Banca Sistema — Meeting expectations

Banca Sistema (MI: BST)

Last close As at 17/07/2024

EUR1.39

0.00 (0.00%)

Market capitalisation

EUR113m

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Research: Financials

Banca Sistema — Meeting expectations

Banca Sistema’s first half figures showed strong growth in customer loans against a stable market background for public authority receivables financing in Italy. The proposed reduction in risk weighting for salary and pension-backed lending bodes well for the bank’s other core activity. On maintained forecasts, the shares remain conservatively valued both on absolute and relative measures.

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Financials

Banca Sistema

Meeting expectations

H118 results

Financial services

2 August 2018

Price

€2.10

Market cap

€169m

Net debt/cash (£m)

N/M

Shares in issue

80.4m

Free float

54%

Code

BST

Primary exchange

Borsa Italiana

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

3.4

(7.7)

(4.4)

Rel (local)

1.5

0.7

(5.3)

52-week high/low

€2.6

€1.9

Business description

Banca Sistema is a speciality finance provider with a primary focus on factoring receivables from the Italian public sector (public administrations or PAs) with salary and pension-based lending forming a second core activity. The bank is also opportunistic, and is looking to diversify into new areas such as its gold and jewellery-backed lending business.

Next events

Q318 report

31 October 2018

Analyst

Andrew Mitchell

+44 (0)20 3681 2500

Banca Sistema is a research client of Edison Investment Research Limited

Banca Sistema’s first half figures showed strong growth in customer loans against a stable market background for public authority receivables financing in Italy. The proposed reduction in risk weighting for salary and pension-backed lending bodes well for the bank’s other core activity. On maintained forecasts, the shares remain conservatively valued both on absolute and relative measures.

Year end

Net operating income (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/17

82.5

38.9

33.3

8.6

6.3

4.1

12/18e

89.9

39.2

33.7

9.0

6.2

4.3

12/19e

116.6

52.1

44.7

9.7

4.7

4.6

12/20e

136.1

60.6

52.0

10.5

4.0

5.0

Note: *Reported PBT and EPS.

H118/Q218 results indicate on track

In its first half, Banca Sistema’s factoring turnover and receivables outstanding increased by 29% and 33% respectively compared with the prior year period and overall customer loans were 45% ahead. A change in mix within factoring towards lower-risk, lower-yield assets including tax receivables and the expansion of salary and pension-backed lending has been the main factor behind a reduction in adjusted interest margin. Including fee income on factoring receivables, this was 5.2% compared with 6.1% for H117 and is in line with the group’s three-year plan. The mix change also reduces the credit risk and capital absorption and increases the duration of the loan book. Compared with prior year periods, net income was 12.4% ahead for the first half and 16.5% for the second quarter.

Outlook remains promising

In the call following the results announcement Banca Sistema confirmed that the market environment remains stable and, in particular, there has been no resumption of the pressure on pricing for factoring receivables seen in 2016. This is encouraging and supportive of the targets set out in its three-year plan announced in April this year. This included compound annual growth objectives of 28% and 25% in factoring and salary and pension-backed lending in the period to 2020. The most recent report on payment times in Europe by Intrum Justitia suggests that in Italy these have lengthened rather than contracted for both corporates and the public authorities (Banca Sistema’s main counterparty), tending to confirm the potential for growth in factoring.

Valuation: Still conservatively valued

Our estimates are effectively unchanged following the first half figures (see page 4) and our ROE/COE-based valuation of around €3.40 is also unchanged. While Banca Sistema shares have outperformed our selected peer group over the last year and year to date it still appears conservatively valued in terms of P/E and price to book.

H1/Q218 results: In line with expectations

Banca Sistema’s first half results showed healthy growth in factoring turnover, receivables and total banking income, and at the bottom line net earnings increased by 12% over the same period last year. Sequentially, Q218 earnings were 25% ahead of Q118 after adding back a €0.8m TLTRO-related provision in the first quarter.

A longer-term view of the progression of factoring turnover and receivables outstanding is shown in Exhibit 1 confirming the progress that has been made even though seasonality and the incidence of transactions does, unsurprisingly, give rise to some quarterly volatility in turnover.

