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Important: All disclosure information can be found on page 39 of this document.
Industrials Company Report
Norway 22 January 2018
Torghatten
Buy
Fasten seat belt while seated A wise man once said: “70% of future financial performance is explained by historical
financial performance”. And, we don’t disagree. Indeed, our long-term investment case in
TORG is based on three simple arguments. First, TORG has evidenced a solid track record
of profitable growth for more than a decade. Second, the company has been able to
improve its position in both the Air-, Ferry- and Bus segment and is currently positioned as
the leading (top 1-3) player in all segments. Third, we find valuation attractive at 4.5x and
9.2x current 2018e EV/EBITDA and P/E, respectively, and hence, we see solid upside
potential in underlying values. Thus, based on these arguments coupled with a 2017e-
2018e EPS, which is upped 6% and 9%, respectively, we reiterate our Buy recommendation
but increase our target price from NOK88 to NOK115. Our tp correspond to 6x and 5.5x
2018e and 2019e EV/EBITDA, respectively and 2018e P/E of 12.3x and 2019e P/E of 10x.
Evidenced profitable growth for more than a decade Since the ‘90s, competition in the public transportation sector intensified with entry
of public tenders and Torghatten has grown rapidly at a 20% CAGR to the ~NOK9.4bn
turnover transportation giant it is today and averaged 18% ROE at the same time.
Improved its position in all key segments Torghatten has won two significant ferry contracts from its rivals with start-up in 2019,
has moved from #3 position to #2 position in the bus segment and Widerøe won all 13
public service obligations contracts for ’19-’26 at a revenue potential of ~NOK5bn.
We see solid upside in underlying values Our updated SOTP arrive at a fair price per TORG share of +NOK115, up from NOK88
in our latest update. The deviation is driven by 1) overall positive EBITDA and EPS
estimate revisions (NOK8), 2) multiple expansion in both the bus and airline business
segment (NOK17) and 3) NOK2 per share increase in TORG’s ~11% stake in NTS ASA.
Our valuation implies a 2018E EV/EBITDA of 6x, EV/EBIT 11x, and P/E of 12x.
Key Data
Share price (NOK) 85.75
Target price (NOK) 115.00
Bloomberg TORG NO
Market capitalisation (NOKm) 4,124m
Enterprise value (NOKm) 6,642m
Shares outstanding (m) 48m
Shares fully diluted (m) 48m
Average daily volume (000s) 50.0
Free float (%) 47.1
Share Price (12m)
1m 6m 12m
Price n/a n/a n/a
Rel. Index n/a n/a n/a
Share Price Performance
74
76
78
80
82
84
86
88
24/11/16 24/2/17 24/5/17 24/8/17TORG NO
Company Overview
Year end: Dec 2015 2016 2017E 2018E 2019E 2020ETotal Revenues (m) 8,574 9,386 9,896 10,279 11,015 11,262EBITDA (m) 1,195 1,345 1,325 1,543 1,705 1,803EBIT (m) 548 733 666 844 958 997Net profit (m) 304 347 371 476 552 594DPS (NOK) 4.2 1.3 1.9 2.6 3.2 3.5
Balance SheetEquity excl. minority (m) 1,558 1,954 2,225 2,606 3,039 3,672GIBD (m) 3,580 3,319 2,959 3,168 2,673 2,261NIBD (m) 2,567 2,151 1,744 1,610 989 129WC 295 367 346 360 386 394
Margins & ProfitabilityEBITDA margin (%) 13.9% 14.3% 13.4% 15.0% 15.5% 16.0%EBIT margin (%) 6.4% 7.8% 6.7% 8.2% 8.7% 8.9%Profit margin (%) 3.5% 3.7% 3.8% 4.6% 5.0% 5.3%ROE rep. (%) 19.6% 19.9% 16.3% 19.6% 19.7% 18.2%ROCE (%) 9.2% 12.0% 10.9% 13.2% 14.4% 14.8%Sales Growth (%) 4.7% 9.5% 5.4% 3.9% 7.2% 2.2%EBIT growth (%) 18.5% 33.8% -9.1% 26.7% 13.5% 4.1%
ValuationEV/Sales (x) 1.04 0.95 0.90 0.86 0.81 0.79EV/EBITDA (x) 7.4 6.6 6.7 5.8 5.2 4.9EV/EBIT (x) 16.2 12.1 13.3 10.5 9.3 8.9P/E (x) 18.2 15.9 14.9 11.6 10.0 9.3P/B (x) 3.5 2.8 2.5 2.1 1.8 1.5
Analysts
Lars-Daniel Westby +47 24 14 74 16 [email protected]
Petter Kongslie +47 24 14 74 96 [email protected]
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 2
Company Report
Torghatten
Investment Summary .................................................................................................................................................. 3
Company Overview ..................................................................................................................................................... 9
TORG Sea Transportation .......................................................................................................................................... 10
Bastø Fosen .................................................................................................................................................... 10
FosenNamsos Sjø ............................................................................................................................................ 10
Torghatten Trafikkselskap ............................................................................................................................... 11
Torghatten Nord ............................................................................................................................................. 11
Contract vs ticket revenues ............................................................................................................................. 11
The Norwegian ferry market ..................................................................................................................................... 12
130 connections in total, served by ~220 ferries ............................................................................................. 12
Consolidated market ....................................................................................................................................... 13
Costs follow inflation ...................................................................................................................................... 14
Contractual structure… ................................................................................................................................... 15
…coupled with the green shift… ...................................................................................................................... 15
…drives capex in the ferry industry ................................................................................................................. 15
Ferries will remain critical to Norwegian infrastructure .................................................................................. 16
TORG sea estimates ........................................................................................................................................ 17
TORG sea valuation ......................................................................................................................................... 18
TORG Air Transportation ........................................................................................................................................... 19
Widerøe .......................................................................................................................................................... 19
No losses since 1999 in Widerøe ..................................................................................................................... 20
Majority of fleet dedicated to Norwegian short-runway network................................................................... 21
Fleet and SCAT-1 key to Widerøe's competitiveness....................................................................................... 21
Lifetime extension program helps delay full Q100 phase-out to 2023 ............................................................ 22
The Norwegian Airline Market .................................................................................................................................. 23
Norway airline traffic highly correlated to GDP ............................................................................................... 23
~50% of journeys are business-related, of which half are oil-related .............................................................. 23
PMI points to a boost in production ............................................................................................................... 24
Higher ticket price, somewhat offset by increased oil price ............................................................................ 24
We also see a trend towards longer season .................................................................................................... 25
Annual passenger growth on routes expected at 1.1% through 2020 ............................................................. 25
TORG air estimates ......................................................................................................................................... 26
TORG air valuation .......................................................................................................................................... 26
TORG Bus Transport .................................................................................................................................................. 28
Norgesbuss ..................................................................................................................................................... 28
Trønderbilene ................................................................................................................................................. 28
Sørlandsruta ................................................................................................................................................... 28
Torghatten Buss .............................................................................................................................................. 28
The Norwegian Bus Market ....................................................................................................................................... 29
Population growth only explains half of the volume growth… ........................................................................ 29
…but, passenger volume growth expected at 1-3% going forward ................................................................. 29
Increasingly competitive industry spurring heavy consolidation ..................................................................... 30
Torghatten has become the second largest bus operator, up from #3 in 2014 ............................................... 30
Over 50% of current contracts could mature over the next three years ......................................................... 31
TORG contract overview ................................................................................................................................. 31
TORG bus estimates ........................................................................................................................................ 32
TORG Bus Valuation ........................................................................................................................................ 33
Estimate revisions ..................................................................................................................................................... 34
TORG P&L ....................................................................................................................................................... 34
TORG Balance sheet ........................................................................................................................................ 35
TORG cash flow ............................................................................................................................................... 36
Valuation ................................................................................................................................................................... 37
Target price upped from NOK88 to NOK115 ................................................................................................... 37
Valuation support in ROE vs. P/B approach .................................................................................................... 38
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 3
Company Report
Torghatten
Investment Summary Torghatten has a track record of strong revenue and earnings growth. Since 2006, the
company’s top line has quintupled while its EBITDA has quadrupled. This impressive
performance stands in stark contrast with the markets to which Torghatten is exposed,
which are relatively stable in nature with single-digit growth rates. Acquisitions help explain
this mismatch. While we see limited potential for further consolidation, with an exception
within the bus segment where among other Boreal is for sale, Torghatten still has rosy
organic growth prospects in our view. Torghatten has won two significant ferry contracts
from its rivals with start-up in 2019, has the second least percentage of current production
maturing in the bus segment and Widerøe won all 13 public service obligations (PBO)
contracts in Nord-Trøndelag, Nordland and Finnmark. Going forward, we expect more
contracting opportunities will arise and we believe TORG is competitively positioned to win
new business. In terms of profitability, our take is that margins and return on capital will
continue to increase in 2018 and beyond on the back of favourable developments within
cost in general, number of HSE incidents within ferry operations and ticket prices in the air
business unit. As a result, we revise up our target price from NOK88 to NOK115 driven by 1)
overall positive EBITDA and EPS estimate revisions, 2) multiple expansion in both the bus
and airline business segment and 3) the fact that TORG’s ~11% stake in NTS ASA has also
increased by NOK2 per share since our latest report. Hence, we still see significant upside
potential to the current share price of NOK87 and reiterate our Buy recommendation.
Indeed, our valuation implies a 2018E EV/EBITDA of 6x, EV/EBIT 11.1x, and P/E of 12.3x. The
corresponding 2019e figures are EV/EBITDA of 5.5x, EV/EBIT 9.5x, and P/E of 10x.
Impressive track record with accretive growth In the early 1990s, TORG's revenues barely reached NOK100m. As competition in the public
transportation sector intensified with the entry of public tenders, however, Torghatten has
grown rapidly at a 20% CAGR to the ~NOK9.4bn turnover transportation giant it is today.
With a strong foundation in profitable operations, the company has made a number of
acquisitions, building leading market positions in all transport segments apart from rail.
Despite this expansion, Torghatten has impressively made no losses in this time period and
EBITDA-margins have consistently exceeded 12.5% in the last decade.
Torghatten ASA: Revenue and EBITDA-margin Exhibit 1.
Source: Torghatten ASA, Brønnøysund, SpareBank 1 Markets.
Indeed, TORG's track record is no coincidence. We argue its decade-long experience and
organisational structure makes it able to choose and win profitable public tenders. The
whole organisation is heavily decentralised, allowing subsidiaries to take advantage of their
strong local awareness and recognition to quickly respond to unforeseen circumstances and
jump on attractive business opportunities. Interference from the six-person strong top
management team is kept at a minimum.
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0.0
2.0
4.0
6.0
8.0
10.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
EBIT
DA
mar
gin
NO
Kb
n
Revenues EBITDA EBITDA-margin
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 4
Company Report
Torghatten
TORG owns 66% of Widerøe, which have delivered no losses since 1999 and… Over the past 15 years, Widerøe's revenues have more than doubled, growing by an average
6% per year. With the share of passenger revenues growing from 66% in 2004 to 84% in
2016, the company has become less dependent on state purchases over the last years. In
2016, state purchases amounted to ~NOK0.7bn of revenues totalling NOK4.5bn. EBITDA-
margins have averaged 11% since 2000, bottoming at 6% during the financial crisis and
peaking at 17% in 2011. Additionally, Widerøe has not had any losses in over 15 years,
averaging a net profit margin of 2.8%. Moreover, Widerøe won all 13 public service
obligations (PBO) contracts in Nord-Trøndelag, Nordland and Finnmark, competing against
Danish Air Transport AS and FlyViking. The PBO contracts will run from 2019-2026 with 5x1
year options to extend and represent potential revenues of NOK5bn (including options).
Widerøe: Financial performance Exhibit 2.
Source: SB1M, Widerøe, Brønnøysundregistrene
..its fleet and SCAT-1 is key and will ensure competitive advantage going forward Historically, Widerøe has been the only airline to submit bids on airports with runways
shorter than 1,199m and when the seat requirement has been at least 30 per flight. To serve
these airports, special aircraft like Q100/200 are needed and Widerøe is the European
airline with the largest fleet of such aircraft. Indeed, according to Avinor, only Dash-8
Q100/200, Fairchild Dornier 228, Twin Otter (Dash-6) and Dash-7 aircraft are able to
sufficiently operate in this network. Considering that 28 of Norway's 52 airports are shorter
than 1,199m, Widerøe has a significant advantage. Although runway extensions are possible
for all but nine of these airports, it is only commercially viable for four of them, according
to Avinor and combined they represented only 1-2% of all passengers on domestic flights.
Moreover, with its fleet approaching end-of-life and few other options in terms of
newbuilds exist; Widerøe launched a lifetime extension programme in 2009 as the only
operator in the world licensed to do so. Aimed initially at 16 Q100 aircraft, they prolonged
the lifetime from 80,000 flight cycles to 120,000, enabling Widerøe to secure short-runway
aircraft until the end of 2023. In addition, Widerøe will try to phase out at least one Q100
per year as they reach the new end-of-life limit, swapping to less intensely used second-
hand aircraft and they hope to maintain the current fleet until ~2030. Furthermore,
Widerøe is also one of the only bidding airlines with SCAT-1 security systems installed in its
aircraft, which has favoured Widerøe in earlier tenders.
Norway: Airport overview Exhibit 3. Norway: Airport breakdown by runway length Exhibit 4.
¨
Source: Avinor, SpareBank 1 Markets Source: The Norwegian National Transport Plan, Avinor, SpareBank 1 Markets
0 %
2 %
4 %
6 %
8 %
10 %
12 %
14 %
16 %
18 %
20 %
0
500
1 000
1 500
2 000
2 500
3 000
3 500
4 000
4 500
5 000
NO
Km
Revenues (LHS) EBITDA (LHS) EBITDA margin (RHS) Net profit margin (RHS)
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 5
Company Report
Torghatten
Torghatten has become the second largest bus operator, up from #3 in 2014… At the end of 2014/early 2015, TORG was the third largest bus operator with 13.1% market
share. However, from the latest report released from Kollektivtrafikkforeningen (November
2017), TORG had improved its position to number two with 20.3% market share of the total
route production on public contracts in Norway today. Moreover, TORG is the only operator
present in all regions, which position the company to take part in further consolidation.
Indeed, its strongest positions are in West (#2, 30%) and Oslo/Akershus (#2, 25%). The
company has also has meaningful positions in Central Norway (#2, 20%), South (#3, 18%),
East (#3, 13%), and lastly but not least in the North (#4, 10%).
Norway: Market Share by Bus Operator and County Exhibit 5. Norway: Market Share public route production Exhibit 6.
