Equity Research Kindred Group

Company Update Leisure 01 June 2018 Buy

Recommendation Upgrade Date and time of decision to change In for the long haul, a look at the US potential recommendation: 1 June 2018, 09:00 CET Our investment case for Kindred is based on its good long-term strategy focused on increasing its presence in regulated markets, scalability, and best-in-class execution. The share price has declined by around 20% from the last peak and trades at EV/EBITDA of 11x. Furthermore, the short and long-term outlook looks solid, with the FIFA Football World Cup and US expansion in the cards. We upgrade to Buy with a target price of SEK 153. Key Data (2018E) Price (SEK) 111.80 Upgrade to Buy and target price up to SEK 153 Target price (SEK) 153.00 We have increased our EPS estimates by 3% for 2018, 20% for 2019, and - changed from (SEK) 135.00 17% for 2020. At 2018E EV/EBITDA of 11x, the shares are attractive and we Recommendation Buy have upgraded our recommendation to Buy with DCF target price of SEK 153. - changed from Hold Risk High Margin bargain as Kindred benefits from increasing scale Reuters KINDsdb.ST We are impressed by the company’s ability to continually deliver above-market Bloomberg KINDsdb SS organic growth, and as the company has grown larger, it has become adept at Market cap (SEKm) 25,307 leveraging fixed costs and may grow without needing to sacrifice profitability. Market cap (USDm) 2,871 With size comes greater bargaining power, and we believe Kindred will be in a Market cap (EURm) 2,455 good position to offset the margin pressure from pending tax obligations by Net debt (GBPm) 38 renegotiating with suppliers and gaining better absorption on fixed costs. We expect that the company should be able to keep EBITDA flat organically over Shares fully dil. (m) 226.4 2018-20. The strong balance sheet leaves room for acquisitions, which would Avg daily turnover (SEKm) 86.7 bring additional upside to our estimates and earnings growth through the period. Free float 76% US expansion could add GBP 500m to Kindred’s revenue by 2025 PASPA has fallen in the US and sports betting growth could follow as states Estimate Revisions (%) issue licenses. We estimate a sports betting market potential of USD 35bn by 2018E 2019E 2020E Revenues (1) (1) (1) 2025 in the US, paving way for online migration. We believe Kindred could start Adj. EBIT 4 21 18 generating small scale revenues in the US by 2019, but the US would be more Adj. EPS 3 20 17 important for the growth case beyond 2020, and we estimate potential for the US market to generate GBP 500m in GGR for Kindred by 2025. Share Price (12M) Financials (GBP) Year end: Dec 2016 2017 2018E 2019E 2020E Revenues (m) 544 751 903 1,022 1,139 140 Adj. EBIT 100 149 158 153 159 Pre-tax profit (m) 93 132 153 149 155 120 EPS, pence 36.5 51.8 60.6 59.1 61.8 Adj. EPS, pence 37.6 56.8 60.6 59.1 61.8 100 DPS, pence 31.0 55.1 42.0 42.0 45.0 80 Revenue growth (%) 252.4 38.1 20.1 13.2 11.5 Jun Aug Oct Dec Jan Apr Jun Adj. EBIT growth (%) 148.6 48.6 6.3 (3.2) 3.7 Adj. EPS growth (%) 130.0 51.0 6.5 (2.4) 4.5 Absolute (green) / Relative to Sweden (purple). Adj. EBIT margin (%) 17.8 18.3 17.5 15.0 13.9 ROE (%) 36.7 43.5 46.2 42.4 39.1 ROCE (%) 34.3 35.1 33.1 32.9 33.3 Analysts Mathias Lundberg PER (x) 20.2 18.6 15.8 16.1 15.4 (46) 8 522 29794 Free cash flow yield (%) 5.3 5.2 6.4 7.8 8.9 [email protected] Dividend yield (%) 4.1 5.2 4.4 4.4 4.7 P/BV (x) 7.13 8.08 7.29 6.44 5.68 Nicklas Fhärm (46) 8 522 29631 EV/Sales (x) 3.13 3.26 2.43 2.08 1.78 [email protected] EV/Adj. EBITDA (x) 13.8 13.2 10.8 10.5 9.7

Gustav Sandström EV/Adj. EBIT (x) 17.0 16.5 13.9 13.9 12.8 (46) 8 522 29745 Operating cash flow/EV (%) 7.1 7.1 7.9 9.6 11.3 [email protected] Net debt/Adj. EBITDA (x) (0.29) 0.21 0.18 (0.17) (0.63) Source for all data on this page: SEB (estimates) and SIX/Thomson Reuters (prices) research.sebgroup.com/equity Important. All disclosure information can be found on pages 24 – 26 of this document Company Update Kindred Group 01 June 2018 2

Contents Page

Investment case summary ...... 3 Scalability underestimated ...... 4 Gaining leverage on scale ...... 4 Scalability offsets tax pressure ...... 6 The US opportunity ...... 8 US betting market USD 35bn by 2025 ...... 8 US online market to pass UK by 2020 ...... 11 US could be GBP 500m to Kindred 2025 ...... 11 Estimates ...... 13 Valuation...... 16 Back in Buy territory ...... 16 Overview...... 18 Target prices and risks ...... 22

Equity Research Company Update Kindred Group 01 June 2018 3

Investment case summary Best in class operational efficiency mitigates tax induced margin pressure Leveraging scale to offset We believe that Kindred operates one of the most efficient operations in the taxation impact space as it has successfully been able to persistently grow faster organically than the market, and combined with good cost control, this helps the company to fend off the margin pressure faced by increased taxation on remote gambling.

The ability to mitigate margin pressure is primarily achieved by three means:

● A digital business – size is the strongest marker for high profitability. ● Renegotiation of supplier contracts support gross margin. ● Strong brand recognition reduces affiliate costs. We expect that Kindred will be able to hold EBITDA flat organically throughout 2018-20, which includes the re-regulation of Sweden and the Netherlands. By complementing organic growth with acquisitions, as the company has done historically, Kindred could increase earnings throughout our forecast period.

PASPA has fallen – we estimate USD 35bn potential by 2025 We estimate USD 35bn sports The US gambling market is the largest in the world with gross gaming revenue betting market potential in the US (GGR) of around USD 100bn, even though sports betting has been banned in most states since 1992. The US Supreme Court in May 2018 judged that the Professional and Amateur Sports Protection Act of 1992 (PASPA) is unconstitutional, allowing any state the opportunity to legalise sports betting, which provides strong support for growth of the US gambling market.

We expect that the US sports betting market will unfold gradually, with a handful of states as the front runners in 2018-20, and the bulk to follow after 2020. Land based gambling will likely be first, and online to follow in its wake. Based on the assumption that 80% of the population is covered by legal sports betting opportunities and a USD 150 wager per adult per year, we estimate that the US sports betting market could be worth USD 35bn by 2025, and represent 22% of all gambling in the US.

US expansion could add GBP 500m to Kindred’s GGR by 2025 Kindred could add GBP 500m in The online migration of gambling in the US took a turn for the worse in 2006 revenue through US expansion with the introduction of the Unlawful Internet Gambling Enforcement Act (UIGEA). US online gambling went from the world’s largest to an online penetration of 3-4% today. Supported by the sports betting roll out, we expect that online gambling growth will be revisited and revitalised. According to our estimates, the US online gambling market could overtake the UK as the largest by 2020, and reach 15% online penetration by 2025 and be worth USD 24bn.

Kindred has expressed its intention to expand to the US and is currently in a licensing process with . If it is able to take 3% market share in the US market, compared with its current 4% in Europe, this would translate to GBP 533m in revenue potential by 2025.

Valuation again attractive and strong balance sheet leaves room for M&A Share is back in Buy territory Kindred’s share price has performed weakly over the past quarter, despite a strong report for Q1, including a strong Q2 outlook, and a positive PASPA verdict which caused operator peers in the UK to rally. We have upgraded our recommendation to Buy and increased our DCF based target price to SEK 153.

Equity Research Company Update Kindred Group 01 June 2018 4

Scalability underestimated Gaining leverage on scale Best in class operational efficiency We believe that Kindred operates one of the most efficient operations in the online gambling space. Below, we have outlined revenues against the number of full time employees for a handful of Kindred’s closest online peers. The comparison is especially interesting when putting it side by side with its closest peer Betsson over time. In 2013, the two companies were around the same size, EUR 300m in revenue and 900 employees.

Impressive scalability FTE vs revenue generation 1200

1000 GVC

Kindred 800

Kindred 2016 600

Kindred 2015 Betsson Revenue (EURm) 888 Betsson 2016 400 Kindred 2014 Betsson 2014 Betsson 2015 Kindred 2013 Betsson 2013 200 LeoVegas Mr Green

0 0 500 1000 1500 2000 2500 3000 3500 FTEs

Source: SEB, company reports

The companies thereafter pursued different strategic agendas, Kindred spun off its sports book operation, Kambi, whilst Betsson continued to operate its sports book operation in-house. Betsson pursued a multi-brand strategy fuelled by acquisitions, whilst Kindred continued with the single brand and only slowly transitioned to dual brand, then multi-brand. In our view, this more cautious expansion strategy has paid off and will likely continue.

