eurotech buy eur11 · company insight eurotech 2 kepler teather & greenwood merrion february 1,...

Kepler Teather & Greenwood Merrion

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Welcome to the Pervasive Era Company Insight Company Contact

February 1, 2007

With the skills and background to become a pioneer in the fast-approaching “pervasive computing” age, Eurotech’s Buy rating is supported by greater earnings visibility and a likely boost to sales and margins from newly launched products.

Year Sales EBIT EBIT Net EPS P/E P/CF EV/ EV/ EV/ Div.End (m) Margin Profit Sales EBITDA EBIT YieldDec. 31 (EURm) (EURm) (%) (EURm) (EUR) (%)2005 29.9 2.3 7.7 1.0 0.03 211.5 36.6 6.5 59.2 84.9 0.02006E 50.4 0.0 0.1 2.0 0.06 151.7 nm 4.7 81.1 nm 0.02007E 116.1 12.6 10.8 7.6 0.22 39.8 14.1 1.8 13.4 17.0 0.02008E 152.4 24.7 16.2 15.8 0.46 19.3 10.5 1.3 6.6 7.7 0.02009E 178.5 33.6 18.8 21.7 0.63 14.0 10.7 0.9 4.4 5.0 0.0

Note: Arcom consolidated since April 1, 2006, ADS since January 8, 2007. Source: Kepler Equities

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Our View

• Poised for the “Pervasive Computing” Challenge We expect 2007 and 2008 to be the years when we see the shift to so-called“pervasive computing” (ie, a virtual environment wherein devices such as mobile or wearable computers and sensors communicate with each other) and away from the current “embedded computing”, where miniaturised PCs are simply part of thephysical world. Eurotech is at the cutting edge of pervasive computing, via its development of Nano and High-Performance PCs enabled for intercommunication.

• With Pervasive Products, Eurotech Will Soon Reach Critical Mass… So far, Eurotech has posted almost no contribution from pervasive PCs. We expect sales from pervasive products to kick in into 2007 (over 11% of total revenues), and to surpass 50% by 2009. The main drivers should be wearable PCs and thepartnerships with Finmeccanica and IBM. We expect Eurotech to hit in 2008 already the EUR150m-revenue critical mass to be regarded as a leading player in the sector.

• ….And Benefit From Increasing EBITDA Profitability Also, Eurotech management already dimensioned the company for the pervasive area,almost doubling its workforce in 2004-06 through the hiring of skilled teams of highly qualified engineers and researchers. Cost scalability is now as high as to allow the company for well over 20% EBITDA margin in the medium run.

• On Our Base-Case Estimates, Stock Is Worth EUR11.6 per Share On our published estimates, underpinning over 40% revenue CAGR 2006-10, our DCF model yields a target price of EUR11.6 per share. We maintain our Buy rating.

• Scenario Analysis Supports Buy Case As it is tough to assess precisely when the order intakes will translate into actualrevenues, we have depicted two alternative scenarios. Assuming a best case, whereby new revenue strings flow more rapidly (CAGR 2006-10 at over 50%), we obtainEUR15.5 per share value. Under a worst-case, implying a slower start of new products and revenue CAGR of 38% in 2006-10, we get to a fair value of EUR10.1 per share. Hence, even gloomier than base-case assumptions justify our Buy rating.

Reuters ETH.MI / Bloomberg ETH IM Rating Target Price

Eurotech Buy EUR11.6

Previous Current PriceRoberta Ciaccia +39 02 8550 7214 [email protected]

Sector Technology Hardware & Equip.

Market Cap EUR303.9m

Free Float 72% Buy EUR8.84

Company Insight Eurotech

2 Kepler Teather & Greenwood Merrion February 1, 2007

ReutersBloombergAv. Vol. Traded ('000)Price Market Cap FloatETH IM ETH.MIEUR8.84 EUR304.3m 72% 418.4

Company ProfileEurotech is a leading player in research, development, production and sale of miniaturized and high-performance PCs (the company introduced in 2006 wearable PCs). The comprehensive range of products offered is Eurotech’s key distinctive feature, which helped the company building a wide and diversified client base throughout key reference markets (industrial, defense, transport, medical and research).

14/02/2007Q4 approval 25.0%ManagementEvents Calendar Top Shareholders

18/07/20063.2%

17/10/2006Top ManagementRoberto Siagri, Chairman and CEO

Published ResearchNew Angle

Massimo Mauri, Exec. Vice Chairman In Focus 25/08/20062006 FY approval 29/03/2007 Friulia SpA

Company Insight

2009E2008E2007E2006ESales 50.4 116.1P&L (EURm), Dec. 31

152.4 178.5EBITDADepreciation & provisionEBIT bef. except.ExceptionalsReported EBIT aft. except.

Financial incomeProfit bef. tax & extr.ExtraordinariesProfit before taxTaxesTax rate (%)

Rep. net earnings (group)AdjustmentsAdj. net earnings (group)

Minority

2.9-2.90.00.00.0

2.02.00.02.00.0

0.0%

2.00.02.0

0.0

15.9-3.312.60.0

12.6

0.012.60.0

12.6-4.9

39.3%

7.60.07.6

0.0

29.1-4.324.7

0.024.7

0.024.7

0.024.7-9.0

36.3%

15.80.0

15.8

0.0

38.2-4.533.6

0.033.6

0.033.6

0.033.6

-11.935.5%

21.70.0

21.7

0.0

Balance Sheet (EURm), Dec. 31 2006E 2007E 2008E 2009E141.4119.296.580.5Cash and equivalents

Net working capitalNet working capital/salesFixed assetso/w tangible assetso/w int. assets (incl. GW)o/w financial assetsCapital employedTotal assetsNet debt/(net cash)Net debt/equity (%)Net debt/EBITDANet debt/cap. employedShareholders' equity

ROCE (%)ROE (%)

Equity/total assets (%)

6.212.3%

64.23.9

59.21.1

69.2173.8-74.8

-0.5-25.7

-108.0%143.9

0.1%2.3%

0.83

-4.4-3.8%

66.44.9

60.41.1

60.9219.2-90.8-0.6-5.7

-149.3%151.2

19.3%5.2%

0.69

-13.3-8.7%

68.25.6

61.51.1

53.8253.9

-113.6-0.7-3.9

-211.0%166.9

43.1%9.9%

0.66

12.2%62.7%

188.60.65

-254.2%-3.6-0.7

-135.7289.1

53.41.1

62.56.4

70.0-8.7%-15.5

Trends & Margins (%)Sales growthEBITDA marginEBITDA growthEBIT bef. except. marginEBIT bef. except. growthProfit bef. tax & extr. marginProfit bef. tax & extr. growthNet adjusted profit marginNet adjusted profit growth

2006E68.9%

5.8%-11.8%

0.1%-97.9%

4.1%2.2%4.1%

100.4%

2007E130.2%13.7%

446.3%10.8%

nm10.8%

514.6%6.6%

273.2% 106.1%10.3%96.4%16.2%96.4%16.2%82.9%19.1%31.3%2008E 2009E

17.1%21.4%31.3%18.8%36.0%18.8%36.0%12.2%37.7%

Per Share (EUR) 2006E 2007E 2008E 2009EEPS (reported)EPS (adjusted)

0.220.22 0.46

0.46 0.630.63

EPS growthCash-flowBook valueDividendYear-end no. of sharesAvg. diluted no. of shares

0.060.07

100.4%0.074.180.0034.430.3

273.2%0.634.390.0034.434.4 34.4

34.40.004.850.84

106.1% 37.7%0.835.480.0034.434.4

Free cash-flowCapex/depreciationCash-flow/capex (%)Capex/sales (%)CapexOperating CF/sales (%)Operating Cash-flowChange in WCRCash-flowCash-Flow Statement (EURm) 2006E

4.9-2.52.4

4.7%5.5

10.9%89.2%

2.78-3.1 16.0

2.38198.9%

4.7%5.5

18.5%21.510.610.9

2007E 2008E20.1

8.929.0

19.0%6.2

4.1%324.1%

2.0822.8 22.1

2.08416.4%

3.5%6.3

15.9%28.42.2

26.22009E

FCF/sales (%) -6.2% 13.8% 14.9% 12.4%DisposalsFinancial invest.Buy-BacksDividendsDividend pay-outEquity issueOthersNet debt increase (decrease) -54.5

