Torghatten Buy

Industrials Company Report Norway 22 January 2018

Torghatten Buy

Key Data Share price (NOK) 85.75 Fasten seat belt while seated Target price (NOK) 115.00 A wise man once said: “70% of future financial performance is explained by historical financial performance”. And, we don’t disagree. Indeed, our long-term investment case in Bloomberg TORG NO TORG is based on three simple arguments. First, TORG has evidenced a solid track record

Market capitalisation (NOKm) 4,124m of profitable growth for more than a decade. Second, the company has been able to Enterprise value (NOKm) 6,642m improve its position in both the Air-, Ferry- and Bus segment and is currently positioned as the leading (top 1-3) player in all segments. Third, we find valuation attractive at 4.5x and Shares outstanding (m) 48m 9.2x current 2018e EV/EBITDA and P/E, respectively, and hence, we see solid upside Shares fully diluted (m) 48m Average daily volume (000s) 50.0 potential in underlying values. Thus, based on these arguments coupled with a 2017e- Free float (%) 47.1 2018e EPS, which is upped 6% and 9%, respectively, we reiterate our Buy recommendation but increase our target price from NOK88 to NOK115. Our tp correspond to 6x and 5.5x 2018e and 2019e EV/EBITDA, respectively and 2018e P/E of 12.3x and 2019e P/E of 10x.

 Evidenced profitable growth for more than a decade Since the ‘90s, competition in the public transportation sector intensified with entry Share Price (12m) of public tenders and Torghatten has grown rapidly at a 20% CAGR to the ~NOK9.4bn

88 turnover transportation giant it is today and averaged 18% ROE at the same time. 86 84  Improved its position in all key segments 82 Torghatten has won two significant ferry contracts from its rivals with start-up in 2019, 80 has moved from #3 position to #2 position in the bus segment and Widerøe won all 13 78 public service obligations contracts for ’19-’26 at a revenue potential of ~NOK5bn. 76 74  We see solid upside in underlying values 24/11/16 24/2/17 24/5/17 24/8/17 TORG NO Our updated SOTP arrive at a fair price per TORG share of +NOK115, up from NOK88 in our latest update. The deviation is driven by 1) overall positive EBITDA and EPS Share Price Performance estimate revisions (NOK8), 2) multiple expansion in both the bus and airline business 1m 6m 12m segment (NOK17) and 3) NOK2 per share increase in TORG’s ~11% stake in NTS ASA. Price n/a n/a n/a Our valuation implies a 2018E EV/EBITDA of 6x, EV/EBIT 11x, and P/E of 12x. Rel. Index n/a n/a n/a Company Overview Year end: Dec 2015 2016 2017E 2018E 2019E 2020E Total Revenues (m) 8,574 9,386 9,896 10,279 11,015 11,262 EBITDA (m) 1,195 1,345 1,325 1,543 1,705 1,803 EBIT (m) 548 733 666 844 958 997 Net profit (m) 304 347 371 476 552 594 DPS (NOK) 4.2 1.3 1.9 2.6 3.2 3.5

Balance Sheet Equity excl. minority (m) 1,558 1,954 2,225 2,606 3,039 3,672 GIBD (m) 3,580 3,319 2,959 3,168 2,673 2,261 NIBD (m) 2,567 2,151 1,744 1,610 989 129 WC 295 367 346 360 386 394

Analysts Margins & Profitability Lars-Daniel Westby EBITDA margin (%) 13.9% 14.3% 13.4% 15.0% 15.5% 16.0% +47 24 14 74 16 EBIT margin (%) 6.4% 7.8% 6.7% 8.2% 8.7% 8.9% Profit margin (%) 3.5% 3.7% 3.8% 4.6% 5.0% 5.3% [email protected] ROE rep. (%) 19.6% 19.9% 16.3% 19.6% 19.7% 18.2% ROCE (%) 9.2% 12.0% 10.9% 13.2% 14.4% 14.8% Petter Kongslie Sales Growth (%) 4.7% 9.5% 5.4% 3.9% 7.2% 2.2% +47 24 14 74 96 EBIT growth (%) 18.5% 33.8% -9.1% 26.7% 13.5% 4.1% [email protected] Valuation EV/Sales (x) 1.04 0.95 0.90 0.86 0.81 0.79 EV/EBITDA (x) 7.4 6.6 6.7 5.8 5.2 4.9 EV/EBIT (x) 16.2 12.1 13.3 10.5 9.3 8.9 P/E (x) 18.2 15.9 14.9 11.6 10.0 9.3

P/B (x) 3.5 2.8 2.5 2.1 1.8 1.5 Important: All disclosure information can be found on page 39 of this document. Torghatten Company Report 22 January 2018

Investment Summary ...... 3 Company Overview ...... 9 TORG Sea Transportation ...... 10 Bastø Fosen ...... 10 FosenNamsos Sjø ...... 10 Torghatten Trafikkselskap ...... 11 Torghatten Nord ...... 11 Contract vs ticket revenues ...... 11 The Norwegian ferry market ...... 12 130 connections in total, served by ~220 ferries ...... 12 Consolidated market ...... 13 Costs follow inflation ...... 14 Contractual structure… ...... 15 …coupled with the green shift… ...... 15 …drives capex in the ferry industry ...... 15 Ferries will remain critical to Norwegian infrastructure ...... 16 TORG sea estimates ...... 17 TORG sea valuation ...... 18 TORG Air Transportation ...... 19 Widerøe ...... 19 No losses since 1999 in Widerøe ...... 20 Majority of fleet dedicated to Norwegian short-runway network...... 21 Fleet and SCAT-1 key to Widerøe's competitiveness...... 21 Lifetime extension program helps delay full Q100 phase-out to 2023 ...... 22 The Norwegian Airline Market ...... 23 Norway airline traffic highly correlated to GDP ...... 23 ~50% of journeys are business-related, of which half are oil-related ...... 23 PMI points to a boost in production ...... 24 Higher ticket price, somewhat offset by increased oil price ...... 24 We also see a trend towards longer season ...... 25 Annual passenger growth on routes expected at 1.1% through 2020 ...... 25 TORG air estimates ...... 26 TORG air valuation ...... 26 TORG Bus Transport ...... 28 Norgesbuss ...... 28 Trønderbilene ...... 28 Sørlandsruta ...... 28 Torghatten Buss ...... 28 The Norwegian Bus Market ...... 29 Population growth only explains half of the volume growth… ...... 29 …but, passenger volume growth expected at 1-3% going forward ...... 29 Increasingly competitive industry spurring heavy consolidation ...... 30 Torghatten has become the second largest bus operator, up from #3 in 2014 ...... 30 Over 50% of current contracts could mature over the next three years ...... 31 TORG contract overview ...... 31 TORG bus estimates ...... 32 TORG Bus Valuation ...... 33 Estimate revisions ...... 34 TORG P&L ...... 34 TORG Balance sheet ...... 35 TORG cash flow ...... 36 Valuation ...... 37 Target price upped from NOK88 to NOK115 ...... 37 Valuation support in ROE vs. P/B approach ...... 38

Important: All disclosure information can be found on page 39 of this document. 2 Torghatten Company Report 22 January 2018

Investment Summary Torghatten has a track record of strong revenue and earnings growth. Since 2006, the company’s top line has quintupled while its EBITDA has quadrupled. This impressive performance stands in stark contrast with the markets to which Torghatten is exposed, which are relatively stable in nature with single-digit growth rates. Acquisitions help explain this mismatch. While we see limited potential for further consolidation, with an exception within the bus segment where among other Boreal is for sale, Torghatten still has rosy organic growth prospects in our view. Torghatten has won two significant ferry contracts from its rivals with start-up in 2019, has the second least percentage of current production maturing in the bus segment and Widerøe won all 13 public service obligations (PBO) contracts in Nord-Trøndelag, Nordland and Finnmark. Going forward, we expect more contracting opportunities will arise and we believe TORG is competitively positioned to win new business. In terms of profitability, our take is that margins and return on capital will continue to increase in 2018 and beyond on the back of favourable developments within cost in general, number of HSE incidents within ferry operations and ticket prices in the air business unit. As a result, we revise up our target price from NOK88 to NOK115 driven by 1) overall positive EBITDA and EPS estimate revisions, 2) multiple expansion in both the bus and airline business segment and 3) the fact that TORG’s ~11% stake in NTS ASA has also increased by NOK2 per share since our latest report. Hence, we still see significant upside potential to the current share price of NOK87 and reiterate our Buy recommendation. Indeed, our valuation implies a 2018E EV/EBITDA of 6x, EV/EBIT 11.1x, and P/E of 12.3x. The corresponding 2019e figures are EV/EBITDA of 5.5x, EV/EBIT 9.5x, and P/E of 10x.

Impressive track record with accretive growth In the early 1990s, TORG's revenues barely reached NOK100m. As competition in the public transportation sector intensified with the entry of public tenders, however, Torghatten has grown rapidly at a 20% CAGR to the ~NOK9.4bn turnover transportation giant it is today. With a strong foundation in profitable operations, the company has made a number of acquisitions, building leading market positions in all transport segments apart from rail. Despite this expansion, Torghatten has impressively made no losses in this time period and EBITDA-margins have consistently exceeded 12.5% in the last decade.

Torghatten ASA: Revenue and EBITDA-margin Exhibit 1.

10.0 18%

16%

8.0 14%

12% 6.0 10%

NOKbn 8% 4.0

6% EBITDA margin

2.0 4% 2%

0.0 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Revenues EBITDA EBITDA-margin

Source: Torghatten ASA, Brønnøysund, SpareBank 1 Markets.

Indeed, TORG's track record is no coincidence. We argue its decade-long experience and organisational structure makes it able to choose and win profitable public tenders. The whole organisation is heavily decentralised, allowing subsidiaries to take advantage of their strong local awareness and recognition to quickly respond to unforeseen circumstances and jump on attractive business opportunities. Interference from the six-person strong top management team is kept at a minimum.

Important: All disclosure information can be found on page 39 of this document. 3 Torghatten Company Report 22 January 2018

TORG owns 66% of Widerøe, which have delivered no losses since 1999 and… Over the past 15 years, Widerøe's revenues have more than doubled, growing by an average 6% per year. With the share of passenger revenues growing from 66% in 2004 to 84% in 2016, the company has become less dependent on state purchases over the last years. In 2016, state purchases amounted to ~NOK0.7bn of revenues totalling NOK4.5bn. EBITDA- margins have averaged 11% since 2000, bottoming at 6% during the financial crisis and peaking at 17% in 2011. Additionally, Widerøe has not had any losses in over 15 years, averaging a net profit margin of 2.8%. Moreover, Widerøe won all 13 public service obligations (PBO) contracts in Nord-Trøndelag, Nordland and Finnmark, competing against Danish Air Transport AS and FlyViking. The PBO contracts will run from 2019-2026 with 5x1 year options to extend and represent potential revenues of NOK5bn (including options).

Widerøe: Financial performance Exhibit 2.

5 000 20 %

4 500 18 %

4 000 16 %

3 500 14 %

3 000 12 %

2 500 10 % NOKm 2 000 8 %

1 500 6 %

1 000 4 %

500 2 %

0 0 %

Revenues (LHS) EBITDA (LHS) EBITDA margin (RHS) Net profit margin (RHS)

Source: SB1M, Widerøe, Brønnøysundregistrene

..its fleet and SCAT-1 is key and will ensure competitive advantage going forward Historically, Widerøe has been the only airline to submit bids on airports with runways shorter than 1,199m and when the seat requirement has been at least 30 per flight. To serve these airports, special aircraft like Q100/200 are needed and Widerøe is the European airline with the largest fleet of such aircraft. Indeed, according to Avinor, only Dash-8 Q100/200, Fairchild Dornier 228, Twin Otter (Dash-6) and Dash-7 aircraft are able to sufficiently operate in this network. Considering that 28 of Norway's 52 airports are shorter than 1,199m, Widerøe has a significant advantage. Although runway extensions are possible for all but nine of these airports, it is only commercially viable for four of them, according to Avinor and combined they represented only 1-2% of all passengers on domestic flights. Moreover, with its fleet approaching end-of-life and few other options in terms of newbuilds exist; Widerøe launched a lifetime extension programme in 2009 as the only operator in the world licensed to do so. Aimed initially at 16 Q100 aircraft, they prolonged the lifetime from 80,000 flight cycles to 120,000, enabling Widerøe to secure short-runway aircraft until the end of 2023. In addition, Widerøe will try to phase out at least one Q100 per year as they reach the new end-of-life limit, swapping to less intensely used second- hand aircraft and they hope to maintain the current fleet until ~2030. Furthermore, Widerøe is also one of the only bidding airlines with SCAT-1 security systems installed in its aircraft, which has favoured Widerøe in earlier tenders.

Norway: Airport overview Exhibit 3. Norway: Airport breakdown by runway length Exhibit 4.

Source: Avinor, SpareBank 1 Markets Source: The Norwegian National Transport Plan, Avinor, SpareBank 1 Markets Important: All disclosure information can be found on page 39 of this document. 4 Torghatten Company Report 22 January 2018

Torghatten has become the second largest bus operator, up from #3 in 2014… At the end of 2014/early 2015, TORG was the third largest bus operator with 13.1% market share. However, from the latest report released from Kollektivtrafikkforeningen (November 2017), TORG had improved its position to number two with 20.3% market share of the total route production on public contracts in Norway today. Moreover, TORG is the only operator present in all regions, which position the company to take part in further consolidation. Indeed, its strongest positions are in West (#2, 30%) and Oslo/Akershus (#2, 25%). The company has also has meaningful positions in Central Norway (#2, 20%), South (#3, 18%), East (#3, 13%), and lastly but not least in the North (#4, 10%).

Norway: Market Share by Bus Operator and County Exhibit 5. Norway: Market Share public route production Exhibit 6.