Margin bargain as Kindred benefits from increasing scale Persistent high growth and As Kindred has increased in sized over the past couple of years, the business selective M&A has been key as become better at leveraging both fixed and variable costs. The supplier cost of sales has decreased as Kindred has increased in size and negotiated new, more favourable, contracts with its suppliers. The company has shown that it can outgrow growth in fixed costs, such as salaries, offsetting the tax-induced margin pressure.

We believe the company will be able to continue to leverage scale and absorption of fixed costs, and we believe the market underestimates this effect. Combined with potential M&A, we are not particularly concerned about margin compression due to increased gambling taxes as the company has proven that it can absorb these.

Equity Research Company Update Kindred Group 01 June 2018 5

Other cost of sales – supplier costs (%) Salaries as % of sales (20.0) (19.7) (3.0) (14.0) -1.5 (19.3) (19.2) (19.3) (19.0) (12.9)(12.7)(12.9) (18.8) (19.0) (12.0) (12.1) (2.0) (11.8) -1.0 (18.1) (11.1) (11.2) (11.2) (18.0) (17.8) (10.7) (10.5) (10.0) (10.0) (9.7) (17.8) (17.0) (1.0) (9.5) -0.5 (9.2) (9.0) (17.0) (16.7) (8.7) (17.1) (16.5) (8.0) (16.0) (16.0) 0.0 0.0 (6.0) (15.0) (15.0) 1.0 0.5 (14.7) (4.0) (14.0)

2.0 1.0 (13.0) (2.0) Q1/15 Q3/15 Q1/16 Q3/16 Q1/17 Q3/17 Q1/18 Q3/18E Q1/15 Q3/15 Q1/16 Q3/16 Q1/17 Q3/17 Q1/18 Q3/18E (12.0) 3.0 0.0 1.5 Chg q-o-q p.p Supplier cost of sales Chg q-o-q p.p Salaries % of sales Source: SEB Source: SEB

Kindred’s ability to continuously outgrow the market organically over several years has resulted in the company becoming one of the largest online gambling companies in the market, with an estimated market share of 4% in Europe. Given its digital operational model, scale is the best factor to achieve higher profitability.

Through a strong brand proposition and brand awareness, the company is successful in reducing its use of affiliate generated traffic and the many years in operation has enabled the company to learn efficient methods to acquire new customers on its own merits. As more nations will continue to re-regulate, resulting in improved mandates for traditional promotion, Kindred will be able to continue this trend.

Affiliate cost of sales Revenue (EURm) vs EBITDA margin, 2017 -60,000 (12.0) 30.0% R² = 0.5975 (10.6) (10.4) Paddy Power -50,000 (10.0) 25.0% Kindred Betfair GVC

William Hill -40,000 (7.9) (8.0) 20.0% Betsson (6.9) % of sales 888 (6.4) (6.3) -30,000 (6.0) 15.0% Mr Green (5.6) (5.5) (5.5) (5.3) (4.8) (4.7) LeoVegas -20,000 (4.0) 10.0%

-10,000 (2.0) 5.0%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 0 0.0 0.0% Affiliate marketing spend Affiliate spend cost of sales 0 500 1000 1500 2000 Source: SEB Source: Reuters

Kambi contract renewal will result in lower commission in the future Kindred renewed its sportsbook contract with Kambi in Q1, which was largely expected by the market. The new contract stretches to 2023, but the details of the contract are not public. But given Kambi’s communication that the renewal will not have any material effect on revenues in 2018, we believe that additional tiers with lower commission for higher levels of sportsbook revenue are likely to have been added. Thus the effect will not be immediate, but comes with increasing volumes, allowing Kindred to continue to lower its supplier cost of sales in the future. Growing in Australia, in and on horse racing, where the company has its own sportsbook operation, will also result in lower cost of sales.

Equity Research Company Update Kindred Group 01 June 2018 6

Scalability offsets tax pressure Gambling tax impact and EBITDA margin through the looking glass We believe that Kindred reached a turning point some time ago, where because of its size, it can better absorb investments by reallocating internal recourses and more swiftly engage in growth opportunities in the market, supported by many years of investments in IT infrastructure and knowhow. Even though tax pressure has accelerated over this past two years, the company has managed to hold steady margins following years of decline when it was smaller.

Betting duties (GBPm) and % of sales Adjusted EBITDA margin (%) vs gross winnings (GBPm) 50.0 275,000 (45,000.0) (20.0) 45.0 225,000 (40,000.0) (18.0) 40.0

(16.0) 35.0 (35,000.0) 175,000 30.0 (14.0) (30,000.0) 25.0 125,000 (12.0) (25,000.0) 20.0 (10.0) 75,000 15.0 (20,000.0) (8.0) 10.0 (15,000.0) 25,000 (6.0) 5.0 (10,000.0) (4.0) 0.0 -25,000

(5,000.0) (2.0) Q2/08 Q4/08 Q2/09 Q4/09 Q2/10 Q4/10 Q2/11 Q4/11 Q2/12 Q4/12 Q2/13 Q4/13 Q2/14 Q4/14 Q2/15 Q4/15 Q2/16 Q4/16 Q2/17 Q4/17 Q2/18E Q4/18E Q1/12 Q2/12 Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q3/14 Q4/14 Q1/15 Q2/15 Q3/15 Q4/15 Q1/16 Q2/16 Q3/16 Q4/16 Q1/17 Q2/17 Q3/17 Q4/17 Q1/18 Q2/18E Q3/18E Q4/18E 0.0 0.0 EBITDA margin , adjusted (%) Gross winnings Betting duties % of gross winnings Source: SEB Source: SEB

Free lunch in – potentially boosting gross margin by 1.7pp in Q2 On March 22 2018, Kindred Group received a positive ruling in the Belgian Court, cancelling the imposed VAT on online gambling. Assuming that Belgium is 8% of revenues, scrapping the 21% VAT tax would translate to a saving of GBP 3.7m, or a 1.7pp boost on gross margin in Q2, all else equal. However, we do not believe all else will be equal in Q2, as there are many moving parts, for example we believe that French revenues in the mix will increase due to faster than group average growth in that market. We account for half of the gain, 0.8pp.

Strong position in Belgium Belgium VAT to add to gross margin as of Q2 supportive as VAT is scrapped (20.0) -75,000 (17.7) (18.0) (17.3) (17.1) -65,000 (15.6) (16.9) (16.0) (15.2)(14.9) (14.5) -55,000 (14.0) (13.2) (12.4)(12.4) (11.6) -45,000 (12.0) (10.9) (9.9) (10.0) (9.3)(9.2) -35,000

(8.0) -25,000 (6.0) -15,000 (4.0) -5,000 (2.0) Q1/15 Q3/15 Q1/16 Q3/16 Q1/17 Q3/17 Q1/18 Q3/18E 0.0 5,000 Betting duties Betting duties of sales

Source: SEB

Equity Research Company Update Kindred Group 01 June 2018 7

Marketing efforts benefit from larger budgets FIFA Football World Cup will be Regarding the FIFA Football World Cup, and large sporting events in general, the main driver in 2018 Kindred tends to favour growth above profitability and the company reiterates this intention for 2018. In terms of marketing, the company guided in its Q4 earnings call that marketing to sales (affiliate + promotional) should be “a couple of percentage points below 30%” in 2018. We have assumed 26.6% for the full year. This is the same full year as during the last large football tournament, the European championship in 2016. But given that we forecast full year revenue to be about 65% higher in 2018 than in 2016, the total marketing budget is around GBP 80m higher. This, in our view, underlines the benefit to invest in long-term growth above profit optimisation as the benefit over time is higher.

In Q2, which will be the marketing heavy quarter, we have assumed 30.5% total marketing to sales, which includes affiliate fees of 5.5% and traditional marketing of 25.0%.

We expect growth above EBITDA margin vs organic growth vs marketing spend profitability 50.0 (35.0)

45.0 (30.0) 40.0

35.0 (25.0)

30.0 (20.0) 25.0 (15.0) 20.0

15.0 28.4 (10.0) 25.5 25.3 23.6 22.6 22.5 23.3 24.1 22.8 24.0 10.0 20.2 18.9 19.2 18.3 17.9 16.7 (5.0) 5.0

0.0 0.0

EBITDA margin Organic growth Marketing to sales (COGS+OPEX)

Source: SEB, Kindred

As a result of the increase in marketing, we expect EBITDA to decline sequentially from Q1 to Q2. Historically, the sequential decline in EBITDA has been between 10% and 30%. In our model, we assume a 17.5% decline to a margin of 17.9%.

