High Risk Reuters FL.IC / Bloomberg FL IR FL Group Reduce ......May 29, 2007 · Financial Calendar Date Major Shareholders Senior Management Published Research Date ... perpetuum

Reuters FL.IC / Bloomberg FL IR Rating Target Price* High Risk FL Group Reduce ISK28.90

Previous Current PriceKarl Kári Másson +354 410 7394 [email protected]

Sector Market Cap ISK233bn

Free Float 30%

Kepler Teather & Greenwood Merrion

Amsterdam Dublin Edinburgh Frankfurt London Madrid Milan New York Paris Reykjavik Zurich

Great Expectations Company Insight Company Update

May 29, 2007

FL Group has been rapidly transforming from an airline operator to a dynamic investment company. Although it has been highly successful, the company is also highly leveraged, increasing risk. Its market value reflects investors’ high expectations of FL Group’s management.

Hold ISK29.35 General Financial

ISKmNet financial

incomeOperating expenses

After-tax profit EPS R

5.90 556.65 42

0.96 33-0.02 -7.0.684.341.90 42

OE Equity ratioP/E

(12M) P/B

2005 20,349 1,652 17,251 .0% 56.1% 6.4 1.52006 17,491 2,771 44,559 .9% 54.3% 4.4 1.4

Q1 2006 10,458 485 5,839 .8% 41.1% 5.7 1.7Q2 2006 -1,346 523 -118 0% 41.2% 4.9 1.2Q3 2006 1,211 695 5,257 4.5% 46.8% 8.2 1.6Q4 2006 32,867 1,068 34,457 107.6% 54.3% 4.6 1.4Q1 2007 15,580 884 15,084 .4% 46.8% 4.8 1.6

Source: Landsbanki *12 month target price

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Our View

• Short operating history As an investment company, FL Group’s history only began in 2005. It’s 2006 profitswas ISK 45bn, of which ISK 26bn was profit on the sale of Icelandair. In Q1 2007, the company reported a profit of ISK 15bn while its market cap increased by ISK48bn including dividends paid. As a result its price rose from 1.4x to 1.6x NAV. We focus primarily on the P/NAV ratio to value investment companies.

• High speed growth FL Group’s balance sheet has expanded greatly in recent years. At year-end 2004, the company’s total assets were close to ISK 47bn and its equity ISK 15bn. Today we estimate its total assets, including off-balance-sheet items, at ISK 406bn and its equity at ISK 144bn. During this period the company’s share capital has been increased byISK 83bn. FL Group’s equity ratio at the end of Q1, including off-balance-sheet items, was 34%, making the company very sensitive to market fluctuations. Suchhigh leverage means the company could be hit quite hard by cooling markets,especially if this were to happen suddenly.

• Great expectations of management Our calculations suggest that investors expect FL Group to yield a return exceedingaverage market return by 5% annually for the next five years and by 1% annuallyafter that in perpetuum. This would mean an annual ROE of 34% the next five years and 19% ROE annually there after. This is higher than, or as high as, the highest returns of comparison companies.

• Recommend reduce and underweight

Based on its leverage, the current ratio of unlisted assets (7%) and its investment strategy, we value FL Group’s at 1.4x NAV, or ISK 198bn (ISK 25.5 p. share) with a 12 month target price of 28.9. We assume FL Group will be able to achieve returns 3% above the market average for the next five years (ROE of 27%) and then 0.75% above the market average (ROE of 18%), which is roughly that of the best foreign investment companies we have examined. We recommend underweighting FL Group’s shares in a well-diversified portfolios reflecting the Icelandic market.

Company Insight FL Group

Company Profile

Financial Calendar Date Major Shareholders Senior Management Published Research DateQ2 results week 31 07 Oddaflug B.V. 19.8% Hannes Smárason, CEO Earnings est. Marketweight 15 Jan 07

Q3 results week 44 07 Gnúpur fjárfestingafélag hf 19.1% Jón Sigurðsson, Deputy CEO In Focus Marketweight 15 Nov 06

Q4 results week 5 08 BG Capital ehf 18.4% Sveinbjörn Indriðason, CFO Earnings est. Marketweight 5 Oct 06

Icon ehf 5.6% Adam Shaw, MD UK operations In Focus Underweight 22 Aug 06

Materia Invest ehf 5.1% Martin Niclasen, MD Nordic operations Earnings est. Marketweight 6 Jul 06

P&L Account (mISK) 2005 2007 Q1 Balance Sheet (mISK) 2006 2007 Q1Financial income 1,270 1,498 Cash and cash equivalents 47,022 30,994

Dividend income 0 0 Securities 181,161 217,602

Fair value changes on investments 21,958 12,472 Derivatives 4,309 20,833

Total financial income 23,228 13,970 Restricted cash 9,572 12,575

Interest expenses -2,258 -3,017 Assets held for sale 904 0

Net forgein exchange difference -621 4,627 Loans and other receivables 19,478 20,290

Net financial income 20,349 15,580 Operating assets 425 464

Operating expenses -1,652 -884 Intangible assets 0 0

Net profit (loss) before taxes 18,697 14,696 Other assets 0 0

Income tax -3,292 388 Total assets 262,871 302,758Profit from continuing operations 15,405 15,084 Derivatives 7,021 11,147

Profit from discountinued operations* 1,846 0 Trade and other liabilities 5,908 4,111

Net profit (loss) 17,251 15,084 Deferred income 0 0

Deferred tax liabilities 895 1,292

Valuation 2005 2007 Q1 Borrowings 104,955 129,423

EPS 5.9 1.9 Other liabilities 1,416 14,983

P/Book value 1.5 1.6 Total liabilities 120,195 160,956P/E 6.4 4.8 Share capital 7,763 7,763

ROE 55.0% 42.4% Share premium and reserve 71,477 70,513Equity ratio 56.1% 46.8% Retained earnings 63,425 63,526

Dividend yield 7.0% 7.8% Minority interest 11 0

Total shareholders' equity 142,676 141,802

Glitnir Bank

Commerzbank

AMR Corporation

Finnair

Royal Unibrew

Largest unlisted holdings OwnershipRefresco Holding B.V. 49.0%

Northern Travel Holding ehf. 34.8%

Highland Group Holding Limited 13.9%

*Net of income tax

**Part of FL Group's holdings are in forward contracts and thus off-balance sheet

21,821

12,823

19.6 3.0% 59,557

24.4%

8.5%

23.3%

1.6

20.7

58,175

74,443

132,618

39,668

5,802

43,60425,027

10

277

8,931.5

7,222

0

0

10,895

2,641

4,694

10,350

69,138

6,341

Av. Vol Traded ('000)Market Cap

2005

FL Group is an international investment company, focusing on two areas of investments. The company’s Private Equity and Strategic Investments section acquires stakes in public and private companies with a long-term time frame. Its Capital Markets unit oversees short-term investments as well as derivatives and securities trading related to the company’s asset portfolio. In 2004 Oddaflug, owned by Hannes Smárason, FL Group's current CEO and Jón Helgi Guðmundsson, acquired a controlling stake in the airline Icelandair and related companies, which then was renamed FL Group. FL Group became a pure investment company in late 2006 after the former airline operator Icelandair (est. 1937) was restructured and the airline itself floated on the Iceland Stock Exchange.

Bloomberg ReutersFL IR FL.ICISK 29.35 ISK 233bn

Largest listed holdings**

20.5

Price Float30%

Market value% of shares

32.0%

4.4

42.9%

20,731

0

3,470

15,366

54.3%

6.0%

20066.7

1.4

4,758.8 121,468

34,720

Shares (m)

2006854

806

23,150

44,559

24,810

-2,771

-4,948

-2,371

17,491

14,720

2,631

17,351

27,208

FL Group

10

15

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25

30

35

May 06 Jul 06 Sep 06 Nov 06 Jan 07 Mar 07 May 07

FL Group OMXI15 scaled

Key

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2 Kepler Teather & Greenwood Merrion May 29, 2007


Company Insight:

Co

nten

ts FL Group May 29, 2007

Key Financials 2

Contents 3

Summing Up 4

The short but successful story 4

Drivers and Catalysts 6

What determines an investment company’s market price? 6

Company History 9

FL Group’s current portfolio 12

FL Group has been a very successful performer 14

Investment companies comparison 27

Constructing the Forecast 30

Valuation 32

Sensitivity Analysis 33

Disclosure 34

Legal Information 35

May 29, 2007 Kepler Teather & Greenwood Merrion 3


Sum

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p The short but successful story

As an investment company, FL Group’s history only began in 2005. Prior to that time it was practically exclusively an airline, which since 2003/4 had also been developing investment activities on the side. FL Group’s performance has been very good: in 2006, the company returned a profit of ISK 45bn, more than half of which (ISK 26bn) was profit on the sale of Icelandair.

In Q1 2007 the company reported a profit of ISK 15bn while at the same time its market cap grew by ISK 48bn including dividends paid. Its market price as a ratio of NAV rose from 1.4 to 1.6. Around 86% of the company’s assets are listed securities, 7% unlisted and the remaining in cash and equivalents along with loan, trade and other receivables. The principal changes in FL Group’s portfolio during this period were an increase in its holding in the US airline AMR from 5.98% to 8.63%, plus the acquisition of a 2.43% holding in the German Commerzbank, announced on 27 April this year. Its holding in Commerzbank is currently 2.99%.

Although it is difficult to find an investment company identical to FL Group, there are a considerable number of investment companies which share similar traits. Compared to other investment companies, FL Group is priced on the high side, especially since the greatest share of its holdings are listed companies. There is generally an inverse correlation between the pricing of an investment company and the proportion of its listed assets. Despite the fact that most of FL Group’s portfolio is listed assets, various factors make it difficult to duplicate this portfolio, including its large trading book, major holdings below the flagging limits and active management of this portfolio. FL Group’s share price clearly reflects investors’ high expectations of the company and the ability of management to achieve returns surpassing the market average and higher than investors themselves could achieve by duplicating FL Group’s portfolio.

