow by 4.8% to 60.8m 14 13 12 11 21/07/2006 Indra 03/11/2006 16/02/2007 01/06/2007 14/09/2007 28/12/2007 11/04/2008 25/07/2008 07/11/2008 20/02/2009 05/06/2009 Gas overhang risk over Gas Natural (which owned 18.5% of Indra) sold a 10% stake to ALBA (Spanish holding company), kept a 5% stake (contrary to initial plans of selling its whole stake), and placed the balance (c. 3% stake) in the market among institutional investors, everything at 15 per share (c. 4% discount to previous closing price). This almost puts an end to Gas overhang risk, which has been a drag to Indra s recent share price performance. Share Price Relative to IBEX (5-yr) 170.0 160.0 150.0 140.0 130.0 120.0 110.0 though we disliked Indra selling treasury stock Reportedly, and due to the high demand levels when placing the 3% stake sold by Gas Natural, JP Morgan offered Indra the possibility to include some of its own shares. Indra sold 2.5m shares, or 1.52% of its capital at 15 per share. Total proceeds of 37.5m (moving down its treasury stock position from 4.1m to 1.6m shares, or c. 1% of capital). Despite non sizeable, from a qualitative standpoint we disliked the move: no reason (Indra does not need the proceeds for cutting down debt, no major impact in the stock liquidity) for selling 1.5% stake at a 4% discount (with a limited capital gain, if not a loss, considering the share price recent performance), rather than cancelling the shares. 100.0 90.0 80.0 70.0 21/07/2006 29/09/2006 08/12/2006 Indra relative to IBEX-35 16/02/20 07 27/04/2007 06/07/20 07 14/09/2007 23/11/2007 01/02/2008 11/04/2008 20/06/20 08 29/08/2008 07/11/20 08 16/01/2009 27/03/20 09 05/06/2009 Please refer to important disclosures at the end of this report Limited upside, downgrade from Buy to Hold Since we last upgraded Indra to Buy, in June 08, the shares have outperformed the Ibex 35 Index by c. 20%. Outperformance is nevertheless less evident since March 09 (in fact the shares have underperformed since then). Recent good news (Telvent sale process now over, Gas overhang risk behind) have led share price to get closer to our 17 target price (c. 6% upside potential). We continue to like Indra s fundamentals, but considering limited upside potential and current trading multiples (13X PER and 8X EBITDA 09E), we are no longer buyers of the stock.
Downgrade to Hold on valuation We are downgrading our recommendation on Indra from Buy to Hold, on valuation grounds. Our 17.02 target price offers less than 10% upside from current share prices. Under our estimates, the stock trades at 8X EBITDA and 13X PER 2009E, not attractive enough multiples to remain buyers. Since we upgraded our recommendation on Indra to Buy, in June 08, the shares have outperformed the Ibex 35 Index by c. 20%. Nevertheless, and as we feared in our March 09 report, outperformance has been less evident since then (in fact Indra shares have underperformed the market since the beginning of March), on Fenosa s overhang, Telvent risk, and an overall poor relative performance from Indra on rising markets. Both Fenosa and Telvent risks are now gone, and seems that most of good news are behind us. Indra has proven a defensive stock within weak markets, which seems not to be the case now. Indra: Share price performance relative to Ibex 35 since upgrade 170.0 160.0 150.0 140.0 130.0 120.0 110.0 100.0 90.0 30/05/2008 08/08/2008 17/10/2008 26/12/2008 06/03/2009 15/05/2009 Indra relative to IBEX-35 Source: Bloomberg We continue to like Indra from a fundamental standpoint, though we are downgrading the stock to Hold on valuation multiples: Limited upside to our 17 target price: Our target price of 17.03 per share offers 6.7% upside from current share prices, not enough to keep a Buy recommendation. Not cheap anymore: The stock is trading at c. 13X PER and 8X EBITDA 09E, not undemanding multiples. Should the shares trade at our target price of 17.03 per share, they would trade at 14X PER and 8.5X EBITDA 09E Recent underperformance likely to continue: We believe Indra will continue to underperform the market, following a sharp outperformance during the last 18 months. 