European Cable Sector - Credit Suisse

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12 February 2013

Europe

Equity Research

European Cable Sector Connections Series

The Cable Guys: Follow the leader

We launch coverage of the European cable sector, initiating with an Outperform rating on Prysmian (TP €19) and a Neutral rating on Nexans (TP €36). We analyse the key growth end markets, focusing on submarine cables and the SURF segment, and map out the global competitive landscape, taking a closer look at optical fibre & cables.

■ Attractive medium-term growth. We view submarine cables as an attractive market for both Prysmian and Nexans. On our analysis of recent contracts and industry relationships, we prefer Prysmian as a play on this theme as we believe it can take market share over the next five years. In the SURF segment we analyse the supply and demand of flexible pipes and show three capacity utilisation scenarios for Prysmian’s Flexible pipe plant.

■ Mapping the competitive landscape: Based on market size and

characteristics, we focus on optical fibre & cable and particularly the fast-growing Chinese market where we view the medium-term competitive threat as manageable. In Land High Voltage, we believe the competitive threat is well understood by the market but view the risk of pricing pressure as greater for Nexans due to its higher exposure to the Middle East.

■ Stock calls: We favour Prysmian for its 1) exposure to growth themes,

2) competitive positioning, 3) improving end market exposure and 4) self-help. We view risk/reward at Nexans as balanced, as its exposure to growth end markets is offset by 1) lack of valuation upside on reaching the low end of 2015 targets and 2) the relatively higher risk of near-term earnings volatility. Our €19 target price for Prysmian is derived using a 2013E sector multiple (ex lifts) vs the current discount of 10%. For Nexans our €36 target price is driven by a 8.1x 2014E EV/EBIT multiple (10% sector discount).

Figure 1: Competitive risk matrix in cable markets (more detail on page 31)

Risk Rating 1 2 3 4 5

Land High Voltage

Optical Fibre Telecom

Rail cables

Mining cables

Aerospace cables

Established

relationships

Low

Building cables

Market size less

attractive

High barriers to

entry

Electrical Distribution

Time frame in years

HighCopper telecom cable

Submarine cables

Medium

Automotive cables

Emerging mkt

competition has

had an impact

Source: Credit Suisse estimates

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End-market primers series

This report contains a detailed primer on

the Global Cable end-market as well as in-

depth analysis of the key thematic

drivers. For other detailed global end-

market primers published by the team,

please click here:

Industrial Automation, Elevators, Global

Power Generation

https://doc.research-and-analytics.csfb.com/docView?language=ENG&source=emfromsendlink&format=PDF&document_id=994715241&extdocid=994715241_1_eng_pdf&serialid=hDabUewpvOqQcRiLxK7rxEHL%2bxCL3SeBXfbprcgY26I%3d

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12 February 2013

European Cable Sector 2

Table of contents Key charts 3

Executive summary 4

Prysmian Investment Case 7

Nexans Investment Case 8

Medium-term sector drivers 9

#1: Submarine cables 9

Submarine opportunity for Prysmian and Nexans 11

Prysmian’s market share may increase in the medium term 12

We also see greater project execution risk at Nexans 14

#2: SURF: Limited downside risk in the near term 19

Why is the market concerned about SURF products? 22

Scenario analysis for flexible pipe ramp-up 25

#3: Mapping the global cable competitive landscape 28

Global cable competitor growth and margin trends 30

Optical fibre cables: attractive in the medium term 32

Land HV: Expect more moderate pricing pressure 36

#4: Self-help is key to margin expansion 38

We expect €170m of Draka synergies by 2015E 39

Nexans: 2015 targets but limited near-term impact 44

Company section 47

Prysmian (PRY.MI) 48

Prysmian investment case 51

Nexans (NEXS.PA) 70

Nexans investment case 72

End market primer 91

Energy cables 93

Building cables 97

Industrial cables 101

Telecom cables 105

Appendix: Further company details (Metal price impact,

Management remuneration, Shareholder structure) 109

12 February 2013


Key charts Figure 2: In submarine cables we expect Prysmian to win €745m orders per year, 2012-16E vs 2011 sales of €556m. We also see potential for market share gains.

Figure 3: In Optical fibre & cable Prysmian is global leader and on our analysis we see double digit EBITDA margins as sustainable in the medium-term (2011, €m)

0

100

200

300

400

500

600

700

800

2012 2013 2014 2015 2016

ABB Nexans Prysmian

0

500

1000

1500

Sumitomo Corning Prysmian Furukawa Fujikura GeneralCable

Nexans

Optical Fibre & Cables sales Total Telecom related sales

Source: Credit Suisse Research, Ten Year National Dev. Plan Source: Company data, Credit Suisse research

Figure 4: We think the market is overly concerned about Prysmian’s SURF business. Based on supply/demand we view this as a key 2014E growth driver for Prysmian (nKM)

Figure 5: We believe the market under-estimates Prysmian’s self-help potential. In 2014E we believe self-help can result in 5% upgrades to consensus EBIT

450 450650 650

270 270

270540

150 150

150

150

250

2240

1280

1920

2240

0

500

1000

1500

2000

2500

2011 2012 2013E 2014E

Technip capacity Wellstream capacity

Prysmian capacity NKT capacity

Flexible pipe demand

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2013E 2014E 2015E

Incremental T& I savings (assume a 100bps improvement)

Top end of Draka synergies Targets (€170) (c'sus €150)

Source: Company data, Credit Suisse estimates Source: Company supplied consensus, Credit Suisse estimates

Figure 6: Based on Nexans reaching the bottom end of its €350m–400m operating profit target we view Nexans current price as broadly fair value

Figure 7: Based on the growth outlook, competitive positioning, and end-market exposure we believe Prysmian can re-rate to a sector multiple

€ 37€ 36

€ 46

€ 30

€ 35

€ 40

€ 45

€ 50

Current price Assume €350 Op. profit (2015)

Assume €400 Op. Profit (2015)

Nexans warrented share price

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

110.0%

120.0%

Feb-08 Oct-08 Jun-09 Feb-10 Oct-10 Jun-11 Feb-12 Oct-12

PRY sector rel. EV/EBIT NEX sector rel. EV/EBIT

Source: Credit Suisse estimates. Source: Thomson Reuters

12 February 2013


Executive summary In this report:

■ Take an in-depth look at key growth markets in the sector focusing on Submarine

Cables (go to pages 9 to 18) and SURF products that are used in subsea oil

production (go to pages 19 to 27);

■ Map out the global cable competitive landscape in terms of growth rates and margins

among the large cable players (go to pages 29 to 31);

■ Take a deep-dive into the optical fibre & cable market, assessing the risk to Prysmian

both in the developed markets and the fast-growing Chinese market (pages 33 to 35);

■ Include a cable sector primer running through the key end markets for Prysmian and

Nexans (go to pages 91 to 108).

Figure 8: Prysmian and Nexans adjusted EBITDA (2011) by segment (we favour Prysmian’s cable end market exposure)

Submarine20%

SURF2%

Optical Fibre & Cable23%

High Voltage & Components

12%

OEM (renewable,

elevator, mining)

5%

OGP4%

Higher cyclicality/Lower value add

34%

Prysmian (LHS)

Nexans (RHS)

Attractive

Average

Commoditized

Submarine22%

Optical Fibre & Cable

4%High Voltage

& Components6%

Resources8%

Transport5%


55%

Source: Company data, Credit Suisse estimates

In Figure 9 we show a growth and profit matrix for cable segments and in Figure 10 we lay

out key global competitors end market cable market exposures.

Figure 9: Growth and Profit matrix of cable end markets Figure 10: Global competitor mapping by end market

Submarine

Network components

Optical Fibre

High Voltage

Industrial

Power Distribution

High

LONG TERM GROWTH

Surf (Flexible pipes & Umbilicals

LowBuilding cables

Copper Telecom

Low Medium

PROFITABILITY

High Extra High Voltage

Medium

Company Utilities Construction Industry Other

Leoni 40% 60%

Nexans 45% 22% 21% 12%

NKT cable 41% 30% 29%

Prysmian 28% 30% 22% 20%

Belden cables 25% 37% 38%

Coleman Cable 42% 22% 36% 0%

General Cables 61% 24% 15%

Southwire 0%

Asian companies

Fukijura 100%

Furukawa 25% 39%

Hitachi Cable 41% 49%

US companies

European companies

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates. The above

percentages are sales by end market

12 February 2013


Medium-term sector drivers

1. Submarine cables; Medium term structural growth

This market is driven by renewable additions (offshore wind connections) and the need to

transport power further from areas of power supply to power demand (Submarine

interconnections). We have focused on the European market which we estimate generates

90% of Prysmian’s and Nexans’ Submarine sales. We view this as a structurally growing

market, with high technological barriers to entry and strong pricing based on there being

only three producers in the market (Prysmian, Nexans and ABB).

Based on our analysis of the Ten Year National Development Plan (TYNDP 2012) we

believe this market can generate €745m of orders for Prysmian per year, 2012-16E, vs

current sales of €556m. For Nexans we expect €503m vs current sales of €491m.

Figure 11: Submarine cable (Europe) market shares (2011). Prysmian is leader in this segment and in the medium term we see potential for market share gains

Figure 12: SURF products can generate €13m of incremental EBITDA in 2014E (20% of the incremental EBITDA we forecast for Prysmian group

ABB18%

Nexans 27%

Prysmian40%

Other15%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

2013 2014

Base case SURF incremental Other group incremental EBITDA

Source: Company data, Credit Suisse research Source: Credit Suisse estimates

2) SURF- Market concerns are overdone

We believe the market is overly concerned regarding the potential for this market for

Prysmian following the cost focus of Petrobras’ (Prysmian’s key customer) 2012-16

business plan (June 2012). Based on our analysis of flexible pipe production capacity in

Brazil and demand forecasts we remain confident that Prysmian can achieve 80%

utilisation at its new Vila Velha plant by 2015 (vs our estimate of 20% utilisation currently).

In our base case SURF accounts for 20% of our incremental 2014 EBITDA forecasts for

Prysmian. We acknowledge the potential for some short-term demand volatility in SURF

as the new Petrobras management become established, but in our bear case scenario we

only see 1.3% downside risk to consensus 2013 estimates.

3) Competitive threat – Prysmian are relatively well positioned

We map out the growth rates and margins of global competitors in the cable market and

give our view of the medium-term competitive outlook for cable end markets in Figure 13.

We view the competitive threat in Land High Voltage (LHV) as relatively well understood

but, based on the margin declines that have already occurred at Nexans, we expect more

moderate levels of pricing pressure going forward. However, in our view the risk in this

market remains relatively higher for Nexans based on 37% of its Land High Voltage sales

coming from the highly competitive Middle Eastern market. In our view Prysmian is better

positioned with lower exposure in this region and higher exposure to the >220KV segment

(60% of Prysmian’s Land HV sales).

12 February 2013


Figure 13: Competitive risk matrix for key cable end markets (more detail on page 31)


Land High Voltage


Rail cables

Mining cables

Aerospace cables

Established

relationships

Low

Building cables

Market size less

attractive

High barriers to

entry


Time frame in years


Submarine cables

Medium

Automotive cables

Emerging mkt

competition has

had an impact


We have also focused on the threat in Optical Fibre and Cable where Prysmian is global leader and has 2011 sales of €1bn. In Europe (Prysmian’s core market) we see limited threat as we believe large Japanese competitors will likely focus on the faster-growing Chinese market in the medium term. Specifically in China we view the threat as manageable and see the market as attractive in the medium term based on 1) Prysmian’s #1 share in China through its JV with YOFC (Yangtze Optical Fibre & Cable), 2) greater pricing discipline due to the market structure (five key players), and 3) expected high demand limiting the risk of over-capacity and therefore the likelihood of pricing strategies. We expect local players to grow in size—however Prysmian operates primarily through its Chinese JV, making it competitive on price.

4) Self-help- Key driver of margin expansion in 2013/14

Prysmian: We believe Prysmian can achieve the top end (€170m) of synergies from its recent acquisition of Draka faster than consensus expects. We also see potential for further restructuring of its underperforming building cables business (Figure 14). Combined, we believe these factors could drive 5% upgrades to 2014 consensus EBIT.

Nexans: Nexans’ 2015 operating profit target is €350m–400m—our estimate is at the

lower end. We remain cautious because 1) we expect some slippage in targeted cost

savings, and 2) we believe details of the cost savings programme have not been finalised.

However, the level of saving as a percentage of sales is reasonable relative to the sector

(Figure 15) despite our caution on the eventual drop through to profits. If Nexans achieves

the low end of the targeted range we calculate the current price as broadly fair value.

Figure 14: In our Nexans Trade & Installers division restructuring scenario we estimate a 100bps improvement could generate €21m of savings

Figure 15: €65m of cost savings per year in 2014E–15E at Nexans looks credible relative to cost savings programmes across the sector as a % of sales

T&I restructuring scenario 100bps 200bps

2011 group employees 21,547 21,547

T&I (assume 30% of total) 6,464 6,464

Employee cost

Group Personnel Cost (€mn) 916 916

Implied annual employee salary (€,000) 42,512 42,512

Scenario cost savings

Targeted cost saving (€mn) 21 42

Implied redundancies (based on av salary) 494 988

as a % of T&I employees 7.6% 15.3%

as a % of group employees 2.3% 4.6%

Cost savings as a % of sales

2012E 2013E 2014E 2015E

Nexans 1.3% 1.2%

Electricals

Philips 1.8% 3.5%

Schneider 1.0% 1.4%

Siemens 1.7% 3.1%

Electrical Average 1.5% 2.7%

Mechanical

Alfa Laval 1.1% 0.3%

Assa Abloy 0.7% 0.4%

Electrolux 1.5% 2.3%

Metso nm 0.7%

Sandvik 0.8% 1.0%

SKF 0.4% 0.2%

Mechanical Average 0.7% 0.7% Source: Company data, Credit Suisse estimates Source: Credit Suisse estimates

12 February 2013


Prysmian Investment Case Outperform, TP €19

We initiate coverage of Prysmian with an Outperform rating and a €19 target price.

We view Prysmian as a well-managed business with good exposure to key growth

markets and, despite the recent strong performance (+43% LTM vs 10% for the sector),

we see 25% potential upside from current levels.

Figure 16: Prysmian investment case

Prysmian Investment case: Comment

1) Exposure to growth themes:

Submarine & SURF.

Prysmian has a leading share in the European Submarine cables and we see potential for market

share gains in the medium term. We also remain positive on the growth prospects for SURF to

2015 while in the short term our bear-case scenario implies only a 1.3% risk to our 2013

forecasts.

2) Competitive positioning: Leader in

Optical Fibre & Cable.

We have focused on Optical Fibre & Cable (13% of sales & double digit EBITDA margin). Based

on our analysis we view the margins in this segment as sustainable and view the potential

competitive threat to Prysmian’s #1 share in China as manageable. We believe the expected

high demand in China should reduce the risk of overcapacity and therefore the likelihood of

aggressive pricing, Prysmian produces locally through its JV thereby making it competitive on

price, and the high technological barriers to entry limit the threat from new entrants.

3) Improving end market exposure.

Through investment in higher margin cable segments (SURF and Submarine), acquiring Draka,

and the growth of Optical Fibre & Cable Prysmian has reduced its exposure to more cyclical and

commoditized end markets. These less attractive end markets currently only account for 35% of

Prysmian's EBITDA and in our forecasts we discount minimal growth in these markets in 2013.

4) Self-help potential.

We believe Prysmian can achieve the top end (€170m) of synergies from the Draka acquisition

faster than consensus expects. We also see potential for further restructuring of its

underperforming building cables (T&I) division. Combined, these factors could drive 5% upgrades

to 2014 consensus EBIT.

5) Valuation.

Our €19 target price is derived by applying a 2013E EV/EBIT sector multiple (ex lifts) of 10.1x to

our 2013 EBIT forecast. Currently Prysmian is at a 13% discount to the sector but we believe it

can re-rate based its growth outlook, competitive positioning and improved end market exposure.


Figure 17: Our adjusted EBIT forecasts are 4% and 7.3% ahead of consensus in 2013E–14E € in millions, unless otherwise stated

CS CS CS

CS F'cast C'sus vs C'sus CS F'cast C'sus vs C'sus CS F'cast C'sus vs C'sus

Sales 7,939 7,946 -0.1% 8,070 8,226 -1.9% 8,398 8,428 -0.4%

organic growth 0.8% 2.2% 4.2%

Adjusted EBITDA 635 637 -0.3% 695 680 2.3% 761 725 5.0%

margin 8.0% 8.0% 8.6% 8.3% 9.1% 8.6%

Adjusted EBIT 477 475 0.3% 540 519 4.0% 602 561 7.3%

margin 6.0% 6.0% 6.7% 6.3% 7.2% 6.7%

Adjusted Net Income 252 254 -0.7% 305 287 6.2% 350 305 14.6%

2012 2013 2014

Source: Company compiled consensus, Credit Suisse estimates

12 February 2013


Nexans Investment Case Neutral, TP €36

We initiate coverage of Nexans with a Neutral rating and a target price of €36.

Since a 22% share price decline in 2012 relating to submarine cable production issues

Nexans has given a 2015 target of €350m–400m of operating profit. In our view the 24%

potential upside from achieving the top end (€400m) 2015 targeted range is offset by its

competitive positioning, end market exposure and relatively higher execution risk.

Figure 18: Nexans investment case

Nexans Investment case: Comment

1) Submarine opportunity but we prefer

Prysmian in this market.

Following recent order wins, Nexans has strong momentum in submarine cables and we

view this as an attractive growth market for Nexans. We estimate Nexans has a 27%

market share in European submarine cables and we see this market as a a €503m

opportunity per year 2012-16 (current sales €491m). However, Prysmian is our preferred

stock in this market as we see lower execution risk and greater potential for Prysmian to

gain market share.

Self-Help: Limited upside from low end

of targets

We calculate the top end of the 2015 op. profit range (€350m-€400m) implies 24% upside

from current levels. However, we remain on the cautious side and forecast €351m in 2015

because 1) historically in the sector we have seen cost savings slippage and 2) in our view

Nexans have not yet clearly mapped out all of the targeted cost savings (there is expected

to be minimal contribution from cost savings in 2013).

3) Relatively higher cyclicality and

earnings volatility risk at Nexans.

We believe Nexans derives c55% of EBITDA from relatively higher cyclicality,

commoditized cables (in 2012 39% of profits were from building cables). As a result we

believe a 10% discount to the sector is justified. We also see relatively higher execution

risk at Nexans but believe this is to an extent mitigated by managements cautious

guidance of flat profitability in 2013.

4) Valuation.

Nexans is trading on a 12% discount to the sector on 2014E EBIT. We derive our €36

target price using a 10% discount to the 2014E EV/EBIT sector multiple and discount it

back to 2013. We view the 10% discount as justified by the above factors but have a

neutral rating as we believe these factors are balanced by the 24% potential upside from

reaching the top end of 2015 operating profit targets. We also note the potential share

price support gained from Madeco (20% stake) exercising their right to raise their holding

to 28%.


Figure 19: Our Nexans adjusted EBIT forecasts are 14.1% below 2013 consensus (pre FY12 results) and 0.4% ahead in 2014E (pre FY12 results).

CS CS

CS F'cast C'sus vs C'sus CS F'cast C'sus vs C'sus

Sales 5,038 5,086 -0.9% 5,196 5,291 -1.8%

organic growth 1.6% 3.1%

Adjusted EBIT 212 247 -14.1% 300 299 0.4%

margin 4.2% 4.9% 5.8% 5.7%

2013 2014

Source: Credit Suisse estimates, Thomson Reuters

12 February 2013


Four medium-term sector drivers #1: Submarine cables

#2: SURF: Limited downside risk in the near term

#3: Mapping the global cable competitive landscape

#4: Self-help is key to margin expansion

#1: Submarine cables

In 2011, submarine accounted for 7.3% of sales and we estimate 20% of EBITDA at

Prysmian, and 10.7% of sales and we estimate 22% of EBITDA at Nexans: We view

submarine cables as a premium growth market, with relatively high technical barriers to

entry and good visibility owing to existing order backlogs. These cables also achieve

margins (15-20% EBITDA) that are significantly higher than the group average for both

Prysmian and Nexans. Prysmian’s and Nexans’ submarine operations are predominantly

European and as a result we have focused on the European market in this section.

Based on our analysis we prefer Prysmian to Nexans as a play on this theme:

■ We prefer Prysmian as a play on this theme due to its potential for market share gains

owing to 1) its strong relationships with key power grid equipment providers; 2) its

successful execution of high-value, complex projects; and 3) we see greater risk at

Nexans on the execution of its order backlog.

■ We expect submarine cables to generate €745m of orders per year for Prysmian and

€503myear for Nexans for the next five years. This is 1.3x Prysmian’s 2011 submarine

sales and 1x Nexans’ submarine sales. We have focused here on the potential of the

European market, which we estimate is 90% of Prysmian’s and Nexans’ Submarine

cable sales.

■ Prysmian has a submarine order backlog of 3.2 years and Nexans has a backlog of

1.8 years. Based on our forecasts for sustained high demand, we believe the risks are

to the upside for Prysmian’s submarine business as it may add capacity to meet

demand. At Nexans we believe the execution risk is higher given production issues

seen at the Halden plant in 2011.

Figure 20: Market shares and per-year order volume opportunity (€m) in submarine cables in Europe

market shares Value of subsea links (2012-16 (€mn) Cable Value (assume 45% of link value) (€mn) 2012-16 Per year (€mn)

ABB 18% 1,677 335

Nexans 27% 2,515 503

Prysmian 40% 3,726 745

Other 15% 1,397 279

Total 100% 20,700 9,315 1,863 Source: Credit Suisse estimates

12 February 2013


Forecasting grid investment over the next 10 years

To forecast the submarine cable market we have used data from the Ten Year Network

Development Plan (TYNDP) 2012, which analyses required grid investment based on

research and feedback from stakeholders.

According to the TYNDP 2012 renewable capacity will increase by 250GW over the next

ten years. Renewable additions are most commonly away from the areas of high electricity

demand (eg off-shore wind) and as a result electricity will have to travel further through the

grid to meet demand. This is forecast to drive total investment in the grid of €104bn,

of which €23bn is for subsea cables.

In Figure 21 we show the TYNDP forecasts broken down by cable type for subsea cables

in the medium term (2012-2017) and the long term (2017-2022). We highlight that

submarine in this instance includes interconnections (to connect Islands or regions under

the sea) and off-shore wind connection cables (to connect off-shore wind farms to the

grid).

Figure 21: The TYNDP forecasts subsea cables in the medium term (2012-17) to account

for 46% of extra high voltage cables (KM)

0

10000

20000

30000

40000

Mid Term (2012-2017) Long Term (2017-2022)

Subsea Cables Overhead Lines Inland Cables Upgrades

Source: TYNDP 2012

From Figure 21 we would highlight:

■ Over the next ten years, €23bn is expected to be spent on subsea links and we

estimate 45% (€10.4bn) of this will be related specifically to cables and therefore

within Prysmian’s and Nexans’ addressable markets.

■ 90% (€20.7bn) of subsea links in the TYNDP are expected to be installed in the next

five years. This makes the total subsea link market (including substations, cables and

other equipment) valued at €4.1bn per year for the next five years.

■ Assuming 45% of the cost of subsea links is associated with the cables, we

estimate the total value of the cable market at €1.9bn per year.

12 February 2013


Submarine opportunity for Prysmian and Nexans

Due to the complexity of the cables and the permit requirements, large submarine

contracts in Europe are predominantly contested by three players in the market. Based on

company feedback we estimate ABB, Prysmian and Nexans combined have a 85%

market share.

Methodology for forecasting the submarine opportunity for Prysmian and Nexans

On page 11 we show the announced submarine cable orders from each of these players

and have given the implied market shares using announced orders. However, when

forecasting the potential opportunity for each of Prysmian, Nexans and ABB we

have used existing submarine sales as the basis for market shares.

Figure 22: We estimate Prysmian has a 40% market share in European submarine cables based on value (€m) but we believe this can rise

Figure 23: Based on a total subsea cable market size of €1.9bn we estimate this market to represent a €745m per-year opportunity for Prysmian vs. €503m for Nexans

ABB18%

Nexans 27%

Prysmian40%

Other15%

0

100

200

300

400

500

600

700

800

2012 2013 2014 2015 2016

ABB Nexans Prysmian

Source: Credit Suisse estimates, For ABB (not rated) we have used

announced orders to estimate its market share in submarine cables.

Source: TYNDP 2012 Credit Suisse estimates. We have assumed

35% of the sub-sea links value is related to the cable.

■ To place the above forecasts in context, Prysmian’s submarine sales were €556m

in 2011 (we expect close to €600m by 2012), and Nexans’ were €491m, we

estimate.

■ On that basis, our forecasts for Prysmian’s €745m per-year submarine

opportunity represents 1.3x of its current submarine sales and Nexans’

opportunity of €503m represents 1x its current sales.

12 February 2013


Prysmian’s market share may increase in the

medium term

We see Prysmian’s market share in the submarine market as well established and,

based on its ability to bring on new capacity, we see potential for this share to rise.

■ Prysmian has established relationships with key power grid equipment players, eg

Siemens. Siemens is not only prominent in installing offshore wind turbines in Europe

(74% share in 2012) but also in providing the substations to connect wind farms to the

grid (Figure 25).

■ Prysmian has the most experience in complex, high-value extra high voltage (EHV)

interconnections and in offshore wind connections, which are among the deepest and

furthest offshore connections that have been laid. The European Wind Energy

Association expects both the average water depth and distance to shore of projects to

increase over the coming years.

In our view, Prysmian is not only gaining ground in interconnections (traditionally Nexans’

core market) but also consolidating its position in offshore wind cables. In Figure 24 we

show that in submarine cables, offshore cables account for the highest proportion of value

at 54% and this is the segment in which Prysmian is strongest due to its industry

relationships and the complex projects on which it has executed.

Figure 24: Off-shore wind connections account for 54% of the global HV and EHV submarine power market (2011)

Offshore wind54%

Island Connection

23%

Inter-country7%

Offshore Oil8%

Other8%

Source: CRU, General Cable company presentation 2011

Prysmian has key industry relationships

In our view, Prysmian’s industry relationships will be key to it gaining market share:

Offshore wind contracts are becoming increasingly complex due to the depth and

distances offshore that are involved. The European Wind Energy Association expects the

trend to continue over the coming years.

Therefore standardisation of cable and power equipment (eg substations) becomes an

advantage and having previously combined technologies in deep, rough waters reduces

the risks associated with the process. In our view, Prysmian’s working relationship

with Siemens and experience of harsh installation conditions on the North sea

contracts (Figure 25) will be a key advantage in the bidding process for future

higher-value submarine tenders.

12 February 2013


Prysmian, through the German North Sea offshore wind projects, has worked on four large

projects where Siemens has provided the substations. These contracts are laid out below

in Figure 25 and we would note their relatively high value accounting for a combined

€850m of orders for Prysmian. We expect Prysmian to continue to win a significant share

of the next round of North Sea offshore wind connections such as Borwin 3, Helwin 3 and

the next Sylwin, which are likely to be announced in 2013.

Figure 25: German offshore wind transmission contracts

Connection Operator Wind Farm MW Power System Value (€ mn) Cables Value (EUR mn) Exp. Completion

Borwin 2 TenneT Veja Mate and Global Tech 1 800 Siemens 250 Prysmian 250 2013

Helwin1 TenneT Nordsee-Ost 576 Siemens 350 Prysmian 150 2013

Sylwin TenneT DanTysk 288 Siemens 470 Prysmian 180 2014

Helwin2 TenneT Amrum Bank West 300-400 Siemens 400 Prysmian 200 2015

Source: Company data, Credit Suisse research

These contracts have caused Siemens to take charges relating to the Borwin 2 and Helwin

1 contracts, while Prysmian management guides for some push-out to cash milestones in

2013. The issues on these contracts however were related to TenneT (the grid operator)

which halted installation over financial risk concerns (delays were unrelated to Prysmian’s

cable production). We believe that the German government is close to a legislative

solution that would allow transmission system operators to pass on the costs of connection

delays on to consumers.

We expect Prysmian to win future North sea contracts…

■ Prysmian management commented on its nine month 2012 results conference call

that it was currently tendering for further North Sea contracts, which include Borwin 3,

Helwin 3 and the next Sylwin contract.

■ We expect Prysmian to hold a significant advantage over its competitors in the tender

process, as it is working alongside Siemens on similar contracts which include Borwin

3 and 4, and Helwin 3.

■ The combined value of the Borwin 2, Helwin 1 and Sylwin contracts for Prysmian was

€600m and potentially the next three North Sea contracts could be of a similar value.

The opportunity for Nexans is in French offshore wind…

■ France aims to add 6GW of offshore wind, to come online by 2020. However, EDF

published a report (18 July, 2012) estimating France would only be able to achieve

3.9GW by 2020.

■ 2GW of capacity was awarded in April 2012 in four development zones while the

awarding of the last one will take place at a later date.

■ EDF and Alstom have won three out of four and Iberdrola won one. We would expect

Nexans to play a relatively central role in providing cables for these.

■ These wind farms will be less distance offshore than in the North Sea farms (c20km vs

>100km in the North Sea). We estimate the value per grid connection is likely to be

€30m-50m based on previously won contracts of a similar specification.

12 February 2013


Prysmian has won higher value, higher specification

Submarine cable contracts

We also believe Prysmian may take share via winning the higher value, more

complex submarine contracts which we have seen since 2010.

In Figure 28 we have listed announced submarine contract wins in Europe—on average

Prysmian’s value per contract has been €266m vs. €105m per contract at Nexans.

The European Wind Energy Association expects the trend towards large projects to

continue over the coming years with both average water depth and distance to shore

expected to increase.

In the last two years, Prysmian has won large contracts including the €800m Westlink

interconnection and the German offshore wind contracts. Not only are these contracts of

significant value but the company is achieving record technical specifications on them.

■ For example, the €800m Westlink interconnection contract set a record in terms of

voltage for an insulated cable as it will achieve 600KV.

■ Similarly the German offshore wind connections in the North Sea have involved

Siemens’ Voltage Sourced Converters (VSC), which has allowed Prysmian to use

extruded HVDC cables for the connections. These were the first commercial 300KV

DC cables made using extruded technology, which has the advantage of being lighter

and less susceptible to faults than impregnated technology.

As a result of these advances, we expect Prysmian to remain the market leader with an

opportunity to extend its market share (in euro value terms) depending on its ability to

increase capacity. However, we expect Prysmian to remain at the forefront of cable

technology resulting in its winning the higher value submarine contracts.

We also see greater project execution risk at Nexans

Submarine cable production processes are very complex. Due to undersupply in Europe,

Prysmian and Nexans’ submarine factories are running at full capacity. Figure 26 shows

Prysmian’s and Nexans’ order backlogs in submarine and high voltage cables, indicating

greater earnings visibility at Prysmian. We also believe there is greater execution risk at

Nexans based on a recent production issue at its Halden plant. Despite announced

plans to increase capacity at Prysmian, and past increases at Nexans, we expect

both to continue running their submarine plants at near-full capacity over the next

12 months.

