INDRA SPAIN \ TECHNOLOGY Company Update WHAT ABOUT 2011? BUY (unchanged) Target: 17 (prev. 20) Risk: High STOCK DATA Price 14.01 Bloomberg Code IDR SM Market Cap. ( mn) 2,262 Free Float 59.31% Shares Out. (mn) 161 52-week range Max 18.2 min 13.25 Daily Volumes (k) 1,118 PERFORMANCE 1M 3M 12M Absolute -7.6 1.8 +2.6 Rel. To SXXP index 4.3 3.3-14.1 MAIN METRICS 2009 2010E 2011E Revenues ( mn) 2,513 2,568 2,454 EBITDA ( mn) 327 333 313 Net Income ( mn) 196 200 185 EPS 1.21 1.25 1.16 DPS 0.66 0.68 0.63 MULTIPLES 2009 2010E 2011E P/E 11.6 x 11.2 x 12.1 x EV/EBITDA 7.4 x 7.4 x 7.7 x After 1Q results and the start up of an austerity plan by the Spanish government, we completely revised our 2011 estimates. Even if public spending cuts will affect less Indra business vs other Spanish sectors, we tried to incorporate in our estimate a scenario more coherent with recent European public spending development. We confirm our Buy recommendation and reduce our target price at 17. Q1 results ok and order intake was sound. Order intake was sound and increased by 7.4% yoy (+4% domestic and +16% international). However services segment, (+40%) continues to perform better than the Solutions segment (-7%) putting pressure on future Ebit margin. Revenue increase at 3% yoy on the back of the positive evolution of emerging countries (especially LATAM +34% yoy), has compensated the 4% decrease in the domestic market, already affected by budget restrictions in those segments with a larger component of institutional demand. Spanish revenues now account for 60% of company sales. Recurring EBIT margin was at 10.8%, in line with the figure for the same period of 2009 and in line with company expectations. Guidance confirmed, but sales at the lower end level. The likely scenario for full year revenue growth is to be in the lower part of the guidance range (+2%-+4%) according to Indra. Order intake >+5% and Ebit margin 11.4% confirmed. Dividend proposed at 0.66 per share. This represents an 8% increase over the ordinary dividend for the previous year and represents a pay-out of 55%, in line with the payout implicit in the ordinary dividends paid over recent years. Dividend yield at 4.7%. REMUNERATION Dividend Yield 4.7% 4.9% 4.5% FCF Yield (on EV) 4.6% 4.4% 7.1% INDEBTNESS 2009 2010E 2011E NFP 135 132 70 Debt/EBITDA 0.4 x 0.4 x 0.2 x Interest coverage 11.5 x 12.0 x 12.8 x. PRICE ORD. LAST 365 DAYS 18 16 14 12 May 09 Jul 09 Sep 09 Rel vs Sxxp Index Nov 09 ANALYSTS Massimo Bonisoli CFA +39 02 6204271 m.bonisoli@equitasim.it Gianmarco Bonacina +39 02 6204368 g.bonacina@equitasim.it Fabio Fazzari +39 02 6204491 f.fazzari@equitasim.it Jan 10 Mar 10 IDR SM EQUITY 17 May 2010 #36 1,10 1,0 0 0,90 0,80 0,70 0,60 May 10 We reduced our 2011 estimate to factor in the Spain risk. Our base case scenario is now in line with previous bear case scenario for 2011. We conservatively assume revenues to decline by 4.4% even though the order intake should be sound in 2010, >+5% yoy (28 days Bloomberg consensus already discount a revenue decline scenario for 2011). Ebit margin would decline to 11% for the portfolio mix effect (an increase in weight of services vs solutions). EPS at 1.16 Indra already trades at 20% discount vs peers In a normal year, we think Indra should trade at premium vs Cap Gemini, thanks to higher profitability and in line with our peers blended average. On our 2010 estimates, Indra trades at 20% discount vs peers and 30% vs Cap Gemini. We would not use 2011 multiples comparison, as they still do not factor in any economic weakness for peers (like we did for Indra). However