The market environment in most parts of the world is currently very favourable for investors and investment companies, as reflected in companies’ high performance in recent years. FL Group is well situated to take advantage of the many opportunities available on financial markets, which is probably the main reason which the market is prepared to pay 1.6x NAV for its shares. It should be borne in mind, however, that competition between investment companies, including private equity firms, for investment opportunities has stiffened recently, resulting in higher prices for takeovers.

Our calculations suggest that investors expect FL Group to yield a return exceeding market returns by 5% annually for the next five years and by 1% annually after that in perpetuum. This would mean an annual ROE of 34% the next five years and 19% ROE annually after that. This is among the highest returns produced by any comparison company abroad, see the discussion of investment companies’ returns in a subsequent section. The average ROE of the ten investment companies we have used for comparison is 14.0% in the last five years, although their ROE varies very widely, ranging from 5.2% to 21.2%. Over one-quarter of the income of the company with the highest ROE, Candover Investments, originates in its asset management. The next highest performers had an ROE of around 17.2%. The companies’ average annual ROE during the past three years was considerably higher, or 21.4%. In recent years, FL Group’s operations have been very successful and its ROE extremely high, averaging 41% annually over the past five years. Although financial markets were sluggish in 2002 and 2003, when FL Group had not started its investment operations, the Group was able to deliver a high ROE on its airline operations.



Based on its leverage, the ratio of unlisted assets, and investment strategy, we value FL Group at 1.4x NAV. This would mean FL Group would have to deliver a return 3% higher than the market average in the next five years and 0.75% higher after that. This would mean an ROE of 27% annually for the next five years and over 18% annually after that, or roughly in line with the performance of the top investment companies we have used for comparison. We have high confidence in the company’s management, which has shown plenty of initiative and achieved laudable success. FL Group has become a well-known investment company, to whom companies turn when seeking investors. This is the main factor that we feel justifies expecting better than average returns from FL Group.

Although we value FL Group at 1.4x NAV this is by no means to say that the market will do the same, as markets are currently very favourable. The company’s market cap increased well beyond the value of its underlying assets in a brief period of time in Q1. During this period the company’s market cap rose from around 1.4x NAV to 1.6x NAV, although no changes in its operations were announced.



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What determines an investment company’s market price?

The chief indicator we use to value an investment company is its price-to-book ratio, i.e. the company’s market value divided by its net asset value (P/NAV). The ratio indicates the value investors place on the company’s assets and operations. Generally, the P/NAV ratio for investment companies ranges from 0.8 to 1.5, depending upon the nature of their activities, although the range has been broader in the past. Whether investors are prepared to pay more or less for investment companies than their net asset value appears to depend primarily on factors such as the composition of their portfolio (liquidity, controlling holdings, unlisted assets, how simple it is to duplicate the asset portfolio), ownership and length of ownership of assets, management, leverage, operating cost and tax environment. Each of these is discussed below.

• Tax environment An investment company’s tax environment is very important. If the company itself has to pay tax, this can lead to double taxation of its investors, who need to pay tax on income from their assets in the investment company. To avoid double taxation, investors can elect to hold directly the listed assets which the investment company holds. Investment companies in those countries we generally use for comparison, i.e. the US, UK and Sweden, can avoid most taxes provided they satisfy certain conditions. In most instances these conditions stipulate that the greatest share of the company’s profit must be paid out as dividend. The situation in Iceland is similar, as investment companies can postpone payment of taxes for as long as the company is in operation. This being the case, the tax environment is not a factor of consequence in determining the value of the investment companies we have examined.

• Operating costs High operating costs can justify discounting the value of an investment company. As long as such cost is, however, within normal limits, it should have a negligible effect. Investors have to be prepared to pay for the management of assets which the investment company actually carries out, and they themselves would incur certain administrative costs if they were to invest directly. The cost can also be compared with commissions paid to mutual fund managers: it is not unusual for annual commissions to amount to 1-2%, for the fund to share in profits gained and for the difference in the fund’s bid and ask price to be 1-2%.

• Leverage An investment company’s leverage can substantially affect its performance. While leverage serves to amplify returns, it also increases risk. When the company is successful, and returns on its portfolio exceed interest expense, the ROE gets a considerable boost; on the other hand, high indebtedness increases the negative impact in less fortunate times, when high debt can quickly eat away equity.

Investment companies’ equity ratios are generally 40-100%. If the equity ratio is based on book value, however, this needs to be used cautiously. Investment companies which have extensive unlisted assets can, for instance, actually have a higher equity ratio than their balance sheet indicates, since a precautionary rule is generally followed in updating unlisted assets. Similarly, the equity ratio of companies holding substantial forward contracts can be considerably lower than indicated by their balance sheet, due to its large share of off-balance sheet assets and liabilities. Information is sometimes supplied on forward contracts in the notes to companies’ financial statements.

It should be borne in mind that, since general investors can also leverage their investments to boost returns, they should not be prepared to pay specifically for the additional return leverage provides, except to the extent that an investment company can leverage itself higher than general investors can. It is also natural that investors be



prepared to pay a premium on an investment company’s capital, if that investment company is in a position to borrow on better terms than investors themselves.

• Management team An investments company’s management and other employees can have a decisive impact on the company’s profitability. Investing in an investment company is, to a large extent, betting on the investment expertise of these parties. If they have demonstrated they can outperform the market and investors believe that the management can obtain better returns than they and/or the market could, then investors will naturally be prepared to pay a premium on NAV.

• Ownership Ownership of investment companies varies greatly. The companies on which we have focused are primarily listed companies, as it is difficult to obtain financial details for unlisted companies. Even in listed companies, ownership can differ considerably. In Nordic countries, especially in Sweden, the issuing of both A and B shares is common. A shares confer greater voting rights, often ten times more than others which reflect equal holdings. Free float of A shares is generally practically nil, making it very difficult or even impossible for new investors to acquire a controlling holding. In some cases A shares may be unlisted. This system can be very restrictive, making it only natural for investors to wish to discount NAV under such arrangements. The arrangements prevent new investors, who feel they could operate the company more effectively, from acquiring a controlling holding.

• Asset composition Investment companies have widely differing asset portfolios, especially with regard to the balance between listed and unlisted assets. Some have practically no listed assets while others may have almost only listed assets. Some investment companies primarily take equity stakes in companies, while others provide loan financing; still others may do both. The number of assets in companies’ portfolio, and their respective size, also varies greatly. Factors such as the ratio of unlisted to listed assets, whether the investment company has controlling holdings, and the liquidity of its holdings, determine both its NAV and the premium investors should be prepared to pay, as will be explained below.

• Period of ownership Investment companies can follow very varying practices in managing their assets, but in general they seek investments they regard as under priced. The length of time companies hold assets can vary. Management of some companies feel that the highest profits are made in the first years of the investment, while others feel that profit is spread over a considerably longer period.

The former group generally aim at concluding their investment projects within a certain period, e.g. five years. They use this time to increase the value of their investments, for instance, through restructuring, organic growth or mergers. Management of investment companies are often involved in the operations of companies in which they have holdings or bring in outside experts to implement desired changes. Once they feel they have done what they can improve things, the asset is sold and the capital thereby released is used for new investment.

Management following the latter course regard their investments as long-term assets and have no specific plans to sell the asset within a certain time frame. These companies' behaviour is not unlike that of funds which are not actively managed. This is a common approach for most of the Swedish investment companies we have used as reference. Many of them have assets in their portfolio which they have owned for 10-20 years, or even longer.



Based on the companies we have examined, there is a correlation between the former type, i.e. shorter-term investment companies and investors’ willingness to pay a higher multiple of NAV.

• Portfolio duplication If an investment company’s portfolio consists exclusively of listed assets, investors should not actually be prepared to pay a premium on NAV, since they could simply purchase directly all the assets owned by the investment company and in the same proportions, i.e. duplicate its asset portfolio. Since information on all investment company’s listed assets may not be available, however, e.g. if some assets are under flagging limits, it can be very difficult to produce a complete duplicate. As a result, an investor aiming to duplicate a portfolio may often be one step behind. On the other hand, if individual equities, or the equity market as a whole, takes a sudden plunge, smaller investors can be in a considerably better position than investment companies to dispose of holdings expeditiously.

• Unlisted assets Investing in an investment company which holds primarily unlisted assets can be the only way to acquire holdings in these assets. If investors are of the opinion that unlisted assets will deliver better returns than can be expected elsewhere for the same level of risk, this can induce them to pay a commensurate premium on an investment company’s NAV.

Investment companies which hold substantial unlisted assets often request managers or third parties to revalue these assets at the end of each quarter, adjusting the book value of the assets on their balance sheets accordingly upward or downward. Most companies do follow a cautious approach, however, with the result that in spite of this unlisted assets are not uncommonly undervalued in their accounts. If this is the case, it justifies paying a premium on NAV reflecting the estimated asset undervaluation.

• Controlling holdings Some investment companies seek to acquire a controlling holding in companies in which they invest. This places them in a position to actively encourage the increase in value of that investment, for instance, by restructuring and/or mergers. In some instances investment companies have acquired holdings in companies in order to acquire selected units of these companies for their own unlisted portfolio. Investment companies with a controlling holding in their investments may in such a case be worth a premium on NAV.

• Liquidity of underlying assets It is important to examine how liquid an investment company’s assets are, especially in the case of major assets or holdings. Large holdings in a listed company with low share turnover can be risky, especially if market conditions change. Small investors generally can dispose of their holdings relatively easily while larger investors can be left holding assets for which there is little demand. Selling such assets may require lowering their price considerably. In such a situation an investor is better off owning the holding directly rather than through an investment company. This can therefore make it advisable to discount the NAV of investment companies with major holdings in companies with low share turnover and/or inefficient price formation.



Company History

FL Group has only a brief history as an investment company. In 2004, the holding company Oddaflug, owned by Hannes Smárason and Jón Helgi Guðmundsson, and later fully owned buy Hannes Smárason, acquired a holding of close to 40% in the Icelandic airline Icelandair. The company’s strategy at that time was to have the equivalent of 25% of the group’s estimated turnover in cash and cash equivalents, liquid securities, securities with short duration, un-mortgaged assets and easy access to credit lines. This strategy proved extremely advantageous in the turbulence following the terrorist attacks of 11 September 2001. Icelandair was performing extremely well when Oddaflug acquired its holding and the Oddaflug management decided it could invest these liquid assets more profitably, as turned out to be the case.