100% 90% 6.8% 80% 7.5%

70% 27.5% 60% Nettbuss Torghatten 50% 11.1% Tide 40% Unibuss 30% Boreal 20% 12.3% Andre Nobina 10% 20.3% 0% Oslo/akerhus Østlandet Sørlandet Vestlandet MidtNorge NordNorge 14.5%

Andre Boreal Nettbuss Nobina Tide Torghatten Unibuss

Source: Kollektivtrafikkforeningen (Nov. 2017), SpareBank 1 Markets Source: Kollektivtrafikkforeningen (as of Nov. 2017), SpareBank 1 Markets

…and has a relatively low share of contracts expiring next three years Excluding options, 53% of all Norwegian route production on contract today will mature by end-2020. If all options are called, the same figure is just below 40%. Therefore, several new tender opportunities could surface for bus operators in the coming years. However, the share of contracts maturing by 2020 is in the low end for Torghatten, both including and excluding options. Therefore, instead of defending contracts already in production, TORG can focus its resources on competing for new contracts. Indeed, as evidenced in exhibit 8 below, the situation is worse for almost all the other operators. Unibuss and Tide risk north of 50% of all production volume expiring in the next three years, whereas Nettbuss and Nobina risk just south of 50%.

Norway: Maturity schedule of total route production on contract Exhibit 7. Norway: Contract maturity by end-2020, by operator Exhibit 8.

90 35% 90% 80 30% 80% 70 70% 25% 60 60% 50 20% 50% 40 15% 40% 30

10% 30% % of current production current of %

million route kilometers route million 20 20%

5% maturing production current of % 10 10% 0 0% 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 0% Unibuss Tide Nettbuss Nobina Torghatten Boreal Contract Expiry (without options) Contract Expiry (with options) Without Options With Options

Source: Kollektivtrafikkforeningen (Nov, 17), SpareBank 1 Markets Source: Kollektivtrafikkforeningen (Nov, 17), SpareBank 1 Markets

Important: All disclosure information can be found on page 39 of this document. 5 Torghatten Company Report 22 January 2018

TORG is one of the largest ferry companies in a consolidated market… Over the last 10 years, there has been an interesting development in this market, with an aggressive consolidation and today, the ferry market is indeed characterized as a consolidated market. More precisely, TORG, Nordled, Boreal Transport and Fjord1 are actually the main and only players in this market. Moreover, TORG transported 7.2 million passenger car equivalents in 2016 on 38 ferry connections. With a 33% market share in number of connections and 21% in terms of number of PCE transported, TORG is one of the largest ferry companies in Norway together with Fjord1.

TORG vs Peers: (PCE and number of connections) Exhibit 9.

Market share (PCE 2016) Market share (connections 2017) Boreal 2 % Other 1 %

Other Torghatten 8 % Fjord1 Boreal 21 % 24 % 12 % Fjord1 121 35m PCE 49 % connections

Norled Torghatten Norled 27 % 33 % 23 %

Source: Statens vegvesen, Ferjedatabanken, Oslo Economics, SB1M

…and has improved its position considerably over the last couple of years Although, TORG does not have the largest number of PCE transported in the market in 2016, the company will from 2019 operate three out of the ten largest ferry routes in Norway. Thus, it is our understanding that adjusted for the contract wins over the last years (not yet in operation), the “pro-forma” market share has increased to above 21%. Indeed, as shown in exhibit 10 and 11 below, TORG only operate one of the ten largest ferry connections in Norway, namely Moss – Horten (Bastø Fosen) as of 2017. However, with the contract win of both Sandvikvåg – Halhjem and Flakk – Rørvik, which has start-up 01.01.19, TORG is rigged for significant EBITDA growth going forward. Moreover, as 1) TORG has a relatively old fleet (capacity adjusted) and 2) lag peers on number of HSE accidents, the company is still to benefit from a higher EBITDA margin and return on capital. In addition, with an increasing share of revenues steaming from gross contracts, our take is that the renewal of the fleet requires TORG to extract higher margins on new contracts to offset increased capex on new vessels. Indeed, according to management, they expect EBITDA margins of 35-40% on new contracts. However, all else equal, the latter alone does not affect ROCE.

10 largest ferry connections: 2016 Exhibit 10. 10 largest ferry connections: 2019e Exhibit 11.

2017 2019e # Connection Company Comment PCE 2016* Avg. per day # Connection Company Comment PCE 2016* Avg. per day 1 Moss - Horten Torghatten 3,475,843 9,497 1 Moss - Horten Torghatten End 2026 3,475,843 9,497 2 Mortavika - Årsvågen Fjord1 2,831,842 7,737 2 Mortavika - Årsvågen Fjord1 Start up 1.1.19 2,831,842 7,737 3 Sandvikvåg - Halhjem Fjord1 1,854,016 5,066 3 Sandvikvåg - Halhjem Torghatten Start up 1.1.19 1,854,016 5,066 4 Molde - Vestnes Fjord1 1,558,869 4,259 4 Molde - Vestnes Fjord1 Tender 2017/2018 1,558,869 4,259 5 Fodnes - Mannheller Fjord1 1,223,280 3,342 5 Fodnes - Mannheller Fjord1 End 2025 1,223,280 3,342 6 Hareid - Sulesund Nordled 1,218,901 3,330 6 Hareid - Sulesund Fjord1 Start up 1.1.19 1,218,901 3,330 7 Sykkylven - Magerholm Fjord1 1,170,630 3,198 7 Sykkylven - Magerholm Fjord1 Start up 1.1.20 1,170,630 3,198 8 Festøya - Solavågen Fjord1 1,168,776 3,193 8 Festøya - Solavågen Fjord1 Start up 1.1.20 1,168,776 3,193 9 Oppedal - Lavik Nordled 1,095,517 2,993 9 Oppedal - Lavik Nordled End 2024 1,095,517 2,993 10 Flakk - Rørvik Fjord1 1,019,811 2,786 10 Flakk - Rørvik Torghatten Start up 1.1.19 1,019,811 2,786 Total top 10 16,617,485 45,401 Total top 10 16,617,485 45,401

Source: TORG, Fjord1, Statens Vegvesen, Ferjedatabanken, Oslo Economics Sparebank 1 Markets Source: TORG, Fjord1, Statens Vegvesen, Ferjedatabanken, Oslo Economics Sparebank 1 Markets

Important: All disclosure information can be found on page 39 of this document. 6 Torghatten Company Report 22 January 2018

Target price upped from NOK88 to NOK115 We revise up our target price from NOK88 to NOK115 driven by 1) overall positive EBITDA and EPS estimate revisions, 2) multiple expansion in both the bus and airline business segment and 3) the fact that TORG’s ~11% stake in NTS ASA has also increased by NOK2 per share since our latest report. Hence, we still see significant upside potential to the current share price of NOK87 and reiterate our Buy recommendation. Indeed, our valuation implies a 2018E EV/EBITDA of 6x, EV/EBIT 11.1x, and P/E of 12.3x. The corresponding 2019e figures are EV/EBITDA of 5.5x, EV/EBIT 9.5x, and P/E of 10x. Overall, these are implied multiples we find very attractive and argue support our Buy recommendation and NOK115 target price, which represent approximately 35% upside to last close.

Torghatten: Sum-of-the-Parts Valuation Exhibit 79.

Torghatten Valuation To Torghatten NOKm Methodology 2018E EV/EBITDA EV NIBD Equity Value Ownership Equity Value Per Share

Ferry Transport Peer multiples 6.0x 3,543 2,200 1,343 94% 1,269 27 Bus Transport Peer multiples 7.3x 1,846 0 1,846 97% 1,784 38 Air Transport Peer multiples 4.9x 3,206 400 2,806 66% 1,852 39 Other Maritime Peer multiples 6.1x 283 192 91 100% 91 2 NTS ASA Current market capitalisation 3,332 11% 355 7

Associates/EAIs Book/Market value 155 3 Other investments Book value 22 0

Total 8,878 2,792 9,418 5,528 116 Upside (Downside) on last close 35.7%

Valuation Metrics Implied 2018e EV/EBITDA 6.0x Implied 2019e EV/EBITDA 5.5x

Implied 2018e EV/EBIT 11.1x Implied 2019e EV/EBIT 9.5x

Implied 2018e P/E 12.3x Implied 2019e P/E 10.0x

Source: Bloomberg, Torghatten, SpareBank 1 Markets. Note: Multiples adjusted for minorities

As evidenced in the figure below, Air transport, i.e. the 66% stake in Widerøe, account for some 34% of our NOK116 per share SOTP. The segment is closely followed by Bus, which account for 32% of our SOTP. Next, we have the ferry transport segment, which account for 23% of the value in TORG. The stake in NTS is 6% of the SOTP and other maritime, associates/EAIs and other investments in sum account for the reminder or NOK5 per share.

Torghatten: Sum-of-the-Parts Valuation Illustrated Exhibit 80.

Associates/EAIs Other investments 3% 0% Other Maritime 2% NTS ASA 6%

Ferry Transport 23%

Air Transport 34%

Bus Transport 32%

Source: Bloomberg, Torghatten, SpareBank 1 Markets.

Important: All disclosure information can be found on page 39 of this document. 7 Torghatten Company Report 22 January 2018

Valuation support in ROE vs. P/B approach From our experience with discussing transportation companies, we found various opinions on long-term ROE, required return on equity (“RROE”) and how to think about P/B. This applies to TORG as well. However, we can only speak for ourselves, but here is our view. First, to calculate long-term fair ROE for TORG, we look at the company adjusted for minorities, i.e. we use net income attributed to parent company (adjusted for non- controlling interests) and book values adj. for minorities. Indeed, TORG has been able to deliver ROE around 17-18% on average last five years, and based on the arguments in the “estimates” section above, we argue TORG should be able to deliver 18% going forward. Hence, we apply long-term ROE of 18% in this approach.

TORG: ROE adjusted for minorities Exhibit 14.

21.1% 19.7% 19.7% 19.6% 17.8% 17.7%

14.5% 13.7% 12.1% 11.1%

2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E

Source: TORG, SpareBank 1 Markets.

Moreover, when calculating required return on equity from peers by simply dividing ROE by the current P/B valuation in the market, we arrive at around 7% on average. Hence, if we take our long-term ROE assumption of ~18% mentioned above and divide by the required return on equity from peers of 7%, we arrive at a fair P/B multiple in TORG of 2.57x. Thus, coupled with a book value of equity, adjusted for minorities as of 2H17 (last reported figure in TORG) of NOK2.177m, this cocktail of numbers correspond to a fair market cap of ~NOK5.6bn or NO118 per share, assuming 47.5m shares. Thus, our take and key take-away from this approach is that we find valuation support for our Buy rec. and NOK115 tp.

TORG: Valuation based on ROE vs. P/B Exhibit 15.

Scenario analysis Comments

10 year average ROE 18.1% Based on reported figures 17-'20e average ROE 17.9% SB1M estimates Normalised long-term ROE 18% Average

RROE from peers 7% Implied from traded peers Implied fair P/B ratio 2.57

Book value adj. for minorities 2,177 1H17 reported figure Fair equity value 5,598

# of shares 47.5 Fair TORG share price 118

Source: TORG, SpareBank 1 Markets.

TORG: Valuation sensitivities Exhibit 16.

160 144 137 140 131 124 118 120 111 105 98 100 92

Fair TORG TORG Fair price share 40

0 14% 15% 16% 17% 18% 19% 20% 21% 22% Nomalised long-term ROE

Source: SpareBank 1 Markets. Important: All disclosure information can be found on page 39 of this document. 8 Torghatten Company Report 22 January 2018

Company Overview Torghatten ASA is one of Norway's largest transportation companies, operating in the air, sea and road transportation segments. The company's roots date back to 1878 when Dampskibet Torghatten Aktieselskap was founded, shipping cargo and mail along the coast of Nordland with the region's first steamship. Over the next decades, the company expanded and entered bus operations in 1930. After the government permitted counties to put public transportation services on tender in the 1990s, the company experienced phenomenal growth, and it is today a leading Norwegian transportation company with revenues of NOK9.4bn (+USD1bn) and EBITDA of NOK1.35bn in 2016.

Torghatten ASA: Company structure Exhibit 17.

Source: Company webpage, SpareBank 1 Markets.

In 1991, Torghatten became exposed to the airline industry through an investment in Widerøe. This holding was sold 11 years later, but Torghatten re-entered the airline industry in 2013, once again through ownership in Widerøe. Being fully consolidated from 2014, the airborne segment was in 2016 the largest source of revenue and EBITDA for Torghatten, followed by seaborne and bus transportation. Indeed, the jump in 2014 is explained by the consolidation of Widerøe. Moreover, there should be no doubt that TORG is a great company, where management, its board of directors and employees has evidenced an ability to deliver profitable growth and hence, managed to create significant shareholder value over time. However, in order to fully reflect the underlying values in TORG, we encourage decision makers in the company to outline 1) a clear investor relation strategy, 2) increase transparency and visibility around earnings, 3) address the comprehensive company structure above, and 4) look at its large portfolio of assets from a strategic point of view to visualize underlying values.

Torghatten ASA: Revenue and EBITDA-margin Exhibit 18.

10.0 18%

16%

8.0 14%

12% 6.0 10%

NOKbn 8% 4.0

6% EBITDA margin

2.0 4% 2%

0.0 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Revenues EBITDA EBITDA-margin

Source: Torghatten ASA, Brønnøysund, SpareBank 1 Markets. Important: All disclosure information can be found on page 39 of this document. 9 Torghatten Company Report 22 January 2018

TORG Sea Transportation The sea transportation segment consists of 100% ownership in Bastø Fosen, Torghatten Trafikkselskap and Torghatten Nord. In addition, it consist of 66% ownership in FosenNamsos Sjø, which owns 51% of Kystekspressen ANS. Hence, Torghatten does not own 100% of the reported EBITDA within the Sea segment, which is important to adjust for in the valuation. Our take is that blended TORG owns approximately 94% of the reported Sea Transportation EBITDA and our valuation is adjusted accordingly.

Sea Transportation – Structure Exhibit 19.

Source: Company webpage, SpareBank 1 Markets.

Bastø Fosen Bastø Fosen (est. 1995) is the third largest Torghatten subsidiary in the sea transportation segment. Bastø Fosen operates five RoRo/PAX ferries (+1 reserve vessel) between Moss and Horten in eastern Norway, which is considered the country's busiest ferry route. The reserve vessel will be used if traffic exceeds expectations. Bastø Fosen’s fleet currently consists of vessels with an average age of 10 years. The oldest is the Bastø I and Bastø II, which were both built in 1997. The youngest vessels are the three new energy efficient diesel engine vessels Bastø IV, Bastø V and Bastø VI, which were all built in 2016. These new vessels are expected to substantially improve bunker cost by 25-30%, but given the highly competitive nature of the business we are of the opinion that Torghatten will not be able to absorb all of this gain.

