final note 2 july - huffpostbig.assets.huffingtonpost.com/mb.pdf · time last week to a potentially...

IMPORTANT DISCLOSURE FOR U.S. INVESTORS: This document is prepared by Mediobanca Securities, the equity research department of Mediobanca S.p.A. (parent company of Mediobanca Securities USA LLC (“MBUSA”)) and it is distributed in the United States by MBUSA which accepts responsibility for its content. The research analyst(s) named on this report are not registered / qualified as research analysts with Finra. Any US person receiving this document and wishing to effect transactions in any securities discussed herein should do so with MBUSA, not Mediobanca S.p.A.. Please refer to the last pages of this document for important disclaimers.

Italy 03 July 2014

Country Update

Growth pain versus reforms gain Antonio Guglielmi

Equity Analyst

EU elections – Italy’s tailwind; now or never for reforming the country…

Renzi’s PD 41% historically-high score at the last elections unexpectedly pointed to Italy as

one of the most stable and pro-Euro governments. This overshadowed the protest vote’s

success elsewhere in EU, and provided undisputable endorsement to the non-elected Italian

premier. Renzi’s victory also forced M5S to recognise his leadership and open up for the first

time last week to a potentially fruitful debate with PD on the electoral law and other

reforms. Renzi is now in the enviable position of discussing reforms on two fronts (Forza

Italia and M5S) counting on a larger potential PMs majority and on higher chances of

delivery. As we see it, it is now or never for his reforms to accelerate in 2H 2014.

..with the help of Draghi who hasn’t finished yet: Italian banks sensitivity to TLTRO

Italy’s GDP is highly geared into its trade balance and loan growth. As such,

competitiveness reforms and SMEs’ lending are crucial to kick-start Italy’s muted

growth path. Recent ECB measures should point to Italy as a key QE play, help building

up further momentum in 2H 2014. Indeed, we estimate T-LTRO and MROs sterilisation

could add some 5% to our 2016 Italian banks’ EPS, with UBI leading the pack with +14%.

Renzinomics needs reforms delivery first in order to benefit from EU flexibility

Our recent Right way, wrong speed report (dated 1 April), showed our view that

Renzinomics offers the right mix of growth and competitiveness reforms, worth €21bn in

2015. However, 30%-50% of the €25bn resources we identified call for EU flexibility on

for instance PA arrears, deficit, balanced budget, golden rule and fiscal compact. The

recent EU summit sadly confirmed that it is early for Renzi to pretend such flexibility

now, ahead of the reforms’ approval. This probably leaves Italy with more short term

pain ahead: recent data suggest 2014 0.8% GDP growth estimate from the government is

overly optimistic. Things might have to get worse before they can get better as €10bn

extra resources might be needed this year due to lower growth.

Fiscal Compact: the growth vs austerity trap – Keynes? We have a problem

Recent budget law suggests that Italy can comply with balanced budget and fiscal

compact subject to 2% GDP growth and 5% primary surplus for 20 years. This is twice the

amount the country has achieved in 1999-07, confirming growth needs softening of

austerity via investments. Renzi’s reference to Keynesian demand measures is good news

to us: investments/GDP has dropped to 17% today from 22% in 2007. Closing the €70bn

investments gap would require Italy to ignore the fiscal compact and maintain the current

135% debt/GDP. Renzi needs to speak louder in the EU in seeking a compromise.

MB 50 Italian Corporates Survey: worst is over but credit access remains an issue

Twelve months after our first survey, we found a much more constructive mood in our

panel: 70% point to signs of recovery (vs 36% last year), 80% welcome political stability,

96% show high faith in ECB measures, and 80% see reforms affecting growth. However,

only 40% see a confidence pick-up impacting purchasing attitude and 60% still face credit-

access issues even though 88% confirmed a decrease in their cost of funding.

Our more sanguine view leads to 20% upside: upgrades in ratings, EPS and TPs

Italy is the best performing market YTD in EU. Some 60% multiple expansion over the last 12

months anticipated the inflection point in the EPS cycle, which we expect to materialise in

1H 2015. Our ‘more short term pain’ stance means 1.9% average EPS cut in 2014. However, a

long list of potential good news including reforms delivery, ECB measures, FX impact, lower

CoE, lower refinancing costs and higher mid-term growth is only partly captured in our +0.8%

and +1.5% EPS in 2015 and 2016 with several stocks already in double-digit territory. We lift

our TPs by 6.5% on average with Infrastructure, Real estate, Utilities and Banks leading the

pack. In the accompanying notes, we upgrade Geox, Ferragamo, Finmeccanica, Landi Renzo,

and Mediaset to N from U and De’ Longhi to O from N . We downgrade SNAM to N from O.

+44 203 0369 570

[email protected]

Javier Suárez

Equity Analyst

+39 02 8829 036

[email protected]

Italian Equity Team

Alessandro Tortora +39 02 8829 673

Andrea Filtri +44 203 0369 571

Andrea Scauri +39 02 8829 496

Nicolo Pessina +39 02 8829 796

Chiara Rotelli +39 02 8829 931

Fabio Pavan +39 02 8829 633

Gian Luca Ferrari +39 02 8829 482

Massimo Vecchio +39 02 8829 541

Niccolo Storer +39 02 8829 444

Riccardo Rovere +39 02 8829 604

Simonetta Chiriotti +39 02 8829 933

We thank Sara Piccinini for her contribution to this report

EPS changes Target Price

14 15 16 New Change Upside

Geox nm 18% 14% 3.2 45% 18% Landi Renzo nm 101% 79% 1.20 41% 2% Finmeccanica 22% 16% 15% 6.0 30% -14% Trevi Fin. -16% 12% 23% 5.6 26% -15% Beni Stabili 1% 8% 13% 0.83 19% 21% Amplifon 1% 3% 3% 6.6 18% 43% Atlantia -4% -8% -9% 23.5 18% 13% Enel 0% 3% 3% 4.2 17% -3% EGP 3% 1% 0% 2.3 15% 10% EI Towers 0% -8% -16% 58.3 14% 47% Autogrill 0% 21% 11% 9.7 14% 52% IGD -8% 0% -6% 1.48 14% 12% Biancamano nm -79% -39% 0.70 13% 11% Hera 0% 6% 7% 2.6 12% 23% Unicredit 0% 0% 0% 8.9 11% 42% Saipem -5% -12% 12% 22.9 11% 16% Safilo 0% 0% 0% 21.5 10% 33% Luxottica -4% -1% 0% 49 10% 17% Mediaset -32% -16% 3% 3.82 10% 8% Astaldi -3% -9% nm 9.3 9% 13% De' Longhi -2% 1% 1% 18.7 9% 19% Eni -4% 5% 8% 21.1 8% 5% Brembo 2% 1% 1% 33.5 8% 21% Unipol 0% 0% 0% 6.80 8% 59% ISP 0% 0% 0% 2.80 8% 21% A2A 6% 5% 4% 0.94 7% 11% Interpump 0% 2% 1% 11.8 6% 15% Piaggio -12% -6% 0% 2.85 6% 11% Aeffe 0% 0% 0% 2.0 5% 58% Eurotech nm -14% 0% 2.42 5% 15% Moleskine 0% 0% 0% 1.66 5% 31% Emak 3% 8% nm 1.26 5% 39% L'Espresso -6% 1% 3% 2.34 5% 61% Mondadori nm 27% 23% 1.31 5% 28% Tod's 0% 0% 0% 100 4% 10% Ferragamo 1% 3% 8% 20.8 4% -5% Generali 0% 0% 0% 16.6 4% 3% RCS nm 6% 7% 2.02 4% 63% Cattolica A i i

0% 0% 0% 18.1 3% 9% Unipol-SAI 0% 0% 0% 3.1 3% 30% Cementir 7% 10% nm 6.30 3% 12% Banca Gen. -6% 1% 2% 23.7 3% 16% Moncler 0% 0% 0% 15.9 3% 32% Buzzi Unicem -2% 5% 2% 15.4 3% 23% GTECH 1% 1% 0% 27.4 3% 47% Terna 0% 0% 0% 4.1 2% 6% UBI Banca -8% -2% 1% 8.3 2% 25% Snam 2% 2% 2% 4.3 2% -3% Azimut -12% 1% 5% 26.6 2% 38%

TOTAL -1.9% +0.8% +1.5% 6.5% 20%

Italy

03 July 2014 ◆ 2

Contents

Executive Summary 3

Renzi’s conundrum: growth vs fiscal consolidation 13

Draghi hasn’t finished yet 25

MB’s 2014 Italian Economic Survey: the worst is over 39

Estimates and target price revision 47

Italy

03 July 2014 ◆ 3

Executive Summary EU elections – Italy’s tailwind Historic 41% score from Renzi at EU elections overshadowed protest vote winning elsewhere. . .

The European elections in May ended with Renzi’s PD party scoring its historical-high result at 41% of the votes. Such an outcome pointed to Italy as one of the most stable, pro-market and pro-Euro government coalitions; an outcome so rare and unexpected as to overshadow the negatives of the protest vote succeeding elsewhere in Europe.

ITALY – Breakdown of Seats at the EU Parliament

Source: Mediobanca Securities

European Parliament – Seats

. . . and forced M5S to open up a constructive debate on reforms, which now look more likely The EU elections also had important implications at home, forcing M5S to capitulate and recognise Renzi’s leadership. As a result, PD and M5S met for the first time last week to open up a dialogue focused on the electoral law; the two sides also agreed to widen the debate on other reforms and meet up again in the coming weeks. All of a sudden it seems that we are entering a situation where more than 80% of the Italian Parliament is willing to show a constructive approach on reforms. This means Renzi might end up in the pleasant situation of discussing reforms on two separate fronts, one with Berlusconi and the other with M5S. Each of them might make himself available for specific reforms, with no need for the three of them always voting together, but with certainty for the country that positive things might be agreed. As such, following the EU elections’ success, we think Renzi has all the favorable conditions for his reform’s train to accelerate. Renzi’s reforms – now or never for Italy The EU elections result in turn provides the non-elected Italian premier with a much-needed endorsement to accelerate reforms. Our analysis of Renzi economic reform proposals back in April (see our Renzinomics - Right way, wrong speed report of 1 April) suggested that Italy is proposing the right mix of competitiveness measures and growth initiatives, but that its success is subject to Europe willing to soften its austerity mantra. More specifically, we reached two key conclusions at that time:

Some €21bn economic reforms proposals for 2015 on competitiveness, job market and growth seems sizable enough to bring momentum to the Italian recovery, and most importantly, in our view, they have been coupled with sufficient resources (€25bn) to cover them.

However, between 30-50% of such resources call Europe into question as they require some sort of green light from Brussels: from public administration arrears to balanced budget constraint and to the so-called golden rule on stripping out investments from the deficit calculation, we believe it is up to European partners to concede some flexibility to Italy.

31

17

13

5

3

3

1

73

Democratic party

Five Star

Forza Italia

Northern League

Centre-right coalition

The Other Europe

South Tyrolean People's party

Tot

221

191

70

67

52

50

48

43

9

751

EEP

S&D

ECR

ALDE

GUE/NGL

Greens/EFA

EFD

NI

Others

Total number of seats

Italy

03 July 2014 ◆ 4

As such, we concluded that it will be Europe to dictate the speed of success of the Italian turnaround story. Without flexibility from Europe, it remains hard to see where Italy will find the required resources to fund its well needed reforms.

Renzinomics – Economic initiatives and resources available to cover them in 2014 and 2015

Source: Eurostat, Mediobanca Securities

Public investments - Renzi needs a Keynesian receipt to grow . . . It is on the delay/softening of the Fiscal Compact that we believe Renzi needs to speak louder. We assessed the recently-presented budget law of the Italian government and concluded that based on the current government assumptions, Italy should be able to stick with the balanced budget requirement and deliver on the fiscal compact constraint, i.e. some 57% debt / GDP ratio 20 years from now as we show below.

Renzi Budget Law – key macro assumptions and comply with the balanced budget and the fiscal compact real GDP

growth nominal

GDP growth cost of debt r-g primary surplus

deficit / GDP Debt / GDP

structural deficit

2014 0.8% 1.7% 3.85% 2.15% 2.6% 2.5% 134.9% -0.6% 2015 1.3% 2.5% 3.82% 1.32% 3.3% 1.6% 133.3% -0.1% 2016 1.6% 3.1% 3.92% 0.82% 4.2% 0.8% 129.8% 0.0% 2017 1.8% 3.2% 3.91% 0.71% 5.0% 0.1% 125.1% 0.0% 2018 1.9% 3.3% 3.90% 0.60% 4.5% 0.0% 116.7% 0.0% Average 2014-18 1.5% 2.8% 3.88% 1.1% 3.92% 1.0% 127.9% -0.14% . . . 2034 4.5% 0.0% 57.0% 0.0%


. . . as 5% primary surplus and 2% growth seems not feasible in the long run As such, in theory the respect of the Fiscal Compact seems possible even for a country such as Italy with such a high debt / GDP ratio. In reality though, the above simulation will prove correct only if one assumes that Italy can keep running at an average 4-5% primary surplus over 20 years and still generate some 2% average real GDP growth and this can far from be assumed given this is roughly double the growth and the primary surplus Italy managed to achieve over the last decade. As such, Renzi is trying to move the debate towards public investments as a mean to boost growth via the so called golden rule. We estimate below that ignoring the Fiscal Compact and merely keeping debt / GDP ratio at current 135% level, would free up resources for €26bn in year 1 and €77bn in year 4.

2.5 1.9

4.0

1.0

1.4 1.9

1.0

7

2.9

7

2.4

6.0

6.0

0.9 2.9

1.5

10.0

3.5

1.5

1.7

-3.0

2.0

7.0

12.0

17.0

22.0

Tax on financial assets

(8 months)

Bilateral agreement with Switzerland on

assets repatriation

(one off)

Spending review

Extra VAT from 2013 PA arrears

(FY impact)

IRAP tax cut (8 months)

10% SME energy price cut

(8 months)

IRPEF cut (8 months)


(full year)

Spending review Lower interest on spread

Exploiting 2014 3% deficit

treshold

Total VAT on PA arrears

ESA 95 higher deficit

IRAP tax cut (Full year)

10% SME energy price cut (full year)

IRPEF cut (full year)

investment in education and

schools

Hydro geological disasters

Youth unemployment

Buffer left

2014 2015

. . . to 2015 optimal goalsFrom 2014 realistic targets . . .

Italy

03 July 2014 ◆ 5

A different path – no fiscal compact and commitment to keep current 135% Debt/GDP unchanged – Keynes at work Debt / GDP

Primary surplus

Primary surplus difference vs Fiscal

Compact scenario Difference in €bn

2014 134.9% 2.6% 0.0% 0 2015 134.9% 1.7% 1.6% 26 2016 134.9% 1.1% 3.1% 52 2017 134.9% 0.9% 4.1% 64 2018 134.9% 0.8% 3.7% 77 ... 2034 134.9% 0.8%


Some 5 p.p. of higher investments would close the gap . . . Interestingly enough, €70bn is exactly the extra public investment needed for Italy to return to its pre-crisis ratio of 22% between investment in fixed assets and GDP, from current 17%.

Italy - GDP and Investments – Italy (Y/Y)


In conclusion, we welcome Renzi opening up to a more Keynesian support to growth via public investments, as we think this is the only way for Italy to rapidly start growing. However, it is not easy to move the EU establishment from a macro stance focused on the supply side to a more demand-driven approach. This we believe identifies the key challenge for Renzi: only by securing a solid victory in Europe on softening austerity via Keynesian demand-side measures will the premier secure the time and the resources needed at home to implement his reforms.

. . . but Europe wants reforms first: at least €10bn extra pain seems inevitable this year

Recent discussions with Eurozone partners confirm flexibility as the medium-term target. However, Renzi has agreed to implement a first round of reforms at home in 2H 2014 before being able to benefit from such flexibility. This leaves the Italian government with some €10bn short term problem: with no concession on postponing the balanced budget to 2016 and given the lower-than-expected underlying GDP growth, €10bn seems to be a reasonable estimate of the extra tax rises or spending cuts needed in the winter 2014 to comply with the 3% deficit threshold.

Draghi hasn’t finished yet Macro: Italy very pro-cyclically geared into loan growth and current account balance

If the reforms agenda represents the first catalyst for what we see as a 2H 2014 momentum potentially building up in Italy, it is Draghi who provides the second element in support of our constructive view. The Italian GDP growth shows the highest correlation among Eurozone countries on both current account balance and loan growth. As such, competitiveness reforms and loan growth are the two mandatory requirements for Italy to accelerate its growth path, in our view.

0%

5%

10%

15%

20%

25%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

GDP vs Investments (%GDP)

GDP (€m) Invest/GDP

Italy

03 July 2014 ◆ 6

ITALY – GDP growth vs loan growth


ITALY – GDP growth vs trade balance

Italy geared into ECB measures . . .

Italy appears to be the perfect country to gain exposure to the recent ECB measures aimed at kick-starting SMEs growth, and also to the future implementation of non-conventional QE initiatives. We have simulated for a sample of Italian banks the potential impact of the recently-announced initiatives from Draghi. We aimed to measure the likely impact on Italian banks’ profitability in case of an effective transmission of monetary policy actions to the real economy.

In our Base-Case scenario we have assumed that the T-LTRO facility could bring some expansion of the SME loan book on top of what is already embedded in our forecasts, bringing on average 4% EPS upgrade potential.

The sterilisation of the MROs could bring lower sovereign yields, which – in turn – may prompt lower cost of funding. In light of the overwhelming sovereign exposure in Italian banks and the relatively short residual maturity, we calculate most of the impact from 25bps lower cost of ML-term funding would be eroded by the lower yields on the sovereign exposure, leaving the overall aggregate impact in the region of 1%.

The table below shows the outcome of our analysis, from which UBI emerges as the winner due to its relatively low risk cost of SME loans, a large portion of ML-term funding expiring in 2014-16E and the relatively longer residual maturity of its sovereign portfolio.

. . . partly already anticipated via multiple expansion

The market has efficiently anticipated the potential inflection point in the earnings cycle of Italian stocks. We calculate over the last 12 months that Italy benefited from 60% multiple expansion as a result of roughly 40% share price rerating and 20% EPS downgrades, with TMT and Oil leading the pack.

R² = 0.7218

-6%

-4%

-2%

0%

2%

4%

6%

-3% 2% 7% 12% 17% 22%

Loan growth YoY

GDP Growth YoY

R² = 0.6707

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

-4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0%

Italian Banks – Estimated earnings Impact from T-LTRO and MROs Sterilisation, 2016E

€m UCG ISP UBI BP CE TOTAL

T-LTRO (Base-Case) 177 115 45 25 10 373

MROs Sterilisation (Lower Cost of Funding and Lower Yield on Sov. Exp.) 38 13 34 20 0 105

Total 215 128 79 46 10 478

As % of 2016E Earnings +5% +3% +14% +8% +5% +5%

Source: Mediobanca Securities estimates

Italy

03 July 2014 ◆ 7

1 yr performance breakdown between EPS change and P/E expansion – by sector


This outcome seems consistent with the pre-crisis trend. We calculate that at the end of 2006, the YoY EPS downgrade on 2007 consensus reached 3%. Considering that our Italian coverage was up 32% in 2006, it follows that the market priced in some 35% P/E expansion in 2006. The by-stock chart below shows a widely-dispersed combination of multiple versus EPS changes.

However, if multiple expansion is the way for the market to capture inflection points in the near term, over the mid to long-term it is EPS upgrades having to drive rerating: indeed, we calculate over the last decade some 80% r-squared in our coverage universe between performance and EPS growth.

-100%

-50%

0%

50%

100%

150%

TMT

OIL

PURE

INDU

STRI

AL

CONS

UMER

S

REAL

ESTA

TE

FINA

NCIA

LS

BRAN

DED

GOOD

S

INFR

ASTR

UCTU

RES

UTIL

ITIE

S

HEAL

THCA

RE

MB C

OVER

AGE

EPS upgrades /downgrades P/E expansion/contraction with EPS

1 yr share performance breakdown between EPS upgrade/downgrade and P/E expansion, ranked by P/E expansion


-150%

-100%

-50%

0%

50%

100%

150%

200%

250%

Cem

entir

Unipo

l-SAI

Brem

boER

GEI

Towe

rsRe

cord

ati

Fiat

Cred

emAs

taldi

Banc

a Gen

erali

Azim

ut H

olding A2

AMe

diolan

umDe

lclim

aUn

ipol G

rupp

o Fin

anzia

rioBe

ni St

abili

Tern

aSa

filo

Snam

Atlan

tiaMa

rrUB

I Ban

caDa

nieli

Salin

i Im

preg

iloGT

ECH

Gene

rali

Inter

pum

p Gr

oup

Hera

L'Esp

resso Enel

Ferra

gam

oMe

diase

tEn

el Gr

een

Powe

rSo

gefi

Catto

lica

Assi.

niAn

saldo

STS

Brun

ello

Cucin

elli

Mond

ador

iInt

esa

Sanp

aolo

Pire

lli &

C.Te

naris

Unicr

edit

Luxo

ttica

Dias

orin

Sorin

De' L

ongh

iEm

akAm

plifo

nCa

iro C

omm

unica

tion

Cam

pari

IGD

Yoox

Tesm

ecTo

d'sPr

ysm

ian Eni

Finm

ecca

nica

Aeffe

Telec

om It

alia

Moles

kine

Buzz

i Unic

emTr

evi F

in.Ind

esit

Com

pany

Maire

Tec

nimon

tPi

aggio

Saipe

mBP

Emilia

Rom

agna

Italce

men

tiEu

rote

chAu

togr

illGe

oxLa

ndi R

enzo

Sara

s

P/E expansion/contraction with EPS EPS upgrades /downgrades

Italy

03 July 2014 ◆ 8

EPS upgrade/downgrade vs total return in the long run (period 2005-13)


On average, the market anticipated the estimates cycle by three to four quarters. With the Italian rerating having started during the summer last year and no major EPS upgrades in sight for now, it seems clear to us that this time around the market needs to be more patient in waiting for EPS upgrades, probably coming not earlier than 1H 2015.

MB’s 2014 Italian Economic Survey: the worst is over A more constructive outcome vs 12 months ago . . .

Our Italian corporates survey last year delivered a message of uncertainty due to political instability and credit access issues. Twelve months later, the same sample of more than 50 Italian corporates under our coverage leaves us with a much more constructive outcome. The survey includes some €316bn cumulated market cap. i.e. 70% of the Italian FTSE Mib Index. Almost 70% of our sample confirmed the first tangible signs of a recovery of the economic cycle, with 95% expecting infrastructure investment to lead the recovery path both in Italy and Europe (while fears of slowdown for emerging market are rising). However, the disconnect between expectations and the real economy remains: less than 40% of our sample sees the pick-up trend in consumer confidence (as a four years high) starting to translate into consumers’ purchasing attitude.

Consumer confidence has finally picked up


. . . helped by positive expectations on the ECB measures . . .

We also find a lot of faith in the recently-announced ECB measures: some 96% declared that ECB’s non-conventional measures will at least slightly support domestic consumption.

R² = 0.7946

-300%

-200%

-100%

0%

100%

200%

300%

400%

500%

600%

-500% -400% -300% -200% -100% 0% 100% 200% 300% 400% 500%

EPS g

rowt

h 200

5-201

3

Total Return 2005-2013

4% 9%

19%

25%10%

27%42%

36%

25%

2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Confidence indicators have signalleda recovery of the economic cycle.

Do you agree?

Consumer confidence in Italy shows growth rates in the 10/15% range; do you see this trend refleted

into consumers' purchasing attitude?

A lot Moderatly Neither much nor little Slightly Not at all

Italy

03 July 2014 ◆ 9

Macroeconomic impact of ECB measures and low interest rates


. . . and by confidence in the new government

Political expectations are maybe the most evident discontinuity point compared with last year’s findings. While last year’s survey confirmed fears over the unstable political framework following the uncertain outcome of the national elections, the answers we have collected this year seem to suggest an open door for Renzi, with 80% of the companies sitting on positive expectations for Renzi reforms to accelerate growth, introduce tax cuts and finally clearing the PA arrears issue. More specifically, almost half of our sample points to the IRAP cut as the most important measure undertaken so far to positively affect its operations.

Government’s priorities according to our sample


Renzi’s measures that would impact our sample’s business


Access to credit remains an issue although cost of credit has gone down

Finally, on access to credit, still some 60% of the interviewed sample confirmed it is experiencing difficulties in opening/increasing credit lines (basically confirming the outlook of last year). This is why 78% of them have increased cash reserves and point to debt refinancing as a key priority. The positive news versus 12 months ago is that 88% of the sample have experienced a decrease in the cost of credit.

4%17%

4%

30%

22%

13%

30% 22%

27%

23%

15%36%

13%

22% 13%

2% 7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Draghi's non conventional measure will be enought to sustain internal demand?

How much has the low inflation penalized

your business?

Impact on mid-term profits of current yield curve and

low rate scenario

Extremely A lot Moderatly Neither much nor little Slightly Not at all

Comply with fiscal

compact's criteria

3%

Reduce public debt

11%

Reduce fiscal pressure

33%

Restructure the PA

21%

Introduce growth

strategies32%

IRAP cut45%

IRPEF cut16%

PA credit16%

Public investments

9%

Privatization4%

Jobs act10%

Italy

03 July 2014 ◆ 10

In conclusion, while last year the overall picture was of a country in a ‘wait-and-see’ mood, with companies reluctant to invest, our second annual survey seems to confirm an increase in the recovery hopes (helped by the ECB’s measures and by a more stable domestic political landscape), even if the high strategic focus on self-help and cost-cutting and the cautious stance on acquisitions confirm only a moderate sentiment turn translating into still-low propensity to investments.

New estimates, ratings and target prices changes In this note, we adjust our EPS, target prices and rating changes in our Italian coverage universe, reflecting the investment case discussed in this report. Our key actionable points:

‘More short term pain ahead’ due to lower-than-expected GDP growth and extra resources to be found by the government this year translates in a market cap weighted average EPS cut of 1.9%.

A mix of reforms delivery, ECB support, FX impact, lower cost of equity, lower refinancing cost and accelerating growth is the rationale behind an market cap weighted average EPS increase of 0.8% and 1.5% in 2015 and 2016, respectively.

The above results in an average 6.5% lifting of our target price, also reflecting a new risk free rate in our model to 3% versus 4% previously. This leaves us with 20% upside.

The sectors benefiting the most from our upgrades are Real Estate (6.7%), Oil (6.5%), Asset Gatherers (+3.4%), Utilities (+2.4%) and Pure Industrial (+2.2%).

Credit availability analysis


Estimates changes, weighted average change - market cap adjusted, by sector

SECTOR Market cap EPS 2014 EPS 2015 EPS 2016 TP

%change %change %change % Change

BRANDED GOODS 34,067 -2.4% 0.2% 1.1% 8.4%

CONSUMER GOODS 14,427 0.0% 3.0% 1.6% 5.2%

FINANCIALS - BANKS 83,897 -0.5% -0.1% -0.1% 8.2%

FINANCIALS - ASSET GATHERERS 9,173 -5.2% 1.2% 3.4% -0.5%

FINANCIALS - INSURANCE 35,432 0.0% 0.0% 0.0% 4.0%

HEALTHCARE 5,325 -1.2% -0.2% 0.0% 0.0%

INFRASTRUCTURES 27,553 -5.0% -4.6% -7.3% 12.2%

OIL 102,654 -3.0% 2.8% 6.5% 6.9%

PURE INDUSTRIAL 39,418 0.7% 2.8% 2.2% 4.7%

REAL ESTATE 1,981 -1.1% 5.2% 6.7% 15.2%

TMT 25,027 -6.0% -2.7% 1.3% 1.9%

UTILITIES 80,361 0.4% 2.3% 2.4% 11.6%

MB AVERAGE 459,315 -1.9% 0.8% 1.5% 6.5%


22%

40%

18%

24%

23%

18%

13%

13%

25%

28%

15%

18%

11%9%

11%

2%9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Cash reserves increasedd or access to capital markets

more than needed

Difficulties in opening/increasing credit

lines in Italy

Cost of credit has decreased in the last 12 months


Italy

03 July 2014 ◆ 11

Our new EPS are ahead of 2015 and 2016 consensus by an average 2-3%. We are now well ahead of consensus on Real Estate (+15%), Asset Gatherers (+14%) and Utilities (+8%), and well below consensus on Insurance -14%) and Branded Goods (-5%).

We also implement some rating changes aimed at better capturing our more sanguine investment case on Italy as well as the higher valuations. We upgrade our ratings on Geox, Ferragamo, Finmeccanica, Landi Renzo and Mediaset to Neutral from Underperform, and De’ Longhi to Outperform from Neutral, and downgrade SNAM to Neutral from Outperform.

Overall, we conclude that main beneficiaries from the Italian Government’s reform agenda and the ECB measures remain banks (UCG, UBI and Credem core holdings), publishers (RCS and L’Espresso our favorite names) and Beni Stabili, and stocks geared towards demand recovery such as Atlantia, MARR, GTECH and Autogrill.

