Fondsfinans Weekly Picks

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1 Fondsfinans Weekly Picks 21 February 2012 Fondsfinans Research This report was prepared by an analyst employed by Fondsfinans ASA, the Norwegian affiliate of Fondsfinans Inc., who is not registered as a research analyst with FINRA or subject to FINRA rules governing research. See the last page of this report for Important Disclosure Information. 1

2 Portfolio last week Fondsfinans' Weekly Picks Outperform portfolio Price Ticker Date rec. At rec. Week start Last Current Accum. CEQ % 14.1 % EDBASA % 42.7 % MHG % 6.8 % PRS % 25.0 % SFR % -1.9 % SIOFF % 2.9 % RETURN 1.3 % 17.6 % RETURN OSEBX % 10.7 % RETURN DIFFERENCE -1.2 % 6.9 % Underperform portfolio Price Ticker Date rec. At rec. Week start Last Current Accum. GOGL % % NHY % % TEL % -4.7 % RETURN -4.2 % 2.1 % Sw itch (long/short) Price Ticker Date rec. At rec. Week start Last Current Accum. RETURN 0.0 % 0.0 % 2

3 This week s portfolio OUTPERFORM: In: GSF, STL Out: CEQ, PRS UNDERPERFORM: In: Out: EDBASA, GSF, MHG, SFR, SIOFF, STL GOGL, NHY, TEL SWITCH (long / short): 3

4 Outperform portfolio 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 30 Dec ' FF Outperform Portfolio OSEBX Week 4

5 Weekly picks historical performance (Only outperform portfolio) 60% 50% 40% 30% 20% 10% 0% -10% -20% FF Outperform Portfolio OSEBX 5

6 Outperform portfolio Fondsfinans Research 6

7 EDB ErgoGroup NOK 13.2 Buy (EDBASA) 21 February 2012 Target NOK Financial target NOK 1.3b EBITA vs NOK 950m expected Details reveal that much of improvement in 2013 Will increase 2013 EBITA by NOK 100m or 10% Working capital reduction programme from 6,5% of sales to 4,0% Targets release of NOK 300m of cash in addition to ordinary cash flow Says comfortable gearing ratio <2.0x and will reach this in 2012 I.e can move dividend higher in target ratio of 20-50% Dividend could amost double 2012 to 0.65 again in 2013 to 1.1 Pricing in line with ATEA on 2012 = 19, on 2013 = 23 7

8 With new targets DISCOUNTED CASH FLOW NOK million E 2013E 2014E 2015E 2016E 2017E 2018E 2019E Term Sales Growth -1,3 % 3,2 % 3,0 % 3,0 % 3,0 % 3,0 % 3,0 % 3,0 % 3,0 % 3,0 % 2,0 % EBITDA EBITDA margin 9,3 % 9,7 % 10,2 % 12,0 % 12,5 % 12,9 % 12,9 % 12,9 % 12,9 % 12,9 % 12,9 % Depreciation & Amortization EBIT Calculatory tax Cashflow from operations Net investments working capital Net investments assets Net cash flow Years 0,9 1,9 2,9 3,9 4,9 5,9 6,9 7,9 7,9 Discounted value Net present value CF ASSUMPTIONS Net present value CF Beta 1,2 NPV terminal value Risk premium after tax 5,0% Estimated EV Risk free rate 4,0% Net interest bearing debt Return equity 10,0 % Value equity Return debt 6,0 % No. of shares 266,2 Debt ratio 20,0 % NPV per share WACC 9,2 % Working capital/sales 4,0 % Capex/Sales 4,0 % 8

9 EDB is undervalued at current forecasts Key figures (NOKm) E 2013E 3q11 4q11 Revenues EBITDA EBITA Pre-tax Net Income EPS, recurring 2,00 1,71 1,97 2,41 0,54 0,57 Revenue grow th -1 % 3 % 3 % 5 % 4 % 3 % EBITDA margin 9,3 % 9,7 % 10,2 % 11,2 % 11,3 % 10,5 % EV/Sales, static 0,6 0,4 0,5 0,4 EV/EBITDA, static 5,6 5,2 4,8 4,1 EV/EBITA, static 11,0 8,3 7,3 5,9 EV/Op.FCF, static 18,1 7,9 8,2 6,1 P/E, adj 7,9 5,7 6,5 5,3 P/B 0,8 0,5 0,6 0,6 9

