Building value one balcony at a time Balco

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Balco

NOT TO BE DISTRIBUTED IN, OR TAKEN OR TRANSMITTED INTO, THE UNITED STATES, CANADA, JAPAN, AUSTRALIA OR IN ANY OTHER JURISDICTION WHERE TO DO SO WOULD BE UNLAWFUL.

Unrated Company Update Construction Sweden 26 November 2018

Building value one balcony at a time

We expect the solid growth of the balcony construction market to continue, primarily driven by the age profile of the housing stock. Balco’s strong market position in its key markets and the one-stop-shop business model differentiates it from its competitors making it an interesting investment opportunity.

Investment case

Balco has developed a business model where it controls its entire value chain and has achieved a market leading position in its key markets. We believe that the strong market position and efficient business model enable Balco to continue its profitable growth and simultaneously generate impressive cash flows. Moreover, the increased focus on the renovation segment improves the company’s resilience in the face of a downturn in housing construction.

Financial forecasts – stable growth ahead supported by strong order book We model average organic sales growth for 2018-20 of around 8%, slightly below the company’s anticipated sales growth target of 10% per year.

Furthermore, we estimate gradual margin improvements for 2019-20, mainly driven by increased focus on renovation as well as efficiency improvements from the new production facilities in Poland, while potential price increases could further add to the story.

Equity valuation

Currently, the shares are trading at about 9.5x our 2019 EV/EBIT forecasts and 11.5x our 2019 earnings estimates, while the peer group is at average 2019 PER of 10x and EV/EBIT of 9.5x. We argue that Balco should be trading with a slight premium to the peer group due to Balco’s attractive growth profile, strong market position and cash-generative business model. Our DCF valuation implies a valuation range of SEK 79 to SEK 100.

Share Price (12M)

Absolute performance (green) / Relative to Sweden (purple).

50 55 60 65 70 75 80

Nov Jan Mar May Jul Sep Nov

Financials (SEK)

Year end: Dec 2016 2017 2018E 2019E 2020E

Revenues (m) 801 989 1,072 1,284 1,384

Adj. EBIT 64 116 120 151 169

Pre-tax profit (m) 23 55 112 143 160

EPS 0.18 2.43 4.09 5.21 5.83

Adj. EPS 0.18 2.43 4.09 5.21 5.83

DPS 0.00 1.00 2.04 2.60 2.91

Revenue growth (%) 25.5 23.4 8.4 19.8 7.7

Adj. EBIT growth (%) (1.9) 81.2 3.9 26.0 11.9

Adj. EPS growth (%) (36.5) n.m. 68.1 27.5 11.9

Adj. EBIT margin (%) 8.0 11.7 11.2 11.8 12.2

ROE (%) 9.2 14.3 20.9 22.9 22.5

ROCE (%) 23.4 27.4 19.7 22.2 22.6

PER (x) 25.5 14.7 11.5 10.3

Free cash flow yield (%) 10.4 0.4 6.9 8.3

Dividend yield (%) 1.6 3.4 4.4 4.9

P/BV (x) 3.44 2.83 2.47 2.18

EV/Sales (x) 1.43 1.30 1.12 1.01

EV/Adj. EBITDA (x) 0.0 13.0 10.0 8.3 7.3

EV/Adj. EBIT (x) 0.0 12.3 11.6 9.5 8.2

Operating cash flow/EV (%) 10.9 2.6 8.6 10.2

Marketing communication commissioned by:

Balco

Key Data (2018E) Price (SEK)

Reuters Bloomberg Market cap (SEKm) Market cap (USDm) Market cap (EURm) Net debt (SEKm) Net gearing

Net debt/EBITDA (x) 0.8

Shares fully dil. (m) Avg daily turnover (m)

Free float 0%

124106 23%

21.40.0 BALC.ST BALCO SS 1,283 142 59.85

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Investment case

Balco is the leading operator in the Nordic countries focusing on high quality balcony renovations and constructions. The company provides turnkey solutions for building and renovating balconies primarily for tenant-owner associations but also for private landlords, public housing sector clients and construction companies. All of Balco’s products are produced under its own brand in its own production facilities.

We believe that the main drivers for the investment case are the high demand for balcony renovations due to the age profile of dwellings in Balco’s key markets, Balco’s market leading position in growing key markets, its cash-generative business model and good visibility of future sales. We estimate that Balco’s strong balance sheet and cash flow will enable it to pay out growing dividends, but we see also potential for value-adding M&A.

