Download Atlantia Low risk, high return

2 April 2008
Atlantia
Sergio Molisani, Equity Analyst (HVB Milan)
+39 02 8862 2339
[email protected]
Roberto Larotonda, Equity Analyst (HVB Milan)
+39 02 8862 2383
[email protected]
Stefano Vitali, Equity Analyst (HVB Milan)
+39 02 8862 2003
[email protected]
Roberto Odierna (HVB Milan)
Head of Equity Research Italy
+39 02 8862 8912
[email protected]
Bayerische Hypo- und Vereinsbank AG
●
UniCredit CAIB Group
CROSS ASSET RESEARCH
GLOBAL EQUITY RESEARCH
GLOBAL CREDIT RESEARCH
GLOBAL ECONOMICS & FI/FX RESEARCH
Low risk, high return
Global Equity Research
2 April 2008
Atlantia
Bayerische Hypo- und Vereinsbank AG
●
UniCredit CAIB Group
page 2
Global Equity Research
Company Report
Utilities
2 April 2008
Italy
Atlantia
Buy
Low risk, high return
Price on 1 Apr 2008
EUR 19.25
● Our Buy rating with a 12 month target price of EUR 29.5 per share
Target price (prev. EUR 28.65)
EUR 29.50
Upside to TP
●
●
●
●
●
(substantially in line with our former TP of EUR 28.65) is supported by
a combination of limited downside risk and good potential upside.
Green light to the new tariff scheme expected in the next few
months. Independent from the outcome of the mid-April general
elections, one of the priorities of the incoming government is likely to be
the ratification of the new Single Concession Contract (signed in
October 2007 between Atlantia and ANAS), not least considering the
pressure placed by the EU Commission on the matter, and the similar
electoral programmes of both the major right and left-wing parties
(strong support for domestic infrastructure investments).
Draft new regulation offers improved visibility and better value
protection thanks to: i) a clear and automatic tariff formula for the
duration of the concession, ii) the inclusion of a pass-through
mechanism and/or explicit indemnities in the event of regulatory
changes or early termination of the concession, and iii) good potential
upside linked with re-gearing.
However, the two alternative systems (i.e. status quo, represented by
the 1997 Concession Contract as integrated by the 2002
Supplementary Agreement, or the Single Concession Contract) are
substantially on a par from a financial viewpoint, suggesting a fair
valuation for Atlantia in the range of EUR 29-EUR 30 per share, either
way.
The firm resolution of the EU Commission excludes a ‘third
scenario’ implying a further revision of the existing regulation,
which would pose as a threat to Atlantia’s valuation.
A sensitivity analysis to a large series of factors (traffic growth, real
interest rates, inflation, etc.) reveals that at the current market price,
downside risk of investment in the stock is very low.
2004
2005
2006
2007
2008E
2009E
Sales
2,882.5
2,957.4
3,141.2
3,271.6
3,429.7
3,548.2
EBITDA
1,842.4
1,853.4
1,989.1
2,068.3
2,127.6
2,211.9
429.0
791.4
662.6
684.1
760.9
779.3
Adj EPS
0.58
1.21
1.16
1.20
1.33
1.36
DPS
0.51
0.56
0.62
0.68
0.75
0.82
Adj Group Net Profit
After tax ROIC
3.5%
8.0%
7.7%
8.1%
8.3%
8.1%
Adj P/E
32.0x
16.1x
19.6x
20.4x
14.5x
14.1x
P/CF
95.5x
29.0x
12.3x
13.6x
9.3x
9.0x
EV/EBITDA
13.4x
13.0x
13.4x
14.0x
11.9x
11.6x
14.8x
EV/EBIT
24.8x
15.7x
16.6x
17.6x
15.1x
Free cash flow yield
-8.0%
-9.4%
0.8%
1.6%
-1.0%
0.8%
2.8%
2.9%
2.7%
2.8%
3.9%
4.3%
Dividend yield
Source: Atlantia, UniCredit Global Research
Bayerische Hypo- und Vereinsbank AG
●
CA IB International Markets AG
page 3
7.2%
High/Low (12M)
27.22/18.60
INVESTMENT HIGHLIGHTS
Winning combination of low downside risk and
significant potential upside
Good exposure to low real interest rates
STOCK TRIGGERS
Clarity on tariff issue
Re-gearing potential
Falling real interest rates
STOCK DATA
Reuters/Bloomberg
ATL.MI/ATL IM
Average daily volumes ('000)
2854.9
Free float (%)
37.5
Market capitalisation (EUR bn)
11.0
No. of shares in issue (m)
571.7
Shareholders
Schema 28 (50.1%); BPM (6.4%)
Sintonia (6.0%)
UPCOMING EVENTS
AGM
21-22 Apr 08
1Q08
09 May 08
28
26
24
22
20
18
16
EUR mn
53.2%
Cost of equity
2007
2008
ATLANTIA
MILAN MIBTEL - PRICE INDEX
Source: Thomson Datastream
STOCK PERFORMANCE (% CHG.)
absolute
1M
3M
6M
-9.0
-26.0
-18.0
rel. to MIBTEL
-7.0
-10.0
3.0
rel. to ES Utilities
-8.1
-11.2
-10.1
Sergio Molisani, Equity Analyst (HVB Milan)
+39 02 8862 2339
[email protected]
Roberto Larotonda, Equity Analyst (HVB Milan)
[email protected]
Stefano Vitali, Equity Analyst (HVB Milan)
[email protected]
Roberto Odierna (HVB Milan)
Head of Equity Research Italy
+39 02 8862 8912
[email protected]
See last pages for disclaimer.
Global Equity Research
2 April 2008
Atlantia
Contents
Bayerische Hypo- und Vereinsbank AG
5
Investment Case: back to fundamentals
9
The regulatory game
19
Valuation sensitivity: low risk, high return
28
Appendix 1: FY2007 results at a glance
29
Appendix 2: Shareholder structure
32
Appendix 3: Follow up on the Single Concession Contract
●
CA IB International Markets AG
page 4
Global Equity Research
2 April 2008
Atlantia
Investment Case: back to fundamentals
Regulatory uncertainty is never good news…
In spite of investors’ appetite for regulated stocks with good exposure to falling real interest
rates, from January 2008 to date, Atlantia has posted a negative performance of 25.8%, thus
under-performing the Italian blue chip indexes (Mibtel –15.4%, S&P/Mib40 – 15.7%), its
European comparables (such as Abertis, Brisa and APRR), and other Italian infrastructure
stocks (such as Snam RG and Terna).
Clarity is not on the near
horizon…
ATLANTIA - MARKET PERFORMANCE YEAR TO DATE VS. THE ITALIAN MARKET AND OTHER
ITALIAN INFRASTRUCTURE STOCKS
0.0%
-1.0%
-5.0%
-8.0%
-10.0%
-15.0%
-20.0%
-15.4%
-15.7%
Mibtel
S&P/Mib40
-25.0%
-25.8%
-30.0%
Atlantia
Snam Rete
Gas
Terna
Source: UniCredit Global Research on FactSet (prices as at 1 April 2008)
Bayerische Hypo- und Vereinsbank AG
●
CA IB International Markets AG
page 5
Global Equity Research
2 April 2008
Atlantia
ATLANTIA - MARKET PERFORMANCE YEAR TO DATE VS. EUROPEAN MOTORWAYS SECTOR
13.4%
-8.1%
AP
nc
i
s
Vi
R
R
as
Au
to
st
ra
da
So
ci
ét
é
de
Ei
ffa
ge
in
tra
C
a
Br
is
M
ila
no
nt
ia
-19.1%
To
r in
o
la
-7.0%
-8.0%
-16.8%
-25.8%
At
-9.2%
Si
-5.7%
Ab
er
tis
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
-20.0%
-25.0%
-30.0%
Source: UniCredit Global Research on FactSet (prices as at 1 April 2008)
In our opinion, this is attributable to:
● The diminished visibility on the motorway regulatory framework, following the negative
opinion given by NARS - the committee providing the CIPE (the Inter-ministerial Economic
Planning Committee) with non-binding advice on the regulation of public utilities regarding the draft agreement (the so-called Single Concession Contract or Convenzione
Unica) reached between Autostrade per l’Italia (ASPI, Atlantia Group’s main
concessionaire) and ANAS in October 2007.
● The fact that following the collapse of the Italian government at end-January 2008, a final
clarification of the tariff issue is unlikely to be achieved before the new general elections
take place (13-14 April 2008) and the new government is fully in force (probably June
2008).
These factors have been exacerbated by liquidity problems involving certain funds in a
market characterised by an indiscriminate sell-off of low visibility and highly geared equity
stories.
…but the market reaction is overly penalising for the stock
Against this backdrop, we remain convinced that the only possible regulatory scenarios are:
…but in our view it is only a
matter of time
● The Single Concession Contract signed in mid-October 2007 by ASPI and ANAS.
● The status quo, represented by the 1997 Concession Contract as integrated by the 2002
Supplementary Agreement (via an amendment of the law 286/2006).
Our view is supported by the fact that the EU Commission (whose position is obviously fully
corroborated by Atlantia) has clearly stated that:
Bayerische Hypo- und Vereinsbank AG
●
CA IB International Markets AG
page 6
Global Equity Research
2 April 2008
Atlantia
● It will not accept any ‘third scenario’ implying further unilateral revision of the existing
regulatory framework, whilst simultaneously requesting the Italian government pass an ad
hoc law which excludes any backdated, periodical and unilateral revision of the existing
concession contracts.
● It is satisfied with the signing of the Single Concession Contract agreement between ANAS
and ASPI, and that it requests the entry into force of the terms of the previously agreed
concessions.
● Only once the above requests have been complied with, will it propose the closure of the
infringement procedure against Italy, launched in November 2006.
While a clarification of the tariff issue is unlikely in the short-term, we nonetheless expect the
issue to be resolved by end-2008 (pending the general elections to be held in Italy in midApril), thus bringing fundamentals back into the spotlight.
Indeed, we are convinced that whatever the outcome of the general elections, one of the
priorities of the new government will be the ratification of the new Single Concession Contract
considering:
Ratification of the Single
Concession Contract likely to
be independent of the outcome
of the general elections
● Pressure from the EU Commission
● The electoral programmes of both the major right and left-wing parties envisage a strong
support for domestic infrastructure investments, in a bid to close Italy’s historical gap with
the rest of Europe.
● The outgoing (leftwing) Italian government already presented the concession agreement
between ANAS and ASPI to the EU Commission on 12 October 2007, in an attempt to
secure the closure of the infringement procedures against Italy.
● The 2002 Supplementary Agreement was ratified (in 2004) by the Italian government, at
that time represented by the rightwing, which today is considered the most likely candidate
to win the elections.
● Via the Single Concession Contract ASPI has committed itself with new investments for
EUR 5.7bn in order to fill Italy’s historical infrastructure gap with the rest of Europe
We have accordingly decided to take the Single Concession Contract as the base case of our
model.
Low risk, high return. Buy with a TP of EUR 29.5 per share
We remain convinced that the key benefits of the Single Concession Contract are greater
visibility and improved value protection for Atlantia, as a result of the following:
The new regulation offers
better visibility and value
protection…
● A clear, straightforward and automatic formula for the duration of the concession, based on
a percentage of actual inflation, thus avoiding the periodical tariff revision incorporated in
the existing mechanism.
● The inclusion of a pass-through mechanism and/or explicit indemnities in the event of
regulatory changes or early termination of the concession.
