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

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 and the relatively large size of Balco’s operations compared to its competitors will help Balco to continue its strong growth within its focus markets. The company has made investments to strengthen its sales forces and has now extensive coverage throughout its key markets. It has also invested in new production facilities in Poland that will ensure cost efficient production capacity to support future growth. Moreover, the company is strengthening its sales forces in non-core markets such as Germany, the Netherlands and Finland to gain market share. These countries will open new channels for growth in structurally attractive markets.

Balco's sales development per geography (SEKm)

600 CAGR 26%

500

400

300

CAGR 200 6% CAGR 59% CAGR 41% 100 CAGR '16-17 -38% CAGR growth 449% 142% 0 Sweden Norway Denmark Germany UK Netherlands Finland 2015 2016 2017 Source: SEB, Balco annual reports

Proven cash-generative business model combined with good visibility Balco has been able to steadily grow its order intake, reaching a CAGR of 21.8% between 2014 and 2017. Orders have historically been converted into sales within approximately one year after the order has been recorded. However, as the scale of Balco’s business has expanded, the order turnover rate has also been lengthened slightly, being around 1.2x in 2018, we estimate. The steady growth in order intake has also increased the order stock, increasing the visibility of Balco sales. However, the order intake growth has slightly decelerated during the last couple of years and averaged 6.1% in 2016 and 2017.

Despite the growth, Balco has been able to post strong cash flows, illustrating the low capital intensity in the business model. Moreover, we argue that Balco has been able to grow faster than its competitors in Sweden while still sustaining

higher margins, suggesting that its business model is working and is superior to those of other market participants.

Strong sales growth and improved margins Order intake and order stock development 1,200 15% 1400 Order intake CAGR 1.4 14% 14-17 21.8% 1200 1,000 CAGR 15-17 6.1% 13% 20.3% 1.2 11.8% 12% 1000 800 1.12 11% 1.04 1 800

600 10.3% 10% 0.8 10.3% 600 9% 0.72 400 0.6 7.2% 8% 400

7% 200 200 0.4 6%

0 5% 0 0.2 2014FY 2015FY 2016FY 2017FY 2014FY 2015FY 2016FY 2017FY Net sales Adj. EBIT margin Order intake total Orderstock Order turnover rate Source: SEB, Balco IPO prospectus Source: SEB, Balco annual report

Growing dividends, more acquisitions or both? The balance sheet is strong and the cash-generative business model would support a growing dividend. However, we also see untapped potential in the company through acquisitions and argue that the strong balance sheet would give support for further M&A even after the acquisition of TBO. This would enable Balco to expand into new product categories and to strengthen Balco’s positioning in its key markets.

As the company is already active within transforming the building facades, we argue that expansions into façade renovations would add significant competitive advantages for Balco. This in our view would enhance Balco’s positioning in the market and strengthen its perception as a one-stop-shop service provider. Most of the competitors that operate in both façade renovations and balcony renovations have significantly narrower offerings within balcony solutions than Balco. Combining façade renovations with Balco’s wide balcony offering would open interesting opportunities for the company to continue taking market share from its competitors. However, we acknowledge that the most potential takeover targets are quite small local players, which would leave still some room for increased dividends.

Main risks in the underlying market and operations We think the main risk lies in the development of the overall residential construction market. Even though Balco focuses on the renovation market, we believe that the renovation activity is somewhat closely linked with the development of housing prices or overall housing market activity. Even though we have already seen slight deceleration in housing prices and in the new build activity, we continue to believe that the low interest rate environment will support the renovation market in the near-term, and thus see the risks of slowing housing market affecting more the new build segment.

Additionally, the project nature of the business exposes the company to several operational risks regarding the balcony construction projects. For instance, prolonged installation times due to increased order book could lead to lower quality, thus negatively affecting the brand value. Moreover, the “lean” production model and the “just in time” delivery model exposes the company to the risk of miscalculations that could lead to increased project costs and lower margins. Furthermore, regulatory challenges in getting building permits, especially in larger cities could mean postponed projects and longer lead times.

Overview of Balco Brief History ● Balco was founded in 1987 in Växjö by a Swedish entrepreneur Lars Björkman with a focus on providing balcony renovation and construction services for Swedish customers. ● During the late 1980s, Balco started its international expansion with operations in Norway and Germany. This was followed by expansion into Denmark and the UK in 2001-05. ● In 2010 Balco was acquired by the private equity firm, Segulah. The acquisition was followed by expansion into new product categories (city balconies) and by expansion into Finland. Segulah is still the largest shareholder with approximately 19% of the shares. ● In October 2017 the company was listed on Nasdaq Stockholm with an issue price of SEK 56 per share. ● In November 2018, Balco acquired the Swedish balcony construction and renovation company TBO-Haglinds AB for SEK 100m to continue strengthening its positioning in its key markets. Main segments, customers and products Balco operates in the construction market and designs, manufactures, repairs and constructs balconies for residential buildings. The company operates mainly in the balcony renovation market but has also small operations within the new build segment. However, the company will increasingly focus its sales efforts on the less cyclical and more profitable renovation segment. In 2017, renovation contributed 85.7% of the group’s total sales, and according to our estimates, renovation’s share will increase to approximately 95% in 2020.

The company has said that Sweden, Denmark and Norway are its focus markets, accounting for 87% of sales. Balco also has operations in Germany, Finland, Netherlands and the UK, while the production facilities are located in Sweden, Denmark and Poland.

In November 2018, Balco announced that it would acquire the operations of TBO, a Sweden based balcony construction company. According to the company, TBO will generate revenues of approximately SEK 130m in 2019, thus accounting for approximately 10% of the group’s revenues in 2019.

Sales split by geography in 2017 Sales split by segment (SEKm) Netherlands UK Finland 1,500 20% 1% 1% 1% Germany 15% 10% 1,300 13.5% 12.2% 11.5% 10% 1,100 5% Denmark 13% 900 0% 1.0% 5.2% 700 -5%

-10% Sweden 500 56% -15% 300 -26.5% -20% Norway 100 18% -25%

-100 2015 2016 2017 2018E 2019E 2020E -30% Renovation New build TBO Renovation EBIT margin New build EBIT margin Source: SEB, Balco annual report Source: SEB, Balco annual reports

Balco’s operations lean heavily towards the residential renovation sector, which is why the tenant-owner associations are by wide margin the largest customer group. In 2017, tenant-owner associations contributed around 60% of group sales. During the first nine months in 2018 the tenant-owner associations have further increased their share of Balco’s sales to 68%. The other customer segments include privately owned properties, public sector companies and construction companies, which mainly represent the new build sector.

Sales split by customer type in 2017… ...and 2018 first nine months Construction Construction companies companies 12% 9% Publicly owned companies Publicly owned 12% companies 9%

Privately-owned properties 11% Tenant-owner Privately-owned associations properties 60% 19% Tenant-owner associations 68%

Source: SEB, Balco annual report Source: SEB, Balco Q3 2018 report

Number of tenant-owned associations in Sweden 35,000

33,000

31,000

29,000

27,000

25,000

23,000

21,000

19,000

17,000

15,000 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Number of tenant-owned housing associations in Sweden

Source: SEB, Finansinspektionen

Balco’s strong positioning towards the tenant-owner associations is also a key driver of the business case, as these are an increasingly popular type of accommodation in the Nordics. Moreover, tenant-owner associations are more likely to undertake renovation, as the costs are split evenly among all the members of the association.

The low interest rate environment has further boosted associations’ willingness to undertake renovations, as they have been able to secure financing with good conditions. This naturally raises the question of how renovation market activity will be affected if interest rates rise and whether the increased indebtedness of tenant-owner associations would then become a problem.

Year-on-year change in loans in Sweden (%) Average debt per sqm for housing associations (SEK) 12 7,000

6,000 10

5,000 8

4,000 6 3,000

4 2,000

2 1,000

0 0 2011 2012 2013 2014 2015 2016 2017 2018 H1 2010 2011 2012 2013 2014 2015 Households Housing association Other (rest of Swe) Total Malmö Gothenburg Stockholm Source: SEB, Riksbanken, Statistics Sweden Source: SEB, UC Bostadsvärdering AB, Riksbanken

According to the Riksbank, most of the tenant-owner associations have fixed their interest payments in the medium or long term, suggesting that gradual increases in interest rates would not have a major impact on renovation activity in the near term. Furthermore, the high indebtedness is focused more on newly- formed associations in new buildings. Therefore we believe that the indebtedness of Swedish tenant-owner associations is not a significant near- term threat for Balco, since Balco is targeting the older dwellings that are in need of renovation.

Why do old dwellings need balcony renovations? Balcony renovation is a large investment for dwelling owners. According to Balco, a new glazed balcony constructed using the Balco method costs around SEK 120,000, but varies between different projects. However balcony renovation has several benefits for the housing associations and individual tenants:

● Reduced risk of corrosion and frost damage. Especially in the Nordic countries the cold weather can cause frost damage to the concrete reinforcement, thus significantly weakening the reinforcement and creating a safety hazard. ● Increases property value. A glazed balcony increases a property’s value for several reasons. It makes the balcony useable for more of the year; it reduces outside noise, and it saves energy. ● Opportunity for the dwelling owner to increase the rent. According to Balco, on average installing a glazed balcony can increase an apartment’s rent by around SEK 400 per month.