Age profile of dwellings increases the demand for balcony renovations We believe that Balco’s business is largely driven by the underlying demand for renovation due to the old dwelling stock in Balco’s key markets (Sweden, Denmark and Norway). The ageing dwelling stock is even more pronounced in Sweden, which contributed 56% of Balco’s sales in 2017. Furthermore, the trend for renovating apartments to make them more energy efficient will support Balco’s business, as glazed balconies are able to decrease energy consumption by as much as 10-20%.

We argue that the need to renovate balconies is a structural demand driver and by nature uncyclical. This is as long as financing conditions remain favourable for tenant owned apartments. Generally, balconies need their first renovation approximately 50 years after being built, which means that a large share of the dwelling stock in Balco’s key markets will be in need of renovation during the coming years. After the first renovation, balconies need to be renovated again after 15-50 years, depending on the method and scope of the renovation.

Age profile of dwellings in Balco's key markets Age profile of multi-dwelling buildings in Sweden

Source: SEB, Eurostat Source: SEB, SCB

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Before 1946 1946-1980 1981-2000 2001 onwards

Avg. Focus markets Avg. Rest of EU

0 100,000 200,000 300,000 400,000 500,000 600,000 700,000

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Strong market position in fragmented but growing key markets

One main reason for the rapid growth of Balco’s sales is its strong market position in its focus markets. According to our estimates, in 2017 Balco was clear market leader in Sweden and Norway with approximate market shares of 21% and 18%

while in Denmark Balco has established an approximate market share of around 11%, being the number two operator in the Danish balcony market. We argue that the company has been able to increase its market share in the more profitable renovation segment, even though the total market share has slightly decreased.

This is due to Balco’s strategic decision to focus on the renovation segment rather than the new build market, which has been growing rapidly during the past few years, especially in Sweden. Furthermore, the recent acquisition of TBO-Haglinds AB (TBO) will further strengthen Balco’s market share in 2019.

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

These countries will open new channels for growth in structurally attractive markets.

Balco's sales development per geography (SEKm)

Source: SEB, Balco annual reports

Proven cash-generative business model combined with good visibility Balco has been able to steadily grow its order intake, reaching a CAGR of 21.8%

between 2014 and 2017. Orders have historically been converted into sales within approximately one year after the order has been recorded. However, as the scale of Balco’s business has expanded, the order turnover rate has also been lengthened slightly, being around 1.2x in 2018, we estimate. The steady growth in order intake has also increased the order stock, increasing the visibility of Balco sales. However, the order intake growth has slightly decelerated during the last couple of years and averaged 6.1% in 2016 and 2017.

Despite the growth, Balco has been able to post strong cash flows, illustrating the low capital intensity in the business model. Moreover, we argue that Balco has been able to grow faster than its competitors in Sweden while still sustaining higher margins, suggesting that its business model is working and is superior to those of other market participants.

0 100 200 300 400 500 600

Sweden Norway Denmark Germany UK Netherlands Finland

2015 2016 2017

CAGR 41%

CAGR 6%

CAGR 26%

CAGR 59%

CAGR 449%

CAGR -38%

'16-17 growth 142%

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Strong sales growth and improved margins Order intake and order stock development

Source: SEB, Balco IPO prospectus Source: SEB, Balco annual report

Growing dividends, more acquisitions or both?

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

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

Main risks in the underlying market and operations

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

Additionally, the project nature of the business exposes the company to several operational risks regarding the balcony construction projects. For instance, prolonged installation times due to increased order book could lead to lower quality, thus negatively affecting the brand value. Moreover, the “lean”

production model and the “just in time” delivery model exposes the company to the risk of miscalculations that could lead to increased project costs and lower margins. Furthermore, regulatory challenges in getting building permits, especially in larger cities could mean postponed projects and longer lead times.

7.2%

10.3% 10.3%

11.8%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

0 200 400 600 800 1,000 1,200

2014FY 2015FY 2016FY 2017FY

Net sales Adj. EBIT margin CAGR 20.3%

0.72

1.04

1.12

0.2 0.4 0.6 0.8 1 1.2 1.4

0 200 400 600 800 1000 1200 1400

2014FY 2015FY 2016FY 2017FY

Order intake total Orderstock Order turnover rate Order intake CAGR

14-17 21.8%

15-17 6.1%

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Overview of Balco

Brief History

● Balco was founded in 1987 in Växjö by a Swedish entrepreneur Lars Björkman with a focus on providing balcony renovation and construction services for Swedish customers.