12 February 2013


Figure 26: Prysmian and Nexans have 3.2 and 1.8 years of submarine order backlog so

the near-term focus remains on execution

0

1

2

3

4

5

Prysmian Nexans

Submarine backlog (years) Land HV (years)

Source: Company data

Prysmian Submarine Cable capacity increases

Based on the size of Prysmian’s backlog, and our forecasts for €695m of orders per year

in 2012-16, we see potential for further increases in submarine capacity. As a result we

see the risks to our 2014E and 2015E submarine sales growth forecasts as being to the

upside.

Prysmian is currently increasing capacity by 25-30% at its Arco Felize factory, which

should be completed by 1H 2013 for the production of the Westlink cable. It has also

increased capacity at its Drammen plant for Interarray cables (to link wind turbines within

wind farms) and adapted one production line from terrestrial HV cables to submarine at its

Pikkala facility (it has the ability to convert the second). Before further capacity increases,

the company will monitor the development of orders.

Nexans Submarine Cable capacity increases

In 2011 production capacity at Nexans’ Halden plant increased by 150% specifically for

submarine and umbilical capacity. We believe this capacity will underpin high-single-digit

submarine sales growth over the next three years. Based on the current order book, we

would not expect further capacity increases in the short term.

However, we see greater execution risk at Nexans

Despite the new capacity, we believe the submarine cable factories at both Prysmian and

Nexans will continue to operate at close to full capacity in the short term, resulting in

project execution risk at both. However, we believe this risk is materially higher at Nexans

based on its track record:

1. There were production issues at Nexans’ Halden plant in both 2010 and 2012 (Figure

27); and

2. in the last four years, we have not seen production issues at Prysmian that have

materially impacted margins.

12 February 2013


Figure 27: Nexans reported production issues on more than one occasion in its high voltage business

Reporting period Commentary

Q2 10

The margin on high voltage business was affected by additional cost incurred as a result of execution

difficulties in the submarine cable business. A large reorganization and capacity investments should see a

return to normal operations in the second half of the year

Q1 12Regarding submarine transmission activity, the Group experienced in the quarter a slower than expected rate in

commencing certain production runs. Source: Company data

■ Nexans’ production issues in Q1 12 resulted in an organic decline of -32% in

submarine and caused the overall group margin in H1 12 to fall to 3.6% (down 150bps

yoy). We view the risks in 2013 and 2014 as relatively higher for Nexans based on

these historical production issues.

■ Nexans has been proactive in its approach to solving these issues and has changed

the management of the division. It has also renegotiated delivery dates to reduce the

pressure on the production schedule.

■ However, given the impact production issues can have on group profitability, we see

the successful execution of the existing backlogs as a key driver of earnings stability

over the next 12 months. We would need to see a few quarters of normalised

transmission margins before being reassured that these production issues have been

fully resolved.

12 February 2013


Historical order trends in submarine

In Figure 28 we list the orders wins over the last three years from ABB, Prysmian and

Nexans and the value and order type (interconnection or offshore wind).

Interconnection trends: Historically, Nexans has led the interconnection market reflected

by order wins in 2010 but in 2012 Prysmian won the largest interconnection order (€800m,

660KV) in history. Prysmian also won a larger share of the Italy/ Montenegro cable

(€400m, 500KV).

Off-shore wind connections trends: In terms of contract value Prysmian are leaders due

to their role in the complex but valuable off-shore wind connections in the North Sea.

Nexans’ off-shore wind contracts are on average at €54m vs €149m at Prysmian.

Figure 28: ABB, Prysmian and Nexans announced submarine orders

Date Customer Country Type Value Implied market share

Mar-09 Eirgrid Ireland Interconnection 396

Jul-09 TenneT Germany / North Sea Offshore wind 227

Nov-10 C-Power NV Belgium Offshore wind 39

Aug-11 TenneT Germany / North Sea Offshore wind 324

Apr-12 TenneT Germany / North Sea Offshore wind 25

Dec-12 Subsea 7 Norway Offshore wind 131

TOTAL 986 18%

Aug-09 Vattenfall Ireland Offshore wind 27

Dec-09 Terna Sicily / Italy Interconnection 300

Jan-10 Dong Energy Ireland Offshore wind 18

Jun-10 TenneT Germany / North Sea Offshore wind 250

Jul-10 TenneT Germany / North Sea Offshore wind 150

Jan-11 TenneT Germany / North Sea Offshore wind 280

Aug-11 TenneT Germany / North Sea Offshore wind 200

Feb-12 NGET/SPET Scotland / England Interconnection 800

Oct-12 Terna Italy / Montenegro Interconnection 400

TOTAL 2,425 43%

Apr-09 Sheringham Shoal Offshore Wind Farm Norway Offshore wind 12

Sep-09 Colruyt Belgium Offshore wind 39

Nov-09 Centrica UK Offshore wind 50

Dec-09 Dong Energy UK Offshore wind 100

Jul-10 Statnett Norway Interconnection 104

Dec-10 Enemalta Malta / Sicily Interconnection 178

Dec-10 Fingrid Oyj / Elering OU Finland / Estonia Interconnection 180

Feb-11 Dong Energy Denmark Offshore wind 30

Dec-11 Red Electrica de Esp. Mallorca & Ibiza Interconnection 80

Jan-12 Energinet / Statnett Denmark / Norway Interconnection 87

Apr-12 Colruyt Belgium Offshore wind 50

Aug-12 Greece PPC Greece Interconnection 64

Oct-12 Terna Italy / Montenegro Interconnection 300

Jan-13 Nalcor Energy Canada Interconnection 80

TOTAL 1354 24%

NEXANS

PRYSMIAN

ABB

Source: Company data, Credit Suisse estimates for implied market share

12 February 2013


Risks to our positive stance on submarine cables

■ Renewable subsidies: We acknowledge that renewables are becoming an expensive

option given the current low cost of electricity in Europe. Despite this we do not expect

any material change in governmental policy in the medium term (2012-2017) and

expect the EU to keep to the 20-20-20 target. We also note that Germany returning to

nuclear remains unlikely, making the 10GW of offshore wind additions a necessity. On

this basis we remain confident in our €830m and €437m per year sales

opportunity estimates for Prysmian and Nexans in submarine cables.

■ Delays to TYNDP forecasts: A further risk, and particularly to the interconnection

projects, is project delays. Offshore wind connections are easier to forecast as the

tenders for cables lag the awarding of the wind turbines. The timing of

interconnections is more difficult to forecast and delays are usually caused by social

resistance or permitting issues.

Figure 29: 33% of grid investments laid out in the TYNDP 2010 plan have been delayed.

Ahead of schedule

5%

On track62%

Delayed33%

Source: TYNDP 2012

Delays are generally in the planning stage rather than after cables requirements have

been specified and the cable is in production. In our view it is a case of ‘when’ these

investments are made, not ‘if’, and we believe any delays can be offset by the current

order backlogs at Nexans and Prysmian.

12 February 2013


#2: SURF: Limited downside risk in the near term

SURF (Subsea Umbilicals, Risers (or flexible pipes) & Flow lines) accounts for 2% of

group sales but we view it as an important growth driver and in our base case it accounts

for 12% and 20% of incremental group EBITDA in 2013E and 2014E, respectively.

We believe the market has become overly concerned regarding Prysmian’s ability to ramp

up capacity utilisation (currently 20%) in flexible pipes at its Vila Velha plant following

Petrobras’ (largest customer) 2012-2016 business plan release (June 2012). This is

because 1) it is a newly built asset that could result in potential write-downs and 2) SURF

is an important growth driver for Prysmian owing to the flexible pipe capacity ramp-up and

high margins on these products. We have also looked at Saipem’s (Oil Field services)

profit warning on 30/01/13 and see limited threat to our thesis for the SURF business.

In our base case for SURF we assume it accounts for 12% of the incremental EBITDA we

forecast for the group in 2013 and 20% in 2014. Stress testing our assumptions using a

bear case only implies 1.3% downgrades to our group EBITDA forecast in 2013 and 2014.

We worked with our Petrobras analyst and looked at competitors (Technip), and

conclude that these concerns are overdone. We would highlight the following:

■ PROMINP forecasts demand for flexible pipes in 2014 at 2,240 nKM vs. installed

production capacity in Brazil of 1,590 nKM (nKM stands for normalised kilometres),

which we believe underpins our base case SURF assumptions.

■ In our base case we forecast a conservative rise to 35% flexible pipe capacity

utilisation in 2013 rising to 80% by 2015. In 2013 and 2014 respectively our SURF

forecasts account for 12% and 20% of incremental EBITDA for the group

■ In our bear case scenario we see potential for limited downgrades to consensus

(-1.3%). However we would also note that in our base case scenario we see

upside risk for the remaining 93% of sales in the industrial division as our

current forecasts imply limited growth in these areas.

Figure 30: Timeline of the development of Prysmian’s SURF business

Date Event

2007Prysmian's Vila Vehla plant becomes fully operational with the capacity to produce

250 km of Umbilicals

2007Prysmian sign a contract with Norsk Hydro and Anadarko Petroleum Corporation

for supply of umbilicals worth €13.5mn

2008Prysmian manufacture a new technology for the manufacturing of hybrid Umbilicals

using plastic instead of steel

2008-2012 Prysmian sign a flexible pipe agreement for 4 years with Petrobras worth €135m

2009 Prysmin win a contract for 84.5 km of Umbilicals worth €28.4m


Nexans’ Umbilicals business

Nexans also produces umbilicals from its facility in Halden. However, its umbilicals

business is already established (with relatively higher capacity utilisation than Prysmian)

and therefore is not as important growth driver as SURF products is for Prysmian.

Therefore we have not commented on Nexans umbilicals business in detail here but we

would highlight that it continues to win good contracts in Europe (including December

2012, when Nexans won a €45m umbilicals contract for the Statoil fields in Norway.

12 February 2013


What are SURF products?

SURF products are used in the production of oil from the sea floor to floating or fixed

platforms. In Prysmian’s SURF business specifically, they include umbilicals (2012E

revenue €45m), downhole technology (2012E revenue €45m) and flexible pipes (€30m).

Figure 31: Definitions of subsea umbilicals, risers, flow lines & DHT (SURF)

Product Definition

Umbilical

These are long, flexible pieces of equipment that consist of tubes, cables and armouring.

They provide the link from the above sea facility through which power and injection

chemicals are supplied to wells

Riser (or Flexible

Pipe)

These are pipes that transfer materials from the seafloor well to the production facilities

above the sea. These are insulated to withstand seafloor temperatures and can be rigid or

flexible. There are 2 - 16 inch variations of these products

Flowline These are pipelines that carry oil from the wellhead on the seafloor to the foot of the riser.

Key to these products is their ability to restart production quickly on demand.

Riser (or Flexible

Pipe)

These are pipes that transfer materials from the seafloor well to the production facilities

above the sea. These are insulated to withstand seafloor temperatures and can be rigid or

flexible. There are 2 - 16 inch variations of these products

Downhole

Technology

(DHT)

This is included in Prysmian's SURF business and provide cables that moniter well

performance, supply power or sensors and that can be used for chemical and hydraulic

injection


The decision whether to use flexible or rigid depends on the operator. Petrobras is

Prysmian’s key customer for SURF products and most commonly uses flexible pipes

because 1) they are suitable for deeper waters as in Brazil, 2) flexibles are more suited to

the harsher conditions off Brazilian shores and 3) flexible pipelines can be more quickly

installed. Flexible pipes are most commonly used in the floating production, storage and

offloading (FPSO) method of production.

12 February 2013


Technical specifications of flexible pipes

■ Flexible pipes range from 2 inches to 16 inches in diameter.

■ The qualification process is complex, particularly for pre-salt conditions (water

depths of 2000KM+, high CO2 and H2S) which place extra pressure on the pipe.

■ Currently Technip and Wellstream are the largest producers of flexible pipes for

Petrobras and to an extent have a monopoly over the higher-end specification flexible

pipes.

■ Prysmian is qualified to produce 2- and 4-inch flexible pipes and is expected to gain

accreditation for 6-inch pipes from Petrobras in the near future. This broader offering

will allow Prysmian’s flexible pipes to be used in more locations in the Santos and

Campos basins.

The qualification process for flexible pipes is complex and makes flexible pipes relatively

R&D intensive. We believe there is a 4-5-year lead time for a new entrant to be able to

compete at the high end of the market, which is still dominated by Technip and

Wellstream.

On this basis Prysmian may be able to sell to the very high end (pre-salt) of the flexible

pipe market in 2014. However, qualification for high-end flexible pipes is not a formality

and NKT-flexibles have not managed to break the high-end duopoly of Technip and

Wellstream despite being in this market for a relatively long time.

Our Petrobras analyst Emerson Leite does not forecast production by pre-salt and post-

salt; we have split Petrobras’ assumptions of its production along these lines. This

highlights that in five years pre-salt is growing its share in the mix from 5% to 31%. We

believe Prysmian’s flexible pipes will be most utilised within post-salt conditions.

Figure 32: Pre-salt currently accounts for 5% of Petrobras’ oil production in Brazil…

Figure 33: …but this is expected to rise to 31% of oil production by 2016

Pre-salt 5%

Post salt95%

Pre-salt 31%

Post salt69%

Source: Petrobras Business Plan 2012-16 Source: Petrobras Business Plan 2012-16

Based on the supply and demand of flexible pipes (Figure 37) in Brazil, we would expect

Technip and Wellstream to focus on the pre-salt flexible pipes. However, owing to their

current capacity in Brazil this would most likely mean reducing their production of flexible

pipes for post-salt. Therefore while the post-salt segment appears to be declining in

importance, we believe demand for Prysmian’s flexible pipes in this segment will continue.

12 February 2013


Why is the market concerned about SURF products?

Petrobras’ 2012-16 business plan and management change have had a negative

readacross to Prysmian based on the cost-saving focus that could affect the ramp-up of its

Vila Velha plant. While we do not believe it has materially affected consensus forecasts,

this was one of the bull cases for Prysmian in 1H12 and we believe recent news flow may

have weighed on the multiple. We assume only a moderate pick-up in capacity in

2013E, but based on the currently tight flexible pipe market in Brazil we expect

capacity saturation can be achieved by 2015.

Key points of the Petrobras 2012-2016 business plan

■ Exploration and production will account for 60% of Petrobras’ total investment

between 2012 and 2016 of US$236.5bn.

■ All projects under implementation or evaluation will be monitored and evaluated using

the physical and financial evolution of the project.

■ There are three structural programmes: 1) Campos basin operational efficiency

improvement programme, 2) operational cost optimisation programme and 3) local

content management programme.

We view these concerns as overdone

■ The cost of flexible pipe is low relative to the entire production process and therefore

we think it unlikely these will be a focus of Petrobras’ plan. Furthermore, as part of the

2012-16 plan Petrobras has committed to “maximizing the use of the Brazilian

equipment and services industry capacity…”. We believe this focus is positive for

Prysmian given it produces its flexible pipes locally at its Vila Velha plant in Brazil.

■ Petrobras continues to encourage large players (Wellstream and Technip) to add

Flexible pipe capacity in Brazil. Technip is installing a new plant and Wellstream is

planning plant expansions in 2013, reflecting the tight flexible pipe market in Brazil.

Demand for flexible pipes in Brazil is still forecast by PROMINP to be 40% higher

than installed flexible pipe capacity in 2014 (see Figure 37).

■ Prysmian has started to deliver flexible pipes produced at the Vila Velha plants outside

Brazil, which can help offset any short-term soft demand from Petrobras.

■ Our analyst for Petrobras continues to forecast Petrobras capex as flat yoy in 2013 at

US$41,740m, implying no slowdown in investment. Petrobras is also targeting

production to increase at a CAGR of 4.3% between 2011 and 2016.

Figure 34: The 2016 production target (bpd ‘000) still implies 4.3% CAGR 2011-16

2022

3070

4910

2022

2500

4200

0

1000

2000

3000

4000

5000

6000

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

2011-15 business plan 2012-16 business plan

Source: Petrobras Business Plan 2012-16

12 February 2013


Further offshore O&G news flow: Read-across from Saipem profit warning

(30/01/13)

What happened? Following an internal review Saipem (offshore and on-shore E&C) pre-

announced 2012 profits 10% below consensus and guided for 2013 more than 50% below

consensus.

What’s changed: The review commented on lower activity in high-margin pre-09

contracts, competitive market conditions in 2009-11 in offshore and high levels of

investment in Brazil. New management has also taken a more conservative approach to

revenue recognition.

Read-across to Prysmian: Saipem is a small customer of Prysmian’s but this profit

warning does not change our view on the Prysmian flexible pipe ramp-up. This is because

the majority of the above issues are company specific and Brazil appears, given Saipem’s

higher investment, to have been one of areas of more resilient demand. As we have

mentioned Petrobras is Prysmian’s key customer and we therefore view flexible pipe

supply and demand in Brazil as a much clearer indicator of the potential for Prysmian’s

business.

Rising SURF EBITDA driven by flexible pipe ramp-up

We have focused on flexible pipes rather than on umbilicals and downhole

technology (DHT) because Prysmian has been producing umbilicals since 2007 and

expects to generate approximately €60m of revenue from umbilicals in 2012E. DHT is also

an established business acquired through Draka with products predominantly sold into the

US. We continue to expect both to grow at 5% over the next three years.

Therefore based on the ramp-up of flexible pipes, the incremental EBIT from SURF will be

driven by these products, rather than by umbilicals, where we estimate capacity utilisation

is currently c60% (vs c25% in flexible pipes). Our base case assumption is that flexible

pipe capacity is 80% utilised by 2015E.

Figure 35: Flexible pipes account for the lowest

proportion of SURF revenues but we believe they have

the greatest growth prospects over the next three years

(2012E)

Figure 36: Incremental SURF EBITDA will be driven by

flexible pipes as we estimate capacity is currently 20%

utilised compared with 60% for umbilicals

Umbilicals37%

Downhole Technology

38%

Flexible pipes25%

0%

10%

20%

30%

40%

50%

60%

70%

Umbilicals Flexible pipe

Capacity Utilization in 2012

Source: Company data, Credit Suisse estimates. * = Flexible pipes

are currently not higher margin but if both umbilicals and flexible pipes

were at saturated capacity flexible pipes would be


12 February 2013


Flexible pipe supply and demand in Brazil

Historically Technip and Wellstream have been the sole suppliers to the Brazilian market

and have combined capacity of 720 nKM per year. Prysmian signed an agreement with

Petrobras to build a 150nKM/year plant while competitor NKT will have a 250nKM/year

plant from 2013. Technip plans to increase its capacity by 200nKM/year from 2013.

In Figure 37, we show Brazil’s flexible pipe capacity, which PROMINP estimates will see a

2012-14 CAGR of 35%. PROMINP forecasts demand for flexible pipes remains 40%

above the installed production capacity.

We have also cross-checked these demand estimates against the Brazilian Organisation

for the Petroleum Industry forecasts (ONIP). ONIP forecasts between 1,360 nKM and

1,700 nKM of flexible pipe demand per year in 2010–2020. The mid-point of this is 1,530

nKM, which implies the 1,590 nKM of capacity would be close to 100% utilised in 2014.

Figure 37: PROMINP forecasts flexible pipe demand to remain above capacity in Brazil in 2013/14 despite expansion plans from market leaders Technip and Wellstream

450 450650 650

270 270

270

540150 150

150

150

250

2240

1280

1920

2240

0

500

1000

1500

2000

2500

2011 2012 2013E 2014E

Technip Wellstream Prysmian NKT Flexible pipe demand

Source: Company data, PROMINP

PROMINP forecast rising demand in 2013 and 2014: Looking at Figure 37, PROMNIP

estimates flexible pipe demand to decline materially in 2012 and recover in 2013. In our

view the decrease in demand in 2012 was driven by the limited floating production,

storage and offloading platforms but deliveries are expected increase significantly in 2013,

which drive an increase in flexible pipe demand forecast by PROMINP in 2013.

Flexible pipe contracts are often framework agreements: For the more standard

specification flexible pipes, Petrobras uses framework agreements. This was the case for

Prysmian, which was given a four-year €135m flexible pipe contract. Recent examples of

these contracts are included in Figure 38. For the higher-end products Petrobras tends to

go to an open tender process between Technip and Wellstream. We expect Prysmian’s

agreement to be renewed in 2012, which should result in saturation by 2015. Furthermore,

with ongoing technological improvements there may be the opportunity to bid against

Technip and Wellstream on some of the larger, higher-value contracts.

Figure 38: Framework agreements – We estimate these guarantee 40% of the agreements to be delivered but the ramp-up for Prysmian will be generated by product demand which, PROMINP forecasts, should continue

Company Start of agreement Duration value Quantity Specification

NKT flexibles 2011 4 years EUR 1.3bn 694KM 4 - 8 inches, up to 2,000KM

NKT flexibles 2009 3 years EUR 200m na na

Prysmian 2008 4 years €135mn na Up to 2,000 KM

Wellstream 2008 4 years GBP 600mn 700KM 2.5 inch to 9.5 inch, up to 2,000KM Source: Company data, Credit Suisse research

12 February 2013


Scenario analysis for flexible pipe ramp-up

In Figure 39 we have included our base, bull and bear case assumptions for the ramp-up

of Prysmian’s flexible pipe capacity at its Vila Velha plant in Brazil. In each scenario, we

have assumed a price of $1,500 per metre of flexible pipe. Prysmian’s total capacity is

150KM per year but we assume saturation is 80% (or 120KM).

Base case: In our base case, we assume a small ramp-up to 35% utilisation in 2013,

which we believe fairly accounts for the impact of the new Petrobras business plan.

However, based on the production targets and forecast flexible pipe demand, we see a

material pick-up in utilisation in 2014E to 65% and capacity to be saturated by 2015E.

Bull case: Our bull case scenario implies a broadly stable ramp-up in capacity utilisation

to 85% in 2015E. Based on demand vs flexible pipe capacity in Brazil we see this scenario

as realistic but note that the current internal business plan at Petrobras may cause some

short-term demand volatility. This implies 1% upgrades to our 2014 EBITDA forecasts.

Bear case: Here we stress test our forecasts assuming no ramp-up in capacity in 2013

(which we view as highly unlikely) and then for 45% capacity to be achieved in 2015. We

also assume the umbilical and DHT businesses do not grow in 2013-15. However, we

reiterate our view that this is unlikely as the large flexible pipe players such as Technip

and Wellstream continue to add capacity in Brazil to meet increasing flexible pipe demand.

This implies 1.3% downgrades to our 2014 EBITDA forecasts.

12 February 2013


Scenario analysis for SURF contribution, 2012-2015

Figure 39: Scenario analysis for the ramp-up of flexible pipe capacity at Prysmian (€m)

Bull case Scenario 2012E 2013E 2014E 2015E

FLEXIBLE PIPES

KM of Flexible pipes 30 67 120 128

Implied utilization 20% 45% 80% 85%

Revenue 33.6 75.1 134.4 143.4

EBITDA 1.7 14.1 31.9 34.6

implied EBITDA margin 5.0% 18.8% 23.8% 24.1%

Umbilicals and DHT

Revenue 82.2 86.3 90.6 95.1

EBITDA margin 20% 20% 20% 20%

EBITDA 16.4 17.3 18.1 19.0

TOTAL SURF REVENUE 115.8 161.3 225.0 238.5

SURF EBITDA 18.1 31.4 50.0 53.6

INCREMENTAL EBITDA FROM SURF 13.3 18.7 3.6

Base Case Scenario 2012E 2013E 2014E 2015E

FLEXIBLE PIPES



Revenue 33.6 59.4 100.8 134.4

EBITDA 1.7 9.4 21.8 31.9


Umbilicals and DHT

Revenue 82.2 86.3 90.6 95.1


EBITDA 16.4 17.3 18.1 19.0


SURF EBITDA 18.1 26.7 40.0 50.9

INCREMENTAL EBITDA FROM SURF 8.6 13.3 11.0

Bear Case Scenario 2012E 2013E 2014E 2015E

FLEXIBLE PIPES



Revenue 33.6 33.6 50.4 76.2


EBITDA 1.7 1.7 5.9 12.3


Umbilicals and DHT

Revenue 82.7 82.7 82.7 82.7


EBITDA 16.5 16.5 16.5 16.5


SURF EBITDA 18.2 18.2 22.4 28.9

INCREMENTAL EBITDA FROM SURF 0.0 4.2 6.4 Source: Credit Suisse estimates

12 February 2013


SURF contribution implies limited growth from

remainder of the Industry division Looking at the revenue split for the industry division (Figure 41) SURF accounts for 7% of

group revenues and therefore our 2013 revenue forecast of €1,891m for industry implies

1% and 1.5% growth for the remaining 93% of the industry division in 2013E and 14E. In

Figure 40 we show our incremental EBITDA forecasts for Prysmian in 2013/14 and the

incremental EBITDA accounted for by SURF within this. SURF accounts for 12% in 2013E

and 20% in 2014E.

Figure 40: Incremental EBITDA for the group and contribution from SURF using our base case assumptions for a flexible pipe capacity ramp-up, €m

Figure 41: Our base case capacity ramp-up assumptions for SURF imply the remaining 93% will grow at 1% in 2013E which we view as conservative

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

2013 2014


Specialties & OEM35%

Automotive23%

OGP13%

SURF7%

Renewables14%

Elevators6%

Other2%

Source: Credit Suisse estimates Source: Company data

Implications of our bull and bear cases for SURF: We have also included the sensitivity

on the incremental EBITDA for the group in Figure 42 and Figure 43 for our bull case and

bear case scenarios. We believe this highlights that concerns are overdone as limited

ramp-up in capacity utilisation in our bear case results in 1.3% downgrades to our 2013

and 2014 EBITDA forecasts. In our bull case, group EBITDA for 2013E and 2014E rises

by €5m in both years (0.8% upgrades). In our bear case we see EBITDA declining by €9m

in 2013E and 2014E (1.3% downgrades). On that basis we believe the spread of the

potential impact to Prysmian from SURF is plus or minus 2.3% in 2013E.

Figure 42: The total group incremental EBITDA rises by €7.5m in 2013E in our bull case scenario (1% upgrades for the group on Credit Suisse forecasts)

Figure 43: The total group incremental EBITDA rises by €7.5m in 2013E in our bear case scenario (-1% downgrades) for the group on Credit Suisse forecasts)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

2013 2014

Bull case SURF incremental EBITDA Other group incremental EBITDA

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

2013 2014

Bear case SURF incremental Other group incremental EBITDA

Source: Credit Suisse estimates Source: Credit Suisse estimates

12 February 2013


#3: Mapping the global cable competitive landscape

2011 operating profit margins at Prysmian and Nexans were 370bps and 330bps

respectively below peak, with increasing competition being one of the factors responsible

for the decline. In this section we have looked in detail at competitors’ growth rates and

margins, and Prysmian’s and Nexans’ recent commentaries to consider the broader

competitive landscape. Based on the threat in Land High Voltage being relatively well

understood we have focused on the threat in Optical fibre & cable.

Our conclusions from this analysis are:

■ Combined, Europe and the US account for 45% of Prysmian’s optical fibre & cable

sales and Prysmian has a leading market share in most European countries. In our

view the large Japanese competitors are unlikely to focus primarily on expansion in

this market and rather focus on China given the demand outlook.

■ In China (25% of Prysmian’s optical fibre & cable sales) we view the threat from

Japanese competitors to Prysmian’s leading market share as manageable. Given the

high expected demand (limiting the risk of over-capacity), and consolidated market

(five key players) we would not expect aggressive pricing strategies from competitors

that could ultimately destroy the longer-term value of this market.

■ Currently, domestic Chinese competitors do not represent a significant threat to

Prysmian in China, in our view. In the medium term we expect existing smaller players

to grow to meet demand but, based on the technology and high cost of developing

optical fibre, we see limited scope for new entrants. We also believe Prysmian can

continue to compete on price with existing domestic players as it produces locally

through its JV (YOFC).

■ In Land High Voltage (6% of Nexans’ sales and 7% of Prysmian’s sales) these

players, and particularly Nexans, have flagged emerging market competition in the

Middle Eastern and Chinese markets. We expect pricing pressure to moderate over

the next two years as prices have already fallen so significantly (Nexans now has a

low single digit EBITDA margin in Land HV compared with double digits previously).

However, we believe pricing pressure will continue to be of greater concern for

Nexans as 37% of its Land HV sales were in the Middle East in 2012 (vs 49% in

2010). We think Prysmian’s business has a greater focus on the higher voltage

segments, with only 40% of sales in the <220KV segment.

12 February 2013


Global competitor mapping; end market presence

Below we show the global cable players and their exposure by end market. We have also

included a small description of business focus (Figure 44).

Prysmian is the largest global player with Nexans the second largest. General Cable is the

largest US player but is less focused on submarine cables due to the slower progression

of offshore wind in the US. In Asia Fujikura and Furukawa are less than half of the size of

Prysmian and Nexans but are focused more on telecoms and specifically optical fibres. As

a result they are disproportionately large players in the Optical fibre & cable market

relative to their overall size.

Figure 44: Competitor end market exposures and comments

Company Utilities Construction Industry Automotive Communication Other company comment

Leoni 40% 60%Leader in European Automotive cables and also provides

Industrial, Healthcare and Communication cables

Nexans 45% 22% 21% 10% 2%#1 in Europe interconnections, #1 building cables in

France, #1 share in Aerospace cables

NKT cable 41% 30% 29%

NKT is focusing on growing on Electricity Infrastructure

and have opened factories in China and Germany. They

lead the high performance over-head rail cable market in

China

Prysmian 28% 30% 22% 18% 2%

Leader in all submarine applications with largest

production capabilities. New leader in Optical Fibre Cables

(Telecom Division)

Belden cables 25% 37% 38%

Belden provides transmission solutions and

communication systems in to power plants, buildings,

hospitals, rail and other end markets

Coleman Cable 42% 22% 36%Coleman cable provides electrical, electronic and

assembled wire and cable products industry and utilities.

General Cables 61% 24% 11% 4%

64% of revenues outside North America. Leader in T& D

cables in the US. 45% of ROW sales (33% of group) are in

construction

Southwire

Southwire sells low, medium and HV cable, building cables

and wire for automotive harnesses, electric motors and

industrial equipment.

Fukijura 36% 21% 43%The largest segment of group sales (c50%) is Copper

Cables, Industrial cables and magnet wires

Furukawa 25% 21% 15% 4% 50% Marketshare in Brazil in Telecom Cables (FISA).

Hitachi Cable 41% 38% 11%

Hitachi are forecasting overseas revenue to be 28% of

sales. Hitachi cable are targeting Auto cables expansion

outside Japan

LS Cables

offers power T&D cables, Optical fibre cables and cables

for Industry (nuclear, rail, airport). C50% of cables are

exported from Korea

European companies

US companies

Asian companies

Source: Company data, Credit Suisse estimates.

