European Equity Research

Italy Retail
Madrid, October 9, 2002

FIN.PART

STRONG BUY
PRESENT PRICE: 0.69 TARGET PRICE: 1.35 1
Felipe Snchez Fuertes
(1) FULLY DILUTED

To Be or Not To Be

(34) 91-701-9324 fsfuertes.madrid@sinvest.es

Basic Figures, September 20, 2002

Reuters code: Market capitalisation ( mn): xxxx Number of shares (mn) 1: Average daily volume ( mn): 52-week range (): Free float (%): 2002E ROE (%): 2002E P/BV (x): 2001-04F PEG: FNAI.MI 163.9 234.1 0.77 0.52-1.17 40.5 -13.9 0.95 NM

(1) Fin.Part is increasing capital by 100mn by issuing 100mn new shares at 1.00 each. The final number of shares should be 334.1mn. Source: Reuters and SCH Bolsa estimates and forecasts.

Fin.Part has a high-risk profile owing to the ongoing restructuring effort to cut its current net debt (468mn) and gearing ratio (489%) arising from a hectic buying spree. This effort includes an ongoing 100mn capital increase at 1.00 per share. However, within the Fin.Part group, we have identified Frette, a 79%-owned subsidiary engaged in the manufacture of high-quality textiles for luxury linen. We value Frette at between 183mn and 214mn, equivalent to 112% and 130%, respectively, of Fin.Parts current market capitalisation. We see substantial business prospects for Frette in the hotel and restaurant procurement market, especially in the US. The top-end segment of this industry has an estimated annual turnover of 1.2bn in the US alone, where Frette, a recent entrant to this region, currently has a meagre 1.6% share of the market. Frette had sales of 134mn in 2001 (32% of the groups total) and, despite the mature profile of the linen industry, its revenues grew at a 27% CAGR in 1998-2001. This suggests that Frettes product is successful in the US, thanks to a substantial effort over the past two years. Thus, we estimate a 35% CAGR in sales in the region in that period. Recent openings, the careful selection of new outlets and a clear focus on the top-end market could boost Frettes developing presence in the US. Our base-case valuation for Fin.Part (874.3mn) ignores such potential for Frette and, after applying a 40% discount for illiquidity, points to a fully-diluted target price of 1.35/share. Much of the stocks revaluation should hinge on the groups turnaround. Risks include the disposal of assets at less than favourable prices and changes in the capital structure. However, the stocks 93% upside potential and Frettes latent possibilities should make the stock an interesting proposition.

Estimates and Fundamental Ratios

2001 Net profit ( mn): % change: Cash flow ( mn): % change: P/E (x) 2: EPS ()2: % change: P/CF (x) 2: CF/S ()2: EV/EBITDA (x): GDY (%)2: DPS ()2: -37.2 NM 6.8 NM -5.4 -0.13 NM 29.7 0.02 18.5 0.0 0.00 2002E -18.2 NM 24.2 257.5 -13.5 -0.05 NM 10.1 0.07 14.7 0.0 0.00 2003F 3.1 NM 45.7 88.5 86.8 0.01 NM 5.9 0.12 8.1 0.0 0.00 2004F 18.8 NM 61.6 34.9 14.4 0.05 NM 4.4 0.16 5.2 0.0 0.00

(2) Fully-diluted data based on 387.7mn shares: 234.1mn at present, 100mn to be issued in the ongoing capital increase and 53.6mn for the 107.2mn existing warrants. The exercise of these warrants would imply the issue of 53.6mn new shares at 1.03 each. Source: Company data and SCH Bolsa estimates and forecasts.

Relative Performance (12 Months)

1.20 1.10 1.00 0.90 0.80 0.70 0.60 0.50 O N D J02 F M A M J J A S O Fin.Part (Relative to MIBTEL) Fin.Part (Absolute)

Source: Datastream.

Italian Venture Caps Watch 2002

BRIEF DESCRIPTION OF THE COMPANY

Initially incorporated to group together diverse assets . . .

Fin.Part was founded in 1996 to group together a number of diverse private assets ranging from hotels to fashion. Shortly afterwards, the companys focus became increasingly concentrated on fashion, while hotel-related activities were left aside and fully discontinued in November 2000, when Fin.Part sold its hotel chain to the Fusi group for 150mn. Simultaneously, the company implemented an ambitious plan to expand in the fashion sector (where it now operates exclusively), both organically and through acquisitions. Fin.Part has consistently targeted companies that were underdeveloped in terms of potential sales and profitability, allowing the targets to be acquired at low EV/sales multiples, taking into account their recent performance and their even lower prospective multiples. Figure 1 below reflects the groups intense corporate activity over the past four years.
Figure 1. Fin.Part Acquisition Track Record
Target Pepper Frette Maska Star Cerruti Boggi Date Dec 98 Jan 99 Jan 00 July 00 June 01 Jan 02 Stake Acquired (%) 80.0 87.6 70.0 100.0 100.0 90.0 Price ( mn) 7.3 47.8 5.9 18.0 160.3 8.6 Targets Net Debt ( mn) 46.6 23.9 16.8 5.2 11.1 3.6 EV ( mn) 55.7 78.5 25.3 23.2 171.4 13.2 EV/Sales 0.80 1.17 0.61 1.09 2.14 0.58 EV/EBITDA 5.9 21.3

. . . the group has gradually focused on fashion

Source: Fin.Part and Santander Central Hispano Bolsa

Growth has been driven by acquisitions . . .

In most cases these acquisitions were funded with external resources, leading to a substantial increase in both the groups indebtedness and gearing ratio. While still at manageable proportions, they represent one of the major sources of concern on the stock, as explained below. By year-end 2001, Fin.Parts net debt already stood at 467.8mn, which implies a worrying 489% gearing ratio. In 2001 the group posted a net loss of 37.2mn and a cash flow of 6.8mn (-82%) on sales of 409.5mn (-35%). The decline in profitability occurred at the operating level, as evidenced by Fin.Parts 2001 EBITDA of 28.8mn and EBIT of -1.7mn. Such figures imply an EBITDA margin of 7.0% and an EBIT margin of -0.4% in 2001 versus 18.0% and 9.3%, respectively, in 1998. This shrinking profitability basically reflects that: (1) the efforts to turn around the companies acquired have not succeeded; (2) the action to reduce heavy structural charges has been slow; and (3) an aggressive pricing policy is in place aimed at curbing the rise in finished goods inventories at acquired companies. In addition, Fin.Part has faced rising goodwill amortisation charges (from 3.6mn in 1998 to 14.8mn in 2001) and increasing net financial expenses (from 5.5mn in 1998 to 26.1mn in 2001) related to the payment of such acquisitions. As shown in Figure 2 below, the changes in the consolidation perimeter of the Fin.Part group also led to a substantial change in its sales breakdown. According to the companys guidelines, the largest part of 2002E revenues comes from the casual wear division (48% of 2002E sales). For 2002E, luxury textile is expected to contribute roughly 29% of the groups revenues and there should be a strong, growing presence of luxury fashion (Cerruti with 18% of the income), while Boggi, a retailer recently acquired by the group, should contribute 5% of sales. This compares with the sales mix in 2000, when 58% of revenues came from the casual wear division, 32% from luxury textile and 11% from the Bonaparte hotel chain.

