Datalogic SpA analisti... · Datalogic SpA ... Recovering ADC market and acceleration in IA driving top- ... Company is one of the global leading players in ADC and in the IA market

BERENBERG EQUITY RESEARCH

Datalogic SpA

Buy

Scanning the future

Simona Sarli

Analyst

+44 20 3207 7834

[email protected]

6 October 2014

Capital Goods & Industrial Engineering

For our disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) and our disclaimer please see the end of this document. Please note that the use of this research report is subject to the conditions and restrictions set forth in the disclosures and the disclaimer at the end of this document.

Table of contents Scanning the future 1

Datalogic SpA – investment thesis in pictures 2

Datalogic SpA – investment thesis 3

Company overview 7

Key investment point 1: Leading player in markets with high barriers to entry 14

Key investment point 2: Recovering ADC market and further acceleration in IA: the key catalysts for top-line growth 19

Key investment point 3: Company self-help initiatives – margin expansion 26

Key investment point 4: High cash generation supporting future investments in R&D and leaving room for potential M&A 28

Changes to earnings/Berenberg versus consensus 32

Valuation and sensitivity analysis 33

Current momentum 36

Blue sky and doomsday scenario 37

Key risks 39

Appendix 1: Corporate structure 41

Appendix 2: History 42

Financials 43

Contacts: Investment Banking 47

Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) 48

Datalogic SpA Small/Mid-Cap: Capital Goods & Industrial Engineering

1

Scanning the future

● We initiate coverage of Datalogic (“DAL” or “the Company”) with a Buy rating and a EUR11.8 price target, which implies 42% upside. DAL is a leading player in automatic data capture (“ADC”) and the industrial automation (“IA”) markets, manufacturing retail scanners, handheld devices, sensors, vision systems and laser marking systems.

● Compelling investment case: (1) Leading player in markets with high barriers to entry: No.1 globally in POS retail scanners and No.3 in hand-held readers, the Company is also No.1 globally in industrial stationary scanners. We believe DAL will continue to benefit from its leading positioning in these markets, which have high barriers to entry – ie technology protected by patents, the ability to continue innovating, established relationships with large distributors and system integrators and a significantly consolidated ADC market. (2) Recovering ADC market and acceleration in IA driving top-line growth: We expect the favourable market outlook to be the main driver of Datalogic’s 2013-2016 revenue CAGR of 4.7%, given the increasing demand for process and goods traceability and the growing penetration of retail and industrial automation technologies in EMs. (3) Self-help driving margins: DAL has successfully reduced its variable cost base, with COGS notably decreasing from 58.2% in 2009 to 52.9% in 2013. The Company is fully committed to further improving its cost structure, with savings expected from the IA reorganisation and centralised procurement. (4) High cash generation supports future growth: DAL’s historically healthy cash generation has allowed consistent investment in product innovation and external growth (contributing c7% to 2001-2013 sales growth). We believe its sound financial position will continue to support growth both internally and through selected M&A in IA.

● Catalysts: Q3 results are out 7 November. We expect an update on the IA division reorganisation after recent management changes.

● Attractive valuation: Trading at a c40% discount to peers on a 2015 EV/EBITDA and P/E basis, we believe this discount is overdone, given better growth and cash conversion. Our DCF valuation points to 44% upside, and our DCF- and peer multiples-based PT of EUR11.8 gives upside of 42%.

Buy (Initiation) Current price

EUR 8.34 Price target

EUR 11.80 03/10/2014 Milan Close Market cap EUR 474 m Reuters DAL.MI Bloomberg DAL IM Share data

Shares outstanding (m) 57 Enterprise value (EUR m) 547 Daily trading volume 94,227

Performance data

High 52 weeks (EUR) 10.00 Low 52 weeks (EUR) 7.60

Relative performance to SXXP FTSE MCap

1 month 0.5 % 2.9 % 3 months -3.6 % 3.3 % 12 months 4.9 % 1.2 %

Key data

Price/book value 2.5 Net gearing 33.0% CAGR sales 2013-2016 4.7% CAGR EPS 2013-2016 25.9%

Business activities: Leading player in automatic data capture and industrial automation markets, manufacturing barcode readers, sensors, vision systems and laser marking systems for different end-markets.

Non-institutional shareholders: Hydra SpA 67%

6 October 2014

Simona Sarli Analyst +44 20 3207 7834 [email protected]

Y/E 31.12., EUR m 2010 2011 2012 2013 2014E 2015E 2016E

Sales 393 426 462 451 464 489 518

EBITDA 50 59 63 60 68 79 88

EBIT 35 36 16 45 51 63 71

Net profit 18 26 10 27 32 44 54

Y/E net debt (net cash) 77 61 121 97 73 51 19

EPS (reported) 0.32 0.44 0.18 0.47 0.56 0.77 0.94

EPS (recurring) 0.37 0.60 0.79 0.53 0.66 0.83 1.01

CPS 1.83 2.79 1.68 2.27 2.27 2.27 2.81

DPS 0.00 0.14 0.15 0.15 0.16 0.19 0.27

Gross margin 45.6% 46.2% 46.1% 47.1% 47.9% 48.4% 49.2%

EBITDA margin 12.7% 13.9% 13.7% 13.3% 14.7% 16.2% 17.0%

EBIT margin 8.8% 8.6% 3.5% 10.1% 10.9% 12.9% 13.8%

Dividend yield 0.0% 2.3% 2.3% 2.2% 2.0% 2.3% 3.2%

ROCE 7.3% 7.9% 4.4% 8.5% 9.4% 11.2% 11.8%

EV/sales 0.8 1.0 1.1 1.1 1.2 1.1 1.0

EV/EBITDA 6.4 6.9 7.7 8.2 8.0 6.6 5.6

EV/EBIT 9.2 11.2 29.9 10.8 10.8 8.3 6.9

P/E 13.5 13.4 35.8 14.6 14.9 10.9 8.8

Source: Company data, Berenberg


2

Datalogic SpA – investment thesis in pictures

Chart 1: Leading player in the highly consolidated ADC market, No.1 in POS retail scanners and No.3 in handheld scanners globally

Chart 2: Well positioned in the high-growth IA market, Datalogic is market leader globally in industrial stationary scanners with a 26% market share, twice the share of the market held in 2008

Source: Berenberg estimates, VDC research Source: Berenberg estimates, VDC research

Chart 3: Recovering ADC market and further acceleration in IA are the main drivers of DAL’s 2013-2016 revenue CAGR of 4.7%

Chart 4: We expect the centralisation of procurement at group level to start generating a positive impact on gross margin from the end of 2014/beginning of 2015

Source: Berenberg estimates, VDC research Source: Berenberg estimates

Chart 5: Today’s even stronger balance sheet will support future growth

Chart 6: Attractive valuation

Source: Berenberg estimates Source: Berenberg estimates

POS retail scanners Handheld scanners

DAL, 30%

Other

Players, 70%

2008

DAL, 33%

Other

Players, 67%

2013

DAL, 32%

Other

Players, 68%

2008

#1 Globally

#1 EMEA

#1

EMEA

#1 Globally

DAL, 33%

Other

Players, 67%

2013

Industrial Stationary scanners

DAL, 26%

Other

Players, 74%

2013

DAT,13%

Other

Players, 87%

2008

#1Globally

#3 Globally

(USDbn) CAGR13-16E CAGR13-16E

Automatic Data Capture Industrial Automation

0.8 1.10.3

0.40.9

1.0

2.5

2.7

0.00.51.01.52.02.53.03.54.04.55.05.5

2013A 2016EMobile computersHand held scannersPOS retail scannersSelf-check out solutions

+5.0%

+3.1%

4.51

5.22

+3.3%

+12.7%

+5.0%

0.4 0.50.5 0.60.6 0.70.6

0.7

1.9

2.2

0

1

2

3

4

5

2013A 2016E

Sensor and Safety LasermarkingVision SystemsIdentification

3.93

4.56

+4.4%

+7.5%

+7.5%

+5.1%

+5.1%

+5.1%

(USDbn)(EURm)

228.9249.3 238.5 241.6 252.2 262.8

53.8% 53.9% 52.9% 52.1% 51.6% 50.8%

0.0%

8.0%

16.0%

24.0%

32.0%

40.0%

48.0%

56.0%

0.0

50.0

100.0

150.0

200.0

250.0

300.0

2011A 2012A 2013A 2014E 2015E 2016E

COGS as a % of sales

7761

121

97

73

51

19

1.5x

1.0x

1.9x

1.6x

1.1x

0.6x0.2x 0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

0

20

40

60

80

100

120

140

Net Debt (EURm) ND/EBITDA (x)

Value per share (EUR)

6.99

11.30

11.61

10.02

10.00

12.00

12.46

11.32

6 7 8 9 10 11 12 13 14

52W High (10/06/14) / Low(30/09/13)

Current PT range

DCF (WACC: 8.2%-9.2%; LT rate:2.0%-3.0%)

Trading Comps (2015EEV/EBITDA and P/E)

Berengerg TP: EUR11.8

DCF at 8.7% WACC and 2.5% LT rate: EUR12.02

Current share price: EUR8.34


3

Datalogic SpA – investment thesis

Two-minute summary

Based in Calderara di Reno (Bologna), Italy, Datalogic manufactures barcode readers, mobile computers, sensors, vision systems and laser marking systems for retail, manufacturing, transportation and logistics and healthcare applications. Given its strong positioning in the ADC and IA markets, which are protected by high barriers to entry, as well as its growing exposure to EMs, we believe that DAL is well positioned to benefit from strong underlying markets. Increasing demand for process and goods traceability, as well as increasing penetration of retail and industrial automation technologies in EMs, represent the main growth catalysts for both the automatic data capture and industrial automation markets. These markets are expected to grow at a CAGR of 5.0% and 5.1%, respectively, over the next three years. DAL’s solid equity story is also evident from its above-average growth profile and cash conversion ratio, which we expect will continue supporting investments in R&D – critical to success in this sector – as well as in external growth.

The Company’s valuation is very attractive, with the stock currently trading at a c40% discount to peers (Cognex, Honeywell, Scansource and Zebra Technologies) on 2015 EV/EBITDA and P/E. We think the share price de-rating in the last three months looks overdone, given that Datalogic offers, on average, a better growth profile and cash conversion compared to peers – only partially offset by lower profitability. Our target price of EUR11.8, based on a 70:30 weighting between DCF analysis and multiples, indicates 42% upside potential. Based on our earnings forecasts, the stock is currently trading at 2015E P/E multiple of 10.9x for 26% EPS CAGR 2013-2016E, giving a PEG of 0.4x.

Key investment point 1: Leading player in markets with high barriers to entry

While Datalogic might not be well known in the wider investor community, the Company is one of the global leading players in ADC and in the IA market. Ranked within the top three globally in the ADC market, with a 10% share, Datalogic has an even stronger position in its higher-growth segments, namely POS retail scanners and handheld scanners, which represent c28% of the overall ADC market and c70% of the Company’s ADC division revenues. It is also global market leader in industrial stationary scanners, a niche of IA accounting for c23% of the market, with a 26% market share. We believe that in the next few years the Company will continue to benefit from its leading positioning in both ADC and IA since its reference markets are protected by high barriers to entry, namely: (a) technology, given that the key components of DAL’s product offerings (eg scan engines) are protected by patents; (b) the ability to continue innovating; (c) well established relationship with large distributors and system integrators; and (d) high consolidation in the ADC market, where Datalogic, together with the other top-two players, controls c70% of the market.

