(*) general risks document


My passion for finance was born a long time ago with small savings investments on the stock market starting when I was still a lad. At the beginning I focused on stocks of Italian issuers, then on foreign stocks wherever listed.

At University and while employed at some outstanding banks, financial subjects were studied, with the prestigious CIIA certification and the Unit 1 FSA Financial Regulation Award achieved.

To put ideas into practice developing an industrial firms’ evaluation model, which is based on discounted cash flow (“DCF”), has been found quite useful, while in respect of financial and insurance firms, the “excess return” method has been primarily adopted.

My main objective is to try to understand as simply as possible if a company is overvalued, undervalued or fairly valued when compared to its market price at a given point.

My main focus is on certain data. For example, with reference to industrial firms, the focus is on operating cash flow (“OCF”) and the additions to property, plant and equipment (“CAPEX”) realized during the last twelve trailing months (“ttm”). The free cash flow (“FCF”), that is their difference, is the basis of assessment and by rule has to be recalculated whenever is possible.

A lot of other data from company reports is collected and elaborated. The entire evaluation process, even reasonableness, is nevertheless complex and inevitably implies some margin of discretion, managed with impartiality.

Please note that my opinions aren’t a substitute to autonomous exercise of judgment and of competences. They are to be considered by you in any event and in all circumstances exclusively as one of many factors to be evaluated for your investment decisions or those of your nominee(s) after you have performed your own analysis and evaluations for each single decision.