if there is a deep recession again in 2011, the stock could trade at single digit P/E and price could get below 10. Traditional target price methodology does not work during financial turmoil 21% upside on our revised target price Our fair value is based on the average of our models: DCF 17.6 per share, over the cycle multiples 18.9 p.s. and Peers 14.5 p.s. We assumed a LT growth of 2% and a terminal margin of 10.5% (vs past 10 year average of 11.1%). Current share price discount terminal Ebit margin at 7.5% or 0% growth at the terminal year. IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 1
MAIN FIGURES mn 2007 2008 2009E 2010E 2011E 2012E Revenues 2,168 2,380 2,513 2,568 2,454 2,577 Growth 9.4% 9.8% 5.6% 2.2% -4.4% 5.0% Ebitda 273 309 327 333 271 341 Growth 48.2% 13.1% 5.9% 1.8% -18.8% 26.2% Ebit 240 271 285 293 271 296 Growth 46.7% 13.1% 5.2% 2.7% -7.7% 9.5% Profit before tax 227 249 261 269 250 279 Growth 46.7% 9.4% 4.9% 3.1% -7.2% 11.6% Net income 163 180 196 200 185 207 Growth 44.5% 10.5% 8.7% 2.3% -7.4% 11.8% MARGIN 2007 2008 2009E 2010E 2011E 2012E Ebitda margin 12.6% 13.0% 13.0% 13.0% 11.0% 13.2% Ebit Margin 11.1% 11.4% 11.4% 11.4% 11.0% 11.5% Profit before tax Margin 10.5% 10.4% 10.4% 10.5% 10.2% 10.8% Net income Margin 7.5% 7.6% 7.8% 7.8% 7.5% 8.0% SHARE DATA 2007 2008 2009E 2010E 2011E 2012E Eps - 1.01 1.12 1.21 1.25 1.16 1.29 Growth n.a. 11% 8% 3% -7% 12% Dps ord - 0.50 0.61 0.66 0.68 0.63 0.70 Bvps - 4.6 5.3 5.8 6.4 6.9 7.5 VARIOUS - mn 2007 2008 2009E 2010E 2011E 2012E Capital Employed 932 1,037 1,112 1,205 1,219 1,272 Fcf 82 132 111 109 171 155 Capex -313-67 -99-70 -70-70 Working Capital 501 579 621 667 637 669 INDEBTNESS - mn 2007 2008 2009E 2010E 2011E 2012E Net Debt 151 149 135 132 70 16 D/E 0.20 0.18 0.14 0.13 0.06 0.01 Net Debt/Ebitda 0.6 x 0.5 x 0.4 x 0.4 x 0.3 x 0.0 x Interests cov. 18.8 x 11.9 x 11.5 x 12.0 x 12.8 x 16.6 x MARKET RATIOS 2007 2008 2009E 2010E 2011E 2012E P/E 13.9 x 12.5 x 11.6 x 11.2 x 12.1 x 10.8 x P/Bv 3.1 x 2.7 x 2.4 x 2.2 x 2.0 x 1.9 x P/Cf 14.6 x 11.4 x 10.8 x 12.7 x 9.4 x 10.1 x EV FIGURES 2007 2008 2009E 2010E 2011E 2012E EV/Sales 1.2 x 1.0 x 1.0 x 1.0 x 1.0 x 0.9 x EV/Ebitda 9.2 x 8.0 x 7.4 x 7.4 x 7.7 x 6.9 x EV/Ebit 10.5 x 9.1 x 8.5 x 8.4 x 8.9 x 7.9 x EV/NOPAT 14.0 x 12.3 x 11.2 x 11.0 x 11.7 x 10.4 x EV/Ce 2.7 x 2.4 x 2.2 x 2.0 x 2.0 x 1.8 x REMUNERATION 2007 2008 2009E 2010E 2011E 2012E Div. yield 3.6% 4.4% 4.7% 4.9% 4.5% 5.0% Fcf yield (on EV) 3.2% 5.4% 4.6% 4.4% 7.1% 6.6% Roe 29.0% 22.7% 22.0% 20.4% 17.4% 17.9% Roce 25.6% 20.4% 20.2% 19.2% 17.0% 18.1% IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 2
Q1 RESULTS COMMENT Order intake was sound and increased by 7.4% yoy. Backlog increased by 7.1% to 2.88 bn. In the domestic market, order intake growth was surprisingly positive (4% yoy), while in the international markets it has shown +16% yoy. Order intake in the Services segment, which has grown by 40% on the back of multi year contracts, continues to perform better than the Solutions segment, which is declining by 7%. The decline in Solutions segment reflects the postponement of investment decisions by clients, mainly in the domestic market. However Solutions segment carries higher margins than services. Revenue coverage relative to mid point of 2010 guidance stands at 80%, in line with the ratio registered at the same period of 2009. Revenue increase was ok at 3% yoy. The positive performance of the international markets with sales growing by 17% yoy on the back of the positive evolution of emerging countries (especially LATAM +34% yoy), has compensated the 