MB new estimates vs. consensus IBES

SECTOR Market cap (TOT) EPS 2014 EPS 2015 EPS 2016

BRANDED GOODS 34,067 -4.7% -4.6% -5.1%

CONSUMER GOODS 14,427 6.3% 8.8% -2.6%

FINANCIALS - BANKS 83,897 5.8% 7.5% -1.4%

FINANCIALS - ASSET GATHERERS 9,173 -2.2% 3.4% 13.8%

FINANCIALS - INSURANCE 35,432 -10.8% -11.9% -14.4%

HEALTHCARE 5,325 -3.9% -3.8% -3.7%

INFRASTRUCTURES 27,553 1.7% 0.8% 4.1%

OIL 102,654 2.0% 3.1% 3.4%

PURE INDUSTRIAL 39,418 4.5% 2.4% 3.9%

REAL ESTATE 1,981 18.1% 27.3% 15.5%

TMT 25,027 -4.2% -3.5% -3.2%

UTILITIES 80,361 0.5% 5.7% 8.4%

TOT 459,315 1.1% 2.9% 1.5%


Italy

03 July 2014 ◆ 12

New estimates, target prices and rating changes, 2014-16


BRANDED GOODS

Aeffe O 0.03 0% nm 0.06 0% 56% 0.09 0% nm 2.0 5% 58% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Brunello Cucinelli N 0.45 0% -5% 0.50 0% -6% 0.56 0% -8% 19.0 0% 13% No changes to estimates /valuation

Ferragamo N (from U) 0.89 1% -5% 1.01 3% -7% 1.19 8% -5% 20.8 4% -5% Reduced negative FX impact on 2015, and lower minorities - estimates lifting and lower CoE

Geox N (from U) -0.03 nm nm 0.05 18% -15% 0.15 14% -6% 3.2 45% 18% Estimates raised to be aligned with company targets which now seem to be more realistic

Luxottica O 1.38 -4% -6% 1.60 -1% -5% 1.80 0% -7% 49.0 10% 17% Lower CoE and 14-16 estimates finetuning

Moleskine N 0.09 0% -2% 0.10 0% -2% 0.12 0% 2% 1.66 5% 31% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Moncler N 0.44 0% -6% 0.51 0% -8% 0.61 0% -8% 15.9 3% 32% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Safilo O 0.84 0% 8% 1.13 0% 8% 1.38 0% 3% 21.5 10% 33% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Tod's N 4.12 0% -6% 4.59 0% -6% 5.14 0% -5% 100.0 4% 10% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Yoox O 0.32 0% 8% 0.47 0% 15% 0.69 0% 21% 34.0 0% 74% Minor changes to capex/NFP estimates Valuation unchanged since based on M&A multiples

CONSUMER GOODS

Autogrill O 0.07 0% -33% 0.20 21% 4% 0.30 11% 7% 9.7 14% 52% Better confidence on profitability improvement in Italy (8% EBITDA margin in 2016 instead of 2017)

Amplifon O 0.21 1% 11% 0.24 3% 4% 0.27 3% -8% 6.6 18% 43% Lower CoE due to revision of 10 year bond yield at 3% and roll over of valuation model

De' Longhi O (from N) 0.87 -2% 0% 1.04 1% 1% 1.19 1% 0% 18.7 9% 19% Revision of Italian 10 year bond yield at 3% and roll over of valuation model

GTECH O 1.45 1% -1% 1.60 1% 0% 1.48 0% -11% 27.4 3% 47% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Indesit Company O 0.46 0% 45% 0.70 0% 36% NA nm nm nr nm nm No changes in valuation

Marr O 0.76 0% -3% 0.80 0% -5% 0.84 0% -5% 15.7 2% 13% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Nice N 0.28 0% 75% 0.29 0% 68% NA nm nm nr nm nm No changes in valuation

Campari N 0.33 0% 17% 0.36 0% 14% NA nm nm 6.1 0% -2% No changes in valuation

FINANCIALS - BANKS

Banco Popolare N 0.11 0% -73% 1.02 0% 3% 1.50 0% 4% 14.50 nm 17% No changes in valuation

UBI Banca O 0.32 -8% 14% 0.53 -2% 20% 0.65 1% 13% 8.30 2% 25% Revision of ITA 10YR bond yield + 2% cut in estimates on lower interest rates after ECB measures

Unicredit O 0.38 0% 9% 0.53 0% 1% 0.58 0% -13% 8.90 11% 42% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Intesa Sanpaolo N 0.12 0% 2% 0.21 0% 12% 0.25 0% 8% 2.80 8% 21% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Credem O 0.51 0% 6% 0.56 1% 2% 0.63 0% -1% 8.60 1% 28% Lower CoE due to revision of Italian 10 year bond Yield at 3%. Modest EPS change

FINANCIALS - ASSET GATHERERES

Azimut Holding O 1.12 -12% -8% 1.54 1% 3% 1.93 5% 19% 26.60 2% 38% Estimates finetuning, lower risk-free rate (3% from 3.8%).

Banca Generali N 1.37 -6% 0% 1.41 1% -2% 1.60 2% 3% 23.70 3% 16% Estimates finetuning, lower risk-free rate (3% from 3.8%).

Mediolanum N 0.46 0% 1% 0.52 1% 6% 0.61 4% 16% 7.00 -4% 20% Lower market multiples

FINANCIALS - INSURANCE

Cattolica Assi.ni U 1.28 0% -18% 1.31 0% -22% 1.34 0% -28% 18.10 3% 9% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Generali U 1.28 0% -13% 1.41 0% -14% 1.50 0% -17% 16.60 4% 3% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Unipol Gruppo Finanziario O 0.61 0% 15% 0.62 0% 1% 0.61 0% 4% 6.80 8% 59% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Unipol-SAI O 0.23 0% -12% 0.24 0% -7% 0.24 0% -9% 3.10 3% 30% No relevant valuation changes and Lower CoE due to revision of Italian 10 year bond Yield at 3%

HEALTHCARE

Diasorin N 1.51 -4% -5% 1.66 -3% -5% 1.88 -2% 2% 34.00 0% 10% Positive impact of $/€ more than balanced by worse top line trend

Recordati N 0.74 0% -3% 0.80 2% -2% 0.85 1% -6% 13.50 0% 10% lower financial charges

Sorin N 0.12 0% -4% 0.13 0% -7% 0.15 0% -7% 2.05 0% -5% No changes to estimates /valuation

INFRASTRUCTURE

Ansaldo STS O 0.44 0% -3% 0.47 0% -5% 0.51 0% -1% 9.50 1% 21% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Astaldi N 0.92 -3% -8% 0.94 -9% -17% 1.08 nm -27% 9.30 9% 13% Lower Coe and EV/EBIT fair multiple of 4.5x for construction unit

Atlantia O 1.07 -4% 9% 1.16 -8% 7% 1.37 -9% 13% 23.50 18% 13% Lower CoE due to revision of 10 year bond yield at 3% and roll over of valuation model

Danieli N 1.92 -24% -7% 2.44 -7% 7% 2.62 -6% 5% 26.00 -1% 13% Impact of mark-to-market on Forex

EI Towers O 1.25 0% -8% 1.37 -8% -12% 1.44 -16% -18% 58.30 14% 47% New mux contract, lowering long-term CPI assumptions, 3% risk-free

Prysmian N 0.87 -6% -19% 1.21 10% -15% 1.40 -9% -16% 17.00 1% 3% 2014-16 estimates finetuned due to extracosts related to WL project

Tesmec N 0.05 -42% -13% 0.06 -43% -27% 0.06 nm -39% 0.80 -8% 26% Estimates' cut due to weak stringing equipment partly offset by lower risk free

Trevi Fin. U 0.26 -16% -23% 0.33 12% -32% 0.40 23% -41% 5.60 26% -15% Lower CoE due to revision of 10 year bond yield at 3% and roll over of valuation model

OIL

Eni O 1.35 -4% 3% 1.63 5% 6% 1.75 8% 4% 21.10 8% 5% Lower forex assumptions, stable oil price assumptions, lower free risk

Maire Tecnimont O 0.19 0% 24% 0.27 0% 23% 0.25 0% -3% 3.40 0% 43% No changes in valuation

Saipem O 0.79 -5% -1% 1.28 -12% -13% 1.82 12% -2% 22.90 11% 16% Lower free risk, higher profitability in 2016E from backlog execution

Saras N -0.01 nm nm 0.07 0% nm 0.10 13% nm 0.98 -17% -2% Revision of ITA 10YR bond yield + cut in operating estimates on weak refining environment

Tenaris O 1.34 0% -2% 1.53 0% 0% 1.67 0% 4% 19.60 2% 13% Lower CoE due to revision of Italian 10 year bond Yield at 3%

PURE INDUSTRIALS

Biancamano N -0.15 nm nm 0.03 -79% -42% 0.16 -39% 74% 0.70 13% 11% TP increase driven by lower Lower CoE. Earnings visibility remains low

Brembo O 1.72 2% 3% 1.98 1% 4% 2.22 1% 1% 33.50 8% 21% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Buzzi Unicem O 0.36 -2% -20% 0.58 5% -22% 0.77 2% -27% 15.40 3% 23% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Cementir N 0.30 7% -10% 0.40 10% -17% 0.50 nm -16% 6.30 3% 12% Lower CoE due to revision of Italian 10 year bond Yield at 3%

CNH Industrial O 0.73 -4% 2% 1.06 -1% 18% 1.37 -1% 18% 9.40 2% 26% Lower financial charges; $/€ rate

Delclima N 0.08 0% -22% 0.09 0% -25% NA nm nm nr nm No changes in valuation

Emak O 0.08 3% -11% 0.10 8% -1% 0.12 nm -8% 1.26 5% 39% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Fiat N 0.61 0% 28% 1.05 4% 1% 1.45 3% 3% 9.00 0% 21% Lower financial charges; $/€ rate

Finmeccanica N (from U) 0.41 22% -21% 0.50 16% -27% 0.59 15% -23% 6.00 30% -14% EPS upgrade mostly driven by higher cash flow generation (lower capex)

Interpump Group O 0.52 0% -2% 0.60 2% -4% 0.66 1% -6% 11.80 6% 15% Lower CoE due to revision of Italian 10 year bond Yield at 3% and USD/EUR at 1.30

Landi Renzo N (from U) 0.004 nm nm 0.04 101% 90% 0.08 79% -12% 1.20 41% 2% Lower CoE due to revision of Italian 10 year bond Yield at 3% + better business profitability

Piaggio N 0.08 -12% -2% 0.14 -6% 4% 0.20 0% 6% 2.85 6% 11% Cut in FY2014/15 estimates. Lower CoE due to revision of Italian 10 year bond Yield at 3%

Pirelli & C. O 0.98 -1% 9% 1.16 -1% 12% 1.39 -1% 20% 14.00 0% 17% Not meaningful changes in the valuation

Sogefi O 0.27 -23% -26% 0.40 -16% -5% 0.48 -14% -4% 5.20 0% 29% Revision of ITA 10YR bond yield + cut in estimates on weakness in Latam

REAL ESTATE

Beni Stabili O 0.04 1% 28% 0.05 8% 46% 0.06 13% 25% 0.83 19% 21% TP increase driven by lower RFR and lower NAV discount in valuation.

IGD - Immobiliare Grande DistrN 0.09 -8% 2% 0.10 0% -7% 0.11 -6% -1% 1.48 14% 12% TP increased following lower RFR and lower NAV discount in the stock valuation

Prelios U -0.10 nm nm -0.02 nm nm -0.01 nm nm 0.54 0% -5% No changes in valuation

TMT

Cairo Communication N 0.13 -31% -49% 0.23 -19% -43% 0.36 18% -22% 7.65 0% 17% Lowering '14 adv. collection, new channels by 2015, 3% risk-free

Eurotech N -0.02 nm nm 0.13 -14% 11% 0.08 0% -50% 2.42 5% 15% Change in TP driven by lower RFR

L'Espresso O 0.04 -6% -12% 0.11 1% 41% 0.13 3% 20% 2.34 5% 61% More aggressive adv. assumptions from '15, 3% risk-free

Mediaset N (from U) 0.07 -32% -16% 0.12 -16% -26% 0.18 3% -23% 3.82 10% 8% M&A approach for payTV, lowering '14 ads, more aggressive on '15 & '16

Mondadori N 0.03 nm -38% 0.06 27% -46% 0.07 23% -27% 1.31 5% 28% lower top-line offset by costs saving, abb impact, 3% risk-free

RCS Mediagroup O -0.07 nm nm 0.10 6% 45% 0.12 7% 38% 2.02 4% 63% More aggressive adv. assumptions from '15, 3% risk-free, savings conversion

Telecom Italia nr 0.09 0% nm 0.09 0% nm 0.09 0% nm NA nm nm N.A.

UTILITIES

A2A N 0.06 6% -3% 0.07 5% 5% 0.07 4% 21% 0.94 7% 11% Lower Refinancing Costs. Lower CoE due to revision of Italian 10 year bond Yield at 3%

Enel N 0.32 0% 2% 0.37 3% 9% 0.39 3% 12% 4.2 17% -3% Lower Refinancing Costs. Lower CoE due to revision of Italian 10 year bond Yield at 3%

Enel Green Power N 0.11 3% 4% 0.12 1% 7% 0.13 0% 3% 2.3 15% 10% Lower Re-financing costs. Lower CoE due to revision of Italian 10 year bond Yield at 3%

ERG N 0.46 -23% -16% 0.46 0% -20% 0.40 5% -26% 11.3 3% -1% Revision in ITA 10YR bond yield + cut in estimates

Hera O 0.10 0% -3% 0.12 6% 3% 0.13 7% 6% 2.6 12% 23% Increase in Waste Volumes. Lower Re-financing costs. Lower cost of capital.

Snam N (from O) 0.29 2% -1% 0.31 2% 2% 0.31 2% 6% 4.3 2% -3% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Terna O 0.25 0% -1% 0.26 0% -1% 0.28 0% 9% 4.1 2% 6% Lower CoE due to revision of Italian 10 year bond Yield at 3%

SIMPLE AVERAGE -3.9% 0.4% 2.5% 5.7% 19.9%

WEIGHTED AVERAGE -1.9% 1.1% 0.8% 2.9% 1.5% 1.5% 6.5% 14.2%

EPS 2014 EPS 2015 EPS 2016

Stock Rating

% change

%

change

%

change

MB vs.

consensus

MB vs.

consensus

MB vs.

consensusnew new new

New TP Main reasons for new TP

Upside

%

change

Italy

03 July 2014 ◆ 13

Renzi’s conundrum: growth vs fiscal consolidation The European elections in May ended with Renzi’s PD party scoring its historical high result at 41% of the votes. Such an outcome pointed to Italy as one of the most stable, pro-market and pro-Euro government coalitions; an outcome so unusual and unexpected as to overshadow the negatives of the protest vote succeeding elsewhere in Europe. This result in turn provides the non-elected Italian premier with a much-needed endorsement to accelerate reforms. Our Renzinomics analysis suggests that Italy is proposing the right mix of competitiveness measures and growth initiatives. However, we also show that only via concessions from its EU partners on, for instance, the so-called golden rule will Renzi eventually gain momentum in implementing its reforms. In particular, it is on the delay/softening of the Fiscal Compact that Renzi needs to speak louder. We assessed the recently-presented budget law of the Italian government and concluded that based on the current government assumptions, Italy should be able to stick with the balanced budget requirement and deliver on the Fiscal Compact constraint, i.e. some 57% debt / GDP ratio 20 years from now. However, this can only be achieved if we assume Italy will constantly deliver 5 p.p. of primary surplus and some 2 p.p. of GDP growth over the next 20 years, and this can far from be assumed, in our view. For the sake of reference, we calculate that should the government ignore the Fiscal Compact and merely target to keep unchanged the current debt / GDP ratio at 135%, this would free up resources for €26bn in year one and €77bn in year four of Renzi’s mandate. Interestingly enough, this is exactly the extra public investment needed for Italy to return to its pre-crisis ratio of 22% between investment in fixed assets and GDP, from current 17%. In conclusion, we welcome Renzi opening to a more Keynesian support to growth via public investments, as we think this is the only way for Italy to quickly start growing. However, it is not easy to move the EU establishment from a macro stance focused on the supply side to a more demand-driven approach. This identifies the key challenge for Renzi: only by securing a solid victory in Europe on softening austerity via Keynesian demand-side measures will the premier secure the time and the resources needed at home to implement his reforms. EU elections – Italy’s tailwind Protest vote won everywhere . . . The European elections on 25th May were the key cross-roads to assess the risk of a potential derailing of the ongoing re-rating in periphery. Indeed, the elections confirmed the exploits of the protest vote with UKIP at 28% in UK, FPOE at 20% in Austria, M5S at 21% in Italy, FN at 25% in France, Danish People Party at 27% in Denmark, KNP at 7% in Poland, Podemos at 8% in Spain, Syriza first party in Greece at 27%, and even AfD scored a respectable 7% in Germany.

As a result of this unprecedented success, the protest vote accounted for c.130 seats at the EU parliament versus 64 previously. However, EPP with 221 seats (versus 274) and social democrats with 191 (versus 196) remain the two leading parties in Brussels.

European Parliament (2014)


European Parliament – Seats

European People's Party

29%

Socialists and Democrats

26%

European Conservatives

and Reformists

9%

Alliance of Liberals and Democrats

9%

European United

Left/Nordic Green Left

7%

The Greens/Europ

ean Free Alliance

7%

Europe of freedom and democracy

6%

Non-attached Members

6%Others

1%

221

191

70

67

52

50

48

43

9

751

EEP

S&D

ECR

ALDE

GUE/NGL

Greens/EFA

EFD

NI

Others

Total number of seats

Italy

03 July 2014 ◆ 14

. . . but not so in Italy Undoubtedly Italy was widely seen as the elephant in the room of these elections given the non-elected government running the country, the delay in the structural reforms, and the mounting protest vote intercepted by the Five Star. The historically-high 41% result achieved by Renzi’s PD party, as well as M5S tracking back to 21% from the 25% achieved last year, point to the Italian result as the most pro-market victory. Further confirming how relevant will reform delivery of Italy be for the future of the Eurozone, such a pro Euro and pro reforms victory of Renzi alone managed to overshadow the negative messages coming from the protest vote in the other European countries. It is the first time Italy has emerged from elections as one of the most stable EU governments in Europe.

ITALY – Breakdown of Votes


ITALY – Breakdown of Seats at the EU Parliament

As a result of the above, the initial spike on the BTP spread following the EU elections traced back and touched new lows also in light of the recent monetary measures announced by the ECB.

Italian and Spanish spread, Jan 2013 - today


Italian and Spanish spread, Jan 2014 - today

The Italian reform train is ready to depart now, in our view

The low growth – low competitiveness trap forced Renzi into an ambitious plan made up of job market reform, tax cuts and the boosting of internal demand. Admittedly, the EU elections forced the non-elected premier into plenty of announcements aimed at winning the elections and implicitly endorsing his own premiership. Now that such result has been secured, Renzi has the necessary democratic legitimacy to accelerate on internal reforms (labour market, electoral law and constitutional changes, spending cuts to fund tax cuts).

We analyzed his key proposals in our recent piece Renzinomics (1st April 2014) in which we attempted to estimate the room available for the Italian government to fund its economic measures.

Competitiveness Competitiveness is mainly tackled via three measures:

some 10% IRAP regional tax cut (€2.9bn) aimed at reducing the tax wedge (cuneo fiscale);

Democratic party; 40.80%

Five Star; 21.10%

Forza Italia; 16.80% Northern

League; 6.20%

Centre-right coalition;

4.40%

The Other Europe; 4%

South Tyrolean People's party;

0.50%

Others; 6.90%

31

17

13

5

3

3

1

73

Democratic party

Five Star

Forza Italia

Northern League

Centre-right coalition

The Other Europe

South Tyrolean People's party

Tot

1.1

1.6

2.1

2.6

3.1

3.6

4.1

Spain Italy

EuropeanElections

ECB expansion measures

Inconclusive Italian election

1.1

1.3

1.5

1.7

1.9

2.1

2.3

01/01/2014 01/02/2014 01/03/2014 01/04/2014 01/05/2014 01/06/2014

Spain Italy

EuropeanElections

ECB expansion measures

Italy

03 July 2014 ◆ 15

some 10% energy cost cut for SMEs (€1.5bn); and

the labour market reform.

The latter targets to reduce the excessive protection for insiders at the expense of young and newcomers. It foresees changes to apprenticeships and short-term contracts so to make it easier for companies to hire. It still has to be agreed how to increase flexibility for the companies to set their own wages rather than having to rely on countrywide agreements. It is also subject to discussion if and how to simplify layoffs. The reform remains controversial, given lobbies and unions being affected. Unsurprisingly, the main opposition for Renzi sits in his own party.

A specific package of corporate-related measures aimed at improving competitiveness is expected to be approved over the summer:

Direct lending to companies from insurance companies and funds. The Insurance companies will not provide direct financing to companies, but may be interested in the acquisition of notes issued by the companies.

Incentives to the listing of companies on the market. This should happen through fiscal deduction of the related costs and introduction of shares with multiple votes to ensure that control of companies remains in the hands of the entrepreneurs.

Push to capitalize companies. The main measure relates to the deductibility of 50% of the “instrumental” capex.

Measures to allow assets securitization to ensure access of SMS to this option through a State-back vehicle.

Consumption, investments and GDP growth

Consumption and investments foresee: IRPEF personal tax cut for €1,000 net tax reduction per annum on wages below €25k, thus

involving some 10m taxpayers (€10bn);

three key areas of investments: education and school, hydro geological disasters and youth unemployment (€6.7bn); and

finally, the most important boost to consumption is expected to come from the clearance of €68bn arrears of the public administration.

Extra resources to fund economic proposals

Obviously identifying resources to cover to above commitments remains the most controversial part of Renzinomics. The premier is essentially relying on three sources of funding for his initiatives:

higher taxation on financial assets (€2.9bn);

bilateral agreement with Switzerland on assets’ disclosure (€4bn); and

the spending review.

The EU will set Renzi’s room for action – Our Fiscal Compact simulation

As we show in the chart on the following page, in theory Renzi should have capacity to implement the above plan given €25bn resources versus €21bn commitments in 2015. In practice though, this is only true when assuming full margin of maneuvering the deficit and a softer approach to austerity from EU partners. The red bars on the following pages suggest that some sort of agreement from Europe is needed in order for Renzi to have enough resources capacity to fund the reforms. Indeed, lower interest on debt, 3% deficit and ESA 95 accounting changes make 37% of the 2015 resources. If we add the €6bn extra VAT expected from PA arrears, whose clearance relates to issuing higher debt (hence in EU hands as well), we can conclude that more than half of the resources needed to fund Renzi’s reform depend on European concessions. As such, Renzi needs to win his game in Europe first in order to make his reforms plan working at home. The European semester led by Italy in 2H 2014 is therefore expected to shed more clarity on three initiatives:

a European plan of investments ideally fund through ad hoc Eurobond issued by the EIB;

more flexibility on the deficit calculation via the introduction of the so-called golden rule aimed at stripping out infrastructural investments from the computation of the deficit; and

the re-negotiation of the fiscal compact.

Italy

03 July 2014 ◆ 16

Renzinomics: From 2014 realistic target to 2015 optimal goals*, €bn

Source: Mediobanca Securities, * red bar signals controversial step

2.5 1.9

4.0

1.0

1.4 1.9

1.0

7

2.9

7

2.4

6.0

6.0

0.9 2.9

1.5

10.0

3.5

1.5

1.7

-3.0

2.0

7.0

12.0

17.0

22.0


(8 months)

Bilateral agreement with Switzerland on

assets repatriation

(one off)

Spending review

Extra VAT from 2013 PA arrears

(FY impact)

IRAP tax cut (8 months)

10% SME energy price cut

(8 months)

IRPEF cut (8 months)


(full year)

Spending review Lower interest on spread

Exploiting 2014 3% deficit

treshold

Total VAT on PA arrears

ESA 95 higher deficit

IRAP tax cut (Full year)

10% SME energy price cut (full year)

IRPEF cut (full year)

investment in education and

schools

Hydro geological disasters

Youth unemployment

Buffer left

2014 2015

. . . to 2015 optimal goalsFrom 2014 realistic targets . . .

Italy

03 July 2014 ◆ 17

Austerity does not help Italian growth We have seen plenty of evidence to date on how the strict austerity regime ends up penalizing peripheral countries’ growth. The trade-off between fiscal consolidation and growth is now at the center of the European debate, and Renzi made no mystery of his plan to tackle the austerity mantra that has so far driven the Eurozone macro policy.

Some numbers:

Since 2007, unemployed people increased from 11.6m to 19m at end-2013 in the Eurozone (+65%);

Italy more than doubled its unemployed people from 1.5m to 3.2m over the same period; and

The Eurozone GDP is still some 1.5% below its 2007 level, but in Italy such a number is in the region of 9%.

An historical record for unemployment rate . . . Latest macro data from Italy show that overall unemployment has increased to 12.6% by end-April 2014. When looking at just young people (under 25Y) this ratio rises to 43% in the whole country, and to 60% in Southern Italy. Such youth unemployment ratio compares with a European average of 22.5%, and is the worst in Europe after Spain (53%) and Greece (57%).

ITALY – Unemployment Rate (%)

Source: Istat, Mediobanca

ITALY – Youth Unemployment Rate (%)

. . . while loan growth continues to be weak . . The most recent data released by the Bank, confirmed a credit crunch environment. Lending to domestic customers was down 3.1% y-o-y in April versus -3.3% in March. The decline continues to be remarkable in corporate lending – down 4.4% in April 2014 versus -4.3% in March 2014 - while the negative growth in retail stabilized at -1%. On the other hand, the funding mix continues to rebalance toward deposits at the expenses of bonds (institutional and retail), as deposits grew by 1.4% y-o-y in April versus -9.6% showed by bonds (on average bonds account for c.35% of banks funding mix).

The credit crunch environment is particularly penalizing for Italy. As we show in the lhs chart below, only 20% of corporate borrowing in US comes from banks lending, the rest being provided by the market. In Europe, such a number doubles to 40% with Italy and Germany sitting well above the average at almost 60%.

Such a ‘bank centric’ funding model inevitably affects growth at times of credit crunch. As such, it is not surprising to see such a high correlation in Italy between loan growth and GDP growth; some 0.7 r-squared between the two variables is the highest we have observed among Eurozone countries.

12.0

12.212.1 12.1

12.3

12.4 12.4

12.7

12.5

12.7 12.712.6 12.6

39.4

38.5

39.439.8

40.641.1

41.541.9 41.9

42.9 42.7 42.943.3

Italy

03 July 2014 ◆ 18

Bank’s lending as a % of corporate borrowing


ITALY – GDP growth vs loan growth

. . . and current account balance has been adjusted largely via lower imports

In spite of the lack of competitiveness, Italy has managed to defend relatively well its manufacturing trade balance. As we show in the lhs chart below, Italy still represents the fifth largest manufacturing surplus in the world. Moreover (rhs chart), if 100 was the worldwide share of manufacturing exports for Italy in 1999, today such number has been reduced to 71%, largely for the benefit of China. Only Germany managed to do better.

Trade balance – manufacturing, 2012 USD bn


Trade balance – manufacturing, share of worldwide exports in 2012 vs rebased to 100 in 1999

Italy remains an export-led economy. The lack of competitiveness penalizing exports resulted in heavy current account imbalances since entering the Euro, mirroring the surplus scored by Germany.

Current account balance of Italy, Germany, Spain and Greece


R² = 0.7218

-6%

-4%

-2%

0%

2%

4%

6%

-3% 2% 7% 12% 17% 22%

Loan growth YoY

GDP Growth YoY

866

394292

205113

-34-99

-610-800

-600

-400

-200

0

200

400

600

800

1000 94%

71% 71%67%

61%

55%

40%

50%

60%

70%

80%

90%

100%

Germany Italy US Japan France UK

-20.0

-15.0

-10.0

-5.0

-

5.0

10.0

Germany CA Greece CA Italy CA Spain CA

Italy

03 July 2014 ◆ 19

Indeed, over the last decade, Italy lost market share in exports for the benefit of Germany and most recently of Spain.

Italian export in relation to Eurozone partners (%)


Italian and Spanish export in relation to Germany (%)

Such an imbalance made austerity the inevitable road to travel in search of rebalancing the current account deficit. As we show below, it has been mainly through lower imports resulting from austerity and compression in domestic consumption that such rebalance has been achieved.

Italian export, % change QoQ


Italian import, % change QoQ

This ended up exacerbating the growth problems of the country, amplified by the forced collapse of internal demand introduced by the Monti government. The lhs chart below compares the last five years of trade balance in the manufacturing sector of Italy. It confirms that the slowdown has been largely explained by the contraction in domestic consumption when compared to Germany and France.

This leads us to the second conclusion: not only the overreliance on banks’ lending due to the credit crunch was a key source of GDP contraction for Italy, but also the forced austerity to rebalance the current account contributed to the pain. Italy is the most pro-cyclical Eurozone country, i.e. the most geared into its trade balance. The rhs chart below confirms that 67% of the Italian GDP growth is affected by its trade balance. This number compares with 30% in Germany. As such, it is from a combination of higher loan growth and competitiveness-oriented reforms that Italy could manage to get out of its woods, in our view. This is exactly at the heart of the Renzi government’s recently-presented measures.

15

20

25

30

35

40

45

50

2000 2001 2002 2003 2004 2005 2006 2007 208 2009 2010 2011 2012 2013

Italy/Euro (no Germany) Italy/ Germany

15

20

25

30

35

40

45

50

55

60

65

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Spain/Germany Italy/GermanySpain/Italy

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2

Italian Export, % change QoQ

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2

Italian Import, % change QoQ

Italy

03 July 2014 ◆ 20

Trade balance – manufacturing, breakdown external vs internal demand, October 2008 vs year-end 2013


ITALY – GDP growth vs trade balance

Lowering funding costs offset narrowing assets spread

Margins-wise, Bank of Italy data show that lending rates applied to residential mortgages and corporate loans are down in April versus March (7bps and 8bps, respectively). On the other hand, the cost of deposits is down 5bps MoM and cost of bonds down c.2bps in April 2014 versus March 2014. Overall, we believe the most recent data reported by the Bank of Italy show that Italian banks’ NII should suffer from weak loan demand, compensated by the rebalancing of funding sources towards less expensive deposits at the expenses of bonds. Declining cost of funding should compensate for the lowering assets spread. On the other hand, Bank of Italy data show a deceleration in the annual growth rate of Gross NPL (hitting c€166bn in April) to below 25% versus c.26% in March and c.27% in February.

