Company Valuation of NCC AB

Copenhagen Business School, 2016

M.Sc. in Economics and Business Administration Supervisor: Finn Østrup Finance and Strategic Management Submission date: 01.06.2016 Master Thesis Authors: Number of pages: 116

Peter Eriksson Number of characters: 195 336 Tobias Forsberg

Executive Summary This thesis contains a valuation of the Swedish construction company NCC AB, and ultimately aims to answer the question “What is the fair value per share as the 18th of March 2016?”.

The strategic analysis undertakes three well-established frameworks: PEST Analysis, Porter’s Five Forces Analysis, and SWOT Analysis. The aim of these is to present the driving factors, both internal and external, from a macroeconomic-, industrial-, and company perspective, which potentially will affect NCC’s businesses. The findings of the strategic analysis provided an opportunistic outlook for NCC based on the increasing population and urbanization, low expected interest rates, and stable expected GDP growth in especially NCC’s primary market, which is the main source for the company’s business. In addition, NCC’s foreseeing position within technology, environmental consciousness, and brand reputation contributes to a favorable future market position.

The financial health of NCC is evaluated in the financial analysis, and considers its ten-year historical development. The revenues have shown an upward-sloping trend after the financial crisis, which indeed affected NCC but from which they have managed to recover. Essential key ratios such as ROE and ROIC are benchmarked against two competitors of NCC, in terms of Skanska and Peab. NCC outperformed its competitors regarding ROE, while Skanska performed better regarding ROIC. In addition, NCC have had the highest profit margin of the three.

Based on the findings in the strategic- and financial analyses, NCC’s future have been forecasted. In order to achieve reliable growth estimations, the revenues of NCC have been allocating to respective business area to derive individual growth rates for each one of them. The value per share was calculated by using the well-established valuation models Discounted Cash Flow and Economic Value Added. Theoretically, these two models should generate an identical value but in this case a difference of 1,5 SEK appeared. Despite that, we set the value per share at 375,1 SEK based on the DCF value. This computed value per share was further tested through a sensitivity analysis and multiple comparison. The final conclusion is that the share of NCC is undervalued, and the thesis’ recommendation is set to buy.

1 INTRODUCTION ...... 1

1.2 CHOICE OF SUBJECT ...... 1 1.3 RESEARCH QUESTIONS ...... 1 1.4 DELIMITATIONS ...... 2 1.5 METHODOLOGY ...... 2 1.6 STRUCTURE OF THE THESIS ...... 3 2 NCC GROUP OVERVIEW ...... 4

2.1 COMPANY HISTORY ...... 4 2.2 BUSINESS AREAS ...... 4 2.2.1 NCC Construction ...... 5 2.2.2 NCC Roads ...... 6 2.2.3 NCC Property Development & Housing ...... 7 2.3 GEOGRAPHICAL MARKETS ...... 8 2.4 INDUSTRIAL MACROECONOMIC OVERVIEW ...... 9 2.4.1 Competitors ...... 10 2.5 CORPORATE GOVERNANCE ...... 11 2.5.1 Ownership Structure ...... 11 2.5.2 Board of Directors ...... 11 2.6 NCC STRATEGY: 2016 – 2020 ...... 12 2.7 ACQUISITIONS ...... 14 2.8 NCC SHARE...... 15 2.9 NCC PROJECTS ...... 16 3 STRATEGIC ANALYSIS ...... 18

3.1 PEST ANALYSIS ...... 19 3.1.1 Political & Legal ...... 20 3.1.2 Economic ...... 22 3.1.2.1 Gross Domestic Product (GDP)...... 23 3.1.2.2 Interest Rate...... 29 3.1.2.3 Inflation Rate ...... 33 3.1.3 Social ...... 36 3.1.4 Technological & Environmental ...... 40 3.1.5 PEST Conclusion ...... 42 3.2 PORTER’S FIVE FORCES ...... 43 3.2.1 Threat of New Entrants ...... 44 3.2.2 The Power of Suppliers ...... 45 3.2.3 The Power of Buyers ...... 46 3.2.4 The Threat of Substitutes ...... 47 3.2.5 Rivalry ...... 48 3.2.6 Porter’s Five Forces Conclusion ...... 49 3.3 SWOT ANALYSIS...... 50 3.3.1 Strengths ...... 50 3.3.2 Weaknesses ...... 51 3.3.3 Opportunities ...... 52 3.3.4 Threats ...... 52 3.3.5 SWOT Conclusion ...... 53 4 FINANCIAL ANALYSIS ...... 55

4.1 NCC’S COMPARABLE ...... 55 4.2.1 Accounting Principles ...... 56

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4.2.2 Reorganizing Income Statement ...... 56 4.2.2.1 Taxes ...... 56 4.2.3 Reorganizing Balance Sheet ...... 57 4.2.3.1 Operating and Excess Cash ...... 58 4.2.3.2 Receivables...... 58 4.2.3.3 Operating Working Capital ...... 59 4.2.3.4 Operating Leases ...... 59 4.3 PROFITABILITY ANALYSIS ...... 60 4.3.1 Return on Equity ...... 61 4.3.1.1 Decomposition of ROE ...... 62 4.3.1.2 Financial Leverage ...... 63 4.3.1.3 Net Borrowing Cost ...... 64 4.3.1.4 Operating Spread ...... 65 4.3.2 RETURN ON INVESTED CAPITAL...... 66 4.3.2.1 Decomposition of Return on Invested Capital ...... 67 4.3.2.2 Profit Margin ...... 68 4.3.2.2 Turnover Rate ...... 68 4.4 GROWTH ANALYSIS ...... 70 4.4.1 Revenue Growth ...... 70 4.4.2 Business Areas ...... 71 4.4.3 Geographical Areas ...... 73 4.4.4 Orders received ...... 75 4.5 FREE CASH FLOW ANALYSIS ...... 76 4.6 CHAPTER CONCLUSION: FINANCIAL ANALYSIS ...... 77 5 FORECAST ...... 79

5.1 FORECAST PERIOD ...... 79 5.2 FORECAST OF THE INCOME STATEMENT ...... 80 5.2.1 Revenues ...... 80 5.2.1.1 Revenue Forecast: NCC Construction ...... 80 5.2.1.2 Revenue Forecast: NCC Roads ...... 81 5.2.1.3 Revenue Forecast: NCC Property Development ...... 81 5.2.1.4 Revenue Forecast: NCC Housing ...... 82 5.2.1.5 Revenue Forecast: Other...... 82 5.2.2 Cost of Sales ...... 83 5.2.2.1 Change in inventories ...... 83 5.2.2.2 Personnel Expenses ...... 83 5.2.2.3 Depreciation and Amortization ...... 84 5.2.2.4 Impairment losses ...... 84 5.2.2.5 Production related goods and services ...... 84 5.2.3 Other Operating Income ...... 85 5.2.4 Tax Rate ...... 85 5.2.5 Net Operating Profit after Tax Forecast ...... 85 5.3 FORECAST OF BALANCE SHEET ...... 86 5.3.1 Operating Working Capital ...... 86 5.3.2 Net Operating Assets ...... 87 5.4 RETURN ON INVESTED CAPITAL & FREE CASH FLOW TO FIRM FORECAST ...... 87 5.4.1 Return on Invested Capital ...... 87 5.4.2 Free Cash Flow to Firm ...... 88 5.5 CHAPTER CONCLUSION: FORECAST...... 88 6 VALUATION ...... 90

6.1 VALUATION MODELS ...... 90

6.1.1 Discounted Cash Flow ...... 90 6.1.2 Economic Value Added ...... 91 6.1.3 Assumptions ...... 92 6.2 WEIGHTED AVERAGE COST OF CAPITAL ...... 92 6.2.1 Cost of Equity ...... 94 6.2.1.1 Risk-free rate ...... 94 6.2.1.2 Beta ...... 95 6.2.1.3 Market Risk Premium ...... 96 6.2.2 Cost of Debt (After Tax) ...... 97 6.2.3 Cost of Capitalized Operating Leases (After Tax) ...... 98 6.2.4 Capital Structure ...... 98 6.2.5 WACC Calculation...... 99 6.3 DISCOUNTED CASH FLOW VALUATION ...... 99 6.4 ECONOMIC VALUE ADDED VALUATION ...... 100 6.5 SENSITIVITY ANALYSIS ...... 101 6.5.1 Sensitivity Analysis of Profit Margin and Net Sales ...... 102 6.5.2 Sensitivity Analysis in WACC and Terminal Growth ...... 103 6.6 MULTIPLES ANALYSIS ...... 105 6.6.1 EV/Sales ...... 106 6.6.2 EV/EBITDA ...... 106 6.6.3 EV/EBIT ...... 107 6.6.5 Summary of Multiples Comparison ...... 107 6.7 CHAPTER CONCLUSION ...... 108 7 THESIS CONCLUSION ...... 109 8 REFERENCES ...... 111 APPENDIX 1 – REORGANIZED BALANCE SHEET ...... 119 APPENDIX 2 – EXCESS CASH CALCULATIONS ...... 122 APPENDIX 3 – OPERATING LEASE INTEREST RATES ...... 123 APPENDIX 4 – OPERATING LEASES ...... 124 APPENDIX 5 – REORGANIZED INCOME STATEMENT ...... 125 APPENDIX 6 – TAX CALCULATIONS ...... 127 APPENDIX 7 – RETURN ON EQUITY CALCULATIONS ...... 128 APPENDIX 8 – FREE CASH FLOW TO FIRM CALCULATIONS ...... 129 APPENDIX 9 – FORECAST INCOME STATEMENT ...... 130 APPENDIX 10 – FORECAST INCOME STATEMENT GROWTH ...... 131 APPENDIX 11 – FORECAST BALANCE SHEET ...... 132 APPENDIX 12 – FORECAST BALANCE SHEET RATIO...... 133 APPENDIX 13 – ROIC & PROFIT MARGIN ...... 134 APPENDIX 14 – INTEREST RATES FOR COST OF DEBT CALCULATIONS ...... 136

Figure 1 Structure of the thesis ...... 3 Figure 3 Businesses and Business areas ...... 5 Figure 4 Value-chain of the Construction and Civil Engineering business...... 7

Figure 5 Strategic top-down approach ...... 18 Figure 6 SWOT ...... 54 Figure 7 DuPont Model ...... 61

Graph 1 NCC B Share Development 2006-01-01 – 2016-03-18...... 16 Graph 2 Real GDP Growth for NCC’s Primary Market ...... 24 Graph 3 Construction Industry Growth for NCC’s Primary Market ...... 24 Graph 4 Real GDP Growth Estimations for NCC’s Primary Market ...... 26 Graph 5 Real GDP Growth for NCC’s Secondary Market ...... 27 Graph 6 Construction Industry Growth for NCC’s Secondary Market ...... 27 Graph 7 Real GDP Growth Estimations for NCC’s Secondary Market ...... 29 Graph 8 Interest rate for NCC’s Primary Market ...... 30 Graph 9 Interest rate for NCC’s Secondary Market ...... 32 Graph 10 Inflation Development for NCC’s primary market...... 34 Graph 11 Inflation Development for NCC’s primary market...... 35 Graph 12 Population for NCC’s primary market...... 37 Graph 13 Population for NCC’s secondary market...... 38 Graph 14 Urban population of NCC’s primary market...... 39 Graph 15 Urban population of NCC’s secondary market...... 40 Graph 16 Return on Equity for NCC, Skanska, and Peab, for the period 2006 – 2015...... 62 Graph 17 Financial Leverage...... 64 Graph 18 Net Borrowing Cost...... 65 Graph 19 Operating Spread...... 66 Graph 20 Return on Invested Capital...... 67 Graph 21 Profit Margin...... 68 Graph 22 Turnover rate of invested capita...... 69 Graph 23 Net Sales and Growth...... 71 Graph 24 NCC Business Areas where NCC Housing is separated...... 72 Graph 25 NCC Business Areas where NCC Housing is included in NCC Construction...... 72 Graph 26 NCC’s geograpgical markets...... 74 Graph 27 NCC’s received orders...... 76 Graph 28 NOPAT & Profit Margin Forecast 2011 – Terminal...... 86 Graph 29 ROIC Development and Forecast 2011 – Terminal...... 87 Graph 30 FCFF Development and Forecast 2011 – Terminal...... 88 Graph 31 Regression beta...... 96

Table 1 NCC’s Board of Directors ...... 12 Table 2 Bribing and corruption in NCC’s Primary Market...... 20 Table 3 Bribing and corruption in NCC’s secondary market...... 21 Table 4 Adaptability of government policies for NCC’s primary market...... 21 Table 5 Adaptability of government policies for NCC’s secondary market...... 21 Table 6 Corporate tax rate for NCC’s primary market ...... 22 Table 7 Corporate tax rate for NCC’s secondary market ...... 22 Table 8 Geometric Average Growth Rate for NCC’s Business areas ...... 73 Table 9 Geometric Growth for NCC’s geographical markets ...... 75 Table 10 NCC’s Free Cash Flow to Firm ...... 77 Table 11 Estimated After tax cost of debt ...... 98 Table 12 Discount Cash Flow Valuation ...... 100 Table 13 Economic Value Added Valuation ...... 101

Table 14 Sensitivity Analysis – Profit Margin and Net Sales ...... 102 Table 15 Sensitivity Analysis – WACC and Terminal Growth ...... 103 Table 16 Sensitivity Analysis – Cost of Debt and Operating Leases ...... 104 Table 17 Sensitivity Analysis – Risk Market Premium and Terminal Growth ...... 104 Table 18 Sensitivity Analysis – Beta and Terminal Growth ...... 105 Table 19 EV/Sales Multiple ...... 106 Table 20 EV/EBITDA Multiple ...... 106 Table 21 EV/EBIT Multiple ...... 107

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1 Introduction

1.2 Choice of Subject NCC Group is one of the leading companies within construction and property development in Northern Europe. With high focus on innovative and sustainable solutions, a portfolio widely spread throughout the value chain of construction and development, in combination with its Swedish originates and the Nordic region as its home market, NCC is of natural interest for the authors of this thesis.

1.3 Research Questions According to the authors of this thesis, NCC is facing an interesting future at its home market within the Nordic region, mixed with its more challenging markets as Eastern Europe/Russia. This makes NCC both challenging and yet attractive and interesting company to valuate. Therefore, the research question that this thesis will answer is:

What is the fair value per share of NCC, as of 18th March, 2016?

In order to answer the research question, the following sub-questions will be answered throughout the thesis:  What are the most critical internal and external factors affecting NCC?  Compared to NCC’s competitors - have NCC outperformed or underperformed considering a financially aspect?  What is the fair value per share considering the Discounted Cash Flow (DCF), and the Economic Value Added (EVA) valuations?  How sensitive are the above stated valuation models to changes in underlying factors?

1.4 Delimitations In order to cope with the in many times infinite information, the authors of this thesis have stated the following delimitations in order to keep focus, and highlight the most important matters. As the thesis aims to be seen from the perspective of an investor, only publically open information and information sources have been used. This is, interviews with, or information from, employees and management from inside NCC have not been used.

Furthermore, the valuation of NCC in this thesis aims to determine a value per share as for the 18th of March, 2016, which means that information from any sources after that have been excluded in the report.

For the strategic and financial analyses, we have narrowed the thesis down to using some of the most common and acceptable models in terms of PEST, Porter’s Five Forces, and SWOT for the strategic part, and DCF and EVA for the financial part. This is done as we believe it is more advantageous to focus on a few models rather than several models, given the time frame.

1.5 Methodology This thesis is entirely based on secondary data, where NCC’s website and annual reports have been the main source of information for covering the company’s background, strategies, and financials. Further on, Copenhagen Business School’s (CBS) e-library have been used in the search for articles and publications. For the macroeconomic data and statistics, well-recognized databases in terms of e.g, International Monetary Fund (IMF) and OECD have been used.

Throughout the whole thesis, the book Financial Statement Analysis by Petersen and Plenborg have been worked as a framework in order to support our strategic- and financial analyses. In addition, literatures and articles of well-established and accepted authors, such as Koller, Damodaran, and Porter, have been used to strengthen our models and theories.

1.6 Structure of the Thesis The structure of this thesis is, as can be seen below in Figure 1, divided into seven chapters. The first chapter, Introduction, highlights the choice of subject, problem identification, and problem definition. The second chapter provides an overview of NCC Group, and includes NCC’s history and business areas, visions and mission, corporate governance, and share overview. The third and the fourth chapters contains the Strategic- and Financial Analysis of NCC and aims to create an in-depth analysis regarding its current strategic and financial position. The findings from the analyses is used as the foundation for the fifth chapter which is the Forecast. The Valuation chapter, which is the sixth chapter, uses well-known and established models in combination with the findings from the Forecasting chapter in order to calculate a share price for NCC. Finally, our findings are presented in the seventh chapter, Conclusion.

Chapter 1: •The Introduction chapter presents the topic of the thesis, including the research Introduction questiaons, delimitations, and methodology.

Chapter 2: NCC •This chapter presents NCC Group and its history, organisational structure and Overview business areas, as well as future strategies and share performance.

Chapter 3: Strategic •The Strategic Analysis includes the PEST-, Porter's Five Forces, and SWOT Analysis analyses, in order to present the internal and external factors affecting NCC.

Chapter 4: Financial •The Financial Analysis aims to provide an understanding of NCC's financials, and what affects Analysis them. In this chapter the fiancnial statements are reorganized.

•In the Forecast chapter, the future of NCC's performance is forecasted based on the strategic Chapter 5: Forecast and financial analyses chapters.

•The Valuation chapter is based on the previous chapters' findings, and aims to determine the Chapter 6: Valuation fair value per share of NCC.

Chapter 7: Final •In the Final Conclusions, the authors' findings and reflections from the previous chapters are Conclusions presented and discussed.

Figure 1 Structure of the thesis. Source: Authors’ own creation.

2 NCC Group Overview

In this chapter, NCC Group will be presented in terms of its history, business areas, geographical markets, and ownership structure. Furthermore, NCC’s share and company strategy, including mission and vision is presented in order to gain a deeper understanding in NCC current state as well as for its future.

2.1 Company History NCC is today one of the leading construction and property development companies within the Nordic region, with Sweden as its home market.

NCC was legally formed in 1989 due to a merger between Armerad Betong Vägförbättringar (ABV) and Johnson Construction Company (JCC). However, ABV and JCC had been working under the same roof and symbol since 1988 (NCC, 2016a).

In 1987, Nordstjernan AB, which already had their own construction company in form of JCC, started to acquire shares in ABV. During the spring 1988, Nordstjernan increased their shareholding in ABV, and a few months later a new organization and a structure of what would become Nordic Construction Company - NCC, was established. Later in September, Nordstjernan acquired all the shares in NCC from JCC, and all construction operations were transferred from ABV and JCC to NCC. As a result, NCC Group as we know it today were established, while JCC became a subsidiary under the name NCC Bygg AB (NCC, 2016a).

2.2 Business Areas NCC conduct its operations within three different businesses, which in turn contains four different business areas. Table 1 below illustrates the relationship between the businesses and business areas. As can be seen, we have included both the old terminology and the new terminology regarding the business areas. However, as this thesis is based on financials referring to the end of

2015, and the fact that the new terminology was not applied until 2016, we will use the old terminology throughout the paper.

Similar is regarding NCC Housing as the management board have proposed a spin-off. This spin-off would mean that NCC Housing is separated from NCC Group, and become an independent company (NCC, 2016b). However, as this proposition is not yet approved, and the fact that the spin-off would not affect the financials before 2016, we have decided to include the NCC Housing as a part of our paper regarding NCC Group.

NCC GROUP AB

Construction & Civil BUSINESS Industrial Development Engineering

OLD NCC Property NCC Roads NCC Construction NCC Housing BUSINESS Development AREA VS. NEW NCC NCC Property BUSINESS NCC Industry NCC Building NCC Housing AREA Infrastructure Development

Figure 2 Businesses and Business areas. Source: Authors’ own creation based on NCC’s website.

2.2.1 NCC Construction The Construction and Civil Engineering business is conducted within the business area of Construction. The business is less capital-intensive compared to NCC’s other businesses, generates a strong cash flow, and is project-oriented, which in turn means that it holds a relatively low risk, and is a fundamental source regarding revenue stream. The Construction business area holds a strong market position in the Nordic countries, and in particular in Sweden, and is the main source of NCC’s revenue streams (NCC, 2016c).

NCC Construction is categorized into two parts in terms of infrastructure and building. The infrastructure offers infrastructure projects throughout the whole chain - from design and construction to production and service. The missions taken on include both major infrastructure projects which include tunnels, roads and railways, and complicated concrete constructions, but minor projects which include services in terms of land and plumbing work, solutions regarding safe traffic environment, and maintenance and road service (NCC, 2016d).

NCC’s second business area within the Construction and Civil Engineering business is Building. NCC’s Building is the largest business area of NCC, and assigns projects mainly within constructions of housing and offices, as well as public and commercial premises. In addition, renovations regarding housing and offices is becoming increasingly important. Although Sweden is the business area’s most important market, NCC Building is represented within the whole Nordics (NCC, 2016e).

2.2.2 NCC Roads NCC Roads is conducted within the Industrial business where the focus is mainly on processing stone materials and asphalt production. The business requires capital tied up in materials and products facilities with high fixed costs, which thereby include a relatively high risk.

The NCC Roads is organized in three divisions, Hercules (piling operations), Stone Materials, and Asphalt. Production of stone materials and asphalt, as well as piling and asphalt surfacing is what the industrial core operation is based upon (NCC, 2016f). These three divisions are a natural part of the value chain of NCC’s Construction and Civil Engineering business, which can be seen in Figure 4.

Stone materials Asphalt Paving Road services

Figure 3 Value-chain of the Construction and Civil Engineering business. Source: Authors’ own creation based on NCC’s value-chain model.

For both construction and civil engineering as for asphalt production, stone materials from mainly proprietary quarries is used. In various types of road surfaces asphalt produced from proprietary asphalt plants are used. From garage driveways and small roads to complex infrastructure projects component, materials and asphalt are supplied from a high-tech production process. Further, stone materials are also delivered to other projects as well e.g., in the foundations of housing, offices and industries, as well as in the concrete industry (NCC, 2016f).

Although asphalt and surfacing work is conducted in the area of St. Petersburg, NCC’s industrial focus is mainly limited to the Nordic countries where NCC holds the position as a market leader. Sweden, which is the single largest market, constitutes to about half of the industry business’ revenue (NCC, 2016f).

2.2.3 NCC Property Development & Housing In the Development business, NCC Property Development develops and sells commercial properties in the Nordic region, as well as in Estonia and Latvia. The focus is on sustainable offices, retail, and logistics properties, defined according to the customers’ requirements and with attractive geographical locations. The Development business could be seen as a more risky operation compared to NCC’s other businesses as it requires NCC Property Development to tie up capital in development properties and ongoing projects. In addition, the market risk is greater than the other

7 businesses due to the long time horizon for the projects’ chain, from acquiring land to delivering the finalized project (NCC, 2016g).

In order for NCC Property Development to be successful, it is crucial to understand the market and to be able to predict the future regarding customer preferences, not least due to the long processes within the business area. As a consequence, NCC also takes a consultancy perspective in order to support the customer regarding future trends, interviews, and studies, all in order to optimize both the geographical location and the work environment (NCC, 2016g).

In addition to NCC Property Development is the separated business area NCC Housing. NCC Housing is conducted in eight countries, including the Nordic region, Germany, the Baltic countries, and St. Petersburg, which makes NCC the leading actor within the housing market in Northern Europe (NCC, 2016h).

Due to the increasing population in NCC’s operating geographical areas and the ongoing urbanization (UN, 2014). NCC’s stated strategy is to continue their operations limited to the metropolitan regions with a significant growth and where a steady labor market increases the demand for new housing.

2.3 Geographical Markets NCC’s primary market is the Nordic region with Sweden as its home market. In addition to the Nordic region, operations in Germany, Russia, and to a smaller extent Latvia and Estonia also exists.

The Nordic region, which includes Sweden, Norway, Finland, and Denmark, together comprise 93% of NCC total net sales, which equals to SEK 62 billion. These Nordic countries are also represented in all of NCC’s four business areas. Meanwhile, Germany (6%), Russia (1%) and Estonia and Latvia (<1%) only contributes to a minor part of a total of SEK 4,5 billions. (NCC, 2016b), and their operations are limited to NCC Property Development, and NCC Industry.

As Sweden is NCC’s largest market, it is also the main source of revenue stream with net sales of 32 104 MSEK, which equal to 51% of NCC’s total net sales. NCC is a market leader in most of the business areas it is present in, and its customers contains e.g. central and local governments, large companies, as well as private customers (house-buyers).

The second largest market is Norway closely followed by Denmark, which contribute to 9 319 MSEK 15% and 8 621 MSEK 14% of NCC’s total net sales, respectively. In Norway, NCC is especially large within the Construction and Civil engineering business in terms of both Infrastructure and Building, as well as the Industrial business. Similar, NCC’s major business areas in Denmark are the Building, Industry and also the Property Development. Both Norway and Denmark relies to a large extent on its public sectors considering the customer base, although various investors, including large corporations, and private customers of course are essential not least for the building and property development areas. The fourth Nordic country, Finland, stands for 7 960 MSEK of NCC’s total net sales, and has through NCC Building its focus on the construction business regarding residential and building constructions. In addition, the establishment of the Civil Engineering business is in progress, and NCC has also expanded its presence within the Industrial business concerning stone materials, asphalt, paving and road services (NCC, 2016b).

NCC’s other geographical markets, Germany, the Baltics, and St Petersburg are mainly about constructions where NCC Building maintain the strategy of focusing on the metropolitan regions. In St Petersburg, NCC has also asphalt and paving operations (NCC, 2016b).

2.4 Industrial Macroeconomic Overview In 2015 the European construction industry grew by 1.5% to reach a value of $2,041.1 billion. To the construction industry counts residential, non-residential, and civil engineering segments. The European construction industry is forecasted to have a value of 2 430.3 B USD in 2020, which is an increase of 19.1% since 2015. The largest segment of the construction industry in Europe is the residential which accounts for 41.9% of the industry’s total value and Germany accounts for 22.8% of the European construction industry value (Marketline, 2016a).

The construction industry in Sweden shrank with 2.3% in 2015 to a value of $49.1 billion. However, the forecast for 2020 is to see an increase from 2015 with 20% to a value of $58.9 billion. Of the European construction industry value Sweden accounts for 2.4% (Marketline, 2016b).

2.4.1 Competitors On the Nordic construction market NCC is one of the largest construction companies with a market share of 5%. The market is fragmented and it is driven with hard local competition. NCC meet thousands smaller contracting companies on the Nordic local market and larger construction projects is procured with international competitors with the biggest construction companies in Europe. It is also normal that larger construction projects are prosecuted together with other companies, consortia.

In the Nordic region NCC has a market share of 5 % as well has Skanska followed by PEAB with 4 %. Veidekke from Norway and Lemminkäinen from Finland has a 2 % market share and are the biggest companies outside Sweden (NCC, 2016i).

The main competitor in the Nordic market for NCC is ● Skanska (Sweden) ● Peab (Sweden) ● MT Højgaard (Denmark) ● Veidekke (Norway) ● AF Gruppen (Norway) ● YIT (Finland) ● Lemminkäinen (Finland)

Regarding the housing development market in Sweden JM is the competitor, when coming to construction projects and road infrastructure even state production units, Svevia, will be the concurrent.

Coals and CRH is competitors in Denmark and Finland regarding asphalt and stone material. NCC is one of the main operators within real estate development, another one is Skanska. On the local market there are some other competitors as well as the Finnish YIT and SRV (NCC, 2016i).

2.5 Corporate Governance 2.5.1 Ownership Structure NCC’s ownership is divided among institutions (37,3%), mutual funds (23,3%), and private investors (15,6%), and the ownership is mainly concentrated to Sweden, which has a share capital of 76,2%. The United States (7,9%), The United Kingdom (6,1%), and Norway (2,2%) are the three of countries that contain the largest share capital, and in total, foreign shareholders accounts for 23,8% of the shares. The share capital of the Swedish owners hold 90,3% of the voting power, where the institutions have over 70% of the total voting power (NCC, 2016i).

Nordstjernan is unquestionable the largest shareholder, and holds 20,1% of the shares and 62,2% of the voting power where A-stocks constitutes the significant majority of its portfolio (NCC, 2016f). Nordstjernan is a family-controlled, unlisted investment company whose business concept is to be an active owner that creates long-term and positive value growth (Nordstjernan, 2016). The chairman of Nordstjernan since 2007 is Viveca Ax:son Johnson and she is also a board member of NCC. Tomas Billing is CEO of Nordstjernan and also chairman of NCC.

2.5.2 Board of Directors The Annual General Meeting elects the board, and the board members are elected for a period of one year, which shall not consist of not more than ten members and not fewer than five. The employees are represented on the Board. Tomas Billing is the chairman of the Board of Directors, and he has been that since 2001 and been a member of the Board since 1999. Viveca Ax:son Johnson is the largest shareholder in the company and she is the Chairman of Nordstjernan AB since 2007 (NCC, 2016l).

The Board of Directors consists of seven elected members, 3 members appointed by employee organizations, 2 deputy members appointed by employee organizations, and one secretary.