Key investment point 2: The recovering ADC market and further acceleration in IA are the key catalysts for Datalogic’s top-line growth

We expect the favourable ADC and IA market outlook to be the main growth driver behind Datalogic’s 2013-2016 revenue CAGR of 4.7% given the increasing


4

demand for process and goods traceability, as well as growing penetration of retail and industrial automation technologies in EMs. In particular, VDC Research(1) forecasts the IA market to grow at a 5.1% CAGR from USD3.9bn in 2013 to USD4.6bn in 2016 as a result of companies focusing on streamlining their supply chain and improving operational efficiency, stricter regulations on drug traceability, and increasing penetration of IA technologies in EMs. At the same time, after a weak 2012 and a 2013 showing some signs of recovery, VDC Research expects the ADC market to further improve globally and to grow at a 5.0% CAGR from USD4.5bn in 2013 to USD5.2bn in 2016, driven by the increasing adoption of 2D bar codes and the growing penetration of retail automation technologies in EMs.

Key investment point 3: Company self-help initiatives – margin expansion

In the past few years, Datalogic has been really effective in optimising its cost base. Since 2009, its EBITDA margin has improved by c700bp from 6.3% to 13.3% in 2013 driven, predominantly, by a reduction of COGS, which decreased from 58.2% to 52.9%, and a reduction of distribution expenses, which went from 21.8% to 18.5%. This margin improvement was the result of extensive cost optimisation initiatives, namely the simplification of the ADC production platform, which started in 2011, as well the re-organisation of Datalogic’s business units and its distribution platform by reference markets (ADC and IA) rather than by product. While significant progress has already been made, we expect further profitability improvements in the next three years, as the Company is currently rolling out an internal reorganisation plan. The new plan includes procurement at group level through a single purchasing centre located in China, as well as the reorganisation of the IA division. We forecast that the implementation of this reorganisation plan will result in an additional margin improvement of c370bp. We expect the EBITDA margin to increase from 13.3% in 2013 to 17.0% in 2016.

Key investment point 4: High cash generation supports future growth

Since 2008, Datalogic has delivered an impressive cash conversion ratio in the range of 75-180%, consistently well above the median for its peers. Its high cash conversion has provided the Company with significant flexibility to consistently invest in R&D (during the downturn also) and to enhance its technological know-how through bolt-on acquisitions (which we estimate contributed 7% to total 2001-2013 revenue CAGR of 12%). At the same time, management has remained focused on maintaining a conservative capital structure, with leverage consistently below 2x since 2010. In the absence of M&A, and on the back of its solid market positioning, complemented by a disciplined investment strategy and strict working capital management, we think Datalogic is well placed to continue generating solid cash flows and, thus, further strengthen its balance sheet – in our base case, we forecast a net cash position for the Company by 2017. This will leave plenty of room to even increase investments in R&D – essential for maintaining technological leadership in a rapidly evolving market – and to continue actively looking for interesting European and North American targets in the IA market, as reflected in our upside case.

Berenberg versus consensus

Our estimates are more or less in line with consensus, except for 2014, when we are slightly below consensus. While we believe the reorganisation of IA will

1 M2M market intelligence and advisory firm for technology suppliers and engineering companies.


5

represent meaningful growth upside in the medium term, we also believe it will take some time, probably more than market expects, for positive signs to become evident in the financials.

Relative and absolute valuation

Our target price of EUR11.8, based on a 70:30 weighting between DCF analysis and multiples, indicates close to 42% upside potential.

Our DCF yields a fair value of EUR12.02 per share based on 8.7% WACC, a 2.5% terminal growth rate and a terminal EBIT margin of 13.7%. We believe this assumption is fair, given the on-going roll-out of cost efficiency initiatives, new product launches and the increasing contribution of the industrial automation division to group sales (currently representing roughly a third of group revenues and expected to increase to c50% of group sales).

Our multiples-based valuation uses the peer average for 2015E EBITDA and earnings multiples. However, it is worth mentioning that the valuation based on the trading multiples of listed comparables has some limitations, as few companies with a similar business model and geographic exposure are listed, or only a small part of their business operates in this sector (eg Honeywell). We include in our peer set Cognex, Honeywell, Scansource and Zebra Technologies, and we apply a 20% discount to their average multiples in order to reflect Datalogic’s smaller size and lower profitability, although these are offset by a better growth profile and stronger cash conversion ratio.

Blue sky/doomsday scenario

In our blue sky scenario, we assume that the Company will continue to grow through acquisitions, and that the restructuring of IA will generate a further margin uplift compared to what we forecast in our base case. In particular, we assume that annually, between 2015 and 2017, Datalogic will make a fully cash-financed acquisition for an EV of EUR50m, and will pay 8.0x LTM EBITDA. At the same time, we assume that DAL’s EBITDA margin will reach 18% by 2018, 110bp higher than in our base case. Based on this, we obtain a fair value of EUR13.3 per share, equivalent to 61% upside to the current share price.

Conversely, in our worst case scenario, we assume Datalogic will not succeed in the implementation of its cost efficiency initiatives and will lose significant market share in IA. This scenario envisages a 4% downside risk to our 2016 revenue estimates and a 36% downside risk to our 2016 EPS estimates. Based on these assumptions, we obtain a fair value of EUR7.71 per share, only 7.5% lower than the current share price.

Key risks

Technological changes and the ability to continue innovating ADC and IA are rapidly evolving markets where the ability to innovate is key for retaining market share at least. DAL’s track record in product innovation, consistent investment in R&D (historically between 8-10% and expected to increase to 10.5-11.0% of sales) as well as its full pipeline of upcoming product launches in H2 2014 and 2015 give us enough reassurance on its ability to successfully innovate and respond to evolving market needs.

Raising Asian competition in the ADC market While we have observed increasing Asian competition in the ADC market, this trend has mainly been limited to more commoditised products (eg mobile


6

computers). DAL focuses (and will increasingly focus) on retail and handheld scanners, which represent more than two-thirds of ADC division revenues.

Replacement of purpose-built scanners with consumer products In the last few years, a new trend observed has been the replacement of purpose-built scanners (like those of Datalogic) with consumer products (eg smart phones, tablets). However, we think the risk arising from this is only limited to (very) small businesses, as purpose-built scanners have significantly higher performance standards than consumer products.

Will radio frequency identification tags replace bar codes? Even though radio frequency identification (“RFID”) technology does not yet enjoy extensive commercial use, it could potentially replace 1D and 2D bar codes in the future. However, we do not believe that this technology represents a significant risk for Datalogic in the next five years, given its prohibitive cost compared to a traditional bar code, and also because it still requires significant technological improvements.

FX Risk We think Datalogic is also exposed to FX risk, as a little over 50% of its revenues are generated outside Europe. We understand the Company is mainly exposed to the USD, and that, even though it does not use derivatives, it mitigates its exposure to the USD through natural hedging. A 1% appreciation in USD translates into a negative impact on EBIT of EUR200,000, equivalent to 0.4% of EBIT in 2013.


7

Company overview

• A leading player in niche segments of automatic data capture and industrial automation markets, Datalogic manufactures barcode readers, sensors, vision systems and laser marking systems.

• It serves a broad range of blue chip companies operating in different end markets, including retail, manufacturing, transportation, logistics, healthcare, etc.

• DAL dominates the higher growth segments of the highly consolidated ADC: No.1 globally in POS retail scanners with a 33% share, and No.3 in hand-held readers. The Company is also a leading manufacturer in IA, where it is No.1 in industrial stationary scanners with a 26% share.

• The Company has a well diversified geographic footprint, with a direct presence in 30 countries globally and only 8% of revenues in Italy.

History

Established in 1972 in Bologna, Italy, as a producer and designer of photoelectric sensors for the textile, packaging and ceramic industries, Datalogic soon made inroads into foreign markets. In 1974, it started distributing its products in Germany, and then two years later in Japan. Since then, its global footprint has grown considerably, in particular through 11 acquisitions, which also contributed to expanding the Company’s technological know-how in automatic data capture and industrial automation.

Today, Datalogic is among the global leaders in the ADC and IA markets, and is present in over a third of supermarkets and POS worldwide, as well as in airports and the shipping and postal services.

Business model

A leading player in the automatic data capture and industrial automation markets, Datalogic manufactures barcode readers, sensors, vision systems and laser marking systems used for different end-market applications, including retail, manufacturing, T&L, healthcare and other industries.

Datalogic serves a broad range of blue chip customers (eg Walmart, Daimler, Pirelli, FedEx and UPS), with its top five accounts representing just 10-15% of sales.

The Company operates through three segments:

Automatic data capture (63% of 2013 sales): specialises in high-performance fixed scanners for retail and manual bar code readers, which represent the vast majority of divisional revenues. Datalogic also manufactures mobile computers used for warehouse management, automation of sales and field forces and the collection of data at stores. ADC products are manufactured at Datalogic’s facilities in Vietnam (c80% of volumes) and Slovakia (c20%).


8

Chart 7: ADC product offering

Source: Company, Berenberg

Industrial automation (30%): manufactures laser and imaging fixed barcode readers, photoelectric sensors and equipment for industrial automation and security, remote cameras and software for artificial vision, barcode reader systems and technologies for the automation of logistics and postal companies, and industrial laser markers.

On-counter readersIn-counter scanners / Scales

Handhelds Mobile computers


9

Chart 8: IA product offering

Source: Company, Berenberg

Informatics (7%): sells and distributes products and solutions for automatic identification for small and medium-sized companies.

The Company has a well diversified geographic footprint, with a direct presence in 30 countries globally and only 8% of revenues generated in its domestic market. The remaining 92% of group sales mainly come from the rest of Europe (41%), North America (32%) and, to an increasing extent, APAC (13%), as detailed in the pie chart below.

Safefy (light curtains, control units, photocells)

Machine vision (vision sensors, cameras, software, vision processors, accessories)

Fixed Industrial bar code readers (laser scanners, imagers, controllers for high speed data collection)

Phoelectric sensors


10

Chart 9: 2013 Sales by geography Chart 10: 2013 sales by industry

Source: Company Source: Company

Chart 11: 2013 Sales by division Chart 12: 2013 EBITDA by division

Source: Company Source: Company

Market structure and competitive landscape

Datalogic operates in the automatic data capture and industrial automation markets.

Following a weak 2012, the ADC market returned to growth in 2013, and VDC Research expects it to reach USD5.22bn by 2016 (see charts below). Datalogic is a top three player globally in the overall ADC market – with a 10% market share – where it mainly competes with Zebra Technologies/Motorola and Honeywell/Intermec. Together with the other two players, Datalogic controls c70% of the ADC market, leaving limited room for potential new entrants.

