Transportation Company Report Norway 14 October 2015 Torghatten Buy Key Data Transportation giant with strong growth prospects Share price (NOK) 286.00 We initiate coverage of Torghatten with a Buy rating and NOK330 target price. We see Target price (NOK) 330.00 stable growth in all of the segments Torghatten is exposed to and we argue the company is well-placed in all of them given strong market positions. We are impressed by Bloomberg TORG NO Torghatten's track record with accretive growth, which we attribute to the company's Market capitalisation (NOKm) 2,608m decade-long experience and decentralised and responsive organisational setup. This has Enterprise value (NOKm) 5,841m provided Torghatten with an attractive and fragmented backlog that is exposed to some of the fastest growing regions in Norway. The company keeps winning important Shares outstanding (m) 9.5m contracts in all segments, cementing its positions and providing a strong base for future Shares fully diluted (m) 9.5m earnings and dividend growth. Average daily volume 300 Free float (%) 47.1 Stable growth outlook and strong positions in consolidated markets Based on population growth and travel frequency, we expect all of the markets in which Torghatten operates will grow steadily at 2-4% over the long term. The company is well-placed to absorb this growth with #2 or #3 market positions in each segment, competing only with a small number of established players. Impressive track record and attractive backlog Share Price (12m) With a sales CAGR of 20% over the last 25 years and stable margins in the last 150 decade, Torghatten has an impressive history that we partly attribute to the 140 decentralised organisational structure. The benefits of the setup is obvious with 130 Torghatten outperforming avg. net profit margins in bus and sea transport industries 120 Index by 2-3pp in recent years. Its backlog is exposed to some of the fastest growing 110 regions, and based on the track record we are confident that the large, recently won 100 contracts are profitable. 90 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Initiate with a Buy recommendation and TP NOK330 OSEBX Torghatten Our valuation is based on peer multiples for each segment, market values where available and otherwise book values. This gives us our NOK330 target price, implying a 15% upside on last close and a 2016E EV/EBITDA of 7.4x. Company Overview (NOK) Year end: Dec 2013 2014 2015E 2016E 2017E Total Revenues (m) 5,106 8,187 8,501 9,670 10,263 EBIT (m) 296 462 573 645 687 Profit Before Tax (m) 202 266 439 508 550 EPS (Reported) (NOK) 14.09 16.33 26.01 32.51 41.60 EPS (Adjusted) (NOK) n.a. n.a. n.a. n.a. n.a. DPS (NOK) 5.89 4.50 7.02 8.78 11.23 Balance Sheet Total assets (m) 7,318 7,519 7,600 8,277 8,326 Total liabilities (m) 5,632 5,715 5,576 5,803 5,494 NIBD 2,678 3,084 2,637 2,544 2,050 Margins & Profitability EBIT margin (adjusted) (%) n.a. n.a. n.a. n.a. n.a. ROE (annualised) (%) 10.6 11.8 16.0 15.5 16.8 Analysts ROCE (%) 4.7 6.9 7.6 7.8 8.2 Peder Nicolai Jarlsby Sales Growth (%) 43.3 60.4 3.8 13.8 6.1 +47 24 13 37 31 EBIT growth (%) 7.5 56.3 23.9 12.7 6.5 [email protected] Valuation P/E (adjusted) n/a n.a. n/a n.a. n.a. Carl Oskar Thoen EV/sales (x) 0.53 0.50 0.43 0.37 0.30 +47 24 14 74 94 EV/EBITDA (x) 4.0 3.8 7.9 7.4 6.8 [email protected] P/BV (x) n/a 0.54 n/a 0.41 0.36 Dividend yield (%) 3.9 2.3 3.0 3.1 3.9 Lars-Daniel Westby Custom assumption 1 +47 24 14 74 16 Custom assumption 2 [email protected] Custom assumption 3 Source: SpareBank 1 Markets and Company Data Important: All disclosure information can be found on page 37 of this document. Company Report 14 October 2015 Contents Investment Summary .............................................................................................. 3 Company profile ...................................................................................................... 6 Sea Transport....................................................................................................... 7 Norwegian ro-pax/pax market ........................................................................ 9 Estimates ....................................................................................................... 13 Valuation ....................................................................................................... 13 Bus Transport .................................................................................................... 14 Norwegian bus market .................................................................................. 15 Contract overview ......................................................................................... 19 Estimates ....................................................................................................... 