EQUITY RESEARCH

Duro Felguera Engineering Emerging Power

Accumulate

(Initiating Coverage)

High Risk September 2009

4 Duro Felguera (DF) is a Spanish EPC contractor, mainly focused on power plants, industrial plants and fuel storage (75% of revenues). Moreover, the company has also a (1) services unit, which accounts for 13% of revenues, and (2) manufacturing arm (12% of sales), which produces generators, turbines, turbine and other capital goods. The company has been showing healthy growth, with EBITDA posting a 41% CAGR04-08 and rising 14% in 1H09, while owning a net cash position, resulting from positive WC cycle.

Spain Duro Felguera vs. IBEX35 vs. MSCI Small Cap Index 120 IBEX35 100 Duro Felguera

4 DF owns high earnings visibility, with an order book of €2.3bn (3.3x years of project sales). International markets represent 80% of its order book, with the recently awarded CCGT plant in Venezuela accounting for 65%. Moreover, DF’s services area should continue to grow fast, benefiting from higher internationalization. We consider that the EPC sector is back on track and we expect DF to (1) continue to benefit from structural demand for power plants in emerging markets; and (2) increase its focus on larger projects in alliance with the “Four Giants”. Consequently, we estimate revenues to post a 8% CAGR08-12 F , while margins should ease due to lower profitability in the manufacturing area. Overall, EBITDA and net Income should record a 6% and 9% CAGR08-12 F , respectively.

80 60 40

MSCI S/C

20 Aug-07

Apr-08

Dec-08

Aug-09

Source: Bloomberg.

4 DF has been a major outperforming, with a 100% YTD gain, incorporating its higher order intake and the expected reactivation of the EPC industry. The stock is trading at some discount to its peers, while FCF yield is attractive, even adjusting upfront fees. DF offers a good exposure to the structural need for energy and our YE10 Price Target of €8.90 (10% small caps discount) shows some upside. We believe that main triggers lie on (1) a healthy execution of its order book; (2) new EPC awards, especially in energy and industrial plants business, and (3) increased activity in services. ACCUMULATE.

Stock Data Price:

7.48 Price Target:

No. of shares (mn): Reuters/Bloomberg:

EPS Growth (3 years):

26%

-4.4 ROE:

36%

45% Avg. Daily Vol. [€'000]:

528

Alvarez Arrojo (20.6%); Aguilera Izquierdo (19.2%); TSK (10%); Garcia Arias (7.6%); I Melca (6.3%); Arias Lopez (5.3%); Liquidambar (6.1%) F

F

F

F

2007

2008

2009

2010

2011

2012

0.42 18.0 3.5% 11.6% 10.4

0.50 14.9 8.8% 66.8% 7.9

0.56 13.4 4.8% 24.0% 5.1

0.64 11.7 5.6% 25.5% 4.7

0.73 10.3 6.3% 26.0% 4.2

0.78 9.6 6.8% 22.4% 4.0

Estimates EPS Adj. (€) PE Adj. Dividend yield FCF yield EV/EBITDA

763

MDF.MC/MDF SM Free-Float:

NET DEBT/EBITDA:

Major Shareholders:

8.90

102 Market Cap (€ mn):

Analysts Eduardo Coelho Phone 351 21 310 1263

Manuel Coelho Phone 351 22 6073173

Available on our website: www.bpi.pt/equity, BPI Online, and Bloomberg at BPIR.