Chart 13: ADC market Chart 14: Leading player in the consolidated ADC market

Source: Berenberg, VDC research Source: Berenberg, VDC research

Rest of Europe, 41%

North America, 32%

Asia Pacific, 13%

ROW, 6% Italy, 8%

Retail, 38%

Manufacturing, 37%

T&L, 16%

Healthcare, 6%Other, 3%

ADC63%

IA30%

Informatics7%

ADC83%

IA13%

Informatics4%



0.8 1.10.3

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+5.0%

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0.4 0.50.5 0.60.6 0.70.6

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2013A 2016E


3.93

4.56

+4.4%

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+5.1%

+5.1%

+5.1%

(USDbn)

2013 Revenues in $M

20

13

M

arket Sh

are


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Conversely, industrial automation has shown stronger resilience during the downturn, and is expected to grow at a 5.1% CAGR to USD4.6bn by 2016. This is due to the increasing demand for traceability of processes and goods, as manufacturers aim to improve product quality and customer satisfaction, as well as rising penetration of IA technologies in EMs. The industrial automation market is highly fragmented, but Datalogic holds a leading position in some of its niches, eg industrial stationary scanners, where it is the global market leader with a 26% share.

Chart 15: IA market Chart 16:Well positioned in the high growth IA market




0.8 1.10.3

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+5.0%

+3.1%

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5.22

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+12.7%

+5.0%

0.4 0.50.5 0.60.6 0.70.6

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2013A 2016E


3.93

4.56

+4.4%

+7.5%

+7.5%

+5.1%

+5.1%

+5.1%

(USDbn)

$400 M$200 M $300 M

12%

6%

2%

4%

8%

2013 Revenues in $M

Industrial Stationary Scanners

#1 WW - 26.2% mkt share

20

13

M

arket Sh

are

$100 M


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Chart 17: A Well-diversified geographic footprint

Source: Company Note: Revenues breakdown by country as of H1 2014.


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Chart 18: Business overview

Source: Company, Berenberg, VDC Research 2013 and 2014. Note: Revenues by division do not add up to group sales, due to consolidation adjustments. (1) Based on VDC Research 2013; all other market data is based on VDC Research 2014.

Key

Competitors

Clients

Reta

il

Man

ufa

ctu

rin

g

T&

L

Healt

hcare

Automatic Data Capture (ADC)Division Industrial Automation (IA) Informatics

Description

• Global leader in high performance fixed scanners for retail

and major EMEA supplier of manual bar code readers

• Leading player in the mobile computer market for

warehouse management, automation of sales and field

forces and the collection of data at stores

• Products and solutions for automatic identification,

recognition and marketing in the IA market

• Product offering includes: laser and imaging fixed barcode

readers, photoelectric sensors and equipment for industrial

automation and security, remote cameras and software for

artificial vision, barcode reader systems and technologies

for the automation of logistics and postal companies,

industrial laser markers

Distribution of automatic identification products and

solutions for small and medium sized companies

Market trends

• CAGR 2013-2016 +5.0%, with strong growth expected in

APAC

• CAGR 2013-2016 of 3.3% and 5.0% for handheld scanners

and POS retail scanners, respectively (Datalogic‘s products)

• Fragmented IA industry

• CAGR 2013-2016 of 5.1% in available markets

• Growing technology convergence (laser and vision based

technology)

• n. m.

Datalogic’s

positioning

• POS Retail Scanners: #1 WW – 32.8% mkt share

• Handheld Scanners: #1 in EMEA – 32.8% mkt share, #3

WW – 16.9% mkt share

• Mobile Computers #3 in EMEA – 7.3% mkt share , #3

WW – 3.9 % mkt share

Industrial Stationary Scanners

• #1 WW – 26.2% mkt share

• #1 in Americas – 31.3% mkt share(1)

• #2 in EMEA – 29.1% mkt share(1)

• n.m.

Distribution

channels

• c70-80% sold through distributors and system integrators

• c20-30% sold directly to end-users

Sales (EURm)

and EBITDA

margin

% of

Datalogic’s

revenues 63%

7%

• n.m.

30%

26

9 29

8

29

8

28

2

29

4

30

8

32

3

11.9%13.5%

15.5%17.9%

0%

5%

10%

15%

20%

200

250

300

350

2010 2011 2012 2013 2014 2015 2016

91 96

13

1

13

8

14

0

15

1

16

4

12.0%14.3%

5.7% 5.8%0%

5%

10%

15%

20%

50

100

150

200

2010 2011 2012 2013 2014 2015 20163

2 34

31

30 30 31

12.7% 12.1%

8.3%

0%

5%

10%

15%

10

20

30

40

2010 2011 2012 2013 2014 2015 2016

13-16 CAGR: 4.6%10-13 CAGR: 1.6%13-16 CAGR: 5.9%10-13 CAGR: 15.0%

13-16 CAGR: 0.0%11-13 CAGR: -2.2%


14

Key investment point 1: Leading player in markets with high barriers to entry

• Datalogic is a top three player globally in the ADC market, with a 10% share, and has an even stronger positioning in its higher-growth segments – namely in POS retail and handheld scanners. The Company is also a leading player in IA, where it is No.1 in selected niches (eg industrial stationary scanners).

• We believe that, following years of solid growth, DAL will continue to benefit from its leading positioning in the high-growth IA and recovering ADC markets, which have significant barriers to entry. Technology is protected by patents and complemented by: i) the ability to continue innovating, ii) established relationships with distributors, iii) system integrators and solution providers, and iv) significant consolidation in the ADC market. This will significantly reduce the risk of new entrants, as well as limit price erosion.

A top three player globally in the ADC market with a 10% market share, Datalogic is even stronger in the higher-growth segments of this market, namely POS retail and handheld scanners, which represent c28% of the overall ADC market. Datalogic is the global market leader in POS retail scanners, with a 33% share; No.1 in in handheld scanners in EMEA, with a 33% share; and No.3 globally, with 17% share. By leveraging its leadership positioning and distribution network in retail, the Company is also expanding into self check-out solutions for retailers. This is a niche segment of the ADC market worth cUSD0.8bn according to VDC Research, and it is expected to grow at a 2013-2016 CAGR of 12.7% to USD1.1bn.

DAL is also a leading player in some niches of IA, namely industrial stationary scanners, which presents c23% of the total IA market and roughly half of Datalogic’s IA division sales. In this segment, Datalogic is the global No.1, with 26% market share. On the back of its positioning in industrial stationary scanners and its customer base in IA, Datalogic is also rapidly expanding in machine vision, one of the highest growth segments in the IA sector, and where it started operating in 2012 following the acquisition of the American PPT Vision.

Datalogic’s addressable market in ADC and IA

Chart 19:Datalogic focuses on the ADC market’s higher growth segments: POS retail scanners and handheld scanners represents 28% of the overall ADC market and c70% of Datalogic’s ADC division sales

Chart 20: Datalogic is the global market leader in industrial stationary scanners, which represent c23% of the total IA market


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Datalogic's main focus area

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Datalogic is global #1 industrial stationary scanners with a 26%

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15

In both markets, Datalogic competes with ‘giants’, like Zebra Technologies and Honeywell/Intermec in the ADC market, and Keyence and Panasonic in the IA market. However, by positioning itself in selected market niches, it has been able to retain and, in some cases, even improve its positioning (see charts below).

Datalogic’s Market Share Evolution in the ADC and IA markets

Chart 21: POS Retail Scanners (ADC)

Chart 22: Handheld Scanners (ADC)

Chart 23: Industrial Stationary Scanners (IA)

Source: Berenberg, VDC Research

High barriers to entry protect Datalogic’s competitive advantage

We believe that, following years of solid growth (sales CAGR 2001-2013:+12%), DAL will continue to benefit from its positioning in the IA and ADC markets, which are protected by high barriers to entry. We expect barriers to entry not only to limit the risk of potential new entrants but also to get around price erosion, which would ultimately affect Datalogic’s profitability. In particular, we see Datalogic’s market position being supported by the following.

Technology protected by patents… Technology represents a high barrier to entry to both the ADC and IA markets. Products with higher technological content and performing standards are launched every year, making it more difficult for new and smaller manufacturers to remain competitive in a fast-evolving market. Moreover, the key components of Datalogic’s product offering, such as scan engines, are protected by patents, which represents a high barrier to entry – in particular for Asian manufacturers. In addition to the patent for scan engines, Datalogic’s technological know-how is secured by a constantly growing portfolio of many other patents, currently totalling c1,100, of which c100 were only filed in 2013 (see chart below).

DAL, 26%

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2013 #1

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16

Chart 24: Datalogic’s patent portfolio

Source: Company

…complemented by ability to continue innovating DAL has constantly focused its efforts on developing innovative products which are not only customised to specific local markets but also respond to evolving customer needs. In order to do this, the Company has consistently prioritised its investments in R&D over the years, including during a downturn. As shown in the chart below, DAL has historically invested between 7% and 10% of sales in R&D, which is in line with Zebra Technologies’ spend in the last three years, and significantly above that of Honeywell. In the next three years, we expect the Company to remain focused on product and technological innovation, and to even slightly increase its R&D spend to 10.5-11% of sales.

Chart 25:Datalogic’s R&D spend compared to peers

Source: Berenberg, Datalogic

As a result of its significant investments in R&D, Datalogic has developed a broad R&D platform, which today counts more than 350 engineers and 12 centres across different continents, with an additional centre soon to open in China (where DAL plans to strengthen its presence). In R&D, the Company’s capabilities have resulted in a solid track record of new product launches, as detailed in the chart below, which on average generate c25% of total revenues.

264 283 328 342

682761 789

867 885 8981,003 1,023

1,090

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

(EURm) R&D as a % of sales

24.9 26.3 26.2 32.0 35.6 41.8 41.6 44.00.2 1.3 7.05.3

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DAL Expensed R&D DAL Capitalised R&DDAL R&D as a % of sales Zebra R&D as a % of salesHoneywell R&D as a % of sales


17

Chart 26: Datalogic’s new product launches

Source: Company

We expect this trend to continue, at least in the medium term, on the back of a full pipeline of new products – some of which are only just being announced. In August this year, for instance, Datalogic further broadened its offering of wireless 2D handheld scanners with the introduction of QuickScan QBT2400 and QM2400. The new products respond to the increasing popularity of digital imaging technology as a result of the move from 1D to 2D bar codes, and to the ongoing shift to field mobility deployments.

Established relationships with large distributors, system integrators and solution providers In both the ADC and IA markets, the vast majority of products (c70-80%) are sold through distributors, system integrators and solution providers. Therefore, developing relationships with some of the main names helps manufacturers broaden their end-user base. After talking to some large distributors and system integrators, we understand that the key factors they look at when deciding which brands to distribute or use for their projects are:

(a) breadth of product offering: it is more efficient for them to deal with fewer suppliers who provide products for different end markets, eg Datalogic’s. The Company’s products are sold through some of the largest distributors and system integrators globally, namely Scansource, Bluestar, Wincor Nixdorf (mainly for products used in retail), Toshiba and Idec, which sells exclusively Datalogic products in Japan.

(b) brand name: system integrators and solution providers have a strong preference for brands their customers are familiar with, since well-known brands work as a marketing tool advertising the high quality of their service offering.

(c) local aftersales presence and business continuity: when deciding what to buy, end users, distributors and system integrators prefer brands which can provide easy access to local aftersales services and guarantee these services throughout the entire product life. As a company with a history dating back to 1972 that ensures business continuity and has a direct presence in 30 countries worldwide, and an even broader reach through c1,000 external partners, Datalogic therefore enjoys a clear competitive advantage versus smaller and newly established players.