12 February 2013


Global cable competitor growth and margin trends

Figure 45: Sales growth and profit margin for global cable companies

Sales growth (** organic) Q2 10Q4 11 Q1 12 Q2 12 Q3 12 2007 2008 2009 2010 2011

Leoni 12.6% 6.4% 2.5% 4.6% 12.3% 23.0% -25.8% 36.8% 25.0%

Nexans** 5.8% 0.4% -0.3% 2.4% 5.0% 1.5% -18.1% 0.4% 6.5%

NKT cable** 0.0% -5.0% -3.0% -2.0% 11.0% 2.0% -10.0% 12.0% 5.0%

Prysmian** 9.0% 2.6% -4.0% -1.4% 7.7% 4.2% -17.4% 3.2% 11.2%

Belden cable 9.2% 0.6% -9.7% -5.6% 36.0% -1.3% -29.4% 14.3% 22.6%

Colman Cable 11.1% 7.1% 5.2% -2.4% -48.2% 39.6% 23.2%

General Cable 0.8% -3.1% -3.5% -1.0% 23.0% 37.0% -20.0% -5.0% 12.0%

El Sewedy 2.9% -2.7% -6.7% 28.9% 22.4% -18.8% 13.9% 17.6%

Fujikura -11.2% -8.9% -9.3% -12.1% -13.0% -12.2% 3.6% -2.5%

Furukawa -2.5% -1.7% -6.6% -1.9% 6.3% -12.0% -21.6% 14.3% -0.8%

Hitachi Cable -5.8% 15.9% -12.9% -16.3% 4.0% -12.9% -24.5% 12.6% 3.2%

LS Cables -7.0% 39.0% 21.0%

Average 5.6% 0.0% -3.2% -1.7% 14.9% 1.6% -23.1% 11.2% 14.0%

Margin Q4 11 Q1 12 Q2 12 Q3 12 2007 2008 2009 2010 2011

Leoni 5.7% 9.7% 5.3% 5.5% 5.5% 1.9% -1.7% 4.4% 6.4%

Nexans (constant metals 6.0% 3.6% 8.5% 8.9% 6.0% 4.8% 5.6%

Nexans (current metals ) 5.5% 6.3% 4.8% 3.7%

NKT cable 2.1% 3.7% 3.2% 3.4% 8.4% 5.9% 3.6% 3.3% 2.9%

Prysmian 6% 5% 7% 6% 9.1% 9.3% 9.0% 6.8% 5.6%

Belden cable 7.5% 9.5% 12.1% 10.0% 11.0% 0.0% 0.1% 8.0% 9.4%

Colman Cable 4.3% 5.8% 8.0% 6.7% 5.5% 8.7% 5.8% 6.1%

General Cable 2.3% 3.7% 4.9% 5.0% 7.9% 6.8% 4.1% 4.6% 4.2%

El Sewedy 2.9% 6.2% 6.8% 9.4% 8.0% 9.1% 8.4% 7.0%

Fujikura 2.1% 3.8% 2.7% 1.0% 3.1% 0.0% 3.6% 3.2% 2.6%

Furukawa 0.5% 1.9% 1.6% 2.2% 3.5% 1.0% 2.5% 3.8% 1.7%

Hitachi Cable 0.1% 0.4% -0.2% 2.4% 4.0% -3.0% -1.7% 0.2% 0.5%

LS Cables 4.6% 5.2% 2.7%

Average 3.6% 5.0% 5.0% 4.7% 6.9% 4.3% 4.1% 4.6% 4.7%

European companies

US Companies

Asian & Middle east companies

European companies

Asian & Middle east companies

US Companies

* = Organic growth rather than nominal growth Source: Company data, Credit Suisse research

Asian competitors—operating at low margins in more commoditised end markets:

We believe Asian competitors have historically operated at lower margins to win market

share from developed market players. Taking an average of Furukawa, Fujikura and

Hitachi the margins in 2010 and 2011 respectively were 2.4% and 1.6%. In the case of

Hitachi Cable and Furukawa this appears to have been a successful strategy as they grew

12.6% and 14.3% in 2010. However, these names primarily operate in the lower value

added end of the market. Hitachi derives 58% of sales from copper strips and products

and from Automotive wires and Magnet and Electronic products.

Middle East: Aggressive pricing in land high voltage: El Sewedy demonstrated 13.9%

and 17.6% organic growth in 2010 and 2011. We believe this growth has been at the

expense of Nexans and Prysmian, which have lost share in this region.

Developed market competitors: Market share trends appear stable: The growth and

margins trends of Prysmian’s and Nexans’ developed market competitors do not imply

market share gains. General Cable sales declined in 2009 (-20%) and 2010 (-5%), likely

due to its European construction exposure and reduced utility spend in the downturn.

Similarly, despite NKT growing relatively well in 2010 and 2011, its margin continued to

decline. The only player we believe has continued to take share in the developed markets

is Leoni, in the Automotive cable end market.

12 February 2013


Cable end market risk matrix

Figure 46 highlights the cable end markets which in our view are most at risk from

competitive pressures. Here we are talking about a combination of emerging market

competitors and, in cases such as optical telecom, developed market players from Japan.

High barriers to entry: In our view the Optical Fibre and Telecom markets have high

barriers to entry based on the regulatory process associated with producing these cables

and also the capital required to enter these markets. We would also include Elevator

cables in this category (7% of industry division sales) but do not include it in the chart. As

a result we believe they are protected in the medium term from emerging market

competitors.

Established relationships: In our view Building cables are relatively protected in the near

term due to Prysmian’s and Nexans’ relationships with distributors making it a hard market

to break into. Equally in Power distribution cables, relationships with the Utilities

companies are essential and this serves as a barrier to entry.

Market size less attractive: In the Capital Goods sector we have seen emerging market

competitors focus on large markets and export to developed markets as domestic demand

slows (eg Power transformers). Due to the size of the markets we believe the focus on

emerging market competitors is unlikely to be on Mining, Aerospace or Rail cable markets.

We also believe there are regulatory barriers to entry in these markets due to the high

risks involved with product failure in Mining, Aerospace or rail operations.

Emerging competition impacting already: We discuss this in greater detail on page 36

but Land High Voltage has been particularly affected by competition in the Middle East

and China markets. We have also seen margins come under pressure in more

commoditised end markets such as Automotive cables.

Figure 46: Competitive risk in cable end markets. We see limited medium-term risk in markets which are small and

where there are either technological barriers to entry or barriers through established relationships.


Land High Voltage


Rail cables

Mining cables

Aerospace cables

Established

relationships

Low

Building cables

Market size less

attractive

High barriers to

entry


Time frame in years


Submarine cables

Medium

Automotive cables

Emerging mkt

competition has

had an impact


12 February 2013


Optical fibre cables: attractive in the medium term

Prysmian’s telecom division has risen in importance, accounting for 26% of group

EBITDA having in H1 12 versus 18% in H1 10. We have assessed the competitive risk for

Prysmian in optical connectivity and fibre, as this accounts for 47% of the telecom division

(or 75% including JV’s) and, we estimate, generates approximately at least a double digit

EBITDA margin.

Our conclusions from our analysis are as follows:

■ We see limited risks to telecom margins over the next three years due to the high

technological barriers to entry. There are five key players (Prysmian, Corning,

Furukawa, Fujikura, Sumitomo) that can produce both fibre and cable and therefore it

is a relatively consolidated market.

■ China (25% of Prysmian’s Optical fibre & cable sales) is forecast to represent 45% of

the global fibre optical cable market in terms of length (kilometres), growing

cumulatively at +46% over the next four years. Prysmian has a leading market share

via its JV, which produces locally, making it competitive on price.

■ In China we view the threat from Japanese competitors to Prysmian’s leading market

share as manageable. Given the high expected demand (limiting the risk of over-

capacity), and consolidated market (five key players producing cable and fibre) we

would not expect aggressive pricing strategies from established players that could

ultimately destroy the longer-term value of this market.

■ Currently, domestic Chinese competitors do not represent a significant threat to

Prysmian in China in our view. In the medium term we expect existing players to grow

to meet demand but based on the technology and high cost of developing Optical

Fibre we see limited scope for new entrants. We also believe Prysmian can continue

to compete on price with existing domestic players as it produces locally through its JV

(YOFC).

12 February 2013


Optical fibre and cable market landscape

Globally there are multiple optical cable producers but there is an important distinction

between cable manufacturers, fibre-only manufacturers and those companies that can

produce both the fibre and the cable, which reduces cost and improves overall cable

design quality. Within optical cables it is the optical fibre which is both the major cost

component and the major value added element. For this reason we think it may be difficult

for local Chinese competitors to aggressively compete on price.

With the acquisition of Draka in 2011 Prysmian became #1 in Europe and China, and

#1 worldwide in optical fibre. There are five key established players who produce both

the optical fibre and the optical fibre cables: Corning in the US (sells optical Fibre and

cables), the Japanese players Furukawa, Fujikura and Sumitomo, and Prysmian.

Figure 47: Prysmian is number 3 in terms of Total Telecom sales but #1 in the higher margin optical fibre & telecom segment (Corning is #2). 2011

0

200

400

600

800

1000

1200

1400

1600

Sumitomo Corning Prysmian Furukawa Fujikura General Cable Nexans

Optical Fibre & Cables sales Total Telecom related sales

Source: Company data;

In Figure 47 we show Prysmian’s overall telecom sales but we would highlight that most

importantly it has a leading global market share in Optical fibre & cable. Corning is number

two with €750m of sales in 2011 vs €1bn at Prysmian.

Competition from Asia unlikely to threaten Europe and US Optical markets

Competition from Asia in the Capital Goods sector has tended to intensify when: 1) the

growth prospects for a domestic industry are soft (because when the Asian market slows

exports become a priority); 2) the domestic Chinese market is important to an international

company and they are squeezed out of the local market and 3) there are low barriers to

entry. We have used this criteria to assess the threat to Prysmian’s growth and margins in

both its core European market and its positions in emerging markets.

We have concluded the competitive threat to Prysmian from Asia is manageable

because of three factors (please see the three next pages for details)

1) Optical fibre & cable in China is a consolidated market (five key players) and high

demand is likely to prevent overcapacity, both of which should reduce the risk of

aggressive pricing strategies from competitors in this market.

2) There are barriers to entry against aggressive new entrants (high cost of optical

fibre production and the technological expertise involved).

3) The focus of Japanese players on China is likely to take focus away from the

European and US markets (45% of optical fibre & cable sales), both of which

exhibit good growth potential for Prysmian.

12 February 2013


1) Limited risk of aggressive pricing strategies in China from competitors

In our view Japanese competitors (Furukawa, Fujikura and Sumitomo) are likely to focus

on the Chinese market, as their domestic Japanese market is forecast to slow over the

next five years by the CRU(Figure 48). However we believe there are two factors that

should prevent aggressive pricing strategies.

■ High demand should prevent over-capacity: optical fibre & cable demand is

forecast to grow at +46% over the next four years on a cumulative basis by the CRU.

In our view the installed production capacity will be running close to saturation to meet

demand and therefore limiting the need for aggressive pricing, which would ultimately

destroy value in the long-term.

■ Consolidated market structure: The Chinese optical fibre & cable market has five

key large players. In our view this market structure encourages pricing discipline. We

expect domestic Chinese players to grow to meet demand but see limited scope for

significantly undercutting Prysmian on price based on Prysmian operating through a

JV in China. We also note that technological edge is key in this market and we see

Prysmian as more advanced than existing Chinese competitors.

Figure 48: Fibre optic cable consumption is expected to grow fastest in emerging markets. In Western Europe and the

US growth is expected to be above 20% due to the currently low optical penetration in the regions.

299

122

66 5631

18 8

437

147

83

51 4734

18

0

100

200

300

400

500

600

China North America Western Europe North Asia Eastern Europe Latin America Australia

2008-11 cumulative 2012-15 cumulative

+20%

+27%-9% +52% +86% +118%

+46%

Source: Prysmian company presentation (September 2012), CRU (July 2012)

2) Barriers to entry limit the risk of aggressive new entrants:

■ Producing optical fibre is not only technically advanced but is also a capital intensive

process which reduces the risk of new entrants.

■ Prysmian is #1 in optical fibre in China and has established relationships with tier 1

telecom operations in China, which also serves as a further barrier to entry.

■ It also has production facilities in China through its JV. This, combined with the fact

that it produces both the Fibre and cable elements, suggests it can retain a cost

advantage over the Chinese cable manufacturers that have to buy in fibre.

■ We believe local players may grow in the medium term to meet demand in China but

would not expect them to reach a scale that can challenge Prysmian’s JV.

12 February 2013


3) We expect Asian competitors to have a limited impact on Prysmian’s’ position in

the European market

Europe is a key region for Prysmian in optical fibre cables—according to the

company it is leader in most European countries. Europe accounts for 25% of Optical

sales while the US is 20%. In our view the focus of the Japanese players on the larger and

faster growing Chinese market and also we believe it would be difficult to break

Prysmian’s dominant market share in Europe.

Prysmian sees Western Europe remaining an attractive optical cable market, with a

forecast for 27% cumulative growth over the next four years (Figure 48).

Figure 49: We believe China (25% of Prysmian’s optical fibre & Cable sales) will be the focus of Japanese competitors

Figure 50: Based on the low penetration of Fibre in Europe we expect this to be a significant growth opportunity for Prysmian in the medium term.

China25%

Europe25%

North America20%

South America25%

Australia5%

DSL81%

Cable Modem16%

Fibre + LAN3%

Source: Company data Source: Prysmian ‘Company Presentation’ December 2012. Originally

from OECD, June 2011

12 February 2013


Land HV: Expect more moderate pricing pressure

■ We view Land High Voltage pricing pressure and competitive threats as relatively well

understood by the market but we see an on-going risk in emerging markets.

■ We expect pricing pressure to be more of an issue for Nexans as it has 37% of its

Land HV sales coming from the Middle East in 2012 (Figure 53). However, we expect

pricing pressure to moderate from the previously high levels due to 1) a more selective

approach to contracts (which may constrain growth) and 2) margins already having

declined to low levels on these cables (Nexans now has low single digit EBITDA

margins vs double digits previously).

■ We expect on-going pricing pressure in the 110–220KV markets in the Middle East

and China due to the fragmented market, but we see greater stability in the higher

voltage (>220KV) segments. We see less of a risk for Prysmian due to 60% of its Land

High Voltage sales coming from the >220KV cables.

■ We think European and US margins in Land HV margins will remain attractive given

the investment focus being on the higher voltage (>220KV), higher value add cables

(these have higher barriers to entry than the <220KV segment).

Figure 51: Prysmian and Nexans commentary on the Land HV market in conference calls

Prysmian

Q2 12 ...from the high voltage point of view is still suffering of the Transco (Middle East €250mn) project

...competition is very strong in Asia, particularly China

...competition is strong also in the Middle east, then it's less strong in Europe and North America

...the competition is stronger below 220KV, particularly is a lot stronger in 110KV and 150KV

Q1 12 ...Obviously it was not so very brilliant even one year ago, but the demand is pretty stable

Nexans

Q2 12 ...Final point on the competitive landscape, remains intense as we've already inficated- as is always indicated

Q1 12 ...our margins in high voltage terrestrial…are under pressure

...the business (high voltage)…is in a way characterized by an excess capacity from suppliers

...driven by Korean players, driven by Middle East players, and to a lesser extent, by European players

...3 or 4 years ago around a 10% margin… We (now) have a single digit or small single digit profitability

Company Comment

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse research

12 February 2013


Chinese high voltage cable competitive trends

In China we expect on-going pricing pressure driven by the fragmented market and see

competition as greatest in the 110KV segment, which we believe has the lowest barriers to

entry. The greater fragmentation in the 110KV segment is also apparent as the large listed

Chinese players have the lowest market share in this segment.

Figure 52: Consensus estimates for grid investment in China (2011-2015E)

Value of investment Share of total investment CAGR share of Chinese listed players (%)

2011-2015E (€ bn) 2011-2015E 2011-2015E

UHV (800-1000KV) 63 25% 63.1% 14%

220-750KV 87 34% -4.6% 7%

110KV and below 103 41% 9.6% 4%

Total 253 100% 6.9% 63% Source: SGCC, Chinese listed players included are China XD, Pinggop Electric, TBEA and Tianwei Baobian. As a note investment in this context

includes power products (e.g. transformers) as well as cables.

However, in the >220KV segment we believe there are fewer competitors and as a result

the margins are more stable. Current trends suggest a slower than expected ramp up to

ultra high voltage cables (800-1000KV) and therefore we believe the -4.6% CAGR for 220-

750KV shown in Figure 52 is overly conservative. We expect this to continue to be an area

of high investment as the transition to extra high voltage may take longer than expected.

Middle Eastern high voltage cable competitive trends

Local competition in the Middle East has had an impact on both Nexans and Prysmian.

The Middle East in 2010 accounted for 49% of Nexans’ Land High Voltage sales but due

to competitive pressure it has reduced its exposure.

The two key Middle Eastern competitors in land high voltage are El Sewedy and Riyadh

Cables but data is only available for El Sewedy. Figure 54 shows that El Sewedy’s sales in

tons of cables had a 13% CAGR between 2007 and 2011, which we believe was at the

expense of developed market cable makers.

We expect Prysmian and Nexans to become more selective on contracts, which may limit

growth. However, in order to continue to grow sales, Nexans will have to have to continue

to sell to the Middle East, in our view, even at lower than desired margins. This is why we

believe pricing pressure will remain an issue, albeit at more moderate levels.

Figure 53: Nexans Land HV sales exposure to the Middle East has reduced since 2010 and we expect this to continue

Figure 54: El Sewedy appears to have met this demand increasing cable sales (tons) at a 13% CAGR (2007-2011)

49%37%

51%63%

0%

20%

40%

60%

80%

100%

2010 2012

Middle east Europe & Other

0

50

100

150

200

250

300

2007 2008 2009 2010 2011

Cable production capacity (tons) Sales (tons)

Source: Company data Source: Company data

12 February 2013


#4: Self-help is key to margin expansion

Currently the more cyclical end-markets (eg building cables and distribution) remain

depressed. In the current macro environment we see limited scope for material positive

growth surprises and therefore in 2013/14 we view self-help as a key earnings driver.

Even in markets exhibiting good growth such as submarine cables, Prysmian and Nexans

are running at full capacity, thus further limiting the scope for 2013 top-line surprises.

Prysmian announced a synergies programme post the 2011 Draka acquisition, and at its

FY12 result, Nexans announced a €350m–400m operating profit target by 2015 (part of

which would be driven by €70m savings ‘over time’ (to 2017). Nexans also targets a

doubling of ROCE (currently 6%) by 2015.

From our analysis we have drawn the following conclusions:

■ If by 2015 Prysmian achieves €191m of cost reduction (€170m synergies and

incremental €21m of savings from Prysmian’s Trade & installers division), we believe

this could drive 5% EPS consensus upgrades in 2014 and 2% in 2015.

■ We also see ‘free’ optionality on Prysmian disposing of lower-margin businesses, most

likely from the industry division. We believe this could drive medium-term margin

improvement, raise ROIC and ultimately warrant a higher earnings multiple.

■ We forecast Nexans to achieve the lower end of the €350m–400m operating profit

target and believe the cost savings look realistic relative to other cost savings

programmes in the Capital Goods sector and given the current profit/employee at

Nexans relative to Prysmian. In a scenario where Nexans achieves €400m of

operating profit, we see 24% upside potential to Nexans’ current share price.

■ However, we are cautious on the 2015 operating profit target: 1) we expect some

slippage on cost savings (as has historically been the case in the sector), 2) we

believe details of the cost savings programme have not been finalised (we note that

employment laws in France have made restructuring difficult for large companies in

the past). We also note minimal benefit is likely from the programme in 2013, with

management guiding to flat yoy profitability in 2013.

Figure 55: Potential upgrades to consensus from Prysmian achieving €170m of Draka synergies and incremental savings from the T&I business

Figure 56: We view Nexans as fair value if we assume that it hits the low end of targets (We assume Nexans achieves €351m but our TP is driven by 2014E EV/EBIT)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2013E 2014E 2015E

Incremental T& I savings (assume a 100bps improvement)

Top end of Draka synergies Targets (€170) (c'sus €150)

€ 37 € 37

€ 46

€ 30

€ 35

€ 40

€ 45

€ 50

Current price Assume €350 Op. profit (2015) Assume €400 Op. Profit (2015)


Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

12 February 2013


Draka synergies can continue ahead of expectations

Post the acquisition of Draka in 2011 Prysmian outlined a programme for synergies of

between €130m and €170m by 2015 (Figure 57). In our view Prysmian can continue to

achieve synergies ahead of consensus expectations of €150m in savings (we assume

€170m by 2015E).

Figure 57: We expect Prysmian can achieve the top end of its €130m–170m targeted synergies from the Draka acquisition (below the midpoint and we believe c’sus view)

€50mn

€35mn

€65mn

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50

75

100

125

150

2011A 2012E 2013E 2014-15E

Overheads Procurement Operations FY12 & FY13 target

Source: Company data and estimates

We expect €170m of Draka synergies by 2015E

1) Management has a track record of achieving the top end of guidance

In Figure 58 we show the guidance Prysmian has given over the past two years and the

result that has been achieved or is expected. This highlights that on both the Draka

synergies and EBITDA targets Prysmian has achieved the top end or exceeded

expectations. We believe this could continue in 2013 and 2014.

Figure 58: Management has consistently achieved the top end or beaten guidance over the past two years, €m

Prysmian Guidance Actual or updated guidance

2011 EBITDA 530mn -580mn adjusted EBITDA €568mn

2011 Draka synergies €10mn €13mn

2012 EBITDA 600-650Company updated to 'likely to reach the top end of guidance

(current c'sus is for €637).

2012 Draka synergies €45mn Company updated guidance at Q3 results to €55mn.

Source: Company data, Thomson Reuters

2) We believe there is clarity on how synergies will be achieved

We are comfortable that there is a clear roadmap to achieving the cost savings. The

largest segment of the savings is from overheads which accounts for 43% of total savings.

Historically, in the sector these savings have been the most achievable as they are directly

related to headcount and footprint.

We also gained further confidence at FY11 results as Prysmian noted 1) c8%

management and staff rationalisation completed by 1Q 12 and 2) first production facilities

rationalisation from H2 12, and closing down six plants by Q1 13.

12 February 2013


3) Draka margins were underperforming Prysmian’s by 290bps at the time of

acquisition

We also gain confidence from the fact that there is material scope for improvement at

Draka based on its group margin being 290bps below Prysmian’s at the time of

acquisition. This is despite Draka operating in broadly similar end-markets to Prysmian.

Figure 59: Draka EBITDA margins were 290bps points below Prysmian’s at the time of

the acquisition despite a broadly similar business split

4%

6%

8%

10%

12%

2007 2008 2009 2010

Prysmian EBITDA margin Draka EBITDA margin


We have also looked at synergies from historical deals in the sector

In Figure 60 we have considered other large acquisitions in the sector and the cost

savings that were made from them. This shows that the average cost synergies as a

percentage of acquired sales resulting from large deals in the Capital Goods sector have

been 4.7%.

Figure 60: Synergies achieved in previous large acquisitions across the Capital Goods sector € in millions unless stated

Acquirer Company acquired Acquired sales (€) Cost synergies (€) Synergies / sales

ABB Baldor 1,278 75 5.9%

ABB Thomas and Betts 1,655 72 4.3%

Schneider Areva 1,700 70 4.1%

Schneider Telvent 753 23 3.0%

Prysmian Draka 2,669 170 6.4%

Average 4.7% Source: Company data

We acknowledge that the Draka synergies targeted are higher than average but we

remain confident that the €170m of synergies can be achieved because:

■ Draka’s individual divisions were consolidated across Prysmian’s four divisions giving

greater opportunities for synergies, and

■ Draka’s size represented over 50% of Prysmian’s sales which is significantly greater

than the listed comparable deals.

12 February 2013


Potential for incremental savings to Draka synergies

■ In our forecasts we assume synergies can continue to come through faster than

consensus expects and that Prysmian can reach the top end of the targeted range

(€130m–170m).

■ We also see potential for a further restructuring of Prysmian’s Trade & Installers

(building cables) division. We run a 100bps margin improvement scenario where we

assume €21m of savings in 2014 & 2015 (incremental to €170m synergies). We also

run a sensitivity to a 200bps margin improvement based on a more extensive

restructuring programme.

■ We believe that a 100bps improvement would generate €21m incremental EBIT in

2014 and 2015 and 200bps would generate €42m. We believe this is possible

because the T&I division is underperforming both relative to its peer Nexans and

relative to its own history

■ We believe combining our €170m Draka synergy savings and the incremental

€21m savings (split between 2014 and 2015) can generate consensus upgrades

of 5% in 2014E (3% from synergies and 2% from T&I restructuring).

In Figure 61 we show what we believe to be consensus expectations for Draka synergies

and we include our synergy assumption, and the potential T&I divisional restructuring. In

2014E we assume Prysmian makes €17m more savings than consensus and we also see

potential for a further €11m of savings in a scenario in which a deeper restructuring of the

T&I division is undertaken.

Figure 61: Credit Suisse cost-cutting scenario: Synergies (€170m total by 2015E) and T&I savings (an incremental €21m split between 2014E and 2015E), 2011A–15E € in millions, unless otherwise stated

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C'sus assumed savings Incremental savings (€170mn total)

T&I (incremental restructuring) Cumulative scenario savings


Our view that Prysmian could save €21m of cost in 2014/15 (incremental to €170m

synergies) is driven by the following:

■ Prysmian undertook minimal restructuring programmes prior to the Draka deal; and

■ The T&I business is the clear underperformer in Prysmian’s portfolio.

12 February 2013


Historically, Prysmian has undertaken limited restructuring

In Figure 62 we show Prysmian’s and Nexans’ restructuring as a percentage of sales over

the past five years. On average Prysmian has spent 0.3% of sales, which rose to only

0.5% in 2009. In contrast Nexans spent 3.1% of sales with 1,000 employees leaving the

group. However, we would highlight that between 2001-2003 there was more extensive

restructuring at Prysmian which result in their being in a relatively strong position as they

entered the downturn. We note that Prysmian has structurally lower margins here because

it focuses on cash generation rather than margin. Despite this, however we believe there

is scope for restructuring.

Figure 62: In 2009 Prysmian spent 0.5% of sales on restructuring vs. 3.1% at Nexans.

Nexans’ restructuring focused primarily on 1,000 people leaving that year.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2007 2008 2009 2010 2011

Prysmian restructuring as a % of sales Nexans restructuring as a % of sales


Restructuring in the downturn has been the key driver of the Capital Goods sector margin

rising above previous highs post the 2008/09 crisis. Therefore, given the relatively low

restructuring spend at Prysmian in 2009 we currently see greater scope for savings on the

underlying Prysmian business than at Nexans.

Prysmian: We see an opportunity for restructuring the underperforming T&I division

Margins at Prysmian’s T&I (building cables) fell to 1.6% in 2011 from 7.6% in 2007.

Historically Nexans’ D&I has achieved higher margins owing to favourable geographic

exposure (eg Nordics) but the margin gap widened in 2010/11. On average the spread has

been c3% in 2006–10 and our 100bps scenario assumes the spread returns to this level.

A 100bps improvement assumes a 3.3% Prysmian T&I margin vs. our 6.5% forecast for

Nexans in 2013 (a return to a c3% spread); (see Figure 63).

12 February 2013


Figure 63: The spread between Prysmian and Nexans’ building cables divisions has widened in recent years

Figure 64: Restructuring could generate a 100bps or 200bps improvement equalling €21m or €42m savings

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2007 2008 2009 2010 2011 2012E

Prysmian T& I margin Nexans D&I margin

T&I restructuring scenario 100bps 200bps

2011 group employees 21,547 21,547

T&I (assume 30% of total) 6,464 6,464

Employee cost

Group Personnel Cost (€mn) 916 916

Implied annual employee salary (€,000) 42,512 42,512

Scenario cost savings

Targeted cost saving (€mn) 21 42

Implied redundancies (based on av salary) 494 988

as a % of T&I employees 7.6% 15.3%

as a % of group employees 2.3% 4.6% Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

We believe €21m of cost savings is achievable in T&I and in Figure 63 we have looked

this on a cost per employee basis. This shows that a €21m cost saving to achieve a

100bps margin improvement would require a 7.6% reduction in our assumed number of

T&I employees or a 2.3% reduction for the group.

Combined Draka synergies and T&I could drive 5% consensus upgrades in 2014:

The €21m of incremental savings (100bps) added to our €170m Draka would result in 5%

EBIT upgrades in 2014, on our estimates. A €42m (200bps closing half the spread with

D&I) would drive 7% upgrades in 2014E.

Figure 65: We see potential for 5% upgrades to consensus in 2014 based on Prysmian

achieving €170m synergies by 2015E and restructuring the T&I business

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2014E 2015E

Top end of Draka synergies (c'sus €150) Incremental T&I savings (assume 100bps margin increase)


12 February 2013


Nexans: 2015 targets but limited near-term impact

Figure 66: Nexans action plan to 2015

Nexans 2012 2015E

Cost savings targeted €70m (over time)

2015 Operating profit target € 202 €350-€400m

2015 ROCE 6.6% 11.60%

Source: Company data’

Nexans has announced targets of €70m of savings ‘over time’ and operating profit of

€350m-€400m by 2015. Nexans is targeting €70m of savings (restoring competitiveness)

by 2017 (we assume, based on its released profit bridge to 2015, that €50m is achieved by

2015E). Other improvements include innovation, manufacturing and purchasing.

■ In 2015 we forecast €351m of operating income and remain at the low end of the

targeted range because historically in the sector we have seen cost saving slippage

and this may also be the case at Nexans. On this basis we view Nexans as fair

value but Nexans achieving the top end of the targeted range (€400m) by 2015E

would imply 24% share price upside from current levels.

■ We remain cautious on Nexans achieving the top end of the targeted profit range

based on we believe the details of cost improvement having not been finalised. At

FY12 results management noted that ‘the group is tabling the subject of saving to the

relevant employee representative bodies in 3Q13’.

■ However, we do acknowledge that Nexans cost savings programme (on a

savings/sales basis) looks reasonable. We would also note the room for improvement

based on looking at employee/sales and employees/profits.

The bridge to €400m of operating profit in 2015

At their FY12 results Nexans outlined the bridge to the top end of their 2015 targets

(Figure 68). In our view the cost savings are credible as we discuss later in this section but

our 2015 forecasts remain at the lower end of the 2015 range. This is because 1) we

expect some slippage of cost savings, 2) we believe details of the cost savings

programme have not been finalised (we note that employment laws in France have made

restructuring difficult for large companies in the past).

Figure 67: Profit bridge to 2015 target (as disclosed by the company)

400

200

22

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3920

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300

350

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450

2012 Service &Innovation

Manufacturing &Purchasing

Restorecompetitiveness(rationalization)

Organic growth Turnaround Scope 2015


12 February 2013


Potential for cost slippage

In Figure 68 we have shown the same profit bridge to 2015 (but grouped the cost savings,

service & innovation and manufacturing & purchasing). Historically, in the sector we have

seen cost savings slippage of between 25-50% of the targets. To illustrate this we have

used 50% slippage based on pricing pressure and cost increases. This results in a 2015

adjusted operating profit of €335 which is below our forecast by 5%. The below chart is not

our base case assumption to an extent justifies our 2015 forecast.

Figure 68: Credit Suisse scenario highlighting potential cost saving slippage. Here we assume 50% of cost savings in the companies bridge are lost to pricing pressure and cost inflation.