Balco’s offering and products Balco’s offering focuses on different types of balconies and balcony solutions with the main expertise being in replacing existing balconies with Balco’s own glazed balcony products using the so called “Balco-method”. In balcony renovations Balco always replaces the floor module with a new one instead of only renovating the floor module, and entirely tears down the old balconies. According to the company, this will significantly lengthen the life span of the new balcony to at least 50 years, while traditional renovations only give around 15 additional years; however it is also more than twice as expensive as a traditional renovation where the floor module is only renovated.

All of the products are manufactured in-house under Balco’s own brand and are always tailored and designed according to the customers’ needs and wishes. Currently Balco holds 45 patents. Balco’s product split is shown in the chart below.

Balco’s product split of 2017 sales Other products 10%

Open balconies 15%

Glazed balconies 75%

Source: SEB, Balco annual report

Glazed balconies are by far the largest product category contributing 75% of group total sales in 2017. The product category also contains clima walls, loft glazed balconies and etage balconies. The main advantage of glazed balconies comes through the reduced energy costs, which according to the company can be up to 20% lower, as well as through the opportunity for the apartment owner to increase rents. Moreover, glazing will reduce noise, increase living standards as the balcony season is lengthened and also lower the maintenance costs as it reduces the potential corrosion of the reinforcements.

Open balconies are constructed with steel frames and concrete bases and are sold to both renovation and new build segments. Similar to glazed balconies, open balconies can also be tailored and designed with different forms, floors and railings to suit the customer’s needs. The segment includes city balconies, which are generally smaller in order to adapt to city centre environments. The segment was further strengthened in 2015 by acquiring Kontech, a city balcony specialist operating in Denmark. Currently city balconies are offered only in Denmark but the company has stated its plans to expand the city balcony offering to other geographies as well. The production of these balconies has also been moved to Poland, which enables Balco to produce city balconies on a larger scale and with lower costs.

Prefabricated balconies on the other hand are manufactured in pre-defined shapes and sizes, which can more easily be attached into buildings cutting installation time. The AluOne comes in 12 different sizes and was first developed for the German market. PGS balconies are produced for the Swedish market and are primarily sold for new house production. PGSs are prefabricated modules made from concrete and steel.

Maritime balconies are developed and sold to cruise ships and therefore produced using lightweight materials like aluminium and glass. The maritime balcony segment is an example of Balco’s ability to expand its offering into new product categories and to utilize their production facilities more efficiently.

Other products and accessories include rails, sun screens, carpets, glass corners, roller blinds, powered awnings and other accessories. All of these products are designed so that they can be installed into the balconies at a later stage. Additionally, the category also includes railings and stairways, which are designed for both indoor and outdoor use. One-stop-shop operating model Balco’s main markets are Sweden, Denmark and Norway but the company has also established a presence in Germany, Finland, the Netherlands and the UK, with production facilities also in Poland. The company has recently ramped up its sales networks both in its key markets as well as in other markets to strengthen its market position and to gain market share in the renovation segment. The below picture illustrates Balco’s geographical footprint as of the end of 2017.

Overview of Balco’s operations

Balco has operations in 7 different countries

Sales Office

Production facility

Head office

Source: SEB, Balco

Balco’s aim is to offer its customers turnkey solutions, where the company takes care of every step in the process using in-house resources. Generally, the operating model consists of four different steps starting from sales and ending with installation. Different parts of the operating model are shown in the chart below and described in more detail in the text.

Balco operates also a product development department with eight full-time product developers working towards developing new solutions and products. The company currently holds 45 different patents.

Balco’s process 1 Sales

• First contact • Animations and in-house 4 Installation showings 2 Planning & permission • Assisting in getting a building • Installations at site, outside permission of the apartments 3 Production & logistics • Detailed planning of the project • Two-staged production process in own facilities • Just-in-time deliveries

Source: SEB, Balco IPO prospectus

Sales The sales process differs slightly between different customer segments, but generally the sales phase starts by contacting customers and analysing their needs. Often the first contact with potential customers is achieved during mini- fairs, where Balco typically has good presence. The first phase also contains pre-planning and animation work. When selling to the most common customer group, tenant-owner associations, Balco takes an active part in the decision making process by arranging in-house showings for the tenants before their association’s meeting. By this Balco can influence and increase the probability that the residents will vote in favour of the balcony renovation. Balco has recently focused on expanding its sales network, which now covers all of Sweden, Norway and Denmark and has established a presence also in Germany, the UK and Finland. At the end of 2017 the company employed in total 64 sales employees, averaging revenues of SEK 15.5m per sales employee.

Project planning and permission The project phase starts by signing a co-operation agreement after the decision to start building or renovating the balconies is taken. Building and renovation processes that impacts the building facade need to get approval from the local city planning office. Balco works closely and actively with the client to get such a permission, which often cuts the lead times due to Balco’s established processes and contacts within the city planning offices. The company has stated that there are currently four persons working solely with tenant-owner associations and helping them to secure building permits. Simultaneously the detailed planning of the project is started, including calculations, technical details and choices of materials and colour.

Production and logistics The production process generally starts after the permission to build is granted and is based on the drawings for every specific construction site. The balconies are usually produced in modules in Balco’s own production facilities in Sweden and Poland. The company will close down its production facility in Denmark in order to concentrate production into more cost efficient Poland. Balco has been investing into its production facilities to be able to keep pace with its growing order book. The modules are delivered directly to the workplace, with “just-in- time” deliveries.

The production process involves two different workflows, as outlined in the picture below:

Phases of balcony production process 1 Steel and concrete processing Steel cutting Galvani- Powder Planning Welding Casting and sation coating punching

2 Glazing and balcony frontage

Aluminium Assembly, Aluminium cutting Assembly of powder packaging and and punching windows lacquering freight

Source: SEB, Balco IPO prospectus

The first process focuses on the production of the steel frame and concrete slab, which serve as the framework for the balcony. The second process focuses on the windows and balcony fronts. The framework, windows and balcony fronts are shipped and installed at the construction site to ensure as efficient logistics and process as possible.

Installation and handover Installations of the balconies are carried out by contracted fitters who work solely for Balco. Balco has entered into long-term contracts with the selected contractors and thus secured workforce for the projects. All of the installation work primarily takes place outside the apartment leaving the tenants with as little disturbance as possible. After the installation Balco and the client jointly inspect the work. Ownership structure The largest shareholder in Balco is Segulah, with 19.0% of the total shares and votes. The second and the third largest shareholders are Carl-Olof och Jenz Hamrins Stiftelse and Erik Selin through the holding company Skandrenting AB. In total the three largest shareholders control 41.9% of the company.

Largest shareholders as of 30 September 2018 Share of No. of shares Value (SEKm) total shares Country Shareholder Segulah 4,079,373 288.0 19.0% Sweden Carl-Olof och Jenz Hamrins Stiftelse 2,638,524 169.7 12.3% Sweden Erik Selin 2,250,000 144.7 10.5% Sweden Swedbank Robur Fonder 1,339,286 86.1 6.2% Sweden Danica Pension 771,708 49.6 3.6% Sweden Stiftelsen Riksbankens Jubileumsfond 680,000 43.7 3.2% Sweden Lazard Asset Management 625,000 40.2 2.9% US Janus Henderson Investors 540,564 34.8 2.5% UK Avanza Pension 505,030 32.5 2.4% Sweden Canaccord Genuity Wealth Management 497,810 32.0 2.3% UK

Top 3 largest 8,967,897 602.4 41.9% Total 10 largest 13,927,295 921.2 65.0% Source: SEB, Holdings.se

Market Macro economy and housing market Balco operates in the Northern European construction market with renovation as its main focus segment. Balco’s key focus markets are Sweden, Norway and Denmark, which generated roughly 87% of the group revenues in 2017. Generally, the construction and renovation markets are closely related to the development of the overall economy, which during recent years has supported Balco’s business. GDP growth in Europe, especially in Balco’s focus markets, has been solid. Healthy growth in GDP is even expected for 2018-20 by SEB, which we believe will further support both the construction and renovation markets. The favourable economic conditions have also been reflected in construction confidence, which has generally been upward sloping for in recent years.