Name Position Appointed Holdings Tomas Billing Chairman 2001 20 600 Series A shares 75 400 Series B shares Viveca Ax:son Johnson Board member 2014 74 000 Series B shares, 25 000 Series A shares, 44 000 Series B shares via private companies Ulla Litzén Board member 2008 3 400 Series B shares Olof Johansson Board member 2012 4 000 Series B shares Sven-Olof Johansson Board member 2012 100 000 Series B shares via companies Christoph Vitzthum Board member 2010 - Carina Edblad Board member - Members appointed by employee organizations Lars Bergqvist Board member 1991 1 140 Series A shares, 200 Series B shares (included related-party holdings) Karl-Johan Andersson Board member 2011 - Karl G Sivertsson Board member 2009 -

Deputy members appointed by employee organizations Mats Johansson Deputy Board 2011 100 Series B shares member Lis Karlehem Deputy Board 2009 - member Secretary - Håkan Broman General Counsel 2009 500 Series B shares Table 1 NCC’s Board of Directors. Source: Own creation with data retrieved from NCC’s annual report 2015.

2.6 NCC Strategy: 2016 – 2020 Considering the period 2016 – 2020, NCC has a strategy for profitable growth, which include an aim of 5 percent growth per year in average, and an aim to increase the profit margin from the current level of 3 percent to minimum 4 percent during the period (NCC, 2016n).

NCC’s new organization structure will create a more specialized and efficient organization, which in turn will open up for growth- and profitability opportunities to a larger extent than earlier and thereby also stimulate the profitability, according to Peter Wågström, CEO of NCC (NCC, 2016n).

Furthermore, NCC will continue to focus on segments with growth potential, which include large- scale infrastructure projects and refurbishments, and thus expect to grow as these segments grow. The goal of growth will be fundamental for further growth investments such as future acquisitions (NCC, 2016n). The strategic objectives for NCC Group are defined as follow:

● Operating margin shall reach at least 4 percent during the strategy period, ● Annual sales shall grow with an average of 5 percent during the strategy period, ● Return on equity after tax shall be at least 20 percent annually, ● The net indebtedness shall be less than 2,5 times, ● Minimum 20 percent in EBITDA Equity/assets ratio, ● The accident frequency rate shall be reduced by half by 2020 (compared to the outcome in 2015), ● Reduce NCC’s CO2 emissions by its half by 2020 (compared to the outcome in 2015)

For the three businesses and business areas the following financial objectives will be. During the strategy period NCC Industry will have at least a 4 % operating margin and at least a 10 % average annual return on capital employed. The operating margin for NCC Building and NCC Infrastructure will be at least 3,5 % per year. NCC Property Development objective are to have at least 10 % operating margin and at least 10 % average annual return on capital employed (NCC, 2016n).

To be able to reach the set of strategic objectives for the 2016-2020 strategy period it all starts in NCC’s vision to renew the industry and provide superior sustainable solutions. Urbanization, globalization, sustainability, competition for the best talent, and new technologies are the five megatrends that NCC has identified and believe that will change the construction and property industry. What is seen in those five identified trends are opportunities for both profitability and growth (NCC, 2016n).

There are three corner stones that are important to succeed: operational excellence, market excellence, and investment initiatives. Operational excellence, by strengthening the existing

13 expertise, NCC aims to become more efficient and profitable. Develop more efficient processes, more centralized purchasing processes and increased support for digitized information flows. In the market excellence, there is a major growth potential in the infrastructure and refurbishment segments. Here sales of sustainable lifecycle offerings, this will be done by being the customer’s first choice and early marketing of these solutions. Investment initiatives, the new strategy will increase NCC’s profitability and growth. Growth through investments can be made by company acquisitions, PPP projects, and project development (NCC, 2016n).

2.7 Acquisitions Since 1988 NCC has made several acquisitions of other companies. The major ones have occurred in the Nordic region in order to, in addition to strengthen the overall businesses, strengthen NCC’s specific business areas and geographical position in specific countries.

To strengthen the position in the Nordic market NCC acquired Rasmussen & Schiøtz in Denmark 1996, Puolimatka in Finland 1996, and Eeg-Henriksen in Norway 1995. The Nordic market will act as a base and from where investments in new market can be done. With NCC Puolimatka it opens up access to to both Russia, St Petersburg, and to the Baltic countries. Those acquisitions were included in a long term strategy for the nordic region (NCC, 1996).

In the early 1997 a bid to acquire Siab was made and the 17 of June the Swedish Competition Authority acknowledged the deal between NCC and Siab and thereby the leading construction and property development in the Nordic had formed. Both Siab and NCC had earlier been focusing on specialization and development by business areas. With this acquisition more resources became available and new opportunities created to develop methods, materials, etc. (NCC, 1997).

Continuing in specialization and focus in infrastructure 1999 NCC acquired the Danish company Superfos Construction. Superfos Construction was an asphalt and ballast oriented company and this strengthened the segments where NCC had a low market share. To build up a specialized housing

14 unit in the Danish market NCC acquired Denmark’s largest standard housing company, Bülow & Nielsen in December 1999 (NCC, 1999).

Rieber & Sons’s Roads Division was acquired in November 2000, which conducted operations in Norway, Denmark, Finland, Poland and the Baltic countries. NCC became now the largest player in the Nordic crushed products and asphalt sectors, with market shares of approximately one third, and added about SEK 2 billion to annual sales (NCC, 2000). Within the business area’s operations this acquisition has increased the seasonal fluctuations, since during spring paving contracts is largely conducted, while asphalt production and paving are conducted during the summer half of the year. To further strengthen the position as a residential builder in Denmark, NCC acquired Holmbo Huse Orla Christensen A/S, which was a manufacturer of single-family dwellings (NCC, 2004). As can be seen the construction industry is an industry with ongoing acquisitions between companies. NCC is strengthened both its competence and market shares with acquisitions.

2.8 NCC Share NCC is traded on NASDAQ OMX Stockholm Large Cap. The share was introduced on the Stockholm Stock Exchange 1988, under Nordstjernan name. The company’s capital structure includes both Series A and Serie B shares. With a voting right ratio of 10:1. There exist total 26 023 097 Series A shares and 81 820 225 Series B shares.The largest shareholder is Nordstjernan AB. The dividend policy of NCC is to distribute at least half of profit after taxes as dividends. (NCC, 2016b).

In the beginning of 2004 the share price of NCC B was SEK 55,50, and it has increased to SEK 282,90 as of February 2016. Right before the financial crises (April 2007) the share value was above SEK 200 and the value decreased below SEK 40 in November 2008. Since then the stock prices has gradually increased to today's value (NCC, 2016).

NCC B 350

300

250

200

150

100

Graph 1 NCC B Share Development 2006-01-01 – 2016-03-18. Source: Own creation with data retrieved from NCC’s website.

2.9 NCC Projects NCC has been involved in many bigger projects from The Öresund link to the Data center for Facebook in Umeå, as well as smaller housing projects in their market. Followed are a few projects that NCC has been involved in as well as future projects.

The Öresund link - the world’s largest immersed tunnel, Sweden. The Öresund link is one of Scandinavia’s most important infrastructural achievements and 16 kilometers long. The immersed tunnel is 3.7 kilometers long and 40 meters wide with space for both highway traffic and railway tracks. The Öresund link connects Sweden and Denmark (NCC, 2016p).

Data Center for Facebook in Luleå, Sweden. This was the first data center for Facebook in Europe and is of a total 28 000 square meters, and will serve more than 800 million Facebook users (NCC, 2016q).

Turning Torso, Malmö, Sweden. The building is of 190 meters height and the project was completed in spring 2005. A total of 147 rental apartments and 4 200 square meters of office space exist in

Turning Torso. Turning Torso won the Best International Residential Building prize at the MIPIM Awards in Cannes (NCC, 2016r). Lysaker Brygge, Oslo, Norway. The project was of total around 60 000 square meters and included 324 apartments, as well as parking garage, and commercial areas. Development of the existing harbor and jetties was also done (NCC, 2016s).

E18 Knapstad-Retvet, Norway. Building of highway and several bridges from the Norwegian Statens Vegvesen as a customer (NCC, 2016t).

Carlsberg Byen - Byggeafsnit 8. The construction will include new campus area, commercial areas, office areas, residential areas, and parking garage. The area will be used by more than 10 000 students and 800 employees on a regular daily basis (NCC, 2016u).

3 Strategic Analysis

With known theories a strategic analysis will be conducted in this chapter of NCC. A strategic analysis will be based on different strategic theories. The aim of the analysis is to get a good understanding of the environment NCC is operating within, and thereby cover aspects of the company’s cash flow potential and risk (Petersen & Plenborg, 2012).

The strategic analysis made by the authors of this paper will start with analyzing of the “big picture”. The business environment, macro factors, industry factors, and from there discuss the potential of NCC’s cash flow potential and risks. The strategic will take a top-down approach in accordance with Figure X below:

PEST Analysis

Porter's Five Forces

SWOT

Figure 4 Strategic top-down approach. Source: Own creation based on Petersen & Plenborg (2012).

To start of the strategic analysis the PEST-analysis will be used. The focus of this analysis will be to determine which macro factors that have an affect on NCC’s potential cash flow and risk. The PEST- analysis is focusing on the impact of: ● Political/Legal factors ● Economic factors ● Sociocultural factors ● Technological/Environmental factors

The macro factors affect companies in different ways, here it is important to understand which factors are currently the most important ones, which affects the risk and cash flow, and which are more important in the future.

The strategic analysis will continue from here by focusing more on the industry factors that influence the company’s cash flow potential and risks. This will be done by using the five forces analysis, Porters five forces. The forces that are discussed are threat of new entrants, bargaining power of suppliers, bargaining power of customers, threat of substitute products or services, and competitive rivalry (Porter, Michael E. "How competitive forces shape strategy." (1979): 21-38).

To finish up the strategic analysis the identification of strategic drivers will be made. What have been learned from the earlier strategic analysis will be to good help here, PEST and Porters five forces. It will all be summarized into a SWOT matrix, where NCC’s external factors, opportunities and threats, as well as NCC’s internal factors, strengths and weaknesses, will be presented.

3.1 PEST Analysis The following section will cover a PEST analysis. The PEST analysis gains a wide range view and knowledge from a macro-environmental perspective in order to highlight the key drivers which have a direct effect on the industry NCC is operating within, and thereby affects NCC itself. In order to cover a wider range, the PEST analysis will be expanded to a PESTEL analysis in order to cope with environmental and legal factors which are becoming far more important in today’s society and business operations. However, instead of assigning these two in separate sections, the environmental and legal aspects will be addressed in the technological and political section, respectively.

The intention of this section is to, by analyzing the political-, economic-, social-, technological-, environmental-, and legal factors, identify the critical factors of the industry of NCC, and thereby also the key drivers of change. These key drivers will not only help us to understand the environment of NCC, but will also be taken into consideration for the conduction of the financial valuation of NCC.

3.1.1 Political & Legal As already mentioned, the Nordic region with Sweden, Denmark, Norway, and Finland, is NCC’s primary market. Common for these four countries is the political stability characterized by e.g., low corruption, high work ethics, stable and efficiently working governmental bureaucracy (Schwab, 2015). These countries have for a long period experienced political stability and is expected to continue to do so in the future (Economist, 2009). For foreign investment inflows government stability is important. Absence of internal conflict and ethnic tensions as well as basic democratic rights and that the government can ensure law and order are important factors for investors (Busse, M, & Hefeker, C. 2005). All the Nordic countries are full democracy and placed top eight in the democracy index 2015 (Economist, 2016). Full democracy means that political freedoms and civil liberties are respected, the functioning of government is satisfactory. Continuously, as can be seen in the Table 2 below, all of the Nordic countries have a low risk of bribing and corruption (IMD World Competitiveness Online, 2016).

Bribing and 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 corruption Denmark 9,05 9,32 9,19 8,65 9,25 8,55 9,06 9,18 9,29 9,15 9,27 Finland 9,41 9,35 8,37 7,96 8,95 8,25 8,74 8,53 8,47 8,51 8,71 Norway 6,89 7,19 6,41 5,54 6,51 6,64 7,47 7,03 7,36 7,21 7,81 Sweden 7,71 7,97 7,98 7,82 7,74 7,82 7,79 8,00 7,72 7,89 8,23 Table 2 Bribing and corruption in NCC’s Primary Market. Source: Own creation with data retrieved from IMF World Competitiveness Online.

Different from the primary market, the political environment in NCC’s secondary market in terms of Estonia and Latvia, and Russia tend to be less stable and with an increase in corruption (Schwab, 2015) as well as in bribes in comparison to the primary market. Estonia is the country that is most stable when it comes to the three countries in the east in which NCC is active in as can be seen in Table 3 below.

A high degree of political instability will generate lower growth rate in the terms of GDP per capita (Aisen, A. & Veiga, J, F., 2013). Both Estonia and Latvia counts as flawed democracy while Russia is an authoritarian regime (Economist, 2015). A flawed democracy means that the countries have had political instability and the popular support for democracy is surprisingly low and there is an underdeveloped political culture and low levels of political participation. In Russia there is a decline

20 in the quality of democracy. During the year of 2015 Russia and the West ended up in a stand-off over Ukraine. Continuously in Russia there has been limited competition in the electoral process, candidates have been prevented from registering, the elections are not free and fair, which places Russia as an authoritarian regime (Economist, 2015).

Although Germany is similar to the Nordic countries in several aspects, and compared to many other countries that experience a political stability, not least the other previously mentioned countries in NCC’s secondary market, it has a more vulnerable position due to its prominent position in the world’s politics. Germany has also, as similar to the Nordic countries, a lower risk of bribing and corruption. Further, the country is also known for its policy stability and predictability as well as for a skilled workforce (IMD World Competitiveness online, 2016b). Similar to the Nordic countries, Germany counts as a full democracy country (Economist, 2015).

Bribing and 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 corruption Estonia 5,71 5,74 5,09 5,44 5,44 5,32 5,43 6,10 6,06 6,18 6,41 Germany 6,47 6,61 5,92 6,50 6,32 6,45 6,92 7,48 7,23 7,56 7,65 Latvia ------2,76 3,38 3,29 Russia 0,64 1,17 0,74 0,47 0,66 0,51 0,51 0,76 1,01 1,68 1,47 Table 3 Bribing and corruption in NCC’s secondary market. Source: Own creation with data retrieved from IMD World Competitiveness Online.

Adaptability of 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 government policy Denmark 6,03 6,80 6,58 6,58 6,45 5,09 5,55 5,40 5,37 5,74 5,03 Finland 4,75 4,85 4,65 5,04 6,13 5,00 5,89 5,75 5,36 3,76 2,97 Norway 4,25 4,81 4,61 4,18 4,73 5,33 5,95 6,10 5,77 5,87 6,08 Sweden 3,33 3,61 5,53 5,38 5,90 5,51 7,40 6,90 6,53 6,35 4,43 Table 4 Adaptability of government policies for NCC’s primary market. Source: Own creation with data retrieved from IMD World Competitiveness Online.

Adaptability of 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 government policy Estonia 5,25 5,96 5,09 4,82 2,86 6,07 6,70 6,13 5,66 5,47 4,69 Germany 2,47 2,99 3,45 3,27 4,59 4,18 4,51 5,11 4,67 4,74 4,35 Latvia ------3,79 4,78 3,66 Russia 2,84 3,92 3,98 4,08 4,16 3,14 3,32 3,47 3,17 4,20 3,47 Table 5 Adaptability of government policies for NCC’s secondary market. Source: Own creation with data retrieved from IMD World Competitiveness Online.

What can been discovered regarding the corporate tax rates in the Nordic region is that the rates over time has decreased in all four countries, even though the decrease in Norway is only 1 %. The other countries, Denmark, Finland, and Sweden have had a corporate tax rate decrease with around 6 % (Denmark 5,5%).

Country 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Denmark 28,00% 25,00% 25,00% 25,00% 25,00% 25,00% 25,00% 25,00% 24,50% 23,50% Finland 26,00% 26,00% 26,00% 26,00% 26,00% 26,00% 24,50% 24,50% 20,00% 20,00% Norway 28,00% 28,00% 28,00% 28,00% 28,00% 28,00% 28,00% 28,00% 27,00% 27,00% Sweden 28,00% 28,00% 28,00% 26,30% 26,30% 26,30% 26,30% 22,00% 22,00% 22,00% Table 6 Corporate tax rate for NCC’s primary market. Source: Own creation with data retrieved from KPMG, 2016.

In NCCs secondary market the tax rate is, except Germany, lower than in the Nordic region. The tax rate varies between 15-20 %. What can be seen in comparison to the Nordic region is that the tax rate has only fallen 3 % in both Estonia and in Russia while in Latvia the tax rate has been stable at the same level over the time. Germany is the big exception with the highest corporate tax rate that is 29,65% in year 2015. Further, the tax rate has had the biggest decline with a decrease of 8,69 % from the tax rate of 38,34% in 2006.

Country 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Estonia 23,00% 22,00% 21,00% 21,00% 21,00% 21,00% 21,00% 21,00% 21,00% 20,00% Germany 38,34% 38,36% 29,51% 29,44% 29,41% 29,37% 29,48% 29,55% 29,58% 29,65% Latvia 15,00% 15,00% 15,00% 15,00% 15,00% 15,00% 15,00% 15,00% 15,00% 15,00% Russia 24,00% 24,00% 24,00% 20,00% 20,00% 20,00% 20,00% 20,00% 20,00% 20,00% Table 7 Corporate tax rate for NCC’s secondary market. Source: Own creation with data retrieved from KPMG, 2016.

3.1.2 Economic The economic factors are critical in order to understand the macro-economic environment and the potential impact it has on industries and companies. In this section, three of the factors that are expected to have the greatest impact on the economic situation in general, and the construction industry and NCC in particular, are to be investigated and analyzed. These three economic factors are real Gross Domestic Product (GDP) growth, interest rates movements, and inflation.

3.1.2.1 Gross Domestic Product (GDP) The Gross Domestic Product (GDP) is the value of a country’s output of goods and services over a certain period of time. Usually, this period of time is on a quarterly basis, however, in this thesis an annual horizon will be used as it is more common when measuring economic growth. As the GDP growth is an aggregated measurement of the total economic production of a country, including personal consumption, government purchases, private inventories, and foreign trade balance, it could be seen as an indicator of a country’s economic health (Mankiw, G, 2014).

In general, economist differentiate between nominal (current) GDP and real (constant) GDP. Nominal GDP is measured in today’s prices, and therefore lacks the adjustments of inflation. In contrary, the real GDP is adjusted to the inflation. Based on this, the real GDP is a better measurement for comparison, especially when comparing the GDP growth of different countries, and over longer time horizons (Mankiw, G, 2014).

The following graphs illustrates the historical real GDP growth for the period 2004 - 2020, for NCC’s primary and secondary market, respectively. For the period 2014 - 2020, the real GDP growth is the estimated projections made by the International Monetary Fund.

3.1.2.1.1 Primary Market - Real GDP Growth As Graph 2 illustrates, the real GDP growth has been relatively stable for all the Nordic countries for the period 2004 until the start of the financial crisis 2007/2008, and held a growth level of 2-5% annually. From the bottom in 2009, all four countries have managed to recover in 2010 to a similar level as before the financial crisis.

Despite the recovery in 2009/2010, which actually just meant that the countries were back at the same production level as for before the crisis, the Nordic countries experienced a setback in 2012, except for Norway. This setback was due to the Eurozone crisis (European sovereign debt crisis) where several Eurozone member states, including the PIIGS countries (Portugal, Ireland, Italy, Greece, and Spain) were unable to repay and/or refinance their government debts.

Real GDP Growth - Primary Market 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 E2016 E2017 E2018 E2019 E2020 E2021

Finland Denmark Norway Sweden

Graph 2 Real GDP Growth for NCC’s Primary Market. Source: Own creation with data retrieved from IMF.

Construction Industry Growth - Primary Market 15%

10%

-5%

-10%

-15% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Denmark Finland Norway Sweden

Graph 3 Construction Industry Growth for NCC’s Primary Market. Source: Own creation with data retrieved from IMF.

SWEDEN. For the period 2004 - 2007, Sweden had a real GDP growth between 2,82% - 4,69%. As a consequence of the financial crisis, the GDP experienced a negative growth of -0,56% in 2008, followed by -5,19% in 2009. Sweden recovered well in 2010, with a positive growth of almost 6%, however, the upturn was temporary as the Eurozone crisis occurred, and the growth declined to a

24 negative of -0,29% in 2012. In 2013 the growth was back to positive at 1,28% and continued to increase the following years to 4,09% in 2015. According to IMF’s projections, the upcoming six years for the period 2016 - 2021 is estimated to generate a growth rate around 2-3% annually. The construction industry contribution to the GDP growth in Sweden have been on a relatively smooth level, although it is possible to see the impact of the financial crisis and the Eurozone crisis. Before the crises, the construction industry accounted for around 5,5%, in order to slowly decline the years of the crises and thereafter, to a level between 4,5% - 5,3% (OECD.Stat, 2016).

Denmark. Denmark’s real GDP growth was between 2,64% - 3,80% for the period 2004 - 2006. In 2007, the impact of the financial crisis started to become visible as the GDP growth had declined to 0,82%, and reached negative levels in 2008 and 2009, with a level of -5,09% as its worst. Although Denmark managed to gain a positive growth of 1,62% in 2010, the following two years real GDP growth was negative, as a effect of the Eurozone crisis. For the period 2016 - 2021, Denmark is estimated to experience a real GDP growth of around 1,5% - 2% per year. The construction industry in Denmark is contributing on a steady state to the GDP of an amount of 4-4,5%. This has been steady except with two years, 2010 and 2011, when the contribution was below 4%. In 2010 the contribution from the construction industry was 3,84% and 2011 3,92% (OECD.Stat, 2016).

Finland. Finland experienced a positive growth before the financial crisis, and in 2007, their real GDP growth was 5,19%. However, as a consequence of the financial crisis, the growth declined to 0,72% in 2008, and the severe impact of the financial crisis became far more significant in 2009 when Finland had a negative growth of -8,27%. Although the real GDP growth was positive in 2010 and 2011, Finland’s real GDP growth have been negative the last recent years. Considering the construction industry, its contribution to the GDP has been on a constant level above 5%, and with low volatility.

Norway. The real GDP growth was at a level of 2,4% - 3,96% in 2004 - 2007. Followed came four years of lower real GDP growth with 2009 as the lowest point with a negative growth of -1,62%. In 2010, the real GDP growth reached positive level of 0,60%. The growth continued to increase and in order to peak in 2012 at 2,75% which was similar as before the financial crisis. The effects of the

Eurozone crisis in 2013 lead to that the real GDP again declined to 0,74% with an immediate increase to a growth of 2,21 % in 2014. As can be noticed regarding the construction industry contribution to the real GDP growth it has been at a steady state throughout the entire period 2004-2015 with very low fluctuations. It has been steady with contribution 4,17%-4,88%. During Norway's negative real GDP growth year 2009, the contribution was 4,54% (OECD.Stat, 2016).

Real GDP Growth Estimations - Primary Market 4%

0% E2016 E2017 E2018 E2019 E2020 E2021

Denmark Finland Norway Sweden

Graph 4 Real GDP Growth Estimations for NCC’s Primary Market. Source: Own creation with data retrieved from IMF.

In conclusion, the Nordic countries and their GDP growth have been stabilized since the financial crisis, although they have not managed to reach the same level as for before the crisis. In addition, the Eurozone crisis have had a negative impact on the GDP growth recovery. Considering the future, the last years trend in combination with the estimated projections of IMF shown in Graph 4, it is reasonable to believe that the real GDP growth have been stabilized, and will continue to develop on a level with stable growth and low volatility.

3.1.2.1.2 Secondary Market - Real GDP Growth NCC’s secondary market, including the Baltic countries in terms of Estonia and Latvia, Russia, and Germany, have experienced a more volatile period then its primary market, although the trend pattern is similar with negative GDP growth as a consequence of the financial crisis. The historical GDP growth for the countries of NCC’s secondary market is shown in Graph 5.

Real GDP Growth - Secondary Market 15%

10%

-5%

-10%

-15%

-20% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 E2016 E2017 E2018 E2019 E2020 E2021

Estonia Germany Latvia Russia

Graph 5 Real GDP Growth for NCC’s Secondary Market. Source: Own creation with data retrieved from IMF.

Construction Industry Growth - Secondary Market 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Estonia Germany Latvia Russia

Graph 6 Construction Industry Growth for NCC’s Secondary Market. Source: Own creation with data retrieved from IMF.

Estonia. Estonia had experienced significant growth regarding its GDP during the year 2004 - 2007, with an annual growth of 8,42% in average. However, the impact of the financial crisis was severe, and already in 2008 the GDP had declined with 13,17 percentage, given a GDP growth of -5,42%. The negative growth continued in 2009 to -14,72%. The following years, Estonia managed to recover

27 to a positive growth as high as 7,58% and 5,18% in 2012 and 2013, respectively. The last years, Estonia’s GDP growth have been around 1,5-3%. In 2004-2008, the Estonian construction industry’s contribution to the country’s GDP was increasing from 5,67% to 7,19%. As a consequence of the crisis, the contribution declined by 1,67 percentage to 5,52% in 2009. Thereafter, Estonia’s construction industry contribution to the GDP growth have been relatively stable, although declining.

Latvia. Latvia did, in similarity to Estonia, experience a significant GDP growth the years before the financial crisis, with an average annual growth of 10,13% for 2004-2007, followed by negative growth in 2008-2010, where the negative GDP growth of -14,19% in 2010 is remarkable. Since 2011, the GDP growth have been a positive, yet declining phase. The construction industry contribution to Latvia’s GDP growth peaked the year before the crisis, and have for the last years been around 5- 6%.

Russia. The financial crisis also had a severe impact on Russia, and its GDP growth dropped by 13 percentage to -7,8% in 2009. Different from the Baltic countries, Russia recovered to a positive growth in a year, and in 2010 the GDP growth was 4,5%. Similar to the Baltic countries, Russia have thereafter experienced a declining GDP growth, yet positive, phase. The construction industry’s contribution to Russia’s GDP have been stable, and compared to the other countries, it is hard to define any significant negative impact of the crisis. Instead, the construction industry contribution to the GDP growth have been constant around 4,5%-5%.

Germany. Germany, which differs significantly compared to the other countries within NCC’s secondary market, not least regarding general economic stability, have experienced a similar pattern but on a more stable level with less volatility. Similar as most countries, Germany experienced an upturn before the crisis, followed by a negative GDP growth of -5,57% in 2009. In 2010 and 2011, they recovered to a level similar as for 2007-2008, followed by a modest growth rate the following years. The construction industry contribution to the GDP growth have been stable throughout the years at a level of approximately 3,6%-3,8%.

Real GDP Growth Estimations - Secondary Market 5%

-1%

-2%

-3% E2016 E2017 E2018 E2019 E2020 E2021

Estonia Germany Latvia Russia

Graph 7 Real GDP Growth Estimations for NCC’s Secondary Market. Source: Own creation with data retrieved from IMF.

From the above, we can conclude that the Baltic countries and Russia have had a similar trend pattern with high real GDP growth before the financial crisis, followed by significant negative growth as a result of the crisis. They managed to recover well in 2010, although not to the same high level as earlier. Germany have had the same development although they did not start off at the same level. For the last couple of years, all countries, except for Russia, have experienced a relatively stable real GDP growth. The economic stability in terms of the real GDP growth is expected to be stable in the future according to IMF’s projections, eventually except for Russia which still will need to experience a recovery-period in 2016.

3.1.2.2 Interest Rate Central banks are using the interest rate as a monetary policy tool with the purpose to control inflation. The interest rate have a direct impact on the credit market, and thereby also a direct impact on the economic activity and stimulation. This is, as when the interest rate declines, the borrowing costs decreases, which leads to households become more willing to consume goods and services and companies to expand their businesses. In contrary, an increase in the interest rate increases the borrowing costs, which lower the household spending and companies’ investments (Sveriges Riksbank, 2015).

3.1.2.2.1 Primary Market – Interest Rate The countries in the primary market have experienced a development regarding the interest rate with similar pattern to each other. The trend have been raising interest rate until the financial crisis with a significant drop between 2008 and 2009. For the last recent years, the interest rate have been declining year by year. As follow, each country will be individually presented in order to provide a structured view.

Interest Rate - Primary Market 7%

0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 -1%

FIN SWE NOR DNK

Graph 8 Interest rate for NCC’s Primary Market. Source: Own creation with data retrieved from IMF.

The Nordic countries have had a similar pattern of development over the years presented in Graph 8. As can be seen, all countries experienced a trend of increasing interest rates between 2004 and the peak in 2008. Norway had the most significant increase where the interest rate of 2% in 2004 was raised to over 6% in 2008. Sweden, on the other hand, had the lowest increase, comparing the same period, and reached a level of nearly 3,91% in 2008. As a consequence of the financial crisis and the following economic turmoil, the interest rates were lowered quite significantly in all the countries between 2008 and 2010. In 2009, Sweden’s interest rate was as low as 0,40%, while in 2010 all countries had lowered their interest rates with around 3,5 - 4 percentage since 2008.