Torghatten won the new 10-year Moss-Horten contract lasting from 1.January 2017 to 31.December 2026. The contract were worth NOK4.5bn (~USD550m). As this route is based on concession, rights granted by the government, there will be no financial support and Bastø Fosen must take all cost and revenue risk – in contrast to many other ferry routes.

Bastø Fosen's new energy efficient diesel ferry

FosenNamsos Sjø FosenNamsos Sjø is the second largest company in Torghatten's sea portfolio with NOK406m in revenue and 3.8m passengers in 2016. FosenNamsos Sjø has 23 vessels operating on 15 ferries and speedboat routes in central and west Norway. Torghatten ASA owns 66% of FosenNamsos Sjø, which also owns 51% of Partsrederiet Kystekspressen ANS, in which rival Fjord 1 owns the remaining 49%. Partsrederiet Kystekspressen ANS has a contract fixed through 2021 to operate the Trondheim-Kristiansund route as well as routes in accompanying areas.

Important: All disclosure information can be found on page 39 of this document. 10 Torghatten Company Report 22 January 2018

Torghatten Trafikkselskap With revenues of NOK284m and 647.000 passengers, Torghatten Trafikkselskap is the smallest of the companies in Torghatten's sea transport operations. The 11-vessel strong company operates four express routes, and five ferry routes in Nord-Trøndelag and Sør- Helgeland, as well as one local ferry route in Brønnøy and another in Gildeskål.

Torghatten Nord In 2016, Torghatten Nord generated revenues of NOK1.2bn, making it the largest revenue generating unit in Torghatten's sea transportation division. Torghatten Nord was

established in 2008 after Torghatten acquired Hurtigruten's ferry and speedboat operations. Today, it runs 46 vessels in total along the Norwegian west coast. Torghatten Nord's revenues are mainly sourced from PSOs with the Norwegian Public Roads Administration (Statens Vegvesen) and Nordland and Troms counties.

Contract vs ticket revenues While ticket revenues have been stable over the past six years, contract revenue is becoming an increasingly important part of Torghatten's sea borne revenues, accounting for 60% of total revenues in 2016, up from 53% in 2011. This compares to 69% for the whole industry, data from Statistics Norway suggest. EBITDA margins has also increased driven by 1) improved operational efficiency and 2) less number of accidents and 3) to offset increased capex as government require environmental friendly vessels, which has higher capex. As such, EBITDA – capex has not increased to the same extent and consequently, even though we have seen improvements in return on capital, it has not improved as much as the gain in EBITDA margin should indicate.

Torghatten: Sea Transport Revenues vs. EBITDA margin Exhibit 20.

Sea Transport Revenues 1,600 23% 1,400 21% 1,200 19% 1,000 800 17%

NOKm 600 15% 400 13% 200 0 11% 2011 2012 2013 2014 2015 2016 Ticket revenues Contract revenues Other EBITDA-margin

Source: SpareBank 1 Markets, Torghatten.

Important: All disclosure information can be found on page 39 of this document. 11 Torghatten Company Report 22 January 2018

The Norwegian Ferry Market

130 connections in total, served by ~220 ferries Being a part of the public road network, the Norwegian ferry industry serves as a crucial part in both passenger and vehicle transportation. As of today, there are 17 state highway ferry connections ("samband") operated by private companies. In addition to the 17 state highways, there are +110 additional county and township ferry links adding up to a total of around 130 connections in total, served by ~220 ferries.

State highway ferry connections in Norway Exhibit 21.

# Road nr Route Operator Parent 1 Rv. 19 Horten - Moss Bastø Fosen Torghatten ASA 2 E39 Arsvågen - Mortavika Fjord 1 Fjord 1 3 Rv. 13 Lauvik - Oanes Norled Norled 4 Rv. 13 Hjelmeland - Nesvik - Ombo Norled Norled 5 E39 Halhjem - Sandvikvåg Fjord 1 Fjord 1 6 Rv. 5 Mannheller - Fodnes Fjord 1 Fjord 1 7 Rv. 13 Hella - Vangsnes - Drahsvik Fjord 1 Fjord 1 8 E39 Lavik - Oppedal Fjord 1 Fjord 1 9 E39 Lote - Anda Fjord 1 Fjord 1 10 E39 Volda - Folkestad Norled Norled 11 E39 Solevåg - Festøy Fjord 1 Fjord 1 12 E39 Molde - Vestnes Fjord 1 Fjord 1 13 E39 Halsa - Kanestraum Fjord 1 Fjord 1 14 Rv. 827 Drag - Kjøpsvik Torghatten Nord Torghatten ASA 15 E6 Bognes - Skarberget Torghatten Nord Torghatten ASA 16 Rv. 80 Bodø - Værøy - Røst - Moskenes Torghatten Nord Torghatten ASA 17 Rv. 85 Bognes - Lødingen Torghatten Nord Torghatten ASA

Source: SpareBank 1 Markets, Statens Vegvesen.

In terms of passenger numbers, the CAGR over the past 10 years has been 3.3%, while km per passenger has decreased, pointing towards shorter freight distances but higher load per kilometre. This is further supported by a decline in vessel kilometre over the same period. With regards to revenues for the 10 year period, regular ticket revenue has experienced a modest annual increase of 1.1%, but ticket revenue per passenger has actually come down. The reason for the increase in total revenue per passenger is due to a large increase in public spending (8.1% CAGR), which has increased steadily from 2005, but spiked in the last year. Moreover, the Norwegian ferry market consisted of 35 million PCEs and 43 million passengers in 2016 and is characterized by stable growth with compound annual PCE and passenger growth rates from 2007-2016 of 1.5% and 0.5%, respectively.

Norwegian ferry market growth: 2007-2016 in PCE (millions) Exhibit 22. Norwegian ferry market growth: 2007-2016 in passengers (millions) Exhibit 23.

35,0 34,8 1% 34,5 43,3 34,0 34,0 43,0 42,4 42,4 32,9 27% 42,1 41,9 41,9 41,7 49% 31,7 31,4 31,4 41,3 2% 30,8 21% 40,5

Fjord1 Torghatten Boreal Nordled Other 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: Statens Vegvesen, Ferjedatabanken, Oslo Economics, SpareBank 1 Markets Source: Statens Vegvesen, Ferjedatabanken, Oslo Economics, SpareBank 1 Markets

Important: All disclosure information can be found on page 39 of this document. 12 Torghatten Company Report 22 January 2018

Consolidated market Over the last 10 years, there has been an interesting development in this market, with an aggressive consolidation and today, the ferry market is indeed characterized as a consolidated market. More precisely, TORG, Nordled, Boreal Transport and Fjord1 are actually the main and only players in this market. Moreover, TORG transported 7.2 million passenger car equivalents in 2016 on 38 ferry connections. With a 33% market share in number of connections and 21% in terms of number of PCE transported, TORG is one of the largest ferry companies in Norway together with Fjord1.

TORG vs Peers: (PCE and number of connections) Exhibit 24.

Market share (PCE 2016) Market share (connections 2017) Boreal 2 % Other 1 %

Other Torghatten 8 % Fjord1 Boreal 21 % 24 % 12 % Fjord1 121 35m PCE 49 % connections

Norled Torghatten Norled 27 % 33 % 23 %

Source: Statens vegvesen, Ferjedatabanken, Oslo Economics, SB1M

As evidenced below, TORG is geographically more geared towards ferry connections in the north, while Norled and Fjord1 have large market shares in the western part of Norway. Although, TORG does not have the largest number of PCE transported in the market in 2016, the company will from 2019 operate three out of the ten largest ferry routes in Norway. Thus, it is our understanding that adjusted for the contract wins over the last years (not yet in operation), the “pro-forma” market share has increased to above 21%.

TORG vs Peers: Geographical exposure Exhibit 25.

Source: Statens vegvesen, Ferjedatabanken, Oslo Economics, SB1M

Boreal Transport (previously Connex and Veolia) is a private operator of public transportation services in Norway and operates trams, buses, rail and ferries through its four subsidiaries. In the sea segment, Boreal operates 31 vessels.

Fjord1 is one of the largest ferry operators in Norway. The company is also involved in transportation by air, owning the remaining part of 34% of Widerøe. Fjord1 had revenues of NOK9.4bn in 2016, and operates 66 ferries and boats on 40 different ferry routes in Norway.

Norled (previously Tide Sjø) is a Norwegian ferry and express boat operator currently in control of 80 vessels from Oslo to Troms.

Important: All disclosure information can be found on page 39 of this document. 13 Torghatten Company Report 22 January 2018

Focus on safety and operations On the operational side of the business, TORG has done a lot of work in order to drive down cost. Since 2011/2012, the company has been able to lower the amount of annual HSE incidents from +30 to below around 15 incidents per year. Compared to its peers, TORG has still some potential to reduce number of incidents even further and hence, improve margins accordingly. Thus, even though TORG has been able to increase profitability over the last years, we argue there are room for additional margin expansion, supporting investor returns through a combination of 1) revenue growth, 2) margin expansion and 3) dividends.

Number of accidents: TORG vs. peers Exhibit 26.

40 35 30 25 20 15 10 5 0 2010 2011 2012 2013 2014 2015 2016

Boreal Fjord1 Nordled Torghatten Other

Source: Statems Vegvesen, SpareBank 1 markets

Indeed, in the ferry industry, there is a strong correlation between HSE incidents and EBIT margins, because fewer HSE incidents result in lower operating expenses. As TORG remained focused on operations and safety, the margin began to rise. In 2016, the EBIT margin came in above 14% versus a low of 13% in 2012. Consequently, TORG has improved its HSE position, but has as mentioned above, still potential for additional margin expansion and improved return on capital through even more focus on safety.

TORG: Correlation between number of HSE incidents and EBIT margin Exhibit 27.

15.5% 40 15.0% 35 14.5% 30 25 14.0% 20 13.5% 15 13.0% 10 12.5% 5 12.0% 0 2010 2011 2012 2013 2014 2015 2016

EBIT-margin Number of accidents Torghatten ASA

Source: Torghatten ASA, Statens Vegvesen, SpareBank 1 markets

Costs follow inflation According to statistics from Statistisk Sentralbyrå (Statistics Norway), the cost curve in the domestic sea segment (nærsjøindeks) has increased by roughly 1.8% p.a. since 2009. Indeed, in the Norwegian ferry industry, the nærsjøindeks is used to price-adjust ferry route budgets. Thus, Norwegian ferry operators are not exposed to risks related to fuel, maintenance, wages, administrative costs and interest rates. Even though the crude price has dropped and interest rates remain record low, overall costs have increased by 2.2% over the past year, above the average rate. The increase was driven by higher maintenance and Important: All disclosure information can be found on page 39 of this document. 14 Torghatten Company Report 22 January 2018

wage costs. Looking at the past seven years, the trend shows that wages and administrative costs have increased by roughly 2.6% and 3.3%, respectively, p.a. since 2009, leading to total average cost growth of a steady 1.8%. Going forward, we expect to see a reduction in the rate of wage growth simply due to more potential employees becoming available on the back of cost cutting in the oil industry.

Statistics Norway cost base for domestic sea borne transportation (nærsjøindeks) Exhibit 28.

Source: Statistics Norway, SpareBank 1 Markets. Note: Rebased to 100 in 2Q 2009

Contractual structure… In Norway, the ferry routes are allocated following public tender offers. In the tendering process for the state highway ferry connections, the Norwegian Public Roads Administration (NPRA) and local road authorities are the only customers and the tendering is offered both domestically and internationally before a final award is then given to the provider offering the best solution within the predefined requirements. Moreover, in an analysis undertaken by economics consultancy, Oslo Economics, on behalf of the NPRA, the competitive environment of the Norwegian public ferry operators was investigated. The report concluded that after changing from a process based on negotiating to a tendering process, the ferry market has in general improved. Furthermore, contracts in the Norwegian ferry market are designated as either gross or net. A gross contract is where the charterer (public authority) takes on the market risk and the operators bid in relative to what they consider a decent margin. Conversely, a net contract is one in which the operator is responsible for generating sufficient revenues and each bidder in the tender must evaluate what they consider to be achievable in terms of revenues vs cost. Thus, gross contracts have no volume or price risk is the undisputable preferred contract model. Moreover, the trend in the industry is also towards more gross contracts.

…coupled with the green shift… Over the recent years there has been an increased emphasis towards the environmental footprint of the ferry industry and both electrical and LNG fuelled ferries have been introduced. Compared to buses, sea borne transportation in general produce substantially

higher CO2 and NOX emissions in terms of gram/km. In the future, the tendering process on all ferry routes will have environmental requirements in order to reduce greenhouse gas emissions by one third of today’s level. Certain ferry routes will have zero emission policies, requiring newbuilds or reengineering of vessels in the existing fleet. In the next few years, a large amount of tenders will be awarded as they come off contract in 2018-2019.

…drives capex in the ferry industry As mentioned above, the demand for newbuilds has soared due to the green shift. With gross contracts, newer vessels have higher EBITDA margins than older vessels to offset increased capex. Competitors are on equal ground with regards to return on capital employed, and thus operational efficiencies are what separate vessel operators. As TORG has a relatively old fleet (capacity adjusted), it is still to benefit from a high EBITDA margin.

Important: All disclosure information can be found on page 39 of this document. 15 Torghatten Company Report 22 January 2018

Toghatten ASA versus Norwegian peers on EBIT margin Exhibit 29.

25%

20%

15%

10% EBIT margin margin EBIT 5%

0% 2011 2012 2013 2014 2015 2016

-5%

Fjord 1 Torghatten (Sea Segment) Boreal Sjø AS Norled

Source: Torghatten ASA, Sparebank 1 markets *includes buses

In addition, as TORG expects to order new vessels over the next 3-4 years from both recently won contracts and tenders they expect to win, the EBITDA margin is expected to be 35-40% on new contracts due to these investments, as illustrated below.