. . . and profitability has suffered

We believe that Fin.Part needs to be rethought

Clothing (casual and luxury) accounts for 71% of revenues

Figure 2. Fin.Part Sales Breakdown, 2000

Hotel 11%

Fin.Part Sales Breakdown, 2002E

Textile 29%

Casualwear 48%

Textile 32%

Casualwear 57%

Luxury 18%

Boggi 5%

Source: Fin.Part.

Source: Fin.Part and Santander Central Hispano Bolsa.

Boggi is the latest acquisition in fashion retail

The aforementioned guidelines already include the acquisition of Boggi, a small upmarket retailer acquired in January 2002 for 8.6mn. Boggi operates 30 shops with annual revenues of some 24.7mn. This acquisition reinforces Fin.Parts capacity to promote its clothing and obtain firsthand feedback on market trends with a view to positioning its brands. We also note that an increasing part of Fin.Parts revenues come from abroad. As shown in Figure 3 below, the company expects to generate some 340mn of sales abroad in 2002E (58% of total income) compared with a 37% in 2000.
Fin.Part Geographical Breakdown of Sales, 2000E

Foreign sales are a growing part of business

Figure 3. Fin.Part Geographical Breakdown of Sales, 2000

Abroad 37%

Italy 42%

Italy 63%

Abroad 58%

Source: Fin.Part.

Source: Fin.Part and Santander Central Hispano Bolsa.

The groups chairman is its largest single shareholder

As shown in Figure 4 below, Fin.Parts main shareholder is Gianluigi Facchini, the groups chairman and CEO, who holds 30% of the stock. An additional 19% of the capital is mainly in the hands of financial institutions and approximately 51% is free float. On September 9, Fin.Part announced a capital increase to raise 100mn by issuing 100mn new shares at 1.00 each, which should be completed at the end of November. This is around 45% above current prices, and we view it as a way to let in new long-term investors. According to Fin.Part these new investors would include, among others, the Lafico Fund, comprising certain Libyan investments abroad. Mr Facchini also announced his intention of subscribing the necessary proportion of the new shares to maintain his current stake in the company.

Italian Venture Caps Watch 2002

Figure 4. Fin.Parts Shareholder Structure

Free Float 51% Gianluigi Facchini 29%

Virginia Alessio 3% Luca Bassani CoGeFin 3% 3% Banque du Gothard 5%

True Nature 6%

Source: Fin.Parts.

THE CORE OF ITS EQUITY STORY

WHY LOOK AT FIN.PART?
We see Frette as the jewel of the Fin.Part group

Frette is our key reason for focusing on Fin.Part. This 79%-owned subsidiary is mainly engaged in the manufacture of textiles for luxury linen. Frettes revenues have risen sharply in the past four years (a 27% CAGR), and we believe that this growth is far from exhausted. Frette, which Fin.Part acquired in January 1999, is among Italys longest-established names in the linen industry. It is also renowned for top-quality, premium products. Revenues at Frette jumped from 65mn in 1998 to 134mn in 2001, implying a 27% CAGR. These figures include the acquisition in July 2000 of Star (Stampa Tessuti Artistici), a small company specialising in high-quality printed fabrics with annual sales of some 25mn. However, even excluding this contribution, we still obtain an excellent 19% CAGR for the period. We consider that these CAGRs are more than acceptable for a product like linen, which is perceived as a relatively mature market rather than a sophisticated growth business.
Figure 5. Frette Sales, 1998-2001
160 140 120 100 80 60 40 20 0 1998 1999 2000 2001 96.9 65.0 73.9 133.8

Frettes sales have grown organically at a 19% CAGR in a mature market

Source: Fin.Part and Santander Central Hispano Bolsa.

A CLOSER LOOK AT FRETTE

Present in all segments of the market

Frette produces a wide range of top-quality linen for both household and hotel use. Frettes household lines include bathroom, bed and table linen, as well as all sorts of accessories and luxury fabrics. A similar range is available for hotels, airlines, restaurants, etc. As shown below, around 42% of Frettes 2001 revenue (133.8mn) came from linen sales to the retail segment, 39% from sales to the hospitality segment (hotels, restaurants etc.) and 19% from sales of textile print. Note that Frette is still mostly a domestic company, with 47% of sales made in the Italian market.

Italian Venture Caps Watch 2002

Figure 6. Frette Sales Breakdown, 2001

Textile Print 19%

Frette Geaographical Breakdown of Sales, 2001

EU and Other 28% Italy 47%

Retail 42%

Hotels and Restaurants 39%

US 25%

Source: Fin.Part.

Source: Fin.Part.

WHERE IS FRETTES POTENTIAL?

Frettes Growing US Presence
Far from being a purely domestic play . . .

Given that Frette is one of Italys longest-established suppliers of luxury linen as well as a small company, it would be normal to expect its revenues to be almost exclusively generated in the domestic market. After all, 44 of its 55 shops (ie, 80% of the total) are in Italy. Therefore, it is surprising that 33.9mn, or more than 25% of its 2001 revenues, came from the US, a country which was in no mood to spend on luxury goods last year. This surprise is heightened on learning that only eight of Frettes outlets (a mere 15% of the total) are located in the US. Moreover, five of these stores were opened in 2000 and two in 2001, suggesting that they are far from reaching maturity. Figure 7 below provides a comparison of revenues generated in Italy and in the US, with the operations in the US averaging 1.8mn per outlet, more than twice the average income per outlet in Italy (0.8mn). The reason is simple: a higher level of personal income means a greater capacity to spend on luxury goods.
Frette Revenues per Outlet, 2001
EU and Other NA

. . . Frette is performing very strongly in the US . . .

Figure 7. Frette Number of Outlets by Area, 2001

50 45 40 35 30 25 20 15 10 5 0 Italy 8 US 3 EU and Other 44

US

1.8

Italy

0.8

0.0

0.5

1.0

1.5

2.0

Source: Fin.Part.

Source: Fin.Part and Santander Central Hispano Bolsa.

. . . even though the penetration of key segments is still low

However, this is debatable, as Frette not only sells its products through its own outlets, but also via other distribution channels like wholesalers or department stores. This brings us to one of the more interesting aspects of this equity story: the fact that most of Frettes sales in the US involve linen supplied to hotels, restaurants, etc. We therefore believe that this sector could be a potential source of high revenues for Frette. With a minor presence in the US retail market (eight shops is very few in US terms) and a very small commercial presence, Frette has managed to create brand awareness in the luxury segment of the leisure industry. This is obviously helped by the fact that Italian products are normally associated with the idea of top quality.