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Product Update New line of products Breakthrough innovation


18

High level of consolidation in the ADC market Together with Zebra Technologies and Honeywell/Intermec, DAL controls c70% of the ADC market. This leaves very limited room for further consolidation and for potential new entrants.

Conclusion

Datalogic in one of the key global players in the higher growth segments of the ADC market, namely POS retail and handheld scanners, and in some niches of the of the industrial automation market.

We think the Company will retain its leading positioning in both ADC and IA in the next few years since its reference markets are protected by high barriers to entry, including:

(a) technology protected by patents: the key components of DAL’s product offering (eg scan engines) are protected by patents which Datalogic, together with other few companies globally, owns itself;

(b) the ability to continue innovating: DAL’s consistent investments in R&D and its successful track record of new product launches reassure us on its ability to continue developing new technologies as the market and customer needs evolve;

(c) established relationships with large distributors, system integrators and solution providers, which is critical for broadening access to end users; and

(d) high consolidation in the ADC market: together with Zebra Technologies and Honeywell, DAL controls 70% of the ADC segment.

We are thus convinced that Datalogic is well positioned to benefit from the recovery in the ADC market and from the growth acceleration in IA, which we analyse in detail in the next section.


19

Key investment point 2: Recovering ADC market and further acceleration in IA: the key catalysts for top-line growth

• We expect the favourable ADC and IA market outlook to be the main driver behind Datalogic’s top-line growth.

• We estimate that the IA market will grow at a 2013-2016 CAGR of 5.1% as a result of increasing demand for traceability of processes and goods, focus among companies on streamlining the supply chain and improving operational efficiency, stricter regulations on drug traceability and increasing penetration of IA technologies in EMs.

• The ADC market in developed countries has returned to growth, and we expect it to further improve globally, driven by the increasing adoption of 2D bar codes and the growing penetration of retail automation technologies in EMs.

In the next three years, we forecast that Datalogic’s top line will grow at a [4.7%] CAGR driven by:

(a) a supportive market outlook in both ADC and IA, which we expect to be the main catalyst behind Datalogic’s top-line growth in the next few years (see chart below); and,

(b) improving market share as a result of Datalogic’s recent product launches in ADC (eg self check-out solutions, scanners for healthcare and public administration applications), as well as in IA, driven by the increasing convergence between the two segments.

Chart 27: Recovering ADC market and further acceleration in IA to drive Datalogic top-line growth

Source: Berenberg and VDC Research 2014 for market growth estimates. Note: “Others” include Informatics.

In the next few paragraphs, we analyse in more detail the growth acceleration in IA, as well as the recovery of the ADC market and how we expect that to impact Datalogic’ top line growth in the next three years.

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Market share improvement to contribute EUR15m to top line growth, equivalent to a 13-16 CAGR of 1.1%


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Industrial Automation acceleration

Industrial automation has demonstrated strong resilience during a downturn, and, as the economy in developed markets improves, VDC Research forecasts that it will grow at an average of 5.1% pa – from USD3.9bn in 2013 to USD4.6bn in 2016. The IA market has been – and will continue to be – positively impacted in the medium term by:

(a) stricter regulations on drug traceability;

(b) manufacturing companies increasingly focusing on streamlining their supply chain and improving operational efficiency; and

(c) increasing penetration of IA technologies in EMs.

We expect the strong market outlook to be the main driver of Datalogic’s IA revenue growth. We forecast divisional sales will grow at a 2013-2016 CAGR of 5.9%, which is slightly above the market growth of 5.1%. Following an expected decline in market share in 2014, mainly due to poor performance in North America (as the integration of Accu-Sort is taking longer than initially expected), we expect Datalogic’s market share in IA to start improving from 2015 onwards, reaching c27% by 2016 as the benefits of the on-going restructuring of the division start to materialise (see table below).

Chart 28: Datalogic’s IA revenue development

Source: Berenberg

In the next few paragraphs, we analyse in more detail growth drivers for the industrial automation market.

Stricter regulation on drug traceability In the last few years, we have observed increasingly strict regulations on traceability, safety and security of drugs throughout their entire supply chain. This trend is the result of the alarming increase in bogus medicines detected globally. So far, most of the action taken to reduce this issue comes from the EU, with its Falsified Medicines Directive, and the US, with the e-Pedigree laws.

Since 2013, all EU countries have implemented the European Medicines Verification System (“EMVS”). The EMVS, which is the result of the EU Falsified Medicines Directive (directive 2011/62/EU), enables manufacturers to place a 2D bar code on their products to show that they are not counterfeit; dispensers can scan them to verify this.

Meanwhile, US congress is working on e-Pedigree legislation to create a nationwide pharmaceutical track and trace system. However, some States, namely California, have already approved the enforcement of drug traceability systems, which will start taking effect on a staggered basis from January 2015 to July 2017. All drug products will need to have electronic pedigrees (ePedigrees). An ePedigree is an

2013A 2014E 2015E 2016E

Market (EURm): 526 552 581 612

% growth 4.9% 5.3% 5.3%

Datalogic market shares: 26.2% 25.5% 26.1% 26.7%

Datalogic's IA revenues 138 140 151 164

% growth 1.9% 7.8% 8.1%


21

electronic log using both the bar codes and RFID tags of all parties at all points in the supply chain that possess a given drug.

Given Datalogic’s significant exposure to these geographies (c70% of sales) and its new products, which are specifically designed for healthcare applications (eg Lynx PDA, which is rapidly becoming a very popular product since Pharmagest used it to run its OPTISTOCK application for hundreds of pharmacies in Belgium, France and Luxemburg), we think it is well placed to benefit from stricter drug traceability regulations in the US and Europe. In the next three years, we expect Datalogic’s revenues from healthcare products to grow at a double-digit rate. In particular, we expect 2014 sales from healthcare to grow in the range of 30-40% from cEUR27m in 2013 to EUR35-38m.

Increasing focus on supply chain streamlining and production efficiency In April 2014, IDC Manufacturing Insights published the results of a survey on the critical business initiatives that European companies will prioritise in the next three years. Not surprisingly, the improvement of operational efficiency and supply chain streamlining came out to have the highest priority. In order to achieve this, European companies think they need first to improve their ‘plant floor visibility’ and, thus, have a better understanding of the status and performance of plant floor operations in an optimal timeframe. According to the survey, almost 50% of the companies have only limited or basic level plant floor visibility (production data collected only few times during the day, and only for some areas of the floor), leaving plenty of room to improve their industrial automation level.

The chart below shows the distribution of European manufacturers at the different levels of plant floor visibility.

Chart 29: Current distribution of European manufacturers at the different levels of plant floor visibility

Source: IDC Manufacturing Insights. Notes: Limited visibility indicates that production data is collected manually from time to time. Basic visibility indicates that data are collected only for some area of the plant floor and only each day or at each shift through the use of ruggedised handheld devices and bar codes. Integrated visibility indicates that data are collected at the end of batches, work orders or production phases through the use of ruggedised handheld devises and bar codes. Extended visibility indicates that data are collected in real time from moving assets through the use of sensors and RFID technology. Advanced visibility indicates that data are collected in real time by using big data analytics, internet of assets, cloud, etc.

According to this study, 65% of the companies with a basic or integrated level of


22

floor plan visibility recognise that over the next three years they will need to invest in IA technologies in order to speed up inbound/outbound operations and reduce their inventory and work-in-progress levels. Among the key technologies that companies plan to adopt to streamline their supply chain they mention 2D bar code technologies, given their flexibility and because they are information richer than 1D bar codes.

Therefore, we believe that, on the back of its positioning in IA and, in particular, in the manufacturing sector, Datalogic will benefit in the medium term from increasing focus in Western countries on improving plant automation levels.

Increasing penetration of IA technologies in EMs In the past decade, the share of world factory production in EMs has dramatically increased, going from 27% in 2000 to 46% in 2011, mainly led by China, whose share in world manufacturing output doubled from 10% in 2005 to 20% in 2011. This trend has accelerated, particularly over the past five years, as shown in the chart below.

Chart 30: Distribution of world manufacturing output by geography

Source: Berenberg, FT, HIS Global Insight, UN Statistical service

The shift in industrial production from DMs to EMs can be explained by favourable demographics and extension of the middle class base in Asia, which has resulted in: i) increasing investments in capacity to meet local demand, and ii) significantly lower production costs compared to Western countries. However, in some EMs, including China, Thailand and Malaysia, the supply of surplus labour is decreasing rapidly, driving wage costs up. As detailed in the chart below, personnel expenses between 2009 and 2012 have increased by more than 50% in China and Thailand, and by c40% in Malaysia. On a comparable basis, this makes it less profitable to carry out production in these countries.

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Chart 31: Annual personnel expenses in Asia’s manufacturing sector

Source: Japan External Trade Organization. Note: Personnel expenses include basic salary, allowances, social security, overtime payments and bonuses.

In addition to raising wage costs, another catalyst which will positively contribute to the penetration of IA technologies in EMs is the currently low “robot density” in these countries. It is estimated that in EMs there are only 11 industrial robots per 10,000 manufacturing employees compared to 149 robots for developed countries. This still leaves significant room to increase the level of industrial automation and, thus, reduce personnel expenses.

Given its growing exposure to APAC (2009-2013 sales CAGR of 16.9% and contribution to DAL’s sales from 9.7% in 2009 to 12.5% in 2013) and the recent investments made to open a new R&D centre in China, we believe Datalogic will benefit from the increasing automation of the manufacturing process in EMs.

Recovering ADC market in DMs and growing penetration in EMs

Datalogic is well placed to benefit from strong growth in the ADC market, which VDC Research expects to grow at a 5.0% CAGR from USD4.5bn in 2013 to USD5.2bn in 2016. In particular, VDC forecasts that mobile computers will grow at a 3.1% CAGR, while handheld scanners and POS retail scanners are expected to grow at 3.3% and 5.0% CAGRs, respectively. Following a weak 2012 as a result of challenging market conditions, the ADC market in developed countries has returned to growth, and will further improve globally, driven by the increasing adoption of 2D bar codes and higher penetration of retail automation technologies in EMs.

We expect growth in the ADC market to be the main driver of Datalogic’s ADC revenue increase. We forecast the divisional revenues will register a 2013-2016 CAGR of 4.6%. As shown in the table below, we assume revenues from mobile computers will grow in line with the market (ie constant market shares), while for handheld and POS retail scanners we forecast a slight improvement in market share on the back of Datalogic’s new product launches in 2014.

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Chart 32: Datalogic’s ADC revenue development

Source: Berenberg

In the next section, we analyse in more detail the growth drivers for the ADC market.

Shift to 2D bar codes In the last few years, we have observed the increasing adoption of 2D barcodes instead of 1D, since these can accommodate significantly more and varied information, including in different languages, and can be read in any direction.

