Initiation of Coverage BUY - UBI Banca 23 May... · payments methods (e.g. Alipay, Wepay, Google...

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NEXI

Initiation of Coverage BUY

23 May 2019 – 5:30 PM MARKET PRICE: EUR8.80 TARGET PRICE: EUR10.20

Financial Technology - Payments

Data

Shares Outstanding (m): 627.8

Market Cap. (EURm): 5,524

Enterprise Value (EURm): 7,012

Free Float (%): 36.7%

Av. Daily Trad. Vol. (m): 4.8

Main Shareholder: Mercury UK 60.2%

Reuters/Bloomberg: NEXII.MI NEXI IM

52-Week Range (EUR) 7.83 9.00

Source: FactSet, UBI Banca estimates

Performance

1m 3m 12m

Absolute 6.6% NA NA

Rel. to FTSE IT

Source: FactSet

12.9% NA NA

Graph aerea Absolute/Relative

Source: FactSet

Analysts

Massimo Vecchio Senior Analyst [email protected] Tel. +39 02 62753016

Dario Fasani Analyst [email protected] Tel. +39 02 62753014

www.ubibanca.com/equity-research

A bet on a cash-less future

Nexi business model is different from any of its competitors as its activities span across the entire electronic payments value-chain while being focused entirely on Italy. Nexi can boast its scale, being the market leader, and established partnerships with the Italian banking system. It is a story of mild but visible growth enhanced by a high operating leverage and cost-structure optimization. Nexi was listed in April 2019 at EUR9.0 p.s.. We initiate coverage with a BUY, TP EUR10.2 (based on DCF and peers comparison).

> The leading player in Italy, a relatively underdeve loped market. With 70% market share in merchant acquiring, 60% in cards issuing, circa 150 partner banks (2018 data) Nexi is the leader in the Italian electronic payments market, where card penetration of 26% is half the WE average.

> We think that the industry can boast secular growth drivers. The payments sector looks attractive given its secular growth drivers (younger generations more inclined to electronic payments and e-commerce) and economic resilience. We expect a 2018-23 CAGR of 7.6% in value for the Italian card payment, below the 9.7% mark of the past three years.

> A market decorrelated from the local GDP trend. Exposure to Italy is a plus but also a perceived risk by investors. Our analysis shows that, in the past 20 years, the value of card payments declined only once (2008).

> Future growth to be organic, but consolidation rema ins an option.Product innovation and marketing are the main growth leavers, focused at easing electronic payments. But also external growth is in Nexi’s DNA and the sector has begun a second consolidation wave.

> We estimate a visible 22.3% 2018-23 Adj Net Profit C AGR while deleveraging the BS. We estimate 2018-23 EBITDA CAGR of 13.8% with top line growing 6.6%. This thanks to a cost base fix for two/thirds(operating leverage at 80.6%). The solid cash flow generation should bring Net Debt/EBITDA to 1.6x by 2021. Our 2019 estimates are 2% above guidance, reinforced by a solid set of 1Q19 results.

> What has changed since the IPO. A debt refinancing exercise, thanks to the agencies ratings upgrade, reduced the average cost by 70 bps to 3.1% thus increasing our EPS by 5.5% on average in 2019-21.

> Main risks. Card payments growth could be slower; in case of systemic risks, electronic payments values may decline; the growth of non-banking channels may be a risk for the Italian banks and ultimately for Nexi.

Financials (2018 before initiatives)

2018P/F 2019E 2020E 2021E

Revenues (EURm) 931 982 1051 1118

EBITDA (EURm) 424 500 574 646

EBITDA margin (%) 45.5% 50.9% 54.6% 57.8%

EBIT (EURm) 349 385 429 476

EPS (EUR) 0.03 0.18 0.29 0.37

CFPS (EUR) 0.14 0.27 0.38 0.48

DPS (EUR) 0.0 0.0 0.0 0.0 Source: Company data, UBI Banca Estimates

Ratios (2018 bef. Initiat.), priced on 22 May 2019

2018P/F 2019E 2020E 2021E

P/E (x) n.a. 48.8 30.2 24.0

P/CF (x) n.a. 32.4 23.4 18.5

P/BV (x) n.a. 4.1 3.6 3.2

Dividend Yield n.a. 0.0% 0.0% 0.0%

EV/EBITDA (x) n.a. 14.0 11.9 10.1

Debt/Equity (x) 4.2 1.1 0.8 0.6

Debt/EBITDA (x) 5.7 3.0 2.3 1.6 Source: Company data, UBI Banca Estimates

7.40

7.60

7.80

8.00

8.20

8.40

8.60

8.80

9.00

Nexi FTSE Italia All-Share

NEXI 18 May 2019

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Index

1

EXECUTIVE SUMMARY

3

2

COMPANY PROFILE

7

3

THE DIGITAL PAYMENT MARKET

15

4

STRATEGY: GROWTH (ORGANIC & IN-ORGANIC) AND EFFICIE NCIES

26

5

SWOT ANALYSIS

35

6

FINANCIALS

37

7

VALUATION

48

8

APPENDIX A: GOVERNANCE

56

9 APPENDIX B: MANAGEMENT TEAM 59

10

APPENDIX C: PEER GROUP DESCRIPTION

63

11

APPENDIX D: HOW THE ELECTRONIC PAYMENT SECTOR WORKS

64

NEXI 23 May 2019

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EXECUTIVE SUMMARY

Nexi – The leading Italian player in the electronic payment industry…

The group, thanks to its scale that allows massive capex spending, is the innovation leader on the Italian market.

The company operates through three divisions:

� Merchants Services & Solutions (48% of 2018 pro-forma revenues including other services like HelpLine): provider of electronic payments solutions to merchants;

� Cards & Digital Payments (39% of 2018 pro-forma revenues): consumer cards, commercial cards, mobile payments and payment apps;

� Digital Banking Solutions (13% of pro-forma revenues): advance banking solutions, open banking and other services.

…that covers all the steps of the electronic paymen t value chain…

Nexi can boast the broadest offering with coverage of value chain that is unique and it is much more entrenched than anyone in the Italian eco-system both at the banking and merchant level.

This, coupled with Nexi’s extension in other adjacent digital services and rail-agnostic payments segments has made Nexi the partner of choice for global payments methods (e.g. Alipay, Wepay, Google Pay etc.).

This, in our view, makes Nexi’s business model highly defensible and could push many players to partner with Nexi in Italy rather than challenging it.

…and has a strong relationship with the Italian ban king system

Nexi customer base includes ca. 150 partner banks accounting for ca. 80% of the Italian banking sector by number of branches, which creates an effective and cost-efficient distribution network, to which Nexi provides mission-critical services.

These relationships give Nexi unparalleled access to merchants, as the banking channel in Italy represents the most important distribution actor for the payment sector, accounting for ca. 93% of total volumes in acquiring and POS distribution (source: company data).

These relationships are governed by strategic framework agreements that are either multiyear (45% of net revenues expiring in 2025 or later) or with undated duration (subject to termination by the partner bank).

Figure 1 – 2018 revenues breakdown by contract expiration date

Recurring annual contracts 2025+ 2024 2023 2022 2021 2020 Total

Banks #1-5 - 30.2% - 8.0% - - 6.3% 44.5%

Banks #6-10 2.8% - - 2.2% 0.6% 8.3% 13.9%

Banks #11-20 8.3% 0.7% - - 1.1% 1.0% 1.2% 12.3%

Other banks 11.4% - - - - - 4.1% 15.5%

Direct/referral 1.3% 12.5% - - - - 13.8%

Total 23.8% 43.4% 0.0% 10.2% 1.7% 1.0% 19.9% 100.0%

Source: Company data

NEXI 23 May 2019

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As a result of the aforementioned elements customer retention has been very high:

� Most bank partnerships have been in place for more than 25 years;

� Top 10 partner banks have been customers for > 15 years;

Strong track record of contract renewals and no material customer losses during the last 3 years (since the change of ownership. Exception made for Merchant Services and Cards & Digital Payments solutions of Banca Popolare di Vicenza and Veneto Banca, now part of IntesaSanPaolo to whom, nevertheless, processing services are still sold through Mercury payment services).

The Industry benefits from secular growth drivers a nd is resilient…

We expect, as detailed in the “Payment market” chapter, the Italian card payment market to grow at a 2018-23 CAGR of 7.6% in value.

The number of transactions in our view should grow double digit during the same period, while average value per transaction should decline mid-single digit (micro-payments growing more than proportionally).

The industry looks attractive given its high leverage, secular growth drivers (younger generations more inclined to electronic payments and e-commerce) and its resiliency.

On the latter point in particular our analysis shows that consumer spending is the most resilient part of the GDP and that the natural increase in the penetration of card payment on total payment is such that card payment in value declined only once (2008) in the past 20 years (we did not investigate figures prior to this date).

…and the Italian market is particularly underdevelo ped

Despite having all the infrastructure in place (highest number of POS/inhabitants and one of the highest mobile penetration in selected EU countries), Italy’s penetration of card payments on total consumptions is half the Western European average (26% vs. 45% in 2018 according to Nexi).

The reasons for the under-development may also include cultural aspects and a high share of “shadow economy” but, notwithstanding that, the penetration has grown in the past years from 15% in 2011. The average speed of growth has been 180 bps in the past 5 years (sources: company data, Banca d’Italia and ECB), which is close to our assumption going forward (154 bps).

Nexi aims to put in place a series of initiatives to ease the cards utilization and latest government actions have been supportive too.

Future growth driven by products…but don’t rule out consolidation

Our understanding is that marketing and product innovation are the leavers management will use to support future growth. New products aim is different depending on the division:

� In Merchants Solutions the key task is to simplify the process and improve merchants’ control;

� In Cards & Digital Payments the key task is to expand the portfolio and unlock the card usage;

� In Digital Banking the key is to digitalize banking activities and to develop the Open Banking technology;

� Cross selling too is a relevant item as not all partner banks buy from Nexi all of its products;

NEXI 23 May 2019

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� New opportunities, only partially included in our estimates, encompass corporate/B2B payments, data-enabled solutions and YAP (the app specifically designed by Nexi for millennials).

We believe that external growth is in Nexi’s DNA and, despite the fact that opportunities in Italy are more limited than in the past, we note that sector consolidation is still in progress. In fact, in January 2019 Fiserv announced the acquisition of First Data and more than 40 significant transactions have taken place over the last 5 years with a 50% to 100% increase in the size of the leading consolidators (source: Worldline 2019 investor day presentation). In our view, Nexi is in an ideal position to participate in this consolidation exercise.

A high-fix costs business where growth should suppo rt our

estimates for a 22.4% 2018-23 Adj. Net Profit CAGR

According to Nexi, more than 50% of its revenues are driven by its installed base and this gives high visibility to the financials of the company.

At the same time, around two/thirds of costs were defined as fixed, so, on the basis of our expected 6.6% top line 2018-23 CAGR, we see EBITDA CAGR at 13.8% in the same period (when some EUR72 million of efficiencies are also taken into account).

As a consequence we see Adjusted Net Income CAGR above 20% in 2018-23 coupled with solid cash generation to de-leverage the balance sheet with Net Debt/EBITDA at 1.6x by 2021.

The company issued the following financial guidance:

� Net revenues 2019-23 CAGR between 5% and 7% with 2019 towards the low-end of the range;

� Normalized EBITDA 2019-23 CAGR between 13% and 16% with 2019 towards the high-end of the range;

� Capex between 16% and 17% on Net Revenues in 2019 including both ordinary and “transformational projects”. Ordinary capex is expected anywhere between 8% and 10% of Net Revenues and should trend towards this level in the medium-long term.

Our estimates are 2% above the guidance for 2019 EBITDA and in the middle of the medium term guidance:

Figure 2 – UBI estimates vs. Guidance and Consensus estimates

(EURm, %) 2019E 2020E 2021E

Guidance UBI change Consensus Guidance UBI change Consensus Guidance UBI change Consensus

Net Revenues 978 982 0% 978 1,046 1,051 0% 1,038 1,119 1,118 0% 1,109

EBITDA 490 500 2% 490 NA 574 559 612/662 646 613

% 50.0% 50.9% 50.1% NA 54.6% 53.9% NA 57.8% 55.3%

EBITDA cagr 18-21 13%-16% 15.1% 13.1%

Non recurring items <(52) (85) NA (40) NA NA (30) NA

Capex - Total (156)/(166) (163) +1.1% (160) (152) (154) NA (151) (135)

Ordinary Capex 8%-10% 8.6% NA

D&A (117) (115) -2% (101) (145) (129) 15% on Sales 15.2% 12.7%

Net Debt/EBITDA <3.2 3.0 3.3 2.3 2.5 2-2.5 1.6 1.9

Source: Company data, FactSet, UBI Banca estimates

NEXI 23 May 2019

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Investment case and potential risks

We initiate our coverage on the stock with a BUY rating and a EUR10.2 target price. Nexi’s investment case is based on a visible top line growth (mid to high-single digit) which is predicated on a market which has been growing relentlessly in the past decade. When moving to profitability, growth reaches the double-digit level thanks to the very high operating leverage and the “initiatives” put in place by the management to further optimize the operating and the cost structure. In summary, Nexi equity story is the following:

� Nexi is by far the market leader in Italy;

� Its unique business model that encompasses all the area of the payments market value chain allows Nexi to increase its penetration and gives it unmatchable scale advantages;

� Nexi’s partnership with the Italian banking systems dates back to decades ago and the partnership has been working well for both parties given that the retention rate is particularly high;

� The products that Nexi has recently launched or is planning to launch give more visibility to its growth expectations;

� Nexi’s scale allows the company to invest around EUR150 million in capex in 2018 thus maintaining its technological leadership;

� Nexi’s financials are outstanding: an industry-leading 46% EBITDA margin (2018 P/F before initiatives) is mostly driven in our view by an increase in the take-rate and an efficient cost structure;

� The management team has a visible track record both before Nexi and at Nexi itself (being in place since the end of 2015 when a new ownership was established).

The major risks we see are:

� The penetration of card payments on total consumptions could grow at a slower pace than predicted;

� Past experiences (reference to a period before 2011, when the card penetration began to rise) show that, in case of systemic risks, electronic payments value may decline;

� According to Nexi 57% of millennials do not have a fully-fledged bank account. In the long run this could be a threat for the banking system and ultimately for Nexi;

� Nexi, having a local nature, is not suited to satisfying the needs of global e-commerce players which continue, however, to gain market share;

� The fact that Nexi’s brand is gaining relevance in consumers’ minds (YAP, Nexi branded cards, etc.) could be seen as a threat by partners’ banks;

� Industry consolidation is creating competitors of bigger size. In certain activities/segments (processing, international SMEs, large corporate) Nexi may end up being too small.

NEXI 23 May 2019

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COMPANY PROFILE – A UNIQUE PAYTECH

Nexi is the product of acquisitions, asset disposals and restructuring actions taken over the past three years. The history of Nexi dates back to 1939 when ICBPI (Istituto Centrale delle Banche Popolari) was founded. Since then, the business was progressively focused on payment technologies, both through several acquisitions and disposals. Major Italian banks were conferring/selling to the company their payment activities (Intesa SanPaolo, MPS, the popular banks, CartaSi, Bassilichi, Carige more recently).

By looking at Nexi’s genesis it is possible to understand a key pillar of its equity story: the long-lasting relationship with the Italian incumbent banks which, until the end of 2015 owned 100% of the asset (they sold around 90% to private equity funds at that date).

As can be seen in the next graph, Nexi has undergone in the last three years a re-focus exercise by selling/spinning off the businesses which were non-core (depositary/banking activities, market making in stocks/bonds, real estate, pension fund transfer agents, etc.), a re-branding exercise in 2017 and a re-organization in 2018 that followed the acquisition spree. Following the 2018 reorganization, the former ICBPI payments activities were separated from the banking business (which remained in ICBPI, now renamed Depobank) and concentrated in the current Nexi S.p.A (formerly Latino Italy S.p.A.). This impacted significantly the financials of the company as it will be seen in the relevant chapter later in this report:

Figure 3 – Recent acquisitions, disposals and restructuring


Overtime Nexi has moved:

� From a diversified banking group to a payment-focused company;

� From an under-invested company to a technological leader, according to management, through a massive increase in spending;

� From a company with drifting financials into a 46% P/F-EBITDA margin company.

2016 2017 2018 2019

OUT

IN

(12/2016)

(6/2017)

Merchant

Acquiring Business

(6/2017)

Merchant

Acquiring Business

(7/2017)

Rebranding

(11/2017)

(4/2018)

(9/2018)

Merchant

Acquiring Business

Fondo Italiano

di Investimenti

Transfer Agent

Pension Fund

Brokerage and

Market Making

«Non-core»

real estate

portfolio

Separation of

banking activities

/ Corporate

restructuring

Signed

Business Services

Increase scale

and leadership

Focus on core

business

NEXI 23 May 2019

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The company operates through three business units

Nexi operates through three business units, two of which represents almost 90% of 2018 revenues:

Figure 4 – Nexi – Business units summary


Merchant Services & Solutions supplies merchants with the necessary

infrastructure to enable digital payment acceptance, and executes card payments on the merchant’s behalf. The services performed within the Merchant Services & Solutions business unit can be divided into core acquiring services and POS management.

� Core acquiring services are financial services such as the settlement of card payments to merchants, technology services aimed at a fast, reliable and secure authentication and execution of payment transactions, and administrative services such as payment tracking and data analytics;

� POS management involves the configuration, activation and maintenance of the hardware and software required for digital payments, which is installed both at physical POS such as shops, grocery stores, restaurants, taxis, hotels and vending machines and online POS such as websites and mobile applications.

Core acquiring and POS management services are usually sold as a bundle, which offers customers a full service benefit. Nexi provides the majority of acquiring services in partnership with its partner banks – benefitting, as a result, from the existing relationships and extensive branch networks for customer origination, while providing them with the benefit of its expertise and scale in the areas of procurement, processing and data security. However, Nexi also serves certain merchants directly through direct acquiring activities, with the partner bank acting solely as a referral partner.