Exhibit 1: Factoring turnover and receivables outstanding by quarter

Source: Banca Sistema

We have set out a comparison of the H1 and Q2 income statements with the prior year periods in Exhibit 2 and highlight key features below, with percentage changes being for the first half compared with the same period in 2017 unless indicated.

Customer loans (excluding government securities) were 45% ahead of the prior year period and up 16% from the FY17 year-end level. The largest contributor to growth in absolute terms was factoring followed by salary and pension-backed lending (CQ). In percentage terms CQ loans saw the most rapid growth (60%), reflecting the group’s positive outlook for this niche area, the potential for a lower risk weighting in FY19 and retention rather than sale of securitised assets. The SME loan book continues to run off and now stands at €40m out of the €2,180m total. Sequentially, Q2 saw an increase of 12% versus Q1.

Factoring turnover increased by 29% for the half and for Q218 alone by 33%.

Net interest income was up 9%. In practice it is probably more useful to view net interest income and fee income together, because factoring income can fall into either category depending on client preference, and, in total, this measure increased by 16%.

Late payment interest in total accounted for 32% of factoring interest (30%).

The adjusted interest margin was 4.5% versus 5.4% and, including factoring commission, the margin was 5.2% compared with 6.1%. The reduction mainly reflects a change in mix within factoring with receivables purchased at lower discounts and a higher percentage of tax receivables which have lower risk, longer duration and lower capital absorption.

The underlying average gross yield on factoring receivables (interest and commission) ticked up slightly from Q1 (6.9%) to 7.2%.

Operating income was 16% ahead and operating expense increased at a slower pace (8%), while normalisation of impairments following a write-back in H117 and a slightly higher tax rate of 34% versus 31% left net income up by 12%.

Exhibit 2: H118/Q218 income statement summary

€000s

Q217

Q218

H117

H217

H118

Q218/Q217 % change

H118/H117 % change

H118/H217 % change

Interest and similar income

21,209

24,672

37,564

49,670

44,714

16.3

19.0

-10.0

Interest expense and similar charges

(3,747)

(5,752)

(7,679)

(8,905)

(12,106)

53.5

57.7

35.9

Net interest income

17,462

18,920

29,885

40,765

32,608

8.3

9.1

-20.0

Net fee and commission income

2,358

3,801

4,607

6,045

7,359

61.2

59.7

21.7

Other banking income

434

34

665

502

891

-92.2

34.0

77.5

Operating income

20,254

22,755

35,157

47,312

40,858

12.3

16.2

-13.6

Net impairment losses on loans

(1,915)

(1,852)

(1,427)

(3,925)

(2,939)

-3.3

106.0

-25.1

Net operating income

18,339

20,903

33,730

43,387

37,919

14.0

12.4

-12.6

Personnel expenses

(4,598)

(4,796)

(8,872)

(8,759)

(9,560)

4.3

7.8

9.1

Other administrative expenses

(4,978)

(5,934)

(10,030)

(9,675)

(11,005)

19.2

9.7

13.7

Administrative expenses

(9,576)

(10,730)

(18,902)

(18,434)

(20,565)

12.1

8.8

11.6

Net allowance for risks and charges

19

23

(58)

50

(51)

21.1

-12.1

-202.0

Net adjustments to property and intangible assets

(153)

(141)

(153)

(150)

(141)

-7.8

-7.8

-6.0

Other operating income/costs

(231)

48

(38)

(377)

52

-120.8

-236.8

-113.8

Operating expenses

(9,941)

(10,800)

(19,151)

(18,911)

(20,705)

8.6

8.1

9.5

Profit/(loss) from equity investments

(32)

(186)

(32)

(108)

(229)

481.3

615.6

112.0

Profit before tax

8,366

9,917

14,547

24,368

16,985

18.5

16.8

-30.3

Tax

(2,781)

(3,413)

(4,564)

(7,558)

(5,764)

22.7

26.3

-23.7

Profit after tax

5,585

6,504

9,983

16,810

11,221

16.5

12.4

-33.2

Net interest margin (%)

4.8

3.7

4.2

4.9

3.3

Loan loss provision as % of average loans

0.53

0.36

0.20

0.47

0.30

Cost income ratio (%)