0.0109.20.0%

0.00.0

51.60.0

0.0-16.0

0.00.00.00.0

-22.80.00.0

0.0%

-22.1

0.00.00.00.0

0.0%0.00.0

0.00.00.00.0

0.0%0.0

15.0%6.0%

12.0%2009E

50.0%14.0% 15.0%

52.0%

2008E12.0%6.0%

18.0%18.0%7.0%

15.0%2007E

45.0%10.0% 12.0%

48.0%

2006E18.0%

9.0%18.0%

USARoW

Geographical Sales Split (%)ItalyUKEU Cont

nana

Sales (m)7.17.17.16.22.4

Mgnnananana

nana

EBITDA

nanaResearch Institutes

Medical

2005 Divisional SplitIndustrialTransportDefence

3.10.0%

7.3%0.95

4.45.0

10.51.8

19.3 14.01.6

10.7

7.76.6

1.257.5%

3.30.0% 0.0%

3.3

5.3%1.8413.417.0

nm2.2

151.7 39.82.0

14.1

2006E 2007E 2008E 2009EP/EP/Book ValueP/CFFCF yieldEV/SalesEV/EBITDAEV/EBITEV/Capital employedDividend yield 0.0%

5.8nm

81.14.67

-1.0%

Valuation

Eurotech

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February 1, 2007 Kepler Teather & Greenwood Merrion 3

Company Insight:

Eurotech February 1, 2007

Key Financials 2

Contents 3

Summing Up 4

Key Questions for Management 5

Strategies 5

Financials 5

Outlook 5

Drivers and Catalysts 6

Pervasive Computing Era Is Turning Into Reality 6

Nearing Critical Mass to Enter Top Sector Players’ List 9

Expected Strong Profitability Improvements 10

Acquisition Spree Not Over Yet 11

Increasing Visibility On Orders and Revenue Flows 12

Constructing the Forecast 13

Building Forecasts 13

Full Financials 18

Valuation 20

Valuation Scenarios Support Buy Case, Target EUR11.6 20

Disclosure 25

Legal Information 27

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• “Pervasive Computing” World Is Fast Approaching In our view, 2007 and, to a greater extent 2008, should see an accelerating shift from “embedded computing”, where miniaturised PCs are simply part of the physical world, to “pervasive computing”, whereby PCs increasingly communicate with each other. This will enable individuals to improve their perception skills, and prove crucial in application fields such as logistic, military, defence, homeland security, transportation and medical.

• Eurotech Has All the Skills to Take the Lead While Eurotech has so far generated almost no revenues from pervasive products, it has already developed a wide range of devices awaiting their applications in the fast-approaching pervasive world. We expect the company to post over 11% of total revenues from pervasive PCs in 2007, rising to over 50% by 2009. We believe main drivers should be wearable PCs, introduced in 2006 but fully available to the market in 2007, and the recent signing of two strategic partnerships with Finmeccanica and IBM.

• Also, Critical Mass Drawing Closer. Other M&A Should Follow in 2007 With the revenue boost from pervasive products and partnerships, we expect Eurotech to reach by 2008 the EUR150m revenue threshold needed to become a leader in its sector, and therefore to support the virtuous circle of bigger size, bigger orders, bigger revenues. Also, Eurotech still has around EUR75m cash to spend on acquisitions (most likely in 2007), which would further enhance growth profile.

• EBITDA Profitability Bound to Increase Eurotech is ready for the pervasive era, not only on the product range side but also in terms of cost efficiency. With the strong personnel intake in 2005 and 2006 (almost double 2004 levels), the company can now benefit from sizeable operating leverage. After a gloomy 2006, volumes increase at the sales level will translate into rising EBITDA profitability—we expect it to surpass 23% in 2010.

• More Recurrent Order Flow Should Increase Medium-Term Visibility While it is difficult to predict when Eurotech’s order intake will actually translate into revenues, still the company’s increasingly ample product range and the search for strategic partnerships are poised to provide a more recurrent and stable order inflow, therefore rendering medium-term earnings more predictable than at present.

• On Base-Case Estimates, We Set a Target Price of EUR11.6 Per Share On our published estimates, which suggest over 40% revenue CAGR in 2006-10, our DCF model yields a fair value of EUR11.6 per share, which we set as our target price. The 30% fundamental upside from current market price commands a Buy rating on Eurotech.

• Scenario Analysis Suggests No Downside Risk As said, we see some higher visibility on medium-term earnings potential, but still short-term may reserve some surprises on the upside or on the downside—orders translating more quickly or more slowly into actual revenues. Hence, we have depicted two alternative scenarios to our base-case. Taking into account a more bullish case, whereby orders are rapidly transformed into revenues (sales CAGR 2006-10 at over 50%), we obtain a value per Eurotech’s share of EUR15.5. Under worst-case assumptions, implying a slower kick-off of pervasive revenues compared to our base-case and sales CAGR of 38% in 2006-10, Eurotech’s fair valuation would reach EUR10.1 per share. Hence, even taking as a reference a milder outlook than our published estimates would suggest, Eurotech would still bear some upside to current market price.

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Strategies

• What kind of skills do you intend to develop to become, and remain, leader in the “pervasive computing” world?

• Which final market (military & defence, transportation, medical, industrial, etc) are you chiefly targeting for future developments?

• Which geographical areas will you mostly target?

Financials

• Which share of your yearly budgeted turnover does order intake represent on average? Do you plan to increase this share through additional stable agreements?

• Do you see any possibility that your capex commitments increase over currently-estimated levels (due to new products launch, etc)?

• Do you rule out any chance to increase your gross margin over 50% level?

Outlook

• As far as M&A is concerned, is it likely that you could spend the remaining EUR75m from the capital increase for an acquisition already in H1 2007?

• What kind of new products launch do you have in your 2007 roadmap? • Do you have a feeling of the amount of wearable PCs you could sell in 2007?

When do you expect to launch the rugged release?

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Pervasive Computing Era Is Turning Into Reality

• Eurotech’s Target Is To Move From Embedded To Pervasive Computing Since listing in November 2005, Eurotech’s mission has been to become a leading player in the “pervasive computing” arena.

The company’s vision indeed implies that the world will evolve from the current embedded computing status, where miniaturised PCs are simply part of the physical world, to pervasive computing. The latter is a sort of cyberspace made by embedded PCs, such as mobile, wearable computers and sensors, all enabled to communicate with each other. Pervasive computing therefore embraces all the product range already developed, or under development, at Eurotech: Nano PCs, digital communication infrastructures and High-Performance computers (HPCs). Once all interconnected, these components create the so-called GRID, or the infrastructure on which pervasive computing is based.

Chart 1: GRID

HP

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GRID

Source: Eurotech

In the pervasive environment, computing devices will be hidden into objects used in everyday’s life, making it finally possible to develop PCs which improve customers’ perceptive skills in a sort of “enhanced reality”.

The range of products so far developed by Eurotech for reaching a leading position in the pervasive era is illustrated in Chart2, while in Chart 3 we have summarized a number of applications Eurotech has developed for some of its main customers.

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Chart 2: Eurotech - Product Portfolio by Industry

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HPCs SYSTEMSHLs & HMIs

WEARABLEPCs

SENSORS BOARDS

Source: Eurotech

Chart 3: Eurotech - Customer Case Studies

Train Audio Matrix: Public addresso Voice/Message communication/distribution in all the new Traino IP65 HMI with ISDN communication interface

Pipeline monitoringo Advanced Control System o Monitors pipeline data for maintenance e billing

o Improved Operator Control Panel (IOCP) o 1 ATR Cockpit Computer and Display

o Application: EA-6B Prowler

o Portable Computer for digital Radio o for Radio Video link processing

o Application: UAV radio link

Source: Eurotech



• Eurotech Has Been Setting The Ground For Pervasive Products In last years, Eurotech created fertile ground for the future evolution of pervasive products. The company has been working closely with research institutions to develop increasingly powerful High Performance Computers (HPCs) and started designing Nano PCs that could eventually be part of the grid.

So far, the creation of potentially “pervasive-enabled” products has had almost no impact on Eurotech’s turnover. In 2004 and 2005, the company’s sales derived exclusively from embedded products (see Chart 4), chiefly on the Nano PC side.