Yearly GDP growth rates Construction confidence indicators at positive levels 5.0 40

4.0 30

20 3.0 10

2.0 0

1.0 -10 -20 0.0 -30

-1.0 -40

-50 -2.0 2013 2014 2015 2016 2017 2018E 2019E 2020E

Denmark Finland Germany

01/01/13 01/10/13 01/07/14 01/07/13 01/01/14 01/04/14 01/10/14 01/01/15 01/04/15 01/07/15 01/10/15 01/01/16 01/04/16 01/07/16 01/10/16 01/01/17 01/04/17 01/07/17 01/10/17 01/01/18 01/04/18 01/07/18 01/10/18 Netherlands Norway Sweden 01/04/13 United Kingdom Weighted GDP growth EU 27 Sweden Denmark Germany Finland UK Source: SEB, IMF Source: European Commission

Housing starts and completions in focus markets (units) Housing price index* 20,000 1.6 18,000 1.5 16,000

14,000 1.4

12,000 1.3 10,000 1.2 8,000

6,000 1.1

4,000 1 2,000 0.9 0

0.8

Q3 2012 Q3 2016 Q2 Q2 2012 Q2 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3

Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18

Sep-13 Sep-14 Sep-15 Sep-16 Sep-17

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17

Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Sweden starts Denmark starts Norway starts Mar-13 Sweden completions Denmark completions Norway completions Denmark Sweden Norway Source: SEB, Datastream Source: SEB, Eurostat, *December 2012 = 1

Fears of an over-heated housing market, especially in Sweden, have raised concerns in the construction sector after an extended period of rising housing prices. The concerns have been reflected in the new house production numbers, which are slightly down in every country from the highs in 2017 but still at relatively good levels. We argue that the lowered activity in the new build housing market in Balco’s focus markets will not have a severe impact on Balco as only 14.7% of revenues in 2017 were generated from the new build segment.

Moreover, the company has even stated that it will only focus on the renovation segment and only undertake the new build projects that are already waiting in the order stock. We believe that the new build projects represent approximately 10% of the current orders. The renovation segment has historically been more stable than the new build market, as can be seen from the charts below. Moreover, we believe that the age profile of the dwelling stock in focus markets will drive demand for balcony renovations, even if the new build housing market slows down even more.

YoY growth of new build residential construction (%) YoY growth of residential renovation construction (%) 35 35

30 30

25 25

20 20

15 15

10 10

5 5

0 0 2014 2015 2016 2017 2018E 2019E 2014 2015 2016 2017 2018E 2019E -5 -5

-10 -10

-15 -15 Denmark Finland Germany Netherlands Norway Sweden United Kingdom Denmark Finland Germany Netherlands Norway Sweden United Kingdom Source: SEB, Euroconstruct Source: SEB, Euroconstruct

Market share and competitive landscape Total balcony market According to Arthur D. Little, the entire balcony market in countries where Balco has operations was in 2017 estimated to be worth approximately SEK 30bn. In 2017, around 70% of the entire market was renovation and the remaining 30% new build. The new build market is expected to increase its share slightly in 2018, but to cool down in 2019 and 2020.

Total balcony market in selected markets (SEKm) Total balcony market per country (SEKm) 40,000 40,000 CAGR 3.0% 35,000 CAGR 35,000 4.0% 30,000 30,000

25,000 25,000

20,000 20,000

15,000 15,000

10,000 10,000

5,000 5,000

0 0 2013 2014 2015 2016 2017 2018E 2019E 2013 2014 2015 2016 2017 2018E 2019E Renovation New build Sweden Norway Denmark Finland Germany United Kingdom Netherlands Source: SEB, Arthur D. Little, Balco 1)Selected markets: Sweden, Norway, Denmark, Source: SEB, Arthur D. Little, Balco Finland, Germany, UK, Netherlands

Balcony market split in 2017 (for countries where Balco is present) Netherlands Sweden 6% 9% Norway 3% Denmark United Kingdom 4% 18% Finland 5%

Germany 55% Source: SEB, Arthur D. Little, Balco

In 2017, around 55% of Balco’s addressable balcony market was in Germany, while 18% was in the UK. Balco’s focus markets, Sweden, Norway and Denmark made up approximately 16% of the total, and amounted to approximately SEK 4.8bn in 2017.

Of this SEK 4.8 billion around 60% was renovation while the remaining 40% was new build. Between 2014 and 2017 annual growth in the renovation market was approximately 9% and growth is estimated to increase slightly to 10% between 2017 and 2019; the corresponding figures for the new build market are 20% and 13%. However, most of the growth in new build is expected to come in 2018 and the market is anticipated to cool down slightly in 2019. The market growth in the Nordic balcony market is expected to be substantially stronger compared to other markets in Northern Europe and UK.

Balcony market development in Sweden, Norway and Denmark 7,000 CAGR 11.6% 6,000 CAGR 13.1% 5,000

4,000

3,000

2,000

1,000

0 2014 2015 2016 2017 2018E 2019E Renovation New build

Source: SEB, Balco, Arthur D. Little

Balco’s current market share Based on Arthur D. Little’s market estimates and our calculations, we estimate that Balco had approximately 21% of the Swedish balcony market in 2017 and approximately 18% and 11% in Norway and Denmark, respectively. Balco is the market leader in Sweden and Norway and market number two in Denmark, measured by sales.

We believe that the combined market share for Balco in its focus markets of Sweden, Denmark and Norway amounted to approximately 18% in 2017, while the renovation market share amounted to almost 27%. According to our estimates, Balco’s total market share will decline slightly due to Balco shifting its focus to the renovation market. However, the decline in total market share is compensated for in the renovation market, where we assume slight market share growth for Balco in 2018 due to its effective business model and recent investments into sales forces and production facilities. In 2019, we also include TBO’s estimated market share in Sweden in our assumptions, which will increase Balco’s market share in renovation to approximately 30%.

Market share in respective balcony markets in 2017* Market share in focus markets 35% 35% 33.0% 31.7% 30.0% 30% 30% 26.7% 27.0%

25% 25% 23.9%

20.9% 20.4% 19.7% 20% 20% 18.7% 17.9% 18.0% 17.3% 16.8% 15.1% 15.4% 15% 14.0% 15% 11.4% 10% 10%

5% 5%

0% 0% Balco Sweden Balco Norway Balco Denmark 2014 2015 2016 2017 2018E 2019E Renovation market share Total market share Renovation market share in focus markets Total market share in focus markets Source: SEB, Arthur D. Little, Balco *TBO not included Source: SEB, Arthur D. Little, Balco

Competition in the balcony market The balcony market in Northern Europe is fragmented and therefore the competition in Balco’s main focus markets comes primarily from smaller non- listed niche companies that generally focus on façade renovations, other such renovations or glazing. On top of this, some of the companies also offer balcony renovation, but only a few have their main focus on balconies.

Balco has identified some unlisted international companies as its peers with sales roughly in line with Balco, including Lumon, WinGroup and Solarlux. However, none of these companies has as broad and focused offering in balconies as Balco, as they also focus on other products such as doors and windows. This could be seen both as a threat and an advantage for Balco. The broader product offering could in our view increase the chances for cross selling products and thus help increase market share, but on the other hand the more focused offering in balconies could be seen as a sign of higher quality. Moreover, both Solarlux and Wingroup outsource the installation part of the value chain, which in our view strengthens Balco’s positioning as it controls all pieces of the value chain.

The table below gives an overview of Balco’s competitors in its main market Sweden and illustrates their segment focus and product offering in balconies. According to our estimates, the competitors listed in the table had approximately 35% of the Swedish balcony construction market in 2017. This leaves an approximate market share of 44% for the other market participants given that Balco’s market share in Sweden was approximately 21%. The other market participants are mainly the international players named above as well as other construction companies engaging especially in the new build segment. As the table below illustrates, Balco has clear advantages compared to its competitors due to its broader offering and especially for its larger size. The table also illustrates how fragmented the market is, as the second largest competitor holds only approximately 7% of the market. Moreover, after the acquisition of TBO, Balco will further increase its market share in Sweden by some 5%.

Key competitors in Sweden

Sales in Swe 2017 EBIT-% Mkt. Share Open Glazed City (SEKm) 2017 in Swe (%) New Built Renovation balconies balconies Clima walls balconies Maritime

Alnova Balkongsystem AB 99 2 4 X X X X X Arqdesign Byggprodukter AB 113 -3 4 X X X X Balcona Aktiebolag 43 -7 2 X X X Högstad Aluminium Aktiebolag 81 11 3 X X X X X RK Teknik I Gusum Aktiebolag 87 5 3 X X X X TBO-Haglinds AB* 130 12 5 X X X X X Teknova Byggsystem Aktiebolag 176 1 7 X X X X Weland Aluminium Aktiebolag 182 13 7 X X X X X

Balco Sweden 550 12 21 X X X X X X X *Estimated 2019 sales for TBO AB Source: SEB, Balco, Allabolag.se

Competitive landscape in Sweden 25% Balco TBO Arqdesign Sales: 550 Sales 2017: Sales: 130 20% 113

15% Weland Högstads Alnova AB Aluminuum Aluminium Sales 2017: Sales 2017: 182 10% Sales 2017: 81 99

RK Teknik AB 2017 - Sales 2017: 87 5%

0% Teknova Sales 2017:

-5% 176 Sales Sales 2014 CAGR

-10% Balcona AB Sales 2017: 43 -15%

-20% -3% -1% 1% 3% 5% 7% 9% 11% Average EBIT-% 2014-2017

Source: SEB, Balco IPO prospectus, Allabolag.se

The scatter chart above supports our belief that Balco’s business model is superior than its peers’ as it has been capable of sustaining good average EBIT margins although achieving a sales CAGR of 21.6% between 2014 and 2017. We believe that this is mainly because of Balco’s scale and efficient process where it controls the entire value chain, compared to smaller competitors who are more reliant on outsourcing many parts in the process. Furthermore, most of the smaller competitors in Sweden focus only on glazing or other such niches, which we believe will make Balco an even stronger actor in the market with its one-stop-shop business model.