2 Indra
2Q results out July 29th Indra will release its 1H 09 results next Wednesday July 29 th. We look for 2Q 09 revenues to grow by 5.7% y-o-y to 703m, which would be below the 10% growth seen to March, and within the FY 09E provided guidance of between 5% and 7% growth. By verticals, we see Transport & Traffic sales growing by 8.7% in 2Q 09 to 133m (+8% growth seen to March), Telecom & Media also growing above the average, by 9.6% y-o-y to 74m (+10% in 1Q), Public Administrations to grow 6.9% (+8% to March) to 93m, Financial Services to grow by 9.5% (roughly in line with what seen in 1Q), and Energy & Industry to show growth of c. 2% (below the 6% growth seen to March). Finally, we look for Defence & Security sales to show growth in the quarter of 2.1% (Defence should be one of the verticals to show below average growth by year-end). At the EBIT level, we look for 4% y-o-y growth to 82.3m, which would compare with the c. 7% growth seen to March. EBIT margin in the quarter should stand at 11.7%, slightly below the 11.9% seen in the same period last year, although higher than the 10.8% seen in 1Q 09 (which was flat y-o-y). Finally, we expect net profit to grow by 4.8% to 60.8m. Indra: 2Q'09 results' preview m 2Q'08 change 2Q'09E Total Sales 665.3 5.7% 703.2 Transport & traffic 122.3 8.7% 132.9 Telecommunications & Media 67.4 9.6% 73.9 Public Administrations & Sanity 86.9 6.9% 92.9 Finance & Insurance 91.9 9.5% 100.6 Industry & Energy 102.7 2.0% 104.8 Defence, Security & Logistics 194.1 2.1% 198.1 EBIT 79.1 4.0% 82.3 EBIT margin 11.9% 11.7% Net profit 58.0 4.8% 60.8 3 Indra
Indra: Summary of Financial Statements P&L ( m) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total revenues 677 774 874 981 1,079 1,202 1,407 2,168 2,380 2,520 2,658 2,801 Operating expenses -595-678 -760-852 -945-1,042-1,222-1,910-2,071-2,194-2,309-2,425 EBITDA 82 96 114 129 134 160 184 258 308 326 349 376 Depreciation -11-12 -18-20 -20-18 -21-34 -38-43 -48-54 EBIT 70 84 96 109 115 142 164 224 271 284 301 322 Net financial items 3 1 0 5 4 5-1 -13-23 -21-18 -10 Exceptional items -9-2 -12-18 0 0 0 0 0 0 0 0 Corporate tax -16-20 -14-19 -23-38 -44-57 -65-72 -77-85 Affiliates -1-2 -1 1-6 -1 1 1 4 4 4 4 Goodwill amortisation -1-1 -4-4 -6-1 -1 0 0 0 0 0 Minorities -8-12 -8-2 -5-3 -4-7 -4-4 -4-4 Net atr. Profit 38 48 57 72 80 104 114 148 182 191 205 226 Ratios RoCE 33% 23% 26% 34% 35% 35% 26% 19% 21% 21% 21% 21% Return on Equity 27% 22% 22% 21% 20% 37% 33% 21% 23% 22% 22% 22% EV/EBITDA 28.0 23.9 21.0 17.9 16.8 14.6 13.0 10.7 9.0 8.6 8.0 7.4 EV/EBIT 32.5 27.4 24.9 21.2 19.6 16.4 14.6 12.3 10.2 9.9 9.2 8.6 Net debt/ebitda -1.0-0.8-0.3-1.1-1.5-0.3 0.3-0.2 0.2 0.5 0.4 0.5 Gearing (%) -56% -34% -14% -37% -47% -18% 16% 20% 18% 20% 17% 14% Balance sheet ( m) Equity 141 219 255 337 401 283 346 697 781 861 935 1,019 Minority items 52 59 36 36 36 20 26 42 42 46 50 54 Provisions 100 141 99 86 94 154 203 311 333 247 276 308 Net debt (cash) -79-74 -37-136 -205-55 59 149 147 178 167 148 Capital invested 214 345 354 323 326 402 634 1,199 1,304 1,332 1,429 