79

Equity Research

Small Caps

September 2009

INVESTMENT CASE Duro Felguera (MDF) is a Spanish EPC (engineering, procurement and construction) contractor, mainly focused on power plants (50% of its 1H09 Revenues Breakdown by revenues), also working on industrial plants (mining concentration Division (€454mn) industry and ports due to historical reasons) and fuel storage. The EPC business represents 75% of its consolidated revenues. Furthermore, the company has two further businesses that complement its EPC offer: (1) manufacturing of capital goods for several industries such as generators, turbines or railway equipment (12% of revenues), which generates reasonable margins, but is capital intensive (lower ROCE); and (2) services (13% of revenues), which provides assembly, operation and maintenance. DF is a small company, but it is great in its niche. DF has an energy expertise accumulated over the last decades, while having: (1) collaboration agreements with the four giants turbines producers (ABB Alstom, GE, Mitsubishi and Siemens) on a project basis and normally works with one of them outside Spain; (2) very flexible workforce (67% of temporary employees), although its manufacturing presents limited Source: Duro Felguera. flexibility; (3) a powerful B/S, with a net cash position of €247mn in 1H09 (c.85% related with upfront fees), while benefiting from positive WC needs; and (4) a high dividend yield (50% average payout in 200408), with the committed of a payout between 65%-70% over the next years. 1H09 EBITDA Breakdown (€39mn) The company has been recording powerful earnings performance, benefiting from (1) rising demand for energy turnkey projects, including in Spain, which witnessed a huge growth in CCGTs; (2) increased internationalisation, especially towards LatAm; and (3) fast services activity, which has been growing double digit every year. Consolidated revenues posted a 31% CAGR04-08. Furthermore, EBITDA recorded a 41% CAGR04-08, with margins improving from 5.9% in 2004 to 8.0% in 2008, mainly on the back of (1) sound EPC activity, especially in energy and industrial plants; (2) increased weight of services, which provides higher than average margins; and (3) significant restructuring of its manufacturing area. Moreover, net income posted a skyrocketing performance, recording a 66%CAGR04-08, benefiting from financial gains derived from its cash position and a lower effective tax rate (around 24%). Source: Duro Felguera.

1H09

2008

2006

2005

1000 More recently, DF won its large order ever, a CCGT plant in Venezuela (Termocentro) of €1.5bn (1.6x of its FY08 revenues). Consequently, 500 DF’s order book stands currently at €2.3bn (June 2009), which is the company’s historical high and represents 3.3 years of project sales. We 0 believe this order book provides an excellent earnings visibility for the next quarters, while considering that DF’s order book has good quality and no risk of cancellations. International markets represent 80% of its order book, coming mainly from LatAm and the Med Basin. The recent Domestic order in Venezuela corresponds to 65% of the total backlog, which represents a significant weight on its activity. We stress that DF has been working on Venezuela over the last decades, including in large Source: Duro Felguera. projects such as the upgrade of the Orinoco iron ore concentration plant.

2007

However, DF was not immune to the sub prime crises, global recession, credit crunch and the fall in oil prices. These facts led to a significant delay of energy projects and a major stoppage in the EPC industry, both in oil& gas and power. The company’s order book reached a high in Evolution of Order Book (€mn) 2007 and decreased 12% in FY08 to €1.1bn (1.5 years of project sales) 2500 on the back of a declined order intake. DF’s recent numbers confirmed some slowdown, with project revenues standing flat in 1H09, although 2000 the company’s service arm continued to grow double digit, which allowed consolidated revenues to rise 8% in 1H09 and improve margins 1500 40b.p. to 8.5% in 1H09.

International

Looking forward, we consider that the EPC sector should record an

80

Equity Research

Small Caps

September 2009

increased reactivation. Moreover, we strongly believe there is a structural demand for power plants in emerging markets, given the huge unbalance between demand and supplies in those countries. The IEA (International Energy agency) foresees a total investment of c.€25bn in the energy sector until 2030, with power representing more than half of the expected investments. Emerging markets should be responsible four almost three quarters of this effort and the Middle East is expected to be the fast growing market. Meanwhile, we also believe that demand for mineral concentration plants will continue to be sound as it propels a significant increase of mining efficiency levels as it would allow a higher extraction from minerals

Electricity Demand Growth by Regions 8%

6%

4%

2%

0% OECD

Russia

Brazil

Africa

2006-2015

Middle East

China

Indonesia

India

2006-2030

Source: IEA (International Energy Agency).

FY12F EBITDA Breakdown by Division

Overall, we see the Spanish market is already pretty mature (4.5% of DF’s order intake in 1H09), after several years of strong growth, but we (€100mn) believe that DF is very well positioned to use its knowledge in several regions, especially LatAm and Northern Africa. Consequently, we estimate DF’s order intake will reach €1.8bn in FY09, while standing at c. €1.0bn in 2010-11. On the top of that, we stress that the company has been increasingly focused on large contracts and we think it is very well positioned to grab some important contracts (€300mn-€1.0bn) over the next quarters, especially in energy in several countries in LatAm and mineral concentration plants in India. Moreover, we forecast DF’s project area to keep its EBITDA margins flat at 6.6% over the next few years. Consequently, EBITDA of this unit should record a 11% F CAGR08-11 . Meanwhile, we estimate that that DF’s other business areas have a different outlook.

