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SB1M Template V2.09 TRANSPORTATION 5 November, 2020 TORG (Buy tp NOK190): 10x P/E, cash equivalent 20% of mcap and 11% FCF yield Lars-Daniel Westby Petter Kongslie Phone : (+47) 24 14 74 16 Phone : (+47) 24 14 74 96 Mobile : (+47) 90 03 96 65 Mobile : (+47) 98 41 1080 E-mail : [email protected] E-mail : [email protected] 10x P/E, cash equivalent 20% of mcap and 11% FCF yield Reiterate our Buy rec. and target set at NOK190, which is 2021 P/E of 15x + 6% stake in NTS During Covid-19 and the following complete shutdown of society, TORG has demonstrated an impressive resilient business model driven by a combination of being an very important Norwegian infrastructure giant (Ferry, Bus, Air) with leading market position in all its verticals with high share of gross contracts (no risk on price and volume). Where Ferry revenues are down only 12% in 1H20 and Air only -18.7% YoY, Bus revenues is actually up 1% in 1H20 due to star-up in Sweden and new contracts in Norway. Moreover, with cost initiatives implemented, the blended EBITDA margin is set to decline only 1.2pp from 14.1% to 12.9%. The investment case in TORG is therefore highly compelling as we see it at a 2021 P/E of 10x adj. for the 6% ownership stake in NTS. Indeed, with a order backlog of NOK42bn with a duration of 7-8 years, TORG is set for significant revenue growth from a trough in 2020 (CAGR of 16% between 2006-2019). Moreover, with a lower fixed cost base and fall through from scale, EBITDA margin rebound is set for both Bus (5.5% EBITDA margin in 1H20 vs. 7.5% in 2019) and Air (7.7% margin in 1H20 vs. 10.1% in 2019) post 2020. Coupled with peak capex last four years, TORG is set to generate NOK14 per share in FCF in 2021, which on last close correspond to ~11% yield. On top is a strong balance sheet with NIBD/EBITDA of ~2x, of which cash equivalent to 20% of mcap. Consequently, we reiterate our Buy rec. and set target at NOK190, which correspond to 2021 P/E of 15x + 6% stake in NTS Source: SB1M, TORG, Bloomberg 2 High share of gross contracts show strength during Covid-19 TORG trades at 2021 P/E of ~10x adj. for the 6% ownership in NTS Estimates Comments Torghatten ASA History New NOKm 2016A 2017A 2018A 2019E 2020E 2021E Ferries; Revenues 9.386 9.740 10.209 11.401 9.946 10.622 Expenses -8.040 -8.426 -8.790 -9.793 -8.661 -9.041 - Revenues down 12% in 1H20 EBITDA 1.345 1.314 1.419 1.608 1.285 1.581 EBITDA-margin 14.3% 13.5% 13.9% 14.1% 12.9% 14.9% DA&I -612 -689 -734 -782 -731 -766 - EBITDA margin of 30% EBIT 733 625 684 826 554 815 Net financials and other -143 -67 -3 -140 -94 -141 Pre-tax profit 590 558 681 686 460 674 Tax & Minorities -244 -153 -137 -189 -106 -192 Net income to TORG 346 405 544 497 354 482 EPS to TORG (adj. for treasury shares) 7.4 8.7 12.0 11.1 7.9 10.7 Bus; Adj. EPS (excl. treasury shares) 8.0 7.1 9.8 11.3 6.6 11.6 P/E adj. for NTS at current price 9x 11x 10x 10x 17x 10x - Revenues up 1% in 1H20 due to start-up in Sweden and P/E adj. for NTS at target 16x 27x 15x new contracts in Norway Sea Revenues 2.354 2.483 2.567 3.186 2.708 2.844 - EBITDA margin of 5.5% EBITDA 502 561 742 882 812 910 EBITDA % 21.3% 22.6% 28.9% 27.7% 30.0% 32.0% Bus Revenues 2.100 2.450 2.606 2.773 2.800 2.912 EBITDA 191 186 193 209 140 204 Air; EBITDA % 9.1% 7.6% 7.4% 7.5% 5.0% 7.0% Air - Revenues down 18.7% YoY in 1H20 Revenues 4.560 4.449 4.721 5.088 4.070 4.477 EBITDA 646 548 441 515 326 448 EBITDA % 14.2% 12.3% 9.3% 10.1% 8.0% 10.0% - EBITDA margin of 7.7% Other Maritime Revenues 330 309 260 287 310 325 EBITDA 35 27 50 13 15 26 EBITDA % 10.6% 8.7% 19.1% 4.7% 5.0% 8.0% Other Revenues 42 49 56 68 58 64 EBITDA -29 -8 -7 -11 -9 -6 Source: SB1M, TORG 3 This is how it looks like today Ferries based on FJORD ferry valuation, Bus on Nobina and Air on ~30% discount to air peers Torghatten Valuation To Torghatten NOKm Methodology '21e multiple EV NIBD Equity Value Ownership Equity Value Per Share Ferry Transport FJORD ferry EV/EBITDA 8.5x 7.735 2.495 5.240 95% 4.978 105 Bus Transport Nobina P/E 12.4x 1.220 106 1.114 98% 1.092 23 Air Transport EV/EBITDA (Peers at 8.3x) 5.5x 2.462 352 2.110 66% 1.393 29 Other Maritime Avergage of Ferry, Bus and Air 8.8x 173 246 -74 100% -74 -2 NTS ASA Market value 9.661 6% 627 13 Treasury shares ~2.6m shares 309 0 309.4 100% 309 7 Other investments Book value 25 1 2021 FCF 750 90% 677 14 Total 11.899 3.199 19.112 9.028 190 Upside (Downside) on last close 59.7% Source: SB1M, TORG, Bloomberg 4 Torghatten is a Norwegian infrastructure giant Focus on decentralized organization with centralized capital allocation Company structure Valuation break-down Other investments 0% 2021 FCF Other Maritime 8% -1% NTS ASA 7% Air Transport 16% Ferry Transport 56% Bus Transport 12% MCAP 6082 Airplanes 44 NIBD (last reported) 3199 Ferries 67 19A Revenues ('06-'19 CAGR) 11401 (16%) Busses 1570 19A EBITDA ('06-'19 CAGR) 1608 (14%) Express boats 18 Employees 7000 Backlog (NOKbn) 42 Source: SB1M, TORG 5 Impressive track-record with steady growth for many years… The increase from 2013 to 2014 driven by higher share of ownership in Widerøe 12000 18% 16% 10000 14% 8000 12% 10% 6000 NOKm 8% Margin 4000 6% 4% 2000 2% - 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Revenues EBITDA EBIT EBITDA-margin EBIT-margin Source: SB1M, TORG 6 …where the growth also have been highly profitable, even with lots of cash… NOK26 cash per share, NIBD / EBITDA of 2.7x on avg. between 2011-2019 and 2.5x as of 1H20 Pre-tax ROCE and ROE Cash on the balance sheet (NOKm) 1.252 1.158 19.6% 19.9% 19.5% 18.2% 942 16.8% 828 800 815 13.5% 13.3% 754 12.0% 12.0% 11.8% 640 580 8.9% 9.2% 9.4% 8.8% 9.4% 8.0% 7.3% 6.1% 2011 2012 2013 2014 2015 2016 2017 2018 2019 ROCE ROE 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: SB1M, TORG 7 …and the cash balance is high moving into a period with less capex Total investments in PPE in NOKm (including sale of PPE and air- bus- and sea investments) Capex (NOKm) NIBD/EBITDA (x) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 4.1 0 -200 3.5 3.2 -400 3.0 -385 -600 -460 2.3 2.3 -610 2.2 -659 2.1 -800 -689 -711 2.0 1.8 NOKm -1.000 -941 1.3 -1.200 -1.146 -1.186 -1.227 -1.400 -1.600 -1.593 -1.800 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E Source: SB1M, TORG 8 Environmental focus – TORG to be an ESG outsider? TORG adopt new technological solutions that ensure lowest possible impact 1. The Worlds first hybrid Ferry 2. Investment in gas and battery ferries (16) 3. 35 electric busses out of a fleet of 1.5k buses. Moreover, 30% of the busses are on biofuel or gas 4. TORG has ordered 3 low emissions jet airplanes 5. All companies in the bus-segment and most of the ferry-companies are ISO 14001 certified » Meaning; commits to active effort to control and recued external environmental impact Source: SB1M, TORG 9 Sea 10 TORG Sea Transportation Take away; 1) competitive advantage and 2) share of gross contracts Natural competitive advantage in each region Increased share of contracted revenues 3.500 20% 18% 3.000 16% 2.500 14% 2.000 12% NOKm 10% 1.500 8% 1.000 6% 4% 500 2% 0 0% 2011 2012 2013 2014 2015 2016 2017 2018 2019 Ticket revenues Contract revenues Other EBIT-margin Source: SB1M, TORG 11 TORG is one of the larges ferry companies in a consolidated market Trend over the least years has been towards 1) public to private ownership and 2) less players Market share (PCE) Market share (connections) Source: SB1M, TORG, FJORD 12 TORG has improved its position considerably over the last couple of years TORG has gone from 1 of the top 10 connections to operate three out of the top 10 connections 10 largest ferry connections: 2017 10 largest ferry connections: 2019 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 Start up 1.1.21 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: SB1M, TORG, FJORD 13 Contract length often 8-10 years + options with solid counterparts TORG backlog of ~NOK20bn For illustrative purposes only as the contract overview is FJORD Source: SB1M, FJORD 14 Share of Non-Diesel ferries in FJORD from ‘20e is above 50% Green shift means higher capex and hence higher required EBITDA margin – same ROCE 90.
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