Luxury brand awareness with minimal effort

The US Market of Luxury Linen for Hotels and Restaurants

Assessing the potential market is not an easy task

Despite an intense research effort to estimate the market for bed, bath and table linen for the US hospitality and restaurant industries, we only managed to obtain scant statistical data about this specific segment, partly due to its niche profile. Nonetheless, we supplemented the data available with assumptions to help us build a credible scenario of the market potential. According to the Hospitality Research Group, the US hotel procurement market accounted for US$15.9bn in 1999, of which US hotels spent US$2.9bn on complimentary items, linen, tableware and similar products. Moreover, according to the same source, these items should experience the greatest growth, since the hotels cost-control policies focus mainly on expenses that are the most likely to escape close scrutiny by guests. In fact, spending on items intended to be noticed by the guests including towels and bed linen rose by almost 5% in 1999. We calculate that this market must have grown by around 5% per annum in 2000-02E and, consequently, should be worth some US$3.3bn in 2002E. We detected major discrepancies in estimates of the size of the US procurement market for the hospitality sector. On May 2, 2000 Marriott International and the Hyatt Corporation issued a note announcing the launch of an e-based company to serve the needs of the hospitality industry in the US, which, it indicated, spent US$50bn each year on procurement. Based on the data from this source, we would conclude that spending by US hotels on linen, tableware, complimentary and other items could amount to some US$9.1bn. According to Dr Ravi Kalakota, CEO of Hotel Supply, a company that caters for the US hospitality industrys procurement needs, US hotels spend some US$10bn per annum on supplies such as bed linen, towels, soap and similar items for guests. However, the latter two market estimates date back to the dot.com-fever. Therefore, we cautiously opt for the first estimate of US$3.3bn, even at the risk of it being too low. Frette focuses on the upper segment of the hospitality industry. According to the American Hotel & Lodging Association, there are 50,500 hotel/motel properties in the US, with a total of 4.1mn rooms. According to Smith Travel Research, Frettes potential targets, which fall within the fullservice segments (Upper-Upscale, Upscale and Mid-Scale with Food and Beverage), have a total of 1.5mn rooms, or 37% of the total in the US. It stands to reason that 37% of the upper hotel segment should account for a high share of the estimated US$3.3bn, as top-of-the-range hotels are likely to give greater importance to their image and, therefore, spend more on high-quality items, including linen. Hence, we believe that this 37% of rooms could easily account for some US$1.5bn, or 45% of the US$3.3bn that we consider the market to be worth.

In 2002E the US hospitality industry should spend US$3.3bn on linen, tableware and guest amenities

Some sources suggest up to US$10bn

We prudently take the lower US$3.3bn estimate

The top-end segment accounts for 37% of all US hotel rooms . . .

. . . which should represent US$1.5bn in linen, tableware, etc . . .

Italian Venture Caps Watch 2002

. . . of which some US$0.6bn should correspond to linen

While tableware is more expensive than towels or bed linen, the formers useful life is normally much longer. Towels and bed linen must be washed daily at very high temperatures, so their average useful life with a suitable quality for top-end hotels would be four years at the most. Hence, we assume that bath and bed linen should represent some US$0.6bn, or 40% of the US$1.5bn procurement niche for the US top-end hospitality industry.
Figure 8. The US Luxury Textile Market for the Hospitality Industry (2002 E)
Other Guests Amenities 40% US$0.9

US$0.6 bn

Linen 40% US$1.5 US$0.9

US$0.3 bn US$0.6 bn

China and Cutlery 20%

Full Service Limited Service Independents

Source: Santander Central Hispano Bolsa based on data from the Hospitality Research Group and the American Hotel and Lodging Association.

Linen for top-end hotels and restaurants: a potential market of US$1.2bn for Frette in the US

The size of the table linen market for top-end US restaurants is equally hard if not harder to estimate. According to the US National Restaurant Association, there are 858,000 restaurant locations in the US, or 17 times the number of hotels. Thus, as our assumptions for the hospitality industry are deliberately conservative, for the sake of simplicity we shall assume that the table linen market for top-end US restaurants is roughly another US$0.6bn per annum. The combined top-end hospitality and restaurant market for linen in the US should be worth around US$1.2bn. Since luxury hotels and restaurants in the US already use linen, they obviously have suppliers already. However, Frette only started looking for US clients in earnest two years ago. In our view, this suggests that Frette has considerable potential for swift market share gains in the US, leading to increasing revenues and profits.

Frettes penetration in the US could be just starting to take off

What Is This Worth?

Frette has less than 1.6% of the US luxury linen market for the hospitality segment

We estimated the potential value of Frettes business should the groups management decide to focus on developing Frettes presence in the US. This is merely a theoretical exercise and is not an indication of the managements intentions. On the basis of the above calculations, we estimate that the combined market for linen, including top-end hotels and restaurants in the US, should amount to US$1.2bn in 2002E. Assuming that Frettes US outlets achieve revenues of 1.5mn each (in line with its mature outlets in Italy), we conclude that the hospitality segment generated revenues of some 20mn for Frette in 2001. This implies that Frette has a share of just 1.6% of its US$1.2bn target market. However, this tiny market share would have been achieved in just over two years, which, as stated above, suggests strong growth prospects in the longer run. As shown in Figure 9 below, assuming that Frette succeeds in gaining a 13.5% market share in eight years, this would represent sales of 230mn in the hospitality and restaurant sector.

A 13.5% market share within eight years . . .

. . . could bring Frettes total sales in the US to 0.5bn . . .

We can also reasonably expect a favourable trend in sales to the top-end retail sector (note Frettes focus on its prime locations: Beverly Hills, Aspen, etc). Again based on the patterns in its longestablished domestic market, we estimate that for every 1,000 of sales to hotels and restaurants a further 1,500 of sales are made in the retail and wholesale segment. Therefore, even if we assume a 1:1 ratio for sales to hotels and restaurants and to retail and wholesale, Frette should be posting retail sales worth a further 230mn eight years from now. This assumption is feasible, given Frettes plans to gradually increase its number of outlets in the US, and could imply total sales of 0.5bn for Frette in the US. In terms of margins, profitability at Frette slipped from an 8% EBITDA margin in 1998 to 6% in 2001. Similarly, EBIT margins fell from 4% in 1998 to a low 1% in 2001. This is mostly due to the hefty start-up expenses for the flagship outlets in the US, which are gradually reaching maturity. Margins should improve as such outlets near maturity, tending towards the 8% mark. Moreover, as the business is expanded, structural costs should be absorbed by a larger revenue base. As a result, we consider that Frette should be able to raise its EBITDA margins to just over 12% in eight years. Of the Frette groups total current depreciation charges (5.9mn per annum), we estimate that some 1.8mn relate to the US business. In the long run, this figure should increase, as annual capex should also rise gradually from the present 1.8mn to 2.6mn in eight years. Capex would be mainly related to warehouses and new openings rather than increased production, since much of Frettes output is outsourced to selected textile workshops. Frettes main funding effort would involve the working capital required to meet rising needs of finished goods to supply a growing business. As shown below, this would imply substantial negative free cash flows at the beginning of our eight-year period, after which the working capital requirements would level off at an estimated 20% of annual turnover.
Figure 9. Frette Potential US Business, Summary of Main Assumptions
( mn) Size of target linen market Annual growth (%) Market share (%) Sales to hotels & restaurants Sales to retail & wholesale Total sales in the US EBITDA As a % of sales EBIT Trade provisions Change in working capital Working cap as % of sales Depreciation Capex Tax on EBIT Effect tax rate on EBIT (%) Free cash flows Year 0 1,204 4.5 1.7 20.5 20.5 40.9 2.9 0.07 0.5 0.6 1.3 30.0 1.8 -1.8 -0.2 42 2.2 Year 1 1,259 4.5 5.0 62.9 62.9 125.9 10.1 0.08 6.3 1.9 -19.2 25.0 1.9 -1.8 -2.7 42 -13.6 Year 2 1,315 4.5 9.0 118.4 118.4 236.7 20.1 0.09 14.6 3.6 -21.8 22.5 2.0 -1.9 -6.1 42 -9.7 Year 3 1,374 4.5 11.0 151.2 151.2 302.4 28.0 0.09 21.3 4.5 -7.2 22.0 2.1 -2.0 -9.0 42 9.8 Year 4 1,436 4.5 11.5 165.2 165.2 330.3 33.0 0.10 25.9 5.0 -5.6 22.0 2.2 -2.1 -10.9 42 14.4 Year 5 1,501 4.5 12.0 180.1 180.1 360.2 37.8 0.11 30.1 5.4 -6.0 22.0 2.3 -2.2 -12.6 42 17.0 Year 6 1,568 4.5 12.5 196.1 196.1 392.1 44.1 0.11 35.7 5.9 -6.4 22.0 2.5 -2.3 -15.0 42 20.4 Year 7 1,639 4.5 13.0 213.1 213.1 426.1 50.1 0.12 41.0 6.4 -6.8 22.0 2.6 -2.5 -17.2 42 23.6 Year 8 1,713 4.5 13.5 231.2 231.2 462.4 57.8 0.13 48.1 6.9 -7.3 22.0 2.8 -2.6 -20.2 42 27.8

Frettes margins have deteriorated recently

We assume that EBITDA margins will gradually improve over the next eight years

Frette would need to give a major boost to its working capital

Source: Santander Central Hispano Bolsa estimates and forecasts.