Loan Growth (YoY%)

Funding Growth (YoY%)

Main interest rates on loans (%)


Main interest rates funding (%)

-15.9%

-1.0%

4.6%

16.5%

11.6%

5.9%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Italy Germany France

Domestic Foreign

R² = 0.6707

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

-4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0%

-3.5-3.7

-4.3

-3.7-3.5 -3.6

-3.3-3.1

-1.1-1.3

-1.5-1.3 -1.2 -1.2 -1.1 -1

-4.5-4.2

-4.9-5.2

-4.9-5.1

-4.3 -4.4

-6

-5

-4

-3

-2

-1

0

Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14

Private Sector Households Corporate

3.6

5.46.1

2.3 2.71.8 1.6 1.4

-7.2 -7 -7.3-8.3

-9.3 -9.2-10.6

-9.6

-12

-10

-8

-6

-4

-2

0

2

4

6

8


Deposits Bonds

3.97 3.9 3.86 3.8 3.8 3.73 3.7 3.63

5.23 5.295.17 5.16

5.31 5.23 5.15 5.17

4.334.47 4.38 4.36 4.4 4.4

4.2 4.28

2.982.84 2.76 2.82 2.8 2.79 2.89

2.66

2

2.5

3

3.5

4

4.5

5

5.5


Res. Mortg. Corp. Overdraft Corp. Up to €1m Corp. Above €1m

1.02 0.99 0.99 0.97 0.95 0.94 0.94 0.89

3.54 3.55

3.13

2.5

2.812.65 2.68 2.66

0

0.5

1

1.5

2

2.5

3

3.5

4


Deposits Bonds

Italy

03 July 2014 ◆ 21

Recent Bank of Italy data suggest there is enough evidence to celebrate an inflection point in the second derivative of loan growth and NPLs generation. However, we think it difficult for Italy to foresee massive acceleration in its growth recovery path if it has to stick with the straitjacket imposed by the EU fiscal consolidation focus. Indeed, it is now or never for Italy to pretend some softening of the EU austerity stance, and we welcome Renzi putting this at the top of its European agenda.

Softening austerity is Renzi’s major task Back-testing Renzi’s assumptions on the Fiscal Compact: fiscal consolidation vs growth

We have reviewed the Budget Law recently presented by Renzi government with the aim of assessing the feasibility of the macroeconomic assumptions embedded in the plan. The tables below show that Renzi has an ambitious plan aimed at reaching both the debt / GDP reduction below 60% in 20 years and the respect of the balanced budget.

We start by summarizing below the key growth assumptions embedded in Renzi’s Budget law. It can be seen that with an average cost of debt assumed in the 3.88% region over the period and given average inflation assumed at 1.3%, the difference between cost of debt and nominal growth should reduce from 2.15% as a starting point in 2014 to 0.6% at the end of the Parliamentary mandate in 2018.

Renzi Budget Law – key macro assumptions and difference between cost of debt and growth real GDP

growth nominal GDP

growth cost of debt r-g

2014 0.8% 1.7% 3.85% 2.15%

2015 1.3% 2.5% 3.82% 1.32%

2016 1.6% 3.1% 3.92% 0.82%

2017 1.8% 3.2% 3.91% 0.71%

2018 1.9% 3.3% 3.90% 0.60%

Average over the period 1.5% 2.8% 3.88% 1.1%


The table below suggests that by maintaining a cyclically-adjusted structural balanced budget, the above scenario would allow for a debt-to-GDP reduction of 15 p.p. over the four years of Renzi government, from 135% today to 120% in 2018. Even more notably, if we assume the 0.6% difference between cost of debt and nominal growth in 2018 to stay unchanged over the 20 years timetable imposed by the fiscal compact, i.e. until 2034, the result would be full respect of the Fiscal Compact constraints given a debt to GDP ratio of 57% in 2034.

As such, in theory the respect of the Fiscal Compact seems possible even for a country such as Italy with such a high debt / GDP ratio. In reality though, when moving from excel theory to real life, the above simulation will prove correct only if one assumes Italy can keep running at

Structural deficit and primary surplus required to reduce debt / GDP below 60% in 2034

primary surplus deficit / GDP Debt / GDP

structural deficit

2014 2.6% 2.5% 134.9% -0.6%

2015 3.3% 1.6% 133.3% -0.1%

2016 4.2% 0.8% 129.8% 0.0%

2017 5.0% 0.1% 125.1% 0.0%

2018 4.5% 0.0% 116.7% 0.0%

...

2034 4.5% 0.0% 57.0% 0.0%


Italy

03 July 2014 ◆ 22

an average 5% primary surplus over 20 years and still generate some 2% average real GDP growth. This is far from being easy, in our view, and it ignores what has been already proven over the last three years: a fiscal multiplier in the region of 1.6x for Italy penalizes growth via austerity. Thus as we see it, Renzi needs to secure some sort of victory on softening austerity if he wants to find a good and sustainable combination between fiscal discipline and growth.

Let us now look at exactly the opposite scenario, i.e. how much can Italy free up in terms of resources to allocate to growth if it commits to just maintain debt / GDP unchanged at current 135% level. This means ignoring the Fiscal Compact timetable and the balanced budget constraint. As we show below, moving into a fiscal policy of mere stabilization of debt rather than into the reduction path required by the fiscal compact would free up resources of €26bn in year one up to €77bn in year four. In short, a blue-sky scenario that ignores the fiscal compact constraint and merely keeps the debt level unchanged would free up plenty of resources to fund the well-needed reforms.

It follows that Renzi needs to aim for some sort of half-way solution between the two extremes scenario highlighted above. This means inevitably relying on a Keynesian approach to public investments, which is not exactly in line with the austerity focus driving the Eurozone for the time being.

A Keynesian Approach to economic recovery . . .

As the looming recession persists, many governments have started to speak about increasing investment in infrastructure as a counter-cyclical tool for their economic policies. Spain is a clear demonstration among peripheral economies of the Keynesian approach adopted to boost the economic recovery. The Spanish Government recently announced a plan for €6.3bn tax cuts to recover growth. Out of this amount, €2.7bn should come from the private sector and €3.3bn from the public sector through funds from the EIB.

When looking at the purchasing drivers for capital goods, the models that are most heavily used belong to the same general family, the neoclassical model of investment. All studies conclude that investment spending by firms depends primarily on three factors:

The projected growth in business output (basically GDP), as determined by final demand.

The cost of acquiring and using capital goods, i.e. the user cost of capital. This in turn depends on factors such as the price of new capital goods, the real interest rate at which firms must borrow to finance their investment spending, the rate at which capital

depreciates, and the degree to which the tax code subsidises or penalises investment.

The market value of firms relative to their underlying capital assets. When the stock market values firms and their future prospects highly, investments in physical assets such as capital goods are more profitable for firms than financial investments such as stock repurchases,

mergers or corporate takeovers.

A different path – no fiscal compact and commitment to keep current 135% Debt/GDP unchanged

Debt / GDP

Primary surplus

Primary surplus difference vs Fiscal Compact scenario

Difference in €bn

2014 134.9% 2.6% 0.0% 0

2015 134.9% 1.7% 1.6% 26

2016 134.9% 1.1% 3.1% 52

2017 134.9% 0.9% 4.1% 64

2018 134.9% 0.8% 3.7% 77

...

2034 134.9% 0.8%


Italy

03 July 2014 ◆ 23

However, the second point has a potential complication. If a price decline today leads firms to expect even greater price decreases in the future, then they may delay current purchases of capital goods in order to take advantage of lower prices in the future.

This is partly what, in our view, has happened to companies highly dependent on movements in raw material prices: declining prices of raw material (copper, oil and steel prices) pushed customers to delay entering into new projects in the hope of getting a lower total project cost.

. . . a route that Renzi may be keen to explore

We have looked at fixed capital formation versus GDP over the period 1999-2013 in Italy. Gross fixed capital formation consists of “resident producers” acquisitions, less disposals, of fixed assets during a given period. Fixed assets are “tangible or intangible assets produced as outputs from processes of production that are themselves used repeatedly, or continuously, in processes of production for more than one year. GDP and Investments are strictly correlated. We analysed GDP and gross fixed capital formation in the EU (25 countries) from 1999-2013, which represents full investment cycles of boom and bust.

GDP and Investments – EU 28 countries (Y/Y)


GDP and Investments – Italy (Y/Y)

As highlighted in the charts above, GPD and investments in fixed assets are strictly correlated over the three cycles analysed. The same proves to be true for Italy, even if the correlation is lower (R-squared of 0.65 for Italy versus 0.75 for EU 28 countries) in particular during the downturn of the cycle between 2010-2013. The reason for this seems to lie in the missing contribution of the public investments that dropped in line with the trend of GDP and private investments, while in the EU 28 zone such a correlation has proved to be much softer.

GDP and Investments – EU 28 countries (Y/Y)



-20%

-15%

-10%

-5%

0%

5%

10%

15%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

GDP and Investments - EU 28 Countries (YoY)

GDP Gross fixed cap. form.

-15%

-10%

-5%

0%

5%

10%

15%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

GDP and Investments - Italy(YoY)

GDP Gross Fixed cap form.

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

GDP, Public and Private Investments - EU 28(YoY)

GDP (€m) Investments by private sector (€m)

Investments by public sector

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

GDP, Public and Private Investments - Italy (YoY)

GDP (€m) Investments by private sector (€m)

Investments by public sector

Italy

03 July 2014 ◆ 24

Looking at the historical trend of investments in fixed assets on GDP, it is evident from the chart below the decline in the ratio, from a 22% average over the period 2000-2008 to the current 17% ratio. The conclusion might seem naïve, but very logical at the same time, in our view: a recovery of the 500 bps difference between the historical average and current level would translate into some €70bn/€80bn new investments, with a knock-on effect on the capital goods and cement sectors. We believe that public spending should arguably come to the rescue, substituting current lack of private investment, since this process may create a positive loop leading into higher employment, higher consumption and higher GDP growth. What seems even counter-intuitive, i.e. the demand side of the equation matters and requires the state to step in when private investment is low, is however in deep conflict with the macro receipts driving the EU establishment so far, i.e. macroeconomic policies purely focused on the supply side of the equation.

A larger majority will facilitate reforms approval - Five Star at play?

Last week, Renzi met a delegation of senior PMs of Five Star to open up a dialogue focused on the electoral law but the two sides agreed to widen the debate on other reforms and meet up again in the coming weeks. It is the first time since Five Star scored a 25% result at last year elections that the two sides have stopped attacking each other and started instead exploiting the room for a fruitful cooperation. The 41% result achieved by Renzi at the recent EU elections helped to force Five Star to capitulate and recognize Renzi leadership and move away from the ‘non elected premier’ complaint they have always raised. Obviously both sides might be bluffing and in search of their own agenda.

In the case of Five Star, the goal might simply be to endorse themselves as a responsible force willing to cooperate with the government in order to achieve credibility with the electorate. Even if nothing happens, they can now always say ‘we have given our official availability, but Renzi did not accept it’.

In the case of Renzi, this might be another attempt to move Five Star voters on his side, making the two parties effectively converge.

Whatever the rationale behind such an unexpected move, we think it is important, as to us this significantly increases the chances of relevant reforms approval. All of a sudden it seems that we are entering a situation where more than 80% of the Parliament one way or another is willing to show a constructive approach on reforms. This means Renzi might end up in a pleasant situation of discussing reforms on two separate tables, one with Berlusconi and the other with M5S. Each of them will make himself available for specific reforms with no need of the three of them voting always together but with certainty for the country that positive things might be agreed.



0%

5%

10%

15%

20%

25%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

GDP vs Investments (%GDP)

GDP (€m) Invest/GDP

Italy

03 July 2014 ◆ 25

Draghi hasn’t finished yet If the reforms agenda represents the first catalyst for what we see as a 2H 2014 momentum potentially building up in Italy, it is Draghi who provides the second element in support of our constructive view. The Italian GDP growth shows the highest correlation among Eurozone countries on both current account balance and loan growth. As such, competitiveness reforms and loan growth are the two mandatory requirements for Italy to accelerate its growth path, in our view. Italy appears to be the perfect country to gain exposure to the recent ECB measures aimed at kick-starting SMEs growth and to the future implementation of non-conventional QE initiatives. We simulated for a sample of Italian banks the potential impact of the recently-announced initiatives from Draghi: 1) T-LTRO could result in average 4% net profit impact via higher SME lending, and 2) suspension of MROs sterilization could be worth some 1% further EPS boost via lower cost of funding. UBI emerges as the most geared Italian bank in our panel to ECB measures (+14% EPS sensitivity) versus ISP as the least exposed with 3% potential impact. The market has efficiently anticipated the potential inflection point in the earnings cycle of Italian stocks. We calculate over the last 12 months that Italy benefited from some 60% multiple expansion as a result of roughly 40% share price rerating and 20% EPS downgrades, with TMT and Oil leading the pack. However, if multiple expansion is the way for the market to capture inflection points in the near term, over the mid-to-long term it is EPS upgrades having to drive rerating: indeed, we calculate over the last decade some 80% r-squared in our coverage universe between performance and EPS growth. On average, the market anticipated the estimates cycle by three quarters. With the Italian rerating having started during the summer last year and no major EPS upgrades in sight for now, it seems clear that this time around the market needs to be more patient in waiting for EPS upgrades probably until 1H 2015.

Rates lower for longer and an attempt to kick-start lending Draghi’s last receipt before QE implementation

Our recent upgrade of the European banking sector to Neutral (see QE drives sector upgrade, 13 May 2014) came in anticipation of further easing monetary actions. Indeed, at the last ECB meeting on 5 June, Draghi proposed a receipt large enough to keep rates lower for longer and stimulate economic growth. The Central Bank proposed a mix of the following measures:

Main refinancing rate cut by 10bps to 0.15%;

Marginal lending facility rate cut by 35bps to 0.4%;

ECB deposit rate cut by 10bps to -0.1%;

Extension of the fixed rate allotment liquidity auctions;

Suspension of MROs sterilisation;

TLTRO programme for €400bn; and

Commitment to further action to revive the ABS market.

The result of the above should be a combination of cheap money for longer and an attempt to boost the economy by trying to kick-start lending activity, the right receipt to support the peripheral recovery.

Hopes of better returns lie in steadily lower cost of funding and T-LTRO

Although no traditional QE has been announced yet, we think there is already enough to argue that the ECB has already entered the QE territory due to the decision to extend the MROs until December 2016, and more importantly to suspend its sterilization. Since May 2010, for every euro the ECB has spent on government bonds, it has tried to withdraw an equal amount from banks through interest-bearing deposits. Each week, the ECB offers banks interest-bearing deposits equal to the amount of government bonds the ECB still has on its balance sheet. This drains money from

Italy

03 July 2014 ◆ 26

the financial markets, but only temporarily so it must be repeated weekly. By keeping the money supply stable, the ECB claimed that it hasn’t engaged in quantitative easing so far. In announcing to stop such weekly sterilisation though, that money will stay in the banking system. The hope is that banks with excess liquidity would lend to other banks, thus reducing short-term interest rate. In theory, if banks are able to borrow more cheaply, they should make more loans to households and businesses. With the extension of full allotment until 2016, suspension of sterilisation and with T-LTRO rates will stay lower for longer and this will feed the economy via lower rates and FX.

Assets inflation and cost of funding compression worked in US

When looking at the strong correlation between US banks’ performance and the FED balance sheet since the QE started in US in 2009 (both rebased to 100 in January 2009), there seems to be enough evidence to expect a similar trend to materialise in Europe, in our view.

FED balance sheet size vs US banks’ performance ECB balance sheet size vs EU banks’ performance


QE via govies would have limited effects in Italy

We think that QE through government bonds would add little to the real economy given how low the spreads already are. Additionally, assuming to allocate €1trn QE to each EU country by contribution to the ECB capital would leave Italy and Spain with roughly €280bn extra demand via the ECB on their government bonds, but such a number is not much different from the LTRO refund that Italian and Spanish banks are expected to provide by March next year.

In the table above, we allocate €1trn QE on government bonds pro rata on each EU country based both on their contribution to the capital of the ECB and to the European GDP. It can be seen that

40

60

80

100

120

140

160

180

200

70

90

110

130

150

170

190

210

Jan-

09

Apr-

09

Jul-0

9

Oct-

09

Jan-

10

A pr-

10

Jul-1

0

Oct-

10

Jan-

11

Apr-

11

Jul-1

1

Oct-

11

Jan-

12

A pr-

12

Jul-1

2

Oct-

12

Jan-

13

Apr-

13

Jul-1

3

Oct-

13

Jan-

14

A pr-

14Fed balance sheet US banks performance (rhs)

50

70

90

110

130

150

170

70

80

90

100

110

120

130

140

150

160

Jan

-09

Mar

-09

May

-09

Jul-

09

Sep

-09

No

v-09

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-10

Jan

-11

Mar

-11

May

-11

Jul-

11

Sep

-11

No

v-11

Jan

-12

Mar

-12

May

-12

Jul-

12

Sep

-12

No

v-12

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

-13

No

v-13

Jan

-14

Mar

-14

May

-14

Eurosystem total assets EU Banks performance (rhs)

Simulating €1 trn QE allocated to government bonds

National central bank Curren ECB

Capital % QE allocation by

ECB Capital GDP as % of

total QE allocation by

GDP weighting LTRO

outstanding Belgium 3.5% 35 4.0% 40 35.6 Germany 25.7% 257 28.5% 285 9.0 Estonia 0.3% 3 0.2% 2 Ireland 1.7% 17 1.7% 17 25.6 Greece 2.9% 29 1.9% 19 Spain 12.6% 126 10.7% 107 96.5 France 20.3% 203 21.5% 215 4.2 Italy 17.6% 176 16.2% 162 159.3 Cyprus 0.2% 2 0.2% 2 3.5 Latvia 0.4% 4 0.2% 2 Luxembourg 0.3% 3 0.5% 5 Malta 0.1% 1 0.1% 1 Netherlands 5.7% 57 6.3% 63 3.2 Austria 2.8% 28 3.3% 33 2.1 Portugal 2.5% 25 1.7% 17 32.8 Slovenia 0.5% 5 0.4% 4 2.1 Slovakia 1.1% 11 0.8% 8 Finland 1.8% 18 2.0% 20 Total Euro Area NCB's 100.0% 1,000 1,000

Source: Mediobanca Securities on data from ECB, Bloomberg and IMF OECD

Italy

03 July 2014 ◆ 27

the ‘replacement effect’ between ECB and national banks would leave Italy with around €170bn QE-driven demand for its govies versus €160bn of LTRO govies to mature next year. Equally, for Spain some €110bn QE govies compares with €96bn LTRO. Paradoxically, it would be Germany that would be the main beneficiary of such QE given a pro rata allocation of more than €250bn versus virtually no negative impact from LTRO maturity. As such, the QE on govies net of LTRO maturity could result in higher spread for peripheral countries relative to Germany. As a result, we think that any potential QE solely through government bonds would have limited impact in terms of further cost-of-funding compression, given the already low starting point. The base case would essentially be that of a zero-sum game between the extra govies to be bought by the ECB and the lower exposure for a similar magnitude that we could expect from peripheral banks post LTRO maturity. If anything, we would expect QE via AAA super national bonds, i.e. bonds issued by the European Investment Bank of the EFSF/ESM.

Inflation and exchange rate will dictate the level of ECB success

In one of his recent speeches, Draghi quantified the impact of QE of up to 70bps higher inflation. Indeed, one should expect QE to primarily help the debt / GDP ratio in periphery via the double-positive effect of higher inflation via assets re-pricing and higher GDP growth via Euro devaluation. Empirical and academic evidence suggest QE acts as a drag on the exchange rate, often resulting in devaluating the currency. However, this is proved only at the early stages of QE, i.e. post announcement. After one year, such a benefit becomes much less in evidence. The chart below confirms that the recent US experience on QE made no exception: the USD-devaluated against the Euro by roughly 15% in 2009 right after the QE implementation. However, four years on the road, and with QE still in place, albeit in its tapering time, the FX is pretty much back to its pre-QE time.

FED balance sheet size vs USD vs EUR exchange rate


. . . while its impact on inflation remains uncertain

Even more controversial is the relationship between QE and inflation, as we lack clear evidence from academic papers on the correlation between the two variables. Again the recent experience in the US (lhs chart below) suggests a positive impact, but only at the beginning: by the end of 2009 CPI in US increased by roughly 2p.p. before starting to drift down almost to pre-QE levels. Surely the current ‘lowflation’ situation in Europe seems to offer room for Draghi’s expectations to materialize, but this is far from being obvious given the late implementation of QE in Europe.

80

85

90

95

100

105

110

115

120

80

100

120

140

160

180

200

220

240

Jan-09

Apr-0

9

Jul-09

Oct-09

Jan-10

Apr-1

0

Jul-10

Oct-10

Jan-11

Apr-1

1

Jul-11

Oct-11

Jan-12

Apr-1

2

Jul-12

Oct-12

Jan-13

Apr-1

3

Jul-13

Oct-13

Jan-14

Apr-1

4

Fed balance sheet USDEUR FX rate

Italy

03 July 2014 ◆ 28

FED balance sheet size vs US CPI inflation ECB balance sheet size vs EU CPI inflation


Any success from the ECB in devaluating the currency and adding inflation to the real GDP growth would essentially result in helping peripheral countries putting debt / GDP ratio on a more sustainable path.

QE via ABS could make the difference

It is well known that the shrinking securitisation market in Europe remains the major obstacle for an ABS QE move from Draghi together with the high capital absorption on ABS. Securitisation helps transforming relatively illiquid assets into more liquid securities. It allows the originators to obtain funding and transfer part of the underlying risk, while investors can diversify their portfolios in terms of risk and return. In addition, a high quality and transparent senior ABS can also help meet the increasing demand for high quality collateral providing a complement to government bonds. However, the stigma on securitisation post the US subprime crisis caused on overreaction from the regulator, which clearly did not help Europe developing a large enough securitisation market.

The outstanding amount of ABS in Europe is currently €1.5trn, i.e. some 25% the size of the US market. As we show below, since its peak in 2009, the outstanding amount has decreased by a third, i.e. roughly €750bn. RMBS is by far the largest component, accounting for 60% of the European market. The UK, Netherlands, Spain and Italy are the largest markets.

European ABS outstanding, € bn

Source: Mediobanca Securities, AFME

. . . with ABS issuance largely retained by originating banks and placed as collateral in ECB

As shown in the lhs chart below, in 2006 all primary issuances were placed with investors and other banks, but by 2009 almost all deals were retained by the originating banks and largely placed as collateral with the central banks.

As shown on the rhs chart below, monthly issuance volumes over the last couple of years remained pretty much flat in the region of USD22bn per month on average, and in Europe continue to be mostly originated in Germany, Netherlands and the UK. Deals involve either short maturities on high-yielding assets or SME transactions with specific support from the European Investment Bank.

-3

-2

-1

0

1

2

3

4

5

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

4500000

5000000

Jan-

09

Apr-0

9

Jul-0

9

Oct-0

9

Jan-

10

Apr-1

0

Jul-1

0

Oct-1

0

Jan-

11

Apr-1

1

Jul-1

1

Oct-1

1

Jan-

12

Apr-1

2

Jul-1

2

Oct-1

2

Jan-

13

Apr-1

3

Jul-1

3

Oct-1

3

Jan-

14

Apr-1

4

Fed balance sheet CPI Inflation RHS

0

0.5

1

1.5

2

2.5

3

3.5

0

500

1000

1500

2000

2500

3000

3500

Jan-

09

Apr-0

9

Jul-0

9

Oct-0

9

Jan-

10

A pr-1

0

Jul-1

0

Oct-1

0

Jan-

11

A pr-1

1

Jul-1

1

Oct-1

1

Jan-

12

A pr-1

2

Jul-1

2

Oct-1

2

Jan-

13

A pr-1

3

Jul-1

3

Oct-1

3

Jan-

14

A pr-1

4

Eurosystem total assets EU HICP RHS

Belgium

Italy

Netherlands

Spain

UK

Other

0

500

1000

1500

2000

2007 2008 2009 2010 2011 2012 2013

Italy

03 July 2014 ◆ 29

European ABS issuance, € bn Global ABS issuance, USD bn


SME ABS – a very small market with high capital treatment

SMEs ABS account for just 8% of the EU securitisation market, i.e. some €120bn. Under the current framework, there are two approaches: (a) the standardised approach (SA), and (b) the IRB approach.

The banks that apply the SA must apply a ratings-based approach for the rated securitisation exposures. Under Basel II, if securitisation exposures are unrated, this will be required to be deducted from regulatory capital. However, under Basel III such exposures are subject to a 1250% risk weight.

Similarly, banks that apply the IRB approach must apply the relevant ratings-based approach for the securitisations that are rated or using the provided risk weights set out in the relevant tables. These differ from the SA tables, and usually have lower risk weights.

When an external or “inferred” rating is not available, a bank must use: (a) an internal assessment approach ("IAA"), subject to certain operational requirements, or (b) a supervisory formula approach ("SFA"). If the bank is unable to use any of these approaches, under Basel II, securitisations would be deducted from the capital base, or will instead be subject to a 1250% risk weight under Basel III.

. . . and Second Proposal on Risk-Based Capital Requirements (December 2013) . . .

In December 2013, the Basel Committee issued another document in respect of the risk-based capital requirements for securitisation exposures, offering the proposed hierarchy of approaches:

The first choice is for the banks to use an internal ratings-based (IRB) approach to determine the capital requirements.

If the IRB cannot be used for some securitisations, an external ratings-based approach (external rating) may be used, assuming that the use of ratings is permitted within the relevant jurisdiction.

If neither of the above approaches can be used, then a standardised approach is applied. This is based on the underlying capital requirement under the standardised approach for credit risk and other risk factors.

As we show below, there is a 15% risk-weight floor for all three approaches, which is more than double the 7% imposed under the existing framework. Indeed, overreaction to the US subprime crisis led to the overpenalising of ABS in spite of their relatively healthier profile compared to US. According to S&P, the cumulative default rate on European structured finance assets for instance has been just 1.5% since July 2007. This compares with default rates on US ABS loans of 18% over the same period, including subprime loans.

. . . suggest the need for a relief on risk weight

The ECB should, we believe, provide the banks with some kind of relief regarding the risk-weighting calculation of securitisations, by reducing the floor of the external ratings-based approach. However, given that the 2nd consultative document already reduced the weightings from the first

0

100

200

300

400

500

600

700

800

900

2006 2007 2008 2009 2010 2011 2012 2013

non‐retained retained

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Jan‐12

Feb‐12

Mar‐12

Apr‐12

May‐12

Jun‐12

Jul‐12

Aug‐12

Sep‐12

Oct‐12

Nov‐12

Dec‐12

Jan‐13

Feb‐13

Mar‐13

Apr‐13

May‐13

Jun‐13

Jul‐13

Aug‐13

Sep‐13

Oct‐13

Nov‐13

Dec‐13

Jan‐14

Feb‐14

Mar‐14

Apr‐14

US$m

Global ABS Issuance

Italy

03 July 2014 ◆ 30

document, this is not straightforward at this stage. We have already seen that banks increased their credit risk RWA in respect of securitisation (Credit Suisse, Deutsche Bank, HSBC) recently. The regulatory initiatives have been designed to address the shortcomings highlighted during the crisis. However, the proposed changes do not appear to distinguish sufficiently between simple and prudently-designed ABS and more opaque complex structures. Indeed, capital charges appear to be too high for high quality ABS. Also, a key issue remains on the treatment of securitisation in the forthcoming implementation of the Liquidity Coverage Ratio.

Risk weights for ABS – different approaches Rating

External Ratings-Based Approach (2nd consultative

document)

Revised Ratings-Based Approach (1st consultative document)

RBA (current framework)

Maturity Maturity Maturity 1 year 5 years 1 year 5 years 1 year 5 years

AAA 15% 25% 20% 58% 7% 7%

AA+ 15% 35% 32% 75% 8% 8%

AA 25% 50% 51% 97% 8% 8%

AA- 30% 55% 61% 110% 8% 8%

A+ 40% 65% 71% 124% 10% 10%

A 50% 75% 81% 141% 12% 12%

A- 60% 90% 94% 162% 20% 20%

BBB+ 75% 110% 106% 183% 35% 35%

BBB 90% 130% 118% 203% 60% 60%

BBB- 120% 170% 136% 235% 100% 100%

BB+ 140% 200% 153% 265% 250% 250%

BB 160% 230% 170% 294% 425% 425%

BB- 200% 290% 210% 363% 650% 650%

B+ 250% 360% 262% 442% 1250% 1250%

B 310% 420% 321% 485% 1250% 1250%

B- 380% 440% 389% 502% 1250% 1250%

CCC [+/-] 460% 530% 472% 568% 1250% 1250%

Below CCC- 1250% 1250% 1250% 1250% 1250% 1250%

Source: Mediobanca Securities, AFME

ECB measures could bring 5% earnings upside to Italian banks Draghi hasn’t finished yet

In this section we aim at measuring what could be the impact on Italian banks’ profitability in case of an effective transmission of monetary policy actions to the real economy.

In our Base-Case we assume that the T-LTRO facility could bring some expansion of the SME loan book on top of what is already embedded in our forecasts, bringing on average 4% EPS upgrade potential;

The sterilization of the MROs could bring lower sovereign yields, which – in turn – may prompt lower cost of funding. In light of the overwhelming sovereign exposure in Italian banks and the relatively short residual maturity, we calculate most of the impact from 25bps lower cost of ML-term funding would be eroded by the lower yields on the sovereign exposure, leaving the overall aggregate impact in the region of 1%.