Source: Duro Felguera.

On the one hand, the services area should continue to propel significant growth on the back of increased internationalisation, while still delivering powerful margins. We expect margin to stand at the same level, allowing EBITDA to post a 7% CAGR08-12 F . This should enhance the recurrent nature of DF’s revenue stream, although we stress that services should maintain a 13% weight on consolidated revenues as the project areas should post a faster growth. On the other hand, the manufacturing arm should post some revenue decline on the back of slow demand and higher competition, especially in 2009-10. We believe these facts will lead to a sharp margin deterioration, assuming a stabilisation at c. 11% level. However, we believe that manufacturing business should post some reactivation in 2011 benefiting from better macro conditions. Overall, we forecast

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Equity Research

Small Caps

September 2009

EBITDA in the manufacturing area to post a -16% CAGR08-12 F . Summing up, we estimate DF’s consolidated revenues to increase 10% in 2009 and 12% 2010, accumulating a 8% CAGR08-12 F . EBITDA margins should post some deterioration due to the manufacturing area. Consequently, we expect consolidated EBITDA to increase 5% in 2009 and 10% in 2010, recording a 6% CAGR08-12 F . Additionally, we estimate net income will also benefit from a positive evolution of financials (high net cash position) and an effective tax rate around F 20%, posting a 9% CAGR08-12 . Lastly, we continue to expect DF to provide a healthy shareholder remuneration, with a payout ratio of 65%. Dividend This corresponds to a dividend yield of 5.6%, which is highly attractive.

BPI Estimates vs. Consensus BPI € mn Revenues EBITDA Margin Net Income

09

F

10

Consensus F

11

F

09

F

10

F

Difference 11

F

09

F

10

F

11

F

1031

1172

1299

1092

1317

1222

-6%

-11%

6%

79

86

95

84

93

87

-6%

-7%

9%

7.6%

7.4%

7.4%

7.7%

7.0%

7.1%

57

65

74

59

66

60

-3%

-2%

24%

Source: BPI Equity Research, Factset.

DF's Equity Story In a nutshell, we consider DF as a superior company, combining structural growth prospects, sound alliances with biggest players, a powerful B/S, low capex requirements and double digit ROCE. The stock went up almost 100% YTD (116% since its lows of €3.47) but we consider that DF still has an attractive risk reward. The stock is trading at attractive multiples (P/E 10 of 11.7x and EV/EBITDA 10 of 4.7x and EV/EBIT 10 of 5.1x) representing some discount to its proxy peers. FCF yield is double digit on a sustainable basis, while excluding upfront front fees stands at 13.7% in 2010, which is still a attractive level Overall, we have set our YE10 Price Target of €8.90 (includes a 10% small caps discount). This still represents some fundamental potential and we believe that main triggers lie on (1) healthy execution of its order book; (2) new EPC awards, especially in energy and industrial plants, and (3) faster services activity. ACCUMULATE.

Positives

Negatives

Good management team Recovered order book Structural need for energy Alliance with the four giants

Limited diversification of its order book Manufacturing arm

Strong B/S High dividend yield Source: BPI Equity Research

Duro Felguera vs Peers – EBITDA margin 25% 20% 15% 10% 5%

Moreover, we have also compared DF with two other groups. Firstly, Spanish engineering companies that also develop some EPC activity in 2007 power, namely (1) Abengoa, which has an engineering arm that also acts as an EPC contractor in conventional and renewable energy; and Source: Company Releases. (2) Elecnor, which is a EPC contractor and also won a large order for a CCGT plant in Venezuela. Secondly, the four giants turbines, namely Alstom, GE, Mitsubishi and Siemens. Obviously, this comparison is

Serco

Melka

Tecnicas Reunidas

Abengoa Eng.

