H Farm S p A : EQUITY RESEARCH - Initiation of Coverage

EQUITY RESEARCH - Initiation of Coverage

May 3rd, 2021

Catching up with digitization

OUTPERFORM

Current Share Price (€): 0.23

Target Price (€): 0.31

H-Farm - Share Performance

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We initiate coverage of H-Farm: OUTPERFORM rating, Target Price €0.31 per share

H-Farm, born as accelerator-incubator, in nearly 2 decades has become a cultural leader within the everchanging digital landscape, offering education and digital consulting services to companies, professionals and individuals. H-Farm BUs are: Education, from pre-school to post-graduates, with global and technical knowledge footprint; Consultancy, digital consulting arm; Portfolio, initially investing in startups, now in a divesting phase.

One-of-a-kind multidisciplinary digital knowledge provider. H-Farmmission consists in being a front-runnerin digital services through a synergic business model where BUs concur to create value for clients by an integrated approach and cross fertilization.

New Venice campus, a catalyst to exploit a growing demand for international schooling. In September 2020, the H-Campusopening ended an intensive investment phase troubled by delays and setbacks causing loss of revenues and €8m additional costs, further stressed by the pandemic. Ready to catalyze the demand for international and specialized schools, driven by an increasingly globalized and digitized world, the next Campus goal is to reach full capacity and payback.

H-Farm Share Price		FTSE AIM Italia

Source: S&P Capital IQ - Note: 3/02/2020=100

Company data

H-Farm embodies a creative soul overstepping traditional consulting services. H-FarmConsultancy BU boasts large size and international client base leveraging on creativity, digitization and consulting as a one-stopservice where professionals manage to deliver value in industries or projects with strong innovative content.

ISIN number	IT0004674666
Bloomberg code	FARM IM	Ride the wave of the digital transformation. Fundamentals of digital transformation
Reuters code	FARM.IM	keep rising: digital marketing and e-commerce fuel total spending on digital media;
Industry	Financials
traditional IT infrastructure is left behind in favor of cloud; data volume is set only to
Stock market	AIM Italia
Share Price (€)	0.23	increase; data analytics is becoming an essential tool for businesses.
Date of Price	03/05/2021
Shares Outstanding (m)	128.7	2020: end of intensive investment cycle and €20m finance raising for future growth.
Market Cap (€m)	29.6	2020 also marks the 2020-24 management plan designed to getting up to speed the
Market Float (%)	49.4%
Daily Volume	246,000	Education BU, while keeping on the development of Consultancy. To feed cash needs, H-
Avg Daily Volume YTD	53,974	Farm raised financing for €20m, €10m of capital increase and €10m of convertible bonds
Target Price (€)	0.31	2020-25, well above the €15m management initial target.
Upside (%)	35%
Recommendation	OUTPERFORM

Share price performance

	1M	3M	1Y
H-Farm - Absolute (%)	-5%	-9%	-28%
FTSE AIM Italia (%)	5%	19%	34%
1Y Range H/L (€)		0.35	0.22
YTD Change (€) / %		-0.03	-11%

Source: S&P Capital IQ

Analysts

Franco Gaudenti - Head of Research

Target Price €0.31 per share, OUTPERFORM recommendation

Our analysis on peers shows that domestic consulting and education industries experienced two figures profitability and steady growth, as healthy niche markets with sound profitability and solid growth. As such, we consider management guidelines overall consistent with reference industries outlook and opportunities arising from cultural gaps. Anyway, our revenue estimates take into account current uncertainties related to the timing of full recovery of markets. Our valuation results in an equity value of €39.6m, with a corresponding target price per share of €0.31, a potential upside of 35% on the current share price. We initiate the coverage of H-Farm with an OUTPERFORM rating.

[e-mail]	Key financials and estimates
Luigi Tardella - Co-Head of Research	€m	2018	2019	2020	2021E	2022E	2023E	2024E
[e-mail]
Revenues	56.7	61.1	52.7	65.9	80.7	95.7	110.9
	EBITDA	(4.4)	(5.4)	(4.8)	(2.7)	1.4	3.8	6.1
EnVent Capital Markets Limited	EBIT	(8.3)	(10.0)	(10.4)	(6.4)	(2.6)	(0.6)	1.3
42, Berkeley Square - London W1J 5AW (UK)	Margin	-14.7%	-16.3%	-19.8%	-9.7%	-3.2%	-0.6%	1.2%
Net Income	(4.9)	(12.7)	(14.8)	(7.9)	(4.0)	(1.7)	0.4
Phone [phone]
Net (Debt) / Cash	(5.7)	(2.0)	(1.0)	(6.9)	(5.9)	4.0	9.1

Source: Company data 2017-20, EnVent Research 2021-24E

This document may not be distributed in the United

States, Canada, Japan or Australia or to U.S. persons.

The Issuer is a corporate client of EnVent Capital Markets Ltd., thus this Note is to be intended as a marketing communication, not an independent research. See final two pages for important disclosures.

This document is reserved to "qualified investors" (Please refer to the "Disclaimer" page for details).

1. INVESTMENT CASE

Company

H-Farm S.p.A., founded in 2005 and listed on AIM Italia since 2015, operates through three business units oriented by and to digital culture and competencies:

• H-FarmEducation, which provides full range education offer by K12 International schools, from Early to High School, undergraduate, post-graduate and executive courses, such as a Degree in Digital Management in partnership with Venice Ca' Foscari University. H-Farm can also rely on partnerships with international schools such as Chichester University (UK), Luxembourg School of Business and Zagreb School of Economics. The programs are completed by a computer graphics training center and are targeted at individuals, companies and professionals
• H-FarmConsultancy, which provides digital and business transformation services, such as sales, brand and customer relationship strategies, digital marketing and artificial intelligence applications
• H-FarmPortfolio, which manages seed and post-seedstart-ups focused on digital

From the IPO to date, H-Farm has substantiated, through its investment program, its mission of being a one-of-a-kind multidisciplinary innovation platform, relying on digital transformation, integrated technology and education offer with a global footprint.

