Mirato Buy EUR5 JuliusBaer.pdf · PV 2.3 5.5 8.7 8.3 7.6 7.2 126.4 Source: Julius Baer estimates We...

www.brokerage.juliusbaer.com JULIUS BAER ITALIA

In-DepthDecember 17, 2002

Italian ResearchBranded Goods

Mirato Buy EUR5.30

Deals Should Spur Growth in 2003 (Initiating Coverage)

[email protected]

+39 02 8550 7213

� A Lean, Agile Italian Player in Personal Care ProductsMirato is a leading player in the Italian personal care market. Weexpect the company to post 2002 revenues of EUR124.1m. In Italy,the company holds a 17% share of the deodorant market, 29% inhairspray and 22% in hair gel. The successful acquisition of Cliniansin 2000 allowed Mirato to enter the highly profitable upper-mass-market cosmetics segment, where competition is somewhat lessintense than in the broad-mass-market traditional area.

� Mil Mil 76 Deal Should Drive Further GrowthIn November, Mirato announced a deal for a further 50% of Mil Mil76 (a supplier with its own liquid-production technology) in whichMirato had already held a 25% stake, at a value-enhancing impliedEV/EBITDA of 3.7x. The move is expected to spur sales, EBITDAand net profit by EUR16m, EUR2.3m and EUR0.9m respectively in2003 (up 12.4%, 13.7% and 13.4% vs. the non-acquisition case).

� Further Clinians-Style Expansion ExpectedThe Mil Mil 76 deal paves the way for the acquisition of otherfamily-run players. Mirato will leverage its production capacity,powerful commercial structure and tightly targeted advertising tospur the commercial introduction of newly acquired brands.

� Looking Cheap: Target Price of EUR8.4 Per ShareBasing on DCF and free-cash-flow yield we set a target price ofEUR8.4 per share, implying a hefty 23% discount to peer averageEV/EBITDA 2003E, enough, in our view, to account for competitionissues related to Mirato’s small stature.

Key Data

Year end (Dec. 31) 2001 2002E 2003E 2004ENet profit - declared 4.6 6.0 7.5 8.2EPS adj 0.27 0.35 0.43 0.48CFPS 0.60 0.71 0.78 0.84Book value per share 2.73 2.97 3.23 3.51Dividend 0.18 0.20 0.21 0.57P/E 20.0 15.3 12.2 11.1P/CF 8.8 7.5 6.8 6.3EV/Sales 0.96 0.89 0.75 0.67EV/EBITDA 7.49 6.66 5.53 4.93EV/EBIT 12.43 10.62 7.98 7.07ROE 9.88% 12.17% 14.02% 14.12%ROIC 9.11% 9.21% 11.41% 12.04%EV/Capital employed 1.67 1.57 1.49 1.44

Rel. Performance 1m 6m 12m vs. DJSTOXX (%) 6.2 24.1 79.3

No. of Shares Market Cap High/Low17.2m EUR91m EUR5.7/3.6

Reuters BloombergMRT.MI MRT IM

Share Price Performance0,5$72

D J F M A M J J A S O N D3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

7.50

8.00

PRICEPRICE REL. TO DJ STOXX - PRICE INDEX

Source: DATASTREAM, Julius Baer

In-Depth: Mirato December 17, 2002

2 JULIUS BAER ITALIA

Investment Case

Key Player in the Italian Market

A leading player in the Italian

personal care market, Mirato is

active in personal hygiene, hair care

and cosmetics. We expect the

company to post 2002 sales of

EUR124.1m, a 9% jump YOY. Mirato

holds significant market share in

segments including deodorants

(17%), hairsprays (29%) and hair gels

(22%).

Foreign Markets Spur Growth

A successful expansion strategy into

foreign markets, mainly into Africa

and Eastern Europe, is helping to

spur top-line growth. We expect

Mirato to generate 21% of FY 2002

sales from these areas. The largely

untapped personal care market in

these developing countries means

that distribution there remains highly

fragmented, allowing Mirato to wield

greater negotiating power with

retailers. In our view, these factors

should allow growth to accelerate

further, despite the potential for

competition to increase in the

medium term.

Growing in Cosmetics

With the successful acquisition of

Clinians at the end of 2000, Mirato

entered the highly profitable (nearly

25% EBITDA margin vs. a 13.4%

average for the group) cosmetics

segment, that we expect to account

for 18% of FY 2002 sales. Mirato has

successfully leveraged its powerful

commercial structure (120,000

shops, up from 25,000 at Clinians

prior to the acquisition) to spur the

introduction of Clinians products. In

addition, a tightly focused

promotional strategy has driven

massive sales growth (JB estimate for

FY 2002: up 33.4% to EUR22.4m).

Mil Mil 76: A Transitional Move…

In November, Mirato announced the

acquisition of 50% of Mil Mil 76 (it

had already owned 25%), a supplier

that produces liquids. Previously,

Mirato owned the technology to

produce sprays, outsourcing liquids

to other companies. In FY 2003, we

expect Mil Mil 76 to contribute sales

of EUR16m, EBITDA of EUR2.3m and

net profit of EUR0.9m (up 12.4%,

13.7% and 13.4% respectively vs. the

non-acquisition case). The cash-out

for the 50% stake will be EUR4.6m,

implying an EV/EBITDA multiple at a

value-enhancing 3.7x.

…Towards Further Acquisitions

While that deal alone should allow

Mirato to sustain growth in 2003, Mil

Mil 76 is likely to be only the first of

several moves to snap up Italian

family-run brands in the personal care

market, with others likely to be

announced at the end of 2003 or

early 2004. Management is targeting

companies with strong brands but

more limited access to distribution

channels and limited internal

production resources. Mirato’s

access to retail distribution, coupled

with its internal resources and

production expertise (now bolstered

by Mil Mil 76) sets the stage for

considerable synergies, which should

lead to further value-enhancing deals.

Despite Size Issues…

In valuing Mirato versus peers, we

think a discount is justified. To begin

with, the group is much smaller than

other comparable players - in many

cases big multinationals boasting

broader diversity both geographically

and in terms of product range. Size is

closely related to the promotional

costs (such as listing fees) paid to

large retailers: while this accounts for

23.5% of Mirato’s sales, it is closer to

a more manageable 15% for larger

multinationals, partly offset by

savings in G&A and advertising costs.

…Valuation Looks Undemanding

Nevertheless, while size is definitely

an issue, the company’s figures have

not yet been adequately priced in,

either. We valued Mirato using DCF

and a free-cash-flow yield approach.

Averaging the two methods, we set

our target price at EUR8.4 per share.

At this price Mirato would still trade

at a considerable 23% discount to its

peer average EV/EBITDA 2003E – a

level we consider adequate to

account for competition issues

arising from Mirato’s diminutive

stature.


JULIUS BAER ITALIA 3

Valuation

Based on multiples, Mirato’s stock is trading at a 40-55% discount topeers. Our DCF and free-cash-flow yield valuations point to EUR8.2 and8.7 per share respectively, still a not-insignificant discount versuspeers. Our target price of EUR8.4 per share implies considerable (58%)upside.

We valued Mirato using two approaches:

• DCF.

• Free cash flow yield.

We then conducted a trading multiples analysis as a crosscheck.

DCF

We factored into our FCF model that D&A was inflated by EUR3.3m by brand

costs and goodwill amortisation (mainly related to the Clinians acquisition).

This is reflected in the drop of D&A (and jump in EBIT) at the terminal year.