EBITDA margins on new versus old vessels Exhibit 30. New vessel 20 year old vessel Comments Capex 90 30 Vessel delivered 2016 ROCE 9 % 9 % After tax NOPLAT 8 3

Tax 3 1 Assuming 25% tax rate EBIT 11 4

Depreciation 3 3 Assuming 30 years linear depreciation on newbuild EBITDA 14 7 EBITDA margin 37 % 22 %

Cost 24 24 Based on PCE-cost per vessel for 2016

Source: Fjord1, Torghatten, SpareBank 1 Markets.

Ferries will remain critical to Norwegian infrastructure Ferries are likely to remain essential to Norwegian infrastructure for decades to come. Indeed, according to the economic research company, Oslo Economics, ferry demand is likely to increase over the next 5-15 years, with a possible slow decline to begin in 15-30 years’ time. As ferry transportation represents a cost efficient solution to society, and infrastructure projects in Norway are costly and time consuming, ferry demand is likely to increase until 2050. Indeed, Oslo Economics identified nine infrastructure projects (tunnels and bridges) in Norway, where the government had approved only two of the projects.

Identified and approved infrastructure projects in Norway - 2016 Exhibit 31. 9

Identified infrastructure projects Approved projects on larger ferry connections

Source: Oslo Economics, SpareBank 1 Markets.

Important: All disclosure information can be found on page 39 of this document. 16 Torghatten Company Report 22 January 2018

TORG sea estimates Our estimates for the sea unit are based on our outlook for the ferry segment in light of a shift towards a more eco-friendly fleet, trend towards long-term gross contracts and more frequent departures. First, in our revenue estimate below, we model with a significant increase from 2018e to 2019e. This is driven by the changes in the figures below. Indeed, as shown in the exhibit to the left, TORG only operate one of the 10 largest ferry connections in Norway, namely Moss – Horten (Bastø Fosen) as of 2017. However, as you can see from the exhibit to the right, TORG has won both Sandvikvåg – Halhjem and Flakk – Rørvik, in which has start-up 01.01.19 and explain the increase in reported figures.

10 largest ferry connections: 2016 Exhibit 32. 10 largest ferry connections: 2019e Exhibit 33.

Source: TORG, Fjord1, Statens Vegvesen, Ferjedatabanken, Oslo Economics Sparebank 1 Markets Source: TORG, Fjord1, Statens Vegvesen, Ferjedatabanken, Oslo Economics Sparebank 1 Markets

Moreover, as 1) TORG has a relatively old fleet (capacity adjusted) and 2) lag peers on number of HSE accidents, the company is still to benefit from a higher EBITDA margin and return on capital. Moreover, with an increasing share of revenues steaming from gross contracts, our take is that the renewal of the fleet requires TORG to extract higher margins on new contracts to offset increased capex on new vessels. Indeed, according to management, they expect EBITDA margins of 35-40% on new contracts, however, all else equal, this shift alone does not affect ROCE.

Estimates: Sea transport Exhibit 34.

Sea Transport 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E

Ticket revenues 622 651 710 658 657 718 Contract revenues 999 1,062 1,181 1,290 1,425 1,429 Other 253 231 196 214 207 207 Revenues 1,874 1,945 2,087 2,162 2,289 2,354 2,518 2,568 2,953 3,011 YoY 3.8% 7.3% 3.6% 5.9% 2.8% 7.0% 2.0% 15.0% 2.0%

OpEx -1,548 -1,635 -1,801 -1,862 -1,870 -1,852 -1,939 -1,977 -2,244 -2,228 YoY 5.6% 10.1% 3.4% 0.4% -1.0% 4.7% 2.0% 13.5% -0.7%

EBITDA 326 310 286 300 418 502 579 591 709 783 EBITDA-margin 17.4% 15.9% 13.7% 13.9% 18.3% 21.3% 23.0% 23.0% 24.0% 26.0%

D&A -133 -142 -187 -191 -209 -211 -293 -295 -364 -432 D&A / Sales -7.1% -7.3% -9.0% -8.8% -9.1% -8.9% -11.6% -11.5% -12.3% -14.3%

EBIT 193 168 99 109 210 291 287 296 345 351 EBIT-margin 10.3% 8.6% 4.8% 5.0% 9.2% 12.4% 11.4% 11.5% 11.7% 11.7%

Net financials -36 -38 -63 -57 -60 -53 (55) (55) (55) (55) Net Income from EAIs and Associates 0 0 0 0 0 0

Pre-tax profit 156 130 37 51 150 238 232 241 290 296

Taxes -45 -35 -6 -8 -27 -49 -46 -48 -58 -59 Effective tax rate -28.5% -26.7% -16.6% -15.3% -17.8% -20.8% -20.0% -20.0% -20.0% -20.0%

Net Profit 112 95 30 44 124 188 185 193 232 237 of which, parent 115 97 27 41 119 183 179 187 226 231 of which, non-controlling interests -3 -2 3 2 5 6 6 6 6 6 Net Margin 6.0% 4.9% 1.5% 2.0% 5.4% 8.0% 7.4% 7.5% 7.9% 7.9% Source: Torghatten, SpareBank 1 Markets.

Important: All disclosure information can be found on page 39 of this document. 17 Torghatten Company Report 22 January 2018

TORG sea valuation We have decided to take a relative valuation approach to TORG’s sea segment. As opposed to other transportation segments where a large part of the fleet is leased and a P/E multiple probably is most fair, the sea segment largely has fully owned vessels and we have consequently relied upon EV/EBITDA multiples in our valuation, and adjusted for ownership and sanity checked against P/E.

Torghatten Sea Transportation Peers Exhibit 35.

Share price performance EV/EBITDA Historical EV/EBIT Historical P/E P/B 1m 3m 6m 2017 2018 2019 5Y avg. 2017 2018 2019 5Y avg. 2017 2018 2019 2017

Sea Peers -3% -3% 5% 9.0x 8.7x 8.2x 8.3x 12.3x 11.8x 11.5x 12.7x 15.0x 13.2x 12.0x 2.7x IR5B ID -2% 0% 3% 13.0x 12.3x 10.9x 11.4x 17.6x 16.8x 14.7x 16.3x 18.9x 18.7x 16.0x 5.1x DFDS DC -8% -8% -5% 8.0x 7.7x 7.5x 7.0x 12.3x 11.8x 11.2x 12.7x 11.8x 10.9x 10.0x 2.9x 603167 CH -5% -6% 8% 12.2x 11.3x 10.5x 13.6x n.a. n.a. n.a. n.a. 15.7x 13.6x 12.2x 1.7x TAL1T ET 5% -3% 18% 8.6x 8.6x 8.2x 7.6x 17.9x 18.8x 18.6x 14.9x 14.2x 12.8x 10.8x 0.9x SLK AU -7% -2% -1% 9.4x 8.8x 8.2x 9.0x 12.2x 11.5x 10.6x 11.6x 16.3x 15.5x 14.1x 2.7x FJORD NO 6% 17% 31% 5.9x 5.7x 6.8x 5.5x 8.1x 8.1x 11.5x 7.4x 8.3x 8.3x 11.8x n.a. Source: Bloomberg, SpareBank 1 Markets. When we valued Fjord1, we conducted the valuation based on a 20% discount to DFDS multiples, which we regarded as the closest peer, due to differences in terms of 1) EBITDA margins, 2) return on capital, 3) growth rates, 4) dividend yield and 5) liquidity. Consequently, we apply the same EV/EBITDA multiple on TORG’s Sea segment, and arrive at a fair equity value of the sea transportation segment of around NOK1.34bn or NOK27 per TORG share. This translates into an implied 2018e EV/EBITDA of ~6x. Moreover, applying Fjord1 2017-2019 average P/E multiple on TORGs Sea segment, yields NOK1.55bn in equity value or NOK33 per share and hence, we find our Sea segment valuation reasonable.

Valuation: Torghatten sea transportation segment valuation per share Exhibit 36.

EV/EBITDA P/E

Source: Torghatten, Bloomberg, SpareBank 1 Markets

Important: All disclosure information can be found on page 39 of this document. 18 Torghatten Company Report 22 January 2018

TORG Air Transportation The air transportation segment consists of WF Holding, which is owned by Torghatten ASA (66%) and Fjord1 AS (34%). The holding company fully owns the regional airline Widerøe. Widerøe Widerøe is one of Scandinavia’s largest regional airlines with approximately 3,000 employees. Widerøe serves 2.8 million passengers every year, and offers routes to 46 domestic and international destinations. In 2002, the company was acquired by Scandinavian Airlines. It remained fully owned by SAS until 2013, when, Fjord1, Torghatten and Nordland county acquired an 80% stake in the company. In 2016, Torghatten bought Nordland county’s interest in Widerøe as well as the remaining 20% stake from SAS. After the transaction, Fjord1 owned 34% of Widerøe, while Torghatten held 66% of the shares.

Widerøe: Company structure Exhibit 37.

Source: Widerøe, SpareBank 1 Markets.

In addition to the airline, the company has three business segments: Widerøe Internett, Widerøe Ground Handling (WGH) and Widerøe Technical Services (WTS). Widerøe internett is responsible for maintaining the company’s webpage, wideroe.no, as well as servicing and helping customers order tickets, reserve hotel rooms and rental cars. A quarter of all reservations made through Wideroe.no is for flights that are operated by other airlines. WGH provides a long list of services in order to facilitate safe departures for Widerøe’s aircraft, and swift processing of arrivals. WGH services include de-icing, ramp handling, passenger handling, cargo handling and security services. In 2016, Widerøe entered into an agreement with SAS regarding the provision of ground handling services for all SAS’ aircraft on Norwegian airports except for OSL Gardermoen. WTS offers services such as maintenance and specialized service on all of Widerøe’s aircraft. With the expertise of WTS, Widerøe can extend the life of the aircraft fleet from being able to do 80,000 landings before being decommissioned to 120,000 landings. Moreover, Widerøe won all 13 public service obligations (PBO) contracts in Nord-Trøndelag, Nordland and Finnmark, competing against Danish Air Transport AS and FlyViking. The PBO contracts will run from 2019-2026 with 5x1 year options to extend and represent potential revenues of NOK5bn (including options).

Widerøe: Flight network Exhibit 38.

Source: SB1M, Widerøe

Important: All disclosure information can be found on page 39 of this document. 19 Torghatten Company Report 22 January 2018

No losses since 1999 in Widerøe Over the past 15 years, Widerøe's revenues have more than doubled, growing by an average 6% per year. With the share of passenger revenues growing from 66% in 2004 to 84% in 2016, the company has become less dependent on state purchases over the last years. In 2016, state purchases amounted to ~NOK0.7bn of revenues totalling NOK4.5bn. EBITDA- margins have averaged 11% since 2000, bottoming at 6% during the financial crisis and peaking at 17% in 2011. Additionally, Widerøe has not had any losses in over 15 years, averaging a net profit margin of 2.8%. Free cash flow wise, however, Widerøe is down a cumulative ~NOK700bn over the last 15 years, after significant investments in 2013.

Widerøe: Financial performance Exhibit 39.

5 000 20 %

4 500 18 %

4 000 16 %

3 500 14 %

3 000 12 %

2 500 10 % NOKm 2 000 8 %

1 500 6 %

1 000 4 %

500 2 %

0 0 %

Revenues (LHS) EBITDA (LHS) EBITDA margin (RHS) Net profit margin (RHS)

Source: SB1M, Brønnøysundregistrene, Widerøe

Widerøe: Financial performance Exhibit 40. NOKm 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Revenues 1 680 1 804 2 045 2 072 2 154 2 345 2 427 2 493 2 829 2 747 2 918 3 270 2 820 4 176 3 807 3 940 4560 EBITDA 226 244 267 222 233 228 175 251 162 167 321 542 279 404 493 492 646 Net profit 39 49 48 47 55 50 14 108 8 34 117 266 129 104 60 121 257

EBITDA margin 13 % 14 % 13 % 11 % 11 % 10 % 7 % 10 % 6 % 6 % 11 % 17 % 10 % 10 % 13 % 12 % 14 % Net profit margin 2 % 3 % 2 % 2 % 3 % 2 % 1 % 4 % 0 % 1 % 4 % 8 % 5 % 2 % 2 % 3 % 6 %

Source: SB1M, Brønnøysundregistrene

Important: All disclosure information can be found on page 39 of this document. 20 Torghatten Company Report 22 January 2018

Majority of fleet dedicated to Norwegian short-runway network Widerøe's fleet consists entirely of Dash-8 Q-Series aircraft of various specifications. Of the total 41 aircraft in operation, 23 are Q100/200 dedicated to the Norwegian short-runway network, with runways down to 800m in length. These have low seat capacity relative to the Q300s and Q400s, of which Widerøe operates 7 and 11 aircraft, respectively. During 2015, Widerøe planned to phase out two Q300s, one has been returned to a Kenyan airline (LN-WFD), and however, we believe the other aircraft has not yet been phased out.

Widerøe: Fleet overview Exhibit 41. Widerøe: Fleet and seat capacity Exhibit 42.

Source: Bombardier, Wideøe, Airvectors, SpareBank 1 Markets Source: Widerøe (incl. two Q300 to be phased out in 2015), SpareBank 1 Markets

Widerøe also signed a contract with Embraer, a Brazilian aircraft manufacturer, for the delivery of three E2-190 jet aircraft in 2018, and an option to acquire another 12 aircraft. The Embraer E2-190 has significantly lower fuel costs and offer lower CO2 emissions compared to aircraft in Widerøe’s current fleet.

Embraer E2-190 Exhibit 43.

Source: Widerøe, SpareBank 1 Markets

Fleet and SCAT-1 key to Widerøe's competitiveness Historically, Widerøe has been the only airline to submit bids on airports with runways shorter than 1,199m and when the seat requirement has been at least 30 per flight. To serve these airports, special aircraft like Q100/200 are needed and Widerøe is the European airline with the largest fleet of such aircraft. Indeed, it is one of the world's largest airline with these aircraft (behind Jazz Air and Piedmont). According to Avinor, only Dash-8 Q100/200, Fairchild Dornier 228, Twin Otter (Dash-6) and Dash-7 aircraft are able to sufficiently operate in this network. The ATR-42 300/500 would only be able to operate to a limited extent, mostly due to runway length and capacity specifications. Considering that 28 of Norway's 52 airports are shorter than 1,199m, Widerøe has a significant advantage. Although runway extensions are possible for all but nine of these airports, it is only commercially viable for four of them, according to Avinor. These are Førde, Sogndal, Namsos and Rørvik, and combined they represented only 1-2% of all passengers on domestic flights. Widerøe is also one of the only bidding airlines with SCAT-1 security systems installed in its aircraft, which has favoured Widerøe in earlier tenders. Hence, its aircraft are arguably key to its competitiveness and thus maintaining the current fleet as long as possible is crucial.