47.3

47.2

53.8

39.0

50.3

Source: Banca Sistema, Edison Investment Research

As far as the balance sheet is concerned, we have highlighted the growth in customer loans above, while the other notable movement in assets was an increase to €436m in the government bond portfolio (from €84m at the year-end). On the liability side of the balance sheet, wholesale funding now accounts for a higher percentage (57% compared with 51% in FY17 and 47% in H117) reflecting repos funding government bonds and a senior bond issue in Q2. The total cost of funding was virtually stable at 0.9% excluding the impact of a €0.8m one-off relating to TLTRO funding that affected Q118. In July Banca Sistema launched a partnership with Deposit Solutions, a platform that gives its clients access to deposit products from a range of banks. This should help broaden Banca Sistema’s deposit base without the need for any additional infrastructure.

Looking at asset quality, the level of bad and unlikely to pay loans as a percentage of customer loans has fallen from 3.1% for Q217 to 2.7% at the end of June. This is similar to the end-FY17 level of 2.6%. The past-due exposure is not relevant here as it is part of normal business in factoring but has also fallen from 5.1% to 4.1%, most likely reflecting the growth in CQ business.

The Q218 CET1 ratio was 11% and total capital ratio 14.1%, which compares with 11.8% and 15% at the end of Q118. The increased volatility in bond markets during Q2 resulted in a valuation reserve (c €2m, taken straight to the balance sheet), which had a small, 18bp, impact on the CET ratio. The ratios are well above the Bank of Italy minima set at 7.125% for CET1 and 11.225% for the total capital ratio.

Outlook, estimates

Banca Sistema reports that there has been no material change in the trading background and, in particular, there has been no sign of a return of the yield compression in factoring seen during 2016. As noted above, factoring turnover and receivables outstanding have shown continued strong growth in the latest quarter. Looking to the medium to long term, the relatively long time taken to pay suppliers by Italian public authorities,1 the broader scope of VAT split payments and the low credit risk associated with PA receivables all provide a positive backdrop for Banca Sistema’s factoring business. The CQ business addresses a niche area providing consumer loans backed by salaries or pensions, with 83% of H118 loans outstanding being to pensioners or PA employees. During the quarter Banca Sistema completed its acquisition of a 19.9% stake in ADV Finance (for €0.6m). While the transaction is relatively small, the strengthening of this relationship with one of its seven introducers should facilitate development of the CQ business. Progress has also been made in the European Parliament with the proposal to reduce the risk weighting applied to CQ loans from 75% to 35% where loans are secured by one-fifth of salary or pension payments. If the proposal clears further stages of approval, it would add about 150bp to the CET1 ratio, facilitating growth in this activity.

According to Intrum Justitia’s latest annual European payment report, the time to pay for the Italian public sector has lengthened from 95 to 105 days, while for corporates the latest reading is 56 days versus 52.

As a reminder, the financial targets set out in BST’s three-year strategic plan announced in April are summarised in Exhibit 3 with further detail and discussion in our note published in May.

Exhibit 3: Financial targets 2018-20

Target

Comments

Factoring turnover

18% CAGR to €3.3bn

Strong growth, though high relative to market expectation, is similar to prior three years reflecting VAT receivables opportunity and increased sales effort.

Factoring outstanding

28% to €3.0bn

Outpaces turnover growth reflecting mix change towards longer-duration receivables including those under legal collection or VAT receivables.

Consumer finance

25% CAGR to €1.0lbn

Extension of origination network and drive to increase market share.

Return on average equity

18-24% range

Compares with 21.5% FY17 and three-year average of 24.6% FY15-17.

CET1 ratio

c 10.5% over period and >11% end period

FY17 11.9%. Prospective figures before any weighting change for consumer finance. RWA density* is expected to reduce from 46% in FY17 to c 38% reflecting mix including growth in VAT receivables, which have a zero weighting.

Interest income margin**

400-450bp

Average for last three years 480bp: reduction reflects mix and allowance for slightly lower discounts in the market.

Interest expense

c 1% on average

Expected to be lower initially reflecting lower retail cost but increasing towards end of period.

