ISRA Vision

(CDAX, Technology)

A n a l y s t

Andreas Wolf

awolf@warburg-research.com

+49 40 309537-140

CO M M E N T Published 01.03.2018 08:15 1

Hold

EUR 205.00

Price EUR 199.80

Upside 2.6 %

Value Indicators: EUR Share data: Description:

DCF: 207.78

FCF-Value Potential 20e: 111.46

Bloomberg: ISR GR

Reuters: ISRG

ISIN: DE0005488100

Machine vision systems, optical robot guidance systems.

Market Snapshot: EUR m Shareholders: Risk Profile (WRe): 2017/18e

Market cap: 875.0

No. of shares (m): 4.4

EV: 850.8

Freefloat MC: 612.5

Ø Trad. Vol. (30d): 2.96 m

Freefloat 70.0 %

CEO 25.2 %

ISRA VISION Management 4.8 %

Fidelity 9.0 %

Beta: 1.2

Price / Book: 4.0 x

Equity Ratio: 69 %

Q1: ISRA runs like clockwork

Stated Figures Q4/2016/17: Comment on Figures: � Industrial Automation: Despite high comparables which were created

by growth of >40% in Q1 last year, ISRA has achieved attractive growth of 10% in this segment. In this segment, ISRA serves a broad customer base of international car manufacturers - including renowned premium manufacturers - as well as industry leaders from other sectors.

� Surface Vision continues to grow at its typical pace of nearly 10%. � Regions: Growth was especially strong in Europe as well as Asia while

the Americas have room for improvement.

� ISRA’s Q1 figures have marked a solid start to the year. Revenue growth of 10% was evenly split between both segments. At a pace of 11%

EBT grew slightly higher than proportionally. Both figures are in line with the full year guidance which anticipates double-digit organic growth

with at least stable margins – the same target as in previous years.

� While the order book declined by some EUR 7m yoy to EUR 83m, management has highlighted its expectation of larger orders in the near

future. Especially for inspection solutions for smart phone and tablet touch screens supplemented with new developments for the quality

assurance of modern display designs, ISRA is currently expecting further orders entries. These will feed the revenue development in the

Industrial Automation segment contributing to double-digit growth rates at group level.

� Free cash flow reached approx. EUR 1.1m (vs. EUR -1.3m in Q1 last year) supporting ISRA’s net cash creation: at the end of 2017 ISRA

has entered the net cash territory. This development was supported by ISRA’s ongoing efficiency gains and working capital optimisation.

Flanked by this progress, ISRA will propose a higher dividend of EUR 0.59.

� On the call management has confirmed its medium-term revenue target of EUR 200m which might be reached within three years confirming

our estimates. Acquisitions might accelerate growth. A recent example of a takeover was Polymetric which should accelerate business in the

medical vertical. While the company is relatively small given annual revenues of approx. EUR 1-2m, it will also trigger additional sales of ISRA

products. Furthermore, ISRA can leverage its worldwide salesforce to scale Polymetric’s outstanding technology in areas such as 3D

scanning. Thus, newsflow should remain intact. As ISRA shares are trading close to our PT, the Hold rating is being confirmed.