Source: Kollektivtrafikkforeningen (Nov. 2017), SpareBank 1 Markets Source: Kollektivtrafikkforeningen (as of Nov. 2017), SpareBank 1 Markets
…and has a relatively low share of contracts expiring next three years Excluding options, 53% of all Norwegian route production on contract today will mature by
end-2020. If all options are called, the same figure is just below 40%. Therefore, several new
tender opportunities could surface for bus operators in the coming years. However, the
share of contracts maturing by 2020 is in the low end for Torghatten, both including and
excluding options. Therefore, instead of defending contracts already in production, TORG
can focus its resources on competing for new contracts. Indeed, as evidenced in exhibit 8
below, the situation is worse for almost all the other operators. Unibuss and Tide risk north
of 50% of all production volume expiring in the next three years, whereas Nettbuss and
Nobina risk just south of 50%.
Norway: Maturity schedule of total route production on contract Exhibit 7. Norway: Contract maturity by end-2020, by operator Exhibit 8.
Source: Kollektivtrafikkforeningen (Nov, 17), SpareBank 1 Markets Source: Kollektivtrafikkforeningen (Nov, 17), SpareBank 1 Markets
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Oslo/akerhus Østlandet Sørlandet Vestlandet MidtNorge NordNorge
Andre Boreal Nettbuss Nobina Tide Torghatten Unibuss
27.5%
20.3%
14.5%
12.3%
11.1%
7.5%
6.8%
Nettbuss
Torghatten
Tide
Unibuss
Boreal
Andre
Nobina
0%
5%
10%
15%
20%
25%
30%
35%
0
10
20
30
40
50
60
70
80
90
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
% o
f cu
rre
nt
pro
du
ctio
n
mill
ion
ro
ute
kilo
me
ters
Contract Expiry (without options) Contract Expiry (with options)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Unibuss Tide Nettbuss Nobina Torghatten Boreal
% o
f cu
rre
nt
pro
du
ctio
n m
atu
rin
g
Without Options With Options
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 6
Company Report
Torghatten
TORG is one of the largest ferry companies in a consolidated market… Over the last 10 years, there has been an interesting development in this market, with an
aggressive consolidation and today, the ferry market is indeed characterized as a
consolidated market. More precisely, TORG, Nordled, Boreal Transport and Fjord1 are
actually the main and only players in this market. Moreover, TORG transported 7.2 million
passenger car equivalents in 2016 on 38 ferry connections. With a 33% market share in
number of connections and 21% in terms of number of PCE transported, TORG is one of the
largest ferry companies in Norway together with Fjord1.
TORG vs Peers: (PCE and number of connections) Exhibit 9.
Source: Statens vegvesen, Ferjedatabanken, Oslo Economics, SB1M
…and has improved its position considerably over the last couple of years Although, TORG does not have the largest number of PCE transported in the market in 2016,
the company will from 2019 operate three out of the ten largest ferry routes in Norway.
Thus, it is our understanding that adjusted for the contract wins over the last years (not yet
in operation), the “pro-forma” market share has increased to above 21%. Indeed, as shown
in exhibit 10 and 11 below, TORG only operate one of the ten largest ferry connections in
Norway, namely Moss – Horten (Bastø Fosen) as of 2017. However, with the contract win
of both Sandvikvåg – Halhjem and Flakk – Rørvik, which has start-up 01.01.19, TORG is
rigged for significant EBITDA growth going forward. Moreover, as 1) TORG has a relatively
old fleet (capacity adjusted) and 2) lag peers on number of HSE accidents, the company is
still to benefit from a higher EBITDA margin and return on capital. In addition, with an
increasing share of revenues steaming from gross contracts, our take is that the renewal of
the fleet requires TORG to extract higher margins on new contracts to offset increased
capex on new vessels. Indeed, according to management, they expect EBITDA margins of
35-40% on new contracts. However, all else equal, the latter alone does not affect ROCE.
10 largest ferry connections: 2016 Exhibit 10. 10 largest ferry connections: 2019e Exhibit 11.
Source: TORG, Fjord1, Statens Vegvesen, Ferjedatabanken, Oslo Economics Sparebank 1 Markets Source: TORG, Fjord1, Statens Vegvesen, Ferjedatabanken, Oslo Economics Sparebank 1 Markets
Fjord149 %
Norled27 %
Torghatten21 %
Boreal 2 % Other 1 %
Market share (PCE 2016)
35m PCE
Fjord124 %
Norled23 %
Torghatten33 %
Boreal12 %
Other8 %
Market share (connections 2017)
121connections
# Connection Company Comment PCE 2016* Avg. per day
1 Moss - Horten Torghatten 3,475,843 9,497 2 Mortavika - Årsvågen Fjord1 2,831,842 7,737 3 Sandvikvåg - Halhjem Fjord1 1,854,016 5,066 4 Molde - Vestnes Fjord1 1,558,869 4,259 5 Fodnes - Mannheller Fjord1 1,223,280 3,342 6 Hareid - Sulesund Nordled 1,218,901 3,330 7 Sykkylven - Magerholm Fjord1 1,170,630 3,198 8 Festøya - Solavågen Fjord1 1,168,776 3,193 9 Oppedal - Lavik Nordled 1,095,517 2,993
10 Flakk - Rørvik Fjord1 1,019,811 2,786 Total top 10 16,617,485 45,401
2017# Connection Company Comment PCE 2016* Avg. per day
1 Moss - Horten Torghatten End 2026 3,475,843 9,497 2 Mortavika - Årsvågen Fjord1 Start up 1.1.19 2,831,842 7,737 3 Sandvikvåg - Halhjem Torghatten Start up 1.1.19 1,854,016 5,066 4 Molde - Vestnes Fjord1 Tender 2017/2018 1,558,869 4,259 5 Fodnes - Mannheller Fjord1 End 2025 1,223,280 3,342 6 Hareid - Sulesund Fjord1 Start up 1.1.19 1,218,901 3,330 7 Sykkylven - Magerholm Fjord1 Start up 1.1.20 1,170,630 3,198 8 Festøya - Solavågen Fjord1 Start up 1.1.20 1,168,776 3,193 9 Oppedal - Lavik Nordled End 2024 1,095,517 2,993
10 Flakk - Rørvik Torghatten Start up 1.1.19 1,019,811 2,786 Total top 10 16,617,485 45,401
2019e
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 7
Company Report
Torghatten
Target price upped from NOK88 to NOK115 We revise up our target price from NOK88 to NOK115 driven by 1) overall positive EBITDA
and EPS estimate revisions, 2) multiple expansion in both the bus and airline business
segment and 3) the fact that TORG’s ~11% stake in NTS ASA has also increased by NOK2 per
share since our latest report. Hence, we still see significant upside potential to the current
share price of NOK87 and reiterate our Buy recommendation. Indeed, our valuation implies
a 2018E EV/EBITDA of 6x, EV/EBIT 11.1x, and P/E of 12.3x. The corresponding 2019e figures
are EV/EBITDA of 5.5x, EV/EBIT 9.5x, and P/E of 10x. Overall, these are implied multiples we
find very attractive and argue support our Buy recommendation and NOK115 target price,
which represent approximately 35% upside to last close.
Torghatten: Sum-of-the-Parts Valuation Exhibit 79.
Source: Bloomberg, Torghatten, SpareBank 1 Markets. Note: Multiples adjusted for minorities
As evidenced in the figure below, Air transport, i.e. the 66% stake in Widerøe, account for
some 34% of our NOK116 per share SOTP. The segment is closely followed by Bus, which
account for 32% of our SOTP. Next, we have the ferry transport segment, which account for
23% of the value in TORG. The stake in NTS is 6% of the SOTP and other maritime,
associates/EAIs and other investments in sum account for the reminder or NOK5 per share.
Torghatten: Sum-of-the-Parts Valuation Illustrated Exhibit 80.
Source: Bloomberg, Torghatten, SpareBank 1 Markets.
Torghatten ValuationNOKm Methodology 2018E EV/EBITDA EV NIBD Equity Value Ownership Equity Value Per Share
Ferry Transport Peer multiples 6.0x 3,543 2,200 1,343 94% 1,269 27
Bus Transport Peer multiples 7.3x 1,846 0 1,846 97% 1,784 38
Air Transport Peer multiples 4.9x 3,206 400 2,806 66% 1,852 39
Other Maritime Peer multiples 6.1x 283 192 91 100% 91 2
NTS ASA Current market capitalisation 3,332 11% 355 7
Associates/EAIs Book/Market value 155 3
Other investments Book value 22 0
Total 8,878 2,792 9,418 5,528 116
Upside (Downside) on last close 35.7%
Valuation Metrics
Implied 2018e EV/EBITDA 6.0x
Implied 2019e EV/EBITDA 5.5x
Implied 2018e EV/EBIT 11.1x
Implied 2019e EV/EBIT 9.5x
Implied 2018e P/E 12.3x
Implied 2019e P/E 10.0x
To Torghatten
Ferry Transport 23%
Bus Transport32%
Air Transport34%
Other Maritime2%
NTS ASA6%
Associates/EAIs3%
Other investments0%
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 8
Company Report
Torghatten
Valuation support in ROE vs. P/B approach From our experience with discussing transportation companies, we found various opinions
on long-term ROE, required return on equity (“RROE”) and how to think about P/B. This
applies to TORG as well. However, we can only speak for ourselves, but here is our view.
First, to calculate long-term fair ROE for TORG, we look at the company adjusted for
minorities, i.e. we use net income attributed to parent company (adjusted for non-
controlling interests) and book values adj. for minorities. Indeed, TORG has been able to
deliver ROE around 17-18% on average last five years, and based on the arguments in the
“estimates” section above, we argue TORG should be able to deliver 18% going forward.
Hence, we apply long-term ROE of 18% in this approach.
TORG: ROE adjusted for minorities Exhibit 14.
Source: TORG, SpareBank 1 Markets.
Moreover, when calculating required return on equity from peers by simply dividing ROE by
the current P/B valuation in the market, we arrive at around 7% on average. Hence, if we
take our long-term ROE assumption of ~18% mentioned above and divide by the required
return on equity from peers of 7%, we arrive at a fair P/B multiple in TORG of 2.57x. Thus,
coupled with a book value of equity, adjusted for minorities as of 2H17 (last reported figure
in TORG) of NOK2.177m, this cocktail of numbers correspond to a fair market cap of
~NOK5.6bn or NO118 per share, assuming 47.5m shares. Thus, our take and key take-away
from this approach is that we find valuation support for our Buy rec. and NOK115 tp.
TORG: Valuation based on ROE vs. P/B Exhibit 15.
Source: TORG, SpareBank 1 Markets.
TORG: Valuation sensitivities Exhibit 16.
Source: SpareBank 1 Markets.
14.5%13.7%
11.1%12.1%
21.1%19.7%
17.8%
19.7% 19.6%
17.7%
2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E
Comments
10 year average ROE 18.1% Based on reported figures17-'20e average ROE 17.9% SB1M estimatesNormalised long-term ROE 18% Average
RROE from peers 7% Implied from traded peersImplied fair P/B ratio 2.57
Book value adj. for minorities 2,177 1H17 reported figureFair equity value 5,598
# of shares 47.5Fair TORG share price 118
Scenario analysis
9298
105111
118124
131137
144
0
20
40
60
80
100
120
140
160
14% 15% 16% 17% 18% 19% 20% 21% 22%
Fair
TO
RG
sh
are
pri
ce
Nomalised long-term ROE
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 9
Company Report
Torghatten
Company Overview Torghatten ASA is one of Norway's largest transportation companies, operating in the air,
sea and road transportation segments. The company's roots date back to 1878 when
Dampskibet Torghatten Aktieselskap was founded, shipping cargo and mail along the coast
of Nordland with the region's first steamship. Over the next decades, the company
expanded and entered bus operations in 1930. After the government permitted counties to
put public transportation services on tender in the 1990s, the company experienced
phenomenal growth, and it is today a leading Norwegian transportation company with
revenues of NOK9.4bn (+USD1bn) and EBITDA of NOK1.35bn in 2016.
Torghatten ASA: Company structure Exhibit 17.
Source: Company webpage, SpareBank 1 Markets.
In 1991, Torghatten became exposed to the airline industry through an investment in
Widerøe. This holding was sold 11 years later, but Torghatten re-entered the airline industry
in 2013, once again through ownership in Widerøe. Being fully consolidated from 2014, the
airborne segment was in 2016 the largest source of revenue and EBITDA for Torghatten,
followed by seaborne and bus transportation. Indeed, the jump in 2014 is explained by the
consolidation of Widerøe. Moreover, there should be no doubt that TORG is a great
company, where management, its board of directors and employees has evidenced an
ability to deliver profitable growth and hence, managed to create significant shareholder
value over time. However, in order to fully reflect the underlying values in TORG, we
encourage decision makers in the company to outline 1) a clear investor relation strategy,
2) increase transparency and visibility around earnings, 3) address the comprehensive
company structure above, and 4) look at its large portfolio of assets from a strategic point
of view to visualize underlying values.
Torghatten ASA: Revenue and EBITDA-margin Exhibit 18.
Source: Torghatten ASA, Brønnøysund, SpareBank 1 Markets.
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0.0
2.0
4.0
6.0
8.0
10.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
EBIT
DA
mar
gin
NO
Kb
n
Revenues EBITDA EBITDA-margin
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 10
Company Report
Torghatten
TORG Sea Transportation The sea transportation segment consists of 100% ownership in Bastø Fosen, Torghatten
Trafikkselskap and Torghatten Nord. In addition, it consist of 66% ownership in
FosenNamsos Sjø, which owns 51% of Kystekspressen ANS. Hence, Torghatten does not
own 100% of the reported EBITDA within the Sea segment, which is important to adjust for
in the valuation. Our take is that blended TORG owns approximately 94% of the reported
Sea Transportation EBITDA and our valuation is adjusted accordingly.
Sea Transportation – Structure Exhibit 19.
Source: Company webpage, SpareBank 1 Markets.
Bastø Fosen
Bastø Fosen (est. 1995) is the third largest Torghatten subsidiary in the sea transportation
segment. Bastø Fosen operates five RoRo/PAX ferries (+1 reserve vessel) between Moss and
Horten in eastern Norway, which is considered the country's busiest ferry route. The reserve
vessel will be used if traffic exceeds expectations. Bastø Fosen’s fleet currently consists of
vessels with an average age of 10 years. The oldest is the Bastø I and Bastø II, which were
both built in 1997. The youngest vessels are the three new energy efficient diesel engine
vessels Bastø IV, Bastø V and Bastø VI, which were all built in 2016. These new vessels are
expected to substantially improve bunker cost by 25-30%, but given the highly competitive
nature of the business we are of the opinion that Torghatten will not be able to absorb all
of this gain.