0% Elecnor

DF is not a pure EPC provider as it also owns a manufacturing area (projects represent 75% of revenues and 62% of total EBITDA), which owns tangible assets and lower ROCE. Bearing that in mind, we have compared DF with other EPC providers, mainly focused on energy, namely (1) Metka, a Greek EPC contractor, especially focused on power, while also having a presence in infrastructures and defence (one of main suppliers of the Hellenic Armed Forces); (2) Techip, Saipem and Fluor, three major EPC contractors, working in all energy segments, including off-shore; and (4) the Spanish Tecnicas Reunidas, which has a similar EPC business model although power only represents c.15% of its revenues as the company has a strong bias to oil&gas downstream projects.

Duro Felguera

VALUATION

2008

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Equity Research

Small Caps

September 2009

tough as these companies have a pretty high diversification revenue stream and have a wide presence throughout the world.

Market Multiples P/E 09

F

EV/EBITDA

10

F

11

F

09

F

10

F

EV/EBIT 11

F

09

F

10

F

11

F

Duro Felguera (BPI)

13.4

11.7

10.3

5.1

4.7

4.2

5.7

5.1

4.6

Duro Felguera (consensus)

12.7

11.2

11.2

4.4

3.6

4.2

4.8

4.1

4.7 6.5

Elecnor

9.1

10.3

7.7

5.6

5.8

4.7

7.8

8.6

Tecnicas Reunidas

15.3

13.7

11.6

9.3

8.6

7.5

9.6

9.0

7.7

Abengoa

11.7

11.9

9.0

10.4

9.2

7.9

16.1

14.4

12.3

Metka

12.4

7.4

6.5

7.1

4.6

4.1

7.8

5.0

4.4

Fluor

13.8

14.8

13.9

5.7

5.8

4.9

6.4

6.5

5.4

Technip

11.1

13.9

12.5

4.3

4.9

4.2

5.4

6.7

5.7

Saipem

11.8

13.9

12.1

7.3

7.4

6.5

10.3

11.6

10.0

Average

12.3

12.5

11.2

6.1

5.7

4.9

7.5

7.5

6.4

Source: BPI Equity Research (Duro Felguera, Elecnor, Tecnicas Reunidas, Abengoa), Factset.

We note that DF has been performing in line with the best performers in the EPC sector, accumulating a 100%YTD gain. We see that DF trades at P/E 10 of 11.7x and EV/EBITDA 10 of 4.7x, which represents some discount to its closest peers. Finally, we have valued DF through a SoP based a DCF model for each of the three areas, which have different profitability, capital employed and WC cycles. In that sense, we have used a (1) an average WACC of 9.0%, to incorporate the company’s exposure to emerging markets, especially to Brazil and Peru; and (2) a growing perpetuity of 2.0% for both projects and services area.

Sum of Parts (€ mn) EV Business

EV

Stake

Att.

% as

Growth

EV WACC

P.

EV/EBITDA 09

10

11

Projects

469

94%

440

70%

9.3%

2.0%

9.0

7.8

7.0

Services

143

100%

143

23%

8.4%

2.0%

10.1

9.0

8.2

Manufacturing

45

100%

45

7%

9.3%

0.0%

3.5

4.3

4.2

Enterprise Value

656

7.6

6.9

6.6

YE10 Adjusted Net Cash Finantial Inv. Equity Value

627 351 32 1 009

Number of Shares (mn)

102

YE10 Fair Price (€)

9.90

Small Cap discount

10%

YE10 Price Target (€)

8.90

Source: BPI Equity Research.

Overall, we have reached a YE10 Price Target of €8.90/share, which includes a 10% small cap discount. This still represents some fundamental upside, implying a P/E 10 of 13.9x and an EV/EBITDA 10 of 6.9x.

83

Equity Research COMPANY PROFILE

Small Caps

September 2009

FY08 Revenue Breakdown (€935mn)

DF is a real case of transformation and re-invention. The company was founded in the XIX Century in Asturias, Northern Spain as a major industrial group, mainly focused on iron and steel production, while owning some assets in coal mining. The company moved to capital goods in 1968, mainly focused on the manufacturing of equipment for several industries (energy, railways and mining), while starting to divest its mining assets. DF started to act as a turnkey project provider in the 90’s, especially for the energy and industrial sector. Starting to suffer from intense Asian competition in its manufacturing business, the company decided to change again its business model. DF made a huge turnaround in 1994 started to (1) divested most of its industrial areas, with fixed assets; and (2) focused on services, taking advantage of its human know-how Source: Duro Felguera.