10 Grieg Seafood ASA NOK 5.7 BUY (GSF) 21 February 2012 Target NOK 12 GSF trades around EV/kg of 24, P/E (13) around 3.5 and P/B ~0.3 Salmon prices in March towards Easter should be attractive and estimated around NOK 28/kg level Key figures (NOK m) E 2013E 4Q10 4Q11 Total revenues EBITDA EBIT bef. adj IFRS biomass adj PTP EPS EPS adj DPS NIBD Farming Finnmark Farming Rogaland Farming Canada Farming Shetland Total farming (tons) Total farming growth Y/Y -7% 28% -6% 17% -11% 12% 2% EBIT/kg EV/Sales EV/EBITDA EV/EBIT P/E adj P/B Attractive GSF Finnmark Easter biomass this year NAFS Seafood conference in Oslo March Volume guidance Licenses Y/Y Y/Y at 3Q at 4Q 11/10 12/11 Farming Finnmark % 24% Farming Rogaland % 6% Farming Canada % 6% Farming Shetland % 36% Total GSF % 18% 10

11 GSF financials ongoing refinancing 2012 waived (highly geared company; net debt around NOK 19/kg fish) New funding of NOK 400m being established. Final approval pending on one of the syndicate banks 4 banks - Sp Vest (lead), Nordea, Sp 1 SMN & BnBank Paying down Grieg Holding AS with NOK 200m The management is confident that closing will take place Grieg Seafood ASA 1Q11 2Q11 3Q11 4Q11 1Q12E 2Q12E 3Q12E 4Q12E 1Q13E 2Q13E EBITDA 4Q rolling Equity NIBD Gross bank debt Cash end period Adj. NIBD/4Q roll. EBITDA < NIBD/NWC < Adj. equity ratio > 35% 52% 46% 41% 41% 42% 43% 44% 48% 50% 51% Source: Fondsfinans estimates 11

12 Marine Harvest ASA NOK BUY (MHG) 21 February 2012 Target NOK 4.0 MHG trades around EV/kg of 33 and P/E (13) around 7.0 We expect salmon price to slide back this week However, salmon prices in March towards Easter should be attractive and estimated around NOK 28/kg level NAFS Seafood conference in Oslo March Ke y figures E 2012E 2013E 4Q10 4Q11E Total revenues EBITDA EBIT (before IFRS) Net IFRS adj PTP Reported EPS EPS adj Chilean volumes Norw egian volumes Total volumes Volumes Y/Y -10% 15% 6% 0% 13% DPS NIBD EV/ Sales EV/ EBITDA EV/EBIT, before adj P/E adj P/B

13 Statoil Fuel & Retail NOK Buy (SFR) 21 February 2012 Target NOK 50 4Q11 earnings hit by declining margins Data for uary indicate margins will improve in 1Q11 Especially Poland is important: Now: Appreciating zloty and increasing pump Higher margins crucial to defend capex program Stock price came signifcantly down on 4Q figures We believe overreaction Margin improvement and lower risk -> Good point of entry! 13

14 SWEDEN New fuel tax of SEK 0.19 per liter, but increase in pump price is higher than that Pump Price* (SEK) Pump Price* (NOK) Feb Mar Apr Mai Pump Price and Brent Crude** (index NOK) *** 0.92 Feb Mar Apr Mai *** SEK/NOK exchange rate *** Pump price (index = 100) Brent crude (index = 100) 0.82 Feb Mar Apr Mai *** Source: Bloomberg * Price included taxes for Euro-Super 95 Gasoline ** Does not reflect changes to refinery margins *** New tax of NOK 0.19 per liter subtracted 14