Torghatten won the new 10-year Moss-Horten contract lasting from 1.January 2017 to
31.December 2026. The contract were worth NOK4.5bn (~USD550m). As this route is based
on concession, rights granted by the government, there will be no financial support and
Bastø Fosen must take all cost and revenue risk – in contrast to many other ferry routes.
FosenNamsos Sjø
FosenNamsos Sjø is the second largest company in Torghatten's sea portfolio with
NOK406m in revenue and 3.8m passengers in 2016. FosenNamsos Sjø has 23 vessels
operating on 15 ferries and speedboat routes in central and west Norway. Torghatten ASA
owns 66% of FosenNamsos Sjø, which also owns 51% of Partsrederiet Kystekspressen ANS,
in which rival Fjord 1 owns the remaining 49%. Partsrederiet Kystekspressen ANS has a
contract fixed through 2021 to operate the Trondheim-Kristiansund route as well as routes
in accompanying areas.
Bastø Fosen's new energy
efficient diesel ferry
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 11
Company Report
Torghatten
Torghatten Trafikkselskap
With revenues of NOK284m and 647.000 passengers, Torghatten Trafikkselskap is the
smallest of the companies in Torghatten's sea transport operations. The 11-vessel strong
company operates four express routes, and five ferry routes in Nord-Trøndelag and Sør-
Helgeland, as well as one local ferry route in Brønnøy and another in Gildeskål.
Torghatten Nord
In 2016, Torghatten Nord generated revenues of NOK1.2bn, making it the largest revenue
generating unit in Torghatten's sea transportation division. Torghatten Nord was
established in 2008 after Torghatten acquired Hurtigruten's ferry and speedboat
operations. Today, it runs 46 vessels in total along the Norwegian west coast. Torghatten
Nord's revenues are mainly sourced from PSOs with the Norwegian Public Roads
Administration (Statens Vegvesen) and Nordland and Troms counties.
Contract vs ticket revenues
While ticket revenues have been stable over the past six years, contract revenue is
becoming an increasingly important part of Torghatten's sea borne revenues, accounting
for 60% of total revenues in 2016, up from 53% in 2011. This compares to 69% for the whole
industry, data from Statistics Norway suggest. EBITDA margins has also increased driven by
1) improved operational efficiency and 2) less number of accidents and 3) to offset
increased capex as government require environmental friendly vessels, which has higher
capex. As such, EBITDA – capex has not increased to the same extent and consequently,
even though we have seen improvements in return on capital, it has not improved as much
as the gain in EBITDA margin should indicate.
Torghatten: Sea Transport Revenues vs. EBITDA margin Exhibit 20.
Source: SpareBank 1 Markets, Torghatten.
11%
13%
15%
17%
19%
21%
23%
0
200
400
600
800
1,000
1,200
1,400
1,600
2011 2012 2013 2014 2015 2016
NO
Km
Sea Transport Revenues
Ticket revenues Contract revenues Other EBITDA-margin
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 12
Company Report
Torghatten
The Norwegian Ferry Market
130 connections in total, served by ~220 ferries
Being a part of the public road network, the Norwegian ferry industry serves as a crucial
part in both passenger and vehicle transportation. As of today, there are 17 state highway
ferry connections ("samband") operated by private companies. In addition to the 17 state
highways, there are +110 additional county and township ferry links adding up to a total of
around 130 connections in total, served by ~220 ferries.
Norwegian ferry market growth: 2007-2016 in PCE (millions) Exhibit 22. Norwegian ferry market growth: 2007-2016 in passengers (millions) Exhibit 23.
Source: Statens Vegvesen, Ferjedatabanken, Oslo Economics, SpareBank 1 Markets Source: Statens Vegvesen, Ferjedatabanken, Oslo Economics, SpareBank 1 Markets
30,8
31,4 31,431,7
32,9
34,0 34,0
34,534,8
35,0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
49%
21%2%
27%
1%
Fjord1 Torghatten Boreal Nordled Other
41,3
41,741,9
40,5
41,9
42,442,1
42,4
43,043,3
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
State highway ferry connections in Norway Exhibit 21.
Source: SpareBank 1 Markets, Statens Vegvesen.
In terms of passenger numbers, the CAGR over the past 10 years has been 3.3%, while km
per passenger has decreased, pointing towards shorter freight distances but higher load per
kilometre. This is further supported by a decline in vessel kilometre over the same period.
With regards to revenues for the 10 year period, regular ticket revenue has experienced a
modest annual increase of 1.1%, but ticket revenue per passenger has actually come down.
The reason for the increase in total revenue per passenger is due to a large increase in public
spending (8.1% CAGR), which has increased steadily from 2005, but spiked in the last year.
Moreover, the Norwegian ferry market consisted of 35 million PCEs and 43 million
passengers in 2016 and is characterized by stable growth with compound annual PCE and
passenger growth rates from 2007-2016 of 1.5% and 0.5%, respectively.
# Road nr Route Operator Parent
1 Rv. 19 Horten - Moss Bastø Fosen Torghatten ASA
2 E39 Arsvågen - Mortavika Fjord 1 Fjord 1
3 Rv. 13 Lauvik - Oanes Norled Norled
4 Rv. 13 Hjelmeland - Nesvik - Ombo Norled Norled
5 E39 Halhjem - Sandvikvåg Fjord 1 Fjord 1
6 Rv. 5 Mannheller - Fodnes Fjord 1 Fjord 1
7 Rv. 13 Hella - Vangsnes - Drahsvik Fjord 1 Fjord 1
8 E39 Lavik - Oppedal Fjord 1 Fjord 1
9 E39 Lote - Anda Fjord 1 Fjord 1
10 E39 Volda - Folkestad Norled Norled
11 E39 Solevåg - Festøy Fjord 1 Fjord 1
12 E39 Molde - Vestnes Fjord 1 Fjord 1
13 E39 Halsa - Kanestraum Fjord 1 Fjord 1
14 Rv. 827 Drag - Kjøpsvik Torghatten Nord Torghatten ASA
15 E6 Bognes - Skarberget Torghatten Nord Torghatten ASA
16 Rv. 80 Bodø - Værøy - Røst - Moskenes Torghatten Nord Torghatten ASA
17 Rv. 85 Bognes - Lødingen Torghatten Nord Torghatten ASA
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 13
Company Report
Torghatten
Consolidated market
Over the last 10 years, there has been an interesting development in this market, with an
aggressive consolidation and today, the ferry market is indeed characterized as a
consolidated market. More precisely, TORG, Nordled, Boreal Transport and Fjord1 are
actually the main and only players in this market. Moreover, TORG transported 7.2 million
passenger car equivalents in 2016 on 38 ferry connections. With a 33% market share in
number of connections and 21% in terms of number of PCE transported, TORG is one of the
largest ferry companies in Norway together with Fjord1.
TORG vs Peers: (PCE and number of connections) Exhibit 24.
Source: Statens vegvesen, Ferjedatabanken, Oslo Economics, SB1M
As evidenced below, TORG is geographically more geared towards ferry connections in the
north, while Norled and Fjord1 have large market shares in the western part of Norway.
Although, TORG does not have the largest number of PCE transported in the market in 2016,
the company will from 2019 operate three out of the ten largest ferry routes in Norway.
Thus, it is our understanding that adjusted for the contract wins over the last years (not yet
in operation), the “pro-forma” market share has increased to above 21%.
TORG vs Peers: Geographical exposure Exhibit 25.
Source: Statens vegvesen, Ferjedatabanken, Oslo Economics, SB1M
Boreal Transport (previously Connex and Veolia) is a private operator of public
transportation services in Norway and operates trams, buses, rail and ferries through its
four subsidiaries. In the sea segment, Boreal operates 31 vessels.
Fjord1 is one of the largest ferry operators in Norway. The company is also involved in
transportation by air, owning the remaining part of 34% of Widerøe. Fjord1 had revenues
of NOK9.4bn in 2016, and operates 66 ferries and boats on 40 different ferry routes in
Norway.
Norled (previously Tide Sjø) is a Norwegian ferry and express boat operator currently in
control of 80 vessels from Oslo to Troms.
Fjord149 %
Norled27 %
Torghatten21 %
Boreal 2 % Other 1 %
Market share (PCE 2016)
35m PCE
Fjord124 %
Norled23 %
Torghatten33 %
Boreal12 %
Other8 %
Market share (connections 2017)
121connections
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 14
Company Report
Torghatten
Focus on safety and operations On the operational side of the business, TORG has done a lot of work in order to drive down
cost. Since 2011/2012, the company has been able to lower the amount of annual HSE
incidents from +30 to below around 15 incidents per year. Compared to its peers, TORG has
still some potential to reduce number of incidents even further and hence, improve margins
accordingly. Thus, even though TORG has been able to increase profitability over the last
years, we argue there are room for additional margin expansion, supporting investor
returns through a combination of 1) revenue growth, 2) margin expansion and 3) dividends.
Indeed, in the ferry industry, there is a strong correlation between HSE incidents and EBIT
margins, because fewer HSE incidents result in lower operating expenses. As TORG
remained focused on operations and safety, the margin began to rise. In 2016, the EBIT
margin came in above 14% versus a low of 13% in 2012. Consequently, TORG has improved
its HSE position, but has as mentioned above, still potential for additional margin expansion
and improved return on capital through even more focus on safety.
Costs follow inflation
According to statistics from Statistisk Sentralbyrå (Statistics Norway), the cost curve in the
domestic sea segment (nærsjøindeks) has increased by roughly 1.8% p.a. since 2009.
Indeed, in the Norwegian ferry industry, the nærsjøindeks is used to price-adjust ferry route
budgets. Thus, Norwegian ferry operators are not exposed to risks related to fuel,
maintenance, wages, administrative costs and interest rates. Even though the crude price
has dropped and interest rates remain record low, overall costs have increased by 2.2% over
the past year, above the average rate. The increase was driven by higher maintenance and
Number of accidents: TORG vs. peers Exhibit 26.
Source: Statems Vegvesen, SpareBank 1 markets
TORG: Correlation between number of HSE incidents and EBIT margin Exhibit 27.
Source: Torghatten ASA, Statens Vegvesen, SpareBank 1 markets
0
5
10
15
20
25
30
35
40
2010 2011 2012 2013 2014 2015 2016
Boreal Fjord1 Nordled Torghatten Other
0
5
10
15
20
25
30
35
40
12.0%
12.5%
13.0%
13.5%
14.0%
14.5%
15.0%
15.5%
2010 2011 2012 2013 2014 2015 2016
EBIT-margin Number of accidents Torghatten ASA
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 15
Company Report
Torghatten
wage costs. Looking at the past seven years, the trend shows that wages and administrative
costs have increased by roughly 2.6% and 3.3%, respectively, p.a. since 2009, leading to
total average cost growth of a steady 1.8%. Going forward, we expect to see a reduction in
the rate of wage growth simply due to more potential employees becoming available on
the back of cost cutting in the oil industry.
Contractual structure…
In Norway, the ferry routes are allocated following public tender offers. In the tendering
process for the state highway ferry connections, the Norwegian Public Roads Administration
(NPRA) and local road authorities are the only customers and the tendering is offered both
domestically and internationally before a final award is then given to the provider offering
the best solution within the predefined requirements. Moreover, in an analysis undertaken
by economics consultancy, Oslo Economics, on behalf of the NPRA, the competitive
environment of the Norwegian public ferry operators was investigated. The report
concluded that after changing from a process based on negotiating to a tendering process,
the ferry market has in general improved. Furthermore, contracts in the Norwegian ferry
market are designated as either gross or net. A gross contract is where the charterer (public
authority) takes on the market risk and the operators bid in relative to what they consider
a decent margin. Conversely, a net contract is one in which the operator is responsible for
generating sufficient revenues and each bidder in the tender must evaluate what they
consider to be achievable in terms of revenues vs cost. Thus, gross contracts have no volume
or price risk is the undisputable preferred contract model. Moreover, the trend in the
industry is also towards more gross contracts.
…coupled with the green shift…
Over the recent years there has been an increased emphasis towards the environmental
footprint of the ferry industry and both electrical and LNG fuelled ferries have been
introduced. Compared to buses, sea borne transportation in general produce substantially
higher CO2 and NOX emissions in terms of gram/km. In the future, the tendering process on
all ferry routes will have environmental requirements in order to reduce greenhouse gas
emissions by one third of today’s level. Certain ferry routes will have zero emission policies,
requiring newbuilds or reengineering of vessels in the existing fleet. In the next few years,
a large amount of tenders will be awarded as they come off contract in 2018-2019.
…drives capex in the ferry industry
As mentioned above, the demand for newbuilds has soared due to the green shift. With
gross contracts, newer vessels have higher EBITDA margins than older vessels to offset
increased capex. Competitors are on equal ground with regards to return on capital
employed, and thus operational efficiencies are what separate vessel operators. As TORG
has a relatively old fleet (capacity adjusted), it is still to benefit from a high EBITDA margin.
Statistics Norway cost base for domestic sea borne transportation (nærsjøindeks) Exhibit 28.
Source: Statistics Norway, SpareBank 1 Markets. Note: Rebased to 100 in 2Q 2009
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 16
Company Report
Torghatten
In addition, as TORG expects to order new vessels over the next 3-4 years from both recently
won contracts and tenders they expect to win, the EBITDA margin is expected to be 35-40%
on new contracts due to these investments, as illustrated below.
EBITDA margins on new versus old vessels Exhibit 30.
Source: Fjord1, Torghatten, SpareBank 1 Markets.
Ferries will remain critical to Norwegian infrastructure
Ferries are likely to remain essential to Norwegian infrastructure for decades to come.
Indeed, according to the economic research company, Oslo Economics, ferry demand is
likely to increase over the next 5-15 years, with a possible slow decline to begin in 15-30
years’ time. As ferry transportation represents a cost efficient solution to society, and
infrastructure projects in Norway are costly and time consuming, ferry demand is likely to
increase until 2050. Indeed, Oslo Economics identified nine infrastructure projects (tunnels
and bridges) in Norway, where the government had approved only two of the projects.
Identified and approved infrastructure projects in Norway - 2016 Exhibit 31.
Source: Oslo Economics, SpareBank 1 Markets.
New vessel 20 year old vessel Comments
Capex 90 30 Vessel delivered 2016
ROCE 9 % 9 % After tax
NOPLAT 8 3
Tax 3 1 Assuming 25% tax rate
EBIT 11 4
Depreciation 3 3 Assuming 30 years linear depreciation on newbuild
EBITDA 14 7
EBITDA margin 37 % 22 %
Cost 24 24 Based on PCE-cost per vessel for 2016
9
2
Identified infrastructure projects Approved projects on larger ferry connections
Toghatten ASA versus Norwegian peers on EBIT margin Exhibit 29.