Table 1: Free Cash Flow Calculation

2002 2003 2004 2005 2006 2007 Terminal Year Terminal

EBIT 10.4 13.5 14.3 15.1 15.8 16.6 19.6

Taxation (4.1) (5.4) (5.7) (6.1) (6.4) (6.7) (6.7)

NOPAT 6.3 8.1 8.6 9.0 9.5 9.9 12.9

Change in working capital (2.7) (4.9) (1.0) (1.0) (1.6) (1.7) (1.1)

Depreciation and amortisation 5.2 5.3 5.5 5.6 5.8 5.9 2.9

Capex (6.3) (2.4) (2.6) (2.7) (2.9) (3.1) (3.2)

Free cash flow to the firm 2.4 6.2 10.5 10.9 10.7 11.1 11.6 208.8PV 2.3 5.5 8.7 8.3 7.6 7.2 126.4

Source: Julius Baer estimates

We have set a neutral beta, which could seem high considering that Mirato is

involved in a market segment with little cyclicality. We view a debt weight of

0.15 as in line with the company’s leverage structure. Market prospects and

capex versus D&A at the terminal year justify a perpetual growth rate of 2.5%.

Given a long-term inflation rate of 2%, this implies slightly positive real growth.

Under these conditions our DCF leads to a target price of EUR8.2 per share,

55% above current price, implying 23.6 and 18.9 PE 2002 and 2003E, 9.7 and

8.1 EV/EBITDA 2002 and 2003E. These multiples are still below those of major

peers.

Table of Contents

Valuation 3

Business Analysis 7

Strategy 18

Financials 21

D&A inflated by Clinians

acquisition

Our DCF drives to EUR8.2 per

share



Table 2: DCF Calculation

(EURm)

NPV of free cash flows 2002-2007 39.6 23.9% Risk free 4.80NPV of terminal 126.4 76.1% Beta 1.00EV 166.0 100.0% Market premium 4.00Net financial debt 2001A (18.5) Cost of equity 8.80Minorities (6.6) Equity weight 0.85Equity Value 140.9Number of shares (m) 17.2 Cost of debt 5.80Value per share �� Tax rate 36%

Debt weight 0.15

WACC 8.04

LT growth rate 2.5%Source: Julius Baer estimates

A scenario wherein WACC rose (or long-term growth fell) by 50bp would drive a

7% drop in our DCF-based fair value.

Table 3: Sensitivity Analysis

WACC 7.2 7.6 8.04 8.4 8.8

Long term growth rate1.0% 7.5 7.1 6.6 6.1 5.52.0% 8.8 8.2 7.6 6.9 6.22.5% 9.6 9.0 8.2 7.5 6.63.0% 10.7 9.9 8.9 8.1 7.14.0% 13.7 12.4 10.9 9.8 8.5


Free Cash Flow Yield Valuation

Our free cash flow yield valuation is based on 2003E normalised figures

regarding change of working capital. D&A include EUR3.3m of brands and

goodwill amortisation. This weighs on EBIT and is the reason for the difference

between capex and D&A.

This valuation method drives to EUR8.70 per share, slightly above our DCF.

Free-cash-flow yield valuation

points to EUR8.7



Table 4: Free-Cash-Flow Yield Valuation

(EURm) 2003E

Sales 144.6EBIT 13.5D&A 5.2Taxes on EBIT (5.3)Change NWC (1.2)Capex (2.4)Free cash flow (FCF) 9.8

FCF /EV 9.1%FCF /Sales 6.8%

Hurdle rate 8.0%Growth rate 2.5%Discount rate 5.5%

Target EV/Sales multiple 1.23Target EV 178.5Net debt (16.7)Fair equity value (EV-debt) 161.8Shares outstanding 17.2Fair value per share 9.4Discounted fair value 8.7


Trading Multiples Analysis

This analysis confirms Mirato’s substantial undervaluation.

Table 5: Trading Multiples Analysis

Market

Cap

PE

2002

PE

2003

EPS CAGR

01-04E

P/CF

2002

P/CF

2003

EV/EBITDA

2002

EV/EBITDA

2003

EBITDA CAGR

01-04E

EV/EBIT

2002

EV/EBIT

2003

EV/Sales

2002

EV/Sales

2003

L'Oréal 47,832 33.80 29.28 16.6% 28.28 25.25 16.90 15.19 11.0% 21.89 19.18 2.82 2.59Clarins 917 24.72 21.91 14.8% 11.11 10.39 10.06 8.36 7.2% 15.77 12.41 1.09 0.99Wella 3,668 28.96 22.83 21.7% 15.30 12.69 11.49 9.90 15.5% 16.10 13.74 1.46 1.29Beiersdorf 8,063 32.84 30.44 6.7% 18.48 17.17 14.53 13.40 7.5% 19.72 18.27 1.97 1.86Henkel 8,427 20.83 18.24 8.7% 10.37 10.07 7.36 6.89 -14.7% 15.22 13.25 0.97 0.87Average 28.23 24.54 13.7% 16.71 15.12 12.07 10.75 5.3% 17.74 15.37 1.66 1.52

Mirato at EUR5.3 91 15.30 12.20 21.4% 7.50 6.80 6.70 5.50 11.8% 10.60 8.00 0.89 0.75discount vs. average 45.8% 50.3% 55.1% 55.0% 44.5% 48.8% 40.2% 48.0% 46.5% 50.6%

Mirato at EUR8.2 p.s. 23.60 18.90 12.60 11.00 9.70 8.10 15.40 11.70 1.29 1.09Discount vs. average 16.4% 23.0% 24.6% 27.2% 19.6% 24.6% 13.2% 23.9% 22.4% 28.2%

Source:Julius Baer estimates

The group is trading at a discount in the 40-55% range based on the multiples

considered.

Significant 40-55% discount vs.

peers



As stated earlier, we can find at least partial justification for this discount in

Mirato’s more limited product range, geographical diversification and size-

related competitive disadvantages versus major sector peers. However, table

10 shows that despite its much more limited size, the group’s highly efficient

production allows it to post EBITDA margin in line with peer averages.

At our DCF-based fair value of EUR8.20 per share, Mirato would still trade at a

10-30% discount based on the multiples considered - in our view the

appropriate range to account for issues related to scale, geographical diversity

of and product range.

Conclusions

Averaging the two methods considered, we reach a target price of EUR8.40 per

share, implying 58% upside.

In our view, the current discount both versus major peers and versus DCF and

free-cash flow yield based fair values is excessive.

At EUR8.40 per share, size-related competitive disadvantages would be priced

in at a not-insignificant 23% and 21% discount to peer average EV/EBITDA and

PE 2003E.

Our target price of EUR8.40 per

share still implies a significant

discount to peers



Business Analysis

A leading player in the Italian personal care market, Mirato is active inthe personal hygiene, hair care and cosmetics segments. The companyholds significant market share in segments like deodorants (17%),hairsprays (29%) and gels (22%). Successful expansion into foreignmarkets, most notably in Africa and Eastern Europe, is further spurringtop-line growth.

Overview

Mirato, with revenues of EUR124.1m (2002E), is a producer of hygiene andbeauty products, covering the cosmetics segment (mainly through the Clinians

brand, acquired in 2000), personal hygiene and haircare products.

Chart 1: Revenues Split by Line

Haircare26%

Other3%

Cosmetics14%

Personal hygiene57%

Source: Mirato

The three lines include the following products:

• Cosmetics: Includes products in the facial skin care, body care and suncare segments. Mainly covered by the Clinians umbrella brand, acquired in2000.

• Personal hygiene: Deodorants, bathroom products (foams and soaps),men’s lines (pre- and aftershave, eau de toilette). Marketed under theMalizia and Intesa brand umbrellas and marginally under the Cliniansbrand. In particular, Malizia covers the entire product range, Intesa istargeted to men, Clinians to women.

Cosmetics, personal hygiene and

haircare products



• Haircare products: Shampoos, conditioners under the brands Malizia andIntesa. Hair styling products (gel, hairspray, mousses) under the brandsMalizia, Intesa, Gomgel and Splend’or.

Though mainly exposed to the Italian market, in recent years Mirato has

successfully penetrated some foreign markets, mainly developing countries in

Eastern Europe, the Middle East as well as South and West Africa.