15 DENMARK Higher fuel price outweighs weaker DKK Pump Price* (DKK) Pump Price* (NOK) Feb Mar Apr Mai Pump Price and Brent Crude** (index NOK) Pump price (index = 100) Brent crude (index = 100) Feb Mar Apr Mai DKK/NOK exchange rate Feb Mar Apr Mai Source: Bloomberg * Price included taxes for Euro-Super 95 Gasoline ** Does not reflect changes to refinery margins 15

16 NORWAY Fuel price for uary still not reported, but news flow indicates the price is up more than the added NOK 0.10 tax Pump Price* (NOK) ? Pump Price and Brent Crude** (index NOK Feb Mar Apr Mai Pump price (index = 100) Brent crude (index 100) Source: Bloomberg * Price included taxes for gasoline 95 (SSB) ** Does not reflect changes to refinery margins 16

17 POLAND Appreciating zloty of significant importance Pump Price* (PLN) Pump Price* (NOK) Feb Mar Apr Mai Pump Price and Brent Crude** (index NOK) Pump Price (index = 100) Brent crude (index = 100) Feb Mar Feb Apr Mai PLN/NOK exchange rate Mar Apr Mai Source: Bloomberg * Price included taxes for Euro-Super 95 Gasoline ** Does not reflect changes to refinery margins 17

18 ESTONIA Recovering from price war Pump Price* (EUR) Pump Price* (NOK) Feb Mar Apr Mai Pump Price and Brent Crude** (index NOK) Feb Mar Apr Mai EUR/NOK exchange rate Pump Price (index = 100) Brent crude (index = 100) 7.5 Feb Mar Apr Mai Source: Bloomberg * Price included taxes for Euro-Super 95 Gasoline ** Does not reflect changes to refinery margins 18

19 LITHUANIA More positive outlook Pump Price* (LTL) Pump Price* (NOK) Feb Mar Apr Mai Pump Price and Brent Crude** (index NOK) Pump Price (index = 100) Brent crude (index = 100) Feb Mar Apr Mai LTL/NOK exchange rate Feb Mar Apr Mai Source: Bloomberg * Price included taxes for Euro-Super 95 Gasoline ** Does not reflect changes to refinery margins 19

20 LATVIA Also looks better Pump Price* (LVL) Pump Price* (NOK) Feb Mar Apr Mai Pump Price and Brent Crude** (index NOK) Source: Bloomberg * Price included taxes for Euro-Super 95 Gasoline ** Does not reflect changes to refinery margins Pump price (index = 100) Brent crude (index = 100) Feb Mar Apr Mai LVL/NOK exchange rate Feb Mar Apr Mai 20

21 Siem Offshore (SIOFF) NOK February 2012 Buy Target NOK 15 North Sea spot exposure 2012 North Sea spot AHTS market set to be very hot!!!! Siem Offshore has biggest spot exposure of the Oslolisted names 2012 to date spot earnings twice that of early 2011 We expect to see NOK 1m/day barrier breached in 2Q12 Long-term AHTS contract pending in Brazil Award due any time Statoil also has LT tender for AHTs with capabilities to operate in Northern waters AHTS PSV Siem Offshore 6 Deep Sea Supply 1 1 Farstad Shipping 2 2 Solstad Offshore 3 1 Havila Shipping 3 2 DOF 1 2 Maersk 6 Viking Supply Ships 6 1 Rem Offshore 1 5 Vessel trading spot or expected available spot within next 30 days Spot rates large AHTS Siem WIS due to deliver commercial contracts Management has said late 2011/early 2012 This was reiterated at recent Fondsfinans presentation We extend this timeline to Mid-February 21

22 Rising drilling activity leads the way 2012 forecast: Based on NPD s forecast for exploration and appraisal wells (55 vs. 52 in 2011) NCS mobile rig fleet going from 28 to 36 through 2012 Assuming 6 wells per year per rig gives an average delta of 24 wells in capacity YoY 22

23 Spot AHTS represents a huge swing factor We assume USD 67.5k as average spot earnings for 2012 Siem operates 10 large AHTS and owns 8 of them 4 are fixed long-term in Brazil 6 operate spot in the North Sea Assuming USD 75k/day on 4 vessels adds USD or NOK 0.16/share Our base case estimate is for 2012 EPS of USD 0.17 The supply sector trades at 2012 median P/E of 13x 23