4% decrease in the domestic market, mainly affected by budget restrictions in those segments with a larger component of institutional demand. Given the current market environment, the company believes that the likely scenario for full year revenue growth is to be in the lower part of the guidance range. Recurring EBIT margin was at 10.8%, in line with the figure for the same period of 2009 and in line with company expectations. The higher growth in Services versus Solutions, together with the higher growth on new clients and geographical markets, is putting pressure on margins which the company expects to continue compensating with both productivity increases and indirect costs reductions. Net debt increased by 22 mn (yoy) to 214 mn in line with our estimates. It represents 0,7x LTM s EBITDA. The higher debt level was mainly due to Net working capital increase as it was equivalent to 86 days of annualised revenues, above the level reached a year ago (77 days), and mainly due to the decrease in clients prepayments. The trend is not expected to revert during the current fiscal year. The company estimates that net working capital will stand between 90 and 95 days of sales at the end of 2010 (our estimate is 95 days). Net income was above estimates thanks to lower interest costs and lower tax rate than expected Dividend proposed at 0.66 per share. This represents an 8% increase over the ordinary dividend for the previous year and represents a pay-out of 55%, in line with the payout implicit in the ordinary dividends paid over recent years. Dividend yield at 4.7%. IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 3
VALUATION Our fair value is based on the average of our models: DCF 17.6 per share, over the cycle multiples 18.9 p.s. and Peers 14.5 p.s. We assumed a LT growth of 2% and a terminal margin of 10.5% (vs past 10 year average of 11.1%) DCF ASSUMPTIONS Enterprise value 2996 Risk Free 4.0% Net cash (debt) - 2010-132 Risk Premium 4.5% Minorities (maket value) and Pension deficit -44 Levered Beta 1.1 spread over risk free 1.5% Cost of Debt after tax 4.2% Equity 2,821 Cost of Equity 9.0% Shareout 160 WACC 8.5% per share 17.6 LTg 2.0% SENSITIVITY - WACC GROWTH RATE WACC 8.0% 8.5% 9.0% 1.0% 16.7 15.4 14.3 2.0% 19.3 17.6 16.2 3.0% 23.0 20.7 18.8 SENSITIVITY EBIT MARGIN GROWTH RATE TERMINAL EBIT MARGIN 9.5% 10.5% 11.5% 1.0% 14.0 15.4 16.8 2.0% 16.0 17.6 19.2 3.0% 18.8 20.7 22.5 SENSITIVITY RISK FREE RATE AND BETA BETA SPANISH RISK FREE RATE 4.0% 5.0% 6.0% 0.8 22.2 18.4 15.6 1.1 17.6 15.0 13.0 1.4 14.5 12.6 11.1 Indra already trades at 20% discount vs peers - In a normal year, we think Indra should trade at premium vs Cap Gemini, thanks to higher profitability and in line with our peers blended average. On our 2010 estimates, Indra trades at 20% discount vs peers and 30% vs Cap Gemini. We would not use 2011 multiples for peers comparison, as it still does not factor in any economic weakness (like we did for Indra). However if there is a deep recession again in 2011, the stock can go trading single digit P/E and price would get below 10. IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 4