Frettes potential business in the US could be worth 245mn

As shown in Figure 10 below, a DCF model to assess the value of Frettes potential business in the US yielded 245mn. For our model we used a WACC of 9%, with a 5.5% risk-free rate, a risk premium of 4.0%, a beta of 1.5x and a perpetual growth rate (g) of 2.5%. In our calculations we assumed a net debt attributable to US operations of 17.3mn, by determining the weight of Frettes US sales in its total revenues and applying the resultant proportion to its total net debt of 80.1mn.

Italian Venture Caps Watch 2002 Figure 10. Frette DCF Model Valuation of Potential US Business
mn DCF (YoY) PV of terminal value Total leveraged value Plus/less net cash (debt) Total equity value
Source: Santander Central Hispano Bolsa estimates and forecasts.

45.1 217.3 262.4 -17.3 245.1

The non-US business could easily be worth around 26mn

In addition, we value the rest of Frettes operations (mainly those in the domestic market and some minor ventures in Europe) at 26.0mn. This is the result of applying a 0.90x EV/sales multiple to 2003F sales of 115.4mn (based on a 5% CAGR from 2001 with non-US sales of 104.7mn) and an 8.0x EV/EBITDA ratio to 2003F EBITDA of 9.2mn (assuming an 8% EBITDA margin, as stated above). In our calculations we assumed a net debt attributable to non-US operations of 62.8mn, by determining the weight of Frettes non-US sales in its total revenues and applying the resultant proportion to its total net debt of 80.1mn.
Figure 11. Frette Valuation of Non-US Operations
mn Frettes 2003F non-US sales (at a 5% CAGR from 2001 revenues of 133.4mn) EV/sales of 1.25x Net debt Value (1) Frettes 2003F EBITDA outside the US (at a 8% margin on sales) EV/sales of 1.0x Net debt Value (2) Average of (1) and (2)
Source: Santander Central Hispano Bolsa estimates and forecasts.

115.4 103.9 -62.8 41.0 9.2 73.9 -62.8 11.0 26.0

Frette could have a potential value of 214mn

As shown in Figure 12 below, this results in a sum-of-the-parts value of 271mn for Frette. Net of the 21% minority interests, we obtain a valuation of 214mn, or 0.55 per fully diluted share, for Fin.Parts 79% stake in Frette. This amount is equivalent to 131% of Fin.Parts current market capitalisation and suggests that the stock could be significantly undervalued.
Figure 12. Frette Sum-of-the-Parts Valuation
mn Potential business in the US Non-US operations Total Less 21% minority interests Potential value of Fin.Parts 79% stake in Frette Fin.Parts current market capitalisation Total as % of current value
(1) Fully diluted per share data. Source: Santander Central Hispano Bolsa.

/Share 0.63 0.07 0.70 -0.15 0.55 0.70 78.9

245.1 26.0 271.1 -56.9 214.2 163.9 130.7

10

THE ISSUES
Not everything is rosy in Fin.Parts equity story

Evidently, this rosy investment scenario also has a number of potential sources of concern that investors should be aware of. We highlight three: competition, Fin.Parts financial situation and its current strategy.

Little Room for Manoeuvre among Competitors

The competition could react . . .

Luxury hotels in the US already have bed and bathroom linen and, logically, their suppliers. Frettes competitors would obviously react to a newcomer in the market, although defensive strategies against new entrants are hard to implement in the luxury industry. Price wars are contrary to the industrys own philosophy and positioning strategy. Furthermore, it is difficult to improve products that are already supposed to be of the highest possible quality. If Frettes products earn a reputation for good quality and prestige in the restaurant and hotel segments and they seem to be on their way to doing so there is little that competitors can do until Frette reaches a certain market share. Frette only entered the US market recently and has already posted remarkable sales growth, which we estimate at above 35% in the past three years, and this seems to be far from exhausted.

. . . but not with very strong weapons

Fin.Parts Troubled Financial Position

Fin.Parts troubled financial position . . .

In our view, a more important cause for concern is Fin.Parts difficult financial position, as evidenced by its modest 1.10x interest coverage ratio (2001 EBITDA/net financial expenses, since an EBITbased ratio cannot be calculated given the operating losses reported in 2001). The group has spent over 250mn in the past four years to expand via acquisitions. The divestiture of the hotel division provided a financial relief of some 150mn (between the cash collected and the debt taken by the buyer). The rest of the acquisitions have been funded with debt. As a result, Fin.Parts net debt position stood at 467.8mn at year-end 2001, implying a gearing ratio of 489%. Furthermore, in July 2001 Fin.Part carried out a 200mn bond issue, to be repaid in three years, as part of a re-financing scheme. Consequently, Fin.Part needs to generate free cash flows of around 65mn per annum. However, it only managed EBITDA of 28.8mn in 2001, suggesting that it may have money for its ongoing operations but it does not seem to be able to generate the extra money required to repay the bond issue. It could even be necessary to implement an aggressive restructuring process, sell non-strategic assets or discontinue non-core activities. Hence, unless the groups recently-acquired operations manage to increase their profitability, we would not rule out some action to reshuffle Fin.Parts capital structure. The groups pressing needs for funds may prevent it from obtaining the best prices for its non-core assets/activities. It is also worth noting that a capital increase can also be a means of selling part of your assets at prices that may be less than favourable.

. . . clearly entails the risk of value dilution

We do not rule out asset disposals, though not maximising value

Fin.Parts Current Strategy

The groups focus is the key to our investment case

While the groups strategy (detailed below) sounds quite sensible as far as its business lines are concerned, it is not particularly focused on Frettes potential. Thus, our investment case for Frette and, consequently, for Fin.Part may not be feasible.

11

Italian Venture Caps Watch 2002

The Pros and Cons

Figure 13. Fin.Part The Pros and Cons of the Investment Case
Pros Increasing focus of the groups strategy on the luxury, fashion and textile segments. Potential for profits in underdeveloped but reputable Cerruti brand name (so far just 18% of 2002E sales) Frette, the subsidiary engaged in top-quality textile for luxury linen, enjoys a solid reputation in the domestic market. Cons Very small market capitalisation. Some investors may disregard the stock since the impact of a position in Fin.Part in a portfolio may be limited in the short term. Limited liquidity: some patience may be required to build a position. Fin.Part has a net debt of 467.8mn (a 489% gearing ratio). This could limit the groups strategy, unless the turnaround of the group is efficiently executed and the financial structure reorganised. A restructuring plan contemplates three scenarios. In one Frette could be divested for the sake of a stronger luxury fashion division (Cerruti). While this could give visibility to the value of the group, it would affect the core of our investment case. The need to generate extraordinary financial resources may imply the disposal of assets at not necessarily the best prices.