in EUR m Q1/ 18 Q1/ 17 yoy 2018e 2017 yoy

Sales 31.2 28.5 9.8% 159.2 143.0 11.3%

EB IT D A 10.0 9.1 9.7% 46.8 42.8 9.3%

margin 31.8% 31.9% 29.4% 30.0%

EB T 6.2 5.6 11.3% 33.7 28.0 20.3%

margin 19.9% 19.6% 21.2% 19.6%

Industria l A uto matio n 7.8 7.1 9.9% 43.5 37.2 17.0%

Surface Vis io n 23.4 21.3 9.9% 115.6 105.8 9.3%

FY End: 30.9. in EUR m

CAGR (16/17-19/20e) 2013/14 2014/15 2015/16 2016/17 2017/18e 2018/19e 2019/20e

Sales 12.0 % 102.5 112.2 128.8 143.0 159.2 178.6 200.8

Change Sales yoy 14.4 % 9.5 % 14.8 % 11.0 % 11.3 % 12.2 % 12.4 %

Gross profit margin 55.2 % 55.8 % 56.4 % 56.6 % 57.8 % 58.0 % 58.0 %

EBITDA 11.4 % 36.5 32.4 37.7 42.8 46.8 52.2 59.2

Margin 35.7 % 28.9 % 29.3 % 30.0 % 29.4 % 29.3 % 29.5 %

EBIT 17.3 % 20.1 22.6 25.6 28.3 33.9 38.7 45.7

Margin 19.6 % 20.1 % 19.9 % 19.8 % 21.3 % 21.7 % 22.7 %

Net income 14.7 % 13.0 14.8 17.6 20.5 22.9 26.2 30.9

EPS 14.7 % 2.98 3.39 4.01 4.68 5.23 5.99 7.07

EPS adj. 14.7 % 2.98 3.39 4.01 4.68 5.23 5.99 7.07

DPS 5.9 % 0.39 0.41 0.48 0.59 0.65 0.70 0.70

Dividend Yield 0.9 % 0.8 % 0.7 % 0.5 % 0.3 % 0.4 % 0.4 %

FCFPS 3.03 -0.52 4.26 4.66 2.43 6.43 5.12

FCF / Market cap 6.7 % -1.0 % 6.4 % 3.7 % 1.2 % 3.2 % 2.6 %

EV / Sales 2.2 x 2.4 x 2.5 x 3.9 x 5.3 x 4.6 x 4.0 x

EV / EBITDA 6.3 x 8.5 x 8.4 x 13.0 x 18.2 x 15.8 x 13.6 x

EV / EBIT 11.5 x 12.2 x 12.4 x 19.7 x 25.1 x 21.3 x 17.7 x

P / E 15.2 x 15.9 x 16.7 x 27.0 x 38.2 x 33.4 x 28.3 x

P / E adj. 15.2 x 15.9 x 16.7 x 27.0 x 38.2 x 33.4 x 28.3 x

FCF Potential Yield 8.9 % 5.6 % 6.1 % 4.3 % 2.8 % 3.3 % 3.9 %

Net Debt 31.6 38.1 23.2 4.6 -24.1 -49.4 -68.7

ROCE (NOPAT) 8.8 % 8.9 % 9.9 % 11.5 % 12.2 % 13.4 % 15.5 % Guidance: 2017/18: Revenue growth of approx. 10%, at least stable margins

Rel. Performance vs CDAX:

1 month: 8.5 %

6 months: 36.0 %

Year to date: -2.9 %

Trailing 12 months: 58.0 %

Company events:

28.03.18 AGM

30.05.18 Q2

31.08.18 Q3

14.12.18 Prel. FY 2017/18

ISRA Vision

CO M M E N T Publ ished 01 .03 .2018 2

Sales development in EUR m

Source: Warburg Research

Sales by regions 2016/17

Source: Warburg Research

EBIT development in EUR m

Source: Warburg Research

Company Background

� Global leader in concentrated niche markets for optical surface inspection systems such as flat glass inspection, metals inspection or

paper inspection. European leader in 3D machine vision.

� These systems have very short amortisation periods of typically less than six months due to significant cost savings and yield

improvements.

� ISRA Vision's impressive track record of generating double-digit sales growth and double-digit EBIT margins is driven by a largely

untapped market (penetration only c. 15-20%) and a strong trend towards automation.

� Management’s interests are aligned with shareholder interest as the CEO owns 25% of the company.

Competitive Quality

� Strong competitive position based on ISRA Vision's relatively large size and more than 6,000 reference installations.

� Key customers are large, globally active blue chip industrial companies who value the one-stop-shop approach which few apart from

the larger suppliers can deliver.

� Strong global sales and service network, which is constantly being expanded.

� Competitive defence through high R&D expenditure of 20% of revenues.

� Diversification via technology, industry and region limits its dependencies in weak economic periods, as proved by the company’s

double-digit EBIT margin even in crisis year 2008/09.

Order book in EUR m

Source: Warburg Research

Sales by segments 2016/17

Source: Warburg Research

Net income development in EUR m

Source: Warburg Research

ISRA Vision

CO M M E N T Publ ished 01 .03 .2018 3

DCF model

Detailed forecast period Transitional period Term. Value

Figures in EUR m 17/18e 18/19e 19/20e 20/21e 21/22e 22/23e 23/24e 24/25e 25/26e 26/27e 27/28e 28/29e 29/30e

Sales 159.2 178.6 200.8 224.9 251.9 281.5 314.0 349.4 388.1 430.2 475.9 525.5 579.2

Sales change 11.3 % 12.2 % 12.4 % 12.0 % 12.0 % 11.8 % 11.5 % 11.3 % 11.1 % 10.8 % 10.6 % 10.4 % 10.2 % 2.0 %

EBIT 33.9 38.7 45.7 50.6 56.7 63.3 70.6 78.6 87.3 96.8 107.1 118.2 130.3

EBIT-margin 21.3 % 21.7 % 22.7 % 22.5 % 22.5 % 22.5 % 22.5 % 22.5 % 22.5 % 22.5 % 22.5 % 22.5 % 22.5 %

Tax rate (EBT) 31.4 % 31.4 % 31.4 % 31.4 % 31.4 % 31.4 % 31.4 % 31.4 % 31.4 % 31.4 % 31.4 % 31.4 % 31.4 %

NOPAT 23.3 26.6 31.3 34.7 38.9 43.5 48.5 53.9 59.9 66.4 73.5 81.1 89.4

Depreciation 12.9 13.5 13.5 16.2 20.7 23.9 26.7 29.7 33.0 36.6 40.5 44.7 49.2

in % of Sales 8.1 % 7.6 % 6.7 % 7.2 % 8.2 % 8.5 % 8.5 % 8.5 % 8.5 % 8.5 % 8.5 % 8.5 % 8.5 %