Key figures:

• 2015 to 2020, revenues double from €24m to over €50m,
• Business unit breakdown in 2020: Consultancy 70%, Education 27%, Portfolio & others 3%
• Around 2,000 students, over 150 teachers. 2021 capacity over 3000
• Over 300 Consultancy professionals and 250 clients
• Headcount: 570
• Over €100m invested by Cattolica Assicurazioni and CDP in the 50.000sqm H-Farm Campus near Venice, completed in September 2020, and leased for 30 years to the Company

Coping with the digital ecosystem

Major trends such as accelerated globalization and digitization are generating growing demand for digital and marketing competencies. Moreover, there is a gap competence which calls for dedicated education paths and continuous learning about ever changing digital landscape. Those trends imply a growing need for change in schooling models to train young future professionals ready and able to meet industry transformation needs. H-Farm vision is to be a front runner at the crossroads of the calls for new skills, with its offering of digital consultancy services, while providing the next generation education.

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This document is reserved to "qualified investors" (Please refer to the "Disclaimer" page for details).

Drivers

Industry drivers - Education

Globalization boosts international schools. Globalization drives demand for high quality education and communication skills with an international scope. According to International Schools Consultancy (ISC Research), a market intelligence firm specialized in K-12 international school data, in the last 20 years international schools fee income has grown ten times between 2000 and 2020 from $5bn to $54bn, and it is set to reach $85bn in 2027.

Flexible schooling trend is the next education model. Flexible schooling delivers more scheduling options for learners and enhances personalization of degree programs. Besides, Covid pandemic has been a catalyst for hybrid learning and some new approaches are here to stay.

Moving to more Industry-basedteaching. Specialist technical schooling is gaining momentum, especially for highly technical fields.

Digital and visual infrastructure becoming predominant. Digital transformation in the education system is set to accelerate over the medium term delivering a more accessible and engaging product thanks to innovations like virtual and augmented reality.

Industry drivers - Consultancy

Digital transformation needs strategy and planning support. Major challenges that companies face while executing digital transformation include the lack of budget allocation and planning. To undertake a digital transformation, a company needs to make a huge investment in acquiring state-of-the-arttechnology and the appropriate team. Companies need to have a strategy in place for the long-termand have a sound capital plan. The global digitization service market, according to BCG analysis on Grandview data for Company management plan, will rise at a CAGR 19-24Eof 19.4%, reaching €216bn in 2024.

Spending on digital media keeps rising. Digital marketing and e-commerce business fuel total spending on digital media, which is outpacing other channels. The trend is expected to continue with a worldwide spending CAGR 2019-24 of 11% reaching $790bn in 2024 according to BCG analysis on emarketer.com

Digitization by migration of traditional IT infrastructure. The cloud and computing solutions fuel the digital transformation consulting market globally. Digital transformation holds the potential to streamline and integrate all business operations, increasing business performance efficiency.

Increasing amount of data volume. Businesses are looking to centralize data management and delivery, as well as to leverage data to control their businesses and the user experience, which eventually may lead to higher uptake for digital consulting services.

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This document is reserved to "qualified investors" (Please refer to the "Disclaimer" page for details).

Accelerating AI Data Analytics. The new data economy relies on AI's ability to analyze data and data science is a rapidly growing field that expands the need for culturally skilled professionals.

COVID-19global outbreak. In the near term the global pandemic has pushed further digital transformation, given the increasing trend on mobile devices usage, stay-at-home and remote working.

Company drivers

Being in the forefront line of innovative education. H-Farmprovides education which encompasses all diplomas and courses from K12 school (4-18years) to bachelor and master courses. The schools have an international and digital footprint, leveraging on Digital Technology for education purposes, a distinctive students' experience making its teaching model unique. The International standing is backed by undergraduate and graduate programs organized in partnership with universities such as Chichester University (UK), Luxembourg School of Business and Zagreb School of Economics.

Cutting-edgeeducation facilities. Having a digital approach to education, H-Farm facilities provide the latest technology to support education efficiently. For instance, K12 can count on innovative solutions for a digital learning environment such as the proprietary virtual reality platform designed to fit K12 IB school needs. Also, the university is set to plan its distance learning unit as soon as the campus is saturated.

Solid consultancy track record. H-Farm Consultancy unit has over 10 years of track record and is well-positioned within the industry, providing business innovation and digital marketing consultancy to large size international companies. In the past years, the Consultancy business has been the major source of revenue, growing at a CAGR 2015-19 of 19%.

Ability to generate synergies across business units. The teaching method is intended to provide professionals with cultural and technical equipment conceived to understand and respond to digitization and transformation needs.

Challenges

Education realizable growth is on hold. Covid-19 is challenging the industry, which is not experiencing growth but will likely be back to normal in the near future.

Established private schools might turn to more innovative teaching, following H-Farm

approach. Private schools with an established track record in attractive cities might invest to offer a comparable to H-Farm education model and intensify competition.

Increasing competition push on prices for consultancy services. The budget reductions may also cause competitors to lower fees in order to maintain their market share.

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This document is reserved to "qualified investors" (Please refer to the "Disclaimer" page for details).

Market uncertainty on VC investments. Post-pandemic economic conditions are not a clear path forward given the size and the high risk associated with the portfolio holdings.

© Marco Zanta

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