Hannes Smárason soon became Chairman of the Board and began to emphasise investments while at the same time expanding Icelandair’s operations. These investments were of two types: first, acquiring companies with related activities offering possible synergies and expansion of Icelandair’s current activities. Secondly, investments based on available expertise, for instance, in the transport sector. In 2004, the company invested ISK 11.8bn in equities, including a stake in the UK low-cost carrier easyJet.

Since 2004, the company’s emphasis on investment has grown steadily and in March 2005 the name Icelandair was changed to FL Group, reflecting this. To begin with the company’s main investments were in airlines, including easyJet and Sterling, and airlines still comprise a major share of its portfolio. At the beginning of 2006, FL Group’s investments grew substantially, adding some breadth to its portfolio, as explained in more detail below. Divestiture of Icelandair and Sterling in the autumn of 2006 left FL Group with almost no direct commercial operations.

• Two foreign offices FL Group currently has two establishments outside of Iceland. An office opened in Copenhagen in April 2006 and its MD is Martin Niclasen. In May 2006 an office, directed by Adam Shaw, was opened in London.

• Brief investment history Like the history of FL Group itself as an investment company, its list of completed investment projects is short. Leading among them are the airlines Icelandair, easyJet and Sterling, and the investment bank Straumur-Burðarás. During this period, FL Group has been highly successful. ROE averaged 48% from 2004 to 2006 and shareholders received a return of 81% annually including dividends. During this same period the ICEX-15 index (now OMXI15) rose by 49% annually on average, adjusted for dividends. The company’s advance has therefore occurred during highly favourable economic conditions. During its short history, the company’s management has not been tested by an adverse economic environment.

• Icelandair As mentioned, FL Group originated in Icelandair. In November 2006, Icelandair was floated on the market, returning FL Group a gain on the sale of this asset of ISK 26bn, well over market analysts’ expectations. Icelandair’s EV at the time was around ISK 43bn and represented around 25% of FL Group’s NAV. The sale added around ISK 35bn in cash to FL Group’s coffers. Three groups of investors acquired a majority of the shares (50.5%) while the remainder was sold to other institutional investors (39.5%), Icelandair employees (6%) and the general public (4%) in an IPO concurrent to listing on the Icelandic market in mid-December 2006. Today FL Group is no longer among the company’s 20 largest shareholders.



Chart 1: Icelandair’s share price since its IPO (ISK)

25.5

26.0

26.5

27.0

27.5

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29.0

13-Dec-2006 13-Jan-2007 13-Feb-2007 13-Mar-2007 13-Apr-2007 13-May-2007

Source: OMX Iceland

•

its holding and by April 2006

he estimated selling price was around nd 70%.

easyJet In late November 2004 FL Group (then Icelandair) announced it had acquired and 8.4% stake in the UK low-cost carrier easyJet for around ISK 6.2bn. It soon increased this stake to 10.1%. In 2005, FL Group added further to this had grown to 16.9%, or just over 25% of its NAV.

On 5 April 2006, FL Group announced that it had sold this holding to various international investors through the intermediation of the international investment bankers JPMorgan and JPMorgan Cazenove. TISK 29bn, and annualised ROI arou

Chart 2: easyJet’s share price (GBp)

0100200300400500600700800

1-Jan-04 1-Jul-04 1-Jan-05 1-Jul-05 1-Jan-06 1-Jul-06 1-Jan-07

FL Group announces 10.1% stake

FL Group announces the sale of its 16.9% stake

FL Group announces a 16.2% stake

FL Group announces 13.0% stake

Source: Bloomberg, OMX Iceland

•

that the company’s operations have been in line with management forecasts in Q1 2007, and that Q2 and Q3 are the most important for Sterling’s performance.

Sterling At the beginning of 2006, FL Group acquired the Nordic low-cost carrier Sterling for ISK 15bn, shortly after the airline had merged with the Danish low-cost airline Maersk. Sterling’s book value at year-end 2006 was ISK 20bn, based on the company’s original purchase price, additional capital injected into its operations, translation difference and the company’s 9M performance in 2006. At year-end 2006 the company was sold to Northern Travel Holding for ISK 20bn, or its book value. Although FL Group owns 35% of Northern Travel Holding, it has disclosed the value of this stake. FL Group has only stated



• Straumur-Burðarás In June 2006¸ FL Group acquired a 24.2% stake in Straumur-Burðarás from Magnús Kristinsson, Kristinn Björnsson and connected parties, in a deal valued at around ISK 47bn (ISK 18.7 p. share). The purchase was a consequence of discord among Straumur’s directors earlier in the year, which eventually resulted in the change of the bank’s CEO.

Part of the purchase price, or around ISK 12bn was paid with shares in Kaupthing Bank, while the remaining ISK 35bn was paid with an increase in FL Group’s share capital delivered to the sellers in payment. This was equivalent to a 30% increase in FL Group’s capital. These shares were valued at ISK 18.52 per share in the transaction, while FL’s market share price was ISK 16.60, and the share capital increase therefore sold at a 12% premium.

Straumur and other investors subsequently acquired FL Group’s 22.6% holding in December for ISK 42.1bn, leaving FL Group with 4% of the bank’s shares. The purchase price of ISK 18.0 per share was almost 3% above market price at the time. Payment was made in cash (ISK 28.3bn), shares in Finnair (ISK 10.2bn) and other domestic equities (ISK 3.6bn). We estimate FL Group’s loss on this holding in Straumur-Burðarás to be around ISK 1.8bn. If the opportunity cost of making payment with Kaupthing’s shares, which rose by around 13% during this period, is included the loss amounts to some ISK 3.4bn. On the other hand, when FL Group increased its share capital to acquire this stake in Straumur, the shares were valued at a 12% premium and the cost of issuance was nominal. If this is taken into consideration this stake was sold at a profit. Furthermore, FL managed to issue new share capital at a time when the domestic equity market was anything but inviting due to negative media coverage of the Icelandic economy. Chart 3: Straumur-Burðarás’s share price (ISK)

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1-Jan-06 1-Apr-06 1-Jul-06 1-Oct-06 1-Jan-07 1-Apr-07

FL Group sells a 22.6% stake

FL Group buys a 24.2% stake




FL Group’s current portfolio

FL Group’s balance sheet has grown enormously in recent years. At year-end 2004, the company’s total assets were close to ISK 47bn and its equity ISK 15bn. Today we estimate that FL Group’s total on-balance-sheet assets amount to around ISK 288bn, increasing five times in two years’ time and more taking dividend payments into account. If off-balance-sheet items are included, we estimate that the company’s total assets amount to ISK 406bn. During this period the company’s share capital has three times been increased. A PO held at year-end 2005 added ISK 44bn market value to the company’s share capital, early-2006 shares of ISK 4bn market value were issued as a partial payment for Sterling and in mid-2006 additional shares of ISK 35bn market value were issued as partial payment for a stake of just over 24% in Straumur-Burðarás investment bank. At the end of Q1, FL Group’s equity was ISK 142bn, net of an ISK 15bn dividend announced in the quarter.

Chart 4: Balance sheet growth (ISKbn)

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2002 2003 2004 2005 2006 2007 Q1

Shareholder equity Total assets (exc. off-balance sheet)

Total assets (inc. off-balance sheet)

Source: FL Group

• Greatest share of portfolio is listed assets Most of FL Group’s portfolio is listed equities. Around 80% of the market value of FL Group’s listed assets are holdings which exceed the flagging limits, making it actually possible to duplicate this portion of its portfolio. If investors can acquire the underlying assets directly rather than holding a share in them through FL Group, there would seem to be little reason to pay additionally to hold these assets through FL Group.

Chart 5: Breakdown of total assets

Glitnir banki (32%)

Commerzbank (15%)

AMR Corporation (9%)

Finnair (5%)

Royal Unibrew (3%)

Bang & Olufsen (3%)

Other listed securities (18%)

Unlisted securities (7%)

Other assets (8%)

Source: Landsbanki, FL Group, Bloomberg



FL Group’s trade book amounts to around ISK 50bn ± 20bn at any given time, but it is very difficult to duplicated as only a limited part of the holdings are above flagging limits. The domestic investments might be partially duplicated, as FL Group’s holding is sometimes sufficiently large to place it among a company’s 20 largest shareholders, a list of which is publicly accessible.

• Full duplication impossible Although it may be possible to duplicate a major portion of FL Group’s portfolio, various limitations should be borne in mind. Until FL Group’s holding has reached the minimum flagging level, it cannot be duplicated. Investment companies such as FL Group acquire shares in companies they expect to deliver good returns, often over a lengthy period. Months may pass from the time an investment company begins to acquire a holding until its holding has reached the flagging limit and the acquisition is made public. If FL Group is among the first to notice an under priced investment, it could realise a tidy profit during this period which investors trying to duplicate its actions will miss. This has in fact been the case in recent years, and is one of the reasons investors are ready to pay a premium on investment companies’ NAV. Justifiably so, but this is not the full story.

Equity prices have risen strongly in recent years, with the result that FL Group’s capability of divesting large holdings in a bear market has only partly been tested with the sale of the easyJet stake. As relatively few, large holdings dominate its portfolio, this must be viewed as a risk which would be considerably less for smaller investors endeavouring to duplicate.



FL Group has been a very successful performer

FL Group’s performance in the past few years has been very good, as the table below shows. The company’s operations have undergone major changes within a brief period of time, which must be borne in mind in any comparison of profitability. What is today a purely investment company was to a great extent an active operations company at year-end 2004. During the period 2003-2006, ROE was between 13-55%, which is more than acceptable, and the company has maintained an equity ratio of 25-56% during the same period. Annualised ROE in Q1 2007 was over 40%.

