Hongrui (Henry) Chen

Email: hongrui.chen@mail.mcgill.ca , Tel: 514-632-4518

March 29, 2013

McGill University
Target Price: US$53.03

Solera Holdings Inc.

(SLH - NYSE) Stock rating: Sell

Investment Thesis
Solera Holdings Inc. is engaging in the automobile insurance claims processing industry, which is highly competitive. The ability to maintain customers is a key to the company`s growth and survival. During fiscal year 2012, 12.7% of its total revenue was derived from its ten largest insurance company customers. However, in December 2012, Solera was noticed by one of its largest insurance company customers that it will not renew its contract with Solera. This contract accounted for approximately 2% of Solera`s total revenue in 2012, and Solera expected this customer to transition to other provider in fiscal year 2013. The loss of one of its biggest customers is expected to have a significant negative impact on Solera`s annual revenue growth rate. Moreover, Solera divides its customer base into 3 different segments: advance market, evolving market, and emerging market. One of the primary growth drivers for this industry is the number of insurance claims made, which is determined by several factors. One of the main factors is the size and growth of the car parc (numbers of cars on road). According to industry sources, compound annual growth rate of new vehicle sales in advance market and evolving and emerging markets through 2020 are projected to be 0.9% and 5.7%, respectively. However, according to Soleras annual report 2012, over 80% of its revenue was generated in advance market. Therefore, a high growth rate in evolving & emerging market would not make a large contribution to Solera`s total annual growth. Stock Info: Last price: US$58.33 Target price: US$53.03 52-wk high/low: 36.81-57.73 Shares outstanding: 16.36M Avg trading volume: 234,564 Market cap: 3.95B Financials: Revenue: 801.32M EBIDTA: 338.83.M EPS: 1.44 Profit margin: 12.60% Operating margin: 29.62%

Furthermore, Solera has large amounts of debt outstanding. As of December 31, 2012, Solera had $1.1 billion worth of debt outstanding, which made up 28% of its market capitalization. In order to service its indebtedness, a significant amount of cash is required to pay its interest expense. Large amounts of debt and high interest expense would reduce Solera`s net income and challenge the managements goal of penetrating into new markets by acquiring more companies. Moreover, due to the issuance of senior unsecured notes in June 2011 and April 2012, Solera`s interest expense and cash interest expense are expected to increase significantly in 2013. Soleras current interest coverage ratio is 4.37, which is low compared to the comparable companies average of 14.38. As a result of lower expected revenue growth and increasing interest expense (which is expected to reach 63 million in fiscal year 2013), Solera would have more difficult capacity to service their debt, and thus increase their credit risk..

Forecast
In fiscal year 2013, Solera Holdings Inc.s expected revenue growth rates from insurance companies, collision reparit facilities, independent assessors, and automotive recycle and others are estimated to be 10%, 5.7%, 3.34%, and 5.65%, respectively. The unlevered free cash flows annual terminal growth rate is estimated to be 1.7%.

Valuation
A target price of US$53.03 was determined. This price was derived by using DCF calculation, where the assumptions of 13.69x EV/EBITDA and terminal growth rate of 1.7% were made, according to the average

EV/EBITDA values of Solera and its comparable companies and the average U.S. GDP growth rate from 2002 to 2012, respectively.

Recommendation
With a target below current trading value, Solera Holdings Inc. is rated as a SELL recommendation.

Industry & Company Overview

Solera Holding Inc. is engaging in the automobile insurance claims processing industry, which is highly competitive. The failure to compete effectively could lead to a result of losing customers and market share. Solera has different competitors in different regional markets. It mainly completes with DAT Gmbh, EurotaxGlass Group and GT motive Einsa Group in the European market. In North America, its largest competitors are CCC Information Services Inc. and Mitchell International Inc. Solera competes primarily on the value and functionality of its software and service. However, this industry is subjects to rapid technological changes. Solera needs to maintain its abilities to research, develop, design and market its new software and services, which are subject to changing market requirements, access to and rights to use third-market data. The failure to be the first to market would compromise the companys competitiveness. To maintain above abilities is costly and require financial support from the company.