With the further evolution of Nano PCs, and the introduction on the market of pervasive-enabled HPCs, 2006 should, in our estimates, have experienced the first, though moderate, contribution of pervasive products to Eurotech’s revenues (5.0% according to our model).

Chart 4: Eurotech – Embedded and Pervasive PCs as % of Total Revenues

100.0% 100.0% 95.0% 88.9%65.6%

49.5%38.7%

11.1%34.4%

50.5%61.3%

5.0%0.0%0.0%

0%

20%

40%

60%

80%

100%

2004 2005 2006E 2007E 2008E 2009E 2010E

Embedded PC as % of total revenues Pervasive PC as % of total revenues

Source: Kepler Equities

• Time Is Ripe for Quantum Leap In Pervasive Revenues

2007 and, to a greater extent, 2008 look set to be the first years for pervasive products to really kick in.

In our view, the main drivers for pervasive products generating substantial revenue flows from 2007 onwards are:

• The commercial introduction of so-called wearable PCs, or Zypad. We see Zypad as the real killer application for the pervasive computing world. Wearable PCs have been launched by Eurotech in June 2006, and for the time being they exist exclusively in the plain version, while rugged models will be introduced some time in H1 this year. So far, Zypad have attracted strong interest from Eurotech’s existing and potential client base, but only limited orders, due to the necessity to test and then create a tailored application software for each end market. From 2007 we expect orders to materialise into actual revenues, helped by the wider knowledge of the product among clients and the higher standardisation degree of the product itself. Wearable PCs are by nature bound to become crucial assets in the pervasive world, as they allow users to be interconnected among them. In our view, the markets which stand to benefit most from the introduction of the Zypad are, in the initial phase, logistics and medical. Looking forward, we believe that military, homeland security and transportation will be the sectors generating the biggest orders for Zypad, especially after the introduction of the rugged wearable PC. Note that, for Zypad to be as successful as possible, Eurotech is working to attract big clients and partnering with value-added distributors’ networks in the various markets. We expect this to greatly enhance the knowledge and development of Zypad.



• The partnership agreements with Finmeccanica and IBM. The rationale behind Eurotech’s willingness to sign strategic agreements with major clients is to take the chance to work closely with the relevant partner right from the initial design through the whole development process of each new product, system or solution. This should prove extremely helpful also in increasing Eurotech’s earnings visibility. Indeed, while it is tough to predict when order intakes from these agreements will materialise into actual revenues (we believe 2008 rather than 2007 should face a major contribution from these agreements), these partnerships lay the best possible foundations for the development of GRIDS, and hence pervasive products, and for a stronger order generation.

As a result of the above, we expect pervasive revenues to reach over 11% of Eurotech’s total revenues this year, and then jump to over 50% in 2009 (see Chart 4).

Nearing Critical Mass to Enter Top Sector Players’ List

In our estimates, from 2007 onwards Eurotech’s earnings should be boosted by pervasive products as well as by the consolidation of ADS, the US-based company specialized in low-consumption embedded PCs purchased in December 2006.

According to our calculations (see Chart 5), the combination of the two factors should bring Eurotech, already in 2008, to the EUR150m revenue threshold representing critical mass in the sector. This would represent a turning point for the company, as:

• It would put Eurotech in a position to compete with the big guys in the industry, namely Radisys, Mercury, GE Fanuc.

• It would allow the company’s clients to increase the number, scope and size of the orders they place to Eurotech, as the bigger size would eliminate the dependency of the company’s turnover from a single client and/or order.

• It would foster further, ampler growth rates for the future.

Chart 5: Eurotech – Revenue Forecasts (EURm)

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Expected Strong Profitability Improvements

• Operational Costs Should Benefit from Pervasive Computing As stated above, in last years Eurotech worked its way to the development of pervasive products, with a view to fostering future revenue growth.

The company’s efforts in the past were, however, not only devoted to researching and designing new products and solutions, but also to create the right organisation, and hence cost structure, for the pervasive era.

This has most likely resulted in a dip in both gross profit and, especially, EBITDA margin in 2006, though this paves the way for a recovery in the medium run.

• Gross Profit Margin Should Remain Pretty Stable Eurotech’s gross profit margin has remained, on average, in the 50% area. This testifies to the following:

• That, so far, the sector in which the company operates has not suffered from price pressure.

• That the company has been able to manage smoothly and efficiently the consolidation of lower-margin entities (before entering Eurotech’s perimeter, Arcom reported a gross-margin of 46%; the whole group should have posted some 50% margin in 2006, meaning that Eurotech has been able to bring Arcom’s profitability levels in line with the ongoing business).

We expect 2007 to suffer from a light fall in gross profit margin to around 49%, due to the consolidation of ADS, which has so far posted lower margins than Eurotech standalone. However, we forecast profitability to recover progressively to at least 50% over time. This is, in our view, mainly attributable to the company selling an increasing number of pervasive micro PCs, bearing higher margins than embedded devices and HPCs, and to the rising sales of complete systems and products rather than just components.

• EBITDA Margin Should Rise Dramatically In our view, the biggest gain in terms of profitability for Eurotech should take place at EBITDA level.

Indeed, with particular reference to 2005 and 2006, Eurotech has built up an organisational structure aimed at supporting strong future developments. The company has hired highly qualified teams of experts (49% of employees at present are either engineers or in the R&D department) based in different locations and covering a wide range of specialisations in several product areas and markets.

This meant a rise in personnel from 158 to 290 people between 2005 and 2006, also as an effect of the purchase of Arcom. The increase in employees has led to a temporary reduction in productivity (from EUR189,000 revenue/employee/year in 2005 to EUR174,000 revenue/employee/year in 2006, as illustrated in Chart 6). However, 2007 will see a further personnel rise to 388 employees, due to the intake of ADS and Vantron, which should anyway not put a halt to Eurotech’s path towards higher productivity. From 2008 onwards, and assuming no further acquisitions, the company’s workforce should be already well suited to the company’s requirements. Hence, Eurotech’s high operating leverage should provide the company with strong potential for EBITDA profitability growth.



Chart 6: Eurotech – Employees and Revenue/Employee

147 158 290 388 388 388 388

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Eurotech’s state of readiness in 2007 for the launch of pervasive products paves the way for EBITDA margin to skyrocket from 13.7% to 23.1%, according to our estimates (see Chart 7 below).

Chart 7: Eurotech – Gross Profit Margin and EBITDA Margin

51.2% 50.2% 46.8% 48.5% 49.3% 50.0%

11.0%5.8%

13.7%19.1% 21.4% 23.1%

61.0%

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2004 2005 2006E 2007E 2008E 2009E 2010E

Gross margin as % of sales EBITDA margin


Acquisition Spree Not Over Yet

In July 2006, Eurotech launched a EUR110m capital increase devoted to potential acquisitions. The rationale behind this was to reach through external growth (and therefore in the quickest way possible), the critical mass necessary to compete with industry heavyweights. So far, however, after the failed attempt to buy into UK-based Radstone Technology, Eurotech managed to spend only EUR34.6m for the purchase of ADS, a company specialising in embedded PCs with low power consumption. Hence, Eurotech is now left with around EUR75m to use for possible M&A. We believe the company will manage to exploit this opportunity in the course of 2007, which should bring a twofold benefit:

• Increasing critical mass, and hence possibly geographical and client exposure. • Improving financial structure (at present, Eurotech has no debt).



Increasing Visibility On Orders and Revenue Flows

2006 has admittedly been a disappointing year for the company. While until the release of Q3 results we had expected around EUR60m in revenues (assuming the consolidation of Arcom since April 1, 2006), we are now forecasting EUR50.4m for the full year. This was due to later-than-expected order intake, as well as the integration with Arcom not having been up and running.

We believe that, especially looking at 2008 onwards, such disappointments are less likely. Indeed, Eurotech has been able to set the stage for better visibility on its order intake, and hence revenue flows, chiefly through:

• The launch of wearable PCs, which could foster dramatic order growth in 2007-08.

• The signing of partnerships with IBM and Finmeccanica, which will also fuel further contribution to revenues from these two clients.



Building Forecasts

• Revenue Forecasts Embedded Versus Pervasive We expect revenue growth from pervasive products and systems to become Eurotech’s most distinguishing feature, and indeed for the group to be increasingly recognised as a pioneer in this field.