On the back of its clear technical benefits and the currently still low penetration of 2D bar codes compared to 1D bar codes, we think the penetration of 2D barcodes will continue in the medium term. We expect this trend to translate into growing demand for imager scanners, since traditional laser scanners can only read 1D barcodes, while imagers can read both 1D and 2D barcodes. Indeed, according to a study published by ABI Research in September 2013, in 2012 2D imagers accounted for c48% of barcode reader shipments globally, and this is expected to increase to 62% by 2018, which is equivalent to a CAGR of 4.4%. Therefore, we think the increasing demand for imagers will positively impact ADC market growth in the next three years, and that Datalogic will benefit from this given its strong positioning in handheld imagers. We estimate that, currently, Datalogic’s

2013A 2014E 2015E 2016E

Market (EURm):

POS retail market 241 253 266 279

% growth 5.0% 5.0% 5.0%

Handheld retail scanners 714 738 762 788

% growth 3.3% 3.3% 3.3%

Mobile computers 1,814 1,871 1,929 1,988

% growth 3.1% 3.1% 3.1%

Total addressable market 2,770 2,862 2,957 3,055

Datalogic market shares:

POS retail market 32.8% 33.0% 33.5% 34.0%

Market share improvement 20bps 50bps 50bps

Handheld retail scanners 16.9% 17.0% 17.2% 17.5%


Mobile computers 4.6% 4.6% 4.6% 4.6%


Total addressable market 10.2% 10.3% 10.4% 10.6%


Datalogic revenues:

POS retail market 79 84 89 95

% growth 5.6% 6.6% 6.6%

Handheld retail scanners 121 125 131 138

% growth 3.9% 4.5% 5.1%

Mobile computers 83 85 88 90

% growth 3.1% 3.1% 3.1%

Datalogic's ADC revenues 282 294 308 323


25

handheld scanners are 50/50 split between imagers and lasers, and that next year the revenue contribution of handheld scanners will increase to c55%.

Growing penetration of retail automation technologies in EMs The consuming class in EMs is growing substantially in terms of size and buying power. Euromonitor forecasts that annual disposable income in EMs will develop in the next ten years at a CAGR of 5% versus 2% in developed countries, and that EMs will account for 47% of the world’s total disposable income by 2014, up from 41% in 2013 (see chart below). This is expected to translate into consumption expenditure growing at a faster pace in EMs compared to DMs. By 2024, their contribution to global consumer expenditure will be almost even.

Chart 33: Distribution of disposable income and consumer expenditure by geographic area

Source: Berenberg, Euromonitor

It is therefore not surprising that, as consumer spending in EMs continues to grow dramatically and, at the same time, European and North American leading brands (eg Tesco, Metro, Wal-Mart, Carrefour) experience lower growth in their domestic markets, these brands have started opening more and more stores in high-growth countries. New store openings have given way to increasing penetration of bar codes and, thus, POS retail and handheld scanners in EMs. We expect the world’s leading brands to continue expanding their store footprint in EMs in the medium term, and Datalogic to benefit from this on the back of its increasing exposure both in LatAm, particularly Brazil, and APAC, and from strong relationships with some of the leading European and American brands.

Distribution of annual disposable income by geographic area

Distribution of annual consumer expenditure by geographic area

63% 62% 62% 62% 61% 60% 59% 58% 57% 56% 55% 54% 53% 52% 52% 51% 51% 50% 50% 49% 48% 48% 47% 47% 46%

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Key investment point 3: Company self-help initiatives – margin expansion

• Over the past few years, Datalogic has already successfully reduced its cost base, and we believe more reductions are possible.

• We expect a margin uplift of c370bp by 2016, with the EBITDA margin improving from 13.3% in 2013 to 17.0% in 2016, driven by centralisation of the procurement function at group level and the reorganisation in progress at the IA division.

In the past few years, Datalogic has been very effective in optimising its cost base. Since 2009, its EBITDA margin has improved by c700bp, from 6.3% to 13.3% in 2013. This improvement has been driven by:

(a) lower COGS (down from 58.2% in 2009 to 52.9% in 2013) due to simplification of the ADC production platform, which has resulted in an increase in the division’s productivity, as well as a tightening of control procedures; and

(b) lower distribution expenses (down from 21.8% in 2009 to 18.5% in 2013), as a result of the new organisational structure introduced in 2011. Datalogic’s business units have been reorganised by reference markets (ADC and IA), rather than by products, which has allowed the Company to capture the commercial potential of an integrated distribution platform and, thus, reduce the associated costs.

While significant progress has already been made, we expect further profitability improvements in the next three years. The Company is currently rolling out an internal reorganisation plan which includes centralised procurement at group level and restructuring of the IA division.

We forecast the implementation of this reorganisation plan will result in an additional margin improvement of c370bp, with the EBITDA margin increasing from 13.3% in 2013 to 17.0% in 2016.

Procurement centralised at the group level

Until today, Datalogic’s sourcing was mainly carried out locally, with many of its suppliers being based either in Europe or North America. However, since the end of 2013, the Company has been working on centralising its procurement function at group level through a single purchasing centre in China for both the IA and ADC division. While, in the past, Datalogic was already sourcing some of the materials for its ADC division through a small subsidiary based in Singapore, with a single purchasing centre in China, the Asian sourcing will be handled on a larger scale and will follow a more structured quality control process based on a strict vendor rating system.

However, since the Company is still working on centralising its procurement function, we do believe most of the benefits associated with this project will start materialising from end of 2014/beginning of 2015. Moreover, as shown in the chart below, we expect most of the cost benefits to be achieved mainly in the ADC division, given: a) the larger scale of this division compared to IA, entailing better bargaining power when ordering large volumes; b) that the ADC product portfolio is based only on three main products (retail scanners, handheld scanners and, to a lesser extent, mobile computers), making easier to identify the key suppliers; and (c) that the product offering in IA includes many different technologies (sensors,


27

stationary scanners, vision imaging systems and laser marking), and these products have a higher technological content compared to ADC products.

Chart 34: ADC and IA COGS development


Therefore, we expect COGS at group level to fall from 52.9% of sales in 2013 to 50.8% in 2016, resulting in an EBITDA margin benefit of c210bp by 2016.

Chart 35: Datalogic COGS development


IA reorganisation

In the next three years, we expect a further margin uplift from the ongoing reorganisation of the IA division. In particular, we expect SG&A expenses to decrease from 11% in 2013 to 9% in 2016 as Datalogic will look to further reduce the fixed cost base for IA by streamlining the North American structure of the division.

In addition to this, we believe the recent management changes at the IA division will help Datalogic solve the issues encountered with the North American distribution channel, and finally entail a move from a product-oriented to a more client-oriented approach. However, due to the lack of details on the new market and product strategy for industrial automation, which we hope to learn more about on the Q3 conference call, we do not reflect any further upside on our EBITDA forecasts, apart from decreasing SG&A costs.

(EURm)

162.1 156.4 143.7 145.6 150.9 155.1

48.973.9 77.6 79.5 84.8 90.8

54.5%

52.5%50.9% 49.5% 49.0% 48.0%

50.8%

56.6% 56.3% 56.6% 56.0% 55.5%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

0.0

30.0

60.0

90.0

120.0

150.0

180.0

210.0

2011A 2012A 2013A 2014E 2015E 2016E

ADC COGS IA COGS ADC COGS as a % of ADC sales IA COGS as a % of IA sales

(EURm)

228.9249.3 238.5 241.6 252.2 262.8

53.8% 53.9% 52.9% 52.1% 51.6% 50.8%

0.0%

8.0%

16.0%

24.0%

32.0%

40.0%

48.0%

56.0%

0.0

50.0

100.0

150.0

200.0

250.0

300.0

2011A 2012A 2013A 2014E 2015E 2016E

COGS as a % of sales


28

Key investment point 4: High cash generation supporting future investments in R&D and leaving room for potential M&A

• Since 2008, Datalogic has delivered a cash conversion ratio in the range of 75-180%, well above the median level for its peers. The Company’s superior cash conversion has been driven by a disciplined investment strategy, as well as by strict working capital management.

• High cash conversion has provided the Company with significant flexibility to consistently invest in R&D and to enhance technological know-how through bolt-on acquisitions, which we estimate contributed 7% to total 2001-2013 revenue CAGR of 12%. At the same time, management has remained focused on maintaining a conservative capital structure, with a leverage consistently below 2x since 2010.

• We expect Datalogic’s cash conversion to remain solid in the next few years, leaving plenty of room to boost investments in R&D even further – essential for retaining technological leadership in a rapidly-evolving market – and to continue to actively look for interesting European and North American targets operating in IA.

Since 2008, Datalogic has delivered an impressive cash conversion ratio in the range of 75-180%, which is consistently well above the median for its peers. The chart below benchmarks Datalogic to its peers. We show the sector median with and without Scansource, since this company is only a distributor (we refer you to the valuation section for more details on the Company’s peers).

Chart 36: Cash conversion ratio(1) development since 2008

Source: Berenberg, Bloomberg, Company filings. Note: (1) Defined as (EBITDA – change in working capital – capex)/EBITDA.

Datalogic’s superior cash conversion has been driven by: a) a disciplined investment strategy, with investments in tangible assets lower compared to peers; and b) strict working capital management, resulting in working capital requirements which are well below the sector average.

Median 85% 89% 75% 70% 81% 84%

Median (ex Scansource) 86% 88% 77% 72% 88% 88%

88%

179%

93%

74%

94%

123%

85%89%

75%70%

79%84%

112%

84%

71%

84%

97%

82%

87%80%

64%

81%

93%

57%

132%

8%0%

29%

84%

-30%

0%

30%

60%

90%

120%

150%

180%

2008 2009 2010 2011 2012 2013

Datalogic Honeywell Cognex Zebra Scansource

-167%


29

Datalogic could, historically, allocate fewer resources to capex than its peers (see chart below) since, as part of its strategy, the Company assembles components which it buys from external suppliers prior to testing the final products in house. The only capital-intensive operation still conducted by Datalogic itself is the surface mount technology, since this requires its own technological know-how.

Chart 37: Capex(1) as % of sales

Source: Berenberg, Bloomberg, Company filings. Note: Includes only investments in PPE.

At the same time, through active management of receivables (DSO down from 77 days in 2008 to 58 in 2013) and payables (up from 88 days to 130), the Company has also successfully managed to steadily reduce its working capital, which has consistently been below the sector average since 2009 (see chart below).

Chart 38: Trade working capital(1) as % of sales

Source: Berenberg, Bloomberg, Company filings. Note: Defined as inventories + receivables – payables.

However, while we believe that Datalogic’s investments in PPE as a percentage of sales and its number of sales outstanding are also sustainable in the medium term, we expect that, as its top line grows, Datalogic will not be able to retain the same favourable payment terms achieved during the crisis. Therefore, we expect its cash

Median 2.4% 2.3% 2.0% 2.2% 2.3% 1.9%

Median (ex Scansource) 2.4% 2.7% 2.0% 2.3% 2.3% 2.2%

2.4% 2.3%

1.7%1.6%

2.0%

1.7%

2.4%

2.0% 2.0%2.2%

2.3%2.4%2.5%

3.1%

2.0%

2.4%

3.0%

2.7%

4.2%

3.1%

3.4%

2.7%

2.3%

1.9%

0.3% 0.2%0.4% 0.5%

0.3% 0.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

2008 2009 2010 2011 2012 2013


Median 20.1% 19.9% 20.0% 18.5% 19.0% 19.6%

Median (ex Scansource) 21.0% 22.2% 20.6% 20.0% 18.7% 18.8%

22.3%19.9%

15.1%16.0%

13.5%

9.0%

17.0%

19.7% 20.0%18.5% 18.4% 18.0%

20.1%

24.4%

21.1%21.5%

19.0% 19.6%

22.0%

25.2%

23.3%

26.0%27.0%

25.4%

16.9%15.6% 16.4%

17.6%

19.5%20.2%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2008 2009 2010 2011 2012 2013



30

conversion to remain strong also in the next few years, albeit below the level reached in 2013 (see chart below).