Currently, DF is basically a Spanish EPC contractor, mainly focused on power plants, also working on industrial plants (mining industry and ports infrastructures due to historical reasons) and fuel storage. Overall, EPC represents 75% of its consolidated revenues. Furthermore, the company has two other businesses: (1) manufacturing of industrial equipment for the energy, industry and infrastructures sectors; and (2) specialized services.

FY08 Country Breakdown (€935mn) DF has been increasing its international expansion, especially to LatAm (Venezuela, Peru, Chile, Argentina and Brazil) and Northern Africa as well as to Asia in a minor extend. Overall, external markets increased its weight from 35% in 2005 to 46% in 2008. This weight was not as high as expected as the Spanish market also showed a powerful growth, especially in CCGT plants. Consequently, Spain still represented 54% of its FY08 consolidated revenues and 48% in 1H09. The company is controlled by four different Spanish groups. We recall that (1) DF witnessed a take over offer in 2004 from the Spanish construction group San Jose, which did not succeeded; and (2) Vegasol, DF’s second largest shareholder, recently reduced its stake from 20.0% to 16.1%. 1. PROJECTS (75% of FY08 Revenues)

Source: Duro Felguera.

The projects unit is DF’s most important area, in which the company acts as an EPC provider, normally working with LSTK (Lump Sum turnkey) contracts. Overall, the company operates in three main areas: Firstly, Energy, which is mainly focus on the execution of a wide range of power generation projects, especially CCGT (combined cycle gas turbines) plants and conventional thermal power stations and desulphurization for coal fired power plants. The company has collaboration agreements with the four turbines manufactures (Siemens, ABB Alstom, Mitsubishi and GE) for emerging markets (especially LatAm) and it has been recurrently bidding projects together with one of them both with majority or minority stakes. More recently, we have been witnessing a larger activity with Siemens. With this strategy, DF has been able to (1) reduce bidding expenses and enhance contract conditions; (2) get access to several large clients and entry into new markets; and (3) share risks and knowledge. The energy area posted a fast revenue growth, with EBITDA margins standing normally at 7%-9%. Secondly, Industrial Plants, which is mainly composed by projects for mineral concentration plants, petrochemicals and steel plants. There has been a significant demand for iron concentration plants as this improves efficiency, allowing a higher extraction from minerals. This is a highly complex area, delivering higher margins than in energy,

84

Equity Research

Small Caps

September 2009

and DF takes advantage of its historical background in those industries. Projects division In the meantime, the company is also pretty active in port infrastructure projects and has a wide internationalization activity, both 800 in Middle East, Asia and LatAm. This area also recorded a healthy growth over the last few years, with margins normally ranging 10%600 12%, slightly above energy plants. Thirdly, Fuel Storage, especially projects for gas storage tanks for regasification plants and it is the most related with the oil and natural gas prices. The company has been mainly working in Spain and it has here a joint venture with the Japanese company Ishikawajima

400

Overall, the company works with LSTK projects, which have an average duration of 24-36 months and have several milestones. In some cases, DF receives an upfront fee of 30% of the total project (average of the industry stands at 15%) in order to minimize its risk profile in some countries. Consequently, the company’s WC cycle in normally positive as long as it keeps growing, which further enhances its B/S.

0

12% 10% 8% 6% 4%

200 2% 1H09

2008

2007

2006

2005

2004

0%

Revenues EBITDA margin Source: Duro Felguera.

Overall, DF has been showing a powerful growth in the project area (37% CAGR04-08), while margins normally range between 6.5%-8.5%, Manufacturing division depending on its product mix. 160

20%

2. MANUFACTURING (13% of FY08 Revenues) 10% 80 5% 40

0%

1H09

2008

2007

-5% 2006

0 2005

Currently, this unit is composed by four plants and it is mainly focused on the production of heat recovery steam generators and equipment for turbines, generators, petrochemicals, offshore refineries and railways equipments.