History suggests that EBITDA may Reported EBITDA Q1 vs Q2 (GBPm) in a football championship year fall 16-36% q/q Year Q1 Q2 Change q/q

2006 8.3 6.3 -24% 2008 13 8.3 -36% 2010 12.9 10.8 -16% 2012 15.3 11 -28% 2014 21.3 16 -25% 2016 27.6 21.1 -24% 2018E 47.5 39.0 -18% Source: SEB

The strategy behind investing in promotion and customer acquisition relative to a large sporting event is that some of the customers remain for the long- term. As Kindred has executed several such ventures, and with a data-centric approach, we believe the company is in a good position to leverage the FIFA Football World Cup.

Equity Research Company Update Kindred Group 01 June 2018 8

The US opportunity US betting market USD 35bn by 2025 PASPA has fallen and online is again in a land grab phase PASPA = Professional and The US gambling market is the world’s largest, despite the strict regulatory Amateur Sports Protection Act landscape where sports betting and online gambling have been curtailed by legal prohibitions. According to data from H2GC, the US was the largest gambling market in the world with an estimated GGR of USD 100bn in 2017.

UIGEA = Unlawful Internet The US online gambling market amounted to USD 3bn in 2016, i.e. an online Gambling Enforcement Act penetration of 3%, compared with around 20% in Europe and closer to 45% in the most mature markets such as the UK and Scandinavia. Before UIGEA came into action in 2006, the US was the largest online gambling market in the world with above USD 5bn in online gambling GGR, underling that there should be large potential and that the US in a couple of years could challenge the UK for the position as the largest online gambling market. Because of PASPA, the US gambling market is skewed to casino, which in 2016 accounted for 58% of all gambling and sports betting 4%, compared with 16% and 17% in Europe, respectively.

Total gambling market in the US (USDbn) Online US gambling market (USDbn) and penetration 120,000 6,000 7.0%

6.0% 100,000 5,000 5.7% 5.4% 5.0% 80,000 4,000 4.3% 4.0% 3.8% 3.6% 3.7% 60,000 3,000 3.4% 3.1% 3.0% 2.8% 2.6% 2.8% 2.5% 2.5% 40,000 2,000 2.3% 2.0%

20,000 1,000 1.0%

0 0 0.0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: H2GC Source: H2GC

US gambling market by product EU gambling market by product Betting 4% Betting Lotteries 17% 23%

Lotteries 35%

Casino Bingo 16% 5%

Gaming Machines Casino 10% 58% Bingo/Other 4%

Gaming Machines 28% Source: H2GC Source: H2GC

Equity Research Company Update Kindred Group 01 June 2018 9

What happens now – the re-regulatory roadmap It is difficult to know what to expect from the US sportsbook market and when the potential revenue growth is set to materialize, especially in the online market where the Wire Act and UIGEA have historically curtailed the online migration.

The UIGEA states that online gambling is unlawful where it is not explicitly legal, leaving no grey market, unlike in many jurisdictions in Europe. In the US online gambling is either a black market or legal, and some states have issued license system which allow online casino. The Wire Act prohibit operators and customers to engage in cross state or cross nation betting, and operators cannot take traffic from states they are not licensed in, a situation opposite to the case with based operators serving customer in the rest of Europe.

We expect a fragmented rollout of We expect the sports betting and online gambling rollout to be fragmented in the sports and online gambling in the US with a handful of states at a time through a period of several years, similar to US how the member nations of the EU implemented their licence systems individually over the past decade. Catena Media, an online gambling affiliate company with operations in the US, has presented its view of when it expects the different states to legalize sports betting, which in our view is a credible roadmap.

Catena Media - US sports re-regulation roadmap

Catena Media forecast 17% of US population to have sports betting by 2020…

…56% by 2022

Source: Eilers & Krejcik Gaming LLC as interpreted by Catena Media.

We believe land based sports betting will be first online, and in the most swift of cases be legalised simultaneously. But given the need for special regulation regarding online tax rates, player and data protection laws, we expect online in general to lag the land based rollout.

We expect large volumes, but lower profit margins and less fragmentation We expect the regulator to take a The US states and regulators are in a unique position to mould the online and tight grip… sports gambling market in the way they see fit. As a result, we believe the regulators will take their time before opening the markets, getting things right …resulting in lower profit margins from the very start with the many implementations in Europe as proper case and less fragmentation studies. The stakeholder perspective is different in the US than in Europe, with more power among the sporting leagues and the physical casinos, at times tribal casinos. As such, we expect more legislation with requirements of land based partnerships for online actors, more rigorous licence processes and higher fees, resulting in a less fragmented market with few operators.

Equity Research Company Update Kindred Group 01 June 2018 10

High tax rates and integrity fees to the sport leagues will likely result in lower profit margins for the revenue generated in the US than in the EU, but given the large volumes, it would still make business logic for most operators to pursue.

We estimate betting market value of USD 35bn by 2025 in the US High consumer spending and large As Kindred’s expansion plans are at an early phase, as is the regulatory population… landscape, we have not included any US revenues in our estimates and valuation. However, we believe it is valid to estimate the potential worth of the sports betting and online gambling markets in the US, assuming a number of different scenario, and what it could mean for Kindred’s revenues in the long- term.

…unveils large market potential We estimate that the US betting market could be worth USD 35bn by 2025, but up to USD 58bn in a bull case scenario and USD 17bn in a bear case scenario. At USD 35bn, the betting market would account for 15-20% of the total gambling market in the US, depending on the overall growth, which is close to the 17% in Europe, underlining the plausibility of the scenario.

Potential value of US sports betting (USDbn), assuming 290m adult population

Population covered by sports book legislation

60% 70% 80% 90% 100% Wagering per 100 17 20 23 26 29 adult USD 125 22 25 29 33 36 per year 150 26 20 35 39 44 175 30 36 41 46 51 200 35 41 46 52 58 Source: SEB

The USD 35bn market would translate into an annual spend of USD 150 per adult on wagering. This is high compared with internationally, but below betting intense nations such as Sweden, Ireland, and Australia. We have assumed growth in the US adult population from 250m to 290m by 2025.

Spending per adult on betting per year (USD) US gambling market by product (USDbn) 250 180 120%

160 200 100% 140

150 120 80%

100 100 60% 80

50 60 40%

40 0 20% 20

0 0% 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Gambling ex sport Sport betting 2020 2025 Gambling ex sport share of total Sport betting share of total Source: H2GC Source: H2GC

Equity Research Company Update Kindred Group 01 June 2018 11

US online market to pass UK by 2020 Online migration revitalised simultaneously with sports betting rollout The online migration was derailed in the US with the introduction of UIGEA in 2006, but states are again looking to legalise online gambling, supported by the positive development for New Jersey’s online gambling market, which according to Plajnj.com has generated USD 143m in tax revenue to date. We expect online migration to strengthen by the wave of sports betting rollout.

In a fairly plausible scenario, we believe the US online gambling market could surpass the UK as the largest online gambling market by 2020, and continue to grow to a value of USD 24bn by 2025, with online penetration of 15%. This is still far below the UK, which by that time we expect to have passed 50% online penetration, but the fact that it is unlikely that all states will legalise online gambling, a lower assumption should be warranted for the US market.

Online gambling market, the UK vs the US (USDbn) Online gambling penetration, the UK vs the US (%) 25 60%

50% 20

40% 15

30%

10 20% UIGEA 5 10%

0 0%

UK online gambling market US online gambling market UK online gambling penetration US online gambling penetration Source: H2GC Source: H2GC

US could be GBP 500m to Kindred 2025 Kindred is planning a US expansion Kindred has transitioned from a Nordic online betting company to a market leading European online gambling group. The company estimates that its market share in Europe is around 4%. The company has stated its intention to expand into the US and has applied for a licence in New Jersey. If Kindred is able to take 2-4% market share in the US, this would translate to revenue contribution of GBP 355m-711m, with GBP 533m at the mid-point by 2025.

Potential revenue potential for Kindred in the US

2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

US online gambling market USDbn 3.0 4.6 6.5 8.4 10.6 12.9 15.3 17.9 20.7 23.7 GBPbn at 0.75 exchange rate 2.2 3.5 4.8 6.3 7.9 9.7 11.5 13.5 15.5 17.8

Kindred market share Bull 0.2% 0.5% 1.5% 2.0% 2.0% 2.0% 2.0% Base 0.5% 1.0% 2.0% 3.0% 3.0% 3.0% 3.0% Bear 1.0% 1.5% 3.0% 4.0% 4.0% 4.0% 4.0%

Kindred revenue GBPm Bull 13 40 145 230 269 311 355 Base 32 79 193 345 404 466 533 Bear 63 119 290 460 538 622 711 Source: SEB

Equity Research Company Update Kindred Group 01 June 2018 12

Kindred hypothetical P&L in 2025 In a fairly reasonable scenario, including a successful US expansion, Kindred could grow to a company generating GBP 2.4bn in revenue and GBP 450m in EBITDA by 2025, where the US would account for 22% of group revenue and 18% of EBITDA.