335

200

130

90

20

65

0

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300

350

400

450

2012 Cost savings Organic growth &Turnaround

Scope Pricing Pressure &Cost increases

2015


As we have discussed in the competitive landscape section we see further potential for

pricing pressure in Land High Voltage for Nexans due to 37% of sales still coming from the

highly competitive Middle Eastern market.

2015 targets: The positives and negatives

Despite the positive implications for 2015 operating profit we remain cautious in the

short term on the programme based on two factors:

■ The plan is expected to produce only marginal effects in 2013 (the group is currently

expecting operational profitability to be roughly the same as in 2012—4.1% adjusted

operating profit margin).

■ There are currently limited details relating to the plan apart from the group meeting

relevant employee bodies in 3Q 13.

…But the company defined ROCE target looks achievable…

Currently Nexans achieves a ROCE of 6.6%. Using a simplified calculation an operating

profit of €202 implies a capital employed of €3,061. If we take our 2015 forecast of €352

that implies a ROCE of 11.5% in 2015. However, we acknowledge this does not account

for the rising capital base.

12 February 2013


…And in our view there are undoubtedly opportunities for savings

In Figure 69 we have laid out cost savings across the sector that we forecast as a

percentage of sales The average for the sector is 1.7% in 2013 and using €65m per year

for Nexans implies the savings are on average 1.3% of sales in 2014/15. In our view this is

a realistic target and particularly given the comparatively low employee/profit ratios shown

in Figure 71.

Figure 69: Cost savings to sales expected across the sector in 2012/13. On this basis

Nexans targets look reasonable

Cost savings as a % of sales

2012E 2013E 2014E 2015E

Nexans 1.3% 1.2%

Electricals

Alstom nm nm

Legrand nm nm

Philips 1.8% 3.5%

Schneider 1.0% 1.4%

Siemens 1.7% 3.1%

Electrical Average 1.5% 2.7%

Mechanical

Alfa Laval 1.1% 0.3%

Assa Abloy 0.7% 0.4%

Atlas Copco 0.1% nm

Electrolux 1.5% 2.3%

Geberit nm nm

Kone 0.2% 0.4%

Metso nm 0.7%

Sandvik 0.8% 1.0%

Schindler 0.6% 0.6%

SKF 0.4% 0.2%

Mechanical Average 0.7% 0.7% Source: Company data, Credit Suisse estimates

Nexans profit per employee has been running at broadly around 50% of Prysmian’s levels

and has declined by 43% since 2008. This is to an extent a structural issue based on

Prysmian’s greater exposure to more profitable markets but irrespective of this the decline

highlights the opportunity for improvement.

Figure 70: Nexans sales (‘000) / employee in 2011 were

broadly in line with 2008 levels…

Figure 71: …but Nexans’ underlying profit / employee

(‘000) was 43% below 2008 levels

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2008 2009 2010 2011

Prysmian Nexans

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2008 2009 2010 2011

Prysmian Nexans


12 February 2013


Company section

12 February 2013


Europe / Italy

Prysmian (PRY.MI) INITIATING COVERAGE

Leading positions in key growth markets ■ Outperform, TP €19 (25% potential upside). Medium term, we like

Prysmian’s 1) exposure to growth markets, 2) competitive positioning, 3) improving end market exposure. In the near term we like its self-help measures, which we believe can drive 5% upgrades to consensus.

■ Exposed to key growth themes: Prysmian has a market-leading position in submarine cables, which we believe can generate €745m of orders per year 2012–16E (current sales €556m). Medium term, we see potential for market share gains. We also view market concerns on SURF as overdone. We are constructive on Prysmian’s ability to ramp up its Brazil plant and in our base case we have SURF generating 20% of our incremental group 2014 EBITDA estimate. We also see limited near-term risk with our bear-case scenario implying 1.3% downgrades to 2013 consensus.

■ Competitive landscape: Optical Cables—Prysmian positioned for growth: In our view the Land HV competitive threat is well understood by the market so we focus on optical fibre & cable (13% of sales, double digit EBITDA margin). We view margins as sustainable and think the competitive threat to Prysmian’s #1 share in China is manageable. High demand should support pricing while Prysmian should also remain competitive as it accesses this market primarily through its JV (YOFC). We also see high technological barriers to entry as limiting the risk of new entrants.

■ Self-help potential: We believe Prysmian can achieve the top end (€170m) of synergies from the Draka acquisition faster than consensus expects. We also see potential for further restructuring of its underperforming building cables (T&I) division. Combined, these factors could drive 5% upgrades to 2014 consensus EBIT.

■ Catalysts: FY12 results on 27 February 2013.

■ Valuation: Prysmian trades on 2013E EV/EBIT of 8.8x (13% discount to the Cap Goods sector). We are 5% ahead of consensus in 2014E but believe that, given the organic growth outlook, potential for margin expansion, Prysmian can re-rate to a sector multiple.

Share price performance

9

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Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12

Price Price relative

The price relative chart measures performance against the

FTSEUROFIRST 300 INDEX which closed at 1162.1 on

07/02/13

On 07/02/13 the spot exchange rate was €1./Eu 1. -

Eu .75/US$1

Performance Over 1M 3M 12M Absolute (%) 0.5 6.1 21.9 Relative (%) 1.6 1.4 14.7

Financial and valuation metrics

Year 12/11A 12/12E 12/13E 12/14E Revenue (Eu m) 7,583.0 7,939.2 8,070.4 8,398.5 EBITDA (Eu m) 568.00 635.38 695.31 761.34 Adjusted Net Income (Eu m) 217.4 252.2 304.7 349.5 CS adj. EPS (Eu) 1.05 1.19 1.44 1.65 Prev. EPS (Eu) — — — — ROIC (%) 17.85 16.34 17.28 18.96 P/E (adj., x) 14.58 12.78 10.58 9.22 P/E rel. (%) 131.3 116.5 104.9 104.8 EV/EBITDA 7.8 7.0 6.1 5.3

Dividend (12/12E, Eu) 0.21 IC (12/12E, Eu m) 2,419.46 Dividend yield (%) 1.4 EV/IC 1.8 Net debt (12/12E, Eu m) 1,163.6 Current WACC 9.0 Net debt/equity (12/12E, %) 92.7 Free float (%) 100.0 BV/share (12/12E, Eu) 5.8 Number of shares (m) 214.51

Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates.

Rating OUTPERFORM* Price (07 Feb 13, Eu) 15.24 Target price (Eu) 19.00¹ Market cap. (Eu m) 3,269.11 Enterprise value (Eu m) 4,432.7

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

Research Analysts

Max Yates

44 20 7883 8501

[email protected]

Andre Kukhnin CFA

44 20 7888 0350

[email protected]

Simon Toennessen

44 20 7883 6893

[email protected]

12 February 2013


Prysmian PRY.MI Price (07 Feb 13): Eu15.24, Rating: OUTPERFORM, Target Price: Eu19.00

Income statement (Eu m) 12/11A 12/12E 12/13E 12/14E

Sales revenue 7,583 7,939 8,070 8,398 EBITDA 568 635 695 761 Depr. & amort. (142) (159) (156) (160) EBIT (CS) 426 477 540 602 Net interest exp. (129) (130) (120) (120) Associates 9 12 12 12 Other adj, 407 87 56 59 PBT (CS) 713 446 488 553 Income taxes (80) (100) (121) (138) Profit after tax 633 345 367 414 Minorities (9) (6) (6) (6) Preferred dividends — — — — Associates & other (407) (87) (56) (59) Net profit (CS) 217 252 305 350 Other NPAT adjustments (353) (63) (41) (42) Reported net income (136) 189 264 307

Cash flow (Eu) 12/11A 12/12E 12/13E 12/14E

EBIT 426 477 540 602 Net interest 129 130 120 120 Cash taxes paid (97) (76) (105) (122) Change in working capital 165 (125) (58) (48) Other cash & non-cash items (56) (58) (21) (19) Cash flow from operations 567 347 476 533 CAPEX (140) (115) (117) (122) Free cash flow to the firm 427 232 359 410 Acquisitions (485) (87) — — Divestments 179 — — — Other investment/(outflows) (131) (115) (117) (122) Cash flow from investments (437) (202) (117) (122) Net share issue/(repurchase) 1 — — — Dividends paid (37) (44) (66) (77) Issuance (retirement) of debt (2) (108) (120) (120) Other (550) (22) — — Cash flow from financing activities

(588) (174) (186) (197) Effect of exchange rates 5 — — — Changes in Net Cash/Debt (453) (29) 173 214 . Net debt at start 682 1,135 1,164 991 Change in net debt 453 29 (173) (214) Net debt at end 1,135 1,164 991 777

Balance sheet (Eu m) 12/11A 12/12E 12/13E 12/14E

Assets Cash and cash equivalents 727 720 893 1,107 Accounts receivable 1,713 1,826 1,856 1,932 Inventory 929 994 1,049 1,099 Other current assets 113 113 113 113 Total current assets 3,482 3,653 3,911 4,251 Total fixed assets 1,539 1,562 1,559 1,559 Intangible assets and goodwill 618 651 627 601 Investment securities — — — — Other assets 244 244 244 244 Total assets 5,883 6,109 6,341 6,655 Liabilities Accounts payable 1,992 2,045 2,072 2,150 Short-term debt 982 410 410 410 Other short term liabilities 416 416 416 416 Total current liabilities 3,390 2,871 2,898 2,976 Long-term debt 880 1,474 1,474 1,474 Other liabilities 509 509 509 509 Total liabilities 4,779 4,854 4,881 4,959 Shareholders' equity 1,042 1,188 1,386 1,616 Minority interest 62 68 74 80 Total equity & liabilities 5,883 6,109 6,341 6,655 Net debt (Eu m) 1,135 1,164 991 777

Per share data 12/11A 12/12E 12/13E 12/14E

No. of shares (wtd avg) 208 211 211 211 CS adj. EPS (Eu) 1.05 1.19 1.44 1.65 Prev. EPS (Eu) — — — — Dividend (Eu) 0.21 0.21 0.31 0.36 Dividend payout ratio 20.09 17.28 21.67 21.98 Free cash flow per share (Eu)

2.05 1.10 1.70 1.94

Key ratios and valuation

12/11A 12/12E 12/13E 12/14E

Growth(%) Sales 65.9 4.7 1.7 4.1 EBIT 37.9 11.9 13.2 11.5 Net profit 35.0 16.0 20.8 14.7 EPS 16.4 14.1 20.8 14.7 Margins (%) EBITDA margin 7.5 8.0 8.6 9.1 EBIT margin 5.6 6.0 6.7 7.2 Pretax margin 9.4 5.6 6.0 6.6 Net margin 2.9 3.2 3.8 4.2 Valuation metrics (x) EV/sales 0.58 0.56 0.53 0.48 EV/EBITDA 7.8 7.0 6.1 5.3 EV/EBIT 10.3 9.3 7.9 6.7 P/E 14.6 12.8 10.6 9.2 P/B 3.0 2.6 2.2 1.9 Asset turnover 1.3 1.3 1.3 1.3 ROE analysis (%) ROE stated-return on equity

(15.1) 16.7 19.7 19.5 ROIC 17.9 16.3 17.3 19.0 Interest burden 1.7 0.9 0.9 0.9 Tax rate 26.0 28.0 28.0 28.0 Financial leverage 1.8 1.5 1.3 1.1 Credit ratios (%) Net debt/equity 102.8 92.7 67.9 45.8 Net debt/EBITDA 2.0 1.8 1.4 1.0 Interest coverage ratio 3.3 3.7 4.5 5.0

Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities

(EUROPE) LTD. Estimates.

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The price relative chart measures performance against the FTSEUROFIRST 300

INDEX which closed at 1153.16 on 07/02/13

On 07/02/13 the spot exchange rate was €1./Eu 1. - Eu .75/US$1

12 February 2013


Prysmian: Profit bridge and forecasts vs consensus

Prysmian EBITDA bridge to 2014E

In Figure 72 we show our EBITDA bridge for Prysmian to 2014E. In our view we are 5%

ahead of consensus primarily because we are more aggressive on our Draka synergy

assumptions. We also believe we have taken a conservative view on price/mix based on

potential positive mix impact from Optical Fibre, SURF and submarine cables.

Figure 72: Prysmian: EBITDA bridge to 2014E

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2014E

EB

ITD

A


Credit Suisse forecasts vs consensus

Below, in Figure 73, we show our forecasts vs consensus for Prysmian. For 2013 and

2014, we are broadly in line with consensus on revenues and, as noted previously, our

view on SURF offsets our more conservative views on automotive cables and construction.

However, we acknowledge the risk is to the upside as we are currently discounting

minimal growth for these cable markets from currently depressed levels. We forecast a

6.7% operating profit margin in 2013 and a 7.2% margin in 2014—40bps and 50bps higher

than consensus, respectively.

Figure 73: Our forecasts are 4% and 7.3% ahead of consensus in 2013E and 2014E at adjusted EBIT level

CS CS CS

CS F'cast C'sus vs C'sus CS F'cast C'sus vs C'sus CS F'cast C'sus vs C'sus

Sales 7,939 7,946 -0.1% 8,070 8,226 -1.9% 8,398 8,428 -0.4%

Adjusted EBITDA 635 637 -0.3% 695 680 2.3% 761 725 5.0%

margin 8.0% 8.0% 8.6% 8.3% 9.1% 8.6%

Adjusted EBIT 477 475 0.3% 540 519 4.0% 602 561 7.3%

margin 6.0% 6.0% 6.7% 6.3% 7.2% 6.7%

Adjusted Net Income 252 254 -0.7% 305 287 6.2% 350 305 14.6%

2012 2013 2014

Source: Company consensus, Credit Suisse estimates

12 February 2013


Prysmian investment case We initiate on Prysmian with an Outperform rating and a €19 target price. We view

Prysmian as a well-managed business with good exposure to structurally growing markets

and, despite the recent strong performance (+43% LTM vs 10% for the sector), we see

25% potential upside from current levels.

Our investment case is based on five factors:

1) Exposure to growth themes

2) Competitive positioning

3) Improving end market exposure

4) Self-help potential

5) Valuation

In the medium term we view Prysmian as a re-rating story based on its 1) exposure to

growth themes, 2) competitive positioning, and 3) improving end market exposure, and in

the near-term we see potential for 5% consensus upgrades driven by self-help.

1) Attractive exposure to growth themes

As we discuss earlier in this report, we view Prysmian as attractive based on its

positioning in submarine (go to page 9) and for its exposure to SURF in the medium term

(to go page 19). In our view the potential for Prysmian market share gains in submarine

are underestimated by the market while we believe SURF is an attractive growth market

and concerns in the near term are overdone.

Below we have included short summaries of our conclusions on these themes:

Submarine cables—potential for Prysmian to gain share in the medium term

Submarine cables account for 7% of group sales and we estimate 18% of EBITDA in

2011. We view this as a consolidated (three players have 85% share), structurally growing

market, with high technological barriers to entry. In submarine, Prysmian has a three-year

order backlog but we continue to see upside to our double digit sales growth forecasts if

Prysmian were to increase its submarine production capacity at its Pikkala plant.

We believe Europe submarine cables will be a €745m market for Prysmian (2012E–17E)

vs. current sales of €556m. We also see potential for Prysmian to take share in this market

based on 1) its relationships with key grid players, eg Siemens, and 2) as it has won the

higher-value, more complex contracts since 2009.

12 February 2013


Figure 74: We view on average €745m of submarine orders per year for the next five years at Prysmian. We also see potential for market share gains

Figure 75: In our view SURF will be an important growth driver in 2014-2015 (20% of incremental EBITDA in 2014E)

0

100

200

300

400

500

600

700

800

2012 2013 2014 2015 2016

ABB Nexans Prysmian

0

10

20

30

40

50

60

70

80

2013 2014


Source: Credit Suisse estimates Source: Company data, Credit Suisse estimates

SURF (Subsea Umbilicals, Risers (or flexible pipes) & Flow lines)

SURF products accounted for 2% of group sales in 2012E, but we view it as an important

growth driver and in our base case it accounts for 12% and 20% of incremental group

EBITDA in 2013E and 2014E, respectively. We believe the market has become overly

concerned regarding Prysmian’s ability to ramp up capacity utilisation in Flexible Pipes at

its Vila Velha plant following the cost focus of Petrobras’ (major customer) 2012-2016

business plan (June 2012). These concerns have emerged because 1) it is a newly built

asset that could result in potential write-downs and 2) SURF is important owing to the

ramp-up and high margins on these products. However based on demand forecasts and

existing installed flexible pipe capacity of Prysmian and competitors in Brazil, we expect

Prysmian’s Vila Velha plant to reach saturation (80% utilisation) by 2015E.

12 February 2013


2) Competitive positioning

We have mapped out the competitive landscape and assessed the on-going risk to Land

HV cables and optical fibre & cable based on size and market structure.

Figure 76: Competitive threat from competitors for different cable groups


Land High Voltage


Rail cables

Mining cables

Aerospace cables

Established

relationships

Low

Building cables

Market size less

attractive

High barriers to

entry


Time frame in years


Submarine cables

Medium

Automotive cables

Emerging mkt

competition has

had an impact


Land HV: From our analysis we have concluded that the impact of emerging market

competition is well understood by the market. In our view the on-going risk of pricing

pressure in this market is relatively lower for Prysmian than for Nexans based on 1)

Prysmian having lower exposure to the highly competitive Middle Eastern market and 2)

Prysmian’s focus on the less competitive, less commoditised >220KV segment.

Optical Fibre & Cable: Given the Land HV risk has to a large extent played out, in our

view, we focus on the threat in optical fibre & cable (8% of Prysmian’s sales but double-

digit EBITDA margin). We view Europe as a significant growth opportunity due to the low

penetration rate of optical fibre and we expect Prysmian to face limited threat to its leading

market position in most European countries. In China (25% of optical fibre & cable sales)

we view the threat as manageable based on the high expected demand limiting the risk of

over-capacity, a relatively consolidated market structure and high technological barriers

limiting the risk of aggressive new entrants. Prysmian also operates in this market via its

JV (YOFC) making it competitive on price.

12 February 2013


3) Improving end market exposure

Prysmian declined organically by -17.4% in 2009 but since then we believe the business

mix has shifted away from the relatively higher cyclicality, more commoditised cable end

markets. As a result we believe the Prysmian business now deserves a relatively higher

rating than it has achieved previously.

In 2011 65% of Prysmian’s EBITDA was from non-cyclical or higher value-add businesses,

compared with 45% at Nexans. Prysmian has reduced its exposure to these businesses

over time and as a result we believe Prysmian deserves a higher multiple than its own

history and Nexans.

Figure 77: Nexans’ and Prysmian’s exposure to cyclical and relatively lower cyclical businesses

Lower value add or relatively higher-cyclical business High value add or relatively lower-cyclical business

Nexans Power Distribution, Building cables, Copper Telecom cables,

Other Industrial (pumps and industrial equipment)

Transmission, Resources, Transport cables, Optical

telecoms

Nexans % of profits 55% 45%

PrysmianPower Distribution, Building Cables, Industrial (non priority),

Copper telecomsTransmission, Industry (priority sectors), Optical telecoms,

Prysmian % of profits 35% 65%


A key driver of Prysmian’s shift in business mix has been the growth of the telecom

division and the Draka acquisition. In 2011 the telecom division accounted for 19% of

profits in 2011 vs 10% in 2007. We also believe the business has reduced its cyclicality by

growing the submarine business and investing in higher value add end markets such as

SURF. We also view the decline of the Trade & Installers division (building cables) in the

business mix as positive as we view these cables as relatively commoditised and

susceptible to shifts in demand.

Figure 78: Prysmian EBIT split in 2007 Figure 79: Prysmian EBIT split in 2011

Utilities45%

T&I30%

Industry15%

Telecom10%

Utilities55%

T&I8%

Industry18%

Telecom19%

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

12 February 2013


4) Self Help: Potential for 5% consensus upgrades

We believe Prysmian can reach the top end (€170m) of its targeted synergies faster than

consensus assumes. Our view is underpinned by three factors: 1) we view

management as conservative and Prysmian has consistently achieved close to the top

end of previous guidance ranges; 2) we have gained confidence from details on

headcount and footprint rationalization, and 3) Draka EBITDA margins were 290bps below

Prysmian’s in 2009, indicating significant scope for improvement.

We also see potential for savings on Prysmian’s underlying business incremental to Draka

synergies. If Prysmian further restructured its T&I (building cables) division resulting in a

100bps margin improvement this could result in €21m of savings (return to historical

margin spread between Prysmian and Nexans building cables businesses). In our view

this is achievable because Prysmian has undertaken limited restructuring in the past, and

T&I is underperforming relative to history and relative to Nexans’ comparable D&I division.

Figure 80: We see potential for 5% upgrades to consensus in 2014E based on Prysmian achieving €170m synergies by 2015E and restructuring the T&I business.

0

50

100

150

200

250

0

10

20

30

40

50

60

70

2011A 2012E 2013E 2014E 2015E

C'sus assumed savings Reaching top end of Draka synergies (€170m)"

T&I (incremental restructuring) Cumulative scenario savings


Based on our cost saving scenario we see potential for 5% upgrades to 2014

consensus. In our view consensus is discounting €150m of Draka synergies and no

further incremental saving on the underlying Prysmian business. In the above scenario we

assume that the €14m of the €20m synergy gap (€170m vs €150m), and half of the

incremental €21m T&I synergies are achieved, which would drive 5% upgrades to

consensus in 2014E.

12 February 2013


5) Valuation

Valuation methodology and target price

We value Prysmian using a sector multiple which drives our target price €19. In our sector

multiple, we would highlight that we exclude Kone, Schindler and Geberit from the

electricals and mechanicals universe due to the relatively higher proportion of services in

their businesses.

Figure 81: We use a sector multiple to value Prysmian (ex Kone and Schindler and Geberit) based on the exposure to

structural growth themes, clear roadmap to margin expansion and improving returns (€m)

2013 EBIT Sector multiple (ex lifts) Net Debt (inc liabilities) Implied target price (€) Upside

Prysmian 540 10.1 1,459 19 25%

Source: Credit Suisse estimates. For the sector average we include Alstom, Legrand, Philips, Schneider, Siemens, Alfa Laval, Assa Abloy, Atlas

Copco, Electrolux, Metso, Sandvik, Schindler and SKF

Discount to the sector no longer justified

■ Prysmian’s organic growth is no longer lagging the sector given structural growth

exposure

■ EBIT is growing ahead of the sector on our estimates, driven by synergies from the

Draka acquisition.

■ Prysmian has changed its business mix, making it more resilient in future downturns.

Organic growth in line with the sector and 10% average EBIT growth 2012-14E

Organic growth: We forecast 2.2% organic growth for Prysmian in 2013 vs the sector (ex

lifts) at 2.7%. However, we forecast Prysmian’s organic growth in 2014 at 4.2%, which is

broadly in line with the sector. This discounts limited recovery in the more commoditised,

cyclical cable end markets.

Margin: We believe Prysmian can grow in 2013E and 2014E EBIT by more than 10%, vs

5.4% and 10.2% for the sector.

Figure 82: In our view, Prysmian’s organic growth should be broadly in line with the sector in 2013/14E…

Figure 83: …and self-help combined with improving mix should drive stable EBIT growth ahead of the sector

-2%

0%

2%

4%

6%

8%

10%

12%

2011 2012E 2013E 2014E

Prysmian Nexans Sector

-30%

-20%

-10%

0%

10%

20%

30%

2011 2012E 2013E 2014E

Prysmian Nexans Sectors


12 February 2013


The historical discount to the sector has been driven

by growth and margin

Prysmian and Nexans have historically traded at a discount to the broader capital goods

sector. Over the past five years, on a 12-month forward EV/EBIT multiple, Prysmian has

traded at an 18% discount to the capital goods sector (ex lifts) Figure 84). Prysmian has

underperformed the sector by 16% over the past five years.

Figure 84: Prysmian 12-mth FWD EV/EBIT vs. the capital

goods sector (ex lifts) (Current discount = 13%)

Figure 85: Prysmian has also underperformed the sector

by 16% on a five year view

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

110.0%

120.0%

Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13

EV/EBIT rel to sector Average

40.0

60.0

80.0

100.0

120.0

140.0

160.0

Fe

b 0

8

Ap

r 08

Jun

08

Au

g 0

8

Oct 0

8

Dec 0

8

Fe

b 0

9

Ap

r 09

Jun

09

Au

g 0

9

Oct 0

9

Dec 0

9

Fe

b 1

0

Ap

r 10

Jun

10

Au

g 1

0

Oct 1

0

Dec 1

0

Fe

b 1

1

Ap

r 11

Jun

11

Au

g 1

1

Oct 1

1

Dec 1

1

Fe

b 1

2

Ap

r 12

Jun

12

Au

g 1

2

Oct 1

2

Dec 1

2

Fe

b 1

3

Price Relative 90d Moving Avg

90d Moving Avg (+10%) 90d Moving Avg (-10%)

Source: Thomson Reuters Source: Thomson Reuters

Historically, we believe this valuation discount is justified for both companies for

the following three key reasons:

1) Organic growth has been below the sector average (Figure 86)

2) Margins have eroded while the overall capital goods sector margin has increased

above its 2007 peak (Figure 87)

3) The relative cyclicality of earnings—Prysmian declined by 17.4% in 2009 but we

would not expect this to be repeated in a future downturn based on shifts in the

business mix away from relatively higher cyclicality, commoditised end markets.

Figure 86: Prysmian vs. Nexans – Organic growth index Figure 87: Prysmian vs. Nexans’ margin progression

80%

90%

100%

110%

120%

2007 2008 2009 2010 2011


4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2007 2008 2009 2010 2011



12 February 2013


Prysmian ROIC, FCF and Credit Suisse HOLT®

Here we have used our ROIC and FCF methodology that we applied across the sector in

our report Who adds value, 11 September 2012—LINK TO THE REPORT (100 PAGES).

Figure 88: Prysmian – Simple vs CS adjusted IC (€m) Figure 89: Prysmian – CS adj ROIC and its drivers

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2007 2008 2009 2010 2011 2012E 2013E 2014E

CS Adjusted IC Simple IC

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

3.6

3.8

4.0

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2007 2008 2009 2010 2011 2012E 2013E 2014E

CS Adjusted ROIC, % NOPAT margin, % Capital turns, x

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse research

■ Invested capital: Prysmian had a IC CAGR of 16.6% between 2007 and 2011.

Between 2007 and 2009, IC was flat. In 2010, IC grew by 17% driven by working

capital growth related to submarine and capex related to the SURF business. In 2011,

Prysmian acquired Draka, which increased IC by 58%.

■ ROIC: ROIC has declined from 24.6% in 2008 to 11.9% in 2011, driven by declining

margins, particularly in industrial and building cables. In 2010/11, ROIC declines were

driven by on-going margin pressure but also by increases in IC.

Figure 90: Prysmian – Credit Suisse ROIC model, €m

ROIC MODEL 2007 2008 2009 2010 2011

Invested Capital (IC)

Simple IC 1,254 1,129 1,242 1,481 2,239

CS Adjustments:

Acq. intangibles amort. (cumulative) 0 4 9 16 41

Capitalised operating leases 105 224 84 84 175

Deferred tax related to intangibles 0 0 0 0 0

Pension deficit 112 125 142 145 268

CS Adjusted IC 1,471 1,482 1,477 1,726 2,723

NOPAT

Reported EBIT 508 448 386 307 19

Recurring EBITA 464 477 334 309 426

Normalised restructuring charge 0 0 0 0 0

Normalised tax rate 26.0% 26.0% 26.0% 26.0% 26.0%

CS Adjusted NOPAT 349 365 252 233 325

Capital turns, x 3.5 3.5 2.5 2.6 2.8

NOPAT margin, % 6.8% 7.1% 6.7% 5.1% 4.3%

CS Adjusted ROIC 23.7% 24.6% 17.0% 13.5% 11.9%

Simple ROIC 24.6% 26.4% 16.9% 12.6% 8.8%

Company-provided

Company-provided IC 1,282 1,165 1,314 1,403 2,436

Company-provided ROIC 36.2% 40.9% 25.4% 22.0% 17.5%

Source: Company data, Credit Suisse research. In our ROIC calculation we adjust invested capital upwards accounting for rentals, goodwill writedowns and Pensions.

https://doc.research-and-analytics.csfb.com/docView?sourceid=em&document_id=x470013&serialid=aDQ%2b0HvZNZffjqfBMIm2H4KlbJkcrKgdkpZbhU7lS0w%3d

12 February 2013


EVA® analysis

We created an EVA®-based DCF valuation for Prysmian to reverse-solve it for the current

share price, maintaining a consistent methodology relative to other companies in the

sector; therefore, we are able to compare what future ROIC or mid-cycle profitability the

shares are currently discounting. Details of the model are illustrated in Figure 93.

Figure 91 Prysmian – Past vs future Figure 92: Prysmian – DCF sensitivity, €

KEY OUTPUT 2007-112012E-21E

CS Adj ROIC (average) 18.2% 12.1%

Capital turns (average) 3.0 2.8

CS NOPAT margin (average) 6.0% 4.2%

Non-acquired capital growth (average) 12.3%

Total capital CAGR 16.6% 4.4%

Sales CAGR 10.3% 4.6%

Organic Sales growth (average) 4.8% 4.3%

CS Adj EBITA CAGR -1.8% 4.2%

CS Adj NOPAT CAGR -9.5% 6.6%

CS Adj EBITA margin (average) 8.1% 5.9%

Restructuring / Sales (average) 1.2% 0.0%

Mid-cycle Sales / Capital Growth

ROIC 0.5% 2.0% 3.5% 5.0% 6.5% 8.0% 9.5%

7.0% 8 8 7 7 7 7 7

8.5% 10 10 10 10 10 10 10

10.0% 12 12 12 13 13 14 14

11.5% 14 14 15 16 16 17 18

13.0% 16 17 17 18 19 20 21

14.5% 18 19 20 21 22 23 25

16.0% 20 21 22 24 25 27 28


In this model, we make the following assumptions that are constant across all the

companies in the sector: terminal growth of 2%, WACC of 9%.

Our key observations:

■ What is discounted: If Prysmian maintains 5% organic revenue growth and has

capital turns at 2.8x then, at the current share price, Prysmian is discounting a ROIC

of 11.5% which is a small improvement on the 11.1% achieved in 2011. We expect

Prysmian can improve its operating margin materially through Draka synergies and, as

a result, we forecast ROIC to return to 14.5% in 2014E. This implies, on a mid-cycle

basis, a fair value of €21.

■ Sensitivity. Based on the current uncertainties over the macro environment, we have

run a scenario using a through-cycle organic growth rate of 3.5% (vs 5% historically)

and an improvement in ROIC to 14.5%. This would imply a fair value for Prysmian of

€20 which represents 30% potential upside vs the current price.

Figure 93: Prysmian – Credit Suisse EVA® DCF model, €m

Source: Company data, Credit Suisse estimates. Here we use NOPAT/Average Invested capital to calculate ROIC which results in the historical ROIC differing to the ROIC model included on the previous page.