While FL Group has been highly successful, it must be borne in mind that the economic climate and financial markets have also been very favourable, as witnessed by the OMXI15 total return. Since the beginning of 2003, shareholders’ return on FL Group has been 500%, while the total return on the ICEX-15 index has been 410% during the same period. Table 1. FL Group’s ROE compared to indices, total returns FL Group FL Group OMXI 15 S&P500 FTSE100 ROE Total return Total return Total return Total return 2003 13% 34% 58% 29% 19% 2004 38% 62% 62% 11% 12% 2005 55% 100% 67% 5% 21% 2006 43% 39% 19% 16% 15% Source: Landsbanki, Bloomberg

• Young but determined management team Although FL Group’s management team is young, it is not inexperienced. The company has managed to attract highly capable employees but in view of its expanding scope, it will clearly need more of them.

Chart 6: FL Group’s organisational chart

Source: FL Group

Hannes Smárason became CEO of FL Group in October 2005 after serving as Chairman of the company’s Board of Directors from March 2004. Prior to joining FL Group, he was Executive Vice-president and Senior Business Officer of deCode Genetics Inc. Hannes Smárason worked as consultant with McKinsey & Co. in Boston from 1992 until December 1996. He holds a BSc in Mechanical Engineering and Management from MIT and MBA from MIT’s Sloan School of Management.

Jón Sigurðsson became FL Group’s Deputy CEO in December 2006 after joining the company as Managing Director in September 2005. Prior to that he worked in Corporate Finance at Landsbanki Íslands hf. and Búnaðarbanki Íslands (now Kaupthing Bank). He holds a BSc in Business Administration from Reykjavík University.

Sveinbjörn Indriðason, FL Group’s CFO, has been responsible for finance and administration since 3 May 2005. He joined the Risk Management Department of FL Group’s predecessor Flugleiðir in 1999 and served as its director from 2000. Prior to that he worked for the Icelandic Investment Bank (FBA) which later became part of Glitnir.



Adam Shaw, Managing Director of UK operations, previously headed UK M&A for Kaupthing Bank and prior to that was a director of M&A at Enskilda Securities. His experience in the Nordic Region fits in well with FL Group’s current activities, while his UK expertise enables FL Group to capitalise on the significant number of opportunities in this market.

Martin Niclasen, Managing Director of Nordic Operations, has worked extensively in corporate finance and M&A activity in the Nordic region. He previously headed the investment banking activities of FIH Erhversbank and Kaupthing Bank in Denmark. Educated at Copenhagen Business School, he worked with KPMG Corporate Finance and Carnegie before joining Kaupthing Bank and FIH.

Benedikt Gíslason, became head of FL Group’s Capital Markets division in May 2007 after serving as MD of Proprietary Trading at Straumur-Burðarás since 2001. Prior to that he had worked for Glitnir, in various capacities, including head of foreign equity brokering. He holds a cand. scient. degree in engineering from the University of Iceland.

Örvar Kærnested has been Managing Director of Private Equity and Strategic Investments since December 2006. Previously he worked as deputy head of Investment Banking for Kaupthing Bank hf. He received his BSc in Business Administration from the University of Iceland in 1999.

Þorsteinn Örn Guðmundsson was appointed Managing Director of Operation Management in February 2006 after serving as President and CEO of FL Travel Group following FL Group’s fundamental organisational changes on 19 October 2005. He originally joined FL Group in September 2004 as Director of Corporate Strategy and was appointed Senior VP of Corporate Strategy & Business Development on 10 August 2005. Previously he worked as management consultant at McKinsey & Co. in Scandinavia and Singapore between 1999 and 2004. Þorsteinn Guðmundsson graduated with an MSc degree in Civil Engineering from the Technical University of Denmark in 1999.

Concurrent to its announcement of the hiring of Benedikt Gíslason this spring, FL Group also announced organisational changes, including the departure of Albert Jónsson, MD of Proprietary Trading since October 2005.

• FL Group’s investment policy FL Group’s main focus is on private equity, strategic investments and proprietary trading, in both securities and currency. Unlike traditional private equity firms, FL Group does not manage funds and therefore is subject to fewer restrictions on its investments and the time frame of projects. The company makes strategic investments, generally holding 30-49% of equity but does not rule out owning 100%. Enterprise value of individual investments is generally not less than EUR 200m. This enables it to use its influence to make changes and increase value, either through representation on the board or management contact.

FL Group does not restrict itself to investments in specific industries but attempts to put to good advantage its own group-wide experience as well as the expertise of co-investors and management of individual companies. The company’s primary geographic focus has been northern Europe, especially the Nordic countries and the UK, but it does not rule out investment opportunities elsewhere.

Although unlisted assets currently comprise only around 7% of FL Group’s gross balance sheet, we expect this share to increase in coming years. The change could come quickly and in various ways. The Group’s current unlisted assets, in particular Refresco and Geysir Green Energy, can be expected to grow rapidly in coming years. We also expect FL Group to invest in additional unlisted assets, or acquire listed



assets which it intends to delist. Clearly if FL Group’s management aims at further expansion, the company will need additional employees. Currently they number only 38, 11 of them located abroad, where most of the company’s growth can be expected.

• Dividend policy FL Group aims to pay out 30-40% of each year’s profit as dividends. Of its 2006 profit of close to ISK 45bn, the company decided to pay out one-third or ISK 15bn, in dividends.

• Listed domestic assets. Two of FL Group’s largest domestic assets are a holding of almost 32% in Glitnir and an estimated 4% holding in Straumur-Burðarás. Its holding in Glitnir comprises almost one-third of its entire balance sheet, including forward contracts, and close to 92% of NAV. Other domestic listed equity holdings total some ISK 23.4bn in value, or 16.5% of NAV Table 2: FL Group’s stake in Glitnir Market value ISKbn 130.4 % of NAV 92.0% % of total assets 32.1% % of Glitnir shares 32.0% Source: Landsbanki, FL Group

Table 3: FL Group’s stake in Straumur-Burðarás* Market value ISKbn 8.4 % of NAV 5.9% % of total assets 2.1% % of Straumur-Burðarás shares 4.0% Source: Landsbanki, FL Group *Holdings based on last public announcement

Chart 7: Glitnir’s share price (ISK)

Chart 8: Straumur-Burðarás’s share price (ISK)

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On 2 April, it was announced that Kjarrhólmi, a company in which FL Group owns 45%, had acquired a 37.57% stake in TM Insurance. The other owners of Kjarrhólmi are Sund ehf. (45%), Imon ehf. (5%) and Sólstafir (5%). This makes Kjarrhólmi TM’s second-largest shareholder after Guðbjörg Matthíasdóttir, who holds 45% in the company through her holding companies. Table 4: FL Group’s stake in TM Insurance Market value ISKbn 7.0 % of NAV 4.9% % of total assets 1.7% % of TM’s shares 16.9% Source: Landsbanki



Table 5: FL Group’s other listed domestic holdings Market value ISKbn 23.4 % of NAV 16.5% % of total assets 5.7% % of domestic shares n/a Source: Landsbanki

• Listed foreign assets

We estimate the market value of FL Group’s listed foreign assets being close to ISK 172bn, or around 42% of its gross balance sheet and 120% of NAV. At year-end 2005, listed foreign assets amounted to over ISK 29bn, of which the Group’s holding in easyJet comprised over 90%. The foreign portfolio has grown rapidly and become more diversified, although banks and airlines dominate.

Commerzbank FL Group’s second-largest current holding, and largest overseas holding, is a 2.99% stake in Commerzbank, announced the same day as FL Group published its Q1 results, on 27 April. We assume the shares were purchased during the period from January to April this year. The bank’s share price is currently 17% above its Q1 average, taking into account a EUR 0,75 dividend. Table 6: FL Group’s stake in Commerzbank Market value ISKbn 59.6 % of NAV 42.0% % of total assets 14.7% % of Commerzbank shares 3.0% Source: Landsbanki

Since acquiring Eurohypo, Europe's largest financer of real-estate and public-sector projects, Commerzbank has been Germany's second-largest bank and one of the leading banks in Europe. It has a consolidated balance-sheet total of EUR 608bn, around 36,000 employees (8,725 of them active outside Germany), and over 8 million customers worldwide.The bank has some 800 branches in Germany plus offices in another 40 countries. It returned a record profit in 2006 of EUR 1.6bn.

Chart 9: Commerzbank’s share price (EUR)

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FL Group holds a 2.43% stake


Source: Bloomberg, OMX Iceland Commerzbank paid a €0.75 dividend on 17 May 2007

Dirk Becker, Landsbanki Kepler’s Commerzbank analyst, raised his target price for Commerzbank following its Q1 results this year from EUR 34.5 to EUR 43.5. He indicated that the increase was due to higher earnings estimates and a more positive view of long-term profitability. Dirk Becker also suggests that Commerzbank emphasises what investors are currently looking for: consolidation, capital market exposure and German recovery. The attack on the Dutch banking giant ABN Amro has sparked speculation that Commerzbank could be a similar target. Dirck Becker’s break-up valuation for Commerzbank is as high as EUR44.



Analysts’ assessments of Commerzbank vary, but appear to show increased optimism. The average target price of 11 analysts during the period 1 Jan.-30 March 2007 was EUR 35.3 whereas from 1 April to 25 May this year their average target price was EUR 37.4. Table 7: Target price for Commerzbank (EUR) From 1.4.2007 to 25.5.2007 From 12.1.2007 to 20.3.2007 Min 31.0 Min 32.4 Max 46.0 Max 40.0 Average 37.4 Average 35.3 No. of analysts 27 No. of analysts 11 Source: Bloomberg

AMR FL Group’s second-largest overseas holding is an 8.53% stake in AMR, making it the company’s largest single shareholder. The 5.98% stake in the company, which it announced it had acquired on 26 December 2006, had increased to 8.63% by 22 February 2007. Rumours of possible US airline mergers at the beginning of this year have not yet materialised. The airline industry is undergoing rapid and wide-reaching changes and now no further consolidation is expected until the next crisis hits the US industry. In Q1 AMR increased its share capital by close to 6%, which diluted FL Group’s holding slightly and at the end of Q1 it held 8.53% in the company. Table 8. FL Group’s stake in AMR Market value ISKbn 34.7 % of NAV 24.5% % of total assets 8.5% % of AMR shares 8.5% Source: Landsbanki

AMR is the parent company of American Airlines, the world’s largest passenger carrier, with 840 aircraft providing scheduled services between 172 cities in North America, the Caribbean, Latin America, Europe and the Pacific. American Airlines also operates the world’s largest regional airline, American Eagle, which has connecting flights between American hubs and other key cities. Its 293 aircraft fly over 1,400 flights a day between 132 cities in the US, Canada and the Caribbean.