PEERS MULTIPLE EV EV EV EV EV EV EBITDA NET DEBT COMPANY SALES 10 SALES 11 SALES12 EBITDA10 EBITDA11 EBITDA12 PE10 PE11 PE12 P/B 10 MG 10 EBITDA INDRA 0.96 0.98 0.91 7.4 7.7 6.9 11.2 12.1 10.8 2.2 13.0% 0.4 Premium/(discount) to peers -14% -5% -4% 1% 17% 16% -20% 2% 4% -22% Peers Blended average 1.11 1.02 0.94 7.3 6.5 5.9 14.1 11.9 10.4 2.8 13.6% 0.0 CAP GEMINI 0.6 0.5 0.5 6.8 5.6 4.9 16.0 11.0 9.5 1.40 8.2% -2.1 ATOS ORIGIN 0.5 0.5 0.5 5.3 4.7 4.4 14.8 12.0 10.5 1.53 10.1% 0.1 LOGICA 0.6 0.6 0.6 7.0 6.6 6.3 11.5 10.6 9.7 1.12 9.1% 0.6 TIETO 0.6 0.6 0.6 5.8 5.2 4.7 12.2 10.4 9.1 1.99 11.0% 0.2 IT SERVICES (40% Weight) 0.6 0.6 0.5 6.2 5.5 5.1 13.6 11.0 9.7 1.5 9.6% -0.3 IBM 1.8 1.7 1.6 7.3 6.9 6.3 11.7 10.6 9.7 6.09 24.2% 0.4 HP 0.9 0.8 0.8 5.9 5.5 5.3 11.0 10.0 9.2 2.43 15.2% -0.1 Accenture 1.1 1.0 1.0 7.3 6.8 6.4 15.4 13.6 12.1 8.62 15.4% -1.3 Telvent GIT SA 1.6 1.5 10.9 9.4 17.8 15.1 14.3% 2.9 Alten Ltd 0.8 0.8 0.7 8.6 7.3 6.6 15.6 12.9 11.8 2.05 9.5% -0.1 Infosys Technologies Ltd 5.1 4.3 3.6 15.0 12.7 10.9 22.4 19.0 15.8 5.59 34.2% -1.8 Sopra Group SA 0.6 0.6 0.6 6.7 6.0 5.6 11.8 10.1 9.0 1.95 9.4% 0.7 Groupe Steria SCA 0.5 0.5 0.5 5.7 5.2 4.7 12.5 10.6 9.1 1.10 9.1% 1.0 Tata Consultancy Services Ltd 4.2 3.6 3.0 14.7 12.5 10.6 19.6 17.3 14.7 5.89 28.5% -0.5 COMPUTER SERVICES (30% Weight) 1.8 1.6 1.5 9.1 8.0 7.0 15.3 13.3 11.4 4.2 17.8% 0.1 CAE Inc 1.6 1.5 1.3 7.4 6.9 6.2 14.9 13.6 11.0 1.88 22.0% 0.4 Cobham PLC 1.5 1.4 1.4 7.4 7.0 6.9 12.5 11.3 10.4 2.69 20.6% 0.7 Elbit Systems Ltd 0.8 0.8 0.7 5.8 5.4 5.2 11.5 10.6 10.3 2.52 13.9% -0.2 Lockheed Martin Corp 0.7 0.7 0.6 6.1 6.0 5.3 11.3 10.6 8.8 6.25 11.3% 0.4 Raytheon Co 0.8 0.8 0.7 6.2 6.0 5.6 11.3 10.7 9.6 2.07 12.8% -0.2 Thales SA 0.5 0.4 0.4 6.3 4.8 4.1 16.4 10.0 8.3 1.42 7.2% 0.3 Ultra Electronics Holdings 1.6 1.5 1.4 9.4 8.7 8.2 15.9 14.4 13.5 4.92 16.5% 0.0 DEFENSE AVERAGE (30% Weight) 1.1 1.0 0.9 7.0 6.4 5.9 13.4 11.6 10.3 3.1 14.9% 0.2 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 5
OVER THE CYCLE MULTIPLES 5 YR AVERAGE P/E MULTIPLE 1 YR FW 5 YR AVERAGE GEARING 13.4x 10% 2012 EPS ESTIMATE 2012 1.29 6% TARGET P/E MULTIPLE TARGET PRICE 12M FORWARD 14.6x 18.9 TARGET PRICE CALCULATION DCF target 50% EUR 17.6 Peers target 25% EUR 14.5 Over the cycle target 25% EUR 18.9 Average target EUR 17.2 PERFORMANCE Indra has materially underperformed its peers over the last twelve months as peers have higher earnings cyclicality exposure. 12 MONTHS PERFORMANCE 240,0 220,0 200,0 180,0 160,0 140,0 120,0 100,0 80,0 mag-09 giu-09 lug-09 ago-09 set-09 ott-09 nov-09 dic-09 gen-10 feb-10 mar-10 apr-10 Source: Bloomberg INDRA CAP GEMINI ATOS ORIGIN LOGICA IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 6
COMPANY DESCRIPTION Indra is the largest Information Technology company in Spain and a leading IT multinational in Europe and Latin America. It is the second biggest European company in its sector by stock market capitalisation after CAP GEMINI. Two thirds of revenues come from Spain, and the rest from the international market. The company employs more than 29,000 professionals and has clients in more than 100 countries. Indra is organised around six vertical markets: Security and Defence; Transport and Traffic; Energy and Industry; Telecom and Media; Finance and Insurance and Public Administration and Healthcare. Indra provides services which ranges from consultancy, project development, and systems and applications integration to outsourcing of IT systems and business processes. This offer is structured into two primary segments: Solutions and Services. REVENUE BREAKDOWN - BUSINESS MODEL Source: INDRA The offer in Solutions (74% of sales) includes a wide range of systems, applications, and components for obtaining, processing, transferring, and subsequently presenting, data and information, which are basically aimed at controlling and managing complex and/or critical processes. Indra has a wide supply of consultancy, which includes technological, operations and strategic consultancy, which is offered by Europraxis. In general, Indra