24 Time to buy! 24

25 Statoil NOK Buy (STL) 20 February 2012 Target NOK 185 Investment case the high exposure to oil and gas prices a project backlog that will generate top line growth RRR of 117% in 2011, and above 1 the next 6-8 years exploration success in Norway and internationally more than 12 high impact wells planned for 2012 reducing risk in balance sheet Statoil s safe haven status 80% of production in non conflict area 25

26 Stepping up to Growth 2.5mboe/d We estimate that Statoil will grow volumes to 2mboe/d in 2012 and more than 2.5mboe/d in 2020 kboe/d 2,800 2,600 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1, A Excisting production 2011E 2012E New developments 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E FF forecast Statoil -CMD 2011 goal Low High 2010A 1, E 1, E 2, % 2% 3% 2013E 2, E 2, E 2, E 2, % 3% 4% 2017E 2, E 2, E 2, E 2, % 2.5mb/d 2.5mb/d 26

27 Exploration - turnaround in the upstream business The last 2 years Statoil has been seeking early access at scale the group now has 100k km2 of international exploration acreage versus 30k km2 previously. More exploration risk - targeting larger prospects but with lower chances of success Recent exploration success The wells to watch: More than 12 high impact wells planned for 2012 Tanzania (Zafarani well spudded with results expected in 1Q 2012) Gulf of Mexico (Bioko and Hummer Shallow prospects) Canada (two/three exploration offshore off East Coast) Norway (three/four wells on Aldous Major North and South) Norway (Skrugard-2 appraisal well in 1Q 2012) Norway (King Lear spud in Q1 and results in late Q1) Sources: Fondsfinans, Statoil, 27

28 Our estimated reserve base (mmboe) E 2012E 2013E 2014E 2015E 2016E 2017E Proved reserves 6,010 5,584 5,408 5,323 5,426 5,527 5,781 6,067 6,210 6,684 7,363 Production mmboe Purchase/Sales/Chg. in interest Revisions and improved recovery Extensions & Discoveries RRR (%) All-in F&D cost ($/boe) Upstream CAPEX $MM 11,480 14,796 11,809 12,625 14,500 16,000 17,000 18,000 18,000 19,500 19,500 In 2011, Statoil replaced 117% of its reserves We estimate the RRR be between % in the period The Johan Sverdrup alone offers exposure to bnboe of net resources, translated to recoverable reserves this represents ~20% of current proven reserve base The 2020 volume target of 2.5mboe/d will require upstream investments to increase from around $15bn to $18-20bn Source: Fondsfinans and Statoil 28

29 Key figures Key figures (NOKm) E 2012E 2013E Revenues 465, , , , ,307 EBIT, reported 121, , , , ,112 EBIT, adjusted 130, , , , ,108 PTP 114, , , , ,912 EPS reported EPS adjusted DPS Production mmboed 1,962 1,888 1,851 2,015 2,065 Oil price, $/bbl $58.3 $76.4 $105.7 $107.4 $110.1 Gas price, NOK/Sm P/E reported P/E adj P/BV ROE 9% 19% 36% 22% 18% ROACE 8% 13% 24% 16% 14% Sensitivity 2012 E Base case EPS estimate 19.1 EPS change + 10 USD oil price % gas price % NOK/USD rate % NOK/USD rate E NOK billion new old change EBIT, adj % PTP % EPS, adj % Production 2,015 2,015 0% Oil price $107.4 $ % Gas price % USD/NOK % Oil price NOK % We have adjusted our 2012 estimates up by approximately 5% The main reason is; lower opex and depreciation in 2H12 29