Rapid development of Frettes presence in the US. We estimate this market to have an annual turnover of 1.2bn in the top-end hotel and restaurant procurement segments. Frettes tiny 1.6% estimated market share could multiply in a relatively short time. The ongoing 100mn capital increase could provide the group with the relief required to turn the group around. Turnaround could deliver a 43% CAGR at the EBITDA level in 2001-05F.
Source: Santander Central Hispano Bolsa estimates and forecasts.

12

WHERE IS FIN.PART HEADED?

MANAGEMENT STRATEGY
The Ideal World
The acquisition phase is now over . . .

According to Fin.Parts management, the group has completed the first part of its growth plan (acquisitions) and is now on its way to accomplishing the second part (consolidation). In 19982001 the group executed a large number of corporate deals, especially considering Fin.Parts relatively small size. Management considers that the group should develop its full potential in 2002-04, reinforcing what has been achieved so far. As a result, we no longer expect Fin.Part to grow through acquisitions, but organically. Rather than add new brand names to the portfolio, which would probably dilute the existing ones, management wants to reinforce the current brands. The groups two key targets are economies of scale and marketing aimed at positioning its brands. As regards the casual wear division, which was the groups main contributor to sales in 2001, Fin.Part wants to focus on its main brands, including Marina Yachting, Moncler and Henry Cottons. The groups recent acquisition of Boggi could serve as a good platform, as it provides the group with a ready-made network of 30 shops. According to managements guidelines, Moncler enjoys considerable brand awareness in the US, Japan and Italy. However, Fin.Parts main effort is aimed at bolstering the business and profitability of Cerruti. Management is convinced that the markets awareness of the Cerruti brand far exceeds the products actual market penetration. Management believes that the high proportion of sales of Cerruti fragrances (licensed to Unilever) relative to the rest of Cerruti brand-related sales is a sign of this fashion trade names considerable potential. In fact, Unilever generated fragrance sales worth 104.7mn in 2001, or almost 40% of all Cerruti brand sales, while fragrances may account for less than 10% of the sales of other prestigious fashion brands. Working on the assumption that the Cerruti brand name has not yet been optimised, sales could be boosted considerably through a commercial effort to place the product in more stores, launch an informal line of menswear and reinforce the womenswear product line. Moreover, as the production of Cerrutis womenswear was previously under a license contract that expired in 2Q02, it has now been relocated to the underused facilities of Maska, an integrated fashion company purchased in 2000. This and other commercial economies of scale could help improve margins considerably, while sales should expand at relatively modest rates, as they benefit from marketing campaigns expected to absorb 6% of the groups turnover. With regard to Frette, Fin.Part is planning to make significant efforts to expand its sales to the retail sector through new outlet openings, both in Italy and abroad, together with the refurbishment of some of its existing stores. Gross margins in the retail business are higher than on sales to the wholesale sector or to hotels and restaurants, which is probably the reason behind such plans. However, the costs related to the location of the outlets, in addition to other expenses, must also be borne in mind. Consequently, operating margins should end up basically the same in both segments.

. . . and the new focus is on profitability

Among its portfolio of brand names . . .

. . . Fin.Part intends to focus on Cerruti

Cerrutis brand name extension approach

No major investments in Fin.Parts plan

13

Italian Venture Caps Watch 2002

Adopting a Realistic Attitude

Financial troubles have led Fin.Part to consider disposals

Given its troubled financial position, the group is taking serious steps to downsize its operations and increase its focus on profitability to reduce the groups financial burden. As shown in Figure 14 below, Fin.Part has prepared three scenarios. The master plan envisages the disposal of non-core businesses and non-strategic real estate. The second scenario involves the disposal of Maska (part of the casual wear division) in 4Q02, while the third scenario envisages the disposal of everything but the luxury division (casual wear division in 4Q02, textiles in 4Q03 and Boggi in 4Q04). Although the estimated NPV of EBIT under the master plan is 126.2mn, well above the 106.3mn and 51.0mn of options two and three, respectively, it also implies a very high financial risk, as no major cash-inflow is contemplated through disposals. In any event, there is no visibility on Fin.Part before 2004F, which means that the stock is likely to go through tough times as regards share price performance in the coming years.
Figure 14. Fin.Part Managements Three Scenarios (2002E-04F)
2002E Sales EBITDA As % of sales EBIT As % of sales EBIT after goodwill Net income Net debt/(cash) Equity Minority interests Gearing ratio ROI NPV of EBIT 531.4 38.1 7.2 16.5 3.1 -2.1 -28.1 378.4 112.2 5.4 321.8 -0.4 Master Plan 2003F 2004F 566.9 68.4 12.1 45.8 8.1 30.5 -7.6 376.5 104.7 5.4 342.0 6.3 126.2 671.2 102.6 15.3 79.8 11.9 63 14.2 382.3 118.9 5.4 307.6 12.4 2002E 531.4 38.1 7.2 16.5 3.1 -2.1 -14.1 324 126.1 5.4 246.4 -0.5 Option 2 2003F 483.9 56.7 11.7 37.1 7.7 22.6 -8.4 321.2 117.7 5.4 260.9 5.1 106.3 2004F 577.2 85.1 14.7 65.9 11.4 49.9 10.2 328.9 127.9 5.4 246.7 10.8 2002E 531.4 38.1 7.2 16.5 3.1 -2.1 52.7 111.6 192.9 5.4 56.3 -0.7 Option 3 2003F 2004F 275.2 26.4 9.6 16 5.8 5.2 56.7 -12.6 228.6 5.4 -5.4 2.4 51.0 225.2 28.8 12.8 24 10.7 15 46.3 -51.6 263.6 5.4 -19.2 6.9

Best value in master plan, but also the highest risks

Source: Fin.Part and Santander Central Hispano Bolsa estimates and forecasts.

ESTIMATES ACCORDING TO FIN.PARTS STRATEGY

We are keeping our assumptions very simple . . .

Although we have prepared a case for Fin.Part based on the eventual development of Frettes potential in the US hotel and restaurant segments, we cannot ignore managements plans when it comes to making our forecasts. These are very simple and take managements master plan as the basis of reference. We assume a 17% CAGR in sales over the next four years and a gradual improvement from a 7% EBITDA margin in 2001 to 15.8% in 2005F (slightly above managements expectation of 15.4% for 2004F). As regards the companys financial position, we have ignored the assets likely to be sold, the schedule for such disposals and the potential proceeds. Also, for the sake of prudence, we have excluded any cash inflow from such sources. We have estimated managements capex needs at around 22mn per annum and working capital needs at roughly 30% of sales for the period. Based on the foregoing assumptions, we expect the company to return to net profit (3.1mn) in 2003F and to post a net profit of 25.3mn in 2005F. The group should be able to generate a modest free cash flow in 2003F-05F, although this unlikely to be sufficient to reduce its net debt position. However, we expect the net debt to fall to 377.0mn in 2005F (a 158% gearing ratio), thanks to the impact of the ongoing 100mn capital increase described below. Note that we have deliberately ignored any proceeds from potential disposals of non-core assets.