Chart 2: Revenues Split by Geographic Area, 2002E

Italy79.16%

Asia1.51%

Africa7.50%

Other0.03%

Europe11.80%

Source: Mirato

The strong growth in revenues generated abroad was spurred by aggressive

moves into marginal geographic areas where big multinationals and distribution

chains are still largely absent. Advertising is generally much cheaper in these

areas, making it easier for smaller players like Mirato to exploit first-mover

advantage.

Chart 3: Development Abroad


Italy remains the reference market for Mirato, where it holds significant market

share in several segments.

Exposure to Italy, Eastern

Europe, Africa, Middle East

Benefiting from first-mover

advantage abroad

In Italy, significant market share

14.1%

18.4%20.2% 20.9%

0

5

10

15

20

25

30

1999 2000 2001 2002E0%

5%

10%

15%

20%

25%

revenues abroad % on total revenues



Table 6: Italy - Mirato’s Market Share by Segment

2001

Personal hygiene (Malizia, Intesa, Clinians)Deodorants 17.0%Bath foams 8.1%Shower foams 6.7%Pre shave 10.4%After shave 7.9%Hair care (Malizia, Intesa, Gomgel, Splend'or)Hairsprays 29.0%Mousses 12.2%Gel 22.0%Conditioners 11.7%Cosmetics (Clinians)Facial skin care 4.9%

Source: Iri Infoscan, AC Nielsen

Apart from some marginally productive activities in South Africa, all spray-

product output comes from the plant in Landiona. Before the acquisition of Mil

Mil 76, Mirato did not possess the technology to produce liquid products. The

group used to outsource liquids production to small, loyal suppliers, many of

whom depend on Mirato for their survival. Clinians products are also

outsourced.

The Market

Products, Growth and Cycle Characteristics

Italy’s personal care market was worth EUR7.82bn in 2001, EUR6.68bn of

which (85%) from retail channels. The bulk is from body care (32.1% of total),

and facial skin care/colour cosmetics products (27.3%). Aggregate revenues

generated by companies in the sector was EUR6.78bn, with Mirato accounting

for 1.8%.

Chart 4: Italian Personal Care Market: Split by Line

Body care32.1%

Oral hygiene and other8.4%

Hair products16.6%

Men’s lines3.7%

Perfumes11.9%

Facial skincare - Colour cosmetics

27.3%

Source: UNIPRO 2001, Julius Baer estimates

Following the Mil Mil 76

acquisition, Mirato produces

spray products & liquids in-house

Italy’s personal care market is

worth EUR6.68bn; Mirato

accounts for 1.8% of national

turnover



� The body care segment comprises hygiene products such as soaps, bath

and shower foams which account for 13.8% of the market. Deodorants,

hydrating lotions and creams, sun products, anti-cellulite and lifting

products account for 16.1%. Hand-care products account for 2.2%.

� Facial skin care - colour cosmetics include detergents, nourishing

products, age-related products (together 14.9% of the market). Make-up

and lip products account for 8.1% and 4.3% respectively.

� Hair products include shampoos, conditioners, colour lotions, hairsprays,

gels and mousses.

In the retail turnover by channel, we note that large and traditional distribution

accounts for 42.1% of the market. Apart from a minor share in perfumeries and

chemists, this is the channel in which Mirato is most present. Perfumeries

account for a significant 30% of turnover.

Table 7: Italy – Consumptions by Channel, 2001(EURbn) (%)

Large and traditional distribution 3.30 42.1%Chemist’s 0.86 11.0%Perfumeries 2.35 30.1%Herbs shops 0.17 2.2%Total retail channels 6.68 85.4%Other channels 1.14 14.6%Total consumptions 7.82 100.0%

Source: UNIPRO 2001, Julius Baer estimates

The personal care market is driven first and foremost by the growing

importance, both in developed and developing countries, placed on looking

good and being healthy. The ageing process, coupled with the desire to appear

young and promote health and well being, are not likely to disappear any time

soon.

We have compared the trend of personal care consumption versus nominal

GDP growth after 1992.

Chart 5: Growth 1992-2002: Nominal GDP vs Consumptions of Personal Care Products

5.3%

3.0%

5.8%

8.1%

6.4%

4.5% 4.6%

3.3%

5.1%5.3%

1.8%

7.3% 7.4%

8.5%

6.4%

5.2%5.1%

4.5%3.9%

4.9%

2.2%

0.8%

0%1%2%3%4%5%6%7%8%9%

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Ave

rage

GDP Growth Personal Care Consumption

Source: UNIPRO, Julius Baer estimates

Large and traditional distribution

make up 42.1% of final sales

A growth market



As shown in the previous graph, no meaningful difference exists in the two

growth rates. As regards cyclical behaviour, the personal care sector tends to

show a counter-cyclical behaviour, underperforming the whole economy in

periods of strong growth and holding up well during downturns. We highlight

the sector’s significant growth trend from 1997, gradually fading after 1999.

Broken down by product line, hair products underperformed in the period; due

to the lacklustre performance of shampoos, accounting for some 39% on

aggregate. We note better performances and higher growth rates for perfumes,

facial skin care (wherein Mirato is now present with Clinians) and body care

products.

Table 8: Average Growth Rates by Segment

1992-2001

Hair products 3.6%Men’s lines 2.1%Perfumes 6.5%Facial skin care – Colour cosmetics 5.2%Body care 5.7%Average 4.9%


Market Outlook: Italy and Europe

Although defensive, the personal care sector is expected to slow slightly in H2

2002 compared to H1. In particular, UNIPRO (the Italian Association of

Cosmetic Industries) in its October survey expects a slight slowdown of

turnover growth, which should come in at 6.6% (vs. 7.5% in 2001 and 10.2% in

2000). This represents a slight worsening versus the May survey, that had

called for 7% growth in FY 2002. Exports, accounting for 26% of turnover, are

still expected to lead the race with a 15.1% (yet still slowing from the 16% and

26% posted in 2001 and 2000). Sales to traditional channels in Italy accounted

for 66% of total, and are expected to grow by 3.5% YOY, slowing slightly from

4.7% in 2001. The survey does not expect recovery in 2003.

Despite the expected deceleration, for now we see no real sign of danger. We

still view high single-digit growth as positive.

Table 9: Italian Cosmetic Industry - Turnover

(EURm) 2001 % 01 vs. 00 2002E % 02 vs. 01

Traditional channels 4,474 65.9% 4.7% 4,631 64.0% 3.5%Professional channels 569 8.4% 5.6% 600 8.3% 5.5%Export 1,742 25.7% 16.0% 2,005 27.7% 15.1%Total 6,785 100.0% 7.5% 7,236 100.0% 6.6%


The personal care market tends

to be largely immune to

economic cycles

For 2002, UNIPRO expects 6.6%

turnover growth for companies in

Italy (this was 7.5% in 2001)



Small Player Among Giants: Disadvantages, Perspectives

As the personal care market is dominated by multinationals, Mirato faces

competition from much bigger players.

Table 10: Personal Care Players - Key Figures

(EURm) Market Cap Revenues 2002E EBITDA 2002E EBITDA margin 2002E

L'Oréal 47,832 14,426 2412 16.7%Clarins 917 911 102 11.1%Wella 3,668 3,435 436 12.7%Beiersdorf 8,063 4,715 631 13.4%Henkel 9,051 9,672 1271 13.1%Average 14,158 6,632 970 13.4%Mirato 88 125 17 13.4%


The table shows that, despite being much smaller, Mirato posts EBITDA margin

in line with its larger, multinational peers.

Players in the personal care sector are generally heavily exposed to the mass

market. Their counterparts are large retail chains with high contractual power.

To get their product on shelves, companies must fork over to retail chains a

percentage of their sales as so-called “promotional costs.”

The larger the supplier, the greater the bargaining power with retail chains, the

lower the percentage of sales to be paid. Mirato carries a significant

competitive disadvantage compared to larger competitors. By our reckoning,

this weighs for some 8-9% of revenues: while Mirato’s promotional

expenditure/sales ratio is 23.5% (2002E), the average for larger players is

considered to be around 15%.