Chart 39: Datalogic’s expected cash conversion ratio

Source: Berenberg

Datalogic’s historically high cash conversion ratio has been critical to enhancing its technological know-how through bolt-on acquisitions, which we estimate contributed 7% to total 2001-2013 revenue CAGR of 12%, as well as in continued investment in R&D. Indeed, also during the downturn, Datalogic consistently invested in R&D – with investments ranging between 7% and 10% of sales (taking into consideration capitalised and expensed R&D). At the same time, management has remained focused on maintaining a conservative capital structure, with leverage consistently below 2x since 2010.

We believe that, on the back of its solid market positioning complemented by a disciplined investment strategy and strict working capital management, Datalogic is well positioned to continue generating solid cash flows and, thus, to further bolster its balance sheet. As shown in the chart below, we forecast that, in the absence of M&A, it will be in a net cash position by 2017.

Chart 40: Datalogic’s net debt and leverage ratio development

Source: Berenberg

This should leave plenty of headroom for:

(a) future bolt-on acquisitions: we understand the Company is open to acquiring European or North American targets with revenues between EUR20m and

88%

179%

93%

74%

94%

123%

74% 75%83%

0%

30%

60%

90%

120%

150%

180%

2008A 2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E

77

61

121

97

73

51

19

-15

1.5x

1.0x

1.9x

1.6x

1.1x

0.6x

0.2x

-0.2x-0.5x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

-40

-20

0

20

40

60

80

100

120

140

2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E

Net Debt (EURm) ND/EBITDA (x)


31

EUR80m that would enhance its market positioning and broaden the product offering in IA, in particular in the high-growth and equally fragmented machine vision segment; and

(b) higher investments in R&D, which we forecast will increase from 7-10% of sales to 10.5-11% of sales in the next three years.


32

Changes to earnings/Berenberg versus consensus

• Our forecasts are roughly in line with consensus.

• However, our 2014 forecasts are slightly below the market, since we believe the positive effects of the IA reorganisation and the new marketing strategy will take some time before translating into market share gains.

Our estimates are in line with consensus, except for 2014. While we believe the reorganisation of IA will represent meaningful growth upside in the medium term, we also expect it will take some time, and probably more than other brokers expect, for the new product and marketing strategy to start driving top-line growth.

Chat 41: Berenberg versus consensus

Source: Berenberg

2014 2015 2016

Last fiscal year Current Y Next fiscal year Next fiscal year +1

Sales 451 464 489 518

yoy 3.0% 5.4% 5.8%

EBITDA 60 68 79 88

yoy 13.9% 15.8% 11.0%

as % of sales 13.3% 14.7% 16.2% 17.0%

EBIT 45 51 63 71

yoy 11.4% 24.8% 13.0%

as % of sales 10.1% 10.9% 12.9% 13.8%

Net income 27 32 44 54

yoy 18% 37.1% 23.2%

EPS 0.47 0.56 0.77 0.94


Sales 451 472 510 525

yoy 4.6% 8.2% 2.9%

EBITDA 60 69 79 87

yoy 15.7% 13.3% 10.6%

as % of sales 13.3% 14.7% 15.4% 16.6%

EBIT 45 53 63 72

yoy 16.1% 20.1% 13.8%

as % of sales 10.1% 11.2% 12.4% 13.7%

Net income 27 33 42 46

yoy 23% 25.6% 10.4%

EPS 0.47 0.58 0.74 0.83


Sales 0.0% -1.6% -4.1% -1.4%

EBITDA 0.0% -1.5% 0.6% 1.0%

EBIT 0.0% -4.0% -0.2% -0.9%

Net income 0.0% -4.2% 4.6% 16.7%

EPS 0.0% -3.6% 3.6% 13.4%

FY

Berenberg

Consensus

Diff. vs. consensus


33

Valuation and sensitivity analysis

• We base our target price EUR11.8 of on a 70:30 weighting between DCF analysis and multiples, which indicates upside to the current share price of 42%.

• We afford a higher weight to DCF to fully capture growth potential beyond 2015, as well as the benefits stemming from the implementation of further cost efficiency initiatives.

DCF method

Our DCF model yields a fair value of EUR12.02 per share based on the following assumptions:

• a terminal EBIT margin of 13.7%, which we believe to be a fair assumption given the on-going roll-out of cost efficiency initiatives, new product launches and the increasing contribution of the industrial automation division to group sales (currently about a third of group revenues, and expected to increase to c50% of group sales);

• a WACC of 8.7% based on 1.0 beta, a risk-free rate of 4.5% (equivalent to a 2000-2014 average yield for the 10-year Italian government bond) and a 6% risk premium;

• a tax rate of 25%, higher than the effective tax rate in 2013 (24.3%) and the expected tax rate in 2014 (in the range of 22-24%), since, in future, we expect the IA division to grow at a faster pace compared to the ADC division, and because IA is mainly exposed to mature economies (eg North America);

• a long-term growth rate of 2.5%; and

• a terminal value accounting for 58% of total value, which indicates that we do not use overly aggressive assumptions.

Chart 42: DCF valuation

Source: Berenberg estimates

2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E

Terminal

value

Operating profit (NOPAT) 38.0 47.5 53.6 55.4 56.8 57.8 58.6 59.4 60.1 60.9

Change commercial working capital -6.8 -7.4 -4.9 -4.3 -4.8 -4.8 -0.7 -0.7 -0.7 -0.7

Depreciation and Amortisation 15.2 15.8 16.3 16.7 17.1 17.4 17.7 18.0 18.6 18.7

Capex -18.6 -19.6 -18.1 -18.8 -19.3 -19.7 -20.0 -20.2 -18.6 -18.7

Net cash flow 27.8 36.3 46.9 49.1 49.8 50.8 55.6 56.5 59.4 60.2 993

Discount factor 0.98 0.90 0.83 0.76 0.70 0.65 0.59 0.55 0.50 0.46

Present value 27.3 32.7 38.9 37.5 34.9 32.8 33.0 30.8 29.9 27.8 458.8

WACC 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7%

Long-term growth rate 2.5%

DCF per share derived from WACC 8.7%

Total present value 785 Interest costs, pre-tax 6.0%

thereof terminal value: 58% Tax rate 25.0%

Net debt 97 Interest costs, after taxes 4.5%

Investments & pensions 4 Risk premium 6.0%

Equity value 684 Risk-free (10y. bond) 4.5%

No. of outstanding shares 56.9 Beta 1.0

Implied Equity value (per share in EUR) 12.02

Current trading 8.34 E/D+E 70%

Premium/-Discount 44.2% D/D+E 30%


34

Chart 43: Sensitivity analysis – fair value per share (EUR)


Peer group comparison

Using a peer group comparison to value Datalogic is challenging, as few companies with a similar business model and geographic exposure are listed, or only a small part of their business operates in this sector (eg Honeywell). However, looking at the Company’s main competitors in the ADC and IA markets, we include in our peer set Cognex, Honeywell, Zebra Technologies and Scansource.

At present, Datalogic is, on average, trading at a 40% discount to its peers’ 2015 EBITDA and earnings multiples. However, while its discount can be partially explained in light of its smaller size and lower profitability, we believe it looks overdone. Indeed, Datalogic offers a better sales and EPS growth profile in 2015, and its cash conversion has been consistently above that of its peers as a result of significantly lower working capital requirements.

In order to reflect smaller size and lower profitability, we apply a 20% discount to our valuation based on peer average 2015 EBITDA and earnings multiples. Based on this, we achieve an average value per share of EUR10.7, equivalent to a 28% premium to the current share price.

Chart 44: Peer group multiples

Source: Bloomberg Note: Datalogic trading multiples are based on forecasts as per market consensus. Closing share price as of 3 October 2014.

12.02 1.5% 2.0% 2.5% 3.0% 3.5%

7.7% 12.91 13.72 14.68 15.84 17.29

8.2% 11.79 12.46 13.23 14.16 15.28

8.7% 10.84 11.39 12.02 12.77 13.66

9.2% 10.00 10.46 10.99 11.61 12.33

9.7% 9.27 9.66 10.10 10.61 11.20

Long-term growth rate

WA

CC

Market Cap Country

Company €m 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E

Datalogic SpA 485 IT 1.2 1.1 8.0 6.7 11.0 9.2 12.8 10.7

Honeywell International Inc 57,478 US 1.79 1.71 9.6 8.6 11.1 10.2 16.6 14.9

Zebra Technologies Corp 2,852 US 2.60 2.44 11.5 8.2 14.2 12.9 19.9 16.1

Cognex Corp 2,742 US 6.89 6.70 19.4 19.2 22.7 22.8 29.9 30.5

ScanSource Inc 791 US 0.27 0.24 6.2 6.4 6.7 6.5 14.0 12.1

Mean 2.89 2.77 11.7 10.6 13.7 13.1 20.1 18.4

Datalogic SpA 470 IT 1.23 1.14 8.0 6.7 11.0 9.2 12.8 10.7

Premium/ Discount

to Mean -57% -59% -32% -37% -20% -30% -36% -42%

Datalogic Estimates based on Berenberg Research (EURm)

Applied Multiples (20% Discount to Mean)

Implied Enterprise Value (EURm)

Net Debt (as of Dec 2013)

Investments, minorities & pensions

Implied Equity Value (EURm)

Average Equity Value (EURm)

Value per share (EUR)

Premium / (Discount to current share price) 28.0%

3.6

570.0 643.8

606.9

10.67

8.5x 14.8x

670.6

97.0

EBITDA Net Income

2015E 2015E

79.1 43.6

EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) P/E (x)


35

Chart 45: Peer group operational performance

Source: Bloomberg Note: Datalogic operational metrics are based on forecasts as per market consensus

Conclusion

We base our target price EUR11.8 on a 70:30 weighting between DCF analysis and multiples, which indicates upside to the current share price of 42%.

We afford more weight to the DCF model in order to fully capture growth potential as well as benefits stemming from the implementation of further cost efficiency initiatives beyond 2015.

Cash Conversion WC as % of sales FCF Yield

Company 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E 2008-2013 Median 2008-2013 Median 2008-2013 Median

Honeywell International Inc 18.8% 19.5% 16.1% 16.8% 11.4% 11.1% 7.4% 4.5% 82% 18.4% 7.0%

Zebra Technologies Corp 22.6% 29.8% 18.3% 18.9% 28.2% 23.1% 17.7% 6.5% 80% 25.3% 6.2%

Cognex Corp 35.4% 34.1% 30.4% 29.4% 69.9% n.m. 48.0% 2.8% 84% 20.6% 11.6%

ScanSource Inc 4.4% 3.8% 4.0% 3.7% n.m. 15.4% 1.4% 13.1% 43% 17.3% 3.8%

Mean 20% 22% 17% 17% 36% 17% 19% 7% 72% 20.4% 7.1%

Datalogic SpA 14.7% 15.4% 11.2% 12.4% 17.0% 19.6% 2.0% 8.2% 94.0% 15.5% 10.3%

Premium/ Discount

to Mean -27% -29% -35% -28% -53% 19% -89% 22% 30% -24% 45%

EPS g (%) Sales g (%)EBITDA Margin (%) EBIT Margin (%)


36

Current momentum

Since 2010, Datalogic’s share has performed well below its peers, which has resulted into lower EV/ NTM EBITDA and NTM PE multiples over the last four years.