Chart 10: AMR’s share price (USD)

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AMR’s 2006 income was USD 22,563m, increasing 8.9% YoY. It reported a profit of USD 231m for the year, following a loss of USD 857m in 2005. In Q1 this year, AMR’s performance was roughly as forecasted by market analysts. Its Q1 income



was USD 5,427m and profit USD 81m. This was the first time since 2000 that AMR has returned a profit in Q1.

In 2003 the company was close to bankruptcy, as the terrorist attacks on 11 September 2001 had an enormous impact on many airlines. Although the company has been viewed with considerable optimism in recent years, as its performance has improved, it faces considerable uncertainty due to rising oil prices and flight delays, which could reduce travel volume. Both uncertainties are a cause for concern, as they tend to slow overall growth in the sector and cut into margins.

This is clearly reflected in analysts’ views of AMR, although they do vary. The average target price of 15 valuations published by Bloomberg following AMR’s Q1 results is USD 36.8 per share. Analysts’ valuations of AMR have slid markedly in recent months as the average share price of seven published between mid-December to the announcement of Q1 results was USD 47.4 (a 22% drop). Table 9: Target price development of AMR (USD) 18.4.2007 – 25.5.2007 12.12.2006 - 17.4.2007 Min 25.0 Min 33.5 Max 49.0 Max 64.0 Average 36.8 Average 47.4 No. of analysts 15 No. of analysts 7 Source: Bloomberg

Finnair FL Group’s third-largest overseas holding is a stake of just over 23.3% in the Finnish air carrier Finnair. At the beginning of 2006 FL Group announced its acquisition of a 6.1% holding in Finnair, which it had increased to 10% by 1 April. When the Group sold its 22.6% holding in Straumur-Burðarás in mid-December 2006, it acquired additional Finnair shares as partial payment, pushing up its holding to 22.3%. Table 10: FL Group’s stake in Finnair Market value ISKbn 21.8 % of NAV 15.4% % of total assets 5.4% % of Finnair shares 23.3% Source: Landsbanki

Finnair operates domestic flights to 15 destinations, plus flights to 50 foreign destinations, in addition to charter services to 60 destinations. The company has landing rights in Russia en route to its Asian destinations, which makes the route from Helsinki very economical. Finnair’s Asian services have been growing strongly; passengers carried rose by 40% from March 2006 to March 2007 and further growth is expected in this market. Finnair’s operations have concurrently been very successful; its income grew by 6% last year and seat utilisation improved. Rising fuel prices, restructuring cost and difficulties in technical services resulted in a loss of EUR 13m in 2006, following a profit of EUR 61.4m in 2005.



Chart 11: Finnair’s share price (EUR)

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As the Finnish state is Finnair’s largest shareholder, with a controlling holding of 55.8%, FL Group’s influence would seem to be very limited, despite holding almost a quarter of the company’s shares. At Finnair’s latest AGM, the Group was determined to have a representative elected to the board, and proposed to have Hannes Smárason represent it. This the Finnish state refused to agree to, and a compromise was reached whereby Sigurður Helgason, Icelandair’s former CEO, took a seat on Finnair’s board.

In our opinion, the rejection of Hannes Smárason by the Finnish state must have been a disappointment for FL Group and an indication of scant, if any, desire for changes in the company’s operations. While Sigurður Helgason’s appointment as director is some consolation, the position of the majority of board members appears clear. The question then arises as to what FL Group can do with its holding if it cannot be more active in the company’s direction, which we assume was clearly its intent. The company’s strategy does not include holding large stakes without influence. In our estimation, what future possibilities exist is far from clear after the Finnish state has shown its intentions and appears determined to keep its controlling interest.

Since November 2006 analysts have published seven valuations of Finnair on Bloomberg’s open pages, with target prices ranging from EUR 12-16, and averaging EUR 13.8. Table 11. Target prices for Finnair (EUR) From 8.11.2007 to 8.5.2007 Min 12.0 Max 16.0 Average 13.8 No. of analysts 7 Source: Bloomberg

Royal Unibrew FL Group’s fourth-largest overseas holding is a stake of almost one-quarter in the Danish beverage manufacturer Royal Unibrew. In February 2006, the Group announced the acquisition of a 10.70% holding, which it increased to 16.35% in March that year and to 20.47% at the end of June 2006. It currently holds 24.38% in the company.

Table 12: FL Group’s stake in Royal Unibrew Market value ISKbn 12.8 % of NAV 9.0% % of total assets 3.2% % of Royal Unibrew shares 24.4% Source: Landsbanki



Although FL Group currently owns just over 24% of Royal Unibrew, its voting rights are limited to 10%, according to the company’s Articles of Association. While the provisions of the Articles cannot prevent a takeover, they do block de facto control by a minority. Partly as a result of this provision, no representative of FL Group was elected a director at Royal Unibrew’s AGM on 30 April this year.

The second-largest beverage manufacturer in Scandinavia, Royal Unibrew manufactures, markets and distributes beverages, including both soft drinks and beer, to markets principally in Europe, the US and Asia. Besides manufacturing its own brands, it is a licensed bottler for other producers including PepsiCo and Heineken. The company has four plants in Denmark, one in Lithuania, two in Latvia and three in Poland, as well as sales offices and distributors in a number of countries.

Chart 12: Royal Unibrew’s share price (DKK)

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Royal Unibrew’s operations have been very successful in recent years, with both good income growth and profits. The company’s income in 2006 was DKK 3.439m, an increase of 8% YoY and an increase of 31% from 2003. In 2006 its after-tax profit was DKK 234m, which is an increase of 14% YoY and of 54% over 2003. The company reported a loss of DKK 42.9m in Q1 this year, but usually operates at a loss in Q1 and this year’s figure was in line with management forecasts. Its Q1 turnover of DKK 1,298m represents a YoY increase of 9%.

Data vendors have only published three valuations, and their target prices range from DKK 600-725 per share. All of these are from 2006, the most recent dated 16 November. Table 13: Analysts’ target prices for Royal Unibrew (DKK) From 13.1.2006 to 16.11.2006 Min 600.0 Max 725.0 Average 653.3 No. of analysts 3 Source: Bloomberg

Bang & Olufsen FL Group holds 10.4% in the Danish electronics manufacturer Bang & Olufsen. It increased its original acquisition of 8.2% in February 2006 to 10.1% less than a month later. Table 14: FL Group’s stake in Bang & Olufsen Market value ISKbn 10.6 % of NAV 7.5% % of total assets 2.6% % of Bang & Olufsen shares 10.4% Source: Landsbanki

B&O’s income for the first 9M of its operating year (1 June to 31 May) was DKK 3,287m, a YoY increase of 5%. Although its after-tax profit was DKK 285m, a YoY



increase of 12%, this fell short of analysts’ expectations and the company’s share price fell by 4.4% after the announcement of results. The company’s share price development reflects the major turnaround in its operations in recent years.

Chart 13: Bang & Olufsen’s share price (DKK)

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Analysts have published very varied assessments of B&O. Target share prices of the seven valuations available on Bloomberg this year range from DKK 615-900, with an average of DKK 757. Table 15: Target prices for Bang & Olufsen (DKK) From 5.1.2007 to 19.4.2006 Min 615.0 Max 900.0 Average 757.1 No. of analysts 7 Source: Bloomberg

Aktiv Kapital FL Group holds a 13.3% stake in the Norwegian company Aktiv Kapital, which specialises in acquiring default credit portfolios, as well as in debt collection and administrative and financial services. The company’s share price has decreased by 15% since FL acquired a 9% holding in Aktiv Kapital at the beginning of March 2006 taking 2005 dividend into account.

Table 16: FL Group’s stake in Aktiv Kapital Market value ISKbn 5.8 % of NAV 4.1% % of total assets 1.4% % of Aktiv Kapital shares 13.3% Source: Landsbanki

After substantial increases in income and profit each year since 2000, the company’s profit dropped YoY in 2005 and it reported a loss in 2006. This loss can be attributed to a considerable extent to high write-offs of its portfolio in 2006, in Finland, the UK and Germany, for instance following a change to IFRS accounting. Its operations have been turned around and the company reported a profit in Q1 2007.



Chart 14: Aktiv Kapital’s share price (NOK)

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Analysts differ considerably as to the company’s value, and have suggested target prices ranging from NOK 76-113. Some analysts have pointed out that a comparison of price multiples indicates Aktiv Kapital is a rather more attractive operation than its Swedish peer Intrum Justitia. Table 17: Target prices for Aktiv Kapital (NOK) From 8.2.2007 to 30.4.2006 Min 76.0 Max 113.0 Average 96.6 No. of analysts 5 Source: Bloomberg

• Share prices of leading assets YtD

As previously mentioned, FL Group’s main assets are in listed companies. At the halfway point in Q1, its three largest holdings, AMR, Glitnir and Finnair, comprised around half of its balance sheet. A comparison of their share prices with that of FL Group itself is revealing. The acquisition of Commerzbank, currently FL Group’s second-largest individual holding, was not announced until 27 April.