Probably the most worrying evidence is that this ratio for Mirato (and for other

players) appears to be continuously increasing, as is the weight of advertising

costs. In management’s view, the current trend for promotional costs is likely

to continue. Mirato expects an average increase in the region of 50 bp per

year. Mounting competition from major players in the sector is likely to reflect

also a growing advertising costs/sales ratio.

While this is without doubt a worrying trend and one that is likely to weigh on

margins medium-term, the problem can be attacked in two ways:

• Size matters: management is aware that external growth is needed toboost bargaining power versus large retail chains. For this reason, thestrategy for 2003-04 involves further acquisitions of family-run Italiancompanies in the personal care sector, in the manner of Clinians.

• Production efficiencies: the recent deal to acquire 50% of Mil Mil 76(Mirato had already owned 25%) should allow the group to internalisemargins in the production of liquid products. Value creation is a

In a sector dominated by large

multinationals…

…The much smaller Mirato posts

comparable profitability

More bargaining power with large

distributors and lower

promotional costs/revenues ratio

Worrying trend

Mirato needs to get bigger

Production efficiencies help



consequence of the low multiples recognised: EV (100%) of EUR9.3m foradditional EBITDA of EUR2.5m ; implied EV/EBITDA: 3.7x.

Chart 6: Rising Advertising and Promotional Costs

17.3%18.5% 19.1%

20.9%22.5% 22.9% 23.5%

8.8%8.7%7.8%7.5%5.8%5.6%6.5%

0%

5%

10%

15%

20%

25%

1996 1997 1998 1999 2000 2001 2002E

Promotional Advertising

Source: Mirato, Julius Baer estimates

The Importance of Advertising

In the mass-market segment, little differentiates products in the minds of end-

consumers. Consequently, demand is highly sensitive to pricing strategies -

much akin to commodities markets. Two main actions are required to sustain

both price and demand: new launches and strong advertising. Management

thinks an intensive, if sustainable, advertising policy will pay off.

Another way to improve profitability is entering market segments higher than

the pure mass market. In the last few quarters, so-called prestige cosmetics

have suffered from the sluggish global economic conditions, causing a general

shift away from high-range branded goods. Prestige cosmetics, characterised

by high profitability, are sold mostly in specialised shops: perfumeries and

chemists. This shift benefited the upper mass-market segment. Mirato entered

this segment at the end of 2000 with the acquisition of Clinians, which drove

top-line growth in 2001 and 2002 due to the group’s successful commercial

penetration into the larger Italian retail chains, through leveraging Mirato’s

powerful distribution network.

The upper mass-market segment is less crowded than the pure mass market.

One consequence is that large retail chains wield less contractual power,

above all when facing leader brands such as Clinians in the skin care segment,

where it co-leads that market with L’Oreal brands (Plenitude). The positioning

pays-off: while Mirato doesn’t disclose margins by product segment,

management tells Clinians’ EBITDA margin is not far from 25%, considerably

higher than the average of 14.3% (JB 2002E).

Importance of price vs. quality

and advertising

Clinians allows Mirato to be

present in the less competitive

upper mass-market

Clinians EBITDA margin: near 25%

vs. 14.3% for Mirato as a whole



Mirato envisages other external growth opportunities in the upper mass market

segment by focusing on niches in which competition is relatively limited, such

as sun protection. Perlier and Cadey-Bilboa are two possible Italian targets. We

are confident that Mirato has the ability to exploit its effective distribution

network and the commercial expertise to push growth.

Clinians: Entering Upper Mass-Market Cosmetics

Mirato was founded in the 1960s, when it began selling hair-care products. In

the 1980s and 1990s a significant position was established in Italy with the

success of the Malizia and Intesa umbrella brands, pushed by intense

advertising campaigns. By the end of the 1990s, Mirato had carved out a

significant share of the personal care sector’s mass-market segment.

The acquisition of Clinians at the end of 2000 (consolidated from 2001) from

allowed Mirato to entering the cosmetic sector and to position itself in the

“upper mass-market” segment. Clinians products are distributed both in retail

chains and, to a limited extent, in perfumeries. The average cost per item (body

and skincare lotions and creams) is EUR13, well above the average for mass

market products. This is paired with an EBITDA margin thought to be near 25%

(vs. 14.3% for Mirato as a whole, 2002E). In addition, the sales CAGR in body

and skin care market segments is above average for the personal care market

(see table 8).

In the skin-care segment, Clinians faces competition from brands like Plenitude

(L’Oreal), Synergie (Garnier-L’Oreal), Nivea (Beiersdorf), Venus in the anti

cellulite segment (L’Oreal), Oil of Olaz (Procter & Gamble) and Cupra

(Ciccarelli).

In the body-care segment, Nivea and Venus are the two main competitors.

Clinians faces perfumeries competition from Italy’s Collistar, Clarins, German

company Lancaster and Biotherm (L’Oreal). Mirato must compete with

powerful companies, stronger both in terms of power versus retailers and in

terms of ad spending.

Clinians was paid EUR28m (of which EUR22.4m for the brand itself). Mirato

was cash positive for EUR8.9m in 1999. Net financial debt, meanwhile,

reached EUR18.5m at the end of 2001 (gearing: 39%), mainly due to the cash-

out related to the acquisition.

At the time of the acquisition, Clinians products were distributed through

25,000 points of sale. Mirato is present in about 120,000 locations, allowing

management to leverage the brand name to exploit its wide-spread commercial

network and significantly boost penetration levels for Clinians products. This

was further enhanced by intense promotion and advertising efforts and by the

extension of the product range.

Focusing on further growth,

above all in the upper-mass-

market

Clinians: higher unit price, higher

margins, higher expected CAGR

Nevertheless, competition is

tough

Pushing the brand via the

powerful commercial structure

and focused ad action



In 2001, Mirato spent EUR3.4m on promotion and the same amount again on

advertising for Clinians products; the combined total of EUR6.8 accounted for

some 41% of Clinians’ 2001 gross sales (EUR16.8m). This percentage was well

above the average for the group (31.6%). We expect Clinians gross sales to

grow to EUR22.4m in 2002 (+33.4% YOY) from EUR16.8m in 2001, which was

little changed from 2000.

While management has in the past suggested EBITDA margins for Clinians in

the neighbourhood of 25%, in our view this was not the case in 2001 and will

not be again in 2002, given the huge investments in promotions and

advertising undertaken to push the brand. If we were to assume that Clinians

does in fact hit 25% EBITDA margin, this would mean that the marginality of old

Mirato products has fallen from 14.2% in 2000 to 10% in 2001-02, which

seems excessive.

Assuming 25% EBITDA margin, the cash-out of EUR28m implies 5x EV/EBITDA

2002E, value-enhancing compared to Mirato’s current 6.6x.

Table 11: Clinians and Old Mirato – Can Clinians Manage 25% EBITDA Margin?

2000 2001 YOY 2002E YOY

RevenuesClinians 0.0 16.8 nm 22.4 33.4%Old Mirato products 99.7 103.4 3.7% 109.0 5.4%Discounts (5.5) (6.3) 13.3% (7.2) 14.8%Total 94.2 113.9 20.9% 124.1 9.0%

EBITDAClinians 4.2 5.6 33.4%Margin (assumed) 25.0% 25.00%Old Mirato 13.4 10.4 -21.8% 11.0 5.3%Margin (implied) 14.2% 10.10% 10.10%Total 13.4 14.6 9.6% 16.6 13.4%Margin 14.2% 12.9% 13.40%

Implied EV/EBITDA on Clinians (cash out: EUR28m) 6.7 5.0Source: Julius Baer estimates

Mil Mil 76: Improving Margins for Liquids

Management does not intend to take the production of Clinians products in-

house, due to strict sanitary regulations and potential risks regarding creams

and lotions. Liquids suppliers are in a weak position versus Mirato, in many

cases their key client. This favours their acquisition at value-enhancing

multiples. In addition, owning its own liquids technology paves the way for the

acquisition of those competitors that are also currently outsourcing

production.