Source: Torghatten ASA, Sparebank 1 markets *includes buses
-5%
0%
5%
10%
15%
20%
25%
2011 2012 2013 2014 2015 2016
EBIT
mar
gin
Fjord 1 Torghatten (Sea Segment)
Boreal Sjø AS Norled
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 17
Company Report
Torghatten
TORG sea estimates
Our estimates for the sea unit are based on our outlook for the ferry segment in light of a
shift towards a more eco-friendly fleet, trend towards long-term gross contracts and more
frequent departures. First, in our revenue estimate below, we model with a significant
increase from 2018e to 2019e. This is driven by the changes in the figures below. Indeed, as
shown in the exhibit to the left, TORG only operate one of the 10 largest ferry connections
in Norway, namely Moss – Horten (Bastø Fosen) as of 2017. However, as you can see from
the exhibit to the right, TORG has won both Sandvikvåg – Halhjem and Flakk – Rørvik, in
which has start-up 01.01.19 and explain the increase in reported figures.
10 largest ferry connections: 2016 Exhibit 32. 10 largest ferry connections: 2019e Exhibit 33.
Source: TORG, Fjord1, Statens Vegvesen, Ferjedatabanken, Oslo Economics Sparebank 1 Markets Source: TORG, Fjord1, Statens Vegvesen, Ferjedatabanken, Oslo Economics Sparebank 1 Markets
Moreover, as 1) TORG has a relatively old fleet (capacity adjusted) and 2) lag peers on
number of HSE accidents, the company is still to benefit from a higher EBITDA margin and
return on capital. Moreover, with an increasing share of revenues steaming from gross
contracts, our take is that the renewal of the fleet requires TORG to extract higher margins
on new contracts to offset increased capex on new vessels. Indeed, according to
management, they expect EBITDA margins of 35-40% on new contracts, however, all else
equal, this shift alone does not affect ROCE.
Estimates: Sea transport Exhibit 34.
Source: Torghatten, SpareBank 1 Markets.
# Connection Company Comment PCE 2016* Avg. per day
1 Moss - Horten Torghatten 3,475,843 9,497 2 Mortavika - Årsvågen Fjord1 2,831,842 7,737 3 Sandvikvåg - Halhjem Fjord1 1,854,016 5,066 4 Molde - Vestnes Fjord1 1,558,869 4,259 5 Fodnes - Mannheller Fjord1 1,223,280 3,342 6 Hareid - Sulesund Nordled 1,218,901 3,330 7 Sykkylven - Magerholm Fjord1 1,170,630 3,198 8 Festøya - Solavågen Fjord1 1,168,776 3,193 9 Oppedal - Lavik Nordled 1,095,517 2,993
10 Flakk - Rørvik Fjord1 1,019,811 2,786 Total top 10 16,617,485 45,401
2017# Connection Company Comment PCE 2016* Avg. per day
1 Moss - Horten Torghatten End 2026 3,475,843 9,497 2 Mortavika - Årsvågen Fjord1 Start up 1.1.19 2,831,842 7,737 3 Sandvikvåg - Halhjem Torghatten Start up 1.1.19 1,854,016 5,066 4 Molde - Vestnes Fjord1 Tender 2017/2018 1,558,869 4,259 5 Fodnes - Mannheller Fjord1 End 2025 1,223,280 3,342 6 Hareid - Sulesund Fjord1 Start up 1.1.19 1,218,901 3,330 7 Sykkylven - Magerholm Fjord1 Start up 1.1.20 1,170,630 3,198 8 Festøya - Solavågen Fjord1 Start up 1.1.20 1,168,776 3,193 9 Oppedal - Lavik Nordled End 2024 1,095,517 2,993
10 Flakk - Rørvik Torghatten Start up 1.1.19 1,019,811 2,786 Total top 10 16,617,485 45,401
2019e
Sea Transport 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E
Ticket revenues 622 651 710 658 657 718
Contract revenues 999 1,062 1,181 1,290 1,425 1,429
Other 253 231 196 214 207 207
Revenues 1,874 1,945 2,087 2,162 2,289 2,354 2,518 2,568 2,953 3,011
YoY 3.8% 7.3% 3.6% 5.9% 2.8% 7.0% 2.0% 15.0% 2.0%
OpEx -1,548 -1,635 -1,801 -1,862 -1,870 -1,852 -1,939 -1,977 -2,244 -2,228
YoY 5.6% 10.1% 3.4% 0.4% -1.0% 4.7% 2.0% 13.5% -0.7%
EBITDA 326 310 286 300 418 502 579 591 709 783
EBITDA-margin 17.4% 15.9% 13.7% 13.9% 18.3% 21.3% 23.0% 23.0% 24.0% 26.0%
D&A -133 -142 -187 -191 -209 -211 -293 -295 -364 -432
D&A / Sales -7.1% -7.3% -9.0% -8.8% -9.1% -8.9% -11.6% -11.5% -12.3% -14.3%
EBIT 193 168 99 109 210 291 287 296 345 351
EBIT-margin 10.3% 8.6% 4.8% 5.0% 9.2% 12.4% 11.4% 11.5% 11.7% 11.7%
Net financials -36 -38 -63 -57 -60 -53 (55) (55) (55) (55)
Net Income from EAIs and Associates 0 0 0 0 0 0
Pre-tax profit 156 130 37 51 150 238 232 241 290 296
Taxes -45 -35 -6 -8 -27 -49 -46 -48 -58 -59
Effective tax rate -28.5% -26.7% -16.6% -15.3% -17.8% -20.8% -20.0% -20.0% -20.0% -20.0%
Net Profit 112 95 30 44 124 188 185 193 232 237
of which, parent 115 97 27 41 119 183 179 187 226 231
of which, non-controlling interests -3 -2 3 2 5 6 6 6 6 6
Net Margin 6.0% 4.9% 1.5% 2.0% 5.4% 8.0% 7.4% 7.5% 7.9% 7.9%
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 18
Company Report
Torghatten
TORG sea valuation
We have decided to take a relative valuation approach to TORG’s sea segment. As opposed
to other transportation segments where a large part of the fleet is leased and a P/E multiple
probably is most fair, the sea segment largely has fully owned vessels and we have
consequently relied upon EV/EBITDA multiples in our valuation, and adjusted for ownership
and sanity checked against P/E.
Torghatten Sea Transportation Peers Exhibit 35.
Source: Bloomberg, SpareBank 1 Markets.
When we valued Fjord1, we conducted the valuation based on a 20% discount to DFDS
multiples, which we regarded as the closest peer, due to differences in terms of 1) EBITDA
margins, 2) return on capital, 3) growth rates, 4) dividend yield and 5) liquidity.
Consequently, we apply the same EV/EBITDA multiple on TORG’s Sea segment, and arrive
at a fair equity value of the sea transportation segment of around NOK1.34bn or NOK27 per
TORG share. This translates into an implied 2018e EV/EBITDA of ~6x. Moreover, applying
Fjord1 2017-2019 average P/E multiple on TORGs Sea segment, yields NOK1.55bn in equity
value or NOK33 per share and hence, we find our Sea segment valuation reasonable.
Historical Historical P/B
1m 3m 6m 2017 2018 2019 5Y avg. 2017 2018 2019 5Y avg. 2017 2018 2019 2017
Sea Peers -3% -3% 5% 9.0x 8.7x 8.2x 8.3x 12.3x 11.8x 11.5x 12.7x 15.0x 13.2x 12.0x 2.7x
IR5B ID -2% 0% 3% 13.0x 12.3x 10.9x 11.4x 17.6x 16.8x 14.7x 16.3x 18.9x 18.7x 16.0x 5.1x
DFDS DC -8% -8% -5% 8.0x 7.7x 7.5x 7.0x 12.3x 11.8x 11.2x 12.7x 11.8x 10.9x 10.0x 2.9x
603167 CH -5% -6% 8% 12.2x 11.3x 10.5x 13.6x n.a. n.a. n.a. n.a. 15.7x 13.6x 12.2x 1.7x
TAL1T ET 5% -3% 18% 8.6x 8.6x 8.2x 7.6x 17.9x 18.8x 18.6x 14.9x 14.2x 12.8x 10.8x 0.9x
SLK AU -7% -2% -1% 9.4x 8.8x 8.2x 9.0x 12.2x 11.5x 10.6x 11.6x 16.3x 15.5x 14.1x 2.7x
FJORD NO 6% 17% 31% 5.9x 5.7x 6.8x 5.5x 8.1x 8.1x 11.5x 7.4x 8.3x 8.3x 11.8x n.a.
Share price performance EV/EBITDA EV/EBIT P/E
Valuation: Torghatten sea transportation segment valuation per share Exhibit 36.
Source: Torghatten, Bloomberg, SpareBank 1 Markets
27
33
EV/EBITDA P/E
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 19
Company Report
Torghatten
TORG Air Transportation The air transportation segment consists of WF Holding, which is owned by Torghatten ASA
(66%) and Fjord1 AS (34%). The holding company fully owns the regional airline Widerøe.
Widerøe
Widerøe is one of Scandinavia’s largest regional airlines with approximately 3,000
employees. Widerøe serves 2.8 million passengers every year, and offers routes to 46
domestic and international destinations. In 2002, the company was acquired by
Scandinavian Airlines. It remained fully owned by SAS until 2013, when, Fjord1, Torghatten
and Nordland county acquired an 80% stake in the company. In 2016, Torghatten bought
Nordland county’s interest in Widerøe as well as the remaining 20% stake from SAS. After
the transaction, Fjord1 owned 34% of Widerøe, while Torghatten held 66% of the shares.
Widerøe: Company structure Exhibit 37.
Source: Widerøe, SpareBank 1 Markets.
In addition to the airline, the company has three business segments: Widerøe Internett,
Widerøe Ground Handling (WGH) and Widerøe Technical Services (WTS). Widerøe internett
is responsible for maintaining the company’s webpage, wideroe.no, as well as servicing and
helping customers order tickets, reserve hotel rooms and rental cars. A quarter of all
reservations made through Wideroe.no is for flights that are operated by other airlines.
WGH provides a long list of services in order to facilitate safe departures for Widerøe’s
aircraft, and swift processing of arrivals. WGH services include de-icing, ramp handling,
passenger handling, cargo handling and security services. In 2016, Widerøe entered into an
agreement with SAS regarding the provision of ground handling services for all SAS’ aircraft
on Norwegian airports except for OSL Gardermoen. WTS offers services such as
maintenance and specialized service on all of Widerøe’s aircraft. With the expertise of WTS,
Widerøe can extend the life of the aircraft fleet from being able to do 80,000 landings before
being decommissioned to 120,000 landings. Moreover, Widerøe won all 13 public service
obligations (PBO) contracts in Nord-Trøndelag, Nordland and Finnmark, competing against
Danish Air Transport AS and FlyViking. The PBO contracts will run from 2019-2026 with 5x1
year options to extend and represent potential revenues of NOK5bn (including options).
Widerøe: Flight network Exhibit 38.
Source: SB1M, Widerøe
22 January 2018
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Company Report
Torghatten
No losses since 1999 in Widerøe
Over the past 15 years, Widerøe's revenues have more than doubled, growing by an average
6% per year. With the share of passenger revenues growing from 66% in 2004 to 84% in
2016, the company has become less dependent on state purchases over the last years. In
2016, state purchases amounted to ~NOK0.7bn of revenues totalling NOK4.5bn. EBITDA-
margins have averaged 11% since 2000, bottoming at 6% during the financial crisis and
peaking at 17% in 2011. Additionally, Widerøe has not had any losses in over 15 years,
averaging a net profit margin of 2.8%. Free cash flow wise, however, Widerøe is down a
cumulative ~NOK700bn over the last 15 years, after significant investments in 2013.
Widerøe: Financial performance Exhibit 39.
Source: SB1M, Brønnøysundregistrene, Widerøe
Widerøe: Financial performance Exhibit 40.
Source: SB1M, Brønnøysundregistrene
0 %
2 %
4 %
6 %
8 %
10 %
12 %
14 %
16 %
18 %
20 %
0
500
1 000
1 500
2 000
2 500
3 000
3 500
4 000
4 500
5 000
NO
Km
Revenues (LHS) EBITDA (LHS) EBITDA margin (RHS) Net profit margin (RHS)
NOKm 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Revenues 1 680 1 804 2 045 2 072 2 154 2 345 2 427 2 493 2 829 2 747 2 918 3 270 2 820 4 176 3 807 3 940 4560
EBITDA 226 244 267 222 233 228 175 251 162 167 321 542 279 404 493 492 646
Net profit 39 49 48 47 55 50 14 108 8 34 117 266 129 104 60 121 257
EBITDA margin 13 % 14 % 13 % 11 % 11 % 10 % 7 % 10 % 6 % 6 % 11 % 17 % 10 % 10 % 13 % 12 % 14 %
Net profit margin 2 % 3 % 2 % 2 % 3 % 2 % 1 % 4 % 0 % 1 % 4 % 8 % 5 % 2 % 2 % 3 % 6 %
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 21
Company Report
Torghatten
Majority of fleet dedicated to Norwegian short-runway network
Widerøe's fleet consists entirely of Dash-8 Q-Series aircraft of various specifications. Of the
total 41 aircraft in operation, 23 are Q100/200 dedicated to the Norwegian short-runway
network, with runways down to 800m in length. These have low seat capacity relative to
the Q300s and Q400s, of which Widerøe operates 7 and 11 aircraft, respectively. During
2015, Widerøe planned to phase out two Q300s, one has been returned to a Kenyan airline
(LN-WFD), and however, we believe the other aircraft has not yet been phased out.
Widerøe: Fleet overview Exhibit 41. Widerøe: Fleet and seat capacity Exhibit 42.
Source: Bombardier, Wideøe, Airvectors, SpareBank 1 Markets Source: Widerøe (incl. two Q300 to be phased out in 2015), SpareBank 1 Markets
Widerøe also signed a contract with Embraer, a Brazilian aircraft manufacturer, for the
delivery of three E2-190 jet aircraft in 2018, and an option to acquire another 12 aircraft.
The Embraer E2-190 has significantly lower fuel costs and offer lower CO2 emissions
compared to aircraft in Widerøe’s current fleet.
Embraer E2-190 Exhibit 43.