Cards & Digital Payments , in partnership with its partner banks, provides a wide spectrum of services in connection with the issuance of payment cards to cardholders:

Merchant Services & Solutions

One-stop solution provi8der for

merchants of all categories and size

∼∼∼∼ 890kMerchants

served

€249bnValue of

Transactions

3.2bnNumber of

Transactions

48%Cards and Digital Payments

Comprehensive portfolio, leading towards

complete digitalisation of payments

41mPayment Cards

managed

€197bnValue of

Transactions

2.4bnNumber of

Transactions

39%Digital Banking Solutions

Driving adoption of advanced banking

solutions and developing Open Banking

936mNumber of

Clearing

Transactions

13.4kATMs

managed

∼∼∼∼ 420kCorporate

Banking

Workstations

13%

150 banks >800 SMEs ∼30m Cardholders

Business

Activities

Scale(2018 data)

SME Solutions

E-Commerce &

Invisible Payments

Data-enabled

products

Large merchants

omni-channel

Mobile Payments Payment Apps

Consumer Cards Commercial Cards

PSD2 & Open

Banking

Digital Corporate

Banking

Instant Payments Self Banking

NEXI 23 May 2019

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� Product development and procurement services relating to the design and production of durable and secure payment cards;

� Anti-fraud and customer support services;

� Pricing services;

� Banking services such as the provision of an underlying credit allowance and credit scoring services;

� Financial services such as the prefunding of card payments;

� Technology services to ensure a fast, reliable and secure authentication and execution of payment transactions;

� Administrative services such as payment tracking and monthly billing and data analytics services.

We note that Nexi acts almost exclusively alongside partner banks in the provision of issuing services, with its partner banks assuming the underlying cardholders’ credit risk . The Nexi Group services most of the card issuing needs of the partner banks, allowing them to focus on their core lending business.

Digital Banking Solutions provides:

� Clearing services, including the provision of infrastructure for and management of the execution of account-based payments. It also operates as a clearing house for domestic and international SEPA payments;

� Digital corporate banking services, by providing digital solutions to banks and corporate clients to help them manage their bank accounts and payments, such as a customizable e-banking platform. The Digital Banking Solutions business unit also provides market-leading CBI Gateway services (an Italian payment platform allowing direct payment collection and delivery of supporting documentation between banks, corporations, tax authorities, pension schemes and other public and private bodies);

� Financial supply chain services;

� ATM management services. ATM management services range from the complete management of an ATM fleet for banks to the management of discrete parts of the ATM management value chain based on customer needs.

In the vast majority of cases risk rests with the p artner banks : as for Cards & Digital Payments when it is the co-issuer or issuer (which we estimate being 1.5% of total card managed) the risk rests with Nexi. As for the Merchant & Services side when Nexi acts as a commercial acquirers Nexi can bear some risk (there is a time-lag between the moment the merchant receives the money from Nexi and the moment Nexi itself is paid by the bank that issued the card, or the factor or the card scheme).

The ownership of the clients data follows the same rules (when the customer is a bank one, the bank owns the data too). In cases where Nexi is the co-licensee or co-commercial acquirer, it can share the ownership of the data but not the credit risk .

The importance of scale in the payment industry

Nexi is by far the leading player in the Italian electronic payment market and scale in this business is, in our view, a phenomenal competitive advantage:

� A total of EUR446 billion transacted in 2018;

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� 70% circa market share in merchant acquiring and 60% circa in card issuing (market shares estimated by management allocating proportionally other issuers’ card volumes among Nexi’s clients and other merchants for total market volumes. Data refer to international card scheme only);

� Around 150 partner banks;

� 90% of Italian spending flowed through Nexi (company’s estimate based on percentage of card spending via Nexi issuing or acquiring on international schemes).

Despite being present only in Italy, Nexi ranks fifth in the European market as can be seen from the following graph:

Figure 5 – PSP ranking in the EU (European revenues in EURm)

Source: Worldline 2019 Investor Day (based on latest available public information, 2017 for Nexi)

We estimates Nexi to gain market share, despite its incumbent status, thanks to:

� Nexi’s strong relationship with banks, which originate around 93% of the acquiring business in Italy. In fact, Nexi still has room to cross-sell products that have not yet been sold to some partner banks;

� New products that Nexi has launched or is developing should further improve its offer stimulating banks and customers. More details can be found in the “New products” paragraph in the chapter on Strategy.

Based on the assumption that it is tougher to grow when you have already two/thirds of the market, we estimate smaller market share gains in Merchant & Solutions (physical) and credit cards while we expect higher market share gains in the segment where Nexi has a relatively lower presence (Merchant & Solutions – Ecommerce; Debit and pre-paid cards).

Scale allows Nexi to invest around EUR150 million in 2018 in the development of new technologies, products and operational processes that would be unthinkable for the rest of the Italian market players (the second competitor has an EBITDA that is less than half Nexi’s). The strategy is to build in-house key

0 400 800 1,200 1,600 2,000

+

NEXI 23 May 2019

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software/infrastructure owning the IP of the key differentiating components while purchasing from outside and then develop (partnering with suppliers) less critical software/infrastructure. More specifically, the key technological layer that Nexi wants to control are labeled in the following graph as “a” (digital layer) and “d” (security and infrastructure layer). The former in particular is the backbone of the Italian digital payment infrastructure. The customer management layer is somewhat less important (labeled “b”) so it falls in the category of purchasing/co-developing while the transaction processing layer (labeled “c”) is the least important:

Figure 6 – Nexi – Technology architecture


Why Nexi has and will have a space on the market…

A key question to pose when investing for the long term is why a business exists and has developed to-date and if it deserves a place on the market going forward.

We believe that Nexi was born as a typical process of outsourcing of non-strategic activities from major banks, so the first question to pose is “would banks like to in-source the payment business again?” In our view the answer is no for three reasons:

� Nexi operates the business better than banks would;

� No bank would be capable of investing EUR150 million per year alone to support the business development;

� Nexi’s approach with banks is such that banks see t he company as a value-oriented partner.

Evidence that confirms our view:

� 56% of Nexi 2017 normalized revenues coming from contracts/distribution agreements are locked until 2023 while most of the remaining contracts have undated duration (unless terminated by one of the parties);

Issuing & Issuing & Issuing & Issuing &

AcquiringAcquiringAcquiringAcquiring

ProcessingProcessingProcessingProcessing

PaymentPaymentPaymentPayment

ProcessingProcessingProcessingProcessing

Real TimeReal TimeReal TimeReal Time

Transactional Transactional Transactional Transactional

ServicesServicesServicesServices

SecuritySecuritySecuritySecurity

Nexi Blue InfrastructureNexi Blue InfrastructureNexi Blue InfrastructureNexi Blue Infrastructure

Data LayerData LayerData LayerData Layer

Integration Layer Integration Layer Integration Layer Integration Layer

(Microservices)(Microservices)(Microservices)(Microservices)

EEEE----CommerceCommerceCommerceCommerce

PaymentPaymentPaymentPayment

GatewayGatewayGatewayGateway

OpenOpenOpenOpen

BankingBankingBankingBanking

Customer ServicesCustomer ServicesCustomer ServicesCustomer Services

• Marketing Marketing Marketing Marketing

AutomationAutomationAutomationAutomation

• DisputesDisputesDisputesDisputes

• OnboardingOnboardingOnboardingOnboarding

• Customer CareCustomer CareCustomer CareCustomer Care

API GatewayAPI GatewayAPI GatewayAPI GatewayMobile Mobile Mobile Mobile –––– PortalPortalPortalPortal ––––

WalletWalletWalletWalletPOSPOSPOSPOSATMATMATMATM

Terminal ManagementTerminal ManagementTerminal ManagementTerminal Management

Authorization LayersAuthorization LayersAuthorization LayersAuthorization Layers

a - Digital Layer b - Customer Management Layer c - Transaction Processing Layer d - Security Infrastructure Layer

NEXI 23 May 2019

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� Top 10 partner banks have been customers for more than 15 years;

� No customer loss since 2015 (change of ownership, exception made for Merchant Services and Cards & Digital Payments solutions of Banca Popolare di Vicenza and Veneto Banca, now part of IntesaSanPaolo to whom, nevertheless, processing services are still sold through Mercury payment services).

Nexi has increasingly been supporting partner banks with their commercial activity as competition from alternative players increase, thus resulting in the need to be more proactive on this front. Support in commercial activities like targeted campaigns, upselling campaigns targeting profiled customers, product specialists for large merchants, corporate cards specialists, on-field support, training days and similar activities have already had directly quantifiable benefits for the partner banks (and consequently for Nexi’s revenues).

The fact that Nexi offers a one-stop-shop (merchant acquiring and cards but also IBAN/SEPA based payments, ATM/POS, corporate banking, CBI network, etc.) has the twofold effect of satisfying partner banks while creating enormous entry barriers.

…and how it compares with peers’ business models

Nexi’s business model is unique as it operates across all the digital payments value-chain activities though it is focused entirely on one country (Italy).

Figure 7 – Electronic Payment Industry – Business model comparison

Company I&M Acquiring Processing Antifraud POS

mgnt ATM mgnt

Card Networks

Money Transfer D/C Banking Others Geography

NEXI x x x x x x x x x Italy

WorldPay* x x x USA+UK

Global Payments x Global

First Data* x x x x x Global

TSYS x x x North America

Worldline x x x x x x Europe+India

FIS* x x x Global

Adyen x x x x x Global

Wirecard x x Global

Square x USA

NCR x x x Global

Evertec x x x x x Latam

Fiserv* x USA

Safecharge x Global

Pagseguro x x x Brazil

Ingenico x x Global

Cardtronics x x x Global

Diebold Nixdorf x x x Global

Visa x Global

Mastercard x Global

Amex x Global

Paypal x x Global

Source: Companies websites, * in merger talks

NEXI 23 May 2019

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Its competitors are generally focused only on few activities but on a larger

geographical span. Thanks to its business model Nexi is trying to establish its brand in the mind of the consumers (which would increase the value of the company). This strategy cannot be followed by the majority of the other players (we believe that Worldpay or Square are not top of mind brands).

Worldline is one of the closest to Nexi in terms of business model and geography (France, Belgium, the UK and the Netherlands represent 70% of its revenues). Similarly to Nexi, it has low exposure to e-commerce given its high presence in in-store merchants and banks.

Nexi is less exposed than peers to e-commerce and this is due partly to the structure of the Italian market (93.5% of the total commerce is physical, source: Politecnico, Osservatorio eCommerce B2c, October 2018) and partly to the fact that Nexi’s main partners are banks (where, in terms of relative weight, incumbents represents the majority of the portfolio, mirroring the structure of the Italian banking system). Companies highly exposed to e-commerce includes Worldpay and Global Payment (which generates 40% of their revenues in this market and aims to reach 60%).

The payment process is quite complex and this issue is amplified by the fact that players may outsource some activities to companies that may become competitors in other areas. For instance, in some cases, Nexi uses SIA and Equens-Worldline as processors. By default, this let us assume that Nexi processes the transaction itself when it sits on all sides of the transaction.

Generally speaking, merchant acquirers benefit from the same secular trends as the networks, and also see similar benefits of scale, although they have slightly higher product development and client acquisition costs vs. the networks.

Figure 8 – Nexi and its peers – 2018 Capex/Sales comparison

Source: Company data (P/F for Nexi), FactSet

Merchant acquiring/processing, which was once highly commoditized, has seen

stable/increasing prices as POS and digital offerings have become more complex. We witness a market rapidly evolving over the next 2-3 years, as continued investments and specialization begin to define clear winners.

1.5%

4.9%5.4%

6.0% 6.0% 6.0% 6.2%

7.2%

16.1%

Transformation

Capex7.0%

9.1%Ordinary

Capex

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Another difference in business models is that some are tailored for SMEs and P2P (Nexi for instance), while others are more suitable for large corporates and global digital players. Adyen, for instance, built its own network (gateway) to simplify the payment value chain for the benefit of the merchant. Its business model fits in perfectly with large customers:

Figure 9 – Adyen business model & infrastructure

Source: Company website

Summing up, trying to answer the question about who is competing against Nexi, our answer would be:

� At retail level any bank that is not a customer of Nexi (i.e. Unicredit, Poste) or customers banks for products that they do not buy from Nexi;

� In card issuing:

o Amex on affluent and corporate customers;

o Any bank/financial institution that has a different go-to-market strategy (challenging banks like N26 or Revolut) and “steals” customers from Nexi’s partner banks;

� In merchant acquiring any player/financial institution that focus on verticals:

o On global large e-commerce players (Worldpay, Wirecard);

o On large multi-channel merchants (Adyen);

o On small/medium e-commerce (Stripe);

o On Physical SMEs (limited competition to date, would mention Paypal, Stripe, iZettle and SumUp);

� Any traditional payment sector player that competes with Nexi to sign supply contracts with banks (SIA, Six, Worldline, First Data, etc.).

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THE DIGITAL PAYMENT MARKET – A VISIBLE GROWTH STORY

We think that the payments sector looks attractive, given its natural leverage, secular growth drivers and economic cycle resilience.

Secular tailwinds from the shift to electronic payments, B2B payments, etc. should continue to drive attractive industry growth.

Worldpay, citing McKinsey data from “Global Payments Map” database, expects the growth to accelerate as worldwide industry CAGR should go from 6% in the 2011-17 period to 7% expected in 2017-21.

The Italian card payment market has grown faster than the European market and at a 9.7% CAGR in the past three years. With a card-payment penetration rate that is half the Western European average, we believe this overperformance vs. Europe should continue and we forecast a 2018-23 CAGR of 7.6%:

Figure 10 – The Italian Electronic Payment market – Estimates on growth and card penetration

2016AG 2017AG 2018PF 2019E 2020E 2021E 2022E 2023E 15-18 CAGR 18-23 CAGR

Italian digital payment market

ISTAT/OE Consumer spending - Italy (EURbn) 1,021 1,048 1,064 1,065 1,095 1,110 1,150 1,184

YoY growth 1.4% 2.6% 1.5% 0.1% 2.8% 1.4% 3.6% 3.0%

Shadow Economy (EURbn) 205 208 213 213 219 222 230 237

Consumer spending - Italy (EURbn) 816 840 851 852 876 888 920 947 2.4% 2.2%

YoY growth NA 3.0% 1.3% 0.1% 2.8% 1.4% 3.6% 3.0%

Card Payment penetration 22.5% 24.0% 25.9% 27.2% 28.8% 30.4% 32.0% 33.6% 7.2% 5.4%

Card Payment value (EURbn) 189 206 220 231 252 269 294 318 9.7% 7.6%

YoY growth 13.4% 9.0% 6.8% 5.1% 8.9% 7.0% 9.1% 8.1%

Card Payment - segmentation by kind

Physical (EURbn) 167 180 189 196.7 213.3 226.5 246.0 264.3 6.4% 6.9%

YoY growth NA 7.8% 5.0% 4.1% 8.4% 6.2% 8.6% 7.5%

E-Commerce (EURbn) 22 26 31 34.6 38.5 43.0 47.9 53.4 18.7% 11.5%

YoY growth NA 18.2% 19.2% 11.5% 11.5% 11.5% 11.5% 11.5%

Issuing Market

ATM activity (EURbn) 223 222 230 238 249 256 269 281

YoY growth NA -0.4% 3.6% 3.6% 4.3% 2.9% 5.1% 4.5%

Prepaid (EURbn) 37 43 51 53 57 60 64 68

Debit (EURbn) 306 312 323 337 359 377 404 430

Credit (EURbn) 69 73 76 79 85 89 95 101

Issuing market Total (EURbn; Card payment + ATM) 412 428 450 470 500 525 563 598 4.5% 5.9%

YoY growth NA 3.9% 5.1% 4.3% 6.6% 5.0% 7.1% 6.4%

Source: Nexi, ISTAT, Oxford Economics, McKinsey, Worldpay, UBI Banca Estimates

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In our analysis of the market we wanted to go more in depth and we questioned ourselves on two specific topics:

� Why does Italy show such a low rate of electronic payment and is there some structural reason that could prevent its growth?

� Is consumer spending as resilient as market participants claim and how did the payment sector behave during recessions?

Card penetration in Italy: why it should (continue to) grow

Italians pay only 26% of what they consume on the retail side by cards and this compares with a Western European average of 45% and with countries like France (often referred to as Italy’s “cousins”) at 52% and growing (it was 49% back in 2015).

Figure 11 – 2018 card payment penetration (% by value)

Source: Euromonitor International Consumer Finance 2019

In terms of infrastructure Italy is extremely well positioned with respect to other

Western European countries as it boasts the highest number of POS/inhabitants (although the distribution is still uneven) and a very high level of smartphone penetration (although the connection speed is not always optimal):

∼ 3x

2x

26%

45%

52%

63%69%

9.7% 5.6% 3.9% 5.9% 6.2%

42%

21%

49%

58%62%

Cards Payments CAGR

2015-2018 by Value

2015 Card payment

penetration

Western Europe

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Figure 12 – Payment terminal penetration in Europe (terminals/000 inhabitants)

Source: ECB

Figure 13 – Western Europe – Smartphone penetration rate and apps usage for M-Commerce


0 5 10 15 20 25 30 35

Italy

Malta

United Kingdom

Spain

Finland

Portugal

Cyprus

Netherlands

Denmark

Croatia

Estonia

France

Greece

Sweden

Slovenia

Belgium

Lithuania

Latvia

Austria

Germany

Czech Republic

Bulgaria

Poland

Hungary

Slovakia

Romania

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While the infrastructure is there and consumer spending habits seems to tend

towards the European average, we believe that two factors are preventing Italians from spending more through payment cards:

� Corruption: the share of “shadow economy” is reported by ISTAT itself (the Italian Statistical Office) being worth around 20% of total consumer spending. CapGemini established a connection between the perceived corruption level of several countries and the level of electronic payments and, not surprisingly, the correlation holds true;

Figure 14 – Correlation between perceived corruption and usage of cash

Source:CapGemini – World Payment reports 2018

� A cultural component : We believe that Italians are quite conservative when

using their money (i.e. perception of losing one’s spending control) and have a relatively high fears of frauds (mostly from the merchant side which also fears not having real-time visibility of revenues and costs). We arrived to this conclusion as one of the few options to explain the difference in card penetration with countries that usually have similar behaviors.