Changes in provisions 0.9 0.1 0.0 0.5 0.6 0.6 0.7 0.8 0.8 0.9 1.0 1.1 1.2

Change in Liquidity from

- Working Capital 7.3 2.8 5.4 4.2 8.1 2.2 16.2 17.7 19.3 21.0 22.9 24.8 26.8

- Capex 17.0 17.8 18.4 20.2 22.7 25.3 28.3 31.4 34.9 38.7 42.8 47.3 52.1

Capex in % of Sales 10.7 % 9.9 % 9.2 % 9.0 % 9.0 % 9.0 % 9.0 % 9.0 % 9.0 % 9.0 % 9.0 % 9.0 % 9.0 %

Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Free Cash Flow (WACC Model)

12.7 19.6 21.0 27.0 29.4 40.5 31.4 35.2 39.5 44.1 49.2 54.8 60.8 86

PV of FCF 12.6 18.1 18.1 21.6 21.8 27.9 20.1 21.0 21.9 22.7 23.6 24.4 25.2 637 share of PVs 5.33 % 25.13 % 69.54 %

Model parameter Valuation (m)

Derivation of WACC: Derivation of Beta: Present values 2029/30e 279

Terminal Value 637

Debt ratio 4.00 % Financial Strength 1.15 Financial liabilities 31

Cost of debt (after tax) 1.4 % Liquidity (share) 1.15 Pension liabilities 3

Market return 7.00 % Cyclicality 1.15 Hybrid capital 0

Risk free rate 1.50 % Transparency 1.15 Minority interest 2

Others 1.15 Market val. of investments 0

Liquidity 30 No. of shares (m) 4.4

WACC 7.57 % Beta 1.15 Equity Value 910 Value per share (EUR) 207.78

Sensitivity Value per Share (EUR)

Terminal Growth Delta EBIT-margin

Beta WACC 1.25 % 1.50 % 1.75 % 2.00 % 2.25 % 2.50 % 2.75 % Beta WACC -1.5 pp -1.0 pp -0.5 pp +0.0 pp +0.5 pp +1.0 pp +1.5 pp

1.34 8.6 % 157.57 161.07 164.83 168.87 173.24 177.96 183.09 1.34 8.6 % 155.28 159.81 164.34 168.87 173.40 177.93 182.47

1.24 8.1 % 172.73 177.01 181.63 186.62 192.05 197.96 204.43 1.24 8.1 % 171.72 176.69 181.66 186.62 191.59 196.56 201.52

1.20 7.8 % 181.26 186.00 191.14 196.72 202.80 209.45 216.76 1.20 7.8 % 181.08 186.29 191.51 196.72 201.93 207.15 212.36

1.15 7.6 % 190.51 195.79 201.53 207.78 214.62 222.14 230.44 1.15 7.6 % 191.33 196.82 202.30 207.78 213.27 218.75 224.23

1.10 7.3 % 200.58 206.48 212.91 219.95 227.68 236.21 245.68 1.10 7.3 % 202.61 208.39 214.17 219.95 225.72 231.50 237.28

1.06 7.1 % 211.57 218.19 225.42 233.38 242.15 251.89 262.76 1.06 7.1 % 215.06 221.17 227.27 233.38 239.48 245.59 251.69

0.96 6.6 % 236.87 245.29 254.57 264.88 276.38 289.29 303.89 0.96 6.6 % 244.27 251.14 258.01 264.88 271.75 278.62 285.48

� Sales growth looks set to remain clearly above GDP growth driven by automation trend and need to increase efficiency.

� EBIT margins are assumed to remain at high levels driven by sales growth and operating leverage.

� Margins look set to erode slightly thereafter assuming increased competitiveness, partly defended by the company’s R&D.

� Working capital requirements are expected to remain at high levels owing to the customer structure.

ISRA Vision

CO M M E N T Publ ished 01 .03 .2018 4

Free Cash Flow Value Potential Warburg Research's valuation tool "FCF Value Potential" reflects the ability of the company to generate sustainable free cash flows. It is based on the "FCF potential" - a FCF "ex growth" figure - which assumes unchanged working capital and pure maintenance capex. A value indication is derived via the perpetuity of a given year’s “FCF potential” with consideration of the weighted costs of capital. The fluctuating value indications over time add a timing element to the DCF model (our preferred valuation tool). in EUR m 2013/14 2014/15 2015/16 2016/17 2017/18e 2018/19e 2019/20e

Net Income before minorities 13.1 14.8 17.8 20.7 22.9 26.2 30.9

+ Depreciation + Amortisation 16.5 9.8 12.1 14.5 12.9 13.5 13.5

- Net Interest Income -0.9 -0.7 -0.4 -0.3 -0.2 -0.1 -0.1

- Maintenance Capex 10.0 10.1 11.0 11.7 11.9 12.4 12.9

+ Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0

= Free Cash Flow Potential 20.5 15.2 19.3 23.9 24.1 27.4 31.7

FCF Potential Yield (on market EV) 8.9 % 5.6 % 6.1 % 4.3 % 2.8 % 3.3 % 3.9 %

WACC 7.57 % 7.57 % 7.57 % 7.57 % 7.57 % 7.57 % 7.57 %

= Enterprise Value (EV) 229.8 274.2 316.5 558.6 850.8 825.6 806.3 = Fair Enterprise Value 271.3 201.3 255.5 315.3 318.4 362.3 418.5