EVA DCF MODEL 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Sales 7,583 7,939 8,070 8,398 8,818 9,259 9,722 10,208 10,719 11,255 11,817

Growth 65.9% 4.7% 1.7% 4.1% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

CS Adj EBITA 439 489 552 615 485 510 537 565 594 625 658

Margin 5.8% 6.2% 6.8% 7.3% 5.5% 5.5% 5.5% 5.5% 5.5% 5.6% 5.6%

Tax rate 43.6% 28.0% 28.0% 28.0% 28.1% 28.3% 28.4% 28.6% 28.7% 28.9% 29.0%

NOPAT 248 352 398 442 349 366 384 404 424 445 467

ROIC 11.1% 12.5% 13.5% 14.9% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% 11.5%

Capital charge @ 9% 155 245 263 268 266 279 293 308 324 340 357

EVA® 92 107 134 174 82 87 91 95 100 105 110

Discounted EVA® 2,723 98 113 134 58 56 54 52 50 48 727

Total NPV 4,115

Shares in issue, m 211

Net debt 777

Equity Value 3,338

Share Valuation, EUR 16

12 February 2013


Cash conversion analysis

We show the details of our cash conversion analysis in Figure 94 below from clean net

income to Free Cash Flow.

Figure 94: Net income to free cash flow conversion model, €m

Average Average

2007 2008 2009 2010 2011 Simple Cumulative

Net income to FCF reconciliation

Clean net income 263 299 215 161 217

Reported net income 300 237 248 148 (136)

Working capital (51) 68 21 (5) 200

Delta b/w Capex & Depreciation (29) (40) (30) (21) (35)

Delta b/w R&D Capitalised & Intangibles Amort. 5 (6) (6) 18 56

PPA 0 0 0 0 0

Other (Deferred tax, Pension, Minority etc) 52 127 (11) 41 323

Free Cash Flow 277 386 222 181 408

Conversion ratios

Clean net income 100% 100% 100% 100% 100% 100% 100%

Reported net income 114% 79% 115% 92% -63% 68% 69%

Working capital -19% 23% 10% -3% 92% 20% 20%

Delta b/w Capex & Depreciation -11% -13% -14% -13% -16% -14% -13%

Delta b/w R&D Capitalised & Intangibles Amort. 2% -2% -3% 11% 26% 7% 6%

PPA 0% 0% 0% 0% 0% 0% 0%

Other (Deferred tax, Pension, Minority etc) 20% 42% -5% 25% 149% 46% 46%

Free Cash Flow 105% 129% 103% 112% 188% 128% 128%


Prysmian delivered an average free cash flow conversion of 128% over 2006-2011

(on a cumulative basis), which is above the sector average of 83%.

■ Prysmian has managed working capital relatively well, and undertaken limited

restructuring. However, we would highlight that the cash conversion of 128% is

flattered by exceptional items that are not commonly seen across the sector including

volatile metal derivatives and a large acquisition resulting in a material working capital

release. A provision for €200m for anti-trust was taken in 2011 but the cash for

this has not been paid—2011 FCF conversion would be 99% excluding this item.

■ For Prysmian, unlike many other Capital Goods companies, the material difference

between clean net income and net income is not restructuring. For Prysmian, the

difference is primarily the movement in metal derivatives, which was €68m negative in

2008 and €91m positive in 2009. These are added back in ‘Other’ as they are non-

cash and are, in part, responsible for the volatility of this line.

■ Prysmian’s free cash flow over the last five years has been resilient with good working

capital management. Working capital was released in 2008 and 2009 and was broadly

flat in 2010. In 2011 the apparent €200m working capital release was primarily driven

by the integration of the Draka business into the Prysmian group. Prysmian’s capex

has run ahead of R&D over the last five years but this is primarily a function of its

expansion in the submarine cable and SURF businesses.

■ Lastly, the year of highest cash conversion was 2011 but we would highlight this has

been skewed by the working capital release driven by the Draka acquisition. The

figure is also flattered by metal derivatives and a relatively high net interest (added

back pre operating cash flow) which was due to Prysmian’s 2x net debt/EBITDA.

12 February 2013


Prysmian in Credit Suisse HOLT®

Using our forecasts in HOLT implies a warranted price of €23 (51% upside potential to

current levels) vs. our target price of €19. As we discuss below, Prysmian’s valuation is

sensitive to margin forecasts and a 100bp increase or decrease in the EBITDA margin can

increase or decrease the upside/downside potential by c20%.

Figure 95: Credit Suisse Prysmian forecasts in HOLT

Current Price: EUR 15.24 Warranted Price: EUR 22.96 Valuation date: 08-Feb-13

Sales Growth (parallel % point change to forecasts) Dec-10A Dec-11A Dec-12E Dec-13E Dec-14E

-2.0% -1.0% 0.0% 1.0% 2.0% Sales Growth, % 22.5 65.9 65.9 65.9 65.9

EBITDA Mgn, % 6.8 6.7 6.7 6.7 6.7

Asset Turns, x 1.40 1.80 2.82 4.34 6.66

CFROI®, % 6.4 6.6 15.9 16.2 15.8

Disc Rate, % 5.9 6.9 6.1 6.1 6.1

Asset Grth, % 20.1 27.7 4.6 6.4 7.6

Value/Cost, x 1.6 1.4 1.7 1.6 1.5

Economic PE, x 24.4 21.9 10.9 9.8 9.2

Leverage, % 38.7 45.3 42.0 42.2 42.5

More than

10%

downside

Within 10%More than

10% upside

Source: Credit Suisse HOLT®. CFROI, HOLT, and ValueSearch are trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries.

* Operating margin (yellow) is EBITDA (grey) plus rental expense and R&D expense

2.0% 74% 86% 99% 113%

1.0% 52% 63% 75% 88%

26% 36% 47%

129%

51% 62% 74%

102%

HO

LT

-

C

red

it S

uis

se

An

aly

st

Sc

en

ari

o D

ata

PRYSMIAN SPA (PRY)

EB

ITD

A M

arg

in (

pa

rall

el

% p

oin

t

ch

an

ge

to

fo

rec

as

ts)

-2.0% -12% -5% 2%

0.0% 31% 40%

11% 20%

-1.0% 9% 18%

-40.00

-20.00

0.00

20.00

40.00

60.00

80.00

100.00

120.00

2006 2008 2010 2012 2014 2016

Sales Growth (in %)

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

2006 2008 2010 2012 2014 2016

Operating Margin and EBITDA (in %) - see note*

0.00

2.00

4.00

6.00

8.00

10.00

12.00

2006 2008 2010 2012 2014 2016

Asset Turns (x)

0.00

5.00

10.00

15.00

20.00

25.00

2006 2008 2010 2012 2014 2016

Historical CFROI

HistoricalTransaction CFROI

Forecast CFROI

ForecastTransaction CFROI

Discount Rate

CFROI & Discount Rate (in %)

-5.00

0.00

5.00

10.00

15.00

20.00

25.00

30.00

2006 2008 2010 2012 2014 2016

Historical AssetGrowth Rate

Historical GrowthIncl Intang

Forecast Growth

Forecast GrowthIncl Intang

Normalised GrowthRate

Asset Growth (in %)

Source: Company data, Credit Suisse estimates, Credit Suisse HOLT

12 February 2013


HOLT®: What is consensus discounting?

Our forecasts for Prysmian are more positive than consensus for two reasons. 1) We

believe Prysmian can continue to achieve synergies from Draka faster and to a larger

extent than the market expects; and 2) we think the market has become too cautious on

SURF (a c20% EBITDA margin business) and believe this will be a driver of the group in

2014E.

Consensus is currently discounting…

We believe Prysmian’s current share price is discounting an improvement in CFROI to

14% in 2016E (or back to 2008 levels). This would imply asset turns remaining at 2011

levels of 1.77, EBITDA margins of 8.7% in 2014E but with an improvement to 11.9% in

2016E, and a return to 5% sales growth by 2015E (Figure 96). However, we believe 2014

consensus margins are too low and result in the aggressive pick up in 2015 shown below.

Figure 96: Using HOLT to solve current share price implies a significant pick-up in sales

growth and margins in 2015-16E

2011 2012 2013 2014 2015 2016

Sales Growth 65.9% 5.8% 2.4% 3.8% 5.0% 5.0%

EBITDA Margins 6.7% 7.7% 8.3% 8.7% 10.3% 11.9%

Asset Turns 1.77 1.77 1.77 1.77 1.77 1.77

Source: Credit Suisse HOLT

We have flexed the assumptions in HOLT, indicating the share price is most

sensitive to changes in the EBITDA margin: We highlight in HOLT for a 100bps move

in the EBITDA margin the shares change the valuation by 20%. In our view, the 8.6%

EBITDA margin assumed in 2014E by consensus is conservative due to Draka synergies

and the potential for further savings. If we assume higher margins in 2014E, this would

imply less of a step up in 2015E and 2016E, which we would view as a more realistic

scenario.

12 February 2013


Prysmian PEERs map

We show below the PEERs map for Prysmian. PEERs is a global database that captures

unique information about companies within the Credit Suisse coverage universe based on

their relationships with other companies – their customers, suppliers and competitors. The

database is built from our research analysts’ insight regarding these relationships. Credit

Suisse covers over 3,000 companies globally. These companies form the core of the

PEERs database, but it also includes relationships on stocks that are not under coverage.

Figure 97: Prysmian PEERs map relationships

Source: Credit Suisse PEERs research

12 February 2013


Prysmian: Company description

Prysmian is the leading global provider of technology cables and systems for energy and telecommunications. The

group is active in the development, design, manufacturing, installation and supply of a wide range of cables. The

company operates in two major business segments:

Energy cable and systems: The energy division has three areas - utilities, trade & installers, and industrial.

The major competitors are Nexans, General Cable and ABB.

− Utilities: Provides cables and systems for power transmission, power distribution and submarine systems.

The key customers are Transco, EDF, TenneT.

− Trade and installers: Low voltage cable for residential and non-residential construction. The key

customers are BATT cable, Rexel, Solar.

− Industrial: Provides integrated cable solutions for oil & gas, renewables, elevators, SURF, auto and OEMs.

The key customers are Vestas, Siemens, Kone, Schindler.

Telecom: Provides optical fibre, copper cable for telecoms. The major competitors are General Cable, Nexans

and LS cable. The key customers are BT, NSN, Bharti Airtel, Alcatel-Lucent.

Figure 98: Prysmian: Sales by geography, 2011 Figure 99: Prysmian: Sales by division, 2011

Latin America9%

Asia Pacific15%

Europe, Middle East and Africa

64%

North America12%

Utilities30%

T&I31%

Industry21%

Telecoms18%

Figure 100: Prysmian: EBIT by division, 2011 Figure 101: Management

Utilities55%

T&I8%

Industry18%

Telecoms19%

Valerio Battista CEO

Fabio Romeo EVP Energy

Phil Edwards EVP Telecom

Massimo Battani COO

Pier Francesco Facchini CFO

Frank Dorjee CSO

Luca Caserta Head IR


12 February 2013


Historical valuation multiples

Figure 102: Prysmian: Historical and estimate valuation multiples

MULTIPLES 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E

Average/Current 18.4 13.7 10.6 13.1 12.9 15.2 15.2 15.2 15.2

High 21.2 18.6 13.8 15.8 16.0 16.5 16.5 16.5 16.5

Low 15.3 6.2 6.1 11.3 9.3 11.5 11.5 11.5 11.5

Year end 16.9 11.1 12.2 12.8 9.6 13.0 13.0 13.0 13.0

P/E average 12.9 10.7 8.7 14.6 12.3 12.8 10.6 9.2 8.3

P/E high 14.9 14.5 11.4 17.6 15.2 13.8 11.4 10.0 9.0

P/E low 10.8 4.8 5.0 12.6 8.8 9.6 8.0 7.0 6.2

P/E year-end 11.9 8.6 10.0 14.2 9.2 10.9 9.0 7.9 7.1

EV/Sales average 0.84 0.64 0.70 0.71 0.55 0.62 0.59 0.54 0.50

EV/Sales high 0.94 0.81 0.85 0.81 0.63 0.65 0.62 0.57 0.53

EV/Sales low 0.73 0.38 0.48 0.63 0.45 0.52 0.49 0.45 0.40

EV/Sales year-end 0.78 0.55 0.77 0.69 0.46 0.56 0.53 0.49 0.44

Operating profit margin 9.1% 9.3% 9.0% 6.8% 5.6% 6.0% 6.7% 7.2% 7.6%

EV/EBITDA average 8.1 6.1 6.5 8.3 7.3 7.7 6.8 6.0 5.2

EV/EBITDA high 9.1 7.7 7.9 9.6 8.4 8.2 7.2 6.3 5.6

EV/EBITDA low 7.0 3.6 4.5 7.5 6.0 6.5 5.7 4.9 4.3

EV/EBITDA year-end 7.6 5.2 7.2 8.2 6.1 7.0 6.2 5.4 4.7

EV/EBIT average 9.2 6.9 7.8 10.4 9.7 10.3 8.8 7.6 6.6

EV/EBIT high 10.3 8.8 9.5 12.0 11.2 10.9 9.3 8.0 7.0

EV/EBIT low 8.0 4.1 5.4 9.4 8.0 8.7 7.3 6.2 5.4

EV/EBIT year-end 8.6 5.9 8.6 10.2 8.1 9.3 7.9 6.8 5.8

FCF yield average 6.7% 11.8% 8.7% 5.9% 10.3% 4.7% 7.5% 9.0% 10.5%

FCF yield high 6.0% 9.3% 7.1% 5.1% 8.9% 4.5% 7.1% 8.5% 9.9%

FCF yield low 7.7% 20.2% 12.6% 6.6% 12.6% 5.6% 9.0% 10.9% 12.9%

FCF yield year-end 7.1% 13.8% 7.8% 6.0% 12.3% 5.2% 8.4% 10.1% 11.8%

Dividend yield av. 3.1% 4.0% 3.2% 1.6% 1.4% 2.0% 2.4% 2.7%

Dividend yield high 2.3% 3.0% 2.6% 1.3% 1.2% 1.9% 2.2% 2.5%

Dividend yield low 6.7% 6.9% 3.7% 2.3% 1.8% 2.7% 3.2% 3.6%

Dividend yield year-end 3.8% 3.4% 3.3% 2.2% 1.6% 2.4% 2.8% 3.1%

EV/IC average 3.13 2.63 1.88 1.99 1.65 1.83 1.75 1.66 1.56

EV/IC high 3.51 3.33 2.30 2.28 1.91 1.93 1.85 1.76 1.66

EV/IC low 2.73 1.54 1.30 1.78 1.35 1.54 1.46 1.37 1.27

EV/IC year-end 2.93 2.25 2.09 1.94 1.38 1.66 1.58 1.49 1.39 Source: Company data, Credit Suisse estimates

12 February 2013


Financial statements

Figure 103: Organic growth and margin divisional breakdown (€m) SALES BY DIVISION 2007 2008 2009 2010 2011R 2012E 2013E 2014E 2015E

Utilities 1894 2028 1598 1790 2318 2375 2466 2600 2745

Trade & Installers 1802 1629 1020 1465 2233 2126 2114 2157 2178

Industrial 795 850 628 742 1824 1884 1891 1986 2065

Others 92 101 82 124 167 167 167 167 167

ENERGY CABLES & SYSTEMS REVENUE 4583 4608 3328 4121 6542 6552 6639 6910 7155

TELECOMS CABLES & SYSTEMS REVENUE 535 536 403 450 1315 1387 1432 1489 1534

GROUP REVENUE 5118 5144 3731 4571 7857 7939 8070 8398 8689

Organic Growth by Division 2007 2008 2009 2010 2011R 2012E 2013E 2014E 2015E

Utilities 3.3% 12.1% -13.9% 1.5% 17.8% 3.5% 3.4% 5.4% 5.6%

Trade & Installers 7.1% -5.0% -21.5% 6.6% 0.1% -2.5% 0.0% 2.0% 1.0%

Industrial 21.1% 5.0% -16.1% -1.1% 8.5% 2.0% 2.0% 5.0% 4.0%

ENERGY CABLES & SYSTEMS REVENUE 7.8% 4.0% -17.0% 3.4% 10.5% 1.0% 1.9% 4.2% 3.6%

TELECOMS CABLES & SYSTEMS REVENUE 6.3% 5.2% -20.7% 1.2% 17.3% 0.0% 3.5% 4.0% 3.0%

Total Group Organic Growth 7.7% 4.2% -17.4% 3.2% 11.2% 0.8% 2.2% 4.2% 3.5%

Operating Profit by Division 2007 2008 2009 2010 2011R 2012E 2013E 2014E 2015E

Utilities 208 256 237 215 238 230 249 276 302

Trade & Installers 137 100 26 20 35 49 66 73 78

Industrial 71 80 46 42 79 96 112 129 145

Others 4 -1 0 3 2 0 2 2 2

ENERGY CABLES & SYSTEMS 420 435 309 280 354 375 428 480 527

TELECOMS CABLES & SYSTEMS 44 45 25 29 81 101 112 122 130

GROUP UNDERLYING OPERATING PROFIT 464 477 334 309 435 477 540 602 657

Margin by Division 2007 2008 2009 2010 2011R 2012E 2013E 2014E 2015E

Utilities 11.0% 12.6% 14.8% 12.0% 10.7% 9.7% 10.1% 10.6% 11.0%

Trade & Installers 7.6% 6.1% 2.5% 1.4% 1.5% 2.3% 3.1% 3.4% 3.6%

Industrial 8.9% 9.4% 7.3% 5.7% 4.4% 5.1% 5.9% 6.5% 7.0%

Others 4.3% -1.0% 0.0% 2.4% 0.8% 0.0% 1.0% 1.0% 1.0%

ENERGY CABLES & SYSTEMS 9.2% 9.4% 9.3% 6.8% 5.6% 5.7% 6.4% 6.9% 7.4%

TELECOMS CABLES & SYSTEMS 8.2% 8.4% 6.2% 6.4% 5.9% 7.3% 7.8% 8.2% 8.5%

Group Underlying Operating Profit Margin 9.1% 9.3% 9.0% 6.8% 5.6% 6.0% 6.7% 7.2% 7.6% Source: Company data, Credit Suisse estimates. 2011R = restated for the full consolidation of Draka in 2011.

12 February 2013


Figure 104: Prysmian – Income statement (€m)

Per share data in €

P&L 2007 2008 2009 2010 2011 2011R 2012E 2013E 2014E 2015E

Group Sales 5118 5144 3731 4571 7583 7857 7939 8070 8398 8689

COGS -3198 -3127 -2060 -2963 -4917 -5176 -5246 -5442 -5613

Gross Profit 1920.022 2017 1671 1608 2666 2763 2825 2956 3076

Gross Margin 38% 39% 45% 35% 35% 35% 35% 35% 35%

Sales, General and Administration -1347 -1499 -1305 -1243 -2405 -2231 -2186 -2254 -2315

as a % of sales 26% 29% 35% 27% 32% 28% 27% 27% 27%

Reported EBITDA 573 518 366 365 269 532 639 703 761

Margin 11.2% 10.1% 9.8% 8.0% 3.5% 6.7% 7.9% 8.4% 8.8%

Total non recurring expenses -44 24 37 22 299 103 56 59 61

of which restructuring costs 6 11 19 11 56

UNDERLYING EBITDA 529 542 403 387 568 586 635 695 761 822

Margin 10.3% 10.5% 10.8% 8.5% 7.5% 7.5% 8.0% 8.6% 9.1% 9.5%

Depreciation -60 -61 -64 -71 -117 -135 -132 -134 -139

Amortization -5 -4 -5 -7 -25 -24 -24 -25 -26

Non Recurring Impairments 0 -5 -2 -21 -38 0 0 0 0

UNDERLYING OPERATING PROFIT 464 477 334 309 426 435 477 540 602 657

Margin 9.1% 9.3% 9.0% 6.8% 5.6% 6.0% 6.7% 7.2% 7.6%

Total non-recurring charges -44 29 -52 2 407 87 56 59 61

REPORTED OPERATING PROFIT 508 448 386 307 19 389 483 543 596

Margin 9.9% 8.7% 10.3% 6.7% 0.3% 4.9% 6.0% 6.5% 6.9%

Net Interest -123 -165 -52 -96 -129 -130 -120 -120 -120

Share of income from associates and dividends from investments2 3 3 2 9 12 12 12 12

REPORTED PROFIT BEFORE TAX 387 286 337 213 -101 271 375 435 488

UNDERLYING PROFIT BEFORE TAX 343 315 285 215 306 233 359 432 494 549

Income tax expenses -85 -51 -85 -63 -44 -76 -105 -122 -137

Exceptional Tax -89 -82 -74 -56 -80 -100 -121 -138 -154

Effective tax rate 22% 18% 25% 30% 44% 28% 28% 28% 28%

Underlying Tax rate 26% 26% 26% 26% 26% 28% 28% 28% 28%

PROFIT AFTER TAX 302 235 252 150 -145 195 270 313 351

UNDERLYING PROFIT AFTER TAX 254 233 211 159 226 233 258 311 356 395

Minority interest 2.284 -2 4 2 -9 -6 -6 -6 -6

NET INCOME 300 237 248 148 -136 189 264 307 345

UNDERLYING NET INCOME 256 231 215 161 217 224 252 305 350 389

Reported EPS (basic) 1.67 1.32 1.40 0.82 -0.65 0.90 1.25 1.45 1.63

Repoted EPS (diluted) 1.65 1.31 1.39 0.82 -0.65 0.90 1.25 1.45 1.63

UNDERLYING EPS (BASIC) 1.42 1.29 1.21 0.90 1.05 1.08 1.19 1.44 1.65 1.84

UNDERLYING EPS (DILUTED) 1.41 1.27 1.20 0.90 1.05 1.08 1.19 1.44 1.65 1.84

DIVIDEND PER SHARE 0.00 0.42 0.42 0.42 0.21 0.21 0.21 0.31 0.36 0.41

Payout Ratio 0% 32% 30% 51% -32% 23% 25% 25% 25% Source: Company data, Credit Suisse estimates

12 February 2013


Figure 105: Prysmian - Balance sheet (€m)

Balance Sheet 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E

Inventories 583 514 443 600 929 994 1049 1099 1145

Trade receivables 831 732 622 764 1197 0 0 0 0

Other current receivables 277 301 359 397 516 0 0 0 0

Total Receivables 1108 1033 981 1161 1713 1826 1856 1932 1998

Financial assets held for trading 40 38 42 66 80 80 80 80 80

Derivatives 25 46 44 52 28 28 28 28 28

Available of sales financial assets 0 0 0 142 0 0 0 0 0

cash and cash equivalents 252 492 492 630 727 720 893 1107 1353

Asset held for sale 0 26 28 9 5 5 5 5 5

CURRENT ASSETS 2008 2149 2030 2660 3482 3653 3911 4251 4609

Property,plant and equipment 838 806 872 949 1539 1562 1559 1559 1559

Intangible assets 21 31 43 59 618 651 627 601 575

Investment in associates 9 9 9 9 87 87 87 87 87

Available for sale financial assets 13 10 6 3 6 6 6 6 6

Derivatives 32 21 9 14 2 2 2 2 2

Deferred tax assets 29 44 47 30 97 97 97 97 97


Other non-current receivables 34 26 28 41 52 52 52 52 52

NON-CURRENT ASSETS 978 949 1014 1105 2401 2456 2430 2404 2378

TOTAL ASSETS 2986 3098 3044 3765 5883 6109 6341 6655 6988

Short-term borrowings 61 189 152 201 982 410 410 410 410

Trade payables 738 650 561 862 1421 0 0 0 0

Other current payables 356 346 326 355 571 0 0 0 0

Total payables 1094 996 887 1217 1992 2045 2072 2150 2217

Derivatives 29 120 46 28 71 71 71 71 71

Provisions for risks and charges 75 67 62 62 295 295 295 295 295

Tax payables 35 42 45 46 50 50 50 50 50

CURRENT LIABILITIES 1295 1414 1192 1554 3390 2871 2898 2976 3043

Long-term borrowings 990 969 884 1111 880 1474 1474 1474 1474

Other non-current payables 43 30 13 20 32 32 32 32 32

Provisions for risks and charges 27 34 41 44 67 67 67 67 67

Derivatives 2 33 7 48 36 36 36 36 36

Defered tax liabilities 62 30 67 44 106 106 106 106 106

Employee benefits liability 112 125 142 145 268 268 268 268 268

NON CURRENT LIABILITIES 1237 1221 1154 1412 1389 1983 1983 1983 1983

TOTAL LIABILITIES 2532 2635 2346 2966 4779 4854 4881 4959 5026

SHAREHOLDERS EQUITY (GROUP) 433 447 677 756 1042 1188 1386 1616 1875

Share capital 18 18 18 18 21 21 21 21 21

Reserves 114 192 411 590 1157 1021 1167 1365 1595

Net income/(loss) for the period 300 237 248 148 -136 189 264 307 345

Dividend 0 0 0 0 0 -44 -66 -77 -86

SHAREHOLDERS EQUITY (MINORITY) 21 16 21 43 62 68 74 80 86

Share capital and reserves 19 18 17 41 71 62 68 74 80

Profit/ (loss) for the year 2 -2 4 2 -9 -6 -6 -6 -6

Total shareholders equity 454 463 698 799 1104 1256 1460 1696 1961

TOTAL EQUITY & LIABILITIES 2986 3098 3044 3765 5883 6109 6341 6655 6988 Source: Company data, Credit Suisse estimates

12 February 2013


Figure 106: Prysmian – cash flow statement (€m)

Cash Flow Statement 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E

Net income/(loss) before income tax expenses 387 286 337 213 -101 271 375 435 488

Depreciation and Amortisation 65 70 71 99 180 159 156 160 165

Depreciation expense 60 66 66 71 150 135 132 134 139

Amortization expense 5 4 5 28 30 24 24 25 26

Badwill from acquisition 0 -3 0 0 0 0 0 0 0

Purchase of division -60 0 0 0 0 0 0 0 0

Gain on disposal of PP&E and intangible assets -1 0 0 0 -2 0 0 0 0

Gain from disposal activities 0 0 0 0 0 0 0 0 0

Share of income from invetsment in associates -3 -3 -3 -2 -9 -12 -12 -12 -12

Share based payments 6 2 1 0 7 0 0 0 0

Fair value change in metal derivatives 0 0 -91 -41 63 0 0 0 0

decrease/(increase) in inventories -50 56 88 -131 115 -65 -55 -50 -46

Trade receivables and trade payables 24 17 23 164 50 -60 -3 2 1

Other assets and other liabilities -25 -5 -90 -38 35 0 0 0 0

Fair value of currency derivatives -8 -2 15 -1 -3 0 0 0 0

Cash generated from operations 335 418 351 263 335 293 461 535 596

Utilization of provisions -53 -47 -58 -50 -67 0 0 0 0

Accruals of provisions 47 49 46 33 267 0 0 0 0

Income tax paid -86 -83 -62 -59 -97 -76 -105 -122 -137

Net finance costs 123 165 52 96 129 130 120 120 120

NET CASH FROM OPERATING ACTIVITIES 366 502 329 283 567 347 476 533 579

Purchase of Energy & Telecom cables & Systems division 45 16 0 0 0 0 0 0 0

Acquisition -4 -1 -3 -21 -419 -87 0 0 0

Investmemnt in PP&E -87 -103 -91 -83 -135 -127 -129 -134 -139

Disposal of PP&E 5 1 1 7 14 0 0 0 0

Investment in intangible assets -2 -13 -16 -19 -24 0 0 0 0

disposal of intangible assets 2 0 0 0 0 0 0 0 0

Investment in financial assets held for trading -22 -7 0 -18 -42 0 0 0 0

disposal of financial assets held for trading 8 1 5 0 22 0 0 0 0

Investment in available for sale investments 0 0 0 -152 0 0 0 0 0

Disposal in available for sale investments 0 3 6 12 143 0 0 0 0

Investment in associates 0 0 0 0 -1 0 0 0 0

Dividends received from investment in associates 3 3 3 2 5 12 12 12 12

Effect of disposed operations 0 0 0 0 0 0 0 0 0

NET CASH FROM INVESTING ACTIVITIES -53 -100 -95 -272 -437 -202 -117 -122 -127

FREE CASH FLOW 285 390 226 190 427 232 359 410 452

Contribution capital -30 2 5 13 1 0 0 0 0

Dividend paid 0 -76 -75 -75 -37 -44 -66 -77 -86

Purchase of treasury shares 0 -30 0 0 0 0 0 0 0

Net finance costs -83 -88 -46 -52 -130 -130 -120 -120 -120

Net changes in short and long-term borrowings -337 41 -124 233 128 22 0 0 0

NET CASH FROM FINANCING ACTIVITIES -450 -151 -240 119 -38 -152 -186 -197 -206

Exchange gain/(loss) -4 -11 6 8 5 0 0 0 0

Net cash used in the period -141 240 0 138 97 -7 173 214 246

Cash and cash equivalent beginning of period 393 252 492 492 630 727 720 893 1107

Cash and cash equivalent end of period 252 492 492 630 727 720 893 1107 1353 Source: Company data, Credit Suisse estimates

12 February 2013


Europe / France

Nexans (NEXS.PA) INITIATING COVERAGE

Self Help attractions balanced by risks

■ We initiate on Nexans with a Neutral rating and €36 target price.

■ Submarine opportunity, but we prefer Prysmian as a play on the theme: Following recent order wins, Nexans has good momentum in submarine cables. We estimate Nexans has a 27% market share in European Submarine cables and we see this market as a €503m opportunity per year 2012-16 for Nexans (current sales €491m). However, Prysmian is our preferred stock on this theme as we see lower execution risk and potential market share gains.

■ Self-help: risk/reward on targets balanced. We view the cost action plan announced at the FY12 results at a positive step for Nexans, with the top end of the 2015 operating profit range (€350m–400m) implying 24% upside. However, we cautiously forecast €351m in 2015 because 1) there has been cost savings slippage in the sector in the past and 2) in our view Nexans has not yet clearly mapped out all the targeted cost savings (in 2013 management guidance is for yoy flat profitability).

■ Relatively higher cyclicality and execution risk at Nexans. We believe Nexans derives c55% of EBITDA from relatively higher cyclicality, commoditised cables (in 2012 39% of profits were from building cables). As a result we believe a 10% discount to the sector is justified. We also see relatively higher execution risk at Nexans in the near term but believe this is

to an extent mitigated by management guiding to flat profitability in 2013.

■ Catalysts: 25 April, 2013—1Q 13 sales figures.

■ Valuation: Nexans is trading on a 12% discount to the sector on 2014E

EBIT. We derive our €36 target price using a 10% discount to the 2014E

EV/EBIT sector multiple and discount it back to 2013E. We view the 10%

discount as justified by the above factor and initiate with a Neutral rating as

we believe the above risks are balanced by the optionality from reaching the

top end of 2015 targets (implies 24% upside).