Despite these factors, the penetration rate has been growing in the past 5 years by 180bps per year which, conservatively, is close to what we assumed in our forecasts (154bps). We said conservatively because there are some forces at play that may change both the corruption and the cultural component:

a) As can be seen in the following graph, past Italian governments, regardless of their political color, have been acting in favor of electronic payments with the aim of reducing the magnitude of the shadow economy. It is worth mentioning that the Monti government’s (2011 - 2013) decided to make POS mandatory at merchants’ level;

ItalyTurkey

South Africa

Hong KongRussia

GreeceChina

India

Mexico

Saudi

Arabia

Czech Republic

Spain

Denmark

JapanBrazil

Singapore

Austria

Ireland

GermanySwitzerland

Belgium

France

CanadaLuxemburg

United Kingdom

Finald

USA

South KoreaSweden

AustraliaNetherlands

35 9545 55 65 75 85

0

100

200

500

400

300

Number of Non-Cash

Transactions per

Capita (2016)

Corrupution Perception Index (2016)

(Decreasing level of Corruption)

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Figure 15 – Italian government laws on topics related to the electronic payments


b) Nexi itself is improving the “electronic payment experience” to make it faster,

easier with the ultimate goal of incentivizing consumers to use cards.

Consumer spending: resilient unless 2009-like syste mic crisis occur

Our analysis shows that Italian consumer spending is less volatile than GDP or, in other words, when GDP contracts, it is mostly investments and exports that take the hit. This makes sense since the amount of goods one may need is somewhat limited despite potentially stronger GDP growth:

Figure 16 – Italian GDP and consumer spending (rebased to 100) and spread of GDP vs. consumer spending growth

Source: ISTAT, UBI Banca estimates

20172011 2012 2013 2014 2015 2016 20192018

Mandatory POS Terminals

Obligation to provide customers

with the option to pay by card

(instead of cash) involving all

merchants and professionals

Digital Agenda

Relaunch of Digital Agenda and

strengthening of its governance

PagoPA

Introduction of a new national

digital payment acceptance

system for Public Administration

e-Invoicing

Obligation of electronic invoicing

between Italian private VAT

holders (from January 2019)

Electronic payment for fuel prchase

Obligation of electronic payment for

the purchase of fuel at petrol pumps

to benefit from tax exempions (from

January 2019)

New Universal Basic Income

Payment of New Universal Basic Income to

Italian citizends through pre-paid payment

cards, driving penetration of cashless

payment methods

Monti

2011 - 2013

Letta

2013 - 2014

Renzi

2014 - 2016

Gentiloni

2011 - 2013

Conte

2018 - TodayGovernments

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Spread GDP Consumption expenditure

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During the 2003 recession Italian consumer spending growth was moderate but

remained positive (source ISTAT). Instead it went negative in 2012 and, obviously, in 2008. The increase in cards payment penetration rate was such that it more than compensated the 2012 slow down and the overall card-spending went down only in 2008 (mostly due to corporate cards).

Figure 17 – Card payments value compared to GDP and Consumer spending

Source: Banca D’Italia, UBI Banca estimates

Our understanding is that in case of systemic crisis, where also the banking

system is under extreme pressure, and consumer confidence’s negative influence is stronger than the real disposable income, then the amount of electronic payment could decline.

This is also related to the Italian market peculiarity on the acquiring side: 93% of the acquiring is led by banks:

Figure 18 – Acquiring distribution channels in Europe


To sum up, our market estimates (based on Oxford Economics in terms of Italian

consumer spending), forecast a 154bps increase in card penetration and we would describe this as reasonably conservative. Our estimates, however, do not incorporate the negative effect of a systemic crisis.

70

120

170

220

270

320

370

420

470

Card Payments Nominal GDP Consumption Expenditure

93%

82%

38%

25%

18%

62%

75%

7%

Banks

Other

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How pricing works in the electronic payment market…

The electronic payment value chain is quite long and involves several actors (for more details see the Appendix C), each of which does the work in exchange for a fee. Although several companies play more than one role, typically the fees paid from merchants and consumers could be grouped into the following three categories:

� Interchange fees (Nexi, Worldpay, Worldline, Firstdata, etc.);

� Card scheme fees (Visa, Mastercard);

� Merchant acquirer/banks (i.e. Nexi and its partner banks).

The sum of all those fees is usually referred as the Merchant Discount Rate (MDR) or Gross Merchant Service Charge (Gross MSC).

For full details of how the payment system works and who the players involved are please refer to Appendix C.

Interchange Fees

Every time a customer uses a credit card in a store, a fee is paid by the acquiring bank (merchant account) to the issuing bank (customer account). It’s called an interchange fee.

Interchange fees are set by each network (Mastercard’s and Visa’s interchange rates are on their website). They change twice a year, in April and October.

The purpose of interchange fees is to help the card-issuer cover things like the risk of approving the sale, fraud, and handling costs. So it should not be surprising that the factors that influence these rates relate in some way to the risk taken on by the card issuer, e.g.:

� The card that is used : debit cards with PINs are lower risk than credit cards, so they typically have a lower interchange rate. Moreover, rewards cards (travel, triple points, etc.) and business cards have higher interchange;

� How the transaction is processed : in-person card present transactions at the point of sale (POS) typically have lower rates compared to card not-present (CNP) transactions (online, over the phone, invoices, or mail order);

� The amount being charged : Merchants with small ticket sizes and a large amount of sales can qualify for lower interchange rates to help reduce their costs;

� The type of business : every business that accepts credit card payments has a merchant category code (or MCC), a four-digit number that is assigned to them by the acquiring bank or institution. The MCC is used to classify businesses into market segments that simplify IRS reporting;

� The MCC also influences how much a bank or institution charges in interchange fees. Business types that are considered “higher risk” (like financial services, travel, gambling, and hospitality) often have to pay higher interchange fees.

American Express and Diners serve as both the card network and the card issuer and their fee structure varies from the interchange fees we mentioned (it is a closed network and not an open one like Visa and Mastercard where any partner could issue cards).

As an indication, in the following table, we report the Interchange fees as per Mastercard’s website:

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Figure 19 – Mastercard – Interchange fees for consumer and corporate cards

Payment Product Fee Tier General Bill Payment and Government Reloadable Cards Top Up

Mastercard Consumer Credit Contactless 0.30% 0.30% (Max EUR 0.20) 0.30% (Max EUR 0.20)

Chip & PIN 0.30% 0.30% (Max EUR 0.20) 0.30% (Max EUR 0.20)

Low Value Payments 0.28% 0.28% (Max EUR 0.20) 0.28% (Max EUR 0.20)

Enhanced Electronic 0.30% 0.30% (Max EUR 0.20) 0.30% (Max EUR 0.20)

Merchant UCAF 0.30% 0.30% (Max EUR 0.35) 0.30%

Full UCAF 0.30% 0.30% (Max EUR 0.35) 0.30%

Base 0.30% 0.30% (Max EUR 0.35) 0.30%

Purchase at ATM 0.30% 0.30% (Max EUR 0.20) NA

Purchase at ATM (late presentment) 0.30% 0.30% NA

Mastercard Consumer Debit Contactless 0.20% 0.20% (Max EUR 0.08) 0.20% (Max EUR 0.08)

Chip & PIN 0.20% 0.20% (Max EUR 0.08) 0.20% (Max EUR 0.08)

Low Value Payments 0.18% 0.18% (Max EUR 0.08) 0.18% (Max EUR 0.08)

Enhanced Electronic 0.20% 0.20% (Max EUR 0.08) 0.20% (Max EUR 0.08)

Merchant UCAF 0.20% 0.20% (Max EUR 0.20) 0.20%

Full UCAF 0.20% 0.20% (Max EUR 0.20) 0.20%

Base 0.20% 0.20% (Max EUR 0.20) 0.20%

Purchase at ATM 0.20% 0.20% (Max EUR 0.08) NA

Purchase at ATM (late presentment) 0.20% 0.20% NA

Mastercard Corporate Contactless 0.50% + EUR 0.02 0.50% + EUR 0.02 EUR 0.20

Chip & PIN 1.50% 1.50% EUR 0.20

Enhanced Electronic 1.60% 1.60% EUR 0.20

Merchant UCAF 1.60% 1.60% EUR 0.35

Full UCAF 1.75% 1.75% EUR 0.35

Base 1.90% 1.90% EUR 0.35

Incentive -0.30% -0.30% N/A

Purchase at ATM 1.50% NA EUR 0.20

Purchase at ATM (late presentment) 1.90% NA 1.90%

Source: Mastercard website

Electronic payment costs are higher in USA

When it’s all said and done, according to Square for instance, the average cost of processing payments for U.S. businesses ranging between USD10,000 and USD250,000 in annual payments volume is between 2.87% and 4.35% per transaction.

The Nilson Report instead estimates the average MDR in USA at around 170bps:

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Figure 20 - MDR rates in USA

(%) 2010 2012 2013 2014 2016

V/MC credit 2.02% 2.16% 2.17% 2.15% 2.12%

American Express 2.29% 2.41% 2.37% 2.48% 2.36%

V/MC Debit 1.59% 0.78% 0.76% 0.75% 0.73%

Private Label 1.00% 1.10% 1.12% 1.13% 1.17%

Discover 1.88% 1.90% 1.89% 1.89% 2.04%

Average 1.76% 1.67% 1.66% 1.68% 1.68%

Source: Nilson report, No data for 2011/2015; US market, UBI Banca estimates

The Durbin Amendment, which was passed as part of the Dodd-Frank financial

reform legislation and implemented in 2011, set interchange caps on debit transactions at 0.05% plus 21 cents. This drove the fall in debit MDRs between 2012 and 2010.

Although what we wrote works in the vast majority of cases (and geographies), some case are peculiar, for instance Adyen, which has a different business model (it owns the infrastructure) and presents a different pricing structure. In the end, however, what finishes in the merchant bank account is still 1.76%, broadly in line with the MDR incorporated in our estimates:

Figure 21 – Adyen – MDR rates charges to customers

Source: Adyen corporate website

…and where it should go from here

We believe that MDR in Europe is lower than what it is in the USA and should be around 1.45%, it has been quite stable for some time. Our estimates are based on the assumption that:

� The interchange fee is 30bps for credit and 20bps for debit cards;

� The card scheme fees is 50bps;

� The remaining part of the MDR is split between the partner bank and Nexi (we estimate a 70/30. When Nexi is co-issuer we this could be around 50/50).

A warning to investors however needs to be made: estimating the MDR is a

NEXI 23 May 2019

24

nightmare. It may vary significantly as:

� It is composed by many parts and generally merchants do not know how to answer the question “how much do you pay for accepting electronic payments?”;

� It varies from card circuit to card circuit and by type of card (credit, debit, prepaid, meal voucher, pin debit, etc.);

� It depends on which offer made by the various circuit the merchant has accepted. For instance, some possible kinds of offers are:

o Interchange-Plus typically consist of both a percentage markup and a per-transaction fee markup, which are applied to all transactions;

o Subscription/Membership similar to interchange-plus, the difference is that you do not pay any percentage markup on transactions, just a small per-transaction fee. Then, an additional markup is charged as a flat monthly subscription fee;

o Tiered where fees (fix and in percentage of value) change depending on the amount of business that a merchant generates;

o Flat rate is like tiered pricing, but without the tiers. Instead, all transactions cost the exact same percentage and transaction fee, regardless of the wholesale cost. All costs are blended together to create one consistent rate and fee. This pricing model often makes sense for low-volume businesses.

The reason why we model the MDR is to better understand the price dynamics going forward. In that respect, we model 0.5bps decline every 2 years in the MDR due to increasing competition (e-commerce, PSD2, open banking, etc.).

Regardless of the MDR what we know for sure is that Nexi take-rate was, in 2018, 18bps (EUR448 million revenues based on EUR249 billion on transaction value for Merchants Services & Solutions and EUR361 million revenues based on EUR197 billion on transaction value for Card & Digital). Nexi’s take rate has grown in the past three years:

� In Merchant Services & Solutions it went from 17bps in 2016 to 18bps in 2018;

� In Card & Digital it went from 17.8bps to 18.3bps in 2018.

We warn investors not to confuse the take-rate with the average price charged by Nexi. The take-rate can grow because of mix (for instance corporate cards command a higher cost for customers vs. consumer cards) and/or because Nexi increases its share of wallet (it is involved in more activities within the payment value chain. Put it simply Nexi increases its market share).

Contractual agreements with banks

Leaving aside the differences in MDR, there is another factor that influences what part of the MDR goes to Nexi: the type of cooperation (i.e. contract) Nexi has signed with every partner bank:

� Direct acquiring: Nexi directly serve the customer, cashes all the MDR and pays out intercharge fee and scheme fee. On the MSS side large corporates may fall into this category while, for Cards, at the end of 2018, this represented only 1.5% of total number of cards managed;

� Referral model : Nexi enters directly into the contractual agreement with a merchant signaled by the partner bank. It charges directly the MDR to a merchant and gives part of it to the partner banks, based on their contract. MPS, Deutsche Bank and Carige fall into this category on the MSS side;

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� Associate licensing agreement : the relationship (and the contract) with the merchant is managed by the partner bank. Nexi offers a more limited amount of services to the merchant, manages the relationship with the card scheme and receives fees by the partner bank. BPM, BPER and Credit Agricole fall into this category for MSS. For card, main customers are UBI Banca and MPS (pure associates) and BPM, Unipol, Mediolanum, Credit Agricolè and PoP Sondrio (traditional licensing);

� Servicing model : Is the form that involves Nexi the least; in fact the relationship with the merchant and the card scheme are managed by the partner bank while Nexi offers usually POS management services only. Intesa Sanpaolo and ICCREA fall into this category as far as the MSS division is concerned. As far as card are concerned Intesa Sanpaolo and ICCREA again, BPM, BPER and Deutsche Bank are the main customers.

For the MSS business the next table summarizes duties and fees:

Figure 22 – Merchant Services & Solutions – Possible cooperation forms between Nexi and the partner banks

Referral Agreement Associate Licensing

Agreement Servicing Agrrement

Direct Acquiring

Contractual relationship with merchant Nexi Partner Bank Partner Bank Nexi

Services provided by Nexi

Full range:

Pos management Payment

autenthication/execution Adiministrative services

Pre-funding

POS management Relationship with card

scheme POS management Full range

Fees received by Nexi

Merchant fee

POS management (from merchant)

Fee per transaction (from partner bank)

Fee per transaction (from partner bank)

Merchant fee

POS management (from merchant)

Fees paid by Nexi Rebate to partner bank

Interchange fee Scheme fee

Interchange fee

Scheme fee

Source: UBI Banca estimates, Company data

For the C&DP business the following table summarizes duties and fees:

Figure 23 – Card & Digital Payments – Possible cooperation forms between Nexi and the partner banks

Licensing

Agreement Associate Licensing

Agreement Servicing Agrrement

Direct Issuing

Contractual relationship with merchant Pertner Bank & Nexi Partner Bank Partner Bank Nexi

Services provided by Nexi

Nexi is the card issuer:

Management of the partner’s entire stock of cards

Relationship with card scheme Product development and

marketing Anti-fraud

Nexi is the card co-issuer: Management of thepartner’s entire stock

of cards Relationship with card

scheme Anti-fraud

Processing Fraud management

Dispute management Full range

Fees received by Nexi

From cardholder: annual and

service fees From acquirer: interchange fee

Service fee (from partner bank)

Service fee (from partner bank)

From cardholder: annual

and service fees From acquirer: interchange fee

Fees paid by Nexi

Rebate to partner bank Scheme fee

Funding costs (rebated to the bank)

Scheme fee

Funding costs

Credit risk Partner Bank Partner Bank Partner Bank Nexi

Source: UBI Banca estimates, Company data

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STRATEGY: product, product, product…M&A

Nexi’s strategy to fuel growth can be summarized in three simple points:

� Increase the card penetration rate through new products that should improve the electronic payment experience;

� Cross selling within the current customer base;

� Search for new business opportunities (i.e. B2B and e-commerce).

Segmenting growth by customer type, the best opportunities should arise from Italian SMEs and Large corporates going Omni-channel.

All this implies significant investment in technology and a strong focus on operational excellence (it is a sector where customers do not accept even the smallest mistake).

We understand that Nexi is also investing to develop its own salesforce. In Merchant Services, it is in the process of building a team of >120 FTEs dedicated to large merchants. A similar approach is also under development in commercial cards. Those investments are aimed at helping partner banks better understand its products and services and at supporting their commercial activity.

Last but not least, Nexi has grown through a disciplined acquisition strategy and should continue to do so, although few opportunities are left in Italy and as such looking abroad is almost mandatory given the industry consolidation wave. It is worth mentioning that the payment market is considered, for antitrust purposes, a Europe-wide market so we see few risks in terms of further consolidation in Italy.

We will examine some of these points in more details in the next paragraphs.

New products to overcome electronic payment limitin g factors

It is useful in our view to look at new products/services separating the three business units to take into account the different issues experienced by merchants, card owners and partner banks with the electronic payment process.

Merchant Services & Solutions: the key task is to si mplify the process and improve merchants’ control

Intuitively, one of the reasons why card payment penetration is low in Italy is that the speed of execution in some cases is long and, in a few cases, the outcome is uncertain: it happens from time to time that the POS may not be working so one ends up paying cash. For significant amounts, if in doubt that the POS may not work, customers usually pay by cash.

So one of Nexi’s main efforts has been and will be to speed up the payment process and this should have the side-effect of increasing micro-payment transactions (considering that part of Nexi’s revenues is volume-driven, the benefits are obvious):

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Figure 24 – Speed of electronic payment on the Italian market


Another issue perceived by merchants is the complexity of having to use several

devices (one for each circuit) and the associated costs. Nexi, to overcome this issue, has launched in 3Q18 the “SmartPOS”, a device that incorporates all the hardware that today sits on the merchant’s desk. This device could be also mobile (in-store mobility) and offered on a large screen desktop solutions. It accepts all payment methods (including meal vouchers), acts as a cash register with fiscal printer included, and offers other VAS:

Figure 25 – Nexi SmartPOS – Comparison with current products on the market


14.6

13.5

12.4

65%

81%85%

38%

78%

0%

+7pp

2016 2017 2018 2016 2017 2018 2016 2017 2018 Merchants with vs without

micropayment’s promotion

Transaction Speed POS C-Less Premium Assistance Micro-Payments

Acceptance Infrastructure Perception / Reliability Habits

Seconds / Transaction % POS C-Less Merchants coverage YoY growth rate

+15/20% transaction speed54% C-Less transactions

(Dec-2018)90min-4h 24/7 SLA

High elasticity on «daily»

card usage

Today Tomorrow

� Multiple devides

� High costs

� Space issue

� Simple configuration, lean layout

� Cost reduction

� More services

• POS and acquiring • Full merchant service suite

• Add’I revenues and margins from both

merchants and alternative rail issuers

Merchant

NEXI 23 May 2019

28

Early adopter banks, according to Nexi, have been able to “place” it on 20% of their customer base. Those merchants have experienced a EUR14.0 higher ARPU (EUR40 for those that were using SmartPOS+ECR).