The table below shows the outcome of our analysis, from which UBI emerges as the winner due to its relatively low risk cost of SME loans, a large portion of ML-term funding expiring in 2014-16E and the relatively longer residual maturity of its sovereign portfolio.

Italy

03 July 2014 ◆ 31

T-LTRO could account for 4% EPS potential upgrade in a Base-Case In order to support bank lending to households and non-financial corporations, excluding loans to households for house purchase, the ECB will conduct a series of T-LTRO operations, maturing in Sept-18. Counterparties will be entitled to borrow 7% of the total amount of their loans to the euro area non-financial private sector, excluding loans to households for house purchase, outstanding on 30 April 2014. Lending to the public sector will not be considered in this calculation. In assessing the potential impact from the T-LTRO, we make the following assumptions.

Maximum SME book expansion from T-LTRO. We calculate the 7% borrowing potential using the Bank of Italy disclosure of loan book breakdown in 2013, which should ensure a good degree of homogeneity in classifying loans to Government/Public Agencies/Financial Institutions. In other words, we start from 2013 loan book, deduct loans to Government/Public Agencies/Financial Institutions and retail mortgages and then calculate 7% of the residual amount. This represents the maximum funding to be allocated to SME lending in the future;

Yield on new SME loans origination set at 3.25%. We estimate the average rate on new SME loans at 3.50%, i.e. the most recent data on the rate of newly originated corporate loans. We consider origination of loans below €1m and above €1m, as we believe it would not be correct to account for loans below €1m only, unlikely to apply for medium-sized companies. We use 25bps as cost of funding of T-LTRO operations, adding 10bps to the current policy rate (15bps);

Fee margin hovering over 25bps. We estimate the origination of new loans should also bring some fees, whose margin is quantified in c25bps on average;

Cost / Income Ratio set at 15%. We estimate the origination of new loans should also bring some paperwork, indirect taxes, insurance premiums, etc. Summing up general expenses, indirect taxes, insurance premiums we come to a reasonable 15% C/I ratio;

Italian Banks – Estimated earnings Impact from T-LTRO and MROs Sterilization, 2016E

€m UCG ISP UBI BP CE TOTAL

T-LTRO (Base-Case) 177 115 45 25 10 373

MROs Sterilization (Lower Cost of Funding and Lower Yield on Sov. Exp.) 38 13 34 20 0 105

Total 215 128 79 46 10 478

As % of 2016E Earnings +5% +3% +14% +8% +5% +5%


Italian Banks – Estimated Maximum SME Loan Book Expansion from T-LTRO, 2016E €bn BP UBI CREDEM ISP UCG

Loan Book - FY2013 86 88 20 344 503

Estimated Mortgages - FY13 18 23 6 72 114

Financial Institutions - FY13 12 3 0 30 55

Public Administration - FY13 1 3 0 32 29

Estimated Loan Book Eligible for T-LTRO – FY13 55 60 13 211 305

Potential Loan Book Expansion from T-LTRO Funding 7% 7% 7% 7% 7%

Potential Loan Book Expansion from T-LTRO 3.9 4.2 0.9 14.7 21.4

Estimated SME Loan Book - FY13 47 42 9 151 217

Max Loan Book Expansion from T-LTRO as % of SME Loan Book +8% +10% +10% +10% +10%


Italy

03 July 2014 ◆ 32

Risk cost ranging from 120bps at ISP and BP to 40bps at CREDEM. We set different cost of risk generated by new SME loans from bank to bank. In light of the marked variance in 2016E risk cost of the banks under scrutiny and considering that SME loan book account for the majority of the book, we regard differentiating the cost of risk as a reasonable assumption. Starting from the estimated loan book breakdown and from a standardized risk cost for certain asset classes (c25bps for residential mortgages, 250bps for consumer credit, 20bps for Large Corporate/Financial Institutions, 5bps for Public Administration), we calculate the implicit cost of SME lending by deducting the amount of standardized provisions for the above mentioned asset classes from Group loan losses in 2016E, resulting in an implicit risk cost ranging from 40bps at CREDEM to 120bps at ISP/BP;

33% tax rate for Italian banks and 29% for UCG. We estimate 33% tax rate for pure domestic players (including ISP, as its CEE exposure should not change remarkably the consolidated tax rate). We use 29% for UCG (in line with Group estimate in 2016E), as some of the new SME lending should be originated in Germany, Austria, and CEE, benefiting from lower tax burden;

The table below shows the estimated earnings impact from the T-LTRO in the Base-Case scenario. We strip out from the maximum SMEs lending boost potential what is already captured in our 2014-16 estimates. We calculate average 5% EPS uplift potential from SME loan book expansion in 2016E, with UBI being the one benefiting the most (+8%) and ISP benefiting the least (+3%);

Suspension of MROs sterilization may add less than 1% of EPS Unsurprisingly the correlation between the Italian sovereign yields and Italian banks’ cost of funding has been very strong over the past few months, either with the yield of the Italian 10-years BTP or the yield of the Italian Treasury-Bills.

Italian Banks – Estimated EPS Impact from SME Loan Book Expansion T-LTRO (Base-Case), 2016E

UCG ISP UBI BP CREDEM

Potential Loan Book Expansion from T-LTRO 13.8 9.4 3.0 2.1 0.6

Estimated Avg Rate on SME Loans 3.50% 3.50% 3.50% 3.50% 3.50%

Estimated Cost of T-LTRO Funding 0.25% 0.25% 0.25% 0.25% 0.25%

Fee Margins on New Loans 0.23% 0.29% 0.25% 0.25% 0.20%

C / I Ratio 15% 15% 15% 15% 15%

Loan Loss Ratio 1.15% 1.20% 0.70% 1.20% 0.40%

NII 448 307 97 69 19

Fee Income 32 27 7 5 1

Operating Costs -72 -50 -16 -11 -3

Operating Profit 408 284 88 63 17

Loan Losses -158 -113 -21 -26 -2

Profit Before Tax 250 171 67 37 15

Tax Rate 29% 33% 33% 33% 33%

Net Impact 177 115 45 25 10

as % of 2016E Earnings +4% +3% +8% +4% +5%


Italy

03 July 2014 ◆ 33

Italy – Correlation between Italian 10-Yrs BTP Yield and Cost of

Banks’ M/L-term Funding, (Jul-13/Apr-14)

Source: Bank of Italy, ABI, Mediobanca Securities analysis

Italy – Correlation between Italian BOT Yield and Cost of Banks’

Deposits, (Jul-13/Apr-14)

Source: Bank of Italy, ABI, Mediobanca Securities analysis

With the extension of full allotment until 2016, suspension of sterilization and with T-LTRO, short-term rates and sovereign yields started to go down: in example the Euribor 3-months dropped by 12bps since the end of Apr-14, accelerating its descent at the start of Jun-14, while the yield of the Italian 10-Yrs BTP dropped to c290bps nowadays from 317bps at the end of Apr-14.

As it is arguable that rates will stay lower for longer, our estimates are based on the assumption that the sovereign yields and cost of funding will continue to shrink. In example, in H214 we assume the Euribor3-Months to level-out at 20bps, the yield of the Italian 10-Yrs BTP to level-out at c280bps and the Yield of Italian Government bonds to level-out at c250bps. As a consequence, we assume the cost of bonds issued by Italian banks and the cost of deposits to lower progressively over the course of H214.

We simulate the impact on banks’ profitability in the event that ECB actions pushed the Italian 10-Yrs BTP yield at 250bps, 25bps below what is incorporated in our estimates. We proceed as follows:

€220bn of bonds maturing in 2014-16E, accounting for 55% of M/L-term funding in 2016E – Banks disclose around €220bn bonds (retail and wholesale) maturing over the period 2014-16, accounting for c55% of the M/L-term funding estimated in 2016E;

R² = 0.7747

3.32%

3.34%

3.36%

3.38%

3.40%

3.42%

3.44%

3.46%

3.48%

2.50% 2.75% 3.00% 3.25% 3.50% 3.75% 4.00% 4.25% 4.50%

R² = 0.6782

0.86%

0.88%

0.90%

0.92%

0.94%

0.96%

0.98%

1.00%

1.02%

1.04%

1.06%

1.08%

0.30% 0.40% 0.50% 0.60% 0.70% 0.80% 0.90%

Progression of Euribor 3-Months and Italian Sovereign Yield, Apr-14 to Jun-14

% 30-Apr-14 7-May-14 14-May-14 21-May-14 28-May-14 4-Jun-14 11-Jun-14 18-Jun-14

Euribor 3-Months 0.34 0.34 0.33 0.32 0.31 0.30 0.26 0.22

10 Yrs BTP Yield 3.17 3.11 3.01 3.29 3.04 3.12 2.91 2.96

Source: Datastream, Mediobanca Securities

Italy – Forecast Progression of ST Rates, Sov. Yields and Banks Cost of Funding, 2014E

Euribor 3M 10-Yrs BTP BTP (All Matur.) Cost Deposits Cost Bonds

Dec-13 0.29% 4.09% 3.65% 0.97% 3.44%

Mar-14 0.31% 3.30% 3.06% 0.94% 3.37%

Jun-14E 0.20% 2.77% 2.50% 0.87% 3.30%

Sep-14E 0.20% 2.77% 2.50% 0.85% 3.27%

Dec-14E 0.20% 2.77% 2.50% 0.83% 3.23%

Source: Bank of Italy, Datastream, Mediobanca Securities estimates

Italy

03 July 2014 ◆ 34

M/L-Term funding cost 350bps in 2013 – Based on the homogeneous disclosure imposed by the Bank of Italy, we calculate that the bonds issued by the banks under scrutiny had an average cost of funding of 350bps in 2013. Such estimates exclude the bonds backed by a State guarantee, which carried a very low cost (c50bps) and doomed to be refunded in 2014E. We use this as a proxy of the cost of bonds not maturing over the course of 2014-16E in our simulation;

Italian Banks – Estimated Cost of M/L-term Funding, 2013

TOTAL UCG ISP UBI BP CE

3.5% 3.9% 3.7% 2.7% 3.7% 3.6%

Source: Company data, Mediobanca Securities analysis and estimates

Cost of issuances dropped to by 120bps in H114 – Looking at the various issuances of bonds (mostly wholesale senior unsecured and covered bonds), we calculate the banks under scrutiny issued M/L-Term funding with an average coupon of 2.30%, c120bps lower than the average cost of M/L-Term funding estimated for 2013. Hence, the cost of issuing wholesale closely mirrors the drop in sovereign yields over the same period of time (c130bps), as the 10-yrs Italian BTP fell to 280bps nowadays from c410bps at the beginning of 2014;

Italian Banks – Estimated Cost of M/L-Term Issuances, H114


2.3% 2.2% 2.2% 2.7% 3.7% 1.9%


25bps lower cost of new ML-Term issuances translates into 2% higher NII – Weight-averaging the cost of bonds not maturing in 2014-16E with the cost of new issuances, we estimate the cost of M/L-term bonds should position at c300bps in 2016E. We assume the cost of new issuances replacing the debt maturing in 2014-16 to cost 25bps less than the 3.0% embedded in our forecasts. This should bring the average cost of M/L-term bonds to c285bps. 15bps lower cost on €220bn M/L-Term funding would translate into c€600m lower interest expenses in 2016E from the five banks under scrutiny, accounting for average 2% of NII;

Italian Banks – Estimated Lower Interest Expenses Following 25 Drop in Sov. Yields, 2016E

€m TOTAL UCG ISP UBI BP CE

Lower Interest Expenses 590 210 215 90 70 6

As % of NII – 2016E +2% +2% +2% +5% +4% +1%


Italian Banks – M/L-Term Maturities Profile, 2014-16


Maturing Bonds 2014-16 (A) 219 83 86 27.2 8.8 1.7

Bonds 2016E (B) 411 170 147 45.4 12.1 6.4

A/B 53% 49% 59% 60% 20.9 27%


Italian Banks – Simulated Change in Cost of ML-Term Funding After 25bps Drop in Sover. Yields, 2016E

BP UBI CE ISP UCG

Estimate Simul. Estimate Simul. Estimate Simul. Estimate Simul. Estimate Simul.

Cost of Non-Maturing Bonds 3.7% 3.7% 2.7% 2.7% 3.6% 3.6% 3.72% 3.72% 3.90% 3.90%

Cost of New Issuances 2.4% 2.2% 3.0% 2.8% 1.9% 1.6% 2.17% 1.92% 2.24% 1.99%

Cost of Securities in Issue 3.1% 2.9% 2.9% 2.7% 3.2% 3.1% 2.81% 2.67% 3.09% 2.97%

Chg in Cost of ML Funding -0.17% -0.20% -0.10% -0.15% -0.12%


Italy

03 July 2014 ◆ 35

25bps lower yield on sovereign exposure translates into 1.5% lower NII in 2016E – Based on the EBA disclosure as at June 2013, we calculate the residual maturities of each bank sovereign exposure as at Jun-13. We calculate 3-yrs residual maturity for ISP and BP, meaning that 100% of the sovereign exposure should be replaced by 2016 at lower yields. We calculate 4-yrs for UCG and UBI, meaning that 75% the sovereign exposure should be replaced by 2016. In absence of EBA disclosure, we use an average for CREDEM (3.5 years), meaning that 80% of the sovereign exposure should be replaced by 2016. For ISP and CREDEM, we use only the sovereign exposure related to the banking operations ignoring the one pertaining to the insurance business (40% of total in both cases). We apply 25bps lower yield on the sovereign exposure in 2016E, reducing NII by c€440m, equal to c1.5% of 2016E NII.

Italian Banks – Estimated Lower Interest Income Following 25 Drop in Sov. Yields, 2016E

€m TOTAL UCG ISP UBI BP CE

Lower Interest Expenses (440) (155) (195) (40) (40) (6)

As % of NII – 2016E -1.6% -1.2% -2.1% -2.0% -2.3% -1.0%


We estimate that further 25bps decline in M/L-term funding cost over 2014-16E driven by shrinking sovereign yields should translate into c2% EPS upgrade potential in 2016E. According to our calculations, UBI would benefit the most thanks to a larger portion of ML-term funding expiring over 2014-16E and to above average residual maturity of its sovereign portfolio. Due to their relatively large sovereign portfolio, ISP and CREDEM would have very little impact, as the lower yield on the sovereign exposure would almost completely wipe-out the positive impact coming from reducing cost of funding.

Multiple Re-rating anticipated the Italian inflection point Some 60% multiple rerating over the last 12 months . . .

The market has been quite efficient in anticipating the inflection point in the Italian GDP as well as any potential support from the ECB via monetary easing and QE. Indeed, we calculate that over the last 12 months the Italian market enjoyed some 60% multiple expansion in our coverage universe as a result of almost 40% average share price re-rating coupled with some 20% EPS downgrades.

. . . driven by TMT and Oil

By sector, this means TMT and Oil lead the pack of multiple expansion with +95% and +86%, respectively, followed by Pure industrials (+80%), as shown below.

Italian Banks – Estimated EPS Impact from MROs Sterilisation, 2016E

UCG ISP UBI BP CE

M/L-Term Funding - 2016E - €bn 170 147 45 42 6

Lower Cost of M/L-term Funding -0.12% -0.15% -0.20% -0.17% -0.10%

Lower Interest Expenses - €m 209 215 91 70 6

Sovereign Exposure - 2016E - €bn 62 78 16 16 2

Lower Yield on Sov. Exposure -0.25% -0.25% -0.25% -0.25% -0.25%

Lower Interest Income - €m -156 -196 -40 -40 -6

Pre-Tax Impact - €m 53 19 51 30 0

Tax Rate 29% 33% 33% 33% 33%

Net Profit Impact - €m 38 13 34 20 0

as % of 2016E Earnings +0.9% +0.3% +5.8% +3.6% +0.1%


Italy

03 July 2014 ◆ 36

1 yr performance breakdown between EPS change and P/E expansion – by sector


In order to quantify the magnitude of multiple expansion, we started from each company’s last year share price performance and calculated the difference between today’s consensus on 2014 EPS and the same estimates a year ago; the difference between 2014 consensus EPS changes and 1 yr performance gives a reasonable proxy of the implied multiple expansion currently priced in.

This approach allows us to differentiate between stocks that showed positive performance supported by EPS upgrades versus stocks that merely benefited from P/E expansion. Not surprisingly, the stocks that enjoyed the highest multiple expansion are the ones which should benefit the most from the reform process announced by the government (i.e. cyclical stocks). Our key findings:

Our coverage universe suffered a Bloomberg consensus average downgrade of 21% on 2014 EPS versus market expectations of 12 months ago. As a consequence, the 38% positive performance translated into a 58% P/E expansion over 1 yr.

This seems to be consistent with the pre-crisis trend. We calculate that at the end of 2006, the YoY EPS downgrade on 2007 consensus reached 3%. Considering that the Italian coverage share price was up 32% in 2006, it follows that the market priced in some 35% P/E expansion in 2006.

1 yr implicit multiple expansion period 2006-07 (pre-crisis)


Hence, if 35% was the multiple expansion in 2006, i.e. in advanced stages of the macro recovery, one could argue that the current 58% at the bottom of the cycle seems reasonable enough as long as there are EPS upgrades in sight.

The by-stock chart below shows a widely dispersed combination of multiple versus EPS changes.

-100%

-50%

0%

50%

100%

150%

TMT

OIL

PURE

INDU

STRIA

L

CONS

UMER

S

REAL

ESTA

TE

FINAN

CIAL

S

BRAN

DED G

OODS

INFR

ASTR

UCTU

RES

UTILI

TIES

HEAL

THCA

RE

MB CO

VERA

GE


-100%

-50%

0%

50%

100%

150%

PURE IN

DUSTRI

AL

FINANC

IALS

TMT

INFRAS

TRUCTU

RES

CONSUM

ERS

UTILIT

IES OIL

REAL ES

TATE

BRANDE

D GOOD

S

HEALTH

CARE

MB CO

VERAG

E


Italy

03 July 2014 ◆ 37

We need EPS upgrades to support multiples now

The market is therefore in a ‘look-through’ mood on Italy, willing to pay higher multiples in anticipation for future growth. However, even if multiple expansion normally drives the short term rerating at times of potential inflection points in the macro recovery path, it is also true that in the long run the share price performance is driven by EPS evolution.

Some 79% r-squared between share price and EPS change over the period 2005-13

We run some correlations between share price movements and EPS upgrade/downgrade. If in the short run the relationship between the two variables is not significant, it is also true that in the long run this relationship is holding through quite significantly. As we show below over the 2005-13 period, which captures periods of macro growth as well as recessions, we find almost 80% r-squared between share price performance and EPS changes in the Italian market.

EPS upgrade/downgrade vs total return in the long run (period 2005-13)


Some three quarters time lag between multiple and EPS

In the following charts, we have looked at the share price performance of the FTSE MIB and the market cap weighted EPS by quarters to identify the specific pattern that links EPS upgrade/downgrade with market performance. The chart shows how the market normally anticipates via multiple expansion/contraction the EPS cycle. We calculate that since 2005 the market has anticipated by roughly three-quarters future EPS upgrade/downgrades. Using the same metric, and considering the rerating started during the summer 2013, it follows that one should

R² = 0.7946

-300%

-200%

-100%

0%

100%

200%

300%

400%

500%

600%

-500% -400% -300% -200% -100% 0% 100% 200% 300% 400% 500%

EPS g

rowt

h 200

5-201

3

Total Return 2005-2013

1 YR share performance breakdown between EPS upgrade/downgrade and P/E expansion, ranked by P/E expansion


-150%

-100%

-50%

0%

50%

100%

150%

200%

250%

Cem

entir

Unipo

l-SAI

Brem

bo ERG

EI To

wers

Reco

rdat

iFia

tCr

edem

Asta

ldiBa

nca G

ener

aliAz

imut

Hold

ing A2A

Medio

lanum

Delcl

ima

Unipo

l Gru

ppo

Finan

ziario

Beni

Stab

iliTe

rna

Safil

oSn

amAt

lantia Marr

UBI B

anca

Danie

liSa

lini I

mpr

egilo

GTEC

HGe

nera

liInt

erpu

mp

Grou

pHe

raL'E

spre

sso Enel

Ferra

gam

oMe

diase

tEn

el Gr

een

Powe

rSo

gefi

Catto

lica

Assi.

niAn

saldo

STS

Brun

ello

Cucin

elli

Mond

ador

iInt

esa

Sanp

aolo

Pire

lli &

C.Te

naris

Unicr

edit

Luxo

ttica

Dias

orin

Sorin

De' L

ongh

iEm

akAm

plifo

nCa

iro C

omm

unica

tion

Cam

pari

IGD

Yoox

Tesm

ecTo

d'sPr

ysm

ian Eni

Finm

ecca

nica

Aeffe

Telec

om It

alia

Moles

kine

Buzz

i Unic

emTr

evi F

in.Ind

esit

Com

pany

Maire

Tec

nimon

tPi

aggio

Saipe

mBP

Emilia

Rom

agna

Italce

men

tiEu

rote

chAu

togr

illGe

oxLa

ndi R

enzo

Sara

s

P/E expansion/contraction with EPS EPS upgrades /downgrades

Italy

03 July 2014 ◆ 38

expect EPS upgrade to materialise now. However, we doubt this is going to be the case at least until 1H 2015. It follows that the market needs to show patience this time around, in our view, and this is where some reforms delivery from Rome would help in keeping up momentum and supporting investors trust in the turnaround story that Renzi is trying to shape up.

Banks SX7P Index vs. EPS cycle

Utilities SX6P Index vs. EPS cycle

TMT SXKP Index vs. EPS cycle


OIL SXEP Index vs. EPS cycle

20

40

60

80

100

120

140

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1 Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

SXTP Banks EPS sx7p

20

40

60

80

100

120

140

160

180

4Q05

2Q06

4Q06

2Q07

4Q07

2Q08

4Q08

2Q09

4Q09

2Q10

4Q10

2Q11

4Q11

2Q12

4Q12

2Q13

4Q13

2Q14

SX6P Index EPS SX6P

20

40

60

80

100

120

140

4Q05

2Q06

4Q06

2Q07

4Q07

2Q08

4Q08

2Q09

4Q09

2Q10

4Q10

2Q11

4Q11

2Q12

4Q12

2Q13

4Q13

2Q14

SXKP Index EPS SXKP

20

40

60

80

100

120

1403Q

05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

SXEP Index EPS SXEP Index

Italy

03 July 2014 ◆ 39

MB’s 2014 Italian Economic Survey: the worst is over Our Italian corporates survey last year delivered a message of uncertainty due to political instability and credit access issues. Twelve months later, the same sample of more than 50 Italian corporates under our coverage leaves us with a much more constructive outcome. The survey includes some €316bn cumulated market cap. i.e. 70% of the Italian FTSE Mib Index. Almost 70% of our sample confirmed the first tangible signs of a recovery of the economic cycle, with 95% expecting infrastructure investment to lead the recovery path both in Italy and Europe (while fears of slowdown for emerging market are rising). However, the disconnect between expectations and the real economy remains: less than 40% of our sample sees the pick-up trend in consumer confidence (as a four years high) starting to translate into consumers’ purchasing attitude. We also find a lot of faith in the recently-announced ECB measures: some 96% declared that ECB’s non conventional measures will at least slightly support domestic consumption.

Political expectations are maybe the most evident discontinuity point versus last year findings. While last year’s survey confirmed fears over the unstable political framework following the uncertain outcome of the national elections, the answers we have collected this year seem to suggest an open door for Renzi, with 80% of the companies sitting on positive expectations for Renzi reforms to accelerate growth, introduce tax cuts and finally clearing the PA arrears issue. More specifically, almost half of our sample points to the IRAP cut as the most important measure undertaken so far to positively affect its operations. Finally, on access to credit, still some 60% of the interviewed sample confirmed it is experiencing difficulties in opening/increasing credit lines (basically confirming the outlook of last year). This is why 78% of them have increased cash reserves and point to debt refinancing as a key priority. The positive news versus 12 months ago is that 88% of the sample has experienced a decrease in the cost of credit.

In conclusion, while last year the overall picture was of a country in a ‘wait-and-see’ mood, with companies reluctant to invest, our second annual survey seems to confirm an increase in the recovery (helped by the ECB’s measures and a more stable domestic political landscape), even if the high strategic focus on self-help and cost cutting and the cautious stance on acquisitions confirm only a moderate sentiment turn translating into still-low propensity to increase investments.

Improving macro outlook and confidence finally picking up Confidence is increasing, but not yet matched by higher consumer spending

We outline in this chapter the key findings of our second Mediobanca Italian Corporates Sentiment Survey aimed at capturing expectations into 2014 and 2015. Although this kind of exercise should clearly be taken with extreme care and should not be seen as fully representative of the entire country, we stress that the fairly large sample of the companies surveyed (more than 50 between corporates and financials) make the responses to our questionnaire an interesting reference point on where to set expectations, in our view.

One of the most positive feedback items we got from our survey is related to the recovery of the economic cycle. Indeed, almost 70% of the Italian companies interviewed have confirmed the first tangible signs of improvement of the economic cycle versus the gloomy picture that emerged from the 2013 questionnaire.

As a demonstration of the up-ticking sentiment, we note that 67% of the companies surveyed is convinced about a recovery of the economic cycle although the fear of a slowdown of the emerging markets is confirmed 65% of our panel. However, this long-awaited recovery is not reflected in higher sales yet; indeed, only 2% of our sample strongly sees this recovery reflected in the consumer purchasing attitude. The majority of

Italy

03 July 2014 ◆ 40

the companies involved in the questionnaire sits on a more ‘wait-and-see’ stance, with 36% of them expecting only a moderate consumer spending pick up.

ECB’s action will support internal demand, but low yield and inflation still weighs on profit

The long-awaited Draghi’s announcement on 5 June was considered to be the D-Day for European markets to finally get a strong answer against the negative spiral stemming from a combination of low inflation, low access to credit and strong currency. Even if our sample has been surveyed before this announcement, the results confirm that Italian companies are confident that the ECB’s measures will have a positive impact on the real economy.

We believe that the upward trend of consumer confidence registered in Italy in the past quarters will also be supported by the actions taken by the ECB to fight the low inflation and boost the real economy. As a result, 96% of our sample has agreed that ECB’s non-conventional measures will, at least slightly, sustain internal demand. However, boosting demand is not the only problem that Italian companies are facing at the moment. As shown in the central and right columns below, low inflation and low yield curve are dragging down companies’ profitability; only 17% of our sample hasn’t been penalised by the low-inflation environment and only 4% of the companies interviewed have experienced no impact on mid-term profits from the current yield curve and low interest rate scenario.

Consumer confidence has finally picked up


Macroeconomic impact of ECB measures and low interest rates


4% 9%

19%

25%10%

27%42%

36%

25%

2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Confidence indicators have signalleda recovery of the economic cycle.

Do you agree?

Consumer confidence in Italy shows growth rates in the 10/15% range; do you see this trend refleted

into consumers' purchasing attitude?

A lot Moderatly Neither much nor little Slightly Not at all

4%17%

4%

30%

22%

13%

30% 22%

27%

23%

15%36%

13%

22% 13%

2% 7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Draghi's non conventional measure will be enought to sustain internal demand?

How much has the low inflation penalized

your business?

Impact on mid-term profits of current yield curve and

low rate scenario


Italy

03 July 2014 ◆ 41

A wild card for Mr. Renzi: focus on growth & competitiveness . . .

With Italy in strong need of regaining competitiveness and boosting internal demand, we believe Renzi has a wild card to deliver political and economic reforms. Last year’s survey showed a strong fear over the unstable political framework. However, 12 months later the situation seems having changed. Undoubtedly the last European elections confirmed the strong support for Renzi. Italy was widely seen as the elephant in the room of these elections given the non-elected government running the country, the delay in structural reforms, and the mounting protest vote intercepted by the Five Star. The record result achieved at the EU elections, however, allowed Renzi to endorse his leadership significantly securing a solid platform for his government to deliver on the promised reforms. As shown below, almost 80% of our surveyed companies have positive expectations on the Renzi government managing to boost short-term recovery.

. . . by tax cuts and PA restructuring

In line with the feedback we received last year, among the key priorities of the Government, 33% of the pool indicated the reduction of fiscal pressure, followed by the introduction of growth strategies (32%). The cut in corporate tax (IRAP) will increase competitiveness, and this is the main reason that 45% of our sample believes that this is the measure that would impact most of their businesses. On a second level, the cut in labour cost, which will allow to fight the high level of unemployment, is considered by 16% of our companies as the most powerful measure to improve their business, together with the repayment of the €68bn public administration arrears.

Government’s priorities according to our sample


Renzi’s measures that would impact our sample’s business


Comply with fiscal

compact's criteria

3%

Reduce public debt

11%

Reduce fiscal pressure

33%

Restructure the PA

21%

Introduce growth

strategies32%

IRAP cut45%

IRPEF cut16%

PA credit16%

Public investments

9%

Privatization4%

Jobs act10%

Expectations on Renzi’s government


He will do some reforms to boost a mid-term recovery

22%

He increases domestic

consumers' and foreign investors' confidence and it's enough to expect

a short-term recovery

57%

He won't do much and there will be elections within

12 months7%

He will not be able to change

Europe's austerity dogma

15%

Italy

03 July 2014 ◆ 42

As far as competitiveness is concerned, our pool also suggests the Government should focus on reducing the energy prices. In particular, our sample has indicated the limited access to gas supplies and the lack of competition as the main reasons behind the higher cost of electricity in Italy versus the rest of Europe.

Should energy prices be a priority for the government?


Cost of electricity in Italy compared to the rest of Europe


Italy’s return to grow via investments boost, but cost saving remains key

Despite that fact that Renzi’s and ECB’ actions still haven’t showed tangible effects on the real economy yet, Italian companies are confident in increasing revenues growth in 2014. Indeed, as in the chart below, where c.70% of our sample is expecting to generate revenue growth this year.