Chart 15: Share price of FL Group and Chart 16: Share price of FL Group and principal assets in ISK principal assets in local currencies

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FL Group

The chart shows clearly how FL Group’s share price has definitely outperformed that of its main assets, as reflected in its P/NAV ratio, which has increased from around 1.4 at year-end 2006 to over 1.6 in only a short time, as the following chart shows. In

AM R (25% o f NAV) FL Group AM R (25% of NAV)Glitnir banki (92% of NAV) Finnair (15% o f NAV) Glitnir banki (92% o f NAV) Finnair (15% o f NAV)

Source: Bloomberg, OMX Iceland *Share price adjusted for dividend **Share price of foreign assets in local currency

Bloomberg, OMX Iceland *Share price adjusted for dividend **Share price of foreign assets converted to ISK



ISK terms, the company’s market cap increased by around ISK 48bn in Q1, while its revalued equity rose by ISK 15bn.

Chart 17: FL Group’s P/NAV

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• Main unlisted assets Unlisted assets are not a major component of FL Group’s balance sheet. Their book value at end of Q1 was only around ISK 28bn, taking into account a ISK 14bn loan to North Travel Holding (NTH). This amounts to roughly 7% of the gross balance sheet and 20% of NAV. These unlisted assets include Refresco, House of Fraser, NTH and Geysir Green Energy. FL has not disclosed the book value of individual assets. The Group’s management are actively involved in the operations of its unlisted companies, thereby ensuring that their strategy is followed. FL Group conservatism in its fair value adjustments on its unlisted assets joined with the relative short history of FL Group’s unlisted assets we have not seen any large fair value adjustments in FL Group’s financials. Although the company provides very limited financial information on these companies, we estimate that they represent hidden asset value.

Real estate projects On 22 May this year, FL Group announced a USD 50m investment in four real estate developments in the US together with Bayrock Group, a US-based international real estate investor and developer. The projects include two 5-star hotels in partnership with Donald Trump, one in Soho Manhattan and the other at Fort Lauderdale beach. The third is a 5-star hotel and residential condominium development in Phoenix, and the fourth is the development of 13 acres of land located along the east river in Whitestone, Queens where Bayrock Group plans to build luxury homes and town houses. In addition to these projects FL Group has also formed a 50:50 joint venture undertaking with Bayrock Group for investments in worldwide real estate development projects.

Refresco FL Group holds a 49% stake in the European manufacturer of private label fruit juice and soft drinks Refresco. FL Group and other investors bought Refresco from the investment company 3i Group in May 2006. The enterprise value of the deal amounts to EUR 461m. Employing 1,900 people in eight countries, the company is the largest manufacturer of private label fruit juices and soft drinks in Europe. Refresco's product portfolio is comprised of juices, still drinks, carbonated soft drinks, ice tea and sport drinks.

Here as in its other unlisted companies, FL Group’s management are actively involved in operations and have encourage further rapid growth. This year the company has acquired four others, Sun Beverages Company, which operates in France, the Netherlands and Belgium, Kentpol, which has operations in Poland, UK



manufacturer Histogram and Nuits Saint-Georges Production SAS, a French fruit drinks company based in the Dijon region in France. The company is expected to conclude further takeovers this year. The run rate for Refresco’s and its new acquisitions, was EUR1.1bn and its EBITDA around EUR 0.1bn.

Based on Refresco’s EBITDA in 2005, the purchase price multiple paid by FL Group was just over 7x EBITDA. The company has grown strongly following FL Group’s takeover, plus EV/EBITDA multiples in similar transactions have been rising and range, according to FL Group’s management, from 8-10 recently. As a result, we feel that Refresco represents a considerable hidden asset.

Northern Travel Holding Northen Travel Holding is a newly established leisure company in which FL Group holds a 35% share. Other shareholders are the Icelandic investment companies Fons and Sund with 44% and 22% respectively. Northern Travel acquired Sterling from FL Group in late 2006 for ISK 20bn and also holds 100% of Iceland Express, 51% of the UK-based charter airline Astraeus, 29.26% of the listed Swedish travel agent Ticket and 100% of the Danish travel agent Hekla Travel.

Geysir Green Energy FL Group holds 35% stake in the newly founded Geysir Green Energy, an investment company with the objective of investing in sustainable energy. Geysir Green Energy intends to seek leading market opportunities in harnessing of geothermal energy, invest in the development and construction of geothermal plants, acquire plants currently owned by power utilities and participate in the privatisation of energy companies internationally. Current company employees possess a wide variety of expertise in this field.

Geysir Green Energy submitted the winning bid for the Icelandic’s state’s 15.2% holding in Sudurnes Regional Heating. Geysir Green Energy’s bid of ISK 7,6bn was 62% above the second- and third-highest bids of the four groups which made offers. In our estimation this newly formed company has great potential and its investment in Sudurnes Regional Heating fits in well with its strategy. We do feel, however, that the price paid was very high. As the EBITDA of Sudurnes Regional Heating 2006 was close to ISK 3.2bn, the EV/EBITDA ratio for this acquisition by Geysir Green was around 20.

• Foreign currency balance Approximately half of FL Group’s total assets are in foreign currency. We estimate its foreign assets to be slightly more the currency liabilities, if off-balance-sheet items are included. Currency exposure by FL Group should be regarded as positions taking, but FL Group’s management have been reluctant to disclose the company’s foreign currency position. They have readily expressed their opinion, however, that the ISK exchange rate is too high and for much of 2006 had substantial foreign currency positions. At the investors’ meeting following Q1 results, management maintained that the ISK was still too strong, although there were no indications of a near-term weakening.

• FL Group’s liabilities Total interest-bearing debt on FL Group’s balance sheet amounted to ISK 129bn at the end of Q1, increasing from ISK 105bn at year-end 2006. Much of this increase can certainly be attributed to FL Group’s acquisition of holdings in Commerzbank and AMR in the interim. In H2 2006, FL Group announced two new loan agreements. The former was a loan of EUR 250m to finance FL Group’s holding in Glitnir, the terms of which were not revealed. UniCredit Group was lead arranger for this



syndicated facility, with the participation of Bayerische Hypo- und Vereinsbank AG. The 3Y contract provides for repayment of principal upon maturity. The latter funding agreement was for a maximum of EUR 400m concluded with Barclays Capital. Again, no terms were disclosed.

FL Group’s maturity profile is somewhat patchy, with a variety of short- and long-term investments. It is natural enough to finance the company’s trading portfolio, with assets amounting to around ISK 50bn ± ISK 20bn at any time, using short-term financing. Major investments, where FL is a strategic investor, such as in Glitnir, longer term financing is called for. The chart shows clearly how the company’s debt has increased from previous years.

Chart 18: FL Group’s maturity profile

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• Equity and risk FL Group’s total assets according to its Q1 statements amounted to ISK 303bn and its equity ratio was 46.8%. If off-balance-sheet forward contracts are included, however, the company’s equity ratio is only around 34%. In view of the company’s current balance sheet, this must be considered highly aggressive. Its equity ratio is low, its portfolio not very diversified and its four largest holdings comprise around 60% of its balance sheet.

Due to its high leverage, FL Group’s asset portfolio would not have to drop greatly to eat up a sizeable chunk of its equity. Admittedly, in some instances the risk involved in each equity asset is only the capital invested in that particular asset, and not FL Group’s entire equity. Nonetheless, the company must be considered risk-seeking and subject to considerable fluctuations in performance and, in turn, company value.



Investment companies comparison

A comparison of the pricing of Icelandic investment companies, including FL Group, with investment companies in Sweden, the UK and the US can be instructive. The charts below show the correlation between the companies’ P/NAV and leverage, on the one hand, and P/NAV and the ratio of unlisted assets, on the other. The trend line is only based on the values of the non-Icelandic companies, as our aim was to compare the valuation of the Icelandic investment companies to foreign peers.

As the first chart shows, although the pricing of FL Group based on its NAV is not far above that of comparison companies, it does have both the highest P/NAV ratio and the highest leverage.

Chart 19: Correlation between P/NAV ratio and equity ratio

Exista

Allied Capital

3i

Investor

Industrivarden

Kinnevik

RatosCaledonia

CandoverFL Group

Atorka Group

0.6x

0.8x

1.0x

1.2x

1.4x

1.6x

30% 40% 50% 60% 70% 80% 90% 100%

Equity Ratio

P/N

AV

Source: Landsbanki, Bloomberg, the companies, Carnegie The trend line is only based on the values of the non-Icelandic investment companies.

On the second chart, FL Group is clearly in a class of its own, with Exista also well above the trend line. The line shows clearly the strong correlation between the proportion of unlisted assets and the premium on NAV paid for the company’s shares. The comparison companies with a majority of listed assets in their portfolios have P/NAV ratios below 1, with the exception of FL Group and Exista, where FL Group’s ratio is 1.6. It should be kept in mind, however, that the companies with P/NAV ratios less than 0.9 have very passive investment strategies, unlike FL Group. In our estimation this does justify a higher ratio for FL Group. Since the difference is so large, however, it indicates that FL Group is priced very high.

Chart 20: Correlation between P/NAV and listed assets as a ratio of total assets

ExistaAmerican Capital

Allied Capital

3i

InvestorIndustrivarden

Kinnevik

RatosCaledonia

Candover

FL Group

Atorka Group

0.6x

0.8x

1.0x

1.2x

1.4x

1.6x

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Listed assets / Total assets

P/N

AV

Source: Landsbanki, Bloomberg, the companies, Carnegie The trend line is only based on the values of the non-Icelandic investment companies.