Talking about SMEs, Nexi is developing (launched during 1Q19) Omni channel solutions which are different based on the vertical to which they refer to, for instance:

� For Grocery and retail: in-app mobile self-scan, purchase & payment solutions;

� For Fuel & Petrol: mobile payment and e-invoicing;

� For Food & Restaurant: Omni-channel and loyalty solutions;

� For B2B2C: a new collection process for the Insurance sector.

To better serve the e-commerce space, Nexi, in 2Q17, launched X-Pay a comprehensive payment gateway that allows the use of e-wallets and is already being sold to several customers.

To improve the analytical capabilities of merchants, Nexi launched, in 4Q17, “Nexi Business” an app that helps compare merchant’s historical data, benchmark vs. similar merchants and manage the documentation.

Cards & Digital Payments: expanding the portfolio a nd unlocking card usage is key

When comparing Italy consumers behaviors on cards it emerges that:

� Italian debit cards are mostly used for cash withdrawals (“Bancomat”). International debit card have been launched recently and are growing fast (+53% CAGR in 2016-2018 vs. -10% of the national debit cards);

� Italian pre-paid cards have a very low level of activation and are mainly used for e-commerce;

� Italian credit card have low credit limit (according to Nexi 7 million transactions every year are denied due to credit limit).

As for debit cards, to summarize, Nexi’s focus is to make it works like credit cards (i.e. enabling e-commerce, mobile payments and acceptance abroad).

As for credit cards, we see that the majority of product innovations strive to overcome customers’ issues:

� High value purchases often carried out by cash/cheque as 55% of cards have less than EUR1,600 limit: Nexi’s offer allows customers to pay by instalments therefore enabling larger transactions (and customer stickiness);

� Card limit: 7 million transactions every year are denied due to credit limit. Starting from June 2019, Nexi’s products will allow customers to purchase extra credit ceiling (10-20% of total limit);

� Control and security issues limit payments and, more specifically, micro-payments. Nexi’s products will increase spending control by introducing immediate control over single transactions.

But, in our view, one of the most underdeveloped segments in Italy is corporate cards. It can be seen from two points of view: corporate consumer cards and corporate B2B cards.

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Figure 26 – Corporate Cards Addressable Market by Value of B2B Transactions (EURbn)


While the action to increase the usage of Corporate consumer cards is similar to

the normal consumer card in our view this segment matters because the take-rate for Nexi is higher (source: interchange fees reported by Mastercard).

As for B2B corporate cards, Nexi’s idea is to launch virtual cards solutions to pay for items that normally fall into the working capital needs. This could be integrated with the company ERP (thus simplifying the payment matching exercise later on) and with the automatic generation of the e-invoice.

This product has already been trialed selectively by some corporate customers while its full launch is scheduled for 2Q19.

Digital Banking Solutions: digitalizing banking acti vities and developing the Open Banking technology is key

We would like to focus here on two main initiatives:

� Digital corporate banking: to be launched during 1Q19, this involves E-invoice management and dedicated mobile apps for CFOs;

� Open Banking: to be launched in 3Q19 (mandatory by the regulation), this involves the PSD2 gateway solution for the entire Italian banking system as Nexi won the tender issued by ABI and Consorzio CBI (over 70% of the Italian banking system has already joined CBI Globe).

Cross selling: low-hanging fruit

While Nexi has undoubtedly a strong relationship with the Italian banking system, not all partner banks have outsourced 100% of their activity to Nexi. For every activity there is a specific contract so, with the 150 banks with which Nexi works, the company has signed around 1,000 contracts. Growth space is evident from the following table:

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Figure 27 – Nexi cross selling opportunities – Penetration on top 25 Nexi partner banks based on revenues


These relationships evolve overtime, not least because of bank concentration

(which per se is neither negative nor positive: some banks which were not customers may end up within the scope of Nexi’s partner banks and vice versa).

In our experience, cross-selling is easier said than done and requires stringent execution and operational capabilities.

Nonetheless, in our experience, incumbents stand more of a chance of gaining market share than new comers, above all in a sector as traditional and conservative as the banking sector.

New opportunities: not included in our estimates

Nexi’s role as market leader in Italy also entails the “responsibility” of advancing the market by being the first mover.

The target segments that Nexi tries to capture are:

� Millennials;

� Corporate (mostly large) B2B payments;

� Data-Enabled that opens new opportunity in payments.

Millennials: 6 million people in Italy alone

Millennials, as far as payments are concerned, can be described as people with high propensity to spend, who are inclined towards e-commerce and are often disconnected from traditional banks.

On that score, Nexi has internally developed an app called YAP that is driven by Nexi itself but could also carry the bank brand and gives 1:1 promotion opportunities that could drive cross/up-selling.

Launched in September 2018, it has gained an ever growing number of users:

Figure 28 – YAP enrolled users (000) by week


Please note

said before Nexi is trying to establish its brand in

Corporate Payments: an EUR85 billion addressable mark et

With working capital and cash flow discipline assuming corporate payments revenues pool becomes an addressahere needwhile in procurement cycle.

Nexi’s areas. The combination of its Digital Corporate Banking business (Italian provider of DCB workstations, market share in cards and merchants segments) allows Nexi to supply services like account receivables collection, real time supplier payments, real time international cash pooling 24x7x365 and supply chain synchronized payments.

Data-enabled:

Data analytics and machine learning are opening up new frontiers that were unthinkable only some years ago.

It is difficult to summarize in to its partner banks, many of which are not big enough to develop themselves anything similar to what Nexi could offer.

We would only verifications, context analysis and the fact that Nexi sees both sides of a transaction help the company

YAP enrolled users (000) by week

Please note that for YAP consumers are Nexi’s (and also data ownership). As we said before Nexi is trying to establish its brand in the consumers’ minds.

Corporate Payments: an EUR85 billion addressable mark et

With working capital and cash flow discipline assuming greatercorporate payments revenues pool becomes an addressable market. Customers here need to deal with the fact that regulation now requires electronic processes

in reality paper-based processes and payments are often decoupled fromprocurement cycle.

position here is strong thanks to its business model that spans across all areas. The combination of its Digital Corporate Banking business (Italian provider of DCB workstations, only supplier of the CBI Globemarket share in cards and merchants segments) allows Nexi to supply services like account receivables collection, real time supplier payments, real time international cash pooling 24x7x365 and supply chain synchronized payments.

enabled: it could open interesting cross/upselling opportunities

Data analytics and machine learning are opening up new frontiers that were unthinkable only some years ago.

It is difficult to summarize in a few lines the array of services that Nexi could offer its partner banks, many of which are not big enough to develop themselves

anything similar to what Nexi could offer.

We would only like to present an example here that deals with how direct customer verifications, context analysis and the fact that Nexi sees both sides of a transaction help the company to massively reduce its fraud rates vs. the past:

NEXI 23 May 2019

31

consumers are Nexi’s (and also data ownership). As we consumers’ minds.

Corporate Payments: an EUR85 billion addressable mark et in EMEA

greater importance, the ble market. Customers

requires electronic processes often decoupled from the

position here is strong thanks to its business model that spans across all areas. The combination of its Digital Corporate Banking business (as the largest

supplier of the CBI Globe gateway, market share in cards and merchants segments) allows Nexi to supply services like account receivables collection, real time supplier payments, real time international cash pooling 24x7x365 and supply chain synchronized payments.

selling opportunities

Data analytics and machine learning are opening up new frontiers that were

services that Nexi could offer its partner banks, many of which are not big enough to develop themselves

present an example here that deals with how direct customer verifications, context analysis and the fact that Nexi sees both sides of a

its fraud rates vs. the past:

NEXI 23 May 2019

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Figure 29 – Evolution of fraud rate on expenditure


Not only this but nowadays Nexi anti-fraud systems are no worse than Visa’s or

Mastercard’s ones:

Figure 30 – Gross Fraud rates (basis points, 2018)


External Growth: national…or international

Nexi’s history is one of external growth which, since the entry of Private Equity funds in the shareholders base at the end of 2015, has been focused on transforming the company from a bank-like group into a payment-focused company.

It is inevitable to think that such experienced management would look at M&A again in the future. However, we would like to split this theme in two parts: national and international M&A.

National M&A

In our view, it is obvious that, for a company that has a 70% market share in the merchant acquiring market and 60% in the card issuing market there are few options in Italy in terms of consolidation.

Before the IPO the deal that even the press has been talking about is the merger with SIA.

SIA is a EUR615 million sales company (in 2018) with EUR201 million EBITDA (33% margin) operating in the processing space but also in the issuing, acquiring, clearing as well as in other activities.

8,08,08,08,0

4,44,44,44,4

7,97,97,97,9

6,76,76,76,7

NEXI EU perimeter

NEXI 23 May 2019

33

In press interviews, SIA CEO, Mr. Cordone, said that he would prefer to go stand-alone but if shareholders were to create a national champion through a merger with Nexi then cost optimization and scale opportunity would arise.

SIA major shareholder, CDP (the Italian “sovereign fund”), however could envision to create a national champion to go, at a later stage, as a consolidator.

Nexi outsources to SIA part of its processing and, in 2018 alone, paid EUR44 million to SIA. A merger will have the benfit to internalize this revenues (and the margins attached).

It is worth mentioning that, as far as antitrust issues are concerned, the payment sector is seen as a Europe-wide market place and, as such further consolidation in Italy should not raise particular antitrust issues.

International M&A

A first wave of M&A transactions has already happened in the sector, quite recently: the combination between Vantiv and Worldpay, which created one of the sector leaders dates from January 2018. The rationale of the merger was to create a global player in the merchant acquiring market, with a focus on e-commerce and omni-commerce in particular on specific verticals.

Figure 31 – Electronic payments M&A Deals – Major deals of the past 5 years

Buyer Target EV/Sales EV/EBITDA Price Date Expanded Offering

Vantiv Mercury Payments USD 1.7 bn Jun-14 Integrated payments

Wex Evolution1 USD 533 m Jul-14 Virtual corporate payments

DH Fundtech 4.8x USD 1.3 bn May-15 Hub Payment technology

Fidelity National Sungard 11.5x USD 9.1 bn Aug-15 Finance software

Wex EFS USD 1.4 bn Oct-15 Virtual corporate payments

Alliance Data Systems Conversant 10.0x USD 2.3 bn Nov-15 Customer data analytics

Global Payments Heartland Pmts 19.2x USD 4.3 bn Dec-15 Merchant acquiring

Total System Services Transfirst 13.8x USD 2.4 bn Jan-16 Merchant acquiring

Fleetcor STP (Brazil) USD 1.1 bn Mar-16 Workforce Payments, Toll Network

Fleetcor Cambridge Global Pmts USD 675 m May-17 Cross border payments

Vantiv Worldpay 16.7x USD 10 bn Jul-17 Merchant acquiring, e-commerce

American Express Cake Technologies EUR 11 m Oct-17 Mobile payment

Blackhawk Silver Lake / P2 Capital 12.0x USD 3.5 bn Jan-18 Digital Commerce

PT Metranet Cellum Global EUR 5 m Jan-18 Mobile payment

Alfa Bank Pay-Me EUR 7 m Feb-18 Merchant acquiring

Verifone Francisco Partners 10.4x USD 3.4 bn Apr-18 Going private

DST Global Revolut EUR 206 m Apr-18 Global money transfer

SIA Firstdata 3.9x EUR 387 m May-18 Card processing business

Nets Dotcard EUR 73 m Jun-18 Payment Services

Dunedin Capital Partners Global Processing Service EUR 50 m Jun-18 Issuer processing

PayPal iZettle 18.6x EUR 1.9 bn Sep-18 Money transfer

Sella Open Fintech Platform Vipera EUR 22 m Sep-18 Mobile banking, mobile payment

Wordline SIX Payment Services EUR 2.4 bn Nov-18 Merchant acquiring

Source: Company data, UBI Banca estimates

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The French Worldline too executed 8 deals in the past 5 years, the most notable

being Six, competing against Nexi. According to Worldline for instance (2019 investor day presentation) more than 40 significant transactions have taken place over the last 5 years with a 50% to 100% increase in the size of the leading consolidators. The previous table lists the most relevant (by size) with the kind of expanded offer the acquirer was trying to achieve.

The consolidators have been massively increasing their competitive advantage in terms of scale and European reach.

The second wave of consolidation in payments could just have started: in January 2019 Fiserv announced the acquisition of First Data, just to name the most recent and relevant transaction. The strategic rationale is to add Global Merchant Acquiring business of First Data to the card-based payments & security solutions of Fiserv.

Worldline itself didn’t made a mystery it is open to new acquisitions (source: 2019 Investor day presentation). Worth mentioning that Nexi outsources to Equens/Worldline part of its processing and, in 2018 alone, paid EUR90.7 million. A merger will have the benefit to internalize this revenues (and the margins attached).

We expect M&A will largely focus on the themes outlined in this report: expanding exposure to e-commerce, integrated Merchant Services & Solutions and B2B services. Additionally, we expect that payment companies will seek international growth opportunities that can provide cross-border or emerging market exposure.

Nexi is, as we have stressed, the Italian leader but lacks a foreign presence. By looking at its business model (please refer to Figure 6) it seems difficult to us that Nexi would try to specialize in one/two activities of the value chain at a European/worldwide level. It is more likely that Nexi would try to replicate its whole-chain/few countries strategy. As such, the companies more similar to Nexi are, in our view, Worldline and Adyen (within the listed universe). Please note that the market capitalization of both companies (Adyen in particular) are, in our view, significantly higher than Nexi’s prospective one.

Summing up, our understanding about M&A options for Nexi is that:

� Nexi does not need an international M&A deal as it sees the organic growth in its core market being the main driver;

� However, it does have the size to look at potential opportunities and it is keeping an eye on what is happening in its sector (i.e. a second wave of consolidation);

� The criteria with whom management would look at potential M&A are strategic fit and value creation for shareholders.

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SWOT ANALYSIS

Strengths

� By far the market leader in Italy, in a business where scale matters, offering full coverage of the payment system value-chain;

� High entry barriers: much more entrenched than anyone in the Italian eco-system both at the banking and merchant level;

� Large and diversified customer base with around 150 partner banks;

� High customer retention rates (each of the top 10 partner banks has been a customer for more than 15 years);

� Visible business: more than 50% of revenues are installed base-driven (i.e. 1st January of every single year half of the revenues are already “at home”);

� Dual-sided positioning allows to see both side of the transaction improving cost and operational efficiency while reducing risks;

� The majority of the credit risks rests with partner’s banks;

� Attracted and developed an excellent management team;

� Solid financials allow Nexi to remain the innovation leader on the market;

� Nexi is in an enviable position to further consolidate the Italian market and to grow abroad.

Weaknesses

� Lack of international presence;

� Low exposure to e-commerce;

� Limited direct exposure to retail customers (merchants and card holders);

� Heavily reliant on the Italian banking systems (origination, distribution, marketing);

� Large amount of goodwill (EUR2.1 billion).

Opportunities

� B2B/Corporate payments are un-tapped market opportunities that could result in a significant boost to the growth rate of the payment market;

� Nexi has just launched its app (YAP) to attract millennials to the payment market. Customers and their data are owned directly by Nexi in this case;

� Broader technological developments (faster broadband connections, smartphone penetration, contactless payments) work in favor of the electronic payment industry;

� New opportunities arising in payments thanks to big data and advanced analytics;

� Dual-sided positioning allows to see both side of the transaction and should be an asset in data analytics, instant credit scoring, closed-loop schemes (i.e. fuel cards);

� Nexi is trying to establish its brand also in the mind of retail consumers and this could represent an asset going forward;

� Nexi is developing its own sales force to support banks’ commercial activity and this could further speed up market growth.

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Threats

� Penetration of card payments on total consumptions could grow at a slower

pace than predicted;

� Past experience shows that, in case of systemic risks, electronic payments value may decline;

� According to Nexi, 57% of millennials do not have a bank account. In the long run, this could be a threat for the banking system and ultimately for Nexi;

� Nexi, having a local nature, is not suited to satisfy the needs of global e-commerce players which continue, however, to gain market share;

� Reputational risk (data privacy, frauds to clients, etc) may impact customers willingness to use Nexi as a payment actor;

� Risk of default for Banca Carige; some of Nexi’s customers in the MSS division utilize Carige banking services;

� The fact that Nexi’s brand is gaining relevance in consumers’ minds (YAP, Nexi branded cards, etc.) could be seen as a threat from partners’ banks;

� Industry consolidation is creating larger competitors. In certain activities/segments (processing, international SMEs, large corporate) Nexi may end up being too small.

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FINANCIALS

In the past three years, Nexi changed significantly its perimeters (acquisitions of companies and merchants books, disposals, spinoff of Depobank and sale of real estate assets) plus a refinancing of its debt in 2018 which has a meaningful impact on the amount of financial charges (please refer to Figure 2 for more details).

In this context, the financials that we present are the following:

� “Aggregated” numbers for 2016 and 2017 (i.e. providing the full year effect of completed M&A);

� Pro-forma 2018 reflecting full-year effects of completed M&A and of the refinancing and the contracts signed with Depobank at the time of the spinoff.

Below is a useful reference to draw a comparison between carve-out EBITDA (i.e. figures reported in the official financial accounts), aggregated and pro-forma:

Figure 32 – Historical normalized EBITDA evolution (EURm)

Source: Company data, “Announced Initiatives” to be fully realized by 2020 according to the company

Income Statement – 53% of revenues are installed ba se-driven

In the past three years revenues have grown at a 8.5% CAGR if 2018 P/F is considered as opposed to 7.8% when aggregated figures are considered. Merchant Services & Solutions have grown at the strongest pace (9.3%), followed by Cards & Digital Payments (7.0%) whereas Digital banking posted a +5.0%.