Following this very positive signal, we have then asked our sample what are their 2014 plans when it comes to 1) cost rationalisation, 2) new investments in Italy, 3) investments in advertising, 4) reduction of temporary lay-off, and finally 5) inventory strategy.

The picture offered by the survey seems to suggest that the efforts the Italian corporates have made on costs saving, as a sort of self-help to address the weak demand, are still ongoing: more than 70% of the companies have confirmed the need for a further rationalisation, while only 16% have no plans to cut costs further. However, the increasing focus on cost efficiency is not expected to be reached at the expense of new investments. Indeed, 78% of the companies surveyed are

Not at all2%

Slightly11%

Neither much nor little

13%

Moderatly34%

A lot28%

Extremely13%

Lack of interconnectio

ns 13%

Lack of competition

(i.e. oligopolistic

market structure) 26%

Too expensive access to gas supplies 35%

Too high Cost for renewable energies 25%

2014 Growth expectation in Italy


Not at all4%

Slightly14%

Neither much nor little

14%

Moderatly39%

A lot19%

Extremely10%

Would you expect a growth of revenues in Italy in 2014?

Italy

03 July 2014 ◆ 43

increasing, at least slightly, investments in Italy in 2014 (vs. 20% in the Survey we ran a year ago), and the same percentage is also considering to spend more in advertising.

In terms of reduction of temporary lay-offs, our sample hasn’t taken a clear view; indeed, around half of the companies are not expecting headcount reduction. Finally, 61% of our sample are not considering to increase the inventory in sight of a recovery of the economy; this confirms the result obtained in the previous analysis in which we highlighted that only 2% of our sample sees the economic recovery reflected in a better consumers’ purchasing attitude.

Room for consolidation, too early for acquisitions

With confidence indicators signalling a recovery of the economic cycle, coupled with both expected revenues growth in 2014 and an increase in investments, we would expect the Italian market to be ready for a wave of consolidation and M&A in the different industries.

As a result, over 70% of our sample see opportunities for market consolidation in the reference industry. However, only 35% seems to be ready for acquisition in Italy or abroad, while 47% is still too cautious and not considering any acquisition in 2014.

This last result reaffirms the general message that we have extracted from our questionnaire: Italian companies are confident about the future, but still lack of tangible effects of the improving situation, and therefore still maintain a cautious and risk-adverse aptitude.

Economic recovery in Italy translated into corporate actions


Consolidation and M&A sentiment


22% 25%

9%

35%

16%

16%25%

19%

26%

6%

16%8% 47%

19%

34%

24%25%

19%19%

38%

14%15%

6%6% 6% 2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

further cost rationalization

in 2014

increasing investments in Italy

in 2014

increasing investments

in advertising inItaly in 2014

Do you see a reduction of temporary lay-offs?

Inventories increase in sight

of economy recovery


8%

47%20%

11%

18%

6%28%

17%

18%

17%

8%2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Do you see opportunities of consolidation in your sector?

Are you considering acquisitions in Italyor abroad in the short term?


Italy

03 July 2014 ◆ 44

Credit access issues are still there, but cost of credit is slightly decreasing

Finally, we have investigated whether the increasing of investments in Italy and the relatively low percentage of companies considering acquisition in 2014 is driven only by the still-weak macro conditions, or it is also the result of the difficulties in accessing the credit market. As shown in the chart below, 17% of our sample needs credit lines for M&A reason, while 29% need them for new investments. We conclude that the access of credit will be an important factor in determining the pace at which Italian companies will be able to grow and the markets to consolidate.

We also asked the Industrial companies in our pool to give us more detail on their accessibility to credit. Some 60% of the interviewed sample confirmed that they are currently experiencing difficulties in opening/increasing credit lines (basically confirming the outlook of last year). As a consequence of that, 78% of the panel has increased cash reserves. The positive news is represented by the fact that 88% of the sample has experienced at least a slight decrease in the cost of credit.

Primary reason behind the need of credit lines


Credit availability analysis


Working capital

20%

New investments

29%

Inventory increase

2%

M&A17%

Debt refinancing at a lower

cost32%

22%

40%

18%

24%

23%

18%

13%

13%

25%

28%

15%

18%

11%9%

11%

2%9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Cash reserves increasedd or access to capital markets

more than needed

Difficulties in opening/increasing credit

lines in Italy

Cost of credit has decreased in the last 12 months


Italy

03 July 2014 ◆ 45

Questionnaire – Part 1

Questions Not at

all Slightly

Neither much

nor little Moderately A lot Extremely Total

Would you expect a growth of revenues in Italy in 2014? 4% 14% 14% 39% 18% 10% 100%

Are you considering further cost rationalisation in 2014? 0% 16% 6% 34% 38% 6% 100%

Do you plan to increase investments in Italy in 2014? 22% 16% 16% 24% 14% 6% 100%

Do you plan to increase investments in advertising in Italy in2014?

25% 25% 8% 25% 15% 2% 100%

Do you see opportunities of consolidation in your sector? 8% 20% 18% 28% 18% 8% 100%

Have you increased cash reserves or have you turned to capitalmarkets more than your real needs?

22% 24% 13% 28% 11% 2% 100%

Do you have difficulty in opening/increasing credit lines in Italy? 40% 23% 13% 15% 9% 0% 100%

Has the cost of credit decreased in the last 12 months for you? 18% 18% 25% 18% 11% 9% 100%

How much would you expect to be the impact of PA's debt? 34% 19% 15% 13% 17% 2% 100%

Do you see more opportunities to acquire assets from the PA asa consequence of its increasing financing needs?

32% 16% 32% 13% 3% 5% 100%

Do you see a slowdown of the growth trend in the emergingmarkets to which you are exposed?

16% 18% 18% 29% 13% 5% 100%

Have you revised your growth plans in the emerging markets? 29% 26% 18% 18% 8% 0% 100%

Does the strength of the Euro have an impact on your company? 16% 27% 25% 32% 0% 0% 100%

Are you currently considering acquisitions in Italy or abroad? 47% 11% 6% 17% 17% 2% 100%

Should energy prices be a priority for the government? 2% 11% 13% 34% 28% 13% 100%

Sentiment and confidence indicators have recently signaled arecovery of the economic cycle. Do you agree?

4% 19% 10% 42% 25% 0% 100%

Since June 2013 consumer confidence in Italy shows growthrates in the 10/15% range; do you see this trend reflected intoconsumers' purchasing attitude?

9% 25% 27% 36% 2% 0% 100%

Have you increased you inventories in sight of the recovery? 35% 26% 19% 19% 0% 0% 100%

Governor Draghi has recently opened to non-conventional QEmeasures. Do you think banks will be able to transfer thebenefits to the real economy and sustain internal demand?

4% 30% 30% 23% 13% 0% 100%

How much has the low inflation penalised your business? 17% 22% 22% 15% 22% 2% 100%

Will the current yield curve and the low rate scenario have an impact on your mid-term profits?

4% 13% 27% 36% 13% 7% 100%

Do you see a reduction of temporary lay-offs? 9% 19% 47% 19% 6% 0% 100%


Italy

03 July 2014 ◆ 46

Questionnaire – Part 2

Additional Questions %

What is the primary reason behind the need of credit lines for you?

Working capital 20%

New investments 29%

Inventory increase 2%

M&A 17%

Debt refinancing at a lower cost 32%

Payment of taxes /salaries 0%

Do you believe in a recovery of investments in infrastructure in Italy/Europe? What would you expect the timeline to be?

No 4%

Yes, but only in Europe starting 2015 11%

Yes, but only in Europe in the next 2 years 13%

Yes, both in Italy and in Europe starting 20156 41%

Yes, both in Italy and in Europe in the next 2 years 30%

Why do you think cost of electricity is high when compare to the rest of Europe?

Lack of interconnections 13%

Lack of competition (i.e. oligopolistic market structure) 26%

Too expensive access to gas supplies 35%

Too high Cost for renewable energies 25%

Since cost of renewable energies already represent 20% of the tariff, what do you believe the Government should do?

To cut remuneration in premiums paid since they are excessive 28%

To re-modulate these premiums, reducing their impact in the short term 54%

Move the premiums out of the electricity tariffs, as they should be paid by tax-payers and not by the electricity consumers 18%

Following the crisis in Ukraine, what do you believe the Government should do?

Build up new international gas interconnections 28%

Build up new storage facilities & re-gasification plants 44%

Ensure the access of competitive gas into the local market 22%

Nothing. Structurally Italy does not have an issue with gas supplies 6%

What should be the government's priorities?

Comply with fiscal compact's criteria 3%

Reduce public debt 11%

Reduce fiscal pressure 33%

Restructure the PA 21%

Introduce growth strategies 32%

Which is the Renzi's measure to impact your business the most?

IRAP cut 45%

IRPEF cut 16%

PA credit 16%

Public investments 9%

Privatisation 4%

Jobs act 10%

Renzi government's importance you:

He will do some reforms to boost a mid-term recovery 22%

He increases domestic consumers' and foreign investors' confidence and it's enough to expect a short-term recovery 57%

He won't do much and there will be elections within 12 months 7%

He will not be able to change Europe's austerity dogma 15%


Italy

03 July 2014 ◆ 47

Estimates and target price revision We present in this chapter our new EPS, target prices and rating changes in our Italian coverage universe, reflecting our revised investment case as discussed in this report. Our key actionable points:

‘More short term pain ahead’ due to lower-than-expected GDP growth and extra resources to be found by the government this year, which translates into a market cap weighted average EPS cut of 1.9%.

A mix of reforms delivery, ECB support, FX impact, lower cost of equity, lower refinancing cost and accelerating growth is the rationale behind a market cap weighted average EPS increase of 0.8% and 1.5% in 2015 and 2016, respectively.

The above results in a lifting of our target price by an average of 6.5%, also reflecting a new risk free rate in our models to 3% versus 4% previously. This implies 20% upside now.

The sectors benefiting the most from our upgrades are Real Estate (6.7%), Oil (6.5%), Asset Gatherers (+3.4%), Utilities (+2.4%), and Pure Industrial (+2.2%).

Our new EPS are ahead of 2015 and 2016 consensus by an average 2-3%. We are now well ahead of consensus on Real Estate (+15%), Asset Gatherers (+14%) and Utilities (+8%), but well below consensus on Insurance (-14%) and Branded Goods (-5%).

We also implement some rating changes aimed at better capturing our more sanguine investment case on Italy as well as the higher valuations. We upgrade to Neutral from Underperform Geox, Ferragamo, Finmeccanica, Landi Renzo and Mediaset. We upgrade De’ Longhi to Outperform from Neutral and downgrade SNAM to Neutral from Outperform.

Overall we conclude that the main beneficiaries from the Italian Government’s reform agenda and the ECB measures remain banks (UCG, UBI and Credem core holdings), publishers (RCS and L’Espresso our favorite names) and Beni Stabili, and stocks geared towards demand recovery such as Atlantia, MARR, GTECH and Autogrill.

Higher estimates and TPs aimed at capturing the Italian momentum In this chapter, we present our new estimates and target prices aimed at capturing the key pillars of the investment case on Italy that we built up in this note.

We end up cutting our 2014 EPS by 1.9% on average in order to reflect the ‘more short term pain ahead’ expected in 2H 2014 due to lower-than-expected underlying GDP growth.

Equally though, our mid-term constructive stance brings us to upgrade our 2015 and 2016 estimates by 0.8% and 1.5%, respectively.

As a result, we lift our target prices by on average 6.5%. This leaves us with Italy now offering an average 20% upside on next year valuations (14% if market cap weighted).

The above conclusions stem from a combination of lower cost of equity reflecting historically low risk free rate, positive gearing into Renzinomics tax cuts reforms, lower cost of debt in our corporates coverage, and sensitivity to QE and loan growth.

Tax cuts are already at play In our last report Renzinomics - Right way, wrong speed dated 1 April, we attempted to quantify the impact on our estimates from the announced IRAP and IRPEF tax cuts. We found that the two sectors best-positioned for a low hanging fruit reward were publishers (L’Espresso, Mondadori, RCS, Cairo) and financials (UBI, BPER, Banca Generali, Credem, ISP and UCG) with potential high-single digit / low-double digit EPS impact.

Italy

03 July 2014 ◆ 48

IRAP cut: up to 7-8% EPS boost for RCS and l’Espresso

We estimate that the companies populating our Italian coverage are expected to contribute to a total 2014 IRAP of roughly €2.9bn at current IRAP rates. Some 55% of such an amount comes from financials, followed by utilities (19%) and the TMT/Publishing sector (12). Our estimates assume a 4.8% IRAP tax rate for industrial stocks, a 5.5% rate for Banks, and a 6.8% rate for Insurers. Some 10% IRAP cut would therefore generate some €288m of tax savings in our coverage, with an average overall positive impact on of 1%. L’Espresso, Mondadori and RCS could end up in the high-single digit EPS boost, followed by UBI, BPER, Finmeccanica and Autogrill in the 3-4% region.

IRPEF cut: L’Espresso leading the pack again

We have developed our proprietary model aimed at capturing the impact of €10bn IRPEF cut on our stocks, taking into account cyclicality, elasticity of demand and exposure to the domestic markets. As such, we estimate less than a €1bn IRPEF cut will hit our coverage via higher revenues. We estimate the impact by taking into account the revenues generated by each company in Italy, their market share in respective sectors within the Italian market, the weight assigned by ISTAT to each sector for the CPI Basket calculation, and the IRPEF tax rate cut per se.

Our conclusions suggest an EPS boost in the 0.26% region for our coverage. Consumers, TMT and certain Infrastructures are best placed to gain the most out of it. We highlight amongst the top-impacted stocks the potential 7.5% EPS change of L’Espresso followed by Atlantia and Cairo with 2.6% EPS impact. The IRPEF cut should, in our view, also have a positive second derivative effect on the companies exposed to the recovery and the internal consumption boost such as Autogrill, Campari, De’Longhi and Indesit.

Potential annualised impact on 2014 EPS from 10% IRAP tax reduction*

Source: Mediobanca Securities, * RCS not showing up due to expected net loss in 2014. On an adjusted basis the impact would be 8%. Biancamano would also end up in the 10% region on a 2015 scenario

Italy

03 July 2014 ◆ 49

Lower cost of debt - MB’s 10Y Bond Yield moved to 3.0% (from 4.0%) Southern European Yields have benefited from a significant compression during the last couple of years. In this document, we reduce our risk free assumption to 3% from 4% on our Italian coverage universe.

Current long-term debt of Italian corporations: almost half sitting in the Utility sector

At the end of 2013 the total amount of debt of the Italian stock market as represented by MB coverage equated to €164bn, almost half of it coming from the Utilities sector (44%) followed by TMT (19%), Pure Industrials (11%) and Oil (12%). The MB coverage Net Debt/EBITDA averages 3.4x, but this ratio is highly influenced by the real estate sector having a Net Debt/EBITDA ratio at a particularly high 12.6x. This higher multiple in the real estate sector could be explained by the value of the collaterals backing the debt, long duration of tenancy contracts, and arguably the quality of the tenant too.

Potential annualised impact on 2014 EPS from IRPEF tax reduction


Southern European 10 YR bond yield vs. German 10 YR bond yield


0

2

4

6

8

10

12

14

16

18

2007 2008 2009 2010 2011 2012 2013 2014

ITALY GERMANY PORTUGAL SPAIN

Italy

03 July 2014 ◆ 50

Stock of Debt 2013 YE


Net Debt/EBITDA 2013 YE

For YE 2014, the picture does not materially differ from 2013, since the total outstanding debt amounts to €159bn and Utilities is the sector contributing the most (45%). The total amount of debt expiring in the next two years is more than €50bn, of which half is expected by 2014. Looking at each sector specifically it emerges that:

Utilities report the highest level of Net debt both for FY14 and for FY15, equal to around €70bn in 2014-15e. The level of Net Debt/EBITDA ratio is around 3x. However, the sector showing the highest level of Debt expiring in the next two years is Pure Industrials, at around €8.3bn.

Branded goods, Oil and Healthcare enjoy the lowest Net Debt/EBITDA ratios, with the former showing the largest number of companies with net cash position.

Real Estate is still the sector showing the highest Net Debt/EBITDA ratio (12.1x in FY14e vs. the Market average ratio of 2.6x).

Pure industrials shows the largest portion of debt expiring in 2014e and 2015e, highly influenced by FIAT, whose portion of debt expiring in 2014 amounts to €5.6bn. TMT would follow at 15% of cumulated debt, again highly impacted by the level of Telecom Italia at €5.7bn in 2014.

Real Estate, Healthcare and Branded Goods are the sectors that do not show a significant amount of debt expiring in the next two years. Together they represent an average of 3% of the total amount of debt of the MB coverage.

The stocks showing the highest portion of long term debt expiring in 2014-15 are also the ones with the heaviest level of outstanding debt. Namely Fiat, Telecom Italia, Enel and Atlantia, ranked by the portion of LT debt expiring in 2014-15.

UTILITIES44%

TMT19%

PURE INDUSTRIAL

11%OIL12%

INFRASTRUCTURES8%

CONSUMERS3%

REAL ESTATE2%

BRANDED GOODS

1%

HEALTHCARE0%

12.6

3.3 3.2 3.0 2.3 2.2

1.6 1.4 1.3

MB average 3.4x

Italy

03 July 2014 ◆ 51

Sensitivity to 50bps lower cost of debt, our methodology

In order to calculate the impact of cost-of-debt reduction, we refer to the portion of debt expiring in 2H 2014 and 2015. We consider only medium to long-term debt (bank credit lines and bonds including subordinated bonds) and we exclude financing for working capital, as we assume this to be linked to short-term rates. To test the potential impact from a decrease in cost of debt on companies’ net profit (FY14e) we have run a sensitivity analysis based on the following assumptions:

All financial debt expiring in 2H 14/FY 15 will be replaced by the negotiation of new credit lines or debt issuance, excluding the potential coverage through currently available cash position.

We assume the credit lines expiring in 2H14 and in 2015 to be renegotiated in 2H14 and in 2015, respectively. Hence we incorporate 18 months of lower cost of debt refinancing in 2H14 and six months for debt expiring in 2015 (with consistent weighted impact on financial charges).

The new credit lines are assumed to be signed at -50bps lower rates than the expiring one, with no difference between large corporate and small-medium sized corporate.

Italian Industrial Sectors – Current Net Debt by Sector

NET DEBT (€m) NET DEBT /EBITDA LONG TERM DEBT EXPIRING

SECTOR 2014 2015 2014 2015 2014 2015

UTILITIES 71,323 69,943 3.2 3.1 3,453 8,370

TMT 28,505 27,204 2.0 0.8 5,828 1,907

PURE INDUSTRIAL 21,603 21,085 2.2 1.7 8,347 8,357

OIL 17,103 16,930 0.9 0.4 4,097 4,225

INFRASTRUCTURES 11,608 11,247 1.0 0.9 3,784 2,609

CONSUMERS 4,334 3,700 1.3 1.0 669 545

REAL ESTATE 3,201 3,111 12.1 11.8 119 396

BRANDED GOODS 1,538 860 0.6 0.3 361 888

HEALTHCARE 328 125 0.5 0.2 236 138

MB COVERAGE 159,542 154,205 2.6 2.2 26,893 27,436


Italian Industrial companies – Highest Net Debt and LT Debt Expiring in 2014-15e

NET DEBT Long term Debt Expiring in 2014-2015 COMPANY SECTOR 2014 2015

Fiat Pure Industrial 10,206 10,148 9,300

Telecom Italia TMT 26,266 24,933 7,675

ENEL Utilities 38,083 36,251 7,490

Atlantia Infrastructures 10,496 10,464 4,969

ENI Oil 14,997 11,526 4,891

CNH Industrials* Pure Industrial 2,246 1,959 4,412

Saipem Oil 4,501 4,014 3,257

Snam Utilities 14,075 14,778 1,538

Terna Utilities 7,083 7,323 1,388

Luxottica Branded Goods 1,311 911 927

Source: Mediobanca Securities, *values for CNH Industrials are in USD

Italy

03 July 2014 ◆ 52

We have applied a tax rate of 32% (27.5% IRES and 4.5% IRAP) to include the IRAP cut of 10% announced by the Renzi’s Government last March.

We are not considering the floating rate portion of debt to simplify the analysis, but this would show further benefits on the outcome.

. . . resulting in minor positive EPS impact

We have applied -50bps at the cost of debt of Italian companies, and we found an average EPS impact of 0.3% for YE 2014 and 0.8% for YE 2015. The sector benefiting the most from a lower cost of debt is pure industrials, with a potential positive EPS impact of 1.7% for FY15. TMT and Branded Goods are the least impacted sectors, because of the presence of stocks with cash in hand (namely Tod’s, Yoox, Cairo and Eurotech).

Among Italian stocks, the companies showing the highest impact on 2015 EPS from a lower cost of debt of 50bps are Fiat, Indesit, Trevi, IGD and Atlantia. More specifically:

Large caps: Fiat (2.8%) and Atlantia (2.0%) are among the top four companies benefiting from the cost-of-debt reduction. Also Telecom Italia shows a significant impact of 1.8%, while Buzzi, Terna, Enel, and Pirelli with an average impact of 0.8%. The other large caps Luxottica, Mediaset, Finmeccanica and Eni would have a lower impact due to their smaller portion of debt expiring in the next two years and, in the case of Luxottica, part of the debt financing comes from US.

Small Medium caps: Indesit (+2.5%), Trevi (+2.3.%), IGD (+2.2%) and Erg (+1.9%) are among the largest impacted small caps, mainly because of the largest amount of debt expiring over the next two years. Moleskine, Brunello Cucinelli and Moncler are among the ones with the lowest impact, and this is in line with what we have showed above with luxury stocks being the sector with lowest Net Debt/EBITDA ratio.

Italian Industrials sector – Estimated EPS impact from -50bps lower cost of debt SECTOR EPS 2014e EPS 2015e

PURE INDUSTRIAL 0.9% 1.7%

REAL ESTATE 0.3% 1.3%

INFRASTRUCTURES 0.2% 0.7%

UTILITIES 0.1% 0.7%

HEALTHCARE 0.1% 0.2%

OIL 0.4% 0.6%

CONSUMERS 0.3% 0.7%

TMT 0.1% 0.2%

BRANDED GOODS 0.0% 0.2%

MB COVERAGE 0.3% 0.8%


Italy

03 July 2014 ◆ 53

Sensitivity to growth acceleration – Italy the QE play

More than 50% of turnover generated in the Eurozone

Within our coverage, the business generated in the Euro Area accounts for 65% of 2014e total turnover. Real Estate (88%), TMT (80%) & Financials (64%) have the highest portion of business generated in Italy and over 80% generated in the Eurozone.

Italian stock market: 2014e turnover breakdown


REVENUES – Exposure to Eurozone (%)

Financials, Utilities and Real estate are the sectors more exposed to Italy and the other EU countries, with more than 90% of revenues coming from this area; and

Oil, Healthcare and branded goods are the ones least exposed to the Eurozone, with the biggest part of the business generated outside Europe.

EUROZONE65%

ABROAD35%

97%85%

83%70%

56%51% 50%

32% 29% 29%

0%

20%

40%

60%

80%

100%

EUROZONE ABROAD

Italian Industrials coverage – impact on EPS 2015 from 50bps lower cost of debt


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Fiat

Ind

esi

tTr

evi

Fin

.IG

DA

tlan

tia

ERG

Saip

em

Bia

nca

man

o

Tele

com

Ital

iaEm

akD

elc

lima

Be

ni S

tabi

liPi

aggi

oA

mp

lifo

nC

NH

Ind

ust

rial

Bu

zzi U

nic

em

Ce

me

ntir

Tern

aSa

filo

Ene

lPi

relli

& C

.H

era

GTE

CH

Bre

mbo

Sara

sG

eo

xA

uto

grill

De

' Lo

nghi

Ae

ffeSo

rin

A2A

Soge

fiLu

xott

ica

Ast

ald

iC

amp

ari

Eni

Tesm

ec

Dan

ieli

Snam

Reco

rdat

iM

aire

Te

cnim

ont

Ene

l Gre

en P

ower

Me

dia

set

Nic

eM

ole

skin

eB

run

ello

Cuc

inel

liFi

nm

ecc

anic

aIn

terp

ump

Gro

upM

on

cler

MB average 0.8%

Large capsSmall caps

Italy

03 July 2014 ◆ 54

Our current base-case scenario assumes an average 2015e revenue growth for Italy and Eurozone of 3.8%, driven by the Financials (8.5%), Luxury (5.9%) and Pure Industrials (4.9%). The table below shows the break-down between growth assumption in Italy and in the Eurozone.

Our sensitivity analysis to 3 p. p. of extra top line growth

We have run a sensitivity analysis to our top line growth assumptions from the potential impact of QE on stimulating higher growth. The benefits are expected to be seen in 2015e turnover because, as Mr Draghi said, the ECB measures will have an immediate effect on the Money Markets and a

Geographic sales mix by sector


Top line growth by sector - Italy and Eurozone, 2014 ITALY EUROZONE

BRANDED GOODS 5.3% 6.6%

CONSUMERS 1.6% 3.6%

FINANCIALS (BANKS + INSURANCE) 7.1% 9.9%

HEALTHCARE 2.9% 5.7%

INFRASTRUCTURES -0.7% 2.8%

OIL 0.1% 2.0%

PURE INDUSTRIAL 4.5% 5.3%

REAL ESTATE 3.0% 6.0%

TMT 3.7% 6.1%

UTILITIES -0.2% 0.9%

MB COVERAGE 2.7% 4.9%


REAL ESTATE TMT FINANCIALS UTILITIES CONSUMERSINFRASTRUCT

URESHEALTHCARE OIL

BRANDED GOODS

PURE INDUSTRIAL

ROW 0.0% 15.2% 0.8% 21.6% 34.5% 41.0% 37.1% 31.5% 67.4% 61.6%

CEE/RUSSIA/TURKEY 3.1% 0.0% 16.3% 8.2% 9.3% 7.9% 12.5% 39.5% 0.7% 9.1%

OTHER EUROZONE 9.1% 5.0% 19.0% 17.5% 21.9% 22.9% 33.3% 17.6% 20.5% 20.0%

ITALY 87.8% 79.9% 63.9% 52.7% 34.3% 28.3% 17.2% 11.4% 11.4% 9.3%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

Italy

03 July 2014 ◆ 55

more delayed effect (3/4 quarters) on the real economy. Some sectors / stocks are not included in our exercise:

Utilities sector: Revenue growth is not dependent on the increase in disposable income, but rather from electricity prices (affected by massive overcapacity) and evolution in the regulatory framework – that we believe could become tougher for the integrated utilities as part of the effort to reduce energy costs for the Italian Industry and households.

Oil sector: growth in turnover is largely dependent upon the oil price (determined at macro level) and on the production profile of the company (determined by exportation activity). Revenue growth is therefore not dependent on the Group’s exposure to specific countries, but rather on its exposure to promising areas. This applies to Eni, Saipem and Saras.

Brembo: The geographical mix of its turnover is not representative of the geographical provenance of its final customers (i.e. buyers of German Luxury cars are spread all over the world, although Brembo’s official figures show revenues from Germany).

Businesses that are expected to decrease their revenue in 2015.

Some 4% higher EPS, but widely dispersed around the mean

Assuming an extra boost of 3% top line growth in the Eurozone and Italy would result on average in a 4.0% higher 2015e EPS in our coverage universe, with the real estate sector benefiting the most (+9.0%) followed by TMT (+7.4%) and pure industrials (+4.1%). Mediaset (14.9%), IGD (+10.9%), Landi Renzo (+10.9%) and Mondadori (+10.8%) would show the highest gearing into accelerating growth.

The by-stock chart below shows that Mediaset (+14.9%) is the one benefiting the most from a QE-driven growth accelerating scenario followed by IGD (+10.9%), Landi Renzo (+10.9%) and Mondadori (+10.8%) mainly because of their operational focus on the Eurozone.

2015e EPS sensitivity to 3 p. p. of higher top-line growth in the Eurozone 2015e EPS IMPACT

BRANDED GOODS 2.2%

CONSUMERS 3.1%

FINANCIALS (BANKS + INSURANCE) 4.2%

HEALTHCARE 2.0%

INFRASTRUCTURES 2.7%

PURE INDUSTRIAL 4.1%

REAL ESTATE 9.0%

TMT 7.4%

MB COVERAGE 4.0%


Italy

03 July 2014 ◆ 56

Some further stock considerations:

Higher GDP growth would boost consumers spending, one of the most important drivers of the advertising market. The advertising market tends to multiply the GDP trend by five-to-six times. This would be extremely good news for the media sector in general and in particular for companies exposed to the advertising, such as Mediaset, Espresso, RCS and Cairo. Mondadori should also benefit, but at a slower pace given the high incidence of the books division on its Group sales.

The real estate sector should also benefit. IGD focuses on the Italian retail segment and in particular on hypermarket and shopping malls. Therefore stronger GDP growth, higher inflation and a recovery in households consumptions would strengthen the group’s rental income, not only because contracts are indexed to inflation and, for a limited part (around 2%), are linked to the level of tenants’ revenues, but also as a consequence of a decreasing vacancy (currently at 4% in Italian shopping malls).

Among the Industrial companies, Italcementi should benefit from a reversal in cement consumption levels in Europe, that have been hit by material peak-to-through declines over the past cycle, as a consequence of an easier and quicker financing for major EU infrastructural projects. Landi Renzo, which is exposed to Europe (around 60% of annual turnover) and to Italy (ca. 25%) should also be a winner.

Within branded goods AEFFE and GEOX are the companies expected to benefit the most from a potential growth acceleration, due to their exposure to Europe (approx. 70% and 77% of their revenues, respectively) and their business mainly generated by local demand, since their exposure to tourists flows in Europe is meaningless.