. . . and in line with the companys master plan

Losses should be left behind in 2003F; debt remains the top issue

14

Figure 15. Fin.Part Profit and Loss Account, 2000-05F

( mn) Net sales YoY growth (%) Other operating income Total revenues COGS Gross profit Personnel expenses Other operating expenses EBITDA As a % of sales Depreciation and trade provisions EBIT As a % of sales Financial income (expense) Equity consolidation method Goodwill amortisation Ordinary profit Extraordinary gains (losses) Profit (loss) before taxes Taxes Tax rate (%) Minority interests Net profit (loss) YoY growth (%) Net cash flow YoY growth (%) 2000 304.0 47.7 7.9 311.9 -93.7 218.2 -57.9 -138.8 21.4 7.1 -17.7 3.7 1.2 -18.3 -0.2 -11.4 -26.2 30.7 4.5 0.0 -0.5 3.6 8.2 202.6 37.3 56.0 2001 409.5 34.7 34.1 443.6 -140.7 302.9 -83.8 -190.3 28.8 7.0 -30.5 -1.7 -0.4 -26.1 -0.8 -13.5 -42.2 13.0 -29.2 -14.1 -48.2 6.0 -37.2 -555.7 6.8 -81.8 2002 532.3 30.0 44.3 576.6 -180.2 396.4 -86.7 -268.7 41.0 7.7 -27.9 13.1 2.5 -21.9 0.4 -14.5 -23.0 0.0 -23.0 0.0 0.0 4.7 -18.2 -51.1 24.2 257.5 2003F 568.5 6.8 47.3 615.8 -189.2 426.6 -89.8 -267.1 69.8 12.3 -28.0 41.8 7.3 -20.1 0.4 -14.5 7.5 0.0 7.5 -3.0 40.0 -1.4 3.1 -117.2 45.7 88.5 2004F 674.7 18.7 56.1 730.9 -221.2 509.7 -92.9 -310.2 106.6 15.8 -28.3 78.3 11.6 -19.7 0.5 -14.5 44.5 0.0 44.5 -18.2 41.0 -7.4 18.8 501.7 61.6 34.9 2005F 759.5 12.6 63.2 822.7 -245.1 577.5 -96.2 -360.6 120.8 15.9 -28.6 92.2 12.1 -19.2 0.5 -14.5 58.9 0.0 58.9 -24.7 42.0 -8.8 25.3 34.4 68.5 11.0 CAGR 2001-05F (%) 16.7

17.5 43.1 NA

NA NA

NA 78.2

Source: Company data and Santander Central Hispano Bolsa estimates and forecasts.

Figure 16. Fin.Part Summarised Cash Flows, 2000-05F

( mn) Net profit Depreciation Operating provisions Goodwill amortisation Net cash flow Capex Dividends Change in working capital Other Net increase in cash (debt) 2000 8.2 17.7 0.8 11.4 38.1 -70 0.0 0.0 0.0 -31.9 2001 -37.2 30.5 2.4 13.5 9.2 -160.91 0.0 -46.3 0.0 -198.0 2002E -18.2 25.7 2.2 14.5 24.2 -21.3 0.0 -42.8 100.0 60.1 2003F 3.1 25.6 2.4 14.5 45.7 -24.4 0.0 -10.3 0.0 11.0 2004F 18.8 25.4 2.8 14.5 61.6 -21.8 0.0 -35.2 0.0 4.7 2005F 25.3 25.4 3.2 14.5 68.5 -25.0 0.0 -28.8 0.0 14.7

(1) Mainly due to impact of Cerruti acquisition. Source: Fin.Part annual reports and Santander Central Hispano Bolsa estimates and forecasts.

Figure 17. Fin.Part Balance Sheet, 2000-05F

( mn) Net fixed assets Inventories Trade debtors Non-trade debtors Cash and equivalents Total assets/liabilities Shareholders equity Minorities Provisions and deferred income Long-term interest-bearing debt Other long-term liabilities Long-term liabilities Short-term interest-bearing debt Trade creditors Other current liabilities Current liabilities Net debt (cash) Net debt/equity (%) RoE (%) 2000 200.5 122.8 70.6 151.9 23.2 568.9 125.0 -1.0 5.7 151.6 4.5 156.1 141.3 75.4 66.4 283.1 269.8 217.7 6.5 2001 492.4 161.7 123.9 72.1 99.2 949.3 90.3 5.4 25.1 368.0 33.8 401.8 199.1 121.3 106.4 426.8 467.8 488.9 -34.6 2002E 488.0 220.6 199.6 54.2 159.4 1,121.8 172.0 0.7 26.3 368.0 33.8 401.8 199.1 210.1 111.7 520.9 407.7 236.0 -13.9 2003F 486.8 235.6 213.2 91.8 170.3 1,197.7 175.2 2.1 27.7 368.0 33.8 401.8 199.1 224.4 167.6 591.0 396.7 223.8 1.8 2004F 483.1 272.5 246.6 91.6 175.0 1,268.9 194.0 9.5 29.0 368.0 33.8 401.8 199.1 259.6 176.0 634.6 392.0 192.6 10.2 2005F 482.7 302.8 273.9 93 189.7 1,342.1 219.3 18.4 30.5 368.0 33.8 401.8 199.1 288.4 184.8 672.2 377.3 158.8 12.2

Source: Company data and Santander Central Hispano Bolsa estimates and forecasts.

15

Italian Venture Caps Watch 2002

LATEST NEWS ON FIN.PARTS TURNAROUND

Financial gearing is a top priority

As indicated, Fin.Part has two problems: (1) the low profitability of some of the operations acquired; and (2) its heavy financial burden, which stood at 468mn at the end of 2001, implying a 489% gearing ratio. The plans mentioned above are aimed at addressing the operating problems in a twoyear timeframe. However, the financial issue is still pending and management knows that it needs to be tackled as soon as possible. Consequently, Fin.Part has been in discussions with several long-term investors, who may be interested in subscribing a 100mn capital increase. These investors include the Lafico Fund, comprising certain Libyan investments abroad, including a 2% stake in Fiat, the Italian car manufacturer. This capital increase is expected to be completed in late November and would imply the issuance of 100mn new shares, raising the total number of shares outstanding to 334.1mn from the current 234.1mn. Given that the current share price is in the region of 0.70 per share and that the new shares are to be issued at 1.00 per share, the effect of this capital increase at a premium of around 45% is clearly accretive and should be welcomed by Fin.Parts investors. It would not only bring financial relief to the group, but would also pay current shareholders a premium for their stake in the company. Similarly, Fin.Part has 107,218,502 warrants outstanding, which entitle their holders to subscribe one newly issued share at 1.03 for every two warrants. Given Fin.Parts current share price, we do not expect any of the warrant holders to come in aid of Fin.Parts troubled financial position and also represent immediate value for its current shareholders. In any case, all our per share estimates and our valuation are fully diluted, taking into account the issuance of new shares for both the 100mn capital increase and the existing warrants. The ongoing 100mn capital increase serves as a convenient source of funds to speed up Fin.Parts restructuring process and to accomplish the planned development of its core activities in casual wear, top fashion and luxury linen.

An ongoing 100mn capital increase . . .

. . . to bring in long-term investors

Existing warrants unlikely to be converted at present

Financial relief to speed up restructuring plans

16

VALUATION OF FIN.PART UNDER THIS SCENARIO

A VALUATION FOR FIN.PART BASED ON THE FOREGOING ASSUMPTIONS
A successful turnaround could make Fin.Parts share price . . .