We do not believe the Company’s current trading level signals a lower-quality stock compared to its North American comparables, but that it is rather the result of the Company’s high correlation with Italian stock market performance – as also evidenced in the chart below, which shows FTSE Mib and FTSE Mib Mid Cap index development vs. the Datalogic share price. Such a high correlation with the Italian indices strikes us as quite odd, and we believe it is likely the result of a misperception, as only 8% of the Company’s revenues are generated in its domestic market, while its well-diversified geographic footprint resembles that of its peers – and we expect it will increasingly do so as the Company continues to grow in emerging markets and strengthen its presence in the North American IA market.

Chart 46: Datalogic share price development and historical NTM PE and EV/EBITDA multiples vs. peers

Source: Berenberg, Bloomberg, Datastream

Share price development since 2010: Datalogic vs. Mib Mid Cap Index and FTSE Mib Index Share price development since 2010: Datalogic vs. Peers

Share price rebased to Datalogic (EUR) 2010-2014 Performance Share price rebased to Datalogic (EUR) 2010-2014 Performance

82.0%

82.0%

189.9%

84.8%

100.4% 103.8%

17.4%

103.0%

Historical NTM PE multiple since 2010 Historical EV / NTM EBITDA multiple since 2010

2010-2014 Avg. Current 2015 PE 2010-2014 Avg. Current EV/15E EBITDA

13.1x 10.7x 6.5x 6.7x

24.4x 30.5x 13.3x 19.2x

13.9x 14.9x 8.0x 8.6x

13.2x 12.1x 6.8x 6.4x

17.0x 16.1x 8.6x 8.2x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

35.0x

40.0x

Datalogic

Cognex

Honeywell

Scansource

Zebra Tech

0.0x

5.0x

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25.0x

Datalogic

Cognex

Honeywell

Scansource

Zebra Tech

3

6

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15

Datalogic

Cognex

Honeywell

Scansource

Zebra Tech

3

6

9

12

15

Datalogic

FTSE MIB Index

FTSE MIB MidCap


37

Blue sky and doomsday scenario

• In our blue sky scenario, we assume that the Company will also continue to grow through acquisitions, and that the restructuring of IA will generate a further margin uplift versus our base case forecast. In particular, we assume that, between 2015 and 2017, Datalogic will make each year a fully cash-financed acquisition for an EV of EUR50m, and will pay 8.0x LTM EBITDA. Based on this, we obtain a fair value of EUR13.3 per share, equivalent to 60% upside to the current share price.

• In our worst case scenario, we assume Datalogic will not succeed in the implementation of its cost efficiency initiatives and will lose significant market share in IA. Based on these assumptions, we calculate a fair value of EUR7.71 per share, just 7.5% lower than the current share price.

• Both our blue sky and worst case scenario price targets are based on a 70:30 weighting between a DCF- and multiples-based analysis.

Blue sky scenario

On the back of Datalogic’s extensive M&A track record, our blue sky scenario assumes that the Company will also continue to grow through acquisitions, and that the restructuring of IA will generate a further margin uplift compared to what we forecast in our base case, reducing the profitability gap currently existing with some of DAL’s peers (eg Zebra). In particular, we assume that, between 2015 and 2017, Datalogic will make an acquisition each year for an EV of EUR50m, and will pay 8.0x LTM EBITDA, which is in line with the 2010 EBITDA multiple paid for Accu-Sort, one of its main and most recent acquisitions. This means that each acquired entity will have a positive impact on Datalogic’s EBITDA of EUR6.3m (see chart below). We also assume the acquisitions will be fully cash financed, which we expect to result into a leverage ratio comfortably below 2x EBITDA.

Chart 47: Datalogic’s EBITDA development in a blue sky scenario


At the same time, we assume that DAL’s EBITDA margin will reach 18% by 2018, 110bp higher than in our base case (see chart below).

49

.8 59

.2

63

.2

60

.0 68

.3 79.1 87

.8

90

.6

85

.4

101.

0

11

0.4

87

.1

10

4.2 11

7.7

20.0

40.0

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80.0

100.0

120.0

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2010 2011 2012 2013 2014E 2015E 2016E 2017E

Base Case EBITDAImplied EBITDA with EUR50m spend pa at 8x EBITDAImplied EBITDA with EUR50m spend pa at 8x EBITDA + Margin Improvement


38

Chart 48: Datalogic’s EBITDA margin development in a blue sky scenario


Based on these assumptions, we calculate a fair value of EUR13.3 per share, equivalent to 60% upside to the current share price. Our blue sky scenario price target is based on a 70:30 weighting between DCF analysis and multiples.

Doomsday scenario

In our worst-case scenario, we assume that Datalogic will not succeed in the implementation of its cost efficiency initiatives or in the reorganisation of the IA division.

Therefore, we assume that, in the next three years, COGS and SG&A costs as a percentage of sales will remain in line with 2013 and that, as detailed in the table below, Datalogic will lose significant market share in IA, mainly driven by the USA. This scenario envisages a 4% downside risk to our 2016 revenue estimates and a 36% downside risk to our 2016 EPS estimates.

Chart 49: IA Revenue assumptions in a worst case scenario


Based on these assumptions, we obtain a fair value of EUR7.71 per share, only 7.5% lower than the current share price. Our doomsday scenario price target is based on a 70:30 weighting between DCF- and multiples-based analysis.

12

.7%

13

.9%

13

.7%

13

.3%

14.7

%

16

.2%

17

.0%

16

.9%

16

.5%

17

.5%

18

.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E

Base Case EBITDA

Implied EBITDA with EUR50m spend pa at 8x EBITDA + Margin Improvement

2013A 2014E 2015E 2016E

Datalogic market share in IA: 26.2% 25.2% 24.7% 24.0%

Market share change -102bps -50bps -69bps

Datalogic market share in North America: 31.4% 29.0% 28.0% 27.0%

Market share change -243bps -100bps -100bps

Datalogic's IA revenues (worst case scenario) 138 139 143 146

% growth 0.7% 2.9% 1.9%

Datalogic's IA revenues (base case scenario) 138 140 151 164

% growth 1.9% 7.8% 8.1%

IA Revenue downside -1.1% -5.6% -11.0%


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Key risks

Datalogic operates in an industry that is undergoing significant changes. Therefore, we think it is exposed to the following key risks.

Technological changes

ADC and IA are rapidly evolving markets where the ability to innovate is key to at least retaining market share.

However, we think DAL’s efforts in R&D are impressive for a mid-sized company, and provide us with enough reassurance on its ability in future to innovate and rapidly respond to evolving customer needs. Datalogic has consistently invested in R&D (with a spend of c7-8% of sales and, more recently, increasing to 8-9%), even during downturns, and its 350 R&D engineers at 12 centres located on different continents develop products specifically adapted to local needs. Since 2006, DAL has launched an average of 20-35 new products pa, which has contributed to c25% of its total sales, and has a full pipeline of upcoming new products which will be launched during the remainder of 2014 (some have only just been announced) and in 2015.

Raising Asian competition in the ADC market

While we have observed increasing competition in the ADC market, this trend has mainly affected more commoditised products, such as mobile computers. Datalogic focuses on retail and handheld scanners, which represent more than two-thirds of the ADC division’s revenues, the remaining third corresponding to mobile computers. The Company aims to continue to expand its presence in POS retail scanners and handheld scanners, and to generate c80% of revenues on these, reducing its already-limited exposure to more commoditised items.

Replacement of purpose-built scanners with consumer products

In the last few years, a new trend observed in the market has been the replacement of purpose-built scanners like those of Datalogic with consumer products (eg smart phones, tablets). If this trend takes hold permanently, it could erode DAL market share in key products, namely POS retail and hand held scanners.

However, we believe this risk is negligible, and can only materialise for (very) small businesses, since purpose-built scanners have a significantly higher durability (purpose-built devices are put through rigorous tests so that they can survive more than 1,000 drops from a 3ft height and resist dust and moisture for up to seven years), better scanning performance and higher security standards. While consumer products are definitely cheaper, the downside and risks associated with them – lower productivity, potential loss of data and higher risk of security breaches – are enough to convince us that POS retail scanners and handheld scanners will not be replaced by consumer products.

Will radio frequency identification tags replace bar codes?

Even though radio frequency identification (“RFID”)-based devices do not yet have an extensive commercial application, they could potentially replace 1D and 2D bar codes in the next few years, negatively affecting Datalogic’s positioning in the ADC and IA markets.

While we see some merits in using RFID tags instead of bar codes, we think that, at present, there are still tangible obstacles to their widespread use, including: a) prohibitive cost, as they are c100x more expensive than a bar code, which costs


40

only USD0.1 cent vs. USD10-11 cents for a passive RFID tag; and b) the fact that their technologies still need to be improved – indeed, engineers are still working to find the optimal frequencies to be used for different materials. Therefore, we think it will take about another five years for RFID-based readers to be enhanced, and for the ASP of a passive tag to become comparable to a bar code, even though the cost will never be USD0.1 cents. Until then, we do not envisage any major risk for Datalogic. Moreover, being a more expensive technology, we think it will be adopted only in specific end markets (eg healthcare). Finally, despite this particular area not being its core expertise, DAL already owns some RFID patents, and is still investing to further develop this technology.

In addition to the market risks mentioned above, we think Datalogic is also exposed to FX risk, as a little more than 50% of its revenues are generated outside Europe. We understand the Company is mainly exposed to the USD and that, even though it does not use derivatives, it mitigates its exposure to USD through natural hedging, and that a 1% appreciation in the USD translates into a negative impact on EBIT of EUR200,000 – equivalent to 0.4% of EBIT in 2013.


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Appendix 1: Corporate structure

Chart 50: Distribution of world manufacturing output by geography

Source: Company


42

Appendix 2: History

Established in 1972 in Bologna, Italy, as a producer and designer of photoelectric sensors for the textile, packaging and ceramic industries, Datalogic soon made inroads into foreign markets. In 1974, a small office in Nuertingen, Germany, was established, and from 1976 the Company started to serve the Japanese market.

From 1980 onwards, research in the field of optical bar code readers intensified, with Datalogic soon becoming the best-practice company in this sector. In 1984, Datalogic produced the first bar code reader to be used in an airport for Linate airport, Milan. In 1988, with the acquisition of Escort Memory Systems, US, technological expertise in the field of RFID was added. By the end of the 1980s, Datalogic was already a truly global company, present on all continents through its subsidiaries, plant or distributors. Internationalisation and further growth advanced, with acquisitions and JVs abroad, as well as the opening of a new production plant in Pescara, IT, in 1995.