• Investment companies’ ROE The ROE of the investment companies we use for comparison has fluctuated considerably over the past five years, as witnessed by the table below. While they have generally been successful in the past two years, in a favourable economic environment, in 2002-2003, when the economic climate was less attractive and equity markets flagging, many of these companies reported losses. The annual returns for most of the companies have been 10-18% over the past five years, their average return was 14.0% and the lowest 5.2%, reported by 3i Group. The company with the highest return, 21.2%, was Candover Investments, the only one which derives a major portion of its profit from fund management: during the past five years an average of 23% of its profit has originated from fund management. While FL Group’s ROE has averaged 40.8% during this same period, the company has been completely transformed, from a predominantly airline operation in 2002 to an exclusively investment-focused operation by year-end 2006. Table 18: ROE of FL Group and comparison investment companies abroad Company Country 2002 2003 2004 2005 2006 Average American Capital US 2.9% 11.3% 18.0% 15.9% 24.6% 14.5% Allied Capital US 15.8% 11.2% 12.8% 38.1% 9.0% 17.2% 3i Group UK -21.8% -27.6% 17.1% 14.4% 22.1% 5.2% Caledonia Investments UK -5.5% -24.8% 43.1% 18.3% 35.7% 13.4% Candover Investments* UK 16.0% 26.5% 25.8% 21.6% 16.0% 21.2% Kinnevik Swe -37.5% 37.8% -7.2% 18.9% 40.0% 10.4% Industrivärden Swe 20.8% -5.3% 21.2% 29.4% 19.9% 17.2% Ratos Swe 4.3% 8.2% 25.4% 21.4% 23.2% 16.5% Investor Swe -2.0% 0.0% 10.0% 39.0% 19.0% 13.2% CapMan Fin 5.9% 2.3% 11.1% 14.8% 23.4% 11.5% Average -0.1% 4.0% 17.7% 23.2% 23.3% 14.0% FL Group Ice 55.0% 13.0% 38.0% 55.0% 43.0% 40.8% Indicies total return S&P 500 US -22.0% 28.4% 10.7% 4.8% 15.6% 7.5% FTSE100 UK -21.5% 17.7% 11.3% 20.8% 14.6% 8.6% OMXI15 Ice 16.7% 56.4% 58.9% 64.7% 15.8% 42.5% Source: Landsbanki, the companies, Bloomberg, OMX Iceland *About 23% of Candover Investments’ net income has been derived from fund management in the past five years.

The correlation between investment companies’ ROE and their pricing, as reflected in their P/NAV ratio, is very low, regardless of whether average ROE during the past five years or only for 2006 is used. Past returns naturally give scant indication of future profitability.

• Private equity comparison Assessing private equity is in many ways similar to assessing regular publicly traded investment companies, since many of the latter have extensive private equity holdings. Private equity firms also invest both in unlisted assets and companies listed on public exchanges which they then take private. Private equity investments can include, for example, leveraged buyouts, venture capital, growth capital, angel investing, mezzanine capital and others.

Private equity investment has risen enormously in recent years after a decade or so of low activity following the boom of the 1980s. Private equity funds typically control management of the companies in which they invest, often bringing in new management teams to focus on adding value to the company. As regulation of unlisted companies is considerably less onerous than that of listed ones, there is, for instance, more scope to reward managers in unlisted or de-listed companies.

Returns of private equity have been high in the past three years, as the figure below shows. However, there is a striking difference between small and large funds. While the latter have returned over 16% on average annually over the past three years, ROE of the smallest funds during that same period was less than 10%. By comparison, return on the S&P500 index was close to 12%.



Chart 21: Private equity average return Oct ‘03 - Sep ‘06

0% 5% 10% 15% 20%

Small funds

Medium funds

Large funds

Mega funds

S&P 500

Source: Venture Economics; Thomson Datastream Small funds $0-$250m Medium funds $250-$500m Large funds $500-$1,000m Mega funds $1,000m+



Co

nstr

uctin

g t

he

Fore

cast Forecast

The eleven factors examined in the previous section form the backbone of our assessment of investment companies such as FL Group. In the ensuing discussion, we summarise how each of them affects FL Group and our valuation of the company.

• Tax environment (neutral/negative) The tax environment in Iceland is relatively favourable to investment companies. The general corporate tax rate of 18% applies to investment companies as well. Investment companies, however, can defer payment of income tax if they reinvest, with the result that investment companies can, in fact, postpone payment of income tax as long as they continue operation. FL Group therefore pays negligible taxes, and there is no cause to assume otherwise than the company will continue to operate in its current form, although the risk does exist.

• Operating cost (neutral/negative) Fairly high operating cost can be expected at FL Group, since the company is very active in managing its assets. Q1 cost amounted to ISK 0.9bn, or an annualised equivalent of 2.5% of NAV and 0.9% of the balance sheet total. We expect the company’s expense to be a similar ratio of NAV in coming years. This cost is in fact similar to that of various mutual funds, if we include their annual commission, possible profit share and difference in their bid and ask price.

Investors attempting to duplicate FL Group’s portfolio would incur considerable expense in doing so, which could fairly safely be assumed to be not much lower than that of FL Group, although this would naturally depend upon the size of the portfolio. Duplicating the portfolio of an investment company active on the market would require considerable time and effort. If the intention is only to duplicate the company’s largest holdings, then the cost would be lower, while on the other hand the danger of missing the boat (and potential profits) increases.

• Leverage (positive) FL Group is currently a highly leveraged investment company, with the highest debt ratio of any we cover, although most of its assets are relatively liquid. The company has profited from this high leverage, which has ensured them a high ROE in times of favourable equity markets. While high leverage does increase risk substantially, if the assets are liquid this can be managed, and this FL Group’s management has done. FL’s available equity ratio is currently around 34%, which we consider to be close to a minimum. As FL Group’s available equity ratio partly reflects the current economic climate, we would expect it to be higher, since economic conditions are highly favourable at the moment. Available equity also depends upon asset composition and can be expected to be higher for companies with a larger share of unlisted assets.

In our estimation the company’s leverage strategy justifies a higher P/NAV, to the extent it can make use of higher leverage than most investors. We also assume FL Group can obtain better interest terms than general investors due to its size, which is another factor justifying a higher P/NAV.

• Management (positive) Despite their somewhat junior age overall, we have considerable confidence in FL Group’s management team. As is generally the case with investment companies, FL Group’s most valuable asset is this management team. As the company’s performance in recent years testifies, they have managed to create high value within a relatively brief period. We are confident that they will continue to sniff out good market opportunities and produce returns exceeding market performance. The management team is the factor which has the greatest impact on our valuation of the company and justification of a premium on NAV.



• Ownership (neutral) All shares in FL Group confer the same voting rights, unlike the situation in many Nordic investment companies. Its ownership base is, however, rather narrow as the company’s three largest shareholders own close to 60% of its shares and the 10 largest shareholders hold a total of 80%.

• Asset categories (neutral) FL Group’s portfolio currently consists primarily of listed companies. As its unlisted assets comprise only 7% of the company’s balance sheet total, any hidden value in the form of unlisted assets is only a very limited proportion of its balance sheet.

• Length of investment (neutral/positive) FL group aims at owning sufficiently large holdings in companies to influence their operations. The company has stated that it does not fix a general time frame for individual investments but rather invests where management feel they can add value to companies by changing their strategy or taking other actions and eventually selling the asset. This releases capital to be invested elsewhere. In our estimation this is a profitable strategy which increases shareholder value.

• Portfolio duplication (neutral/negative) The largest share of FL’s portfolio is listed equities, making it possible to duplicate most of its assets as they are at the moment. If an investment company’s portfolio can be completely duplicated, there is scant reason to pay a premium on the NAV of these underlying assets. While in FL Group’s case a major portion of the portfolio could be duplicated, this would be far from a perfect copy, since the company’s portfolio is constantly changing and it also has large holdings under the flagging limits.

• Unlisted assets (neutral) We expect the proportion of unlisted assets in FL Group’s portfolio to grow substantially in coming years, which will clearly reduce the possibility for duplication. As the situation now stands, hidden assets in the form of unlisted equities are minimal in relation to the company’s balance sheet total. Unlisted assets therefore currently justify only a negligible premium on NAV for FL Group.

• Controlling holdings (positive) FL Group aims at acquiring a controlling holding in the companies in which it invests, in order to influence their operations and thereby achieve an increase in their value would not necessarily be otherwise achieved. FL Group’s disposal of Icelandair is an example of such a successful investment. Investors are often prepared to pay more than market value for controlling holdings. This is value which investors attempting to duplicate FL’s portfolio would miss, as share prices not infrequently drop after major holdings have changed hands, as was the case with FL Group’s sale of its holding in easyJet. In our estimation, this is one of the factors which enables FL Group to achieve returns above the market average and justifies paying a premium on NAV.

•

up’s portfolio, owning the underlying assets directly, would be in a better position.

Liquidity of underlying assets (neutral/negative) Asset liquidity depends upon supply and demand. As pointed out above, however, FL Group’s strategy is to acquire controlling holdings in making investments. Currently, FL Group’s largest holdings are all in companies with high share turnover. Despite this, the Group is exposed to considerable liquidity risk. Should any sudden changes occur in these companies’ operating environment which negatively impact their operations – and thereby their value – this could make it difficult for major investors to dispose of their holdings without pushing share prices further downward. In such circumstances, the investor who duplicates FL Gro



Valuation

Given the assumptions above, the company’s current portfolio and its objective of increasing the relative share of its unlisted assets, we are confident that FL Group can achieve a return surpassing the market average and better than that of any party attempting to duplicate its portfolio. Our view is supported by the very good results achieved by the company’s management in recent years, although success in the past is no guarantee of success in the future.

Investors interested in investing in FL Group actually have two options, since most of the company’s assets are publicly listed. Either they can acquire FL Group’s shares, which are currently valued at around 1.6x NAV or purchase the underlying assets directly. While the latter option is less expensive, it does have various flaws, which were mentioned previously. We also expect the share of unlisted assets to increase, making duplication of the portfolio more difficult.