Important: All disclosure information can be found on page 39 of this document. 21 Torghatten Company Report 22 January 2018

Norway: Airport overview Exhibit 44. Norway: Airport breakdown by runway length Exhibit 45.

Source: Avinor, SpareBank 1 Markets Source: The Norwegian National Transport Plan, Avinor, SpareBank 1 Markets

Lifetime extension program helps delay full Q100 phase-out to 2023 Widerøe's Q100 fleet is nearly 23 years old and as the Q100/200 aircraft series are no longer in production, Widerøe has been forced to look for alternatives in order to maintain a sufficient fleet able to serve the Norwegian short-runway network. With its fleet approaching end-of-life and few other options in terms of newbuilds exist; Widerøe launched a lifetime extension programme in 2009 as the only operator in the world licensed to do so. Aimed initially at 16 Q100 aircraft, they prolonged the lifetime from 80,000 flight cycles to 120,000, enabling Widerøe to secure short-runway aircraft until the end of 2023. Finished in April 2015, total costs were estimated around NOK320m, thereby proving less costly than purchasing new, comparable aircraft. Either way, the closest commercially available alternative is the ATR-42, which is not ideal for the Norwegian short-runway network, according to the Institute of Transport Economics, as mentioned above.

Widerøe fleet age distribution Exhibit 46.

30 25 20

15 Age 10 5 0

Q100 Q200 Q300 Q400 W. Average

Source: Airfleets, Planespotters, SpareBank 1 Markets (excludes one Q300).

Widerøe will try to phase out at least one Q100 per year as they reach the new end-of-life limit, swapping to less intensely used second-hand aircraft. In doing so, they hope to maintain the current fleet until ~2030. Of the current active Q100/200 fleet worldwide, US and Canada together account for 144, or just over half, but the average age is 2 years higher than Widerøe's fleet, suggesting suitable aircraft can be hard to come by here. In 1.5 years' time, the current active Q100 fleet will have reached the average age of scrapped Q100 aircraft (27.6 years), meaning it will become increasingly difficult to find replacements. In terms of Q200, we have already reached the average age of scrapped aircraft (18.0 years).

Dash 100 and 200 world fleet age distribution Exhibit 47.

180 28

130 27 23

80 18 117 12 3 3 30 14 13 Age Average 27 24 # of aircraft of # 20 5 -20 North America Oceania Africa Norway Other Europe 8

Q100 Q200 Average Q100/200 Age

Source: Airfleets, SpareBank 1 Markets.

Important: All disclosure information can be found on page 39 of this document. 22 Torghatten Company Report 22 January 2018

The Norwegian Airline Market

Norway airline traffic highly correlated to GDP The Norwegian airline traffic is highly correlated to the mainland GDP, as evidenced with the figure below, which show data back to 1980. However, there are a couple of observations interesting to point out. First, airline traffic is much more volatile than GDP as we can see from the period 1987-1989, under the dot-com bubble, the financial crisis in 2007/2008 and during the oil price fall in 2014-2016. Second, the airline traffic tend to grow 2x GDP, i.e. if GDP growth is 2%, airline traffic is most likely to grow 4%.

Norway Airline traffic vs. GDP Exhibit 48.

Source: Macrobond, SpareBank 1 Markets

~50% of journeys are business-related, of which half are oil-related The last ten years have seen a fairly stable relationship in the share of leisure and business- related journeys in Norway, with each being the primary purpose of half of all domestic journeys. Growth in the leisure segment has been steady at 3-4% per year until 2014 and was more or less unaffected by the financial crisis. This was not the case for business journeys, which declined in 2008-10 and were barely above 2007-levels in 2013. However, after with flat growth in both international and domestic passengers since 2014, we are finally seeing increased traffic. This trend is most likely due to among other the increase that we have seen in the oil price since 2016 (domestic) and the weak Norwegian Krone (international). Moreover, as we see from the figure below, data from the hotel industry also show that 1) number of hotel guest nights is increasing and 2) hotel guest nights related to business is taking a larger piece of the pie.

Norway: Hotel guest nights Exhibit 49. Norway: Airline passenger Exhibit 50.

Source: Macrobond, Sparebank 1 Markets Source: Macrobond, SpareBank 1 Markets

Important: All disclosure information can be found on page 39 of this document. 23 Torghatten Company Report 22 January 2018

PMI points to a boost in production As mentioned above there is a strong correlation between GDP growth and YoY growth in airline traffic. Thus, with 1) a significant uptick in reported GDP lately and 2) continuation of solid manufacturing PMI’s in Norway, and 3) strong performance in oil related manufacturing, which also mentioned above drives airline traffic, we argue there is solid risk/reward concerning attractive growth in the Norwegian Airline traffic going forward.

Norway PMI manufacturing Exhibit 51. Norway: Manufacturing production Exhibit 52.

Source: Macrobond, Sparebank 1 Markets Source: Statistics Norway, SpareBank 1 Markets

Higher ticket price, somewhat offset by increased oil price After three years of airfare decline following the financial crisis, airfares in Norway have trended upward since mid-2011. In December, the price index for domestic flights increased 15% month on month. Meanwhile, jet fuel prices (in USD) has increased in line with the oil price since early 2016. However, the jet fuel price increase in USD has been to some extent offset by the weak Norwegian Krone. Nevertheless, this diverging trend in input cost versus airfares means the operating environment for Norwegian carriers have improved somewhat.

Norway CPI: Airline ticket Exhibit 53. Jet fuel and crude price: USD per barrel Exhibit 54.

Source: Macrobond, Sparebank 1 Markets Source: Platts, Oanda, SpareBank 1 Markets

Important: All disclosure information can be found on page 39 of this document. 24 Torghatten Company Report 22 January 2018

We also see a trend towards longer season The last trend we see and hear from sources in the transportation space (ferry and air) is that the leisure season is longer than previous years. Indeed, according to hotel capacity utilisation data we have gathered and showed below, we see that in the period 2015 to 2017 (period chosen due to currency), utilisation starts to pick up significantly already in April/May and last until October/November, whereas the same utilization in the period 2000-2014 was much lower. According to our understanding, this support our thesis of a longer season, which favour companies like Widerøe.

Norway hotel capacity utilisation Exhibit 55.

Source: Macrobond, SpareBank 1 Markets

Annual passenger growth on routes expected at 1.1% through 2020 Based on figures from the Institute of Transport Economics, we expect passenger volume growth on Norway's PBO routes (from 1 April 2017) at 1.1% per year through 2020. Strongest growth is expected in southern Norway (1.7%), where Widerøe has already secured an extension through 2020, as mentioned above. In northern Norway, growth is expected at 0.9% per year.

Passenger volume on PSO routes Exhibit 56.

1.2 1.0 0.8 0.6

Passengers (million) Passengers 0.4 0.2 0.0 South Norway North Norway Total

2013 2020E

Source: Institute of Transport Economics, Møreforskning, SpareBank 1 Markets

Important: All disclosure information can be found on page 39 of this document. 25 Torghatten Company Report 22 January 2018

TORG air estimates Widerøe delivered a solid 2016 and our take is that 2017 has been a year highly affected by hiccup’s during the summer months. Indeed, according to our understanding, +100 flights has been cancelled follow by shortage on staff, which we regard as a one-off. With regards to 2018, we assume Widerøe’s results to normalise and develop more in line with the historical performance. Indeed, from 2018 onwards, we expect revenue to grow somewhat above the 10-year average of 2-2.5%, and to normalise in 2020, but margins is assumed to stay flat at 13%, after a decline in 2017 as a result of the abovementioned cancellations. This is based on expectations of marginal growth in passenger volumes with the load factor approaching historical average towards 2020, driven by underlying market growth. We also expect revenue per passenger to return to normalised growth levels of 2%.

Estimates: Air transport (Widerøe at 100% ownership) Exhibit 57.

Air Transport 2013 2014 2015 2016 2017e 2018e 2019e 2020e

Ticket revenues 753 3,178 3,291 3,840 Contract revenues 172 629 661 719 Other 0 0 0 0 Revenues 926 3,807 3,952 4,560 4,791 5,031 5,282 5,414 YoY 311.3% 3.8% 15.4% 5.1% 5.0% 5.0% 2.5%

OpEx -764 -3,320 -3,445 -3,914 -4,312 -4,377 -4,596 -4,711 YoY 334.6% 3.8% 13.6% 10.2% 1.5% 5.0% 2.5%

EBITDA 162 487 507 646 479 654 687 704 EBITDA-margin 17.5% 12.8% 12.8% 14.2% 10.0% 13.0% 13.0% 13.0%

D&A -60 -244 -300 -279 -285 -299 -314 -322 D&A / Sales -6.5% -6.4% -7.6% -6.1% -6.0% -6.0% -6.0% -6.0%

EBIT 101 243 207 367 194 355 372 382 EBIT-margin 10.9% 6.4% 5.2% 8.1% 4.0% 7.0% 7.0% 7.0%

Net financials -30 -159 -58 -43 -51 -44 -35 -28 Net Income from EAIs and Associates 0 0 0 0.0

Pre-tax profit 71 84 150 324 143 311 338 353

Taxes -14 -24 -37 -78.1 -34.3 -74.5 -81.0 -84.8 Effective tax rate -20.4% -29.2% -24.8% -24.1% -24.0% -24.0% -24.0% -24.0%

Net Profit 57 59 113 246 109 236 257 269 of which, parent 29 24 51 159 72 156 169 177 of which, non-controlling interests 28 35 61 87 37 80 87 91 of which, non-controlling interests % 49.0% 59.4% 54.4% 35.3% 34.0% 34.0% 34.0% 34.0% Source: Torghatten, SpareBank 1 Markets.

TORG air valuation As there is difficult to find a key peer for Widerøe, our peer group includes most of Europe's listed airlines, including Norwegian Air Shuttle, SAS, Aer Lingus, Ryanair, and EasyJet.

Widerøe: Peer group Exhibit 58.

Share price performance EV/EBITDA Historical EV/EBIT Historical P/E P/B Airline peers 1m 3m 6m 2017 2018 2019 5Y avg. 2017 2018 2019 5Y avg. 2017 2018 2019 2016

Median 1% 6% 8% 5.0x 4.9x 4.6x 4.8x 8.1x 7.8x 7.5x 7.6x 11.2x 10.1x 10.9x 1.5x RYANAIR HOLDINGS PLC 11% -2% -2% 10.5x 9.7x 9.2x 8.2x 13.9x 12.9x 12.2x 11.3x 16.7x 14.7x 13.7x 5.2x EASYJET PLC 11% 16% 2% 8.6x 7.6x 6.5x 6.9x 12.5x 11.2x 9.2x 8.8x 16.9x 15.1x 12.2x 2.0x NORWEGIAN AIR SHUTTLE AS -19% -8% -19% 60.3x 8.7x 4.6x 8.4x n.a. 29.0x 9.2x 18.6x n.a. n.a. 16.0x 1.5x WIZZ AIR HOLDINGS PLC 5% 13% 46% 9.1x 7.1x 5.9x 5.9x 11.0x 9.2x 7.7x 7.1x 20.2x 16.7x 14.2x 4.9x FINNAIR OYJ 8% 33% 130% 4.2x 4.4x 4.1x 2.4x 6.9x 7.8x 7.2x 7.8x 13.9x 13.6x 12.5x 1.6x SAS AB 0% 40% 58% 4.1x 3.8x 3.9x 3.7x 5.9x 6.3x 6.1x 6.7x 8.6x 8.2x 7.5x 1.1x JETBLUE AIRWAYS CORP 3% 2% -13% 4.7x 4.5x 4.2x 4.7x 7.0x 6.6x 6.0x 6.8x 11.2x 10.8x 10.4x 1.5x GOL LINHAS AEREAS INT SA-PRE 1% 37% 91% 7.2x 6.2x 5.8x 7.7x 11.2x 8.7x 7.9x 24.4x n.a. 81.6x 37.5x n.a. WESTJET AIRLINES LTD -4% 2% 15% 4.3x 3.8x 3.5x 3.5x 8.1x 7.1x 6.5x 5.7x 10.7x 9.3x 8.5x 1.4x VIRGIN AUSTRALIA HOLDINGS LT 45% 41% 57% 7.8x 5.9x 5.5x 6.4x 26.6x 13.1x 11.7x 32.7x n.a. 34.4x 30.6x 1.3x DEUTSCHE LUFTHANSA-REG 6% 40% 70% 3.0x 3.0x 2.9x 2.7x 5.0x 5.2x 4.9x 5.9x 6.5x 6.9x 6.5x 1.4x AIR FRANCE-KLM -14% -7% 16% 2.7x 2.5x 2.4x 3.2x 5.6x 5.2x 4.8x 10.5x 4.9x 5.2x 4.4x 1.5x SOUTHWEST AIRLINES CO 2% 6% -9% 6.8x 5.9x 5.6x 5.3x 9.2x 7.8x 7.3x 7.4x 15.5x 12.4x 11.5x 3.6x TURK HAVA YOLLARI AO 11% 13% 54% 6.5x 6.0x 5.2x 6.3x 16.7x 15.3x 12.8x 23.8x 14.0x 7.5x 6.0x 0.8x FLYBE GROUP PLC -2% -13% -10% 3.7x 3.7x 2.5x 4.0x 267.2x n.a. 14.4x 12.1x 84.4x n.a. 13.5x 0.6x INTL CONSOLIDATED AIRLINE-DI -2% -1% -1% 3.4x 3.3x 3.1x 3.9x 4.8x 4.7x 4.4x 6.9x 6.8x 6.4x 6.0x 2.2x UNITED CONTINENTAL HOLDINGS 0% -5% -26% 5.0x 4.9x 4.7x 4.5x 8.0x 8.1x 7.7x 7.2x 9.4x 9.3x 8.6x 1.9x DELTA AIR LINES INC -2% 6% -2% 5.1x 4.9x 4.7x 4.8x 6.9x 6.6x 6.3x 6.5x 9.8x 9.0x 8.2x 2.3x Source: Bloomberg, SpareBank 1 Markets.

