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Building Value One Balcony at a Time

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Building Value One Balcony at a Time Corporate Research Balco NOT TO BE DISTRIBUTED IN, OR TAKEN OR TRANSMITTED INTO, THE UNITED STATES, CANADA, JAPAN, AUSTRALIA OR IN ANY OTHER JURISDICTION WHERE TO DO SO WOULD BE UNLAWFUL. Unrated Company Update Construction Sweden 26 November 2018 Building value one balcony at a time We expect the solid growth of the balcony construction market to continue, primarily driven by the age profile of the housing stock. Balco’s strong market position in its key markets and the one-stop-shop business model differentiates it from its competitors making it an interesting investment opportunity. Key Data (2018E) Price (SEK) 59.85 Investment case Reuters BALC.ST Balco has developed a business model where it controls its entire value chain and Bloomberg BALCO SS has achieved a market leading position in its key markets. We believe that the Market cap (SEKm) 1,283 strong market position and efficient business model enable Balco to continue its Market cap (USDm) 142 profitable growth and simultaneously generate impressive cash flows. Moreover, Market cap (EURm) 124 the increased focus on the renovation segment improves the company’s Net debt (SEKm) 106 resilience in the face of a downturn in housing construction. Net gearing 23% Net debt/EBITDA (x) 0.8 Financial forecasts – stable growth ahead supported by strong order book Shares fully dil. (m) 21.4 We model average organic sales growth for 2018-20 of around 8%, slightly Avg daily turnover (m) 0.0 below the company’s anticipated sales growth target of 10% per year. Free float 0% Furthermore, we estimate gradual margin improvements for 2019-20, mainly driven by increased focus on renovation as well as efficiency improvements from the new production facilities in Poland, while potential price increases could further add to the story. Equity valuation Currently, the shares are trading at about 9.5x our 2019 EV/EBIT forecasts and 11.5x our 2019 earnings estimates, while the peer group is at average 2019 PER of 10x and EV/EBIT of 9.5x. We argue that Balco should be trading with a slight premium to the peer group due to Balco’s attractive growth profile, strong market position and cash-generative business model. Our DCF valuation implies a valuation range of SEK 79 to SEK 100. Share Price (12M) Financials (SEK) Year end: Dec 2016 2017 2018E 2019E 2020E 80 Revenues (m) 801 989 1,072 1,284 1,384 75 Adj. EBIT 64 116 120 151 169 70 Pre-tax profit (m) 23 55 112 143 160 65 EPS 0.18 2.43 4.09 5.21 5.83 60 Adj. EPS 0.18 2.43 4.09 5.21 5.83 55 DPS 0.00 1.00 2.04 2.60 2.91 50 Revenue growth (%) 25.5 23.4 8.4 19.8 7.7 Nov Jan Mar May Jul Sep Nov Adj. EBIT growth (%) (1.9) 81.2 3.9 26.0 11.9 Adj. EPS growth (%) (36.5) n.m. 68.1 27.5 11.9 Absolute performance (green) / Relative to Sweden (purple). Adj. EBIT margin (%) 8.0 11.7 11.2 11.8 12.2 ROE (%) 9.2 14.3 20.9 22.9 22.5 ROCE (%) 23.4 27.4 19.7 22.2 22.6 Marketing communication commissioned by: PER (x) 25.5 14.7 11.5 10.3 Free cash flow yield (%) 10.4 0.4 6.9 8.3 Balco Dividend yield (%) 1.6 3.4 4.4 4.9 P/BV (x) 3.44 2.83 2.47 2.18 EV/Sales (x) 1.43 1.30 1.12 1.01 EV/Adj. EBITDA (x) 0.0 13.0 10.0 8.3 7.3 EV/Adj. EBIT (x) 0.0 12.3 11.6 9.5 8.2 Operating cash flow/EV (%) 10.9 2.6 8.6 10.2 Net debt/Adj. EBITDA (x) 1.28 0.82 0.76 0.93 0.58 Source for all data on this page: SEB (estimates) and SIX/Thomson Reuters (prices) research.sebgroup.com/corporate Important. All disclosure information can be found on pages 33 – 35 of this document Company Update Marketing communication commissioned by: Balco 26 November 2018 2 Contents Page Investment case ...................................................................................................... 3 Overview of Balco ................................................................................................... 6 Brief History ..................................................................................................................... 6 Main segments, customers and products ................................................................. 6 One-stop-shop operating model ............................................................................... 10 Ownership structure ................................................................................................... 12 Market .................................................................................................................... 13 Macro economy and housing market ...................................................................... 13 Market share and competitive landscape ............................................................. 14 Financials............................................................................................................... 