● Good potential upside linked with re-gearing, in spite of new but well defined limits on the
financial structure, extraordinary transactions and change of control involving the
Bayerische Hypo- und Vereinsbank AG
●
CA IB International Markets AG
page 7
Global Equity Research
2 April 2008
Atlantia
concessionaire.
● The new investment commitment of ASPI is mainly aimed at network de-bottlenecking,
thus ensuring higher traffic growth in the long run
On the other hand, we highlight that from a financial viewpoint, the two alternative systems
(status quo or Single Concession Contract) are substantially equivalent, suggesting:
…but the two tariff systems are
on a par in terms of their
impact on valuation
● A fair valuation for Atlantia in the range of EUR 29 - EUR 30 per share
● An appealing 50%-60% potential upside vs. the current market price
ATLANTIA – TP SENSITIVITY TO DIFFERENT REGULATORY SCHEMES (EUR PER SHARE)
Single Concession
Contract
Current Regulation
Current Regulation
Case A
Case B
FY2008E-FY2038E DCF (Discounted Cash
Flow)
28.1
28.8
26.1
FY2008E-FY2038E DDM (Dividend Discount
Model)
30.0
30.4
27.7
FY2008E-FY2038E APV (Adjusted Present
Value)
30.4
31.2
28.1
Simple Average
29.5
30.1
27.3
Our assumptions
Risk free rate
4.25%
4.25%
4.25%
Market risk premium
4.50%
4.50%
4.50%
Unlevered Beta
0.40
0.40
0.50**
Loan Margin
1.2%
1.2%
1.0%**
Tax Shield on cost of debt
27.5%
27.5%
27.5%
Equity proportion
market cap on rolling
net debt
market cap on rolling
net debt
market cap on rolling
net debt
Debt proportion*
rolling
rolling
rolling
WACC
rolling
rolling
rolling
*assuming a DPS growing by 10% per year and pay-out ratio of 100% from FY2021E
** in order to reflect lower visibility but lower gearing
Source: UniCredit Global Research
Moreover, a sensitivity analysis to a large series of factors (traffic growth, real interest rates,
inflation, etc.) shows that the current market price is already factoring-in a worst-case
scenario for Atlantia, thus ruling out further downside risk on investment in the stock.
A combination of limited downside risk and good potential upside, justifies our Buy rating on
the stock with a 12-month TP of EUR 29.5 per share (substantially in line with our former TP
of EUR 28.65 per share), which takes the Single Concession Contract as the base case of
our model.
Buy with a TP of EUR 29.5 per
share
Bayerische Hypo- und Vereinsbank AG
●
CA IB International Markets AG
page 8
Global Equity Research
2 April 2008
Atlantia
The regulatory game
The current regulatory framework is based on the 1997 Concession Contract as integrated by
the Supplementary Agreement of 2002 (signed in 2004)1.
A never ending regulatory saga
In the wake of an attempted merger between Atlantia and Abertis in the first part of 2006, the
Italian government (at that time represented by the leftwing):
● in August 2006 denied the relevant authorisations for the merger and,
● from September 2006 onwards unilaterally established a new system of rules that
introduced radical changes to existing motorway concession arrangements in Italy.
The lack of the relevant authorisations coupled with a changing and unclear tariff system:
● brought Atlantia and Abertis to acknowledge the impossibility of carrying out the merger in
December 2006 and,
● signalled the beginning of a long lasting legal battle between Atlantia and the Italian
government which is still pending.
A better understanding of the latter is, in our opinion, key in order to assess:
● the likelihood of either of the two alternative scenarios being finalised
● their potential impact on Atlantia’s valuation.
ATLANTIA – A NEVER ENDING REGULATORY SAGA
+
15.06.2006
23.04.2006
In November 2006, the DG Internal Market opens an
infringement proceeding against Italy regarding the new regime
for motorway concessions in Italy for violating Treaty provisions
on the free movement of capital and the right of establishment
AutostradeAbertis merger
announcement
Apr
May
Jun
Jul
2006
Aug Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
26.09.2007
12.10.2007
CIPE
New Directive
Single Concession
Directive no.
for the
Contract between
39/2007
authorization
Autostrade per
(review of the
of the transfer
l’Italia and ANAS
previous
of motorway
signed
Directive no
concessions
1/2007)
Three letters (28 November 2007, 19 December 2007 and 13
March 2008) sent by the EU Commisssion (DG Market)
requesting amendments to law 2862006 and the entry into force
of previously agreed concessions
May
05.07.2006
03.10.2006
09.12.2006
26.01.2007
The Minister of
Infrastructure,
after a ruling of
the Council of
State, states that
authorization is
needed
Law Decree
2622006
converted into
Law 286/2006)
Action by ANAS
against ASPI
and Atlantia for
the delay on
investments
CIPE Directive no. 1/2007
2007
Jun Jul
Aug
Sep
Oct
Nov Dec
Jan
2008
Feb Mar
26 November 2007 NARS gives a negative
opinion on the Single Concession Contract
draft
27.12.2006
2007 Tariff
Increase
frozen
-
Source: UniCredit Global Research
1
For an in depth analysis of the existing regulatory framework, please refer to our reports Balancing on a Thin Line, published on17 October 2003 and
Bright Horizon Beyond Regulatory Maze, published on 28 April 2004.
Bayerische Hypo- und Vereinsbank AG
●
CA IB International Markets AG
page 9
2 April 2008
Global Equity Research
Atlantia
Law 286/2006
In September 2006 the Law Decree 262/2006 (article 12 – subsequently art. 2, paragraphs
82 through 90) converted, with amendments, into Law 286/2006 (and subsequently further
amended by Law 296/2006) introduced the Single Concession Contract Scheme (or
Convenzione Unica) which both current and future concessionaires are substantially obliged
to accept.
The Single Concession
Contract or ‘Convenzione
Unica’…
According to the law, the Single Concession Contract must be signed within a year (i.e. by
end-2008 for Autostrade per l’Italia or ASPI, representing ca. 90% of Atlantia Group’s
revenues and EBITDA) of the first update of the relevant concessionaire’s financial plan, or,
upon the first periodical revision of the concession contract subsequent to the entry into force
of the new legislation. Once received, the concessionaire may submit a counter-proposal to
the draft Single Concession Contract. However, if the counter-proposal is not accepted, the
concession will be ‘redeemed’, subject to ‘any right to compensation’ in favour of the
concessionaire, to be determined on the basis of a decree issued by the Ministry of
Infrastructure and the Ministry of the Economy and Finance.
Amongst others, key clauses of the Single Concession Contract include:
…paved the way to retroactive
and unilateral changes in
concession contracts
● The introduction of new criteria for tariff adjustments, eliminating the automatic annual
increases foreseen in current agreements, and rendering the application of tariff increases
subject to the approval of the relevant ministries, with proposals put forward by ANAS;
● The obligation of motorway concessionaires to:
– act as a Contracting Authority with regard to the awarding of work contracts, as too
services and supply contracts with a value of more than EUR 210,000
– comply with public procedures for the awarding of contracts regarding any kind of
activity, including ordinary operations.
● The obligation for concessionaires to meet adequate capital requirements, as established
by a decree set by the Minister of the Economy and Finance and the Minister of
Infrastructure.
CIPE Directive 1/2007
The first CIPE directive …
On 26 January 2007 the CIPE (Inter-ministerial Economic Planning Committee) Directive
1/2007 (‘Provisions for the economic regulation of the motorway sector’) was approved
following the above-mentioned Law 286/2006, thus enforcing pejorative conditions for
concessionaires whilst also introducing additional criteria and parameters for establishing
motorway tariffs.
…introduced a RAB-based
scheme for all concessions
In a nutshell, the directive introduced a RAB-based tariff mechanism in line with those used
for other regulated utilities in Italy, therefore in contrast with the concession agreements
already executed from 1997 between all concessionaires and ANAS.
EU Commission resistance to the proposed set of new rules
Since the approval of Law 286/2006, Atlantia has never accepted any attempt to change the
existing regulatory framework. In this battle, the company has been strongly supported by the
EU Commission.
The new set of rules…
Bayerische Hypo- und Vereinsbank AG
●
CA IB International Markets AG
page 10
2 April 2008
Global Equity Research
Atlantia
More specifically:
…faced the fierce opposition of
Atlantia and the EU
Commission
● The Directorate General (DG) Competition obligated the Italian government to approve a
new directive (September 2007) for the authorisation of the transfer of motorway
concessions in order to reduce the degree of arbitrariness of the Italian government.
● In November 2006, the DG Internal Market commenced infringement proceedings (still
pending) against Italy regarding the new regime for motorway concessions, which it
regarded as in violation of the Treaty provisions regarding the free movement of capital
(art. 53) and the right of establishment (art 43).
CIPE Directive 39/2007
Following a long series of litigations and appeals, the firm resolution of Atlantia coupled with
the support of the EU Commission achieved an initial tangible result in June 2007. Indeed,
the CIPE’s Directive 39/2007 (of 15 June 2007) modified the previous Directive 1/2007 of 26
January 2007, specifying the directive as not applicable to existing concessionaires which do
not require a review of the financial plan pertaining to the relevant concession, with the sole
exception of new investments not yet consented under the concession as of 3 October 2006,
or consented by such date but not yet included in the relevant financial plan.
The second CIPE directive
ruled out a RAB-based tariff
scheme for existing
concessions
The CIPE’s 39/2007 directive reassured Atlantia on the fact that the value of the company
would not be affected by regulatory changes implying a RAB mechanism, while paving the
way to a more general compromise with the Italian government.
The Single Concession Contract
This compromise was essentially sealed on 12 October 2007 through the signing of the
Single Concession Contract (or Convenzione Unica) scheme with ANAS, provided for by
Law no. 286/2006.
A good compromise between
Atlantia and Italy’s needs
In brief, the draft Single Concession Contract signed by ASPI and ANAS foresees:
● Confirmation of the commitment to carry out the investments foreseen by the contract of
1997 (EUR 4.4bn for major works plus EUR 2.0bn for ongoing capex) and the 4th
Supplementary Agreement of 2002 (EUR 5.9bn) and,
● the commitment to implement the preliminary plans to upgrade an additional 300 km of the
Italian motorway network, for approximately EUR 5bn and complete the noise reduction
plan for ca. EUR 0.7bn.
In a nutshell, the compromise lies between;
● Italy’s infrastructure needs in order to fill its historical gap with the rest of Europe
● Atlantia’s need to preserve its market value, improve visibility on already approved capex,
and to achieve a natural re-gearing via new investments (even with returns lower than in
the past)
In our opinion, the new agreement bodes well for Atlantia in terms of:
Better visibility and value
protection key advantages of
the new agreement
● A clear, straightforward and automatic formula for the duration of the concession based on
a percentage of actual inflation, thus replacing the 5 year tariff revision of the existing
mechanism (improving visibility)
Bayerische Hypo- und Vereinsbank AG
●
CA IB International Markets AG
page 11
2 April 2008
Global Equity Research
Atlantia
● The RAB-system is applied only to new investments not included in existing concessions
(no changes apply to investments already approved)
● The inclusion of a pass-through mechanism and/or explicit indemnities in the event of
regulatory changes or early termination of the concession (low downside risk)
● Good potential upside linked to re-gearing in spite of new, but well-defined, limits on the
financial structure, extraordinary transactions and change of control of the concessionaire
(re-gearing potential)
From a financial view point, the key highlights are:
● Preservation of the value linked to the investments covered by the 1997 Concession
Contract and the 4th Supplementary Agreement of 2002 (for a total consideration of ca.