15%

120

2004

Manufacturing is the only area that remains from DF’s old days and was the company’s core business some years ago. This unit also lived a significant change over the last few years and it was loss making until 2006. This ended after a major restructuring program in 2005, which led to (1) reduced personnel, and (2) shutdown of some facilities.

Revenues

We may see this area as non-core as it implies tangible assets and a EBITDA margin high fixed cost structure. However, we believe this also provides DF with (1) extra knowledge in the energy field; and (2) some synergies Source: Duro Felguera. with the services area. Still, DF has been able to record a strong growth over the last years (11% CAGR04-08), mainly on the back of a powerful performance of the Spain margins. However, this area was hit by the negative macro conditions and showed a 3% decline in 1H09, with margins falling from 17.3% to 10.0%.

Services division 120

25% 20%

80

15%

3. SERVICES (12% of FY08 Revenues)

10%

40

5%

1H09

2008

2007

2006

0% 2005

0 2004

This area is strongly related with its project and manufacturing arm. Overall, the company provides specialized services, namely assembly, operation and maintenance of energy and industrial plants. Consequently, this business does not require major capex and it has part of its revenue stream had a recurrent nature due to maintenance services.

Revenues DF has been also recording strong growth (30% CAGR04-08), mainly on EBITDA margin the back of increased number of projects executed and higher internationalization. EBITDA Margins have been double digit over the Source: Duro Felguera. last years, ranging from 11%-22%

85

Equity Research

Income Statement F

(€ mn)

2007

2008

2009

Sales EBITDA EBITDA margin D&A EBIT EBIT margin Net Financials Extraordinaries Taxes Minority interest Net Profit

850 66 7.8% -7 59 7.0% 1 0 -16 -2 42

935 75 8.0% -7 68 7.2% 3 0 -18 -2 51

1031 79 7.6% -8 71 6.9% 4 0 -16 -2 57

2007

2008

2009

1 102 18 40 366 10 314 852 152 77 37 623 35 852

1 113 32 30 365 10 362 913 153 89 35 670 20 913

2 116 32 33 397 16 403 998 176 67 5 754 20 998

2010

F

1172 86 7.4% -8 78 6.7% 6 0 -18 -2 65

2011

F

1299 95 7.4% -8 87 6.7% 8 0 -19 -2 74

2012

F

1362 100 7.3% -9 91 6.7% 10 0 -20 -2 79

Balance Sheet (€ mn) Net Intangibles Net Fixed Assets Financial Assets Inventories ST Receivables Other ST assets Cash & Equivalents Net Assets Equity & Minorities MLT Liabilities o.w. Debt ST Liabilities o.w. Debt Equity + Min. + Liab.

F

2010

F

2 117 31 38 451 18 481 1138 204 76 5 857 20 1138

2011

F

2 119 31 42 499 20 555 1268 236 83 5 948 20 1268

2012

F

2 120 31 44 523 21 607 1347 267 87 5 993 20 1347

CAGR F 08-12 8% 6%

Small Caps

September 2009

DCF Assumptions - Projects Re

9.3%

Rf

3.25%

Beta Equity 4% 6% 28% 3% 0% 9%

1.0

Mkt Premium

6.0%

Rd

6.25%

Tax Rate

20.0%

D/EV

0.0%

WACC

9.3%

g

2.0%

Source: BPI Equity Research.

CAGR F 08-12 6% 1% -1% 8% 7% 17% 11% 8% 12% 0% -32% 8% 0% 8%

Sensitivity Analysis (€/share) (1) g

Rf

-1pp

2.0%

-1pp

8.90

9.40

+1pp 9.90

3.25%

8.40

8.90

9.40

+1pp

7.90

8.40

8.90

(1) includes 10% small cap discount. Source: BPI Equity Research.

Cash-flow Statement F F (€ mn) 2007 2008 2009 2010 + EBITDA 66 75 79 86 - Changes Working Capital -47 -75 -42 -42 = Operating Cash Flow 113 150 121 129 - Capex 12 19 10 10 - Net Financial Investment 1 14 0 0 = Cash Flow after Inv. 101 117 111 119 - Net Fin. Expenses 1 3 4 6 - Taxes Paid 16 18 16 18 - Dividends Paid 17 31 34 37 + Equity Increase 0 0 0 0 Other 1 -7 7 7 =Change in Net Debt -68 -60 -64 -65 Sou rce : Company d a ta (20 07 , 200 8 ) and BPI Equity Re sea rc h (F ).