Hence, we have re-built our model to account for revenue streams generated by embedded and pervasive products in both Nano PCs and High-Performance computers (see Tables 1 to 7).

Table 1: Eurotech – Revenues From Nano PCs Embedded (EUR000) 2004 2005 2006E 2007E 2008E 2009E 2010ENano PC Embedded - Total revenues 15,056 23,671 41,424 101,622 98,160 86,344 75,592YOY % change 57.2% 75.0% 145.3% -3.4% -12.0% -12.5%Nano PC "Embedded" - Standard products 15,056 23,671 41,424 64,622 58,160 52,344 44,492- From ADS - 28,000 30,000 24,000 21,600- From partnerships - 9,000 10,000 10,000 9,500Source: Kepler Equities

Table 2: Eurotech – Revenues From HPCs Embedded (EUR000) 2004 2005 2006E 2007E 2008E 2009E 2010EHigh Performance Computer Embedded - Total revenues

1,593 6,180 6,500 1,600 1,780 1,936 2,030

Standard pervasive products 1,593 6,180 6,500 1,000 1,000 1,000 1,000- From partnerships 600 780 936 1,030Source: Kepler Equities

Table 3: Eurotech – Revenues From Nano PCs Pervasive (EUR000) 2006E 2007E 2008E 2009E 2010ENano PC Pervasive – Total revenues 2,000 11,250 51,290 83,984 114,841YOY % change 355.9% 63.7% 36.7%of which: wearable PC 8,150 28,500 44,000 58,500- From ADS 0 11,000 22,000 30,800- From partnerships 800 8,800 13,200 19,800Other pervasive products 2,000 2,300 2,990 4,784 5,741Source: Kepler Equities

The spectacular growth we forecast for pervasive Nano PC is mainly driven by the expected strong sales of wearable PCs. In our estimates, we conservatively expect Eurotech to be able to sell 7,000 standard wearable PC and 500 rugged in 2007, due to increase to 45,000 and 15,000 by 2010, respectively.

Table 4: Eurotech – Revenues From Nano PC Pervasive: Wearable PC 2007E 2008E 2009E 2010EWearable PC sold - standard version 7,000 20,000 35,000 45,000Average price (EUR) 1,000 900 800 700Wearable PC sold - rugged version 500 5,000 8,000 15,000Average price (EUR) 2,300 2,100 2,000 1,800Source: Kepler Equities

Table 5: Eurotech – Revenues From HPCs Pervasive (EUR000) 2006E 2007E 2008E 2009E 2010EHigh Performance Computer Pervasive - Total revenues 500 2,200 6,000 11,400 15,900YOY % change 340.0% 172.7% 90.0% 39.5%Of which: Personal Supercomputer 1,000 2,000 3,400 5,100Other pervasive products 500 1,000 2,000 3,000 3,300From partnerships 200 2,000 5,000 7,500Source: Kepler Equities

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Table 6: Eurotech – Revenues From ADS (EUR000) 2007E 2008E 2009E 2010ERevenues from Applied Data Systems 28,000 41,000 46,000 52,400YOY % change 46.4% 12.2% 13.9%Of which: Nano PC "Embedded" 28,000 30,000 24,000 21,600Nano PC "Pervasive" 11,000 22,000 30,800High Performance Computer "Embedded" High Performance Computer "Pervasive" Source: Kepler Equities

Table 7: Eurotech – Revenues From Partnerships With Finmeccanica and IBM (EUR000) 2007E 2008E 2009E 2010ERevenues from partnership with Finmeccanica 10,000 16,780 23,936 30,030YOY % change 67.8% 42.6% 25.5%Of which: Nano PC "Embedded" 9,000 10,000 10,000 9,500YOY % change 50.0% 0.0% -5.0%Nano PC "Pervasive" 200 4,000 8,000 12,000High Performance Computer "Pervasive" 200 2,000 5,000 7,500High Performance Computer "Embedded" 600 780 936 1,030Source: Kepler Equities

As shown in Chart 8, the great improvement we expect in Nano PCs, chiefly through the sale of wearable PCs, leads to miniaturized PCs representing constantly well over 90% of total revenues.

Chart 8: Eurotech – Nano PCs and HPCs As % Of Total Revenues

90.4%79.3% 86.1%

96.7% 94.9% 92.5% 91.1%

9.6%20.7% 13.9% 8.9%

7.5%5.1%3.3%

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2004 2005 2006E 2007E 2008E 2009E 2010E

Nano PC as % of total revenues High Performance Computer as % of total revenues


Table 8: Eurotech – Revenue Split By Embedded/Pervasive Products 2004 2005 2006E 2007E 2008E 2009E 2010EEmbedded Nano PCs 90.4% 79.3% 82.2% 87.6% 64.4% 48.4% 37.7%Embedded High Performance Computers 9.6% 20.7% 12.9% 1.4% 1.2% 1.1% 1.0%Pervasive Nano PCs 0.0% 0.0% 4.0% 9.2% 30.5% 44.1% 53.4%Pervasive High Performance Computers 0.0% 0.0% 1.0% 1.9% 3.9% 6.4% 7.9%Source: Kepler Equities



Revenues by Final Market Also, we have crossed our revenue estimates by product with revenue forecasts by final market (see Table 9 and Chart 9). In our calculations, defence is poised to be the highest-growing sector in the medium run.

Table 9: Eurotech - Revenues by End-Market Split (EUR000) 2004 2005 2006E 2007E 2008E 2009E 2010ENano PC total revenues 15,056 23,671 43,424 112,272 144,650 165,128 182,633Industrial 4,517 7,101 21,712 61,750 69,432 72,656 73,053Transport 4,517 7,101 13,027 22,454 28,930 33,026 36,527Defence 4,517 7,101 4,342 16,841 28,930 41,282 51,137Research Institutes - - - 2,245 2,893 1,651 1,826Medical 1,506 2,367 4,342 8,982 14,465 16,513 20,090Industrial 30.0% 30.0% 50.0% 55.0% 48.0% 44.0% 40.0%Transport 30.0% 30.0% 30.0% 20.0% 20.0% 20.0% 20.0%Defence 30.0% 30.0% 10.0% 15.0% 20.0% 25.0% 28.0%Research Institutes 0.0% 0.0% 0.0% 2.0% 2.0% 1.0% 1.0%Medical 10.0% 10.0% 10.0% 8.0% 10.0% 10.0% 11.0% High Performance Computer total revenues 1,593 6,180 7,000 3,800 7,780 13,336 17,930Industrial 350 304 778 1,600 2,689Transport 350 266 778 1,734 3,227Defence 350 266 1,167 2,667 3,586Research Institutes 1,593 6,180 5,950 2,850 4,668 6,668 7,172Medical - 114 389 667 1,255Industrial 5.0% 8.0% 10.0% 12.0% 15.0%Transport 5.0% 7.0% 10.0% 13.0% 18.0%Defence 5.0% 7.0% 15.0% 20.0% 20.0%Research Institutes 100% 100% 85.0% 75.0% 60.0% 50.0% 40.0%Medical 0.0% 3.0% 5.0% 5.0% 7.0% Total revenues 16,649 29,851 50,424 116,072 152,430 178,464 200,563Industrial 4,517 7,101 22,062 62,054 70,210 74,257 75,743Transport 4,517 7,101 13,377 22,720 29,708 34,759 39,754Defence 4,517 7,101 4,692 17,107 30,097 43,949 54,723Research Institutes 1,593 6,180 5,950 5,095 7,561 8,319 8,998Medical 1,506 2,367 4,342 9,096 14,854 17,180 21,345Industrial 27.1% 23.8% 43.8% 53.5% 46.1% 41.6% 37.8%Transport 27.1% 23.8% 26.5% 19.6% 19.5% 19.5% 19.8%Defence 27.1% 23.8% 9.3% 14.7% 19.7% 24.6% 27.3%Research Institutes 9.6% 20.7% 11.8% 4.4% 5.0% 4.7% 4.5%Medical 9.0% 7.9% 8.6% 7.8% 9.7% 9.6% 10.6%Source: Kepler Equities

Chart 9: Eurotech – Revenues By End-Market Split

27.1% 23.8%

43.8%53.5%

46.1% 41.6% 37.8%

27.1%23.8%

26.5%19.6%

19.5%19.5%

19.8%

27.1%

23.8%

9.3%14.7%

19.7% 24.6% 27.3%

9.6%20.7%

11.8%4.4% 5.0% 4.7%

7.9% 7.8% 9.7% 9.6%

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2004 2005 2006E 2007E 2008E 2009E 2010E

Industrial Transport Defence Research Institutes Medical




Total Revenue To Increase at 46.4% CAGR in 2005-10 Overall, our estimates point at a 46.4% revenue CAGR in 2005-10 for Eurotech.