As we predicted in our Private Views of October 22, 2002, Mirato announced

the preliminary agreement for the control of a further 50% of Mil Mil 76 in

We think Clinians EBITDA margin

were below 25% in 2001-02,

weighed down by heavy ad and

promo spending

Mirato’s strong position favours

acquisitions at value-enhancing

multiples



November 2002. Control of the company is to change hands either as a direct

acquisition or to exploit the option of a full acquisition at a later date.

Mil Mil 76 currently depends on Mirato for EUR5m per year or 21% of its

turnover, out of a total of EUR23.8m (2002E). We estimate 11% of Mirato

COGS (2002E: EUR45.6m) invoiced by Mil Mil 76.

The remaining EUR18.8m in turnover is composed of products sold to

discounts channels and private labels.

In 2001 Mil Mil 76 posted sales of EUR23.1m, EBITDA of EUR3m (13% EBITDA

margin) and net profit of EUR1.6m.

According to management estimates, the acquisition will contribute EUR18m

to Mirato 2003 revenues and EUR2.5m in EBITDA (14.5% and 14.1%

respectively forecast for the group in 2002E). The company has significant free

capacity: Mirato will transfer additional production of liquids to Mil Mil 76 to

book logistics costs savings (due to the proximity of Mil Mil 76 plants). The

process is expected to be in full swing by 2004.

The marketing of Mil Mil 76 unbranded products will continue, as these are

established fits to the Eastern Europe, Africa and Asia markets where Mirato is

already present (overall: 20% of sales, JB 2002E).

In the event of a direct acquisition, Mirato will pay EUR4.6m for the remaining

50% stake, reaching a net financial debt of EUR19.3m (FY 2002, JBE), 38%

gearing.

Assuming that Mirato will hit its target of EUR2.5m in additional EBITDA, this

implies a value-enhancing 3.7x EV/EBITDA.

Table 12: Mirato 2003E; Mil Mil 76 Contribution

With Mil Mil 76 Without Mil Mil 76

2002E % 2003E % YOY 2003E % YOY Post vs Pre

Sales 124.1 100.0% 144.6 100.0% 16.5% 128.6 100.0% 3.6% 12.4%EBITDA (rep) 17.8 14.3% 20.8 14.4% 17.2% 18.5 14.3% 3.4% 13.7%EBIT 10.4 8.4% 13.5 9.4% 30.0% 11.2 8.7% 7.4% 21.1%Net profit 6.0 4.8% 7.5 5.2% 25.2% 6.6 5.1% 10.4% 13.4%

Source: Julus Baer estimates

We conservatively estimate that Mil Mil 76 will contribute EUR16m to 2003

sales, (vs. EUR18m targeted by management) and EBITDA of EUR2.3m (vs. the

targeted EUR2.5m). This would mean a 13.4% increase at net profit level versus

the non-acquisition case.

The acquisition should boost profitability through cost savings and more

efficient production. In our view, further room for manoeuvre on the production

Guidance calls for top-line

contribution of EUR18m in 2003,

EUR2.5m at EBITDA level

Cash-out at EUR4.6m, implying

3.7x EV/EBITDA 2003E

We factor in EUR16m of

additional sales in 2003,

EUR2.3m at EBITDA level



side is now limited, while the promotional and advertising costs/sales ratio is

likely to continue a dangerous trend.

Distribution: Key Point of Strength

We view distribution as a competitive strength for Mirato. The company’s

products can be found in about 120,000 points of sale in Italy, including large

and traditional distribution and specialised shops like perfumeries.

While sales people at large multinationals are part of the labour force, Mirato

uses agents (32 in total) whose pay is strongly correlated to turnover.

In the past, multinational players (eg. Wella) have failed to enter masthe Italian

market, mainly due to the difficulty in establishing an effective commercial

network. For now, the Ravanelli family (which owns 51% of the shares), is

reportedly not interested in selling its stake. We think Mirato is an appetising

target for multinationals interested in entering Italy’s personal care market

seeking to acquire an established commercial network instead of building up a

green-field operation.

Powerful commercial presence

Mirato’s most valuable asset may

be its appeal as a takeover target

for multinationals looking to

enter the Italian market



Strategy

The company’s strategy is to develop the business both in Italy andabroad. After the deal for Mil Mil 76, further acquisitions of family-runbrands are likely starting from the end of 2003. International growthwill require a renewed and greater focus on advertising.

Development at Home and Abroad

Mirato aims to develop its business both in Italy and abroad.

The strengthening of the position in Italy includes:

• Acquisition of brands and companies. Management chooses not totarget brands sold by multinationals: these already leverage off effectiveadvertising campaigns and are generally well-managed. In addition,multinationals trade at higher multiples than Mirato. Consequently, theyare likely to sell their brands at multiples which would be value-destroyingfor the smaller Mirato. Instead, the group targets Italian family run-companies, which can then be exploited through leveraging off Mirato’spowerful commercial network. In many such cases production synergiescan be obtained, with the Mil Mil acquisition the best example yet. Thisincludes names like Cadey, strong in the highly profitable sun-lotionssegment, Perlier, strong in natural products (Kelemata) and Guaber,present in personal care (L’Angelica, Bionsen) and homecare.

• Saving in cost of finished products. An important step is representedby the acquisition of Mil Mil 76, which has seen EBITDA margin for liquidproducts rise from the current 6-8% to a value more in line with the groupaverage. The production and commercial infrastructures already seemquite stretched. In our view, no further ample room for improvement is lefthere, while advertising and promotional costs will continue to grow.

• Ongoing product innovation and differentiation. Mirato’s policy is tocouple advertising campaigns with new product launches. After theacquisition of Clinians, new anti-wrinkle and sensitive skin products werelaunched. The aim is to anticipate market tendencies and requirementswhile maintaining quality/price at an attractive level. In the competitivepersonal care sector, we think this is a must.

• Elevate the portfolio product to focus on the higher-margincosmetic sector. At the moment, cosmetics (mainly Clinians) account for16% of revenues, while personal care and hair care clock in at 57% and26% respectively; “other” (mainly house-care) the remaining 3%. Wehighlight that, prior to the Clinians acquisition, Mirato entered thecosmetics segment with the Malizia Bons-Bons line, targeted at teenagers(make-up). Initially a big success, the experiment is now nearly tapped out



(sales fell 31.4% YOY in Q3 2002). While the cosmetics sector is highlyprofitable, barriers to entry (stemming from reputation effects) are high.Mirato was known as a company involved in mass-market products.Clinians has increased Mirato’s credibility in this aspect. Expansion in thecosmetics area will be pursued through Clinians growth and acquisitions.

The expansion strategy in developing markets involves:

• Greater use of advertising and promotions. The penetration of WesternEuropean markets was seen as a mission-impossible for the plucky yetsmall Mirato. Entering these markets would mean a potentially unbearableburden in terms of advertising and promotional spending. On the contrary,large multinationals are virtually non-existent in generally high-risk,marginal countries in places like Africa, the Middle East and EasternEurope. Promotional efforts to enter these areas are limited by the generalabsence of large, powerful retail chains. We expect Mirato to generaterevenues abroad in the vicinity of 21% of FY 2002 revenues. Broken downfurther: 12% in Eastern Europe, 8% in Africa and 1% in Asia. Although noofficial disclosure is available, these revenues, leavened by threadbare adand promotional costs, are expected to post EBITDA margin not far off thegroup average.