Val

uatio

n

Our valuation is based on a comparison of FL Group’s expected return compared with a baseline case, using the market average and returns of investors who might wish to duplicate FL’s portfolio. Table 19: Valuation criteria FL Group Base case

First 5 years Beyond year 5 First 5 years Beyond year 5 15.0% 12.75% 12.0% 12.0% Return on portfolio 9.0% 8.0% 9.5% 8.5% Interest terms

13.9% 12.1% 12.1% 11.0% Discount rate 70.0% 60.0% 60.0% 50.0% Leverage 0.9% 0.9% 0.9% 0.9% Operating cost*

14.3% 14.2% ROE 27.2% 18.4% Source: Landsbanki *As a percentage of total assets

Based on FL Group’s portfolio and the estimated hidden value in its unlisted assets, we assume that FL Group will manage a return of 3% above the average annually in the next five years, in addition to which the company can leverage itself around 10% more than the baseline case. We also assume that FL Group can obtain financing on terms 50 bp lower than would be available to general investors due to its size. From the sixth year onwards we assume FL Group’s ROE will be 0.75% above average annually. This translates to an ROE of just over 27% annually for the next five years and just over 18% annually after that. Although our expectations are therefore high, they are in line with the performance of the best of those investment companies we have used as reference. Table 20: Valuation drivers Factors justifying premium on NAV Increase Impact Above-avg. return next 5 yrs. 3.0% 0.20 Above-avg. return from 6th year on 0.75% 0.13 Extra leverage 10.0% 0.03 Better interest terms 0.5% 0.04 Total premium on NAV 0.40 Source: Landsbanki

• Recommend reduce and underweight Based on these assumptions, we value FL Group at 1.4x NAV or ISK 198bn (ISK 25.5 p. share) with a 12 month target price of ISK 28.9 per share. Although we value FL Group at 1.4x NAV this is by no means to say that the market will do the same, as markets are currently very favourable. We do point out, however, that investing in an investment company such as FL Group is riskier than many other investments on the market. We recommend underweighting FL Group’s shares in a well-diversified portfolios reflecting the Icelandic market.



Sensitivity analysis

Sen

sitiv

ity A

naly

sis

The valuation is highly sensitive to any changes in the assumptions of above-average return on the portfolio. The table below shows the effect of varying returns above average over the next five years as well as returns after that on the NAV multiple used in our valuation. It shows, for instance, that given our assumption of returns 3% above market average for the next five years, and 0.75% above average after that, gives a valuation of 1.4x NAV for FL Group. Based on our assumptions we expect an average ROE of 27.2% annually for the next five years and of 18.4% after that.

The table shows that based on FL Group’s current market price of around 1.6x NAV, the company’s returns must be 5% above average for the next five years and 1% after that, or the equivalent of an average ROE of 34% for the first five years and 19% annually after that. Table 21: Sensitivity of the valuation for above-average returns

Return % above average next 5 years 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% ROE

-1.25% 0.95x 1.04x 1.13x 1.22x 1.31x 1.39x 1.48x 13.4% -0.75% 0.99x 1.08x 1.17x 1.26x 1.35x 1.44x 1.53x 14.6% -0.25% 1.04x 1.13x 1.22x 1.31x 1.40x 1.49x 1.58x 15.9% 0.25% 1.09x 1.18x 1.26x 1.35x 1.44x 1.53x 1.62x 17.1% 0.75% 1.13x 1.22x 1.31x 1.40x 1.49x 1.58x 1.67x 18.4% 1.25% 1.18x 1.27x 1.36x 1.45x 1.54x 1.62x 1.71x 19.6% 1.75% 1.22x 1.31x 1.40x 1.49x 1.58x 1.67x 1.76x 20.9% 2.25% 1.27x 1.36x 1.45x 1.54x 1.63x 1.72x 1.81x 22.1% 2.75% 1.32x 1.41x 1.49x 1.58x 1.67x 1.76x 1.85x 23.4% 3.25% 1.36x 1.45x 1.54x 1.63x 1.72x 1.81x 1.90x 24.6% R

etu

rn %

ab

ove

ave

rag

e 6th

yea

r o

nw

ard

s

ROE 17.2% 20.5% 23.9% 30.5% 33.9% 37.2% 27.2% Source: Landsbanki



Dis

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Disclosure Checklist - Potential Conflict of Interests Stock ISIN Disclosure (See Below) Currency PriceAtorka Group IS0000000669 1, 3, 5, 9, 10 ISK 8.01Commerzbank DE0008032004 nothing to disclose EUR 36.44Easyjet GB0001641991 nothing to disclose GBP 556.50Exista IS0000013175 3, 10 ISKFL Group IS0000000289 1, 3, 5, 10 ISK 29.35Glitnir Bank IS0000000131 3 ISK 27.50Icelandair Group IS0000013464 1, 3, 10 ISK 28.55Kaupthing Bank IS0000001469 3 ISK 1,106.00Straumur-Burdarás IS0000000644 1, 3, 5 ISK 21.20Tryggingamiðstöðin IS0000000586 3, 10 ISK 39.40

33.65

Source: Factset closing prices of 28/05/2007

1. Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki) and/or its affiliate(s) hold or own or control 1% or more of the issued share capital of this company. 2. The issuer holds or owns or controls 1 % or more of the issued share capital of Kepler Equities or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki). 3. Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki) and/or its affiliate(s) are or may be regularly doing proprietary trading in equity securities of this company. 4. Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki)and/or its affiliate(s) have been lead manager or co-lead manager in a public offering of the issuer’s financial instruments during the last twelve months. 5. Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki) and/or its affiliate(s) are a market maker in the issuer’s financial instruments. 6. Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki) and/or its affiliate(s) are a liquidity provider for the issuer to provide liquidity in such instruments. 7. Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki) and/or its affiliate(s) act as a corporate broker or a sponsor or a sponsor specialist (in accordance with the local regulations) to this company. 8. Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki) and/or its affiliate(s) and the issuer have agreed that Kepler Equities and/or its affiliate(s) will produce and disseminate investment research on the said issuer as a service to the issuer. 9. Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki) and/or its affiliate(s) have received compensation from this company for the provision of investment banking or financial advisory services within the previous twelve months. 10. Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki) and/or its affiliate(s) may expect to receive or intend to seek compensation for investment banking services from this company in the next three months. 11. The author of or an individual who assisted in the preparation of this report (or a member of his/her household), or a person who although not involved in the preparation of the report had or could reasonably be expected to have access to the substance of the report prior to its dissemination has a direct ownership position in securities issued by this company. 12. An employee of Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki) and/or its affiliate(s) serve on the board of directors of this company.

Rating Ratio Kepler Equities Q4 2006 Rating Ratio Merrion Stockbrokers Q4 2006 Rating breakdown A B Rating breakdown A B

Buy 60.9% 0.0% Buy 45.0% 0.0%Hold 9.5% 0.0% Hold 35.0% 0.0%Reduce 26.9% 0.0% Reduce 15.0% 0.0%Not Rated/Under Review/Accept Offer 2.7% 0.0% Not Rated/Under Review/Accept Offer 5.0% 0.0%Total 100.0% 0.0% Total 100.0% 0.0%Source: Kepler Equities A: % of all research recommendations B: % of issuers to which Investment Banking Services are supplied

Source: Merrion Stockbrokers Limited A: % of all research recommendations B: % of issuers to which Investment Banking Services are supplied

Rating Ratio Landsbanki Q4 2006 Rating Ratio Teather & Greenwood Q4 2006 Rating breakdown A B Rating breakdown A B

Buy 54.3% 6.5% Buy 60.0% 84.0%Hold 13.9% 4.8% Hold 27.0% 12.0%Reduce 14.9% 0.0% Reduce 11.0% 0.0%Not Rated/Under Review/Accept Offer 16.9% 88.7% Not Rated/Under Review/Accept Offer 2.0% 4.%Total 100.0% 100.0% Total 100.0% 100.0%

Source: Landsbanki A: % of all research recommendations B: % of issuers to which Investment Banking Services are supplied

Source: Teather & Greenwood Limited A: % of all research recommendations B: % of issuers to which Investment Banking Services are supplied

From May 9th 2006, Kepler Equities, Teather & Greenwood, Merrion and Landsbanki's rating system consists of three recommendations: Buy, Hold and Reduce. For a Buy rating, the minimum expected upside is 10% over 12 months. For a Hold rating the expected upside is below 10%. A Reduce rating is applied when there is expected downside on the stock. Target prices are set on all stocks under coverage, based on a 12-month view. Equity ratings and valuations are issued in absolute terms, not relative to any given benchmark. Kepler Equities, Teather & Greenwood, Merrion and Landsbanki’s strategy teams’ sector allocations rate each sector Overweight, Underweight or Neutral.

Job titles: The functional job title of the person/s responsible for the recommendations contained in this report is equity research analyst unless otherwise stated on the cover

Stock prices: Prices are taken as of the previous day’s close (to the date of this report) on the home market unless otherwise stated.

Regulators Location Regulator Abbreviation Kepler Equities France Autorité des Marchés Financiers AMFKepler Equities España Comision Nacional del Mercado de Valores CNMVKepler Equities Germany Bundesanstalt für Finanzdienstleistungsaufsicht BaFinKepler Equities Italia Commissione Nazionale per le Società e la Borsa CONSOBKepler Equities Nederland Autoriteit Financiële Markten AFMKepler Equities Switzerland Swiss Federal Banking Commission SFBCTeather and Greenwood The Financial Services Authority FSAMerrion Stockbrokers Limited The Irish Financial Services Regulatory Authority IFSRALandsbanki The Financial Supervisory Authority FMESource: Kepler Equities, Teather & Greenwood Limited, Merrion Stockbrokers Limited and Landsbanki

Teather & Greenwood Limited is authorised and regulated by the Financial Services Authority, and entered in its Register under Firm Reference Number 186677. Teather & Greenwood Limited is a member of the London Stock Exchange.

Merrion Stockbrokers Limited is authorised by the Irish Financial Services Regulatory Authority under the Stock Exchange Act, 1995. Merrion Stockbrokers Limited is a member firm of the Irish and London Stock Exchanges.

For further information relating to research recommendation and conflict of interest management please refer to www.kepler-equities.com, www.teathers.com, www.merrion-capital.com, www.landsbanki.is . We have discussed only the facts in the report with the company.


http://www.kepler-equities.com/

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http://www.lansbanki.is/



The information contained in this publication was obtained from various sources believed to be reliable, but has not been independently verified by Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki).Kepler Equities (or Teather & Greenwood Limited or Merrion Stockbrokers Limited or Landsbanki) does not warrant the completeness or accuracy of such information and does not accept any liability with respect to the accuracy or completeness of such information, except to the extent required by applicable law.

Leg

al In

form

atio

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This publication is a brief summary and does not purport to contain all available information on the subjects covered. Further information is available on request. This report may not be reproduced for further publication unless the source is quoted.

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