EUR 12.3bn)
● An asset return nominal post tax (ca. 6.2%-6.3% according to our calculation) for new
investments (ca. EUR 5.7bn) in line or slightly higher than the company's estimated cost of
capital for the next five years. While this offers a slight potential upside vs. our current
valuation, it also provides excellent protection of the market price in the long run due to the
fact that the asset return has been calculated assuming a D/(D+E) level in line with market
values
● Further room for cost of capital optimisation thanks to good visibility (i.e. lower un-levered
beta) and re-gearing actions
● The new investment commitment of ASPI is mainly aimed at network de-bottlenecking,
thus ensuring higher traffic growth in the long run
Toll charges
● The price-cap formula for setting the minimum annual rate of increase of tolls is linked to
The value of visibility
70% of the actual rate of inflation recorded by ISTAT over the previous 12 month period
between 1 July and 30 June;
● The RAB-system is applied only to new investments (ca. EUR 5.7bn) not covered by
existing contracts
● Retroactive application of the new formula from 1 January 2007, less any increases
already applied with effect from this date based on the existing formula.
● Authorisations to increase tariffs given by ANAS, the Ministry of Infrastructure and the
Treasury are only applicable in the event of material mistakes made by the
concessionaries. In case of no remarks, tariffs are increased by the concessionaire from 1
January.
According to the new formula, the annual changes in toll charges (T) are equal to ΔT=
70%*ΔCPI + X + K, where:
● CPI is the actual CPI of the past 12 months (1 July-30 June)
● X represents the factor for the remuneration (based on IRR criteria) of the investments
included in the 2002 Supplementary Agreement (EUR 5.9bn)
● K represents the factor for the remuneration (based on RAB criteria) of the new
Bayerische Hypo- und Vereinsbank AG
●
CA IB International Markets AG
page 12
2 April 2008
Global Equity Research
Atlantia
investments agreed in the Single Contract (EUR 5.7bn)
As a reminder, the current tariff scheme (based on the 1997 Concession Contract as
integrated by the Supplementary Agreement of 2002, signed in 2004) may be summarised as
follows: ΔT= ΔCPI - X + ΒΔQ, where:
● CPI is the expected CPI as per the Italian government’s budget
● X represents the parameter for factoring in an adequate remuneration of invested capital,
future investments, expected change in productivity and expected change in demand.
Moreover, it recuperates on a five-year basis the gap between actual and budgeted CPI.
The X factor is negotiated every 5-10 years; in case of disagreement between ANAS and
the concessionaire, it is equal to the percentage of traffic growth of the previous 5-year
period.
● ΒΔQ is a quality factor (5-year mobile average) based on road surface quality (60%) and
accident rate (40%), with potential new parameters to be added unilaterally by ANAS.
ATLANTIA – OLD AND NEW TARIFF FRAMEWORK
Source: Atlantia
Bayerische Hypo- und Vereinsbank AG
●
CA IB International Markets AG
page 13
2 April 2008
Global Equity Research
Atlantia
ATLANTIA – A NEW TARIFF FRAMEWORK IN LINE WITH THE EUROPEAN TOLL ROAD INDUSTRY
Source: Atlantia
Investments
● Confirmation of the investment commitments envisaged by the Agreement of 1997 and the
Capex commitment in excess
of EUR 18bn for the upgrade of
Italy’s motorway network
Fourth Addendum of 2002 (EUR 10.3bn);
● Definition of the areas for investment already provided for by the Agreement of 1997
through new specific network upgrading projects, amounting to a total investment of
approximately EUR 2bn2;
● A commitment to implement the preliminary design for the upgrade of certain sections of
the network under concession, covering more than 300km and involving expenditure of
approximately EUR 5bn. Following approval of the final design, the new works will be
subject to economic regulation as per CIPE Directive no. 1/2007 (RAB-based, with a return
in line with pre-tax WACC);
● A commitment to complete the National Noise Abatement Plan at a cost of EUR 0.7bn
(subject to a RAB-based mechanism), in addition to the amount already envisaged in the
Agreement of 1997;
● The toll increases, designed to meet the additional investment on top of the commitments
foreseen in the original Agreement of 1997, are to be determined and consequently
applied solely on the basis of the state of progress of the related works.
With reference to the risk of extra-costs related to ASPI’s EUR 18bn capex commitment, we
highlight that:
● The investments covered by the 1997 Concession (EUR 4.4bn) are exposed to further
overrun costs; however it is worth noting that:
– The company’s guideline already includes a buffer (i.e. an estimate of overrun costs) for
ca. EUR 0.7bn
– Considering that ca. 80% of the total works have already passed the design and
authorization phases, major changes are unlikely
● The investments covered by the Fourth Addendum of 2002 (EUR 5.9bn) and the new
2
On top of this we project EUR 1.3bn of not-defined ongoing capex over the concession horizon
Bayerische Hypo- und Vereinsbank AG
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CA IB International Markets AG
page 14
2 April 2008
Global Equity Research
Atlantia
capex envisaged by the Single Concession Contract (EUR 5.7bn) are remunerated on the
basis of the amount set in the final project. This makes the risk of overrun costs low
considering:
– the limited time-lag between the final approval of the project and the start of the works
– the fact that the extra cost related to the new EUR 5bn investments are remunerated to
a maximum of 8% of the amount set in the final project
AUTOSTRADE PER L’ITALIA - CAPEX COMMITMENT FY2007-FY2021E*
* over FY2008E-FY2021E the residual capex to be spent is equal to EUR 4.0bn and EUR 5.6bn for the 1997 Concession
and the 2002 Supplementary agreement, respectively
Source: Atlantia
AUTOSTRADE PER L’ITALIA – MAJOR MOTORWAY WORKS
Source: Atlantia
Bayerische Hypo- und Vereinsbank AG
●
CA IB International Markets AG
page 15
2 April 2008
Global Equity Research
Atlantia
AUTOSTRADE PER L’ITALIA – REVAMPING THE ITALIAN TOLL ROAD NETWORK
Source: Atlantia
ATLANTIA – GROUP’S MOTORWAY INVESTMENT PROFILE FY2007-FY2021E
Source: Atlantia
Bayerische Hypo- und Vereinsbank AG
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CA IB International Markets AG
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2 April 2008
Global Equity Research
Atlantia
ATLANTIA – GROUP’S FY2007 CAPEX*
* excluding government grants
Source: Atlantia
For ASPI, the Single Concession Contract would also entail a large series of:
Little room for uncertainties
● Further commitments and guarantees
● Regulatory provisions aimed at limiting the possibility of extra-profits
● Sanctions and penalties
For an in depth analysis of these issues, please refer to Appendix 3 of this report.
Approval procedure
The authorisation procedure established by Law 286/2006 requires:
A multi-step process involving
a large number of actors…
● The CIPE to approve the text of the agreement (which to this end, will request a nonbinding technical opinion from NARS, the consultative committee which advises the CIPE
on matters relating to guidelines applicable to public services).
● The issue of non-binding opinions by the relevant Parliamentary Committees.
● The agreement to be executed by ASPI and ANAS.
● An inter-ministerial decree approving the agreement to be issued by the Ministry of
Infrastructure and the Ministry of the Economy and Finance.
● The inter-ministerial decree to be filed with the Italian Court of Auditors, after which the
concession agreement is fully effective.
The draft Single Concession Contract agreement envisages that once the agreement comes
into effect, ASPI and ANAS will waive all pending litigation related to concession contracts. In
the meantime, pending the approval, the parties have undertaken to request postponement of
legal proceedings currently underway and have asked the incumbent judiciary for an
…to put the end-word to a
never ending legal battle
Bayerische Hypo- und Vereinsbank AG
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CA IB International Markets AG
page 17
Global Equity Research
2 April 2008
Atlantia
adjournment lasting six months from the date of the signing of the draft agreement.
ATLANTIA - APPROVAL PROCEDURE OF THE SINGLE CONCESSION CONTRACT
CIPE
Opinion given by NARS
Parliamentary
Commissions
Signature
Inter-ministerial Decree
Court of Auditors
Non-binding opinion
Final contract between
ASPI and ANAS
Inter-ministerial decree
issued by the Ministry of
Infrastructure and the
Ministry of Economy
Inter-ministerial decree to
be filed
Approval by CIPE
CIPE resolution to be filed with the Court of Auditors
Source: UniCredit Global Research
Recent developments
NARS’s negative opinion…
When ASPI and the Italian government reached an agreement on 12 October 2007, it looked
like the long lasting regulatory saga that had begun in mid-2006 was finally over. However, on
26 November 2007, NARS issued a negative opinion on the draft agreement, due to an
alleged discrepancy with the former regulatory framework.
…put the entire approval
procedure on hold
In short, whilst acknowledging the “particular complexity of certain aspects of the assessment
to be carried out by NARS, in view of both the large number and many layers of legislation
governing the motorway sector, and the concomitant application of different regulatory
parameters contained in the relevant legislation”, and observing that “in view of the matter’s
importance, it is necessary to obtain clarification regarding the nature of the agreement and
the applicable legislation”, NARS’s negative opinion was essentially motivated by the fact
that:
● The formula for calculating annual toll charge increases, as established in the agreement
(70% of the actual inflation rate throughout the term of the agreement), does not comply
with the price cap method (CPI-X) put in place by the CIPE’s Resolution 319 of 20
December 1996.
● The agreement does not envisage a periodical tariff review as per CIPE Resolution 319 of
20 December 1996 and Law 47/2004
In reality, the principles set out in the above-mentioned resolution and law are now largely out
of date as a result of subsequent regulatory decisions and/or measures (including Law
286/2006), and other agreements entered into (1997 Concession Contract and 2002
Supplementary Agreement). Hence, we believe that in making its objections, NARS (which is
a technical committee!) simply aimed to ‘cover its back’ (through the request of further
investigations) considering the structural change of regulation implied in the Single
Concession Contract.
Hence, even if in theory (as has happened in the past) NARS’ advice may not be adhered to,
its decision coupled with the weakness of the Italian government at that time, put on hold the
entire approval procedure.
In the meantime, on 28 November 2007:
EU Commission pressure
remains high
● The European Commission’s Internal Market and Services Directorate General wrote to
the Italian government expressing its satisfaction with the signing of the Single Concession
Contract agreement between ANAS and Autostrade per l’Italia, which was sent to the
Directorate General by the Italian government on 12 October 2007.
Bayerische Hypo- und Vereinsbank AG
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CA IB International Markets AG
page 18
2 April 2008
Global Equity Research
Atlantia
● The European Commission also stated that it hoped a rewriting of the text of Law no.
286/2006 would eliminate the possibility for unilateral changes to the agreements entered
into when subsequently updating concession financial plans.
European Commissioner McCreevy also wrote to the Italian government on 19 December
2007 with the following requests:
● Amendments to Law 286/206 and,
● The entry into force of the terms of previously agreed concession contracts
In the same communication, the Commissioner announced that only once the above requests
have been complied with, will he propose the termination of the infringement procedures
launched on 14 November 2006, which indicates Law 286/2006 as violating the provisions of
the Treaty governing the free movement of capital and the freedom of establishment.
On 13 March 2008 Commissioner McCreevy sent a third latter to the Italian government
expressing the European Commission’s disappointment at the lack of concrete actions taken
by Italy to address its former commitments. In response to the latter, on 14 March 2008 the
outgoing Italian Prime Minister Mr Prodi stated that contracts may be not changed unilaterally
and that the Italian government intends to resolve the tariff issue in the short term via an ‘ad
hoc’ measure. This statement brought Atlantia’s CEO to express his confidence that a
clarification of the regulatory issue will be arrived at by end-2008. The ball now lies in the
hands of the incoming Italian government, to be appointed after the mid-April political
elections.