Table 13: Revenues Split by Geoographic Area

2000 % 2001 % YOY 2002E % YOY

Italy 79.5 84.4% 90.8 79.8% 14.2% 98.2 79.1% 8.1%Abroad 14.7 15.6% 23.0 20.2% 57.2% 25.9 20.9% 12.5%Eastern Europe 10.3 10.9% 15.2 13.3% 47.3% 14.6 11.8% -3.5%Africa 3.0 3.2% 5.5 4.9% 84.2% 9.4 7.6% 70.0%Asia 1.3 1.3% 2.1 1.8% 64.5% 1.9 1.5% -9.6%Other 0.1 0.1% 0.3 0.3% 161.9% 0.0 0.0% -86.6%Total 94.2 100.0% 113.9 100.0% 20.9% 124.1 100.0% 9.0%


Following a trend observed in the first nine months of 2002, we expect a

considerable slowdown of revenues growth abroad in FY 2002: up 12.5% YOY,

still above 8.1% in Italy but well below the 57.2% posted in 2001. In some

cases, Mirato is encountering barriers to further overseas expansion. In

addition, these revenues are generally driven by external distributors and tend

to be more volatile than revenues in Italy, even considering macroeconomic

instability of some of the areas in which Mirato is present (Serbia, Albania,

Nigeria and West Africa, South Africa). We expect competition to stiffen in

these areas in the medium term. Consequently, greater ad and promotional

efforts will be needed just to maintain current revenue levels. This year, we

expect Mirato to spend EUR1m in advertising abroad, well below the EUR10m

it currently spends in Italy (2002E).

• Entering new areas. In the near term: Russia, Ukraine, Latvia, Lithuania.



• Strengthening the distribution network. Through the appointment ofexclusive local dealers or the acquisition of small distributors, which mayhelp to consolidate market share. A resident manager was appointed inPoland at the beginning of 2002. The company’s strong growth in Africa(2002E: +70%, after +84% in 2001) is due to the higher number of clientsin the area after striking more effective agreements with distributors.

• Start-up of local production. Apart from a JV in South Africa, Miratocurrently exports all products from Italy. Only spray products are soldabroad. For the lower-margin liquid products there is no scope, consideringthe weight of transport costs. Clinians products are entirely sold in Italy. Inthe future, a local presence in production, also through joint ventures,should generate savings in terms of transportation costs.

How Long Will Mirato Be Able to Stay Independent?

In our view, penetration abroad will continue to support top-line growth, even if

at lower rates compared to 2001. In the medium term, we think life will

become increasingly tough for small players involved in mass market

segments, including Mirato. Margin pressure will increase due to higher

commercial costs driven by aggressive retail distribution: a not-insubstantial

competitive disadvantage versus larger players. Elasticity to preserve margins

through more efficient production (the Mil Mil 76 acquisition, for example) is

likely narrow, as the structure becomes stretched. In the medium term, life in

emerging markets will also become tougher: new entrants are likely, first-

mover advantage will fade and distribution will become more aggressive and

concentrated, as they have in developed countries.

We remain highly sceptical about Mirato remaining independent in the medium

run. We think market conditions will eventually convince the Ravanelli family to

surrender to attractive (compared to Mirato’s current price) offers.

In our view, market trends

increase the chances that Mirato

will not remain independent



Financials

The group’s very strong Q1 should allow Mirato to post significantprofitability improvement for FY 2002. We estimate fiscal 2002 sales togrow by 9% to EUR124.1m, EBITDA by 12.7% to EUR17.8m, with netprofit up 30.7% to EUR6m. From 2003, Mirato will benefit from thecontribution of liquids-producer Mil Mil 76.

Nine-Month Results: Growth Slowing

Mirato posted a very bullish (and somewhat misleading) Q1 2002, benefiting

from the favourable comparison basis versus Q1 2001, when Clinians (just

consolidated) turned in a weak performance. In addition, the burden of

promotional and ad costs was limited in Q1 2002 compared to the same period

a year earlier.

In Q2, top-line growth slowed and promotional/ad costs, mainly due to the

introduction of new Clinians launches, cut into profitability: EBITDA and EBIT

both fell YOY.

In Q3, further top-line growth slowdown was observed, with sluggish EBITDA

and EBIT (limited promotions growth but a heavier ad-cost burden) and a drop

in net profit.

Table 14: Quarterly Results

(EURm) Q1

2001

% Q1

2002

% YOY Q2

2001

% Q2

2002

% YOY Q3

2001

% Q3

2002

% YOY 9M

2001

% 9M

2002

% YOY

Total sales 26.1 100% 29.2 100% 12.1% 29.6 100% 32.7 100% 10.7% 30.7 100% 32.3 100% 5.3% 86.3 100% 94.2 100% 9.2%-Clinians 3.2 5.9 86.7% 6.0 7.0 17.0% 3.6 4.3 19.1% 12.7 17.2 34.9%-Old Mirato products 24.3 25.0 2.8% 25.0 27.7 10.9% 29.1 30.0 3.2% 78.3 82.7 5.5%-Discounts (1.4) (1.7) 20.4% (1.4) (2.0) 40.9% (1.9) (1.9) 0.3% (4.7) (5.6) 18.2%EBITDA (as reported) 4.2 16.2% 5.5 19.0% 31.1% 4.1 13.9% 4.0 12.1% -3.9% 4.3 14.1% 4.4 13.5% 0.4% 12.7 14.7% 13.9 14.7% 9.3%EBIT 2.7 10.2% 4.0 13.8% 50.9% 2.4 8.1% 2.0 6.2% -14.5% 2.5 8.2% 2.3 7.2% -7.3% 7.6 8.8% 8.4 8.9% 10.9%Net profit 1.5 5.9% 2.7 9.1% 74.0% 1.3 4.6% 1.4 4.1% 0.8% 1.2 4.0% 1.0 3.0% -19.8% 4.1 4.8% 5.0 5.3% 22.0%


Due to the discretionary allocation of ad and promotional costs over several

months, quarterly results generally need to be looked at with some caution.

It is clear that Clinians is driving growth (+34.9% YOY in the first nine months of

the year vs. +5.5% for traditional products), leveraging mainly on the jump-

effect due to the small numbers of shops in which it’s products were present

prior to the acquisition (25,000) compared to those covered by Mirato

(120,000). It is also clear that this driver is progressively fading and is shortly

expected to disappear.

Bullish Q1 2002…

…Slowdown in Q2…

…and Q3 was even slower

Quarterly releases are volatile

Clinians is driving growth

(+34.9% YOY in 9M)… but this

trend is slowing



Chart 7: Fading Growth

12.4% 10.7%5.3%

31.1%

-3.9%

0.4%

74.0%

0.8%

-19.8%-20%

0%

20%

40%

60%

80%

Q1 Q2 Q3

Sales EBITDA Net profit


FY 2002 Estimates

The very strong Q1 leads us to expect Mirato to post significantly improved

profit for fiscal 2002.