Table 10: Eurotech - Total Revenues (EUR000) 2004 2005 2006E 2007E 2008E 2009E 2010ENano PC - Total revenues 15,056 23,671 43,424 112,272 144,650 165,128 182,633YOY % change 57.2% 83.4% 158.5% 28.8% 14.2% 10.6%High Performance Computer - Tot. revenues 1,593 6,180 7,000 3,800 7,780 13,336 17,930YOY % change 287.9% 13.3% -45.7% 104.7% 71.4% 34.4%Total revenues 16,649 29,851 50,424 116,072 152,430 178,464 200,563YOY % change 79.3% 68.9% 130.2% 31.3% 17.1% 12.4%Source: Kepler Equities

• Costs Forecasts As explained above, the cost structure of Eurotech should permit the company to maintain a pretty stable 50% gross margin over time (see Table 11).

Table 11: Eurotech – Gross Margin By Product (EUR000) 2004 2005 2006E 2007E 2008E 2009E 2010ENanoPC revenues 15,056 23,671 43,424 112,272 144,650 165,128 182,633COGS (5,336) (10,789) (20,844) (59,504) (73,771) (82,564) (89,490)Gross margin 9,720 12,882 22,581 52,768 70,878 82,564 93,143Other opex (7,726) (11,102) Gross margin as % of sales 64.6% 54.4% 52.0% 47.0% 49.0% 50.0% 51.0%HPCs revenues 1,593 6,180 7,000 3,800 7,780 13,336 17,930COGS (1,150) (3,770) (4,270) (2,280) (4,668) (8,002) (10,758)Gross margin 443 2,410 2,730 1,520 3,112 5,334 7,172Gross margin as % of sales 27.8% 39.0% 39.0% 40.0% 40.0% 40.0% 40.0%Total revenues 16,649 29,851 50,424 116,072 152,430 178,464 200,563COGS (6,486) (14,559) (25,114) (61,784) (78,439) (90,565) (100,248)Gross margin 10,163 15,292 25,311 54,288 73,990 87,898 100,315Gross margin as % of sales 61.0% 51.2% 50.2% 46.8% 48.5% 49.3% 50.0%Source: Kepler Equities

The high scalability of opex, especially personnel (see Table 12), should allow Eurotech to report increasing EBITDA margins.

Table 12: Eurotech – Personnel and Personnel Costs ( 2004 2005 2006E 2007E 2008E 2009E 2010EPersonnel costs (EUR000) (5,212) (7,211) (13,566) (18,604) (19,070) (19,546) (20,035)YOY % change 38.4% 88.1% 37.1% 2.5% 2.5% 2.5%Total employees end of period 147 158 290 388 388 388 388Revenues/employee (EUR000/year) 113 189 174 299 393 460 517Average cost per employee (EUR) 35,456 45,639 46,780 47,950 49,148 50,377 51,637YOY % change 28.7% 2.5% 2.5% 2.5% 2.5% 2.5%As % of total revenues 63.7% 60.1% 60.6% 48.4% 42.4% 39.3% 37.2%Source: Kepler Equities



Table 13: Eurotech – Opex (EUR000) 2004 2005 2006E 2007E 2008E 2009E 2010EService costs (3,480) (5,639) (8,320) (19,152) (25,151) (29,447) (33,093)As % of sales -20.9% -18.9% -16.5% -16.5% -16.5% -16.5% -16.5%YOY % change 62.0% 47.5% 130.2% 31.3% 17.1% 12.4%Industrial services (925) (1,772) (2,521) (5,804) (7,621) (8,923) (10,028)As % of revenues -5.6% -5.9% -5.0% -5.0% -5.0% -5.0% -5.0%YOY % change 91.6% 42.3% 130.2% 31.3% 17.1% 12.4%Commercial services (1,021) (1,542) (2,269) (5,223) (6,859) (8,031) (9,025)As % of revenues -6.1% -5.2% -4.5% -4.5% -4.5% -4.5% -4.5%YOY % change 51.0% 47.2% 130.2% 31.3% 17.1% 12.4%General and administration (1,534) (2,325) (3,530) (8,125) (10,670) (12,492) (14,039)As % of revenues -9.2% -7.8% -7.0% -7.0% -7.0% -7.0% -7.0%YOY % change 51.6% 51.8% 130.2% 31.3% 17.1% 12.4%Third parties' assets (286) (492) (517) (646) (710) (746) (783)As % of sales -1.7% -1.6% -1.0% -0.6% -0.5% -0.4% -0.4%YOY % change 72.0% 5% 25% 10% 5% 5%Source: Kepler Equities

• Capex Forecasts As Eurotech’s business model is that of a fabless company (business model is based on researching and developing products, actual production being outsourced), we expect capex to remain extremely light in the future, barely reaching 4% of total revenues.

Table 14: Eurotech - Capex (EUR000) 2005 2006E 2007E 2008E 2009E 2010ETotal Capex 2,500 5,500 5,500 6,200 6,300 6,500As % of sales 8.4% 10.9% 4.7% 4.1% 3.5% 3.2%Source: Kepler Equities



ITable 15: Eurotech - Income Statement (EUR000) 2004 2005 2006E 2007E 2008E 2009E 2010E CAGR

05-10Industrial 4,517 7,101 22,062 62,054 70,210 74,257 75,743 60.5%Transport 4,517 7,101 13,377 22,720 29,708 34,759 39,754 41.1%Defence 4,517 7,101 4,692 17,107 30,097 43,949 54,723 50.4%Research institutes 1,593 6,180 5,950 5,095 7,561 8,319 8,998 7.8%Medical 1,506 2,367 4,342 9,096 14,854 17,180 21,345 55.2%Total revenues 16,649 29,851 50,424 116,072 152,430 178,464 200,563 46.4%YOY % change 79.3% 68.9% 130.2% 31.3% 17.1% 12.4%Cost of goods sold (6,486) (14,559) (25,114) (61,784) (78,439) (90,565) (100,248)Gross margin 10,163 15,292 25,311 54,288 73,990 87,898 100,315As % of revenues 61.0% 51.2% 50.2% 46.8% 48.5% 49.3% 50.0%Personnel costs (5,212) (7,211) (13,566) (18,604) (19,070) (19,546) (20,035)Service costs (3,480) (5,639) (8,320) (19,152) (25,151) (29,447) (33,093)Other operating charges and income 515 856 (517) (646) (710) (746) (783)Total operating costs (8,177) (11,994) (22,403) (38,402) (44,931) (49,739) (53,911)EBITDA 1,986 3,298 2,908 15,886 29,060 38,160 46,404 69.7%YOY % change 66.1% -11.8% 446.3% 82.9% 31.3% 21.6%EBITDA margin 11.9% 11.0% 5.8% 13.7% 19.1% 21.4% 23.1%Depreciation of tangible assets (268) (361) (1,980) (2,310) (2,976) (3,024) (3,510)Amortization of intangible assets (261) (626) (880) (990) (1,364) (1,512) (1,560)Provisions - (11) - - - - -Total depreciation, amortization, provisions (529) (998) (2,860) (3,300) (4,340) (4,536) (5,070)EBIT 1,457 2,300 48 12,586 24,720 33,624 41,334 78.2%Total financial income (charges) (424) (297) 2,000 - - - -Pretax profit (loss) 1,033 2,003 2,048 12,586 24,720 33,624 41,334Reported taxes (455) (981) - (4,944) (8,968) (11,926) (14,492)Profit/(loss) from continued operations 578 1,022 2,048 7,642 15,752 21,697 26,842Third parties' result 69 42 - - - - -Group profit (loss) for the year 647 1,064 2,048 7,642 15,752 21,697 26,842 90.7%YOY % change 64.5% 92.5% 273.2% 106.1% 37.7% 23.7%Source: Kepler Equities