- Net Debt (Cash) 1.3 1.3 1.3 1.3 -28.4 -53.8 -73.1

- Pension Liabilities 3.4 3.4 3.4 3.4 4.3 4.4 4.4

- Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0

- Market value of minorities 0.0 0.0 0.0 0.0 0.0 0.0 0.0

+ Market value of investments 0.0 0.0 0.0 0.0 0.0 0.0 0.0

= Fair Market Capitalisation 266.7 196.7 250.8 310.7 342.5 411.7 487.2

Aktienanzahl (Mio.) 4.4 4.4 4.4 4.4 4.4 4.4 4.4

= Fair value per share (EUR) 60.88 45.00 57.28 70.94 78.22 94.00 111.25

premium (-) / discount (+) in % -60.9 % -53.0 % -44.3 %

Sensitivity Fair value per Share (EUR)

9.07 % 52.08 38.02 48.01 59.09 66.17 80.29 95.63

8.57 % 55.19 40.31 50.87 62.60 69.71 84.32 100.29

8.07 % 58.67 42.87 54.09 66.55 73.68 88.85 105.53

WACC 7.57 % 62.62 45.78 57.73 71.01 78.19 93.98 111.46

7.07 % 67.13 49.09 61.89 76.11 83.33 99.83 118.24

6.57 % 72.33 52.91 66.69 81.99 89.25 106.57 126.04

6.07 % 78.38 57.36 72.27 88.83 96.16 114.43 135.14

� A high market share in its targeted niche markets has created barriers to market entry.

� The beta takes the low liquidity into account.

ISRA Vision

CO M M E N T Publ ished 01 .03 .2018 5

Valuation

2013/14 2014/15 2015/16 2016/17 2017/18e 2018/19e 2019/20e

Price / Book 1.5 x 1.6 x 1.9 x 3.2 x 4.0 x 3.6 x 3.2 x

Book value per share ex intangibles 6.88 8.60 11.02 14.54 23.44 27.76 33.19

EV / Sales 2.2 x 2.4 x 2.5 x 3.9 x 5.3 x 4.6 x 4.0 x

EV / EBITDA 6.3 x 8.5 x 8.4 x 13.0 x 18.2 x 15.8 x 13.6 x

EV / EBIT 11.5 x 12.2 x 12.4 x 19.7 x 25.1 x 21.3 x 17.7 x

EV / EBIT adj.* 11.5 x 12.2 x 12.4 x 19.7 x 25.1 x 21.3 x 17.7 x

P / FCF 14.9 x n.a. 15.7 x 27.1 x 82.3 x 31.1 x 39.0 x

P / E 15.2 x 15.9 x 16.7 x 27.0 x 38.2 x 33.4 x 28.3 x

P / E adj.* 15.2 x 15.9 x 16.7 x 27.0 x 38.2 x 33.4 x 28.3 x

Dividend Yield 0.9 % 0.8 % 0.7 % 0.5 % 0.3 % 0.4 % 0.4 %

FCF Potential Yield (on market EV) 8.9 % 5.6 % 6.1 % 4.3 % 2.8 % 3.3 % 3.9 %

*Adjustments made for: -

Company Specific Items

2013/14 2014/15 2015/16 2016/17 2017/18e 2018/19e 2019/20e

Order book 69.0 80.0 85.0 90.0 n.a. n.a. n.a.

ISRA Vision

CO M M E N T Publ ished 01 .03 .2018 6

Consolidated profit and loss In EUR m 2013/14 2014/15 2015/16 2016/17 2017/18e 2018/19e 2019/20e

Sales 102.5 112.2 128.8 143.0 159.2 178.6 200.8

Change Sales yoy 14.4 % 9.5 % 14.8 % 11.0 % 11.3 % 12.2 % 12.4 % COGS 45.9 49.7 56.1 62.1 67.2 75.0 84.3

Gross profit 56.6 62.6 72.7 80.9 92.0 103.6 116.5

Gross margin 55.2 % 55.8 % 56.4 % 56.6 % 57.8 % 58.0 % 58.0 %

Research and development 13.5 15.2 18.2 20.3 22.6 25.1 27.1

Sales and marketing 19.6 21.2 25.3 28.3 31.4 35.2 39.6

Administration expenses 4.9 4.6 4.9 5.0 5.9 6.4 6.0

Other operating expenses 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other operating income 1.4 0.9 1.2 1.1 1.8 1.9 1.9