The following years would offer a trend of declining interest rates, despite the raise in 2011, which was suffocated by the Eurozone crisis. As the economies experienced economic recessions, the countries’ central banks kept lowering the interest rates in an attempt to increase the consumption

30 and stimulate the economy. Except for Norway, which managed to hold the interest rate on a relative stable level, all the other countries experienced negative interest rates in 2015 for the first time in many years.

We can conclude that the financial crisis have had a significant impact on the interest rates in the Nordic countries, and the central banks have been needed to lower the interest rates in order to stimulate the economy. Although only Finland is a member of the European Monetary Union (EMU), we believe that the Eurozone crisis have affected both Denmark and Sweden. This as the Danish currency krone is fixed against the Euro, and while the Swedish krona indeed is free-floating towards the Euro, Sweden’s dependence of other Eurozone countries in terms of e.g. trade and their position as a member of the European Union (EU), creates a domino effect. Norway, on the other hand, which is neither a member of the EMU or the EU, have also lowered their interest rate, yet not to as a low rate as the other Nordic countries. Their independency of monetary and fiscal unions and, of course their natural resources have been of major reasons.

3.1.2.2.2 Secondary Market – Interest Rate The countries within the secondary market have had similar fundamental trends as the ones in the primary market. However, as can be seen in Graph 9, both Latvia and Russia started off from high levels with interest rates of 4,23% and 7,11%, respectively. Germany’s and Estonia’s interest rate levels were more similar to the Nordic countries’ in 2004.

Interest Rate - Secondary Market 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

RUS EST DEU LVA

Graph 9 Interest rate for NCC’s Secondary Market. Source: Own creation with data retrieved from IMF.

In general, there was a trend of rising interest rates before the financial crisis, where Latvia and Russia had significantly high peaks. Latvia’s first peak was in 2007 at a level of 8,67% followed by 13,05% in 2009, while Russia had a more steep rise in interest rate, going from 6,66% in 2007 to 13,05% in 2009. Estonia and Germany, on the other hand, peak in 2008 at interest rate levels of 6,66% and 4,63%, respectively.

As a reaction of the financial crisis, it is shown that the interest rate in Germany declined between 2008 and 2009. For the other countries in the East, the reaction on the interest rates occurred between 2009 and 2010, when both Russia’s and Latvia’s interest rates was lowered significantly. However, as the interest rates in Estonia, Germany, and Latvia started to stabilize from 2010, yet declining towards negative rates in 2015, Russia’s interest rate rushed away to 14,76% in 2015.

From the above, we can conclude that the interest rate in all the countries in the secondary market have reacted due to the financial crisis, although the interest rate in Latvia and Russia did not drop until between 2009 and 2010. While Latvia, Estonia, and Germany have successively lowered their interest rate towards a negative interest rate in 2015 in an attempt to boost the economy, Russia have instead raised their interest rate heavily.

3.1.2.3 Inflation Rate Another important market condition factor is the inflation rate. The inflation rate is the increase in the general price level for goods and services, which consequently leads to falling purchasing power of currency. It is commonly measured in terms of the change of the Consumer Price Index - CPI. Another commonly used measurement for inflation is the harmonised index for consumer prices - HICP. The HICP is especially useful for comparisons of inflation rates between different countries as it creates a more comparable number.

Most central banks is focusing on maintaining a low and stable inflation rate. The European Central Bank aims to have inflation rates below but close to 2% (ECB, 2016). The fundamental reason is to create favourable conditions for economic growth and development. A low and stable inflation rate lower the uncertainty and risk, and thereby also the borrowing costs. It also makes the long-term planning easier for companies and will increase their incitament for investments. In addition, the inflation affects both the distribution of wealth, as well as the use of resources (Sveriges Riksbank, 2011a). Partly for the above mentioned reasons, many central banks have fixed inflation targets which defines which levels they accept in order to achieve low and stable inflation (IMF, 2012).

As will be seen, most of the countries in which NCC is operating within are experiencing inflation rates below their targets and have so been doing the recent years. These scenarios can be referred to the financial crisis, when central banks are using the low inflation, and in some time even deflation, in order to stimulate the increase of consumption and thereby boost the economy.

3.1.2.3.1 Primary Market – Inflation As can be seen in Graph 10 below, the Nordic countries have managed to avoid deflation and instead been able to hold a inflation level of 1% - 3% most of the time.

Inflation - Primary Market 5% 4% 4% 3% 3% 2% 2% 1% 1% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Denmark Finland Norway Sweden

Graph 10 Inflation Development for NCC’s primary market. Source: Own creation with data retrieved from IMF.

Sweden. The inflation rate in Sweden between 2004 - 2007 was quite stable at 1,02% - 1,68%. The inflation peaked in 2008 to 3,35% to drop down to 1,94% the year after. Since 2009 the inflation has been decreasing year after year until 2014 and was 0,49% in 2015. As can be noted is that before the financial crisis the inflation rate was relatively close to the inflation rate target of 2% (Riksbank, 2011b), however it was lower. After having a year over the inflation target Sweden is now working on to come back to a stable inflation rate around 2%.

Denmark. Between 1,16% and 1,89% was the inflation rate in Denmark during the period of 2004- 2007. The inflation rate increased during 2008 to 3,4% followed by a 2009 with lower rate again 1,33%. In 2010 the inflation rate increased to 2,30% and continued up to 2,76% before it started to decline and in 2014 the inflation rate was 0,57%. The inflation target is close to but below 2% (Nationalbanken, 2016).

Norway. Norway has an inflation target of 2,5% over time (Norges-bank, 2016) and the year before the financial crisis the inflation in Norway fluctuated each year. 2004 with 0,47% to increase to 2,33% in 2006 to drop back again 2007 to 0,73%. In 2008 the inflation was higher than the inflation target and reached 3,77% to follow with lower inflation rate to the lowest in 2012 of 0,71%. Norway

34 has recovered relatively well and had an inflation rate of 2,03% 2014 which is lower than the inflation target of 2,5%.

Finland. Finland is a part of the eurozone and has been using the euro since 2002. The inflation goal of the ECB (2016) is below but close to 2%. From 2004 - 2007 Finland has an inflation rate below 2% but not close to 2%. 2004 was 0,14 % and it increased during time to 1,58% in 2007. A little more than double increase was 2008 to an inflation rate of 3,91% which went down to 1,64% and 1,69% in the two following years before the inflation increased again to over 3% two years in the row. After declining the inflation rate ended up on 1,21% in 2014 which is below but not close to the inflation target of 2%.

3.1.2.3.2 Secondary Market – Inflation

Inflation - Secondary Market 20% 15% 10% 5% 0% -5% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Estonia Germany Latvia Russia

Graph 11 Inflation Development for NCC’s primary market. Source: Own creation with data retrieved from IMF.

Russia. The inflation has been fluctuate more in Russia, in comparison to the other countries there NCC is operating, between the period 2004 - 2014 with highs of over 14% and lows of 5%. 2004 the inflation was 10,89% which followed up with 12,68% before the inflation decline during two years and in 2008 to reach the peak of 14,11%. A decrease the year after to 11,65% to decrease down to 5,07% in 2012. The inflation target is to reduce inflation to 4 % by 2017 and keep it in that level for the medium run (Bank of Russia, 2016). In 2014 after two years of increasing inflation the rate was up to 7,82%, which is above the inflation target set for 2017.

Estonia. In 2011 Estonia introduced the euro (Eesti Pank, 2016) and since then the inflation target is the same as for the other euro members, close to but below 2%. The years before the financial

35 crises the inflation rate was 3,03% in 2004 and increased to 6,74% in 2007. A huge increase to 10,61% was in 2008 to drop significantly down to 0,20% in 2009. In 2011 when Estonia became a euro member the inflation rate was 5,08% and the country is working towards the inflation target and the inflation rate has been declining and was 3,25% in 2013.

Latvia. In 2004-2006 the inflation rate was relatively stable for Latvia 6,20%-6,58%. The following two years the inflation rate increased and reached in 2008 its high of 15,24%. After the financial crises the inflation rate dropped to a low of -1,22% in 2010 to became positive again in 2011 as of 4,22%. Latvia became a member of the euro 2014 (ECBb, 2016) and the inflation rate in that year was low as of 0,70%.

Germany. Regarding both the primary and the secondary market Germany has been the most stable country in terms of fluctuations in inflation. Germany joined the euro in the start of 2002 (ECB, 2016), and the euro area has the same inflation goal, to be below but close to 2%. The years before the financial crisis 2004-2006 Germany was in line with the inflation target, 1,78%-1,92%. The inflation increased to reach a high in 2008 of 2,75% before the inflation rate dropped to 0,22% in 2009. Since then the inflation rate has increased to 2,49% in 2011 to drop again to 0,79% in 2014. In overall Germany has been the most stable country regarding the inflation rate.

3.1.3 Social The social factors are critical in order to understand the socio-economic environment of a business. In the case of NCC, we believe that factors such as population and population growth, urbanization, and education are the most important and relevant, and are therefore the ones we will discuss as follow (KPMG, 2013).

The population in the Nordic region is constantly increasing. Graph 12 below shows the development from 2004, which is chosen as the base year, until 2020 for the primary market. From 2014 and onwards until 2020 the increase is estimated with data retrieved from IMF.

As can be seen in the primary market, all the Nordic countries are expected a growth in population. Regarding the Nordic countries both Sweden and Norway are expected to have the highest population growth during the examined period. Norway with a growth of 19,7% and Sweden with 16,6%. This followed by Finland with 7,5% and Denmark with 5,9%. In comparison to the secondary market (Graph 13) the four countries in the primary market are expected to have a higher population growth.

Population - Primary Market 125 120 115 110 105 100 95 90 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Denmark Finland Norway Sweden

Graph 12 Population for NCC’s primary market. Source: Own creation with data retrieved from IMF.

In the secondary market there is not the same trend in growth in population as in the Nordic region. Both Estonia and Latvia is expected to decrease in population with -4% and -12,3% respectively. Russia on the other hand will experience a population growth of 1,74%. Germany are expected to be pretty stable with a slight decrease in population of -0,25%. What could impact the German population growth is the last years immigration of refugees. The immigration of refugees reached around one million people in 2015 to Germany (The Guardian, 2015).

Population - Secondary Market 105

100

80 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Estonia Latvia Germany Russia

Graph 13 Population for NCC’s secondary market. Source: Own creation with data retrieved from IMF.

With more people in urban areas new solutions to build in urban environments are being sought for. This with an increasing in importance regarding transportation and walkability (PWC, 2016). With this rapid growth in urban areas it is a need for sustainable city planning with effective infrastructure (NCC, 2015). For the first time in the history, more than half of the world's population, 3.3 billion people, lived in urban areas in 2008, and by 2030 this is expected to increase to almost 5 billion (Unicef, 2009). More countries around the world is becoming increasingly urbanized (United Nations, 2014).

For the last decades the construction of residential housing in Sweden has been low. With a rapidly- growing population in Sweden as well as an ongoing urbanisation it is now possible to see that a housing shortages arising in several parts of Sweden (Emanuelsson, R 2015). The population will continue to increase in the future according to SCB (2012), this since it is assumed that there will be more births than deaths, and immigration is assumed to exceed emigration. According to SCB (2016) the population in Sweden in January 2016 was already 9.8 million people, which was an increase with 1,07% since the same period last year, January 2015. Approximately 10 million people will live in Sweden by 2025 and most of them in the three largest city regions. The belief is that in, 2050, there will exist dense city centres, as well as polycentric city structures including several city cores in the result of the ongoing urbanisation (Boverket, 2014).

The amount of people living in the urban area in the primary market has been increasing as can be seen in Graph 14 below. The country that stands out is Norway when considering the amount of the total population in the country that lives in an urban area. 80% of the norwegian population resides in urban areas while in the other nordic countries it is between 84%-88%. In overall it is 80% of the population in NCCs primary market that resides in urban area as of 2014.

Urban population (% of total) - Primary Market 90 88 86 84 82 80 78 76 74 72 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Sweden Denmark Finland Norway

Graph 14 Urban population of NCC’s primary market. Source: Own creation with data retrieved from IMF.

In the secondary market the urbanization is also an ongoing process, see Graph 15 below. For both Germany and Russia there is an increase in urban population in relation to the total country population. In Russia 74% of the population lives in urban areas while in Germany it is 75%. In both Estonia and Latvia there is a decline with one percentage of urban population in respective country.

Urban population (% of total) - Secondary Market 76

64 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Estonia Latvia Germany Russia

Graph 15 Urban population of NCC’s secondary market. Source: Own creation with data retrieved from IMF.

The world is moving towards a more digitized world and Sweden will be a clear frontrunner in exploiting the opportunities opened up by digitization. The access to first-class Internet links is taken for granted and online communications are a precondition of retaining and developing living standards (Boverket, 2014). At 2012, 91,7 % of the Swedish households had internet access (OECD, 2016a).

After the global financial crisis many construction companies had to cut staff and have found it difficult to replace those skills. With lack of skilled personnel there is a concerned that this could threaten growth (PWC, 2016). By the year 2030 it is estimated that there will be a shortage of a total of 51 000 educated engineers. If it is possible to cover 40% of the shortage with people with similar competence there will still be a lack of 30 000 educated engineers (SCB, 2013). With a lack of labor there is believable that projects will be delayed (Whitelaw, 2015). It will be important to find and attract and retain well-educated skilled employees to continue to be competitive (NCC, 2015).

3.1.4 Technological & Environmental Historically the engineering and construction industry has been fairly slow to adopt new technologies. Throughout the last decades the technology has been developing in both regarding new technologies regarding construction as well as to focus in valuable surveys with the customers.

Today the off-site manufacturing techniques are becoming more sophisticated (PWC, 2016). This has resulted in that the construction and engineering industry become more cost efficient as well as to reduce the building time.

The resource scarcity and climate change will transform how constructions will be built in the future. The expectations from the stakeholders within this sector will increase in the way how to create more sustainable buildings. Green building is a growing trend within the industry which is affecting designs, contractors, and building materials companies. The engineering and construction industry play a strong role in achieving climate change goals. This since the construction environment is a significant carbon emitter (PWC, 2016). NCC is working with an environment focus in every step of the supply chain. This is done by offering resources and energy efficient products as well as solutions to the customers which will reduce the environmental impact and also operate more sustainably (NCC, 2016v). Furthermore, NCC is offering customers all the types of environmental certifications that are available regarding both buildings and civil-engineering structures. NCC is one of the founders of Green Building Council and is an active part in Denmark, Finland, Norway, Sweden, and Estonia. The Green Building Council is working towards to develop and influence environmental and sustainability efforts in the industry and to promote green building (NCC, 2016w).

The technology is changing the construction industry, one example is the Building Information Modelling (BIM), where a 3D model of the project is created. With a wide range of data BIM helps improve the efficiency of the project. There are governments that are requiring construction companies to use BIM or strongly promoting companies to use BIM (NCC, 2016e). NCC is using the BIM to deal with information throughout the entire building process (NCC, 2016e). In addition, In order to gain efficiency and productivity through technology, NCC has for several years improved its competences in VDC (Virtual Design and Construction), which is used to improve quality and reduce costs in all stages of the construction process. This technology have been used in more than 960 projects, and NCC is thereby a global market leader in the use of VDC (NCC, 2016x).

Furthermore, from an environmental perspective, there is a risk that the global energy consumption of buildings and construction will continue to increase at the same pace as the population growth

41 and population wealth, which would have a negative impact on the environment regarding e.g. the climate-changes. NCC is therefore constantly working to develop and adapt innovative and sustainable solutions, and have taken active actions in order to create a more sustainable construction industry. For example, NCC has clear sustainability targets to lower the construction industry’s impact on the environment, and has participated in the development of the international environmental certification system, BREEAM, in Sweden. In addition, NCC is working to reduce the energy consumption in both new and existing buildings through their sustainability concept, and is constantly developing products and services to become more environment-friendly in terms of climate, energy, and resources. The long-term objective for NCC is to become both the leader and a pioneer in sustainable construction solutions (NCC, 2016v).

3.1.5 PEST Conclusion The PEST analysis above takes the most crucial macroeconomic factors that potentially may affect the construction industry and NCC into consideration. By identify the cornerstones in terms of the Political-, Economic-, Social-, and Technological factors in NCC’s markets, we are able to analyze the current state as well as to build a forecast in Chapter 5.

Considering the political state, we can conclude that while the primary market with the Nordic countries experience a political stability, both historically and current, and is expected to continue to do so in the future, the secondary market is more vulnerable due to e.g., risk of corruption, bribery, and position in the world politician.

In terms of the economic factors, both NCC’s markets have been negatively affected by the financial crisis, and where the GDP growth have decreased. In addition, the Eurozone crisis also seems to have had a negative impact on most countries in both the primary- and secondary market. However, all countries in both markets have managed to recover relatively well from the crises (Russia), although not to the same level as before, and have realized positive growth rates the last years, and based on the projections made by the IMF they are expected to grow further in the future. Furthermore, the construction industry’s contribution to the GDP, which for many of the countries

42 took a hit during especially the financial crisis, have taken a stronger position the last years, and in most of the countries it is going towards a position at a similar level as before the crisis.

The current interest rates are low in all countries, except for Russia. In fact, most of the countries experience negative interest rates, or just above 0%. This creates an attractive investment climate in terms of business opportunities and future expansions through low interest loans. Although the current interest rates are exceptionally low compared to the markets’ historical rates, the future increases is expected to be by most modest.

Regarding the social aspects, three main drivers have been identified to have the most impact on NCC. First, the population that is constantly increasing in all countries of NCC’s both markets increases the demand of infrastructure and housing, which will gain NCC’s operations. Second, the ongoing urbanization and the increasing life expectancy will create an attractive and promising future for the construction industry, not least in terms of infrastructure and housing. And third, the shortage in scholars within engineering and construction will increase the risk of a shortage in skilled workforce, and hence, increase the risk for a more expensive workforce in the future.

The technology and environmental aspects of the construction industry are of growing interests. New technologies are used both in order to improve the quality of projects as well as to reduce its costs, and with the use of the BIM and as the global market leader in using VDC, NCC is truly aiming to gain the technological advantages. Furthermore, NCC is actively working to create a more sustainable construction industry by its sustainability targets, sustainability concepts, and their development of environment-friendly products and services.

3.2 Porter’s Five Forces In this section, Porter’s Five Forces will be used as a strategic tool in order to undertake a narrower perspective and analyze of the construction industry. Fundamentally, a market becomes more attractive as the possibilities of abnormal returns increases, and consequently, the competitiveness of the market increases. By using Porter’s Five Forces analysis, we will analyze the different forces

43 that affects the competition in the construction industry, as well as the possibilities to earn attractive returns (Petersen & Plenborg, 2012). The forces contains of the threat of new entrants, the power of the suppliers, the power of buyers, the threat of substitutes, and rivalry among existing firms (Porter, 1979).

3.2.1 Threat of New Entrants The threat of new entrants, and the entry barriers, are of highly importance in order to analyze the future profitability of NCC. A new entrant means that the competitiveness of the market increases, which ultimately will have a negative impact on the markets shares as well as the returns and profitability of existing players. Taken the entry barriers into consideration, we can highlight the barriers that provide already existing companies with a major advantage towards potential new entrants.

The construction industry is characterized by a few major players, followed by a plethora of smaller companies, and in combination with high capital requirements, there exists a high barrier for potential smaller construction firms to enter (Porter, 1979). However, in order to lower the need of financial resources, and thereby bypass this barrier, there is an alternative for smaller firms to lease the equipment instead of purchasing them when needed (OECD, 2008). Similar is regarding the workforce, where it is possible to hire temporary staff when needed instead of having a large permanent workforce with a constant high payroll (Marketline, 2014a). These two alternatives for smaller firms creates a threat against the established companies (Marketline, 2014a).

Furthermore, customer to construction companies are exposed to counterparty risk or that the contracted firm will not fulfill their obligations. As a consequence, the customer often require the construction firm to post a bond as a financial guarantee. Thus, high capital requirements is often inevitable, and especially for larger projects this creates a high entry barrier for smaller firms (OECD, 2008).

In addition, the advantage of brand reputation is significant within the construction industry, not least regarding larger projects and public work. This means that these projects often are awarded

44 to larger and well-established companies. However, smaller companies and new entrants have the possibilities to become a threat towards the larger companies by taking on smaller projects and by specialize within niche areas (Marketline, 2014a).

For recent matters, an increasing focus have been on creating a greener process within the construction industry due to governmental pressure regarding CO2 emission and other greenhouse gases, which have a negative impact on the environment and future sustainability. Construction companies therefore need to ensure that the whole supply chain follow the directives and standards, which in turn sets pressure, and eventually reduces the number of approved suppliers. Consequently, higher another entry barrier is created for new entrants, while benefiting currently existing companies with already well-established networks of suppliers.

3.2.2 The Power of Suppliers By taking the bargaining power of suppliers in the construction industry into account, we can determine whether the suppliers are in the position to control prices and quantities in order to capture profit (Porter, 1979). NCC’s suppliers consists of building-material producers, and sub- contractors, which mainly consists of smaller firms specializing in niched construction areas.

The construction industry is recognized with a numerous amount of suppliers, especially for larger construction firms, which creates a beneficial position with low bargaining power of the suppliers. NCC has more than 50 000 suppliers, and thus has a widespread network (NCC, 2016y). However, NCC is relying 94 percent of its total purchasing volume to the Nordic region, which may cause a potential threat due to an undiversified supplier market. In contrary, NCC aims to increase the purchasing volume from the outside-Nordic region to 25 percent (NCC, 2016y), which will increase the geographical diversification, and hence lower the bargaining power from a common Nordic supplier action.

Further on, building materials are largely undifferentiated, which means that suppliers have to compete heavily on price in order to award contracts. As a result, this reduces the suppliers bargaining power. In addition, the increasing demand from developing markets have increased the

45 commodity prices, and thus increased the competition among suppliers, which creates a weaker position among them. Also, NCC has through their operations in e.g. Russia, in-house suppliers regarding asphalt. Furthermore, NCC Roads runs a company with the name Ballast which is a crushing plant who refines millions tons of aggregates from gravel and rock quarries. The products that Ballast makes are used as base material in all construction activities, for example, filling materials, base course for roads, drainage etc. The material is also an important raw material in the production of asphalt and concrete (Ballast, 2016). To be able to generate materials in-house the dependency of certain suppliers will decrease and as well the power of supplier.

In terms of sub-contractors as suppliers, NCC relies on them to a large extent due to the need of special competences within e.g. advanced housing projects, and larger infrastructure work. This creates a high bargaining power of the suppliers. However, the typically numerous amount of specialized and high-skilled sub-contractors reduces the power of the suppliers (Marketline, 2014a).

3.2.3 The Power of Buyers Buyers gain their bargaining power when they are able to force prices down. This is accomplished by making the industry’s competitors to compete against each other, which forces them to lower the prices on behalf of their own profitability and to the benefit of the buyers (Porter, 1979). In the case of NCC, the buyers are typically government and public agencies and larger private-sector customers in terms of corporations, although the housing business also include private individual customers.

The buyers in the construction and engineering industry, as well as the industrial and development industries, tend to be large and few in numbers. Government agencies and large private-sector customers in terms of corporations are the typical buyer in these industries rather than individuals. Normally the customers let the market players bid on contracts, and in this way the buyer is in a powerful position since the project is based on the customer terms. It is not always that the best price of the project wins the bidding since other economic factors influences such as long-term maintenance and proposed efficiency of the project. In this sector (government and public sectors) there is little brand loyalty or personal taste that affects the decision-making, which instead is more

46 common in the private-sector. However, often the project is of significant importance to the buyer, which will reduce the buyer’s power, and in overall the buyer’s power in this industry is moderate (Marketline, 2013).

What strengthens buyers’ power when it comes to building new housings, which is within NCC’s development industry, is that the buyer has many choices of designs and locations. The buyer display a high level of price sensitivity since a home investment is important to the customer. The buyer will be cautious and thoughtful in making a purchase. The demand regarding housing is highly influenced by government intervention and macro-economic factors such as, interest rates, employment levels, wage rises, the availability of mortgage finance. The pricing pressures can increase if there will be limited demand on the market and thereby strengthen buyer power. Also, in contrary to especially the government agencies, private customers have the possibility to choose freely among different companies in their search for a price and product that suits their preferences, which in turn increases the buyer’s power. However, overall the buyers’ power seems moderate (Marketline, 2014a).

3.2.4 The Threat of Substitutes The threat of substitutes is based on the availability of substitutes compared to a particular given product or service. Substituted products or services creates a ceiling price, which in turn limits the potential of an industry. More substitutes lower the prices throughout the whole industry, unless the substituting product or service include an upgrade in terms of e.g. functionality or differentiality. This is, more substitutes creates an elastic demand, and customers can with ease switch to a similar, yet different, product or service. In contrary, in the case of lacking substitutes, the price sensitivity of customers is inelastic, which will gain the profitability and growth of the industry (Porter, 1979).

The construction industry is target for low threats of substitutes as there are few substitutes to switch to considering the industry’s operations in terms of public buildings, offices, residential housing, and infrastructure. In addition, market players are usually involved in the whole value chain, from developing and selling to renovating, which makes it even harder for the customers to change to another products (Marketline, 2013a).

Indeed, there does exist some threats which have, and in the future most likely will, affect the construction industry, and which the market player needs to take into consideration. An increasing alternative towards the market’s current products, especially within the housing, is the prefabricated homes. Yet, although these are prefabricated, there is still a need for the service of assemble these, which is usually assigned to the construction contractors, which makes this substitute alternative insignificant (Marketline, 2013a). Another threat of substitute is the potential demand of more environmental-focus and low-costs housing.

There is no viable substitute and there will continue to be a demand for construction and engineering as the constant depreciation of infrastructure. There is a very weak threat of substitutes in this industry (Marketline, 2013a).

3.2.5 Rivalry The rivalry within an industry is based on a number of factors, which will increase the competition, and hence the profitability of the industry and its players. The rivalry intensity within an industry is most significant when there are numerous equally sized competitors which are equally powerful. In addition, low industry growth and high exit barriers, as well as lack of product differentiation and switching costs, will also create greater rivalry. High rivalry is typically characterised by price competition and decreased prices, new product introduction, and extensive marketing campaigns (Porter, 1979).

The construction industry is largely fragmented, and is characterised by a few larger companies, and smaller companies is working alongside with those. Most companies have specialised focus areas in addition to traditional construction operations in order to diversify their product portfolio and segment dependency, and hence their revenue streams (Marketline, 2013a). NCC is operating within three different businesses, which is to the advantage in terms of diversification, and which lower the dependency to a particular business operation.

With the exception of Norway, NCC’s primary market has experienced poor performance and low growth in the recent years. The degree of rivalry is therefore to be considered as strong (Marketline,

2013a). Norway, however, has had a stable industry growth, which have generated larger industry revenues and which in turn has eased the rivalry. The rivalry in Norway is therefore assessed as moderate (Marketline, 2013b). In the secondary market it is Germany that is experience a robust growth in the recent years, which makes the rivalry assessed as moderate (Marketline, 2013c). Otherwise, the rivalry is considered to be strong in NCC’s secondary market.

3.2.6 Porter’s Five Forces Conclusion From the five forces analysis, we can conclude that new entrants within the construction industry faces several barriers related to capital requirements and reputation. Although it is possible for a new player to enter the market and establish its business within a niche and specialized area, it is difficult to compete with the larger and well-established construction firms. Thus, the threat of new entrants is considered to be low.

Also the threat of suppliers is considered to be low due to the numerous suppliers that are typical for NCC, and the construction industry in general. With more than 50 000 suppliers, NCC’s network is well-diversified, and the aim of increasing the dependency of non-Nordic suppliers will further reduce the power of its suppliers and especially the risk of a common act of a Nordic supplier cartel.

Regarding the buyers’ power of bargain, we can conclude that NCC has several different buyers to take into consideration due to their different business areas. In the construction and engineering business, the buyers tend to be large and few in numbers, which increases the buyers’ bargaining power. However, smaller buyers such as private customers generally have less bargaining power, which reduces the buyers’ power within e.g. the housing business area.

The threat of substitutes within the construction and engineering industry is generally low. This is due to the lack of alternatives for public buildings, residential housing etc. However, for the last recent years, the demand for e.g., pre-fabricated houses have increased, which offers an alternative solution and substitute. With that said, this is currently not any major threat to the construction companies, as the construction companies often are hired to assemble the pre-fabricated houses.

The rivalry within the industry is high. This since there are a few companies that are equally in size and equally powerful. Taking that into consideration together with a low growth in the recent years and high exist cost makes the rivalry to increase. NCC tries to lower the rivalry by having specialized focus areas as well as diversifying both their product portfolio and segment dependency.

3.3 SWOT Analysis In order to identify the strategic drivers that have the most impact on NCC, this section will be dedicated to a SWOT analysis. These strategic drivers are derived from the previous PEST- and Porter’s Five Forces analyses, and are now used in order to identify the strengths, weaknesses, opportunities, and threats of NCC.

The strengths and weaknesses of a firm are derived internally in terms of resources, competences, and the ability to utilize these. The opportunities and threats, on the other hand, are derived externally.