Nexi revenues comes from a different mix of volume-driven (i.e. number/value of transactions) and installed-base driven (i.e. recurring revenues based on the number of clients/hardware/contracts/etc.).

The end result is that, based on 2018 P/F revenues, 53% is installed-base driven meaning that, at 1st January 2018, more than half of Nexi’s revenues were already at home. We consider this feature particularly relevant and therefore we have incorporated this into our analysis.

Summing up our findings, detailed later on, we expect revenues to grow at a 2018-23 CAGR of 6.6%, while the split of volume and installed-base driven should trend towards the 50/50 base. 2019 should trend somewhat below the longer term CAGR due to the deliberate run-off of some low-margins contracts entered into by Bassilichi and the negative impact of two failed banks (Veneto Banca and Banca

2016 2017 2018 2016 2017 2018 2018

Pro Forma

Announced

Initiatives

2018 including

Announced Initiatives

171

338

419

317

369

424 42495

519

56.4% CAGR 15.5% CAGR

Carve-Out Aggregated Pro Forma

NEXI 23 May 2019

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Popolare Vicenza).

Another way of de-constructing our estimates is that volume-driven revenues should grow in line with the market (9.3% 2018-23 CAGR), while installed-base driven should grow predictably at a 2018-23 CAGR of 4.0%. The two divisions represent almost 90% of the business (Merchant Service and Cards), while Digital banking should grow at a slower pace.

Figure 33 – Nexi – Revenues breakdown

2016AG 2017AG 2018PF 2019E 2020E 2021E 2022E 2023E

Merchant Services & Sol. - Revenues (EURbn; A+B) 375 415 448 475.8 517.7 559.1 610.4 661.1

YoY growth 10.7% 8.0% 6.2% 8.8% 8.0% 9.2% 8.3%

Installed base driven revenues - A (EURbn) 173.5 182.2 191.3 199.9 208.9 221.4 234.7 248.8

YoY growth 5.0% 5.0% 5.0% 4.5% 4.5% 6.0% 6.0% 6.0%

NEXI mkt share in Physical NA NA 72.0% 73.0% 74.0% 75.0% 76.0% 77.0%

Physical - NEXI transacted value (EURbn) NA NA 136 144 158 170 187 204

NEXI mkt share in E-commerce NA NA 21.0% 22.5% 23.7% 24.9% 26.1% 27.3%

E-commerce - NEXI transacted value (EURbn) NA NA 6.5 7.8 9.1 10.7 12.5 14.6

MDR assumption (bps) NA NA 145.0 145.0 144.5 144.5 144.0 144.0

Interchange (bps) NA NA 28.0 27.5 27.0 26.5 26.0 25.5

Card Scheme (bps) NA NA 50.5 50.0 49.5 50.0 50.0 50.0

NEXI+partner bank (bps) NA NA 66.5 67.5 68.0 68.0 68.0 68.5

NEXI (bps) NA NA 18.0 18.2 18.5 18.7 18.8 18.9

NEXI Revenues - Physical (EURm) NA NA 244.3 261.7 291.9 317.7 352.1 384.8

NEXI Revenues - E-commerce (EURm) NA NA 11.7 14.2 16.9 20.0 23.6 27.6

Volume driven Revenues - B (EURbn) 201.5 232.8 256.0 275.9 308.8 337.7 375.7 412.3

YoY growth 15.5% 10.0% 7.8% 11.9% 9.3% 11.3% 9.8%

Cards & Digital Payments - Revenues (EURbn; A+B) 315 342 361 387.6 414.0 437.5 466.8 496.3

YoY growth NA 8.6% 5.6% 7.4% 6.8% 5.7% 6.7% 6.3%

Installed base driven revenues (A) (EURbn) 197.4 209.3 216.6 225.3 234.3 244.8 255.8 267.3

YoY growth 6.0% 3.5% 3.5% 4.0% 4.0% 4.5% 4.5% 4.5%

NEXI mkt share in Credit NA NA 77.0% 78.0% 78.5% 79.0% 79.5% 80.0%

Credit - NEXI transacted value (EURbn) NA NA 59 62 66 70 76 81

NEXI mkt share in Debit NA NA 39.0% 40.5% 41.5% 42.5% 43.5% 44.5%

Debit - NEXI transacted value (EURbn) NA NA 126.0 136.5 149.0 160.2 175.7 191.1

NEXI mkt share in Prepaid NA NA 23.0% 24.5% 25.1% 25.7% 26.3% 26.9%

Prepaid - NEXI transacted value (EURbn) NA NA 11.7 13.0 14.2 15.3 16.8 18.2

Total NA NA 196.2 211.4 229.6 245.6 268.0 290.2

NEXI fee (bps) NA NA 0.74 0.75 0.75 0.74 0.74 0.74

NEXI mkt share in B2B payments/cards NA NA NA 60.3% 60.0% 60.8% 61.5% 62.3%

NEXI transacted value (EURbn) NA NA NA 9.7 11.0 13.8 17.3 20.9

NEXI revenues NA NA NA 3.7 8.2 10.2 12.8 15.4

Volume driven Revenues (B) 117.6 132.7 144.4 162.3 179.7 192.7 210.9 228.9

YoY growth 12.9% 8.8% 12.4% 10.7% 7.2% 9.4% 8.5%

Digital Banking - Revenues (EURbn; A+B) 101 109 122 119.0 119.1 121.0 123.0 125.0

YoY growth NA 7.9% 11.9% -2.5% 0.1% 1.6% 1.6% 1.7%

Installed base driven revenues (A) (EURbn) 71.9 78.3 85.4 82.0 81.2 82.0 82.8 83.6

YoY growth 9.0% 9.0% 9.0% -4.0% -1.0% 1.0% 1.0% 1.0%

Volume driven Revenues (B) 29.1 30.7 36.6 37.0 37.9 39.0 40.2 41.4

YoY growth NA 5% 19% 1.0% 2.5% 3.0% 3.0% 3.0%


Our estimate

� Merchant Services & Solutions (

� Cards & Digital Payments

� Digital Banking (

An alternative way to would have been to estimate the number of transaction (or the transaction value) and then multiply it by net revenue per transaction (called “take

Based this approach, and assuming that average ticketdown (increased weight of micro13.1% 2018Solutions and 1better detailed in the “Financials” chapter, in an overall 2018of 7.3% for the Merchants & Solutions plus the Cards & Digital Payments together (we excluded from the calculation digital banking which works on different metrics).

In terms of the 15.5% reported in the 2016constructing the 2016the 15.5% was organic:

Figure 34 – Nexi EBITDA contribution analysis


estimates are based on the following assumptions:

Merchant Services & Solutions (8.1% CAGR):

o 5.4% growth in installed base-driven revenues (

o 18bps fee on the volume-driven revenues (growing to 18.

o Or, take-out rate at 18.4 bps in 2023.

Cards & Digital Payments (6.6% CAGR)

o 4.3% growth in installed base-driven revenues (

o Nexi fee (bps) of 0.75 declining by 1 bps every year;

o Or take-out rate increasing by 0.6 bps to 18.9.

Digital Banking (0.5% CAGR):

o Installed base-driven revenues declining -0.4%

o Volume driven-revenues growing 2.5% (1.0% in 2019).

An alternative way to model revenues, which has been nonetheless explored, would have been to estimate the number of transaction (or the transaction value) and then multiply it by net revenue per transaction (called “take

Based this approach, and assuming that average ticket/transaction should go down (increased weight of micro-payments) by 4.8% per year, we estimate a

% 2018-23 CAGR in number of transactions managed in the Merchants & Solutions and 10.2% growth for Cards & Digital Payments. This should result, as

detailed in the “Financials” chapter, in an overall 2018-% for the Merchants & Solutions plus the Cards & Digital Payments together

(we excluded from the calculation digital banking which works on different metrics).

In terms of EBITDA we expect a 2018-23 CAGR of 13.8%, which is the 15.5% reported in the 2016-18 period on the aggregated figuresconstructing the 2016-18 EBITDA evolution into in-organic/the 15.5% was organic:

contribution analysis – Acquisition, disposals and organic growth (EURm)

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driven revenues (4.5% for 2019);

growing to 18.9 in 2023);

driven revenues (4.0% for 2019);

declining by 1 bps every year;

% (-4.0% in 2019);

% in 2019).

revenues, which has been nonetheless explored, would have been to estimate the number of transaction (or the transaction value) and then multiply it by net revenue per transaction (called “take-rate”).

/transaction should go % per year, we estimate a

23 CAGR in number of transactions managed in the Merchants & % growth for Cards & Digital Payments. This should result, as

-23 CAGR in revenues % for the Merchants & Solutions plus the Cards & Digital Payments together

(we excluded from the calculation digital banking which works on different metrics).

which is consistent with 18 period on the aggregated figures. By de-

/organic, we see how

NEXI 23 May 2019

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Our EBITDA estimates are based on the assumption that 64% of the total costs

are fixed, and this is why we defined the business as one where scale matters: operating leverage is 80.6%.

Slicing the fixed costs by the main components we expect:

� Slightly increase in HR costs mainly due to inflation and business growth;

� No growth in IT costs, as technological upgrades allow Nexi to be already correctly sized. By contrast, the planned actions (IT strategy program, decommissioning initiatives, spending review programs, integration of Bassilichi/MPS, etc.) will favor a reduction in fixed costs in the next few years;

� Decrease in other non-HR cost components is expected thanks to further costs efficiency and synergies.

On top of that, we have considered so far, EUR72 million worth of benefits in terms of EBITDA from initiatives already announced and implemented but not yet realized (EUR36 million of cost savings and EUR36 million of integration synergies). This is the main driver of the pick-up in 2020 EBITDA growth.

Worth mentioning that recent re-organizations allowed the company to keep the overall workforce flat:

Figure 35 – Nexi – Workforce 2016-2018 evolution


Given the current level of investments, we estimate D&A (excluding D&A related to

acquired customer contracts) would increase by around ca. EUR30 million per year (as a result of EUR65 million “transformation capex” amortized over three years) implying that D&A/Net revenues are higher than total capex/net revenues for the next three years and will begin to normalize thereafter.

As a consequence, EBIT 2018-21 CAGR will be lower than EBITDA CAGR for the same period but it will be similar if not higher in the longer run (18-23 CAGR).

Interest expenses should decline significantly in 2019 (cash-in from the IPO and refinancing) and in 2020 (full-year impact of 2019 actions just mentioned plus

2016 2018

∼1000

291 43 (343)

(94)

(721)

(380) 242Bassilichi

MePSOthers

NEXI

Oasi

Bassilichi

Non-core

DEPObank

Acquisitions Restructuring / Disposals Investments

1,7831,7831,7831,7831,8211,8211,8211,821

NEXI 23 May 2019

41

another notes redeemed). Our interest expense line includes also the costs for the long-term incentive program (LTIP) consisting of share options. It will run from 2019 to 2021 and will consist of EUR12 million per year with a vesting period of three years (EUR4 million in 2019, EUR8 million in 2020 and EUR12 million in 2021).

The Non-recurring line declines massively from 2019 according to the company guidance and includes the IPO costs (the company indicated EUR70 million part of which will go through the Balance Sheet, we assume that EUR39 million will flow through the P&L while EUR31 million will be capitalized).

Adjusted Net Profit, considering a tax rate of 33%, is seen posting a 22.4% 2018-23 CAGR. In the next table we present our P&L estimates:

Figure 36 – Nexi P&L estimates

(EURm) 2016AG 2017AG 2018PF 2019E 2020E 2021E 2022E 2023E 16-18 CAGR 18-23 CAGR

Merchant Services & Solutions 375 415 448 476 518 559 610 661

Cards & Digital Payments 315 342 361 388 414 438 467 496

Digital Banking Solutions 101 109 122 119 119 121 123 125

Net Revenues 791 866 931 982 1,051 1,118 1,200 1,282 8.5% 6.6%

Payroll & Personnel Costs (132) (137) (150) (152) (155) (157) (159) (162)

% on Net Revenues 16.7% 15.8% 16.1% 15.5% 14.7% 14.0% 13.3% 12.6%

Non-Personnel Operating Costs (342) (360) (357) (330) (323) (315) (310) (311)

% on Net Revenues 43.2% 41.6% 38.3% 33.6% 30.7% 28.2% 25.9% 24.2%

EBITDA 317 369 424 500 574 646 731 810 15.7% 13.8%

EBITDA margin 40.1% 42.6% 45.5% 50.9% 54.6% 57.8% 60.9% 63.2%

D&A NA NA (75) (115) (145) (170) (175) (160)

% on Net Revenues NA NA 8.1% 11.7% 13.8% 15.2% 14.6% 12.5%

Operating Profit NA NA 349 385 429 476 556 650 NA 13.2%

Operating margin NA NA 37.5% 39.2% 40.8% 42.6% 46.3% 50.7%

D&A Customer Contracts NA NA (40) (40) (40) (40) (40) (40)

Interests + LTIP NA NA (108) (82) (61) (44) (40) (37)

Non Recurring / Extraordinary Items NA NA (131) (85) (40) (30) (20) (10)

Pre Tax Profit NA NA 70 178 288 362 455 563 NA 51.7%

Taxes NA NA (49) (59) (95) (119) (150) (186)

Tax rate NA NA 69.4% 33.0% 33.0% 33.0% 33.0% 33.0%

Net Profit NA NA 21 119 193 243 305 377

Minority Interests NA NA (2) (6) (10) (12) (15) (19)

Group Net Profit NA NA 20 113 183 230 290 358 NA 78.4%

Group Net Profit - Adjusted NA NA 148 210 250 290 343 405 NA 22.4%


Balance Sheet

The main three items to look-at in Nexi’s balance sheet are:

� Debt (gross and net);

� Goodwill;

� Working capital evolution.

NEXI 23 May 2019

42

Debt – renegotiated after the IPO

According to Nexi financials, as of 2018, gross debt was EUR2.6 billion while Net debt stood at ca. EUR2.4 billion representing a 4.5x ratio on pro-forma EBITDA including “Initiatives” and 5.7x excluding initiatives. Including the amount of Visa share held (EUR84 million net of hedging) and the earn-out on OASI (EUR9 million) the 2018 P/F Net Debt would be EUR2,325 million.

After the IPO rating agencies raised Nexi’s rating (and outlook). The current status is highlighted in the table below:

Figure 37 – Nexi – Current Ratings from agencies

Moody's S&P Fitch

Issuer LT / Corporate Family rating Ba3 BB- B+ (rating watch positive)

Outlook Positive Positive Stable (under review)

Issue Rating Ba3 BB- BB- (rating watch positive)


Part of the gross debt has been refinanced after the IPO and part should be

subject to a refinancing exercise from now until 2020:

� Two new lines were signed after the IPO: EUR1 billion senior secured term loan facility and EUR350 million multy-currency RCF. They replace the EUR1,375 million bond expiring May 2023 (and paying Euribor + 362.5bps) which the company redeemed last week.

� EUR825 million expiring November 2023 and paying a fix coupon of 4.125%. Up to 40% of this bond, in case of an IPO, could be redeemed at a call price of 104.125 (thereafter and until 30 November 2020 the call premium is set at 102.0625);

� EUR400 million expiring July 2024 and paying Euribor + 362.5bps. It is callable after 2nd July 2019 at 101 (if called between 2nd July 2019 and 1st July 2020) and at 100 (if called after 2nd July 2020).

In our estimates we assume that the money raised during the IPO (EUR684 million, net of the fees) will be used to call the EUR400 million bond in 2019 and part of the EUR825 million bond in 2020.

The weighted average yield of the existing debt structure, given Euribor current levels, is around 3.1% p.a. and went down (from 3.8% before the IPO) thanks to the refinancing exercise, thus significantly reducing financial charges.

Worth mentioning that, in the IPO prospectus, the company provided a sensitivity to interest rates (presumably before the refinancing exercise): every 100bps increase in the yield curve would bring EUR70 million additional financial charges cumulated 2019-2024. This estimate do not include any mitigant action.

Goodwill & Intangibles – Sizeable and Stable

The balance sheet carries a significant amount of intangibles (EUR2.7 billion on P/F 2018) with the vast majority being goodwill that arose from the acquisitions. Intangibles mostly refer to customer relationships and software. We do not expect the overall Intangible number to vary over time given that the company does not capitalize R&D and the customer relationship may change if, as with bank failures, the impairment test will show their value has changed.

NEXI 23 May 2019

43

Working Capital – Not material

Nexi has a daily operational sourcing requirement generated by the pass through of funds in the card issuing and merchant acquiring business it manages.

As regards the card issuing business, Nexi is debited daily by the card schemes for all payments occurring on any given day with its cards; the time lapse within which Nexi receives back the amount previously debited ranges on average from 15 to 45 days (issuing licensing and direct). A limited number of customers benefit, in the issuing licensing scheme, from 60 to 90 days delay vs. the standard 45 days. Furthermore, should a cardholder elect to pay its monthly bill in instalments, the delay could increase to some months (issuing revolving).

As regards the acquiring business, transactions are debited to Nexi on a daily basis and repaid to Nexi after 1 to 3 days.

In order to support these settlement amounts linked to issuing transactions, Nexi has several different instruments at its disposal:

� Issuing licensing (which represents the largest source for Nexi) is substantially covered by the Factoring Agreement, which provides the daily sale and assignment of receivables by Nexi to Unicredit. About 90% of the Factoring Agreement amount is without recourse so the related receivables are derecognized from the balance sheet;

� Issuing revolving settlement amounts are covered directly by the bank whose cardholder elects to pay in instalments;

� Direct issuing is covered by the same bilateral bank lines dedicated also to acquiring;

� Acquiring is covered by bilateral bank lines.

Focusing on factoring, the purchase price for each receivable is equal to 100% of its face value, net of a factoring fee comprising funding and commitment costs. This means that Nexi monetizes every day the issuing business settlement amounts without waiting for the 15th of the following month. The cost of factoring is rebated to partner banks under the licensing contractual framework. Factoring encompasses a maximum committed amount per bank, totalizing an overall EUR3.2 billion amount.

All of the above is not part of the working capital given the fully matched nature of these exposures / positions.

As such the working capital that we report in our estimates is related to the operating expenses of the company, and we do not expect massive variations in the long term (a small cash absorption given that the business is growing).