Table 15: Income Statement

(EURm) 2000 % 2001 % YOY 2002E % YOY

Clinians 0.0 16.8 nm 22.4 33.4%Old Mirato products 99.7 103.4 3.7% 109.0 5.4%Discounts (5.5) (6.3) 13.3% (7.2) 14.8%Total sales 94.2 100.0% 113.9 100.0% 20.9% 124.1 100.0% 9.0%Row materials (40.0) -42.4% (48.7) -42.7% 21.8% (45.7) -36.8% -6.2%Change of inventories 4.3 4.5% 4.8 4.2% 12.9% 0.0 0.0% -100.1%Other revenues 0.3 0.3% 0.7 0.6% 164.3% 0.4 0.3% -42.9%Gross margin 58.8 62.4% 70.8 62.1% 20.4% 78.9 63.5% 11.5%Advertising (7.3) -7.8% (10.0) -8.7% 35.6% (11.0) -8.8% 10.0%Promotional (21.2) -22.5% (26.0) -22.9% 22.9% (29.2) -23.5% 12.3%Transports (2.9) -3.1% (3.9) -3.5% 33.9% (4.6) -3.7% 16.1%Commissions (3.0) -3.2% (3.0) -2.6% -0.9% (2.6) -2.1% -12.5%Other (2.9) -3.0% (4.3) -3.8% 49.9% (4.5) -3.6% 5.4%Personnel (7.3) -7.7% (7.8) -6.9% 7.7% (9.3) -7.5% 18.4%EBITDA as reported 14.2 15.1% 15.8 13.8% 11.1% 17.8 14.3% 12.7%Other items (0.8) -0.9% (1.1) -1.0% 33.2% (1.2) -0.9% 3.5%EBITDA 13.4 14.2% 14.6 12.9% 9.6% 16.6 13.4% 13.4%Depreciation (1.2) -1.3% (1.1) -1.0% -8.1% (1.0) -0.8% -5.5%Amortization (0.6) -0.6% (0.8) -0.7% 41.8% (0.9) -0.7% 7.4%Provisions (0.5) -0.6% (0.6) -0.5% 15.7% (1.0) -0.8% 61.3%EBIT (before brand/goodwill amortisation) 11.1 11.8% 12.1 10.7% 9.6% 13.7 11.1% 13.0%Brand/goodwill amortisation (1.1) -1.1% (3.3) -2.9% 206.8% (3.3) -2.7% 0.0%EBIT 10.0 10.6% 8.8 7.7% -11.7% 10.4 8.4% 17.9%Net financial expenses 0.3 0.4% (0.8) -0.7% -321.9% (0.9) -0.7% 13.5%Other financials 0.2 0.2% (0.7) -0.6% -412.1% 0.4 0.3% -158.8%Extraordinary items 0.0 0.0% 0.0 0.0% -111.6% 0.0 0.0% -100.0%Pre tax profit 10.6 11.2% 7.4 6.5% -30.0% 10.0 8.0% 34.6%Taxation (4.3) -4.6% (2.8) -2.5% -34.4% (4.0) -3.2% 40.9%Net profit 6.3 6.6% 4.6 4.0% -26.9% 6.0 4.8% 30.7%

Source: Julus Baer estimates



On September 20, 2002, management issued a detailed press release

targeting the following FY results: sales up 9.8%, EBITDA up 18.4%, EBIT up

29.5%, net profit fully 57.5% higher.

After the less-than-brilliant Q3 results, we are more prudent.

We expect sales to grow by 9%, which implies 8.5% growth in Q4, recovering

from the weaker 5.3% in Q3. Full year growth of 9.8% would imply 11.7% in Q4,

what seem aggressive to us.

We expect savings from COGS to drive a gross margin increase of 140bp to

63.5% versus 2001, up 11.5% YOY. We expect promotional (+12.3% YOY vs.

+11.5% targeted) and advertising (+10%, in line) costs to growth broadly in line

with gross margin, while savings in terms of commissions (-12.5% YOY, -13.3%

targeted) will counterbalance offset transport growth (+16.1%, +15.4%

targeted) and personnel (+18.1%) costs.

We expect EBITDA (as reported) to grow by 12.7% YOY to EUR17.8m.

We estimate a slight drop in depreciation (-5.5% YOY) but growing provisions,

leading EBIT to grow by 17.9% to EUR10.4m. Pretax profit will benefit from

little-changed interest payments and the revaluation of own shares: we expect

it to grow by 34.6% to EUR10m (+56% targeted). A tax rate of 40% (38.2% in

2001) leads to net profit of EUR6m, a 30.7% hike YOY but below the targeted

EUR7.2.

Our Estimates for 2003-05

In 2003, Mirato will benefit from the contribution of Mil Mil 76 (see table 12).

We expect revenues to rise by 3.6% organically, lower than the long term

average trend due to the uncertain outlook regarding the personal care market

and the vanishing Clinians driving-effect. We conservatively estimate Mil Mil 76

to add sales of EUR16m, driving to top-line growth of 16.5%. Assuming

contribution in terms of EBITDA of EUR2.3m, we derive a 17.2% EBITDA growth

to EUR20.8m. We expect Mil Mil 76 to also drive EBIT (+30% YOY) and net

profit (+25.2% YOY).

For 2004 and 2005, we factor in 4.5% top-line growth, not far off the average

of 4.9% per year in 1992-2001 (see chart 5). We think further margin pressure

from advertising and above all commercial costs will render a profitability

recovery unlikely (on the contrary, we fear some risks on the downside here).

We maintain EBITDA margin stable at the 2003E level, 14.4%, for 2004 and

2005. We expect EBIT growing by about 5% and net profit by nearly 10% in the

two years.

We expect FY 2002 sales growing

by 9%

Gross margin recovery partly

eroded by higher promotional

costs

FY2002 EBITDA: +12.7% YOY to

EUR17.8m, EBIT + 17.9% to

EUR10.4m, net profit +30.7%YOY

to EUR6m

Mil Mil 76 spurring growth in

2003

We expect 4.5% top-line growth

in 2004 and 2005 with stable

EBITDA margin



Tabl

e 16

: Inc

ome

Stat

emen

t

(EU

Rm)

1999

% o

n

Sale

s

2000

% o

n

Sale

s

% C

hg

99-0

0

2001

% o

n

Sale

s

% C

hg

00-0

1

2002

E%

on

Sale

s

% C

hg

01-0

2

2003

E%

on

Sale

s

% C

hg

02-0

3

2004

E%

on

Sale

s

% C

hg

03-0

4

2005

E%

on

Sale

s

% C

hg.

04-0

5

CAG

R

01-0

5

Sale

s91

.310

0.0

94.2

100.

03.

111

3.9

100.

020

.912

4.1

100.

09.

014

4.6

100.

016

.515

1.1

100.

04.

515

7.9

100.

04.

58.

5%C

onsu

mpt

ions

(69.

2)(7

2.7)

(90.

3)(9

7.1)

(113

.2)

(118

.3)

(123

.7)

Val

ue a

dded

22.1

24.2

21.5

22.8

23.6

20.7

9.9

27.0

21.8

14.6

31.4

21.7

16.1

32.8

21.7

4.5

34.3

21.7

4.5

Pers

onne

l(6

.5)

(7.3

)(7

.8)

(9.3

)(1

0.6)

(11.

0)(1

1.4)

EBIT

DA

(as

repo

rted

)15

.717

.214

.215

.1(9

.4)

15.8

13.8

11.0

17.8

14.3

12.7

20.8

14.4

17.2

21.8

14.4

4.8

22.8

14.4

4.8

9.7%

Oth

er(0

.7)

(0.8

)(1

.1)

(1.2

)(1

.3)

(1.4

)(1

.4)

EBIT

DA

14.9

16.4

13.4

14.2

(10.

6)14

.612

.99.

616

.613

.413

.419

.513

.517

.620

.513

.54.

821

.413

.64.

810

.0%

Dep

reci

atio

n(0

.6)

(1.2

)(1

.1)

(1.0

)(1

.1)

(1.2

)(1

.3)

Am

mor

tizat

ion

(0.5

)(0

.6)

(0.8

)(0

.9)

(0.9

)(1

.0)

(1.1

)Pr

ovis

ions

(0.4

)(0

.5)

(0.6

)(1

.0)

(0.7

)(0

.7)

(0.8

)EB

IT (p

re b

rand

s an

d go

odw

ill a

mm

orti

s.)

14.2

15.5

11.1

11.8

(21.

9)12

.110

.79.

613

.711

.113

.016

.811

.622

.717

.611

.64.

418

.411

.64.

610

.9%

Bran

ds a

nd g

oodw

ill a

mor

tisat

ion

(1.1

)(1

.1)

(3.3

)(3

.3)

(3.3

)(3

.3)

(3.3

)EB

IT12

.413

.510

.010

.6(1

9.1)

8.8

7.7

(11.

7)10

.48.

417

.913

.59.

430

.014

.39.

45.

515

.19.

55.

614

.3%

Net

fin.

Exp

ense

s(0

.1)

0.3

(0.8

)(0

.9)

(1.0

)(0

.7)

(0.1

)O

ter

finan

cial

s0.

60.

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0.6

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inar

y ite

ms

(0.1

)0.