● During the late 1980s, Balco started its international expansion with operations in Norway and Germany. This was followed by expansion into Denmark and the UK in 2001-05.

● In 2010 Balco was acquired by the private equity firm, Segulah. The acquisition was followed by expansion into new product categories (city balconies) and by expansion into Finland. Segulah is still the largest shareholder with approximately 19% of the shares.

● In October 2017 the company was listed on Nasdaq Stockholm with an issue price of SEK 56 per share.

● In November 2018, Balco acquired the Swedish balcony construction and renovation company TBO-Haglinds AB for SEK 100m to continue strengthening its positioning in its key markets.

Main segments, customers and products

Balco operates in the construction market and designs, manufactures, repairs and constructs balconies for residential buildings. The company operates mainly in the balcony renovation market but has also small operations within the new build segment. However, the company will increasingly focus its sales efforts on the less cyclical and more profitable renovation segment. In 2017, renovation contributed 85.7% of the group’s total sales, and according to our estimates, renovation’s share will increase to approximately 95% in 2020.

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

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

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Sales split by geography in 2017 Sales split by segment (SEKm)

Source: SEB, Balco annual report Source: SEB, Balco annual reports

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

Sales split by customer type in 2017… ...and 2018 first nine months

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

Number of tenant-owned associations in Sweden

Source: SEB, Finansinspektionen Sweden

56%

Norway 18%

Denmark 13%

Germany 10%

UK Netherlands1%

1%

Finland 1%

12.2% 11.5% 13.5%

1.0%

-26.5%

5.2%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

-100 100 300 500 700 900 1,100 1,300 1,500

2015 2016 2017 2018E 2019E 2020E

Renovation New build TBO Renovation EBIT margin New build EBIT margin

Tenant-owner associations

60%

Privately-owned properties

19%

Publicly owned companies

9%

Construction companies

12%

Tenant-owner associations

68%

Privately-owned properties

11%

Publicly owned companies

12%

Construction companies

9%

15,000 17,000 19,000 21,000 23,000 25,000 27,000 29,000 31,000 33,000 35,000

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

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

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

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

Source: SEB, Riksbanken, Statistics Sweden Source: SEB, UC Bostadsvärdering AB, Riksbanken

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

Why do old dwellings need balcony renovations?

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

● Reduced risk of corrosion and frost damage. Especially in the Nordic countries the cold weather can cause frost damage to the concrete reinforcement, thus significantly weakening the reinforcement and creating a safety hazard.

● Increases property value. A glazed balcony increases a property’s value for several reasons. It makes the balcony useable for more of the year; it reduces outside noise, and it saves energy.

● Opportunity for the dwelling owner to increase the rent. According to Balco, on average installing a glazed balcony can increase an apartment’s rent by around SEK 400 per month.

0 2 4 6 8 10 12

2011 2012 2013 2014 2015 2016 2017 2018 H1

Households Housing association

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000

2010 2011 2012 2013 2014 2015

Other (rest of Swe) Total Malmö Gothenburg Stockholm

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Balco’s offering and products

Balco’s offering focuses on different types of balconies and balcony solutions with the main expertise being in replacing existing balconies with Balco’s own glazed balcony products using the so called “Balco-method”. In balcony renovations Balco always replaces the floor module with a new one instead of only renovating the floor module, and entirely tears down the old balconies.

According to the company, this will significantly lengthen the life span of the new balcony to at least 50 years, while traditional renovations only give around 15 additional years; however it is also more than twice as expensive as a traditional renovation where the floor module is only renovated.

All of the products are manufactured in-house under Balco’s own brand and are always tailored and designed according to the customers’ needs and wishes.

Currently Balco holds 45 patents. Balco’s product split is shown in the chart below.

Balco’s product split of 2017 sales

Source: SEB, Balco annual report

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

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

Glazed balconies 75%

Open balconies 15%

Other products 10%

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

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

Other products and accessories include rails, sun screens, carpets, glass corners, roller blinds, powered awnings and other accessories. All of these products are designed so that they can be installed into the balconies at a later stage. Additionally, the category also includes railings and stairways, which are designed for both indoor and outdoor use.