solutions serve the core of the business operation of its clients, and require as an essential capability the integration of systems, i.e. the design, configuration, development, and implementation of complete components, applications, and IT systems, featuring its own and third-party products. Through the Services (26% of sales), Indra manages and operates systems and solutions (Outsourcing AM, Maintenance, etc...). Indra develops the Management of Business Processes, where technology is a strategic and differential element, through its subsidiary Indra bmb. REVENUE BREAKDOWN Source: INDRA IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 7
Company s main references: A third of the world s air traffic is managed by countries that use systems developed by Indra for air traffic management. Some of the world s main underground railway systems, such as those in Madrid, Barcelona, Shanghai, Athens and Santiago de Chile, use the ticketing systems developed by the company. The air defence network of the Spanish State has been developed using Indra technology (simulators, automatic testing systems, and defence electronic equipment). More than 120 utilities' companies have introduced Indra technology solutions. SHAREHOLDERS Source: INDRA QUALITY COMPANY 1. Growth outperformance - Since the IPO, Indra has shown an impressive revenue growth outperformance vs peers: in the 2000-08 period, orgarinc growth fluctuated between 9% to 11%, with a CAGR of 10.2% or 6.4% higher than peers. In 2009 and 2010 financial crisis have been reducing the speed of growth to mid single digit level REVENUE GROWTH PROFITABILITY Source: INDRA 2. Higher profitability in the 2000-2010 period Indra have been enjoying on average low teens ebit margins vs mid single digit of its IT services competitors (such as Cap Gemini or Atos Origin) thanks to: a. portfolio mix exposed to higher margin industry: Security & Defence and Transport & Traffic which carries margin above company average profitability. b. the focus on proprietary rather than standard solutions 3. Lower earnings volatility vs peers the bulk of Indra business is skewed to low cyclicality sectors like Defence, Transport, Public administration, Healthcare and Utilities, which have higher entry barriers. Indra has a strong competitive position in some niche markets (see main references) 4. Outstanding Management - Management track record is impressive both in terms of results delivery and acquisition integration. Indra never missed any IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 8
targets since 1999 and it gave guidance even in 2009 when very few companies had the visibility to address market expectations. COMPANY TARGETS ACHIEVEMENT YEAR ITEM Initial Actual Revenue +5%~+7% +5.6% 2009 Order Intake >2008 +4.6% Ebit margin 11.3%~11.5% 11.4% Revenue +8%~+10% +10% 2008 Order Intake +9%~+10% +11% Ebit margin 11.3%~11.5% 11.40% Net profit +18%~+22% +23% Revenue +9.5%~+10.5% +11% 2007 Order Intake > sales 2007 8% > sales 2007 Ebit margin 10% 10.30% Revenue +9%~+10% +11% 2006 Order Intake > sales 2006 13% > sales 2006 Ebit margin 12% 12.00% Revenue +11% +11.4% 2005 Order Intake > sales 2005 +18% Ebit margin 11.5% 11.80% Revenue +9%~+11% +10% 2004 Order Intake > sales 2004 +18% Ebit margin 11.10% 11.40% Net profit >15% +19% Revenue +10% +12% 2003 Order Intake +10% +29% Ebit margin 11.00% 11.10% Net profit > sales 2003 +25% Revenue IT +12%~+15% +15% 2002 Revenue SIM/SAM + EED +15% +17% Ebit margin 10.80% 11.00% Net profit +15% +20% Revenue IT +18% +28% 2001 Revenue SIM/SAM + EED +15% +26% Net profit +18% +25% Revenue IT +20%~+25% +28% 2000 Revenue SIM/SAM + EED +15% +15% Net profit +25% +32% 1999 Revenue +35% +38% Net profit +60% +61% 5. Strong balance sheet Company looks underleveraged with 0.1x Net Debt to Ebitda in 2010. We estimate Indra to get net cash in 2011. 6. Dividend increased every year IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 9