2011

F

95 -36 132 10 0 122 8 19 42 0 6 -59

2012

F

100 -18 118 10 0 108 10 20 48 0 2 -32

Company Description: Duro Felguera is a Spanish engineering group created in 1858 as a mining and industrial conglomerate. Currently, Du ro Felguera has three main business areas, namely (1) turnkey project, especially in power, industrial plants and fuel storage, (2) manufacturing, which produces capital goods; and; (3) specialized services, providing clients with assembly, operation and maintenance. The company has been growing strongly in external markets, especially in LatAm (Venezuela, Peru, Chile and Argentina), but Spain still represented 48% of its 1H09 revenues.

86

EQUITY Large Caps Research Bruno Almeida da Silva, CFA

[email protected]

(351) 22 607 4375

Carlos Peixoto Maria López Banking

[email protected] [email protected]

(351) 22 607 3141 (34) 91 328 9858

Flora Trindade, CFA Felipe Echevarria Olaso Filipe Martins Leite Pablo Pena-Rich Energy & Infrastructures

[email protected] [email protected] [email protected] [email protected]

(351) (34) (351) (34)

Flora Trindade, CFA Pedro Oliveira Telecoms

[email protected] [email protected]

(351) 22 607 4377 (34) 91 328 9852

Eduardo Coelho

[email protected]

(351) 21 310 1263

Ana Oliveira IT, Healthcare, Food & Beverages

[email protected]

(34) 91 328 9855

Joaquin Garcia-Romanillos Food, Leisure, Airlines, Security

[email protected]

(34) 91 328 9853

João Safara Silva Retail, Chemicals, Healthcare

joã[email protected]

(351) 21 310 4475

José Rito Pulp & Paper, Engineering, Auto

[email protected]

(351) 22 607 3142

Manuel Coelho Steel, Engineering, Forestry

[email protected]

22 91 22 91

607 328 607 328

4377 9859 3136 9854

Small Caps Research

(34) 91 328 9857

Manuel Peleteiro

[email protected]

Tiago Veiga Anjos, CFA Media, Water, Gaming

[email protected]

(351) 22 607 3275

(34) 91 328 9856

Ana Spratley Ferreira, CFA Dario Vila Diogo Rolo Francisco Pires Frederico Torre Ignacio Cerrillo de la Fuente

[email protected] [email protected] [email protected] [email protected] [email protected] [email protected]

(351) (34) (351) (351) (34) (34)

22 91 22 22 91 91

607 432 607 607 432 432

3196 1794 3344 3296 1792 1792

Javier Barrio Luís Sousa Pinto Pedro Prista Guerra, CFA Sérgio Godinho

[email protected] [email protected] [email protected] [email protected]

(34) (351) (351) (351)

91 22 22 22

432 607 607 607

1793 3256 3218 3139

Institutional Sales

Sales/Trading Rafael Joanes Francisco Chaves Jason Page Marta Brito e Cunha Pedro Costa Pedro Moreira Ramon Blanco Rodrigo Roque Pinho

(351) 22 607 3279 [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected]

Publishing Maria do Céu Gonçalves Carla Gomes Alves

[email protected] [email protected]

(351) 22 607 3137 (351) 22 607 3160

Economics and Fixed Income Research Cristina Casalinho Chief Economist

[email protected]