Financials Balco’s medium-term financial targets The company has communicated the following financial targets for the medium- term:

● Growth – revenue growth of 10% per year. ● Profitability – operating profit margin of at least 13%. ● Capital structure – interest bearing net debt/EBITDA shall not exceed 2.5x, other than temporarily. ● Dividend policy – At least 50% of profit after tax, taking into consideration Balco’s long-term growth and prevailing market conditions. Acquisition of TBO-Haglinds AB As mentioned earlier, Balco recently announced the acquisition of TBO, which is a Swedish operator in the balcony construction and renovation market. The company operates mainly in Sweden, and offers services in changing and renovating existing balconies as well as building new balconies and providing glazing solutions.

The announced purchase price for the company was SEK 100m, implying a 2019 EV/sales multiple of approximately 0.8x. Additionally, the deal included a condition of an additional purchase consideration of a maximum of SEK 20m, depending on the business development between 2019 and 2020. The extra SEK 20m included the purchase price would imply EV/sales and EV/EBIT multiples of approximately 0.9x and 8x, respectively. According to Balco, TBO generates revenues of some SEK 130m and annual EBIT of SEK 15m, suggesting an EBIT-margin of 11.5%. Additionally, the company has an order backlog of SEK 200m, which in our view translates into sales for around 1.5 years ahead.

Through the acquisition, Balco is able to increase its market share in the Swedish balcony market, thus strengthening its competitive positioning. The acquisition improves the product portfolio and the customer base, giving a solid base for future growth. Moreover, we believe that the company is able to achieve cost synergies that will most likely support margin expansion in the coming years. Orders and sales The order intake has seen rapid growth, amounting to an annual growth rate of 21.8% between 2014 and 2017. We believe that the renovation market activity will stay at good levels, supported by low interest rates and by increasing disposable incomes for households. However, we estimate that the growth rate for group total orders will be negative in 2018, after an excellent year in 2017 and after a slightly disappointing order development, especially in Q3 2018, which was mainly due to fluctuations and delays in decision making for larger clients.

However, we acknowledge that due to the nature of the business the order intake can fluctuate a lot between quarters, and therefore estimate that the order intake will return to its growth path in Q4 2018 and continue to grow in 2019, as no large change in the underlying market have been seen. The order intake in 2019 is estimated to be strong especially within the renovation segment, which is the main focus area for Balco.

Renovation order intake (SEKm) New build order intake (SEKm) 450 1400 100 180

400 90 160 1200 80 350 140 1000 70 300 120 60 250 800 100 50 200 600 80 40 150 60 400 30 100 40 20 200 50 10 20

0 0 0 0

Series1 12m rolling order intake (RHS) Series1 12m rolling order intake (RHS) Source: SEB, Balco annual reports Source: SEB, Balco annual reports

We expect the group order intake to grow in 2019 by almost 26%, compared to 2018 and further grow by some 8% in 2020. The high growth in order stock in 2019 is explained by the SEK 200m order stock that is added in 2019 after the acquisition of TBO. Organically the order intake growth is estimated to be approximately 6%.

Group sales and orders (SEKm) 1,600

1,400

1,200

1,000

800

600

400

200

0 2015 2016 2017 2018E 2019E 2020E Sales Order intake total Orderstock

Source: SEB, Balco Annual reports, Balco IPO prospectus

Due to the somewhat weak order development thus far in 2018, but a strong order stock which supports sales, we expect the company to continue to grow. We estimate sales growth of 8%, 20% and 8% in 2018, 2019 and 2020, respectively. For 2019 we estimate organic sales growth of almost 8%. Again, we expect the growth in the coming years to come from the renovation segment as the company is continuing to be more selective and to scale down the new build segment.

Quarterly sales per segment (SEKm) Annual sales per segment (SEKm) 400.0 1400

350.0 1200

300.0 1000

250.0 800 200.0 600 150.0

400 100.0

200 50.0

0.0 0 Q1 17 Q2 17 Q3 17 Q4 17 Q1 18 Q2 18 Q3 18 Q418E Q119E Q219E Q319E Q419E 2015 2016 2017 2018E 2019E 2020E Renovation New build Renovation New build Source: SEB, Balco annual reports Source: SEB, Balco annual reports

Cost structure, gross profit and operating profit Balco’s cost structure is shown in the chart below. By far the largest contributor to costs is raw materials, consumables, installation, production and personnel costs in production, from which we estimate that raw materials account for approximately 25%. We believe that Balco’s cost structure will remain somewhat stable, with raw materials the most likely part to fluctuate, reflecting the raw material price changes in aluminium, steel, concrete and glass. However, the company has taken actions to hedge its raw material costs and aims to agree contracts with suppliers to secure raw materials at fixed prices for the following six to 12 months. Because of this, we assume that the raw material price changes will only have minor effects, and estimate the cost structure to be quite stable in 2018-20.

Cost structure in 2017

Marketing Operational leases Other costs 2% 1% 3% Transport 2% Depr. and impairment 2%

Renumeration 20%

Raw materials, consumables, installation and production 70%

Source: SEB, Balco annual report

On average, Balco has made an annual gross margin of 24.7% over the past three years. For the first nine months of 2018, Balco has achieved a gross margin of 24.8%, in line with the historical average. Going forward, we estimate that Balco will be able to increase its gross margins with higher utilization of its production units and due to benefits from economies of scale after concentrating more of its production into Poland. Balco is seen as a premium brand in the balcony renovation market and is generally more expensive than its competitors.

We believe that with the help of Balco’s strong position and increased efficiency in production, the company will also be able to gradually increase its gross margins and achieve margins around 26% in 2018-20.

Gross profit (SEKm) Adj. EBIT (SEKm) 400 40% 180 15% 169 364 160 350 334 151 14% 35% 140 300 275 13% 117 120 248 120 250 30% 100 11.8% 12.2% 12% 200 190 82 11.8% 162 80 11% 26.3% 66 11.2% 25.6% 26.0% 25% 150 25.4% 25.0% 60 23.7% 10.3% 10.3% 10% 100 40 20% 9% 50 20

0 15% 0 8% 2015 2016 2017 2018E 2019E 2020E 2015 2016 2017 2018E 2019E 2020E Gross profit Gross profit margin Adj. EBIT Adj. EBIT margin Source: SEB, Balco annual reports Source: SEB, Balco annual reports

Balco targets an EBIT margin of 13% in the medium term. However, in recent years the margin has been lower, primarily due to new build projects, which have substantially lower margins than renovation projects. We believe that Balco will be able to gradually increase its margins in 2019 and 2020, while the margins in 2018 will be slightly down from 2017 due to a somewhat weak H1. In H1 2018, margins were affected by a combination of prolonged building permit decisions, especially in Copenhagen, by investments into new salesforces and by IFRS 15 adjustments.

The increases in operating profit according to our estimates will come from the increased focus on renovation business, more efficient production after investments in the facilities in Poland and Balco’s good market position regarding pricing power. We expect the operating costs to stabilize below 15% of sales, slightly down from 2017 (15.8%) due to operational improvements and efficiency increases within sales efforts and administration. We believe that Balco can utilize cost synergies from the acquisition of TBO, primarily due to more efficient and centralized raw material purchases and lowered administration costs, amounting to approximately SEK 8m in 2019 and 2020.

We estimate that from every SEK in organic sales growth Balco is able to turn approximately 15% into operating profit, due to the good pricing position in renovation projects. Based on the above-mentioned estimates and the inclusion of TBO in the 2019 and 2020 figures, our EBIT forecast for 2018, 2019 and 2020 is SEK 120m, SEK 151m and SEK 169m, respectively. Balance sheet and cash flow Balco’s capex in 2017 amounted to SEK 55m, while the average amount between years 2014 and 2017 was SEK 26m. The increased capex in 2017 was due to investment into the new production facility in Poland. We believe that the capex will move closer to the historical average, as the large investments should now be behind and therefore model capex to be slightly below 3% of revenues in 2018-20. Net working capital was negative in 2017. We believe that the working capital will settle closer to the historical average and to be approximately 3% of group sales in 2018-20. In 2018 we estimate that the net working capital will amount to approximately SEK 33m.

The somewhat low capex and working capital combine to a cash generative business model that leads to solid cash flows, as can be seen from the chart below. In 2019, the cash flow will be negative due to the SEK 100m acquisition of TBO, which should be consolidated into Balco by the start of January 2019 (see chart below left).