DIVIDEND PAYMENT Source: INDRA STATEMENT OF RISK Factors that could impact the stock performance include: 1. Material decline in public spending of Spanish Minister of defence 2. Decline in infrastructure spending 3. M&A which affects the credit worthiness of the company IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 10
INFORMATION PURSUANT TO ARTICLE 69 ET SEQ. OF CONSOB (Italian securities & exchange commission) REGULATION no. 11971/1999 This publication has been prepared by Gianmarco Bonacina, Fabio Fazzari and Massimo Bonisoli on behalf of EQUITA SIM SpA (licensed to practice by CONSOB resolution no. 11761 of December 22nd 1998 and registered as no. 67 in the Italian central register of investment service companies and financial intermediaries) In the past EQUITA SIM did publish studies on INDRA; EQUITA SIM is distributing this publication to some 350 qualified operators today. The prices of the financial instruments shown in the report are the reference prices posted on the day before publication of the same. EQUITA SIM does not intend to provide continuous coverage of the financial instrument forming the subject of the present publication The information contained in this publication is based on sources believed to be reliable. Although EQUITA SIM makes every reasonable endeavour to obtain information from sources that it deems to be reliable, it accepts no responsibility or liability as to the completeness, accuracy or exactitude of such information. If there are doubts in this respect, EQUITA SIM clearly highlights this circumstance. The most important sources of information used are the issuer s public corporate documentation (such as, for example, annual and interim reports, press releases, and presentations) besides information made available by financial service companies (such as, for example, Bloomberg and Reuters) and domestic and international business publications. It is EQUITA SIM s practice to submit a pre-publication draft of its reports for review to the Investor Relations Department of the issuer forming the subject of the report, solely for the purpose of correcting any inadvertent material inaccuracies. This note has not been submitted to the issuer. EQUITA SIM has adopted internal procedures able to assure the independence of its financial analysts and that establish appropriate rules of conduct for them. Furthermore, it is pointed out that EQUITA SIM SpA is an intermediary licensed to provide all investment services as per Italian Legislative Decree no. 58/1998. Given this, EQUITA SIM might hold positions in and execute transactions concerning the financial instruments covered by the present publication, or could provide, or wish to provide, investment and/or related services to the issuers of the financial instruments covered by this publication. Consequently, it might have a potential conflict of interest concerning the issuers, financial issuers and transactions forming the subject of the present publication. In addition, it is also pointed out that, within the constraints of current internal procedures, EQUITA SIM s directors, employees and/or outside professionals might hold long or short positions in the financial instruments covered by this