NEXI 23 May 2019

44

Figure 38 – Nexi – Balance Sheet estimates (2016-17 are “carve-out figures” not directly comparable to 2018 P/F)

(EURm) 2016CO 2017CO 2018PF 2019E 2020E 2021E 2022E 2023E

Cash & Cash Equivalents 8 134 187 1,117 1,314 1,583 1,937 2,296

Financial Assets at Fair Value 48 83 100 100 100 100 100 100

Financial Assets at Amortised Cost 2,878 3,112 1,668 1,520 1,535 1,523 1,485 1,512

a) Receivables from Banks 330 333 561 561 561 561 561 561

b) Receivables from Customers 2,548 2,779 1,107 959 974 962 924 951

Equity Investments 0 0 1 1 1 1 1 1

Tangible Assets 116 163 159 159 159 159 159 159

Intangible Assets 1,906 2,608 2,668 2,628 2,588 2,548 2,508 2,468

of which Goodwill 1,501 2,072 2,097 2,097 2,097 2,097 2,097 2,097

Tax Assets 46 54 63 63 63 63 63 63

Non Current Assets and Assets Under Disposal 54 66 2 2 2 2 2 2

Other Assets 263 340 406 426 439 452 466 480

Total Assets 5,319 6,560 5,254 6,017 6,200 6,431 6,721 7,080

Financial Liabilities at Amortised Cost 1,957 2,606 3,717 3,717 3,717 3,717 3,717 3,717

a) Due to Banks 1,859 2,493 793 793 793 793 793 793

b)Due to Clients 98 113 354 354 354 354 354 354

c) Securities Issued 0 0 2,570 2,570 2,570 2,570 2,570 2,570

Financial Liabilities Held for Trading 0 1 3 3 3 3 3 3

Hedging Derivatives 0 6 17 17 17 17 17 17

Tax Liabilities 146 134 164 164 164 164 164 164

Liabilities Related to Assets Under Disposal 12 23 1 1 1 1 1 1

Other Liabilities 474 720 716 716 716 716 716 716

Severance Pay 16 18 14 14 14 14 14 14

Provisions for Risk and Charges 17 33 47 47 48 48 49 49

Equity 2,697 3,020 576 1,337 1,521 1,751 2,040 2,399

Total Liabilities and Equity 5,319 6,561 5,255 6,017 6,200 6,431 6,721 7,080

Net Debt/(Cash) 2,418 1,488 1,291 1,022 668 309

Capital Employed 2,994 2,825 2,812 2,773 2,708 2,708

Net Debt/EBITDA 5.7 3.0 2.3 1.6 0.9 0.4


Cash Flow – A cash generative business

We estimate that, in the 2016-18 period (excluding the non-recurring items and based on 2016-17 aggregated figures and P/F 2018), Nexi generated an average yearly normalized free cash flow of EUR259 million.

The proceeds from disposals in the period have been almost equal to the non-recurring items:

NEXI 23 May 2019

45

Figure 39 - Nexi non recurring items – Summary of cash flow and P&L impact


Going forward we expect a similar amount of cash generation which should be

back-end loaded as capex should normalize:

Figure 40 – Nexi – Cash Flow Statement estimates

(EURm) 2018PF 2019E 2020E 2021E 2022E 2023E

EBITDA 424 500 574 646 731 810

Ordinary Capex (85) (95) (92) (96) (105) (107)

Transformation Capex (65) (68) (60) (55) (25) (15)

Change in WC (27) (20) (20) (20) (20) (20)

Operating Cash Flow 247 317 402 475 581 668

Non-Recurring Items (131) (69) (40) (30) (20) (10)

Interest Expense (108) (82) (61) (44) (40) (37)

Cash Taxes and Minorities (50) (65) (105) (132) (165) (205)

Capital Increase/(acquisitions)/disposals 0 829 0 0 0 0

Dividends 0 0 0 0 0 (58)

Free Cash Flow (42) 930 196 269 355 358

Free cash flow - before one offs 89 170 236 299 375 368

Capex/Sales 16.1% 16.6% 14.5% 13.5% 10.8% 9.5%

Net Debt/(Cash) - Beginning of the period 2,376 2,418 1,488 1,291 1,022 668

Net Debt/(Cash) - End of the period 2,418 1,488 1,291 1,022 668 309

The most relevant item in Nexi’s cash flow is capex. Management has been

investing heavily in what they call “transformation capex” (IT Strategy Transformation, Customer Care Transformation; M&A-related investments), which should represent anything in the region of 7% on net revenues. In the long run, total capex should decline toward the 8-10% range.

Non-recurring items affecting Reported EBITDA 2016 2017 2018

TransformationExtraordinary costs linked to

transformation projects (including re-

branding)

HR Restructuring Mainly Nexi in 2016 / 2017 and Bassilichi

in 2018

M&A, Corporate

Reorganization and

Other Items

M&A-related extraordinary

items, DEPObank separation, bond

refinancing, start-up investments (e.g.

YAP)

36 54 38

16 51 21

(1) 29 72

Extraordinary items below EBITDA 2016 2017 2018

PPA D&A related to the acquisitions of

Carige, MPS and BK books

Debt Pushdown One-off rating agencies fees as well as

amortisation of the bond cost

- 33 40

- - 9

Disposals EV (EURm)

2017

2018

2019

Fondo Italiano di Investimenti

Transfer Agent Pension Fund

Brokerage and Market Making

«Non-core» Real Estate Portfolio

Business Services

25

114

16

1

2

0.1

73

1

149

0.1

381

NEXI 23 May 2019

46

Figure 41 – Electronic Payment industry – 2018 Capex/Sales comparison

Source: Company data (P/F for Nexi), FactSet

1Q19 results: better than the FY guidance

Nexi reported a solid set of 1Q19 results with a EUR111 million EBITDA that would imply EUR513 million for FY2019, assuming the same weight of 1Q18 (or 21.6% of FY total). During the call management confirmed that 1Q19 numbers where somewhat above budget/expectations but, being the first quarter of the year, it was too early to raise guidance.

Cash generation optically was very strong with 1Q19 net debt already aligned with FY2019 guidance. However, this number includes one-offs from the disposal of OASI (EUR145 million) and a dividend from Depobank for the excess cash that was, cautiously, left in the bank at the time of the spinoff and that is not needed anymore.

More in details: � Revenues grew 5.2% YoY or +6.8% excluding the run-off of some zero margin

contracts included in recently acquired businesses;

o Merchant Services & Solutions grew by 6% YoY;

o Cards & Digital grew 8.1% YoY;

o Digital Banking declined 6.6% YoY;

� EBITDA grew 21% YoY and reached the 48.8% margin or 660 bps above 1Q18:

o Operating leverage added EUR8.8 million to EBITDA, we estimate;

o The remaining EUR11 million increase in EBITDA is explained by cost cutting: despite revenues grew, overall costs went down -6.5% YoY (operating costs alone down 13% YoY).

� Net Debt went down to EUR2,185 million that, considering the IPO proceeds, means EUR1,538 million. This level is basically in line with the FY2019 estimates we have of EUR1,611 million.

1.5%

4.9%5.4%

6.0% 6.0% 6.0%6.2%

7.2%

16.1%

Transformation

Capex7.0%

9.1%Ordinary

Capex

NEXI 23 May 2019

47

Figure 42 – Nexi 1Q19 results vs. 1Q18

(EURm) 1Q18 1Q19A YoY chg.

Merchant Services & Solutions 100 106 6.0%

Cards & Digital Payments 86 93 8.1%

Digital Banking Solutions 29 27 -6.5%

Net Revenues 215 227 5.2%

EBITDA 91 111 21.0%

EBITDA margin % 42.4% 48.8%

Industrial Net (Debt)/Cash (pre capital increase) (2,454) (2,185) -8.0%


The major points that emerged during the call helped to better understand this

firstever set of results:

� Revenues seasonality: quarters should grow sequentially, so 2Q stronger than 1Q and so forth until 4Q. The number of working days is a relevant driver to take into account. In 1Q19 it was lower than 1Q18 (-1.6% YoY);

� Take-out rates (Nexi revenues/transaction value. In other words how much remains to Nexi of every single transaction): increased vs. last year (18.4bps vs. 18.2bps for MSS and 19.9bps vs. 19.2bps for Cards). This is extremely positive as it shows that, regardless of price pressure, Nexi takes a larger chunk of bps from every transaction;

� Revenues on e-commerce grew by 17.5%, in line with our FY estimate;

� Cash flow seasonality: management confirmed that 1Q19 cash generation was particularly strong but the FY guidance implies no cash generation for the rest of the year. Apart from looking conservative, management stressed that taxes and bonds coupon are paid mostly in 2Q. On top of that, management hinted that 1Q19 was below trend line on capex but spending will recover over the course of 2019;

� YAP users progression is very strong: 150K at year end 2018, 200K at the time of the IPO and 430K as of today;

NEXI 23 May 2019

48

VALUATION

We initiate coverage with a Buy rating. Our target price is based on two methods:

� A peer group comparison, given that an homogeneous peer group exists and the dispersion of multiples is quite low;

� A Discounted Cash Flow, given that cash generation is resilient and not extremely volatile;

The summary of our findings, which lead us to establish a target price of EUR10.2, is outlined here below:

Figure 43 – Valuation summary (EURm)

Source: UBI Banca estimates

Peer Group valuation

Out of the entire universe of electronic payments players, (see Figure 7 for more details) we selected two group of peers:

� Tieri I are companies focused on merchant acquiring, issuing and card payments that, at the same time, are technology driven and have a solid IT platform: First Data, Global Payments, TSYS, Worldline; Worldpay;

� Tier II are companies that still are technology driven and have a solid IT platform but focused only on processing: FIS, Fiserv and Wirecard.

Before entering into the comparison exercise, it is worth noticing that peers have performed very well being up on average by 32.5% on a 1 year basis and 123% on a 3 years basis:

10.59.8 10.2

DCF Peers Average

NEXI 23 May 2019

49

Figure 44 – Peer group 3 years share price performances

Source: Facset

Furthermore, the sector has re-rated given that the 1 year forward EBITDA has

gone from 13.1x of 2015 to the current 16.9x:

Figure 45 – Peer group historical EV/EBITDA 1 year forward

Source: Facset

With that in mind, to better understand the impacts of Nexi business model/market

in the context of a peers comparison, we note that:

� Nexi is investing well above peers as its capex/sales spread vs. them is around 9% on average for the 2019-21 period;

� At the same time its EBITDA margin is around 16.5% higher than that of peers over the same time horizon;

� The combined result of the two points above is that Nexi EBITDA-to-cash conversion ratio is broadly 11% lower than peers.

In other words Nexi is investing more than peers to fuel its business model that allows for superior EBITDA margin. Capex should normalize and, at that point, assuming EBITDA margin will not deteriorate, its cash generation potential will be in line with peers.

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First Data Global Payments TSYS Worldline Worldpay Fidelity Fiserv Wirecard

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First Data Global Payments TSYS Worldline Worldpay Fidelity Fiserv Wirecard

NEXI 23 May 2019

50

This can be seen in the following table where it is worth mentioning also the difference between Tier I and Tier II in terms of fundamental that support our view of not using processors’ multiples in the valuation:

Figure 46 – Peer group – Comparison with Nexi on EBITDA margins, cash generation and capex/Sales (priced on 22 May 2019)

Name TIER Price Currency Mkt Cap FCF/EBITDA Capex/Sales Cash conversion ratio EBITDA %

bn 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E

First Data I 23.9 USD 22.5 46.3% 49.8% 51.5% 5.5% 5.5% 5.0% 85.7% 85.9% 87.5% 38.3% 38.9% 39.7%

Global Payments I 135.0 USD 21.2 58.3% 64.0% NA 5.1% 4.9% 4.8% 85.9% 86.6% 87.0% 36.1% 36.7% 37.0%

TSS I 90.8 USD 16.1 47.9% 53.8% NA 5.6% 5.8% 7.1% 84.5% 84.3% 80.6% 36.3% 36.9% 36.5%

Worldline SA I 52.3 EUR 9.6 48.9% 53.5% NA 5.9% 5.8% 5.8% 76.2% 77.6% 78.4% 24.8% 25.9% 26.9%

Worldpay I 109.7 USD 34.1 66.2% 72.7% 82.9% 8.7% 8.3% 7.6% 82.7% 84.1% 85.8% 50.6% 52.1% 53.3%

FIS II 108.5 USD 35.1 59.3% 69.1% NA 1.6% 1.6% 8.7% 96.0% 96.1% 78.7% 39.0% 40.1% 40.9%

Fiserv II 80.3 USD 31.5 66.4% 76.9% 113.2% 7.2% 8.5% 15.1% 81.1% 78.0% 0.0% 38.2% 38.6% 39.5%

Wirecard II 158.9 EUR 19.6 58.4% 61.2% 63.0% 5.6% 5.4% 5.6% 80.9% 82.4% 82.2% 29.4% 30.9% 31.6%

Median 58.3% 62.6% 44.4% 5.6% 5.6% 6.5% 83.6% 84.2% 82.2% 37.2% 37.7% 38.3%

Nexi 34.1% 41.2% 46.3% 16.6% 14.5% 13.5% 67.4% 73.5% 76.6% 50.9% 54.6% 57.8%

TIER I - Average 53.5% 58.8% 33.6% 6.2% 6.1% 6.1% 83.0% 83.7% 83.8% 37.2% 38.1% 38.7%

TIER II - Average 61.4% 69.1% 88.1% 4.8% 5.2% 9.8% 86.0% 85.5% 80.5% 35.5% 36.5% 37.3%


In terms of multiples, the peer group shows a very low dispersion of multiples,

therefore we consider fair to use all of those peers as a valuation tool. During the IPO we used only the Tier I for the valuation but, considering that two companies of the Tier II are taking-over two Tier I companies, we decided to use both Tiers. After the mergers will be closed (2H19) the Tier I and II will be merged into a single peer group:

Figure 47 – Peer group – Multiples (priced on 22 May 2019)

Name TIER Price Currency Mkt Cap EV/EBITDA EV/EBIT P/E FCF Yield

bn 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E 2019E 2020E 2021E

First Data I 23.9 USD 22.5 11.9 x 10.7 x 9.4 x 18.4 x 15.6 x 14.0 x 16.9 14.8 13.0 6.3% 7.3% 8.1%

Global Payments I 135.0 USD 21.2 17.1 x 15.0 x 13.0 x 19.0 x 16.5 x 14.1 x 24.9 21.3 18.4 4.0% 4.8% 6.4%

TSS I 90.8 USD 16.1 14.3 x 12.7 x 11.6 x 21.7 x 18.9 x 16.6 x 20.8 18.2 16.1 3.9% 4.8% 4.6%

Worldline SA I 52.3 EUR 9.6 16.5 x 14.2 x 12.2 x 23.5 x 19.4 x 16.2 x 33.1 27.3 24.1 3.0% 3.7% 4.2%

Worldpay I 109.7 USD 34.1 20.4 x 17.5 x 14.6 x 22.7 x 18.7 x 15.8 x 26.2 22.5 19.7 3.8% 4.6% 6.0%

FIS II 108.5 USD 35.1 14.1 x 12.9 x 11.6 x 16.3 x 14.5 x 13.6 x 16.3 14.9 14.0 5.0% 6.2% 7.9%

Fiserv II 80.3 USD 31.5 16.6 x 15.2 x 14.9 x 23.3 x 19.7 x 19.2 x 25.9 23.3 19.9 4.4% 5.5% 8.6%

Wirecard II 158.9 EUR 19.6 23.9 x 17.5 x 13.3 x 28.8 x 20.6 x 15.6 x 36.8 27.4 21.4 2.3% 3.2% 4.2%

Median 16.6 x 14.6 x 12.6 x 22.2 x 18.8 x 15.7 x 25.4 x 21.9 x 19.0 x 4.0% 4.8% 6.2%

TIER I - Average 16.1 x 14.0 x 12.2 x 21.1 x 17.8 x 15.3 x 24.4 x 20.8 x 18.3 x 4.2% 5.1% 5.8%

TIER II - Average 18.2 x 15.2 x 13.3 x 22.8 x 18.3 x 16.1 x 26.3 21.8 18.4 3.9% 5.0% 6.9%

Nexi 8.80 EUR 5,524 14.0 x 11.9 x 10.1 x 18.2 x 15.9 x 13.8 x 48.8 x 30.2 x 24.0 x 3.1% 4.3% 5.4%

Premium/(Discount) to peers -15.4% -18.6% -19.4% -18.1% -15.6% -12.2% 92.0% 37.7% 26.1% 35.9% 18.1% 7.8%


When valuing Nexi vs. peers three

� Leveragethe

Figure 48 – Peer group Debt/EBITDA


� Growth:

and Net Profit) will reflect the “Initiatives” optimization actions) and the high leverage of the company (two/thirds of the total costs are fix).

