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  • Valuation of anindustrial company

    Pavia University

    November 2014www.pwc.com

  • Agenda

    1 Overview 1

    2 Business Plan analysis 3

    3 Discounted Cash Flow method 10

    3.1 Business Plan: cash flow analysis 12

    3.2 Figurative taxes on EBIT 15

    3.3 Discount rate (WACC) 17

    3.4 Terminal value 24

    3.5 Surplus assets 30

    3.6 DCF results 32

    3.7 Sensitivity analysis 40

    4 Market multiple methodology 44

    5 Equity Value 48

    Page

  • PwCNovember 2014

    OverviewSection 1

    Valuation of an industrial company Pavia University1

  • PwCNovember 2014

    The Group

    We were asked to assist the Group in the estimate of its Enterprise Value, whichcan be divided in two separate business units:

    Business Unit Alfa: operating in the automotive lubricants industry. This sector ischaracterized by agreements between the carmakers and the oil producers for the"First Fill

    Business Unit Beta: operating in the car cleaning and maintenance industry

    Section 1 Overview

    Valuation of an industrial company Pavia University2

  • PwCNovember 2014

    Business Plan analysisSection 2

    Valuation of an industrial company Pavia University3

  • PwCNovember 2014

    Business Plan analysis

    Basis ofinformation:

    approvedBusiness Plan

    To determine the EV, the two business units were valuatedseparately in relation to different reference markets and totake into account the different risk profiles.

    To do this, as a first step we analyzed the twobusinesses in order to understand the differentunderlying riskiness and specificities, which maybe taken into account in our valuation.

    Section 2 Business Plan analysis

    Valuation of an industrial company Pavia University4

  • PwCNovember 2014

    Business Unit Alpha: market environment

    Determination of the reference market

    Which are the forecasts?

    Which are the drivers of the market trend?

    Is the market influenced by specific regulations?

    Are the prices influenced by external entities?

    What is the current market share?

    Who are the major competitors?

    There have been recent new entrants?

    Have the competitive dynamics changed significantly?

    What differentiates the company from its competitors?

    Which geographic markets are covered bycompetitors?

    Which is the average level of profitability of itscompetitors?

    Section 2 Business Plan analysis

    Valuation of an industrial company Pavia University5

    2006 2007 2008 2009 2010 2011 2012E

    2006 2007 2008 2009 2010 2011 2012E

    2008 2009 2010 2011 2012 2013 2014E

    2006 2007 2008 2009 2010 2011 2012E2008 2009 2010 2011 2012 2013 2014E

  • PwCNovember 2014

    Two different sub-sectors

    Automotive (2013 45.8%) Industrial (2013 54.2%)

    Lubricants market

    Section 2 Business Plan analysis

    Valuation of an industrial company Pavia University6

    5

    140 139

    37

    8

    -

    25

    50

    75

    100

    125

    150

    Mln

    .E

    ur

    o

    2009 automotive demand breakdownby segments

    Two-stroke engines Four-stroke enginesDiesel engines Transmissions/SuspensionsGreases

    2008 2009 %

    Two-stroke engines 4 3 (1 9%)

    Four-stroke engines 82 7 1 (1 3%)

    Diesel engines 92 82 (1 1 %)

    Transmissions/Suspensions 36 30 (1 7 %)

    Greases 5 4 (1 6%)

    Bunkerages 36 30 (1 8%)

    Total Automotive 256 220 (14%)

    Gears and transmissions oils 1 07 81 (24%)

    Greases 1 6 1 2 (25%)

    Metalworking oils 58 39 (33%)

    Other oils 65 48 (25%)

    Process oils 7 0 54 (23%)

    Refined oils 1 3 1 0 (23%)

    Bunkerages 1 7 1 6 (1 1 %)

    Total Industrial 345 260 (25%)

    Total 601 480 (20%)

    2008 and 2009 total demand breakdown ('000

    tons) by business and segments2013

    2012 and 2013

    2012 2013

  • PwCNovember 2014

    44,6% 39,7% 37,7% 36,0%34,6%

    15,7%18,6% 21,2%

    22,1%22,4%8,4%

    8,9%9,0%

    9,7%10,7%

    31,3%32,8%

    32,1%

    32,2%

    32,3%

    787862

    943

    1.032

    1.134

    -

    200

    400

    600

    800

    1.000

    1.200

    2014 2015 2016 2017 2018

    Net Sales - breakdown by geographic area ( mln)

    Italy Europe USA Latin America

    Sales breakdown: different risks for different countries

    Section 2 Business Plan analysis

    Valuation of an industrial company Pavia University7

    Geographic area CAGR 2013-2018

    Italy 3 ,8%

    Europe 1 9,4%

    USA 1 8,1 %

    Latin Am erica 1 0,3%

    Total 10,2%

    Geographic area CAGR 2013-2018

    Spain 1 4,92%

    Portugal 1 1 ,06%

    France 1 1 ,40%

    Germ any 25,3 5%

    Belgium 7 ,40%

    UK 1 9,1 9%

    Russia n.a.