The ball is now in the hands of
the incoming government
Valuation sensitivity: low risk, high return
Indeed, we are convinced that whatever the outcome of the general elections, one of the
priorities of the new government will be the ratification of the Single Concession Contract
considering:
Ratification of the Single
Concession Contract is likely
to be independent of the
outcome of the general
elections
● Pressure from the EU Commission
● The electoral programme of both the major right and left-wing parties envisage a strong
support for domestic infrastructure investments, in a bid to close Italy’s historical gap
against the rest of Europe
● The outgoing (leftwing) Italian government already presented the concession agreement
between ANAS and ASPI to the EU Commission on 12 October 2007, in an attempt to
secure the closure of the infringement procedures against Italy opened in November 2006
● For FY2008E the two systems (old and new) grant the same tariff increase (3.61%) to
ASPI, while the y-o-y change from FY2009E onwards would differ significantly depending
upon which system is decided upon.
For this reason we have decided to take the Single Concession Contract as the base case of
our model.
We remain persuaded that the key positive aspect of the Single Concession Contract is the
better visibility and the improved value protection (vs. the existing regulation), as a result of
the following:
The new regulation offers
better visibility and value
protection…
Bayerische Hypo- und Vereinsbank AG
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CA IB International Markets AG
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2 April 2008
Atlantia
● A clear, straightforward and automatic formula for the duration of the concession, based on
a percentage of real inflation, thus avoiding the periodical tariff revision incorporated in the
current mechanism
● The inclusion of a pass-through mechanism and/or explicit indemnities in the event of
regulatory changes or early termination of the concession
● Good potential upside linked with re-gearing, in spite of new but well defined limits on the
financial structure, extraordinary transactions and change of control of the concessionaire
On the other hand, we highlight that from a financial viewpoint, the two alternative scenarios
(status quo or Single Concession Contract) are substantially equivalent. This is summarised
in the table below which shows how, all other things being equal, although penalising until
FY2021E, the Single Concession Contract implies a higher free cash flow generation in the
long run. Moreover, it is worth noting that the higher capex implied by the Single Concession
Contract:
…but the two tariff system are
on a par in terms of their
impact on valuation
● does not put at risk Atlantia’s credit quality, which we estimate as having an average net
debt/EBITDA ratio of 4.3x across the FY2007-FY2020E period, thus in line with the current
level and the industry average
● does not limit Atlantia’s financial flexibility, given that over the FY2007-FY2021E period the
DSCR always remains well below the 1.2-1.6x approval watch bracket set by the regulator
ASPI – ESTIMATED TARIFF EVOLUTION UNDER THE SINGLE CONCESSION CONTRACT
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2.63%*
1.4%
1.4%
1.4%
1.4%
1.4%
1.4%
1.4%
1.4%
1.4%
1.4%
1.4%
1.4%
1.4%
x factor +
0.99%
1.30%
1.40%
2.00%
2.20%
2.20%
2.25%
2.25%
2.30%
1.17%
0.00%
0.00%
0.00%
0.00%
k factor**
0.00%
0.00%
0.00%
0.00%
0.00%
0.12%
0.43%
0.63%
1.40%
2.85%
4.25%
3.66%
2.55%
0.85%
= Total Tariff Evolution
(%)
3.62%
2.70%
2.80%
3.40%
3.60%
3.72%
4.08%
4.28%
5.10%
5.42%
5.65%
5.06%
3.95%
2.25%
0.7% of (actual) CPI +
* including FY2007 recovery ** not including linearization factor
Source: Atlantia for FY2008E; UniCredit Global Research from on FY2009E onwards
ASPI – ESTIMATED TARIFF EVOLUTION UNDER THE CURRENT REGULATION
Expected CPI +
X - factor (a+b+c) +
Productivity recovery (a)
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
1.7%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
1.0%
1.3%
1.4%
2.0%
2.2%
1.3%
1.4%
1.4%
1.4%
0.3%
-0.9%
-0.9%
-0.9%
-0.9%
-0.6%
-0.6%
-0.6%
-0.6%
-0.6%
-0.9%
-0.9%
-0.9%
-0.9%
-0.9%
-0.9%
-0.9%
-0.9%
-0.9%
Inflation gap (b)
0.58%
0.58%
0.58%
0.58%
0.58%
x factor(c)
0.99%
1.30%
1.40%
2.00%
2.20%
2.20%
2.25%
2.25%
2.30%
1.17%
0.00%
0.00%
0.00%
0.00%
BΔQ - quality factor
1.0%
0.5%
0.5%
0.5%
0.5%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
= Total Tariff Evolution
(%)
3.7%
3.8%
3.9%
4.5%
4.7%
3.3%
3.4%
3.4%
3.4%
2.3%
1.1%
1.1%
1.1%
1.1%
Source: Atlantia for FY2008E; UniCredit Global Research on FY2009E onwards
Bayerische Hypo- und Vereinsbank AG
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CA IB International Markets AG
page 20
2 April 2008
Global Equity Research
Atlantia
ATLANTIA – ESTIMATED FREE CASH FLOW GENERATION UNDER THE TWO TARIFF SCHEMES
(EUR MN)
5000
4000
Single Contract
Current Regulation
3000
2000
1000
0
20
08
20
10
20
12
20
14
20
16
20
18
20
20
20
22
20
24
20
26
20
28
20
30
20
32
20
34
20
36
20
38
-1000
Source: UniCredit Global Research
ATLANTIA – ESTIMATED NET DEBT/EBITDA RATIO UNDER THE TWO TARIFF SCHEMES
Single Contract
Current Regulation
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
20
07
20
09
20
11
20
13
20
15
20
17
20
19
20
21
20
23
20
25
20
27
20
29
20
31
20
33
20
35
20
37
-2.0
Source: UniCredit Global Research
Bayerische Hypo- und Vereinsbank AG
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CA IB International Markets AG
page 21
Global Equity Research
2 April 2008
Atlantia
ATLANTIA – NET DEBT/EBITDA RATIO AND DSCR UNDER THE TWO TARIFF SCHEMES
Our estimates*
Atlantia's Guidelines**
Single Contract
4.6
4.0
Current Regulation
4.2
Average Net Debt/EBITDA FY2007-FY2020E
Average Debt Service Cover Ratio FY2007-FY2020E
Single Contract
3.0
Current Regulation
2.8
*Group figures, **ASPI figures
2.5
Source: Atlantia, UniCredit Global Research
EUROPEAN MOTORWAY SECTOR –FY2007-FY2009E NET DEBT/EBITDA (X)
Net debt/EBITDA 07
Net debt/EBITDA 08E
Net debt/EBITDA 09E
Abertis
5.4
4.8
4.4
Atlantia
4.5
4.6
4.6
Autostrada Torino Milano SpA
2.7
3.1
3.7
Brisa Autoestradas de Portugal
6.2
5.8
5.3
Eiffage SA
5.8
5.3
4.9
Sias Spa
3.1
3.5
4.1
Société des APRR
5.5
5.2
4.7
Vinci SA
3.5
3.3
3.0
Source: FactSet, UniCredit Global Research
The equivalence of the tariff systems is confirmed by the fact that whatever the tariff system
considered (status quo or Single Concession Contract) a fair valuation for Atlantia is
consistently in the range of EUR 29 - EUR 30 per share, thus suggesting an appealing 50%60% potential upside vs. the current market price.
Low risk, high reward
Moreover, a sensitivity analysis to a large series of factors (traffic growth, real interest rates,
inflation, etc.) shows that the current market price already factors in a worst-case scenario for
Atlantia, thus ruling out further downside risk of investment in the stock.
A combination of limited downside risk and good potential upside justifies our Buy rating on
the stock with a new 12-month TP of EUR 29.5 per share (substantially in line with our former
TP of EUR 28.65 per share), taking the Single Concession Contract as the base case of our
model.
Buy with a TP of EUR 29.5 p.s.
Bayerische Hypo- und Vereinsbank AG
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CA IB International Markets AG
page 22
Global Equity Research
2 April 2008
Atlantia
ATLANTIA – TP SENSITIVITY TO DIFFERENT REGULATORY SCHEMES (EUR PER SHARE)
Single Concession
Contract
Current Regulation
Current Regulation
Case A
Case B
FY2008E-FY2038E DCF (Discounted Cash
Flow)
28.1
28.8
26.1
FY2008E-FY2038E DDM (Dividend Discount
Model)
30.0
30.4
27.7
FY2008E-FY2038E APV (Adjusted Present
Value)
30.4
31.2
28.1
Simple Average
29.5
30.1
27.3
Our assumptions
Risk free rate
4.25%
4.25%
4.25%
Market risk premium
4.50%
4.50%
4.50%
Unlevered Beta
0.40
0.40
0.50**
Loan Margin
1.2%
1.2%
1.0%**
Tax Shield on cost of debt
27.5%
27.5%
27.5%
Equity proportion
market cap on rolling
net debt
market cap on rolling
net debt
market cap on rolling
net debt
Debt proportion*
rolling
rolling
rolling
WACC
rolling
rolling
rolling
*assuming a DPS growing by 10% per year and pay-out ratio of 100% from FY2021E
** in order to reflect lower visibility but lower gearing
Source: UniCredit Global Research
Flexing our valuation
As aforementioned, we have sanity checked our valuation against a certain number of factors
which, in our view, remain at the heart of investors’ interests when considering Atlantia’s
equity story.
Traffic
Starting with traffic levels, we remind that the positive impact of higher than expected traffic
rates is greater under the current regulation, given that the Single Concession Contract
envisages a mechanism for the recovery (in favour of end-users) of earnings from traffic
exceeding the projections contained in the 2002 Supplementary Agreement.
In particular, the latter envisages:
● On a five year basis, in the event that actual traffic levels for the same period result in an
annual growth rate 1% higher than the estimates stated in the 2002 Supplementary
Agreement3, 50% of the economic benefit (net of taxes) is paid into a special fund for
financing new investments.
● The share of net revenues subject to claw back is equal to 75% in the event that traffic
levels exceed those estimates by 1.5%.
We highlight that our traffic estimates are in line with the 2002 Supplementary Agreement
until FY2012E. Thereafter, our estimates are supported by the consideration that according to
the management, Atlantia’s network is fully capable of sustaining a 1%-1.5% annual increase
in traffic beyond FY2012E.
3
The 2002 Supplementary Agreement forecast an annual traffic growth rate of 1.75% from FY2008E to FY2012E, 1% from FY2013E to FY2017E, 0.5% from
FY2018E to FY2022E, and 0% thereafter.
Bayerische Hypo- und Vereinsbank AG
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CA IB International Markets AG
page 23
Global Equity Research
2 April 2008
Atlantia
ATLANTIA – TRAFFIC LEVEL PROJECTIONS
2.0%
Projections under 2002 S.A.
1.8%
Our estimates
1.6%
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
20
22
20
23
20
24
20
25
20
26
20
27
20
28
20
29
20
30
20
31
20
32
20
33
20
34
20
35
20
36
20
37
20
38
0.0%
Source: UniCredit Global Research
Our sensitivity analysis shows that for every 50 bp of higher average traffic growth over
FY2008E-FY2038E, our valuation moves by ca. 20%. Put another way, currently the market
is discounting a 0% traffic growth over FY2008E-FY2038E, which appears irrational in our
view.