Figure 49 – Peer group net income growth


4.6 x

2.4 x2.2 x

0.2 x

3.9 x

1.7 x

0.0 x

-2.0 x

-1.0 x

0.0 x

1.0 x

2.0 x

3.0 x

4.0 x

5.0 x

First Data Global

Payments

TSYS Worldline

When valuing Nexi vs. peers three other factors have to be taken into account:

Leverage : Nexi’s leverage is slightly higher than peers: for the 3.0x region compared to the 2.4x of the TIER I peer group;

Growth: Nexi growth rates (not in terms of revenues but in terms of EBITDA and Net Profit) will reflect the “Initiatives” (cost and operating structure optimization actions) and the high leverage of the company (two/thirds of the total costs are fix). This can be seen in the following table:

0.2 x

2.8 x

2.2 x

1.7 x

-1.3 x

2.4 x

-0.3 x

1.8 x 1.8 x

1.2 x

-1.6 x

1.4 x

Worldline Worldpay Fidelity Fiserv Wirecard Tier 1

Average

2019E 2020E

NEXI 23 May 2019

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other factors have to be taken into account:

: for 2019 it would be in peer group;

Nexi growth rates (not in terms of revenues but in terms of EBITDA and operating structure

optimization actions) and the high leverage of the company (two/thirds of the This can be seen in the following table:

0.9 x

3.0 x

0.5 x

2.3 x

Tier 2

Average

NEXI

NEXI 23 May 2019

52

� Geographical breakdown of revenues : Nexi is 100% concentrated on Italy while peers are usually more diversified (as can be seen in the next graph). From the one hand this market has higher growth potential than many other in the Western countries but from the other this represents a “concentration risk”;

Figure 50 – Peer group’s revenues breakdown by geography

Source: Companies’ last available reports

We believe the combination of risk and growth allows Nexi to be valued on same

static multiples than its peers, meaning a valuation of EUR9.5 p.s.:

Figure 51 – Peer group summary valuation

(EURm, x) 2019E 2020E 2021E

EV/EBITDA - peers 16.6 x 14.6 x 12.6 x

Nexi EBITDA 500 574 646

Implied EV 8,287 8,376 8,119

Debt/(Cash) 1,488 1,291 1,022

Pension liabilities 14 14 14

A - Nexi Equity value 6,785 7,071 7,083

EV/EBIT - peers 22.2 x 18.8 x 15.7 x

Nexi EBIT 385 429 476

Implied EV 8,565 8,073 7,456

Debt/(Cash) 1,488 1,291 1,022

Pension liabilities 14 14 14

B - Nexi Equity value 7,063 6,768 6,420

P/E - Peers 25.4 x 21.9 x 19.0 x

Nexi Adj Net profit 210 250 290

C - Nexi Equity Value 5,338 5,474 5,526

FCF Yield - Peers 4.0% 4.8% 6.2%

Nexi FCF - before one offs 170 236 299

D - Nexi Equity Value 4,310 4,898 4,856

Average of A,B,C,D 5,874 6,053 5,971

Number of shares (million) 627.8 627.8 627.8

Nexi - Fair value per share (EUR) 9.4 9.6 9.5


0% 20% 40% 60% 80% 100%

Worldline

Worldpay

Global Payments

TSYS

First Data

FIS

Fiserv

Wirecard

Americas Europe RoW

To the static peer group valuation that we multiplesperiod of acquisitions/disposals/reseen in the next two

Sector-within peersNexi fair value given that the company will reap the benefits of its “initiatives” over 2019 and 2020

Figure 52

Source: FactSet,

Figure 53

Source: FactSet,

To the static peer group valuation that we just showed we felt useful to add a multiples-adjusted-for-growth valuation. This given that Nexi is period of acquisitions/disposals/re-organization and the full effects of that will be seen in the next two-three years

-wise, the valuation vs. growth exercise demonstratepeers (the P/E vs. Net Profit growth in particular). It is relevant in assessing

Nexi fair value given that the company will reap the benefits of its “initiatives” over 2019 and 2020:

Figure 52 – EV/EBITDA to EBITDA growth regression

FactSet, UBI Banca estimates

Figure 53 – P/E to Net Income growth regression

FactSet, UBI Banca estimates

NEXI 23 May 2019

53

showed we felt useful to add a growth valuation. This given that Nexi is coming from a

organization and the full effects of that will be

demonstrated a solid correlation in particular). It is relevant in assessing

Nexi fair value given that the company will reap the benefits of its “initiatives” over

NEXI 23 May 2019

54

The resulting valuation is EUR 10.1 p.s. (EUR11.3 p.s. for the EV/EBITDA based one and EUR9.0 p.s. for the P/E based one):

Figure 54 – Peer group – Valuation growth-adjusted

(EURm, x)

Fair EV/EBITDA 2019 (x) 17.1

Nexi 2019 EBITDA 500

Nexi fair EV 8,567

Nexi Net Debt - 2019 1,488

Nexi - Fair Equity Value 7,080

Nexi - Fair value per share 11.3

Fair P/E 2019 (x) 26.9

Nexi 2019 Net profit 210

Nexi fair Equity value 5,664

Nexi - Fair value per share (EUR) 9.0


DISCOUNTED CASH FLOW

Given the resiliency of cash flows in the payment sector (as demonstrated by the high sector leverage), we suggest investors to apply also a DCF valuation to set Nexi’s fair value. We adopted a two-stage DCF based on:

� Explicit estimates until 2023;

� For a 2023-26 period, we assume sales CAGR declining to 3% and a stable EBIT margin while capex is seen in line with D&A and NWC should be neutral;

� Terminal value calculated on a terminal growth rate of 1.75%, revenues growth of 3.0% and an EBIT margin at 45%, capex in line with D&A, and neutral NWC change. This returns an exit EV/EBITDA multiple of 10.8x;

� A WACC of 6.7% deriving from:

o A free risk rate of 3.5%, higher than the current market one;

o An equity risk premium of 4.5%;

o A beta of 1.0 (obtained through peers’ unlevered beta, re-levered with the 2020 debt/equity ratio);

o A sustainable D/E of 22% (implying Debt/EBITDA of 2.5x, in line with peers’ average).

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In summary, here below we present the estimates on which our DCF is based upon:

Figure 55 – DCF valuation – Estimates summary

(EURm) 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E Terminal TV

NOPAT 265 295 328 384 450 473 496 521 476

Capex (150) (163) (152) (151) (130) (168) (176) (185) (199)

D&A (115) (145) (170) (175) (160) (168) (176) (185) (199)

Change in Working capital (20) (20) (20) (20) (20) 0.8 0.8 0.8 -

Cash flow to the firm 209.8 257.2 326.3 388.0 460.1 473.4 497.0 521.9 475.8 9,619

Time adjustment - 1 2 3 4 5 6 7 8 9

Discount factor 1.00 0.94 0.88 0.82 0.77 0.72 0.68 0.64 0.60 0.56

Discounted cash flow to firm 210 241 287 319 355 342 337 332 283 5,367


We then run a sensitivity of the DCF by tweaking WACC by 0.5% up/down and a

terminal growth rate in a 1.50-2.00% range. The resulting fair value range is highlighted in grey in the below table:

Figure 56 – DCF Sensitivity Analysis

(EUR, %) Terminal growth rate

1.50% 1.75% 2.00%

5.7% 13.1 13.8 14.6

6.2% 11.4 11.9 12.5

WACC 6.7% 10.1 10.5 10.9

7.2% 9.0 9.3 9.7

7.7% 8.0 8.3 8.6


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APPENDIX A - GOVERNANCE

Nexi is still controlled by the private equity funds that sponsored the IPO, namely Advent, Bain and Clessidra. According to the registration document, the Executive Managers would own around 1% of the share capital under the hypotheses of full exercise of the greenshoe option and price at the mid-point of the IPO offer price range. Although none of these two conditions apply, this still represent a truthful indication of their share.

Figure 57 – Nexi shareholders base

Source: Consob

Nexi’s board of directors (one-tier, non-staggered) is composed of 13 members,

counting one executive director (namely the CEO, Mr. Bertoluzzo) and twelve non-executive directors, three of which are also independent. The board, illustrated in details in the following table, was appointed by the ordinary shareholders’ meeting of the Group on 13 February 2019 and will remain in office until the date of the shareholders' meeting called to approve the financial statements for the year ending 31 December 2021.

Figure 58 – Nexi Board of Directors and Comittees’ composition

Director Role Strategic

Committee

Appointment and Remuneration

Committee Control and

Risk Committee

Related Parties

Committee

Michaela Castelli BoD President, non-executive director X

Luca Bassi non-executive director X X

Paolo Bertoluzzo executive director (CEO) X

Giuseppe Capponcelli BoD Vice-President, non-executive director X

Francesco Casiraghi non-executive director X X

Simone Cucchetti non-executive director X

Federico Ghizzoni non-executive director

Robin Marshall non-executive director X

Jeffrey David Paduch non-executive director X

Antonio Patuelli independent director X

Maurizio Mussi non-executive director

Marinella Soldi independent director X X X

Luisa Torchia independent director X X X


60.2%

36.6%

3.2%Mercury UK HoldCo Limited

Free Float

GIC Private Limited

NEXI 23 May 2019

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The same shareholders’ meeting has also established a yearly gross salary of EUR50 thousand for each director, with the sole exception of the BoD President, which will make EUR300 thousand, and Vice-President, which will collect EUR150 thousand, for an overall BoD compensation of EUR1 million (gross, yearly basis).

The current board of directors is mainly constituted by representatives of the private equity funds which jointly owned around 94% of the share capital at the date the board was appointed.

However, the picture is going to change following the adoption of the new articles of association approved by the extraordinary shareholders’ meeting on 13 March 2019: starting from the next board renewal (expected in 1H22), the BoD will be made of 7 to 15 re-electable directors appointed on the basis of lists, moreover regulation to guarantee the gender balance will become fully effective.

To sum up, the new articles association establishes that:

� The lists may be submitted by the exiting Board of Directors and by shareholders representing at least 2.5% of the share capital;

� Each vote is for one list only and extends to the entire list, that is all indicated candidates;

� All directors, except for two, will be elected from the list achieving the highest number of votes. The remaining two directors will be elected from the minority lists.

Besides the BoD, Nexi actively manages and monitors operations and performance through a series of committees:

� A Strategic Committee, which advises the board on industrial plans, business lines performances, extraordinary operations, financial strategies and policies and organization structure of controlled entities;

� An Appointment and Remuneration Committee, that submits proposals to the BoD concerning the dimension and the composition of the board itself and the remuneration policy (in terms of fixed and variable component);

� A Control and Risk Committee, which informs the BoD about appropriate risk policy and risk tolerance of the Group, oversees the company-wide risk management processes and exercises a control over the internal audit division;

� Lastly, a Related Parties Committee, that issues opinions on the board resolutions with regard to the adoption and amendments of the procedures on related-party transactions.

Remuneration policy

The remuneration of Nexi employees is based on four main components, but this number can vary according to the band each employee belongs to:

1. A fixed remuneration recognized to the entire Group labor force;

2. A short term variable component (Management By Objectives or MBO plan) intended for the employees of the first five bands;

3. A medium/long term variable component (Long Term Incentive or LTI plan) dedicated to the employees which constitute the top four bands;

4. Benefits (i.e. health insurance, pension plan, ticket restaurant).

The same remuneration policy is also applied for the Group Executive Managers, namely the CEO Mr. Bertoluzzo, the CFO Mr. Mingrone, the Director of the business unit Merchant Services & Solutions Mr. Trovati, the Director of the

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business unit Cards & Digital Payment Mr. Mencarini and the Head of the business unit Digital banking Solutions Mr. Martini.

The MBO plan is defined by a variable amount (expressed as percentage of the fixed remuneration) which changes depending on the banding and the results achieved at group level (overall EBITDA), business unit and individual levels. This variable component is paid entirely in cash and is not characterized by malus and claw-back clauses.

For Executive Managers this short term variable component can reach 50% of the fixed remuneration, the only two exceptions are represented by the CEO and the CFO which present a 130% and 100% cap respectively.

The LTI plan has a three years time horizon and provides the employees of the first four bands (around 230 people) with the right to receive free of charge Nexi ordinary shares on a yearly basis between 2019 and 2022 with a vesting period between 2022 and 2024.

In particular, the Long Term Incentive plan establishes the distribution of two kind of shares:

� Performance shares: destined to the Executive Managers and distributed if specific company performance thresholds (in terms of shareholders return and cumulative operating cash flow) are met;

� Restricted shares: distributed to remaining employees if the recipient is still in office at the end of the vesting period.

The distribution of such shares is based on banding: the higher the banding, the higher the percentage of shares received.

Moreover, the employees belonging to the highest band (which includes the five Executive Managers aforementioned) are subject to a minimum holding period of 1 year for half the shares obtained through this plan. Lastly, contrary to the MBO plan, this incentive is also subject to malus and claw-back clauses.

Lastly, after the listing, the Executive Managers had the opportunity to buy shares from Mercury following the exercise of the call option on their warrants. These shares, which should represent around 1% of the share capital, are subject to lock-up periods, in particular:

� Mr. Bertoluzzo has committed to not sell 50% of these shares for at least 12 months from the acquisition date and the remaining 50% for at least 24 months from the same date;

� The remaining Executive Managers can not sell such shares before at least 12 months have passed from the acquisition date.

These minimum holding periods will become ineffective in case of takeover from an entity different from the Financial Sponsors or in case of good leaver events.

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APPENDIX B – MANAGEMENT TEAM

Nexi management team has a solid experience mostly gained in banking/financial services, telecommunications at national and international levels.

Figure 59 – Management Team

Source: Company website

Paolo Bertoluzzo

Group CEO

Enrico Trovati

Merchant Services

& Solutions

Andrea Mencarini

Cards & Digital

Payments

Renato Martini

Digital Banking

Solutions

Roberto Catanzaro

Business

Development

Giuseppe Dallona

CIO

Bernardo Mingrone

CFO

Marco Ferrero

Commercial

Division

Stefania Gentile

Mercury Payments

Federico Ferlenghi

Operations &

Help Line

Silvia Beraldo

CAO

Saverio Tridico

Corporate &

External Affairs

Daniela Bragante

Compliance &

AML

Emanuele Boati

Audit

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The current management team in place from not so long (Mr. Bertoluzzo, the CEO, joined what still was called ICBPI in May 2016) and has already delivered on many fronts (6 acquisitions, 260 plus hirings, re-branding, new products, IT transformations, etc.).

More specifically here follows a summary cv of the main managers:

Paolo Bertoluzzo Paolo Bertoluzzo is Chief Executive Officer of Nexi and Nexi Payments since July

2016, he is also Chairman of the Nexi Strategic Committee.

Graduated with a degree cum laude in Management Engineering from the Politecnico of Milan and completed an MBA with distinction from INSEAD, he started his career as a management consultant working both in Europe and the United States.

He served as Chief Commercial Operations and Strategy Officer of the Vodafone Group Plc with responsibility for Vodafone’s global commercial management, strategy and operations, as well as innovation and transformation projects. From 2008 to 2013, Paolo was Chief Executive Officer of Vodafone Italy and since 2012 of the Southern Region, when he became a member of the Vodafone Group’s Executive Committee.

Currently he is a member of the Politecnico of Milan Advisory Board. From 2013 to 2016 he has served as a Member of the GSMA Board, the worldwide telecom industry Association.

Enrico Trovati Enrico Trovati is Director of the Business Unit Merchant Services & Solutions since

October 2016.

Graduated in Electronic Engineering at Politecnico of Milan, after his professional experience in McKinsey & Company as Associate Principal and Member of European Telecom Practice Leadership Group, he performed various roles in Telecom Italia, mainly in Value Added Services Marketing and Web Marketing.

From 2008 to 2009 he has been CEO of Matrix S.p.A., Telecom Italia Group, then Marketing Director and Sales Director of the Business Market and Marketing Director of Business, Top & Public Sector since September 2016.

Andrea Mencarini Andrea Mencarini is Director of the Business Unit Cards & Digital Payments in

Nexi since October 2016.

Graduated in Economics and Commerce, he started his career in marketing at the Api Group and then at the De Agostini Group, where he was responsible for loyalty, advertising and customer services projects.

From 1998 to 2002, he held a number of commercial positions at Rolo Banca 1473. He then joined the UniCredit Group, where, up to 2008, he performed various roles in the commercial area as Head of Sales Mass Market and subsequently, in the marketing area as Head of Marketing Family and Senior.

From 2008 to 2016, he was Head of Marketing for Retail Customers at the Banco Popolare Group. He was responsible for the development and launch of financial services and products in the transnational, insurance, financial and social security segments supporting both the physical and the digital channels.

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Renato Martini Renato Martini is Head of Digital Banking Solutions since March 2017.

Graduated in Electronic Engineering at University of Rome and with a Master in Business Administration at INSEAD, he starts his career as Senior Consultant at Andersen Consulting, London.

From 1995 to 2003 he is in Mc Kinsey & Company, where he becomes Associate Principal, in charge of many projects for Financial Institutions, including payments and product innovation in Corporate Banking.

From 2004 to 2013 he is in UniCredit Group, where he becomes Head of Global Marketing for Small and Medium Companies. In 2013 he is appointed CEO of UniCredit Factoring and in 2014 he is promoted Executive Vice President of UniCredit Group.

Roberto Catanzaro Roberto Catanzaro is the Director for Business Development of Nexi from

November 2016.

Chemical engineer, he made his first work experiences in consulting at Accenture and McKinsey, where he supervised and coordinated projects in CRM, Marketing and Sales for primary reality of financial services.

From 2005 to 2014 he worked at Allianz Italy, where he held several management positions within Sales, Marketing and Planning. In particular, he led the digital transformation of Allianz in front office platforms, CRM systems, the creation of modern analytical / marketing capabilities and the creation of a European platform for e-business.

Roberto joined Nexi (formerly CartaSi) in October 2014 as Marketing Director.

Giuseppe Dallona Giuseppe Dallona is CIO at Nexi Group since November 2017 and Member of the

Board of Directors in Mercury Payment Services since December 2016.

Formed professionally in software engineering at Centro di Calcolo of Catholic University in Milan, he starts his career in IT and Management Consulting companies such as Arthur Andersen & Company, General Electric Information Services and Ernst & Young Consultants.

From 1994 to 2001 he is in charge of IT Directional Systems at Intesa Sistemi e Servizi (Banca Intesa) and implementation of management systems for Banco Ambrosiano Veneto-Cariplo-Comit mergers.

From 2001 to 2015 he is CIO at UBI Sistemi e Servizi (UBI Banca), filling moreover the role of General Director of the Company since 2005.

He manages the construction of the Information System and the Merger Project between Banca Lombarda and Banche Popolari Unite; he is Board Member of UBISS and SIA and participates at the Steering Committee of UBI.

In 2015 and 2016 he is CIO of Poste Italiane and CEO of Postecom with an active participation in the IPO of Poste Italiane and IT transformation program forming part of Poste 2020 industrial plan.

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Bernardo Mingrone Bernardo Mingrone is Chief Financial Officer of Nexi Group since 2016.

He was Group Chief Financial Officer of UniCredit and Deputy General Manager in charge of Finance and Operations of Banca Monte dei Paschi di Siena, preceded by a career in investment banking at Lehman Brothers and JP Morgan.

He is also Chairman of the Board of Nexi’s processing subsidiary in Mercury Payment Services, acquired in 2016, and has in the past served as chairman of the Board of Fabrica Immobiliare, Vice Chairman of the Board of Asset Management Holding / Anima, Board Member in AXA MPS and of AS Roma.