Share price performance

27

47

67



The price relative chart measures performance against the

CAC 40 INDEX which closed at 3650.58 on 07/02/13

On 07/02/13 the spot exchange rate was €1./Eu 1. -

Eu .75/US$1

Performance Over 1M 3M 12M Absolute (%) 9.1 15.2 -27.7 Relative (%) 12.0 10.0 -33.3

Financial and valuation metrics

Year 12/12A 12/13E 12/14E 12/15E Revenue (Eu m) 4,872.0 5,038.1 5,196.0 5,382.6 EBITDA (Eu m) 353.03 368.28 456.21 512.89 Adjusted Net Income (Eu m) 66.8 66.5 128.2 164.0 CS adj. EPS (Eu) 2.23 2.22 4.27 5.47 Prev. EPS (Eu) — — — — ROIC (%) 5.94 6.02 8.42 9.72 P/E (adj., x) 16.81 16.90 8.76 6.85 P/E rel. (%) 148.8 145.7 80.5 69.6 EV/EBITDA 4.8 4.6 3.6 3.1

Dividend (12/13E, Eu) 0.45 IC (12/13E, Eu m) 2,467.09 Dividend yield (%) 1.2 EV/IC 0.69 Net debt (12/13E, Eu m) 601.1 Current WACC 9.0 Net debt/equity (12/13E, %) 32.2 Free float (%) — BV/share (12/13E, Eu) 54.9 Number of shares (m) 29.26

Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates.

Rating NEUTRAL* Price (07 Feb 13, Eu) 37.44 Target price (Eu) 36.00¹ Market cap. (Eu m) 1,095.52 Enterprise value (Eu m) 1,696.7

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

Research Analysts

Max Yates

44 20 7883 8501

[email protected]

Andre Kukhnin CFA

44 20 7888 0350

[email protected]

Simon Toennessen

44 20 7883 6893

[email protected]

12 February 2013


Nexans NEXS.PA Price (07 Feb 13): Eu37.44, Rating: NEUTRAL*, Target Price: Eu36.00

Income statement (Eu m) 12/12A 12/13E 12/14E 12/15E

Sales revenue 4,872 5,038 5,196 5,383 EBITDA 353 368 456 513 Depr. & amort. (151) (156) (156) (161) EBIT (CS) 202 212 300 351 Net interest exp. (112) (120) (120) (120) Associates — — — — Other adj, — — — — PBT (CS) 90 92 180 231 Income taxes (25) (28) (54) (69) Profit after tax 65 64 126 162 Minorities 2 2 2 2 Preferred dividends — — — — Associates & other — — — — Net profit (CS) 67 66 128 164 Other NPAT adjustments (40) (28) (29) (30) Reported net income 27 38 99 134

Cash flow (Eu) 12/12A 12/13E 12/14E 12/15E

EBIT 202 212 300 351 Net interest (112) (120) (120) (120) Cash taxes paid (73) (16) (42) (57) Change in working capital (9) (31) (44) (50) Other cash & non-cash items 189 219 217 221 Cash flow from operations 197 264 313 346 CAPEX (161) (126) (125) (129) Free cash flow to the firm 36 138 188 217 Acquisitions — — — — Divestments 5 — — — Other investment/(outflows) (242) — — — Cash flow from investments (403) (126) (125) (129) Net share issue/(repurchase) 16 — — — Dividends paid (33) (13) (26) (33) Issuance (retirement) of debt 266 — — — Other (383) (120) (120) (120) Cash flow from financing activities

(134) (133) (146) (153) Effect of exchange rates 7 — — — Changes in Net Cash/Debt (333) 5 42 64 . Net debt at start 273 606 601 559 Change in net debt 333 (5) (42) (64) Net debt at end 606 601 559 495

Balance sheet (Eu m) 12/12A 12/13E 12/14E 12/15E

Assets Cash and cash equivalents 847 852 894 958 Accounts receivable 1,080 1,134 1,195 1,238 Inventory 1,125 1,151 1,187 1,237 Other current assets 592 609 626 643 Total current assets 3,644 3,746 3,902 4,077 Total fixed assets 1,256 1,226 1,195 1,162 Intangible assets and goodwill 747 747 747 747 Investment securities — — — — Other assets 207 207 207 207 Total assets 5,854 5,926 6,051 6,193 Liabilities Accounts payable 1,136 1,185 1,239 1,282 Short-term debt 425 425 425 425 Other short term liabilities 613 613 613 613 Total current liabilities 2,174 2,223 2,277 2,320 Long-term debt 595 595 595 595 Other liabilities 1,242 1,242 1,242 1,242 Total liabilities 4,011 4,060 4,114 4,157 Shareholders' equity 1,793 1,818 1,891 1,992 Minority interest 50 48 46 44 Total equity & liabilities 5,854 5,926 6,051 6,193 Net debt (Eu m) 606 601 559 495

Per share data 12/12A 12/13E 12/14E 12/15E

No. of shares (wtd avg) 30 30 30 30 CS adj. EPS (Eu) 2.23 2.22 4.27 5.47 Prev. EPS (Eu) — — — — Dividend (Eu) 0.50 0.45 0.86 1.10 Dividend payout ratio 22.46 20.20 20.20 20.20 Free cash flow per share (Eu)

1.20 4.61 6.26 7.24

Key ratios and valuation

12/12A 12/13E 12/14E 12/15E

Growth(%) Sales 6.1 3.4 3.1 3.6 EBIT (21.1) 5.0 41.6 17.0 Net profit (44.2) (0.5) 92.9 27.9 EPS (46.7) (0.5) 92.9 27.9 Margins (%) EBITDA margin 7.2 7.3 8.8 9.5 EBIT margin 4.1 4.2 5.8 6.5 Pretax margin 1.8 1.8 3.5 4.3 Net margin 1.4 1.3 2.5 3.0 Valuation metrics (x) EV/sales 0.35 0.34 0.32 0.30 EV/EBITDA 4.8 4.6 3.6 3.1 EV/EBIT 8.4 8.0 5.5 4.5 P/E 16.8 16.9 8.8 6.8 P/B 0.69 0.68 0.65 0.62 Asset turnover 0.83 0.85 0.86 0.87 ROE analysis (%) ROE stated-return on equity

1.6 2.4 5.9 7.6 ROIC 5.9 6.0 8.4 9.7 Interest burden 0.45 0.43 0.60 0.66 Tax rate 28.0 30.0 30.0 30.0 Financial leverage 0.90 0.89 0.85 0.80 Credit ratios (%) Net debt/equity 32.9 32.2 28.9 24.3 Net debt/EBITDA 1.7 1.6 1.2 1.0 Interest coverage ratio 1.8 1.8 2.5 2.9

Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities

(EUROPE) LTD. Estimates.

27

47

67



The price relative chart measures performance against the CAC 40 INDEX which

closed at 3616.06 on 07/02/13

On 07/02/13 the spot exchange rate was €1./Eu 1. - Eu .75/US$1

12 February 2013


Nexans investment case We initiate on Nexans with a Neutral rating and a target price of €36.

Our investment case is based on four factors.

1) Relatively speaking, we prefer Prysmian as a play on submarine due to potential

for market share gains and relatively lower execution risk.

2) Self-help: Medium term attractions but we remain cautious on target.

3) Relatively higher cyclicality and greater risk of earnings volatility.

4) Valuation.

Nexans: our forecasts vs consensus

We are 14% below consensus in 2013E and in line in 2014E. However, this is versus pre-

2012 results consensus and in our view the downgrades to 2013 are already priced in. We

believe that on the day of the FY 2012 results the market’s focus was on Nexans’ ability to

reach its €350m–400m operating adjusted EBIT target by 2015. With our 2015 forecasts

at the bottom end of the targeted range, we believe we will be broadly in line with

consensus.

Figure 107: Our Nexans forecasts are 14.1% below 2013 consensus (pre FY12 results) and 0.4% ahead in 2014E (pre FY12 results) at adjusted EBIT level. At FY12 result management guided to 2013 operating profitability being ‘roughly the same as in 2012’.

CS CS

CS F'cast C'sus vs C'sus CS F'cast C'sus vs C'sus

Sales 5,038 5,086 -0.9% 5,196 5,291 -1.8%

Adjusted EBIT 212 247 -14.1% 300 299 0.4%

margin 4.2% 4.9% 5.8% 5.7%

2013 2014

Source: Company data, Credit Suisse estimates Thomson Reuters

12 February 2013


1) Submarine is an opportunity, but we prefer

exposure through Prysmian

We view the submarine cable market as a structurally growing market with high

technological barriers to entry. Our base case is that submarine cables will be a €503m

opportunity per year from 2012E–16E for Nexans vs current sales of €491m. However,

while we acknowledge Nexans’ recent strong order momentum (Italy-Montenegro and

Canada Interconnection) we continue to see Prysmian as the preferred play on this theme.

This is because we see lower execution risk at Prysmian and greater potential for medium

term market share gains based on its relationship with large grid players (eg Siemens) and

its winning of higher value, more complex orders over the past three years.

2) Self-help, but we remain cautious

At FY12 results Nexans announced a cost savings action plan targeting €350m–400m in

operating profit by 2015. We remain cautious of the top end of guidance because: 1)

historically in the sector we have seen cost saving slippage and we believe this could

occur at Nexans (see Figure 109 for scenario), 2) in our view Nexans has not yet clearly

mapped out all the specific cost saving details and 3) there is minimal impact from the

saving programme in 2013, with management guiding to flat margins yoy. However,

relative to previous cost savings programmes across the sector and based on Nexans’

relative profit/employee ratio, we believe the savings assumptions are reasonable.

On our calculations, using 2015E EBIT to derive a valuation (vs 2014E EBIT in our

assumptions), Nexans is broadly fair value assuming it reaches the low end (€350m) of its

targets and has 24% upside potential assuming it reaches the top end (€400m) of its

targets.

Figure 108: 2015 target operating profit bridge as given by Nexans at FY12 results. Nexans targets €350m–400m.

Figure 109: Scenario assuming 50% cost savings slippage resulting in 2015 Operating profit below the €350-€400m target.

200

130

90

20

400

0

50

100

150

200

250

300

350

400

450

2012 Cost savings Organic growth& Turnaround

Scope 2015

335

200

130

9020

65

0

50

100

150

200

250

300

350

400

450

2012 Cost savings Organicgrowth &

Turnaround

Scope PricingPressure &

Costincreases

2015


12 February 2013


3) Relatively higher cyclicality and earnings

volatility at Nexans

In our target price methodology we assume that Nexans trades at a 10% discount to the

sector while we value Prysmian using a sector multiple (ex lifts). Since Nexans’ organic

growth declined by 18.1% in 2009 there have been limited shifts in the business mix, with

relatively higher cyclicality or lower value add cables still accounting for more than 50% of

sales (vs 35% at Prysmian).

In 2012 we also saw earnings volatility at Nexans driven by submarine production issues

and Land HV contract delays. We continue to see greater risk of earnings volatility in the

near term at Nexans, which we believe is supportive of the multiples we use to generate

our Prysmian and Nexans target prices.

Figure 110: Nexans has a greater reliance on cyclical or lower value add businesses, in particular building cables which is a market we remain cautious on in 2013

Figure 111: 12 mth fwd earnings at Nexans have been volatile and we see potential for a continuation in 2013

0%

20%

40%

60%

80%

100%

Prysmian Nexans

Cyclical or lower value add Less-cyclical or higher value add

3

3.5

4

4.5

5

1

1.1

1.2

1.3

1.4

1.5

1.6

Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13

Prysmian (12 mth fwd EPS) Nexans (12 mth fwd EPS) (RHS)

Source: Company data, Credit Suisse estimates Source: Thomson Reuters

We would also highlight that since the downturn Nexans’ business has not shifted enough

to justify our applying a significantly higher multiple to earnings relative to its history. We

would highlight that >30% of profit is still derived from building cable. We also believe that

Power distribution cables (within T,D,O) still accounts for 23% of profit and we view this as

a relatively commoditised product.

Figure 112: Nexans operating profit split in 2007 Figure 113: Nexans operating profit split in 2011

T,D,O41%

Industry21%

D&I38%

T,D,O53%

Industry14%

D&I32%

Other1%


12 February 2013


4) Valuation

We derive a fair value of €36 for Nexans using 8.1x 2014E EV/EBIT, implying a 10%

discount to the sector average (electricals and mechanicals ex the service companies).

We then discount this back to 2013E reach our €36 target price.

We view this discount to the capital goods sector as justified due to:

1) On-going risks of earnings volatility (limited growth expected in 2013);

2) a reliance on relatively higher cyclicality, commoditised end markets; and

3) our forecast that ROIC remains below cost of capital.

Figure 114: We use a 8.1x 2014E multiple (10% discount to the sector) discounted back 1 year to value Nexans

2014 EBIT Sector multiple (ex lifts) Net Debt (inc liabilities) Implied target price (€)Upside/

(downside)

Nexans 300 8.1 1,222 36 -4%

Source: Credit Suisse estimates. For the sector average we include Alstom, Legrand, Philips, Schneider, Siemens, Alfa Laval, Assa Abloy, Atlas

Copco, Electrolux, Metso, Sandvik, Schindler and SKF

Operating profit has been volatile at Nexans and we continue to view this as a risk into

2013E/14E but we believe it has to an extent been mitigated by management guiding to

flat profitability year on year in 2013. However, this guidance was against the backdrop of

2015 targets that we believe prevented Nexans’ de-rating on the back of the 2013

consensus downgrades. As we show in Figure 116, the top end of these targets imply

relatively attractive upside for the share (24%).

Figure 115: Nexans EBIT growth has been volatile between 2009-2012 and we this risk is relatively higher than across the Capital Goods sector

Figure 116: Nexans share price implied by achieving top and bottom ends of the 2015 target. We a 8.1x EV/EBIT multiple to derive the values shown below.

-50%

-30%

-10%

10%

30%

50%

2009 2010 2011 2012E 2013E 2014E

Sector EBIT growth Nexans EBIT growth

€ 37

€ 41

€ 51

€ 30

€ 35

€ 40

€ 45

€ 50

€ 55

Current price Assume €350 Op. profit (2015)

Assume €400 Op. Profit (2015)


Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates.

12 February 2013


Nexans’ historical discount to the sector

Prysmian and Nexans have historically traded at a discount to the broader capital goods

sector. Over the past five years, on a 12-month forward EV/EBIT multiple Nexans has

traded at a 23% discount (Figure 117). In common with Prysmian, we believe this is

because of: 1) lagging organic growth, 2) margin declines, 3) returns below the sector

average and 4) the relative cyclicality of earnings.

Figure 117: Nexans 12-mth FWD EV/EBIT vs. the capital

goods sector (ex lifts)

Figure 118: Nexans’ relative performance to the sector on

a five year view is -63%.

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13

EV/EBIT rel to sector Average

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Feb 0

8

May 0

8

Au

g 0

8

Nov 0

8

Feb 0

9

May 0

9

Au

g 0

9

Nov 0

9

Feb 1

0

May 1

0

Au

g 1

0

Nov 1

0

Feb 1

1

May 1

1

Au

g 1

1

Nov 1

1

Feb 1

2

May 1

2

Au

g 1

2

Nov 1

2

Feb 1

3

Price Relative 90d Moving Avg

90d Moving Avg (+10%) 90d Moving Avg (-10%)

Source: Thomson Reuters. The discount here is shown vs on consensus numbers and is greater than the 11% discount on Credit Suisse forecasts.

Source: Thomson Reuters

In Figure 119 and Figure 120 we show this lagging organic growth and the margin

underperformance. This was more pronounced at Nexans than at Prysmian which has

resulted in the greater historical discount to the sector (22% at Nexans vs 18% at

Prysmian) and the more significant five year share price underperformance (63% at

Nexans vs 16% at Prysmian).

Figure 119: Prysmian vs. Nexans – Organic growth index Figure 120: Prysmian vs. Nexans’ margin progression

80%

90%

100%

110%

120%

2007 2008 2009 2010 2011


4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2007 2008 2009 2010 2011



12 February 2013


Nexans ROIC, FCF and HOLT

Figure 121: Nexans – Simple vs CS adjusted IC Figure 122: Nexans – CS adj ROIC and its drivers

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2007 2008 2009 2010 2011 2012E 2013E 2014E

CS Adjusted IC Simple IC

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2007 2008 2009 2010 2011 2012E 2013E 2014E

CS Adjusted ROIC, % NOPAT margin, % Capital turns, x


■ Invested capital: Nexans’ has had a IC CAGR of 2.5% via acquisitions but on an

organic basis, IC has declined since 2007. It peaked in 2010 and declined in 2011

driven by an increase in provisions and a rise in contract liabilities. In 2009 despite

Nexans restructuring, invested capital remained broadly flat as capex continued to run

at 4.1% and 3% of sales in 2009 and 2010 respectively.

■ ROIC: Nexans’ ROIC has broadly declined from 12.7% in 2007 to 5.7% in 2010. There

was a muted recovery in 2011 to 7.5% but we would highlight that since 2009, Nexans

has not covered its cost of capital. IC has been broadly flat but margins have declined

driven by Land HV, Automotive and Building cables.

Figure 123: Nexans – Credit Suisse ROIC model, €m

ROIC MODEL 2007 2008 2009 2010 2011

Invested Capital (IC)

Simple IC 2,049 2,153 2,080 2,350 2,143

CS Adjustments:

Acq. intangibles amort. (cumulative) 4 5 19 41 41

Capitalised operating leases 56 133 161 189 203

Deferred tax related to intangibles 0 0 0 0 0

Pension deficit 337 330 321 324 316

CS Adjusted IC 2,446 2,621 2,581 2,904 2,703

NOPAT

Reported EBIT 362 214 153 205 -48

Recurring EBITA 409 427 241 207 256

Normalised restructuring charge 0 0 0 0 0

Normalised tax rate 25.0% 25.0% 25.0% 25.0% 25.0%

CS Adjusted NOPAT 310 328 190 166 203

Capital turns, x 2.0 1.8 1.6 1.5 1.7

NOPAT margin, % 6.4% 6.9% 4.7% 3.8% 4.4%

CS Adjusted ROIC 12.7% 12.5% 7.3% 5.7% 7.5%

Simple ROIC 11.7% 11.4% 6.5% 5.3% 7.1%

Company-provided

Company-provided IC

Company-provided ROIC

Source: Company data, Credit Suisse research. Credit Suisse research. In our ROIC calculation we adjust invested capital upwards accounting for rentals, goodwill writedowns and Pensions.

12 February 2013


EVA® analysis

We created an EVA®-based DCF valuation for Nexans to reverse-solve it for the current

share price, maintaining a consistent methodology relative to other companies in the

sector; therefore, we are able to compare what future ROIC or mid-cycle profitability the

shares are currently discounting. Details of the model are illustrated in Figure 124.

Figure 124 Nexans – Past vs future Figure 125: Nexans – DCF sensitivity, €

KEY OUTPUT 2007-11 2011-21E

CS Adj ROIC (average) 9.1% 6.6%

Capital turns (average) 1.7 1.7

CS NOPAT margin (average) 5.3% 3.9%

Non-acquired capital growth (average) 0.1%

Total capital CAGR 2.5% 3.1%

Sales CAGR -1.2% 3.0%

Organic Sales growth (average) -0.9% 2.1%

CS Adj EBITA CAGR -10.0% 2.3%

CS Adj NOPAT CAGR -8.5% 2.0%

CS Adj EBITA margin (average) 7.0% 5.4%

Restructuring / Sales (average) -2.9% 0.0%

Mid-cycle Sales / Capital Growth

ROIC -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0%

3.8% 10 7 4 0 -3 -7 -11

4.8% 20 18 15 13 10 7 4

5.8% 31 29 27 25 24 22 20

6.8% 41 40 39 38 37 36 35

7.8% 52 51 51 51 50 50 50

8.8% 62 62 63 63 64 64 65

9.8% 72 73 74 76 77 78 80

Source: Company data, Credit Suisse estimates Source: Credit Suisse estimates

In this model, we make the following assumptions that are constant across all the

companies in the sector: terminal growth of 2%, WACC of 9%.

Our key observations:

■ What is discounted. Reverse-solving the current share price implies growth into

perpetuity of 2% and ROIC improving to 6.8%. In our view, this is also, to an extent,

discounting the relatively higher execution risk at Nexans.

■ Sensitivity. Looking at a scenario in which Nexans improves its ROIC to 150bps

above the 6.3% we forecast in 2013 and growth of 2% implies a value of €51 per

share (31% potential upside). However, in our view, this would require significant

portfolio changes and we believe finding a buyer for Nexans’ underperforming

businesses remains challenging over the next 12 months.

Figure 126: Nexans – Credit Suisse EVA® DCF model, €m

Source: Company data, Credit Suisse estimates. Here we use NOPAT/Average Invested capital to calculate ROIC which results in the historic ROIC differing to the ROIC model included on the previous page.

EVA DCF MODEL 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Sales 4,594 4,872 5,038 5,196 5,300 5,406 5,514 5,624 5,737 5,852 5,969

Growth 6.6% 6.1% 3.4% 3.1% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%

CS Adj EBITA 271 217 227 315 303 307 311 315 320 324 329

Margin 5.9% 4.4% 4.5% 6.1% 5.7% 5.7% 5.6% 5.6% 5.6% 5.5% 5.5%

Tax rate 25.0% 28.0% 30.0% 30.0% 29.6% 29.1% 28.7% 28.3% 27.9% 27.4% 27.0%

NOPAT 203 156 159 221 213 217 222 226 231 235 240

ROIC 7.2% 5.3% 5.0% 7.0% 6.8% 6.8% 6.8% 6.8% 6.8% 6.8% 6.8%

Capital charge @ 9% 261 243 284 286 279 285 291 296 302 308 315

EVA® -58 -87 -125 -65 -66 -68 -69 -70 -72 -73 -75

Discounted EVA 2,703 -80 -105 -50 -47 -44 -41 -38 -36 -34 -490

Total NPV 1,737

Shares in issue, m 30

Net debt 559

Equity Value 1,178

Share Valuation, EUR 39

12 February 2013


Cash conversion analysis

We show the details of our cash conversion analysis in the table below.

Figure 127: Net income to free cash flow conversion model, €m

Average Average

2007 2008 2009 2010 2011 Simple Cumulative

Net income to FCF reconciliation

Clean net income 223 242 93 82 120

Reported net income 190 82 8 82 (178)

Working capital 184 146 261 (3) (72)

Delta b/w Capex & Depreciation (54) (57) (33) 55 12

Delta b/w R&D Capitalised & Intangibles Amort. 7 9 12 12 12

PPA 0 0 0 0 0

Other (Deferred tax, Pension, Minority etc) 78 187 49 (67) 253

Free Cash Flow 405 367 297 79 27

Conversion ratios

Clean net income 100% 100% 100% 100% 100% 100% 100%

Reported net income 85% 34% 9% 100% -148% 16% 24%

Working capital 83% 60% 281% -4% -60% 72% 68%

Delta b/w Capex & Depreciation -24% -24% -35% 67% 10% -1% -10%

Delta b/w R&D Capitalised & Intangibles Amort. 3% 4% 13% 15% 10% 9% 7%

PPA 0% 0% 0% 0% 0% 0% 0%

Other (Deferred tax, Pension, Minority etc) 35% 77% 53% -82% 211% 59% 66%

Free Cash Flow 182% 152% 319% 96% 23% 154% 155%


Nexans delivered an average free cash flow conversion of 155% over 2006-2011 (on

a cumulative basis), which is above the sector average of 83%.

■ Nexans’ FCF conversion from clean net income of 155% is flattered by a €200m

provision for anti-trust taken in 2011 while the cash out has not occurred. Excluding

this impact, Nexans’ FCF conversion would be 113%, we calculate.

■ The difference between Nexans’ clean and reported net income is in part due to

restructuring costs. These accounted for -€119m and -€57m of total costs in 2009 and

2010, respectively. We do not include a recurring restructuring for Nexans but it is a

further factor that helps support a 20% discount in our valuation methodology.

■ However, a further (non-cash) cause of the difference is the core exposure effect

which is an accounting difference driven by the difference between the historical cost

of metal and the allocation of cost via the group’s hedging system. We exclude this

from clean net income and it accounted for -€164m in 2008 and +€89m in 2010.

■ Cumulatively working capital reductions have increased cash conversion by 68% but

in 2010 and 2011 Nexans saw outflows. Inventory reductions drove the 2007-2009

working capital inflows and in 2011 although there was a working capital outflow,

Nexans achieved a reduction in working capital as a percentage of sales.

■ Lastly, Nexans has been running capex above depreciation which has had a negative

impact on cash conversion. However, we have also seen this at Prysmian who

invested in submarine capacity to meet rising demand. In the medium term, we view

this as a positive as it will increase the share of higher margin cables with greater

visibility.

12 February 2013


Nexans on Credit Suisse HOLT®

Nexans: Upside potential driven by fading CFROI® up to cost of capital

On our forecasts using HOLT, Nexans’ warranted price is €40 compared with our target

price of €36. We discuss the HOLT methodology in greater detail in this section but

highlight two factors that give Nexans a favourable valuation: 1) we forecast Nexans’

ROIC to remain below its cost of capital in 2013-15E, and in the HOLT valuation post-

2015E CFROI fades to 6%, which implies a material improvement in Nexans’ operations;

and 2) the HOLT valuation does not account for the operational risks associated with

Nexans as the valuation is solely driven by fundamentals.

Figure 128: Credit Suisse Nexans forecasts in HOLT

Current Price: EUR 37.44 Warranted Price: EUR 40.14 Valuation date: 08-Feb-13

Sales Growth (parallel % point change to forecasts) Dec-10A Dec-11A Dec-12E Dec-13E Dec-14E

-2.0% -1.0% 0.0% 1.0% 2.0% Sales Growth, % 22.5 12.0 7.5 4.4 3.9

EBITDA Mgn, % 6.9 1.9 1.9 1.9 1.9

Asset Turns, x 0.86 0.97 0.99 1.03 1.05

CFROI®, % 3.9 -1.6 1.8 2.2 3.2

Disc Rate, % 6.1 7.1 7.0 7.0 7.0

Asset Grth, % 6.3 -1.3 3.1 0.1 1.1

Value/Cost, x 0.7 0.7 0.7 0.7 0.7

Economic PE, x 18.8 -41.2 40.9 33.6 22.4

Leverage, % 45.0 48.5 65.6 65.8 66.1

More than

10%

downside

Within 10%More than

10% upside

Source: Credit Suisse HOLT®. CFROI, HOLT, and ValueSearch are trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries.

* Operating margin (yellow) is EBITDA (grey) plus rental expense and R&D expense

2.0% 121% 149% 182% 218%

1.0% 47% 69% 95% 125%

-83% -69% -52%

260%

7% 29% 55%

159%

HO

LT

-

C

red

it S

uis

se

An

aly

st

Sc

en

ari

o D

ata

NEXANS SA (NEXS)

EB

ITD

A M

arg

in (

pa

rall

el

% p

oin

t

ch

an

ge

to

fo

rec

as

ts)

-2.0% -182% -190% -190%

0.0% -28% -11%

-184% -175%

-1.0% -102% -94%

-40.00

-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00

40.00

50.00

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Sales Growth (in %)

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Operating Margin and EBITDA (in %) - see note*

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Asset Turns (x)

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Historical CFROI

HistoricalTransactionCFROI

Forecast CFROI

ForecastTransactionCFROI

Discount Rate

CFROI & Discount Rate (in %)

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

12.00

2002200420062008201020122014201620182020

Historical AssetGrowth Rate

Historical GrowthIncl Intang

Forecast Growth

Forecast GrowthIncl Intang

NormalisedGrowth Rate

Asset Growth (in %)

Source: Company data, Credit Suisse estimates, Credit Suisse HOLT

12 February 2013


HOLT: Strategies for CFROI improvement

We have looked at Prysmian and Nexans in HOLT, which supports our view that

Prysmian’s strategy of cutting costs appears to be reasonable based on typical company

lifecycles. We also believe based on Prysmian’s exposure to submarine, oil & gas, and

optical fibre and cable that it has the capacity to grow these higher margin businesses,

which could also positively impact CFROI.

In contrast, we believe Nexans, based on its negative CFROI spread, needs to pursue a

policy of divesting underperforming assets. This should allow Nexans to focus on growing

its higher quality assets but we would highlight it could be difficult to find buyers for the

underperforming assets at a mutually agreeable price based on the previous attempt to

divest the automotive harness business in 2008.

Figure 129: Looking at the typical company lifecycle, we see margin improvement as the driver of CFROI improvement

at Prysmian while at Nexans (negative CFROI spread) we see divestments as the driver for improvement

Prysmian

Nexans


While Nexans stands out as having significant potential for improvement (Figure 130) we

highlight that we continue to see opportunities for improvement also at Prysmian based on

its business mix, its scale, and execution on the Draka synergies programme.

Figure 130: Prysmian’s CFROI is marginally above the cable peer group while Nexans is materially below

Source: Credit Suisse HOLT. Thomson Reuters for Consensus used for all companies in Figure 131

12 February 2013


Nexans: What is consensus discounting?

The current share price implies…

In Figure 131 we show that the CFROI improvement implied by consensus forecasts over

the next four years is limited in HOLT. Consensus forecasts assume a slight improvement

in CFROI and then a decline in 2016 based on the current share price. However, we

highlight that the implied margins in 2015-16E are driven by HOLT fading up the CFROI to

6% after a five-year window (Figure 131). In the next section, we show the implied

consensus margins for 2015-2020 if we were to extend the window to 10 years.

Figure 131: The current share price implies limited CFROI

improvement over the next three years from 2012-15

Figure 132: Based on asset turns remaining at the 2012

level, the current share price is discounting margins

pulling back significantly in 2016E

2011 2012 2013 2014 2015 2016

Sales Growth 12.0% 6.5% 4.1% 3.5% 3.5% 3.5%

EBITDA Margins 1.9% 7.2% 8.0% 8.5% 7.4% 6.2%

Asset Turns 0.96 0.96 0.96 0.96 0.96 0.96

Source: Credit Suisse HOLT Source: Credit Suisse HOLT

Adjusting the HOLT methodology

We would argue however that the low consensus expectations in 2015/16 implied in

Figure 132 are partially reflective of Nexans benefiting from HOLT’s fading methodology.

HOLT phases the CFROI levels of all companies to 6% over the long term. This means

that for companies with a CFROI level below 6%, as is the case with Nexans, its valuation

benefits from having its CFROI faded up.

If, however, we extend the fade to 10 years, to delay the fade up, the implied EBITDA

margin suggested by the current share price looks fairer in our view. This is shown in

Figure 133 and, in our view, the current share price can be justified with sales growth of

4% and a stable margin of 7.3%. Based on the competitive landscape and the lower value

added nature of relatively important parts of Nexans’ business, eg building cables, we do

not see this as an unreasonable scenario.

Figure 133: Using a 10-year fade window for Nexans (a slow rise in CFROI up to the discount rate) implies the current

share price is discounting margins

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Sales Growth 12.0% 6.5% 4.1% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%

EBITDA Margins 1.9% 7.2% 8.0% 8.5% 7.3% 7.3% 7.3% 7.3% 7.3% 7.3% 7.3%

Asset Turns 0.96 0.96 0.96 0.96 0.96 0.96 0.96 0.96 0.96 0.96 0.96


12 February 2013


Nexans’ disposal scenario in HOLT

We have used HOLT to run a scenario based on a disposal of the automotive harness

business. Nexans tried to sell this business in 2008 but was unable to find a buyer. Since

then, the automotive harness business has been depressed as it has found it difficult to

compete with Leoni on scale. (Nexans’ auto harness business is 25% of the size of

Leoni’s.)

In this scenario we have:

■ Changed 2012 sales growth to zero (reflecting a disposal of the automotive harness

business), which excluded the 6% (€294m of sales), while growing the remainder of

the business at the consensus forecast of 6.5% (including acquisitions—a disposal is

reflected in the 0.1% growth in 2012).