P&L forecast 2025

Revenue 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Kindred "as is" 544 751 903 1,022 1,140 1,254 1,379 1,517 1,669 1,836 Kindred US base case 0 0 0 32 79 193 345 404 466 533 Kindred group 544 751 903 1053 1219 1447 1724 1921 2136 2369

Growth "as is" 38% 20% 13% 12% 10% 10% 10% 10% 10% Growth US base case 151% 143% 79% 17% 16% 14% Growth group 38% 20% 17% 16% 19% 19% 11% 11% 11%

EBITDA "as is" 124 186 204 203 210 251 276 303 334 367 EBITDA US -3 -4 -2 10 28 51 80 EBITDA group 124 186 204 200 206 249 286 332 385 447

Margin "as is" 23% 25% 23% 20% 18% 20% 20% 20% 20% 20% Margin US base case -10% -5% -1% 3% 7% 11% 15% Margin group 23% 25% 23% 19% 17% 17% 17% 17% 18% 19% Source: SEB

We extend our explicit forecasts to 2020 with 10% organic growth and 20% EBITDA margin for the “as is” operation towards 2025. We assume that the US expansion will be loss making over the first three years and reach 15% EBITDA margin by 2025, which is slightly lower than the profitability of the European operation, which is in line with our belief that profitability will be lower for operators in the US due to high taxation and integrity fees.

Equity Research Company Update Kindred Group 01 June 2018 13

Estimates We believe flat EBITDA should be attainable organically in 2018-20 We have adjusted our margin and cost assumptions for Kindred and assume close to flat EBITDA throughout 2018-20 as revenue growth, better absorption of fixed costs, and renegotiation with suppliers should be able to offset the negative impact of increased taxation on earnings. We have increased EPS estimates by 3% for 2018, 20% for 2019, and 17% for 2020. This is on the back of organic growth and we have not included future acquisitions or US expansion in our forecasts.

Earnings revision

(GBP) 2018E 2019E 2020E Revenues (m) Old 909 1,028 1,147 New 903 1,022 1,139 Change (%) (1) (1) (1) Operating profit (m) Old 151 126 135 New 158 153 159 Change (%) 4 21 18 Pre -tax profit (m) Old 147 123 132 New 153 149 155 Change (%) 4 21 18 EPS (reported) Old 0.59 0.49 0.53 New 0.61 0.59 0.62 Change (%) 3 20 17 EPS (adjusted) Old 0.59 0.49 0.53 New 0.61 0.59 0.62 Change (%) 3 20 17 Source: SEB

Gross margin, EBITDA margin (%), and EBITDA (GBPm) Total growth, organic growth (%), and revenue (GBPm) 250,000 80.0 1,200,000 60 74.7 54 74.0 1,139 70.9 210 70.0 204 203 1,000,000 50 65.9 47 1,022 200,000 63.4 62.7 61.5 175 60.0 58.2 56.8 903 800,000 38 40 50.0 150,000 751

121 40.0 600,000 30 26 100,000 544 30.0 23 24 20 80,400 77,000 18 23.2 400,000 16 20 64 25.8 16 13 53 23.7 23.3 20.0 354 15 13 21.7 22.2 22.6 312 12 50,000 19.9 18.4 268 200,000 227 10 10.0

0 0.0 0 0 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E EBITDA Gross margin EBITDA margin Revenue Growth Organic growth Source: SEB Source: SEB

Equity Research Company Update Kindred Group 01 June 2018 14

Consolidated P&L

Year end: 31 December (GBP 000s) Q1/17 Q2/17 Q3/17 Q4/17 Q1/18 Q2/18E Q3/18E Q4/18E 2017 2018E 2019E 2020E

Gross winnings 153,200 166,600 193,600 238,000 207,801 218,368 232,303 244,207 751,400 902,668 1,021,544 1,139,125 Cost of sales -59,400 -64,200 -72,500 -84,000 -82,700 -84,965 -88,993 -91,112 -280,100 -347,770 -427,400 -491,916 o/w affiiliate costs -9,500 -9,200 -10,700 -11,900 -11,300 -12,010 -12,080 -12,210 -41,300 -47,600 -49,034 -53,539 o/w betting duties -22,200 -25,400 -28,800 -37,200 -36,800 -36,924 -39,745 -42,270 -113,600 -155,740 -219,002 -265,226 o/w payment providers/other costs -27,700 -29,600 -33,000 -34,900 -34,600 -36,031 -37,168 -36,631 -125,200 -144,430 -159,364 -173,151 Gross profit 93,800 102,400 121,100 154,000 125,101 133,402 143,309 153,095 471,300 554,898 594,144 647,210 Marketing costs -34,900 -34,800 -35,600 -40,000 -41,500 -54,592 -47,622 -48,841 -145,300 -192,555 -214,524 -236,369 Personnel expenses -17,100 -17,500 -19,300 -20,600 -20,100 -20,745 -21,372 -21,979 -74,500 -84,195 -93,982 -107,078 Other operating expenses -20,700 -24,100 -29,600 -28,600 -27,600 -30,571 -30,199 -31,747 -103,000 -120,318 -132,801 -145,238 EBITDA 29,400 30,500 46,600 67,700 47,301 39,094 55,716 61,728 175,200 203,829 202,837 209,525 Depreciation & amort. -9,200 -7,400 -10,200 -9,700 -11,600 -11,600 -11,600 -11,200 -37,500 -46,000 -50,000 -51,000 Total SG&A expenses incl depr -73,600 -79,300 -84,700 -96,000 -89,400 -105,908 -99,193 -102,567 -333,600 -397,068 -441,307 -488,685 EBIT 20,200 23,100 36,400 58,000 35,701 27,494 44,116 50,528 137,700 157,829 152,837 158,525 Net financials -2,000 -200 -1,200 -2,100 -750 -1,550 -1,059 -1,859 -4,700 -5,218 -4,318 -3,418 Pre-tax profit 18,200 22,900 35,200 55,900 34,951 25,944 43,057 48,669 133,000 152,611 148,519 155,107 Total taxes -1,900 -2,500 -5,100 -5,100 -3,700 -2,335 -3,875 -5,361 -14,600 -15,271 -14,864 -15,534 Net profit (reported) 16,300 20,400 30,100 50,800 31,251 23,609 39,182 43,308 118,400 137,340 133,654 139,573

EPS reported 0.07 0.09 0.13 0.22 0.14 0.10 0.17 0.19 0.52 0.60 0.59 0.61

Gross winnings growth (%) 25.2 31.6 36.1 55.8 35.6 31.1 20.0 2.6 38.1 20.1 13.2 11.5 Organic gross winnings growth (%) 12.3 18.0 17.0 42.0 19.8 30.8 23.1 4.5 23.7 14.6 13.2 11.5 Gross profit growth (%) 20.7 30.1 34.9 56.2 33.4 30.3 18.3 (0.6) 36.7 17.7 7.1 8.9 EBITDA growth (%) 6.5 44.5 40.8 74.0 60.9 28.2 19.6 (8.8) 45.2 16.3 (0.5) 3.3 EBIT growth (%) (10.6) 48.1 34.3 83.5 76.7 19.0 21.2 (12.9) 42.1 14.6 (3.2) 3.7 Pre-tax profit growth (%) (19.1) 48.7 41.9 85.7 92.0 13.3 22.3 (12.9) 43.3 14.7 (2.7) 4.4 EPS growth reported (%) (18.5) 51.1 43.3 72.8 91.7 15.7 30.2 (14.7) 42.5 16.0 (2.7) 4.4 Total opex growth (%) 37.8 26.4 38.1 42.3 22.0 35.5 16.7 7.6 36.6 19.4 10.9 9.8

Gross margin (%) 61.2 61.5 62.6 64.7 60.2 61.1 61.7 62.7 62.7 61.5 58.2 56.8 EBITDA margin (%) 19.2 18.3 24.1 28.4 22.8 17.9 24.0 25.3 23.3 22.6 19.9 18.4 EBIT margin (%) 13.2 13.9 18.8 24.4 17.2 12.6 19.0 20.7 18.3 17.5 15.0 13.9 Pre-tax margin (%) 11.9 13.7 18.2 23.5 16.8 11.9 18.5 19.9 17.7 16.9 14.5 13.6 Net margin (%) 10.6 12.2 15.5 21.3 15.0 10.8 16.9 17.7 15.8 15.2 13.1 12.3

SG&A as % of gross winnings 48.0 47.6 43.8 40.3 43.0 48.5 42.7 42.0 44.4 44.0 43.2 42.9 Total opex as % of gross winnings 54.0 52.0 49.0 44.4 48.6 53.8 47.7 46.6 49.4 49.1 48.1 47.4 Tax rate (%) 10.4 10.9 14.5 9.1 10.6 9.0 9.0 11.0 11.0 10.0 10.0 10.0