Source: Widerøe, SpareBank 1 Markets
Fleet and SCAT-1 key to Widerøe's competitiveness
Historically, Widerøe has been the only airline to submit bids on airports with runways
shorter than 1,199m and when the seat requirement has been at least 30 per flight. To serve
these airports, special aircraft like Q100/200 are needed and Widerøe is the European
airline with the largest fleet of such aircraft. Indeed, it is one of the world's largest airline
with these aircraft (behind Jazz Air and Piedmont). According to Avinor, only Dash-8
Q100/200, Fairchild Dornier 228, Twin Otter (Dash-6) and Dash-7 aircraft are able to
sufficiently operate in this network. The ATR-42 300/500 would only be able to operate to
a limited extent, mostly due to runway length and capacity specifications. Considering that
28 of Norway's 52 airports are shorter than 1,199m, Widerøe has a significant advantage.
Although runway extensions are possible for all but nine of these airports, it is only
commercially viable for four of them, according to Avinor. These are Førde, Sogndal,
Namsos and Rørvik, and combined they represented only 1-2% of all passengers on
domestic flights. Widerøe is also one of the only bidding airlines with SCAT-1 security
systems installed in its aircraft, which has favoured Widerøe in earlier tenders. Hence, its
aircraft are arguably key to its competitiveness and thus maintaining the current fleet as
long as possible is crucial.
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 22
Company Report
Torghatten
Norway: Airport overview Exhibit 44. Norway: Airport breakdown by runway length Exhibit 45.
¨
Source: Avinor, SpareBank 1 Markets Source: The Norwegian National Transport Plan, Avinor, SpareBank 1 Markets
Lifetime extension program helps delay full Q100 phase-out to 2023
Widerøe's Q100 fleet is nearly 23 years old and as the Q100/200 aircraft series are no longer
in production, Widerøe has been forced to look for alternatives in order to maintain a
sufficient fleet able to serve the Norwegian short-runway network. With its fleet
approaching end-of-life and few other options in terms of newbuilds exist; Widerøe
launched a lifetime extension programme in 2009 as the only operator in the world licensed
to do so. Aimed initially at 16 Q100 aircraft, they prolonged the lifetime from 80,000 flight
cycles to 120,000, enabling Widerøe to secure short-runway aircraft until the end of 2023.
Finished in April 2015, total costs were estimated around NOK320m, thereby proving less
costly than purchasing new, comparable aircraft. Either way, the closest commercially
available alternative is the ATR-42, which is not ideal for the Norwegian short-runway
network, according to the Institute of Transport Economics, as mentioned above.
Widerøe fleet age distribution Exhibit 46.
Source: Airfleets, Planespotters, SpareBank 1 Markets (excludes one Q300).
Widerøe will try to phase out at least one Q100 per year as they reach the new end-of-life
limit, swapping to less intensely used second-hand aircraft. In doing so, they hope to
maintain the current fleet until ~2030. Of the current active Q100/200 fleet worldwide, US
and Canada together account for 144, or just over half, but the average age is 2 years higher
than Widerøe's fleet, suggesting suitable aircraft can be hard to come by here. In 1.5 years'
time, the current active Q100 fleet will have reached the average age of scrapped Q100
aircraft (27.6 years), meaning it will become increasingly difficult to find replacements. In
terms of Q200, we have already reached the average age of scrapped aircraft (18.0 years).
Dash 100 and 200 world fleet age distribution Exhibit 47.
Source: Airfleets, SpareBank 1 Markets.
0
5
10
15
20
25
30
Age
Q100 Q200 Q300 Q400 W. Average
117
27 24 20 5
27
123 3 14
8
13
18
23
28
-20
30
80
130
180
North America Oceania Africa Norway Other Europe
Ave
rage
Age
# o
f ai
rcra
ft
Q100 Q200 Average Q100/200 Age
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 23
Company Report
Torghatten
The Norwegian Airline Market
Norway airline traffic highly correlated to GDP
The Norwegian airline traffic is highly correlated to the mainland GDP, as evidenced with
the figure below, which show data back to 1980. However, there are a couple of
observations interesting to point out. First, airline traffic is much more volatile than GDP as
we can see from the period 1987-1989, under the dot-com bubble, the financial crisis in
2007/2008 and during the oil price fall in 2014-2016. Second, the airline traffic tend to grow
2x GDP, i.e. if GDP growth is 2%, airline traffic is most likely to grow 4%.
Norway Airline traffic vs. GDP Exhibit 48.
Source: Macrobond, SpareBank 1 Markets
~50% of journeys are business-related, of which half are oil-related
The last ten years have seen a fairly stable relationship in the share of leisure and business-
related journeys in Norway, with each being the primary purpose of half of all domestic
journeys. Growth in the leisure segment has been steady at 3-4% per year until 2014 and
was more or less unaffected by the financial crisis. This was not the case for business
journeys, which declined in 2008-10 and were barely above 2007-levels in 2013. However,
after with flat growth in both international and domestic passengers since 2014, we are
finally seeing increased traffic. This trend is most likely due to among other the increase
that we have seen in the oil price since 2016 (domestic) and the weak Norwegian Krone
(international). Moreover, as we see from the figure below, data from the hotel industry
also show that 1) number of hotel guest nights is increasing and 2) hotel guest nights related
to business is taking a larger piece of the pie.
Norway: Hotel guest nights Exhibit 49. Norway: Airline passenger Exhibit 50.
Source: Macrobond, Sparebank 1 Markets Source: Macrobond, SpareBank 1 Markets
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 24
Company Report
Torghatten
PMI points to a boost in production
As mentioned above there is a strong correlation between GDP growth and YoY growth in
airline traffic. Thus, with 1) a significant uptick in reported GDP lately and 2) continuation
of solid manufacturing PMI’s in Norway, and 3) strong performance in oil related
manufacturing, which also mentioned above drives airline traffic, we argue there is solid
risk/reward concerning attractive growth in the Norwegian Airline traffic going forward.
Norway PMI manufacturing Exhibit 51. Norway: Manufacturing production Exhibit 52.
Source: Macrobond, Sparebank 1 Markets Source: Statistics Norway, SpareBank 1 Markets
Higher ticket price, somewhat offset by increased oil price
After three years of airfare decline following the financial crisis, airfares in Norway have
trended upward since mid-2011. In December, the price index for domestic flights increased
15% month on month. Meanwhile, jet fuel prices (in USD) has increased in line with the oil
price since early 2016. However, the jet fuel price increase in USD has been to some extent
offset by the weak Norwegian Krone. Nevertheless, this diverging trend in input cost versus
airfares means the operating environment for Norwegian carriers have improved
somewhat.
Norway CPI: Airline ticket Exhibit 53. Jet fuel and crude price: USD per barrel Exhibit 54.
Source: Macrobond, Sparebank 1 Markets Source: Platts, Oanda, SpareBank 1 Markets
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 25
Company Report
Torghatten
We also see a trend towards longer season
The last trend we see and hear from sources in the transportation space (ferry and air) is
that the leisure season is longer than previous years. Indeed, according to hotel capacity
utilisation data we have gathered and showed below, we see that in the period 2015 to
2017 (period chosen due to currency), utilisation starts to pick up significantly already in
April/May and last until October/November, whereas the same utilization in the period
2000-2014 was much lower. According to our understanding, this support our thesis of a
longer season, which favour companies like Widerøe.
Norway hotel capacity utilisation Exhibit 55.
Source: Macrobond, SpareBank 1 Markets
Annual passenger growth on routes expected at 1.1% through 2020
Based on figures from the Institute of Transport Economics, we expect passenger volume
growth on Norway's PBO routes (from 1 April 2017) at 1.1% per year through 2020.
Strongest growth is expected in southern Norway (1.7%), where Widerøe has already
secured an extension through 2020, as mentioned above. In northern Norway, growth is
expected at 0.9% per year.
Passenger volume on PSO routes Exhibit 56.
Source: Institute of Transport Economics, Møreforskning, SpareBank 1 Markets
0.0
0.2
0.4
0.6
0.8
1.0
1.2
South Norway North Norway Total
Pas
sen
gers
(mill
ion
)
2013 2020E
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 26
Company Report
Torghatten
TORG air estimates
Widerøe delivered a solid 2016 and our take is that 2017 has been a year highly affected by
hiccup’s during the summer months. Indeed, according to our understanding, +100 flights
has been cancelled follow by shortage on staff, which we regard as a one-off. With regards
to 2018, we assume Widerøe’s results to normalise and develop more in line with the
historical performance. Indeed, from 2018 onwards, we expect revenue to grow somewhat
above the 10-year average of 2-2.5%, and to normalise in 2020, but margins is assumed to
stay flat at 13%, after a decline in 2017 as a result of the abovementioned cancellations.
This is based on expectations of marginal growth in passenger volumes with the load factor
approaching historical average towards 2020, driven by underlying market growth. We also
expect revenue per passenger to return to normalised growth levels of 2%.
Estimates: Air transport (Widerøe at 100% ownership) Exhibit 57.
Source: Torghatten, SpareBank 1 Markets.
TORG air valuation
As there is difficult to find a key peer for Widerøe, our peer group includes most of Europe's
listed airlines, including Norwegian Air Shuttle, SAS, Aer Lingus, Ryanair, and EasyJet.
Widerøe: Peer group Exhibit 58.
Source: Bloomberg, SpareBank 1 Markets.
Air Transport 2013 2014 2015 2016 2017e 2018e 2019e 2020e
Ticket revenues 753 3,178 3,291 3,840
Contract revenues 172 629 661 719
Other 0 0 0 0
Revenues 926 3,807 3,952 4,560 4,791 5,031 5,282 5,414
YoY 311.3% 3.8% 15.4% 5.1% 5.0% 5.0% 2.5%
OpEx -764 -3,320 -3,445 -3,914 -4,312 -4,377 -4,596 -4,711
YoY 334.6% 3.8% 13.6% 10.2% 1.5% 5.0% 2.5%
EBITDA 162 487 507 646 479 654 687 704
EBITDA-margin 17.5% 12.8% 12.8% 14.2% 10.0% 13.0% 13.0% 13.0%
D&A -60 -244 -300 -279 -285 -299 -314 -322
D&A / Sales -6.5% -6.4% -7.6% -6.1% -6.0% -6.0% -6.0% -6.0%
EBIT 101 243 207 367 194 355 372 382
EBIT-margin 10.9% 6.4% 5.2% 8.1% 4.0% 7.0% 7.0% 7.0%
Net financials -30 -159 -58 -43 -51 -44 -35 -28
Net Income from EAIs and Associates 0 0 0 0.0
Pre-tax profit 71 84 150 324 143 311 338 353
Taxes -14 -24 -37 -78.1 -34.3 -74.5 -81.0 -84.8
Effective tax rate -20.4% -29.2% -24.8% -24.1% -24.0% -24.0% -24.0% -24.0%
Net Profit 57 59 113 246 109 236 257 269
of which, parent 29 24 51 159 72 156 169 177
of which, non-controlling interests 28 35 61 87 37 80 87 91
of which, non-controlling interests % 49.0% 59.4% 54.4% 35.3% 34.0% 34.0% 34.0% 34.0%
Historical Historical P/B
1m 3m 6m 2017 2018 2019 5Y avg. 2017 2018 2019 5Y avg. 2017 2018 2019 2016
Median 1% 6% 8% 5.0x 4.9x 4.6x 4.8x 8.1x 7.8x 7.5x 7.6x 11.2x 10.1x 10.9x 1.5x
RYANAIR HOLDINGS PLC 11% -2% -2% 10.5x 9.7x 9.2x 8.2x 13.9x 12.9x 12.2x 11.3x 16.7x 14.7x 13.7x 5.2x
EASYJET PLC 11% 16% 2% 8.6x 7.6x 6.5x 6.9x 12.5x 11.2x 9.2x 8.8x 16.9x 15.1x 12.2x 2.0x
NORWEGIAN AIR SHUTTLE AS -19% -8% -19% 60.3x 8.7x 4.6x 8.4x n.a. 29.0x 9.2x 18.6x n.a. n.a. 16.0x 1.5x
WIZZ AIR HOLDINGS PLC 5% 13% 46% 9.1x 7.1x 5.9x 5.9x 11.0x 9.2x 7.7x 7.1x 20.2x 16.7x 14.2x 4.9x
FINNAIR OYJ 8% 33% 130% 4.2x 4.4x 4.1x 2.4x 6.9x 7.8x 7.2x 7.8x 13.9x 13.6x 12.5x 1.6x
SAS AB 0% 40% 58% 4.1x 3.8x 3.9x 3.7x 5.9x 6.3x 6.1x 6.7x 8.6x 8.2x 7.5x 1.1x
JETBLUE AIRWAYS CORP 3% 2% -13% 4.7x 4.5x 4.2x 4.7x 7.0x 6.6x 6.0x 6.8x 11.2x 10.8x 10.4x 1.5x
GOL LINHAS AEREAS INT SA-PRE 1% 37% 91% 7.2x 6.2x 5.8x 7.7x 11.2x 8.7x 7.9x 24.4x n.a. 81.6x 37.5x n.a.
WESTJET AIRLINES LTD -4% 2% 15% 4.3x 3.8x 3.5x 3.5x 8.1x 7.1x 6.5x 5.7x 10.7x 9.3x 8.5x 1.4x
VIRGIN AUSTRALIA HOLDINGS LT 45% 41% 57% 7.8x 5.9x 5.5x 6.4x 26.6x 13.1x 11.7x 32.7x n.a. 34.4x 30.6x 1.3x
DEUTSCHE LUFTHANSA-REG 6% 40% 70% 3.0x 3.0x 2.9x 2.7x 5.0x 5.2x 4.9x 5.9x 6.5x 6.9x 6.5x 1.4x
AIR FRANCE-KLM -14% -7% 16% 2.7x 2.5x 2.4x 3.2x 5.6x 5.2x 4.8x 10.5x 4.9x 5.2x 4.4x 1.5x
SOUTHWEST AIRLINES CO 2% 6% -9% 6.8x 5.9x 5.6x 5.3x 9.2x 7.8x 7.3x 7.4x 15.5x 12.4x 11.5x 3.6x
TURK HAVA YOLLARI AO 11% 13% 54% 6.5x 6.0x 5.2x 6.3x 16.7x 15.3x 12.8x 23.8x 14.0x 7.5x 6.0x 0.8x
FLYBE GROUP PLC -2% -13% -10% 3.7x 3.7x 2.5x 4.0x 267.2x n.a. 14.4x 12.1x 84.4x n.a. 13.5x 0.6x
INTL CONSOLIDATED AIRLINE-DI -2% -1% -1% 3.4x 3.3x 3.1x 3.9x 4.8x 4.7x 4.4x 6.9x 6.8x 6.4x 6.0x 2.2x
UNITED CONTINENTAL HOLDINGS 0% -5% -26% 5.0x 4.9x 4.7x 4.5x 8.0x 8.1x 7.7x 7.2x 9.4x 9.3x 8.6x 1.9x
DELTA AIR LINES INC -2% 6% -2% 5.1x 4.9x 4.7x 4.8x 6.9x 6.6x 6.3x 6.5x 9.8x 9.0x 8.2x 2.3x
Share price performance EV/EBITDA EV/EBIT P/EAirline peers
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 27
Company Report
Torghatten
Based on the median European peer EV/EBITDA multiple above, our 2018e EBITDA estimate
and NOK400m in NIBD, we believe the fair value of Widerøe is around NOK1.85bn or NOK39
per share with TORG’s effective 66% ownership. We sanity check our valuation with median
peers P/E multiple as there is differences in how fleets are financed, and arrive at ~NOK33
per TORG share.