The aim of the SWOT analysis is to identify the key strategic drivers, both internally and externally, and which may have a direct impact on NCC’s financials, and thus enhance our financial analysis of the company. The key drivers will be of importance in the foundation of the forecast and valuation presented in the next chapters.

3.3.1 Strengths The strengths of NCC are the drivers that provide NCC with a competitive advantage within the construction industry. NCC is a well-established company with a long history and track record, including a good reputation within the construction industry. As previously mentioned, the reputation within the construction industry is crucial, and is often to gain in order to win procurements, as the buyers often equal reputation to safety. The well-established reputation is also to NCC’s gain in terms of recruiting skilled engineers and workforce.

Another strategic strength of NCC is their product portfolio, which includes their three different business areas. This creates diversification which lower the company’s sensitivity as NCC relies on not one, but three different revenue streams. In addition, a major source of revenue for NCC is the government in terms of construction and infrastructure, and political stability is therefore preferable.

Furthermore, NCC is an industry leader when it comes to using new technology. For example, NCC is using the Virtual Design and Construction in all of the projects where the working methods can be affected, and the technology in 3D modeling with BIM is also a technology that NCC is using in order to improve the efficiency of its projects.

Another strength of NCC is their environmental awareness and their efforts to reduce their own environmental effects. The fact that they are working with these matters proactively makes them less vulnerable for future political legislations, and in the same time meets the increasing demand from buyers regarding environment-friendly solutions.

3.3.2 Weaknesses A major weakness of NCC is its undiversified portfolio of suppliers. Although NCC has more than 50 000 suppliers, 94% of these are within the Nordic region. Indeed, the nearness may mean lower costs regarding e.g. transportation costs, and the political stability with low corruption may ease the relationship-network. However, there is also a risk of significantly relying on a narrow geographical area as e.g. an economic turmoil in the Nordic would most likely affect all the Nordic countries, and thus the majority of NCC’s suppliers. In turn, this could cause suppliers to shut down and creating a shortage in supplies, driving the prices to increase.

Furthermore, NCC is to a large extent relying on the revenues generated by its construction business area, whose customers largely consists of governments and large corporations. Thus, political regulations and decisions could potentially affect the business relations with these types of customers, and thereby harm NCC and its revenues significantly.

In addition, the political instability is high in NCC’s secondary market, and especially in Russia. Although Russia only answers for a minor part of the total revenue, it could still harm NCC as the business operations in Russia also works as an in-house supplier to NCC’s other business areas regarding stone materials.

3.3.3 Opportunities In order to determine NCC’s possibilities to gain profit from its opportunities, the external environment is analyzed.

NCC’s primary market in the Nordic region is have since the financial crisis experienced an increase in GDP growth and it is expected to continue in the future, in order to stabilize around 2%. A positive growth in GDP will ultimately lead to an increasing demand in infrastructure, and housing and development projects, which will have a positive effect on NCC’s revenues. Similar is for the increasing population and further urbanization, which in addition increases the emphases on environment-friendly and sustainable solutions. NCC is already in the driving position regarding sustainability and environmental awareness, and they thereby have the possibility to capitalize on the increasing demand and requirements.

Furthermore, considering NCC’s secondary market, which so far is relatively small in terms of revenue share, the estimated GDP growth for the future seems to be stable. The secondary market could therefore be a potential target for NCC to expand their business operations, and hence increase their revenues.

The current low interest rates in most of the countries NCC is present in, creates an attractive investment environment for NCC’s customers as they have the possibility to obtain cheap borrowings. Hence, there is an opportunity for NCC to capitalize on.

3.3.4 Threats From NCC’s external environment, four main threats are identified to have a potential impact on NCC’s business. First, the current interest rate is low, especially in NCC’s primary market. However,

52 considering the historical interest rate levels, it is reasonable to believe that the interest rate will increase in a near future. Such an increase would have a two-folded negative effect on NCC as its borrowing rate would increase and yet makes it more expensive to finance its business through debt, and also as NCC’s counterparties, i.e. its customers would experience it more difficult to finance new investments using NCC as a supplier.

Second, despite NCC’s good reputation and attractiveness as an employer, the estimated shortage in skilled engineers may create difficulties in terms of NCC’s recruitment needs. Hence, NCC there is a chance that NCC will experience a lack of skilled employees, which will harm the company’s business performance, alternatively, the shortage in scholars may drive the wages to increase, and yet increase the costs.

As a third threat we have identified the potentially new future solutions. In the past years, we have seen an increasing demand and supply in pre-fabricated houses, which creates a new type of competition for NCC and its Development business. Taking it one step further, the possibility to build constructions and housing through a 3D printer is under successful development, and it is reasonable to believe that this new technology will enter the construction market further in the future, creating a more cost-effective solution compared to what NCC can offer.

The forth threat is the political instability, mainly related to NCC’s secondary market. Although the secondary market only answers for a minor part of NCC’s operations and revenues, it still has an important purpose to the company.

3.3.5 SWOT Conclusion From the previous sections, we have been able to identify the main internal and external drivers in terms of strengths, weaknesses, threats, and opportunities. These drivers are summarized in Figure 6 below.

• Brand reputation • Undiversified suppliers • Diversified portfolio • Undiversified markets • Nordic stability • Technological advantage • Attractive for scholors

Strengths Weaknesses

• Increasing interest rates Threats Opportunities • GDP growth • Academics • Urbanization • Pre-facbrication • Public procurements • Political instability • Current low interest rates • New technology

Figure 5 SWOT. Source: Own creation.

4 Financial Analysis

The Financial Analysis chapter conducts an analysis of NCC’s financial performance from a historical perspective. The analysis will be the foundation for the Forecast chapter of NCC’s future performance in collaboration with the Strategic analysis in Chapter 3.

In order to identify the economic drivers as well as to make the peer companies comparable, we first reorganized the financial statements of NCC. The analysis is based on annual reports and its data for the period 2004-2016.

4.1 NCC’s Comparable In order to enable a thorough analysis of NCC, a comparison of two of NCC’s closest peers have been conducted. The peer companies chosen are Skanska AB and Peab AB.

In the search for peer companies, there are numbers of factors to take into consideration, such as size and market capitalization, operating areas, and geographical positioning, in order for the companies to become comparable to each other. A comparison between NCC and these peer companies will help us to investigate and evaluate whether the results of the financial analysis is reasonable and trustworthy (Koller, Goedhart & Wessels, 2010). Furthermore, we will compare NCC’s performance towards its peer companies’ performances by evaluating different key ratios, which will create credibility to the valuation in Chapter 6.

One could question the choice of Skanska and Peab as the peer companies due to the difference in market capitalization. Indeed, the spread is significant, especially regarding Skanska. However, considering the business areas the companies are operating within, as well as their original geographical positioning, and the fact that all three descended from Sweden, makes them very interesting for us when comparing to NCC.

According to Sveriges Byggindustrier (2014), which every year compiles a list over the 30 largest construction companies in Sweden, the top three has been the same companies since 1997, and are

Peab, Skanska, and NCC. The list is based on net sales and the amount of people employed in Sweden.

4.2.1 Accounting Principles For companies there are standards and procedures when it comes to reporting regarding the company's business. It is important to know which standards and procedures different companies are using in order to conduct a fair comparison. The three companies, NCC and the peer group of companies are all listed on the Swedish OMXS30 Large Cap Stockholm. All the three companies are following International Financial Reporting Standards (IFRS), which public companies listed on the Swedish stock exchange follows since 2005. In addition, authorized accounting firms review them, and we are thereby confident in that the annual reports from the three companies are validated and trustworthy for our use.

4.2.2 Reorganizing Income Statement The purpose of reorganizing the Income Statement is in order to be able to calculate the Net Operating Profit after Tax (NOPAT). This is accomplished by separating the operating sources and financing sources from each other, and it is thereafter possible to calculate the profit generated from NCC’s core operations (Petersen & Plenborg, 2012). The reorganized Income statements of NCC and its peers companies are available in Appendix 5.

4.2.2.1 Taxes The tax rates in the reorganized income statements of NCC and its peer companies have been reformulated in order to show the effective tax rates. This is in order for us to be able to use the effective tax rate in the reorganized income statements, which thus create a more comparable analysis considering that both NCC and its peers are operating in multiple countries. Using a domestic tax rate would thus distort our analysis and make it biased.

The effective tax rate is calculated by dividing the corporate tax reported by NCC and its peers with the earnings before taxes. The effective tax rate is then used to analyze the tax shield, i.e. the tax amount a company is entitled to for using financial debt (Petersen & Plenborg, 2012). The tax shield

56 are then deducted from our NOPAT calculations in order to determine a realistic and comparable NOPAT.

퐶표푟푝표푟푎푡푒 푇푎푥 퐸푓푓푒푐푡푖푣푒 푇푎푥푒 푅푎푡푒 = 퐸푎푟푛푖푛푔푠 푏푒푓표푟푒 푡푎푥

The tax shield is calculated by multiplying the effective tax rate with the net financial items. All tax- related calculations are available in Appendix 6.

푇푎푥 푆ℎ푖푒푙푑 = 퐸푓푓푒푐푡푖푣푒 푇푎푥 푅푎푡푒 ∗ 푁푒푡 푓푖푛푎푛푐푖푎푙 푖푡푒푚푠

4.2.3 Reorganizing Balance Sheet The balance sheet of a company consists of assets, liabilities, and equity, which holds the accounting relationship as follow:

퐴푠푠푒푡푠 = 퐿푖푎푏푖푙푖푡푖푒푠 + 퐸푞푢푖푡푦

Considering the accountings standards and how balance sheets usually are presented in terms of assets, liabilities, and equity, it appears in a disorganized structure from an analyst’s point of view. This is as the common balance sheets does not determine and separate operating assets, non- operating assets, and sources of financing from each other. It is therefore difficult for an analyst to determine the value-operating items, which in turn reflect the true value of the company (Koller et al., 2010).

In order to be able to separate operating assets and non-operating assets from each other, the notes of the annual reports of the companies have been taken into consideration and analyzed. Thereafter, we have been able to gain valuable insights regarding the stated items in the balance sheets, and thereby been able to determine how to define these. Ultimately, we reorganize the balance sheet in order to be able to calculate the Invested Capital, which is the amount of money invested in the company required to fund operations, by its stakeholders, bondholders and other

57 parties (Koller et al., 2010). We have therefore reorganized the balance sheets for NCC, Peab, and Skanska for the period 2006-2015 in order to gain the invested capital, and the full calculations can be found in Appendix 1. The following sections will determine how certain items have been considered and calculated in order to differentiate between operational-, non-operational-, and financing items.

4.2.3.1 Operating and Excess Cash When considering the cash in the balance sheet, there is a need for distinguishing between the multiple existing cash items and their purposes. It is of highly importance to differentiate the cash used for operating activities, and the cash used for financing activities, otherwise the invested capital calculations will be distorted. We therefore need to identify excess cash and reorganize the balance sheet accordingly (Koller et al., 2010).

In order to identify the excess cash, and thereby differentiate it from operating cash, we apply a proxy where operating cash is equal to 2% of the company’s net sales. In case the reported cash exceeds this proxy, it is to be considered as excess cash. Indeed, this proxy include the disadvantage of not taking the individual company into consideration but rather treating them all the same (Damodaran, A., 2005a). Despite that, we will use this proxy, and apply it on both NCC and the peer companies in order to gain consistency.

Further on, the proxy of 2% of the net sales appears as Operating working cash in our reformulated balance sheets, while the cash reported by the companies less the operating working cash is entitled excess cash. The operating cash calculations are presented in Appendix 2.

4.2.3.2 Receivables Regarding the items Trade receivables and Other receivables, it could be argued that these should be divided into financial- and operating assets and liabilities. However, when we have considered these items, we argue that as none of these are interest-bearing items they should be kept as part of the operating cycle, and thus remain in its reported form.

4.2.3.3 Operating Working Capital In order to calculate the invested capital, the Operating Working Capital has been adjusted to the following formula:

푂푝푒푟푎푡푖푛푔 푊표푟푘푖푛푔 퐶푎푝푖푡푎푙 = 푂푝푒푟푎푡푖푛푔 퐶푢푟푟푒푛푡 퐴푠푠푒푡푠 − 푂푝푒푟푎푡푖푛푔 퐶푢푟푟푒푛푡 퐿푖푎푏푖푙푖푡푖푒푠

As already mentioned in section 4.2.3.1, we have removed excess line items such as excess cash from operating current assets as these items refers to non-operating assets. If still including these items, there is a risk of annually temporary imbalances, which would harm the accuracy of the valuation (Koller et. al., 2010).

4.2.3.4 Operating Leases Companies usually finance their assets through loans, which are recognized as assets and debts in the balance sheet of the company. However, another common way for companies to finance their assets is through leases.

When analyzing the operating leases of NCC, we find that the total operating leases amounted to 745 MSEK in 2015 (NCC, 2016b). However, these operating leases does not reflect the true value in NCC’s balance sheet as the statement only present the periodic rental expenses associated with the lease. In order to enable us to compare NCC and its peers considering operating margins, we therefore need to transform the operating leases into the true value of the asset and the corresponding debt (Koller, et al., 2010).

In order to determine the true value of the asset, we use the formula of Koller et al. (2010):

푅푒푛푡푎푙 퐸푥푝푒푛푠푒푠 퐴푠푠푒푡 푉푎푙푢푒푡−1 = 1 푘 + 푑 퐴푠푠푒푡 퐿푖푓푒

The rental expenses for NCC and its peers are found in the annual report’s notes for each company, respectively. For the asset life, we have chosen to use a value of 10.9 years, which is accordingly

59 with Lim et al. (2003) in order to reflect a reliable asset life. An alternative method to determine the asset life would be to use an average of the company’s assets, but is in this thesis not taken into consideration due to the variety of assets, and thus variety of assets’ lifespan.

The kd in the formula is equal to the cost of debt. We have chosen not to use NCC’s calculated cost of debt but instead use the 10-year US AA-rated corporate bond yield. The reason for this is that, according to Koller et. al. (2010), operating leases are secured by its underlying assets. Using AA- rated corporate bond yield will therefore better reflect the less risky operating leases than the company’s overall cost of debt which reflects not only the secured debt but also the unsecured debt (Koller et al., 2010).

The calculated asset value posts have been added to operating non-current assets and debt and debt equivalents in the companies’ reorganized balance sheets. The imputed interest expense, which is calculated by multiplying cost of operating leases with asset value, is added to the companies’ income statements. The asset value calculations are presented in Appendix 4.

4.3 Profitability Analysis The profitability analysis is an essential key within financial analysis as it provides an indication of a company’s economic strengths and future expectations, and is also important for the relationships with the stakeholders (Petersen & Plenborg, 2012). The profitability analysis in this thesis is built on the DuPont-model, and will be carried out in accordance with Figure 7.

Profit Margin Return from Return on Operating Invested Capital Activities Turnover Rate of Invested Capital Return on Equity Financial Leverage Return from Financing Activities Operating Spread

Figure 6 DuPont Model. Source: Authors’ own creation.

In this subchapter, we will undertake an analysis of the Return on Equity and the Return on Invested Capital, and investigate the drivers of these two ratios in order to gain a more detailed view of the companies’ performances and what drives their profitability.

4.3.1 Return on Equity The Return on Equity (ROE) measures the company’s profitability, taking into account both operating and financial leverage. Thus, the ROE measures the shareholders’ return on their investments in the company (Petersen & Plenborg, 2012).

In order to determine the ROE, we use the following formula for our calculations:

푁푒푡 퐸푎푟푛푖푛푔푠 푎푓푡푒푟 푇푎푥 푅푒푡푢푟푛 표푛 퐸푞푢푖푡푦 = ∗ 100 퐵표표푘 푉푎푙푢푒 표푓 퐸푞푢푖푡푦

Return on Equity 40% 35% 30% 25% 20% 15% 10% 5% 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

NCC Skanska Peab

Graph 16 Return on Equity for NCC, Skanska, and Peab, for the period 2006 – 2015. Source: Authors’ own creation based on the companies’ annual reports.

As can be seen in Graph 16 above, NCC experienced a decreasing trend in the beginning of the investigated period when their ROE of 31.10% in 2007 fell to 15.81% in 2011. In the last four years, NCC’s ROE have stabilized close to its ten-year average of 22,01%. Skanska have had a relatively stable ROE development, and with the exception of 2011-2012 when the ROE decreased from 38.78% to 14.78%, its ROE have been close to the ten-year average of 20.13%. Peab’s first years ROE development is similar to the one of NCC. However, when NCC’s ROE stabilized in 2012, Peab’s ROE continued to decrease. In 2014 the ROE of 12.84% was close to the ten-year average of 15.16%, but once again it decreased in 2015. In general, and with some exceptions, NCC have experienced the greatest ROE of the peer companies.

4.3.1.1 Decomposition of ROE In order to gain a deeper understanding of the underlying drivers of the peer group’s ROE development, we have conducted a decomposition of the ROE. The decomposition of ROE is described as follow:

푁퐼퐵퐷 푅푂퐸 = 푅푂퐼퐶 + (푅푂퐼퐶 − 푁퐵퐶) ∗ 퐵푉퐸 푤ℎ푒푟푒:

푅푂퐼퐶 = 푅푒푡푢푟푛 표푛 퐼푛푣푒푠푡푒푑 퐶푎푝푖푡푎푙 푎푓푡푒푟 푇푎푥 퐵푉퐸 = 퐵표표푘 푉푎푙푢푒 표푓 퐸푞푢푖푡푦 푁퐼퐵퐷 = (푏표표푘 푣푎푙푢푒 표푓) 푁푒푡 푖푛푡푒푟푒푠푡 − 푏푒푎푟푖푛푔 푑푒푏푡 푁퐵퐶 = 푁푒푡 퐵표푟푟표푤푖푛푔 퐶표푠푡 푎푓푡푒푟 푇푎푥 푖푛 푝푒푟푐푒푛푡

From the above, we find that the following is true:

푅푂퐸 = 푅푒푡푢푟푛 표푛 퐼푛푣푒푠푡푒푑 퐶푎푝푖푡푎푙 + (푂푝푒푟푎푡푖푛푔 푆푝푟푒푎푑 ∗ 퐹푖푛푎푛푐푖푎푙 퐿푒푣푒푟푎푔푒)

We can hereby determine the three main factors affecting the level and trend in ROE: ● Operating profitability (ROIC) ● Net borrowing interest rate after tax (NBC) ● Financial leverage (NIBD/BVE)

The financial leverage and the net borrowing interest rate after tax will be discussed in the following sections, while operating profitability in terms of ROIC will be handled in its own subchapter 4.3.2.

4.3.1.2 Financial Leverage The financial leverage ratio (FLEV) is measuring to what extent the invested capital is financed by borrowings in terms of net interest-bearing debt (NIBD) or by equity. The financial leverage is calculated as follow:

푁푒푡 푖푛푡푒푟푒푠푡 − 푏푒푎푟푖푛푔 푑푒푏푡 푁퐼퐵퐷 퐹퐿퐸푉 = = 퐵표표푘 푉푎푙푢푒 표푓 퐸푞푢푖푡푦 퐵푉퐸

The financial leverage’s impact is to a large extent determined on the difference between ROIC and NBC, which is referred to as the Operating spread (also called interest spread). If the operating spread is positive, an increase in financial leverage will improve ROE, while an increase in financial leverage will have a negative impact if the operating spread is negative (Petersen & Plenborg, 2012). The operating spread is further discussed in section 4.3.1.4 Operating Spread.

Financial Leverage 2,00

1,50

1,00

0,50

0,00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

-0,50

NCC Skanska Peab

Graph 17 Financial Leverage. Source: Authors’ own creation based on NCC, Skanska, and Peab Annual Reports 2006 – 20015.

Graph 17 above presents the financial leverage of the companies. As can be seen, NCC and Peab have similar development, and their average financial leverage ratio for the period is 1.35 and 1.36, respectively. Skanska, on the other hand, has an average financial leverage ratio of -0.02. As a financial leverage ratio above one means that a company’s NIBD exceeds its equity, this indicates that NCC and Peab are debt financed as their NIBD exceeds their equity. In addition, NCC and Peab are, based on the financial leverage, equally exposed to financial risk.

Different from the other two companies, Skanska is experiencing negative financial ratios, which indicates that their financial assets exceeds their financial liabilities. This have been mainly due to their large pool of excess cash, which contribute to 44.8% of its financial assets in average.

4.3.1.3 Net Borrowing Cost The Net Borrowing Cost (NBC) is, as already mentioned in the previous section, an affecting variable in the operating spread. We will therefore elaborate on NBC and its development for NCC and its peer companies. The NBC is determined by the following formula:

푁푒푡 푓푖푛푎푛푐푖푎푙 푒푥푝푒푛푠푒푠 푎푓푡푒푟 푡푎푥 푁퐵퐶 = ∗ 100 푁푒푡 푖푛푡푒푟푒푠푡 − 푏푒푎푟푖푛푔 푑푒푏푡

Net Borrowing Cost 2006 - 2015 15,00% 5,00%

-5,00% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 -15,00% -25,00% -35,00% -45,00% -55,00% -65,00% -75,00%

NCC Skanska Peab

Graph 18 Net Borrowing Cost. Source: Authors’ own creation based on NCC, Skanska, and Peab annual report 2006 – 2015.

As can be seen in Graph 18, the NBC varies significantly during the investigated period. NCC is the company with the least volatility regarding NBC, and has an average of 3.31%. Skanska and Peab have averages of -6.67% and 2.58%, respectively. Both companies have experienced negative NBCs, although Skanska’s NBC in 2015 is extreme. The reason for their negative NBC is due to their financial assets which exceeds their financial liabilities. However, as Petersen & Plenborg (2012) argues, the NBC rarely matches the company’s actual borrowing rate as the NBC will be affected by the difference between deposit and lending rates. In addition, NBC could include gains and losses from securities and other financial items, and thus should be interpreted and analyzed with caution (Petersen & Plenborg, 2012).

4.3.1.4 Operating Spread The operating spread is the difference between ROIC and NBC. Hence, a positive operating spread combined with an increase in financial leverage could therefore improve the ROE. This is true in case a company’s NIBD is positive. However, as previously mentioned, Skanska’s financial assets have for several years exceeded its financial liabilities, leading to negative NIBD. Thus, the positive operating spread has not contributed to improve Skanska’s ROE. For NCC and Peab, which have had positive

NIBD and thus positive financial leverage ratios, their positive operating spread have in contrary had a positive impact on their ROE.

Operating Spread 2006 - 2015 120,00%

100,00%

80,00%

60,00%

40,00%

20,00%

0,00% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

NCC Skanska Peab

Graph 19 Operating Spread. Source: Authors’ own creation based on NCC, Skanska, and Peab annual reports 2006 – 2015.

4.3.2 Return on Invested Capital In profitability analysis, the return on invested capital (ROIC) is the overall profitability measure for operations. The ratio states the return on invested capital in a firm’s net operating assets as a percentage, and should be compared to other investments with similar risk. The ROIC ratio is of highly importance, not least in the context of valuation as a higher rate of return will lead to a higher estimated value. As a consequence, a company with high ROIC will become more attractive to provide loans to, and the company will hence be able to obtain cheaper financing (Petersen & Plenborg, 2012). The formula that has been used to calculate ROIC is:

푁푂푃퐴푇 푅푂퐼퐶 = 퐼푛푣푒푠푡푒푑 퐶푎푝푖푡푎푙

The ROIC of NCC and its peer companies are presented in Graph 20 below. As can be seen, NCC’s ROIC development have been the least volatile compared to the other companies, and have fluctuating close to its average of 11.36% for the period. In 2015, NCC had a ROIC of 11.63%, which

66 indicates that the company is able to generate an 11.63% return for each 1SEK invested in its operations. In comparison, Peab’s development regarding the ROIC have been declining from 2007 to 2013, and have been on a level below NCC’s, which its average of 6.09% further indicates. Skanska’s ROIC have been fluctuating extensively for the investigated period with a minimum of 11.57% and a maximum of 35%. With an average of 22.62% Skanska’s ROIC have constantly been significantly higher than the ROIC of NCC. The ROIC calculations are presented in Appendix 13.

Return on Invested Capital 2006 - 2015 40% 35% 30% 25% 20% 15% 10% 5% 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

NCC Skanska Peab

Graph 20 Return on Invested Capital. Source: Authors’ own creation based on annual reports from NCC, Skanska, and Peab 2006 – 2015.

4.3.2.1 Decomposition of Return on Invested Capital One issue of the ROIC is that the ratio is not able to determine whether profitability is due to a better relation between revenues and expenses, or due to an improved capital utilization. In order to answer this, we have decomposed the ROIC into the profit margin and the turnover rate of invested capital (Petersen & Plenborg, 2012) as follow:

푅푂퐼퐶 = 푃푟표푓푖푡 푀푎푟푔푖푛 ∗ 푇푢푟푛표푣푒푟 푟푎푡푒 표푓 퐼푛푣푒푠푡푒푑 퐶푎푝푖푡푎푙

The profit margin and the turnover rate of invested capital will be considered in the following sections.

4.3.2.2 Profit Margin The profit margin, which also is recognized as operating profit margin, describes the revenue-to- expense relation, expressed as operating income as a percentage of net revenue, and where a high profit margin is attractive. The formula to compute profit margin is as follow:

푁푂푃퐴푇 푃푟표푓푖푡 푀푎푟푔푖푛 = ∗ 100 푁푒푡 푅푒푣푒푛푢푒푠

As Graph 21 shows, NCC has a higher profit margin in comparison to both Skanska and Peab in seven out of the ten comparable years. NCCs profit margin over the period is as well higher than the average profit margin except in 2011. The average profit margin for NCC is 3.76% and is higher than both Skanska and Peab 3.25% and 3.07%, respectively. In 2015 NCC reached a profit margin of 4.16%, which is an expression of that the company generates 4.16% of net revenue.

Profit Margin 2006 - 2015 7,00%

6,00%

5,00%

4,00%

3,00%

2,00%

1,00%

0,00% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

NCC Skanska Peab

Graph 21 Profit Margin. Source: Authors’ own creation based on the annual reports from NCC, Skanska, and Peab 2006 – 2015.

4.3.2.2 Turnover Rate The turnover rate of invested capital indicates the company’s ability utilize their invested capital. The higher the turnover rate is, the faster is the company able to utilize its invested capital, while a lower turnover rate indicates that the company has tied up its invested capital for a longer period.

In general, it is therefore more attractive to have a high turnover rate of invested capital, as it indicates that the company is using its assets in a more efficient way (Petersen & Plenborg, 2012). The turnover rate of invested capital is defined as:

푁푒푡 푅푒푣푒푛푢푒 푇푢푟푛표푣푒푟 푅푎푡푒 표푓 퐼푛푣푒푠푡푒푑 퐶푎푝푖푡푎푙 = 퐼푛푣푒푠푡푒푑 퐶푎푝푖푡푎푙

NCC has a stable turnover rate throughout the period with an average rate of 3. In 2015 the turnover rate was 2,58. The turnover rate of 2,58 indicates that NCC’s invested capital is tied up in approximately 140 days (360/2,58 = 139,53 days). It further indicates that for each SEK invested in the operation it generates a sale of SEK 2,53.

Skanska’s turnover rate is significantly higher than NCC’s dito, with an average of 7.15 for the measured period, and a rate of 6.45 in 2015. Except for the first two years, and the last year 2015, Peab have had a lower turnover rate than NCC, with an average rate of 2.61. Based on this, NCC is more effective than Peab, but less effective than Skanska regarding generating high returns on the capital invested in their operations.

Turnover rate of invested capital 2006 - 2015 12

4 Asset Asset turnover

0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

NCC Skanska Peab

Graph 22 Turnover rate of invested capital. Source: Authors’ own creation based on annual reports from NCC, Skanska, Peab, 2006 – 2015.

NCC has lower turnover rate in comparison to Skanska (higher than Peab), this in turn NCC has a higher profit margin than Skanska as well as Peab. Earlier in chapter 3 in the discussion regarding rivalry the conclusion was, that for the construction industry there NCC is operating the rivalry is high. To operate within an industry with high competition the profit margin is generally low and this needs to be compensate with a higher turnover rate (Petersen & Plenborg, 2010). NCC has a higher Profit margin in comparison to the two other companies as well as above the peer group average. With a higher profit margin the turnover rate is normally little lower as can be seen in NCC case.

4.4 Growth Analysis It is of high value that companies understand what drives growth and what makes it value creating in order to be able to maximize the value for their shareholders. For large companies, long-term revenue growth is almost entirely driven by the growth of the markets they operate in and by the acquisitions they undertake (Koller, 2010). To determine a company's future growth potential a historical growth analysis combined with an in-depth knowledge of the market, the industry and the firm is necessary (Petersen & Plenborg, 2012). The findings in the growth analysis chapter combined with the strategic analysis will be used to determine NCC future growth potential.

4.4.1 Revenue Growth If a firm's historically growth rate is high it is not necessarily a reliable indicator of future growth and it is necessary to be cautious about using past growth rates especially in earnings for forecasting future growth (Damodaran, 2012). The revenue growth rate is in general more persistent and predictable since accounting choices have a far smaller effect on revenues in comparison to earnings (Damodaran, 2012). Furthermore, earnings growth is less correlated than revenue growth over time.