MB coverage EPS 2015e impact from 3 p.p. higher top-line growth in the Eurozone


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Me

dia

set

IGD

Lan

di R

enz

o

Mo

nda

dori

RCS

Me

dia

grou

p

Bia

nca

man

o

Ban

co p

opol

are

Tele

com

Ital

ia

Ge

ox

Be

ni S

tabi

li

UB

I Ban

ca

Au

togr

ill

EI T

ow

ers

Atl

anti

a

Un

icre

dit

Inte

sa S

anpa

olo

Un

ipol

GF

Prys

mia

n

GTE

CH

L'Es

pre

sso

Cai

ro C

om

mun

icat

ion

Soge

fi

Cat

tolic

a A

ssi.

ni

Ce

me

ntir

Mar

r

Cre

dem

Bu

zzi U

nic

em

Ind

esi

t Com

pany

De

lclim

a

Ban

ca G

ener

ali

Emak

Piag

gio

Me

dio

lanu

m

Am

plif

on

Un

ipol

-SA

I

Fiat

Ge

ner

ali

Yoo

x

Azi

mu

t Ho

ldin

g

Sori

n

Reco

rdat

i

De

' Lo

nghi

Ast

ald

i

CN

H In

du

stri

al

Nic

e

Safil

o

Tod

's

Bru

nel

lo C

ucin

elli

Dia

sori

n

Mo

ncl

er

An

sald

o ST

S

Mo

lesk

ine

Tesm

ec

MB average 4.0%

Italy

03 July 2014 ◆ 57

Finally on Telecom Italia, we note that (1) a better macro condition could impact the fixed business, given the fact that SMEs (important clients for the company) could benefit from this trend, and (2) the mobile industry could speed up the migration to 4G, and this would translate into an increase in ARPU (after several years of decline).

New estimates . . . Some 2-3% above consensus on 2015 and 2016 now

Historical experience shows that markets tend to anticipate EPS upgrades by an average of three to four quarters.

We are taking a more sanguine view aimed at anticipating the EPS cycle. The sectors benefiting the most from our upgrades on 2016e EPS are Real Estate (6.7%) and Oil (6.5%), mainly due to historical low interest rates and favourable forex but also Asset Gatherers (+3.4%), Utilities (+2.4%) and Pure Industrial (+2.2%). Our new estimates are ahead of 2015 and 2016 consensus by an average 2/3%. Interestingly, in our view, the sector on which our numbers are well ahead of consensus are Real Estate (+15%), Asset Gatherers (+14%) and Utilities (+8%). On the other hand, we are significantly below consensus on the Insurance sector (-14%) and to a lesser extended Branded Goods (-5%).

With this note, we also implement the following recommendation changes:

Geox (TP €3.2, Neutral from Underperform) and Ferragamo (TP €20.8, Neutral from Underperform) for branded goods.

De’ Longhi (TP €18.7, Outperform from Neutral) for consumer goods.

Finmeccanica (TP @€6.00, Neutral from Underperform) and Landi Renzo (TP @€1.20, Neutral from Underperform) for Pure Industrials.

Mediaset (TP @€3.82, Neutral from Underperform) for the TMT sector.

We are also downgrading Snam from Outperform to Neutral, due to the lack of upside to our fundamental valuation of €4.3/share.

We continue to believe that the main beneficiaries of the Italian Government’s reformist policies are banks such as Unicredit (O) & UBI (O), publishers such as RCS (O) & L’Espresso (O) and stocks highly geared towards demand recovery such as Atlantia (O), MARR (O), GTECH (O) and Autogrill (O). Real estate players such as Beni Stabili (O) should also benefit from prolonged scenario of low interest rates.

. . . broken down by Sector As already argued in previous chapters, we think 2014 will still be a relatively weak year, which is reflected in our 2014 EPS cuts across the space, especially in TMT (-6.0%), Infrastructures (-5.0%) and Asset Gatherers (-5.2%). However, we see room for upside on EPS 2015e and 2016e, with an average increase of 0.8% and 1.5%, respectively. The major contribution is coming from Real Estate

Quarterly FTSE MIB consensus EPS vs. FTSE MIB price performance (2Q 2005=100)


20

40

60

80

100

120

140

2Q05

4Q05

2Q06

4Q06

2Q07

4Q07

2Q08

4Q08

2Q09

4Q09

2Q10

4Q10

2Q11

4Q11

2Q12

4Q12

2Q13

4Q13

2Q14

FTSEMIB Indes EPS ftse

Italy

03 July 2014 ◆ 58

(+6.7%) and Oil (+6.5%) for 2016e, and to a lesser extend Asset Gatherers (+3.4%), Utilities (+2.4%) and Pure Industrial (+2.2%).

Asset gatherers: low rates, high inflows – Azimut core holding

A scenario of low interest rates certainly favours net inflows into asset management products, and we believe Italian asset gatherers can be marginal winners in such an environment. For those companies having a banking platform (i.e. Mediolanum and Banca Generali), part of the increase in net commissions will be offset by pressure on the net interest margin. However, for pure players in asset gathering and asset management, such as Azimut or Anima, we see a clear positive momentum under way.

We therefore increased our 2015E and 2016E net inflows estimates across the board, with mid-single digit EPS upgrades for Azimut and Mediolanum in 2016E, and low-single digit EPS increase for Banca Generali. We confirm our preference for Azimut that we keep rating with an Outperform with a close to 40% upside potential.

Branded goods: minor EPS changes – GEOX and Ferragamo upgraded to N from U

For luxury goods stocks under coverage, we have made limited changes to 2014/16 estimates, cutting net income by 2% in 2014, and raising it by some 1% in 2016.

Estimates changes, weighted-average change - market cap

SECTOR Market cap EPS 2014 EPS 2015 EPS 2016 TP

%change %change %change % Change

BRANDED GOODS 34,067 -2.4% 0.2% 1.1% 8.4%

CONSUMER GOODS 14,427 0.0% 3.0% 1.6% 5.2%

FINANCIALS - BANKS 83,897 -0.5% -0.1% -0.1% 8.2%

FINANCIALS - ASSET GATHERERS 9,173 -5.2% 1.2% 3.4% -0.5%

FINANCIALS - INSURANCE 35,432 0.0% 0.0% 0.0% 4.0%

HEALTHCARE 5,325 -1.2% -0.2% 0.0% 0.0%

INFRASTRUCTURES 27,553 -5.0% -4.6% -7.3% 12.2%

OIL 102,654 -3.0% 2.8% 6.5% 6.9%

PURE INDUSTRIAL 39,418 0.7% 2.8% 2.2% 4.7%

REAL ESTATE 1,981 -1.1% 5.2% 6.7% 15.2%

TMT 25,027 -6.0% -2.7% 1.3% 1.9%

UTILITIES 80,361 0.4% 2.3% 2.4% 11.6%

MB AVERAGE 459,315 -1.9% 0.8% 1.5% 6.5%


Change in estimates – Asset Gatherers

Rating

EPS 2014 EPS 2015 EPS 2016 TP

OLD NEW % change

OLD NEW % change

OLD NEW % change

OLD NEW % change

Azimut Holding O 1.28 1.12 -12% 1.52 1.54 1% 1.85 1.93 5% 26.00 26.60 2%

Banca Generali N 1.46 1.37 -6% 1.40 1.41 1% 1.57 1.60 2% 23.00 23.70 3%

Mediolanum N 0.46 0.46 0% 0.51 0.52 1% 0.59 0.61 4% 7.30 7.00 -4%

Simple average -6.2% 1.1% 3.3% 0.4%

Market cap weighted -5.2% 1.2% 3.4% -0.5%


Italy

03 July 2014 ◆ 59

For GEOX, we have materially increased our 2015 and 2016 EPS since having fully executed the first phase of the turnaround process, a material increase in Fall/Winter 14 orders puts the company in a better position to return to growth and profits as a result. We have increased our 2015 and 2016 estimates, and are now aligned with company targets as announced in November 2013. For the other names focused on business internationalisation, given the limited exposure to the domestic demand and the limited financial gearing, we do not expect either a pick-up of consumptions in Italy or a reduction in the cost of debt to have a material impact on their earnings prospects.

We are upgrading FERRAGAMO to Neutral from Underperform, mainly for valuation reasons following recent share price under performance which left us with no further downside on our new TP of €20.8/share.

We are also upgrading Geox to Neutral from Underperform (TP raised from €2.2 to €3.2) having fully executed the first phase of the turnaround process based on restructuring, a satisfactory sell out of the S/S14 season together with a material increase in F/W14 orders puts the company in a better position to coming back to growth and profits as a result. We have increased our 2015 and 2016 estimates, and are now aligned with company targets as announced in November 2013.

Consumer goods: more value from lower rates. De Longhi upgraded to O

The current environment of low interest rates is certainly beneficial to consumer goods companies. Increasing consumer confidence in the last 12 months has failed to translate into higher consumer spending due to persisting uncertainty about the strength of the economic recovery. Therefore, so far growth has been sustained more by pricing rather than by volumes.

A potential Euro devaluation is expected to be beneficial for consumer goods companies, in particular those with a high exposure to non-European markets such Campari, Amplifon and De’Longhi. All players have been strongly impacted by the strength of the Euro in the last nine-to-twelve months and 2Q2014 was no exception. Our view of a EUR/USD exchange rate of 1.30 should be beneficial in particular for Campari and Amplifon. The benefit for De’Longhi from the likely devaluation of the Euro will be of a more limited extent, given its high exposure of the cost base to the USD.

Overall, following the inclusion of a lower Italian bond yield and of a strengthening of the USD, we upgrade De’ Longhi to Outperform from Neutral and raise our target price to €18.7/share from €17.1 (+9.4%). We also raise our target price on Amplifon to €6.6/sh from €5.6 (+17.9%) confirming the Outperform rating.

Change in estimates – Branded Goods

Rating EPS 2014 EPS 2015 EPS 2016 TP

OLD NEW % change OLD NEW %

change OLD NEW % change OLD NEW %

Change

Aeffe O 0.03 0.03 0% 0.06 0.06 0% 0.09 0.09 0% 1.9 2.0 5%

Brunello Cucinelli N 0.45 0.45 0% 0.50 0.50 0% 0.56 0.56 0% 19.0 19.0 0%

Ferragamo N (from U) 0.88 0.89 1% 0.98 1.01 3% 1.10 1.19 8% 20.0 20.8 4%

Geox N (from U) -0.02 -0.03 nm 0.05 0.05 18% 0.13 0.15 14% 2.2 3.2 45%

Luxottica O 1.44 1.38 -4% 1.62 1.60 -1% 1.80 1.80 0% 44.5 49.0 10%

Moleskine N 0.09 0.09 0% 0.10 0.10 0% 0.12 0.12 0% 1.58 1.66 5%

Moncler N 0.44 0.44 0% 0.51 0.51 0% 0.61 0.61 0% 15.45 15.90 3%

Safilo O 0.84 0.84 0% 1.13 1.13 0% 1.38 1.38 0% 19.5 21.5 10%

Tod's N 4.12 4.12 0% 4.59 4.59 0% 5.14 5.14 0% 96.0 100.0 4%

Yoox O 0.32 0.32 0% 0.47 0.47 0% 0.69 0.69 0% 34.0 34.0 0%

Simple average -0.4% 2.0% 2.1% 8.7%

Market cap weighted -2.4% 0.2% 1.1% 8.4%


Italy

03 July 2014 ◆ 60

Banks: gearing into ECB measures – UCG, UBi and Credem core holdings

In light of the recent data unveiled by the Bank of Italy, we have trimmed the foreseen loan growth in 2014-16E, mostly due to anaemic corporate loan demand (still positioned in negative territory). The measures unveiled by the ECB in early June 2014 are pushing short-term rates down (from 0.34% in April to c.0.20%). As a consequence, our NII suffered from lower volumes and lower assets yields.

On the other hand, we have revised downward our cost of Medium/Long-Term funding (i.e. bonds issued by banks themselves), balancing (in some cases more than balancing) the negative impact from lower volumes and lower interest rates. We have also included the lower tax burden due to a lower bracket for regional tax IRAP. In general terms, the combination of all of the above actions has generated modest changes in EPS (low-single digit). We retain our positive stance on banks (in particular UCG, UBI, CREDEM) due to the potential benefit coming from the measures unveiled by the ECB (T-LTRO and lower cost of funding due to the sterilisation of MROs) which could add some 5% to our 2016 EPS and the low multiples at which banks trade after the recent share prices correction.

Insurance: fighting against low rates; U rating on Generali confirmed; still positive on Unipol SAI

The current environment of low interest rates is certainly the worst possible for the insurance sector (and for Life spread-based business in particular), and is the main reason behind our UNDERPERFORM ratings on both Generali and Cattolica.

Change in estimates – Consumer Goods

Rating

EPS 2014 EPS 2015 EPS 2016 TP

OLD NEW % change

OLD NEW % change

OLD NEW %change

OLD NEW % Change

Autogrill O 0.07 0.07 0% 0.17 0.20 21% 0.27 0.30 11% 8.50 9.70 14%

Amplifon O 0.21 0.21 1% 0.23 0.24 3% 0.26 0.27 3% 5.60 6.60 18%

De' Longhi O (from N) 0.88 0.87 -2% 1.03 1.04 1% 1.17 1.19 1% 17.10 18.70 9%

GTECH O 1.44 1.45 1% 1.58 1.60 1% 1.48 1.48 0% 26.70 27.40 3%

Indesit Company O 0.46 0.46 0% 0.70 0.70 0% NA NA nm nr nr nm

Marr O 0.76 0.76 0% 0.80 0.80 0% 0.84 0.84 0% 15.40 15.70 2%

Nice N 0.28 0.28 0% 0.29 0.29 0% NA NA nm nr nr nm

Campari N 0.33 0.33 0% 0.36 0.36 0% NA NA nm 6.10 6.10 0%

Simple average 0.0% 3.2% 2.9% 7.7%

Market cap weighted 0.0% 3.0% 1.6% 5.2%


Change in estimates – Banks


OLD NEW %

change OLD NEW %

change OLD NEW %

change OLD NEW %

Change

Banco Popolare N 0.11 0.11 0% 1.02 1.02 0% 1.50 1.50 0% NA 14.50 nm

UBI Banca O 0.35 0.32 -8% 0.54 0.53 -2% 0.64 0.65 1% 8.10 8.30 2%

Unicredit O 0.38 0.38 0% 0.53 0.53 0% 0.58 0.58 0% 8.00 8.90 11%

Intesa Sanpaolo N 0.12 0.12 0% 0.21 0.21 0% 0.25 0.25 0% 2.60 2.80 8%

Credem O 0.51 0.51 0% 0.55 0.56 1% 0.63 0.63 0% 8.50 8.60 1%

Simple average -1.6% -0.3% 0.2% 5.6%

Market cap weighted -0.5% -0.1% -0.1% 8.2%


Italy

03 July 2014 ◆ 61

Despite the fact that improvement in the economic outlook might have some positive effects on the top line of both Life and P&C business, we remain convinced that falling reinvestment yields is the main threat for this sector.

We are also starting to question insurers’ current strategy of offsetting falling reinvestment yields with higher realised gains, as we consider such move a temporarily one to preserve P&L results, but hardly sustainable in a “lower for longer” scenario on interest rates. We therefore confirm our cautious stance on the sector, and we don’t change our EPS estimates for the time being. We are increasing target prices mainly as a consequence of lower risk-free rates (to 3% from 3.8%).

Given the large upside potential, we reiterate our positive stance on Unipol-SAI and Unipol Gruppo Finanziario.

Healthcare: limited exposure to domestic market

The healthcare sector does not have high gearing into the Italian market, and is not highly leveraged. As such, the improvement in the Italian economy and the interest rates reduction would not bring a material change in our estimates. The only interesting EPS cut case appears to be Diasorin due to forex. Some negative pricing is also behind our EPS cut.

Our general view on the sector is that the growth has slowed,and that the differentiating factor will be the ability to deploy the cash in accretive ways.

Infrastructure: preference for Atlantia, el Towers and Ansaldo

The cluster highlights an average mid-single digit cut in our 2014-16 EP with an implied higher Y/Y EPS growth in 2016E versus our previous forecasts. Infrastructure capital goods still reflect the postponement of major projects and a gradual recovery of the cyclical businesses. The outlook of the Italian market remains poor in the short term, reflecting a very limited room for public investments. A restart of the Keynesian engine in Europe might trigger a rebound in the sector.

Specifically on Atlantia, the 2014-2016E EPS reduction is due to higher minority interests following the consolidation of ADR, but remain positive on the underlying business, with motorway traffic growing +1.5% y/y in 5M2014 in Italy and mid-single digit in South

Change in estimates – Insurance


OLD NEW % change OLD NEW %

change OLD NEW % change OLD NEW %

change

Cattolica Assi.ni U 1.28 1.28 0% 1.31 1.31 0% 1.34 1.34 0% 17.50 18.10 3%

Generali U 1.28 1.28 0% 1.41 1.41 0% 1.50 1.50 0% 16.00 16.60 4%

Unipol GF O 0.61 0.61 0% 0.62 0.62 0% 0.61 0.61 0% 6.30 6.80 8%

Unipol-SAI O 0.23 0.23 0% 0.24 0.24 0% 0.24 0.24 0% 3.00 3.10 3%

Simple average 0.0% 0.0% 0.0% 4.6%



Change in estimates – Healthcare


OLD NEW %

change OLD NEW %

change OLD NEW %chang

e OLD NEW %

change

Diasorin N 1.57 1.51 -4% 1.72 1.66 -3% 1.91 1.88 -2% 34.00 34.00 0%

Recordati N 0.74 0.74 0% 0.79 0.80 2% 0.84 0.85 1% 13.50 13.50 0%

Sorin N 0.12 0.12 0% 0.13 0.13 0% 0.15 0.15 0% 2.05 2.05 0%

Simple average -1.2% -0.5% -0.2% 0.0%

Market cap weighted -1.2% -0.2% 0.0% 0.0%


Italy

03 July 2014 ◆ 62

America and ADR benefitting from a +4.3% y/y traffic growth in 5M2014 and a +7.7% increase of the tariff implemented in March.

On Prysmian, we maintain overall unchanged our top line organic growth assumptions. The EPS change over the 2014-16 period is due to the extra-costs’ allocation related to the Western Link project (based on the projected percentage of works’ completion).

On EI Towers, we flag that our cut in 2016 EPS reflects updated assumptions on long-term inflation, while our valuation now captures the impact of the new contract signed with Cairo (live from 2015, with visible impacts on financials from 2017) and a risk free rate of 3.0% (from 4.0%).

Oil: EPS up due to FX and stable oil price – ENI / Tenaris core holdings

We are increasing our 2015 and 2016 EPS estimates by some 2.8% and 6.5%, respectively, reflecting the stable oil price (Brent at USD109 per barrel in 2014 and USD105 in 2015 and 2016, some 7% below current price), but a more favorable USD/EUR exchange rate (1.35 in 2014, down to 1.30 in 2015 and 2016). We believe that geopolitical tensions in Lybia, Iraq and Iran should contribute to a stabilisation of oil price at current levels, while the recent statements from the US authorities about lifting crude oil export ban should lead to a tightening of the WTI-Brent spread (Brent is now trading at ca. USD7 premium, well below peak levels reached in 2011 of USD30). If the US makes further steps in this direction, there could be benefits for US drilling companies and European refiners as an increase in WTI prices would reduce crack spreads and consequently close arbitrage opportunities to Europe. Apart from a closure of the spread between Brent and WTI (which could be partly beneficial, as US refineries use natural gas to run the plants), a larger availability of light sweet grades would be a second source of relief for European refiners.

As far as the gas market is concerned, the recent decoupling of European gas prices versus Brent (see the chart below) is the result of the missing indexation of European gas prices to oil prices in the new gas supply contracts renegotiation. This, coupled with the expected recovery in volumes sold, should have positive effects on ENI’s figures in the gas marketing activity.

We believe that the best way to play this scenario are the following stocks:

ENI: an appreciation of the USD vs. EUR is a positive for the company. We remind investors that every 5c increase/decrease in USD/EUR exchange rate means an increase/decrease of some €600m at operating profit level. In addition to that, the recent decoupling of the European gas price versus oil mentioned above would lead to a recovery of profitability in the Gas & Power division owing to the renegotiation of the take-or-pay contracts with the main suppliers (see the recent agreement with Gazprom). But the key driver is represented

Change in estimates – Infrastructure

Rating

EPS 2014 EPS 2015 EPS 2016 TP

OLD NEW %

change OLD NEW %

change OLD NEW %

change OLD NEW %

change

Ansaldo STS O 0.44 0.44 0% 0.47 0.47 0% 0.51 0.51 0% 9.40 9.50 1%

Astaldi N 0.95 0.92 -3% 1.04 0.94 -9% NA 1.08 nm 8.50 9.30 9%

Atlantia O 1.11 1.07 -4% 1.26 1.16 -8% 1.50 1.37 -9% 20.00 23.50 18%

Danieli N 2.53 1.92 -24% 2.61 2.44 -7% 2.80 2.62 -6% 26.20 26.00 -1%

EI Towers O 1.25 1.25 0% 1.50 1.37 -8% 1.72 1.44 -16% 51.00 58.30 14%

Prysmian N 0.92 0.87 -6% 1.10 1.21 10% 1.55 1.40 -9% 16.80 17.00 1%

Tesmec N 0.08 0.05 -42% 0.10 0.06 -43% NA 0.06 nm 0.87 0.80 -8%

Trevi Fin. U 0.30 0.26 -16% 0.29 0.33 12% 0.32 0.40 23% 4.45 5.60 26%

Simple average -11.9% -6.6% -3.0% 7.6%

Market cap weighted -5.0% -4.6% -7.3% 12.2%


Italy

03 July 2014 ◆ 63

by the appointment of Mr. Descalzi as new CEO that has increased investors’ confidence about the future shape of ENI, i.e. a company much less exposed to its mid-stream and down-stream activities and much more leveraged on its profitable E&P business. We are convinced that there has been a radical change in ENI’s profile, driven by the fact that the new management team has now been given free rein from the major shareholder (i.e. the Italian government through its 4% direct stake and the 26% stake held by CDP) to cut all the inefficiencies at both corporate and operational level. The deconsolidation of the mid and downstream activities, coupled with the disposal of Saipem, would drive a massive re-rating of the pure E&P core business in our view, now trading at larger discount to peers.

Tenaris: a closure of the spread between Brent and WTI mentioned above should further support the recovery of the drilling activity in the US, i.e. the reference market for Tenaris, weighting some 35% on the group’s total turnover. The short-term driver is represented by the well-known ruling from the US DOC on the anti-dumping against the Korean, expected at the beginning of July (the 10th). A positive ruling would translate into additional volumes for the domestic players (TEN, VK and US steel), coupled with an improvement in the PipeLogix index (the reference index for OCTG prices). Long-term drivers are the benefits from the new energy reform in Mexico and the expected spike in the drilling activity in Argentina, related to the exploitation of the “Vaca Muerta” giant shale gas filed from the local YPF together with Chevron.

Pure industrial: Finmeccanica and Landi Renzo upgraded to N. Pirelli top pick

On pure industrial stocks, we are overall confirming our 2014E estimates, while increasing 2015/16’s. Trends among sub-sectors are quite uneven, but the common trend is that a more constructive view on Europe and Italy (both from a fundamental and financial point of view) could be beneficial to companies exposed to the region, while negative momentum in certain emerging markets (Brazil in particular for the automotive sector) offsets or more than offsets this effect.

As a combined result, we are revising upwards estimates and upgrading to Neutral (from Underperform) both Finmeccanica and Landi Renzo. The former could benefit from 1) eased constraints on defence budgets across Europe, 2) pick-up in consumer spending supporting the civil/commercial side of the business, and 3) lower financial charges, while a looser monetary policy in the Euro-zone might beneficial for Landi: the OE business might accelerate, and therefore the number of alternatively fuelled vehicles could follow suit. Second, a renewed focus on infrastructure might be beneficial to the SAFE business (CNG refilling stations) which in turn could act as a boost to both OE and AM channels. Estimates on other automotive stocks under our coverage are broadly unchanged (except for Sogefi, weighed down by Latam OE) and we still confirm our positive stance on Brembo and Pirelli (the latter long in our recommended portfolio) on exposure to premium markets and European recovery.

Change in estimates: Oil


OLD NEW %

change OLD NEW %

change OLD NEW %

change OLD NEW %

change

Eni O 1.40 1.35 -4% 1.55 1.63 5% 1.62 1.75 8% 19.50 21.10 8%

Maire Tecnimont O 0.19 0.19 0% 0.27 0.27 0% 0.25 0.25 0% 3.40 3.40 0%

Saipem O 0.83 0.79 -5% 1.45 1.28 -12% 1.63 1.82 12% 20.60 22.90 11%

Saras N 0.02 -0.01 nm 0.07 0.07 0% 0.09 0.10 13% 1.18 0.98 -17%

Tenaris* O 1.34 1.34 0% 1.53 1.53 0% 1.67 1.67 0% 19.30 19.60 2%

Simple average -2.2% -1.3% 6.4% 0.8%


Source: Mediobanca Securities. *EPS for Tenaris are in USD

Italy

03 July 2014 ◆ 64

On the cement sector, we our revising upwards our 2015-2016 estimates for Buzzi Unicem (O) mainly thanks to a positive Forex impact (USD/EUR). We still consider 2014 as a bottom for the domestic market and this scenario, coupled with a projected volume pick-up in the main European countries, is already factored into our estimates.

Real estate: improved credit conditions – Beni Stabili core holding

The Italian real estate sector is showing growing investment volumes owing to a growing interest from international investors but the rental market remains weak, vacancy is still increasing, while valuations remain under pressure.

Major Italian real estate groups have benefited from this prolonged period of low interest rates and better credit conditions to refinance a good part of their debt strengthening their financial structure. This is particularly true for Beni Stabili that refinancing the Imser securitisation with a mix of bank debt and new capital is due to boost its recurring cash result per share by 13%.

The inclusion of a lower risk free rate and of lower NAV discounts are the drivers of our target prices adjustments. We remain positive on Beni Stabili, which presents the higher upside and a growing cash flows thanks to the Imser refinancing. We see a lower upside on IGD, while we reiterate our Underperform rating on Prelios as, while more time is required to see a material recovery in the group’s service operations, investments will continue to absorb cash.

Change in estimates – Pure Industrials


OLD NEW %

change OLD NEW %

change OLD NEW %

change OLD NEW %

Change

Biancamano N -0.01 -0.15 nm 0.16 0.03 -79% 0.26 0.16 -39% 0.62 0.70 13%

Brembo O 1.69 1.72 2% 1.97 1.98 1% 2.21 2.22 1% 31.00 33.50 8%

Buzzi Unicem O 0.37 0.36 -2% 0.55 0.58 5% 0.75 0.77 2% 15.00 15.40 3%

Cementir N 0.28 0.30 7% 0.36 0.40 10% NA 0.50 nm 6.10 6.30 3%

CNH Industrial O 0.76 0.73 -4% 1.07 1.06 -1% 1.38 1.37 -1% 9.20 9.40 2%

Delclima N 0.08 0.08 0% 0.09 0.09 0% NA NA nm nr nr nm

Emak O 0.08 0.08 3% 0.09 0.10 8% NA 0.12 nm 1.20 1.26 5%

Fiat N 0.61 0.61 0% 1.01 1.05 4% 1.41 1.45 3% 9.00 9.00 0%

Finmeccanica N (From U) 0.34 0.41 22% 0.43 0.50 16% 0.51 0.59 15% 4.60 6.00 30% Interpump Group O 0.52 0.52 0% 0.59 0.60 2% 0.65 0.66 1% 11.10 11.80 6%

Landi Renzo N (from U) -0.02 0.004 nm 0.02 0.04 101% 0.04 0.08 79% 0.85 1.20 35%

Piaggio N 0.09 0.08 -12% 0.15 0.14 -6% 0.20 0.20 0% 2.70 2.85 6%

Pirelli & C. O 0.99 0.98 -1% 1.17 1.16 -1% 1.41 1.39 -1% 14.00 14.00 0%

Sogefi O 0.35 0.27 -23% 0.48 0.40 -16% 0.56 0.48 -14% 5.20 5.20 0%

Simple average -0.6% 3.1% 4.2% 8.6%


Source: Mediobanca Securities, *EPS for CNH industrial are in USD

Change in estimates – Real Estate


OLD NEW %

change OLD NEW %

change OLD NEW %

change OLD NEW %

Change

Beni Stabili O 0.04 0.04 1% 0.05 0.05 8% 0.05 0.06 13% 0.70 0.83 19% IGD - Immobiliare Grande Distribuzione N 0.10 0.09 -8% 0.10 0.10 0% 0.11 0.11 -6% 1.30 1.48 14%

Prelios U -0.10 -0.10 nm -0.02 -0.02 nm -0.01 -0.01 nm 0.54 0.54 0%

Simple average -3.4% 4.1% 3.5% 11.0%



Italy

03 July 2014 ◆ 65

TMT: Mediaset upgraded to Neutral

While in the short term visibility on the advertising market remains low, and this leads us to take a more cautious stance on 2014 collection, we believe the gap between the consumers’ confidence (at its historical highs since 2010) and the consumers spending (still extremely depressed) will close soon, owing to the measures put in place by the Government and helped by the new ECB strategy.

On the other hand, the severe attention on costs reduction – all the Groups are still extremely focused on that – will allow for a greater FCF generation for the sector. Hence, we are increasing our EPS upwards for the TMT space by 7.7% in 2016. This increase in EPS, coupled with the lower risk-free rates (to 3.00% from 4.00%), leads us to review our target prices upwards (by 6% on average). We reiterate our neutral stance on the media sector, where once again our preference goes to publishers (Espresso & RCS in particular).