Unfrequent items 0.0 0.0 0.0 0.0 0.0 0.0 0.0

EBITDA 36.5 32.4 37.7 42.8 46.8 52.2 59.2

Margin 35.7 % 28.9 % 29.3 % 30.0 % 29.4 % 29.3 % 29.5 %

Depreciation of fixed assets 1.1 1.4 1.4 2.3 2.4 2.5 2.5

EBITA 35.4 31.0 36.3 40.5 44.4 49.7 56.7

Amortisation of intangible assets 15.4 8.5 10.7 12.2 10.5 11.0 11.0

Goodwill amortisation 0.0 0.0 0.0 0.0 0.0 0.0 0.0

EBIT 20.1 22.6 25.6 28.3 33.9 38.7 45.7

Margin 19.6 % 20.1 % 19.9 % 19.8 % 21.3 % 21.7 % 22.7 %

EBIT adj. 20.1 22.6 25.6 28.3 33.9 38.7 45.7

Interest income 0.1 0.0 0.0 0.0 0.1 0.1 0.1

Interest expenses 0.9 0.8 0.5 0.3 0.3 0.2 0.2

Other financial income (loss) 0.0 0.0 0.0 0.0 0.0 0.0 0.0

EBT 19.2 21.8 25.2 28.0 33.7 38.6 45.6

Margin 18.7 % 19.5 % 19.5 % 19.6 % 21.2 % 21.6 % 22.7 %

Total taxes 6.0 7.1 7.4 7.3 10.8 12.4 14.6

Net income from continuing operations 13.2 14.8 17.8 20.7 22.9 26.2 30.9

Income from discontinued operations (net of tax) 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net income before minorities 13.2 14.8 17.8 20.7 22.9 26.2 30.9

Minority interest 0.1 0.0 0.2 0.2 0.0 0.0 0.0

Net income 13.0 14.8 17.6 20.5 22.9 26.2 30.9

Margin 12.7 % 13.2 % 13.6 % 14.3 % 14.4 % 14.7 % 15.4 % Number of shares, average 4.4 4.4 4.4 4.4 4.4 4.4 4.4

EPS 2.98 3.39 4.01 4.68 5.23 5.99 7.07

EPS adj. 2.98 3.39 4.01 4.68 5.23 5.99 7.07

*Adjustments made for:

Guidance: 2017/18: Revenue growth of approx. 10%, at least stable margins

Financial Ratios 2013/14 2014/15 2015/16 2016/17 2017/18e 2018/19e 2019/20e

Total Operating Costs / Sales 35.6 % 35.7 % 36.6 % 36.8 % 36.5 % 36.3 % 35.3 %

Operating Leverage 1.1 x 1.3 x 0.9 x 1.0 x 1.7 x 1.2 x 1.4 x

EBITDA / Interest expenses 39.4 x 42.8 x 79.0 x 144.2 x 156.1 x 261.2 x 295.9 x

Tax rate (EBT) 31.4 % 32.3 % 29.4 % 26.1 % 32.1 % 32.1 % 32.1 %

Dividend Payout Ratio 13.0 % 12.1 % 11.8 % 12.5 % 12.4 % 11.7 % 9.9 %

Sales per Employee n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Sales, EBITDA in EUR m

Source: Warburg Research

Operating Performance in %

Source: Warburg Research

Performance per Share

Source: Warburg Research

ISRA Vision

CO M M E N T Publ ished 01 .03 .2018 7

Consolidated balance sheet In EUR m 2013/14 2014/15 2015/16 2016/17 2017/18e 2018/19e 2019/20e

Assets

Goodwill and other intangible assets 98.0 105.6 109.6 111.7 116.7 121.7 127.2

thereof other intangible assets 0.0 0.0 0.0 0.0 5.0 10.0 15.5

thereof Goodwill 38.3 38.9 38.9 38.9 38.9 38.9 38.9

Property, plant and equipment 5.9 6.2 5.7 5.2 4.3 3.6 3.0

Financial assets 5.0 4.8 3.9 4.2 4.2 4.2 4.2

Other long-term assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Fixed assets 108.9 116.6 119.2 121.1 125.2 129.5 134.4

Inventories 28.0 30.7 33.7 32.7 35.4 35.7 40.2

Accounts receivable 70.2 86.8 88.5 98.0 104.7 107.7 110.0

Liquid assets 11.2 15.1 16.9 29.7 53.4 68.8 88.1

Other short-term assets 4.2 7.1 5.5 3.4 3.4 3.5 3.5

Current assets 113.6 139.7 144.7 163.9 197.0 215.6 241.8

Total Assets 222.5 256.3 263.8 285.0 322.2 345.1 376.2

Liabilities and shareholders' equity

Subscribed capital 4.4 4.4 4.4 4.4 4.4 4.4 4.4

Capital reserve 38.6 38.6 38.8 38.8 38.8 38.8 38.8

Retained earnings 71.1 82.4 97.1 111.6 132.0 155.4 183.2

Other equity components 14.1 17.8 17.6 20.5 44.2 44.7 46.1

Shareholders' equity 128.2 143.2 157.8 175.3 219.3 243.2 272.5

Minority interest 1.3 1.3 1.5 1.7 1.7 1.7 1.7

Total equity 129.5 144.5 159.3 177.0 221.1 245.0 274.2

Provisions 6.3 5.7 9.2 9.2 10.8 11.2 11.6

thereof provisions for pensions and similar obligations 2.9 3.1 4.1 3.4 4.3 4.4 4.4