Cost of risk

<30bp on average

Last three years average 49bp: reduction reflects mix/exit from SME loans.

Cost income ratio

47% on average

Expected to rise in 2018 but then be held stable as business expands.

Source: Banca Sistema, Edison Investment Research. Notes: *RWA density = total RWA/total assets. **Interest income margin = interest income/average loans excluding income from securities portfolio, credit due from banks and repo.

Our estimates are aligned with these targets and are essentially unchanged following the H1 results, as shown in Exhibit 4.

Exhibit 4: Estimate revisions

Net operating income (€m)

PBT (€m)

EPS (c)

DPS (c)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

12/18e

90.2

89.9

-0.3

39.2

39.2

0.0

33.7

33.7

0.0

9.00

9.00

0.0

12/19e

116.5

116.6

0.1

52.1

52.1

0.0

44.7

44.7

0.0

9.70

9.70

0.0

12/20e

135.9

136.1

0.2

60.6

60.6

0.0

52.0

52.0

0.0

10.50

10.50

0.0

Source: Edison Investment Research

Valuation

On largely unchanged estimates, our ROE/COE continues to point to a valuation of c €3.40 using assumptions including a 20% ROE, long-term growth of 4% and cost of equity of 12%.

We have updated our valuation comparison table in Exhibit 5. In terms of share price performance the peers have on average underperformed Banca Sistema over the last 12 months and year to date, but the bank still trades on the lowest P/E, an above average yield and below average price to book.

Exhibit 5: Valuation comparison

Ticker

Market cap
(€m)

CY18 P/E
(x)

Yield
(%)

ROE
(%)

Price to book (x)

Banca Sistema

BST IM

178.9

6.6

3.9

20.0

1.3

Arrow Global

ARW LN

724.5

9.2

3.1

22.0

3.3

Banca Farmafactoring

BFF IM

891.4

8.8

9.4

21.7

2.4

Banca IFIS

IFIS IM

1,812.4

12.0

3.0

13.9

1.3

Encore Capital

ECPG US

972.8

9.6

0.0

14.6

2.0

Grenke

GLJ GY

4,429.1

33.9

1.8

15.7

5.2

Hoist Finance

HOFI SS

596.6

10.3

2.5

14.7

1.9

Intrum Justitia

IJ SS

2,828.6

11.5

4.2

10.9

1.3

Kruk

KRU PW

977.8

11.3

2.3

18.6

2.6

PRA

PRAA US

1,349.6

19.4

0.0

16.6

1.5

Average

13.3

3.0

16.9

2.3

Source: Bloomberg. Note: Priced at 31 July 2018.

Similarly, if we chart ROEs versus price to book for the same group of companies (Exhibit 6), Banca Sistema appears conservatively valued and we would need to assume an ROE of around 15% to place the company more in line with peers. Our ROE/COE model also suggests the market is factoring in an ROE of 14% at the current share price: cautious compared with our estimated average of 20% for FY18-20.

Exhibit 6: Comparing ROE and price to book

Source: Bloomberg

Exhibit 7: Financial summary

Year end 31 December (€000 unless stated)

2016

2017

2018e

2019e

2020e

Income statement

Interest income

86,321

87,234

103,533

138,809

167,306

Interest expense

(15,321)

(16,584)

(26,032)

(36,506)

(46,144)

Net interest income

71,000

70,650

77,501

102,303

121,162

Net fee and commission income

9,060

10,652

11,024

12,981

13,622

Dividends and similar income

227

227

227

0

0

Profit on securitisation

0

0

0

0

0

Net income from asset sales/purchases and trading

1,196

940

1,164

1,280

1,320

Net interest and other banking income

81,483

82,469

89,916

116,564

136,104

Net impairment losses on loans

(9,765)

(5,352)

(6,673)

(9,783)

(11,538)

Net income from banking activities

71,718

77,117

83,243

106,781

124,565

Personnel expenses

(15,169)

(17,631)

(20,506)

(23,501)

(24,948)

Other administrative expenses

(22,529)

(19,705)

(23,124)

(31,152)

(39,021)

Administrative expenses

(37,698)

(37,336)

(43,631)