30 Valuation Statoil Units E 2012E 2013E Oil production NCS 1000 boed Gas production NCS 1000 boed Oil & gas production Int boed Entitlement production 1000 boed 1,791 1,706 1,651 1,761 1,791 PSA effect Equity production 1000 boed 1,962 1,888 1,851 2,011 2,065 Oil price (realized) USD/boe $58.3 $76.4 $105.7 $107.4 $110.1 Gas price (realized) NOK/Sm Op. cash flow NOK mill. 173, , , , ,400 Net Capex " (75,400) (76,500) (88,700) (95,200) (91,300) Tax paid " (100,500) (92,300) (112,600) (150,700) (151,100) Net cash flow " (2,400) 4,200 22,700 14,700 19,000 DPS Dividend payments " (23,100) (19,100) (19,900) (20,700) 0 Cash flow " (25,500) (14,900) 2,800 (6,000) 19,000 DCF valuation WACC assumptions NPV NOK bn 21 Equity beta 1.1 NPV " 639 Debt to capital 33% Net debt 4Q11 " -70 Cost of equity 10.0 % Equity value " 590 Cost of debt 6.0 % Per share NOK 185 WACC 8.7% The target is predicated on a $112/bbl -$111/bbl Brent oil price assumption. We have a long-run oil price estimate to $100/bbl from 2014 onwards We have a UK natural gas price estimate at 58p/th in 2012 and 60p/th in 2013 NOK per share NOK 220 NOK 200 NOK 180 NOK 160 NOK 140 NOK 120 NOK 100 Valuation indication at various oil prices $120 $115 $110 $105 $100 $95 $90 $85 Oil price > 30

31 Underperform portfolio Fondsfinans Research 31

32 Golden Ocean (GOGL) NOK February 2012 Sell Target NOK 4.30 Golden Ocean shares are UP ~45% YTD Baltic Dry Index is down ~56% Clarkson s average daily Capesize earnings down 90% to USD 3,400 since late December Clarkson s average daily Panamax earnings down 42% to USD 5,440 since late December Collapse in cashflow for shipowners and -operators Increasing risk of bankruptcies and charter defaults Golden Ocean has a solid cash position and long-term contracts But value of company is tightly dependent on these contracts remaining in place A number of deals were renegotiated during 2011, putting pressure on earnings and valuation 32

33 Dayrate development Capesize spot average Panamax spot average 250 Max/min ( ) Average Max/min ( ) Average Spot rate (USD 1,000) Spot rate (USD 1,000)

34 Golden Ocean shares vs. peers and Baltic Dry Index 34

35 Norsk Hydro (NHY) NOK 33.9 February 21, 2012 Neutral Target NOK 32 NHY versus LME price from 1. Dec 2011 Strong share price recovery The rebound in LME prices recently has sent Norsk Hydro up from NOK 25 to above NOK 30, outperforming the LME price recovery The share price seems to factor in an aluminium margin around USD 400/ton corresponding to an LME price of USD~2400 Supply/demand balance expected to keep a lid on prices through 2012 Supply/demand balance expected to remain stable in 2012 vs levels MB expect excess supply of , Alcoa excess demand of Bauxite & alumina unit costs down possibly on some one-off items or special variations in numbers and we expect a slight rebound in 1Q before further cost decline through

36 Telenor NOK 102 Sell (TEL) 21 February 2012 Target NOK 90 (97) EBITDA forecast trend negative for Q4 / flat Q EBITDA forecast 4% lower than consensus Norway impacted by campaigns in Q4 Weak Vimpelcom operational numbers push down 2012 EPS Vimpelcom forecasts 6% negative impact on EPS Weak cash flow Q4 Very risky situation with Vimpelcom i Q1/Q2 India/Bangladesh 2G licence case likely with adverse result Three 3G licence rounds coming up in 2012 heavy cash drain 36

37 Vimpelcom accord leaves Telenor as vulnerable With accord, Telenor raises its voting stake to 36.3%, but Altimo/Sawiris still har de facto control with 49.3% The call option is not exercisable until 2015, no protection Telenor says partnered with Sawiris, but we remain sceptical as loyalties shift rapidly Worst case scenario of Telenor injecting 12b into VIP is eliminated, will be only NOK 2b, though we do not believe this was discounted We fear Telenor is as vulnerable to diluting and value depriving transactions as before and do not see this as a relief 37

38 Switch cases Fondsfinans Research 38

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