Financial liabilities (total) 40.0 50.1 36.0 31.0 25.0 15.0 15.0

thereof short-term financial liabilities 32.0 50.1 36.0 31.0 25.0 15.0 15.0

Accounts payable 8.7 11.8 12.4 18.1 20.1 20.6 22.0

Other liabilities 37.9 44.2 46.9 49.8 45.3 53.3 53.3

Liabilities 92.9 111.8 104.5 108.0 101.2 100.1 101.9

Total liabilities and shareholders' equity 222.5 256.3 263.8 285.0 322.2 345.1 376.2

Financial Ratios 2013/14 2014/15 2015/16 2016/17 2017/18e 2018/19e 2019/20e

Efficiency of Capital Employment

Operating Assets Turnover 1.1 x 1.0 x 1.1 x 1.2 x 1.3 x 1.4 x 1.6 x

Capital Employed Turnover 0.6 x 0.6 x 0.7 x 0.8 x 0.8 x 0.9 x 1.0 x

ROA 12.0 % 12.7 % 14.7 % 16.9 % 18.3 % 20.3 % 23.0 %

Return on Capital

ROCE (NOPAT) 8.8 % 8.9 % 9.9 % 11.5 % 12.2 % 13.4 % 15.5 %

ROE 10.7 % 10.9 % 11.7 % 12.3 % 11.6 % 11.3 % 12.0 %

Adj. ROE 10.7 % 10.9 % 11.7 % 12.3 % 11.6 % 11.3 % 12.0 %

Balance sheet quality

Net Debt 31.6 38.1 23.2 4.6 -24.1 -49.4 -68.7

Net Financial Debt 28.8 35.0 19.0 1.3 -28.4 -53.8 -73.1

Net Gearing 24.4 % 26.4 % 14.5 % 2.6 % -10.9 % -20.1 % -25.1 %

Net Fin. Debt / EBITDA 78.7 % 108.1 % 50.5 % 2.9 % n.a. n.a. n.a.

Book Value / Share 29.3 32.8 36.0 40.0 50.1 55.5 62.2

Book value per share ex intangibles 6.9 8.6 11.0 14.5 23.4 27.8 33.2

ROCE Development

Source: Warburg Research

Net debt in EUR m

Source: Warburg Research

Book Value per Share in EUR

Source: Warburg Research

ISRA Vision

CO M M E N T Publ ished 01 .03 .2018 8

Consolidated cash flow statement In EUR m 2013/14 2014/15 2015/16 2016/17 2017/18e 2018/19e 2019/20e

Net income 13.1 14.8 17.8 20.7 22.9 26.2 30.9

Depreciation of fixed assets 1.1 1.4 1.4 2.3 2.4 2.5 2.5

Amortisation of goodwill 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Amortisation of intangible assets 15.4 8.5 10.7 12.2 10.5 11.0 11.0

Increase/decrease in long-term provisions 0.0 0.0 0.0 0.0 0.9 0.1 0.0

Other non-cash income and expenses 5.7 11.4 0.3 -3.4 0.0 0.0 0.0

Cash Flow before NWC change 35.3 36.0 30.2 31.9 36.7 39.8 44.4

Increase / decrease in inventory -2.1 -2.5 -3.0 1.1 -2.7 -0.3 -4.5

Increase / decrease in accounts receivable -7.1 -18.5 -0.3 -9.1 -6.7 -3.0 -2.3

Increase / decrease in accounts payable 1.4 -3.6 6.5 14.6 2.0 0.5 1.4

Increase / decrease in other working capital positions 0.0 0.6 1.0 -1.4 -1.7 8.9 1.8

Increase / decrease in working capital (total) -7.8 -23.9 4.1 5.2 -9.1 6.1 -3.6

Net cash provided by operating activities [1] 27.5 12.2 34.3 37.1 27.6 45.9 40.8

Investments in intangible assets -12.8 -13.3 -14.8 -15.7 -15.5 -16.0 -16.5

Investments in property, plant and equipment -1.4 -1.1 -0.9 -1.0 -1.5 -1.8 -1.9

Payments for acquisitions -0.8 -2.2 0.0 0.0 0.0 0.0 0.0

Financial investments 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Income from asset disposals 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net cash provided by investing activities [2] -15.0 -16.6 -15.6 -16.7 -17.0 -17.8 -18.4

Change in financial liabilities -0.5 10.1 -14.1 -5.0 -6.0 -10.0 0.0

Dividends paid -1.5 -1.7 -1.8 -2.1 -2.6 -2.8 -3.1

Purchase of own shares -0.2 0.2 -0.1 0.0 0.0 0.0 0.0

Capital measures 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other -1.1 -0.7 -0.4 -0.3 0.0 0.0 0.0

Net cash provided by financing activities [3] -3.3 7.9 -16.4 -7.4 -8.6 -12.8 -3.1