NAME OF THE PERSON RESPONSIBLE FOR THE PRODUCTION OF THE RECOMMENDATION AND INDIVIDUAL WHO PREPARES THE RECOMMENDATION: SIMONE LUIGI MARIA FUMAGALLI ROMARIO, alias DIAWONDS®  (herein after referred as “the Analyst”), AN INDEPENDENT FINANCIAL ANALYST (JOB TITLE) who, albeit not subject to, adheres to the SELF-REGULATORY STANDARDS/CODES OF CONDUCT OF THE ITALIAN ASSOCIATION OF FINANCIAL ANALYSTS (A.I.A.F.) WHICH CAN BE DIRECTLY ACCESSED BY THE PUBLIC AT http://www.aiaf.it/codice-e-regolamenti (ONLY IN ITALIAN). The recommendation is produced by the Analyst taking care to ensure that: facts are clearly distinguished from interpretations, estimates, opinions and other types of non-factual information; all sources are reliable or, where there is any doubt as to whether a source is reliable, this is clearly indicated; all projections, forecasts and price targets are clearly labelled as such and the material assumptions made in producing or using them are indicated. Substantially used material sources: publicly available information about the relevant issuer (for example, reports known as 10-ks, 10-qs, 20-fs, along with the relevant issuer’s quarterly and annual reports, recent conference call transcripts and presentations the relevant issuer has held). The recommendation isn’t by rule, disclosed to the relevant issuer. If the recommendation is disclosed to the relevant issuer and amended following this disclosure before its dissemination, it is indicated along with the recommendation. Basis of valuation or methodology used to evaluate a financial instrument or an issuer of a financial instrument, or to set a price target for a financial instrument: 1) Fundamental analysis – Intrinsic Valuation (an assessment of the fair value of the company by itself [discounted cash flow]). Future cash flows are estimated and a number of variables including risk assessment and structure of the company’s capital are incorporated. Then the present value of a company’s stock is determined and compared to its current price. The result: the intrinsic value of a company’s stock. In respect of financial service firms, the excess return model is used. In such a model, the value of a firm can be written as the sum of capital invested currently in the firm and the present value of excess returns that the firm expects to make in the future. The excess returns may be defined as follows: Excess Equity return = (Return on equity – Cost of equity) (Equity capital invested); 2) Fundamental analysis – Relative Valuation (assessment of the company value compared to its peers based on my industry classification using appropriate financial ratios (care is taken to categorize companies with similar characteristics such as size.) and a proprietary evaluation model (PEA© – Peers Evaluation Analysis). Sometimes the SWOT (Strengths, Weaknesses, Opportunities and Threats) methodology may be used to evaluate firms. Detailed information about the valuation or methodology and the underlying assumptions of the DCF (discounted cash flow) model (included some samples calculations) and of the WACC (Weighted Average Cost of Capital) notion, are directly and easily accessible at the following virtual place (only in Italian): http://www.borsaitaliana.it/notizie/sotto-la-lente/metodo-dcf-discounted-cash-flow140.htm; http://www.borsaitaliana.it/notizie/sotto-la-lente/metodo-dcf-caso-pratico141.htm; http://www.borsaitaliana.it/notizie/sotto-la-lente/costo-medio-ponderato139.htm. Material information about the proprietary model PEA© Peers Evaluation Analysis, are directly and easily accessible at the following virtual place (only in Italian): http://www.consulenteindipendente.com/pea_it.html. When a target price is set, the Analyst estimates both the specific risk/reward profile of the issuer or the financial instrument (primarily by the means of the fundamental analysis) and the systematic (or market) risk/reward profile (primarily by the means of the macroeconomic analysis); the Analyst also weights each single component of the cumulative estimated risk/reward. The evaluation of systematic risk/reward profile and the weighting process are uncertain by nature and they are characterized by an high degree of subjectivity; for example the weights vary over time with the greatest contribution when periodic results or material information are disclosed to the market by the issuer. Detailed information about the concept of specific and systematic risk are directly and easily accessible at the following virtual place (only in Italian):http://www.borsaitaliana.it/bitApp/glossary.bit?target=GlossaryDetail&word=Rischio%20Specifico;http://www.borsaitaliana.it/bitApp/glossary.bit?target=GlossaryDetail&word=Rischio%20Sistematico. Meaning of recommendation made:  buy – actual price should be higher; sell – actual price should be lower; hold – actual price is believed to be fair or roughly fair. Ranking system of estimated value versus price: under 16% / from 11% to 16% lower / from 6% to 10% lower / close / from 6% to 10% higher / from 11% to 16% higher / over 16%. When a target price is set, the meaning of the recommendations to “buy”, “sell” or “hold”, is that the Analyst, for the length of time of the investment to which the recommendations relate, expects that the market price of the financial instrument may reach (recommendations to “buy” or “sell”) the target price or stay unchanged (recommendation to “hold”). The meaning of the recommendation to “avoid” is that the Analyst believes that it is impossible to deliver any opinion on the value of the issuer. Principles of valuation: the valuation process is kept as simple as possible. In respect of non-financial services firms and non-insurance services firms, the main focus is on the free cash flows for the last twelve trailing months or FCF (defined as net cash provided by operating activities or OCF less purchases of property, plant and equipment or CAPEX) and on the estimate of a sustainable annual growth rate of the firm for the short and medium term or CFG, based primarily on the observation of the evolution of its past data. The projection of the sustainable growth rate to the future is intended as a substitute of more sophisticated forecasts methods. Sometimes more  sophisticated forecasts methods are employed.  FCF is a useful measure of performance that may be used as an indication of the strength of a company and its ability to generate cash. Among relevant assumptions, the following are usually also estimated: WACC - Weighted Average Cost of Capital; CFG – sustainable annual growth rate of the free cash flows up to a 10 year projection; PGR – perpetual annual growth rate of the free cash flows beyond 10 years; OLC - operating lease converted into debt; UPO - Retirement/Postretirement unfunded obligations; SOV - Stock Options Value and of the RSU (Restricted Stock Units). In respect of financial and insurance services firms: MPR – modified dividend payout ratio; ROE – return on Equity; COE – cost of Equity; Spread – ROE minus COE; TG – perpetual annual growth rate of the excess return beyond 10 years. Time horizon of the investment to which the recommendations relate: until the publication of the periodic results by the issuer (quarterly, semi-annual and annual) subsequent to those already known at the time of the production of the single recommendations or until any eventual communication of material facts and/or information (price-sensitive) by the issuer (or by third parties in any way connected to it) to the market, if earlier. Risk warning: general risks in the investments may be accessed here. Specific risks are disclosed within the companies’ reports. Every reasonable investor should always bear in mind that investors may not get back the full amount invested, as prices of shares and the income from them may fall as well as rise. Equity securities are more volatile than bonds and subject to greater risks. Small and mid-sized company stocks involve greater risks than those customarily associated with larger companies. Bonds are subject to interest-rate, price and credit risks. Prices tend to be inversely affected by changes in interest rates. Exchange rate changes may cause the value of any overseas investments to rise or fall. Past performance is not a guide to future performance and may not be repeated. Sensitivity analysis of the relevant assumptions: included in the single recommendation in a clear and prominent manner (it refers exclusively to the specific risk and therefore may be only partially meaningful). Frequency of updates of the recommendations: no specific frequency of updates of the recommendations is, by rule, planned. However if planned, it is indicated along with the recommendation. Further disclosures indicated in the recommendations: major changes in the policy cover previously announced; the date at which the recommendation was first released for distribution; the relevant date and time for any financial instrument price mentioned; the change and the date of the earlier recommendation where a recommendation differs from a recommendation concerning the same financial instrument or issuer, issued during the 12-month period immediately preceding its release. Relationships and circumstances that may reasonably be expected to impair objectivity of the recommendations: THE ANALYST DOESN’T HAVE, BY RULE, ANY SIGNIFICANT FINANCIAL INTEREST IN ANY FINANCIAL INSTRUMENT WHICH IS THE SUBJECT OF THE RECOMMENDATION, NOR A SIGNIFICANT CONFLICT OF INTEREST WITH THE ISSUER. THE ANALYST DOESN’T OWN, BY RULE, ANY NET POSITION (LONG OR SHORT) EXCEEDING THE THRESHOLD OF 0,5 % OF THE TOTAL ISSUED SHARE CAPITAL OF THE ISSUER, CALCULATED IN ACCORDANCE WITH PERTINENT REGULATIONS; NO SIGNIFICANT FINANCIAL INTERESTS HELD BY THE ANALYST EXISTS, IN RELATION TO THE ISSUER. THE ANALYST ISN’T, BY RULE, PARTY WITH THE ISSUER TO ANY AGREEMENT: RELATING TO THE PROVISION OF FINANCIAL OR INVESTMENT BANKING SERVICES; IN EFFECT, DURING THE 12 MONTHS BEFORE THE RECOMMENDED RELEASE OR GIVING RISE DURING THE SAME PERIOD TO THE PAYMENT OF COMPENSATION OR TO THE PROMISE TO GET COMPENSATION PAID; RELATING TO THE PRODUCTION OF THE RECOMMENDATION. IN SPECIFIC CASES, RELATIONSHIPS AND CIRCUMSTANCES THAT MAY REASONABLY BE EXPECTED TO IMPAIR OBJECTIVITY OF THE RECOMMENDATION, IF ANY, ARE INDICATED IN THE RECOMMENDATION ITSELF.


Reference date: 16 June 2016 (revised).