(351) 21 310 1186

BPI "This research report is only for private circulation and only partial reproduction is allowed, subject to mentioning the source. This research report is based on information obtained from sources which we believe to be credible and reliable, but is not guaranteed as to accuracy or completeness. This research report does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive it. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this research report and should understand that the statements regarding future prospects may not be realized. Unless otherwise stated, all views (including estimates, forecasts, assumptions or perspectives) herein contained are solely expression of BPI's Equity Research department and are subject to change without notice. Recommendations and opinions expressed are our current opinions as of the date referred on this research report and they may change in the period of time between the dates on which the said opinion or recommendation were formulated and made public. Current recommendations or opinions are subject to change as they depend on the evolution of the company and subsequent alterations to our estimates, forecasts, assumptions, perspectives or valuation method used. Investors should also note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Accordingly, investors may receive back less than initially invested. There are no pre-established policies regarding frequency, update or change in recommendations issued by BPI Equity Research. The same applies to our coverage policy. Past performance is not a guarantee for future performance. BPI Group accepts no liability of any type for any indirect or direct loss arising from the use of this research report. For further information concerning BPI Research recommendations and valuations, please visit www.bpi.pt/equity". "This research report did not have any specific recipient. The company subject of the recommendation was unaware of the recommendation or did not validate the assumptions used, before its public disclosure." "Each Research Analyst responsible for the content of this research report certifies that, with respect to each security or issuer covered in this report: (1) all of the views expressed accurately reflect his/her personal views about those securities/issuers; and (2) no part of his/ her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. The Research Analysts do not hold any shares representing the capital of the companies of which they are responsible for compiling the Research Report, except when mentioned in the Report." "Banco BPI has celebrated two "Equity Swap" contracts with Sonae Investments with strictly financial settlements (Cash Settled Share Swap Transaction), the first of which was celebrated in November 2007 to cover the inherent risk in the acquisition of 6.64% of Sonae's share capital, at a price of € 2.06 per share. The second was celebrated in January 2008, involving Sonae Capital shares at a reference price of € 1.92 per share. In both contracts, the periodic repercussion over Sonae Investments of the amounts corresponding to Sonae share price changes relative to the above-mentioned prices was agreed as well as the amounts equivalent to the proceeds to be received by Banco BPI under the exercise of rights inherent to these shares. The contracts have a maximum maturity of 3 years. In December 2008, Banco BPI participated in the financing of "Grupo Soares da Costa", through a project finance, by leading the bank syndicate which financed "AutoEstradas XXI - Subconcessionária Transmontana, S.A.", the sub-concessionaire of the Transmontana Highway (in which "Soares da Costa Concessões SGPS, S.A." and "Soares da Costa Construções, S.A." hold a stake). BPI entered into a liquidity provider agreement with Euronext Lisbon for the Banco Popular Español shares, being such agreement effective from February 2008. In May 2008, BPI was a co-manager in the IPO of EDP Renováveis. BPI Group may provide corporate finance and other investment banking services to the companies referred to in this report." "Amongst the companies covered by BPI Equity Research: BPI Group has qualified stakes in Cofina, Ibersol, Impresa, ZON Multimedia, Semapa, Sonae SGPS and Sonae Capital." "BPI Group, members of the board, or BPI Group employees, may hold a position or any other financial interest in issuer's covered by BPI Equity Research, subject to change, which shall be disclosed when relevant for assessing the objectivity of the recommendation". "BPI's activity is supervised by both Banco de Portugal (the Portuguese Central Bank) and by the CMVM (Stock Exchange Regulator)" INVESTMENT RATINGS AND RISK CLASSIFICATION (TOTAL RETURN IN 12-18 MONTHS): Buy Accumulate Hold Reduce Sell

Low Risk > 15% >10% and < 15% >0% and < 10% >-15% and < 0% < -15%

Medium Risk >20% >10% and < 20% >0% and < 10% >-20% and < 0% < -20%

These investment ratings are not strict and should be taken as a general rule.

INVESTMENT RATINGS STATISTICS As of 31st August BPI Equity Research's investment ratings were distributed as follows: Buy Accumulate Hold Reduce Sell/Accept Bid Under Revision Total

37% 20% 19% 14% 6% 3% 100%

BANCO PORTUGUÊS DE INVESTIMENTO, S.A. Oporto Office

Madrid Office

Lisbon Office

Rua Tenente Valadim, 284 4100-476 Porto Phone: (351) 22 607 3100 Telefax: (351) 22 606 4183

Pº de la Castellana, 40-bis-3ª 28046 Madrid Phone: (34) 91 328 9800 Telefax: (34) 91 328 9870

Largo Jean Monnet, 1 1269-067 Lisboa Phone: (351) 21 310 1000 Telefax: (351) 21 353 5650

High Risk >25% >15% and < 25% >0% and < 15% >-25% and < 0% < -25%