publication and buy or sell them at any time, both on their own account and that of third parties. EQUITA SIM does not hold a significant position in INDRA The remuneration of the financial analysts who have produced the publication is not directly linked to corporate finance transactions undertaken by EQUITA SIM. For European stocks (ex Italy) the recommendations to BUY and SELL are based on Expected Total Return (ETR expected absolute performance in the next 12 months inclusive of the dividend paid out by the stock s issuer) and on the degree of risk associated with the stock, as per the matrix shown in the table. The level of risk is based on the stock s liquidity and volatility and on the analyst s opinion of the business model of the company being analysed. Due to fluctuations of the stock, the ETR might temporarily fall outside the ranges shown in the table. EXPECTED TOTAL RETURN FOR THE VARIOUS CATEGORIES OF RECOMMENDATION AND RISK PROFILE Recommendation/Rating BUY ETR >= 20% SELL ETR <= 20% LOW RISK Beta <1 (weight 60%); market cap above 3bn euro (weight 20%); daily volumes > 30 mln euro (weight 20%) HIGH RISK Beta >1 (weight 60%); market cap below 3bn euro (weight 20%); daily volumes < 30 mln euro (weight 20%) The methods preferred by EQUITA SIM to evaluate and set a value on the stocks forming the subject of the publication, and therefore the Expected Total Return in 12 months, are those most commonly used in market practice, i.e. multiples comparison (comparison with market ratios, e.g. P/E, EV/EBITDA, and others, expressed by stocks belonging to the same or similar sectors), or classical financial methods such as discounted cash flow (DCF) models, or others based on similar concepts. For financial stocks, EQUITA SIM also uses valuation methods based on comparison of ROE (ROEV return on embedded value in the case of insurance companies), cost of capital and P/BV (P/EV ratio of price to embedded value in the case of insurance companies). MOST RECENT CHANGES IN RECOMMENDATION AND/OR IN TARGET PRICE (OLD ONES IN BRACKETS): Date Rec. Target Price ( ) Risk Comment 25 January 2010 BUY 20 H Initiation of Coverage The purpose of this publication is merely to provide information that is up to date and as accurate as possible. The publication does not represent to be, nor can it be construed as being, an offer or solicitation to buy, subscribe or sell financial products or instruments, or to execute any operation whatsoever concerning such products or instruments. EQUITA SIM does not guarantee any specific result as regards the information contained in the present publication, and accepts no responsibility or liability for the outcome of the transactions recommended therein or for the results produced by such transactions. Each and every investment/divestiture decision is the sole responsibility of the party receiving the advice and recommendations, who is free to decide whether or not to implement them. Therefore, EQUITA SIM and/or the author of the present publication cannot in any way be held liable for any losses, damage or lower earnings that the party using the publication might suffer following execution of transactions on the basis of the information and/or recommendations contained therein. The estimates and opinions expressed in the publication may be subject to change without notice. EQUITY RATING DISPERSION ON EUROPE (ex italy) - (art. 69-quinquies c. 2 lett. B e c. 3 reg. Consob 11971/99) COMPANIES COVERED WITH BANKING COMPANIES COVERED RELATIONSHIP BUY 24 0 SELL 5 0 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT 11