As can be seen in Graph 16, the net sales for NCC have been increasing since 2006. Right before the financial crisis in 2008, NCC reached a net sales of SEK M 58 397. The net sales dropped the following three years before net sales started to increase again. 2015 is the year with highest net sales with 62 495 MSEK in the period. The geometric average growth rate from 2006 to 2015 is 1,25%. The

70 geometric growth rate has been used instead of arithmetic since it is a more accurate measure of true growth, especially when the earnings have been volatile (Damodaran, 2012). As can be seen in Graph 16 the growth rate in percentage for each year is volatile.

NCC Net Sales and Growth 70 000 15%

60 000 10% 50 000 5% 40 000 0% 30 000 -5% 20 000

10 000 -10%

0 -15% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Net sales (SEK M) Growth (%)

Graph 23 Net Sales and Growth. Source: Authors’ own creation based on annual reports from NCC 2006 – 2015.

4.4.2 Business Areas Recall from Chapter 2, NCC is operating within four business areas as for 2015. Up until, 2009, NCC Housing was included in NCC Construction, in order to become an individual business area per the 1st January 2009. The chart 17 shows the impact that each operating segments has on total revenue. The segment that contributes the most towards the total revenue is NCC Construction, which contributes with 76%-78% during the period 2006-2008. From 2009, the contribution from NCC Construction drops to between 60%-65% during the measured period. The main reason for this is the mentioned spin-off business area of NCC Housing. Since the start, NCC Housing has contributed with 13-19% of NCC’s total revenue. If NCC Housing would still be a part of NCC Construction during the entire period, NCC Construction would contribute with 74%-78% of total revenue during the period, which is illustrated in Graph 24.

NCC Roads is the second contributor followed by NCC Property Development towards the total revenue with 16%-20% and 2%-7% respectively.

Business Areas 100%

90%

80%

70%

60%

50% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

NCC Construction NCC Roads NCC Property Development NCC Housing

Graph 24 NCC Business Areas where NCC Housing is separated. Source: Authors’ own creation based on annual reports from NCC 2006 – 2015.

Business Areas 100%

90%

80%

70%

60%

50% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

NCC Construction NCC Roads NCC Property Development

Graph 25 NCC Business Areas where NCC Housing is included in NCC Construction. Source: Authors’ own creation based on annual reports from NCC 2006 – 2015.

Geometric Average Growth 2006 - 2015 2009 - 2015 NCC Construction -0,65% 2,25% NCC Roads 1,80% 2,22% NCC Property Development -1,06% 9,26% NCC Housing 6,42% NCC Construction + NCC Housing 2,49% Table 8 Geometric Average Growth Rate for NCC’s Business areas. Source: Own creation with data retrieved from NCC’s annual reports 2006 – 2015.

The geometric average growth of each business area is shown in Table 8 above. Analyzing the business areas as it was organized before NCC Housing was separated from NCC Construction in 2009, we can see that only NCC Roads have had a positive average growth of 1,80%, while NCC Construction and NCC Property Development both had a negative growth of -0,65% and -1,06%, respectively. However, as already mentioned, as NCC Housing was separated towards its own business area, NCC Construction’s growth was negatively affected, which causes its negative growth. Considering the case if NCC Housing would still be included in NCC Construction, then NCC Construction would have an average growth of 2,49%.

In addition, a geometric average growth is calculated for the period 2009 – 2015. The reason for this was to exclude the impact of the financial crisis when considering the average growth rate. Because, we argue that when investigating average growth, extreme outliers such as a financial crisis, would distort our investigation. Therefore, we founded a need to consider also the average growth under normal conditions.

4.4.3 Geographical Areas For NCC the Nordic region is the main market and has a percentage of net sales between 93% - 95%. The contribution from the primary market has been stable during the measured period. Sweden is the country that contributes the most to the net sales with approximately 50% for each year in the period 2006-2015. Denmark, Finland, and Norway contribute with a similar percentage compared to each other during the period, and in 2015 they answered for around 13-15% each.

The secondary market has is stable with 5%-7% of net sales during the measured period. In the secondary market, Germany is the country with the largest contribution. Out of the total net sales Germany contributed with 3% in 2006 and has thereafter increased their net sales and contribution to net sales, and in 2015 they contributed to around 6%.

Geographical market 100%

90%

80%

70%

60%

50%

40% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Sweden Denmark Finland Norway Germany Other

Graph 26 NCC’s geograpgical markets. Source: Own creation with data retreived from NCC’s annual reports 2006 – 2015.

The geometric average growth rate in NCC’s primary market is 1,28% and for the secondary market it is 0,90% for the period of 2006 - 2015. In both markets, the total growth is slow. As could be seen earlier in the strategic analysis the financial crisis and the euro crisis had a negative impact on the construction industry in general. This in turn affected NCC with lower growth rates, and to some extent even negative growth.

In total the Nordic region has experienced a slow but positive geometric average growth rate except for Denmark as can be seen in Table 9, which generated an average growth of -0,63%. The country that generated the highest growth was Finland with 2,18%, followed by Norway and Sweden with 1,83% and 1,48%, respectively.

In the secondary market, Germany have shown a significant growth, with an geometric average growth of 7,82%, and is the reason why the secondary market’s average growth is positive. The other countries, in terms of Estonia, Latvia, and Russia, have experienced negative growth.

Geographical Geometric Growth Primary market 1,28% Sweden 1,48% Secondary market 0,90% Denmark -0,63% Finland 2,18% Norway 1,83% Germany 7,82% Other -8,99% Table 9 Geometric Growth for NCC’s geographical markets. Source: Own creation with data retrieved from NCC’s annual reports 2006 – 2015.

4.4.4 Orders received Considering the investigated period, Graph 20 below shows how the order received decreased between 2007 and 2009 due to the financial crisis, and went from period high of 63 344 MSEK to period low of 45 957 MSEK. From 2009, the orders received have shown an up-going trend despite the fallback in 2012-2013, which was due to the euro crisis. In 2014 and 2015, the orders received was back to a level similar to before the crisis of over 60 MSEK.

Throughout the entire period NCC did experienced a growth in orders received, it was small but on the positive side with a geometric average growth of 0,99%. Since the financial crises the customer of NCC, governments and large private sector customers, has experienced an economic growth and this has recently started to reflect in the orders received.

Orders received 2006 - 2015 70 000

60 000

50 000

40 000

30 000

20 000

10 000

0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Graph 27 NCC’s received orders. Source: Own creation with data retrieved from NCC’s annual reports 2006 – 2015.

As already mentioned earlier Koller (2010) determined that long term growth for larger companies are also driven by acquisitions they perform.

4.5 Free Cash Flow Analysis In this section we will analyze NCC’s Free Cash Flow to Firm (FCFF) and its development for the period 2006 - 2015. The FCFF is the cash that the company that use for dividend payouts and investments, and is generated from the company’s operating business. This excludes non-operating cash flows related to the capital structure of the company. In addition, the FCFF indicates the company’s ability to repay its debt and equity holders.

The following cash flow analysis is based on our previously reorganized financial statements, and will be further used in our Discounted Cash Flow valuation in Chapter 6. The FCFF and Gross Cash Flow (GCF) of NCC is presented in Table 10. The full calculations are available in Appendix 8.

SEK, Million 2007 2008 2009 2010 2011 2012 2013 2014 2015 Gross Cash Flow 3134 2474 2321 2383 2144 2866 3074 3041 3358 Free Cash Flow to Firm -1 1701 5118 1047 -1494 -1652 637 907 3695 Table 10 NCC’s Free Cash Flow to Firm. Source: Own creation with data retrieved from NCC’s annual reports 2006 – 2015.

4.6 Chapter Conclusion: Financial Analysis The financial analysis in this chapter was conducted in order to determine the financial health of NCC from a historical perspective regarding profitability, growth, and cash flows. In addition, in order to gain both perspective and benchmarking, two of NCC’s competitors were chosen to be analyzed in terms of Skanska and Peab.

The return on equity for NCC experienced a decline in the beginning of the measured period, which is reasonable due to the economic downturn and financial crisis. For the last four years, the return on equity have stabilized on a level close to its 10-years average. The development for NCC’s peer companies have been similar although Skanska had a significant increase in 2011, and Peab’s decline in return on equity continued to its period-low in 2013. In general, NCC’s return on equity have been higher which its 10-years average indicates.

The profitability analysis further indicated that the NCC’s and Peab’s financial leverages in combination with the operating spreads had a positive impact on their return on equity, while Skanska, which had a negative financial leverage in the first part of the measured period was mainly affected by the operating spread.

Furthermore, the ROIC analysis clearly states that although NCC had the most consistent level of ROIC, they were outperformed by Skanska despite its high volatility. The ROIC was further decomposed into profit margin and turnover rate on invested capital, where the peer group’s profit margin were low but compensated with higher turnover rates. Despite for Skanska’s extreme profit margin in 2011, NCC had the highest profit margin of the peer group of companies, while Skanska significantly outperformed its competitors regarding turnover rate. Based on the movements of

77 profit margin and turnover rate, we argue that NCC’s ROIC for the last years is driven by the profit margin. Similar is for Peab, while the turnover rate have been the main driver for Skanska. However, taking the whole measured period into consideration, a combination of both variables seems to affect the ROIC, although to an extent similar to as just described.

From the growth analysis we can conclude that the net sales have experienced an annual geometric growth of 1.25% for the period 2006 – 2015. The main revenue-contributing business area of NCC is its Construction business which alone stands for 59% of the companies total revenues. Since 2009, the Housing business has capitalized a larger part of the revenues, but is rather due to the separation from the Construction. This is further stated when considering the growth of the different segments.

From the analysis of the revenue per geographical we can conclude that NCC’s primary market with the Nordic countries contributes to around 93% of total revenues. Sweden is the unquestionable largest market with around 50% of total revenues. For the secondary market Germany is the largest market and contributed with around 6% of net sales. Both of NCC´s markets are experiencing a positive growth. The primary market with a higher geometric average growth rate of 1,28% than the secondary market of 0,90%.

Right before the financial crisis the orders received reached the peak of over 60 MSEK. Since the bottom in 2009 the customers of NCC, governments and large private sector customer, has experienced economic growth and this has also been reflected in the orders received for NCC. The orders received are once again over 60 MSEK.

5 Forecast

The Forecast-chapter will forecast the future performance of NCC for the upcoming years. The forecast of NCC’s key-drivers’ future development is essential in order for us to use the data and conduct a robust valuation in Chapter 6. Together with the input from previous chapters in terms of the strategic and financial analyses, we will take NCC’s reorganized financial statements into consideration, and analyze these with the aim of estimating its future. As the future is highly uncertain it is crucial to conduct a thorough forecast analysis in order to reduce the potential errors and biases that otherwise could arise. In the end, the findings from the Forecast-chapter will lay the foundation for Chapter 6: Valuation.

5.1 Forecast Period In order to create an appropriate forecast, the forecast period in terms of number of years needs to be determined, as well as the level of details to be included in the forecast. The fundamental is that the forecast period needs to be long enough in order for the company to reach a steady state. When a company reach steady state the free cash flow will grow at a constant rate and can be valued using a growth perpetuity. The company growth rate will reach the same growth rate or less than that of the economy, in our case it will be the economy of Sweden. If using a too short forecast period, like 5 years, the result will normally be undervalued. The future assumptions will be harder to determine with a too short forecast period. On the other hand, with a too long forecast period, 10-15 years, it will be hard to forecast specific line items (Koller et al., 2010). The forecast period applied will be 10 years as in line with Kollers recommendations (Koller et al., 2010), and due to our argumentation that NCC is experience a stable growth in a mature and competitive market with high entry barriers.

The 10 years of forecast will be divided into two parts of five years each. The first five years will be more detailed regarding the individual items of NCC’s business, while the last five years will be forecasted in order for them to develop towards stable growth. Thereafter, a terminal value is used in order to reflect the steady-state performance, which will be correlated to the inflation target of NCC’s home market Sweden.

5.2 Forecast of the Income Statement In the following subchapters, items of the Income Statement are to be analyzed in order to create a forecast. These items include Revenue, Cost of Sale, Other Operating Income, Tax Rate, and Net Operating Profit, which we believe are the most essential variables for NCC’s future. The full information of these can be found in Appendix 9.

5.2.1 Revenues In Chapter 4, we discussed the revenue of NCC from a historical perspective, and where the company’s revenue streams of its four business areas were analyzed. Due to the business areas’ variety in size, future prospects, and historical growth, we have decided to forecast and analyze their future growth individually. The historical growth of the business areas constitutes the foundation for our forecast and its assumptions included, together with the strategic analysis in Chapter 3.

Despite the historical merger and acquisitions (M&A) previously made by NCC, mostly in a period before our investigation, we argue that the growth of NCC is mainly due to organic growth. This as the numbers of M&A activities during the investigated period have been limited to a few, which individually do not have had any major impact on the growth on the actual years. In addition, it is impossible to estimate potential future M&A activities that NCC may exercise. As a consequence, and in order to maintain a consistency in our analysis and forecast, we have therefore decided to exclude the potential impact of M&A activities in our forecast.

Recall from Chapter 4 and Table 8 regarding the geometric growth of NCC’s business areas, the average geometric growths during the period 2006 – 2015.

5.2.1.1 Revenue Forecast: NCC Construction For NCC Construction and the historical period 2011-2015 the revenue has increased from MSEK 38 150 to MSEK 40 370. In the years 2011 and 2012, the construction market had recovered from the financial crisis just in time to meet the euro crisis. This can be seen in the revenue stream regarding NCC construction who has the highest year of revenue in 2012 which followed by a downturn in the

80 following two years. NCC Construction started to grow again in 2015 and did that with an annual growth of 4,93%. During the time of 2011-2015 the historical arithmetic average growth rate was 3,69%. This is due to positive growth rate in 2011, 2012, and 2015. There were two years with negative growth and was, as discussed earlier, due to the euro crisis.

The belief is that NCC Construction will be able to continue to grow at the same rate as in 2015 of 4,93% in 2016. For year 2017 the belief is that the growth will increase with the arithmetic average growth of the year 2011-2015, excluding the outliner year 2013. This arithmetic average growth rate is 4,03%. For the following years, 2018 – 2020, a rolling arithmetic average growth rate will be applied, where the average of the past five years is used, which corresponds to 3,03%, 4,23%, and 4,06%, respectively.

During the period of 2006-2015 NCC Construction has recovered from two crises both the financial and the euro. This has made the revenue to experience some fluctuations. The future is, however, expecting the GDP growth of NCC’s markets to become more stabilized and thus the fluctuations in GDP growth will be reduced. This is also why we believe that the average growth rate will be a good estimation for the future.

5.2.1.2 Revenue Forecast: NCC Roads NCC Roads has during the year contributed with 18-22% of total revenue. It is the second biggest contributor to total revenue after NCC Construction and right in front of NCC Housing when looking at the average contribution over the period. NCC Roads have been very stable throughout both a five-year historical period and as well when looking over a longer time period of ten years, in terms of revenue. The geometric average growth rate for a ten year period is 1,80%, as discussed in chapter 4.4.2. For NCC Roads the geometric average growth for the ten-year period is to be used.

5.2.1.3 Revenue Forecast: NCC Property Development The property development has seen an increase in both revenue and growth throughout the period of 2011-2015. There was a slightly downturn directly after the euro crisis but the growth quickly recovered again. The future of NCC Property Development seems to be bright. This is because of

81 the ongoing urbanization, which will contribute to an increase in the property development market in the growing regions. The geometric average growth throughout the period was 25,85%. This geometric average is relatively high and therefore it is recalculated for the period 2009-2015. This is done since the revenue stream in for NCC Property Development was much lower in 2011 in comparison to the other years and this drove the geometric average up. With the new calculation the geometric average growth rate is 9,26%. This segment is the one that contribute the least towards the total revenue of NCC. We will use the geometric average growth rate of 9,26% throughout the forecast from 2016, and after five years lower the growth to 5%.

5.2.1.4 Revenue Forecast: NCC Housing With a growing population in the market where NCC is operating, together with a longer life expectancy, the NCC Housing is going towards a foreseeable good future. More and more customers are demanding more environmental friendly construction and here NCC is in the forefront. This in combination with the continue urbanization there will be more house constructions in the metropolitan areas and as well in the suburban areas.

The geometrical average growth rate for NCC Housing is from the start of 2009 to 2015 equal to 6,42%. In fact, NCC Housing has except for 2010, only experience a positive growth year by year since 2009, where the lowest year corresponds to 4,85% and the highest year 28,95%. NCC Housing will continue to grow in the future with the geometrical average growth rate of 6,42%. From 2020 the growth will start to decline to reach steady state after 2025.

5.2.1.5 Revenue Forecast: Other In this item NCC recognizes the Swedish pension costs in accordance with the Swedish accounting standards and adjustments of IFRS. Further, Other can also include certain items such as impairment losses and provisions as a result from activities made in the different revenue segments listed above. What have been discovered is that there have been some fluctuations on the year to year basis. Other has impacted the revenue stream negatively and since 2012 this negative stream has been lowered. For forecasted rate for Other has been the arithmetic average from the last three years - 6,90%. This has been used since this post have been fluctuate a lot during the period.

5.2.2 Cost of Sales The cost of sales that NCC is listing in their annual reports under operating expenses distributed by type of cost will be further discussed and are as follow; Change in inventories, Personal expenses, Depreciation and Amortization, Impairment losses, and Production-related goods and services, plus raw materials and supplies. These items historical relation to revenue will be examined.

5.2.2.1 Change in inventories The item Change in inventories fluctuates between the years, but is a relatively small part as it is only stands for in average 0,09% of NCC’s total revenue. This relation to revenue will also be used in the forecast.

5.2.2.2 Personnel Expenses The personnel expenses have been increasing during the period 2011-2015 with an exception for 2015. 2015 the personnel expenses dropped significantly with almost 35%. When examining the 10- years of history instead, corresponding to 2006 -2015, the personnel expenses has increasing every year, with significant reductions in 2009 and 2010, in addition to the mentioned one in 2015.

As was discussed earlier in the strategic chapter, there is a potential threat of shortcomings in skilled educated engineers, which in turn potentially will drive the costs for recruitment and personnel. This is, we believe that the personnel cost will increase in the future.

The arithmetic average growth for personnel expenses corresponded to -4,17% for the period 2011 – 2015. However, as mentioned in the beginning of this section, the significant drop in 2015 is the reason to the negative number. Instead, if considering the arithmetic average growth for 2011 – 2014, we found a growth equal to 3,49%. For the same period, the personnel expenses in relation to the total revenue equaled to 20,26%, while including 2015 the average equaled to 18,53%. If only considering 2015 the relationship between personnel expenses and total revenue was as low as 12,31%. With the predictions that there will be a shortage of skilled workers in the nearby future the belief is that the relationship between personnel expenses and total revenue will again increase.

The belief is that the personnel expenses will end up in between the years of 2014 and 2015 which is 16,34%. During this time NCC will have to spend more money for the skilled educated personnel and also in the same time learn how to be cost efficient and not reach the same personal cost as before.

5.2.2.3 Depreciation and Amortization One of the cost of sales that NCC has is the depreciation/amortization. This is a continuous post that there are low fluctuations in and it will continue in the future both for existing and future investments. For the last three years the depreciation/amortization in relation to total revenue has been between 1,21%-1,25%. In comparison to the period of 2009-2012 the relation has increased from an average of 1,10%. The forecast regarding this post is that it will continue in the same level for the future as it has been done for the period of 2013-2015. With a percentage relation to total revenue of 1,22%

5.2.2.4 Impairment losses For NCC impairment losses are a very small part in relation to total revenue. The average of impairment losses for the period is 0,10%. The lowest year is 2014 with 0,01% and the 2011 is the year with the highest of 0,35%. For impairment losses an average will be used for the forecast.

5.2.2.5 Production related goods and services The major cost within the cost of sales is the production related goods and services which also includes raw materials and supplies. Since this is the major post regarding cost it also includes a few different things. As discussed earlier the demand of building more environmental friendly is increasing. This demand is coming both from politicians as well as customers, who can e.g. be governments. NCC has a relatively a large group of suppliers most of them in the Nordic countries but the aim is to increase the suppliers from outside the Nordic region. With an expected increase in environmental friendly materials, related goods, as well as services this cost post could increase. Since 2006-2014 the relation between production related goods and total revenue has been in arithmetic average of 74,72%. The movement have been between 73,44% to 76,74%. In 2015 the relation met 81,55%. The arithmetic average for the last five years including 2015 gives us 75,80%.

This is higher in comparison to the ten-year average, however smaller than the 2015 relation. For the forecast the relation between production related goods and total revenue will be used and the belief that NCC will be able to reduce it cost down to 77,50% to 2020 gradually, which is in between the average and the top value of 81,55%.

5.2.3 Other Operating Income In the annual report there are a few posts that is reported as operating income. Those are listed in the reorganizing statement and are added together to create the post with the name Result from other activities. This post includes e.g. income from joint ventures and associated companies, result from sales of owner-occupied properties. This post is small in relation to the total revenue, and the arithmetic average is -0,003%, which will also be used in the forecast.

5.2.4 Tax Rate The tax rate that will be used for the forecast is 21,5%. This is the average effective tax rate that NCC has had for the last ten years. This tax rate that has been used is also in line with the corporate tax rate for Sweden in year 2015, 22%. The main market for NCC is the Swedish. Finland on the other hand has a lower tax rate of 20%. With the use of the historical average effective tax rate for last ten years and since it is in line with the primary market it will be a good measurement for the forecast.

5.2.5 Net Operating Profit after Tax Forecast Based on the historical NOPAT in combination with the forecasted items previously discussed above, we can determine the NOPAT for the future forecasted period. Consequently, we will also see the changes in profit margin, both historically and for the forecasted future. This is illustrated in Graph 28.

The forecasted of the NOPAT is constructed to increase from 2016 until 2020, i.e. the first five years, in order to start stagnate from 2021. The expected increase in NOPAT is due to the revenue growth NCC is expected to experience due to the current low interest rates, increasing demand for e.g.,

85 infrastructure and housing because of increasing population and urbanization, in combination with the expected reductions in cost of sales.

NOPAT & Profit Margin 4 500 5,00% 4 000 3 500 4,00% 3 000 3,00% 2 500 2 000 2,00% 1 500 1 000 1,00% 500 0 0,00%

NOPAT PM

Graph 28 NOPAT & Profit Margin Forecast 2011 – Terminal. Source: Source: Own creation based on NCC’s annual reports 2010 – 2015, and our forecast assumptions.

5.3 Forecast of Balance Sheet The important part with the forecasting of the balance sheet is to acquire the future predictions of invested capital. The future predictions of invested capital will be used together with the future estimations of NOPAT from the forecasted income statement to derive the forecasted ROIC.

5.3.1 Operating Working Capital The drivers for operating working capital can be found in the reorganized balance sheet. As can be seen property projects + housing projects and trade and other receivables are the main drivers for operating current assets. The drivers for operating current liabilities are account payable, invoiced revenues not worked up, and other current liabilities. During the historical period all those five drivers have been relative stable in relation to revenue. For the future the relationship between those drivers and revenue is estimated to continue to stay stable. With the drivers continuing to be stable the same will be for operating working capital in relation to revenue for the future.

5.3.2 Net Operating Assets For net operating assets it is similar to operating working capital. The drivers for net operating assets are stable in relation to revenue. The bigger driver for this factor is owner occupied properties, machinery & equipment when it comes to operating assets, and other provisions when it comes to operating liabilities. As mentioned the drivers have been stable towards revenue and are also expected to continue to have stable relation towards revenue.

5.4 Return on Invested Capital & Free Cash Flow to Firm Forecast In this subchapter, the final assumptions regarding the Return on Invested Capital and Free Cash Flow to Firm will be discussed. The full forecast is available in Appendix 11.

5.4.1 Return on Invested Capital The ROIC is expected to experience an increase until 2021, and after the ROIC will starts to flatten out with a ROIC of 10,95%. The increase in ROIC until 2021 is driven by the reduction in cost of sales. In 2015 the cost of sales in relation to revenue was remarkable higher in comparison to the last ten years. The expectation is that the cost of sales relation to revenue will decrease until 2021 and then be stable with an average that is less than the ten year average. In cost of sales NCC has been working to reduce both personnel costs and production related goods and services.

ROIC 12,00%

10,00%

8,00%

6,00%

4,00%

2,00%

0,00%

Graph 29 ROIC Development and Forecast 2011 – Terminal. Source: Own creation based on NCC’s annual reports 2010 – 2015, and our forecast assumptions.

5.4.2 Free Cash Flow to Firm The FCFF of NCC is forecasted through the computed estimations of NCC’s NOPAT, Depreciation and Amortization, Change in Net Working Capital, and Net Investments. These estimations and the historical five-year numbers are displayed in Graph 30 below.

FCFF 4000

3000

2000

1000

-1000

-2000

Graph 30 FCFF Development and Forecast 2011 – Terminal. Source: Own creation based on NCC’s annual reports 2010 – 2015, and own forecast assumptions.

5.5 Chapter Conclusion: Forecast Summarizing the Forecast chapter, we set the forecasted period to 10 years in accordance with Koller et al. (2010) in order to ensure a fair valuation. The forecast period was divided into two parts of five years, which the first five years included a more detailed view and the second part contain a simplified forecast.

Thereafter, NCC’s income statement was forecasted based on its organic growth. NCC’s revenue streams from its different business areas were estimated individually considering their historical development, and thus it was concluded that these business areas are expected to experience different future growths. Alongside with the growing revenues, the costs of NCC are expected to grow on a level just below the revenues. The fundamental for this is the historical growth in

88 personnel expenses and costs regarding production related goods and services. In addition and as already discussed, the personnel expenses is expected to grow due to the lack of skilled engineers available on the market, which will lead to higher costs for NCC in order for them to recruit, despite their advantage of brand- and employee reputation.

Followed by the income statement, the balance sheet was forecasted in order to determine the Operating Working Capital and the Net Operating Assets. Both of these were set at a flat future prediction in relation to the total revenue, and equaled 26% and 12%, respectively due to historical averages.

Finally, as a result of all the forecasted numbers, the forecast of ROIC and FCFF was possible to derive. The ROIC experienced an increase during the first five years in order to flatten out at a stable rate from 2020. Consequently, the forecast of the FCFF experience a steep increase the first five years, in order to reach a stable growth in the following five years.

6 Valuation

In order to conduct the valuation of NCC, we will combine the findings from the Strategic Analysis, the Financial Analysis, and the Forecast, in order to estimate the fair value of NCC’s share as for 18th of March, 2016.

First, we will present the two models that are to be used. These two models are the Discounted Cash Flow (DCF) and the Economic Value Added (EVA), and these models will together with our underlying assumptions and calculated numbers compute the final value of NCC. Thereafter, a sensitivity analysis and multiple analysis will be conducted in order to confirm the validity and robustness of the models.

6.1 Valuation Models The models that are applied in this thesis are the Discounted Cash Flow and the Economic Value Added.

6.1.1 Discounted Cash Flow The Discounted Cash Flow (DCF) model values the Enterprise Value (EV) of a company, including equity and outstanding debt, by determining the present value of future cash flows, and is unquestionable the most common and popular present value approaches, and valuation model (Petersen & Plenborg, 2012). This is, the DCF provides us with the value of the company today by discounting the residual cash flows at the weighted average cost of capital (WACC) (Koller et al., 2010). The WACC is further explained in detail in subchapter 6.2.

As follow, the Free Cash Flow to Firm (FCFF) will be discounted, which is the cash flow generated by a company after operating expenses and taxes but before debt and equity payments (Petersen & Plenborg, 2012). The DCF model used in this thesis is formulated as follow:

푛 퐹퐶퐹퐹푡 퐸푛푡푒푟푝푟푖푠푒 푉푎푙푢푒 = ∑ + 푃푉 표푓 퐶표푛푡푖푛푢푖푛푔 푉푎푙푢푒 (1 + 푊퐴퐶퐶)푡 푡=1

푤ℎ푒푟푒:

퐹퐶퐹퐹푡+1 1 푃푉 표푓 퐶표푛푡푖푛푢푖푛푔 푉푎푙푢푒 = × (푊퐴퐶퐶 − 푔) (1 + 푊퐴퐶퐶)푡+1

The above formula is used in order to discounting back the FCFF of the forecasted period, which was calculated in Chapter 5, to its Present Value (PV). In addition, the terminal value, which is also referred to as the continuing value, is also discounted back to its present value. The discounted FCFF and the discounted PV thereafter together form the EV, which reflects the ongoing business value of today. Important to know, is that ongoing business refers to that the company will exist in perpetuity without any expected threats, and that its cash flows will grow on a constant growth rate, and this is simulated in the PV of Continuing Value (Damodaran, 2012).

As for all other valuation models, the DCF model has its pros and cons. A major advantage is the WACC, which is used as the discount rate and offers the possibility to capture all underlying factors that have an impact on the business. It is thereby possible to use different required rate of returns in order to reflect the preferences of different stakeholders. However, the major disadvantages include the model’s limitation of only considering the FCFF as well as its sensitivity of assumptions related to the WACC as the discount factor. The need for robust calculation of the FCFF is therefore of highly importance when conducting the DCF analysis, as well as the underlying factors that are impacting the WACC.