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APPENDIX C – PEER GROUP DESCRIPTION Figure 60 - Worldline sales breakdown by product

Source: Worldline

Figure 61 - Worldpay sales breakdown by product

Source: Worldpay

Figure 62 – Global Payments sales breakdown by product

Source: Global Payments

Figure 63 - TSYS sales breakdown by product

Source: TSYS

Figure 64 – First Data sales breakdown by product

Source: First Data

Figure 65 - FIS sales breakdown by product

Source: FIS

Figure 66 – Fiserv sales breakdown by product

Source: Fiserv

Figure 67 - Wirecard sales breakdown by product

Source: Wirecard

36%

45%

19% Merchant Service

Financial Services

Mobility & e-Transactional

Services

41%

50%

9%Technology Solutions

Merchant Solutions

Issuer Solutions

100%

Payment Services 44%

36%

20%

Issuer Solutions

Merchant Solutions

Consumer Solutions

64%

19%

17%Global Business Solutions

(GBS)

Global Financial Solutions

(GFS)

Network & Security

Solutions (NSS)

52%44%

4%Integrated Financial

Solutions (IFS)

Global Financial Solutions

(GFS)

Corporate & Other

56%

44%Payment Services

Financial Services

71%

29% Payment Processing & Risk

Management (PP&RM)

Acquiring & Issuing (A&I)

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APPENDIX D – HOW THE ELECTRONIC PAYMENT SYSTEM WORK S

The main parties involved in a typical credit or debit card transaction include:

Cardholders : the consumer who use non-cash payment means to purchase goods or services from merchants.

Merchants or other accepting parties: accept consumers’ credit or debit cards in stores, online, or via mobile devices, and deliver goods or services to consumers.

Payment acceptance processing providers : provide merchants with the means (POS terminals, mobile POS terminals, online payment gateways) to collect and transmit card data and receive payment authorizations in stores, online and via mobile devices.

Acceptance related services providers: provide merchants with acceptance related services beyond core processing functions, such as enhanced reporting, loyalty programs, advertising services, quality surveys using payment terminals, dynamic currency conversion (DCC) services, etc. These services are offered by most payment acceptance processing providers.

Commercial acquirers , which are banks or payment institutions that provide merchants with access to the card schemes (e.g., Visa, MasterCard, Carte Blue, Bancontact/Mister Cash, etc.) and a merchant account. Commercial acquirers receive funds from issuing banks and deposit the proceeds, net of a “merchant service charge,” into the merchant’s account.

Acquiring processors , who offer payment transaction processing services for commercial acquirers by routing transaction data received from merchants’ physical or online payment gateways with a view to obtaining payment authorizations via the credit and debit card scheme networks, known as “front-end” processing, and then ensuring that each transaction is appropriately cleared and settled into the merchant’s bank account, known as “back-end” processing.

Card schemes , which set card scheme network rules and interchange fees and act as custodians and clearing houses for their respective card brands. Card schemes include both international brands such as Visa and MasterCard, and local schemes.

Clearing and settlement institutions , such as national banks, which clear and settle transactions between acquiring banks and issuing banks.

Issuers, which distribute card scheme-branded payment cards, and, in the case of

credit cards, extend credit, to consumers.

Issuing processors , which are payment service providers that authorize transactions received from the card scheme networks and ensure that each transaction is appropriately cleared and settled from the originating card account.

Issuing card management service providers , which are service providers that help issuers manage aspects of the card issuing and account management process other than transaction processing functions.

In a typical card based payment transaction, most of the key “core” players deduct

their service fees from the gross amount originally charged by the merchant for the

good or service. By way of a simplified illustration, in a EUR100 credit transaction using Visa or MasterCard with an interchange fee of 0.30% and a card scheme processing fee of EUR0.05 per transaction:

� The issuing bank would immediately withdraw EUR100 from the cardholder’s available balance and a debit of EUR100 would appear on

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the cardholder’s monthly statement at the end of the month;

� The issuer would then transfer EUR99.70 to the card scheme, having deducted the interchange fee of 0.30%. If the issuing bank outsources issuing processing services, it might separately pay the issuing processor a part of its fee;

� The card scheme would then transfer EUR99.70 to the commercial acquirer; the commercial acquirer would then pay the merchant pursuant to terms of their contractual arrangements;

� In most instances, the commercial acquirer pays the merchant within 24 to 48 hours, having deducted from the principal transaction amount a charge comprising the EUR0.30 interchange fee deducted by the issuing bank, the EUR0.05 card scheme processing fee and its own acquiring fee;

� The merchant would therefore receive the remaining amount from the commercial acquirer. Various alternative payment arrangements exist between commercial acquirers and merchants, depending on the particular terms of their contractual arrangements;

� In some cases, the merchant receives the full EUR100 from its commercial acquirer and receives a bill at the end of the month for the merchant service charge; this is known as the “interchange ++” payment method (generally limited to large-volume customers);

� In other cases, the commercial acquirer only pays the merchant several days after the transaction (generally for higher-risk transactions);

� The card scheme would send a bill to the commercial acquirer for its card scheme processing fees on a monthly basis.

Payments processors have to collect something called dues and assessments for the card networks. These are fees that are paid directly to the networks for the use of their card brand, as well as the ability to process transactions on their payments networks. Assessment fees are different from interchange fees in that they are charged based on total monthly sales and not individual transactions. They are typically lower than interchange fees. But how much you pay in assessment fees varies by network and depends on things like whether the cards used were credit or debit, transaction volume, and whether foreign transactions were processed. Similar to interchange fees, networks review their assessment fees twice a year.

Unlike Visa and MasterCard, which are open networks where anyone can issue cards, American Express is a closed network where the company issues cards and offers merchants methods to accept those cards.

Because of this closed network structure, Amex has a lot of control over how much merchants have to pay to accept its cards. It uses that control to command higher rates industries where its cards are the preferred method of payment.

But Amex doesn’t have total control. Many processors - including some of the largest, such as Elavon, TSYS, and First Data - are able to bundle acceptance in with Visa and MasterCard, and set their own markup for doing so.

In addition, the pricing scheme is a bit different than other networks because the card type has no bearing on the processing rate. For instance, with Visa and MasterCard, rewards or commercial cards cost more to process than ordinary debit or credit cards. Not so with Amex. However, industries/merchant categories play a substantial role, and the popularity of the Amex brand in some of those pricier industries also leads to higher fees for merchants.

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Disclaimer Analyst Declaration

This research report (the “Report”) has been prepared by Massimo Vecchio and Dario

Fasani on behalf of UBI Banca S.p.A. (“UBI Banca”) in the context of the ancillary service

provided by UBI Banca named “Investment research and financial analysis or other forms

of recommendation relating to transactions in financial instruments” under Paragraph 5),

Section B, Annex I of the Directive 2014/65/EU (“MiFID II”). UBI Banca is an Italian bank

under art. 4 (1)(27) of MiFID II and it is supervised by the European Central Bank and duly

authorised to provide investment services pursuant to Article 1, Paragraph 5, letter a), b),

c), c-bis), e) and f) of the Legislative Decree 24 February 1998, n° 58 under the supervision

of the Italian Authority for the financial markets (Consob). UBI Banca has its head office at

Piazza Vittorio Veneto 8, 24122 Bergamo.

The analyst who prepared the Report, and whose name and role appear on the front page,

certifies that:

a. The views expressed on the company, mentioned herein (the “Company”)

accurately reflect his personal views, but do not represent the views or opinions

of UBI Banca, its management or any other company which is part of or

affiliated with UBI Banca group (the “UBI Banca Group”). It may be possible that

some UBI Banca Group officers may disagree with the views expressed in this

Report;

b. He has not received, and will not receive any direct or indirect compensation in

exchange for any views expressed in this Report;

c. The analyst does not own any securities and/or any other financial instruments

issued by the Company or any financial instrument which the price depends on,

or is linked to any securities and/or any financial instruments issued by the

Company.

d. Neither the analyst nor any member of the analyst’s household serves as an

officer, director or advisory board member of the Company.

e. The remuneration of the analyst is not directly tied to transactions for services

for investment firms or other types of transactions it or any legal person, part of

the same group performs, or to trading fees it or any legal person that is part of

the same group receives.

f. Massimo Vecchio is a member of AIAF.

General disclosure

This Report is for information purposes only. This Report (i) is not, nor may it be construed,

to constitute, an offer for sale or subscription or of a solicitation of any offer to buy or

subscribe for any securities issued or to be issued by the Company, (ii) should not be

regarded as a substitute for the exercise of the recipient’s own judgement. In addition, the

information included in this Report may not be suitable for all recipients. Therefore the

recipient should conduct their own investigations and analysis of the Company and

securities referred to in this document, and make their own investment decisions without

undue reliance on its contents. Neither UBI Banca, nor any other company belonging to the

UBI Banca Group, nor any of its directors, managers, officers or employees, accepts any

direct or indirect liability whatsoever (in negligence or otherwise), and accordingly no

direct or indirect liability whatsoever shall be assumed by, or shall be placed on, UBI

Banca, or any other company belonging to the UBI Banca Group, or any of its directors,

managers, officers or employees, for any loss, damage, cost, expense, lower earnings

howsoever arising from any use of this Report or its contents or otherwise arising in

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67

connection with this Report.

The information provided and the opinions expressed in this Report are based upon

information and data provided to the public by the Company or news otherwise public,

and refers to the date of publication of the Report. The sources (press publications,

financial statements, current and periodic releases, as well as meetings and telephone

conversations with the Company’s representatives) are believed to be reliable and in good

faith, but no representation or warranty, express or implied, is made by UBI Banca as to

their accuracy, completeness or correctness. Past performance is not a guarantee of future

results. Any opinions, forecasts or estimates contained herein constitute a judgement as of

the date of this Report, and there can be no assurance that the future results of the

Company and/or any future events involving directly or indirectly the Company will be

consistent with any such opinions, forecasts or estimates. Any information herein is subject

to change, update or amendment without notice by UBI Banca subsequent to the date of

this Report, with no undertaking by UBI Banca to notify the recipient of this Report of such

change, update or amendment.

Organizational and administrative arrangements to prevent conflicts of interests

UBI Banca maintains procedures and organizational mechanism (physical and non physical

barriers designed to restrict the flow of information between the unit which performs

investment research activity, and other units of UBI Banca) to prevent and professionally

manage conflicts of interest in relation to investment research in accordance with art. 23

of Directive 2014/65/EU and under art. 34 (3) and art. 37 of the Regulation 2017/565/EU.

More specifically, UBI Banca has established, implements and maintains an effective

conflicts of interests policy aimed at preventing and managing the potential conflicts of

interest that could occur during the performance of the investment research services.

Insofar as the above mentioned organizational and administrative arrangements

established by UBI Banca to prevent or manage potential conflicts of interests are not

sufficient to ensure, with reasonable confidence, that risks of damage to the interests of

the client will be prevented, UBI Banca engages to provide a clear disclosure of the

specific conflicts of interests arising from the performance of investment research

services, including a description of the sources of those conflicts and the steps undertaken

to mitigate them, taking into account the nature of the client to whom the disclosure is

being made.

For further information please see UBI Banca’s website (www.ubibanca.com/equity-

research - “Informativa sintetica sull’attività di ricerca”) and (www.ubibanca.com/Mifid -

“Policy sintetica conflitti di interessi”). More details about the conflicts of interests policy

will be provided by UBI Banca upon request.

Disclosure of interests and conflicts of interests pursuant to Delegated Regulation

2016/958/EU

In relation to the Company the following interest/conflict of interest have been found:

> UBI Banca, in the last 12 months, has acted as lead manager, co-lead manager,

bookrunner or in similar roles in the context of a public offering of financial

instruments of Nexi

> UBI Banca may have long or short positions with the issuer

> UBI Banca has delivered corporate finance services to Nexi S.p.A. in the last 12

months

On the basis of the checks carried out no other interest/conflict of interest arose.

NEXI 23 May 2019

68

Frequency of updates

UBI Banca aims to provide continuous coverage of the companies in conjunction with the

timing of periodical accounting reports and any exceptional event that occurs affecting the

issuer’s sphere of operations and in any case at least twice per year. The companies for

which UBI Banca acts as Sponsor or Specialist are covered in compliance with regulations

of the market authorities.

For further information please refer to www.ubibanca.com/equity-research

Valuation methodology

UBI Banca’s analysts value the Company subject to their recommendations using several

methods among which the most prevalent are: the Discounted Cash Flow method (DCF),

the Economic Value Added method (EVA), the Multiple comparison method, the SOP

method and the NAV method.

The analysts use the above valuation methods alternatively and/or jointly at their

discretion. The assigned target price may differ from their fair value, as it also takes into

account overall market/sector conditions, corporate/market events, and corporate

specifics (i.e. holding discounts) reasonably considered to be possible drivers of the

company’s share price performance. These factors may also be assessed using the

methodologies indicated above.

For further information please refer to www.ubibanca.com/equity-research.

Ranking system

UBI Banca’s analysts use an “absolute” rating system, not related to market performance.

The explanation of the rating system is listed below:

Buy: if the target price is 15% higher than the market price, over the next 12 months.

Hold: if the target price is 15% below or 15% above the market price, over the next 12

months.

Sell: if the target price is 15% lower than the market price, over the next 12 months.

No Rating: the investment rating and target price have been suspended as there is not

sufficient fundamental basis for determining an investment rating or target. The previous

investment rating and target price, if any, are no longer in effect. Alternatively, No Rating

is assigned in certain circumstances when UBI Banca is acting in any advisory capacity in a

strategic transaction involving the Company.

Target price: the market price that the analyst believes that the share may reach within a

one-year time horizon.

Market price: closing price on the day before the issue date of the report, appearing on the

first page.

Distribution

Italy: This document is intended for distribution in electronic form to “Professional Clients”

and “Qualified Counterparties” as defined by Legislative Decree 24 February 1998, n. 58

and by Consob Regulation n. 16190 dated 29.10.2007, as further amended and

supplemented.

This Report has been released within 30 minutes from the timing reported on the front

page.

IN THE UNITED KINGDOM, THIS DOCUMENT IS BEING DISTRIBUTED ONLY TO, AND IS

DIRECTED ONLY AT PERSONS WHO (A) ARE (I) PERSONS FALLING WITHIN ARTICLE 19 OR

NEXI 23 May 2019

69

ARTICLE 49 OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 (FINANCIAL

PROMOTION) ORDER 2005 (AND ONLY WHERE THE CONDITIONS CONTAINED IN THOSE

ARTICLES HAVE BEEN, OR WILL AT THE RELEVANT TIME BE, SATISFIED) OR (II) ANY OTHER

PERSONS TO WHOM IT MAY BE LAWFULLY COMMUNICATED; AND (B) ARE QUALIFIED

INVESTORS WITHIN THE MEANING OF ARTICLE 2(1)(E) OF THE PROSPECTUS DIRECTIVE

(DIRECTIVE 2003/71/EC), (ALL SUCH PERSONS BEING REFERRED TO AS "RELEVANT

PERSONS"). THIS DOCUMENT MUST NOT BE ACTED ON OR RELIED ON BY PERSONS WHO

ARE NOT RELEVANT PERSONS.

SWITZERLAND

THIS REPORT DOES NOT CONSTITUE A PROSPECTUS WITHIN THE MEANING OF THE

ARTICLE 652a OR ART. 1156 OF THE SWISS CODE OF OBLIGATIONS OR A LISTING

PROSPECTUS WITHIN THE MEANING OF THE LISTING RULES OF THE SIX SWISS EXCHANGE

OR ANY OTHER TRADING VENUES IN SWITZERLAND, OR A SIMILAR COMMUNICATION

WITHIN THE MEANING OF ART. 752 OF THE SWISS CODE OF OBBLIGATIONS, AND HAS

BEEN PREPARED WITHOUT REGARD TO THE SWISS LAWS AND REGULATIONS, AND DOES

NOT CONSTITUTE AN OFFER TO SUBSCRIBE FOR, BUY OR OTHERWISE ACQUIRE ANY

SECURITY OF THE COMPANY.

Copyright

This Report is being supplied solely for the recipient’s information and may not be

reproduced, redistributed or passed on, directly or indirectly to any other person or

published, in whole or in part, for any purpose without prior written consent of UBI Banca.

The copyright and intellectual property rights on the data are owned by UBI Banca Group,

unless otherwise indicated. The data, information, opinions and valuations contained in

this Report may not be subject to further distribution or reproduction, in any form or via

any means, even in part, unless expressly consented by UBI Banca.

By accepting this Report the recipient agrees to be bound by all of the forgoing provisions.

Distribution of ratings

Equity rating dispersion in the past 12 months

Buy Hold Sell No Rating

89.1% 6.5% 0.0% 4.4%

Proportion on issuers to which UBI Banca has supplied investment banking services

relating to the last 12 months

Buy Hold Sell No Rating

100% 100% - 100%

For further information regarding yearly and quarterly rating statistics and descriptions,

please refer to www.ubibanca.com/equity-research.

NEXI 23 May 2019

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NEXI 23 May 2019

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THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY

NEXI 23 May 2019

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SERVIZIO STUDI

Head of Research Department

Giovanni Barone

[email protected]

Industry Research

Macroeconomic and Financial Market Research

Equity Research

Enza De Vita

Francesca Pascali

Marco Cristofori

[email protected] [email protected] +39.02.6275 3015

[email protected]

Anna Cristina Visconti

Vincenzo Petrignano

[email protected]

[email protected]

Massimo Vecchio

+39.02.6275 3016

Paolo Manzoni [email protected]

[email protected]

Oriana Cardani, CFA

Quantitative Analysis

Paolo Leoni +39.02.6275 3017

[email protected] [email protected]

Francesco Martinelli

[email protected]

Lorenzo Biagioli

Dario Fasani

[email protected] +39.02.6275 3014

[email protected]

ECM & DCM GLOBAL MARKETS SALES

Head of ECM & DCM Head of Global Markets Sales

Marco Germano (Key Executive) Alessandro Michele Ravogli

+39.02.7781 4651 [email protected]

[email protected]

Head of Sales ECM & DCM

Gisella Barisone (Key Executive) Andrea Paolo Martini

+39.02.7781 4618 +39.02.7781 4341

[email protected] [email protected]

Ilenia Osimi Roberta Pupeschi

[email protected] +39.02.7781 4682

[email protected]

Pierfrancesco Genoviva

[email protected] Laura Katherine Milic

+39.02.7781 4616 Fabio Gatta [email protected]

[email protected]

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