One-stop-shop operating model

Balco’s main markets are Sweden, Denmark and Norway but the company has also established a presence in Germany, Finland, the Netherlands and the UK, with production facilities also in Poland. The company has recently ramped up its sales networks both in its key markets as well as in other markets to strengthen its market position and to gain market share in the renovation segment. The below picture illustrates Balco’s geographical footprint as of the end of 2017.

Overview of Balco’s operations

Source: SEB, Balco

Sales Office Production facility Head office

Balco has operations in 7 different countries

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

Balco operates also a product development department with eight full-time product developers working towards developing new solutions and products.

The company currently holds 45 different patents.

Balco’s process

Source: SEB, Balco IPO prospectus

Sales

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

Project planning and permission

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

Sales

• First contact

• Animations and in-house showings

1

Planning & permission

• Assisting in getting a building permission

• Detailed planning of the project

2

Production & logistics

• Two-staged production process in own facilities

• Just-in-time deliveries

3 Installation

• Installations at site, outside of the apartments

4

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Production and logistics

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

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

Phases of balcony production process

Source: SEB, Balco IPO prospectus

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

Installation and handover

Installations of the balconies are carried out by contracted fitters who work solely for Balco. Balco has entered into long-term contracts with the selected contractors and thus secured workforce for the projects. All of the installation work primarily takes place outside the apartment leaving the tenants with as little disturbance as possible. After the installation Balco and the client jointly inspect the work.

Ownership structure

The largest shareholder in Balco is Segulah, with 19.0% of the total shares and votes. The second and the third largest shareholders are Carl-Olof och Jenz Hamrins Stiftelse and Erik Selin through the holding company Skandrenting AB. In total the three largest shareholders control 41.9% of the company.

Largest shareholders as of 30 September 2018

No. of shares Value (SEKm) Share of

total shares Country Shareholder

Segulah 4,079,373 288.0 19.0% Sweden

Carl-Olof och Jenz Hamrins Stiftelse 2,638,524 169.7 12.3% Sweden

Erik Selin 2,250,000 144.7 10.5% Sweden

Swedbank Robur Fonder 1,339,286 86.1 6.2% Sweden

Danica Pension 771,708 49.6 3.6% Sweden

Stiftelsen Riksbankens Jubileumsfond 680,000 43.7 3.2% Sweden

Lazard Asset Management 625,000 40.2 2.9% US

Janus Henderson Investors 540,564 34.8 2.5% UK

Avanza Pension 505,030 32.5 2.4% Sweden

Canaccord Genuity Wealth Management 497,810 32.0 2.3% UK

Top 3 largest 8,967,897 602.4 41.9%

Total 10 largest 13,927,295 921.2 65.0%

Source: SEB, Holdings.se

Steel and concrete processing

Planning

Steel cutting and punching

Welding Galvani- sation

Powder

coating Casting

Aluminium powder lacquering

Aluminium cutting and punching

Assembly of windows

Assembly, packaging and

freight

1

Glazing and balcony frontage 2

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Market

Macro economy and housing market

Balco operates in the Northern European construction market with renovation as its main focus segment. Balco’s key focus markets are Sweden, Norway and Denmark, which generated roughly 87% of the group revenues in 2017.

Generally, the construction and renovation markets are closely related to the development of the overall economy, which during recent years has supported Balco’s business. GDP growth in Europe, especially in Balco’s focus markets, has been solid. Healthy growth in GDP is even expected for 2018-20 by SEB, which we believe will further support both the construction and renovation markets.

The favourable economic conditions have also been reflected in construction confidence, which has generally been upward sloping for in recent years.

Yearly GDP growth rates Construction confidence indicators at positive levels

Source: SEB, IMF Source: European Commission

Housing starts and completions in focus markets (units) Housing price index*

Source: SEB, Datastream Source: SEB, Eurostat, *December 2012 = 1

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

-2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0

2013 2014 2015 2016 2017 2018E 2019E 2020E

Denmark Finland Germany

Netherlands Norway Sweden

United Kingdom Weighted GDP growth

-50 -40 -30 -20 -10 0 10 20 30 40

01/01/13 01/04/13 01/07/13 01/10/13 01/01/14 01/04/14 01/07/14 01/10/14 01/01/15 01/04/15 01/07/15 01/10/15 01/01/16 01/04/16 01/07/16 01/10/16 01/01/17 01/04/17 01/07/17 01/10/17 01/01/18 01/04/18 01/07/18 01/10/18 EU 27 Sweden Denmark Germany Finland UK

0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000

Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Sweden starts Denmark starts Norway starts

Sweden completions Denmark completions Norway completions

0.8 0.9 1 1.1 1.2 1.3 1.4 1.5 1.6

Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18

Denmark Sweden Norway

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Moreover, the company has even stated that it will only focus on the renovation segment and only undertake the new build projects that are already waiting in the order stock. We believe that the new build projects represent approximately 10% of the current orders. The renovation segment has historically been more stable than the new build market, as can be seen from the charts below.