No of shares (m) 227,705 227,705 227,705 227,705 227,705 227,705 227,705 227,705 227,764 227,764 227,764 227,764 Source: SEB

Equity Research Company Update Kindred Group 01 June 2018 15

Operational data

(GBP 000s) Q1/17 Q2/17 Q3/17 Q4/17 Q1/18 Q2/18E Q3/18E Q4/18E 2017 2018E 2019E 2020E Sportsbetting Nordics 21,600 20,400 26,600 34,400 25,300 24,985 30,307 31,676 103,000 112,268 121,249 130,949 Western Europe 37,000 44,800 49,600 74,900 59,800 68,298 66,462 70,465 206,300 265,025 307,429 344,321 Central, Eastern and Southern Europe 5,000 5,900 6,500 8,600 8,000 8,736 8,075 8,095 26,000 32,906 37,513 42,015 Other 2,800 2,100 3,000 3,300 1,600 1,790 2,095 2,848 11,200 8,332 9,166 10,082 Total 66,400 73,200 85,700 121,200 94,700 103,808 106,939 113,084 346,500 418,531 475,357 527,367

Non-sportsbetting Nordics 47,600 47,400 49,800 49,200 48,700 52,944 54,377 54,841 194,000 210,862 225,622 241,415 Western Europe 32,600 39,000 51,100 56,000 55,000 51,528 59,849 63,776 178,700 230,154 271,581 315,034 Central, Eastern and Southern Europe 6,100 5,600 5,800 7,600 7,500 7,434 7,782 8,284 25,100 30,999 35,649 40,640 Other 500 1,400 1,200 4,000 1,900 2,651 3,353 4,219 7,100 12,122 13,335 14,668 Total 86,800 93,400 107,900 116,800 113,100 114,557 125,360 131,119 404,900 484,137 546,187 611,758

Total gross winnings Nordics 69,200 67,800 76,400 83,600 74,000 77,929 84,684 86,516 297,000 323,129 346,871 372,364 Western Europe 69,600 83,800 100,700 130,900 114,800 119,826 126,311 134,241 385,000 495,179 579,010 659,355 Central, Eastern and Southern Europe 11,100 11,500 12,300 16,200 15,500 16,170 15,856 16,379 51,100 63,906 73,162 82,655 Other 3,300 3,500 4,200 7,300 3,500 4,441 5,448 7,066 18,300 20,455 22,500 24,750 Total 153,200 166,600 193,600 238,000 207,800 218,366 232,300 244,203 751,400 902,668 1,021,544 1,139,124

Growth y-o-y (%) Sportsbetting Nordics 18% 19% 13% 62% 17% 22% 14% -8% 28% 9% 8% 8% Western Europe 28% 36% 41% 90% 62% 52% 34% -6% 51% 28% 16% 12% Central, Eastern and Southern Europe 4% 40% 23% 72% 60% 48% 24% -6% 35% 27% 14% 12% Other 40% 11% 7% 22% -43% -15% -30% -14% 19% -26% 10% 10% Total 23% 30% 28% 77% 43% 42% 25% -7% 41% 21% 14% 11%

Non-sportsbetting Nordics 33% 29% 23% 6% 2% 12% 9% 11% 22% 9% 7% 7% Western Europe 30% 47% 84% 82% 69% 32% 17% 14% 62% 29% 18% 16% Central, Eastern and Southern Europe -10% -15% -15% 23% 23% 33% 34% 9% -5% 24% 15% 14% Other -17% 180% 71% 400% 280% 89% 179% 5% 173% 71% 10% 10% Total 27% 33% 43% 39% 30% 23% 16% 12% 36% 20% 13% 12%

Total gross winnings Nordics 28% 26% 20% 23% 7% 15% 11% 3% 24% 9% 7% 7% Western Europe 29% 41% 60% 86% 65% 43% 25% 3% 56% 29% 17% 14% Central, Eastern and Southern Europe -4% 6% 2% 45% 40% 41% 29% 1% 12% 25% 14% 13% Other 27% 46% 20% 109% 6% 27% 30% -3% 53% 12% 10% 10% Total 25% 32% 36% 56% 36% 31% 20% 3% 38% 20% 13% 12% Source: SEB

Equity Research Company Update Kindred Group 01 June 2018 16

Valuation Back in Buy territory

We base our target price for Kinded on a DCF model which yield a value of SEK 153 per share. Based on valuation and valuation relative to key peers, we believe the shares are trading at the low-end of historical ranges and that this poses an attractive point to buy the shares. Therefore, we have upgraded our recommendation from Hold to Buy.

DCF Summary

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

NPV of FCF in explicit forecast period 14,299 Risk free interest rate 2.5 NPV of continuing value 20,812 Risk premium 5.0 Value of operation 35,111 Cost of equity 7.5

Net debt 441 After tax cost of debt 2.2 Share issue/buy-back in forecast period - Value of associated companies - WACC 7.4 Value of minority shareholders' equity - Value of marketable assets - Assumptions DCF value of equity 34,670 Number of forecast years 10 DCF value per share (SEK) 153 EBIT margin - steady state (%) 14.7 Current share price (SEK) 120 EBIT multiple - steady state (x) 14.3 DCF performance potential (%) 28% Continuing value (% of NPV) 59.3 Source: SEB

Kindred 12M fwd EV/EBITDA, 2013-18E 20.0

18.0

16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Median -25% Median +25% Median Kindred 12M fwd EV/EBITDA

Source: SEB

Equity Research Company Update Kindred Group 01 June 2018 17

Operator peer valuation

Sales Mkt cap Performance PER EV/EBITDA EV/Sales CAGR EBITDA margin (%) (SEK) -1M -3M -12M 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E 2017-20 2018E 2019E 2020E UK & Nordic operators Kindred Group 25,353 -1% -17% 23% 15.8 16.2 15.5 10.8 10.5 9.7 2.4 2.1 1.8 17.0 22.6 19.9 18.4 Paddy Power Betfair 90,010 27% 8% 13% 22.1 20.8 19.3 15.3 14.4 13.7 4.0 3.7 3.5 7.4 26.3 25.7 25.6 GVC 68,369 14% 14% 26% 14.6 13.1 12.2 8.4 7.7 7.5 1.9 1.7 1.7 58.1 22.2 22.6 23.0 William Hill 32,567 11% -1% 11% 12.7 12.7 13.2 8.7 8.7 9.1 1.9 1.9 1.8 0.8 21.8 21.4 20.2 888 12,588 9% 5% 5% 19.5 17.4 16.2 11.7 10.8 10.2 2.2 2.1 2.0 5.6 18.8 19.3 19.5 Betsson 8,059 -2% -11% -24% 8.7 10.1 10.1 6.7 7.0 6.7 1.7 1.5 1.3 10.7 25.1 21.1 19.6 Jackpotjoy 7,454 5% 7% 44% 7.3 6.6 6.3 8.4 8.0 7.8 2.8 2.6 2.4 8.7 33.4 32.3 31.3 LeoVegas 7,602 -11% -19% 31% 27.7 16.0 10.2 15.1 10.1 6.7 2.0 1.5 1.1 42.3 13.5 14.4 16.7 Mr Green 1,802 -1% -12% 15% 13.6 11.6 10.1 5.9 4.9 3.9 0.9 0.7 0.6 22.4 15.1 14.3 14.2 Average 5% -3% 16% 15.8 13.8 12.6 10.1 9.1 8.4 2.2 2.0 1.8 19.2 22.1 21.2 20.9 Source: SEB

DCF sensitivity analysis

Cost of Equity 6.5 7.0 7.5 8.0 8.5 78 230 212 197 183 172 Equity capital 88 202 186 173 161 150 weight (%) 98 179 165 153 143 133 100 176 162 150 140 131

Absolute change in EBITDA margin - all years (%) -2% -1% 0 +1% +2% -2% 123 130 137 145 152 Abs. change in -1% 129 137 145 153 161 sales growth - 0 137 145 153 161 170 all years (%) +1% 144 153 162 171 179 +2% 152 162 171 180 189 Source: SEB

DCF – assumption details

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

Sales growth (%) 20.1 13.2 11.5 8.0 7.0 6.0 4.5 3.0 EBITDA margin (%) 22.6 19.9 18.4 18.4 18.4 18.4 18.4 18.4 EBIT margin (%) 17.5 15.0 13.9 14.4 14.5 14.6 14.7 14.7 Gross capital expenditures as % of sales 3.9 3.6 3.3 3.3 3.3 3.3 3.3 3.3 Working capital as % of sales (15.5) (15.7) (17.5) (17.5) (17.5) (17.5) (17.5) (17.5)

Sales 903 1,022 1,139 1,230 1,316 1,395 1,494 1,593 Depreciation (13) (14) (14) (12) (13) (14) (15) (16) Goodwill amortisation (33) (36) (37) (37) (38) (39) (41) (43) EBIT 158 153 159 177 191 204 219 235 Taxes on EBIT (14) (11) (33) (26) (27) (29) (31) (33) Increase in deferred taxes 0 0 0 0 0 0 0 0 NOPLAT 177 178 162 188 201 214 229 244

Gross capital expenditure (35) (36) (37) (40) (43) (46) (49) (52) Increase in working capital (10) 20 38 16 15 14 11 8 Free cash flow 144 176 177 176 186 196 206 216

ROIC (%) 38.3 37.9 33.4 40.9 46.1 51.3 58.8 67.8 ROIC-WACC (%) 30.8 30.5 26.0 33.5 38.6 43.9 51.4 60.4 Share of total net present value (%) 0.0 5.4 5.1 4.7 4.6 4.5 8.6 7.8 Source: SEB

Equity Research Company Update Kindred Group 01 June 2018 18

Overview

Kindred offers non-cyclical growth prospects, with its core Nordic business showing Investment case good momentum driven by a strong sports betting offering and rapid mobile growth. We believe that a premium to peers is justified given Kindred's superior business mix. We expect a negative earnings impact from re-regulation, especially during 2019, but expect Kindred to benefit in the long-term from re-regulation thanks to a superior brand, offering, and scalability.