Change in liquid funds [1]+[2]+[3] 9.2 3.5 2.2 13.0 2.1 15.3 19.4

Effects of exchange-rate changes on cash 0.0 0.5 -0.5 -0.2 0.0 0.0 0.0

Cash and cash equivalent at end of period 32.9 36.8 38.6 51.4 53.4 68.8 88.1

Financial Ratios 2013/14 2014/15 2015/16 2016/17 2017/18e 2018/19e 2019/20e

Cash Flow

FCF 13.3 -2.3 18.7 20.4 10.6 28.2 22.4

Free Cash Flow / Sales 12.9 % -2.0 % 14.5 % 14.3 % 6.7 % 15.8 % 11.2 %

Free Cash Flow Potential 20.5 15.2 19.3 23.9 24.1 27.4 31.7

Free Cash Flow / Net Profit 101.7 % -15.4 % 106.3 % 99.5 % 46.5 % 107.3 % 72.5 %

Interest Received / Avg. Cash 0.6 % 0.3 % 0.3 % 0.0 % 0.2 % 0.2 % 0.1 %

Interest Paid / Avg. Debt 2.3 % 1.7 % 1.1 % 0.9 % 1.1 % 1.0 % 1.3 %

Management of Funds

Investment ratio 13.9 % 12.9 % 12.1 % 11.7 % 10.7 % 9.9 % 9.2 %

Maint. Capex / Sales 9.7 % 9.0 % 8.5 % 8.2 % 7.5 % 7.0 % 6.4 %

Capex / Dep 86.3 % 146.7 % 129.4 % 114.9 % 131.8 % 131.5 % 136.3 %

Avg. Working Capital / Sales 82.7 % 86.1 % 82.5 % 76.5 % 71.9 % 66.9 % 61.5 %

Trade Debtors / Trade Creditors 808.6 % 736.0 % 712.6 % 542.8 % 520.9 % 522.8 % 500.0 %

Inventory Turnover 1.6 x 1.6 x 1.7 x 1.9 x 1.9 x 2.1 x 2.1 x

Receivables collection period (days) 250 282 251 250 240 220 200

Payables payment period (days) 69 87 81 106 109 100 95

Cash conversion cycle (Days) 301 304 278 206 199 169 166

CAPEX and Cash Flow in EUR m

Source: Warburg Research

Free Cash Flow Generation

Source: Warburg Research

Working Capital

Source: Warburg Research

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LEGAL DISCLAIMER

This research report (“investment recommendation”) was prepared by the Warburg Research GmbH, a fully owned subsidiary of the M.M.Warburg &

CO (AG & Co.) KGaA and is passed on by the M.M.Warburg & CO (AG & Co.) KGaA. It is intended solely for the recipient and may not be passed on

to another company without their prior consent, regardless of whether the company is part of the same corporation or not. It contains selected

information and does not purport to be complete. The investment recommendation is based on publicly available information and data ("information")

believed to be accurate and complete. Warburg Research GmbH neither examines the information for accuracy and completeness, nor guarantees its

accuracy and completeness. Possible errors or incompleteness of the information do not constitute grounds for liability of M.M.Warburg & CO (AG &

Co.) KGaA or Warburg Research GmbH for damages of any kind whatsoever, and M.M.Warburg & CO (AG & Co.) KGaA and Warburg Research

GmbH are not liable for indirect and/or direct and/or consequential damages. In particular, neither M.M.Warburg & CO (AG & Co.) KGaA nor Warburg

Research GmbH are liable for the statements, plans or other details contained in these investment recommendations concerning the examined

companies, their affiliated companies, strategies, economic situations, market and competitive situations, regulatory environment, etc. Although due

care has been taken in compiling this investment recommendation, it cannot be excluded that it is incomplete or contains errors. M.M.Warburg & CO

(AG & Co.) KGaA and Warburg Research GmbH, their shareholders and employees are not liable for the accuracy and completeness of the

statements, estimations and the conclusions derived from the information contained in this investment recommendation. Provided a investment

recommendation is being transmitted in connection with an existing contractual relationship, i.e. financial advisory or similar services, the liability of

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DISCLOSURE ACCORDING TO §85 OF THE GERMAN SECURITIES TRADING ACT (WHPG), MAR AND MIFID II INCL. COMMISSION DELEGATED REGULATION (EU) 2016/958 AND (EU) 2017/565

The valuation underlying the investment recommendation for the company analysed here is based on generally accepted and widely used methods of

fundamental analysis, such as e.g. DCF Model, Free Cash Flow Potential, Peer Group Comparison or Sum of the Parts Model (see also

http://www.mmwarburg.de/disclaimer/disclaimer.htm#Valuation). The result of this fundamental valuation is modified to take into consideration the

analyst’s assessment as regards the expected development of investor sentiment and its impact on the share price.

Independent of the applied valuation methods, there is the risk that the price target will not be met, for instance because of unforeseen changes in

demand for the company’s products, changes in management, technology, economic development, interest rate development, operating and/or

material costs, competitive pressure, supervisory law, exchange rate, tax rate etc. For investments in foreign markets and instruments there are further

risks, generally based on exchange rate changes or changes in political and social conditions.

This commentary reflects the opinion of the relevant author at the point in time of its compilation. A change in the fundamental factors underlying the

valuation can mean that the valuation is subsequently no longer accurate. Whether, or in what time frame, an update of this commentary follows is not

determined in advance.