ATLANTIA – VALUATION SENSITIVITY TO TRAFFIC GROWTH UNDER THE SINGLE CONCESSION
CONTRACT SCHEME (EUR PER SHARE)
Single Contract
% impact on TP of
Base Case
+/-0.5% avg. traffic increase per year
FY2008E-FY2038E DCF (Discounted Cash Flow)
28.1
+/-20%
FY2008E-FY2038E DDM (Dividend Discount Model)
30.0
+/-16%
FY2008E-FY2038E APV (Adjusted Present Value)
30.4
+/-18%
Simple Average
29.5
+/-18%
Source: UniCredit Global Research
ATLANTIA – VALUATION SENSITIVITY TO TRAFFIC GROWTH UNDER THE CURRENT
REGULATION (EUR PER SHARE)
Current
Regulation
% impact on TP of
Base Case
+/-0.5% avg. traffic increase per year
FY2008E-FY2038E DCF (Discounted Cash Flow)
28.8
+/-19%
FY2008E-FY2038E DDM (Dividend Discount Model)
30.4
+/-15%
FY2008E-FY2038E APV (Adjusted Present Value)
31.2
+/-17%
Simple Average
30.1
+/-17%
Source: UniCredit Global Research
Moving to interest rates, it is worth highlighting that:
Real interest rates
● 93% of consolidated total debt is currently at fixed rates or hedged (at an average cost of
debt of 5.1%)
● The company boasts long-term availability of financial resources with an average debt
Bayerische Hypo- und Vereinsbank AG
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CA IB International Markets AG
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Atlantia
maturity of 8 years, with no notes maturing before FY2011E.
This means that in the short-term Atlantia is not exposed to refinancing needs, and
consequently, neither to the risk of near-term interest rate fluctuations.
ATLANTIA – FINANCIAL STRUCTURE AT A GLANCE
Source: Atlantia
On the other hand, our valuation remains exposed to the movement of real long-term interest
rates and to changes in the spread on the risk-free rate. As for the latter, we highlight that the
spread on the 10-year mid swap has moved from:
Inflation
● ca. 35 bp at mid-June 2007
● ca. 60 bp at end-October 2007
● ca. 120 bp today
In view of this, we estimate that:
● for every 50 bp of higher/lower 10 year government bond yield, our valuation moves
down/up by ca. 12%
● for every 20 bp of higher/lower spread on the risk-free rate, our valuation moves down/up
by ca. 2%
ATLANTIA – TP SENSITIVITY TO RISK FREE RATE
Risk-Free Rate
TP EUR (DCF
valuation)
% change in TP
3.3%
3.8%
4.3%
4.8%
5.3%
36.05
31.87
28.10
24.69
21.60
28.3%
13.4%
0.0%
-12.1%
-23.1%
Source: UniCredit Global Research
Bayerische Hypo- und Vereinsbank AG
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CA IB International Markets AG
page 25
Global Equity Research
2 April 2008
Atlantia
ATLANTIA – TP SENSITIVITY TO SPREAD ON RISK-FREE RATE
Risk-Free Rate
4.3%
4.3%
4.3%
4.3%
4.3%
Spread on risk free rate
0.8%
1.0%
1.2%
1.4%
1.6%
Gross Cost of debt
5.1%
5.3%
5.5%
5.7%
5.9%
TP EUR (DCF valuation)
28.85
28.47
28.10
27.73
27.37
% change in TP
2.7%
1.3%
-1.3%
-2.6%
Source: UniCredit Global Research
Re-gearing
The refinancing issue could be crucial in the event that the company decides to carry out a
more aggressive re-leveraging policy. We believe this scenario is unlikely considering that it
would jeopardise relations with the Italian government. However, in theory Atlantia could raise
its debt by ca. EUR 7-8bn without significantly impairing its credit quality, thanks to net
debt/EBITDA and DCSR ratios of 7x and 2x, respectively, over the FY2007-FY2020E period.
Just for arguments sake, we calculate that the benefits arising from the tax shield on higher
debt (without assuming any extra-return compared to Atlantia’s cost of capital) would be in
the range of 5%-6% of our DCF valuation.
Inflation
The rate of inflation has a double impact on the stocks valuation because:
● annual tariff changes tend to recapture inflation developments
● the nominal interest rate used in discounted cash flow valuations are affected by the level
of inflation
In view of this, we estimate that for every 100 bp of higher/lower inflation, which is also
translated into higher nominal interest rates, our valuation moves down/up by ca. 10%.
ATLANTIA – TP SENSITIVITY TO INFLATION AND RISK-FREE RATE
Risk Free Rate
Inflation
3.3%
3.8%
4.3%
4.8%
5.3%
3.00%
48%
31%
16%
3%
-10%
2.50%
38%
22%
8%
-5%
-17%
2.00%
29%
14%
0%
-12%
-23%
1.50%
19%
5%
-8%
-19%
-30%
1.00%
11%
-3%
-15%
-26%
-36%
Source: UniCredit Global Research
In recognition of the practice favoured by some investors in evaluating infrastructure stocks
(i.e., TP derived from target IRR and comparison with the risk-free rate), we have tried to
determine the IRR implied in Atlantia’s current market price. This analysis shows that the
premium offered today by the stock’s equity IRR vs. the 10 year government bond yield (i.e.
today’s level of 10-year bund) – which may be considered a proxy of the market risk premium
- is ca. 630 bp and consequently overly penalising for the stock considering that the market
risk premium for the market as a whole (DJ Eurostoxx) is in the range of 550 bp, whilst for the
EU utility sector it is ca. 300 bp. In other words, our new TP implies a premium of ca. 370 bp,
which we would argue is more reasonable.
IRR
Bayerische Hypo- und Vereinsbank AG
●
CA IB International Markets AG
page 26
Global Equity Research
2 April 2008
Atlantia
ATLANTIA – TARGET IRR AND IMPLIED TARGET PRICE
Target IRR (unlevered)
NPV Equity
(EUR per
share)
Gross cost
of debt*
Net Cost of
debt
D/(D+E)**
E/(D+E)**
Target IRR
(levered)
10 bund
Spread
5.60%
30.1
5.20%
3.77%
48%
52%
7.28%
3.91%
3.37%
5.70%
29.3
5.20%
3.77%
48%
52%
7.47%
3.91%
3.56%
5.80%
28.5
5.20%
3.77%
48%
52%
7.67%
3.91%
3.76%
5.90%
27.7
5.20%
3.77%
48%
52%
7.86%
3.91%
3.95%
6.00%
26.9
5.20%
3.77%
48%
52%
8.05%
3.91%
4.14%
6.10%
26.2
5.20%
3.77%
48%
52%
8.24%
3.91%
4.33%
6.20%
25.5
5.20%
3.77%
48%
52%
8.43%
3.91%
4.52%
6.30%
24.7
5.20%
3.77%
48%
52%
8.62%
3.91%
4.71%
6.40%
24.0
5.20%
3.77%
48%
52%
8.82%
3.91%
4.91%
6.50%
23.3
5.20%
3.77%
48%
52%
9.01%
3.91%
5.10%
6.60%
22.7
5.20%
3.77%
48%
52%
9.20%
3.91%
5.29%
6.70%
22.0
5.20%
3.77%
48%
52%
9.39%
3.91%
5.48%
6.80%
21.3
5.20%
3.77%
48%
52%
9.58%
3.91%
5.67%
6.90%
20.7
5.20%
3.77%
48%
52%
9.78%
3.91%
5.87%
7.00%
20.1
5.20%
3.77%
48%
52%
9.97%
3.91%
6.06%
7.10%
19.5
5.20%
3.77%
48%
52%
10.16%
3.91%
6.25%
7.20%
18.9
5.20%
3.77%
48%
52%
10.35%
3.91%
6.44%
7.30%
18.3
5.20%
3.77%
48%
52%
10.54%
3.91%
6.63%
7.40%
17.7
5.20%
3.77%
48%
52%
10.74%
3.91%
6.83%
7.50%
17.2
5.20%
3.77%
48%
52%
10.93%
3.91%
7.02%
7.60%
16.6
5.20%
3.77%
48%
52%
11.12%
3.91%
7.21%
7.70%
16.1
5.20%
3.77%
48%
52%
11.31%
3.91%
7.40%
7.80%
15.5
5.20%
3.77%
48%
52%
11.50%
3.91%
7.59%
7.90%
15.0
5.20%
3.77%
48%
52%
11.69%
3.91%
7.78%
8.00%
14.5
5.20%
3.77%
48%
52%
11.89%
3.91%
7.98%
* assuming a stable cost of debt in line with the current one ** at market price
Source: UniCredit Global Research
In our opinion, a valuation based on a peer comparison is less reliable than a DCF
methodology because:
Peer comparison supports our
fundamental valuation
● It would take into consideration a timescale that is too brief for a motorway company
operating under concession.
● It would not take into account:
– Different phases in the company’s investment cycle.
– Different laws applicable from country to country.
– The different length of concessions
Nonetheless, we have carried out a peer comparison that substantially supports the results of
our DCF-based SOTP valuation. Just for argument sake, we highlight that based on the old
merger ratio with Abertis and the current market price of Abertis, today Atlantia would trade at
EUR 25.6 per share.
Bayerische Hypo- und Vereinsbank AG
●
CA IB International Markets AG
page 27
Global Equity Research
2 April 2008
Atlantia
EUROPEAN MOTORWAY SECTOR – PEER COMPARISON (X)
Mean P/E 08E
Mean P/E 09E
Mean EV/EBITDA
08E
Mean EV/EBITDA
09E
Abertis
17.8
16.1
10.5
9.8
Atlantia
14.5
14.1
11.9
11.6
Autostrada Torino Milano
9.4
9.9
5.2
5.6
Brisa
28.1
26.3
17.6
16.1
Eiffage SA
13.5
12.6
8.2
7.7
Sias Spa
17.4
16.2
7.3
7.6
Société des APRR
23.7
21.5
11.9
11.2
Vinci SA
13.9
12.7
7.9
7.3
Source: FactSet and UniCredit Global Research (price as of 1 April 2008)
Appendix 1: FY2007 results at a glance
No major news from the
release of FY2007 results
On 14 March Atlantia released its FY2007 results. As shown in the table below, adjusted
revenues and EBITDA were largely in line with our and consensus’s expectations, while net
profit fell a touch below expectations due to negative contribution from associates and higher
minorities (which, however, are not material factors in our view). DPS came in at EUR 0.68
vs. EUR 0.65 expected, of which EUR 0.31 already paid, with the balance of EUR 0.37 to be
paid in May 2008. The company’s results release conference call focused on 3 main issues:
i) traffic development, ii) external growth and iii) regulation.
Traffic rate slow down not an
issue
In January-February 2008, traffic levels registered only a 1% y-o-y increase (excluding the
leap year effect) in Italy, mainly due to the slow-down in GDP. This compares with the 1.75%
projected in our model. The slowdown in traffic growth does not concern us however. Indeed,
according to a sensitivity analysis, FY2008E traffic growth of 0%-1% would reduce our net
profit estimates for FY2008 by only 5%-2% respectively.
International growth on the
agenda
With regards to external growth, Atlantia’s focus remains on Eastern Europe (the tender in
Slovakia – with an initial cash out of ca. EUR 0.5bn – already appears a done deal), Russia
and South America (excluding Argentina).
A ‘third scenario’ is not under
discussion
As to regulation, as mentioned throughout this report, the company’s very clear and
straightforward message was that the only possible regulation scenarios are: the Single
Concession Contract (or Convenzione Unica) signed in October 2006 by Atlantia and ANAS,
or a continuation of the status quo (1997 Concession and Supplementary Agreement of
2002), given that the EU Commission (and obviously the company) will not accept any ‘third
scenario’ implying a revision of the existing regulatory framework.