Cash flow and net debt (SEKm) Potential dividend yields 160 11.0%

140 10.0% 9.6%

120 9.0% 8.6%

100 8.0% 7.2% 6.7% 80 7.0% 6.4%

60 6.0% 5.0% 4.8% 40 5.0% 4.3%

20 4.0% 3.4%

0 3.0%

-20 2.0%

-40 1.0% 2015 2016 2017 2018E 2019E 2020E 2018E 2019E 2020E Net debt CF before changes in WC Operating CF Free CF Base case - 50% payout ratio 75% payout ratio 100% payout ratio Source: SEB, Balco annual reports, the acquisition is planned to be paid in December 2018, but Source: SEB consolidated as of 1st of January. In our estimates we have assumed that the acquisition will be paid and consolidated in January 2019. As mentioned, the company has communicated a net debt / EBITDA target that should not exceed 2.5x, which leaves room to lever up the balance if needed. Currently the 2018E estimated net debt / EBITDA multiple is 0.8x and will increase to approximately 1.0x after the consolidation of the TBO acquisition. According to our estimates, the company would be able to have a net debt of approximately SEK 480m in 2020 and still stay within the indebtedness target of 2.5x EBITDA.

As we have outlined throughout the report, we see Balco’s cash-generative business model and market leading position as an attractive combination. The company has stated to pay out at least 50% of net profits as dividends, however, acknowledging the future growth needs and prevailing markets, thus entailing possible future acquisitions.

We believe that if the company does not conduct any larger acquisitions, which we think is quite likely taking into account the possible target companies that are available and the recent acquisition of TBO, Balco could increase its dividend payout ratio, thus increasing the dividend yields substantially. Reflecting our estimates of earnings, cash flows and indebtedness, we could see a scenario where Balco would do smaller acquisitions to boost growth and market share as well as pay out a higher share of the net profits as dividends. Above graph outlines the potential yields with different payout ratios. The payout ratio in 2017 amounted to 57% of earning per share for 21.4million shares.

Interim financials

Balco Q1/17 Q2/17 Q3/17 Q4/17 Q1/18 Q2/18 Q3/18 Q4/18E Q1/19E Q2/19E Q3/19E Q4/19E 2017 2018E 2019E 2020E (SEKm) Net sales 231 268 206 284 243 274 238 318 294 323 291 376 989 1,072 1,284 1,384 Production and project costs -173 -201 -157 -210 -182 -203 -182 -231 -221 -239 -217 -273 -741 -797 -950 -1,020 Gross profit 57 68 49 74 60 71 56 87 73 85 74 103 248 275 334 364 Sales costs -23 -22 -18 -24 -25 -25 -20 -29 -26 -29 -26 -33 -88 -98 -114 -122 Administration costs -12 -15 -19 -24 -13 -15 -11 -17 -16 -17 -15 -20 -68 -56 -68 -72 Share of associates 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other operating income 2 2 1 2 0 0 0 0 0 0 0 0 7 1 0 0 Other operating expenses -2 -2 -1 -2 0 0 0 0 0 0 0 0 -7 -1 -1 -1 Operating costs -34 -37 -37 -48 -38 -40 -31 -46 -42 -46 -41 -54 -155 -155 -183 -194 Adj. Operating profit 24 34 21 37 22 32 25 41 31 38 32 49 117 120 151 169 Finance income 0 0 0 0 0 0 0 1 0 0 0 0 0 1 1 1 Finance expense -11 -12 -12 -2 -2 -1 -2 -4 -2 -2 -2 -2 -37 -9 -9 -10 Profit before tax 12 19 0 24 20 30 24 38 29 36 30 47 55 112 143 160 Income tax -5 -7 -2 -4 -5 -7 -5 -8 -6 -8 -7 -10 -18 -25 -31 -35 Net profit for the period 7 13 -2 20 16 23 19 30 22 28 24 37 38 88 112 125

EPS adj. (SEK) 0.0 0.0 -0.5 1.1 0.7 1.1 0.9 1.4 1.0 1.3 1.1 1.7 2.4 4.1 5.2 5.8 Dividends per share 1.0 2.0 2.6 2.9 One-offs 1 3 9 11 0 0 0 0 0 0 0 0 25 0 0 0 Sales growth (%) 46 26 7 19 5 2 15 12 21 18 22 18 23 8 20 8 Gross margin(%) 25 25 24 26 25 26 24 27 25 26 25 27 25 26 26 26 EBITDA 29 38 26 42 27 37 30 46 36 44 37 56 136 139 173 191 EBITDA margin (%) 12 14 12 15 11 13 13 14 12 14 13 15 14 13 13 14 Adj. EBIT margin (%) 11 13 10 13 9 12 11 13 11 12 11 13 12 11 12 12 Pre-tax margin (%) 5 7 0 8 8 11 10 12 10 11 10 13 6 10 11 12 Net margin (%) 3 5 -1 7 6 8 8 9 8 9 8 10 4 8 9 9 Tax rate (%) -40 -35 -1100 -16 -23 -24 -19 -22 -22 -22 -22 -22 -32 -22 -22 -22

Orders Order intake 220 395 202 296 271 299 127 320 331 362 199 385 1,114 1,018 1,278 1,380 Order stock 1,101 1,225 1,218 1,238 1,280 1,309 1,203 1,205 1,442 1,481 1,389 1,399 1,238 1,205 1,399 1,395 Order intake growth (%) 15 69 -45 9 23 -24 -37 8 22 21 56 20 4 -9 26 8 Order stock growth (%) na 37 14 12 16 7 -1 -3 13 13 16 16 12 -3 16 0

Sales Renovation 197 229 176 246 219 240 219 291 277 300 277 356 848 969 1,210 1,319 New build 34 39 31 38 24 33 19 27 17 23 14 20 142 103 74 65 Renovation growth (%) 41 14 3 14 11 5 25 18 27 25 26 22 17 14 25 9 New build growth (%) 85 214 36 74 -30 -16 -39 -28 -30 -30 -25 -25 89 -27 -28 -13 Source: SEB, Balco annual reports

Equity Valuation We value Balco by using a DCF model, complemented by peer valuation tables. Peer group analysis As mentioned earlier, Balco’s market is fragmented and the main competitive landscape consists primarily of smaller unlisted companies, thus lacking listed peers with similar business model and offering. The peer group below consists of building material companies and companies that are active within the renovation market. We believe that these companies illustrate the best available comparison for Balco regarding their products and operations, and due to their businesses also being primarily driven by the construction and renovation market activity.

Even though Balco does not have listed peers with similar offerings or focus on balcony renovations, we highlight some companies whose businesses have similar drivers and geographical coverage as Balco. In our opinion, especially the Nordic building materials companies as Inwido, Lindab, FM Mattsson, Nobia and the Finnish construction and renovation company Consti Oyj serve as the closest references to Balco regarding their offering and operations.

The Swedish company Inwido is active within the door and window markets in the Nordics but also in the UK and Europe. The company sells its products to both residential and industrial builders. Lindab, on the other hand has a wider product offering, supplying different products to support and simplify the building processes. The offering contains among others rainwater systems, doors and ventilation products and solutions for indoor climate. Nobia’s and FM Mattsson’s offerings are more focused in kitchen and bathroom interiors, but their businesses are also driven by new build construction and renovation activity.

The Finnish construction and renovation company Consti is active within the façade renovation segment and conducts also balcony renovations in the Finnish market, thus making Consti a competitor for Balco in Finnish balcony projects. However, the façade renovation business segments contribute only 37% of the group sales, while the rest comes from lower margin businesses, which is why we argue that Consti should be trading with discount compared to Balco.

Balco’s current valuation of 11.5x 2019E PER and 9.5x EBIT Balco is currently valued roughly in line with its peers measured by the 2019E EV/EBIT multiple and slightly above its peers, measured by earnings and sales multiples for 2019. Even though the peer group represents companies operating in a similar industry to Balco, we believe that they do not represent Balco’s business model as the market leading company with high barriers to entry, which more or less creates its own market. Therefore we believe that Balco should be trading at a premium to the basic materials and other construction companies listed below.