1,529 Goodwill 15 63 83 60 63 93 188 424 432 432 432 432 Intangible assets 31 41 39 33 31 34 79 98 87 96 103 108 Tangible assets 35 43 57 57 59 60 99 131 139 150 181 213 Financial assets 15 65 68 88 89 34 39 37 43 60 60 60 Other 5 48 52 8 1 25 38 259 287 192 192 192 Working capital 114 98 72 77 83 157 191 250 315 402 461 524 Capital employed 214 358 369 323 326 402 634 1,199 1,304 1,332 1,429 1,529 Cash Flow ( m) Net profit 38 48 57 72 80 104 114 148 182 191 205 226 Depreciation 11 12 18 20 20 18 21 34 38 43 48 54 Other provisions 4 4 4 5 3 5 9 1 1 1 5 5 Minorities 8 12 8 2 5 3 4 7 4 4 4 4 Goodwill & other 1 1 4 4 18 18 3 0 23 0 0 0 Cash Flow 62 77 91 103 125 148 151 190 248 238 262 289 Investments in fixed assets -19-19 -21-18 -11-17 -38-73 -65-60 -62-64 Financial investments 0-59 -72 1-13 -25-128 -40-20 0 0 0 Changes in work. cap. -95 16 26-5.6-5.5-74.3-34.0-59 -65-87 -59-63 Operating Cash Flow -52 16 24 80 95 31-49 18 98 92 141 161 Others (includes buyback) 0-4 12 36-1 -103-2 21-17 -17-17 -17 FCF ex-dividends -52 12 36 116 94-71 -52 39 82 75 125 145 Dividends -10-12 -13-17 -25-78 -63-129 -80-106 -114-125 FCF after dividends -62-1 23 100 68-149 -114-90 2-31 11 19 4 Indra
Iberian Equities was ranked 4th in 2008 for the quality of its recommendations on Spanish stocks (Ibex-35). This is the 4th year in a row that Iberian Equities has been ranked in the top ten by StarMine. Rating definitions BUY: The stock is expected to outperform its market main Index by at least 10% over a 12- month investment horizon. HOLD: The stock is expected to perform in line (+/- 10%) with its market main Index over a 12-month investment horizon. SELL: The stock is expected to underperform its market main Index by at least 10% over a 12-month investment horizon. Statement of risk Our target price is based on assumptions for all Indra s business lines, which are subject to change depending on company or other industry sources information. With some 65% of sales being generated in Spain, Indra s earnings are dependent on the Spanish macro cycle, and a faster than expected slowdown might affect our estimates. In addition, increased competition in the Spanish market could add pressure on industry pricing, which could have a negative impact on margins. LatAm accounts for a big proportion of the group s revenue growth, thus macroeconomic troubles in the region might also well affect the company s outlook. Indra is also exposed to public spending, and to a certain extent depends on the Spanish government spending in Transport, Defense, Public Administrations and Healthcare. Iberian Equities is regulated by the Comisión Nacional del Mercado de Valores (www.cnmv.es) Disclaimer This research report is not an offer to sell or the solicitation of an offer to buy or subscribe for any securities. The securities referred to in this report may not be eligible for sale in some jurisdictions. The information contained in this report has been compiled by Iberian Equities SA, AV from sources that it believes to be reliable, but no representation or warranty is made or guarantee given by Iberian Equities SA, AV- or any other person as to its accuracy or completeness. All opinions and estimates expressed in this report are (unless otherwise indicated) entirely those of Iberian Equities SA, AV as of the date of this report only and are subject to change without notice. Neither Iberian Equities SA, AV nor any other person, accepts any liability whatsoever for any loss howsoever arising from any use of this report or its contents or otherwise arising in connection therewith 5 Indra