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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 ● 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 ● CA IB International Markets AG page 16 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 ● 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 ● 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 ● CA IB International Markets AG page 19 Global Equity Research 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 ● 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 ● 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 ● 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 ● 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 ● CA IB International Markets AG page 24 Global Equity Research 2 April 2008 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 ● 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 Our recommendations are based on information obtained from, or are based upon public information sources that we consider to be reliable but for the completeness and 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 without notice. This analysis is for information purposes only and (i) 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 financial, money market or investment instrument or any security, (ii) is neither intended as such an offer for sale or subscription of or solicitation of an offer to buy or subscribe for any financial, money market or investment instrument or any security nor (iii) as an advertisement thereof. The investment possibilities discussed in this report may not be suitable for certain investors depending on their specific investment objectives and time horizon or in the context of their overall financial situation. The investments discussed may fluctuate in price or value. Investors may get back less than they invested. Changes in rates of exchange may have an adverse effect on the value of investments. Furthermore, past performance is not necessarily indicative of future results. In particular, the risks associated with an investment in the financial, money market or investment instrument or security under discussion are not explained in their entirety. This information is given without any warranty on an "as is" basis and should not be regarded as a substitute for obtaining individual advice. Investors must make their own determination of the appropriateness of an investment in any instruments referred to herein based on the merits and risks involved, their own investment strategy and their legal, fiscal and financial position. As this document does not qualify as an investment recommendation or as a direct investment recommendation, 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. Investors are urged to contact their bank's investment advisor for individual explanations and advice. Neither Bayerische Hypo- und Vereinsbank AG, UniCredit CAIB AG, Bayerische Hypo- und Vereinsbank AG Milan Branch, UniCredit CAIB Securities UK Ltd. and UniCredit Aton, nor any of their respective directors, officers or employees nor any other person accepts any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. This analysis is being distributed by electronic and ordinary mail to professional investors, who are expected to make their own investment decisions without undue reliance on this publication, and may not be redistributed, reproduced or published in whole or in part for any purpose. Responsibility for the content of this publication lies with: a) Bayerische Hypo- und Vereinsbank AG, Am Tucherpark 16, 80538 Munich, Germany, (also responsible for the distribution pursuant to §34b WpHG). The company belongs to UCI Group. Regulatory authority: “BaFin“ – Bundesanstalt für Finanzdienstleistungsaufsicht, Lurgiallee 12, 60439 Frankfurt, Germany. b) Bayerische Hypo- und Vereinsbank AG Milan Branch, Via Tommaso Grossi, 10, 20121 Milan, Italy, duly authorized by the Bank of Italy to provide investment services. Regulatory authority: “Bank of Italy”, Via Nazionale 91, 00184 Roma, Italy and Bundesanstalt für Finanzdienstleistungsaufsicht, Lurgiallee 12, 60439 Frankfurt, Germany. The UniCredit CAIB Group, consisting of c) UniCredit CAIB AG, Julius-Tandler-Platz 3, 1090 Vienna, Austria 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. Bayerische Hypo- und Vereinsbank AG ● CA IB International Markets AG page 36 2 April 2008 Global Equity Research Atlantia 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 ● CA IB International Markets AG page 37 2 April 2008 Global Equity Research Atlantia 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. 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Bayerische Hypo- und Vereinsbank AG ● CA IB International Markets AG page 38 2 April 2008 Global Equity Research Atlantia Bayerische Hypo- und Vereinsbank AG ● CA IB International Markets AG page 39 2 April 2008 Global Equity Research Atlantia 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 ● CA IB International Markets AG page 40