Table 16: Eurotech - Balance Sheet (EUR000) 2004 2005 2006E 2007E 2008E 2009E 2010ECash and deposits 2,560 25,584 80,451 96,479 119,247 141,380 168,660Other current assets 419 2,090 3,530 8,127 10,672 12,495 14,042Net trade receivable 8,402 7,267 12,102 22,866 30,029 35,157 39,511Work in progress - 2,044 3,453 7,948 10,437 12,220 13,733Inventories and current assets 5,250 6,004 10,085 17,411 15,243 17,846 20,056Total current assets 16,631 42,989 109,621 152,830 185,628 219,099 256,002Goodwill - - - - - -Intangible assets 5,306 6,235 7,555 8,765 9,881 10,889 11,929Net tangible assets 2,223 2,550 3,870 4,860 5,604 6,360 6,750Financial assets 19 82 51,739 51,739 51,739 51,739 51,739Other financial assets 36 22 Anticipated taxes 103 1,008 1,008 1,008 1,008 1,008 1,008Total fixed assets 7,687 9,897 64,172 66,372 68,232 69,996 71,426Assets classified as held for sale - - - - - - -Total assets 24,318 52,886 173,793 219,203 253,860 289,095 327,429Bonds 2,447 - - - - - -Payables to banks and other lenders 3,516 2,597 3,000 3,000 3,000 3,000 3,000Deferred fiscal charges 515 324 324 324 324 324 324Liabilities for pension provisions &severance indemnities

550 481 905 1,241 1,272 1,304 1,336

Other current liabilities 100 75 75 75 75 75 75Non-current liabilities 7,128 3,477 4,304 4,640 4,671 4,703 4,735Bonds - - - - - - -Payables to banks and other lenders 5,694 2,639 2,639 2,639 2,639 2,639 2,639Fiscal debts 442 392 392 392 392 392 392Trade payable 4,011 9,572 16,169 37,143 48,777 57,108 64,180Other current liabilities 1,040 3,801 6,421 23,214 30,486 35,693 40,113Current liabilities 11,187 16,404 25,621 63,388 82,294 95,832 107,324Liabilities associates with assets held for sale - - - - - - -Total liabilities 18,315 19,881 29,925 68,028 86,965 100,535 112,059Total shareholders' equity 6,003 33,005 143,869 151,174 166,895 188,560 215,370Total equity and liabilities 24,318 52,886 173,793 219,203 253,860 289,095 327,429Source: Kepler Equities

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Table 17: Eurotech - Cash Flow Statement (EUR000) 2005 2006E 2007E 2008E 2009E 2010ENet financial position beginning of period 20,348 74,812 90,840 113,608 135,741Group share of net income/(loss) 1,064 2,048 7,642 15,752 21,697 26,842Depreciation 361 1,980 2,310 2,976 3,024 3,510Amortisation 626 880 990 1,364 1,512 1,560Other non cash adj. 11 - - - - -Gross cash flow 2,062 4,908 10,942 20,092 26,233 31,912(Increase)/decrease in accounts receivable (4,239) (11,765) (27,182) (10,030) (11,338) (9,624)Increase/(decrease) in accounts payable (8,081) (9,217) (37,768) (18,906) (13,538) (11,491)Change in working capital 3,842 (2,548) 10,586 8,876 2,200 1,868Purchase of assets: tangible (639) (3,300) (3,300) (3,720) (3,780) (3,900)Purchase of assets: intangible (1,861) (2,200) (2,200) (2,480) (2,520) (2,600)Purchase of assets: financial (159) (51,635) - - - -Total investments (2,659) (57,135) (5,500) (6,200) (6,300) (6,500)Cash in from sale of assets Other Operating free cash flow 3,245 (54,776) 16,028 22,768 22,133 27,280Increase/(decrease) in share capital 109,240 - - - -Dividends - - - - - -Change in net financial position 3,245 54,464 16,028 22,768 22,133 27,280Net financial position EOP 20,348 74,812 90,840 113,608 135,741 163,021Source: Kepler Equities



Valuation Scenarios Support Buy Case, Target EUR11.6

• Base-Case Valuation Yields EUR11.6 Per Share On the back of the estimates published in this report, which we regard as a reliable base-case of Eurotech’s earnings, our DCF valuation yields a fair value of EUR11.6 per share.

Table 18: Eurotech – Key DCF Valuation Parameters 2007E 2008E 2009E 2010EUnlevered beta 1.5 1.5 1.5 1.5Tax rate 33% 33% 33% 33%Debt 0.0% 0.0% 0.0% 0.0%Equity 100.0% 100.0% 100.0% 100.0%Levered beta 1.5 1.5 1.5 1.5Period 1 2 3 4Free risk rate 4.3% 4.3% 4.3% 4.3%Risk premium 4% 4% 4% 4%Cost of equity 10% 10% 10% 10%Loan margin 2.0% 2.0% 2.0% 2.0%Tax shield 33% 33% 33% 33%Cost of debt 4% 4% 4% 4%Equity share 100% 100% 100% 100%Debt share 0% 0% 0% 0%WACC 10.3% 10.3% 10.3% 10.3%Discount factor 91% 82% 75% 68%Perpetual growth rate 3.0% Source: Kepler Equities

Table 19: Eurotech – DCF Valuation Under Base-Case Scenario (EURm) 2007E 2008E 2009E 2010EOperating free cash flow 16.0 22.8 22.1 27.3PV of OPFCF 14.5 18.7 16.5 18.5 PV of OPFCF (sum) 68.2 Terminal value 376.3 PV of terminal value 254.7 Enterprise value 322.9 (Net debt)/cash 74.8 Equity value 397.7 Shares fully diluted (m) 34.4 Value per share (EUR) 11.6 Source: Kepler Equities

Base-Case Underpins 41% Revenue CAGR in 2006-10 As illustrated in Table 20 below, our base-case estimates for Eurotech underpin some 41% revenue CAGR in the period 2006-10 (see Table 20), 2007 showing:

• Revenues from ongoing business (ie, keeping the same consolidation perimeter as in 2006 and assuming the sale of the usual product line) at close to EUR70m.

• EUR28m as the initial revenue contribution from ADS. • EUR10m of turnover from the already set up partnerships. • Finally, EUR8m from the actual sale of Zypad (wearable PC).

Table 20: Eurotech – Base-Case Revenue Forecasts (EUR000) 2006E 2007E 2008E 2009E 2010E CAGR 06-10Organic 50,424 69,922 66,150 64,528 59,633ADS 0 28,000 41,000 46,000 52,400Partnerships 0 10,000 16,780 23,936 30,030Wearable PC - 8,150 28,500 44,000 58,500Total revenues 50,424 116,072 152,430 178,464 200,563 41.2%Source: Kepler Equities

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• Things Could Go Worse, But It Is More Than Factored In Market Price We Assumed Marginally Lower Revenue CAGR (38%), But With Much Slower Start As said above, we believe that Eurotech is on the right path to providing increasingly high clarity to its order and revenue flow. However, we cannot rule out that things develop less rapidly than we are currently expecting (as said, it is possible that the bulk of incremental revenue shifts to 2008 and onwards compared to our currently-published estimates).

Therefore, we have depicted also a worse than our base-case scenario, whereby we assume the following for 2007 (see Table 21):

• Eurotech’s organic revenues are marginally over EUR64m. • ADS contribution is limited to EUR25m. • Partnerships contribute EUR6.8m. • Finally, in the first year, wearable PCs do not surpass EUR4m revenues, i.e. the

orders translate into actual revenues only at a later stage.

Overall, total CAGR is not significantly different from our base-case scenario (38% versus 41%), but 2007 revenue level is substantially lower.

Table 21: Eurotech – Worst-Case Revenue Forecasts (EUR000) 2006E 2007E 2008E 2009E 2010E CAGR 06-10Organic 50,424 64,122 60,930 59,830 55,640ADS 0 25000 36,000 39,800 47,700Partnerships 0 6,800 14,340 21,868 28,990Wearable PC 0 4,000 20,400 38,000 49,500Total revenues 50,424 99,922 131,670 159,498 181,830 37.8%Source: Kepler Equities

Under Slower Growth Perspectives, Eurotech Is Worth EUR10.1 per Share Our DCF model, applied to the worst-case scenario, yields EUR10.1 per share (see Table 22).