■ Assumed this improves margins to 8.3% (vs consensus to 8%) in 2013 and then flat

line margins at 8.8% from 2014E (our margin for 2014E is 8.4%); and

■ We have also assumed asset turns remain flat as the average European auto parts

asset turns are 1x, the same as Nexans’ asset turns of 1x.

This scenario shows 45% upside potential in HOLT but we would also highlight it implies

margins remain on a stable upward trajectory in 2013 and 2014, which has not been the

case over the last 12 months. We also note the longer-term risk to Nexans’ margins due to

55% of its EBITDA being generated by more commoditised end markets.

Figure 134: Using HOLT, a scenario disposing of the automotive harness business implies 45% upside potential

Disposal of Auto 10yr 45% Upside

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Sales Growth 12.0% 0.1% 4.1% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%

EBITDA Margins 1.9% 7.5% 8.3% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8%

Asset Turns 0.96 0.958 0.958 0.958 0.958 0.958 0.958 0.958 0.958 0.958 0.958 Source: Credit Suisse HOLT

12 February 2013


Nexans: Company description

Nexans is a global player in the cable industry. Nexans employs 24,500 people and had sales in 2011 of €7bn. It has three business segments:

■ Transmission, distribution and operators: Provides complete cables and cabling solutions for power

production, transmission and distribution operators, and telecom companies. The key end markets are transmission

& distribution, telecom network and transport infrastructures.

■ Industry: Provides complete portfolio of cables and solutions for market segments as diverse as the automotive,

rolling stock and aerospace industries, shipbuilding, nuclear power, oil & gas and petrochemicals, material handling

and automation. The key end markets are energy resources, transportation and other industrial segments.

■ Distributors and installers: Supplies cables and network solutions for structures of all types: from small residences

to public and office buildings and big industrial complexes using power cables and LAN cable. The key end markets

are residential, industrial and commercial building.

Figure 135: Nexans: Sales by geography, 2011 Figure 136: Nexans: Sales by division, 2011

Europe46%

North America16%

Asia Pacific14%

MERA11%

Central and South

America13%

Other6%

Distributor & Installers

25%

Industry25%

Trans, Distribution &

Operators44%

Figure 137: Nexans: Customer mix, 2011 Figure 138: Management

Others5%

OEM25%

Utilities40%

Wholesaler30%

Frederic Vincent Chairman & CEO

Ferderic Michelland Senior EVP

Nicolas Badre CFO

Laura Duquesne Head IR


12 February 2013


Valuation multiple history

Figure 139: Nexans – Multiple valuation history

Multiples

December y/e 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Average/Current 110.8 68.9 44.1 54.9 56.7 37.4 37.4 37.4 37.4

High 131.7 92.0 59.3 66.0 73.1 54.5 54.5 54.5 54.5

Low 82.7 36.3 26.1 45.5 37.4 27.8 27.8 27.8 27.8

Year end 85.5 42.6 55.8 58.9 40.1 27.8 27.8 27.8 27.8

P/E average 12.7 7.4 13.2 18.9 13.6 16.6 16.7 8.7 6.8

P/E high 15.1 9.9 17.8 22.8 17.5 24.2 24.4 12.6 9.9

P/E low 9.5 3.9 7.8 15.7 9.0 12.4 12.4 6.4 5.0

P/E year-end 9.8 4.6 16.7 20.3 9.6 12.4 12.4 6.4 5.0

EV/Sales average 0.72 0.57 0.43 0.48 0.48 0.50 0.48 0.46 0.43

EV/Sales high 0.84 0.69 0.54 0.55 0.58 0.60 0.58 0.56 0.52

EV/Sales low 0.58 0.39 0.31 0.42 0.36 0.44 0.42 0.40 0.38

EV/Sales year-end 0.59 0.42 0.51 0.50 0.38 0.44 0.42 0.40 0.38

Operating profit margin 8.5% 8.9% 6.0% 4.8% 5.6% 4.1% 4.2% 5.8% 6.5%

EV/EBITDA average 6.9 5.1 4.8 6.0 5.6 6.9 6.6 5.2 4.5

EV/EBITDA high 7.9 6.2 6.0 6.9 6.8 8.3 8.0 6.3 5.5

EV/EBITDA low 5.4 3.5 3.4 5.2 4.2 6.1 5.8 4.6 4.0

EV/EBITDA year-end 5.6 3.8 5.7 6.3 4.4 6.1 5.8 4.6 4.0

EV/EBIT average 8.5 6.3 7.2 10.0 8.6 12.0 11.4 7.9 6.6

EV/EBIT high 9.9 7.7 9.0 11.5 10.4 14.5 13.8 9.6 8.0

EV/EBIT low 6.8 4.3 5.1 8.7 6.4 10.6 10.1 7.0 5.8

EV/EBIT year-end 7.0 4.7 8.6 10.5 6.7 10.6 10.1 7.0 5.8

FCF yield average 11.8% 14.2% 17.6% 4.5% 2.0% 1.5% 5.7% 7.9% 9.4%

FCF yield high 10.2% 11.6% 14.1% 3.9% 1.6% 1.2% 4.7% 6.5% 7.7%

FCF yield low 14.8% 20.7% 24.7% 5.1% 2.7% 1.7% 6.5% 9.0% 10.7%

FCF yield year-end 14.5% 19.1% 14.8% 4.2% 2.6% 1.7% 6.5% 9.0% 10.7%

Dividend yield average 1.8% 2.9% 2.3% 2.0% 1.9% 1.3% 1.2% 2.3% 2.9%

Dividend yield high 1.5% 2.2% 1.7% 1.7% 1.5% 0.9% 0.8% 1.6% 2.0%

Dividend yield low 2.4% 5.5% 3.8% 2.4% 2.9% 1.8% 1.6% 3.1% 4.0%

Dividend yield year-end 2.3% 4.7% 1.8% 1.9% 2.7% 1.8% 1.6% 3.1% 4.0%

EV/IC average 1.47 1.09 0.73 0.77 0.89 0.83 0.83 0.80 0.77

EV/IC high 1.69 1.33 0.91 0.89 1.09 1.01 1.00 0.98 0.94

EV/IC low 1.16 0.75 0.52 0.67 0.67 0.74 0.73 0.71 0.68

EV/IC year-end 1.19 0.81 0.87 0.81 0.70 0.74 0.73 0.71 0.68 Source: Company data, Credit Suisse estimates

12 February 2013


Financial statements

Figure 140: Nexans - Organic growth and margin divisional breakdown (€m) Sales by Division 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Transmission, Distribution & Operators 1890 2135 1983 1996 2164 2088 2217 2315 2429

Industry 1005 924 746 875 955 1195 1231 1256 1300

Distributors and Installers 1414 1378 1059 1123 1179 1285 1285 1318 1344

Others 513 339 238 315 296 304 304 307 310

TOTAL GROUP REVENUES 4822 4776 4026 4309 4594 4872 5038 5196 5383

Organic Growth by Division 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Transmission, Distribution & Operators 10.9% 17.1% -8.6% -6.2% 6.9% -4.0% 2.1% 4.4% 4.9%

Industry 18.5% -1.3% -23.0% 16.1% 10.4% 3.7% 1.0% 2.0% 3.5%

Distributors and Installers 11.4% -3.7% -25.0% -3.1% 5.7% 2.0% 1.5% 2.5% 2.0%

Others 0.0% 0.0% 0.0% 0.0% -5.1% 3.0% 1.0% 1.0% 1.0%

Total Group Organic Growth 5.0% 1.5% -18.1% 0.4% 6.5% -0.4% 1.6% 3.1% 3.6%

Operating Profit by Division 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Transmission, Distribution & Operators 170 233 195 147 137 70 82 141 175

Industry 87 65 6 22 36 44 46 61 74

Distributors and Installers 157 145 50 44 81 78 78 86 90

Others -5 -16 -10 -6 2 10 6 12 12

GROUP OPERATING INCOME 409 427 241 207 256 202 212 300 351

Margin by Division 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Transmission, Distribution & Operators 9.0% 10.9% 9.8% 7.4% 6.3% 3.4% 3.7% 6.1% 7.2%

Industry 8.7% 7.0% 0.8% 2.5% 3.8% 3.7% 3.7% 4.9% 5.7%

Distributors and Installers 11.1% 10.5% 4.7% 3.9% 6.9% 6.1% 6.1% 6.5% 6.7%

Others -1.0% -4.7% -4.2% -1.9% 0.7% 3.3% 2.0% 4.0% 4.0%

Total Group Margin 8.5% 8.9% 6.0% 4.8% 5.6% 4.1% 4.2% 5.8% 6.5% Source: Company data, Credit Suisse estimates

12 February 2013


Figure 141: Nexans – Income statement (€m) P&L 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

GROUP REVENUE (at constant metals prices 4822 4776 4026 4309 4594 4872 5038 5196 5383

Cost of Sales (constant metal prices) -3930 -3819 -3274 -3569 -3767 -4046 -4156 -4271 -4419GROSS PROFIT 892 957 752 740 827 826 882 925 963

as a % of sales 18% 20% 19% 17% 18% 17% 18% 18% 18%

Sales General and Administration (includes D&A) -483 -530 -511 -533 -571 -624 -670 -625 -612

as a % of sales 10% 11% 13% 12% 12% 13% 13% 12% 11%UNDERLYING OPERATING PROFIT 409 427 241 207 256 202 212 300 351

Operating Margin 8% 9% 6% 5% 6% 4% 4% 6% 7%

Depreciation, Amortization and Impairment (ex Goodwill) -101 -106 -121 -138 -136 -151 -156 -156 -161UNDERLYING EBITDA 510 533 362 345 392 353 368 456 513

TOTAL ADJUSTMENTS -47 -213 -88 -2 -304 -60 -40 -42 -43

of which restructuring 14 22 119 57 22OPERATING PROFIT 362 214 153 205 -48 142 172 259 308

Financial Income / (Expense) -81 -79 -102 -95 -107 -112 -120 -120 -120

PROFIT BEFORE TAX 281 135 51 110 -155 30 52 139 188UNDERLYING PROFIT BEFORE TAX 328 348 139 112 149 90 92 180 231

Income tax expenses -84 -51 -39 -26 -31 -5 -16 -42 -57

effective tax rate -30% -38% -76% -24% 20% -17% -30% -30% -30%

Underlying Tax rate -30% -30% -30% -25% -25% -28% -30% -30% -30%PROFIT AFTER TAX 197 84 12 84 -186 25 36 97 132

UNDERLYING PROFIT AFTER TAX 230 244 97 84 112 65 64 126 162

Minority interest 7 2 4 2 -8 -2 -2 -2 -2NET INCOME 190 82 8 82 -178 27 38 99 134

UNDERLYING NET INCOME 223 242 93 82 120 67 66 128 164

Impact of Interest Exp. Net of Tax 9 11 16 10 0 0 0 0 0NET INCOME 199 93 24 92 -178 27 38 99 134

UNDELYING NET INCOME 232 253 109 92 120 67 66 128 164

Reported Basic EPS 7.4 3.1 0.3 2.9 -6.2 0.9 1.3 3.3 4.5

Reported Diluted EPS 6.7 3.1 0.7 2.6 -6.2 0.9 1.3 3.3 4.5

UNDERLYING EPS (basic) 8.7 9.3 3.3 2.9 4.2 2.2 2.2 4.3 5.5

UNDERLYING EPS (diluted) 7.7 8.4 3.2 2.6 4.2 2.2 2.2 4.3 5.5

DIVIDEND PER SHARE 2 2 1 1.10 1.10 0.50 0.45 0.86 1.10

Payout Ratio 0.23 0.22 0.30 0.38 0.26 0.22 0.20 0.20 0.20 Source: Company data, Credit Suisse estimates

12 February 2013


Figure 142: Nexans - Balance sheet (€m)

Balance Sheet 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

CURRENT ASSETS 3404 3056 3065 3616 3629 3644 3746 3902 4077

Inventories 1158 922 803 1059 1051 1125 1151 1187 1237


Amounts due from customers on contracts 163 195 215 189 293 335 352 369 386

Other current financial assets 125 320 162 322 134 113 113 113 113

of which short-term financial assets 0 0 0 150 50 0 0 0 0

Current income tax receivables 11 26 15 18 29 31 31 31 31

Other current non-financial assets 83 84 97 106 94 112 112 112 112

Cash and cash equivalents 622 398 817 795 859 847 852 894 958

Assets and groups of assets held for sale 150 1 1 1 1 1 1 1 1

NON CURRENT ASSETS 1227 1616 1750 1897 1915 2210 2180 2149 2116

Goodwill 192 400 335 378 386 509 509 509 509

Other Intangible assets 101 85 189 193 184 238 238 238 238

Property,plant and equipment 858 997 1117 1170 1160 1256 1226 1195 1162

Investment in associates 1 4 8 7 7 13 13 13 13

Other financial assets 28 35 42 44 44 50 50 50 50

Derivatives 0 0 0 0 0 0 0 0 0

Deferred tax assets 48 91 57 82 96 141 141 141 141

Other non-current asset 0 4 2 23 38 3 3 3 3

TOTAL ASSETS 4631 4672 4815 5513 5544 5854 5926 6051 6193

CURRENT LIABILITIES 1815 1993 1601 1961 2122 2174 2223 2277 2320

Short-term provisions 72 65 120 92 86 77 77 77 77

Short-term debt 301 274 140 255 277 425 425 425 425

Liabilities related to construction contracts 128 111 174 202 319 210 210 210 210

Trade Payables 817 908 845 1077 1051 1136 1185 1239 1282

Customer deposit and advances 59 0 0 0 0 0 0 0 0

Accrued payroll costs 0 160 168 179 200 202 202 202 202

Current tax payables 32 43 28 27 51 28 28 28 28

Other current non financial liabilities 47 54 29 32 29 31 31 31 31

Other current financial liabilities 313 376 96 97 109 65 65 65 65

Liabilities related to assets held for sale 45 1 1 1 0 0 0 0 0

NON-CURRENT LIABILITIES 1058 1062 1296 1345 1502 1837 1837 1837 1837

Pension and other retirement benefit obligations 322 317 309 308 300 444 444 444 444

Other employee benefit obligations 15 13 12 16 16 19 19 19 19

Long-term provisions 25 27 49 58 229 232 232 232 232

Convertible bonds 258 271 459 479 499 433 433 433 433

Other long-term debt 353 389 359 354 356 595 595 595 595

Deferred tax liabilities 85 45 109 130 102 114 114 114 114

TOTAL LIABILITIES 2873 3055 2897 3306 3624 4011 4060 4114 4157

Share capital 26 28 28 29 29 30 30 30 30

Treasury Stock 0 0 0 0 0 0 0 0 0

Additional paid-in capital 1133 1256 1258 1283 1286 1301 1301 1301 1301

Reserves 374 212 538 603 396 275 300 373 474

Net income attributable to equity holders 189 82 0 0 0 0 0 0 0

Other components of equity 0 0 52 249 174 187 187 187 187

Equity attributable to owners of the parent 1722 1578 1876 2164 1885 1793 1818 1891 1992

Non Controlling Interest 36 39 42 43 35 50 48 46 44

TOTAL SHAREHOLDERS EQUITY 1758 1617 1918 2207 1920 1843 1866 1937 2036

TOTAL SHAREHOLDERS EQUITY & LIABILITIES 4631 4672 4815 5513 5544 5854 5926 6051 6193 Source: Company data, Credit Suisse estimates

12 February 2013


Figure 143: Nexans – cash flow statement (€m)

Cash Flow Statement 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Net income (loss) attributable to owners 189 82 8 82 -178 27 38 99 134

Net income (loss) attributable to minorities 7 2 4 2 -8 -2 -2 -2 -2

Depreciation, Amortization and Impairment (inc Goodwill) 122 125 143 196 172 167 156 156 161

Cost of Debt (Gross) 57 66 62 79 84 96 120 120 120

Core Exposure Effect -20 165 -18 -89 40 11 0 0 0

Other Restatements (includes added back tax) 118 12 59 -2 185 -3 16 42 57

Cash flows from operations pre interest and tax 473 452 258 268 295 296 328 415 470

decrease/(increase) in inventories 129 174 186 -126 -34 -19 -26 -36 -50

decrease/(increase) in trade receivables 61 31 193 -75 -146 110 -54 -62 -43

decrease/(increase) in trade payables & expenses -6 -59 -118 198 108 -100 49 54 43

Income tax paid -80 -62 -47 -62 -53 -73 -16 -42 -57

Impairment of current assets and accrued costs -4 4 -11 5 5 -17 -17 -17 -17

NET CASH FLOW FROM OPERATING ACTIVITIES 573 540 461 208 175 197 264 313 346

Free Cash Flow 412 384 305 92 44 36 138 188 217

Proceeds from disposals of PPE and intangibles 7 16 8 13 17 5 0 0 0

Capital expenditures -168 -172 -164 -129 -148 -166 -126 -125 -129

Decrease (increase) in short-term financial assets 2 -187 181 -157 89 46 0 0 0

Purchase of shares , net of cash acquired -36 -311 -2 0 -8 -289 0 0 0

Proceeds from sale of shares (net of cash transferred) 48 19 9 19 6 1 0 0 0

NET CASH FOR INVESTING ACTIVITIES -147 -635 32 -254.03 -44 -403 -126 -125 -129

Proceeds from (repayment of) long-term borrowings 344 22 138 -2 1 525 0 0 0

Proceeds (repayment of) short-term borrowings -409 14 -164 43 25 -259 0 0 0

Cash capital increases (reductions) 7 -23 39 22 4 16 0 0 0

Interest paid -36 -54 -45 -38 -68 -73 -120 -120 -120

Dividends paid -32 -52 -57 -32 -33 -33 -13 -26 -33

NET CASH FROM FINANCING ACTIVITIES -126 -93 -89 -7 -71 176 -133 -146 -153

Exhange gain/(loss) 4 -19 18 26 -4 7 0 0 0

Net cash used in the period 305 -207 422 -27 56 -23 5 42 64

Cash and cash equivalent beginning of period 287 594 388 810 783 839 816 821 863

cash and cash equivalent end of period 593 387 810 783 839 816 821 863 927 Source: Company data, Credit Suisse estimates

12 February 2013


Nexans PEERs map

We show below the PEERs map for Nexans. PEERs is a global database that captures

unique information about companies within the Credit Suisse coverage universe based on

their relationships with other companies – their customers, suppliers and competitors. The

database is built from our research analysts’ insight regarding these relationships. Credit

Suisse covers over 3,000 companies globally. These companies form the core of the

PEERs database, but it also includes relationships on stocks that are not under coverage.

Figure 144: Nexans PEERs

Source: Credit Suisse PEERs

12 February 2013


End market primer The global cable market

The global cable market spans multiple end markets but traditionally has been split along

the lines of energy infrastructure (HV cables for offshore wind, interconnectors and

distribution), industry cables and construction related cables. Each of these has a different

geographical division but when combined, the value of Asia Pacific to this market becomes

apparent (Figure 145).

Figure 145: Global Energy Cables market by geography (€89bn) (2011)

North America13%

EMEA30%

APAC53%

LATAM4%

Source: Prysmian analysis based on CRU – Prysmian company presentation, 2012

In 2011 Asia Pacific accounted for 53% of sales of cables by value, which was more than

Europe, North America and Latin America combined. To further place this in context, the

$62bn of sales into China’s grid in 2009 was 1/3rd

of global investment that year, and more

than the US and OECD Europe combined.

In Figure 146 we show the global cable players market positioning. Prysmian post their

acquisition of Draka in 2011 became leaders in the market and are followed by Nexans.

Prysmian’s €8bn of sales implies a 8% global market share of the €99bn Energy and

Telecom cable market but we would highlight there are more commoditized areas of

cables in the total market size which Prysmian do not have exposure to.

Figure 146: 2011A sales of global cable makers (€bn)

8.0

6.15.5

4.0 3.8 3.73.2 2.8

2.5

1.2

0.00%

2.00%

4.00%

6.00%

8.00%

0.0

2.0

4.0

6.0

8.0

10.0

Prysmian Nexans LS Cables GeneralCables

Furukawa Leoni Southwire Fujikura HitachiCable

NKT Cable

2011 sales (€ bn) 2011 EBIT margin


12 February 2013


Cable market growth and profit profiles

In Figure 147 we have estimated Prysmian and Nexans adjusted EBITDA splits to place

the following end market primer section in context. We believe these splits are

considerably more useful than the sales splits as the margin differential between cable end

markets is significant.

Figure 147: Prysmian and Nexans adjusted EBITDA (2011) by segment (we favour Prysmian’s cable end market

exposure)

Submarine20%

SURF2%

Optical Fibre & Cable23%

High Voltage & Components

12%

OEM (renewable,

elevator, mining)

5%

OGP4%


34%

Prysmian (LHS)

Nexans (RHS)

Attractive

Average

Commoditized

Submarine22%

Optical Fibre & Cable

4%High Voltage

& Components6%

Resources8%

Transport5%


55%


To give further clarity to the wide range of cable end markets we have included Figure 148.

This highlights the profit and growth profile of various cable end markets. In this report we

have focused on SURF, Submarine and Optical Fibre cable markets as these are the

highest growth and margin areas. In our view exposure and positioning in these markets

will be the key defining factor in the European cable sector going forward.

Figure 148: We would expect acquisitions to be in the medium-high growth and profitability segments

Submarine

Network components

Optical Fibre

High Voltage

Industrial

Power Distribution

LONG TERM GROWTH

Surf (Flexible pipes &

Umbilicals

Extra High Voltage

PROFITABILITY

Low Medium High

Copper Telecom

High

Medium

LowTrade & Installers

Source: Prysmian company presentation, September 2012, Credit Suisse research

12 February 2013


Energy cables

End market exposure: Prysmian’s and Nexans’ business splits in their energy cables

businesses are broadly similar but with Nexans being more reliant on Distribution cables.

Submarine cables: These connect offshore wind turbines to offshore substations

(interarray cables), and offshore wind farms to the grid (offshore wind connections).

Submarine also includes interconnections which link Island grids to mainland grids.

Land high voltage cables: These high voltage cables are installed inland and range from

220KV and 500KV cable offerings.

Power distribution cables: These distribute power to residential areas or industrial sites.

The cables are medium voltage and can be underground or overhead.

Figure 149: Prysmian Utilities business split (9mths 2012) Figure 150: Nexans T,D,O business split (9mths 2012)

Network Component

6%

High Voltage23%

Submarine26%

Power Distributions

45%

Submarine Power

Transmission23%

Power Distribution

55%

Land power transmissiion

12%

Telecom operators

10%


Geographical exposure: We estimate that over 90% of Prysmian’s and Nexans’

submarine businesses are exposed to Europe. Therefore the exposure to markets outside

Europe in the Energy cable businesses for Prysmian and Nexans comes predominantly

through their distribution businesses. The splits of Prysmian’s and Nexans’ distribution

businesses are below in Figure 151 and Figure 152.

Figure 151: Prysmian’s distribution business (2011) Figure 152: Nexans distribution business (2011)

France 10%

UK 10%

Germany10%

Other Europe35%

North America12%

Latam9%

Asia Pac14%

Europe42%

North America & Australia

16%

Emerging markets

42%


12 February 2013


Prysmian Utilities and Nexans T,D,O divisional Organic growth and margin history

Following the organic decline in 2009 Prysmian’s margin was relatively more resilient than

Nexans’, because it continued to execute on its order backlog, thus improving the

business mix. Nexans’ margin decline (Figure 154) has been greater due to the margin

erosion in its Land HV business. As we discuss in the competition section of this report,

we believe this is due to Nexans’ higher exposure to the <220KV Land High voltage

segment and the Middle East.

Figure 153: Prysmian Utilities growth and EBIT margin Figure 154: Nexans T,D,O growth and EBIT margin

10%

11%

12%

13%

14%

15%

16%

17%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2007 2008 2009 2010 2011

Organic Growth EBIT Margins

4%

5%

6%

7%

8%

9%

10%

11%

12%

-10%

-5%

0%

5%

10%

15%

20%

2007 2008 2009 2010 2011


Source: Company data Source: Company data. Nexans’ T,D,O margin at current metals

prices was 2.8% in 2012 vs 3.7% at constant metals prices

Energy cable market size and demand drivers

Grid investment has historically been difficult to forecast as it can be easily delayed by

utilities in more difficult years. However, over the next five years we expect submarine to

show strong growth while demand for distribution cables to grow low single digits, with

short demand underpinned by replacement for aging cables.

Submarine demand: In the submarine section of this report (page 9) we estimate the

European submarine cable market will be worth €1.9bn per year (vs €1.5bn currently) in

the next five years. We estimate Prysmian, Nexans and ABB have 85% market share.

Figure 155: Using the Ten Year National Development Plan which forecasts European grid investment we estimate that submarine cable demand will be €1.9bn per year 2012-2016 vs the current market size of €1.5bn

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2011 2012 2013 2014 2015 2016

Total market ABB Nexans Prysmian Other

Source: Company data, Credit Suisse estimates, Ten Year National Development plan

12 February 2013


In our view demand for submarine cables is driven by two factors:

1) Increasing share of renewables in the mix: Renewable additions are commonly

away from areas of high electricity demand, placing greater emphasis on an

efficient grid.

2) Security of supply: Transmitting electricity from areas with high generating

capacity to countries of high electricity demand.

In our view the planned offshore wind additions support the view that submarine cables

are a structurally growing market. Offshore wind is forecast a CAGR of 117% (source:

EWEA) from 2011-2020 and the Prysmian, Nexans and ABB will play a key role in

connecting this to the grid.

Figure 156: Installed offshore wind capacity and planned additions(MW)

Country 2011 Installations Cumulative Installations 2011-2020 CAGR Planned offshore capacity

China 108 258 39% 5000 total targeted by 2015 and 30000 by 2020

France 0 0 339% 6000 by 2020 (tender for 3000 launched in 2011)

Germany 108 200 54% 10000 by 2020 (2000 now under construction)

UK 752 2094 22% 13000 by 2020

EU 866 3813 117% 40000 total by 2020

Source: The 40,000MW in the EU by 2020 is a European Wind Energy association forecast.

Land high voltage and Power Distribution cable demand:

Investment in land high voltage and distribution is driven by electricity demand. We would

also highlight that an element of grid investment is driven by replacement demand, as

across the world c5% of the grid is greater than 40 years old (Figure 157). However,

electricity demand is likely to remain relatively weak in developed markets as it is driven

GDP growth. Credit Suisse forecasts 0.5% growth in 2013 in Europe, and 2% in the US.

In Europe the authorities have taken a proactive approach to grid management and

despite weak demand for electricity, grid investment has continued. In contrast, the US

market has been more reactionary in its approach to grid investment in the face of low

electricity demand. We would expect this trend to continue in 2013 but would highlight that

in the medium term, once electricity growth accelerates, significant investment will be

required to upgrade the US grid.

Figure 157: % of T&D infrastructure in place in 2009 reaching 40 years of age by 2015

0%

5%

10%

15%

20%

25%

OECD

Europe

US OECD

Asia Oc.

China India Middle

East

Latin

America

Africa

% of T&D >40 years old by 2015

Source: IEA World Energy Outlook 2011

12 February 2013


Energy cables competitive landscape:

Submarine cables

In the submarine market in Europe, Prysmian and Nexans are the market leaders. Based

on existing submarine sales we estimate that Prysmian has a 40% market share vs

Nexans’ 27% market share (Figure 158).

Distribution cables

The key players in European Distribution cables are Prysmian, Nexans and General

Cable. Prysmian and Nexans report distribution sales at €1.0bn and €1.2bn, respectively.

We estimate General Cable is number three in this market with €0.9bn of 2011 sales

(Figure 159).

Figure 158: We believe Prysmian can increase its 40% market share (Credit Suisse estimate) in the medium term

Figure 159: Distribution cables sales (€m, 2011). Prysmian, Nexans & General cable

ABB18%

Nexans 27%

Prysmian40%

Other15%

0

200

400

600

800

1000

1200

1400

Prysmian Nexans General Cable

Source: Company data, Credit Suisse estimates Source: Company data,

12 February 2013


Building cables

Building cables at Prysmian (Trade & Installers division) account for 30% of sales and 8%

of EBIT while at Nexans (Distributor and Installers business) they account for 26% of sales

but 32% of EBIT.

In our view this difference in profitability is due to:

■ Prysmian running its business for cash and therefore offering cables at lower margin

but with tighter payment terms; and

■ Nexans operating in more profitable markets in which it has higher market shares

(Building cables in France are 25% more expensive than in Germany and Nexans has

a 40% market share).

Geographical splits of Prysmian and Nexans divisions

At 75% of sales, Prysmian’s building cables division is more geared to European

construction trends than that of Nexans (Figure 160 and Figure 161), at 40%.

We would also highlight that of Nexans’ European exposure, only 5% is Spain, Italy and

Greece. The remaining European exposure is to France, Benelux and the Nordics. It

appears that Southern Europe, where construction was particularly weak in 2011, is more

important for Prysmian (but overall Building cables are of limited importance for the group).

We do not expect a material recovery in these markets in 2013 but due to the currently

depressed levels of activity, we see limited risks to the downside.

Figure 160: Prysmian’s Trade and Installer division sales

exposure by geography, 2011

Figure 161: Nexans Distributor and Installer division sales

exposure by geography, 2011

Italy and Spain8%

Eastern Europe22%

Nordics8%

North America7%

Latin America7%

Asia Pacific11%

Other central & Southern Europe

37%

MERA10%

APAC14%

South Amerrica12%

North America24%

Europe40%


Organic growth and margins

Prysmian’s T&I business reported a 1.5% EBIT margin in 2011, versus Nexans at 6.9%,

following similar organic growth performance in the downturn and similar v-shaped

recoveries since then.

As mentioned above, we believe this is due to 1) Prysmian running its business for cash

and offering stricter payment terms and 2) Nexans having higher market shares in more

profitable markets. We also note that Nexans report at constant metal prices due their

hedging system which reflects Nexans margins in a favourable light relative to Prysmian’s.

At current metals prices Nexans margins were 3.5% in 2012 (vs 6.1% at constant).

12 February 2013


Figure 162: Prysmian has focused on running this business for cash, resulting in a 1.5% EBIT margin in 2011. T&I is 8% of Group profits…

Figure 163: …while Nexans Distributor & Installer businesses does a higher margin than the group average and accounts for 32% of group profits

0%

1%

2%

3%

4%

5%

6%

7%

8%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

2007 2008 2009 2010 2011


0%

2%

4%

6%

8%

10%

12%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2007 2008 2009 2010 2011


Source: Company data Source: Company data, Nexans 2012 D&I operating profit margin was

3.5% at current metals prices vs 6.1% at constant metals prices.

Drivers of building cable demand

We do not have details of Prysmian’s end market split for its T&I business but in Figure

164 below we have included the split of Nexans’ D&I business. We would expect

Prysmian’s business split to be similar, perhaps with a slightly lower exposure to Industrial.