In 2005, Informatics Inc., US, was acquired (EV: EUR18m) in order to expand further and strengthen the Company’s US presence. In the same year, the US-based pioneer in the ADC market, PSC, was acquired (EV: EUR163m), making Datalogic one of the Top 3 players in ADC.

In 2008, Datasensor, a designer and producer of photoelectric sensors and devices, was acquired (EV: EUR56m), allowing Datalogic to consolidate the technological platforms of its automation business. The 2010 acquisition of Evolution Robotics (EV: EUR20m) in the US brought further value add, mainly in the form of intangibles such as patents or copyrights for visual pattern recognition. With the acquisition of Accu-Sort (EV: EUR100m), in the US, in 2012, Datalogic’s US presence in the IA market was doubled. Datalogic established its high-growth machine vision business with the 2012 acquisition of PPT Vision, US (EV: EUR4m). In 2013, Multiwave Photonics (EV: EUR0.6m), PT, was acquired, giving access to one of the most modern fiber laser technologies for laser marking. In general, the millennium years marked a time of considerable external growth, and nine acquisitions have been made since.

Chart 51: Company timeline

Source: Datalogic.


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Financials

Profit and loss account

Year-end December (EUR m) 2010 2011 2012 2013 2014E 2015E 2016E

Sales 393 426 462 451 464 489 518

Cost of sales 214 229 249 238 242 252 263

Gross profit 179 197 213 212 222 237 255

General and administration 42 46 79 48 44 44 46

Research and development 26 26 32 36 42 42 44

Other operating income 2 2 7 2 2 2 3

Other operating expenses 63 67 46 71 71 75 79

EBITDA 50 59 63 60 68 79 88

Amortisation of intangible assets 4 3 2 3 3 3 3

Depreciation 8 7 8 7 7 8 8

D&A and write-off due to acquisition 4 4 33 6 5 5 5

Unusual or infrequent items 1 -8 -4 1 -2 0 0

EBIT 35 36 16 45 51 63 71

Interest income 14 15 14 13 12 12 13

Interest expenses 21 19 21 23 22 17 13

Other financial result 0 0 0 0 0 0 0

Financial result -7 -3 -7 -10 -10 -6 0

EBT 28 33 10 36 41 57 72

Taxes 10 7 -1 9 9 14 18

Net income 18 26 10 27 32 44 54

Net income from continuing operations 21 35 45 30 37 47 58

Source: Company data, Berenberg estimates


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Balance sheet

Year-end December (EUR m) 2010 2011 2012 2013 2014E 2015E 2016E

Intangible assets 147 154 211 204 205 207 209

Property, plant and equipment 50 50 52 51 53 56 56

Financial assets 4 8 4 6 6 6 6

Fixed Assets 201 213 267 261 265 268 270

Inventories 45 60 49 54 53 54 55

Accounts receivable 71 76 85 72 75 81 87

Other current assets 11 21 27 19 19 20 21

Liquid assets 103 162 95 129 129 129 160

Deferred taxes 28 37 53 49 48 47 46

Other accruals 0 0 0 0 0 0 0

Current Assets 257 355 308 322 324 331 369

TOTAL 458 568 575 583 589 599 639

Long-term debt 132 157 139 183 183 183 183

Pensions provisions 7 7 7 7 7 7 7

Other provisions 10 15 4 7 7 7 7

Non-current liabilities 17 22 23 20 20 20 20

Short-term debt 48 75 86 47 22 1 0

Accounts payable 57 67 71 85 79 76 76

Advance payments 0 0 0 0 0 0 0

Other liabilities 38 45 62 43 44 46 48

Deferred taxes 10 8 9 6 6 7 7

Other accruals 0 0 0 0 0 0 0

Current liabilities 152 196 229 180 152 129 131

TOTAL 318 397 402 398 369 347 348

EQUITY

Shareholders' equity 140 170 173 185 220 252 291



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Cash flow statement

EUR m 2010 2011 2012 2013 2014E 2015E 2016E

Net profit/loss 18 26 10 27 32 41 48

D&A 16 14 43 16 15 16 16

Other 6 -11 -10 1 0 0 0

Cash flow from operations before changes in w/c 40 30 43 44 47 56 64

Change in inventory -6 -14 15 -5 1 -1 -1

Change in accounts receivable -4 -4 2 12 -4 -5 -6

Change in accounts payable 13 10 0 14 -5 -3 0

Change in other working capital positions 13 15 -7 -15 2 2 2

Change in working capital 16 7 10 6 -7 -7 -5

Cash flow from operating activities 56 37 53 50 40 49 59

Capex, excluding maintenance -8 -14 -14 -17 -19 -20 -18

Payments for acquisitions -21 -4 -100 0 0 0 0

Financial investments 0 -4 4 -1 0 0 0

Cash flow from investing activities -29 -22 -110 -18 -19 -20 -18

Cash flow before financing 27 15 -58 32 22 29 41

Increase/decrease in debt position -11 69 -5 4 -24 -18 -4

Purchase of own shares -2 9 4 2 12 0 0

Dividends paid 0 -8 -9 -9 -9 -11 -14

Others -2 -11 4 8 0 0 0

Effects of exchange rate changes on cash 0 4 -2 -3 0 0 0

Cash flow from financing activities -14 63 -9 2 -22 -29 -18

Increase/decrease in liquid assets 12 77 -66 34 0 0 23

Liquid assets at end of period 83 161 95 128 129 129 152



46

Regional sales

Regional Sales (EUR m) 2010 2011 2012 2013 2014E 2015E 2016E

Domestic 43 46 39 38 37 36 35

Rest of Europe 156 168 172 184 207 218 230

NAFTA 113 123 159 144 121 133 153

Asia Pacific 49 51 53 56 59 71 85

Rest of World 31 38 39 29 39 31 14

TTL 393 426 462 451 464 489 518

Regional sales shares

Domestic 11.0% 10.7% 8.4% 8.4% 8.0% 7.4% 6.8%

Rest of Europe 39.8% 39.4% 37.3% 40.8% 44.7% 44.6% 44.5%

NAFTA 28.8% 28.9% 34.4% 31.9% 26.1% 27.2% 29.5%

Asia Pacific 12.6% 12.0% 11.4% 12.5% 12.8% 14.5% 16.5%

Rest of world 7.8% 9.0% 8.4% 6.4% 8.5% 6.3% 2.8%

TTL 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%



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Please note that the use of this research report is subject to the conditions and restrictions set forth in the “General investment-related disclosures” and the “Legal disclaimer” at the end of this document.

For analyst certification and remarks regarding foreign investors and country-specific disclosures, please refer to the respective paragraph at the end of this document.

Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG)

Company Disclosures Datalogic SpA no disclosures (1) Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as “the Bank”) and/or its affiliate(s) was Lead

Manager or Co-Lead Manager over the previous 12 months of a public offering of this company. (2) The Bank acts as Designated Sponsor for this company. (3) Over the previous 12 months, the Bank and/or its affiliate(s) has effected an agreement with this company

for investment banking services or received compensation or a promise to pay from this company for investment banking services.

(4) The Bank and/or its affiliate(s) holds 5% or more of the share capital of this company. (5) The Bank holds a trading position in shares of this company. Historical price target and rating changes for Datalogic SpA in the last 12 months (full coverage)

Date Price target - EUR Rating Initiation of coverage

06 October 14 11.80 Buy 06 October 14

Berenberg Equity Research ratings distribution and in proportion to investment banking services, as of 01 October 14

Buy 46.82 % 69.23 % Sell 14.78 % 3.85 % Hold 38.40 % 26.92 %

Valuation basis/rating key

The recommendations for companies analysed by Berenberg’s Equity Research department are made on an absolute basis for which the following three-step rating key is applicable:

Buy: Sustainable upside potential of more than 15% to the current share price within 12 months;

Sell: Sustainable downside potential of more than 15% to the current share price within 12 months;

Hold: Upside/downside potential regarding the current share price limited; no immediate catalyst visible.

NB: During periods of high market, sector, or stock volatility, or in special situations, the recommendation system criteria may be breached temporarily.

Competent supervisory authority

Bundesanstalt für Finanzdienstleistungsaufsicht -BaFin- (Federal Financial Supervisory Authority), Graurheindorfer Straße 108, 53117 Bonn and Marie-Curie-Str. 24-28, 60439 Frankfurt am Main, Germany.

General investment-related disclosures Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as „the Bank“) has made every effort to carefully research


49

all information contained in this financial analysis. The information on which the financial analysis is based has been obtained from sources which we believe to be reliable such as, for example, Thomson Reuters, Bloomberg and the relevant specialised press as well as the company which is the subject of this financial analysis. Only that part of the research note is made available to the issuer (who is the subject of this analysis) which is necessary to properly reconcile with the facts. Should this result in considerable changes a reference is made in the research note.

Opinions expressed in this financial analysis are our current opinions as of the issuing date indicated on this document. The companies analysed by the Bank are divided into two groups: those under “full coverage” (regular updates provided); and those under “screening coverage” (updates provided as and when required at irregular intervals).

The functional job title of the person/s responsible for the recommendations contained in this report is “Equity Research Analyst” unless otherwise stated on the cover.

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Legal disclaimer This document has been prepared by Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as „the Bank“). This document does not claim completeness regarding all the information on the stocks, stock markets or developments referred to in it. On no account should the document be regarded as a substitute for the recipient procuring information for himself/herself or exercising his/her own judgements. The document has been produced for information purposes for institutional clients or market professionals. Private customers, into whose possession this document comes, should discuss possible investment decisions with their customer service officer as differing views and opinions may exist with regard to the stocks referred to in this document.

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Analyst certification I, Simona Sarli, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein.

In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by the Bank or its affiliates.

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50

United States of America This document has been prepared exclusively by the Bank. Although Berenberg Capital Markets LLC, an affiliate of the Bank and registered US broker-dealer, distributes this document to certain customers, Berenberg Capital Markets LLC does not provide input into its contents, nor does this document constitute research of Berenberg Capital Markets LLC. In addition, this document is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers.

This document is classified as objective for the purposes of FINRA rules. Please contact Berenberg Capital Markets LLC (+1 617.292.8200), if you require additional information.

Third-party research disclosures

Company Disclosures Datalogic SpA no disclosures (1) Berenberg Capital Markets LLC owned 1% or more of the outstanding shares of any class of the subject

company by the end of the prior month.* (2) Over the previous 12 months, Berenberg Capital Markets LLC has managed or co-managed any public

offering for the subject company.* (3) Berenberg Capital Markets LLC is making a market in the subject securities at the time of the report. (4) Berenberg Capital Markets LLC received compensation for investment banking services in the past 12 months,

or expects to receive such compensation in the next 3 months.* (5) There is another potential conflict of interest of the analyst or Berenberg Capital Markets LLC, of which the

analyst knows or has reason to know at the time of publication of this research report.

* For disclosures regarding affiliates of Berenberg Capital Markets LLC please refer to the ‘Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG)’ section above.

Copyright The Bank reserves all the rights in this document. No part of the document or its content may be rewritten, copied, photocopied or duplicated in any form by any means or redistributed without the Bank’s prior written consent.

© May 2013 Joh. Berenberg, Gossler & Co. KG

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