Operating from London and Malta, Kindred Group offers sports betting services, Company profile online poker, online casino, and other games. The company generates around 50% of gross winnings (net sales) in the Nordic countries, where it is the market leader among the private operators. is one of the market leading operators in European countries such as Belgium, the Netherlands, and France, as well as in eastern Europe.

Kindred trades at a premium to European sector peers, which we believe is justified Valuation approach given its superior earnings growth profile and track record. Our target price is primarily based on a DCF model.

The gaming industry is highly competitive, visibility is limited, and player churn is Target price risks high. Forecasting is difficult and earnings volatility is high, with sports betting margins having a considerable effect on earnings. Furthermore, legal matters remain uncertain as shown by France: other European countries may take similar decisions to enforce legislation that could prove unfavourable for Kindred.

Revenues by region Revenues by division Central, Eastern Other and Southern 2% Europe 7%

Nordics 36%

Sportsbetting 45%

Non-Sportsbetting 55%

Western Europe 55%

Source: SEB Source: SEB

Equity Research Company Update Kindred Group 01 June 2018 19

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

35 5,000 4,500 30 4,000 25 3,500 20 3,000 2,500 (x) 15 (%) 2,000 10 1,500 1,000 5 500 0 0 2004 2007 2010 2013 2016 2019 2004 2007 2010 2013 2016 2019

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

Source: SEB Source: SEB

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

25.0 50 45 20.0 40 35 15.0 30 25 (x) (x) 10.0 20 15 5.0 10 5 0.0 0 2004 2007 2010 2013 2016 2019 2004 2007 2010 2013 2016 2019

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

Source: SEB Source: SEB

Net sales & EBITDA margin EBIT & Operating margin

4,000 40.0 400 30.0 350 3,500 35.0 25.0 3,000 30.0 300 20.0 2,500 25.0 250 2,000 20.0 200 15.0 (%) (%) 1,500 15.0 150 (GBPm) 10.0 (GBPm) 1,000 10.0 100 5.0 500 5.0 50 0 0.0 0 0.0 2008 2010 2012 2014 2016 2018E 2020E 2008 2010 2012 2014 2016 2018E 2020E Net sales EBITDA margin EBIT Operating margin Source: SEB Source: SEB

Comparison with sector index - 1 year Comparison with Betsson - 1 year 140 170 130 160 150 120 140 110 130 100 120 110 90 100 80 90 70 80 Jun 17 Aug 17 Nov 17 Mar 18 May 18 Jun 17 Aug 17 Nov 17 Mar 18 May 18 Kindred Group Rel European Leisure Kindred Group Rel Betsson Source: SIX Source: SIX

Equity Research Company Update Kindred Group 01 June 2018 20

Profit & loss statement - Kindred Group (GBPm) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E Net Sales 123 138 147 154 197 235 312 154 544 751 903 1,022 1,139 Other revenues 0 0 0 0 0 0 0 0 0 0 0 0 0 Total revenues 123 138 147 154 197 235 312 154 544 751 903 1,022 1,139

Total expenses (77) (96) (104) (106) (145) (171) (232) (102) (424) (577) (699) (819) (930) Profit before depreciation 46 42 44 48 52 63 80 53 120 174 204 203 210

Depreciation - Fixed assets (2) (2) (2) (2) (3) (3) (3) (3) (5) (11) (13) (14) (14) Depreciation - Other assets (8) (7) (8) (7) (15) (16) (14) (11) (19) (26) (33) (36) (37) Amortisation - Goodwill 0 0 0 0 0 0 0 0 0 0 0 0 0 Amortisation - Other intangibles 0 0 0 0 0 0 0 0 0 0 0 0 0 Operating profit 37 33 34 39 35 44 64 39 97 138 158 153 159

Associated companies 0 (0) (0) (0) 0 0 0 0 0 0 0 0 0 Net interest expenses (8) (7) (1) (0) (1) (0) 0 (1) (4) (5) (5) (4) (3) Foreign exchange items 0 0 0 0 0 (1) 0 (0) 0 0 0 0 0 Other financial items 0 0 0 (0) (0) (0) (0) 0 0 0 0 0 0 Value changes - Fixed assets 0 0 0 0 0 0 0 0 0 0 0 0 0 Value changes - Financial assets (18) 4 0 0 0 0 35 0 0 0 0 0 0 Value changes - Other assets 0 0 0 0 0 0 0 0 0 0 0 0 0 Reported pre-tax profit 11 29 34 38 34 43 99 38 93 132 153 149 155

Minority interests 0 0 0 0 0 0 0 0 0 0 0 0 0 Total taxes (2) (2) (1) (3) (3) (3) (6) (7) (9) (15) (15) (15) (16) Reported profit after tax 9 27 32 35 32 40 93 31 84 118 137 134 140

Discontinued operations 0 0 0 0 0 0 0 0 0 0 0 0 0 Extraordinary items 0 0 0 0 0 0 0 0 0 0 0 0 0 Net Profit 9 27 32 35 32 40 93 31 84 118 137 134 140

Adjustments: Discontinued operations 0 0 0 0 0 0 0 0 0 0 0 0 0 Interest on convertible debt 0 0 0 0 0 0 0 0 0 0 0 0 0 Minority interests (IFRS) 0 0 0 0 0 0 0 0 0 0 0 0 0 Value changes 18 (4) (0) 0 0 0 (35) 0 0 0 0 0 0 Goodwill/intangibles amortisations 0 0 0 0 0 0 0 0 0 0 0 0 0 Restructuring charges 0 0 0 0 0 0 0 0 0 0 0 0 0 Other adjustments 0 0 0 0 3 1 2 7 3 13 0 0 0 Tax effect of adjustments 0 0 0 0 0 0 0 (1) (0) (1) 0 0 0 Adjusted profit after tax 27 23 32 35 35 41 60 38 87 129 137 134 140

Margins, tax & returns Operating margin 29.6 23.7 23.2 25.1 17.8 18.9 20.4 25.1 17.8 18.3 17.5 15.0 13.9 Pre-tax margin 9.0 20.9 22.9 24.7 17.3 18.4 31.7 24.6 17.1 17.6 16.9 14.5 13.6 Tax rate 20.9 7.3 4.2 6.9 7.6 7.4 5.7 17.1 9.6 11.0 10.0 10.0 10.0 ROE 8.9 24.0 24.5 23.6 18.7 21.2 46.4 15.1 36.7 43.5 46.2 42.4 39.1 ROCE 22.2 21.4 23.4 25.3 20.1 22.7 31.9 16.5 34.3 35.1 33.1 32.9 33.3

Growth rates y-o-y (%) Total revenues n.a. 12.0 6.6 4.7 27.7 19.1 32.9 (50.5) 252.4 38.1 20.1 13.2 11.5 Operating profit 70.6 (10.3) 4.5 13.3 (9.4) 26.5 43.0 (39.0) 149.9 42.1 14.6 (3.2) 3.7 Pre-tax profit (44.7) 160.6 17.1 12.7 (10.2) 26.6 128.7 (61.6) 144.3 42.8 15.3 (2.7) 4.5 EPS (adjusted) 10.1 (7.6) 37.5 13.2 (3.3) 18.3 44.8 (38.0) 130.0 51.0 6.5 (2.4) 4.5

Cash flow (GBPm) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E Net profit 9 27 32 35 32 40 93 31 84 118 137 134 140 Non-cash adjustments 28 6 9 9 17 19 (19) 21 38 37 46 50 51 Cash flow before work cap 36 32 42 45 49 59 75 53 122 154 183 184 191