Widerøe: Equity valuation per share given TORG’s 66% equity stake Exhibit 59.
Source: Bloomberg, SpareBank 1 Markets
39
33
EV/EBITDA P/E
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 28
Company Report
Torghatten
TORG Bus Transport Through its four fully owned subsidiaries, Torghatten runs around 1,480 buses, most of
which are leased, throughout Norway, making it one of the largest bus operators in the
country. Most of its revenues are generated from local route traffic, including school routes,
but it is also active in the tour and express segments, i.e. routes that cross county borders,
along with some regular goods transport and repair services. It is primarily present in 11 of
Norway's 19 counties, with the largest share of its route production on contract generated
in Oslo and Akershus at 35%. Trøndelag is Torghatten's second-largest region with 25% of
its route production. Divisionally, while NorgesBuss makes up over half of Torghatten's
revenues, its share of net profits is lower. Trønderbilene, meanwhile, makes up a third of
revenues but nearly half of net profits. The past few years have seen a steady increase in
Torghatten's contract revenues and they now make up 75% of its total revenues, up from
69% in 2011. Moreover, EBITDA-margins have averaged 11.5% over the last four years.
TORG bus segment: Revenue and EBITDA-margin development Exhibit 60.
Source: TORG, SpareBank 1 Markets
Norgesbuss
Established in 1996, Norgesbuss is today one of Norway's largest bus operators. Torghatten
became the sole shareholder in 2008. Although most of its turnover is generated in
Oslo/Akershus, NorgesBuss won the largest ever bus contract in Norway. Starting in July
2016, the contract with Rogaland County has an annual value of NOK420m, meaning
southern Norway has become an important region for NorgesBuss. The contract also made
TORG the second largest bus operator in the country. On top of route bus operations,
NorgesBuss also runs three of four airport express routes to Oslo Gardermoen, in addition
to owning and operating SAS Flybussen, another airport express bus operator.
Trønderbilene
Established in 1920, Trønderbilene was run by Nord-Trøndelag County until 1998 when
Torghatten acquired two thirds of the company. Torghatten acquired the remaining third in
2011. Today, Trønderbilene has 430 buses and operates routes in Trøndelag and Hedmark
counties. In June 2015, Trønderbilene launched new routes on contract with Hedmark
county with a value of NOK35m p.a.
Sørlandsruta
Sørlandsruta was established in 1951 in Vest-Ager as a merger between 13 individual bus
companies and Torghatten acquired the company in 2009. Sørlandsruta operates around
70 buses. A couple of years back, Sørlandsruta won a 10-year contract in Vest-Agder valued
at NOK30 per year, which was launched in January 2016.
Torghatten Buss
Torghatten Buss traces its roots to the late 19th century when Torghatten was first founded,
but bus operations did not commence before 1930. Today, the company runs 80 buses on
routes in Nordland and Troms.
8.0%
8.5%
9.0%
9.5%
10.0%
10.5%
11.0%
11.5%
12.0%
12.5%
13.0%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2011 2012 2013 2014 2015 2016
NO
Km
Bus Transport Revenues
Ticket revenues Contract revenues Other EBITDA-margin
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 29
Company Report
Torghatten
The Norwegian Bus Market
Population growth only explains half of the volume growth…
While population growth is an important driver of passenger growth, explaining roughly half
of the national increase since 2005, overall, Norwegians are also increasingly using bus
transport. The average number of journeys per citizen has increased from 60 to 67, which
explains the other half of the volume growth. Indeed, Passenger volume in Norway has
increased 2% annually to a total of 350m in 2016. However, as shown below, this
development is also driven by the Oslo/Akershus region, where journey volume per capita
explains almost two thirds of the total passenger growth since 2005. In most of Norway's
other counties, meanwhile, people are actually using bus transport less frequently, in which
makes consolidation even more attractive.
Norway: Passenger Volume Exhibit 61. Norway: Total Buss Passenger Volume Development (2005 – 2016) Exhibit 62.
Source: Statistics Norway, SpareBank 1 Markets Source: Statistics Norway, SpareBank 1 Markets
…but, passenger volume growth expected at 1-3% going forward
Based on Statistics Norway's three population growth scenarios and knowing that
population growth has historically driven around half of the bus passenger growth, we
expect the latter to grow 1-3% annually over the next 15 years. In the mid case scenario,
population growth is expected at 1%, translating into 2% passenger growth. Not
surprisingly, Oslo/Akershus is the region where we should expect the fastest growth. This is
also the case in Rogaland and Vest-Agder, all of which are regions to which Torghatten is
attractively exposed. Hence, with passenger volume growth expected at around 2%,
coupled with the abovementioned evidence that population growth only explains half of
the volume growth in the period 2005 to 2016, we are able to some certain degree the
market growth to be input in our model.
Norway: Passenger volume growth forecast Exhibit 63. Norway: Annual population growth by county (Mid case, 2014-2030e) Exhibit 64.
Source: Statistics Norway, SpareBank 1 Markets Source: Statistics Norway, SpareBank 1 Markets
0
50
100
150
200
250
mill
ion
pas
sen
gers
Akershus/Oslo Non Akershus/Oslo
276
350
0
50
100
150
200
250
300
350
400
Bus Passengers ('05) Population Growth Journeys per Passenger Bus Passengers ('16)
Mil
lio
n P
ass
en
ge
rs
240
290
340
390
440
490
2005 2007 2009 2011 2013 2015E 2017E 2019E 2021E 2023E 2025E 2027E 2029E
mill
ion
pas
sen
gers
Title
Actual passenger volume Population Growth (Mid Case) Journeys/Passenger Growth
+1.0% p.a.
+0.9% p.a.
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
po
pu
lati
on
gro
wth
(C
AG
R 2
01
4-3
0)
Title
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 30
Company Report
Torghatten
Increasingly competitive industry spurring heavy consolidation
The past 20 years have seen a great shift in how municipalities procure bus transport
services. In the early 1990s, all route production was operated directly by local authorities.
However, in 1994 the Norwegian government opened up for competitive tendering. So
today, around 90% of all route production is sourced through this bidding process. By end-
2019, almost all counties will likely procure most of its bus transport needs through such
tendering. In particular, the Northwest, which represented around 10% of Norway's total
route production in 2016, will see strong growth in public procurement, thus opening up
more of the Norwegian market for TORG and other bus operators. While there was over
200 individual bus operators in the 1990s, as contracts were increasingly put on tender,
competition intensified, spurring heavy consolidation. Today, six companies share around
90% of the market, measured in route kilometre production.
Norway: Percentage of total route production on tender Exhibit 65.
Source: NHO Transport (assuming flat route production), NorgesBuss, SpareBank 1 Markets
Torghatten has become the second largest bus operator, up from #3 in 2014
Of the total route production on public contracts in Norway today, Nettbuss (owned by NSB)
is the largest bus operator with a 27.5% market share. TORG is second at 20.3%, followed
by Tide at 14.5%. Unibuss and Boreal each have around 11% and 12% of the market,
respectively, while Nobina holds ~7%. Regionally, the hierarchy varies. Nettbuss has leading
market positions in Central Norway and East (excl. Oslo/Akershus), while Unibuss
dominates in Oslo/Akershus. In the North, Boreal is the clear market leader and has also
taken the leading position in South from Nettbuss, while Tide dominates in the West.
Torghatten is the only operator present in all regions, but its strongest positions are in West
(#2, 30%) and Oslo/Akershus (#2, 25%). It also has meaningful positions in Central Norway
(#2, 20%), South (#3, 18%), East (#3, 13%), and lastly but not least in the North (#4, 10%).
Norway: Market Share by Bus Operator and County Exhibit 66. Norway: Market Share public route production Exhibit 67.
Source: Kollektivtrafikkforeningen (Nov. 2017), SpareBank 1 Markets Source: Kollektivtrafikkforeningen (as of Nov. 2017), SpareBank 1 Markets
1% 2%7%
17%
26% 28%
38%
51%
65%68%
80%
93%97%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1995 1999 2001 2003 2005 2007 2009 2011 2012 2013 2014 2017E 2019E
% o
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Title
0%
10%
20%
30%
40%
50%
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70%
80%
90%
100%
Oslo/akerhus Østlandet Sørlandet Vestlandet MidtNorge NordNorge
Andre Boreal Nettbuss Nobina Tide Torghatten Unibuss
27.5%
20.3%
14.5%
12.3%
11.1%
7.5%
6.8%
Nettbuss
Torghatten
Tide
Unibuss
Boreal
Andre
Nobina
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 31
Company Report
Torghatten
Over 50% of current contracts could mature over the next three years
Excluding options, 53% of all Norwegian route production on contract today will mature by
end-2020. If all options are called, the same figure is just below 40%. Therefore, several new
tender opportunities could surface for bus operators in the coming years. However, the
share of contracts maturing by 2020 is in the low end for Torghatten, both including and
excluding options. Therefore, instead of defending contracts already in production, TORG
can focus its resources on competing for new contracts. Indeed, as evidenced in exhibit 69
below, the situation is worse for almost all the other operators. Unibuss and Tide risk north
of 50% of all production volume expiring in the next three years, whereas Nettbuss and
Nobina risk just south of 50%.
Norway: Maturity schedule of total route production on contract Exhibit 68. Norway: Contract maturity by end-2020, by operator Exhibit 69.
Source: Kollektivtrafikkforeningen (Nov, 17), SpareBank 1 Markets Source: Kollektivtrafikkforeningen (Nov, 17), SpareBank 1 Markets
TORG contract overview
Based on data from Kollektivtrafikkforeningen, TORG currently has 4% of its public contracts
in production, excluding express routes and other contracts, expiring in 2018. Indeed, this
summer, a public contract with region South for 75 busses transporting customers from
Kristiansand to Lista and Lindesnes to Mandal goes off contract. However, the contract
include optionality to extend the contract for four years, in which exercised, TORG has zero
contract expiry this year. Moreover, a contract for 57 busses in East of Norway come on
stream June this year, somewhat offsetting the loss of the contract in South. As such, we
argue that growth in 2018 will be limited to underlying market growth, as discussed earlier.
TORG: Contract overview per region Exhibit 70.
Source: Kollektivtrafikkforeningen (Nov, 17), SpareBank 1 Markets
In 2019, however, seven contracts expire (20% of public route production expires, if options
are not called). Indeed, two contracts in Central Norway for 102 busses, with one optional
year, and one for 120 busses where all options is exercised. Moreover, four contracts in
North of Norway rolls off with in sum 49 busses where only one of the contracts (for two
busses), has a two year option baked in. In addition, a contract in Oslo/Akershus for Nittedal
consisting of 30 busses do also roll off in 2019, without any optionality. We assume TORG is
able to win back its own contracts and hence, growth in 2019 is limited to market growth.
In 2020, five public contracts with expire, if options are not called. In November last year
(which is our latest data point), these contracts represented nearly 20% TORG's public route
production. Indeed, there is one contract in region East for 23 busses with no optionality.
Four contracts with in total 177 busses, with a three year option on only one contract for
0%
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35%
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2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
% o
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Contract Expiry (without options) Contract Expiry (with options)
0%
10%
20%
30%
40%
50%
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70%
80%
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Unibuss Tide Nettbuss Nobina Torghatten Boreal%
of
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Without Options With Options
Region Total rutekm Torghatten %
Sør 17,291,000 3,050,000 17.6%
Oslo/Akershus 61,671,661 15,243,574 24.7%
Øst 60,130,652 7,687,000 12.8%
Midt 42,441,442 8,338,552 19.6%
Nord 30,740,127 3,110,352 10.1%
Vest 60,480,607 17,870,000 29.5%
Sum 272,755,489 55,299,478 20.3%
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 32
Company Report
Torghatten
50 busses, account for the reminder. Moreover, zero contracts have start-up in 2020, which
will not help balance out the potential production loss. However, there are no indications
the contracting authorities in question are dissatisfied with the service provided to date,
and we believe an extension is more likely than the opposite. Nevertheless, we model with
below market growth in 2020 in order to account for the uncertainty.
TORG: Contract expiry overview Exhibit 71. TORG: Contract maturity schedule Exhibit 72.
Source: Kollektivtrafikkforeningen (Nov, 17), SB1M | *Contract expiry (excl. options) Source: Kollektivtrafikkforeningen (Nov, 17), SB1M
TORG bus estimates
Our estimates are based on the above contract overview. We expect options are called and
that the top line will grow in line with the underlying market. We expect margins will
normalise around the historical average at 11%, as we believe strong competition for
individual tenders mean margins face continuous pressure, suggesting excessive margin
expansion is not very likely.
Estimates: Bus transport Exhibit 73.
Source: Torghatten, SpareBank 1 Markets.