Important: All disclosure information can be found on page 39 of this document. 26 Torghatten Company Report 22 January 2018

Based on the median European peer EV/EBITDA multiple above, our 2018e EBITDA estimate and NOK400m in NIBD, we believe the fair value of Widerøe is around NOK1.85bn or NOK39 per share with TORG’s effective 66% ownership. We sanity check our valuation with median peers P/E multiple as there is differences in how fleets are financed, and arrive at ~NOK33 per TORG share.

Widerøe: Equity valuation per share given TORG’s 66% equity stake Exhibit 59.

EV/EBITDA P/E

Source: Bloomberg, SpareBank 1 Markets

Important: All disclosure information can be found on page 39 of this document. 27 Torghatten Company Report 22 January 2018

TORG Bus Transport Through its four fully owned subsidiaries, Torghatten runs around 1,480 buses, most of which are leased, throughout Norway, making it one of the largest bus operators in the country. Most of its revenues are generated from local route traffic, including school routes, but it is also active in the tour and express segments, i.e. routes that cross county borders, along with some regular goods transport and repair services. It is primarily present in 11 of Norway's 19 counties, with the largest share of its route production on contract generated in Oslo and Akershus at 35%. Trøndelag is Torghatten's second-largest region with 25% of its route production. Divisionally, while NorgesBuss makes up over half of Torghatten's revenues, its share of net profits is lower. Trønderbilene, meanwhile, makes up a third of revenues but nearly half of net profits. The past few years have seen a steady increase in Torghatten's contract revenues and they now make up 75% of its total revenues, up from 69% in 2011. Moreover, EBITDA-margins have averaged 11.5% over the last four years.

TORG bus segment: Revenue and EBITDA-margin development Exhibit 60.

Bus Transport Revenues 1,800 13.0% 1,600 12.5% 1,400 12.0% 11.5% 1,200 11.0% 1,000

NOKm 10.5% 800 10.0% 600 9.5% 400 9.0% 200 8.5% 0 8.0% 2011 2012 2013 2014 2015 2016 Ticket revenues Contract revenues Other EBITDA-margin

Source: TORG, SpareBank 1 Markets

Norgesbuss Established in 1996, Norgesbuss is today one of Norway's largest bus operators. Torghatten became the sole shareholder in 2008. Although most of its turnover is generated in Oslo/Akershus, NorgesBuss won the largest ever bus contract in Norway. Starting in July 2016, the contract with Rogaland County has an annual value of NOK420m, meaning southern Norway has become an important region for NorgesBuss. The contract also made TORG the second largest bus operator in the country. On top of route bus operations, NorgesBuss also runs three of four airport express routes to Oslo Gardermoen, in addition to owning and operating SAS Flybussen, another airport express bus operator. Trønderbilene Established in 1920, Trønderbilene was run by Nord-Trøndelag County until 1998 when Torghatten acquired two thirds of the company. Torghatten acquired the remaining third in 2011. Today, Trønderbilene has 430 buses and operates routes in Trøndelag and Hedmark counties. In June 2015, Trønderbilene launched new routes on contract with Hedmark county with a value of NOK35m p.a. Sørlandsruta Sørlandsruta was established in 1951 in Vest-Ager as a merger between 13 individual bus companies and Torghatten acquired the company in 2009. Sørlandsruta operates around 70 buses. A couple of years back, Sørlandsruta won a 10-year contract in Vest-Agder valued at NOK30 per year, which was launched in January 2016. Torghatten Buss Torghatten Buss traces its roots to the late 19th century when Torghatten was first founded, but bus operations did not commence before 1930. Today, the company runs 80 buses on routes in Nordland and Troms. Important: All disclosure information can be found on page 39 of this document. 28 Torghatten Company Report 22 January 2018

The Norwegian Bus Market

Population growth only explains half of the volume growth… While population growth is an important driver of passenger growth, explaining roughly half of the national increase since 2005, overall, Norwegians are also increasingly using bus transport. The average number of journeys per citizen has increased from 60 to 67, which explains the other half of the volume growth. Indeed, Passenger volume in Norway has increased 2% annually to a total of 350m in 2016. However, as shown below, this development is also driven by the Oslo/Akershus region, where journey volume per capita explains almost two thirds of the total passenger growth since 2005. In most of Norway's other counties, meanwhile, people are actually using bus transport less frequently, in which makes consolidation even more attractive.

Norway: Passenger Volume Exhibit 61. Norway: Total Buss Passenger Volume Development (2005 – 2016) Exhibit 62.

250 400

200 350

300 150 250 100 200

million passengers million 50 350 150 276

0 Passengers Million 100

0 Akershus/Oslo Non Akershus/Oslo Bus Passengers ('05) Population Growth Journeys per Passenger Bus Passengers ('16)

Source: Statistics Norway, SpareBank 1 Markets Source: Statistics Norway, SpareBank 1 Markets

…but, passenger volume growth expected at 1-3% going forward Based on Statistics Norway's three population growth scenarios and knowing that population growth has historically driven around half of the bus passenger growth, we expect the latter to grow 1-3% annually over the next 15 years. In the mid case scenario, population growth is expected at 1%, translating into 2% passenger growth. Not surprisingly, Oslo/Akershus is the region where we should expect the fastest growth. This is also the case in Rogaland and Vest-Agder, all of which are regions to which Torghatten is attractively exposed. Hence, with passenger volume growth expected at around 2%, coupled with the abovementioned evidence that population growth only explains half of the volume growth in the period 2005 to 2016, we are able to some certain degree the market growth to be input in our model.

Title Title Norway: Passenger volume growth forecast Exhibit 63. Norway: Annual population growth by county (Mid case, 2014-2030e) Exhibit 64.

490 1.4%

30) 1.2% 440 - 1.0% +0.9% p.a. 390 0.8%

+1.0% p.a. 0.6% 340

million passengers million 0.4% 290

0.2% population growth (CAGR 2014 (CAGR growth population 0.0% 240 2005 2007 2009 2011 2013 2015E 2017E 2019E 2021E 2023E 2025E 2027E 2029E Actual passenger volume Population Growth (Mid Case) Journeys/Passenger Growth

Source: Statistics Norway, SpareBank 1 Markets Source: Statistics Norway, SpareBank 1 Markets

Important: All disclosure information can be found on page 39 of this document. 29 Torghatten Company Report 22 January 2018

Increasingly competitive industry spurring heavy consolidation The past 20 years have seen a great shift in how municipalities procure bus transport services. In the early 1990s, all route production was operated directly by local authorities. However, in 1994 the Norwegian government opened up for competitive tendering. So today, around 90% of all route production is sourced through this bidding process. By end- 2019, almost all counties will likely procure most of its bus transport needs through such tendering. In particular, the Northwest, which represented around 10% of Norway's total route production in 2016, will see strong growth in public procurement, thus opening up more of the Norwegian market for TORG and other bus operators. While there was over 200 individual bus operators in the 1990s, as contracts were increasingly put on tender, competition intensified, spurring heavy consolidation. Today, six companies share around 90% of the market, measured in route kilometre production. Title Norway: Percentage of total route production on tender Exhibit 65.

97% 100% 93% 90% 80% 80% 68% 70% 65%

60% 51% 50% 38% 40% 28% 30% 26% 17% 20%

% of production on tender on production of % 7% 10% 1% 2% 0% 1995 1999 2001 2003 2005 2007 2009 2011 2012 2013 2014 2017E 2019E

Source: NHO Transport (assuming flat route production), NorgesBuss, SpareBank 1 Markets

Torghatten has become the second largest bus operator, up from #3 in 2014 Of the total route production on public contracts in Norway today, Nettbuss (owned by NSB) is the largest bus operator with a 27.5% market share. TORG is second at 20.3%, followed by Tide at 14.5%. Unibuss and Boreal each have around 11% and 12% of the market, respectively, while Nobina holds ~7%. Regionally, the hierarchy varies. Nettbuss has leading market positions in Central Norway and East (excl. Oslo/Akershus), while Unibuss dominates in Oslo/Akershus. In the North, Boreal is the clear market leader and has also taken the leading position in South from Nettbuss, while Tide dominates in the West. Torghatten is the only operator present in all regions, but its strongest positions are in West (#2, 30%) and Oslo/Akershus (#2, 25%). It also has meaningful positions in Central Norway (#2, 20%), South (#3, 18%), East (#3, 13%), and lastly but not least in the North (#4, 10%).

Norway: Market Share by Bus Operator and County Exhibit 66. Norway: Market Share public route production Exhibit 67.

100% 90% 6.8% 80% 7.5%

70% 27.5% 60% Nettbuss Torghatten 50% 11.1% Tide 40% Unibuss 30% Boreal 20% 12.3% Andre Nobina 10% 20.3% 0% Oslo/akerhus Østlandet Sørlandet Vestlandet MidtNorge NordNorge 14.5%

Andre Boreal Nettbuss Nobina Tide Torghatten Unibuss

Source: Kollektivtrafikkforeningen (Nov. 2017), SpareBank 1 Markets Source: Kollektivtrafikkforeningen (as of Nov. 2017), SpareBank 1 Markets

Important: All disclosure information can be found on page 39 of this document. 30 Torghatten Company Report 22 January 2018

Over 50% of current contracts could mature over the next three years Excluding options, 53% of all Norwegian route production on contract today will mature by end-2020. If all options are called, the same figure is just below 40%. Therefore, several new tender opportunities could surface for bus operators in the coming years. However, the share of contracts maturing by 2020 is in the low end for Torghatten, both including and excluding options. Therefore, instead of defending contracts already in production, TORG can focus its resources on competing for new contracts. Indeed, as evidenced in exhibit 69 below, the situation is worse for almost all the other operators. Unibuss and Tide risk north of 50% of all production volume expiring in the next three years, whereas Nettbuss and Nobina risk just south of 50%.

Norway: Maturity schedule of total route production on contract Exhibit 68. Norway: Contract maturity by end-2020, by operator Exhibit 69.

90 35% 90% 80 30% 80% 70 70% 25% 60 60% 50 20% 50% 40 15% 40% 30

10% 30% % of current production current of %

million route kilometers route million 20 20%

Source: Kollektivtrafikkforeningen (Nov, 17), SpareBank 1 Markets Source: Kollektivtrafikkforeningen (Nov, 17), SpareBank 1 Markets

TORG contract overview Based on data from Kollektivtrafikkforeningen, TORG currently has 4% of its public contracts in production, excluding express routes and other contracts, expiring in 2018. Indeed, this summer, a public contract with region South for 75 busses transporting customers from Kristiansand to Lista and Lindesnes to Mandal goes off contract. However, the contract include optionality to extend the contract for four years, in which exercised, TORG has zero contract expiry this year. Moreover, a contract for 57 busses in East of Norway come on stream June this year, somewhat offsetting the loss of the contract in South. As such, we argue that growth in 2018 will be limited to underlying market growth, as discussed earlier.

TORG: Contract overview per region Exhibit 70.

Region Total rutekm Torghatten % Sør 17,291,000 3,050,000 17.6% Oslo/Akershus 61,671,661 15,243,574 24.7% Øst 60,130,652 7,687,000 12.8% Midt 42,441,442 8,338,552 19.6% Nord 30,740,127 3,110,352 10.1% Vest 60,480,607 17,870,000 29.5%

Sum 272,755,489 55,299,478 20.3%

Source: Kollektivtrafikkforeningen (Nov, 17), SpareBank 1 Markets

In 2019, however, seven contracts expire (20% of public route production expires, if options are not called). Indeed, two contracts in Central Norway for 102 busses, with one optional year, and one for 120 busses where all options is exercised. Moreover, four contracts in North of Norway rolls off with in sum 49 busses where only one of the contracts (for two busses), has a two year option baked in. In addition, a contract in Oslo/Akershus for Nittedal consisting of 30 busses do also roll off in 2019, without any optionality. We assume TORG is able to win back its own contracts and hence, growth in 2019 is limited to market growth.

In 2020, five public contracts with expire, if options are not called. In November last year (which is our latest data point), these contracts represented nearly 20% TORG's public route production. Indeed, there is one contract in region East for 23 busses with no optionality. Four contracts with in total 177 busses, with a three year option on only one contract for Important: All disclosure information can be found on page 39 of this document. 31 Torghatten Company Report 22 January 2018

50 busses, account for the reminder. Moreover, zero contracts have start-up in 2020, which will not help balance out the potential production loss. However, there are no indications the contracting authorities in question are dissatisfied with the service provided to date, and we believe an extension is more likely than the opposite. Nevertheless, we model with below market growth in 2020 in order to account for the uncertainty.

TORG: Contract expiry overview Exhibit 71. TORG: Contract maturity schedule Exhibit 72.

Torghatten Total Contract Expiry* % Incl. Options With options % 20 35%

18 31/12/2017 55,299,478 0 0% 55,299,478 0 0% 30% 31/12/2018 53,199,478 2,100,000 4% 55,299,478 0 0% 16 25% 31/12/2019 42,402,137 10,797,341 20% 48,371,628 6,927,850 13% 14 12 31/12/2020 30,690,044 11,712,093 21% 35,886,142 12,485,486 23% 20% 31/12/2021 28,472,044 2,218,000 4% 34,914,651 971,491 2% 10 15% 31/12/2022 26,972,044 1,500,000 3% 32,814,651 2,100,000 4% 8 6 10% production current of % 31/12/2023 24,161,334 2,810,710 5% 28,472,044 4,342,607 8% kilometers route million 4 31/12/2024 6,813,334 17,348,000 31% 26,972,044 1,500,000 3% 5% 2 31/12/2025 2,082,000 4,731,334 9% 20,511,334 6,460,710 12% 0 0% 31/12/2026 0 2,082,000 4% 3,163,334 17,348,000 31% 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

31/12/2027 0 0 0% 2,082,000 1,081,334 2% Contract Expiry (without options) Contract Expiry (with options) 31/12/2028 0 0 0% 0 2,082,000 4%

Source: Kollektivtrafikkforeningen (Nov, 17), SB1M | *Contract expiry (excl. options) Source: Kollektivtrafikkforeningen (Nov, 17), SB1M

TORG bus estimates Our estimates are based on the above contract overview. We expect options are called and that the top line will grow in line with the underlying market. We expect margins will normalise around the historical average at 11%, as we believe strong competition for individual tenders mean margins face continuous pressure, suggesting excessive margin expansion is not very likely.