18 Balco’s medium-term financial targets .................................................................. 18 Acquisition of TBO-Haglinds AB ............................................................................... 18 Orders and sales ........................................................................................................... 18 Cost structure, gross profit and operating profit ................................................... 20 Balance sheet and cash flow..................................................................................... 21 Equity Valuation ................................................................................................... 24 Peer group analysis ..................................................................................................... 24 DCF valuation ................................................................................................................ 26 Overview ............................................................................................................... 28 Corporate Research NOT TO BE DISTRIBUTED IN, OR TAKEN OR TRANSMITTED INTO, THE UNITED STATES, CANADA, JAPAN, AUSTRALIA OR IN ANY OTHER JURISDICTION WHERE TO DO SO WOULD BE UNLAWFUL. Company Update Marketing communication commissioned by: Balco 26 November 2018 3 Investment case Balco is the leading operator in the Nordic countries focusing on high quality balcony renovations and constructions. The company provides turnkey solutions for building and renovating balconies primarily for tenant-owner associations but also for private landlords, public housing sector clients and construction companies. All of Balco’s products are produced under its own brand in its own production facilities. We believe that the main drivers for the investment case are the high demand for balcony renovations due to the age profile of dwellings in Balco’s key markets, Balco’s market leading position in growing key markets, its cash-generative business model and good visibility of future sales. We estimate that Balco’s strong balance sheet and cash flow will enable it to pay out growing dividends, but we see also potential for value-adding M&A. Age profile of dwellings increases the demand for balcony renovations We believe that Balco’s business is largely driven by the underlying demand for renovation due to the old dwelling stock in Balco’s key markets (Sweden, Denmark and Norway). The ageing dwelling stock is even more pronounced in Sweden, which contributed 56% of Balco’s sales in 2017. Furthermore, the trend for renovating apartments to make them more energy efficient will support Balco’s business, as glazed balconies are able to decrease energy consumption by as much as 10-20%. We argue that the need to renovate balconies is a structural demand driver and by nature uncyclical. This is as long as financing conditions remain favourable for tenant owned apartments. Generally, balconies need their first renovation approximately 50 years after being built, which means that a large share of the dwelling stock in Balco’s key markets will be in need of renovation during the coming years. After the first renovation, balconies need to be renovated again after 15-50 years, depending on the method and scope of the renovation. Age profile of dwellings in Balco's key markets Age profile of multi-dwelling buildings in Sweden 50% 700,000 45% 600,000 40% 500,000 35% 30% 400,000 25% 300,000 20% 200,000 15% 10% 100,000 5% 0 0% Before 1946 1946-1980 1981-2000 2001 onwards Avg. Focus markets Avg. Rest of EU Source: SEB, Eurostat Source: SEB, SCB Corporate Research NOT TO BE DISTRIBUTED IN, OR TAKEN OR TRANSMITTED INTO, THE UNITED STATES, CANADA, JAPAN, AUSTRALIA OR IN ANY OTHER JURISDICTION WHERE TO DO SO WOULD BE UNLAWFUL. Company Update Marketing communication commissioned by: Balco 26 November 2018 4 Strong market position in fragmented but growing key markets One main reason for the rapid growth of Balco’s sales is its strong market position in its focus markets. According to our estimates, in 2017 Balco was clear market leader in Sweden and Norway with approximate market shares of 21% and 18% while in Denmark Balco has established an approximate market share of around 11%, being the number two operator in the Danish balcony market. We argue that the company has been able to increase its market share in the more profitable renovation segment, even though the total market share has slightly decreased. This is due to Balco’s strategic decision to focus on the renovation segment rather than the new build market, which has been growing rapidly during the past few years, especially in Sweden. Furthermore, the recent acquisition of TBO-Haglinds AB (TBO) will further strengthen Balco’s market share in 2019. We believe that the strong market position, high brand value
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