Peer group

Mkt cap. SP performance (%) PER EV/EBIT EV / SALES (Ccy) (SEKm) 1M 3M 12M 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E Nordic building materials & renovation Bravida SEK 12,840 -2 -7 10 14.6 14.3 14.8 12.6 12.0 12.5 0.8 0.8 0.8 Caverion EUR 7,463 -2 -22 -18 27.5 13.4 11.8 na 9.3 8.3 0.3 0.3 0.3 Consti EUR 526 -4 -21 -36 na 9.5 6.9 38.6 12.4 7.5 0.3 0.2 0.2 FM Mattsson Mora Group AB SEK 845 19 -6 -16 14.2 12.6 11.2 11.6 10.4 9.1 0.9 0.9 0.9 InnoTec TSS AG EUR 1,134 -12 -29 -27 na na na na na na na na na Inwido SEK 3,377 -2 -15 -33 7.3 7.3 6.9 8.4 7.9 7.6 0.8 0.8 0.8 Lehto Group EUR 3,028 0 -38 -57 9.0 5.8 5.2 7.7 4.9 4.4 0.4 0.4 0.4 Lindab International AB SEK 5,092 8 -12 -3 11.3 10.3 9.1 10.8 9.3 8.7 0.7 0.7 0.6 Nobia SEK 9,277 -6 -14 -19 9.9 9.2 8.7 9.1 8.6 8.2 0.8 0.8 0.8 Nordic Waterproofing Hldg A/S SEK 1,768 1 -11 10 10.1 8.2 7.7 8.2 6.9 6.7 0.7 0.7 0.7 Systemair AB SEK 5,002 -6 -15 -19 14.2 11.9 10.6 14.9 12.8 11.5 1.0 0.9 0.9 Uponor Oyj EUR 6,833 -8 -22 -46 12.9 10.4 9.7 7.1 7.8 7.4 0.6 0.7 0.7 Median -2 -15 -19 12.1 10.3 9.1 9.9 9.3 8.2 0.7 0.7 0.7 Average -1 -18 -21 13.1 10.3 9.3 12.9 9.3 8.3 0.7 0.6 0.6

UK and European building materials & renovation Alumasc Group PLC GBP 539 0 -3 -21 7.7 6.6 5.6 6.7 5.8 4.9 0.6 0.5 0.5 Epwin Group PLC GBP 1,310 -3 -2 13 7.8 7.1 6.7 7.2 6.7 6.3 0.5 0.5 0.4 Eurocell PLC GBP 2,689 4 -1 17 na 10.1 9.3 na 8.3 7.7 0.9 0.9 0.8 Norcros PLC GBP 2,004 4 13 26 7.0 6.6 6.3 5.7 5.4 5.2 0.6 0.6 0.6 Safestyle UK plc GBP 733 -3 26 -62 neg. 16.5 9.9 neg. 30.6 16.3 1.1 1.0 1.0 Titon Holdings PLC GBP 247 15 -7 37 10.6 9.8 9.1 8.5 7.8 7.4 0.6 0.6 0.6 Tyman PLC GBP 5,921 -8 -21 -15 9.3 8.3 7.5 9.6 8.8 8.1 1.4 1.3 1.3 Somec SPA EUR 1,092 -5 na na 18.9 11.0 8.9 10.1 7.1 6.1 0.8 0.7 0.6 Median -1 -2 13 8.5 9.1 8.2 7.8 7.5 6.8 0.7 0.6 0.6 Average 1 1 -1 10.2 9.5 7.9 8.0 10.1 7.8 0.8 0.8 0.7

Median -2 -12 -18 10.4 9.8 8.9 8.8 8.3 7.6 0.7 0.7 0.7 Average 0 -11 -14 12.0 10.0 8.7 11.0 9.6 8.1 0.7 0.7 0.7

Balco SEK 1,283 -3 -14 -4 14.6 11.5 10.3 11.6 9.5 8.2 1.3 1.1 1.0 Diff. To average (%) 22.0 15.4 17.7 4.7 -0.9 1.6 77.8 63.2 51.1 Source: SEB, Datastream

We believe that the strong growth profile, higher margins, strong market position, focused product offering and attractive cash generation justifies the premium PER valuation compared to Balco’s peers. By looking at the peer group table it is also evident that overall the building material and construction/renovation companies have been out of favour with investors, resulting in share prices reversions on average by approximately 14% during the past year, while the last 12M performance for Balco has been -4%.

The EV/EBIT multiples compared to the historical sales growth as well as the better EBIT margin lead us to conclude that the slight premium in valuation should be justified. In our forecast, Balco’s average EBIT margin for 2018-20 is 11.7% compared to the peer group average of 7.7%.

2019 EV/EBIT and sales CAGR Peer group EBIT margins 45% 40% Lehto Group 15% 35% 11.2% 30% 10%

2018 25% -

20% Nordic Waterproofing Balco Holding A/S 5% Tyman PLC 15% Norcros PLC Eurocell PLC 10% Titon Holdings PLC Bravida Systemair AB Inwido Lindab International AB 0% Sales Sales 2015 CAGR Consti 5% Alumasc Group PLC Epwin Group PLC FM Mattsson Mora Group Nobia AB 0% Somec SPA Caverion -5% -5%

-10% 2x 4x 6x 8x 10x 12x 14x -10% EV / EBIT 2019E 2018E EBIT margin Average estimated peer group EBIT margin 18-20 Source: SEB, Datastream Source: SEB, Datastream

Sensitivity analysis In our sensitivity analysis we focus on EV/EBIT, and base our analysis on the 2019 EV/EBIT multiple, which according to our estimates is approximately 9.5x, indicating only a 1% discount to the peer group. However, we argue that due to the efficient business model and better growth profile compared to the peers, Balco should be trading at a slight premium to its peers. If Balco was able to reach its growth target of 10% and deliver an operating margin closer to its target of 13%, we could justify a substantially higher premium to the peer group. Moreover, the basic materials and construction sectors have been out of favour with investors, which could also leave room for multiples expansion for the entire sector in the future. DCF valuation Our DCF valuation derives a valuation range from SEK 79 to SEK 100 per share, with a mid-point value of SEK 89 per share. The following long-term assumptions were used:

● Revenue growth of 5% in year 2021 and decreasing gradually thereafter, being clearly lower than what the company targets in medium-term (10%). ● EBIT margin of 12.2% and EBITDA margin of 13.8% in 2021-22 and gradually decreasing thereafter. However, this assumption leaves some upside potential in our valuation in case Balco is able to reach its medium- term annual EBIT margin target of 13%. ● Working capital of approximately 3.4% of sales after 2020; this is in line with company’s historical working capital. Capital expenditure is assumed to settle slightly below 3% of annual revenues after the large investments into production facilities in 2018 as well as after the acquisition of TBO. The capex is estimated to gradually decrease thereafter due to lower sales growth.

DCF summary

DCF valuation (SEKm) Weighted average cost of capital (%)

NPV of FCF in explicit forecast period 716 Risk free interest rate 2.5 NPV of continuing value 1,297 Risk premium 4.5 Value of operation 2,013 Cost of equity 7.0

Net debt 106 After tax cost of debt 1.9 Share issue/buy-back in forecast period - Value of associated companies - WACC 6.9 Value of minority shareholders' equity - Value of marketable assets - Assumptions DCF value of equity 1,908 Number of forecast years 10 DCF value per share (SEK) 89 EBIT margin - steady state (%) 11.9 Current share price (SEK) 59.85 EBIT multiple - steady state (x) 11.2 DCF performance potential (%) 49 Continuing value (% of NPV) 64.4 Source: SEB

DCF sensitivity

Absolute change in EBITDA margin – all years -2% -1% 0 +1% +2% -2% 65 72 79 86 93 Abs. change in -1% 69 76 84 91 99 sales growth - 0 73 81 89 97 104 all years +1% 77 86 94 102 111 +2% 82 91 100 108 117 Source: SEB

DCF details

Average Average Average (SEKm) 2018E 2019E 2020E 2021E 2022E year 6 year 7-8 year 9-10

Sales growth (%) 8.4 19.8 7.7 5.0 4.0 3.0 3.0 2.5 EBITDA margin (%) 13.0 13.5 13.8 13.8 13.8 13.7 13.6 13.5 EBIT margin (%) 11.2 11.8 12.2 12.2 12.2 12.1 12.0 11.9 Gross capital expenditures as % of sales 2.9 10.5 2.7 2.6 2.6 2.5 2.5 2.5 Working capital as % of sales 3.1 3.3 3.4 3.4 3.4 3.4 3.4 3.4

Sales 1,072 1,284 1,384 1,453 1,511 1,556 1,627 1,717 Depreciation (19) (22) (22) (23) (24) (25) (26) (27) Intangibles amortisation 0 0 0 0 0 0 0 0 EBIT 120 151 169 178 184 188 194 204 Taxes on EBIT (29) (36) (41) (43) (44) (45) (47) (49) Increase in deferred taxes 0 0 0 0 0 0 0 0 NOPLAT 91 115 129 135 140 143 148 155

Gross capital expenditure (31) (135) (37) (38) (39) (39) (41) (43) Increase in working capital (71) (10) (4) (2) (2) (2) (2) (1) Free cash flow 10 (8) 110 118 123 128 131 138

ROIC (%) 14.1 16.0 16.4 16.8 17.1 17.1 17.2 17.4 ROIC-WACC (%) 7.1 9.1 9.4 9.9 10.2 10.2 10.3 10.5 Share of total net present value (%) 0.0 (0.4) 4.9 4.9 4.8 4.7 8.7 8.0 Source: SEB

Overview

Balco is a well-positioned growth company in the growing balcony renovation Investment case market. We believe that Balco represents an interesting investment opportunity, where the main drivers are increasing demand for balcony renovations due to the aged dwelling stock and market leading position in the fragmented key markets. Furthermore, Balco has demonstrated an effective and working business model where it controls the entire value chain as it has been able to outgrow other market participants while generating good margins and cash flows. As the biggest risks regarding the investment case we see the cyclical nature of the residential construction market.