Although we have prepared an investment case for Frette, Fin.Parts luxury textile division, our core valuation for the group as a whole is based on the average of a DCF model and a comparison with a number of small retail companies. As shown in Figure 18 below, the average of both methods yields a value of 874.3mn, or 2.25 per share (fully diluted). However, we applied a 40% discount, mainly for illiquidity, but also to reflect the stocks relatively high-risk profile. Indeed, some of the stocks considered in the peer comparison involve much more liquid companies that enjoy better market awareness among the investor community. After applying this discount, our target value stands at 542.6mn, or 1.35 per share. (Note that, as indicated above, all our per share data, valuation included, are fully diluted and take into account both the 100mn capital increase and the 107.2mn warrants.)
Figure 18. Fin.Part Valuation Summary 1
Methodology DCF (a) International comparison EV/sales EV/EBITDA EV/EBIT P/E P/CF Average of multiples Average after 5% per annum discount for time lag In-flow from possible exercise of warrants Valuation through multiples comparison (b) Average of DCF and market multiples (a and b) Average of (a) and (b) after a 40% discount for illiquidity Current share price Upside potential (%) Upside potential (x current market capitalisation) mn 952.8 845.7 760.0 739.1 558.5 890.5 758.7 740.5 55.5 795.9 874.3 524.6 163.9 /Share 2.46 2.18 1.96 1.91 1.44 2.30 1.96 1.91 0.14 2.05 2.25 1.35 0.69 93.2 1.93

. . . more than double to a fully diluted 1.35/ share

(1) The valuation includes the eventual effects of the ongoing 100mn capital increase (implying the issue of 100mn shares at 1.00 each) and the possible, but unlikely at current prices, exercise of the 107.2mn warrants, which would imply the issue of 53.6mn shares at 1.03 each. The per share data are fully diluted. Source: Santander Central Hispano Bolsa.

We used a comparison with peers . . .

One of the methods we used is a multiples comparison with other fashion and retail stocks in the luxury and casual wear segments. We deliberately included Cortefiel, the small Spanish retailer, on account of its exposure to different segments of the fashion industry, a certain level of vertical integration and its reference position as a small cap. Note that the ratios we were able to find for these comparables are for 2002E and 2003F, while Fin.Part is not expected to start to reap the benefits of its turnaround until 2004F and 2005F. Thus, we have deliberately applied such 2002E and 2003F ratios to our 2004F and 2005F forecasts for Fin.Part and subsequently discounted the value obtained at a rate of 5% for two years. As shown in Figure 18 above, the average value obtained using this method is 795.9mn, or 2.05 per share (fully diluted).

. . . and obtained a value of 2.05 per share for the stock

17

Italian Venture Caps Watch 2002 Figure 19. Fin.Part Comparison with Peers EV/Sales, EV/EBITDA and EV/EBIT Multiples, 2002E-03F
1

( mn)

Country

Market Cap

EV/Sales 2002E 2003F 1.84 0.46 2.85 3.55 1.22 2.16 0.90 1.85 1.84 1.60 0.41 2.52 3.19 1.11 1.99 0.75 1.65 1.60

EV/EBITDA 2002E 2003F 9.7 4.0 15.4 12.6 11.6 11.0 5.3 9.9 11.0 8.1 3.5 12.4 11.2 9.7 9.3 4.3 8.4 9.3

EV/EBIT 2002E 2003F 13.1 6.9 23.2 14.4 23.7 14.7 6.8 14.7 14.4 10.9 5.8 17.8 12.6 17.8 12.2 5.4 11.8 12.2

Bulgari Italy 1,249.9 Cortefiel Spain 304.2 Gucci Group Netherlands 9,221.0 Hermes International France 4,972.8 IT Holding Italy 526.8 LVMH France 20,935.0 Polo Ralph Lauren US 2,215.0 Average 5,632.1 Median 2,215.0 Fin.Part Sales, EBITDA , EBIT (2004F/05F) EV/sales, EV/EBITDA and EV/EBIT multiples applied Implied valuation Average of 2002E + 2003F

674.7 759.5 1.84 1.60 850.4 841.0 845.7

106.6 120.8 11.0 9.3 776.1 743.8 760.0

78.3 92.2 14.4 12.2 731.9 746.3 739.1

(1) Fully diluted per share data. Source: JCF estimates and forecasts and Santander Central Hispano Bolsa estimates and forecasts for Fin.Part.

Figure 20. Fin.Parts Valuation Comparison with Peers P/E and P/CF Multiples, 2002E-03F 1
( mn) Bulgari Cortefiel Gucci Group Hermes International IT Holding Lvmh Polo Ralph Lauren Average M3edian Fin.Part EPS and CFPS () (2004F/05F) P/E and P/CF multiples applied Implied valuation (/share) Average of 2002E+2003F (/share) Country Italy Spain Netherlands France Italy France US Market Capitalisation 1,249.9 304.2 9,221.0 4,972.8 526.8 20,935.0 2,215.0 5,632.1 2,215.0 0.07 20.7 P/E 2002E 16.2 7.7 27.6 23.2 55.6 25.9 11.9 24.0 23.2 0.16 13.1 1.31 2003F 13.1 6.4 22.3 20.8 33.3 20.7 10.2 18.1 20.7 0.18 10.6 1.57 P/CF 2002E 2003F 10.3 3.9 18.1 18.9 13.1 13.9 10.1 12.6 13.1 8.8 3.3 15.5 17.2 10.6 11.6 8.8 10.8 10.6

0.05 23.2

1.44

2.41

2.30

2.18

(1) Fully diluted per share data. Source: JCF estimates and forecasts and Santander Central Hispano Bolsa estimates and forecasts for Fin.Part.

A DCF model yields a value of 2.46 per share

Our DCF model yielded a value of 952.8mn (2.46 per share), which, though slightly lower, is consistent with the figure obtained using a comparison with international peers. Our model considers a 5.5% risk-free rate, a 4% market risk premium, a beta of 1.50x and a long-term growth rate (g) of 2.5%. Note that the bulk of the value according to the DCF model stems from the terminal value, which is hardly surprising when we consider that the initial years considered for Fin.Part relate to the companys turnaround efforts and, therefore, contribute little value according to this methodology.
Figure 21. Fin.Part DCF Model Valuation 1
mn DCF (2002E-10F) PV of terminal value Total leveraged value Plus/less net cash (debt) Plus money-in from warrants exercise Total equity value Fair price (/share)
(1) Fully diluted per share data. Source: Santander Central Hispano Bolsa estimates and forecasts.

239.7 1,025.4 1,265.1 -367.8 55.5 952.8 2.46

18

FRETTE WITHIN FIN.PARTS VALUATION

Of the 1.35 per share basecase value . . .

As shown in Figure 22 below, we value Fin.Part at 874.3mn, which implies a target price of 1.35 per share after applying a 40% discount, mainly for illiquidity. To a great extent, whether or not the stocks potential value eventually materialises will be determined by the execution of the restructuring process. This, in turn, is based on economies of scale and synergies between different parts of the group. Consequently, we prefer to view Fin.Part as a single unit for valuation purposes, rather than prepare a sum-of-the-parts valuation. We have based an investment case for Fin.Part on the business potential envisaged for Frette in the hotel and restaurant procurement market, especially in the US. In order to give an idea of Frettes contribution to our base-case valuation, we attribute to Frette a value equivalent to the proportion of sales it should contribute to the group in 2002E-05F (around 25% on average). We have taken sales as the reference figure, since all the groups units are well below their full potential performance and other financials (EBITDA, EBIT, etc) would tend to have a distorting effect rather than be of help until the turnaround is achieved. Hence, Frette would contribute 182.6mn to Fin.Parts base valuation of 874.3mn, equivalent to 0.28/share after applying a 40% discount for illiquidity. This compares with the 214mn, or 0.55/ share, attributed to Frette in our case study of its business potential in the US hotel and restaurant procurement market. Still, Frettes value of only 0.28/share in our base-case valuation justifies 67% of Fin.Parts current market capitalisation, leaving substantial upside potential for investment in the stock.
Figure 22. Fin.Parts Valuation Frettes Contribution in the Base-Case Scenario
mn Frettes average contribution to group sales in 2002E-05F (%) Fin.Parts valuation In-flow from capital increase and exercise of warrants Non-Frette sources of value Frettes share in Fin.Parts value After 40% discount for illiquidity Fin.Parts valuation In-flow from capital increase and exercise of warrants Non-Frette sources of value Frettes share in Fin.Parts value Frettes share as % of Fin.Parts market capitalisation
(1) Fully diluted per share data. Source: Santander Central Hispano Bolsa estimates and forecasts.