Table 22: Eurotech – DCF Valuation Under Worst-Case Scenario (EURm) 2007E 2008E 2009E 2010EOperating free cash flow 12.2 17.1 18.3 23.4PV of OPFCF 11.0 14.1 13.7 15.9 PV of OPFCF (sum) 54.6 Terminal value 323.3 PV of terminal value 218.8 Enterprise value 273.4 (Net debt)/cash 74.8 Equity value 348.3 Shares fully diluted (m) 34.4 Value per share (EUR) 10.1 Source: Kepler Equities

• Strong Ramp-Up In New Revenue Sources Indicates EUR15.5 per Share A Bullish Scenario Could Underpin Over 50% Revenue CAGR In 2006-10 In addition to the previous two, we have also made a set of more bullish assumptions on the evolution of all the revenue generators of Eurotech see Table 23).

Hence, we have forecast a best-case scenario entailing for 2007:

• Close to EUR74m revenues from ongoing products and activities. • A strong EUR30m contribution from US-based ADS. • Existing partnerships generating EUR14m right from the start. • Wearable PC to have a nice kick-off at EUR12m.



Table 23: Eurotech – Best-Case Revenue Forecasts (EUR000) 2006E 2007E 2008E 2009E 2010E CAGR06-10Organic 50,424 73,650 69,505 67,548 62,200ADS 0 30,000 41,000 46,000 54,600Partnerships 0 14,000 22,700 36,500 47,995Wearable PC 0 12,300 33,000 72,000 94,000Total revenues 50,424 129,950 166,205 222,048 258,795 50.5%Source: Kepler Equities

This Scenario Yields Strong Upside Assuming that Eurotech is able to grow in line with the above-indicated bullish scenario, our DCF model yields a value per share of EUR15.5 (see Table 24).

Table 24: Eurotech – DCF Valuation Under Best-Case Scenario (EURm) 2007E 2008E 2009E 2010EOperating free cash flow 18.4 24.3 32.1 39.6PV of OPFCF 16.7 20.0 23.9 26.8 PV of OPFCF (sum) 87.5 Terminal value 546.6 PV of terminal value 369.9 Enterprise value 457.5 (Net debt)/cash 74.8 Equity value 532.3 Shares fully diluted (m) 34.4 Value per share (EUR) 15.5 Source: Kepler Equities

• Buy Eurotech, Relying On Base-Case Target of EUR11.6 per Share The conclusion we gather from our valuation scenarios is that, even assuming a very gloomy outlook for Eurotech, the stock would still be trading below its fair value, while the upside would be of over 70% if we embraced the best-case scenario; hence, buy case on Eurotech is supported.

Relying on our base-case assumptions, we set a target price of EUR11.6 per share on Eurotech, commanding a Buy rating.



Disclosure Checklist - Potential Conflict of Interests Stock ISIN Disclosure (See Below) Currency Price Alstom FR0010220475 nothing to disclose EUR 93.7 BAE Systems GB0002634946 nothing to disclose PcGBP 417.75 Chevron US1667641005 nothing to disclose USD 73.07 Eurotech IT0003895668 nothing to disclose EUR 8.84 Finmeccanica IT0003856405 nothing to disclose EUR 21.74 IBM US4592001014 nothing to disclose USD 99.37 L3 Communications US5024241045 nothing to disclose USD 81.65 Mercury Computer Systems US5893781089 nothing to disclose USD 12.94 Radisys Corp. US7504591097 nothing to disclose USD 17.2 Radstone Technology GB0007204836 nothing to disclose PcGBP 409.5 Source: Factset closing prices of 31/01/2007

1. Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki) and/or its affiliate(s) hold or own or control 1% or more of the issued share capital of this company. 2. The issuer holds or owns or controls 1 % or more of the issued share capital of Kepler Equities or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki). 3. Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki) and/or its affiliate(s) are or may be regularly doing proprietary trading in equity securities of this company. 4. Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki)and/or its affiliate(s) have been lead manager or co-lead manager in a public offering of the issuer’s financial instruments during the last twelve months. 5. Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki) and/or its affiliate(s) are a market maker in the issuer’s financial instruments. 6. Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki) and/or its affiliate(s) are a liquidity provider for the issuer to provide liquidity in such instruments. 7. Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki) and/or its affiliate(s) act as a corporate broker or a sponsor or a sponsor specialist (in accordance with the local regulations) to this company. 8. Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki) and/or its affiliate(s) and the issuer have agreed that Kepler Equities and/or its affiliate(s) will produce and disseminate investment research on the said issuer as a service to the issuer. 9. Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki) and/or its affiliate(s) have received compensation from this company for the provision of investment banking or financial advisory services within the previous twelve months. 10. Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki) and/or its affiliate(s) may expect to receive or intend to seek compensation for investment banking services from this company in the next three months. 11. The author of or an individual who assisted in the preparation of this report (or a member of his/her household), or a person who although not involved in the preparation of the report had or could reasonably be expected to have access to the substance of the report prior to its dissemination has a direct ownership position in securities issued by this company. 12. An employee of Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki) and/or its affiliate(s) serve on the board of directors of this company.

Rating Ratio Kepler Equities Q4 2006 Rating Ratio Merrion Stockbrokers Q4 2006 Rating breakdown A B Rating breakdown A B

Buy 60.9% 0.0% Buy 45.0% 0.0%Hold 9.5% 0.0% Hold 35.0% 0.0%Reduce 26.9% 0.0% Reduce 15.0% 0.0%Not Rated/Under Review/Accept Offer 2.7% 0.0% Not Rated/Under Review/Accept Offer 5.0% 0.0%Total 100.0% 0.0% Total 100.0% 0.0%Source: Kepler Equities A: % of all research recommendations B: % of issuers to which Investment Banking Services are supplied

Source: Merrion Stockbrokers Limited A: % of all research recommendations B: % of issuers to which Investment Banking Services are supplied

Rating Ratio Landsbanki Q4 2006 Rating Ratio Teather & Greenwood Q4 2006 Rating breakdown A B Rating breakdown A B

Buy 54.3% 6.5% Buy 60.0% 84.0%Hold 13.9% 4.8% Hold 27.0% 12.0%Reduce 14.9% 0.0% Reduce 11.0% 0.0%Not Rated/Under Review/Accept Offer 16.9% 88.7% Not Rated/Under Review/Accept Offer 2.0% 4.%Total 100.0% 100.0% Total 100.0% 100.0%Source: Landsbanki A: % of all research recommendations B: % of issuers to which Investment Banking Services are supplied

Source: Teather & Greenwood Limited A: % of all research recommendations B: % of issuers to which Investment Banking Services are supplied

From May 9th 2006, Kepler Equities, Teather & Greenwood, Merrion and Landsbanki's rating system consists of three recommendations: Buy, Hold and Reduce. For a Buy rating, the minimum expected upside is 10% over 12 months. For a Hold rating the expected upside is below 10%. A Reduce rating is applied when there is expected downside on the stock. Target prices are set on all stocks under coverage, based on a 12-month view. Equity ratings and valuations are issued in absolute terms, not relative to any given benchmark. Kepler Equities, Teather & Greenwood, Merrion and Landsbanki’s strategy teams’ sector allocations rate each sector Overweight, Underweight or Neutral. Job titles: The functional job title of the person/s responsible for the recommendations contained in this report is equity research analyst unless otherwise stated on the cover Stock prices: Prices are taken as of the previous day’s close (to the date of this report) on the home market unless otherwise stated. Regulators Location Regulator Abbreviation Kepler Equities France Autorité des Marchés Financiers AMFKepler Equities España Comision Nacional del Mercado de Valores CNMVKepler Equities Germany Bundesanstalt für Finanzdienstleistungsaufsicht BaFinKepler Equities Italia Commissione Nazionale per le Società e la Borsa CONSOBKepler Equities Nederland Autoriteit Financiële Markten AFMKepler Equities Switzerland Swiss Federal Banking Commission SFBCTeather and Greenwood The Financial Services Authority FSAMerrion Stockbrokers Limited The Irish Financial Services Regulatory Authority IFSRALandsbanki The Financial Supervisory Authority FMESource: Kepler Equities, Teather & Greenwood Limited, Merrion Stockbrokers Limited and Landsbanki

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Teather & Greenwood Limited is authorised and regulated by the Financial Services Authority, and entered in its Register under Firm Reference Number 186677. Teather & Greenwood Limited is a member of the London Stock Exchange. Merrion Stockbrokers Limited is authorised by the Irish Financial Services Regulatory Authority under the Stock Exchange Act, 1995. Merrion Stockbrokers Limited is a member firm of the Irish and London Stock Exchanges. For further information relating to research recommendation and conflict of interest management please refer to www.kepler-equities.com, www.teathers.com, www.merrion-capital.com, www.landsbanki.is . We have discussed only the facts in the report with the company.