ATLANTIA – 4Q07 AND FY2007 RESULTS VS. OUR ESTIMATES
EUR mn
Revenues
y-o-y % change
4Q07
814
3,272
5.8%
789
EBITDA
458
y-o-y % change
FY2007
Actual
Revenues Adj by one-off in 4Q07
EBITDA Adj by one-off in 4Q07
4Q07 Estimates
Actual
440
4.1%
782
123.2
y-o-y % change
-2.8%
3,247
3240
2,068
436
3.9%
Net Profit Adj by one-off in 4Q07
FY2007
Estimates
2,051
2,047
4.0%
133.0
684.1
694.3
3.1%
Source: Atlantia and UniCredit Global Research
Bayerische Hypo- und Vereinsbank AG
●
CA IB International Markets AG
page 28
2 April 2008
Global Equity Research
Atlantia
ATLANTIA – EBITDA DEVELOPMENT FY2007 VS FY2006
Source: Atlantia
Appendix 2: Shareholder structure
Schema 28 break up
The shareholder pact of Schema 28 (the holding that controls 50.1% of Atlantia) was
substantially broken up in the last few weeks and by end-June 2008, each shareholder will
have a direct stake in Atlantia. Sintonia (a holding company led by the Benetton family) will
remain the reference shareholder of Atlantia with a 36% stake (30% coming from the demerger of Schema 28, and 6% acquired on the market from mid-2007 onwards).
Stock overhang remains a
market perception risk
It is difficult to predict the intentions of the different shareholders. On the other hand, we
understand that the overhang risk is strongly felt by investors, and that as such, it may be one
of the causes behind the recent weakness of the stock, along with rumoured liquidity
problems for some funds.
Bayerische Hypo- und Vereinsbank AG
●
CA IB International Markets AG
page 29
Global Equity Research
2 April 2008
Atlantia
ATLANTIA – GROUP STRUCTURE
Source: Atlantia
SCHEMAVENTOTTO - SHAREHOLDER STRUCTURE
Generali
6.7%
Unicredit
6.7%
Abertis
13.3%
Sintonia
60.0%
Fondazione CRT
13.3%
Source: UniCredit Global Research on Consob data
Bayerische Hypo- und Vereinsbank AG
●
CA IB International Markets AG
page 30
Global Equity Research
2 April 2008
Atlantia
ATLANTIA - SHAREHOLDER STRUCTURE TODAY
Market
37.5%
Schema 28
50.1%
Banca Popolare Milano
6.4%
Sintonia
6.0%
Source: UniCredit Global Research on Consob data
ATLANTIA - SHAREHOLDER STRUCTURE AFTER THE DE-MERGER OF SCHEMAVENTOTTO
(FROM JULY 2008)
Sintonia
36.1%
Market
37.5%
Banca Popolare Milano
6.4%
Unicredit
3.3%
Generali
3.3%
Abertis
6.7%
Fondazione CRT
6.7%
Source: UniCredit Global Research on Consob and Atlantia data
Bayerische Hypo- und Vereinsbank AG
●
CA IB International Markets AG
page 31
2 April 2008
Global Equity Research
Atlantia
Sintonia
After the aborted merger with Abertis, the Benetton family created Sintonia, a holding
company grouping all of Benetton’s assets in the infrastructure business. In the last few
months the Benetton family has succeeded in bringing on board new partners such as
Mediobanca, Goldman Sachs and the Government of Singapore Investment Corporation
(GIC). According to press articles, the reorganization of Sintonia should be concluded by end2008, with the Benetton family remaining the main shareholder with a 50.1% stake, and other
financial partners (the current panel, plus new ones) accounting for the balance, after an
increase in shareholders capital in the range of EUR 4.5bn, thus bringing Sintonia’s financial
fire power (including debt) to ca. EUR 10bn.
Sintonia and international
expansion
The aim of Sintonia is to invest in the infrastructure business the world-over, leveraging on
the financial and operating competences of its shareholders and the controlled company.
In view of this, we expect a position of greater involvement for Atlantia in international
expansion, both in terms of operating commitment and financial resources. According to
Atlantia’s initial indications, the key areas of interest are likely to be:
● Turkey
● Eastern Europe
– Poland after the acquisition of Stalexport
– Slovakia, where a tender implying an initial cash out of ca. EUR 0.5bn already appears
as a done deal),
– Russia
– South America, with a particular focus on Chile and Mexico, while excluding Argentina.
Appendix 3: Follow up on the Single Concession
Contract
Further commitments and guarantees
● In the event of amendments to legislation, regulations or tax laws having a specific
Little room for uncertainties
negative impact on the sector, any resulting differences will form an additional component
in determining toll charges (pass-through mechanism).
● The settlement of cases (even in the event of unilateral changes in regulation) of
contractual default that might lead to the lapse, revocation, withdrawal and termination of
the concession, with the explicit recognition of compensatory damages to be determined
on the basis of market practices (early termination clauses).
● In the event of early termination of the concession an indemnity is always explicitly
provided for, which is equal to the net present value of expected cash flows until the end of
the concession as originally agreed in the concession contract (net of a penalty equal to
10% of the value, applied only in the case of revocation due to concessionaire’s fault).
● Introduction of an obligation on the part of the concessionaire to maintain a certain degree
of financial soundness, measured as Debt Service Coverage Ratio (DSCR or operating
cash flow before interest/Debt service). The minimum ratio required per financial year is
Bayerische Hypo- und Vereinsbank AG
●
CA IB International Markets AG
page 32
2 April 2008
Global Equity Research
Atlantia
1.2x (financial covenants).
● A commitment to designate specific credit lines or liquid resources to finance investment
equivalent to the total delays accumulated with respect to the terms of the contract
(liquidity commitment).
● Definition of the scope of application and the criteria necessary in order for the concession
provider (ANAS) and the relevant ministries to authorise any changes in the concession
entity and any extraordinary transaction involving the concessionaire’s issued capital
(extraordinary transactions). In particular, mergers, de-mergers, liquidation, relocation of
company headquarters, change in purpose of the company, involving the concession
holder are subject to the authorisation of ANAS
● The concessionaire’s acquisition and sale of investments or assets are not subject to
authorisation by ANAS, provided that it maintains a DSCR of over 1.6x (acquisitions and
disposals).
● As for the change of control rule, control of the concessionaire must be exercised by an
entity that meets the following requirements:
– equity of at least EUR 10mn for each percentage point of the investment held
– head offices located in a country falling outside the blacklist of tax havens;
– a commitment to keep the concessionaire’s registered office in Italy and to provide the
necessary resources in order to meet the obligations envisaged in the contract;
– corporate officers consisting of directors and statutory auditors that meet the
professional, independence and integrity requirements for companies listed on
regulated markets in the country in which the concessionaire’s registered office is
located.
Other regulatory provisions
● Concession fees
Caps to extra-profits
– The concession fee on tolls is currently set at 2.4%. Future increases are transferred to
tariffs by means of the pass-through mechanism.
– The sub-concession fee on service area royalties is raised from 2% to 5% (20% in the
case of new service stations).
● Recovery of extra traffic
– On a five year basis, in the event that actual traffic levels for the same period result in
an annual growth rate more than 1% higher than the estimates stated in the 2002
Supplementary Agreement4, 50% of the resulting economic benefit (net of taxes) is paid
into a special fund for financing new investments
– The quota of net revenues subject to claw back is equal to 75% in the event that traffic
levels exceed the aforementioned 2002 Supplementary Agreement estimates by 1.5%
4
The 2002 Supplementary Agreement forecast a 1.75% annual growth from 2008 to 2012, 1% from 2013 to 2017, 0.5% from 2018 to 2022 and 0%
thereafter.
Bayerische Hypo- und Vereinsbank AG
●
CA IB International Markets AG
page 33
2 April 2008
Global Equity Research
Atlantia
● Regulatory provisions
– If there is a delay in making investments that are not specifically compensated for in the
tariffs (e.g. the 1997 Concession Agreement investments), the concessionaire must set
aside regulatory provisions of equity capital equivalent to the cumulated net profits
– These reserves will automatically become available when the investments reach the
amount originally planned (EUR 4.5bn).
Sanctions and penalties
A set of sanctions and penalties are actionable in the event of a lack of compliance with the
contractual obligations:
Not a major issue
● Quality standards
– Should the quality indicator used in previous tariff formula reveal a decline to below
2006 levels, the concessionaire must pay a penalty equal to EUR 2mn.
– Other penalties are applicable in the event of a deterioration of quality standards
(ranging from EUR 10,000, up to EUR 500,000 in the severest case)
● Should a delay in the completion of a project phase of an investment or in the execution of
works (after all authorizations are granted) be attributable to the concessionaire, a penalty
of EUR 25,000 is applicable per month of delay,
● Administrative sanctions, ranging from EUR 25,000 through to EUR 2mn in the heaviest
case are applicable in the event of violations of information obligations owed to ANAS, or a
failure to meet major contractual obligations
Bayerische Hypo- und Vereinsbank AG
●
CA IB International Markets AG
page 34
Global Equity Research
2 April 2008
Atlantia
ATLANTIA – KEY DATA*
EUR mn
Market Data
2004
Price Ord
No. Issued Shares
Total Market Cap
2005
2006
2007
2008E
2009E
18.4
19.5
22.8
24.4
19.3
19.3
571.7
10,517.0
571.7
11,147.7
571.7
13,019.8
571.7
13,938.3
571.7
11,005.4
571.7
11,005.4
2,882.5
2,957.4
3,141.2
3,271.6
3,429.7
3,548.2
2.6%
6.2%
4.1%
4.8%
3.5%
P&L
Group Net Sales
yoy % change
EBITDA
1,842.4
1,853.4
1,989.1
2,068.3
2,127.6
2,211.9
EBITDA Margin
EBIT
63.9%
1,000.6
62.7%
1,530.0
63.3%
1,606.4
63.2%
1,643.3
62.0%
1,684.6
62.3%
1,742.5
EBIT Margin
Pretax
Group Net Profit
34.7%
51.7%
51.1%
50.2%
49.1%
49.1%
749.5
1,247.0
1,165.4
1,211.8
1,196.5
1,233.9
429.0
791.4
665.3
380.7
760.9
779.3
14.9%
429.0
26.8%
791.4
21.2%
662.6
11.6%
684.1
22.2%
760.9
22.0%
779.3
1,842.4
1,853.4
1,984.3
2,008.7
2,127.6
2,211.9
11,358.7
11,513.6
12,398.3
13,348.8
14,423.6
15,253.3
1,168.0
1,748.9
1,533.2
951.0
817.3
673.8
-1,736.0
10,790.7
-1,054.9
12,207.7
-1,123.5
12,808.0
-1,113.3
13,186.6
-1,128.1
14,112.8
-1,112.3
14,814.9
Shareholders' Equity
1,824.9
3,414.1
3,862.5
3,946.7
4,315.7
4,660.5
Net Financial Debt (Cash)
8,965.9
8,793.6
8,945.5
9,239.9
9,797.1
10,154.4
Operating Cash Flow
-202.5
-196.3
1,278.3
1,300.3
1,314.5
1,369.8
Capex
Dividends
-638.5
0.0
-852.0
0.0
-1,177.0
-327.3
-1,076.0
-381.6
-1,420.4
-404.0
-1,282.9
-446.9
Change in net financial position
-647.3
172.3
-151.9
-294.4
-557.2
-357.3
Debt/Equity
6.3x
2.8x
2.5x
2.6x
2.5x
2.4x
Debt/EBITDA
EBITDA Interest Coverage
4.9x
4.3x
4.7x
4.3x
4.5x
4.5x
4.5x
4.7x
4.6x
4.4x
4.6x
4.3x
24,773.9
24,023.1
26,653.1
28,934.8
25,417.4
25,742.0
8.6x
8.1x
8.5x
8.8x
7.4x
7.3x
EV/EBITDA
13.4x
13.0x
13.4x
14.0x
11.9x
11.6x
EV/EBIT
[EV/CE]/[ROCE/WACC]
24.8x
3.4x
15.7x
1.4x
16.6x
1.5x
17.6x
1.4x
15.1x
1.1x
14.8x
1.1x
EPS
0.75
1.38
1.16
0.67
1.33
1.36
Adj. EPS
0.58
1.21
1.16
1.20
1.33
1.36
-1.47
2.05
-1.83
1.80
0.18
1.84
0.39
1.96
-0.19
2.13
0.15
2.21
0.51
0.56
0.62
0.68
0.75
0.82
P/E Ord
24.5x
14.1x
19.6x
36.6x
14.5x
14.1x
Adj. P/E Ord
32.0x
16.1x
19.6x
20.4x
14.5x
14.1x
Free cash flow yield
Div. Yield Ord
-8.0%
2.8%
-9.4%
2.9%
0.8%
2.7%
1.6%
2.8%
-1.0%
3.9%
0.8%
4.3%
Net profit margin
Adj. Group Net Profit
Adj. EBITDA
Balance Sheet
Net Fixed assets
Net working capital
Long term liabs. and TFR
Net Capital Required
Cash flow statement
Leverage
EV Ratios
EV
EV/Sales
Per Share Data
Free CFPS
BVPS
DPS Ord
Valuation Ratios
* compared to our former estimates, we have taken the Single Concession Contract as base case
Bayerische Hypo- und Vereinsbank AG
●
CA IB International Markets AG
page 35
Source: Atlantia, UniCredit Global Research
2 April 2008
Global Equity Research
Atlantia
Disclaimer
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accuracy of which we assume no liability. All estimates and opinions included in the report represent the independent judgment of the analysts as of the date of the issue. We
reserve the right to modify the views expressed herein at any time without notice. Moreover, we reserve the right not to update this information or to discontinue it altogether
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Regulatory authority: Finanzmarktaufsichtsbehörde (FMA), Praterstrasse 23, 1020 Vienna, Austria
d) UniCredit CAIB Securities UK Ltd., 80 Cheapside, London EC2V 6EE, United Kingdom
Regulatory authority: Financial Services Authority (FSA), 25 The North Colonnade, Canary Wharf, London E14 5HS, United Kingdom
e) UniCredit Aton, Boulevard Ring Office Building, 17/1 Chistoprudni Boulevard, Moscow 101000, Russia
Regulatory authority: Federal Service on Financial Markets, 9 Leninsky prospekt, Moscow 119991, Russia
POTENTIAL CONFLICTS OF INTERESTS
Company
Key
Aaa
1a
Initiation of coverage: 15 May 2001
Key 1a: Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, Bayerische Hypo- und Vereinsbank AG Milan Branch, UniCredit CAIB Securities UK Ltd., UniCredit Aton
and/or a company affiliated with it (pursuant to relevant domestic law) owns at least 2 % of the capital stock of the company.