Figure 164: Nexans Distributor and Installers business split 2011

Residential34%

Commercial33%

Industrial33%

Source: Company data,

The market offering the closest correlation between Prysmian’s and Nexans’ building

cables business is European new build construction (as indicated by Euroconstruct). We

believe this is because the industrial capex spend on factories (which need building

cables) (33% of Nexans D&I) moves more closely in line with the residential construction

market than the commercial construction market. In Figure 165 we have included our

growth forecasts for construction end markets.

Figure 165: Construction growth forecasts

Europe North America Emerging Markets Global

2012E 2013E 2014E 2012E 2013E 2014E 2012E 2013E 2014E 2012E 2013E 2014E

Residential -5% -3% 5% 2% 10% 10% 4% 5% 8% 1% 4% 8%

Commercial -7% -6% 0% 1% 2% 10% 3% 6% 8% -1% 1% 6%

Government -7% -6% 0% -2% 0% 3% 3% 5% 5% -2% 0% 3%


12 February 2013


In Figure 166 and Figure 167 we show the correlation of European residential new build

with European residential new build construction growth.

Figure 166: Prysmian’s T&I growth troughed with new build growth in 2008…

Figure 167: …but Nexans’ T&I is a better fit with EU res new build with their recoveries being very much aligned

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

2007 2008 2009 2010 2011

Prysmian T& I organic growth Euroconstruct res new build

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2007 2008 2009 2010 2011

Nexans D&I organic growth Euroconstruct new res growth

Source: Company data, Euroconstruct Source: Company data, Euroconstruct

The outlook for European construction remains tough

Since the downturn Euroconstruct has been forecasting a return to stable low single digit

growth, but this appears not to have happened as it has revised down its forecasts (Figure

168). For the total residential market in 2012 and 2013, Euroconstruct is now forecasting

negative growth in 2013, which we believe is reflected in our forecasts for minimal growth

for Prysmian’s and Nexans’ building cable divisions.

Figure 168: Euroconstruct total residential growth forecasts have continued to be revised downwards for this year and next year

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

2012 2013

Nov-10 Jun-11 Nov-11 Jun-12 Nov-12

Source: Company data, Euroconstruct

12 February 2013


Building cables market structure

Prysmian and Nexans both have an element of continuous demand in their building cables

divisions which is driven by remodelling. This market has historically been less volatile

than new build and in 2009 in Europe, total remodelling declined by 3.8% vs 19.1% for

total new build.

However, Nexans sells 80% of its building cables through distributors and we would

assume a similar proportion for Prysmian (Figure 142). In our view this has both positive

and negative implications.

Figure 169: Nexans’ D&I business is split evenly across new construction and renovation…

Figure 170: …and 80% of D&I sales are made through distributors.

New construction

50%

Renovation50%

Distributors 80%

Other20%


On the negative side, selling through distributors provides little visibility on sales and

sales can be materially impacted following a period of distribution destocking.

On the positive side, established relationships with distributors act as a barrier to entry

against new entrants into the European market. In addition, 1) building cables are low

margin so it does not make financial sense transporting them long distance (ie Chinese

manufacturers would struggle to gain competitive advantage in Europe), and 2) labour

costs are c5% of cost so undercutting costs with lower cost labour offers limited upside.

Thus we do not see the building cables market as being under threat from emerging

market competitors.

12 February 2013


Industrial cables

Industrial cables are sold into a broad range of end markets, as highlighted in Figure 171

and Figure 172. These show splits for Nexans’ and Prysmian’s Industry divisions. The

largest end market for both Nexans and Prysmian is Automotive, accounting for 21% and

23% of 2011 divisional revenues, respectively. For Prysmian we would highlight SURF,

Aerospace, Renewables and Automation in Europe as key end markets. For Prysmian

other important end markets are SURF products into petro-chemicals, renewables and

Elevators.

Figure 171: Prysmian industry division end markets, 2011 Figure 172: Nexans industry divisions end markets, 2011

Specialties & OEM35%

Automotive23%

OGP & Surf20%

Renewables 14%

Elevator6%

Other2%

Resources27%

Transportation21%

Automotive31%

Other Industrial Segments

21%


Market positioning

Nexans has a leading position in Aerospace cables, while Prysmian’s strength is its

leading presence in wind towers globally, North American Elevators and advanced

automotive cables. As we have laid out in the SURF section (page 19), Prysmian is also

increasing its market presence. Figure 173 shows a more detailed layout of Prysmian and

Nexans industrial cables businesses.

Figure 173: Industry division end markets and Credit Suisse (CS) growth forecasts

Prysmian Nexans CS growth f’cast 2012 CS growth f’cast 2013E

Transport

Aerospace ✓ ✓ 7% 7%

Rail ✓ ✓ 0% 2%

Ships ✓ ✓

Automotive ✓ ✓ 1% 6%

General Industrial 3% 4%

Automation ✓ ✓ 3% 6%

Machine Tools ✓ ✓

Resources

Nuclear ✓ ✓

Mining ✓ ✓ 8% 0%

Oil and Gas ✓ ✓ 9% 7%

Renewables ✓ ✓

Others

Medical ✓ ✓ 1% 5%

Elevator ✓

Cranes ✓ ✓

OGP and Surf ✓ ✓ 9% 7%

Source: Company data, Credit Suisse estimates. Automotive is a global forecast and Nexans and Prysmian

are more exposed to Europe here. We expect this market to decline in 2013.

12 February 2013


Geographical splits

We do not have a geographical split for Nexans but in Figure 174 we have included the

geographical split for Prysmian’s Industry division. We would highlight that this has higher

than the group average exposure to both North America and, most likely, emerging

markets through Latin America and Asia Pacific.

Figure 174: Prysmian FY11geographical split for the industry division

EMEA52%

North America22%

Latin Amercia11%

Asia Pacific15%


Historical organic growth and margin performance

In Figure 175 and Figure 176 we show the historical organic growth and margin for

Prysmian’s and Nexans’ industrial cables businesses. We believe that Nexans’ industry

cable declined further than Prysmian’s because of auto production exposure (31% at

Nexans vs 23% at Prysmian).

For Prysmian, margins in industry trended down to 4.4% in 2011 from 9.4% in 2008 due to

the lower contribution margin from automotive volumes. However, the decline at Nexans

was greater, with margins falling to 0.8% as a lack of large Oil & Gas contracts

compounded the declines in automotive harnesses (-30.2% in 2009). Nexans’ margins

have recovered from the 2009 level, albeit to low single digit levels.

Figure 175: Prysmian Industry organic decline was lower than Nexans but margins were relatively more resilient

Figure 176: Post Nexans’ Industry -25% organic growth decline margins the margins have remained depressed

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2007 2008 2009 2010 2011


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2007 2008 2009 2010 2011


Source: Company data Source: Company data. Nexans 2012 Industry operating profit margin

was 2.8% at current metals prices vs 3.7% at constant metals prices

12 February 2013


The industrial cables outlook

General industrial production:

We view general industrial production as the key indicator of growth in many of the

industrial cables (automation and machine tools).

Figure 177: Credit Suisse Global Industrial production momentum

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

02 03 04 05 06 07 08 09 10 11 12 13

Global Momentum (3mn/3mn % ann.) with Forecasts

Source: Credit Suisse Fixed Income research

In Figure 177 we show the Credit Suisse fixed income team’s Global IP forecasts in 1H 13.

Looking at 3-month momentum, expectations are for increases of on average 5% per

month from February 2013 to July 2013. In our view Nexans’ business is more cyclical and

likely to benefit more in this division given a pick-up in Industrial activity.

Automotive

Automotive Cables are central to the industry divisions of both Prysmian and Nexans at

23% and 27% of divisional sales, respectively. Here they produce automotive harnesses

and other automotive cables and demand is driven by vehicle production. In Figure 178 we

have included European production forecasts according to IHS data. In 2013, European

production is expected to be down by -6.2% in 2013 and we would highlight that it is

particularly 1H 13 that is forecast to be difficult. In 1Q 13 the forecast for Europe is -11%.

Figure 178: European Automotive production is expected to remain weak in 1H 13

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

Q1

12

Q2

12

Q3

12

Q4

12E

Q1

13E

Q2

13E

Q3

13E

Q4

13E

Q1

14E

Q2

14E

Q3

14E

Q4

14E

European Automotive production

Source: Credit Suisse estimates based on IHS

12 February 2013


The Automotive harness business has continued to be difficult. Nexans have a 10%

market share vs Leoni’s (its closest competitor in this market) 40% share. In our view

harnesses have become a relatively commoditised product and in 2008 Nexans attempted

to sell this business, which was cancelled as it was unable to find a buyer. This could still

be the case in 2013 in the event management pursued a similar strategy, in our view.

Oil & gas

Oil & gas and SURF accounts for 20% of Prysmian’s industrial divisional revenues but we

estimate a higher proportion of profits. We have discussed in detail our view on the

positive outlook for Prysmian’s SURF business and our conclusion is that they will be able

to ramp up capacity to saturation at their Vila Velha plant by 2015. We draw this

conclusion based on the supply vs forecast demand of flexible pipes and Petrobras’ 6% pa

production target 2012-2016.

For the remaining low and medium voltage cables and control cables for rigs and

refineries for Prysmian and Nexans, we remain positive on the outlook for oil & gas

production in 2013 (Figure 179),forecasting 7% growth in 2013.

Figure 179: Credit Suisse Oil & Gas growth forecasts

Europe North America Emerging Markets Global

2012E 2013E 2014E 2012E 2013E 2014E 2012E 2013E 2014E 2012E 2013E 2014E

Oil & Gas 5% 4% 4% 14% 8% 6% 8% 8% 6% 9% 7% 5%


Renewables

At 14% of industrial cables, we believe Prysmian has greater exposure to renewables than

Nexans. Prysmian also gained a leading presence in the wind tower business globally

following the acquisition of Draka.

We think this is a market that will continue to grow, based on the National Renewable

Energy Action (NREAPs) of individual countries. Overall the EU is targeting generating

20% of energy consumption from renewable sources by 2020.

Wind and solar additions are key drivers of Prysmian’s renewable cables in this context

(for example cables in the individual wind towers). In Figure 180 we include IEA forecasts

for wind and solar in Europe. On the basis of these forecasts we would expect stable

medium-term growth for Prysmian and Nexans in this market but would highlight there

could be some short-term volatility based on lack of investment or over-capacity.

Figure 180: IEA forecasts (GW) imply European Wind and Solar will grow at CAGRs of

9.6% and 15.9% per annum to 2020

-

50

100

150

200

250

2009 2015 2020

Wind Solar

Source: International Energy association (IEA)

12 February 2013


Telecom cables

Telecom cables have risen in importance for Prysmian, at 26% of group EBITDA in 1H 12

versus 18% in 1H 10. Since the change in Nexans’ divisional structure, telecoms are no

longer broken out. Instead the old telecom infrastructures business is now included in the

transmission, distributors & operators division and accounts for 10% of the division’s

revenues (a €200m business).

The Telecoms market is broadly split between copper cables and fibre optic cables and

Figure 181 and Figure 182 highlight Nexans’ and Prysmian’s exposure. We believe that

including JV’s and other ‘special’ optical products Optical Fibre, Cable and related

products accounts for c75% of Prysmian’s Telecom division.

Figure 181: Prysmian’s telecom split (2011) Figure 182: Nexans telecom infrastructure split (2011)

Optical, Connectivity &

Fivre44%

Copper13%

Multimedia & Specials

20%

JV's & Others23%

Fibre and Components

80%

Copper20%


Geographical split:

Nexans does not provide a split of its telecom division but in Figure 183 we show

Prysmian’s telecom split. Asia Pacific is important here – but this is not just China.

Prysmian has a five-year agreement with NBN as a major supplier of optical cables worth

€237m, and there is €33bn of capex in Australia planned between 2011 and 2019. We

also show our estimates for the split of Prysmian’s optical cable business in Figure 184.

Figure 183: Prysmian Telecom division geographical split (2011)

Figure 184: Prysmian optical fibre & telecom. We estimate this is close c70% of the telecom division including JVs

EMEA48%

North America13%

Latin America14%

Asia Pacific25%

China25%

Europe25%

North America20%

South America25%

Australia5%


Historical organic growth and margins

12 February 2013


Prysmian’s organic decline was driven by the large operators delaying investment

decisions, predominantly in the US and Australia. Nexans’ telecom infrastructures division

declined by -9.6% in 2009 as it was also impacted by project delays. The operating margin

for Prysmian and Nexans has since recovered and appears to have stabilised around 6%.

In our view however, this margin can increase driven by 1) operational leverage and 2)

improving mix as higher margin optical fibre cables outgrow copper cables.

Figure 185: Prysmian’s organic growth decline in 2009 was more severe than Nexans; growth only remained negative for one year…

Figure 186: …while at Nexans negative organic growth remained >5% for 2 years but despite this margins increased in 2009 driven by copper cable resilience

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

-25%

-20%

-15%

-10%

-5%

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5%

10%

15%

20%

2007 2008 2009 2010 2011


0%

1%

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3%

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6%

7%

8%

9%

10%

-15%

-10%

-5%

0%

5%

10%

15%

2007 2008 2009 2010 2011



Trends and drivers in the telecom cables market

A recent trend in the telecom cables market has been the convergence of the cost of

optical and copper cables. This is the result of continued R&D into optical cable

technology and a steadily rising copper price (up 31% YTD since January 2006).

Investment trends show that optical cables are increasingly being favoured. In 2011 the

optical cables market was 54% larger than the copper cable market and we expect the

Copper cable market to continue to decline in the medium term.

Figure 187: Optical cables market 2011 (€6bn) Figure 188: Copper cable market 2011(€4bn)

North America15%

EMEA30%

APAC49%

LATAM6%

North America10%

EMEA37%

APAC47%

LATAM6%

Source: Prysmian company presentation , September 2011, based on

CRU data

Source: Prysmian company presentation , September 2011, based on

CRU data

Application and advantages of telecom cables

12 February 2013


The primary applications of telecom cables is in phone and broadband lines. The

advantages of optical cables in both markets is that they are smaller in size so more can fit

in a cable, which is important in densely populated urban areas. They are also safer as

they transmit data with light rather than electrical current, reducing the chance of fire. In

broadband the advantages are 1) low signal degradation and 2) less signal interference.

However, despite our positive view on medium-term demand trends in optical fibre and

cable demand (page 33), the timing and execution of these projects is more difficult to

predict. Replacing copper cable with optical fibre is costly, often inconvenient in an urban

environment, and ultimately is not an urgent investment requirement as copper cable is

able to fulfil many businesses’ day to day requirements.

European broadband opportunity

In our view Europe represents a significant medium-term opportunity for Prysmian and

Nexans. While we do not expect large investment programmes in the short term, in the

medium term we believe significant investment is needed. Prysmian reported it had seen a

return to growth in Italy, France and the Nordics.

In Figure 189 we show the penetration of fibre and LAN broadband in Europe and in

Figure 190 the penetration of this technology in non-Europe. For non-Europe it is 21% vs

4% in OECD Europe. This is primarily because broadband installations are older in Europe

and therefore used more basic technology.

To clarify these technologies, Digital Subscriber Line (DLS) is broadband delivered over

an existing copper telephone lines while Cable Model through a digital cable line. Fibre in

this instance carries internet over a single strand of fibre, again using light to transmit.

Figure 189: Europe broadband subscribers by tech

(140mn subscribers)

Figure 190: Non-Europe broadband subscribers by tech

(169mn subscribers)

Cable modem16%

Fibre + Lan3%

DSL81%

Cable modem41%

Fibre + Lan21%

DSL38%

Source: Prysmian company presentation, September 2011, from

OECD 2011

Source: Prysmian company presentation, September 2011, from

OECD 2011

North American and Asia-Pacific opportunity

North America represented 15% of the optical market in 2011 but has significant growth

potential given the 7% penetration of Fibre and LAN. However, in the short term a

material pick-up in growth will depend on incentives being renewed, in our view.

We believe the Asia-Pacific market will remain the fastest growing market – it

represented 53% of the optical market in 2011. Here there are established competitors

and we would expect these players to focus on the Chinese market in particular. (see

page 33 for more detail on the competitive landscape).

Datacentre opportunity

12 February 2013


Datacentres have also driven telecom revenues. Prysmian’s exposure is through its

Multimedia & Specials (20%) segment of telecoms, where it sells high end multimedia

cables into datacentres. We believe Nexans has greater exposure to datacentres through

its LAN segment, which is 5.5% of group sales and, since the divisional re-organisation, is

now included in distributors and installers. Nexans’ LAN business has c55% of sales in

North America and datacentres are a key driver of growth in their region for LAN.

Datacentres represent an opportunity for Nexans and Prysmian within the broader

Telecom business. At its 2011 CMD, ABB highlighted this as a growth market, suggesting

it could grow at a CAGR of 8-12% to 2020 (Figure 191).

Figure 191: Data Centre market growth (2011-2020) Figure 192: Datacentre energy cost breakdown

4550

5

10

0

10

20

30

40

50

60

70

2011 2020

Equipment Service

0%

20%

40%

60%

80%

100%

2011

IT Equipment Cooling Distribution Losses / Lighting

Source: ABB CMD 2011 Source: ABB CMD 2011

Figure 192 shows the energy cost of a datacentre: 20% of energy is used by distribution

losses and lighting. In this market the quality of cable can make a quantifiable difference in

relation to these losses while across the majority of other cable end markets, reliability is

marketed as the differentiating factor.

12 February 2013


Appendix: Further company details Metal price impact

Prysmian and Nexans both hedge their raw material exposure but there remains a risk

from cables with relatively high copper content and listed prices (eg building cables) where

the pass through of the metal price to the customer may be delayed.

Raw materials, and particularly copper, make up a relatively high proportion of the cable

names’ cost bases when compared to other companies in the Capital Goods space.

However, based on the hedging strategies of both Prysmian and Nexans, and that ‘core

exposure effect’ for Nexans is excluded from our underlying operating profit estimate, we

do not see a material risk from fluctuations in the metal price. Credit Suisse expects only

a 1.1% rise in the copper price in 2013E, to US$/t 8,062.

We show the split of Prysmian’s and Nexans’ cost bases in Figure 193. For Prysmian, total

materials account for 83% of the cost base which compares to 69% at Nexans. In our view

the lower proportion at Nexans is because of its definitions and that ‘Other costs’ may

contain costs that Prysmian has included in its definition of raw materials.

Figure 193: Prysmian and Nexans cost bases

0%

20%

40%

60%

80%

100%

Prysmian Nexans

Raw materials Other materials Payroll Other costs

Source: Company data,

Prysmian

Prysmian reports a metal price impact on sales, primarily from copper. Due to a relatively

volatile macro environment over the past four years this metal impact was -8.3% in 2009

and a +12.6% in 2010. Figure 194 shows the influence of the metal price on the overall

cable price and how the fluctuations are managed. In 2013 we forecast minimal positive

impact on Prysmian’s sales of 0.4%.

We would also highlight the sensitivity of working capital to metals prices and every

increase in €1000 per tonne will have a negative impact on working capital of €60m–70m

and vice versa.

Figure 194 highlights that the cables for which it is most difficult to pass through copper

price rises are construction and civil engineering cables, which have a high copper content

are relatively low value add and are highly competitive markets. This limits the speed at

which prices can be adjusted and on the cost side, Prysmian hedges according to

expected volumes rather than actual orders, which can have a positive or negative impact

on margins. Therefore, in a scenario of rapidly rising metals prices, we would expect the

margin of Prysmian’s T&I division (7% of 2011 EBIT) to be most affected.

12 February 2013


Figure 194: Impact of metals prices on Prysmian’s cables

Source: Prysmian company presentation, December 2011

Nexans

Nexans reports sales and cost of sales at constant metal prices. Sales and costs are

based on reference prices, which in 2010 and 2011 were €1500 per metric ton for copper

and €1200 per metric ton for aluminium. Nexans passes on metal price fluctuations in its

own selling price in the majority of products and hedges the related risk, which allows it to

report at constant metal prices.

There is also a line in the income statement, ‘Core exposure effect’, which is related to the

cost of metal. At year end, inventories are measured using the weighted average cost

method (for the hedging mechanism) rather than being based on the historical cost of the

copper used in production and allocated to orders. This results in a difference which is

accounted for in core exposure effect.

Nexans also has partial exposure to fluctuating metals prices in building sector cables as

there can be a lag between the raw material costs and price rises on products. This is

most relevant for Nexans’ D&I division, which accounted for 32% of profits in 2011.

12 February 2013


Management remuneration

We have looked at both Nexans’ and Prysmian’s management remuneration and have

summarised the key aspects in Figure 195.

Valerio Battista (Prysmian CEO): In 2011 the Prysmian CEO achieved 100% of his fixed

remuneration as an annual bonus (€904K). He chose to enter the co-investment plan

investing 75% of his bonus, which has the potential to be multiplied to €1.7m based on

adjusted cumulative EBITDA target.

Frederic Vincent (Nexans CEO): In 2011 Mr Vincent received €870k, implying 109% (of

a potential 150%) of basic remuneration was achieved. In accordance with the LTIP

€316K of stock options were awarded.

Figure 195: Nexans and Prysmian management remuneration

Nexans Prysmian

Variable

CEO and Chairman paid between 0% 150% of basic

remuneration.

1. Based on Qualitative objectives (35%) and

Quantitative (65%)

2. Quantitative objecitves are operating margin (60%),

working capital requirement (30%) and ROCE (10%).

The CEO can receive 100% of annual fixed remuneration. There are

two parts of the variable compensation.

1. Annual Bonus: Based on Group EBITDA and divisional

performance (no detail). Also there is an on/off (on in 2011) target

based on net financial position and EBITDA (€1bn NFP and €600-

€650m in 2012).

2. Co-Investment: Part of the bonus (25%, 50% or 75%) can be

deferred for a maximum of 2 years to achieve a multiple of deferred

amount (1.5x, 2x or 2.5x). Achievement based on Adjusted

cumulative EBITDA 2011-2013 (at least €1.75bn Euro).

LTIP

1. This can be equal to no more than two thirds of the

nominal bonus based on the achievement of four

objectives.

2. One of the objectives is share price linked, two are on

financial performance and the fourth is linked to

qualatitive objctives.

1. There is a preset number of shares for 290 key managers if the

adjusted cumulative EBITDA target 2011-2013 is hit.

2. There is also the opportunity for the preset number of shares +20%

if €2.1bn adjusted cumulative EBITDA 2011-2013 is achieved.

Source: Company data, Regarding Prysmian’s on/off target in 2011 this was ‘on’. Also if at the end of the Co-Investment period targets have not

been achieved either 25%, 50% or 75% of the original co-invested amount will be lost.

Our key takeaways from the remuneration from a strategic perspective:

■ Prysmian’s CEO, Valerio Battista, not only has his interests aligned with the company

via the remuneration programme but also by his extensive shareholding. At year end

2011 he held 2.9 million Prysmian shares worth c€38m (using an average in price of

€13).

■ For Prysmian the co-investment target of cumulative adjusted EBITDA promotes a

more stable, medium-term strategy.

■ We view it as positive that Prysmian has net financial position and Nexans has

working capital in their remuneration structures, as we believe this ensures the focus

remains on payment terms of contracts as well as trying to secure the most profitable

contracts.

■ Of the quantitative objectives for Nexans, only 10% is related to ROIC. We do not

believe this this actively encourages disposals, which we believe are necessary for a

medium-term improvement in returns.

12 February 2013


Shareholder structure

Prysmian has a diverse shareholder structure with the largest holders being long only

institutions such as Fidelity and Norges Bank, which hold 3% each. Nexans has large

holders across the board but in particular we would highlight Madeco. Madeco gained a

stake in 2007 when Nexans bought Madeco’s cable business and in return Nexans issued

shares to Madeco representing 9% of the group.

Figure 196: Prysmian current shareholding structure Figure 197: Nexans current shareholding structure

Clubtre Srl6% FMR

3% Franklin Resources

4%

Norges Bank3%

Others84%

Groupe Madeco20%

Fonds Strategique

6%

Dodge & Cox5%

Franklin Resources

5%

Third Avenue 5%AXA

4%

Others50%

Manning & Napier

5%


Madeco history: 55% of Madeco is controlled by the Luksic family, which is Chile’s

richest family. On 22 January Bloomberg reported Madeco’s share price had been rising

on speculation the Luksic family were increasing their stake and planning to split Madeco

into two parts, one of which would be the Nexans stake.

Since receiving a 9% stake in 2007, Nexans signed an agreement that allowed Madeco to

raise its stake to 20%. However, this agreement was again changed in November 2012 to

another 10-year agreement, allowing Madeco to raise its stake to 28%. Madeco increasing

its holding could result in short-term support for Nexans shares but, based on the size of

Madeco, we do not expect it to rapidly rise towards 28%. In our view it is unlikely that a

takeover bid is launched for Nexans through Madeco.

Figure 198: Madeco’s stake in Nexans has steadily increased since Nexans acquired Madeco’s cable business in return for Nexans shares in 2012

0%

5%

10%

15%

20%

2007 2008 2009 2010 2011 2012

Madeco's Stake in Nexans

Source: the BLOOMBERG PROFESSIONAL™ service

12 February 2013


Companies Mentioned (Price as of 07-Feb-2013)

Furukawa Electric (5801.T, ¥214) Sumitomo Heavy Industries, Ltd. (6302.T, ¥398) Hitachi Construction Machinery (6305.T, ¥2,181) ABB (ABBN.VX, SFr19.2) Alfa Laval (ALFA.ST, Skr143.0) Assa Abloy (ASSAb.ST, Skr239.3) Atlas Copco (ATCOa.ST, Skr180.4) Anixter International (AXE.N, $69.81) Belden (BDC.N, $49.03) General Cable Corp (BGC.N, $33.48) Electrolux (ELUXb.ST, Skr154.0) General Electric (GE.N, $22.48) Geberit (GEBN.VX, SFr216.3) Kone Corporation (KNEBV.HE, €62.2) Legrand SA (LEGD.PA, €32.4) Madeco (MAD.SN, CLP$20.8) Metso (MEO1V.HE, €33.58) Nexans (NEXS.PA, €37.44, NEUTRAL, TP €36.0) Philips (PHG.AS, €22.74) Prysmian (PRY.MI, €15.24, OUTPERFORM, TP €19.0) Sandvik (SAND.ST, Skr102.0) Schneider (SCHN.PA, €54.25) Schindler-Holding AG (SCHP.VX, SFr140.2) Siemens (SIEGn.DE, €77.0) SKF (SKFb.ST, Skr153.8) Saipem (SPMI.MI, €21.8) Subsea 7 S.A. (SUBC.OL, Nkr133.1) Terna (TRN.MI, €3.14)

Disclosure Appendix

Important Global Disclosures

The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

12 February 2013


*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 42% (53% banking clients)

Neutral/Hold* 38% (47% banking clients)

Underperform/Sell* 16% (40% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

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Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for Prysmian (PRY.MI)

Method: Our €19 target price is driven by using a 9.9x 2013 EV/EBITA multiple which is the 2013 adjusted Capital Goods sector multiple. We

adjust our sector multiple by excluding Kone, Schindler and Geberit from the European Electricals and Mechanicals.

Risk: For Prysmian we view the key risks as being 1) project delays on the installation of large contracts resulting in lower than expected margins on contracts, 2) a downturn which would impact the more cyclical parts of the business (automation, construction and distribution cables) and 3) slower than expected extraction of synergies from the Draka business integration and 4) more aggressive strategies by Japanese and emerging market competitors.

Price Target: (12 months) for Nexans (NEXS.PA)

Method: Our €36 target price is driven by using a 8.1x 2014E EV/EBITA multiple which is a 10% discount to the 2013 adjusted Capital Goods

sector multiple (broadly in-line with the five year history). We adjust our sector multiple by excluding Kone, Schindler and Geberit from the European Electricals and Mechanicals.

Risk: For Nexans we view the key risks as being 1) production issues in Submarine cables which impacted group profitability in 2012, 2) the potential for a slower than expected recovery in European construction, 3) a further worsening of the competitive pressure in Land High Voltage cables and 4) difficulties in finding a buyer for underperforming businesses in the company’s portfolio.

Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (NEXS.PA, ABBN.VX, ALFA.ST, GE.N, GEBN.VX, MEO1V.HE, PHG.AS, SAND.ST, SCHN.PA, ATCOa.ST, SCHP.VX, SIEGn.DE, SKFb.ST, SPMI.MI, TRN.MI) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (ABBN.VX, GE.N, MEO1V.HE, PHG.AS, SAND.ST, SCHN.PA, SCHP.VX, SIEGn.DE, TRN.MI) within the past 12 months.

Credit Suisse provided non-investment banking services to the subject company (ABBN.VX, GE.N, GEBN.VX, ATCOa.ST, SCHP.VX, SIEGn.DE, SKFb.ST, TRN.MI) within the past 12 months

Credit Suisse has managed or co-managed a public offering of securities for the subject company (ABBN.VX, GE.N, PHG.AS, SCHP.VX, SIEGn.DE, TRN.MI) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (ABBN.VX, GE.N, MEO1V.HE, PHG.AS, SAND.ST, SCHN.PA, SCHP.VX, SIEGn.DE, TRN.MI) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (NEXS.PA, 5801.T, 6305.T, ABBN.VX, ALFA.ST, AXE.N, GE.N, MEO1V.HE, PHG.AS, SAND.ST, SCHN.PA, SCHP.VX, SIEGn.DE, SPMI.MI, TRN.MI) within the next 3 months.

12 February 2013


Credit Suisse has received compensation for products and services other than investment banking services from the subject company (ABBN.VX, GE.N, GEBN.VX, ATCOa.ST, SCHP.VX, SIEGn.DE, SKFb.ST, TRN.MI) within the past 12 months

As of the date of this report, Credit Suisse makes a market in the following subject companies (AXE.N, GE.N).

As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (PRY.MI, ABBN.VX, GEBN.VX, PHG.AS, SCHN.PA, SIEGn.DE).

Credit Suisse has a material conflict of interest with the subject company (PHG.AS). Credit Suisse is financial advisor to Philips Electronics NV in the sale of its Lifestyle Entertainment business to Funai Electric Co.

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (PRY.MI, NEXS.PA, 5801.T, 6302.T, 6305.T, ABBN.VX, ALFA.ST, ASSAb.ST, AXE.N, ELUXb.ST, GE.N, GEBN.VX, KNEBV.HE, LEGD.PA, MEO1V.HE, PHG.AS, SAND.ST, SCHN.PA, ATCOa.ST, SCHP.VX, SIEGn.DE, SKFb.ST, SPMI.MI, SUBC.OL, TRN.MI) within the past 12 months

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

The following disclosed European company/ies have estimates that comply with IFRS: (ABBN.VX, ALFA.ST, ASSAb.ST, ELUXb.ST, GEBN.VX, LEGD.PA, MEO1V.HE, PHG.AS, SAND.ST, SCHN.PA, ATCOa.ST, SCHP.VX, SIEGn.DE, SKFb.ST, SPMI.MI, TRN.MI).

Credit Suisse has sent extracts of this research report to the subject company (PRY.MI, NEXS.PA) prior to publication for the purpose of verifying factual accuracy. Based on information provided by the subject company, factual changes have been made as a result.

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Credit Suisse Securities (Europe) Limited...................................... Max Yates ; Andre Kukhnin CFA ; Simon Toennessen ; Jonathan Hurn, CFA

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12 February 2013


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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments.

When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

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