0%
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2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
% o
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Contract Expiry (without options) Contract Expiry (with options)
Bus Transport 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E
Ticket revenues 391 383 469 353 294 297
Contract revenues 970 1,019 1,165 1,376 1,466 1,700
Other 41 44 70 96 87 103
Revenues 1,403 1,446 1,704 1,826 1,847 2,100 2,206 2,293 2,384 2,433
YoY 3.1% 17.9% 7.1% 1.2% 13.7% 5.1% 3.9% 4.0% 2.1%
OpEx -1,241 -1,280 -1,519 -1,605 -1,633 -1,908 -1,986 -2,040 -2,122 -2,166
YoY 3.1% 18.7% 5.7% 1.7% 16.9% 4.1% 2.8% 4.0% 2.1%
EBITDA 162 166 186 221 214 191 221 252 262 268
EBITDA-margin 11.6% 11.5% 10.9% 12.1% 11.6% 9.1% 10.0% 11.0% 11.0% 11.0%
D&A -93 -98 -109 -125 -107 -90 -95 -99 -103 -105
D&A / Sales -6.6% -6.8% -6.4% -6.9% -5.8% -4.3% -4.3% -4.3% -4.3% -4.3%
EBIT 69 69 77 96 107 102 126 154 160 163
EBIT-margin 4.9% 4.7% 4.5% 5.2% 5.8% 4.8% 5.7% 6.7% 6.7% 6.7%
Net financials -13 -11 -9 -11 -8 -20 -6 -4 0 2
Net Income from EAIs and Associates 0 3 0 11 0 1
Pre-tax profit 55 60 68 96 98 83 120 150 159 165
Taxes -17 -17 -17 -24 -25 -25 -29 -36 -38 -40
Effective tax rate -31.3% -28.8% -25.5% -24.9% -25.4% -29.9% -24.0% -24.0% -24.0% -24.0%
Net Profit 38 43 51 72 73 58 91 114 121 126
of which, parent 37 42 47 71 69 58 86 109 115 120
of which, non-controlling interests 1 1 4 1 4 1 5 6 6 6
of which, non-controlling interests % 3.4% 2.3% 8.1% 1.0% 6.0% 1.4% 5.4% 4.8% 4.8% 4.8%
Net Profit Margin 2.7% 3.0% 3.0% 3.9% 4.0% 2.8% 4.1% 5.0% 5.1% 5.2%
Torghatten Total Contract Expiry* % Incl. Options With options %
31/12/2017 55,299,478 0 0% 55,299,478 0 0%
31/12/2018 53,199,478 2,100,000 4% 55,299,478 0 0%
31/12/2019 42,402,137 10,797,341 20% 48,371,628 6,927,850 13%
31/12/2020 30,690,044 11,712,093 21% 35,886,142 12,485,486 23%
31/12/2021 28,472,044 2,218,000 4% 34,914,651 971,491 2%
31/12/2022 26,972,044 1,500,000 3% 32,814,651 2,100,000 4%
31/12/2023 24,161,334 2,810,710 5% 28,472,044 4,342,607 8%
31/12/2024 6,813,334 17,348,000 31% 26,972,044 1,500,000 3%
31/12/2025 2,082,000 4,731,334 9% 20,511,334 6,460,710 12%
31/12/2026 0 2,082,000 4% 3,163,334 17,348,000 31%
31/12/2027 0 0 0% 2,082,000 1,081,334 2%
31/12/2028 0 0 0% 0 2,082,000 4%
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 33
Company Report
Torghatten
TORG Bus Valuation
We have decided to take a relative valuation approach to TORG's bus transport business.
The company discloses limited information for this segment, which increases estimate risk
sufficiently to warrant this methodology. Our peer group includes its rival, Nobina, which is
listed in Stockholm and is predominantly active in the bus transport segment throughout
the Nordics. We have also included London-listed peers to hedge the visibility risk, which
also have some railway operations.
Torghatten: Bus Transport Peer Group Exhibit74.
Source: Bloomberg, SpareBank 1 Markets
First, we find Nobina the undisputable most comparable peer to TORG’s Bus segment due
to similar business model. Moreover, Nobina has somewhat higher EBITDA margins, but
similar EBIT margins and TORG is able to achieve higher return on invested capital. As such,
our preferable valuation methodology is to compare TORG with Nobina on EV/EBITDA.
Thus, applying 7.6x EV/EBITDA to our 2018e EBITDA estimate, adjusting for ownership and
dividing by number of shares yield NOK38 per TORG share. However, due to the many
different financing options available to operators in this space and the obvious difference
between TORG and Nobina EBITDA and EBIT margin, we double check and validate our
approach by applying P/E as well. Indeed, Nobina trades at 15x 2018e P/E, which at our
2018e EPS estimate gives us a value of TORG's bus transport business of NOK35 per TORG
share. Thus, we argue our estimate of the Bus transportation business is sound.
TORG Bus Transport: Valuation Exhibit 75.
Source: SpareBank 1 Markets, Bloomberg
Historical Historical P/B
1m 3m 6m 2017 2018 2019 5Y avg. 2017 2018 2019 5Y avg. 2017 2018 2019 2017
Median -1% -5% -12% 4.2x 4.4x 4.3x 6.4x 8.8x 7.9x 8.3x 10.1x 8.5x 9.0x 9.5x 3.2x
NOBINA AB 5% 25% -10% 7.0x 7.3x 6.9x 6.8x 16.6x 17.5x 15.6x 15.4x 15.4x 15.2x 13.6x 3.6x
STAGECOACH GROUP PLC -1% -12% -26% 4.2x 4.4x 4.3x 6.4x 6.9x 7.9x 8.3x 10.1x 6.5x 7.9x 8.6x 5.5x
NATIONAL EXPRESS GROUP PLC 4% -3% 0% 7.3x 7.0x 6.8x 7.1x 12.0x 11.3x 11.1x 11.6x 12.5x 11.5x 11.1x 1.6x
GO-AHEAD GROUP PLC -4% -5% -12% 2.3x 2.5x 2.5x 4.2x 3.4x 3.9x 4.4x 6.6x 7.8x 9.0x 9.5x 3.2x
FIRSTGROUP PLC -5% -13% -28% 3.7x 3.4x 3.3x 4.5x 8.8x 7.5x 6.9x 9.6x 8.5x 8.1x 7.2x 0.7x
Share price performance EV/EBITDA EV/EBIT P/E
38
35
EV/EBITDA P/E
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 34
Company Report
Torghatten
Estimate revisions TORG is an impressive company, which has evidenced stellar performance over a long
period and we see no reason for the company not to perform accordingly in the future as
well. Indeed, since the last update, we have revised up our ferry results for 2017 and 2018
to 1) include recent business wins, 2) take into account improved cost position and 3)
increased focus on reduction in number of incidents. However, TORG still lag key peer
Fjord1 on EBITDA margin. That being said, our understanding is that TORG has the same
mind-set when it comes EBITDA margin in the range of 35% to 40% on new contracts (to
offset increased capex from government requirements of environmental friendly vessels in
new contracts that has higher capex), in which we argue TORG is positioned for margin
expansion going forward. Indeed, already in 2019e we model with a slight up-tick in EBITDA
margin to 24% and large up-tick in absolute EBITDA, as new contracts account for a larger
piece of the pie with start-up of Flakk – Rørvik and Halhjem-Sandvikvåg, the 10th and 3th
largest ferry connections in Norway.
Moreover, in the air segment, we have lowered our 2017e EBITDA with 17%. Indeed,
Widerøe has experienced some issues during the summer this year in relation to lack of
personnel, which has driven cancellations of flights and associated one-off costs. However,
with adjustments to the work force and a normalised cancellation rate, we argue 2017
represent a transition year so to speak, and model Widerøe back to 2016 levels in 2018e.
As such, we up our 2018e revenues and EBITDA estimate with 13% and 12%, respectively.
Bus is a scale game and after taking into account the latest reported figures in TORG, we
simply argue our margin expectations in the Bus segment was unwarranted. Consequently,
our EBITDA in this segment is adjusted down by 9% in 2017e and 5% in 2018e. However,
with upped revenue estimates, the absolute EBITDA figures is actually on average slightly
up.
TORG P&L
Overall, we lower our 2017e EBITDA estimate by 4%, whereas our 2018e EBITDA figures is
upped with 9%. However, with some adjustments to interest cost in 2017 due to lower NIBD
compared to the previous report and lowered depreciation and taxes, our 2017e and 2018e
EPS is increased by 6% and 9%, respectively, whereas 2019e is pretty much unchanged.
Torghatten: Estimate Revisions and Detailed Estimates Exhibit 76.
Source: Torghatten, SpareBank 1 Markets.
Torghatten ASA
NOKm 2016A 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E
Revenues 9,386 9,896 10,279 11,015 9,485 9,700 4% 6%
Expenses -8,040 -8,572 -8,736 -9,310 -8,112 -8,281 6% 5%
EBITDA 1,345 1,325 1,543 1,705 1,373 1,419 -4% 9%
EBITDA-margin 14.3% 13.4% 15.0% 15.5% 14.5% 14.6%
DA&I -612 -665 -704 -726 -677 -717 -2% -2%
EBIT 733 660 839 979 696 702 -5% 20%
Net financials and other -143 -65 -145 -138 -160 -141 -59% 3%
Pre-tax profit 590 595 695 841 536 561 11% 24%
Tax & Minorities -244 -180 -247 -289 -145 -151 24% 63%
Net income 346 415 448 552 391 409 6% 9%
EPS 8.74 9.43 11.62 8.23 8.62 6% 9%
Sea
Revenues 2,354 2,518 2,568 2,953 2,476 2,525 2% 2%
EBITDA 502 579 591 709 484 497 20% 19%
EBITDA % 21.3% 23.0% 23.0% 24.0% 19.6% 19.7%
Bus
Revenues 2,100 2,206 2,293 2,384 2,116 2,199 4% 4%
EBITDA 191 221 252 262 244 265 -9% -5%
EBITDA % 9.1% 10.0% 11.0% 11.0% 11.5% 12.1%
Air
Revenues 4,560 4,791 5,031 5,282 4,386 4,460 9% 13%
EBITDA 646 479 654 687 575 585 -17% 12%
EBITDA % 14.2% 10.0% 13.0% 13.0% 13.1% 13.1%
Other Maritime
Revenues 330 337 344 350 451 460 -25% -25%
EBITDA 35 40 41 42 63 64 -36% -36%
EBITDA % 10.6% 12.0% 12.0% 12.0% 14.0% 14.0%
Other
Revenues 42 43 44 45 55 56 -22% -22%
EBITDA -29 5 5 5 7 7 -22% -22%
Old Delta (%)New
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 35
Company Report
Torghatten
TORG Balance sheet
Torghatten: Balance sheet Exhibit 77.
Source: Torghatten, SpareBank 1 Markets.
Financial Position 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E
Assets 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E
Goodwill/Intangibles 71 123 189 165 141 120 97 73 49 26
Property 160 151 223 211 191 259 238 217 197 176
Sea 1,977 2,403 2,432 2,665 2,693 3,093 3,110 3,518 3,509 3,324
Air 0 0 1,347 1,619 1,525 1,529 1,600 1,641 1,649 1,627
Other PPE 408 455 1,003 778 809 771 633 494 356 218
Total fixed assets 2,616 3,132 5,194 5,438 5,360 5,771 5,678 5,943 5,761 5,371
Investments in EAIs and Associates 249 213 236 258 62 16 16 16 16 16
Other investments 28 23 18 20 24 22 22 22 22 22
Non-current receivables 204 230 8 238 246 28 28 28 28 28
Pensions 32 31 42 55 60 62 62 62 62 62
Total fixed financial assets 513 497 305 571 392 128 128 128 128 128
Inventories 47 51 193 175 173 222 198 206 220 225
Trade receivables 188 223 387 549 437 553 544 565 606 619
Other receivables 91 73 402 133 169 248 248 248 248 248
Investments 126 23 10 14 214 226 226 226 226 226
Cash 580 754 828 640 800 942 989 1,333 1,458 1,907
Total current assets 1,031 1,123 1,819 1,511 1,793 2,191 2,204 2,577 2,757 3,225
Total assets 4,160 4,752 7,318 7,519 7,546 8,091 8,011 8,649 8,647 8,724
Depreciation Schedules
Equity and Liabilities 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E
Paid-in share capital 266 291 208 230 230 234 234 234 234 234
Retained earnings 748 852 1,035 1,089 1,328 1,719 1,991 2,372 2,805 3,438
Minority interests 103 108 442 485 548 447 447 447 447 447
Equity 1,117 1,251 1,686 1,804 2,106 2,401 2,673 3,054 3,487 4,120
Pension liabilities 21 18 45 40 29 20 20 20 20 20
Deferred tax 113 138 139 176 260 380 380 380 380 380
Other provisions 44 24 46 40 39 3 3 3 3 3
Interest-bearing debt 2,198 2,546 3,505 3,724 3,490 3,319 2,959 3,168 2,673 2,261
Other liabilities 37 45 206 113 97 55 55 55 55 55
Non-current Liabilities 2,414 2,771 3,942 4,094 3,916 3,777 3,416 3,625 3,130 2,718
Trade payables 180 253 297 408 315 408 396 411 441 450
Tax payable 35 17 16 20 6 17 17 17 17 17
Public duties payable 81 96 272 300 226 295 295 295 295 295
Dividend for parent shareholders 37 37 42 43 23.8 70.0 91 123 154 0
Dividend for minorities 6 15.7
Other current liabilities 297 327 1,062 845 938 1,123 1,123 1,123 1,123 1,123
Current Liabilities 629 730 1,690 1,621 1,524 1,914 1,921 1,970 2,030 1,886
Total Liabilities 3,043 3,501 5,632 5,715 5,439 5,690 5,338 5,595 5,160 4,604
Total Equity and Liabilities 4,160 4,752 7,318 7,519 7,546 8,091 8,011 8,649 8,647 8,724
Check OK OK OK OK OK OK OK OK OK OK OK
Key metrics 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E
Average interest rate on Cash 6.1% 5.7% 5.4% 4.0% 1.6% 0.5% 0.5% 0.5% 0.5%
Average interest rate on IBD -3.2% -3.4% -4.0% -4.2% -5.0% -3.2% -4.0% -4.0% -4.0% -4.0%
IBD 2,198 2,546 3,505 3,822 3,580 3,319 2,959 3,168 2,673 2,261
NIBD 1,493 1,769 2,668 3,168 2,567 2,151 1,744 1,610 989 129
NIBD/LTM EBITDA 2.9 3.4 3.9 3.0 2.1 1.6 1.3 1.0 0.6 0.1
Equity ratio 27% 26% 23% 24% 28% 30% 33% 35% 40% 47%
Capital Employed 3,530 4,022 5,628 5,897 6,022 6,177 6,089 6,679 6,617 6,838
ROCE 8.9% 7.3% 6.1% 8.0% 9.2% 12.0% 10.9% 13.2% 14.4% 14.8%
ROE 13.5% 13.3% 11.8% 12.0% 19.6% 19.9% 16.3% 19.6% 19.7% 18.2%
ROE adj. For minorities 14.5% 13.7% 11.1% 12.1% 21.1% 19.7% 17.8% 19.7% 19.6% 17.7%
Downpayment profile (per 31.12.2016) OK 503.8 394.7 498.8 415.4
22 January 2018
Important: All disclosure information can be found on page 39 of this document. 36
Company Report
Torghatten
TORG cash flow
Torghatten: Cash flow Exhibit 78.
Source: Torghatten, SpareBank 1 Markets.