Ch. in working capital / Other 17 11 1 2 1 2 1 8 (1) 19 (10) 20 38 Operating cash flow 53 44 43 47 50 61 76 61 122 173 174 204 229

Capital expenditures (7) (3) (7) (15) (19) (20) (24) (17) (30) (49) (35) (36) (37) Asset disposals 0 0 0 0 0 0 4 0 0 0 0 0 0 L/T financial investments 0 0 0 0 0 (4) (8) 0 0 0 0 0 0 Acquisitions / adjustments (4) 0 (1) (3) (23) 0 0 (56) (17) (156) 0 0 0 Free cash flow 43 40 34 29 8 38 49 (12) 75 (31) 138 168 192

Net loan proceeds (34) (43) (14) (7) 13 (14) 0 57 (7) 138 (30) (30) (30) Dividend paid (14) (6) (20) (12) (16) (20) (31) (47) (54) (71) (125) (95) (95) Share issue 0 0 0 (5) 0 1 6 3 (17) 0 (14) 0 0 Other 2 (5) (1) (1) 3 (0) (12) 15 9 33 0 0 0 Net change in cash (3) (14) (1) 4 8 5 12 16 6 70 (31) 43 66

Adjustments C/flow bef chng in work cap 36 32 42 45 49 59 75 53 122 154 183 184 191 Adjustments 0 0 0 0 0 0 0 0 0 0 0 0 0 Int on conv debt net of tax 0 0 0 0 0 0 0 0 0 0 0 0 0 Cash earnings 36 32 42 45 49 59 75 53 122 154 183 184 191

Per share information Cash earnings 15.2 14.3 18.3 20.1 21.8 26.1 32.9 23.0 53.2 67.8 80.8 81.2 84.3 Operating cash flow 22.1 19.2 18.7 21.0 22.4 26.9 33.4 26.6 52.9 76.1 76.5 90.2 101.1 Free cash flow 17.9 17.8 14.8 12.8 3.61 16.6 21.4 (5.42) 32.7 (13.7) 60.9 74.1 84.6

Investment cover Capex/sales (%) 1.6 0.6 0.9 1.9 2.3 1.5 2.4 3.8 1.9 3.8 1.4 1.2 1.0 Capex/depreciation (%) 105 48 75 167 181 110 259 203 219 271 100 86 79

Source for all data on this page: SEB

Equity Research Company Update Kindred Group 01 June 2018 21

Balance sheet - Kindred Group (GBPm) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash and liquid assets 53 40 38 42 50 55 67 83 89 159 128 171 237 Debtors 9 10 13 11 15 15 14 23 31 39 46 52 58 Inventories 0 0 0 0 0 0 0 0 0 0 0 0 0 Other 0 11 10 9 13 21 8 12 21 38 38 38 20 Current assets 62 61 62 62 79 91 89 118 141 236 212 261 316

Interest bearing fixed assets 0 0 0 0 0 0 0 0 0 0 0 0 0 Other financial assets 0 0 0 0 0 2 7 6 9 13 13 13 13 Capitalized development cost 32 27 26 35 40 40 34 86 94 163 152 141 130 Goodwill 123 122 127 131 153 150 144 172 185 279 279 279 279 Other intangibles 0 0 0 0 0 0 0 0 0 0 0 0 0 Fixed tangible assets 4 3 3 4 7 7 4 8 13 25 25 23 20 Other fixed assets 6 0 2 2 2 4 10 10 10 11 11 11 11 Fixed assets 165 152 158 171 202 203 199 281 311 491 480 466 453

Total assets 227 213 219 233 280 294 288 400 451 726 692 727 768

Creditors 50 53 56 59 66 63 63 103 111 168 201 228 254 Other trade financing 0 0 0 0 0 0 0 0 0 0 0 0 0 S/T interest bearing debt 0 21 7 0 14 0 0 57 55 63 55 55 55 Other 7 14 14 14 18 28 21 23 38 59 23 23 23 Current liabilities 57 88 77 73 97 91 84 183 204 289 279 306 332

L/T interest bearing debt 66 0 0 0 0 0 0 0 0 133 111 81 51 Other long-term liabilities 0 0 0 0 4 3 0 0 0 0 0 0 0 Convertible debt 0 0 0 0 0 0 0 0 0 0 0 0 0 Pension provisions 0 0 0 0 0 0 0 0 0 0 0 0 0 Other provisions (0) 0 (0) 0 0 0 0 0 0 0 0 0 (0) Deferred tax 4 2 1 1 1 1 1 3 4 6 6 6 6 Long term liabilities 70 2 1 1 4 5 1 3 4 139 116 86 56

Minority interests 0 0 0 0 0 0 0 0 0 0 0 0 0

Shareholders' equity 101 123 142 159 179 199 203 213 244 298 296 335 380

Total liabilities and equity 227 213 220 233 280 294 288 400 451 726 692 727 768

Net debt (m) 13 (18) (31) (42) (36) (55) (67) (27) (35) 37 38 (35) (132) Working capital (m) (48) (46) (47) (53) (55) (54) (62) (91) (98) (150) (140) (161) (199) Capital employed (m) 167 144 149 159 192 199 203 270 298 494 462 471 485 Net debt/equity (%) 12 (15) (22) (26) (20) (28) (33) (13) (14) 12 13 (10) (35) Net debt/EBITDA (x) 0.3 (0.4) (0.7) (0.9) (0.7) (0.9) (0.8) (0.5) (0.3) 0.2 0.2 (0.2) (0.6) Equity/total assets (%) 44 58 65 68 64 68 70 53 54 41 43 46 49 Interest cover 4.2 4.2 39.4 85.7 31.8 210.2 321.0 43.3 21.6 20.8 29.2 33.9 43.9

Valuation (GBP) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E

No of shares, fully dil. (y/e) 28.4 28.4 28.4 27.8 28.0 28.4 28.7 28.7 228.3 227.8 226.4 226.4 226.4 No of shares, fully dil. avg. 30.1 28.4 28.4 27.8 28.0 28.3 28.5 28.7 230.1 227.8 226.9 226.4 226.4

Share price, y/e 12.0 20.3 16.4 18.5 24.3 36.3 61.6 108.0 85.6 117.4 111.8 111.8 111.8 Share price, high 27.1 24.5 27.1 19.1 24.3 37.4 61.9 108.5 107.9 118.3 139.0 Share price, low 11.2 11.9 13.6 12.7 18.5 24.1 34.9 55.9 73.2 73.3 109.1 Share price, avg 17.7 20.2 18.9 16.0 21.3 28.5 43.7 74.3 86.4 92.6 122.8

EPS (reported), pence 3.65 11.8 14.3 16.0 14.1 17.7 41.0 13.7 36.5 51.8 60.6 59.1 61.8 EPS (adjusted), pence 11.1 10.2 14.1 16.0 15.4 18.2 26.4 16.4 37.6 56.8 60.6 59.1 61.8 Cash earnings/share, pence 15.2 14.3 18.3 20.1 21.8 26.1 32.9 23.0 53.2 67.8 80.8 81.2 84.3 Dividend/share, pence 2.88 8.88 5.31 7.25 8.75 13.8 20.5 23.5 31.0 55.1 42.0 42.0 45.0

Enterprise value/share 1.1 1.7 1.4 1.5 2.1 3.2 4.8 8.6 7.5 10.7 9.7 9.4 9.0 Book value/share 0.4 0.5 0.6 0.7 0.8 0.9 0.9 0.9 1.1 1.3 1.3 1.5 1.7 Adjusted equity/share 0.4 0.5 0.6 0.7 0.8 0.9 0.9 0.9 1.1 1.3 1.3 1.5 1.7

PER (adjusted) 9.5 17.2 11.1 10.8 14.9 18.7 19.2 53.0 20.2 18.6 15.8 16.1 15.4 CEM 6.9 12.3 8.6 8.6 10.5 13.0 15.4 37.7 14.3 15.6 11.8 11.7 11.3 Dividend yield 2.7 5.0 3.4 4.2 3.8 4.0 4.0 2.7 4.1 5.2 4.4 4.4 4.7 EV/EBITDA 5.4 9.1 7.4 7.2 9.1 11.3 13.6 37.2 14.2 14.1 10.8 10.5 9.7 EV/EBITA 6.9 11.6 9.5 8.9 13.6 16.2 17.2 50.6 17.6 17.8 13.9 13.9 12.8 EV/EBIT 6.9 11.6 9.5 8.9 13.6 16.2 17.2 50.6 17.6 17.8 13.9 13.9 12.8 EV/Sales (x) 2.03 2.75 2.20 2.22 2.43 3.06 3.51 12.71 3.13 3.26 2.43 2.08 1.78 Price/Book value 2.36 3.24 2.50 2.41 2.87 3.87 5.70 9.29 7.13 8.08 7.29 6.44 5.68 Price/adjusted equity 2.36 3.24 2.50 2.41 2.87 3.87 5.70 9.29 7.13 8.08 7.29 6.44 5.68

Free cash flow/Market cap (%) 18.4 10.0 9.8 8.3 6.0 5.3 4.5 2.2 5.3 5.2 6.4 7.8 8.9 Operating cash flow/EV (%) 21.2 11.4 13.1 13.6 10.5 8.5 6.9 3.1 7.1 7.1 7.9 9.6 11.3 EV/Capital employed (x) 1.5 2.6 2.2 2.2 2.5 3.6 5.4 7.3 5.7 5.0 4.8 4.5 4.2

Main shareholders Management Company information Name (%) Votes Capital Title Name Contact Swedbank Robur Funds 9.7 9.7 COB Anders Ström Internet www.Kindredgroup.com First AP-fund 9.0 9.0 CEO Henrik Tjärnström Phone number +44 20 8545 8021 Second AP-fund 5.7 5.7 CFO Albin de Beauregard Foreign owners (total) 20.0 20.0 IR Inga Lundberg

Source for all data on this page: SEB

Equity Research Company Update Kindred Group 01 June 2018 22

Target prices and risks Target price definition and associated risks Our target price is the analyst's assessment of what total return an investor should expect over the coming six to 12 months. The target is based on fundamental equity research and other factors at the analyst's discretion.