Estimates: Bus transport Exhibit 73.

Bus Transport 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E

Ticket revenues 391 383 469 353 294 297 Contract revenues 970 1,019 1,165 1,376 1,466 1,700 Other 41 44 70 96 87 103 Revenues 1,403 1,446 1,704 1,826 1,847 2,100 2,206 2,293 2,384 2,433 YoY 3.1% 17.9% 7.1% 1.2% 13.7% 5.1% 3.9% 4.0% 2.1%

OpEx -1,241 -1,280 -1,519 -1,605 -1,633 -1,908 -1,986 -2,040 -2,122 -2,166 YoY 3.1% 18.7% 5.7% 1.7% 16.9% 4.1% 2.8% 4.0% 2.1%

EBITDA 162 166 186 221 214 191 221 252 262 268 EBITDA-margin 11.6% 11.5% 10.9% 12.1% 11.6% 9.1% 10.0% 11.0% 11.0% 11.0%

D&A -93 -98 -109 -125 -107 -90 -95 -99 -103 -105 D&A / Sales -6.6% -6.8% -6.4% -6.9% -5.8% -4.3% -4.3% -4.3% -4.3% -4.3%

EBIT 69 69 77 96 107 102 126 154 160 163 EBIT-margin 4.9% 4.7% 4.5% 5.2% 5.8% 4.8% 5.7% 6.7% 6.7% 6.7%

Net financials -13 -11 -9 -11 -8 -20 -6 -4 0 2 Net Income from EAIs and Associates 0 3 0 11 0 1

Pre-tax profit 55 60 68 96 98 83 120 150 159 165

Taxes -17 -17 -17 -24 -25 -25 -29 -36 -38 -40 Effective tax rate -31.3% -28.8% -25.5% -24.9% -25.4% -29.9% -24.0% -24.0% -24.0% -24.0%

Net Profit 38 43 51 72 73 58 91 114 121 126 of which, parent 37 42 47 71 69 58 86 109 115 120 of which, non-controlling interests 1 1 4 1 4 1 5 6 6 6 of which, non-controlling interests % 3.4% 2.3% 8.1% 1.0% 6.0% 1.4% 5.4% 4.8% 4.8% 4.8% Net Profit Margin 2.7% 3.0% 3.0% 3.9% 4.0% 2.8% 4.1% 5.0% 5.1% 5.2% Source: Torghatten, SpareBank 1 Markets.

Important: All disclosure information can be found on page 39 of this document. 32 Torghatten Company Report 22 January 2018

TORG Bus Valuation We have decided to take a relative valuation approach to TORG's bus transport business. The company discloses limited information for this segment, which increases estimate risk sufficiently to warrant this methodology. Our peer group includes its rival, Nobina, which is listed in Stockholm and is predominantly active in the bus transport segment throughout the Nordics. We have also included London-listed peers to hedge the visibility risk, which also have some railway operations.

Torghatten: Bus Transport Peer Group Exhibit74.

Share price performance EV/EBITDA Historical EV/EBIT Historical P/E P/B 1m 3m 6m 2017 2018 2019 5Y avg. 2017 2018 2019 5Y avg. 2017 2018 2019 2017

Median -1% -5% -12% 4.2x 4.4x 4.3x 6.4x 8.8x 7.9x 8.3x 10.1x 8.5x 9.0x 9.5x 3.2x NOBINA AB 5% 25% -10% 7.0x 7.3x 6.9x 6.8x 16.6x 17.5x 15.6x 15.4x 15.4x 15.2x 13.6x 3.6x STAGECOACH GROUP PLC -1% -12% -26% 4.2x 4.4x 4.3x 6.4x 6.9x 7.9x 8.3x 10.1x 6.5x 7.9x 8.6x 5.5x NATIONAL EXPRESS GROUP PLC 4% -3% 0% 7.3x 7.0x 6.8x 7.1x 12.0x 11.3x 11.1x 11.6x 12.5x 11.5x 11.1x 1.6x GO-AHEAD GROUP PLC -4% -5% -12% 2.3x 2.5x 2.5x 4.2x 3.4x 3.9x 4.4x 6.6x 7.8x 9.0x 9.5x 3.2x FIRSTGROUP PLC -5% -13% -28% 3.7x 3.4x 3.3x 4.5x 8.8x 7.5x 6.9x 9.6x 8.5x 8.1x 7.2x 0.7x Source: Bloomberg, SpareBank 1 Markets

First, we find Nobina the undisputable most comparable peer to TORG’s Bus segment due to similar business model. Moreover, Nobina has somewhat higher EBITDA margins, but similar EBIT margins and TORG is able to achieve higher return on invested capital. As such, our preferable valuation methodology is to compare TORG with Nobina on EV/EBITDA. Thus, applying 7.6x EV/EBITDA to our 2018e EBITDA estimate, adjusting for ownership and dividing by number of shares yield NOK38 per TORG share. However, due to the many different financing options available to operators in this space and the obvious difference between TORG and Nobina EBITDA and EBIT margin, we double check and validate our approach by applying P/E as well. Indeed, Nobina trades at 15x 2018e P/E, which at our 2018e EPS estimate gives us a value of TORG's bus transport business of NOK35 per TORG share. Thus, we argue our estimate of the Bus transportation business is sound.

TORG Bus Transport: Valuation Exhibit 75.

EV/EBITDA P/E

Source: SpareBank 1 Markets, Bloomberg

Important: All disclosure information can be found on page 39 of this document. 33 Torghatten Company Report 22 January 2018

Estimate revisions TORG is an impressive company, which has evidenced stellar performance over a long period and we see no reason for the company not to perform accordingly in the future as well. Indeed, since the last update, we have revised up our ferry results for 2017 and 2018 to 1) include recent business wins, 2) take into account improved cost position and 3) increased focus on reduction in number of incidents. However, TORG still lag key peer Fjord1 on EBITDA margin. That being said, our understanding is that TORG has the same mind-set when it comes EBITDA margin in the range of 35% to 40% on new contracts (to offset increased capex from government requirements of environmental friendly vessels in new contracts that has higher capex), in which we argue TORG is positioned for margin expansion going forward. Indeed, already in 2019e we model with a slight up-tick in EBITDA margin to 24% and large up-tick in absolute EBITDA, as new contracts account for a larger piece of the pie with start-up of Flakk – Rørvik and Halhjem-Sandvikvåg, the 10th and 3th largest ferry connections in Norway.

Moreover, in the air segment, we have lowered our 2017e EBITDA with 17%. Indeed, Widerøe has experienced some issues during the summer this year in relation to lack of personnel, which has driven cancellations of flights and associated one-off costs. However, with adjustments to the work force and a normalised cancellation rate, we argue 2017 represent a transition year so to speak, and model Widerøe back to 2016 levels in 2018e. As such, we up our 2018e revenues and EBITDA estimate with 13% and 12%, respectively.

Bus is a scale game and after taking into account the latest reported figures in TORG, we simply argue our margin expectations in the Bus segment was unwarranted. Consequently, our EBITDA in this segment is adjusted down by 9% in 2017e and 5% in 2018e. However, with upped revenue estimates, the absolute EBITDA figures is actually on average slightly up.

TORG P&L Overall, we lower our 2017e EBITDA estimate by 4%, whereas our 2018e EBITDA figures is upped with 9%. However, with some adjustments to interest cost in 2017 due to lower NIBD compared to the previous report and lowered depreciation and taxes, our 2017e and 2018e EPS is increased by 6% and 9%, respectively, whereas 2019e is pretty much unchanged.

Torghatten: Estimate Revisions and Detailed Estimates Exhibit 76.

Torghatten ASA New Old Delta (%) NOKm 2016A 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Revenues 9,386 9,896 10,279 11,015 9,485 9,700 4% 6% Expenses -8,040 -8,572 -8,736 -9,310 -8,112 -8,281 6% 5% EBITDA 1,345 1,325 1,543 1,705 1,373 1,419 -4% 9% EBITDA-margin 14.3% 13.4% 15.0% 15.5% 14.5% 14.6% DA&I -612 -665 -704 -726 -677 -717 -2% -2% EBIT 733 660 839 979 696 702 -5% 20% Net financials and other -143 -65 -145 -138 -160 -141 -59% 3% Pre-tax profit 590 595 695 841 536 561 11% 24% Tax & Minorities -244 -180 -247 -289 -145 -151 24% 63% Net income 346 415 448 552 391 409 6% 9% EPS 8.74 9.43 11.62 8.23 8.62 6% 9%

Sea Revenues 2,354 2,518 2,568 2,953 2,476 2,525 2% 2% EBITDA 502 579 591 709 484 497 20% 19% EBITDA % 21.3% 23.0% 23.0% 24.0% 19.6% 19.7%

Bus Revenues 2,100 2,206 2,293 2,384 2,116 2,199 4% 4% EBITDA 191 221 252 262 244 265 -9% -5% EBITDA % 9.1% 10.0% 11.0% 11.0% 11.5% 12.1%

Air Revenues 4,560 4,791 5,031 5,282 4,386 4,460 9% 13% EBITDA 646 479 654 687 575 585 -17% 12% EBITDA % 14.2% 10.0% 13.0% 13.0% 13.1% 13.1%

Other Maritime Revenues 330 337 344 350 451 460 -25% -25% EBITDA 35 40 41 42 63 64 -36% -36% EBITDA % 10.6% 12.0% 12.0% 12.0% 14.0% 14.0%

Other Revenues 42 43 44 45 55 56 -22% -22% EBITDA -29 5 5 5 7 7 -22% -22%

Source: Torghatten, SpareBank 1 Markets.

Important: All disclosure information can be found on page 39 of this document. 34 Torghatten Company Report 22 January 2018

TORG Balance sheet

Torghatten: Balance sheet Exhibit 77.

Financial Position 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E

Assets 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E

Goodwill/Intangibles 71 123 189 165 141 120 97 73 49 26 Property 160 151 223 211 191 259 238 217 197 176 Sea 1,977 2,403 2,432 2,665 2,693 3,093 3,110 3,518 3,509 3,324 Air 0 0 1,347 1,619 1,525 1,529 1,600 1,641 1,649 1,627 Other PPE 408 455 1,003 778 809 771 633 494 356 218 Total fixed assets 2,616 3,132 5,194 5,438 5,360 5,771 5,678 5,943 5,761 5,371

Investments in EAIs and Associates 249 213 236 258 62 16 16 16 16 16 Other investments 28 23 18 20 24 22 22 22 22 22 Non-current receivables 204 230 8 238 246 28 28 28 28 28 Pensions 32 31 42 55 60 62 62 62 62 62 Total fixed financial assets 513 497 305 571 392 128 128 128 128 128

Inventories 47 51 193 175 173 222 198 206 220 225 Trade receivables 188 223 387 549 437 553 544 565 606 619 Other receivables 91 73 402 133 169 248 248 248 248 248 Investments 126 23 10 14 214 226 226 226 226 226 Cash 580 754 828 640 800 942 989 1,333 1,458 1,907 Total current assets 1,031 1,123 1,819 1,511 1,793 2,191 2,204 2,577 2,757 3,225

Total assets 4,160 4,752 7,318 7,519 7,546 8,091 8,011 8,649 8,647 8,724

Depreciation Schedules

Equity and Liabilities 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E

Paid-in share capital 266 291 208 230 230 234 234 234 234 234 Retained earnings 748 852 1,035 1,089 1,328 1,719 1,991 2,372 2,805 3,438 Minority interests 103 108 442 485 548 447 447 447 447 447 Equity 1,117 1,251 1,686 1,804 2,106 2,401 2,673 3,054 3,487 4,120

Pension liabilities 21 18 45 40 29 20 20 20 20 20 Deferred tax 113 138 139 176 260 380 380 380 380 380 Other provisions 44 24 46 40 39 3 3 3 3 3 Interest-bearing debt 2,198 2,546 3,505 3,724 3,490 3,319 2,959 3,168 2,673 2,261 Other liabilities 37 45 206 113 97 55 55 55 55 55 Non-current Liabilities 2,414 2,771 3,942 4,094 3,916 3,777 3,416 3,625 3,130 2,718

Trade payables 180 253 297 408 315 408 396 411 441 450 Tax payable 35 17 16 20 6 17 17 17 17 17 Public duties payable 81 96 272 300 226 295 295 295 295 295 Dividend for parent shareholders 37 37 42 43 23.8 70.0 91 123 154 0 Dividend for minorities 6 15.7 Other current liabilities 297 327 1,062 845 938 1,123 1,123 1,123 1,123 1,123 Current Liabilities 629 730 1,690 1,621 1,524 1,914 1,921 1,970 2,030 1,886

Total Liabilities 3,043 3,501 5,632 5,715 5,439 5,690 5,338 5,595 5,160 4,604

Total Equity and Liabilities 4,160 4,752 7,318 7,519 7,546 8,091 8,011 8,649 8,647 8,724 Check OK OK OK OK OK OK OK OK OK OK OK

Key metrics 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E

Average interest rate on Cash 6.1% 5.7% 5.4% 4.0% 1.6% 0.5% 0.5% 0.5% 0.5% Average interest rate on IBD -3.2% -3.4% -4.0% -4.2% -5.0% -3.2% -4.0% -4.0% -4.0% -4.0% IBD 2,198 2,546 3,505 3,822 3,580 3,319 2,959 3,168 2,673 2,261 NIBD 1,493 1,769 2,668 3,168 2,567 2,151 1,744 1,610 989 129 NIBD/LTM EBITDA 2.9 3.4 3.9 3.0 2.1 1.6 1.3 1.0 0.6 0.1 Equity ratio 27% 26% 23% 24% 28% 30% 33% 35% 40% 47%

Capital Employed 3,530 4,022 5,628 5,897 6,022 6,177 6,089 6,679 6,617 6,838 ROCE 8.9% 7.3% 6.1% 8.0% 9.2% 12.0% 10.9% 13.2% 14.4% 14.8% ROE 13.5% 13.3% 11.8% 12.0% 19.6% 19.9% 16.3% 19.6% 19.7% 18.2% ROE adj. For minorities 14.5% 13.7% 11.1% 12.1% 21.1% 19.7% 17.8% 19.7% 19.6% 17.7% Downpayment profile (per 31.12.2016) OK 503.8 394.7 498.8 415.4

Source: Torghatten, SpareBank 1 Markets.