The information contained in this publication was obtained from various sources believed to be reliable, but has not been independently verified by Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki).Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki) does not warrant the completeness or accuracy of such information and does not accept any liability with respect to the accuracy or completeness of such information, except to the extent required by applicable law.

This publication is a brief summary and does not purport to contain all available information on the subjects covered. Further information is available on request. This report may not be reproduced for further publication unless the source is quoted.

This publication is for informational purposes only and shall not be construed as an offer or solicitation for the subscription or purchase or sale of any securities, or as an invitation, inducement or intermediation for the sale, subscription or purchase of securities, or for engaging in any other transaction. This publication is not directed at private individuals.

Any opinions, projections, forecasts or estimates in this report are those of the author only, who has acted with a high degree of expertise, only. They reflect only current views of the author and are subject to change without notice. Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki) has no obligation to update, modify or amend this publication or to otherwise notify a reader or recipient of this publication in the event that any matter, opinion, projection, forecast or estimate contained herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn. The analysis, opinions, projections, forecasts and estimates expressed in this report were in no way affected or influenced by the issuer. The author of this publication benefits financially from the overall success of Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki)

The investments referred to in this publication may not be suitable for all recipients. Recipients are urged to base their investment decisions upon their own appropriate investigations that they deem necessary. Any loss or other consequence arising from the use of the material contained in this publication shall be the sole and exclusive responsibility of the investor and Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki) accepts no liability for any such loss or consequence. In the event of any doubt about any investment, recipients should contact their own investment, legal and/or tax advisers to seek advice regarding the appropriateness of investing. Some of the investments mentioned in this publication may not be readily liquid investments. Consequently it may be difficult to sell or realize such investments. The past is not necessarily a guide to future performance of an investment. The value of investments and the income derived from them may fall as well as rise and investors may not get back the amount invested. Some investments discussed in this publication may have a high level of volatility. High volatility investments may experience sudden and large falls in their value which may cause losses. International investing includes risks related to political and economic uncertainties of foreign countries, as well as currency risk.

To the extent permitted by applicable law, no liability whatsoever is accepted for any direct or consequential loss, damages, costs, prejudices arising from the use of this publication or its contents.

Kepler Equities usually acts as a broker, Teather & Greenwood Limited, Merrion Stockbrokers Limited, Landsbanki act in various different capacities. Kepler Equities, Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki have put in place Chinese Wall procedures in order to avoid any conflict of interests or dissemination of confidential and privileged information.

United Kingdom: This document is intended to be communicated in the UK only to investment professionals and substantial companies. In particular, this document is not directed at private individuals in the UK and no private individual in the UK may act upon it.

United States: This research report is distributed in the United States by Kepler Equities and is intended for distribution in the United States to only "major U.S. institutional investors" as defined in Rule 15a-6 promulgated under the U.S. Securities Exchange Act of 1934, as amended. Kepler Equities is a broker-dealer registered with the Comité des Etablissements de Crédit et des Entreprises d’Investissements in France, and is not registered with the U.S Securities and Exchange Commission (SEC). U.S. persons seeking more information about any of the securities discussed in this report, or wishing to execute a transaction in these securities, should contact Kepler Equities Inc. (KEI), 600 Lexington Avenue, New York, NY 10022, phone (212) 710-7600. KEI is a broker-dealer registered with the SEC and is a NASD member firm. Nothing herein excludes or restricts any duty or liability to a customer that KEI has under applicable law. Investment products provided by or through KEI are not FDIC insured, may lose value and are not guaranteed by Kepler Equities. Investing in non-U.S. securities may entail certain risks. The securities of non-U.S. issuers may not be registered with or subject to SEC reporting and other requirements. The information available about non-U.S. companies may be limited, and non-U.S. companies are generally not subject to the same uniform auditing and reporting standards as U.S. companies. Securities of some non-U.S. companies may not be as liquid as securities of comparable U.S. companies.

France: This publication is issued and distributed in accordance with art. L 544-1 and seq of the Code Monétaire et Financier and with the articles 321-122 to 321-138 of the General Regulations of the Autorité des Marchés Financiers (AMF).

Italy: Information is for institutional clients only as defined by art. 31 of CONSOB reg. 11522/98. Reports on companies listed on the Italian exchange are approved and distributed to over 500 clients in accordance with art. 69 of CONSOB Regulation 11971/1999 for enforcement of the Consolidation Act on financial brokerage (legislative decree 24/2/1998). According to this article Kepler Equities, branch of Milano warns on potential specific interests in securities mentioned. Equities discussed are covered on a continuous basis with regular reports at results release. Reports are released on date shown on cover and distributed via print and e-mail. Kepler Equities, branch of Milano analysts are not affiliated with any professional groups or organizations. All estimates are by Kepler Equities unless otherwise stated.

Spain: Reports on Spanish companies are issued and distributed by Kepler Equities, branch of Madrid, registered in Spain by the Comisión Nacional del Mercado de Valores (CNMV) in the foreign investments firms registry (member of the Madrid exchange). Reports and any supplemental documentation or information have not been filled with the CNMV. Neither verification nor authorization or compliance revision by the CNMV regarding this document and related documentation or information has been made.

Other countries: Laws and regulations of other countries may also restrict the distribution of this report. Persons in possession of this document should inform themselves about possible legal restrictions and observe them accordingly.

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Amsterdam Dublin Edinburgh Frankfurt London Madrid Milan New York Paris Reykjavik Zurich

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Amsterdam Kepler Equities Nederland Herengracht 466 1017 CA Amsterdam Telephone +31 20 563 2365 Fax +31 20 564 1700 Dublin Merrion Capital Group Block C The Sweepstakes Centre Ballsbridge, Dublin 4 Telephone +353 1 240 4100 Fax +353 1 240 4101 Edinburgh Teather & Greenwood Level 5 Napier House 27 Thistle Street Telephone +44 20 7426 9000 Fax +44 20 7426 3235 Frankfurt Kepler Equities Germany Taunusanlage 19 60325 Frankfurt Telephone +49 69 756 960 Fax +49 69 7 43 25 11 London Teather & Greenwood Limited Beaufort House 15 St Botolph Street London EC3A 7QR Telephone +44 20 7426 9000 Fax +44 20 7426 9595 Geneva Kepler Equities (Suisse) SA Chemin du Midi,8 1260 Nyon Switzerland Telephone +41 22 361 5151 Fax +41 22 365 4532

Madrid Kepler Equities España Alcalá 95 28009 Madrid Telephone +34 91 436 5100 Fax +34 91 436 51 51 Milan Kepler Equities Italia Corso Europa 2 20122 Milano Telephone +39 02 855 071 Fax +39 02 855 07 500 New York Kepler Equities Inc. 600 Lexington Avenue 10022 New York, NY USA Telephone +1 212 710 7600 Paris Kepler Equities France 112, Avenue Kléber 75016 Paris Telephone +33 1 5365 3500 Fax +33 1 5365 3521 Reykjavik Landsbanki Hafnarstræti 5 101 Reykjavík Tel: +354 410 4000 Fax: +354 410 3006 Zurich Kepler Equities Switzerland Stadelhoferstrasse 22 Postfach 8024 Zürich Telephone +41 43 333 6666 Fax +41 43 333 6652

Kepler Equities www.kepler-equities.com Landsbanki www.landsbanki.com Merrion Capital Group www.merrion-capital.com Teather & Greenwood www.teathers.com

eurotech buy eur11 · company insight eurotech 2 kepler teather & greenwood merrion february 1,...

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