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0Pr

etax

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fit

12.7

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10.6

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0.0)

10.0

8.0

34.6

13.0

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30.4

14.2

9.4

9.5

15.7

9.9

10.2

20.6

%Ta

xatio

n(5

.4)

(4.3

)(2

.8)

(4.0

)(5

.2)

(5.7

)(6

.3)

Tota

l net

pro

fit7.

38.

06.

36.

6(1

4.3)

4.6

4.0

(26.

9)6.

04.

830

.77.

85.

430

.48.

55.

69.

59.

45.

910

.219

.8%

Min

oriti

es0.

00.

00.

00.

0(0

.3)

(0.3

)(0

.4)

Net

pro

fit

7.3

8.0

6.3

6.6

(14.

3)4.

64.

0(2

6.9)

6.0

4.8

30.7

7.5

5.2

25.2

8.2

5.4

9.5

9.0

5.7

10.2

18.5

%So

urce

: Jul

ius

Baer

est

imat

es

Tabl

e 17

: Bal

ance

She

et

(EU

Rm)

1999

2000

2001

2002

E20

03E

2004

E20

05E

Net

wor

king

cap

ital

18.2

14.8

31.4

34.1

39.0

40.0

41.1

Fixe

d16

.041

.236

.038

.435

.432

.529

.6-S

ever

. and

oth

er l.

t.1.

61.

81.

92.

02.

32.

52.

7

Inve

sted

cap

ital

32.6

54.2

65.5

70.5

72.2

70.0

67.9

Net

fina

ncia

l pos

ition

(8.9

)8.

818

.519

.316

.79.

61.

9M

inor

ities

0.0

0.0

0.0

1.3

1.6

1.9

2.3

Shar

ehol

ders

’fund

s41

.545

.547

.049

.953

.958

.563

.7

Inve

sted

cap

ital

32.6

54.2

65.5

70.5

72.2

70.0

67.9

Gea

ring

-21.

4%19

.2%

39.4

%37

.8%

30.1

%16

.0%

2.9%

Sour

ce: J

uliu

s Ba

er e

stim

ates



Sound Balance Sheet and Attractive Free Cash Flow

We expect Mirato, after the acquisition of Mil Mil 76, to post a 37.8% gearing

for FY 2002. The group’s considerable free cash flow should allow it to nearly

cancel its net financial debt by 2005, factoring in an aggressive capex policy

for the 2003-05 period and working capital/sales ratio dropping from 27.5%

2002E to 26% 2005E. Consequently, a target similar to Clinians’ in terms of

cash-out (EUR28m) is feasible.

Free cash flow generation was negative in 2000 and 2001, hit hard by both the

Clinians acquisition and the working capital increase. We expect this indicator

to revert to slightly positive in 2002, including the EUR4.6m cash-out related to

the Mil Mil 76 acquisition. Considering 2004, which may be considered a

“normalised” year, the current market cap implies an appealing 11.5% free

cash flow yield.

The announced DPS of EUR0.20 (EUR0.18 per share in 2001), 58% pay-out,

implies a 3.9% dividend yield.

Table 18: Cash Flow Statement

(EURm) 2000 2001 2002E 2003E 2004E 2005E

NFP at year beginning (8.9) 8.8 18.5 19.3 16.7 9.6

Net income 6.3 4.6 6.0 7.5 8.2 9.0Depreciation & amortisation 2.8 5.2 5.2 5.3 5.5 5.6Cash from operations 9.1 9.8 11.2 12.8 13.7 14.7Change in working capital 3.4 (16.6) (2.7) (4.9) (1.0) (1.0)Trading cash flow 12.5 (6.8) 8.4 7.9 12.7 13.6Capex (1.2) (0.2) (1.7) (2.4) (2.6) (2.7)Financials (22.6) 0.0 (4.6) 0.0 0.0 0.0Free cash flow (11.4) (7.0) 2.1 5.5 10.1 10.9Dividends (4.0) (3.0) (3.1) (3.4) (3.6) (3.8)Changes in other sources (2.2) 0.2 0.1 0.5 0.6 0.6Change in cash (17.6) (9.8) (0.8) 2.6 7.1 7.7

NFP at year end 8.8 18.5 19.3 16.7 9.6 1.9

Market cap 94.9 88.2 87.7 87.7 87.7 87.7

Free cash flow/Mkt cap -12.0% -7.9% 2.4% 6.3% 11.5% 12.4%Source: Julius Baer estimates

.

Normalised free cash flow yield:

over 10%

DPS 2002E: EUR0.20 per share

(EUR0.18 in 2001)


JULIUS BAER ITALIA

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report may not be reproduced for further publication unless the source is quoted. Further information is available on request.

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not necessarily of other Julius Baer Group entities. Recipients are urged to base their investment decisions upon the appropriate investigations that they

deem necessary, for example, the investments referred to in this publication may not be suitable for all recipients, in the event of any doubt recipients

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arising from the use of this document or its contents.

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approved and distributed to over 500 clients in accordance with art. 69 of CONSOB Regulation 11971/1999 for enforcement of the Consolidation Act on

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Equities discussed are covered on a continuous basis with regular reports at results release. Reports are released on date shown on cover and distributed

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JULIUS BAER ITALIA

Sales by Region Sales by Business Area

Europe 11.79% Haircare 26.3%Africa 7.50% Other 2.6%Asia 1.51% Cosmetics 14.4%Other 0.03% Personal hygiene 56.8%Italy 79.11%

Profit & Loss Account

(EURm) 2001 2002E 2003E 2004ESales 113.9 124.1 144.6 151.1Sales growth (%) 20.9% 9.0% 16.5% 4.5%EBITDA 14.6 16.6 19.5 20.5EBITDA margin (%) 12.9% 13.4% 13.5% 13.5%EBIT 8.8 10.4 13.5 14.3of which goodwill amortisation (3.3) (3.3) (3.3) (3.3)EBIT margin (%) 7.7% 8.4% 9.4% 9.4%Net interest (1.4) (0.5) (0.5) (0.1)Extraordinaries (0.0) 0.0 0.0 0.0Tax (2.8) (4.0) (5.2) (5.7)Tax rate (%) 38.2% 40.0% 40.0% 40.0%Associates 0.0 0.0 0.0 0.0Minorities 0.0 0.0 (0.3) (0.3)Net profit - declared 4.6 6.0 7.5 8.2Net profit - adjusted 4.6 6.0 7.5 8.2

Balance Sheet

(EURm) 2001 2002E 2003E 2004ENet fixed assets 36.0 38.4 35.4 32.5Working capital 31.4 34.1 39.0 40.0Shareholders’ fund 47.0 49.9 53.9 58.5Minorities 0.0 1.3 1.6 1.9Provisions 1.9 2.0 2.3 2.5Net financial position 18.5 19.3 16.7 9.6Gearing 39.4% 37.8% 30.1% 16.0%

Cash Flow Statement

(EURm) 2001 2002E 2003E 2004ECash flow 10.4 12.2 13.5 14.4Working capital requirements (16.6) (2.7) (4.9) (1.0)Capex (1.0) (1.2) (1.3) (1.4)Free operating cash flow (7.2) 8.2 7.3 12.0Financial investments (0.8) 5.1 1.1 1.2Others (1.8) (14.2) (5.7) (6.1)Change in net financial position 9.8 0.8 (2.6) (7.1)

Major ShareholdersRavanelli family, 51%


Activities

Mirato is active in personal care,

commanding significant market

share in Italy in the personal

hygiene, hair care and cosmetics

sectors. The company exports its

products to foreign markets

including Eastern Europe, the

Middle East and Africa.

SWOT Analysis

Strengths− Strong commercial structure.

− Overall flexibility.

− Effective marketing strategy.

Weaknesses− In a very competitive mass-

market: scale.

− Structure already stretched; little

room for further efficiencies.

Opportunities− Strengthening in cosmetics.

− Expansion into new geographical

areas.

Threats− Increase of promotional and

advertising expenses

− The personal care market is

slowing. The outlook for 2003 is

not brilliant.

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