Balco offers turnkey solutions in balcony construction and renovations, primarily in Company profile Sweden, Denmark and Norway, but it also has operations in Finland, Germany, the Netherlands and the UK. The company operates within the new build and renovation markets, although mainly the latter, representing 85.7% of sales in 2017. The offering focuses on glazed balcony solutions, but also includes open balconies, maritime balconies and related products. All of the products are made and tailored in Balco’s own facilities and installed using in-house expertise.

We value the company using a DCF model and arrive in valuation range of SEK 79-99 Valuation approach per share, with a midpoint of SEK 89 per share.

We believe that the main risk lies in the development of the overall residential Risks construction market. Moreover, the project nature of the business exposes the company to project related risks that might affect the profitability of the company.

Revenues by region in 2017 Revenue by customer group Netherlands UK Finland Construction 1% 1% 1% companies Germany 12% 10%

Public sector 9% Denmark 13%

Sweden 56% Tenant-owner Privately-owned associations properties 60% 19% Norway 18%

Source: Balco Source: Balco

PER - 12 month forward P/BV - 12 month forward

20 350 300 15 250 200

10 (x) (%) 150

5 100 50 0 0 2017 2018 2019 2017 2018 2019

PER - 12 month forward P/BV - 12 month forward

Source: SEB Source: SEB

EV/Sales - 12 month forward EV/EBITA - 12 month forward

1.6 14 1.4 12 1.2 10 1.0 8

0.8 (x) (x) 6 0.6 0.4 4 0.2 2 0.0 0 2017 2018 2019 2017 2018 2019

EV/Sales - 12 month forward EV/EBITA - 12 month forward

Source: SEB Source: SEB

Net sales & EBITDA margin EBIT & Operating margin

4,000 400 14.0 14.0 3,500 350 12.0 12.0 3,000 300 10.0 2,500 10.0 250 8.0

2,000 8.0 200

(%) (%)

1,500 6.0 150 6.0 (SEKm) (SEKm) 1,000 4.0 100 4.0 500 2.0 50 2.0 0 0.0 0 0.0 2015 2016 2017 2018E 2019E 2020E 2015 2016 2017 2018E 2019E 2020E Net sales EBITDA margin EBIT Operating margin Source: SEB Source: SEB

Comparison with sector index - 1 year Comparison with Balco - 1 year 80 80

75 75

70 70

65 65

60 60

55 55

50 50 Nov 17 Jan 18 May 18 Aug 18 Oct 18 Nov 17 Jan 18 May 18 Aug 18 Oct 18 Balco Rel Nordic Construction Balco Rel Balco Source: SIX Source: SIX

Profit & loss statement - Balco (SEKm) 2015 2016 2017 2018E 2019E 2020E Net Sales 639 801 989 1,072 1,284 1,384 Other revenues 0 0 0 0 0 0 Total revenues 639 801 989 1,072 1,284 1,384

Total expenses (562) (724) (880) (933) (1,111) (1,192) Profit before depreciation 77 77 109 139 173 191

Depreciation - Fixed assets (12) (14) (17) (19) (22) (22) Depreciation - Other assets 0 0 0 0 0 0 Amortisation - Goodwill 0 0 0 0 0 0 Amortisation - Other intangibles 0 0 0 0 0 0 Operating profit 65 63 92 120 151 169

Associated companies 0 1 0 0 0 0 Net interest expenses (40) (41) (37) (8) (8) (9) Foreign exchange items 0 0 0 0 0 0 Other financial items 0 0 0 0 0 0 Value changes - Fixed assets 0 0 0 0 0 0 Value changes - Financial assets 0 0 0 0 0 0 Value changes - Other assets 0 0 0 0 0 0 Reported pre-tax profit 25 23 55 112 143 160

Minority interests 0 0 0 0 0 0 Total taxes (6) (11) (18) (25) (31) (35) Reported profit after tax 19 12 38 88 112 125

Discontinued operations 0 0 0 0 0 0 Extraordinary items 0 0 0 0 0 0 Net Profit 19 12 38 88 112 125

Adjustments: Discontinued operations 0 0 0 0 0 0 Interest on convertible debt 0 0 0 0 0 0 Minority interests (IFRS) 0 0 0 0 0 0 Value changes 0 0 0 0 0 0 Goodwill/intangibles amortisations 0 0 0 0 0 0 Restructuring charges 0 0 0 0 0 0 Other adjustments 0 0 0 0 0 0 Tax effect of adjustments 0 0 0 0 0 0 Adjusted profit after tax 19 12 38 88 112 125

Margins, tax & returns Operating margin 10.1 7.9 9.3 11.2 11.8 12.2 Pre-tax margin 3.9 2.9 5.6 10.5 11.1 11.6 Tax rate 22.4 46.6 31.9 22.0 22.0 22.0 ROE 16.4 9.2 14.3 20.9 22.9 22.5 ROCE 23.5 23.4 27.4 19.7 22.2 22.6

Growth rates y-o-y (%) Total revenues n.a. 25.5 23.4 8.4 19.8 7.7 Operating profit 162.8 (2.5) 45.7 30.4 26.1 11.9 Pre-tax profit n.m. (7.7) 140.6 103.3 27.5 11.9 EPS (adjusted) 0.0 (36.5) 1,244.3 68.1 27.5 11.9

Cash flow (SEKm) 2015 2016 2017 2018E 2019E 2020E Net profit 19 12 38 88 112 125 Non-cash adjustments 9 58 61 19 22 22 Cash flow before work cap 28 70 99 107 133 147

Ch. in working capital / Other (31) (8) 56 (71) (10) (4) Operating cash flow (2) 62 155 36 124 143

Capital expenditures 36 (24) (55) (31) (35) (37) Asset disposals 0 0 0 0 0 0 L/T financial investments 0 0 0 0 0 0 Acquisitions / adjustments 0 0 0 0 (100) 0 Free cash flow 34 38 100 6 (12) 106

Net loan proceeds (46) (24) 93 0 0 0 Dividend paid 0 0 0 (21) (44) (56) Share issue 0 0 0 0 0 0 Other 32 (20) (108) 0 (0) 0 Net change in cash 20 (6) 85 (16) (55) 50

Adjustments C/flow bef chng in work cap 28 70 99 107 133 147 Adjustments 0 0 0 0 0 0 Int on conv debt net of tax 0 0 0 0 0 0 Cash earnings 28 70 99 107 133 147

Per share information Cash earnings 0.42 1.03 6.39 4.99 6.23 6.86 Operating cash flow (0.03) 0.91 10.0 1.69 5.78 6.65 Free cash flow 0.5 0.55 6.47 0.27 (0.54) 4.94

Investment cover Capex/sales (%) (5.7) 3.0 5.6 2.8 2.7 2.7 Capex/depreciation (%) (300) 168 322 157 162 166

Source for all data on this page: SEB

Balance sheet - Balco (SEKm) 2015 2016 2017 2018E 2019E 2020E Cash and liquid assets 28 22 106 91 35 86 Debtors 164 202 235 273 327 353 Inventories 14 17 21 36 43 47 Other 3 1 4 4 4 4 Current assets 209 242 366 404 410 488

Interest bearing fixed assets 0 0 0 0 0 0 Other financial assets 4 4 4 4 4 4 Capitalized development cost 0 0 0 0 0 0 Goodwill 371 371 372 372 422 422 Other intangibles 10 11 11 11 11 11 Fixed tangible assets 69 85 130 141 205 219 Other fixed assets 9 1 1 1 1 1 Fixed assets 463 473 519 530 644 658

Total assets 672 714 885 934 1,053 1,146

Creditors 134 180 261 241 288 311 Other trade financing 25 10 18 21 25 27 S/T interest bearing debt 92 77 9 9 9 9 Other 1 3 19 19 19 19 Current liabilities 252 269 306 289 340 365

L/T interest bearing debt 67 45 188 188 188 188 Other long-term liabilities 226 260 0 0 0 0 Convertible debt 0 0 0 0 0 0 Pension provisions 0 0 0 0 0 0 Other provisions 0 0 0 0 0 0 Deferred tax 0 0 5 5 5 5 Long term liabilities 293 305 193 193 193 193

Minority interests 0 0 0 0 0 0

Shareholders' equity 127 140 386 452 520 589

Total liabilities and equity 672 714 885 934 1,053 1,146

Net debt (m) 130 100 90 106 161 111 Working capital (m) 20 27 (38) 33 43 47 Capital employed (m) 285 261 583 649 717 786 Net debt/equity (%) 103 72 23 23 31 19 Net debt/EBITDA (x) 1.7 1.3 0.8 0.8 0.9 0.6 Equity/total assets (%) 19 20 44 48 49 51 Interest cover 1.6 1.5 2.5 13.7 17.2 17.3