6.1.2 Economic Value Added Parallel with the DCF model, the Economic Value Added (EVA) model will be used in the valuation of NCC. The EVA provides us with the difference between the company’s return and its cost of capital, which means that the value created by the company needs to exceed its cost of capital. Everything else correct and equal, the EVA model should generate the identical estimated number as the DCF model.

For calculating the EVA, the following formula will be used:

푛 푁푂푃퐴푇푡 − 푊퐴퐶퐶 ∗ 퐼퐶푡−1 푁푂푃퐴푇푛+1 − 푊퐴퐶퐶 ∗ 퐼퐶푡 1 퐸푛푡푒푟푝푟푖푠푒 푉푎푙푢푒 = 퐼퐶 + ∑ + ∗ 0 (1 + 푊퐴퐶퐶)푛 푊퐴퐶퐶 − 푔 (1 + 푊퐴퐶퐶)푛 푡=1

Similar as for the DCF model, the calculated EV through EVA will be divided by NCC’s outstanding shares in order to reach a share price.

Furthermore, as the EVA uses the WACC as a discount factor, the EVA model shares the DCF model’s disadvantage of being sensitive regarding assumptions related to the WACC. However, the EVA model holds the advantage of being able to explain the yearly performance of NCC, compared to the DCF, by analyzing the NOPAT and invested capital (Koller et al., 2010).

6.1.3 Assumptions A number of assumptions have been necessarily to take in order for us to accomplish the valuation of NCC. First, we assume that NCC will continue to conduct its business in perpetuity, i.e. forever, otherwise it would be impossible to calculate its terminal value in the DCF model.

Second, we have adjusted the present value of cash flows upwards with half a year due to the assumption that cash flows are generated continuously throughout the year, which is in accordance with Koller et al. (2010). This is because the assumption that discounted cash flows in full-year increments would generate an end-year lump sum would understate the appropriate discount factor for NCC.

6.2 Weighted Average Cost of Capital The Weighted Average Cost of Capital (WACC) is the opportunity cost of capital for investors, and so forth works as a comparison between different investments that holds a similar risk profile. As already mentioned, the advantage of WACC is that it takes into account the required rate of return for both debt and equity, and so forth it takes into consideration the return required in order to satisfy all the stakeholders of the company (Koller et al., 2010). The WACC of a company is calculated as follow:

퐸 푁퐹푂 푊퐴퐶퐶 = ∗ 푟 + ∗ 푟 (1 − 푡) 퐸푉 푒 퐸푉 푑

푤ℎ푒푟푒: 퐸 = 퐸푞푢푖푡푦 푁퐹푂 = 푁푒푡 퐹푖푛푎푛푐푖푎푙 푂푏푙푖푔푎푡푖표푛 퐸푉 = 퐸푛푡푒푟푝푟푖푠푒 푉푎푙푢푒 (= 퐸 + 푁퐹푂)

푟푒 = 푅푒푞푢푖푟푒푑 푟푎푡푒 표푓 푟푒푡푢푟푛 표푛 푒푞푢푖푡푦

푟푑 = 퐶표푠푡 표푓 푑푒푏푡 푡 = 퐶표푟푝표푟푎푡푒 푡푎푥 푟푎푡푒

As we reorganized the balance sheet in the Financial Analysis chapter, and included the operational leases, we need to adjust our WACC formula and calculations. We will therefore use the adjusted enterprise value where the capitalized operating leases are included. The formula that we will use for the valuation of NCC is therefore as follow:

퐸 푁퐹푂 퐶푂퐿 푊퐴퐶퐶 = ∗ 푟 + ∗ 푟 (1 − 푡) + ∗ 푟 (1 − 푡) 퐴퐸푉 푒 퐴퐸푉 푑 퐴퐸푉 푐표푙

푤ℎ푒푟푒: 퐴퐸푉 = 퐴푑푗푢푠푡푒푑 퐸푛푡푒푟푝푟푖푠푒 푉푎푙푢푒 (푠푢푚 표푓 퐸, 푁퐹푂, 푎푛푑 퐶푂퐿 퐶푂퐿 = 퐶푎푝푖푡푎푙푖푧푒푑 푂푝푒푟푎푡푖푛푔 퐿푒푎푠푒푠

푟푐표푙 = 퐶표푠푡 표푓 퐶푎푝푖푡푎푙푖푧푒푑 푂푝푒푟푎푡푖푛푔 퐿푒푎푠푒푠

The difference to in this WACC formula, compared to the original WACC, is that we now have two additional factors that will influence the WACC, in terms of the Capitalized Operating Leases (COL) and its cost of capital (rcol).

6.2.1 Cost of Equity As could be seen in the stated formulas above, the investors’ required rate of return is required in the WACC model. Therefore, we are using the Capital Asset Pricing Model (CAPM) in order to derive the required cost of equity (re) of NCC’s investors. The company’s cost of capital is based on the risk- free rate, the market risk premium, and the systematic risk of the company. Given this, the CAPM formula is stated as follow:

푟푒 = 푟푓 + 훽푒 ∗ (푟푚 − 푟푓)

푤ℎ푒푟푒:

푟푓 = 푟푖푠푘 − 푓푟푒푒 푟푎푡푒 ′ 훽푒 = 푐표푚푝푎푛푦 푠 푠푦푠푡푒푚푎푡푖푐 푟푖푠푘

푟푚 = 푚푎푟푘푒푡 푟푎푡푒

(푟푚 − 푟푓) = 푚푎푟푘푒푡 푟푖푠푘 푝푟푒푚푖푢푚

The components of the CAPM will be discussed individually in the following sections.

6.2.1.1 Risk-free rate The risk-free interest rate is the rate of return an investor can gain without any risk. In general, government bonds are acceptably used for estimating the risk-free interest rate as these are considered being default-free. Furthermore, the duration of the government bond used should reflect the duration of the estimation (Petersen & Plenborg, 2012).

Given the above, we are using the Swedish government bond as the risk-free rate, and since our cash flows are forecasted for a 10-years period, we will use the Swedish government bond with a 10-years maturity, which holds a rate of 0,817% as of the 18th of March, 2016 (Sveriges Riksbank, 2016a). However, the current yield of the bond is considered to be unusually low, and may therefore not provide us with a fair proxy of future levels of interest rates. Therefore, we will use the ten-years average yield of the Swedish government bond for the risk-free rate, which equals 2,61% as of the 18th of March, 2016 (Sveriges Riksbank, 2016b).

6.2.1.2 Beta The beta measures the systematic risk (volatility) of the company’s stock in relation to the market, and thus is the driver for a stock’s expected return when examining CAPM. The beta of NCC will therefore indicate to what extent NCC’s stock return is correlated to the return of the Swedish OMXS30 index. A beta of 1 indicates a strong correlation and that the stock will generate a return equal to the index. A high beta also indicates that the systematic risk is high for the stock, and that its volatility will be high (Koller et al., 2010).

Furthermore, the measurement period for beta is critical. Both Damodaran (2012) and Koller et al. (2010) are arguing for using a five-year beta with monthly data, which also is used in this thesis. Using the five-year beta on a monthly basis as recommended by Koller et al. (2010) we will gain 60 data points of observations, while a more frequent period would create systematic biases.

In order to estimate the beta of NCC, we have used two methods and compared the results of these against each other. The first method is a regression of the company’s return and the market index return, while the second method is using the formula stated below:

퐶표푣(푟푖, 푟푚) 훽 = 푉푎푟(푟푚)

From the regression, which is illustrated in Graph 31, we receive a beta of 0,91040, while using the beta generated by the formula equals to 0,91043. This is, both methods provide highly similar beta values, of which we have chosen to use the regression beta of 0,91040.

Regression beta 20,00%

15,00%

10,00%

5,00%

0,00% -15,00% -10,00% -5,00% 0,00% 5,00% 10,00% -5,00%

-10,00%

-15,00%

Graph 31 Regression beta. Source: Own creation with data retrieved from Thomson One Banker..

Further, the same smoothing process used by e.g. Bloomberg will be applied to our regression beta of 0,9104. By using smoothing the estimates of beta will be improved, since smoothing dampens extreme observations toward the overall average (Koller, 2010).

퐴푑푗푢푠푡푒푑 퐵푒푡푎 = 0,33 + 0,67(푅푎푤 퐵푒푡푎)

0,33 + 0,67 ∗ 0,91040 = 0,939968

The beta of 0,939968 will be used in the calculations.

6.2.1.3 Market Risk Premium As stated earlier, the market risk premium equals the market return minus the risk-free rate, which is the premium return investors gain for the higher risk exposure compared to the risk-free investment. The market portfolio return is estimated by using an appropriate benchmark in terms of an index reflecting the return of a comparable investment. For this purpose, we will use the OMXS30 index return as our market index, which was used for our calculations of beta.

According to Fernandez (2012), the Swedish market risk premium is 5.80%, while Credit Suisse (2014) estimate it to 5.80%. We have chosen to set the Swedish market risk premium to 6.00% in

96 accordance to Damodaran (2016) as his estimation is made more recently. Furthermore, all three estimations are based on historical returns instead of forecasted returns. Due to the difficulties in forecasting the future, we believe that this approach will reduce potential estimation errors largely than using forecasted returns. As already mentioned in the risk-free rate section, we uses the 10- year Swedish government bond as the risk-free rate.

Recall the CAPM model for cost of equity:

푟푒 = 푟푓 + 훽푒 ∗ (푟푚 − 푟푓) We apply the numbers from the previous three sections into the formula, which provide us with an total cost of equity of 8,25%:

0,0825 = 0,0261 + 0,9399 ∗ (0,060)

6.2.2 Cost of Debt (After Tax) In order to estimate the after tax cost of debt of a company, the yield to maturity of the company’s long-term bonds is commonly used. According to Koller et al. (2010), the proxy of yield to maturity is a generally accepted and suitable approach when the company is rated at BBB or higher.

According to both Handelbanken Capital Markets (2016) and Nordea Markets (2016), NCC rated as a BBB company, and thus we will apply the theory of Koller et al. (2010) explained above in order to estimate the cost of debt after tax for NCC.

Table 11 below presents the loans that NCC has that will be used to estimate the cost of debt after tax. The total amount of loans is weighted against the estimated interest rate of respectively loan. A yield of a BBB rated company has been used, BofA Merrill Lynch US Corporate BBB Effective Yield, Federal Reserve Bank of St. Louis (2016). This in order be able to derive three historical average yield that will be applied to acquire NCC after tax cost of debt.

As presented in chapter 5.2.4 the tax rate that will be used is 21,50%. With these estimations the after tax cost of debt end up to be 3,09% for NCC.

Due Amount (MSEK) Interest Rate (%) Weight Cost of Debt 2020 1524 0,0389 0,9242 3,60% 2021 6 0,0405 0,0036 0,01% 2022 - 119 0,0452 0,0722 0,33% Total 1649 3,94% Tax 21,50% After tax cost of debt 3,09% Table 11 Estimated After tax cost of debt. Source: Own creation with data retrieved from NCC (2016b), and Federal Reserve Bank of St. Louis (2016a).

6.2.3 Cost of Capitalized Operating Leases (After Tax) In our WACC formula, we have stated the cost of Capitalized Operating Leases after tax parameter, which is computed as follow:

푟푐표푙 ∗ (1 − 푡)

We have earlier in Chapter 4 and the reorganized financial statements discussed the cost of capitalized operating leases for the period 2006 – 2015 for NCC, for the valuation the US AAA Corporate Bond of 2015 will be used.

6.2.4 Capital Structure In order to compute the WACC of NCC, we need to define its capital structure. Recall from section 6.2, we do this by weighting the equity (E), the net financial obligation (NFO), and the capitalized operating leases (COL). We will hereby go through these three parameters.

The equity of NCC is calculated by multiplying the numbers of outstanding shares per the 18th of March 2016 with the share price of the same date. However, as there are no information available of the exact number of outstanding shares that particular date, we have used the number of outstanding date per the 31st of December, 2015 (stated in the annual report). Considering previous years’ annual reports versus Q1 reports, we find little deviations, and we therefore argue that the difference between the used number of outstanding shares and the actual number of outstanding

98 shares for the date should be minor, if any at all. Using this method, the calculated equity value of NCC is estimated to be 31 182 MSEK on the 18th of March, 2016.

The debt of NCC is not traded on the public market, and hence, no information regarding the debt value are available for the given date. The book value of debt should, according to Koller et al. (2010) be used as the proxy for a company’s market value of debt. Therefore, we have used the book value on the 31st of December 2015 presented in NCC’s annual report in order to estimate the current debt level in March 2016. NCC’s market value of NFO equals to 20 103 MSEK, which is used as the debt level on the 18th of March 2016.

Similar as for the debt level, the Capitalization of Operating Leases (COL) was calculated by using the numbers presented as of the 31st of December 2015 in NCC’s annual report. Recall from Chapter 4 where we estimate the operating leases with a value of 5 593 MSEK in 2015. This value will be used for the 18th of March, 201 6.

6.2.5 WACC Calculation The input in terms of analyzed and presented numbers from previous subchapters was computed through the following WACC formula:

퐸 푁퐹푂 퐶푂퐿 푊퐴퐶퐶 = ∗ 푟 + ∗ 푟 (1 − 푡) + ∗ 푟 (1 − 푡) 퐴퐸푉 푒 퐴퐸푉 푑 퐴퐸푉 푐표푙

푤ℎ푖푐ℎ 푔푖푣푒푠;

0,0592 = 0,5482 ∗ 0,0825 + 0,0983 ∗ 0,0394(1 − 0,215) + 0,3534 ∗ 0,0389(1 − 0,215)

6.3 Discounted Cash Flow Valuation Table 12 below contains the calculation for the DCF valuation. In order to gain the share price, the enterprise value is divided with the outstanding shares, and we thereby compute the price per share

99 of NCC to be 375,1 SEK, which is an increase of 29,8% compared to the stock price on 18th of March, 2016 which closed at 289 SEK.

2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Terminal FCFF 1 018 1 006 1 461 1 597 1 990 2 661 2 732 2 803 2 876 2 951 3 192 WACC 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% Discount factor 0,944 0,891 0,842 0,795 0,750 0,708 0,669 0,631 0,596 0,563 0,531 PV of FCFF 961 896 1 230 1 269 1 493 1 885 1 827 1 770 1 715 1 661

PV of FCFF Forecast 14 707 PV of FCFF Terminal 45 887 Estimated EV 60 595

NIBD 20 103 Stock price 18th of March 2016: 289 SEK Minority Interest 23 Estimated equity 40 469 Difference against estimated value: 29,8%

Number of shares 107,9

Value per share 375,1 SEK Table 12 Discount Cash Flow Valuation. Source: Own creation based on Forecasted Income Statement and Forecasted Balance Sheet.

6.4 Economic Value Added Valuation The calculation for the EVA valuation is presented in Table 13 below. As already stated earlier in this chapter, the EVA valuation uses different factors but should yield the same result. However, as can be seen, the EVA computes a share value of 373,6 SEK per share.

100

2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Terminal NOPAT 2 599 1 978 2 359 2 698 3 084 3 355 3 440 3 527 3 616 3 707 3 800 3 875 IC 24 224 25 184 26 537 27 773 29 261 30 625 31 404 32 199 33 012 33 843 34 692 35 375 WACC 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% 5,92% EVA 545 869 1 128 1 441 1 624 1 628 1 669 1 711 1 754 1 798 1 823 Discount factor 0,944 0,891 0,842 0,795 0,750 0,708 0,669 0,631 0,596 0,563 PV of EVA 514,8 774,5 949,5 1 145,3 1 218,2 1 153,4 1 116,5 1 080,6 1 045,9 1 012,2

PV of EVA Forecast 10 011 PV of EVA Terminal 26 206 IC 24 224 Estimated EV 60 441 Stock price 18th of March 2016: 289 SEK NIBD 20 103 Minority Interest 23 Difference against estimated value: 29,3% Estimated equity 40 315

Numbers of share 107,9

Values per share 373,6 SEK Table 13 Economic Value Added Valuation. Source: Own creation based on Forecasted Income Statement and Forecasted Balance Sheet.

As previously stated, the results generated through the DCF and the EVA approaches shall, according to theories be identical to each other. As can be seen, this is not the case in this analysis as the value per share using the EVA is approximately 1,5 SEK higher than the value per share generated by the DCF. We believe that this difference eventually could be due to the discounting periods, which are conducted on a full-year basis, rather than adjusted for the particular period of NCC. Instead of discounting the FCFF and EVA on a full-year basis, an adjustment to represent the actual period (3/12 year) would create a more appropriate present value calculation. However, despite the mismatching results of the DCF and EVA, we argue that these two models and their results strengthening each other in the aim of obtaining a fair value per share.

6.5 Sensitivity Analysis In order to test the robustness and trustworthiness of our valuation model we will apply a sensitivity analysis where we changes certain key parameters. We are there through able to conclude whether

101 our model and numbers are reliable and how our estimated values varies based on the impact of these parameters.

The sensitivity analysis will investigate the impact changes have on (1) profit margin and net sales, , and (2) WACC and its underlying factors. We find these variables as the most critical in our valuation, and that changes in these would influence our result significantly.

Our starting point in the sensitivity analysis takes off from the actual stock price of 289 SEK as of the 18th of March, 2016.

6.5.1 Sensitivity Analysis of Profit Margin and Net Sales As can be seen in Table 14 below, minor changes in the profit margin, independent of net sales, will cause major effects on the stock price. Everything else held equal, a 1% increase in the profit margin will lead to an 91% increase in the stock price compared to the stock price as of the 18th of March 2016, which gives a stock price of 553,1 SEK. In contrary, a 1% decrease in profit margin leads to a 32% decrease of the starting stock price. For the investigated levels of changes in the profit margin, we can see that the stock price interval varies from -32% to 91%.

The impact of changes in net sales are not as significant as for the changes in profit margin. A 1% increase in the net sales increases the stock price to 378,6 SEK which is an increase of 31% compared to the starting stock price, while a 1% decrease in net sales generates a stock price of 371,6 SEK.

Stock Price Actual Changes of DCF Values Difference to Stock Market Price 289 Net sales Net sales Profit Margin -1,00% -0,50% 0,00% 0,50% 1,00% -1,00% -0,50% 0,00% 0,50% 1,00% -1,00% 195,3 196,2 197,0 197,9 198,7 -32% -32% -32% -32% -31% -0,50% 283,4 284,7 286,0 287,3 288,6 -2% -1% -1% -1% 0% 0,00% 371,6 373,3 375,1 376,8 378,6 29% 29% 30% 30% 31% 0,50% 459,7 461,9 464,1 466,3 468,5 59% 60% 61% 61% 62% 1,00% 547,8 550,5 553,1 555,7 558,4 90% 90% 91% 92% 93% Table 14 Sensitivity Analysis – Profit Margin and Net Sales. Source: Own creation based Forecasted Income Statement and Forecasted Balance Sheet.

102

Furthermore, the sensitivity analysis regarding the profit margin and net sales provide us with the information that a decrease of -0,5% in profit margin will cause the stock of NCC to underperform and thereby reach a level below 289 SEK.

6.5.2 Sensitivity Analysis in WACC and Terminal Growth This part of the sensitivity analysis contains a focus on the development of NCC’s stock price based on changes in our WACC, which is used as the discount rate, and the terminal value (g). We find the need for a sensitivity analysis regarding these parameters as critical due to the fact that these are built on underlying assumptions which may include estimated errors and biases.

As a first step, we have conducted an analysis regarding the changes in terminal growth and the total WACC, and their impact on the stock price, which is presented in Table 15 below. As can be seen, the terminal growth rate is set close the inflation target rate set by the Swedish Riksbank (Sveriges Riksbank, 2011b). Furthermore, we can see that changes in the terminal growth and when everything else is held equal, will only lead to minor changes in the stock price. Instead, the WACC is the more critical variable causing extensive fluctuations in the stock price, especially when the WACC is lowered.

Stock Price Actual Changes in DCF Values Difference to Stock Market Price 289 Terminal Growth Terminal Growth WACC 0,97% 1,47% 1,97% 2,47% 2,97% 0,97% 1,47% 1,97% 2,47% 2,97% 4,92% 578,3 581,5 584,6 587,7 590,9 100,1% 101,2% 102,3% 103,4% 104,4% 5,42% 458,9 461,4 464,0 466,5 469,1 58,8% 59,7% 60,5% 61,4% 62,3% 5,92% 370,1 373,0 375,1 376,5 379,3 28,1% 29,1% 29,8% 30,3% 31,3% 6,42% 301,6 303,4 305,2 307,0 308,7 4,3% 5,0% 5,6% 6,2% 6,8% 6,92% 247,1 248,6 250,2 251,7 253,3 -14,5% -14,0% -13,4% -12,9% -12,4% Table 15 Sensitivity Analysis – WACC and Terminal Growth. Source: Own creation based on Forecasted Income Statement and Forecasted Balance Sheet.

In the table above, we can clearly see the impact that changes in WACC and terminal growth has on the computed stock price. This is especially for changes in the WACC, which has a greater impact than the terminal growth, as 1% decrease in the WACC, while the terminal growth is held constant, causes the stock price to rise to 584,6 SEK, which corresponds to an increase of 102,3% compared to the starting stock price. The greater impact of the WACC is due to the fact the WACC is discounting

103 all future free cash flows to firm, while the terminal growth only affects the terminal value of NCC. Furthermore, we can see that it is only when the WACC reaches a level of above 6,42% that the stock will underperforms and reaches a level below 289 SEK.

In the section above, the importance of the WACC and its impact on the stock price was emphasized. As follow, we will determine the impact of the WACC’s underlying factors, and what changes in these may cause to the stock price. Table 16 below illustrates the impact of changes in cost of debt and cost of operating leasing.

Stock Change in WACC Actual Changes in DCF Values Difference to Stock Market Price Price 289 Cost of operating leasing Cost of operating leasing Cost of operating leasing Cost of 2,05% 2,55% 3,05% 3,55% 4,05% 2,05% 2,55% 3,05% 3,55% 4,05% 2,05% 2,55% 3,05% 3,55% 4,05% debt 2,09% 5,46% 5,51% 5,56% 5,61% 5,66% 455 446 436 427 418 58% 54% 51% 48% 45% 2,59% 5,64% 5,69% 5,74% 5,79% 5,84% 422 413 404 396 388 46% 43% 40% 37% 34%

3,09% 5,82% 5,87% 5,92% 5,96% 6,01% 391 383 375 368 360 35% 33% 30% 27% 25%

3,59% 5,99% 6,04% 6,09% 6,14% 6,19% 363 356 349 342 335 26% 23% 21% 18% 16% 4,09% 6,17% 6,22% 6,27% 6,32% 6,37% 338 331 324 318 312 17% 15% 12% 10% 8% Table 16 Sensitivity Analysis – Cost of Debt and Operating Leases. Source: Own creation based on Forecasted Income Statement and Forecasted Balance Sheet.

As can be seen, both these factors share their impact on the stock price as when they increase, the stock price decreases, and vice versa. A change of +/-2% change in both factors, will cause the computed stock price to move within the interval of 312 – 455 SEK, which is to be compared to our computed stock price of 375.

Stock Price Actual Changes in DCF Values Difference to Stock Market Price 289 Terminal Growth Terminal Growth Rm WACC 0,97% 1,47% 1,97% 2,47% 2,97% 0,97% 1,47% 1,97% 2,47% 2,97% 5,0% 5,40% 463,0 465,6 468,1 470,7 473,3 60,2% 61,1% 62,0% 62,9% 63,8% 5,5% 5,66% 413,7 416,0 418,3 420,6 423,0 43,1% 43,9% 44,7% 45,6% 46,4% 6,0% 5,92% 370,8 373,0 375,1 377,2 379,3 28,3% 29,1% 29,8% 30,5% 31,3% 6,5% 6,17% 333,4 335,3 337,2 339,2 341,2 15,4% 16,0% 16,7% 17,4% 18,0% 7,0% 6,43% 300,3 302,1 303,8 305,7 307,5 3,9% 4,5% 5,1% 5,8% 6,4% Table 17 Sensitivity Analysis – Risk Market Premium and Terminal Growth. Source: Own creation based on Forecasted Income Statement and Forecasted Balance Sheet.

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Table 17 above displays the effect of changes in risk market premium and terminal growth. As can be seen, a one percent decrease in the risk market premium will decrease the WACC to 5,66%, and the stock price will increase to 418,3 SEK, which is 44,7% higher than the stock market price. In contrary, a one percent increase in the risk market premium will increase the WACC to 6,17%, and which will lower the computed stock price to 303,8 SEK.

Stock Price Actual Changes in DCF Values Difference to Stock Market Price 289 Terminal Growth Terminal Growth Beta WACC 0,97% 1,47% 1,97% 2,47% 2,97% 0,97% 1,47% 1,97% 2,47% 2,97% 0,74 5,26% 493,7 496,4 499,1 501,9 504,6 71,8% 73,7% 72,7% 73,7% 74,6% 0,84 5,59% 426,6 429,0 431,3 433,8 436,2 47,6% 50,1% 49,3% 50,1% 50,9% 0,94 5,92% 370,8 373,0 375,1 377,2 379,3 28,3 30,5% 29,8% 30,5% 31,3% 1,04 6,24% 323,8 325,7 327,6 329,5 331,4 12,0% 14,0% 13,3% 14,0% 14,7% 1,14 7,25% 283,6 285,3 287,0 288,7 290,5 -1,9% -0,1% -0,7% -0,1% 0,5% Table 18 Sensitivity Analysis – Beta and Terminal Growth. Source: Own creation based on Forecasted Income Statement and Forecasted Balance Sheet.

As presented earlier, the beta that we have used in this thesis and the WACC calculations is equal to 0,939968. Table 18 above illustrates the impact on the stock price and WACC related to a change of beta of 0,1 and 0,2, respectively. Within the beta range of 0,74 – 1,14, given that the terminal growth is held constant, our computed stock price is within the range of 287,0 – 499,1 SEK, which corresponds to -0,7% - 72,7% change in relation to the stock market price. Furthermore, the table above indicates that no matter of the given changes in terminal growth, the stock will overperform compared to the stock market price of 289 SEK, up to a beta of 1,04.

6.6 Multiples Analysis The multiples analysis as follow in this subchapter is conducted in order to support and challenge our previously conducted DCF and EVA valuations. The multiples that are used are EV/Sales, EV/EBITDA, and EV/EBIT, and these will be benchmarked against our previously used peer companies in terms if Skanska and Peab.

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6.6.1 EV/Sales The EV/Sales multiple describes the relationship between the enterprise value of a company and its sales, and which thereby indicates how much it would cost an investor to buy the company’s sales.

EV/Sales 2016E 2017E 2018E NCC 0,50 0,50 0,50 Skanska 0,40 0,50 0,40 Peab 0,60 0,60 0,50 Average Peer Group 0,50 0,53 0,47

NCC Estimation 0,91 0,87 0,83 Table 19 EV/Sales Multiple. Source: Own creation based on Thomson Reuters (2016), Forecasted Income Statement, and Forecasted Balance Sheet.

From the presented EV/Sales multiples in Table 19, we can see that NCC is more expensive compared to the peer companies. We can further see that our own estimation regarding NCC’s EV/Sales is higher than the ratio generated by Thomas Reuters. This means that we value NCC’s sales more than Thomas Reuters. In conclusion, the underlying reason for this is probably that we have used a higher growth in our forecast.

6.6.2 EV/EBITDA The EV/EBITDA multiple holds the advantage of excluding the capital structure of the company, and thus is a favorable multiple for comparison against peer companies as it does not include e.g., interest rate expenses.

EV/EBITDA 2016E 2017E 2018E NCC 8,80 9,40 9,10 Skanska 7,30 8,90 8,80 Peab 12,50 8,80 8,50 Average Peer Group 9,53 9,03 8,80

NCC Estimation 18,20 15,71 14,00 Table 20 EV/EBITDA Multiple. Source: Own creation based on Thomson Reuters (2016), Forecasted Income Statement, and Forecasted Balance Sheet.

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Table 20 shows that our estimated EV/EBITDA multiple of NCC is significantly higher than estimated by Thompson Reuters.

6.6.3 EV/EBIT The similarity of the EV/EBIT multiple and the EV/EBITDA multiple is indeed high. The multiples differs in the sense that the EV/EBITDA is disregarding the depreciation and amortization of the company. Yet, the EV/EBIT multiple is of highly relevance in the peer comparison.

Similar as for the EV/EBITDA in previous section, our estimation regarding NCC’s EV/EBIT multiple is significantly higher than the one of Thompson Reuters, although the difference decreases through the three years.

EV/EBIT 2016E 2017E 2018E NCC 11,00 11,60 10,90 Skanska 9,20 10,70 10,60 Peab 22,30 11,90 11,30 Average Peer Group 14,17 11,40 10,93

NCC Estimation 24,05 20,17 17,63 Table 21 EV/EBIT Multiple. Source: Own creation based on Thompson Reuters (2016), Forecasted Income Statement, and Forecasted Balance Sheet.

6.6.5 Summary of Multiples Comparison In the multiple analysis, we have discussed the multiples of NCC and NCC’s peer companies in order to determine how NCC stands against its peers. It has become evident that the estimations conducted by ourselves are higher than the multiples generated from Thomson Reuters, and this is especially for the first two forecasted years, while the third forecasted years tend to be more in line with both Thomson’s figures and the peer group’s average.