Moreover, we believe that the age profile of the dwelling stock in focus markets will drive demand for balcony renovations, even if the new build housing market slows down even more.

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

Source: SEB, Euroconstruct Source: SEB, Euroconstruct

Market share and competitive landscape

Total balcony market

According to Arthur D. Little, the entire balcony market in countries where Balco has operations was in 2017 estimated to be worth approximately SEK 30bn. In 2017, around 70% of the entire market was renovation and the remaining 30%

new build. The new build market is expected to increase its share slightly in 2018, but to cool down in 2019 and 2020.

Total balcony market in selected markets (SEKm) Total balcony market per country (SEKm)

Source: SEB, Arthur D. Little, Balco 1)Selected markets: Sweden, Norway, Denmark, Finland, Germany, UK, Netherlands

Source: SEB, Arthur D. Little, Balco -15

-10 -5 0 5 10 15 20 25 30 35

2014 2015 2016 2017 2018E 2019E

Denmark Finland Germany Netherlands Norway Sweden United Kingdom

-15 -10 -5 0 5 10 15 20 25 30 35

2014 2015 2016 2017 2018E 2019E

Denmark Finland Germany Netherlands Norway Sweden United Kingdom

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000

2013 2014 2015 2016 2017 2018E 2019E

Renovation New build CAGR

4.0%

CAGR 3.0%

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000

2013 2014 2015 2016 2017 2018E 2019E

Sweden Norway Denmark Finland Germany United Kingdom Netherlands

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Balcony market split in 2017 (for countries where Balco is present)

Source: SEB, Arthur D. Little, Balco

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

Of this SEK 4.8 billion around 60% was renovation while the remaining 40%

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

Balcony market development in Sweden, Norway and Denmark

Source: SEB, Balco, Arthur D. Little

Sweden

9% Norway

3%Denmark 4%

Finland 5%

Germany 55%

United Kingdom 18%

Netherlands 6%

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000

2014 2015 2016 2017 2018E 2019E

Renovation New build CAGR

13.1%

CAGR 11.6%

(16)

Balco’s current market share

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

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

Market share in respective balcony markets in 2017* Market share in focus markets

Source: SEB, Arthur D. Little, Balco *TBO not included Source: SEB, Arthur D. Little, Balco

Competition in the balcony market

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

Balco has identified some unlisted international companies as its peers with sales roughly in line with Balco, including Lumon, WinGroup and Solarlux.

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

31.7% 33.0%

14.0%

20.9%

17.9%

11.4%

0%

5%

10%

15%

20%

25%

30%

35%

Balco Sweden Balco Norway Balco Denmark

Renovation market share Total market share

19.7% 20.4%

23.9%

26.7% 27.0%

30.0%

15.1% 15.4% 17.3% 18.0%

16.8%

18.7%

0%

5%

10%

15%

20%

25%

30%

35%

2014 2015 2016 2017 2018E 2019E

Renovation market share in focus markets Total market share in focus markets

(17)

The table below gives an overview of Balco’s competitors in its main market Sweden and illustrates their segment focus and product offering in balconies.

According to our estimates, the competitors listed in the table had approximately 35% of the Swedish balcony construction market in 2017. This leaves an approximate market share of 44% for the other market participants given that Balco’s market share in Sweden was approximately 21%. The other market participants are mainly the international players named above as well as other construction companies engaging especially in the new build segment.

As the table below illustrates, Balco has clear advantages compared to its competitors due to its broader offering and especially for its larger size. The table also illustrates how fragmented the market is, as the second largest competitor holds only approximately 7% of the market. Moreover, after the acquisition of TBO, Balco will further increase its market share in Sweden by some 5%.