Cash Flow 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E
Earnings before tax 205 210 202 266 483 590 538 730 838 897
Taxes paid -35 -29 -28 -14 -26 -6 -124 -168 -193 -206
Profit (Loss) on sale of assets -42 -27 -15 4 -16 2
D&A 239 251 386 607 647 612 659 699 747 806
Dividends 0 0 0 -2 0 0
FX 0 0 15 1 0 0
Items classified as investing/financing activities 22 -9 0 7 -68 1
Profit (Loss) from EAIs and Associates 1 40 3 -22 10 33
Change in current receivables -14 -27 132 -74 112 -116 9 -21 -40 -14
Change in inventory -2 -4 -5 17 2 -49 24 -8 -15 -5
Change in current liabilities (payables going fwd) -1 0 -29 133 -93 94 -13 15 29 10
Change in other items 17 -32 -188 -228 -37 54
Net cash flow from operations 391 373 473 696 1,015 1,215 1,093 1,248 1,367 1,488
Sale of PPE 41 44 30 55 105 118
+ Air PPE investments -320 -320 -320 -320
+ Bus PPE investments -58 -58 -58 -58
+ Sea PPE ivestments -245 -645 -245 -95
Total Investments in PPE -689 -711 -385 -941 -659 -1,146 -623 -1,023 -623 -473
Sale of shares 0 0 0 13 2 13
Purchase of shares and acquisitions -270 0 -589 -54 -8 -90
Sale of financial assets 25 -6 16 9 2 0
Sale of own shares 8 0 16 0 4 0
Purchase of own shares 0 0 -16 -24 -4 -3
Dividends and intra-group contributions 0 0 0 2 0 0
Sale of other investments 2 135 0 3 10 2
Purchase of other investments 0 0 0 -2 -5 0
Net cash flow from investments -883 -538 -927 -940 -553 -1,107 -623 -1,023 -623 -473
Free Cash Flow -492 -165 -454 -243 461 108 470 225 744 1,015
+ Air Loan 0 0 0 0
+ Bus Loan 4 4 4 4
+ Sea Loan 140 600 0 0
Proceeds from new non-current loans 833 563 442 921 257 565 144 604 4 4
Proceeds from new current loans 0 0 0 127 0 0
Flows from (to) EAIs and Associates 0 0 48 0 0 0
Downpayments of non-current IBD -257 -242 -249 -969 -507 -748 -504 -395 -499 -415
Downpayments of other loans 0 0 0 0 0 315
Payments to other creditholders 0 0 -103 0 0 -59
New equity 0 26 293 32 0 0
Dividend payments -38 -36 -56 -55 -51 -39 -64 -91 -123 -154
Net cash flow from financing 538 310 376 56 -301 34 -424 118 -619 -566
Net change in cash 46 145 -77 -188 161 142 46 344 125 449
IB cash 486 580 754 828 640 800 942 989 1,333 1,458
Adjustments to due company changes 47 29 151 0 -1 0
UB cash 580 754 828 640 800 942 989 1,333 1,458 1,907
Check OK OK OK OK OK OK OK OK OK OK
DPS Proposed 4.0 4.5 4.5 2.5 1.0 1.6 2.3 2.9 3.1
DPS Paid for year 4.0 6.1 5.9 5.5 4.2 1.3 1.9 2.6 3.2 3.5
DPS Paid for year (implied minorities) 2.1 1.4 1.0 1.7 0.3 0.3 0.3 0.3 0.3
Payout Ratio 25.0% 31.9% 27.2% 7.7% 13.7% 20% 23% 25% 25%
Average share price 152.1 194.2 52.3 80.0 90.0 90.0 90.0 90.0
Yield 3.0% 2.3% 4.8% 1.3% 1.7% 2.5% 3.2% 3.5%
Assumptions 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E
Inventory / Sales 1.4% 1.4% 3.8% 2.1% 2.0% 2.4% 2.0% 2.0% 2.0% 2.0%
Trade Receivables / Sales 5.5% 6.3% 7.6% 6.7% 5.1% 5.9% 5.5% 5.5% 5.5% 5.5%
Trade Payables / Sales 5.3% 7.1% 5.8% 5.0% 3.7% 4.4% 4.0% 4.0% 4.0% 4.0%
Working capital 55 21 283 316 295 367 346 360 386 394
in % of 12m revenue 1.6% 0.6% 5.5% 3.9% 3.4% 3.9% 3.5% 3.5% 3.5% 3.5%
∆ in WC -34 262 34 -21 72 -20 13 26 9
22 January 2018
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Torghatten
Valuation
Target price upped from NOK88 to NOK115 We revise up our target price from NOK88 to NOK115 driven by 1) overall positive EBITDA
and EPS estimate revisions, 2) multiple expansion in both the bus and airline business
segment and 3) the fact that TORG’s ~11% stake in NTS ASA has also increased by NOK2 per
share since our latest report. Hence, we still see significant upside potential to the current
share price of NOK87 and reiterate our Buy recommendation. Indeed, our valuation implies
a 2018E EV/EBITDA of 6x, EV/EBIT 11.1x, and P/E of 12.3x. The corresponding 2019e figures
are EV/EBITDA of 5.5x, EV/EBIT 9.5x, and P/E of 10x. Overall, these are implied multiples we
find very attractive and argue support our Buy recommendation and NOK115 target price,
which represent approximately 35% upside to last close.
Torghatten: Sum-of-the-Parts Valuation Exhibit 79.
Source: Bloomberg, Torghatten, SpareBank 1 Markets. Note: Multiples adjusted for minorities
As evidenced in the figure below, Air transport, i.e. the 66% stake in Widerøe, account for
some 34% of our NOK116 per share SOTP. The segment is closely followed by Bus, which
account for 32% of our SOTP. Next, we have the ferry transport segment, which account for
23% of the value in TORG. The stake in NTS is 6% of the SOTP and other maritime,
associates/EAIs and other investments in sum account for the reminder or NOK5 per share.
Torghatten: Sum-of-the-Parts Valuation Illustrated Exhibit 80.
Source: Bloomberg, Torghatten, SpareBank 1 Markets.
Torghatten ValuationNOKm Methodology 2018E EV/EBITDA EV NIBD Equity Value Ownership Equity Value Per Share
Ferry Transport Peer multiples 6.0x 3,543 2,200 1,343 94% 1,269 27
Bus Transport Peer multiples 7.3x 1,846 0 1,846 97% 1,784 38
Air Transport Peer multiples 4.9x 3,206 400 2,806 66% 1,852 39
Other Maritime Peer multiples 6.1x 283 192 91 100% 91 2
NTS ASA Current market capitalisation 3,332 11% 355 7
Associates/EAIs Book/Market value 155 3
Other investments Book value 22 0
Total 8,878 2,792 9,418 5,528 116
Upside (Downside) on last close 35.7%
Valuation Metrics
Implied 2018e EV/EBITDA 6.0x
Implied 2019e EV/EBITDA 5.5x
Implied 2018e EV/EBIT 11.1x
Implied 2019e EV/EBIT 9.5x
Implied 2018e P/E 12.3x
Implied 2019e P/E 10.0x
To Torghatten
Ferry Transport 23%
Bus Transport32%
Air Transport34%
Other Maritime2%
NTS ASA6%
Associates/EAIs3%
Other investments0%
22 January 2018
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Company Report
Torghatten
Valuation support in ROE vs. P/B approach From our experience with discussing transportation companies, we found various opinions
on long-term ROE, required return on equity (“RROE”) and how to think about P/B. This
applies to TORG as well. However, we can only speak for ourselves, but here is our view.
First, to calculate long-term fair ROE for TORG, we look at the company adjusted for
minorities, i.e. we use net income attributed to parent company (adjusted for non-
controlling interests) and book values adj. for minorities. Indeed, TORG has been able to
deliver ROE around 17-18% on average last five years, and based on the arguments in the
“estimates” section above, we argue TORG should be able to deliver 18% going forward.
Hence, we apply long-term ROE of 18% in this approach.
TORG: ROE adjusted for minorities Exhibit 81.
Source: TORG, SpareBank 1 Markets.
Moreover, when calculating required return on equity from peers by simply dividing ROE by
the current P/B valuation in the market, we arrive at around 7% on average. Hence, if we
take our long-term ROE assumption of ~18% mentioned above and divide by the required
return on equity from peers of 7%, we arrive at a fair P/B multiple in TORG of 2.57x. Thus,
coupled with a book value of equity, adjusted for minorities as of 2H17 (last reported figure
in TORG) of NOK2.177m, this cocktail of numbers correspond to a fair market cap of
~NOK5.6bn or NO118 per share, assuming 47.5m shares. Thus, our take and key take-away
from this approach is that we find valuation support for our Buy rec. and NOK115 tp.
TORG: Valuation based on ROE vs. P/B Exhibit 82.
Source: TORG, SpareBank 1 Markets.
TORG: Valuation sensitivities Exhibit 83.
Source: SpareBank 1 Markets.
14.5%13.7%
11.1%12.1%
21.1%19.7%
17.8%
19.7% 19.6%
17.7%
2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E
Comments
10 year average ROE 18.1% Based on reported figures17-'20e average ROE 17.9% SB1M estimatesNormalised long-term ROE 18% Average
RROE from peers 7% Implied from traded peersImplied fair P/B ratio 2.57
Book value adj. for minorities 2,177 1H17 reported figureFair equity value 5,598
# of shares 47.5Fair TORG share price 118
Scenario analysis
9298
105111
118124
131137
144
0
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14% 15% 16% 17% 18% 19% 20% 21% 22%
Fair
TO
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sh
are
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Nomalised long-term ROE
22 January 2018
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Company Report
Torghatten
IMPORTANT DISCLOSURES AND CERTIFICATIONS This document provides additional disclosures and disclaimers relevant to research reports and other investment recommendations (“Recommendations”) issued by SpareBank 1 Markets AS (“SpareBank 1 Markets”), cf. the Norwegian Securities Trading Act section 3-10 with further regulations. Standards and supervisory authorities SpareBank 1 Markets complies with the standards for recommendations issued by the Norwegian Securities Dealers Association (http://vpff.no/) and the Norwegian Society of Financial Analysts. The lead analyst (see front page) is employed by SpareBank 1 Markets, which is legally responsible for this report and is under the supervision of The Financial Supervisory Authority of Norway (Finanstilsynet). Previous Recommendations For an overview of SpareBank 1 Markets research reports and other investment recommendations regarding the financial instruments of the issuer the past 12 months, including data on changes in such research reports and other investment recommendations, please see SpareBank 1 Markets’ website, www.sb1markets.no (log-in required) Planned updates Unless explicitly stated otherwise in this report, SpareBank 1 Markets expects, but not undertake, to issue updates to this report following the publication of new figures or forecasts by the issuer covered, or upon the occurrence of other events which could potentially have a material effect on it. Information sources Important sources of information: the issuer, including its quarterly and annual reports, Oslo Stock Exchange, Statistics Norway (Statistisk Sentralbyrå). Sources are cited when referred to in the Recommendation. We use only sources we find reliable and accurate, unless otherwise stated. The Recommendations has not been presented to the issuer/ the issuers of the financial instrument presented before dissemination. SpareBank 1 Markets’ interests and disclosure of assignments and mandates Financial instruments held by the analyst(s) and/or close associate in the issuer/ issuers herein: 0 Other material interest (if any): None SB1M does not own a net long or short position exceeding the threshold of 0,5% of the total issued share capital of the issuer, nor does SB1M hold other interests likely to affect the objectivity of a recommendation, except when disclosed, cf. below. SpareBank 1 Markets may hold financial instruments in companies where a recommendation has been produced or distributed by SpareBank 1 Markets in connection with rendering investment services, including market making. For important disclosures, such as an overview of all financial instruments in which SpareBank 1 Markets or related companies are market makers or liquidity providers, all financial instruments where SpareBank 1 Markets or related companies have been lead managers or co-lead managers over the previous 12 months, and all issuers of financial instruments to whom SpareBank 1 Markets or related companies have rendered investment banking services over the previous 12 months, please refer to SpareBank 1 Markets equity research website: www.sb1markets.no (login required) Please note that agreements and services subject to confidentiality are excluded. SpareBank 1 Markets Research Department Our recommendations are based on a six-month horizon, and on absolute performance. We apply a three-stage recommendation structure where Buy indicates an expected annualized return of greater than +10%; Neutral, from 0% to +10%; Sell, less than 0%.
Current recommendations of the Research Department: (refers to Recommendations published prior to this report and required disclosed in accordance with the Securities Trading Regulations section 3-11 (4)
Current recommendations of the Research Department
Recommendation Percent
Buy 54.3%
Neutral 20.8%
Sell 24.9%
Standard research disclaimer All employees of SpareBank 1 Markets are subject to duty of confidentiality towards clients and with respect to inside information. SpareBank 1 Markets operates a system of “Chinese Walls” and other organizational procedures in order to control the flow of information within the firm and minimize conflicts of interest within SpareBank1 Markets and between clients. The Research Department is part of this system. The Research Analysts of SpareBank 1 Markets receive salary and are members of the bonus pool. However no part of the analysts’ salaries or compensations relates to the performance of their recommendations, directly to investment banking services or other services provided by SpareBank 1 Markets or related companies to issuers. Analyst Certification The views expressed in this research accurately reflect(s) the personal views of the analyst(s) principally responsible for this report about the subject securities or issuers, and no part of the compensation of such analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. No part of the compensation of the research analyst(s) responsible for the preparation of this report was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst(s) in this report. Risks Generally, investments in financial instruments involve risks. For specific risks related to our various recommendations, please see the latest relevant reports. The target prices on companies in the SpareBank 1 Markets Research universe reflect the subjective view of the analyst about the absolute price that financial instruments should trade at, within our
3-Year Price, Target Price and Rating Change History Chart for TORG NO
TORG NO Closing Target
Date Price Price Rating
14/10/2015 289 330 BUY
28/12/2016 80.5 88 BUY
21/01/2018 85.75 115 BUY
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B=Buy, H=Hold, S=Sell
22 January 2018
Company Report
Torghatten
six-month recommendation horizon. The target price is based on an absolute valuation approach, which is detailed in our research reports. The target price can differ from the absolute valuation, in accordance with the analyst's subjective view on the trading or cyclical patterns for a particular financial instrument, or a possible discount/premium to reflect factors such as market capitalization, ownership structure and/or changes in the same, and company-specific issues. This report or summary has been prepared by SpareBank 1 Markets from information obtained from public sources not all of which are controlled by SpareBank 1 Markets. Such information is believed to be reliable and although it has not been independently verified, SpareBank 1 Markets has taken all reasonable care to ensure that the information is true and not misleading. Notwithstanding such reasonable efforts, SpareBank 1 Markets makes no guarantee, representation or warranty as to its accuracy or completeness. 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