We believe that our higher multiples are due to several reasons, it is obvious that our estimated enterprise value is significantly higher than Thomson’s enterprise value, which drives all the investigated multiples.

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Based on this, we can see that our multiple analysis is generating higher values on all three multiples. This indicates that the present value estimate may be too optimistic. The reason for this can be that the forecasted growth is expected to be higher in this thesis in comparison to the estimation done by Thomas Reuters.

6.7 Chapter Conclusion In the valuation chapter, we have conducted two valuations using the DCF and EVA approaches. These two approaches generated close to similar, yet different value per share. The DCF generated a value per share of 375,1 SEK, and the EVA a value per share of 373,6 SEK. This is, the DCF approach’s value was 1,5 SEK higher than the EVA, which corresponds to approximately 0,4% difference. Although the two valuation models theoretically will generate an identical result and value, we argue that the closeness of the values still strengthening the reliability of the models, and the valuation we have performed.

The sensitivity analysis highlights the impact changes of some of the critical factors may have on the computed stock price. As have been obvious, small changes in profit margin, WACC, cost of debt, and beta, would have a large impact on the computed stock price, while net sales and terminal growth, and cost of operating leases would have a limited effect.

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7 Thesis Conclusion

The main purpose of this thesis was to answer the question: What is the fair value per share of NCC, as of the 18th of March, 2016?

The strategic analysis was conducted in order to find the key drivers affecting NCC’s future business operations, through macro-economic-, industry-, and company analyses. From the findings we can conclude a positive economic outlook for NCC and especially its primary market, which stands for the majority of the company’s revenue streams. NCC’s strong market position, reputation, and technological advantage and knowledge creates a beneficial position, and in combination with future low interest rates, GDP growth, increasing population and continued urbanization as contributing factors, we argue that NCC has extensive opportunities to capitalize on in the future. However, cautions should be raised regarding NCC’s dependency on its Nordic suppliers as an economic change would most likely affect the whole Nordic, and hence could affect NCC negatively in terms of higher supplier costs or even shortage in supplies. This is, an increasing diversification regarding the suppliers would benefit NCC, and hedge them against future turmoil related to e.g., economic- and political changes. In addition, the shortage of skilled engineers and workforce threaten to affect NCC’s revenues and costs negatively in the future.

From the financial analysis, we found that NCC has had a stable profitability development from a historical perspective. Considering the ROE, NCC outperformed its peer companies for most of the years, while it was in-between Skanska and Peab regarding the ROIC. NCC has also been able to maintain a higher profit margin than its peers have for all years, except for 2011. Furthermore, since the aftermath of the financial crisis, NCC’s revenue have experience a growth, and for the last years, the revenues have been on a level similar to as before the crisis.

The findings from the strategic- and financial analyses were taken into consideration when calculating the forecast of NCC. The forecast was divided into two parts of five years each, of which the first part included a detailed forecast and the second a simplified forecast. The main driver in the income statement, the revenues, were divided by NCC’s business areas in order to compute as realistic growth estimations as possible, related to the different business areas’ individual

109 performances. The forecast states that the revenues of NCC will grow in the future, and its costs will grow with the revenues although not at the same pace. Hence, the NOPAT and the profit margin are therefore expected to increase, however not to a drastic degree.

For the valuation, the thesis have used two models in terms of DCF and EVA in order to estimate the fair value of NCC’s share as of 18th of March 2016. From the theoretically perspective, the DCF and EVA should generate an identical value. However, in our case, the DCF generated a value per share of 375,1 SEK while the EVA generated a value per share of 373,6 SEK. This is, the DCF generated a value of 1,5 SEK above the EVA’s. However, we argue that although the values are not identical, they still strengthen its others’ reliability, and we have chosen to use the DCF’s value of 375,1 SEK as the target for our share price. In order to test the robustness of the valuation and its underlying factors, a sensitivity analysis was performed to investigate how changes in the underlying variables affected the computed share value. The result of the sensitivity analysis indicates that the value responded the most to changes in profit margin and WACC, through changes in the beta.

The valuation chapter contained a multiple analysis, in which NCC was benchmarked against two of its peers in terms of Skanska and Peab. The peer companies’ forecasted future multiples in terms of EV/Sales, EV/EBITDA, and EV/EBIT were retrieved from Thomson Reuters, while NCC’s multiples was based on the numbers in our forecast- and valuation chapters. The findings from the multiple analysis states that our own forecasted multiples for NCC were significantly higher than the ones of Thomson. This is reasonable due to our optimistic forecast of NCC’s enterprise value, compared to Thomson.

Finally, we can conclude that the fair value of NCC on the 18th of March 2016 is 375,1 SEK, which compared to the market price of 289 SEK indicates that the company is significantly undervalued, and our final recommendation is therefore set to buy.

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Appendix 1 – Reorganized Balance Sheet

NCC Reorganized Balance Sheet

SEK Millions 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Use of funds Operating Working Cash 1 118 1 168 1 149 1 036 988 1 051 1 145 1 156 1 137 1 250 Current asset properties 6 860 8 807 14 462 11 198 11 676 14 335 17 059 17 876 18 305 16 718 Inventories 1 517 2 365 624 514 537 557 655 673 746 696 Accounts, Tax, Other receivables 9 466 10 302 9 597 7 827 7 906 8 415 9 002 8 401 8 226 8 523 Worked-up non invoiced revenues 2 840 2 956 2 208 1 459 804 910 782 918 1 066 1 400 Operating Current Assets 21 801 25 598 28 040 22 034 21 911 25 268 28 643 29 024 29 480 28 587

Account payable 4 874 4 974 4 356 3 545 3 414 4 131 4 659 4 096 3 960 4 694 Invocied revenues, not worked up 4 823 4 971 5 300 4 516 4 092 4 176 4 241 4 264 4 408 4 244 Tax liabilities 170 101 140 38 449 60 122 58 117 287 Other current liabilities, provisions 3 400 4 231 5 228 3 013 3 350 3 614 3 945 5 360 4 782 4 171 Operating Current Liabilities 13 267 14 277 15 024 11 112 11 305 11 981 12 967 13 778 13 267 13 396

Operating working capital 8 534 11 321 13 016 10 922 10 606 13 287 15 676 15 246 16 213 15 191 Property, plat and equipment 2 801 2 435 2 669 2 557 2 392 2 805 3 057 3 206 3 261 3 243 Investments in JV and associated companies 47 25 10 9 7 8 9 9 52 54 Deferred tax assets 262 277 203 117 68 191 281 249 237 204 Add: Operating leases 4 145 4 948 3 688 2 686 3 557 3 496 4 266 5 598 5 587 5 593 Goodwill 1 700 1 651 1 772 1 750 1 613 1 607 1 827 1 802 1 865 1 792 Other Intangible assets 113 96 122 120 115 167 204 267 389 439 Operating Non-Current Assets 9 068 9 432 8 464 7 239 7 752 8 274 9 644 11 131 11 391 11 325

Deferred tax liabilities 461 431 492 710 439 669 725 414 268 322 Non-current provisions 2 157 2 729 3 190 3 023 2 722 2 619 2 435 2 070 2 017 1 970 Operating Non-current liabilities 2 618 3 160 3 682 3 733 3 161 3 288 3 160 2 484 2 285 2 292

Net operating Non-Current Assets 6 450 6 272 4 782 3 506 4 591 4 986 6 484 8 647 9 106 9 033 Operating Invested Capital (incl. Goodwill and Intangibles) 14 984 17 593 17 798 14 428 15 197 18 273 22 160 23 894 25 319 24 224 Financial non-current assets 2 477 1 691 1 135 1 261 1 363 1 559 1 578 247 434 557 Financial current assets 852 1 048 1 169 844 988 1 114 1 544 1 325 1 415 1 262 Assets held for sale 242 250 227 203 182 173 158 131 156 147 Short-term investments 173 483 215 286 741 285 168 143 242 190 Excess Cash 135 517 683 795 1 725 -255 1 489 2 392 1 455 2 927 FINANCIAL ASSETS 3 879 3 989 3 429 3 389 4 999 2 876 4 937 4 238 3 702 5 083 TOTAL FUNDS INVESTED 18 863 21 582 21 227 17 817 20 196 21 149 27 097 28 131 29 021 29 307 Sources of Financing Financial non-current liabilities 2 584 2 406 3 457 3 499 3 633 4 493 7 943 7 328 7 505 6 496 Financial current liabilities 5 144 6 878 7 178 3 930 4 873 4 859 5 889 6 403 6 478 7 166 Pensions 119 112 42 18 1 6 9 125 585 338 Liabilities held for sale Add: Operating leases 4 145 4 948 3 688 2 686 3 557 3 496 4 266 5 598 5 587 5 593 Total Debt & Debt equivalents 11 992 14 344 14 365 10 133 12 064 12 854 18 107 19 454 20 155 19 593

Share capital 867 867 867 867 867 867 867 867 867 867 Paid-in Capital 1 844 1 844 1 844 1 844 1 844 1 844 1 844 1 844 1 844 1 844 Reserves -20 73 173 170 -79 -135 -206 -206 -182 -344 Retained earnings 4 105 4 423 3 955 4 786 5 479 5 710 6 468 6 152 6 318 7 324 Non-controlling interests / Minor interest 75 30 25 18 21 11 15 17 20 23 Total Equity 6 871 7 237 6 864 7 685 8 132 8 297 8 988 8 674 8 867 9 714 TOTAL FUNDS INVESTED 18 863 21 581 21 229 17 818 20 196 21 151 27 095 28 128 29 022 29 307 Source: Own creation based on NCC’s annual reports 2006 – 2015.

119

Skanska Reorganized Balance Sheet

SEK Millions 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 Operating working cash 3 061 2 867 2 730 2 587 2 375 2 444 2 736 2 873 2 776 2 512 Current asset properties 27 020 26 115 25 132 26 904 23 411 20 406 18 610 18 568 13 198 11 827 Inventories 944 1 017 944 1 079 1 014 926 835 901 769 484 Trade and other receivables (incl. Tax receivables) 26 568 27 217 23 296 24 133 23 074 21 810 24 179 26 800 25 579 23 593 Gross amount due from customers for contract work 5 692 5 472 6 232 5 991 5 108 4 941 5 165 6 087 5 656 5 222 Operating Current Assets 63 285 62 688 58 334 60 694 54 982 50 527 51 525 55 229 47 978 43 638

Trade and other payables (account payables) 34 964 33 496 29 967 31 086 28 568 27 169 31 332 33 303 30 960 28 407 Gross amount due to customer for contract work 15 821 14 545 15 008 15 760 16 827 16 937 16 535 17 050 15 748 11 357 Tax liabilities 560 504 621 240 263 1 003 1 064 864 891 728 Current provisions 6 432 6 005 5 649 6 016 5 930 5 037 5 012 4 908 3 646 3 476 Operating Current Liabilities 57 777 54 550 51 245 53 102 51 588 50 146 53 943 56 125 51 245 43 968

Operating working capital 5 508 8 138 7 089 7 592 3 394 381 -2 418 -896 -3 267 -330 Property, plat and equipment (PPE) 6 504 7 122 7 449 7 938 7 018 5 906 6 303 6 919 5 973 5 457 Investments in joint venture and associated companies 2 852 2 618 3 107 2 417 2 526 1 775 1 537 1 512 1 945 1 894 Deferred tax assets 1 384 1 225 1 059 1 255 1 671 1 472 1 668 1 970 956 1 976 Add: Operating leases 2 770 4 155 2 579 3 363 3 272 3 819 3 859 4 458 4 133 4 165 Goodwill 5 256 5 276 4 849 4 882 5 012 3 917 4 363 4 442 4 584 4 490 Other Intangible assets 754 464 346 186 158 354 825 804 658 740 Operating Non-Current Assets 19 520 20 860 19 389 20 041 19 657 17 243 18 555 20 105 18 249 18 722

Deferred tax liabilities 1 286 966 1 002 572 927 1 637 1 673 1 760 2 069 2 892 Non-current provisions 2 12 17 28 53 86 96 119 Operating Non-current liabilities 1 286 966 1 004 584 944 1 665 1 726 1 846 2 165 3 011

Net operating Non-Current Assets 18 234 19 894 18 385 19 457 18 713 15 578 16 829 18 259 16 084 15 711 Operating Invested Capital (incl. Goodwill and Intangibles) 23 742 28 031 25 474 27 049 22 107 15 959 14 411 17 364 12 817 15 382 Financial non-current assets 1 357 1 302 1 892 1 842 2 108 2 122 1 042 309 728 1 500 Financial current assets 7 496 5 839 5 955 5 838 6 361 6 321 7 474 7 285 4 686 3 154 Assets held for sale 1 108 Short-term investments Excess Cash 8 779 6 241 4 541 3 183 2 934 4 210 6 673 5 008 11 433 8 458 FINANCIAL ASSETS 17 632 13 382 12 388 10 863 11 403 13 761 15 189 12 602 16 847 13 112 TOTAL FUNDS INVESTED 41 374 41 413 37 862 37 912 33 510 29 720 29 600 29 965 29 664 28 493 Sources of Financing Financial non-current liabilities 3 874 7 112 6 505 4 820 1 335 1 107 1 913 1 077 955 2 039 Financial current liabilities 6 555 4 086 4 028 6 283 5 563 2 786 1 153 2 081 2 703 1 396 Pensions 3 969 4 655 3 411 4 093 3 757 1 216 2 218 3 100 1 149 1 556 Liabilities held for sale Add: Operating leases 2 770 4 155 2 579 3 363 3 272 3 819 3 859 4 458 4 133 4 165 Total Debt & Debt equivalents 17 168 20 008 16 523 18 559 13 927 8 928 9 143 10 716 8 940 9 156

Share capital 1 260 1 260 1 260 1 260 1 260 1 269 1 269 1 269 1 269 1 269 Paid-in Capital 1 959 1 700 1 436 1 178 938 710 502 316 316 316 Reserves -411 -781 -1 473 -1 657 -1 290 331 1 910 2 456 1 330 745 Retained earnings 21 271 19 072 19 954 18 406 18 505 18 360 16 606 15 030 17 599 16 860 Non-controlling interests / Minor interest 127 154 162 166 170 122 170 178 210 147 Total Equity 24 206 21 405 21 339 19 353 19 583 20 792 20 457 19 249 20 724 19 337 TOTAL FUNDS INVESTED 41 374 41 413 37 862 37 912 33 510 29 720 29 600 29 965 29 664 28 493 Source: Own creation based on Skanska’s annual reports 2006 – 2015.

120

Peab Reorganized Balance Sheet

SEK Millions 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Operating working cash 606 640 683 703 761 871 937 862 873 888 Project and development properties 2 030 2 700 3 614 4 132 4 921 5 180 6 239 6 685 6 523 6 742 Inventories 284 86 528 492 411 416 465 412 379 363 Accounts receivable 5 150 4 973 5 939 5 155 5 955 6 535 7 095 6 104 6 110 6 435 Income tax recoverables 72 56 81 97 98 75 105 73 15 44 Other short term receivables 532 452 461 483 286 465 208 254 442 483 work in progress 1 263 1 689 1 106 1 100 1 186 1 010 Recognized but not invoiced income 2 620 3 192 4 137 3 761 3 801 4 580 5 240 6 043 2 739 2 193 Operating current asset 11 294 12 099 15 443 14 823 17 496 19 811 21 395 21 533 18 267 18 158

Account payable 3 707 3 392 4 044 3 069 4 074 4 508 4 534 3 805 3 837 3 980 Inovoiced income not yet recognised 3 359 3 580 3 685 3 945 4 133 4 269 5 246 6 063 4 234 4 176 Tax liabilities 93 103 307 273 101 289 114 114 75 45 Provisions 55 101 119 60 59 133 173 136 163 119 Other short-term liabilities/other current liabilities989 1 293 1 309 871 1 287 1 619 1 232 1 163 1 134 1 236 Operating current liabilities 8 203 8 469 9 464 8 218 9 654 10 818 11 299 11 281 9 443 9 556

Operating working capital 3 091 3 630 5 979 6 605 7 842 8 993 10 096 10 252 8 824 8 602 Tangible assets 2 595 642 4 335 4 904 4 847 4 580 4 443 3 973 3 830 3 654 Participations in joint ventures and affiliated256 companies247 326 668 1 273 1 323 1 279 1 310 1 006 787 Deferred tax 244 129 595 123 90 158 231 155 145 102 Add: Operating leases 1 388 2 002 1 851 2 037 2 657 2 845 3 612 4 257 3 930 2 620 Intagible assets 659 452 2 112 2 281 2 190 2 231 2 126 2 053 2 039 1 994 Other long term receivables 49 54 69 49 79 359 108 122 121 98 Operating non-current assets 5 191 3 526 9 288 10 062 11 136 11 496 11 799 11 870 11 071 9 255

Deferred tax liabilities 326 376 444 491 562 455 Other provisions 101 78 226 258 263 310 394 473 555 592 Operating non-current liabilities 101 78 226 258 589 686 838 964 1 117 1 047

Net operating non-current assets 5 090 3 448 9 062 9 804 10 547 10 810 10 961 10 906 9 954 8 208 Operating Invested Capital (incl. Goodwill and8 182 Intangibles)7 078 15 040 16 408 18 389 19 803 21 057 21 158 18 777 16 810 Interest bearing long term receivables 99 322 453 387 474 1 314 1 157 1 744 1 663 2 199 Prepaid expenses and accrued income 206 112 420 364 342 352 823 461 491 365 Interest bearing current receivables 81 121 329 388 36 237 567 410 404 210 Other securities held as fixed assets 717 602 302 536 704 885 442 516 480 489 Short term investments/current holdings 6 0 1 007 904 1 9 10 21 20 8 Excess cash 307 572 301 881 48 90 -508 -447 -81 -23 Financial assets 1 416 1 729 2 812 3 460 1 605 2 887 2 491 2 705 2 977 3 248 Total funds invested 9 597 8 807 17 853 19 869 19 994 22 690 23 548 23 863 21 755 20 058

Sources of Financing Interest bearing long term liabilities 1 443 778 5 563 5 670 5 425 7 399 6 772 5 053 3 397 3 301 Other long term liabilities 79 45 92 61 35 110 142 58 205 157 Interest bearing short term liabilities 1 173 279 1 235 2 042 1 602 1 735 1 854 3 470 3 368 3 099 Accrued expenses and deferred income 2 219 2 086 2 634 2 330 2 590 2 641 3 176 3 346 2 858 2 805 Provisions for pensions 17 11 16 20 12 13 7 11 0 0 Add: Operating leases 1 388 2 002 1 851 2 037 2 657 2 845 3 612 4 257 3 930 2 620 Total Debt & Debt equivalents 6 319 5 201 11 391 12 160 12 321 14 743 15 563 16 195 13 758 11 982

Share capital 872 933 1 557 1 584 1 584 1 584 1 584 1 584 1 584 1 584 Other contributed capital 217 679 2 470 2 576 2 576 2 576 2 576 2 576 2 576 2 576 Reserves 0 89 -1 242 125 -82 -152 -283 -449 -504 Profit brought forward 2 188 1 899 2 344 3 264 3 388 3 869 3 976 3 791 4 286 4 420 Non-controlling interests / Minor interest 1 6 92 43 0 0 1 0 0 0 Total Equity 3 278 3 606 6 462 7 709 7 673 7 947 7 985 7 668 7 997 8 076 TOTAL FUNDS INVESTED 9 597 8 807 17 853 19 869 19 994 22 690 23 548 23 863 21 755 20 058 Source: Own creation based on Peab’s annual reports 2006 – 2015.

121

Appendix 2 – Excess Cash Calculations

NCC Operating Cash Calculations

SEK Millions 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Operating Working Cash (2%) 1 118 1 168 1 149 1 036 988 1 051 1 145 1 156 1 137 1 250 Reported Cash & Cash Equivalents 1 253 1 685 1 832 1 831 2 713 796 2 634 3 548 2 592 4 177 Excess Cash 135 517 683 795 1 725 -255 1 489 2 392 1 455 2 927 Source: Own creation based on NCC’s annual reports 2006 – 2015.

Skanska Operating Cash Calculations

SEK Millions 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Operating Working Cash (2%) 2 512 2 776 2 873 2 736 2 444 2 375 2 587 2 730 2 867 3 061 Reported Cash & Cash Equivalents 10 970 14 209 7 881 9 409 6 654 5 309 5 770 7 271 9 107 11 840 Excess Cash 8 458 11 433 5 008 6 673 4 210 2 934 3 183 4 541 6 241 8 779 Source: Own creation based on Skanska’s annual reports 2006 – 2015.

Peab Operating Cash Calculations

SEK Millions 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Operating Working Cash (2%) 606 640 683 703 761 871 937 862 873 888 Reported Cash & Cash Equivalents 913 1 212 984 1 584 809 961 429 415 792 865 Excess Cash 307 572 301 881 48 90 -508 -447 -81 -23 Source: Own creation based on Peab’s annual reports 2006 – 2015.

122

Appendix 3 – Operating Lease Interest Rates

Operating Lease Interest Rate 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 5,24% 5,59% 5,56% 5,63% 5,31% 4,94% 4,64% 3,67% 4,24% 4,16% 3,89% Source: Federal Reserve Bank of St. Louis (2016).

123

Appendix 4 – Operating Leases

NCC Capitalization of Operating Leases

SEK Millions 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Operational Leasing 433 506 612 729 546 389 502 483 548 751 745 Cost of Operating Leasing 5,24% 5,59% 5,56% 5,63% 5,31% 4,94% 4,64% 3,67% 4,24% 4,16% 3,89%

Asset life 10,9 10,9 10,9 10,9 10,9 10,9 10,9 10,9 10,9 10,9 10,9 Asset Value 3510 4145 4948 3688 2686 3557 3496 4266 5598 5587 5593 Interest expense 196 230 279 196 133 165 128 181 233 217 Depreciation 322 380 454 338 246 326 321 391 514 513 Source: Koller et al. (2010), and NCC’s annual reports 2005 – 2015.

Skanska Capitalization of Operating Leases

SEK Millions 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Operational Leasing 265 540 615 609 660 559 539 452 432 346 554 Cost of Operating Leasing 5,24% 5,59% 5,56% 5,63% 5,31% 4,94% 4,64% 3,67% 4,24% 4,16% 3,89% Asset life 10,9 10,9 10,9 10,9 10,9 10,9 10,9 10,9 10,9 10,9 10,9

Asset Value 3746 4165 4133 4458 3859 3819 3272 3363 2579 4155 2770 Interest expense 0 209 232 233 237 191 177 120 143 107 162 Depreciation 382 379 409 354 350 300 309 237 381 254 Source: Koller et al. (2010) and Skanska’s annual reports 2005 – 2015.

Peab Capitalization of Operating Leases

SEK Millions 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Operational Leasing 152 186 205 295 274 295 375 393 464 571 524 Cost of Operating Leasing 5,24% 5,59% 5,56% 5,63% 5,31% 4,94% 4,64% 3,67% 4,24% 4,16% 3,89% Asset life 10,9 10,9 10,9 10,9 10,9 10,9 10,9 10,9 10,9 10,9 10,9

Asset Value 1290 1388 2002 1851 2037 2657 2845 3612 4257 3930 2620 Interest expense 72 77 113 98 101 123 104 153 177 153 Depreciation 118 127 184 170 187 244 261 331 391 361 Source: Koller et al. (2010) and Peab’s annual reports 2005 – 2015.

124

Appendix 5 – Reorganized Income Statement

NCC Reformulated Income Statement

SEK, Millions 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Revenue 55 876 58 397 57 465 51 817 49 420 52 535 57 227 57 823 56 867 62 495 Cost of Sales -50 729 -52 572 -52 005 -46 544 -44 487 -47 721 -51 724 -52 027 -51 176 -56 009 Gross income 5 147 5 825 5 460 5 273 4 933 4 814 5 503 5 796 5 691 6 486 Selling and administrative expenses -2 795 -3 059 -3 197 -3 035 -2 682 -2 774 -2 978 -3 130 -3 117 -3 405 Result from sales of properties 22 19 15 10 2 7 3 6 20 7 Impairment loss, fixed assets -22 -245 -76 -7 -2 -38 -2 7 -40 Results from sales of Group companies 7 415 8 5 3 6 3 Results in associated companies and JV 29 11 9 -1 4 5 5 1 8 -9 Other 4 -175 0 -95 0 0 0 0 0 0 Add: Operating Lease Interest 196 230 279 196 133 165 128 181 233 217 Operating income (EBIT) 2 588 3 021 2 498 2 346 2 388 2 182 2 665 2 861 2 838 3 256 Corporate tax -555 -357 -565 -432 -481 -496 -364 -411 -396 -536 Tax rate 24,52% 13,68% 23,69% 25,50% 23,94% 27,42% 16,08% 17,12% 17,72% 20,18% Tax on financial items -80 -56 -27 -166 -91 -102 -65 -79 -107 -121 NOPAT 1 953 2 608 1 906 1 748 1 816 1 584 2 237 2 371 2 335 2 599 Financial income 116 131 615 70 99 76 73 165 46 50 Financial expenses -245 -313 -449 -526 -345 -284 -347 -444 -416 -433 Remove: Operating Lease Interest -196 -230 -279 -196 -133 -165 -128 -181 -233 -217 Net financial items -325 -412 -113 -652 -379 -373 -402 -460 -603 -600 Tax shield on financial items 80 56 27 166 91 102 65 79 107 121 Net financial items after tax -245 -356 -86 -486 -288 -271 -338 -381 -496 -479 Profit for the year 1 708 2 252 1 820 1 262 1 528 1 313 1 899 1 990 1 839 2 120 Profit for the year attributable to: Equity holders 1706 2247 1809 1261 1524 1310 1894 1986 1835 2 113 Non-controlling interests 1 4 11 1 4 2 5 3 3 6 Net profit for the year 1 707 2 251 1 820 1 262 1 528 1 312 1 899 1 989 1 838 2 119 Source: Own Creation based on NCC’s annual reports 2006 – 2015.

125

Skanska Reorganized Income Statement

SEK Millions 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Revenue 125 603 138 781 143 674 136 803 122 224 118 734 129 350 136 488 143 325 153 049 Cost of sales -114 220 -125 807 -131 532 -123 646 -109 774 -107 410 -117 789 -123 955 -130 215 -139 160 Gross income 11 383 12 974 12 142 13 157 12 450 11 324 11 561 12 533 13 110 13 889 Selling and administrative expenses -6 985 -7 970 -8 932 -8 078 -7 533 -7 853 -8 508 -7 671 -8 370 -8 869 Income from associated companies and JV 365 402 876 143 541 4 942 965 693 669 1 270 Add: operating lease interest 209 232 233 237 191 177 120 143 107 162 Operating income EBIT 4 972 5 638 4 319 5 459 5 649 8 590 4 138 5 698 5 516 6 452 Corporate tax -1 330 -1 546 -1 253 -1 393 -1 395 -830 -923 -1 551 -1 279 -1 185 Tax rate 26,68% 27,28% 28,41% 27,74% 25,72% 9,85% 24,39% 29,15% 24,94% 19,83% Tax on financial items 3 8 26 -121 -58 -16 -86 -110 -97 -94 NOPAT 3 646 4 100 3 092 3 945 4 196 7 744 3 129 4 037 4 141 5 173 Financial income 466 646 536 294 342 290 235 158 139 127 Financial expenses -244 -385 -212 -495 -377 -278 -469 -393 -419 -441 Remove: Operating lease interest -209 -232 -233 -237 -191 -177 -120 -143 -107 -162 Net financial items 13 29 91 -438 -226 -165 -354 -378 -387 -476 Tax shield on financial items -3 -8 -26 121 58 16 86 110 97 94 Net financial items after tax 9 21 65 -316 -168 -149 -268 -268 -291 -381 Profit for the year 3 655 4 121 3 157 3 628 4 028 7 595 2 861 3 769 3 850 4 791 Equity holders 3 635 4 096 3 102 3 623 4 022 7 589 2 853 3 765 3 843 4 780 Non-controlling interest 20 25 55 5 6 6 8 4 7 11 Net profit for the year 3 655 4 121 3 157 3 628 4 028 7 595 2 861 3 769 3 850 4 791 Source: Own creation based on Skanska’s annual reports 2006 – 2015.