Key competitors in Sweden

Sales in Swe 2017

(SEKm) EBIT-%

2017 Mkt. Share

in Swe (%) New Built Renovation Open

balconies Glazed

balconies Clima walls City

balconies Maritime

Alnova Balkongsystem AB 99 2 4 X X X X X

Arqdesign Byggprodukter AB 113 -3 4 X X X X

Balcona Aktiebolag 43 -7 2 X X X

Högstad Aluminium Aktiebolag 81 11 3 X X X X X

RK Teknik I Gusum Aktiebolag 87 5 3 X X X X

TBO-Haglinds AB* 130 12 5 X X X X X

Teknova Byggsystem Aktiebolag 176 1 7 X X X X

Weland Aluminium Aktiebolag 182 13 7 X X X X X

Balco Sweden 550 12 21 X X X X X X X

*Estimated 2019 sales for TBO AB Source: SEB, Balco, Allabolag.se

Competitive landscape in Sweden

Source: SEB, Balco IPO prospectus, Allabolag.se

The scatter chart above supports our belief that Balco’s business model is superior than its peers’ as it has been capable of sustaining good average EBIT margins although achieving a sales CAGR of 21.6% between 2014 and 2017.

We believe that this is mainly because of Balco’s scale and efficient process where it controls the entire value chain, compared to smaller competitors who are more reliant on outsourcing many parts in the process. Furthermore, most of the smaller competitors in Sweden focus only on glazing or other such niches, which we believe will make Balco an even stronger actor in the market with its

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

-3% -1% 1% 3% 5% 7% 9% 11%

Sales CAGR 2014-2017

Average EBIT-% 2014-2017

Balco Sales: 550

Alnova AB Sales 2017:

99 TBO Sales: 130

Teknova Sales 2017:

176

Balcona AB Sales 2017: 43

Weland Aluminuum Sales 2017: 182 Arqdesign

Sales 2017:

113

RK Teknik AB Sales 2017: 87

Högstads Aluminium Sales 2017: 81

(18)

Financials

Balco’s medium-term financial targets

The company has communicated the following financial targets for the medium- term:

● Growth – revenue growth of 10% per year.

● Profitability – operating profit margin of at least 13%.

● Capital structure – interest bearing net debt/EBITDA shall not exceed 2.5x, other than temporarily.

● Dividend policy – At least 50% of profit after tax, taking into consideration Balco’s long-term growth and prevailing market conditions.

Acquisition of TBO-Haglinds AB

As mentioned earlier, Balco recently announced the acquisition of TBO, which is a Swedish operator in the balcony construction and renovation market. The company operates mainly in Sweden, and offers services in changing and renovating existing balconies as well as building new balconies and providing glazing solutions.

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

Through the acquisition, Balco is able to increase its market share in the Swedish balcony market, thus strengthening its competitive positioning. The acquisition improves the product portfolio and the customer base, giving a solid base for future growth. Moreover, we believe that the company is able to achieve cost synergies that will most likely support margin expansion in the coming years.

Orders and sales

The order intake has seen rapid growth, amounting to an annual growth rate of 21.8% between 2014 and 2017. We believe that the renovation market activity will stay at good levels, supported by low interest rates and by increasing disposable incomes for households. However, we estimate that the growth rate for group total orders will be negative in 2018, after an excellent year in 2017 and after a slightly disappointing order development, especially in Q3 2018, which was mainly due to fluctuations and delays in decision making for larger clients.

(19)

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

Renovation order intake (SEKm) New build order intake (SEKm)

Source: SEB, Balco annual reports Source: SEB, Balco annual reports

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

Group sales and orders (SEKm)

Source: SEB, Balco Annual reports, Balco IPO prospectus

Due to the somewhat weak order development thus far in 2018, but a strong order stock which supports sales, we expect the company to continue to grow.

We estimate sales growth of 8%, 20% and 8% in 2018, 2019 and 2020, respectively. For 2019 we estimate organic sales growth of almost 8%. Again, we expect the growth in the coming years to come from the renovation segment as the company is continuing to be more selective and to scale down the new build segment.