Key 1b: The analyzed company owns at least 2% of the capital stock of Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, Bayerische Hypo- und Vereinsbank AG
Milan Branch, UniCredit CAIB Securities UK Ltd., UniCredit Aton and/or a company affiliated with it (pursuant to relevant domestic law).
Key 2: Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, Bayerische Hypo- und Vereinsbank AG Milan Branch and UniCredit CAIB Securities UK Ltd., UniCredit Aton
and/or a company affiliated with it (pursuant to relevant domestic law) belonged to a syndicate that has acquired securities or any related derivatives of the analyzed company
within the twelve months preceding publication, in connection with any publicly disclosed offer of securities of the analyzed company, or in any related derivatives.
Key 3: Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, Bayerische Hypo- und Vereinsbank AG Milan Branch and UniCredit CAIB Securities UK Ltd., UniCredit Aton
and/or a company affiliated (pursuant to relevant domestic law) administers the securities issued by the analyzed company on the stock exchange or on the market by quoting
bid and ask prices (i.e. acts as a market maker or liquidity provider in the securities of the analyzed company or in any related derivatives)
Key 4: The analyzed company and Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, Bayerische Hypo- und Vereinsbank AG Milan Branch and UniCredit CAIB
Securities UK Ltd., UniCredit Aton and/or a company affiliated (pursuant to relevant domestic law) concluded an agreement on services in connection with investment banking
transactions in the last 12 months, in return for which the Bank received a consideration or promise of consideration.
Key 5: The analyzed company and Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, Bayerische Hypo- und Vereinsbank AG Milan Branch and UniCredit CAIB
Securities UK Ltd., UniCredit Aton and/or a company affiliated (pursuant to relevant domestic law) have concluded an agreement on the preparation of analyses.
Key 6a: Employees of Bayerische Hypo- und Vereinsbank AG Milan Branch and/or members of the Board of Directors of UniCredit (pursuant to relevant domestic law) are
members of the Board of Directors of the Issuer. Members of the Board of Directors of the Issuer hold office in the Board of Directors of UniCredit (pursuant to relevant domestic law).
Key 6b: The analyst is on the supervisory/management board of the company they cover.
Key 7: Bayerische Hypo- und Vereinsbank AG Milan Branch and/or other Italian banks belonging to the UniCredit Group (pursuant to relevant domestic law) extended significant
amounts of credit facilities to the Issuer.
RECOMMENDATIONS, RATINGS AND EVALUATION METHODOLOGY
Overview of our ratings
You will find the history of rating regarding recommendation changes as well as an overview of the breakdown in absolute and relative terms of our investment ratings on our
websites hvbmarkets.de and http://www.mib-unicredit.com/research-disclaimer under the heading “Disclaimer.” The history of recommendations is not provided for HVB
Milan and UniCredit CAIB AG.
Note on what the evaluation of equities is based:
We currently use a three-tier recommendation system for the stocks in our formal coverage: Buy, Hold, or Sell (see definitions below):
A Buy is applied when the expected total return over the next twelve months is higher than the stock's cost of equity.
A Hold is applied when the expected total return over the next twelve months is lower than its cost of equity but higher than zero.
A Sell is applied when the stock's expected total return over the next twelve months is negative.
We employ three further categorizations for stocks in our coverage:
Restricted: A rating and/or financial forecasts and/or target price is not disclosed owing to compliance or other regulatory considerations such as blackout period or conflict of
interest.
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Coverage in transition: Due to changes in the research team, the disclosure of a stock's rating and/or target price and/or financial information are temporarily suspended. The
stock remains in the research universe and disclosures of relevant information will be resumed in due course.
Not rated: Suspension of coverage.
Until December 4, 2006, the investment ratings used by Bayerische Hypo- und Vereinsbank AG were in principle judgments relative to an index as a benchmark. The ratings
used by Bayerische Hypo- und Vereinsbank AG until that date were as follows: Buy, Outperform, Neutral, Underperform and Sell. Outperform/Underperform ratings meant that
we expected a stock to outperform or underperform the benchmark by more than 5%. Similarly, a Buy or Sell rating was based on the assumption of outperformance or
underperformance of more than 10%, including an absolute component (i.e. projected absolute gains or losses). The benchmark for the stocks covered in publications earlier to
the date hereof was the Euro STOXX 50.
Until April 1, 2007, the investment ratings used HVB Milan Branch (formerly UniCredit Banca Mobiliare S.p.A.) were judgments based on the expected total return (price
performance plus dividend) relative to the total return of the stock's local market over the next 12 months. The ratings used by HVB Milan Branch (formerly UniCredit Banca
Mobiliare S.p.A.) until that date were as follows: Buy – expected to outperform the market by 10 or more percentage points; Accumulate: expected to outperform the market by 5-10
percentage points; Hold: expected to perform in line with the market, plus or minus five percentage points; Reduce: expected to underperform the market by 5-10 percentage
points; Sell: expected to underperform the market by 10 or more percentage points.
Until August 27, 2007, the investment ratings used by UniCredit Aton were as follows: Buy – appreciation potential of more than 15% over the next 12 months, Hold – appreciation
potential of 0%-15% over the next 12 months, Sell – appreciation potential of less than 0% over the next 12 months.
UniCredit CAIB AG and UniCredit CAIB Securities UK Ltd. have been using the current three-tier recommendation system for the past twelve months.
Company valuations are based on the following valuation methods: Multiple-based models (P/E, P/cash flow, EV/sales, EV/EBIT, EV/EBITA, EV/EBITDA), peer-group
comparisons, historical valuation approaches, discount models (DCF, DVMA, DDM), break-up value approaches or asset-based evaluation methods. Furthermore,
recommendations are also based on the Economic profit approach. Valuation models are dependent on macroeconomic factors, such as interest rates, exchange rates, raw
materials, and on assumptions about the economy. Furthermore, market sentiment affects the valuation of companies. The valuation is also based on expectations that might
change rapidly and without notice, depending on developments specific to individual industries. Our recommendations and target prices derived from the models might therefore
change accordingly. The investment ratings generally relate to a 12-month horizon. They are, however, also subject to market conditions and can only represent a snapshot. The
ratings may in fact be achieved more quickly or slowly than expected, or need to be revised upward or downward.
Note on the bases of evaluation for interest-bearing securities:
Our investment ratings are in principle judgments relative to an index as a benchmark.
Issuer level:
Marketweight: We recommend having the same portfolio exposure in the name as the respective reference index (the iBoxx index universe for high-grade names and the ML
EUR HY index for sub-investment grade names).
Overweight: We recommend having a higher portfolio exposure in the name as the respective reference index (the iBoxx index universe for high-grade names and the ML EUR
HY index for sub-investment grade names).
Underweight: We recommend having a lower portfolio exposure in the name as the respective reference index (the iBoxx index universe for high-grade names and the ML EUR
HY index for sub-investment grade names).
Instrument level:
Core hold: We recommend holding the respective instrument for investors who already have exposure.
Sell: We recommend selling the respective instrument for investors who already have exposure.
Buy: We recommend buying the respective instrument for investors who already have exposure.
Trading recommendations for fixed-interest securities mostly focus on the credit spread (yield difference between the fixed-interest security and the relevant government bond or
swap rate) and on the rating views and methodologies of recognized agencies (S&P, Moody’s, Fitch). Depending on the type of investor, investment ratings may refer to a short
period or to a 6 to 9-month horizon. Please note that the provision of securities services may be subject to restrictions in certain jurisdictions. You are required to acquaint
yourself with local laws and restrictions on the usage and the availability of any services described herein. The information is not intended for distribution to or use by any person
or entity in any jurisdiction where such distribution would be contrary to the applicable law or provisions.
The prices used in the analysis are the closing prices of the appropriate local trading system or the closing prices on the relevant local stock exchanges. In the case of unlisted
stocks, the average market prices based on various major broker sources (OTC market) are used.
The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior written permission of MSCI, this information and any
other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any indices. This information is provided on an “as is”
basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the
information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this
information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information
have any liability for any damages of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates.
The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor’s. GICS is a
service mark of MSCI and S&P and has been licensed for use by UniCredit CAIB Group
Coverage Policy
A list of the companies covered by Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, UniCredit CAIB Securities UK Ltd., Bayerische Hypo- und Vereinsbank AG Milan
Branch and UniCredit Aton is available upon request.
Frequency of reports and updates
It is intended that each of these companies be covered at least once a year, in the event of key operations and/or changes in the recommendation. Companies for which Bayerische Hypo- und
Vereinsbank AG Milan Branch acts as Sponsor or Specialist must be covered in accordance with the regulations of the competent market authority.