19 Valuation ....................................................................................................... 20 Air Transport...................................................................................................... 21 Fleet Overview ............................................................................................... 24 Norwegian airline market .............................................................................. 26 Estimates ....................................................................................................... 28 Valuation ....................................................................................................... 28 Other maritime .................................................................................................. 29 Other activities .................................................................................................. 32 Valuation ............................................................................................................... 33 Vital management team ........................................................................................ 34 Ownership ............................................................................................................. 35 Important: All disclosure information can be found on page 37 of this document. 2 Company Report 14 October 2015 Investment Summary We initiate coverage of Torghatten ASA with a Buy recommendation and target price NOK330, implying a 2016E EV/EBITDA of 7.4x. We see stable growth in all of the segments Torghatten is exposed to and we argue the company is favourably placed in all of them given their #2 and #3 market positions. We are impressed by Torghatten's track record with accretive growth, which we attribute to the company's decade-long experience and decentralised and responsive organisational set-up. This has provided Torghatten with an attractive, fragmented, and long-lasting backlog that is exposed to some of the fastest growing regions in Norway. And the company keeps winning important contracts in all segments, cementing its market positions and providing a strong foundation for future earnings and dividend growth. Although the share price has increased significantly in last year, we are confident Torghatten has a further 15% upside and deserves a Buy rating. Stable growth outlook for all segments We expect all of the markets in which Torghatten operates will grow steadily in the years ahead, mostly due to population growth but also due to travel frequency. Historically, population growth has driven 24-52% of total passenger volume growth, as shown below, with journey frequency making up the balance. Thus, should this trend continue, one can multiply the population growth by ~2-4x to estimate the likely passenger growth. According to Statistics Norway, population growth is estimated at 1% per year through 2030, meaning annual passenger growth should be in the 2-4% range in the coming years. Transport modes: Share of passenger growthTitle driven by population Exhibit 1. Norway's Population and Growth ScenariosTitle Exhibit 2. 60% 7.0 52% 50% 6.5 43% 40% 6.0 30% 24% 5.5 million 20% 5.0 CAGR 2014-30 Low: 0.60% 10% 4.5 Mid: 0.95% Share of passenger volume growth volume passengerof Share High: 1.40% 0% 4.0 Air (2003-13) Sea (2005-14) Bus (2005-14) 2000 2005 2010 2015E 2020E 2025E 2030E Norway's Population Low High Mid Population Growth Source: Statistics Norway, Institute of Transport Economics, SpareBank 1 Markets Source: Statistics Norway, SpareBank 1 Markets Strong market positions in consolidated markets Torghatten is well-positioned to absorb the above-mentioned growth, in our view. Within ferry transport, it is the second-largest operator with 25% market share. In route bus transport, it is currently the third largest player, but after recently winning the largest ever contract in Norway, it will likely become #2 in 2016. Within air transport, Widerøe is #3 carrying 17% of all domestic passengers in 2013. All of the markets are consolidated with few competitors and public contracts are long-term in nature. Market shares, by transportation segment Exhibit 3. Ferry Transport Bus Route Production (on tender) Domestic Airline Passengers 30% 35% 50% 25% 30% 40% 25% 20% 30% 20% 15% Market Share Market MarketShare Market Share Market 15% 20% 10% 10% 10% 5% 5% 0% 0% 0% Fjord1 Torghatten Norled (Tide) Boreal Other Nettbuss Tide Torghatten Boreal Unibuss Nobina Other SAS Norwegian Widerøe DAT Source: Company reports, Oslo Economics, Institute of Transport Economics, SpareBank 1 Markets. Note: Data for airlines from 2013, for bus from 1Q15, for ferry based on 2014 revenues. Important: All disclosure