0 200 400 600 800 1000 1200 1400

0 50 100 150 200 250 300 350 400 450

Series1 12m rolling order intake (RHS)

0 20 40 60 80 100 120 140 160 180

0 10 20 30 40 50 60 70 80 90 100

Series1 12m rolling order intake (RHS)

0 200 400 600 800 1,000 1,200 1,400 1,600

2015 2016 2017 2018E 2019E 2020E

Sales Order intake total Orderstock

(20)

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

Cost structure, gross profit and operating profit

Balco’s cost structure is shown in the chart below. By far the largest contributor to costs is raw materials, consumables, installation, production and personnel costs in production, from which we estimate that raw materials account for approximately 25%. We believe that Balco’s cost structure will remain somewhat stable, with raw materials the most likely part to fluctuate, reflecting the raw material price changes in aluminium, steel, concrete and glass.

However, the company has taken actions to hedge its raw material costs and aims to agree contracts with suppliers to secure raw materials at fixed prices for the following six to 12 months. Because of this, we assume that the raw material price changes will only have minor effects, and estimate the cost structure to be quite stable in 2018-20.

Cost structure in 2017

Source: SEB, Balco annual report

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

0.0 50.0 100.0 150.0 200.0 250.0 300.0 350.0 400.0

Q1 17 Q2 17 Q3 17 Q4 17 Q1 18 Q2 18 Q3 18 Q418E Q119E Q219E Q319E Q419E Renovation New build

0 200 400 600 800 1000 1200 1400

2015 2016 2017 2018E 2019E 2020E

Renovation New build

Raw materials, consumables, installation and

production 70%

Renumeration 20%

Depr. and impairment 2%

Transport 2%

Marketing

2% Operational leases

1% Other costs

3%

(21)

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

Gross profit (SEKm) Adj. EBIT (SEKm)

Balco targets an EBIT margin of 13% in the medium term. However, in recent years the margin has been lower, primarily due to new build projects, which have substantially lower margins than renovation projects. We believe that Balco will be able to gradually increase its margins in 2019 and 2020, while the margins in 2018 will be slightly down from 2017 due to a somewhat weak H1.

In H1 2018, margins were affected by a combination of prolonged building permit decisions, especially in Copenhagen, by investments into new salesforces and by IFRS 15 adjustments.

The increases in operating profit according to our estimates will come from the increased focus on renovation business, more efficient production after investments in the facilities in Poland and Balco’s good market position regarding pricing power. We expect the operating costs to stabilize below 15%

of sales, slightly down from 2017 (15.8%) due to operational improvements and efficiency increases within sales efforts and administration. We believe that Balco can utilize cost synergies from the acquisition of TBO, primarily due to more efficient and centralized raw material purchases and lowered administration costs, amounting to approximately SEK 8m in 2019 and 2020.

We estimate that from every SEK in organic sales growth Balco is able to turn approximately 15% into operating profit, due to the good pricing position in renovation projects. Based on the above-mentioned estimates and the inclusion of TBO in the 2019 and 2020 figures, our EBIT forecast for 2018, 2019 and 2020 is SEK 120m, SEK 151m and SEK 169m, respectively.

Balance sheet and cash flow

Balco’s capex in 2017 amounted to SEK 55m, while the average amount between years 2014 and 2017 was SEK 26m. The increased capex in 2017 was due to investment into the new production facility in Poland. We believe that the capex will move closer to the historical average, as the large investments should now be behind and therefore model capex to be slightly below 3% of revenues in 2018-20. Net working capital was negative in 2017.

We believe that the working capital will settle closer to the historical average and to be approximately 3% of group sales in 2018-20. In 2018 we estimate that the net working capital will amount to approximately SEK 33m.

162

190

248

275

334

364

25.4%

23.7%

25.0% 25.6% 26.0% 26.3%

15%

20%

25%

30%

35%

40%

0 50 100 150 200 250 300 350 400

2015 2016 2017 2018E 2019E 2020E

Gross profit Gross profit margin

66

82

117 120

151

169

10.3% 10.3%

11.8%

11.2%

11.8%

12.2%

8%

9%

10%

11%

12%

13%

14%

15%

0 20 40 60 80 100 120 140 160 180

2015 2016 2017 2018E 2019E 2020E

Adj. EBIT Adj. EBIT margin

Building value one balcony at a time Balco

Balco

Building value one balcony at a time

Contents

Investment case

Overview of Balco

Brief History

Main segments, customers and products

One-stop-shop operating model

Ownership structure

Market

Macro economy and housing market

Market share and competitive landscape

Financials

Balco’s medium-term financial targets

Acquisition of TBO-Haglinds AB

Orders and sales

Cost structure, gross profit and operating profit

Balance sheet and cash flow