(54,653)

(63,969)

Other operating income/costs

(589)

(726)

(140)

0

0

Operating expenses

(38,287)

(38,062)

(43,771)

(54,653)

(63,969)

Profit/(loss) from equity investments

2,281

(140)

(229)

0

0

Pre-tax profit

35,712

38,915

39,243

52,128

60,597

Tax

(10,399)

(12,122)

(12,164)

(16,160)

(18,785)

Profit after tax

25,313

26,793

27,079

35,969

41,812

Adjustment for normalised earnings

1095

0

0

0

0

Adjusted net income

26,408

26,793

27,079

35,969

41,812

Reported earnings per share €

0.31

0.33

0.34

0.45

0.52

Normalised earnings per share (€)

0.33

0.33

0.34

0.45

0.52

Dividend per share (€)

0.076

0.086

0.090

0.097

0.105

Balance sheet

Assets

Financial assets available for sale

514,838

285,610

267,281

267,281

267,281

Due from banks

83,493

36,027

22,119

22,119

22,119

Loans to customers

1,348,329

1,850,290

3,327,616

4,017,428

4,497,240

Property, plant and equipment

23,313

24,272

26,075

26,075

26,075

Intangible assets

1,835

1,790

1,850

1,850

1,854

Tax assets

10,528

10,198

6,203

6,203

6,203

Other assets

17,027

101,046

116,136

116,136

116,136

Total assets

1,999,363

2,309,233

3,767,280

4,457,092

4,936,908

Liabilities and shareholders' funds

Due to banks

458,126

517,533

720,039

869,302

973,125

Due to customers

1,262,123

1,284,132

2,483,460

2,993,307

3,333,917

Securities in issue

90,330

281,770

306,184

306,184

306,184

Total tax liabilities

8,539

10,118

10,358

10,358

10,358

Other liabilities

59,825

71,996

82,819

82,819

82,819

Employee termination indemnities

1,998

2,172

2,329

2,329

2,329

Provisions for risks and charges

4,105

6,745

9,496

11,465

12,834

Total liabilities

1,885,046

2,174,466

3,614,684

4,275,764

4,721,565

Group shareholders' equity

114,297

134,737

152,566

181,299

215,312

Minority interests

20

30

30

30

30

Total liabilities and equity

1,999,363

2,309,233

3,767,280

4,457,092

4,936,908

Capital position

Risk weighted assets

788,000

1,054,901

1,389,347

1,641,598

1,853,818

Credit risk/customer loans

36%

42%

39%

38%

38%

RWA/total assets

39%

46%

37%

37%

38%

Common equity tier 1

104,600

125,800

143,484

171,652

205,024

Total capital

124,700

162,100

177,384

203,152

236,525

CET1 ratio

13.3%

11.9%

10.3%

10.5%

11.1%

Total capital ratio

15.8%

15.4%

12.8%

12.4%

12.8%

Leverage ratio

6.1%

6.2%

4.2%

4.2%

4.5%

Other ratios

Net interest margin

5.1%

5.0%

3.5%

3.1%

3.2%

Loan loss provision as % of average loans

0.70%

0.38%

0.30%

0.30%

0.30%

Total expenses % of interest and fee income

47.1%

45.9%

49.3%

47.4%

47.5%

Return on average equity

25.4%

21.5%

18.9%

21.5%

21.1%

Tax rate

29.1%

31.1%

31.0%

31.0%

31.0%

Source: Company data, Edison Investment Research

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Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Banca Sistema and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Research: Industrials

Lakehouse — Good potential, turnaround well advanced

Growing corporate and government awareness around safety and energy efficiency create an attractive backdrop to Lakehouse’s compliance and energy services business, where strong regulatory drivers have the potential to deliver substantial medium-term EBITA growth. The management team appointed in July 2016 to reverse the decline in performance is taking bold decisions. Property services and construction, which have historically been a drag on the group’s performance, are now to be divested. Heads of terms have been agreed and were announced with the interim results on 26 June, but execution risks in completing the divestment remain. We believe this will result in a better business exposed to growth drivers with a lower-risk profile, which will gradually be reflected in the earnings and valuation multiples expanding.

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