Our current target price of SEK 153 was set today (1 Jun 2018). The main risk to our target price on Kindred Group is as follows. The gaming industry is highly competitive, visibility is limited, and player churn is high. Forecasting is difficult and earnings volatility is high, with sports betting margins having a considerable effect on earnings. Furthermore, legal matters remain uncertain as shown by France: other European countries may take similar decisions to enforce legislation that could prove unfavourable for Kindred.

Risk levels The risk level is the analyst’s view of the uncertainty in the earnings forecasts based on an assessment of the company’s business model, operating risk as well as financial risk. We use two risk levels with the following explanations:

● Normal risk: All forecasts involve uncertainty and we view companies in this risk level to have normal forecast risks ● High risk: The earnings forecasts are more uncertain than for an average instrument due to business model, operating risk, financial risk or any other reason at the analyst’s discretion. All instruments with shorter track record than 12 months as a listed company are by definition classified as high risk according to SEB.

Equity Research Company Update Kindred Group 01 June 2018 23

Authors' statement of independence (Analyst Certification) We, the authors of this report, hereby confirm that notwithstanding the existence of any potential conflicts of interest referred to herein, the views expressed in this report accurately reflect our personal views about the companies and securities covered. We further confirm that we have not been, nor are or will be, receiving direct or indirect compensation in exchange for expressing any of the views or the specific recommendation contained in the report. We are not registered or qualified as research analysts, representatives or associated persons under the rules of any US exchange, regulatory organization or State.

This statement affects your rights This report is confidential and may not be reproduced, redistributed or republished by any recipient for any purpose or to any person.

Producers and Recipients SEB Research is approved and issued by Skandinaviska Enskilda Banken AB (publ) (“SEB”), a bank organized under the laws of the Kingdom of Sweden, on behalf of itself and its affiliates for institutional investors. SEB is not a registered Broker-Dealer under the US Securities and Exchange Act of 1934. When SEB Research is issued by an SEB subsidiary, the subsidiary itself is subject to this disclaimer.

Use This research report is produced for the private information of recipients - if you are not a client of ours, you are not entitled to this research report, and should destroy it. The document is not, and should not be construed as, an offer to sell or solicitation of an offer to buy any securities. Opinions contained in the report represent the author's present opinion only and may be subject to change. In the event that the author's opinion should change or a new analyst with a different opinion becomes responsible for our coverage of the company concerned, we shall endeavour (but do not undertake) to disseminate any such change, within the constraints of any regulations, applicable laws, internal procedures within SEB, or other circumstances. If you are in doubt as to the meaning of the recommendation system used by SEB in its research, please refer to the "Disclaimer" section of SEB Research website, to which our clients are granted access.

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Equity Research Company Update Kindred Group 01 June 2018 24

The SEB Group: members, memberships and regulators SEB is a member of, inter alia, Nasdaq OMX Nordic, Oslo Stock Exchange, the London Stock Exchange, NYSE Euronext, SIX Swiss Exchange, Frankfurt Stock Exchange, Tallinn Stock Exchange as well as certain European MTF’s such as BATS- Chi-X, Turquoise and Burgundy. SEB is regulated by Finansinspektionen in Sweden and, for the conduct of investment services business, in (i) by Finanstilsynet, (ii) Norway by Finanstilsynet, (iii) Finland by Finanssivalvonta, (iv) Germany by Bundesanstalt für Finanzdienstleistungsaufsicht, (v) the UK by the Financial Conduct Authority and Prudential Regulation Authority (details about the extent of our regulation by the Financial Conduct Authority and Prudential Regulation Authority are available from us on request), (vi) Estonia by the Estonian Financial Supervision Authority, (vii) Lithuania by the Bank of Lithuania , (viii) Latvia by the Financial and Capital Markets Commission and (ix) Hong Kong by Securities and Futures Commission. SEBSI is a U.S. broker-dealer, registered with the Financial Industry Regulatory Authority (FINRA). SEBSI is a subsidiary of SEB. SEBSI is authorized to engage in the underwriting of securities but does not make markets or otherwise engage in any proprietary trading in any securities.

SEB’s research reports are prepared in accordance with the industry standards and codes of conduct applicable to financial analysts in the countries where they are based. In Denmark, Finland, Norway and Sweden, analysts act in accordance with the rules of ethics of each country’s Society of Financial Analysts. Analysts comply with the recommendations and industry standards of the Danish, Norwegian and the Swedish Securities Dealers Associations and with those of the Federation of Finnish Financial Services. Analysts certified by the CFA Institute also comply with the Code of Ethics of the CFA Institute. The author of this report is not registered or qualified as a research analyst with FINRA and therefore may not be subject to the FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Prevention and avoidance of conflicts of interest All research reports are produced by SEB’s Research department, which is separated from the rest of its activities by an Information Barrier; as such, research reports are independent and based solely on publicly available information. Following standard practice, recommendations and target share prices are removed from research on companies which are the subject of public offers on which SEB is advising. The remuneration of staff within the Research department is determined exclusively by research management and senior management and may include discretionary awards based on the firm’s total earnings, including investment banking and markets (sales and trading businesses) income; however, no such staff receive remuneration based upon specific investment banking or markets transactions. SEB’s Compliance department monitors the production of research and the observance of the group's procedures designed to prevent any potential conflicts of interest from affecting the content of research; the latter are described in greater detail in the "Statement of Policies for dealing with potential conflicts of interest surrounding our Research activities" which is available on our SEB Research website. Your attention is also drawn to the fact that: The current market price of the securities shown in this report is the price prevailing at the close of the business day preceding the date of publication, save where such price was more than 5% different from the price prevailing as at the time of publication, in which case it is the latter. Unless explicitly stated otherwise in this report, SEB expects (but does not undertake) to issue updates to this report following the publication of new figures or forecasts by the company covered, or upon the occurrence of other events which could potentially have a material effect on it. The securities discussed in this research report may not be eligible for sale in all countries, and such securities may not be suitable for all types of investors. Offers and sales of securities discussed in this research report, and the distribution of this report, may be made only in countries where such securities are exempt from registration or qualification or have been so registered or qualified for offer and sale, and in accordance with applicable broker-dealer and agent/salesman registration or licensing requirements. Additional recommendation history for the issuer is available at https://research.sebgroup.com/equity

A full list of disclosures for other companies mentioned herein (in which SEB has research coverage), can be found on our SEB Research website

Equity Research Company Update Kindred Group 01 June 2018 25

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

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

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

Current recommendation for Kindred Group - Buy - was set on 1 Jun 2018, changed from Hold. The dates of previous recommendation changes in relation to Kindred Group can be found on our Research Online website.

Equity Research

SEB’s standardised recommendation structure

Consolidated distribution Clients to whom SEB has provided Clients from whom SEB has received as per 31 Mar 2018 (%) material investment services, last 12M (%) investment banking income, last 12M (%)

Buy 51 18.7 10.2 Hold 37 10.3 6.7 Sell 12 2.2 2.3

Buy Attractive risk/reward - at least 10% upside to target price. Hold Fairly valued – the security / instrument is trading close to target price. Sell Unattractive risk/reward - security / instrument is trading above target price. Unrated Company not covered, or we are not allowed to have a recommendation for compliance reasons Source: SEB

Please note, in the chart to the Target price and recommendation revision history right: 160 1 2 1 2 1 2 1 1=Buy 2=Hold 140 3=Sell 120 The grey spots mark the point where target prices have been 100

changed. The price chart is not 80 adjusted for dividends paid, whereas our recommendations 60 are based on expected return including dividends 40

20 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18

KINDsdb.ST Target price revisions

Source: Thomson Reuters / SIX / SEB

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