After the poor performance of the last three months, we are upgrading Mediaset to Neutral (from Underperform) as the end of the TV rights saga could facilitate the entrance of a partner for the Italian pay TV business, and given the fact that after the warning of the thirst quarter, now consensus seems us more cautious on its top-line assumptions (even if still in the second quarter the pressure is set to remain high). On the telecom space, we reiterate our view: 2014 could be the year of consolidation both in Italy & Brazil.

Utilities: Hera the M&A play; prefer Terna to Snam (downgraded to N)

We have revised upwards our valuations for the utility sector, mainly to recognise a lower 10Y Bond Yield assumption (3% now). Furthermore, we are upgrading our estimates by an average c.3% to recognise the lower average cost of financing, that we have reduced by an average 50bp during the next few years. This average increase in estimates can be split into a more pronounced upgraded for the integrated utilities (c.4%) and lower for the regulated utilities (c.1%).

Business-wise, we have also upgraded our estimates for industrial waste business, the most cyclical part of the domestic utility business, something that is particularly good for Hera (O) since 50% of volumes are industrial wastes versus just 10% in the case of A2A (N). We believe that Hera fixes well in the reformist approach by the Government of Renzi that may try to reduce significantly the number of municipalities something that we believe could help to reduce the overall cost of the system. Interestingly, in the case of Hera we believe that the Bloomberg consensus is low by c.10% from 2016.

Based on our new valuations, we downgrade Snam to Neutral due to the lack of upside to our fundamental valuation of €4.3/share.

We have a preference for Terna (O, TP €4.1) since it is currently trading at 23% premium on RAB versus 28% for Snam on our numbers and we still see some upside to our fundamental valuation. Furthermore if we mark-to-market current 10Y Bond Yield (c.3%)

Change in estimates – TMT

Rating

EPS 2014 EPS 2015 EPS 2016 TP

OLD NEW %

change OLD NEW %

change OLD NEW %

change OLD NEW %

Change Cairo Communication N 0.19 0.13 -31% 0.28 0.23 -19% 0.31 0.36 18% 7.65 7.65 0%

Eurotech N -0.02 nm 0.16 0.13 -14% 0.08 0.08 0% 2.30 2.42 5%

L'Espresso O 0.05 0.04 -6% 0.11 0.11 1% 0.13 0.13 3% 2.23 2.34 5%

Mediaset N (from U) 0.10 0.07 -32% 0.14 0.12 -16% 0.18 0.18 3% 3.47 3.82 10%

Mondadori N 0.01 0.03 nm 0.05 0.06 27% 0.06 0.07 23% 1.25 1.31 5%

RCS Mediagroup O -0.05 -0.07 nm 0.09 0.10 6% 0.12 0.12 7% 1.95 2.02 4%

Telecom Italia Not Rated 0.09 0.09 0% 0.09 0.09 0% 0.09 0.09 0% nr nr nm

Simple average -17.3% -2.3% 7.7% 4.8%

Market cap weighted -6.0% -2.7% 1.3% 1.9%


Italy

03 July 2014 ◆ 66

and CPI (1.25%), and, the impact on EPS from the next regulatory review could be close to -16%, and assuming the current DPS at €0.20/share for Terna and €0.25/share for Snam, the pay-out would increase for Terna to a still acceptable 85% while in the case of Snam would go to c.100%. Therefore we believe that current dividend policy is better anchored for Terna than for Snam.

MB vs consensus: ahead on real estate, asset gatherers and utilities; below in insurance Our new estimates, we position ourselves some 2/3% ahead of 2015 and 2016 consensus. The sector where we are most ahead of consensus are Real Estate (+15%), Asset Gatherers (+14%) and Utilities (+8%). On the other hand, we are significantly below consensus on the Insurance sector (-14%) and Branded Goods (-5%).

Change in estimates – Utilities


OLD NEW %

change OLD NEW %

change OLD NEW %

change OLD NEW %

Change A2A N 0.05 0.06 6% 0.06 0.07 5% 0.07 0.07 4% 0.87 0.94 7% Enel N 0.32 0.32 0% 0.36 0.37 3% 0.38 0.39 3% 3.6 4.2 17% Enel Green P

N 0.11 0.11 3% 0.12 0.12 1% 0.13 0.13 0% 2.0 2.3 15% ERG N 0.60 0.46 -23% 0.46 0.46 0% 0.38 0.40 5% 11.0 11.3 3% Hera O 0.10 0.10 0% 0.11 0.12 6% 0.12 0.13 7% 2.3 2.6 12% Snam N (from O) 0.28 0.29 2% 0.30 0.31 2% 0.30 0.31 2% 4.2 4.3 2%

Terna O 0.25 0.25 0% 0.26 0.26 0% 0.28 0.28 0% 4.0 4.1 2% Simple average -1.7% 2.4% 3.1% 8.4% Market cap weighted 0.4% 2.3% 2.4% 11.6%


MB new estimates vs. consensus IBES SECTOR Market cap (TOT) EPS 2014 EPS 2015 EPS 2016

BRANDED GOODS 34,067 -4.7% -4.6% -5.1% CONSUMER GOODS 14,427 6.3% 8.8% -2.6% FINANCIALS - BANKS 83,897 5.8% 7.5% -1.4% FINANCIALS - ASSET GATHERERS 9,173 -2.2% 3.4% 13.8% FINANCIALS - INSURANCE 35,432 -10.8% -11.9% -14.4% HEALTHCARE 5,325 -3.9% -3.8% -3.7% INFRASTRUCTURES 27,553 1.7% 0.8% 4.1% OIL 102,654 2.0% 3.1% 3.4% PURE INDUSTRIAL 39,418 4.5% 2.4% 3.9% REAL ESTATE 1,981 18.1% 27.3% 15.5% TMT 25,027 -4.2% -3.5% -3.2% UTILITIES 80,361 0.5% 5.7% 8.4% TOT 459,315 1.1% 2.9% 1.5%


Italy

03 July 2014 ◆ 67

New estimates, target prices and rating changes, 2014-16


BRANDED GOODS

Aeffe O 0.03 0% nm 0.06 0% 56% 0.09 0% nm 2.0 5% 58% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Brunello Cucinelli N 0.45 0% -5% 0.50 0% -6% 0.56 0% -8% 19.0 0% 13% No changes to estimates /valuation

Ferragamo N (from U) 0.89 1% -5% 1.01 3% -7% 1.19 8% -5% 20.8 4% -5% Reduced negative FX impact on 2015, and lower minorities - estimates lifting and lower CoE

Geox N (from U) -0.03 nm nm 0.05 18% -15% 0.15 14% -6% 3.2 45% 18% Estimates raised to be aligned with company targets which now seem to be more realistic

Luxottica O 1.38 -4% -6% 1.60 -1% -5% 1.80 0% -7% 49.0 10% 17% Lower CoE and 14-16 estimates finetuning

Moleskine N 0.09 0% -2% 0.10 0% -2% 0.12 0% 2% 1.66 5% 31% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Moncler N 0.44 0% -6% 0.51 0% -8% 0.61 0% -8% 15.9 3% 32% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Safilo O 0.84 0% 8% 1.13 0% 8% 1.38 0% 3% 21.5 10% 33% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Tod's N 4.12 0% -6% 4.59 0% -6% 5.14 0% -5% 100.0 4% 10% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Yoox O 0.32 0% 8% 0.47 0% 15% 0.69 0% 21% 34.0 0% 74% Minor changes to capex/NFP estimates Valuation unchanged since based on M&A multiples

CONSUMER GOODS

Autogrill O 0.07 0% -33% 0.20 21% 4% 0.30 11% 7% 9.7 14% 52% Better confidence on profitability improvement in Italy (8% EBITDA margin in 2016 instead of 2017)

Amplifon O 0.21 1% 11% 0.24 3% 4% 0.27 3% -8% 6.6 18% 43% Lower CoE due to revision of 10 year bond yield at 3% and roll over of valuation model

De' Longhi O (from N) 0.87 -2% 0% 1.04 1% 1% 1.19 1% 0% 18.7 9% 19% Revision of Italian 10 year bond yield at 3% and roll over of valuation model

GTECH O 1.45 1% -1% 1.60 1% 0% 1.48 0% -11% 27.4 3% 47% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Indesit Company O 0.46 0% 45% 0.70 0% 36% NA nm nm nr nm nm No changes in valuation

Marr O 0.76 0% -3% 0.80 0% -5% 0.84 0% -5% 15.7 2% 13% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Nice N 0.28 0% 75% 0.29 0% 68% NA nm nm nr nm nm No changes in valuation

Campari N 0.33 0% 17% 0.36 0% 14% NA nm nm 6.1 0% -2% No changes in valuation

FINANCIALS - BANKS

Banco Popolare N 0.11 0% -73% 1.02 0% 3% 1.50 0% 4% 14.50 nm 17% No changes in valuation

UBI Banca O 0.32 -8% 14% 0.53 -2% 20% 0.65 1% 13% 8.30 2% 25% Revision of ITA 10YR bond yield + 2% cut in estimates on lower interest rates after ECB measures

Unicredit O 0.38 0% 9% 0.53 0% 1% 0.58 0% -13% 8.90 11% 42% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Intesa Sanpaolo N 0.12 0% 2% 0.21 0% 12% 0.25 0% 8% 2.80 8% 21% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Credem O 0.51 0% 6% 0.56 1% 2% 0.63 0% -1% 8.60 1% 28% Lower CoE due to revision of Italian 10 year bond Yield at 3%. Modest EPS change

FINANCIALS - ASSET GATHERERES

Azimut Holding O 1.12 -12% -8% 1.54 1% 3% 1.93 5% 19% 26.60 2% 38% Estimates finetuning, lower risk-free rate (3% from 3.8%).

Banca Generali N 1.37 -6% 0% 1.41 1% -2% 1.60 2% 3% 23.70 3% 16% Estimates finetuning, lower risk-free rate (3% from 3.8%).

Mediolanum N 0.46 0% 1% 0.52 1% 6% 0.61 4% 16% 7.00 -4% 20% Lower market multiples

FINANCIALS - INSURANCE

Cattolica Assi.ni U 1.28 0% -18% 1.31 0% -22% 1.34 0% -28% 18.10 3% 9% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Generali U 1.28 0% -13% 1.41 0% -14% 1.50 0% -17% 16.60 4% 3% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Unipol Gruppo Finanziario O 0.61 0% 15% 0.62 0% 1% 0.61 0% 4% 6.80 8% 59% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Unipol-SAI O 0.23 0% -12% 0.24 0% -7% 0.24 0% -9% 3.10 3% 30% No relevant valuation changes and Lower CoE due to revision of Italian 10 year bond Yield at 3%

HEALTHCARE

Diasorin N 1.51 -4% -5% 1.66 -3% -5% 1.88 -2% 2% 34.00 0% 10% Positive impact of $/€ more than balanced by worse top line trend

Recordati N 0.74 0% -3% 0.80 2% -2% 0.85 1% -6% 13.50 0% 10% lower financial charges

Sorin N 0.12 0% -4% 0.13 0% -7% 0.15 0% -7% 2.05 0% -5% No changes to estimates /valuation

INFRASTRUCTURE

Ansaldo STS O 0.44 0% -3% 0.47 0% -5% 0.51 0% -1% 9.50 1% 21% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Astaldi N 0.92 -3% -8% 0.94 -9% -17% 1.08 nm -27% 9.30 9% 13% Lower Coe and EV/EBIT fair multiple of 4.5x for construction unit

Atlantia O 1.07 -4% 9% 1.16 -8% 7% 1.37 -9% 13% 23.50 18% 13% Lower CoE due to revision of 10 year bond yield at 3% and roll over of valuation model

Danieli N 1.92 -24% -7% 2.44 -7% 7% 2.62 -6% 5% 26.00 -1% 13% Impact of mark-to-market on Forex

EI Towers O 1.25 0% -8% 1.37 -8% -12% 1.44 -16% -18% 58.30 14% 47% New mux contract, lowering long-term CPI assumptions, 3% risk-free

Prysmian N 0.87 -6% -19% 1.21 10% -15% 1.40 -9% -16% 17.00 1% 3% 2014-16 estimates finetuned due to extracosts related to WL project

Tesmec N 0.05 -42% -13% 0.06 -43% -27% 0.06 nm -39% 0.80 -8% 26% Estimates' cut due to weak stringing equipment partly offset by lower risk free

Trevi Fin. U 0.26 -16% -23% 0.33 12% -32% 0.40 23% -41% 5.60 26% -15% Lower CoE due to revision of 10 year bond yield at 3% and roll over of valuation model

OIL

Eni O 1.35 -4% 3% 1.63 5% 6% 1.75 8% 4% 21.10 8% 5% Lower forex assumptions, stable oil price assumptions, lower free risk

Maire Tecnimont O 0.19 0% 24% 0.27 0% 23% 0.25 0% -3% 3.40 0% 43% No changes in valuation

Saipem O 0.79 -5% -1% 1.28 -12% -13% 1.82 12% -2% 22.90 11% 16% Lower free risk, higher profitability in 2016E from backlog execution

Saras N -0.01 nm nm 0.07 0% nm 0.10 13% nm 0.98 -17% -2% Revision of ITA 10YR bond yield + cut in operating estimates on weak refining environment

Tenaris O 1.34 0% -2% 1.53 0% 0% 1.67 0% 4% 19.60 2% 13% Lower CoE due to revision of Italian 10 year bond Yield at 3%

PURE INDUSTRIALS

Biancamano N -0.15 nm nm 0.03 -79% -42% 0.16 -39% 74% 0.70 13% 11% TP increase driven by lower Lower CoE. Earnings visibility remains low

Brembo O 1.72 2% 3% 1.98 1% 4% 2.22 1% 1% 33.50 8% 21% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Buzzi Unicem O 0.36 -2% -20% 0.58 5% -22% 0.77 2% -27% 15.40 3% 23% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Cementir N 0.30 7% -10% 0.40 10% -17% 0.50 nm -16% 6.30 3% 12% Lower CoE due to revision of Italian 10 year bond Yield at 3%

CNH Industrial O 0.73 -4% 2% 1.06 -1% 18% 1.37 -1% 18% 9.40 2% 26% Lower financial charges; $/€ rate

Delclima N 0.08 0% -22% 0.09 0% -25% NA nm nm nr nm No changes in valuation

Emak O 0.08 3% -11% 0.10 8% -1% 0.12 nm -8% 1.26 5% 39% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Fiat N 0.61 0% 28% 1.05 4% 1% 1.45 3% 3% 9.00 0% 21% Lower financial charges; $/€ rate

Finmeccanica N (from U) 0.41 22% -21% 0.50 16% -27% 0.59 15% -23% 6.00 30% -14% EPS upgrade mostly driven by higher cash flow generation (lower capex)

Interpump Group O 0.52 0% -2% 0.60 2% -4% 0.66 1% -6% 11.80 6% 15% Lower CoE due to revision of Italian 10 year bond Yield at 3% and USD/EUR at 1.30

Landi Renzo N (from U) 0.004 nm nm 0.04 101% 90% 0.08 79% -12% 1.20 41% 2% Lower CoE due to revision of Italian 10 year bond Yield at 3% + better business profitability

Piaggio N 0.08 -12% -2% 0.14 -6% 4% 0.20 0% 6% 2.85 6% 11% Cut in FY2014/15 estimates. Lower CoE due to revision of Italian 10 year bond Yield at 3%

Pirelli & C. O 0.98 -1% 9% 1.16 -1% 12% 1.39 -1% 20% 14.00 0% 17% Not meaningful changes in the valuation

Sogefi O 0.27 -23% -26% 0.40 -16% -5% 0.48 -14% -4% 5.20 0% 29% Revision of ITA 10YR bond yield + cut in estimates on weakness in Latam

REAL ESTATE

Beni Stabili O 0.04 1% 28% 0.05 8% 46% 0.06 13% 25% 0.83 19% 21% TP increase driven by lower RFR and lower NAV discount in valuation.

IGD - Immobiliare Grande DistrN 0.09 -8% 2% 0.10 0% -7% 0.11 -6% -1% 1.48 14% 12% TP increased following lower RFR and lower NAV discount in the stock valuation

Prelios U -0.10 nm nm -0.02 nm nm -0.01 nm nm 0.54 0% -5% No changes in valuation

TMT

Cairo Communication N 0.13 -31% -49% 0.23 -19% -43% 0.36 18% -22% 7.65 0% 17% Lowering '14 adv. collection, new channels by 2015, 3% risk-free

Eurotech N -0.02 nm nm 0.13 -14% 11% 0.08 0% -50% 2.42 5% 15% Change in TP driven by lower RFR

L'Espresso O 0.04 -6% -12% 0.11 1% 41% 0.13 3% 20% 2.34 5% 61% More aggressive adv. assumptions from '15, 3% risk-free

Mediaset N (from U) 0.07 -32% -16% 0.12 -16% -26% 0.18 3% -23% 3.82 10% 8% M&A approach for payTV, lowering '14 ads, more aggressive on '15 & '16

Mondadori N 0.03 nm -38% 0.06 27% -46% 0.07 23% -27% 1.31 5% 28% lower top-line offset by costs saving, abb impact, 3% risk-free

RCS Mediagroup O -0.07 nm nm 0.10 6% 45% 0.12 7% 38% 2.02 4% 63% More aggressive adv. assumptions from '15, 3% risk-free, savings conversion

Telecom Italia nr 0.09 0% nm 0.09 0% nm 0.09 0% nm NA nm nm N.A.

UTILITIES

A2A N 0.06 6% -3% 0.07 5% 5% 0.07 4% 21% 0.94 7% 11% Lower Refinancing Costs. Lower CoE due to revision of Italian 10 year bond Yield at 3%

Enel N 0.32 0% 2% 0.37 3% 9% 0.39 3% 12% 4.2 17% -3% Lower Refinancing Costs. Lower CoE due to revision of Italian 10 year bond Yield at 3%

Enel Green Power N 0.11 3% 4% 0.12 1% 7% 0.13 0% 3% 2.3 15% 10% Lower Re-financing costs. Lower CoE due to revision of Italian 10 year bond Yield at 3%

ERG N 0.46 -23% -16% 0.46 0% -20% 0.40 5% -26% 11.3 3% -1% Revision in ITA 10YR bond yield + cut in estimates

Hera O 0.10 0% -3% 0.12 6% 3% 0.13 7% 6% 2.6 12% 23% Increase in Waste Volumes. Lower Re-financing costs. Lower cost of capital.

Snam N (from O) 0.29 2% -1% 0.31 2% 2% 0.31 2% 6% 4.3 2% -3% Lower CoE due to revision of Italian 10 year bond Yield at 3%

Terna O 0.25 0% -1% 0.26 0% -1% 0.28 0% 9% 4.1 2% 6% Lower CoE due to revision of Italian 10 year bond Yield at 3%

SIMPLE AVERAGE -3.9% 0.4% 2.5% 5.7% 19.9%

WEIGHTED AVERAGE -1.9% 1.1% 0.8% 2.9% 1.5% 1.5% 6.5% 14.2%

EPS 2014 EPS 2015 EPS 2016

Stock Rating

% change

%

change

%

change

MB vs.

consensus

MB vs.

consensus

MB vs.

consensusnew new new

New TP Main reasons for new TP

Upside

%

change

Italy

03 July 2014 ◆ 68

The MB Italian Pulse Index: Improvement confirmed We have updated the Mediobanca Italian Pulse index that we launched last October. After the flat performance reported in April (stable at -0.01) in May the index suggests an improvement of the GDP in 2Q2014 (index from -0.01 to 0.07). We remind that the reported 1Q2014 GDP growth of -0.1% q/q was not in line with the slight improvement shown by the index over the same period. However, and although still in negative territory, the improvement of the underlying trend started at the end of 2012 is confirmed.

Mediobanca Italian Pulse index and Italian real GDP QoQ


These are the indicators we include in the calculation of the index.

Mediobanca Italian Pulse index indicators

Sector Indicator Weighting Mar 2014 Apr 2014 May 2014

Automotive Total Vehicles Registered Monthly Growth 3% 5.8% 3.3% -2.6%

Automotive Total 2 Wheelers Registered Monthly Growth 3% 26.5% 5.4% -13.4%

Banks Corporate Loans Growth 32% -2.7% -3.2% -3.2%

Banks Corporates Into Liquidation / Bankruptcy Growth 2% 2.3% 2.3% 2.3%

Cement Cement Shipping Monthly Growth 2% 8.4% -2.7% -2.7%

Cement Order Book Monthly Growth 3% 19.6% 19.6% 19.6%

Infrastructure Motorway Traffic Monthly Growth 5% -0.3% 3.6% 3.6%

Media Advertising Spending Monthly Growth 7% -1.8% -4.4% -4.4%

Utilities Gas Consumption Monthly Growth 7% -24.0% -15.7% -0.6%

Utilities Electricity Production Demand Monthly Growth 7% -3.7% -2.9% -2.9%

Real Estate Residential Nominal Price Index Growth 6% -5.2% -5.2% -5.2%

Real Estate Residential Number Of Transactions Growth 7% -8.0% -8.0% -8.0%

Macro Consumer Confidence Monthly Growth 8% 18.8% 22.0% 23.2%

Macro Unemployment Rate Monthly Change 4% -0.1% -0.1% 0.1%

Macro Current Account Change 2% 0.5% 0.5% 0.5%

Macro FX competitiveness 2% 1.2% -0.1% -0.5%

Mediobanca Italian pulse Index

-0.01 -0.01 0.07


-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

-1.0%

-0.5%

0.0%

0.5%

1.0%

Real GDP Growth q/q (lhs) Mediobanca Italian Pulse Index (rhs)

Italy

03 July 2014 ◆ 69

MB Italian Pulse Index – Monthly data since Q2 2010

Mediobanca Italian Pulse Index

MoM change in Mediobanca Italian Pulse Index Italian Real GDP QoQ

Q2 10 0.23 -0.12 -0.36 0.17 0.29 0.6

Q3 10 0.14 -0.03 -0.19 -0.33 0.11 0.31 0.4

Q4 10 0.09 -0.03 0.16 0.07 0.19 0.04 0.2

Q1 11 0.26 0.07 0.37 0.11 0.17 -0.20 0.2

Q2 11 -0.02 -0.19 0.55 0.56 0.25 -0.29 0.1

Q3 11 0.12 -0.13 0.31 0.19 0.29 -0.02 -0.1

Q4 11 -0.12 -0.41 -0.07 0.04 -0.43 -0.35 -0.7

Q1 12 -0.85 -0.43 -0.60 0.25 -0.91 -0.31 -1.0

Q2 12 -0.75 0.17 -1.16 -0.41 -0.90 0.26 -0.6

Q3 12 -0.91 -0.01 -0.89 0.02 -1.29 -0.40 -0.3

Q4 12 -0.89 0.39 -1.17 -0.28 -0.85 0.33 -0.9

Q1 13 -0.76 0.09 -0.87 -0.11 -0.73 0.14 -0.6

Q2 13 -0.57 0.15 -0.56 0.01 -0.65 -0.09 -0.3

Q3 13 -0.39 0.26 -0.45 -0.07 -0.16 0.30 -0.1

Q4 13 -0.27 -0.11 -0.26 0.01 -0.21 0.05 0.1

Q1 14 -0.07 0.14 -0.12 -0.05 -0.01 0.10 -0.1

Q2 14 -0.01 0.00 0.07 0.08


Italy

03 July 2014 ◆ 70

We finally compare our Italian Pulse Index with the Italian manufacturing and service PMI surveys, and see a similar trend in their directions. This is shown in the chart below:

Mediobanca Italian Pulse Index with Manufacturing and Services PMI surveys


-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

30

35

40

45

50

55

60

Italy Manufacturing PMI Survey (lhs) Italy Services PMI Survey (lhs) Mediobanca Italian Pulse Index (rhs)

Italy

03 July 2014 ◆ 71

GENERAL DISCLOSURES

This research report is prepared by Mediobanca - Banca di credito finanziario S.p.A. ("Mediobanca S.p.A."), authorized and supervised by Bank of Italy and Consob to provide financial services, and is compliant with the relevant European Directive provisions on investment and ancillary services (MiFID Directive) and with the implementing law.

Unless specified to the contrary, within EU Member States, the report is made available by Mediobanca S.p.A. The distribution of this document by Mediobanca S.p.A. in other jurisdictions may be restricted by law and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions. All reports are disseminated and available to all clients simultaneously through electronic distribution and publication to our internal client websites. The recipient acknowledges that, to the extent permitted by applicable securities laws and regulations, Mediobanca S.p.A. disclaims all liability for providing this research, and accepts no liability whatsoever for any direct, indirect or consequential loss arising from the use of this document or its contents. This research report is provided for information purposes only and does not constitute or should not be construed as a provision of investment advice, an offer to buy or sell, or a solicitation of an offer to buy or sell, any financial instruments. It is not intended to represent the conclusive terms and conditions of any security or transaction, nor to notify you of any possible risks, direct or indirect, in undertaking such a transaction. Not all investment strategies are appropriate at all times, and past performance is not necessarily a guide to future performance. Mediobanca S.p.A. recommends that independent advice should be sought, and that investors should make their own independent decisions as to whether an investment or instrument is proper or appropriate based on their own individual judgment, their risk-tolerance, and after consulting their own investment advisers. Unless you notify Mediobanca S.p.A. otherwise, Mediobanca S.p.A. assumes that you have sufficient knowledge, experience and/or professional advice to undertake your own assessment. This research is intended for use only by those professional clients to whom it is made available by Mediobanca S.p.A. The information contained herein, including any expression of opinion, has been obtained from or is based upon sources believed to be reliable but is not guaranteed as to accuracy or completeness although Mediobanca S.p.A. considers it to be fair and not misleading. Any opinions or estimates expressed herein reflect the judgment of the author(s) as of the date the research was prepared and are subject to change at any time without notice. Unless otherwise stated, the information or opinions presented, or the research or analysis upon which they are based, are updated as necessary and at least annually. Mediobanca S.p.A. may provide hyperlinks to websites of entities mentioned in this document, however the inclusion of a link does not imply that Mediobanca S.p.A. endorses, recommends or approves any material on the linked page or accessible from it. Mediobanca S.p.A. does not accept responsibility whatsoever for any such material, nor for any consequences of its use. Neither Mediobanca S.p.A. nor any of its directors, officers, employees or agents shall have any liability, howsoever arising, for any error, inaccuracy or incompleteness of fact or opinion in this report or lack of care in its preparation or publication.

Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research. The analysts named in this report may have from time to time discussed with our clients, including Mediobanca S.p.A. salespersons and traders, or may discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity securities discussed in this report, which impact may be directionally counter to the analysts' published price target expectations for such stocks. Any such trading strategies are distinct from and do not affect the analysts' fundamental equity rating for such stocks, which rating reflects a stock's return potential relative to its coverage group as described herein.

ADDITIONAL DISCLAIMERS TO U.K. INVESTORS: Mediobanca S.p.A. provides investment services in the UK through a branch established in the UK (as well as directly from its establishment(s) in Italy) pursuant to its passporting rights under applicable EEA Banking and Financial Services Directives and in accordance with applicable Financial Services Authority requirements.

ADDITIONAL DISCLAIMERS TO U.S. INVESTORS: This research report is prepared by Mediobanca S.p.A. and distributed in the United States by Mediobanca Securities USA LLC, which is a wholly owned subsidiary of Mediobanca S.p.A., is a member of Finra and is registered with the US Securities and Exchange Commission. 565 Fifth Avenue - New York NY 10017. Mediobanca Securities USA LLC accepts responsibility for the content of this report. Any US person receiving this report and wishing to effect any transaction in any security discussed in this report should contact Mediobanca Securities USA LLC at 001(212) 991-4745. Please refer to the contact page for additional contact information. All transactions by a US person in the securities mentioned in this report must be effected through Mediobanca Securities USA LLC and not through a non-US affiliate. The research analyst(s) named on this report are not registered / qualified as research analysts with Finra. The research analyst(s) are not associated persons of Mediobanca Securities USA LLC and therefore are not subject to NASD rule 2711 and incorporated NYSE rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst.

ADDITIONAL DISCLAIMERS TO U.A.E. INVESTORS: This research report has not been approved or licensed by the UAE Central Bank, the UAE Securities and Commodities Authority (SCA), the Dubai Financial Services Authority (DFSA) or any other relevant licensing authorities in the UAE, and does not constitute a public offer of securities in the UAE in accordance with the commercial companies law, Federal Law No. 8 of 1984 (as amended), SCA Resolution No.(37) of 2012 or otherwise. This research report is strictly private and confidential and is being issued to sophisticated investors.

REGULATORY DISCLOSURES

Mediobanca S.p.A. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Mediobanca S.p.A. or its affiliates or its employees may effect transactions in the securities described herein for their own account or for the account of others, may have long or short positions with the issuer thereof, or any of its affiliates, or may perform or seek to perform securities, investment banking or other services for such issuer or its affiliates. The organisational and administrative arrangements established by Mediobanca S.p.A. for the management of conflicts of interest with respect to investment research are consistent with rules, regulations or codes applicable to the securities industry. The compensation of the analyst who prepared this report is determined exclusively by research management and senior

Disclaimer

Italy

03 July 2014 ◆ 72

management (not including investment banking). Analyst compensation is not based on investment banking revenues, however, compensation may relate to the revenues of Mediobanca S.p.A. as a whole, of which investment banking, sales and trading are a part.