Valuation (SEK) 2015 2016 2017 2018E 2019E 2020E

No of shares, fully dil. (y/e) 67.7 67.7 21.4 21.4 21.4 21.4 No of shares, fully dil. avg. 67.7 67.7 15.5 21.4 21.4 21.4 Share price, y/e 62.0 59.9 59.9 59.9 Share price, high 68.5 75.5 Share price, low 56.5 57.0 Share price, avg 62.1 65.0 EPS (reported) 0.28 0.18 2.43 4.09 5.21 5.83 EPS (adjusted) 0.28 0.18 2.43 4.09 5.21 5.83 Cash earnings/share 0.42 1.03 6.39 4.99 6.23 6.86 Dividend/share 0.00 0.00 1.00 2.04 2.60 2.91 Enterprise value/share 66 65 67 65 Book value/share 1.9 2.1 18.0 21 24 28 Adjusted equity/share 1.9 2.1 18.0 21 24 28 PER (adjusted) 25.5 14.7 11.5 10.3 CEM 9.7 12.0 9.6 8.7 Dividend yield 1.6 3.4 4.4 4.9 EV/EBITDA 13.0 10.0 8.3 7.3 EV/EBITA 15.4 11.6 9.5 8.2 EV/EBIT 12.3 11.6 9.5 8.2 EV/Sales (x) 1.43 1.30 1.12 1.01 Price/Book value 3.44 2.83 2.47 2.18 Price/adjusted equity 3.44 2.83 2.47 2.18 Free cash flow/Market cap (%) 10.4 0.4 6.9 8.3 Operating cash flow/EV (%) 10.9 2.6 8.6 10.2 EV/Capital employed (x) 2.4 2.1 2.0 1.8

Main shareholders Management Company information Name (%) Votes Capital Title Name Contact Segulah IV, L.P 19.0 19.0 COB Lennart Kalén Internet www.balco.se Jenz & Carl-Olof Hamrins Stiftelse 12.3 12.3 CEO Kenneth Lundahl Phone number 5E+08 Skandrenting, AB 10.5 10.5 CFO Fredrik Hall IR Cecilia Lannebo

Source for all data on this page: SEB

About this publication This report is a marketing communication commissioned by Balco and prepared by Skandinaviska Enskilda Banken AB (publ). It does not constitute investment research; as such, it has not been prepared in accordance with the legal requirements to promote the independence of investment research, nor is it subject to any prohibition on dealing ahead of the dissemination of investment research.

This statement affects your rights This report is confidential and may not be reproduced, redistributed or republished by any recipient for any purpose or to any person. Redistributing this report to third parties may invoke legal requirements on the person engaging in such activities.

Producers and Recipients SEB Research is approved and issued by Skandinaviska Enskilda Banken AB (publ) ("SEB"), a bank organized under the laws of the Kingdom of Sweden, on behalf of itself and its affiliates for institutional investors. When SEB Research is issued by an SEB subsidiary, the subsidiary itself is subject to this disclaimer.

Use This material has been prepared by SEB for information purposes only. It does not constitute investment advice and is being provided to you without regard to your investment objectives or circumstances. The document does not constitute an invitation or solicitation of an offer to subscribe for or purchase any securities and neither this document nor anything contained herein shall form the basis for any contract or commitment whatsoever. Opinions contained in the report represent the authors' present opinion only and may be subject to change. In the event that the authors' opinion should change, we shall endeavour (but do not undertake) to disseminate any such change, within the constraints of any regulations, applicable laws, internal procedures within SEB, or other circumstances.

Good faith and limitations All information, including statements of fact, contained in this research report have been obtained and compiled in good faith from sources believed to be reliable. However, no representation or warranty, express or implied, is made by SEB with respect to the completeness or accuracy of its contents, and it is not to be relied upon as authoritative and should not be taken in substitution for the exercise of reasoned, independent judgement by you. Recipients are urged to base their investment decisions upon such investigations as they deem necessary. To the extent permitted by applicable law, no liability whatsoever is accepted by SEB for any direct or consequential loss arising from the use of this document or its contents.

Distribution This research report has been prepared by SEB or its affiliates and is being distributed by SEB offices in Stockholm, Copenhagen, Oslo, Helsinki, Frankfurt, London, Tallinn, Vilnius, Riga and Hong Kong. Research reports are prepared and distributed in Lithuania by AB SEB bankas and in Estonia by AS SEB Pank in accordance with the requirements of the local laws and Financial Supervision Authority's conduct of business rules. This document may not be distributed in the United States, Canada, Japan or Australia or in any other jurisdiction where to do so would be unlawful. Addresses and Phone numbers for each office can be found at the end of the report.

The SEB Group: members, memberships and regulators SEB is a member of, inter alia, Nasdaq OMX Nordic, Oslo Stock Exchange, the London Stock Exchange, NYSE Euronext, SIX Swiss Exchange, Frankfurt Stock Exchange, Tallinn Stock Exchange as well as certain European MTF's such as BATS-Chi-X, Turquoise and Burgundy. SEB is regulated by Finansinspektionen in Sweden and, for the conduct of investment services business, in (i) Denmark by Finanstilsynet, (ii) Norway by Finanstilsynet, (iii) Finland by Finanssivalvonta, (iv) Germany by Bundesanstalt für Finanzdienstleistungsaufsicht, (v) the UK by the Financial Conduct Authority and Prudential Regulation Authority (details about the extent of our regulation by the Financial Conduct Authority and Prudential Regulation Authority are available from us on request), (vi) Estonia by the Estonian Financial Supervision Authority, (vii) Lithuania by the Bank of Lithuania, (viii) Latvia by the Financial and Capital Markets Commission and (ix) Hong Kong by Securities and Futures Commission.

SEB's research reports are prepared in accordance with the industry standards and codes of conduct applicable to financial analysts in the countries where they are based. In Denmark, Finland, Norway and Sweden, analysts act in accordance with the rules of ethics of each country's Society of Financial Analysts. Analysts comply with the recommendations and industry standards of the Danish, Norwegian and the Swedish Securities Dealers Associations and with those of the Federation of Finnish Financial Services. Analysts certified by the CFA Institute also comply with the Code of Ethics of the CFA Institute.

Prevention and avoidance of conflicts of interest The remuneration of staff within the Research department is determined exclusively by research management and senior management and may include discretionary awards based on the firm's total earnings, including investment banking and markets (sales and trading businesses) income; however, no such staff receive remuneration based upon specific investment banking or markets transactions. SEB's Compliance department monitors the production of research and the observance of the group's procedures designed to prevent any potential conflicts of interest from affecting the content of research; the latter are described in greater detail in the "Statement of Policies for dealing with potential conflicts of interest surrounding our Research activities" which is available on our SEB Research website. Your attention is also drawn to the fact that: The current market price of the securities shown in this report is the price prevailing at the close of the business day preceding the date of publication, save where such price was more than 5% different from the price prevailing as at the time of publication, in which case it is the latter. Unless explicitly stated otherwise in this report, SEB expects (but does not undertake) to issue updates to this report following the publication of new figures or forecasts by the company covered, or upon the occurrence of other events which could potentially have a material effect on it. The securities discussed in this research report may not be eligible for sale in all countries, and such securities may not be suitable for all types of investors. Offers and sales of securities discussed in this research report, and the distribution of this report, may be made only in countries where such securities are exempt from registration or qualification or have been so registered or qualified for offer and sale, and in accordance with applicable broker-dealer and agent/salesman registration or licensing requirements.A copy of this report, not including the recommendation, has been provided to the issuer prior to its dissemination to check factual statements for accuracy; as a result, some amendments have been made. A full list of disclosures for other companies mentioned herein (in which SEB has research coverage), can be found on our SEB Research website

Methodology Final consideration as to any valuations, projections and forecasts contained in this report are based on a number of assumptions and estimates and are subject to contingencies and uncertainties, and their inclusion in this report should not be regarded as a representation or warranty by or on behalf of the Group or any person or entity within the Group that they or their underlying assumptions and estimates will be met or realized. Different assumptions could result in materially different results. Past performance is not a reliable indicator of future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities, such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk.

Company specific disclosures and potential conflicts of interest A member of, or an entity associated with, SEB or its affiliates, officers, directors, employees or shareholders of such members (a) is not, and has never been, represented on the board of directors or similar supervisory entity of Balco, (b) has from time to time bought or sold the securities issued by the company or options relating to the company, and (c) SEB does not hold any short / long position exceeding 0.5% of the total issued share capital of Balco as of 31 Oct 2018.

The analyst(s) responsible for this research report (jointly with their closely related persons) hold(s) 0 shares in Balco and do(es) not have holdings in other instruments related to the company.

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.

Copenhagen Frankfurt Helsinki Hong Kong Bernstorffsgade 50 Stephanstrasse 14-16 Eteläesplanadi 18 17/F London P.O. Box 100 D-60313 Frankfurt am Main P.O. Box 630 DK-1577 Copenhagen V FIN-00101 Helsinki One Carter Lane London, EC4V 5AN

Telephone: (45) 3328 2828 Telephone: (49) 69 9727 7740 Telephone: (358) 9 616 28700 Telephone: (44) 20 7246 4000

Oslo Stockholm Tallinn Filipstad Brygge 1, Kungsträdgårdsgatan 8 Tornimäe 2 P.O. Box 1363 Vika S-106 40 Stockholm EE-Tallinn 15010 NO-0113 Oslo Telephone: (372) 665 7762 Telephone: (47) 2100 8500 Telephone: (46) 8 522 29500

SEB Corporate Research research.sebgroup.com/corporate