Important: All disclosure information can be found on page 39 of this document. 35 Torghatten Company Report 22 January 2018

TORG cash flow

Torghatten: Cash flow Exhibit 78.

Cash Flow 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E

Earnings before tax 205 210 202 266 483 590 538 730 838 897 Taxes paid -35 -29 -28 -14 -26 -6 -124 -168 -193 -206 Profit (Loss) on sale of assets -42 -27 -15 4 -16 2 D&A 239 251 386 607 647 612 659 699 747 806 Dividends 0 0 0 -2 0 0 FX 0 0 15 1 0 0 Items classified as investing/financing activities 22 -9 0 7 -68 1 Profit (Loss) from EAIs and Associates 1 40 3 -22 10 33 Change in current receivables -14 -27 132 -74 112 -116 9 -21 -40 -14 Change in inventory -2 -4 -5 17 2 -49 24 -8 -15 -5 Change in current liabilities (payables going fwd) -1 0 -29 133 -93 94 -13 15 29 10 Change in other items 17 -32 -188 -228 -37 54 Net cash flow from operations 391 373 473 696 1,015 1,215 1,093 1,248 1,367 1,488

Sale of PPE 41 44 30 55 105 118 + Air PPE investments -320 -320 -320 -320 + Bus PPE investments -58 -58 -58 -58 + Sea PPE ivestments -245 -645 -245 -95 Total Investments in PPE -689 -711 -385 -941 -659 -1,146 -623 -1,023 -623 -473 Sale of shares 0 0 0 13 2 13 Purchase of shares and acquisitions -270 0 -589 -54 -8 -90 Sale of financial assets 25 -6 16 9 2 0 Sale of own shares 8 0 16 0 4 0 Purchase of own shares 0 0 -16 -24 -4 -3 Dividends and intra-group contributions 0 0 0 2 0 0 Sale of other investments 2 135 0 3 10 2 Purchase of other investments 0 0 0 -2 -5 0 Net cash flow from investments -883 -538 -927 -940 -553 -1,107 -623 -1,023 -623 -473 Free Cash Flow -492 -165 -454 -243 461 108 470 225 744 1,015

+ Air Loan 0 0 0 0 + Bus Loan 4 4 4 4 + Sea Loan 140 600 0 0 Proceeds from new non-current loans 833 563 442 921 257 565 144 604 4 4 Proceeds from new current loans 0 0 0 127 0 0 Flows from (to) EAIs and Associates 0 0 48 0 0 0 Downpayments of non-current IBD -257 -242 -249 -969 -507 -748 -504 -395 -499 -415 Downpayments of other loans 0 0 0 0 0 315 Payments to other creditholders 0 0 -103 0 0 -59 New equity 0 26 293 32 0 0 Dividend payments -38 -36 -56 -55 -51 -39 -64 -91 -123 -154 Net cash flow from financing 538 310 376 56 -301 34 -424 118 -619 -566

Net change in cash 46 145 -77 -188 161 142 46 344 125 449 IB cash 486 580 754 828 640 800 942 989 1,333 1,458 Adjustments to due company changes 47 29 151 0 -1 0 UB cash 580 754 828 640 800 942 989 1,333 1,458 1,907 Check OK OK OK OK OK OK OK OK OK OK

DPS Proposed 4.0 4.5 4.5 2.5 1.0 1.6 2.3 2.9 3.1 DPS Paid for year 4.0 6.1 5.9 5.5 4.2 1.3 1.9 2.6 3.2 3.5 DPS Paid for year (implied minorities) 2.1 1.4 1.0 1.7 0.3 0.3 0.3 0.3 0.3

Payout Ratio 25.0% 31.9% 27.2% 7.7% 13.7% 20% 23% 25% 25%

Average share price 152.1 194.2 52.3 80.0 90.0 90.0 90.0 90.0 Yield 3.0% 2.3% 4.8% 1.3% 1.7% 2.5% 3.2% 3.5%

Assumptions 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E

Inventory / Sales 1.4% 1.4% 3.8% 2.1% 2.0% 2.4% 2.0% 2.0% 2.0% 2.0% Trade Receivables / Sales 5.5% 6.3% 7.6% 6.7% 5.1% 5.9% 5.5% 5.5% 5.5% 5.5% Trade Payables / Sales 5.3% 7.1% 5.8% 5.0% 3.7% 4.4% 4.0% 4.0% 4.0% 4.0%

Working capital 55 21 283 316 295 367 346 360 386 394 in % of 12m revenue 1.6% 0.6% 5.5% 3.9% 3.4% 3.9% 3.5% 3.5% 3.5% 3.5% ∆ in WC -34 262 34 -21 72 -20 13 26 9

Source: Torghatten, SpareBank 1 Markets.

Important: All disclosure information can be found on page 39 of this document. 36 Torghatten Company Report 22 January 2018

Valuation

Torghatten: Sum-of-the-Parts Valuation Exhibit 79.

Torghatten Valuation To Torghatten NOKm Methodology 2018E EV/EBITDA EV NIBD Equity Value Ownership Equity Value Per Share

Associates/EAIs Book/Market value 155 3 Other investments Book value 22 0

Total 8,878 2,792 9,418 5,528 116 Upside (Downside) on last close 35.7%

Valuation Metrics Implied 2018e EV/EBITDA 6.0x Implied 2019e EV/EBITDA 5.5x

Implied 2018e EV/EBIT 11.1x Implied 2019e EV/EBIT 9.5x

Implied 2018e P/E 12.3x Implied 2019e P/E 10.0x

Source: Bloomberg, Torghatten, SpareBank 1 Markets. Note: Multiples adjusted for minorities

Torghatten: Sum-of-the-Parts Valuation Illustrated Exhibit 80.

Associates/EAIs Other investments 3% 0% Other Maritime 2% NTS ASA 6%

Ferry Transport 23%

Air Transport 34%

Bus Transport 32%

Source: Bloomberg, Torghatten, SpareBank 1 Markets.

Important: All disclosure information can be found on page 39 of this document. 37 Torghatten Company Report 22 January 2018

TORG: ROE adjusted for minorities Exhibit 81.

21.1% 19.7% 19.7% 19.6% 17.8% 17.7%

14.5% 13.7% 12.1% 11.1%

2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E

Source: TORG, SpareBank 1 Markets.

TORG: Valuation based on ROE vs. P/B Exhibit 82.

Scenario analysis Comments

10 year average ROE 18.1% Based on reported figures 17-'20e average ROE 17.9% SB1M estimates Normalised long-term ROE 18% Average

RROE from peers 7% Implied from traded peers Implied fair P/B ratio 2.57

Book value adj. for minorities 2,177 1H17 reported figure Fair equity value 5,598

# of shares 47.5 Fair TORG share price 118

Source: TORG, SpareBank 1 Markets.

TORG: Valuation sensitivities Exhibit 83.

160 144 137 140 131 124 118 120 111 105 98 100 92

Fair TORG TORG Fair price share 40

0 14% 15% 16% 17% 18% 19% 20% 21% 22% Nomalised long-term ROE

Source: SpareBank 1 Markets. Important: All disclosure information can be found on page 39 of this document. 38 Torghatten Company Report 22 January 2018

IMPORTANT DISCLOSURES AND CERTIFICATIONS This document provides additional disclosures and disclaimers relevant to research reports and other investment recommendations (“Recommendations”) issued by SpareBank 1 Markets AS (“SpareBank 1 Markets”), cf. the Norwegian Securities Trading Act section 3-10 with further regulations.

Standards and supervisory authorities SpareBank 1 Markets complies with the standards for recommendations issued by the Norwegian Securities Dealers Association (http://vpff.no/) and the Norwegian Society of Financial Analysts. The lead analyst (see front page) is employed by SpareBank 1 Markets, which is legally responsible for this report and is under the supervision of The Financial Supervisory Authority of Norway (Finanstilsynet).

Previous Recommendations For an overview of SpareBank 1 Markets research reports and other investment recommendations regarding the financial instruments of the issuer the past 12 months, including data on changes in such research reports and other investment recommendations, please see SpareBank 1 Markets’ website, www.sb1markets.no (log-in required)

Planned updates Unless explicitly stated otherwise in this report, SpareBank 1 Markets expects, but not undertake, to issue updates to this report following the publication of new figures or forecasts by the issuer covered, or upon the occurrence of other events which could potentially have a material effect on it.

Information sources Important sources of information: the issuer, including its quarterly and annual reports, Oslo Stock Exchange, Statistics Norway (Statistisk Sentralbyrå). Sources are cited when referred to in the Recommendation. We use only sources we find reliable and accurate, unless otherwise stated.

The Recommendations has not been presented to the issuer/ the issuers of the financial instrument presented before dissemination.

SpareBank 1 Markets’ interests and disclosure of assignments and mandates Financial instruments held by the analyst(s) and/or close associate in the issuer/ issuers herein: 0 Other material interest (if any): None SB1M does not own a net long or short position exceeding the threshold of 0,5% of the total issued share capital of the issuer, nor does SB1M hold other interests likely to affect the objectivity of a recommendation, except when disclosed, cf. below. SpareBank 1 Markets may hold financial instruments in companies where a recommendation has been produced or distributed by SpareBank 1 Markets in connection with rendering investment services, including market making. For important disclosures, such as an overview of all financial instruments in which SpareBank 1 Markets or related companies are market makers or liquidity providers, all financial instruments where SpareBank 1 Markets or related companies have been lead managers or co-lead managers over the previous 12 months, and all issuers of financial instruments to whom SpareBank 1 Markets or related companies have rendered investment banking services over the previous 12 months, please refer to SpareBank 1 Markets equity research website: www.sb1markets.no (login required) Please note that agreements and services subject to confidentiality are excluded.

SpareBank 1 Markets Research Department Our recommendations are based on a six-month horizon, and on absolute performance. We apply a three-stage recommendation structure where Buy indicates an expected annualized return of greater than +10%; Neutral, from 0% to +10%; Sell, less than 0%.

3-Year Price, Target Price and Rating Change History Chart for TORG NO

TORG NO Closing Target 450

Date Price Price Rating 400

14/10/2015 289 330 BUY 350 330 28/12/2016 80.5 88 BUY 300

21/01/2018 85.75 115 BUY 250

200

150

100 12/04/00 88 50

06/02/15 06/05/16 06/05/15 06/08/15 06/11/15 06/02/16 06/08/16 06/11/16 06/02/17 06/05/17 06/08/17 06/11/17

Closing Price Target Price Rating

B=Buy, H=Hold, S=Sell

Current recommendations of the Research Department: (refers to Recommendations published prior to this report and required disclosed in accordance with the Securities Trading Regulations section 3-11 (4)

Current recommendations of the Research Department Recommendation Percent Buy 54.3% Neutral 20.8% Sell 24.9% Standard research disclaimer All employees of SpareBank 1 Markets are subject to duty of confidentiality towards clients and with respect to inside information. SpareBank 1 Markets operates a system of “Chinese Walls” and other organizational procedures in order to control the flow of information within the firm and minimize conflicts of interest within SpareBank1 Markets and between clients. The Research Department is part of this system. The Research Analysts of SpareBank 1 Markets receive salary and are members of the bonus pool. However no part of the analysts’ salaries or compensations relates to the performance of their recommendations, directly to investment banking services or other services provided by SpareBank 1 Markets or related companies to issuers.

Analyst Certification The views expressed in this research accurately reflect(s) the personal views of the analyst(s) principally responsible for this report about the subject securities or issuers, and no part of the compensation of such analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. No part of the compensation of the research analyst(s) responsible for the preparation of this report was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst(s) in this report.

Risks Generally, investments in financial instruments involve risks. For specific risks related to our various recommendations, please see the latest relevant reports. The target prices on companies in the SpareBank 1 Markets Research universe reflect the subjective view of the analyst about the absolute price that financial instruments should trade at, within our

Important: All disclosure information can be found on page 39 of this document. 39 Torghatten Company Report 22 January 2018

six-month recommendation horizon. The target price is based on an absolute valuation approach, which is detailed in our research reports. The target price can differ from the absolute valuation, in accordance with the analyst's subjective view on the trading or cyclical patterns for a particular financial instrument, or a possible discount/premium to reflect factors such as market capitalization, ownership structure and/or changes in the same, and company-specific issues.

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The securities referred to in this report may not be registered under the U.S. Securities Act of 1933, as amended, and the issuer of such securities may not be subject to U.S. reporting and/or other requirements. Available information regarding the issuers of such securities may be limited, and such issuers may not be subject to the same auditing and reporting standards as U.S. issuers.

Such information is provided for informational purposes only and does not constitute a solicitation to buy or an offer to sell any securities under the Securities Act of 1933, as amended, or under any other U.S. federal or state securities laws, rules or regulations. The investment opportunities discussed in this report may be unsuitable for certain investors depending on their specific investment objectives, risk tolerance and financial position. In jurisdictions where SpareBank 1 Capital Markets is not registered or licensed to trade in securities, commodities or other financial products, transactions may be executed only in accordance with applicable law and legislation, which may vary from jurisdiction to jurisdiction and which may require that a transaction be made in accordance with applicable exemptions from registration or licensing requirements. The information in this publication is based on carefully selected sources believed to be reliable, but SpareBank 1 Capital Markets does not make any representation with respect to its completeness or accuracy. All opinions expressed herein reflect the author’s judgment at the original time of publication, without regard to the date on which you may receive such information, and are subject to change without notice.

The information contained herein may include forward-looking statements as described above within the meaning of U.S. federal securities laws that are subject to risks and uncertainties. Factors that could cause a company’s actual results and financial condition to differ from expectations include, without limitation: political uncertainty, changes in general economic conditions that adversely affect the level of demand for the company’s products or services, changes in foreign exchange markets, changes in international and domestic financial markets and in the competitive environment, and other factors relating to the foregoing. All forward-looking statements contained in this report are qualified in their entirety by this cautionary statement.