    Poland 5,3 9%

    Turkey 22,28%

    Total 19,4%

    Geographic area CAGR 2013-2018

    Brazil 9,63%

    Argentina 1 6,62%

    Total 10,3%

  • PwCNovember 2014

    Costs analysis: the project for a new Group's ResearchCentre

    Section 2 Business Plan analysis

    Valuation of an industrial company Pavia University8

    Cost analysis highlights the following special:

    The fixed costs of the Plan include the costs of a new R&D centre which should becompleted in 2016 and the construction of which begun in 2014.

    "Depreciation & amortization" includes depreciation of the cost supported for thecontract with the car maker, according to the duration of the agreement.

    P&L Division Alfa (/000) 2013 2014 2015 2016 2017 2018

    Net sales 632.57 6 7 1 7 .425 7 89.639 868.1 23 952.3 89 1 .049.068

    Cost of good sold (47 4.21 0) (529.7 08) (588.831 ) (649.7 7 1 ) (7 1 5.1 47 ) (7 92.81 3 )

    Gross margin 158.366 187.717 200.808 218.352 237.242 256.255

    % of sales 25,0% 26,2% 25,4% 25,2% 24,9% 24,4%

    Fixed costs (1 05.995) (1 23 .7 33 ) (1 3 1 .599) (1 40.1 95) (1 48.993 ) (1 56.887 )

    EBITDA 52.371 63.985 69.210 78.157 88.248 99.368

    % of sales 8,3% 8,9% 8,8% 9,0% 9,3% 9,5%

    Amortisation & Depreciation (23 .21 8) (27 .3 07 ) (27 .547 ) (25.907 ) (27 .1 85) (28.468)

    EBIT 29.154 36.677 41.662 52.250 61.063 70.900

    % of sales 4,6% 5,1% 5,3% 6,0% 6,4% 6,8%

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    Business Unit Beta

    Similarly, for Business Unit Beta were conducted the same analysis made forthe Business Unit Alpha:

    Analysis of competitive environment and market dynamics;

    Business Plan analysis

    From these analysis, the following features have to be taken into accountduring the valuation process:

    It isnt required and flows normalization;

    The industry is significantly different with respect to the Business Unit Alfa(dynamics, competitors, reference markets, etc ..) and for this reason differentevaluation parameters were adopted for the two Business Units.

    Section 2 Business Plan analysis

    Valuation of an industrial company Pavia University9

  • PwCNovember 2014

    Discounted Cash Flow methodSection 3

    Valuation of an industrial company Pavia University10

  • PwCNovember 2014

    DCF method: main steps

    According to the unlevered approach of the DCF method, the Enterprise Value of acompany is equal to the present value of the net cash flows generated during eachyear of the forecast period.

    The process to calculate the Enterprise Value is based on the following points:

    Analysis of Groups business with a separate analysis of the two Business UnitAlpha and Beta1

    Flows analysis for the 2014-2018, identification of unlevered cash flows andcalculation of figurative taxes2

    Market analysis, calculation of discount rate and long-term growth rate "g3

    Normalization of results for the Terminal Value estimation4

    Tax losses carried forward benefit in the cash flows5

    Section 3 Discounted Cash Flow method

    Valuation of an industrial company Pavia University11

  • PwCNovember 2014

    Business Plan: cash flow analysisSection 3.1

    Valuation of an industrial company Pavia University12

  • PwCNovember 2014

    Discounted Cash Flow unlevered free cash flows

    Normalizationof Business

    Plan cash flows

    To determine the operating cash flows the following analysis have been made:

    Figurativetaxes

    Business Unit Alpha operating cash flows were normalized to exclude thefinancial impact related to the creation of the new R&D centre. Thenormalization was necessary because the Plan of Business Unit Alphaincludes investment and operating costs referable to the centre, but it doesntconsider the potential benefits from the re-charge made to the other Groupscompanies.

    Normalization process refers to:a. Operating and personnel costsb. Investments

    Consistency with the discount rate, figurative IRES and IRAP were calculatedassuming a rate equal respectively to 27.5% and 3.9%.

    Section 3.1 Business Plan: cash flow analysis

    Valuation of an industrial company Pavia University13

  • PwCNovember 2014

    Normalization of Plans margins

    Section 3.1 Business Plan: cash flow analysis

    Valuation of an industrial company Pavia University14

    DCF BU Beta (/000) 2014 2015 2016 2017 2018

    EBITDA 7 .97 1 8.17 4 8.597 9.146 10.048

    Adj EBITDA BU Alfa (1 .469) (1 .491) (1 .523) (1 .558) (1 .592)

    Norm alised EBIT DA 6.501 6.683 7 .07 5 7 .589 8.456

    Amortisation & Depreciation (2.323) (2.622) (2.7 32) (2.548) (2.7 11)

    Amort. Trademarks/Stcca (835) (837 ) (838) (839) (839)

    Norm alised EBIT 3.343 3.224 3.504 4.201 4.906

    DCF BU Alfa (/000) 2014 2015 2016 2017 2