SIGNIFICANT FINANCIAL INTEREST:
Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, Bayerische Hypo- und Vereinsbank AG Milan Branch, UniCredit CAIB Securities UK Ltd., UniCredit Aton and/or a
company affiliated (pursuant to relevant national German, Italian, Austrian, UK and Russian law) with them regularly trade shares of the analyzed company. Bayerische Hypound Vereinsbank AG, UniCredit CAIB AG, Bayerische Hypo- und Vereinsbank AG Milan Branch, UniCredit CAIB Securities UK Ltd. and UniCredit Aton may hold significant open
derivative positions on the stocks of the company which are not delta-neutral.
Analyses may refer to one or several companies and to the securities issued by them. In some cases, the analyzed issuers have actively supplied information for this analysis.
ANALYST DECLARATION
The author’s remuneration has not been, and will not be, geared to the recommendations or views expressed in this study, neither directly nor indirectly.
ORGANIZATIONAL AND ADMINISTRATIVE ARRANGEMENTS TO AVOID AND PREVENT CONFLICTS OF INTEREST
To prevent or remedy conflicts of interest, Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, UniCredit CAIB Securities UK Ltd., Bayerische Hypo- und Vereinsbank
AG Milan Branch and UniCredit Aton have established the organizational arrangements required from a legal and supervisory aspect, adherence to which is monitored by its
compliance department. Conflicts of interest arising are managed by legal and physical and non-physical barriers (collectively referred to as “Chinese Walls”) designed to restrict
the flow of information between one area/department of Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, UniCredit CAIB Securities UK Ltd., Bayerische Hypo- und
Vereinsbank AG Milan Branch and UniCredit Aton and another. In particular, Investment Banking units, including corporate finance, capital market activities, financial advisory
and other capital raising activities, are segregated by physical and non-physical boundaries from Markets Units, as well as the research department. In the case of equities
execution by Bayerische Hypo- und Vereinsbank AG Milan Branch, other than as a matter of client facilitation or delta hedging of OTC and listed derivative positions, there is no
proprietary trading. Disclosure of publicly available conflicts of interest and other material interests is made in the research. Analysts are supervised and managed on a day-today basis by line managers who do not have responsibility for Investment Banking activities, including corporate finance activities, or other activities other than the sale of
securities to clients.
ADDITIONAL REQUIRED DISCLOSURES UNDER THE LAWS AND REGULATIONS OF JURISDICTIONS INDICATED
Notice to Austrian investors
Bayerische Hypo- und Vereinsbank AG
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This document does not constitute or form part of any offer for sale or subscription of or solicitation of any offer to buy or subscribe for any securities and neither this document
nor any part of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever.
This document is confidential and is being supplied to you solely for your information and may not be reproduced, redistributed or passed on to any other person or published, in
whole or part, for any purpose.
Notice to Czech investors
This report is intended for clients of Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, UniCredit CAIB Securities UK Ltd. or Bayerische Hypo- und Vereinsbank AG
Milan Branch in the Czech Republic and may not be used or relied upon by any other person for any purpose.
Notice to Italian investors
This document is not for distribution to retail client as defined in article 26, paragraph 1(e) of Regulation n. 16190 approved by CONSOB on 29th October 2007.
In the case of a short note, we invite the investors to read the related company report that can be find on UniCredit Global research website www.globalresearch.unicreditmib.eu.
Notice to Russian investors
As far as we are aware, not all of the financial instruments referred to in this analysis have been registered under the federal law of the Russian Federation “On the Securities
Market” dated April 22, 1996, as amended, and are not being offered, sold, delivered or advertised in the Russian Federation.
Notice to Turkish investors
Investment information, comments and recommendations stated herein are not within the scope of investment advisory activities. Investment advisory services are provided in
accordance with a contract of engagement on investment advisory services concluded with brokerage houses, portfolio management companies, non-deposit banks and the
clients. Comments and recommendations stated herein rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not suit
your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely on the information stated here may not result in consequences
that meet your expectations.
Notice to Investors in Japan
This document does not constitute or form part of any offer for sale or subscription for or solicitation of any offer to buy or subscribe for any securities and neither this document
nor any part of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever.
Notice to UK investors
This communication is directed only at clients of Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, UniCredit CAIB Securities UK Ltd. or Bayerische Hypo- und
Vereinsbank AG Milan Branch who (i) have professional experience in matters relating to investments or (ii) are persons falling within Article 49(2)(a) to (d) (“high net worth
companies, unincorporated associations, etc.”) of the United Kingdom Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or (iii) to whom it may
otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”). This communication must not be acted on or relied on by persons who
are not relevant persons. Any investment or investment activity to which this communication relates is available only to relevant persons and will be engaged in only with relevant
persons.
Notice to U.S. investors
This report is being furnished to U.S. recipients in reliance on Rule 15a-6 ("Rule 15a-6") under the U.S. Securities Exchange Act of 1934, as amended. Each U.S. recipient of this
report represents and agrees, by virtue of its acceptance thereof, that it is such a "major U.S. institutional investor" (as such term is defined in Rule 15a-6) and that it understands
the risks involved in executing transactions in such securities. Any U.S. recipient of this report that wishes to discuss or receive additional information regarding any security or
issuer mentioned herein, or engage in any transaction to purchase or sell or solicit or offer the purchase or sale of such securities, should contact a registered representative of
UniCredit Capital Markets, Inc. (“UCI Capital Markets”).
Any transaction by U.S. persons (other than a registered U.S. broker-dealer or bank acting in a broker-dealer capacity) must be effected with or through UCI Capital Markets.
The securities referred to in this report may not be registered under the U.S. Securities Act of 1933, as amended, and the issuer of such securities may not be subject to U.S.
reporting and/or other requirements. Available information regarding the issuers of such securities may be limited, and such issuers may not be subject to the same auditing and
reporting standards as U.S. issuers.
The information contained in this report is intended solely for certain "major U.S. institutional investors" and may not be used or relied upon by any other person for any purpose.
Such information is provided for informational purposes only and does not constitute a solicitation to buy or an offer to sell any securities under the Securities Act of 1933, as
amended, or under any other U.S. federal or state securities laws, rules or regulations. The investment opportunities discussed in this report may be unsuitable for certain
investors depending on their specific investment objectives, risk tolerance and financial position. In jurisdictions where UCI Capital Markets is not registered or licensed to trade in
securities, commodities or other financial products, transactions may be executed only in accordance with applicable law and legislation, which may vary from jurisdiction to
jurisdiction and which may require that a transaction be made in accordance with applicable exemptions from registration or licensing requirements.
The information in this publication is based on carefully selected sources believed to be reliable, but UCI Capital Markets does not make any representation with respect to its
completeness or accuracy. All opinions expressed herein reflect the author’s judgment at the original time of publication, without regard to the date on which you may receive
such information, and are subject to change without notice.
UCI Capital Markets may have issued other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. These publications
reflect the different assumptions, views and analytical methods of the analysts who prepared them. Past performance should not be taken as an indication or guarantee of future
performance, and no representation or warranty, express or implied, is provided in relation to future performance.
UCI Capital Markets and any company affiliated with it may, with respect to any securities discussed herein: (a) take a long or short position and buy or sell such securities; (b)
act as investment and/or commercial bankers for issuers of such securities; (c) act as market makers for such securities; (d) serve on the board of any issuer of such securities;
and (e) act as paid consultant or advisor to any issuer.
The information contained herein may include forward-looking statements within the meaning of U.S. federal securities laws that are subject to risks and uncertainties. Factors
that could cause a company’s actual results and financial condition to differ from expectations include, without limitation: political uncertainty, changes in general economic
conditions that adversely affect the level of demand for the company’s products or services, changes in foreign exchange markets, changes in international and domestic
financial markets and in the competitive environment, and other factors relating to the foregoing. All forward-looking statements contained in this report are qualified in their
entirety by this cautionary statement
This document may not be distributed in Canada or Australia.
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UniCredit Global Research*
Thorsten Weinelt, CFA
Global Head of Research & Chief Strategist
+49 89 378-15110
[email protected]
Dr. Ingo Heimig
Head of Research Operations
+49 89 378-13952
[email protected]
Global Equity Research
Mark Robinson, Head
+ 44 20 7826-7960, [email protected]
Tomasz Bardziłowski, CFA, Deputy Head
+48 22 520-2979, [email protected]
Equity Research Italy
Equity Italy
Roberto Odierna, Head
+39 02 8862 8912, [email protected]
Alberto Bellora, Head
+39 02 8862 8919, [email protected]
Automotive & Components
Gabriele Parini
+39 02 8862 8587, [email protected]
Banks
Aurelio Palombo
+39 02 8862 3078, [email protected]
Consumer Goods
Davide Vimercati
+39 02 8862 2456, [email protected]
Equity Sales Italy
Luca Rubini, Head
+44 20 7826 7901, [email protected]
Institutional Sales
Sergio Smaldone, +39 02 8862 0646
Pierfrancesco Battistini, +39 02 8862 0608
Marie Fedotov, +39 02 8862 0821
Sergio Madeo, +39 02 8862 0672
Francesca Tucci, +39 02 8862 0656
Industrial Small & Mid Caps
Alessandro Falcioni
+39 02 8862 2242, [email protected]
Andrea D’Alterio, New York, USA, +1 212 672 6150
Antonio Vizzari
+39 02 8862 2597, [email protected]
Sales Trading
Massimiliano Papile, +39 02 8862 0645
Francesco Branda, +39 02 8862 0809
Andrew Carless, +39 02 8862 0606
Maurizio Offredi, +39 02 8862 0668
Stefano Vitali
+39 02 8862 2003, [email protected]
Industrials/Real Estate
Pierluigi Amoruso
+39 02 8862 8586, [email protected]
Media/Building Materials
Maurizio Moretti
+39 02 8862 2715, [email protected]
Oil/Utilities
Sergio Molisani
+39 02 8862 2339, [email protected]
Roberto Larotonda
+39 02 8862 2383, [email protected]
Telecoms/IT
Giovanni d’Amico
+39 02 8862 2007, [email protected]
Technical Analysis
Marco Zulberti
+39 02 8862 2235, [email protected]
Giovanni Musarra, London, UK, +44 20 7826 7904
Execution Desk Italy
+39 02 8862 0665
Sales Trading Assistant
Valeria Pozzi, +39 02 8862 8261
Equity Sales
Equity Sales Munich
+49 89 378 14129
Equity Sales London
+44 20 7826 6949
Equity Sales Milan
+39 02 8862 0643
Equity Sales New York
+1 212 672 6140
Equity Sales Vienna
+43 5 0505 82976
Equity Sales Zurich
+41 44 288 7700
Global Equity Strategy
Gerhard Schwarz , Head
+49 89 378 12421, [email protected]
Volker Bien
+49 89 378 18148, [email protected]
Nigel Croft
+44 207 826 6680, [email protected]
Dr. Tammo Greetfeld
+49 89 378 18361, [email protected]
Christian Stocker
+49 89 378 18603, [email protected]
Publication Address
UniCredit Markets & Investment Banking
Bayerische Hypo- und Vereinsbank AG - Milan Branch
Global Equity Research
Via Tommaso Grossi, 10
20121 Milano
Tel. +39 02 8862 2020
Fax +39 02 8862 2273
Bloomberg
UCEI
Internet
www.globalresearch.unicreditmib.eu
* UniCredit Global Research is the joint research department of Bayerische Hypo- und Vereinsbank AG (HVB) and UniCredit CAIB Group (CAIB).
Bayerische Hypo- und Vereinsbank AG
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