. . . Frette would contribute . . .

. . . 0.28/share

/Share 1 25.0 2.25 0.40 1.38 0.47 1.35 0.24 0.83 0.28 40.4

25.0 874.3 155.5 536.2 182.6 524.6 93.3 321.7 109.6 66.9

The development of the US potential business could raise Fin.Parts value to 543.5mn

Conversely, in our base-case valuation we attribute 536.2mn to Fin.Parts sources of value other than Frette and another 155.5mn from the cash collected through the capital increase and the exercise of warrants (see Figure 22 above). If we added the worth we would attribute to Frette if its business potential were fully developed (according to the assumptions described in the previous section), Fin.Parts potential total value would be 543.5mn, or 1.40/share. This is equivalent to 3.3x its current market capitalisation and would deliver an investment return of 100% per each fully diluted share.

19

Italian Venture Caps Watch 2002 Figure 23. Fin.Parts Valuation Implications of the Development of Frettes US Business Potential
mn In-flow from capital increase and exercise of warrants Fin.Parts sources of value other than Frette Valuation of Frette assuming the development of US business potential Total value After 40% discount for illiquidity: Money-in from capital increase and warrants exercise Fin.Parts sources of value other than Frette Valuation of Frette assuming the development of US business potential Total potential value Fin.Parts current market capitalisation Total potential value (% of market capitalisation) Total potential value (x current market capitalisation)
(1) Fully diluted per share data. Source: Santander Central Hispano Bolsa estimates and forecasts.

/Share 1 0.40 1.38 0.55 2.34 0.24 0.83 0.33 1.40 0.70 100.2 2.00

155.5 536.2 214.2 905.9 93.3 321.7 128.5 543.5 163.9 231.6 3.32

20

NOTES

21

Italian Venture Caps Watch 2002

NOTES

22

NOTES

23

Santander Central Hispano Local Offices

Madrid Tel: 34-91-701-9009 Fax:34-91-701-9114 Frankfurt Tel: 49-699-1507-0 Fax: 49-699-1507-370 Buenos Aires Tel: 54114-341-1052 Fax: 54114-341-1226 Santiago Tel: 562-336-3300 Fax: 562-697-3869 Tokyo Tel:813-5561-0591 Fax:813-5561-0580 Key to Investment Codes (12- to 18-Month Horizon) Strong Buy Buy Hold Underperform Sell Expected to outperform the market by more than 15% AND Upside potential at least 25% above the 10-year applicable bond yields. Expected to outperform the market by 5%-15% AND Upside potential at least 10% above the 10-year applicable bond yields. Expected to perform within a range of 5% above or below the local market. Expected to underperform the market by 5%-15%. Expected to underperform the market by more than 15% Lisbon Tel: 351-21-380-1500 Fax: 351-21-385-9133 Paris Tel:33-1-4417-6500 Fax: 33-1-4417-6565 Caracas Tel: 582-401-4306 Fax: 582-401-4219 So Paulo Tel: 5511-5538-8226 Fax: 5511-5538-8407 London Tel:44-207-332-6900 Fax:44-207-332-6909 New York Tel: 212-583-4623 Fax: 212-407-4540 Lima Tel: 511-215-8100 Fax: 511-215-8185 Hong Kong Tel: 852-2101-2101 Fax: 852-2101-2994 Milan Tel:39-02-8067-161 Fax:39-02-8067-1692 Bogot Tel: 571-644-8006 Fax: 571-592-0638 Mexico City Tel: 5255-5629-5040 Fax: 5255-5629-5846 Manila Tel: 632-848-7011 Fax:632-848-6552

This report has been prepared by Santander Central Hispano Bolsa, Sociedad de Valores, S.A. (Santander Central Hispano Bolsa) and is provided for information purposes only. This document must not be considered as an offer to sell or a solicitation of an offer to buy. Any decision by the recipient to buy should be based on publicly available information on the related security and, where appropriate, should take into account the content of the related prospectus filed with the Consob (Italian National Securities Market Commission) and available from the Consob, the Authority governing the Italian market, and the company issuing the security and the company issuing the security. This report is issued in the United States by Santander Central Hispano Investment Securities, Inc. (SCHI), in Spain by Santander Central Hispano Bolsa and in the United Kingdom by Banco Santander Central Hispano S.A., London Branch (SCH London), which is regulated by the Financial Services Authority in the conduct of its investment business in the UK. SCHI, Santander Central Hispano Bolsa and SCH London are members of Grupo Santander Central Hispano. This report is not being issued to private customers. This document is intended for Italian and non-Italian institutional investors which are clients of Bipielle Santander Central Hispano SIM SpA or clients of Santander Central Hispano or of its affiliates. This document will be distributed, from the same day of the deposit at Consob, either as a printed document and/or in electronic form. Bipielle Santander Central Hispano SIM SpA anticipates that the approximate number of recipients is 500. Bipielle Santander Central Hispano SIM SpA intends to maintain coverage of the securities directly covered in this report. Santander Central Hispano Bolsa, SCHI and SCH London, or their affiliates, may (a) have managed or co-managed a public offering of the subject companies securities in the past 12 months; (b) have received compensation for investment banking services from the subject companies in the past 12 months; or (c) expects to receive or intends to seek compensation for investment banking services from the subject companies in the next three months. The information contained herein has been compiled from sources believed to be reliable, but while all reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, we make no representation that it is accurate or complete and it should not be relied upon as such. All opinions and estimates included herein constitute our judgement as at the date of this report and are subject to change without notice. From time to time, Grupo Santander Central Hispano, its affiliates and/or any of its officers or directors may have a position, or otherwise be interested in, transactions in securities which are directly or indirectly the subject of this report. Grupo Santander Central Hispano, or its affiliates, may from time to time perform services for or solicit business from any company mentioned in this report. The analyst of this document does not hold a position in the securities that are the subject of this report. Grupo Santander Central Hispano, its affiliates or any other person do not accept any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report may not be reproduced, distributed or published by any recipient for any purpose. Any U.S. recipient of this report (other than a registered broker-dealer or a bank acting in a broker-dealer capacity) that would like to effect any transaction in any security discussed herein should contact and place orders in the United States with the company distributing the research, SCHI at (212) 583-4623, which, without in any way limiting the foregoing, accepts responsibility (solely for purposes of and within the meaning of Rule 15a-6 under the U.S. Securities Exchange Act of 1934) under this report and its dissemination in the United States. Santander Central Hispano Bolsa, Sociedad de Valores, S.A., 2002. All Rights Reserved.