Risks & Uncertainties

1) Limited Number of Customers
Solera is doing business in such a competitive industry, which is not easy to maintain customers loyalty. The biggest 3 customers of Solera accounted for more than 6% of its revenue in fiscal year of 2012. Also, 12.7% of its total revenue in 2012 was contributed by its 10 largest insurance company customers. Losing any of these customers would lead to a significant reduction in Soleras revenue including the revenue contributed by collision repairing facilities associated with these insurance companies. Reduction in revenue would result in a decrease in stock price.

2) Indebtedness
Solera has the problem of overleveraged. As of December 31, 2012, Solera had $1.1 Billion debts outstanding, which was 28% of its market cap. Due to the significant amount of debts, Solera is required to have a huge amount of cash to spend on its interest expense. During fiscal year 2012, Soleras aggregate interest expense was $53.6 million and cash paid for interest was $60.6 million, which was 12% of its ending period cash. Furthermore, in June 2011 and April 2012, Solera completed private offerings of $450.0 million and $400 million, respectively, aggregate principal amount of senior unsecured notes. These senior unsecured notes are expected to drive up its interest expenses and cash interest expense significantly in fiscal year 2013. A large amount of cash interest expense would reduce the cash available to finance its product research and development and restrict its organic growth and acquisition decisions.

3) Foreign Exchange Risk

Due to the substantial volume of its international business operations, Solera Holdings Inc. is exposed to fluctuations in foreign exchange rates, specifically in the values of US dollar versus the Euro and British pound. During fiscal years 2012, 2011, and 2010, Solera recognized net foreign currency transaction losses in its financial consolidate statements of income of $1.4 million, $10.0 million, and 5.8 million, respectively. To hedge the risk resulting from foreign currency exposure, Solera Holdings Inc. entered into two pay fixed Euros / received fixed U.S. dollar cross-currency swaps in the aggregate notional amount of 109.0 million.

4) Goodwill and Other Intangible Assets

Due to acquisitions, Solera has a large amount of goodwill and intangible assets. At December 31, 2012, Solera Holdings Inc. had goodwill and other intangible assets of $ 1.4 billion, which accounted for over 60% of its total assets. Soleras intangible assets and goodwill are required to perform annual or more frequent assessment for possible impairment. Any impairment charge of its goodwill and intangible assets would harm its annual earnings and drive down its market price.

5) Difficulty of Acquire Additional Capital

In the future, Solera holdings Inc. may require additional capital to maintain its ability to develop and market new products and service. Moreover, Solera may need extra capital to cover its ongoing expenses or possible acquisition or similar transactions (one of the companys strategies is to acquire more companies in order to penetrate into more markets). However, Soleras senior unsecured notes and Amended Credit facilities contain covenants that restrict Soleras ability to raise additional capital, equity or debt financing may not be available at all or on unfavorable terms to the company. If the company is not able to obtain adequate capital in the future, it may be unable to support future growth or even operating expenses.

Stock Performance
Solera Holdings Inc.s stock is currently trading at US$58.33 per share. Its stock price has been growing since July, 2012. Its price range in the past 52 weeks is US$36.81-57.73.

Financial Summary
(For detailed financial statements and projections refer to Appendices 1 and 2)

Using the forecast from fiscal year 2013 to fiscal year 2017 and by applying the 13.69x EV/EBITDA multiples, a target price of US$53.03 is derived. Annual sales revenues for Solera Holdings Inc. between fiscal year 2013 and fiscal year 2017 are forecasted assuming an annual compound growth rate of around 7.3%, which is similar with general analyst consensus of 6-8% over the next 3 years. Intangible assets depreciation and goodwill impairment projections were made using management estimates of future amortization expense related to intangible assets subject to amortization and historical data of goodwill impairment cost. CAPEX projections were made using historical records of CAPEX as % of total revenues. Annual EBITDA figures from fiscal year 2013 to fiscal year 2017 were adjusted by CAPX, change in networking capital and unlevered cash tax to obtain the unlevered cash flows. These cash flows were used to calculate the present value of forecasted cash flows, as well as the terminal value which lead to an enterprise value of US$5,900 million. Regarding the number of shares outstanding, it is assumed that it will stay the same.

Information Sources
1) Bloomberg

2) Thomson Research 3) Automotive Recyclers Association 4) www.edgar.com 5) Yahoo Finance 6) Capital IQ 7) Websites of Solera Holdings Inc. and its comparable companies

Appendices
Appendix 1-Assumptions and Income Statement

Appendix 2-DCF

Appendix 3-Revenues by different markets

Appendix 4-Comparable Companies Analysis