For a detailed explanation of the policies and principles implemented by Mediobanca S.p.A. to guarantee the integrity and independence of researches prepared by Mediobanca's analysts, please refer to the research policy which can be found at the following link: http://www.mediobanca.it/static/upload/b5d/b5d01c423f1f84fffea37bd41ccf7d74.pdf

Unless otherwise stated in the text of the research report, target prices are based on either a discounted cash flow valuation and/or comparison of valuation ratios with companies seen by the analyst as comparable or a combination of the two methods. The result of this fundamental valuation is adjusted to reflect the analyst's views on the likely course of investor sentiment. Whichever valuation method is used there is a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of demand for the company's products. Such demand variations may result from changes in technology, in the overall level of economic activity or, in some cases, from changes in social values. Valuations may also be affected by changes in taxation, in exchange rates and, in certain industries, in regulations. All prices are market close prices unless differently specified.

Since 1 July 2013, Mediobanca uses a relative rating system, based on the following judgements: Outperform, Neutral, Underperform and Not Rated.

Outperform (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 6-12 months.

Neutral (N). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 6-12 months.

Underperform (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry (team's) coverage universe, on a risk-adjusted basis, over the next 6-12 months.

Not Rated (NR). Currently the analyst does not have adequate confidence about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage, on a risk-adjusted basis, over the next 6-12 months. Alternatively, it is applicable pursuant to Mediobanca policy in circumstances when Mediobanca is acting in any advisory capacity in a strategic transaction involving this company or when the company is the target of a tender offer.

Our recommendation relies upon the expected relative performance of the stock considered versus its benchmark. Such an expected relative performance relies upon a valuation process that is based on the analysis of the company's business model / competitive positioning / financial forecasts. The company's valuation could change in the future as a consequence of a modification of the mentioned items.

Please consider that the above rating system also drives the portfolio selections of the Mediobanca's analysts as follows: long positions can only apply to stocks rated Outperform and Neutral; short positions can only apply to stocks rated Underperform and Neutral; portfolios selection cannot refer to Not Rated stocks; Mediobanca portfolios might follow different time horizons.

Proportion of all recommendations relating to the second quarter:

Outperform Neutral Underperform Not Rated

41.65% 41.39% 15.68% 1.29%

Proportion of issuers to which Mediobanca S.p.A. has supplied material investment banking services relating to the second quarter:

Outperform Neutral Underperform Not Rated

10.49% 5.59% 13.11% 60%

The current stock ratings system has been used since 1 July 2013. Before then, Mediobanca S.p.A. used a different system, based on the following ratings: outperform, neutral, underperform, under review, not rated. For additional details about the old ratings system, please access research reports dated before 1 July 2013 from the restricted part of the "MB Securities" section of the Mediobanca S.p.A. website at www.mediobanca.com.

COMPANY SPECIFIC REGULATORY DISCLOSURES

SPONSOR This report was prepared by Mediobanca S.p.A. in its capacity as sponsor of the following companies, in compliance with the obligations set forth by the rules of the markets organized and managed by Borsa Italiana S.p.A.: MONCLER. Mediobanca S.p.A. expects to prepare research reports on the following companies at least on a semi-annual basis: MONCLER.

Disclaimer

Italy

03 July 2014 ◆ 73

SPECIALIST This report was prepared by Mediobanca S.p.A. in its capacity as specialist of the following companies, in compliance with the obligations set forth by the rules of the markets organized and managed by Borsa Italiana S.p.A.: AEFFE, ANSALDO STS, EI TOWERS, MOLESKINE, YOOX. Mediobanca S.p.A. expects to prepare research reports on the following companies at least on a semi-annual basis: AEFFE, ANSALDO STS, EI TOWERS, MOLESKINE, YOOX.

AGREEMENT TO PRODUCE RESEARCH OTHER THAN SPONSOR AND/OR SPECIALIST ARRANGEMENT Mediobanca S.p.A. is party to one or more agreements with the following companies relating to the preparation of research reports on the same companies: EUROTECH, TESMEC.

MARKET MAKER Mediobanca S.p.A. is currently acting as market maker on equity instruments, or derivatives whose underlying financial instruments are materially represented by equity instruments, issued by the following companies: A2A, ANSALDO STS, ASTALDI, ATLANTIA, AUTOGRILL, AZIMUT, BANCO POPOLARE, BUZZI UNICEM, CAMPARI, CATTOLICA ASSICURAZIONI, CNH INDUSTRIAL, CREDEM, DIASORIN, ENEL, ENEL GREEN POWER, ENI, ERG, FIAT, FINMECCANICA, GENERALI ASS., GEOX, GTECH, HERA, INTESA SANPAOLO, ITALCEMENTI, L''ESPRESSO, LUXOTTICA, MEDIASET, MEDIOLANUM, MONCLER, MONDADORI, PIRELLI & C. , PRYSMIAN, RECORDATI, SAIPEM, SARAS, SNAM, TELECOM ITALIA, TENARIS, TERNA, TOD''S, UNICREDIT, UNIONE DI BANCHE ITALIANE, UNIPOL, UNIPOL-SAI, YOOX.

MEDIOBANCA REPRESENTATION ON GOVERNING BODIES Mediobanca S.p.A. or one or more of the companies belonging to its group have a representative on one of the governing bodies of the following companies: ATLANTIA, GENERALI ASS..

MEDIOBANCA SIGNIFICANT FINANCIAL INTERESTS Mediobanca S.p.A. or one or more of the companies belonging to its group owns a "major holding" (as defined in the EU Transparency Directive as implemented in each relevant jurisdiction) in the following companies: AEFFE, GENERALI ASS., NICE, PIRELLI & C. , RCS MEDIAGROUP. Please consult the website of the relevant competent authority for details. As of the date of publication of this research report, Mediobanca Securities USA LLC's parent company, Mediobanca S.p.A. beneficially owns 1% or more of any class of common equity securities of the securities of the following companies: AEFFE, GENERALI ASS., NICE, PIRELLI & C. , RCS MEDIAGROUP.

Mediobanca S.p.A. or one or more of the companies belonging to its group hold material open positions in financial instruments, or derivatives whose underlying financial instruments are materially represented by financial instrument, issued by the following companies: GENERALI ASS..

As of the date of publication of this research report, Mediobanca Securities USA LLC's parent company, Mediobanca S.p.A. beneficially owns 1% or more of any class of common equity securities of the securities of the following companies: PRELIOS, TESMEC, UNICREDIT.

ISSUER REPRESENTATION ON MEDIOBANCA GOVERNING BODIES The following companies have a representative on one of the governing bodies of Mediobanca S.p.A. or one or more of the companies belonging to its group: PIRELLI & C. , TELECOM ITALIA, UNICREDIT.

Certain members of the governing bodies of the following companies are also members of the governing bodies of Mediobanca S.p.A. or one or more of the companies belonging to its group: ASTALDI, ATLANTIA, AUTOGRILL, ERG, ITALCEMENTI, LUXOTTICA, MEDIASET, MEDIOLANUM, MONDADORI, PRYSMIAN, SAIPEM, SALINI IMPREGILO, TERNA.

ISSUER SIGNIFICANT FINANCIAL INTERESTS ON MEDIOBANCA The following companies own a "major holding" (as defined in the EU Transparency Directive as implemented in each relevant jurisdiction) in Mediobanca S.p.A.: MEDIOLANUM, UNICREDIT. Please consult the website of the relevant competent authority for details.

LENDING RELATIONSHIP Mediobanca S.p.A. or one or more of the companies belonging to its group have a significant lending relationship with the following companies or one or more of the companies belonging to their group: ATLANTIA, AUTOGRILL, BANCA GENERALI, CNH INDUSTRIAL, FIAT, GENERALI ASS., SNAM, TELECOM ITALIA, TELECOM ITALIA MEDIA, UNIPOL, UNIPOL-SAI.

LEAD MANAGER OR CO-LEAD MANAGER OR SIMILAR ROLES In the past 12 months, Mediobanca S.p.A. has acted as lead manager, co-lead manager, bookrunner or in similar roles in the context of a public offering of financial instruments of the following companies: MONCLER. In the past 12 months, Mediobanca Securities USA LLC has not acted as lead manager, co-lead manager, bookrunner or in similar roles in the context of a public offering of financial instruments of the following companies: MONCLER.

CORPORATE FINANCE SERVICE CONTRACTS Mediobanca S.p.A. or one or more of the companies belonging to its group are currently providing corporate finance services to the following companies or one or more of the companies belonging to its group: ATLANTIA, BANCO POPOLARE, BENI STABILI, CAMPARI, CATTOLICA ASSICURAZIONI, ENEL, FINMECCANICA, GENERALI ASS., ITALCEMENTI, L''ESPRESSO, RCS MEDIAGROUP, TELECOM ITALIA.

In the past 12 months, Mediobanca S.p.A. or one or more of the companies belonging to its group have entered into agreements to deliver corporate finance services to the following companies or one or more of the companies belonging to its group: BANCO POPOLARE, GENERALI ASS., IMMOBILIARE GRANDE DISTRIBUZIONE, RCS MEDIAGROUP, SNAM.

UNDERWRITING Mediobanca S.p.A. is committed to purchase financial instruments remaining unsubscribed in the context of financial instruments offering of the following companies: ITALCEMENTI.

RATING The present rating in regard to A2A has not been changed since 03/08/2012. The present rating in regard to AEFFE has not been changed since 10/06/2014. In the past 12 months, the rating on AEFFE has been changed. The previous rating, issued on 14/05/2013, was NEUTRAL. The present rating in regard to AMPLIFON has not been changed since 13/06/2014. In the past 12 months, the rating on AMPLIFON has been

Disclaimer

Italy

03 July 2014 ◆ 74

changed. The previous rating, issued on 09/04/2013, was UNDERPERFORM. The present rating in regard to ANSALDO STS has not been changed since 12/12/2013. In the past 12 months, the rating on ANSALDO STS has been changed. The previous rating, issued on 16/01/2013, was NEUTRAL. The present rating in regard to ASTALDI has not been changed since 23/04/2013. The present rating in regard to ATLANTIA has not been changed since 04/12/2007. The present rating in regard to AUTOGRILL has not been changed since 11/10/2013. In the past 12 months, the rating on AUTOGRILL has been changed. The previous rating, issued on 01/10/2013, was NOT RATED. The present rating in regard to AZIMUT has not been changed since 14/03/2011. The present rating in regard to BANCA GENERALI has not been changed since 25/03/2013. The present rating in regard to BANCO POPOLARE has not been changed since 27/06/2014. In the past 12 months, the rating on BANCO POPOLARE has been changed. The previous rating, issued on 17/06/2013, was UNDERPERFORM. The present rating in regard to BENI STABILI has not been changed since 12/02/2014. In the past 12 months, the rating on BENI STABILI has been changed. The previous rating, issued on 17/06/2013, was NEUTRAL. The present rating in regard to BIANCAMANO has not been changed since 28/03/2013. The present rating in regard to BREMBO has not been changed since 12/02/2014. In the past 12 months, the rating on BREMBO has been changed. The previous rating, issued on 15/10/2013, was NEUTRAL. The present rating in regard to BRUNELLO CUCINELLI has not been changed since 11/03/2014. In the past 12 months, the rating on BRUNELLO CUCINELLI has been changed. The previous rating, issued on 24/02/2014, was UNDERPERFORM. The present rating in regard to BUZZI UNICEM has not been changed since 10/02/2014. In the past 12 months, the rating on BUZZI UNICEM has been changed. The previous rating, issued on 15/10/2013, was NEUTRAL. The present rating in regard to CAIRO COMMUNICATION has not been changed since 17/02/2014. In the past 12 months, the rating on CAIRO COMMUNICATION has been changed. The previous rating, issued on 26/10/2011, was OUTPERFORM. The present rating in regard to CAMPARI has not been changed since 29/10/2012. The present rating in regard to CATTOLICA ASSICURAZIONI has not been changed since 08/10/2013. In the past 12 months, the rating on CATTOLICA ASSICURAZIONI has been changed. The previous rating, issued on 05/03/2007, was NEUTRAL. The present rating in regard to CEMENTIR has not been changed since 17/03/2014. In the past 12 months, the rating on CEMENTIR has been changed. The previous rating, issued on 21/05/2012, was OUTPERFORM. The present rating in regard to CNH INDUSTRIAL has not been changed since 19/03/2012. The present rating in regard to CREDEM has not been changed since 05/01/2009. The present rating in regard to DANIELI has not been changed since 28/02/2014. In the past 12 months, the rating on DANIELI has been changed. The previous rating, issued on 06/05/2013, was OUTPERFORM. The present rating in regard to DE LONGHI has not been changed since 03/07/2014. In the past 12 months, the rating on DE LONGHI has been changed. The previous rating, issued on 13/05/2014, was NEUTRAL. The present rating in regard to DELCLIMA has not been changed since 02/01/2012. The present rating in regard to DIASORIN has not been changed since 07/03/2014. In the past 12 months, the rating on DIASORIN has been changed. The previous rating, issued on 17/09/2013, was OUTPERFORM. The present rating in regard to EI TOWERS has not been changed since 24/10/2006. The present rating in regard to EMAK has not been changed since 16/05/2013. The present rating in regard to ENEL has not been changed since 09/03/2012. The present rating in regard to ENEL GREEN POWER has not been changed since 08/02/2012. The present rating in regard to ENI has not been changed since 25/02/2004. The present rating in regard to ERG has not been changed since 17/02/2014. In the past 12 months, the rating on ERG has been changed. The previous rating, issued on 13/03/2003, was OUTPERFORM. The present rating in regard to EUROTECH has not been changed since 08/03/2012. The present rating in regard to FERRAGAMO has not been changed since 03/07/2014. In the past 12 months, the rating on FERRAGAMO has been changed. The previous rating, issued on 10/01/2014, was UNDERPERFORM. The present rating in regard to FIAT has not been changed since 07/05/2014. In the past 12 months, the rating on FIAT has been changed. The previous rating, issued on 26/02/2014, was OUTPERFORM. The present rating in regard to FINMECCANICA has not been changed since 03/07/2014. In the past 12 months, the rating on FINMECCANICA has been changed. The previous rating, issued on 09/11/2012, was UNDERPERFORM. The present rating in regard to GENERALI ASS. has not been changed since 03/02/2014. In the past 12 months, the rating on GENERALI ASS. has been changed. The previous rating, issued on 30/07/2012, was NEUTRAL. The present rating in regard to GEOX has not been changed since 03/07/2014. In the past 12 months, the rating on GEOX has been changed. The previous rating, issued on 11/05/2012, was UNDERPERFORM. The present rating in regard to GTECH has not been changed since 07/09/2005. The present rating in regard to HERA has not been changed since 03/03/2014. In the past 12 months, the rating on HERA has been changed. The previous rating, issued on 11/11/2011, was NEUTRAL. The present rating in regard to IMMOBILIARE GRANDE DISTRIBUZIONE has not been changed since 20/11/2007. The present rating in regard to INDESIT has not been changed since 17/09/2013. In the past 12 months, the rating on INDESIT has been changed. The previous rating, issued on 04/05/2011, was NEUTRAL. The present rating in regard to INTERPUMP has not been changed since 15/05/2014. In the past 12 months, the rating on INTERPUMP has been changed. The previous rating, issued on 17/02/2014, was NEUTRAL. The present rating in regard to INTESA SANPAOLO has not been changed since 08/04/2014. In the past 12 months, the rating on INTESA SANPAOLO has been changed. The previous rating, issued on 30/09/2013, was UNDERPERFORM. The present rating in regard to ITALCEMENTI has not been changed since 07/03/2014. In the past 12 months, the rating on ITALCEMENTI has been changed. The previous rating, issued on 10/08/2010, was NEUTRAL. The present rating in regard to LANDI RENZO has not been changed since 03/07/2014. In the past 12 months, the rating on LANDI RENZO has been changed. The previous rating, issued on 06/08/2013, was UNDERPERFORM. The present rating in regard to L''ESPRESSO has not been changed since 30/07/2013. In the past 12 months, the rating on L''ESPRESSO has been changed. The previous rating, issued on 08/07/2011, was NEUTRAL. The present rating in regard to LUXOTTICA has not been changed since 29/01/2014. In the past 12 months, the rating on LUXOTTICA has been changed. The previous rating, issued on 24/11/2011, was NEUTRAL. The present rating in regard to MAIRE TECNIMONT has not been changed since 31/03/2014. In the past 12 months, the rating on MAIRE TECNIMONT has been changed. The previous rating, issued on 11/10/2013, was NEUTRAL. The present rating in regard to MARR has not been changed since 19/03/2014. In the past 12 months, the rating on MARR has been changed. The previous rating, issued on 11/11/2010, was NEUTRAL. The present rating in regard to MEDIASET has not been changed since 03/07/2014. In the past 12 months, the rating on MEDIASET has been changed. The previous rating, issued on 25/02/2014, was UNDERPERFORM. The present rating in regard to MEDIOLANUM has not been changed since 25/03/2013. The present rating in regard to MOLESKINE has not been changed since 24/04/2014. In the past 12 months, the rating on MOLESKINE has been changed. The previous rating, issued on 11/03/2014, was UNDERPERFORM. The present rating in regard to MONCLER has not been changed since 21/01/2014. The present rating in regard to MONDADORI has not been changed since 05/03/2013. The present rating in regard to NICE has not been changed since 06/12/2011. The present rating in regard to PIAGGIO has not been changed since 29/07/2013. In the past 12 months, the rating on PIAGGIO has been changed. The previous rating, issued on 12/10/2012, was UNDERPERFORM. The present rating in regard to PIRELLI & C. has not been changed since 07/10/2013. In the past 12 months, the rating on PIRELLI & C. has been changed. The previous rating, issued on 06/08/2013, was NEUTRAL. The present rating in regard to PRADA has not been changed since 09/04/2013. The present rating in regard to PRELIOS has not been changed since 08/04/2014. In the past 12 months, the rating on PRELIOS has been changed. The previous rating, issued on 13/02/2009, was NEUTRAL. The present rating in regard to PRYSMIAN has not been changed since 09/05/2014. In the past 12 months, the rating on PRYSMIAN has been changed. The previous rating, issued on 01/03/2013, was OUTPERFORM. The present rating in regard to RCS MEDIAGROUP has not been changed since 13/03/2014. In the past 12 months, the rating on RCS MEDIAGROUP has been changed. The previous rating, issued on 28/11/2013, was NEUTRAL. The present rating in regard to RECORDATI has not been changed since 06/03/2014. In the past 12 months, the rating on RECORDATI has been changed. The previous rating, issued on 14/01/2013, was OUTPERFORM. The present rating in regard to SAFILO has not been changed since 02/05/2014. In the past 12 months, the rating on SAFILO

Italy

03 July 2014 ◆ 75

has been changed. The previous rating, issued on 22/04/2013, was NEUTRAL. The present rating in regard to SAIPEM has not been changed since 29/10/2013. In the past 12 months, the rating on SAIPEM has been changed. The previous rating, issued on 03/06/2013, was NEUTRAL. The present rating in regard to SALINI IMPREGILO has not been changed since 22/10/2009. The present rating in regard to SARAS has not been changed since 24/02/2014. In the past 12 months, the rating on SARAS has been changed. The previous rating, issued on 15/10/2013, was UNDERPERFORM. The present rating in regard to SNAM has not been changed since 03/07/2014. In the past 12 months, the rating on SNAM has been changed. The previous rating, issued on 02/08/2007, was OUTPERFORM. The present rating in regard to SOGEFI has not been changed since 30/10/2013. In the past 12 months, the rating on SOGEFI has been changed. The previous rating, issued on 19/03/2012, was NEUTRAL. The present rating in regard to SORIN has not been changed since 08/11/2011. The present rating in regard to TELECOM ITALIA has not been changed since 09/07/2013. In the past 12 months, the rating on TELECOM ITALIA has been changed. The previous rating, issued on 25/01/2012, was NEUTRAL. The present rating in regard to TELECOM ITALIA MEDIA has not been changed since 09/07/2013. In the past 12 months, the rating on TELECOM ITALIA MEDIA has been changed. The previous rating, issued on 17/09/2012, was OUTPERFORM. The present rating in regard to TENARIS has not been changed since 23/01/2014. In the past 12 months, the rating on TENARIS has been changed. The previous rating, issued on 15/01/2013, was UNDERPERFORM. The present rating in regard to TERNA has not been changed since 10/01/2012. The present rating in regard to TESMEC has not been changed since 21/11/2013. In the past 12 months, the rating on TESMEC has been changed. The previous rating, issued on 15/02/2013, was OUTPERFORM. The present rating in regard to TOD''S has not been changed since 05/10/2011. The present rating in regard to TREVI FINANZIARIA has not been changed since 17/06/2013. The present rating in regard to UNICREDIT has not been changed since 26/03/2012. The present rating in regard to UNIONE DI BANCHE ITALIANE has not been changed since 15/11/2013. In the past 12 months, the rating on UNIONE DI BANCHE ITALIANE has been changed. The previous rating, issued on 08/10/2013, was NEUTRAL. The present rating in regard to UNIPOL has not been changed since 14/03/2013. The present rating in regard to UNIPOL-SAI has not been changed since 14/03/2013. The present rating in regard to YOOX has not been changed since 24/02/2014. In the past 12 months, the rating on YOOX has been changed. The previous rating, issued on 17/06/2013, was NEUTRAL.

INITIAL COVERAGE A2A initial coverage as of 21/03/2003. AEFFE initial coverage as of 17/09/2007. AMPLIFON initial coverage as of 05/07/2006. ANSALDO STS initial coverage as of 04/07/2006. ASTALDI initial coverage as of 22/06/2009. ATLANTIA initial coverage as of 10/04/2003. AUTOGRILL initial coverage as of 21/02/2003. AZIMUT initial coverage as of 01/08/2005. BANCA GENERALI initial coverage as of 17/01/2007. BANCO POPOLARE initial coverage as of 25/07/2007. BENI STABILI initial coverage as of 18/06/2007. BIANCAMANO initial coverage as of 13/04/2011. BREMBO initial coverage as of 01/08/2007. BRUNELLO CUCINELLI initial coverage as of 12/06/2012. BUZZI UNICEM initial coverage as of 21/03/2003. CAIRO COMMUNICATION initial coverage as of 12/02/2003. CAMPARI initial coverage as of 21/03/2003. CATTOLICA ASSICURAZIONI initial coverage as of 11/04/2005. CEMENTIR initial coverage as of 23/01/2003. CNH INDUSTRIAL initial coverage as of 04/01/2011. CREDEM initial coverage as of 21/03/2003. DANIELI initial coverage as of 23/05/2006. DE LONGHI initial coverage as of 28/01/2003. DELCLIMA initial coverage as of 02/01/2012. DIASORIN initial coverage as of 11/09/2007. EI TOWERS initial coverage as of 24/10/2006. EMAK initial coverage as of 19/07/2012. ENEL initial coverage as of 09/05/2003. ENEL GREEN POWER initial coverage as of 26/01/2011. ENI initial coverage as of 25/02/2004. ERG initial coverage as of 13/03/2003. EUROTECH initial coverage as of 09/03/2006. FERRAGAMO initial coverage as of 05/09/2011. FIAT initial coverage as of 07/07/2003. FINMECCANICA initial coverage as of 28/03/2003. GENERALI ASS. initial coverage as of 23/01/2003. GEOX initial coverage as of 01/03/2005. GTECH initial coverage as of 15/03/2005. HERA initial coverage as of 30/07/2003. IMMOBILIARE GRANDE DISTRIBUZIONE initial coverage as of 18/06/2007. INDESIT initial coverage as of 16/02/2006. INTERPUMP initial coverage as of 25/10/2004. INTESA SANPAOLO initial coverage as of 16/04/2007. ITALCEMENTI initial coverage as of 31/01/2003. LANDI RENZO initial coverage as of 14/08/2007. L''ESPRESSO initial coverage as of 17/04/2003. LUXOTTICA initial coverage as of 27/06/2003. MAIRE TECNIMONT initial coverage as of 15/09/2008. MARR initial coverage as of 05/06/2006. MEDIASET initial coverage as of 19/03/2003. MEDIOLANUM initial coverage as of 19/03/2003. MOLESKINE initial coverage as of 09/05/2013. MONCLER initial coverage as of 21/01/2014. MONDADORI initial coverage as of 06/02/2003. NICE initial coverage as of 28/07/2006. PIAGGIO initial coverage as of 14/09/2006. PIRELLI & C. initial coverage as of 12/05/2004. PRADA initial coverage as of 21/02/2012. PRELIOS initial coverage as of 20/02/2003. PRYSMIAN initial coverage as of 26/06/2007. RCS MEDIAGROUP initial coverage as of 25/06/2003. RECORDATI initial coverage as of 12/03/2003. SAFILO initial coverage as of 19/12/2006. SAIPEM initial coverage as of 20/02/2003. SALINI IMPREGILO initial coverage as of 24/06/2005. SARAS initial coverage as of 22/05/2012. SNAM initial coverage as of 21/02/2003. SOGEFI initial coverage as of 09/03/2007. SORIN initial coverage as of 10/03/2004. TELECOM ITALIA initial coverage as of 12/02/2003. TELECOM ITALIA MEDIA initial coverage as of 13/02/2004. TENARIS initial coverage as of 15/04/2003. TERNA initial coverage as of 27/08/2004. TESMEC initial coverage as of 21/09/2010. TOD''S initial coverage as of 28/01/2003. TREVI FINANZIARIA initial coverage as of 06/03/2006. UNICREDIT initial coverage as of 30/06/2003. UNIONE DI BANCHE ITALIANE initial coverage as of 16/04/2007. UNIPOL initial coverage as of 21/07/2003. UNIPOL-SAI initial coverage as of 11/09/2003. YOOX initial coverage as of 21/01/2010.

ANALYST'S PERSONAL FINANCIAL INTERESTS PESSINA NICOLO holds no.231 shares of ATLANTIA.

PAVAN FABIO holds no.100 shares of EI TOWERS

COPYRIGHT NOTICE No part of the content of any research material may be copied, forwarded or duplicated in any form or by any means without the prior consent of Mediobanca S.p.A., and Mediobanca S.p.A. accepts no liability whatsoever for the actions of third parties in this respect.

END NOTES The disclosures contained in research reports produced by Mediobanca S.p.A. shall be governed by and construed in accordance with Italian law.

Additional information is available upon request.

Disclaimer

Italy

03 July 2014 ◆ 76

Mediobanca S.p.A. Antonio Guglielmi

Head of European Equity Research +44 203 0369 570

[email protected] ANALYSTS

European Banks

Alain Tchibozo France/IBK +44 203 0369 573 [email protected]

Alex Tsirigotis Greece/UK +44 203 0369 572 [email protected]

Andrea Filtri Spain/Italy +44 203 0369 571 [email protected]

Andreas Williams Spain +44 203 0369 577 [email protected]

Christopher Wheeler UK/IBK +44 203 0369 575 [email protected]

Riccardo Rovere Italy/Scandinavia/CEE/Germany +39 02 8829 604 [email protected]

European Insurance

Marc Thiele Global multi-line, Switzerland and Reinsurance +44 203 0369 584 [email protected]

Gianluca Ferrari Italy and Reinsurance +39 02 8829 482 [email protected]

Maarten Altena Benelux and UK +44 203 0369 578 [email protected]

Simonetta Chiriotti Nordics +39 02 8829 933 [email protected]

Italian Research

Alessandro Tortora Building Materials/Industrials/Holdings +39 02 8829 673 [email protected]

Andrea Scauri Oil & Oil Related/Capital Goods +39 02 8829 496 [email protected]

Chiara Rotelli Branded Goods/Consumers Goods +39 02 8829 931 [email protected]

Fabio Pavan Media/Telecommunications/Consumer Goods +39 02 8829 633 [email protected]

Javier Suárez Utilities +39 028829 036 [email protected]

Massimo Vecchio Auto & Auto Components/Industrials/Holdings +39 02 8829 541 [email protected]

Niccolò Storer Auto & Auto Components/Industrials/Holdings +39 02 8829 444 [email protected]

Nicolò Pessina Consumer Goods/Infrastructure +39 02 8829 796 [email protected]

Simonetta Chiriotti Real Estate/ Industrials +39 02 8829 933 [email protected]

FOR NON US PERSON receiving this document and wishing to effect transactions in any securities discussed herein, please contact:

Mediobanca S.p.A. Charlotte Roden

Head of Equity Sales +44 203 0369 537

[email protected] SALES

Angelo Vietri +39 02 8829 989 [email protected]

Christopher Seidenfaden +44 203 0369 610 [email protected]

Ivan Simetovic +39 02 8829 687 [email protected]

Lorenzo Angeloni +39 02 8829 507 [email protected]

Timothy Pedroni +44 203 0369 635 [email protected]

European Spec Sales

Gaelle Jarrousse Banks +44 203 0369 530 [email protected]

Carlo Pirri Banks +44 203 0369 531 [email protected]

Gert-Jaap Kraan Insurance +44 203 0369 510 [email protected]

Mediobanca S.p.A. Dominic Bidwell

Head of Equity Trading and Sales Trading +44 203 0369 627

[email protected] SALES/TRADERS Alessandro Gobbi +39 02 8829 263 [email protected]

Matteo Agrati +44 203 0369 629 [email protected]

Michael Sherry +44 203 0369 605 [email protected]

Roberto Riboldi +39 02 8829 639 [email protected]

FOR US PERSON receiving this document and wishing to effect transactions in any securities discussed herein, please contact:

Mediobanca Securities USA LLC Pierluigi Gastone

Head of Mediobanca Securities USA LLC +1 212 991 4745

[email protected]

Massimiliano Pula +1 646 839 4911 [email protected]

Robert Perez +1 646 839 4910 [email protected]

MEDIOBANCA – Banca di Credito Finanziario S.p.A. Piazzetta Enrico Cuccia, 1 - 20121 Milano - T. +39 02 8829.1 33 Grosvenor Place – London SW1X 7HY – T. +44 (0) 203 0369 530

final note 2 july - huffpostbig.assets.huffingtonpost.com/mb.pdf · time last week to a potentially...

Documents