Peab Reorganized Income Statement

SEK Millions 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Revenue 30 321 31 977 34 132 35 140 38 045 43 539 46 840 43 095 43 630 44 376 Cost of sales -27 444 -29 049 -31 029 -31 529 -34 533 -39 842 -43 541 -40 295 -39 687 -41 151 Gross income 2 877 2 928 3 103 3 611 3 512 3 697 3 299 2 800 3 943 3 225 Selling and administrative expenses -1 628 -1 621 -1 773 -2 118 -2 139 -2 265 -2 378 -2 305 -2 243 -2 296 Participation in profit of joint venture -9 33 -6 18 95 24 18 13 -42 -3 Result from participation in joint venture sold 11 6 Competition damage charge -85 Capital gains from share sold in joint ventures 29 Capital gains from share sold in Group companies -4 Add: operating lease interest 72 77 113 98 101 123 104 153 177 153 Other operating income 90 38 58 128 126 113 106 Other operating costs -3 -9 -12 -20 -19 -23 Operating income EBIT 1 323 1 338 1 462 1 699 1 604 1 628 1 159 767 1 929 1 162 Corporate tax -363 -325 79 -326 -323 -252 -88 -85 -203 -108 Tax rate 25,73% 29,57% -7,79% 19,79% 21,35% 21,09% 10,82% 22,19% 16,50% 11,92% Tax on financial items 23 -71 35 -10 -19 -91 -37 -85 -115 -31 Profit from discountinued operations, net after tax 37 NOPAT 983 980 1 576 1 363 1 261 1 285 1 034 597 1 611 1 023 Financial income 276 152 202 321 264 158 239 239 122 157 Financial expenses -116 -314 -534 -274 -252 -466 -443 -472 -634 -252 Profit from participation in joint ventures -3 -1 -2 -2 -38 2 -10 -8 Remove: Operating lease interest -72 -77 -113 -98 -101 -123 -104 -153 -177 -153 Net financial items 88 -239 -448 -52 -91 -433 -346 -384 -699 -256 Tax shield on financial items -23 71 -35 10 19 91 37 85 115 31 Net financial items after tax 65 -168 -483 -42 -71 -342 -309 -299 -584 -225 Profit for the year 1 048 811 1 093 1 321 1 190 943 725 298 1 027 798 Equity holders 1 047 811 1 093 1 315 1 187 943 729 298 1 027 798 Non-controlling interest 1 6 3 -4 Net profit for the year 1 048 811 1 093 1 321 1 190 943 725 298 1 027 798 Source: Own creation based on Peab’s annual reports 2006 – 2015.

126

Appendix 6 – Tax Calculations

NCC Tax Calculations

SEK Millions 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Corporate Tax -555 -357 -565 -432 -481 -496 -364 -411 -396 -536 Tax rate 24,52% 13,68% 23,69% 25,50% 23,94% 27,42% 16,08% 17,12% 17,72% 20,18% Net Financial Items -325 -412 -113 -652 -379 -373 -402 -460 -603 -600 Tax Shield 80 56 27 166 91 102 65 79 107 121 Source: Own creation based on NCC’s annual reports 2006 – 2015.

Skanska Tax Calculations

SEK Millions 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Corporate Tax -1330 -1546 -1253 -1393 -1395 -830 -923 -1551 -1279 -1185 Tax rate 26,68% 27,28% 28,41% 27,74% 25,72% 9,85% 24,39% 29,15% 24,94% 19,83% Net Financial Items 13 29 91 -438 -226 -165 -354 -378 -387 -476 Tax Shield -3 -8 -26 121 58 16 86 110 97 94 Source: Own creation based on Skanska’s annual reports 2006 – 2015.

Peab Tax Calculations

SEK Millions 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Corporate Tax -363 -325 79 -326 -323 -252 -88 -85 -203 -108 Tax rate 25,73% 29,57% -7,79% 19,79% 21,35% 21,09% 10,82% 22,19% 16,50% 11,92% Net Financial Items 88 -239 -448 -52 -91 -433 -346 -384 -699 -256 Tax Shield -23 71 -35 10 19 91 37 85 115 31 Source: Own creation based on Peab’s annual reports 2006 – 2015.

127

Appendix 7 – Return on Equity Calculations

NCC ROE Calculations

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 NBC 3,03% 3,44% 0,79% 7,20% 4,08% 2,71% 2,56% 2,50% 3,02% 3,30% ROIC 13,04% 14,82% 10,71% 12,11% 11,95% 8,67% 10,09% 9,92% 9,22% 10,73% ROIC-NBC 10,01% 11,39% 9,92% 4,91% 7,87% 5,95% 7,53% 7,42% 6,21% 7,43% Financial leverage 1,18 1,43 1,59 0,88 0,87 1,20 1,47 1,75 1,86 1,49 Source: Own creation based on NCC’s annual reports 2005 – 2015.

Skanska ROE Calculations

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 NBC 0,23% 0,27% 3,47% -5,23% -3,47% 5,90% 3,48% 6,47% 4,39% -82,17% ROIC 23,70% 31,99% 17,81% 27,37% 26,29% 35,03% 11,57% 15,85% 14,77% 21,79% ROIC-NBC 23,47% 31,72% 14,34% 32,60% 29,76% 29,13% 8,09% 9,38% 10,39% 103,96% Financial leverage -0,20 -0,38 -0,10 -0,30 -0,23 0,13 0,40 0,19 0,31 -0,02 Source: Own creation based on Skanska’s annual report 2005 – 2015.

Peab ROE Calculations

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 NBC -1,33% 4,85% 5,63% 0,48% 0,67% 2,88% 2,36% 2,22% 5,41% 2,58% ROIC 12,01% 13,84% 10,48% 8,31% 6,86% 6,49% 4,91% 2,82% 8,58% 6,09% ROIC-NBC 13,35% 8,99% 4,85% 7,83% 6,19% 3,61% 2,55% 0,61% 3,16% 3,51% Financial leverage 1,50 0,96 1,33 1,13 1,40 1,49 1,64 1,76 1,35 1,08 Source: Own creation based on Peab’s annual reports 2005 – 2015.

128

Appendix 8 – Free Cash Flow to Firm Calculations

SEK Millions 2007 2008 2009 2010 2011 2012 2013 2014 2015 NOPAT 2 608 1 906 1 748 1 816 1 582 2 235 2 371 2 333 2 599

Depreciation & Amortization 526 568 573 567 562 631 703 708 759

Gross Cash Flow 3 134 2 474 2 321 2 383 2 144 2 866 3 074 3 041 3 358

Net Working Capital -2 787 -1 695 2 094 316 -2 681 -2 389 429 -967 1 022

Net Investment 922 703 -1 652 -957 -2 129 -2 866 -1 167 -686

FCFF 1 701 5 118 1 047 -1 494 -1 652 637 907 3 695 Source: Own creation based on NCC’s annual reports 2007 – 2015.

129

Appendix 9 – Forecast Income Statement

-3

-84

300

-638

3 237 3

3 262 3

3 237 3

3 875 3

4 936 4

1 136 1

6 947 6

-1 061 -1

-3 779 -3

72 152 72

15 212 15

93 100 93

20 118 20

14 352 14

55 461 55

-88 461 -88

Terminal

-3

-82

294

-625

3 175 3

3 199 3

3 175 3

3 800 3

4 841 4

1 114 1

6 810 6

2025E

-1 041 -1

-3 704 -3

70 759 70

14 918 14

91 302 91

19 724 19

14 099 14

54 374 54

-86 753 -86

-2

-80

287

-610

3 097 3

3 120 3

3 097 3

3 707 3

4 722 4

1 087 1

6 486 6

2024E

-1 015 -1

-3 819 -3

69 027 69

14 553 14

89 067 89

19 243 19

13 849 13

53 308 53

-84 629 -84

-2

-78

280

-595

-990

3 021 3

3 043 3

3 021 3

3 616 3

4 606 4

1 060 1

6 177 6

2023E

-3 937 -3

67 332 67

14 196 14

86 880 86

18 773 18

13 604 13

52 262 52

-82 551 -82

-2

-76

273

-580

-966

2 947 2

2 968 2

2 947 2

3 527 3

4 493 4

1 034 1

5 883 5

2022E

-4 059 -4

65 674 65

13 846 13

84 741 84

18 315 18

13 364 13

51 238 51

-80 519 -80

-2

-75

266

-566

-942

2 874 2

2 894 2

2 874 2

3 440 3

4 382 4

1 008 1

5 603 5

2021E

-4 184 -4

64 052 64

13 504 13

82 648 82

17 869 17

13 128 13

50 233 50

-78 530 -78

-2

-73

260

983

-552

-919

2 803 2

2 822 2

2 803 2

3 355 3

4 273 4

5 336 5

2020E

-4 314 -4

62 464 62

13 169 13

80 599 80

17 433 17

12 895 12

49 248 49

-76 583 -76

-2

-70

248

939

-527

-845

2 557 2

2 619 2

2 557 2

3 084 3

3 929 3

4 884 4

2019E

-4 633 -4

59 835 59

12 583 12

77 008 77

16 762 16

12 667 12

47 328 47

-73 325 -73

-2

-66

235

892

-501

-739

2 197 2

2 425 2

2 197 2

2 698 2

3 437 3

4 470 4

2018E

-4 976 -4

57 086 57

11 943 11

73 094 73

15 751 15

12 443 12

45 406 45

-69 891 -69

-2

-63

225

852

-478

-646

1 880 1

2 150 2

1 880 1

2 359 2

3 004 3

4 091 4

2017E

-5 345 -5

54 824 54

11 411 11

69 840 69

14 801 14

12 223 12

44 069 44

-67 058 -67

-2

-60

214

809

-454

-542

1 524 1

1 520 1

1 524 1

1 978 1

2 520 2

3 744 3

2016E

-5 741 -5

52 360 52

10 830 10

66 279 66

13 908 13

12 007 12

42 360 42

-63 971 -63

-42

-50

217

759

-479

-657

2015

2 120 2

2 113 2

2 120 2

2 599 2

3 256 3

7 696 7

3 427 3

-6 166 -6

50 963 50

62 495 62

13 069 13

11 795 11

40 370 40

-59 414 -59

-72

233

708

-496

-503

2014

1 838 1

1 835 1

1 837 1

2 333 2

2 836 2

3 125 3

-7 019 -7

41 846 41

11 807 11

56 866 56

10 135 10

12 153 12

38 472 38

-54 294 -54

-19

181

703

-381

-490

2013

1 989 1

1 986 1

1 990 1

2 371 2

2 861 2

9 030 9

4 811 4

-7 180 -7

42 915 42

11 541 11

57 824 57

11 999 11

39 164 39

-55 158 -55

-98

128

631

-338

-429

2012

1 899 1

1 894 1

1 897 1

2 235 2

2 664 2

8 612 8

2 847 2

-7 662 -7

42 840 42

11 285 11

57 226 57

12 211 12

41 218 41

-54 702 -54

-23

-20

165

182

562

-271

-598

2011

1 312 1

1 310 1

1 311 1

1 582 1

2 180 2

7 542 7

1 366 1

-6 289 -6

38 933 38

10 840 10

52 535 52

11 766 11

38 150 38

-50 497 -50

Net profit for the year the for profit Net

Non-controllinginterests

Equityholders

Profit for the year attributable to: attributable year the for Profit

Net profit for the year the for profit Net

Netfinancial items aftertax

NOPAT

Tax on EBIT on Tax

EBIT

OperatingInterest Expenses

Resultactivitiesotherfrom

Total Cost of Sales of Cost Total

Productionrelatedservices and goods

Impairmentlosses

Depreciation/amortization

Personnalexpenses

Changeininventories

Cost ofSalesCost

Total Revenue Total

Other

NCC HousingNCC

NCC PropertyDevelopmentNCC

NCC Roads NCC NCC ConstructionNCC SEK Millions SEK Source: Own creation based on NCC’s annual reports 2010 – 2015.

130

Appendix 10 – Forecast Income Statement Growth

Yearly Growth rate in each item, % 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Terminal NCC Construction 12% 8% -5% -2% 5% 5% 4% 3% 4% 4% 2% 2% 2% 2% 2% 2% NCC Roads 10% 4% -2% 1% -3% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% NCC Property Development -32% 108% 69% -35% 10% 9% 9% 9% 9% 9% 5% 5% 5% 5% 5% 2% NCC Housing 10% 14% 5% 12% 29% 6% 6% 6% 6% 4% 3% 3% 3% 3% 3% 2% Other 51% 22% -6% -2% -12% -7% -7% -7% -7% -7% -3% -3% -3% -3% -3% 2% Total Revenue 6% 9% 1% -2% 10% 6% 5% 5% 5% 5% 3% 3% 3% 3% 3% 2%

Cost of Sales Change in inventories -13% 390% -81% 279% -31% 20% 5% 5% 5% 5% 3% 3% 3% 3% 3% 2% Personnal expenses 5% 4% 2% 2% -35% 41% 5% 5% 5% 5% 3% 3% 3% 3% 3% 2% Depreciation/amortization -1% 12% 11% 1% 7% 7% 5% 5% 5% 5% 3% 3% 3% 3% 3% 2% Impairment losses 452% -76% -59% -72% 820% -31% 5% 5% 5% 5% 3% 3% 3% 3% 3% 2% Production related goods and services 7% 10% 0% -2% 22% 3% 5% 4% 5% 4% 3% 3% 3% 3% 3% 2% Total Cost of Sales 7% 8% 1% -2% 9% 8% 5% 4% 5% 4% 3% 3% 3% 3% 3% 2%

Result from other activities -675% -152% 17% 121% -235% -96% 5% 5% 5% 5% 3% 3% 3% 3% 3% 2%

Operating Interest Expenses 24% -22% 41% 29% -7% -2% 5% 5% 5% 5% 3% 3% 3% 3% 3% 2%

EBIT -9% 22% 7% -1% 15% -23% 19% 14% 14% 9% 3% 3% 3% 3% 3% 2%

Tax on EBIT 5% -28% 14% 3% 31% -18% 19% 14% 14% 9% 3% 3% 3% 3% 3% 2%

NOPAT -13% 41% 6% -2% 11% -24% 19% 14% 14% 9% 3% 3% 3% 3% 3% 2%

Net financial items after tax -6% 25% 13% 30% -3% -5% 5% 5% 5% 5% 3% 3% 3% 3% 3% 2%

Net profit for the year -14% 45% 5% -8% 15% -28% 23% 17% 16% 10% 3% 3% 3% 3% 3% 2%

Profit for the year attributable to: Equity holders -14% 45% 5% -8% 15% -28% 41% 13% 8% 8% 3% 3% 3% 3% 3% 2% Non-controlling interests -50% 150% -40% 0% 100% -26% 41% 13% 8% 8% 3% 3% 3% 3% 3% 2% Net profit for the year -14% 45% 5% -8% 15% -28% 23% 17% 16% 10% 3% 3% 3% 3% 3% 2% Source: Own creation based on NCC’s annual reports 2010 – 2015.

131

Appendix 11 – Forecast Balance Sheet

338

250

790

470

378

209

931

6 717 6

2 513 2

2 163 2

1 454 1

4 424 4

3 634 3

2 889 2

7 369 7

4 655 4

7 448 7

6 517 6

7 448 7

1 862 1

42 092 42

35 375 35

11 378 11

15 802 15

23 997 23

21 622 21

45 619 45

13 965 13

26 999 26

Terminal

331

245

775

461

370

205

913

6 587 6

2 464 2

2 121 2

1 426 1

4 339 4

3 564 3

2 833 2

7 227 7

4 565 4

7 304 7

6 391 6

7 304 7

1 826 1

2025E

41 279 41

34 692 34

11 158 11

15 497 15

23 534 23

21 204 21

44 738 44

13 695 13

26 478 26

323

239

756

449

361

200

891

6 426 6

2 404 2

2 069 2

1 391 1

4 233 4

3 477 3

2 764 2

7 050 7

4 453 4

7 125 7

6 235 6

7 125 7

1 781 1

2024E

40 269 40

33 843 33

10 885 10

15 118 15

22 957 22

20 685 20

43 643 43

13 360 13

25 829 25

315

233

737

438

352

195

869

6 268 6

2 345 2

2 019 2

1 356 1

4 129 4

3 392 3

2 696 2

6 877 6

4 344 4

6 950 6

6 082 6

6 950 6

1 738 1

2023E

39 280 39

33 012 33

10 618 10

14 747 14

22 394 22

20 177 20

42 571 42

13 032 13

25 195 25

307

227

719

428

344

190

847

6 114 6

2 287 2

1 969 1

1 323 1

4 027 4

3 308 3

2 629 2

6 708 6

4 237 4

6 779 6

5 932 5

6 779 6

1 695 1

2022E

38 313 38

32 199 32

10 356 10

14 384 14

21 843 21

19 681 19

41 523 41

12 711 12

24 575 24

300

222

701

417

335

185

826

5 963 5

2 231 2

1 920 1

1 290 1

3 928 3

3 226 3

2 565 2

6 542 6

4 132 4

6 612 6

5 785 5

6 612 6

1 653 1

2021E

37 366 37

31 404 31

10 101 10

14 028 14

21 303 21

19 194 19

40 497 40

12 397 12

23 968 23

292

216

684

407

327

181

806

5 815 5

2 175 2

1 873 1

1 258 1

9 850 9

3 830 3

3 146 3

2 501 2

6 380 6

4 030 4

6 448 6

5 642 5

6 448 6

1 612 1

2020E

36 440 36

30 625 30

13 681 13

20 775 20

18 719 18

39 493 39

12 090 12

23 374 23

279

207

653

389

312

173

770

5 556 5

2 079 2

1 789 1

1 202 1

9 411 9

3 660 3

3 006 3

2 390 2

6 096 6

3 850 3

6 161 6

5 391 5

6 161 6

1 540 1

2019E

34 817 34

29 261 29

13 071 13

19 849 19

17 885 17

37 734 37

11 551 11

22 332 22

265

196

620

369

297

164

731

5 274 5

1 973 1

1 698 1

1 141 1

8 933 8

3 474 3

2 853 2

2 268 2

5 786 5

3 655 3

5 848 5

5 117 5

5 848 5

1 462 1

2018E

33 047 33

27 773 27

12 407 12

18 840 18

16 976 16

35 816 35

10 964 10

21 197 21

253

187

593

352

283

157

698

5 039 5

1 885 1

1 623 1

1 090 1

8 535 8

3 319 3

2 726 2

2 167 2

5 528 5

3 492 3

5 587 5

4 889 4

5 587 5

1 397 1

2017E

31 576 31

26 537 26

11 854 11

18 002 18

16 220 16

34 221 34

10 476 10

20 254 20

240

178

562

334

269

149

663

4 782 4

1 789 1

1 540 1

1 035 1

8 100 8

3 150 3

2 587 2

2 057 2

5 246 5

3 314 3

5 302 5

4 640 4

5 302 5

1 326 1

9 942 9

1 326 1

2016E

29 966 29

25 184 25

11 250 11

17 084 17

15 393 15

32 477 32

19 221 19

190

147

557

322

439

204

287

696

2015

5 083 5

2 927 2

1 262 1

9 033 9

2 292 2

1 970 1

1 792 1

5 593 5

3 243 3

4 171 4

4 244 4

4 694 4

1 400 1

8 523 8

1 250 1

29 307 29

24 224 24

11 325 11

15 191 15

13 396 13

28 587 28

16 718 16

242

156

434

268

389

237

117

746

2014

3 702 3

1 455 1

1 415 1

9 106 9

2 285 2

2 017 2

1 865 1

5 587 5

3 261 3

4 782 4

4 408 4

3 960 3

1 066 1

8 226 8

1 137 1

29 021 29

25 319 25

11 391 11

16 213 16

13 267 13

29 480 29

18 305 18

143

131

247

414

267

249

918

673

2013

4 238 4

2 392 2

1 325 1

8 647 8

2 484 2

2 070 2

1 802 1

5 598 5

3 206 3

5 360 5

4 264 4

4 096 4

8 401 8

1 156 1

28 131 28

23 894 23

11 131 11

15 246 15

13 778 13

29 024 29

17 876 17

168

158

725

204

281

122

782

655

2012

4 937 4

1 489 1

1 544 1

1 578 1

6 484 6

3 160 3

2 435 2

9 644 9

1 827 1

4 266 4

3 057 3

3 945 3

4 241 4

4 659 4

9 002 9

1 145 1

27 097 27

22 160 22

15 676 15

12 967 12

28 643 28

17 059 17

285

173

669

167

191

910

557

-255

2011

2 876 2

1 114 1

1 559 1

4 986 4

3 288 3

2 619 2

8 274 8

1 607 1

3 496 3

2 805 2

3 614 3

4 176 4

4 131 4

8 415 8

1 051 1

21 149 21

18 273 18

13 287 13

11 981 11

25 268 25

14 335 14

TOTAL FUNDS INVESTED FUNDS TOTAL

FINANCIAL ASSETS FINANCIAL

ExcessCash

Short-terminvestments

Assetsheld salefor

Financialassets current

Financialnon-currentassets

Operating Invested Capital (incl. Goodwill and Intangibles) (incl.Goodwill and Capital Invested Operating

Net operating Non-Current Assets Non-Current operating Net

Operating Non-current liabilities Non-current Operating

Non-currentprovisions

Deferredliabilitiestax

Operating Non-Current Assets Non-Current Operating

Other IntangibleOther assets

Goodwill

Add:Operatingleases

Deferredassetstax

Investmentsinjoint ventureassociated companies and

Property, plat and equipmentProperty, and plat

Operating working capital working Operating

Operating Current Liabilities Current Operating

Other current liabilities, current Other provisions

Tax liabilities Tax

Invociedrevenues, workednotup

Account payable Account

Operating Current Assets Current Operating

Worked-upinvoicednon revenues

Accounts, Tax, Other receivablesOtherTax, Accounts,

Inventories

Current assetpropertiesCurrent

OperatingCash Working Use of fundsof Use SEK Millions SEK Source: Own creation based on NCC’s annual reports 2010 – 2015.

132

Appendix 12 – Forecast Balance Sheet Ratio

0,45

0,07

0,03

0,00

0,02

0,38

0,12

0,05

0,04

0,01

0,17

0,01

0,03

0,08

0,00

0,05

0,26

0,23

0,08

0,00

0,07

0,08

0,49

0,02

0,15

0,01

0,29

0,02

Terminal

0,45

0,07

0,03

0,00

0,02

0,38

0,12

0,05

0,04

0,01

0,17

0,01

0,03

0,08

0,00

0,05

0,26

0,23

0,08

0,00

0,07

0,08

0,49

0,02

0,15

0,01

0,29

0,02

2025E

0,45

0,07

0,03

0,00

0,02

0,38

0,12

0,05

0,04

0,01

0,17

0,01

0,03

0,08

0,00

0,05

0,26

0,23

0,08

0,00

0,07

0,08

0,49

0,02

0,15

0,01

0,29

0,02

2024E

0,45

0,07

0,03

0,00

0,02

0,38

0,12

0,05

0,04

0,01

0,17

0,01

0,03

0,08

0,00

0,05

0,26

0,23

0,08

0,00

0,07

0,08

0,49

0,02

0,15

0,01

0,29

0,02

2023E

0,45

0,07

0,03

0,00

0,02

0,38

0,12

0,05

0,04

0,01

0,17

0,01

0,03

0,08

0,00

0,05

0,26

0,23

0,08

0,00

0,07

0,08

0,49

0,02

0,15

0,01

0,29

0,02

2022E

0,45

0,07

0,03

0,00

0,02

0,38

0,12

0,05

0,04

0,01

0,17

0,01

0,03

0,08

0,00

0,05

0,26

0,23

0,08

0,00

0,07

0,08

0,49

0,02

0,15

0,01

0,29

0,02

2021E

0,45

0,07

0,03

0,00

0,02

0,38

0,12

0,05

0,04

0,01

0,17

0,01

0,03

0,08

0,00

0,05

0,26

0,23

0,08

0,00

0,07

0,08

0,49

0,02

0,15

0,01

0,29

0,02

2020E

0,45

0,07

0,03

0,00

0,02

0,38

0,12

0,05

0,04

0,01

0,17

0,01

0,03

0,08

0,00

0,05

0,26

0,23

0,08

0,00

0,07

0,08

0,49

0,02

0,15

0,01

0,29

0,02

2019E

0,45

0,07

0,03

0,00

0,02

0,38

0,12

0,05

0,04

0,01

0,17

0,01

0,03

0,08

0,00

0,05

0,26

0,23

0,08

0,00

0,07

0,08

0,49

0,02

0,15

0,01

0,29

0,02

2018E

0,45

0,07

0,03

0,00

0,02

0,38

0,12

0,05

0,04

0,01

0,17

0,01

0,03

0,08

0,00

0,05

0,26

0,23

0,08

0,00

0,07

0,08

0,49

0,02

0,15

0,01

0,29

0,02

2017E

0,45

0,07

0,03

0,00

0,02

0,38

0,12

0,05

0,04

0,01

0,17

0,01

0,03

0,08

0,00

0,05

0,26

0,23

0,08

0,00

0,07

0,08

0,49

0,02

0,15

0,01

0,29

0,02

2016E

0,47

0,08

0,05

0,00

0,02

0,01

0,39

0,14

0,04

0,03

0,01

0,18

0,01

0,03

0,09

0,00

0,05

0,24

0,21

0,07

0,00

0,07

0,08

0,46

0,02

0,14

0,01

0,27

0,02

2015

0,51

0,07

0,03

0,00

0,02

0,01

0,45

0,16

0,04

0,00

0,20

0,01

0,03

0,10

0,00

0,06

0,29

0,23

0,08

0,00

0,08

0,07

0,52

0,02

0,14

0,01

0,32

0,02

2014

0,49

0,07

0,04

0,00

0,02

0,00

0,41

0,15

0,04

0,01

0,19

0,00

0,03

0,10

0,00

0,06

0,26

0,24

0,09

0,00

0,07

0,50

0,02

0,15

0,01

0,31

0,02

2013

0,47

0,09

0,03

0,00

0,03

0,39

0,11

0,06

0,04

0,01

0,17

0,00

0,03

0,07

0,00

0,05

0,27

0,23

0,07

0,00

0,07

0,08

0,50

0,01

0,16

0,01

0,30

0,02

2012

0,40

0,05

0,00

0,01

0,00

0,02

0,03

0,35

0,09

0,06

0,05

0,01

0,16

0,00

0,03

0,07

0,00

0,05

0,25

0,23

0,07

0,00

0,08

0,48

0,02

0,16

0,01

0,27

0,02

2011

TOTAL FUNDS INVESTED FUNDS TOTAL

FINANCIAL ASSETS FINANCIAL

ExcessCash

Short-terminvestments

Assetsheld salefor

Financialassets current

Financialnon-currentassets

Operating Invested Capital (incl. Goodwill and Intangibles) (incl.Goodwill and Capital Invested Operating

Net operating Non-Current Assets Non-Current operating Net

Operating Non-current liabilities Non-current Operating

Non-currentprovisions

Deferredliabilitiestax

Operating Non-Current Assets Non-Current Operating

Other IntangibleOther assets

Goodwill

Add:Operatingleases

Deferredassetstax

Investmentsinjoint ventureassociated companies and

Property, plat and equipmentProperty, and plat

Operating working capital working Operating

Operating Current Liabilities Current Operating

Other current liabilities, current Other provisions

Tax liabilities Tax

Invociedrevenues, workednotup

Account payable Account

Operating Current Assets Current Operating

Worked-upinvoicednon revenues

Accounts, Tax, Other receivablesOtherTax, Accounts,

Inventories

Current assetpropertiesCurrent

OperatingCash Working Use of fundsof Use % of Revenue of % Source: Own creation based on NCC’s annual reprots 2011 – 2015.

133

Appendix 13 – ROIC & Profit Margin

Free Cash flow to Firm Historical development Detailed Forecast Simplified Forecast SEK Millions 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Terminal NOPAT 1 582 2 235 2 371 2 333 2 599 1 978 2 359 2 698 3 084 3 355 3 440 3 527 3 616 3 707 3 800 3 875

Depreciation & Amortization 562 631 703 708 759 809 852 892 939 983 1 008 1 034 1 060 1 087 1 114 1 136

Gross Cash Flow 2 144 2 866 3 074 3 041 3 358 2 787 3 211 3 590 4 024 4 338 4 448 4 561 4 676 4 794 4 914 5 011

Net Working Capital -2 681 -2 389 429 -967 1 022 -1 893 -918 -839 -1 009 -925 -528 -540 -551 -564 -576 -463

Net Investment -957 -2 129 -2 866 -1 167 -686 124 -1 287 -1 289 -1 418 -1 422 -1 259 -1 290 -1 321 -1 354 -1 387 -1 356

FCFF -1 494 -1 652 637 907 3 695 1 018 1 006 1 461 1 597 1 990 2 661 2 732 2 803 2 876 2 951 3 192 Source: Own creation based on NCC’s annual reports 2010 – 2015.

NOPAT & ROIC

SEK Millions 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Terminal NOPAT 1 582 2 235 2 371 2 333 2 599 1 978 2 359 2 698 3 084 3 355 3 440 3 527 3 616 3 707 3 800 3 875 Operating Invested Capital (incl. Goodwill and Intangibles) 18 273 22 160 23 894 25 319 24 224 25 184 26 537 27 773 29 261 30 625 31 404 32 199 33 012 33 843 34 692 35 375 ROIC 8,66% 10,09% 9,92% 9,21% 10,73% 7,85% 8,89% 9,71% 10,54% 10,95% 10,95% 10,95% 10,95% 10,95% 10,95% 10,95% Source: Own creation based on NCC’s annual reports 2010 – 2015.

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Appendix 14 – Interest Rates for Cost of Debt Calculations

Year Corporate BBB 2006 6,04% 2007 6,11% 2008 7,37% 2009 7,38% 2010 4,82% 2011 4,47% 2012 3,83% 2013 3,70% 2014 3,59% 2015 3,86%

Average 5 year 3,89% Average 6 year 4,05% Average 7 year 4,52% Source: Federal Reserve Bank of St. Louis (2014).

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