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The analysts of Warburg Research GmbH do not receive a gratuity – directly or indirectly – from the investment banking activities of M.M.Warburg &

CO (AG & Co.) KGaA or of any company within the Warburg-Group.

All prices of financial instruments given in this investment recommendation are the closing prices on the last stock-market trading day before the

publication date stated, unless another point in time is explicitly stated.

M.M.Warburg & CO (AG & Co.) KGaA and Warburg Research GmbH are subject to the supervision of the Federal Financial Supervisory Authority,

BaFin. M.M.Warburg & CO (AG & Co.) KGaA is additionally subject to the supervision of the European Central Bank (ECB).

SOURCES

All data and consensus estimates have been obtained from FactSet except where stated otherwise.

ISRA Vision

CO M M E N T Publ ished 01 .03 .2018 10

Additional information for clients in the United States

1. This research report (the “Report”) is a product of Warburg Research GmbH, Germany, a fully owned subsidiary of M.M.Warburg & CO (AG & Co.)

KGaA, Germany (in the following collectively “Warburg”). Warburg is the employer of the research analyst(s), who have prepared the Report. The

research analyst(s) reside outside the United States and are not associated persons of any U.S. regulated broker-dealer and therefore are not subject

to the supervision of any U.S. regulated broker-dealer.

2. The Report is provided in the United States for distribution solely to "major U.S. institutional investors" under Rule 15a-6 of the U.S. Securities

Exchange Act of 1934.

3. Any recipient of the Report should effect transactions in the securities discussed in the Report only through J.P.P. Euro-Securities, Inc., Delaware.

4. J.P.P. Euro-Securities, Inc. does not accept or receive any compensation of any kind for the dissemination of the research reports from Warburg.

Reference in accordance with section 85 of the German Securities Trading Act (WpHG) and Art. 20 MAR regarding possible conflicts of interest with companies analysed:

-1- Warburg Research, or an affiliated company, or an employee of one of these companies responsible for the compilation of the research, hold

a share of more than 5% of the equity capital of the analysed company.

-2-

Warburg Research, or an affiliated company, within the last twelve months participated in the management of a consortium for an issue in

the course of a public offering of such financial instruments, which are, or the issuer of which is, the subject of the investment

recommendation.

-3- Companies affiliated with Warburg Research manage financial instruments, which are, or the issuers of which are, subject of the

investment recommendation, in a market based on the provision of buy or sell contracts.

-4-

MMWB, Warburg Research, or an affiliated company, reached an agreement with the issuer to provide investment banking and/or

investment services and the relevant agreement was in force in the last 12 months or there arose for this period, based on the relevant

agreement, the obligation to provide or to receive a service or compensation - provided that this disclosure does not result in the disclosure of

confidential business information.

-5- The company compiling the analysis or an affiliated company had reached an agreement on the compilation of the investment

recommendation with the analysed company.

-6- Companies affiliated with Warburg Research regularly trade financial instruments of the analysed company or derivatives of these.

-6a- Warburg Research, or an affiliated company, holds a net long position of more than 0.5% of the total issued share capital of the analysed

company.

-6b- Warburg Research, or an affiliated company, holds a net short position of more than 0.5% of the total issued share capital of the analysed

company.

-6c- The issuer holds shares of more than 5% of the total issued capital of Warburg Research or an affiliated company.

-7- The company preparing the analysis as well as its affiliated companies and employees have other important interests in relation to the

analysed company, such as, for example, the exercising of mandates at analysed companies.

Company Disclosure Link to the historical price targets and rating changes (last 12 months)

ISRA Vision 5 http://www.mmwarburg.com/disclaimer/disclaimer_en/DE0005488100.htm

ISRA Vision

CO M M E N T Publ ished 01 .03 .2018 11

INVESTMENT RECOMMENDATION

Investment recommendation: expected direction of the share price development of the financial instrument up to the given price target in the opinion of

the analyst who covers this financial instrument.

-B- Buy: The price of the analysed financial instrument is expected to rise over the next 12 months.

-H- Hold: The price of the analysed financial instrument is expected to remain mostly flat over the next 12

months.

-S- Sell: The price of the analysed financial instrument is expected to fall over the next 12 months.

“-“ Rating suspended: The available information currently does not permit an evaluation of the company.

WARBURG RESEARCH GMBH – ANALYSED RESEARCH UNIVERSE BY RATING

Rating Number of stocks % of Universe

Buy 111 54

Hold 90 44

Sell 5 2

Rating suspended 0 0

Total 206 100

WARBURG RESEARCH GMBH – ANALYSED RESEARCH UNIVERSE BY RATING K

K taking into account only those companies which were provided with major investment services in the last twelve months.

Rating Number of stocks % of Universe

Buy 32 78

Hold 9 22

Sell 0 0

Rating suspended 0 0

Total 41 100

PRICE AND RATING HISTORY ISRA VISION AS OF 01.03.2018

Markings in the chart show rating changes by Warburg Research

GmbH in the last 12 months. Every marking details the date and

closing price on the day of the rating change.

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CO M M E N T Publ ished 01 .03 .2018 12

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