Serneke Construction and Real Estate - Nordea

Serneke SwedenConstruction and Real Estate

Commissioned Equity Research • 7 December 2018

KEY DATA

SwedenStock countrySRNKEB SSBloombergSRNKEb.STReutersSEK 47.65 Share price (close)

Free FloatEUR 0.11/SEK 1.08Market cap. (bn)

www.serneke.seWebsite06 Feb 2019Next report date

PERFORMANCE

Nov16 Jul17 Apr18 Dec18

45

60

75

90

120

SernekeSweden OMX Stockholm All-Share (Rebased)

Source: Thomson Reuters

VALUATION APPROACH

80 120

60 70 80 90 100 110 120 130 140

1

Va

lua

tio

n

Source: Nordea estimates

ESTIMATE CHANGES

2020E2019E2018EYearn.a.n.a.n.a.Salesn.a.n.a.n.a.EBIT (adj)


Poor sentiment may overlook value

Sentiment in the Swedish construction sector has been poor owing to Serneke and peers' project writedowns and fears of a decline in Swedish residential construction activity. We suggest that the focus of Serneke's high-margin ambitions is misguided and that this has exacerbated the perception of a slowdown. We expect margins to improve gradually, in line with the sector average but with the company experiencing higher growth thanks to its project pipeline and growth ambitions. Better visibility in the ongoing project development portfolio and the Karlastaden project, as well as the detailed planning permit potential not reflected in property management portfolio, could turn investor sentiment and lift the share to the higher end of our fair value range of SEK 80-120 per share, which is based on our SOTP, DCF and peer multiples approaches.

Construction and Civil Engineering operationsWe expect margins to gradually improve, reaching 3.9% for Construction and Civil Engineering combined in 2020E. We note that this is below Serneke's ambition of a 5% margin, but in line with its peers and enough to warrant a re-rating, we believe. The company's high residential exposure (55% of the 2017 backlog in Construction) and Sweden-only operations limit the upside, while projects and the pipeline should balance downside risks from slower construction activities in general.

Properties and developmentProperty management and the development assets were at SEK 1.8bn in Q3 2018, corresponding to SEK 79 per share, and we argue that perceived risks in the Karlastaden JV project overshadow the potential from the property management portfolio and the value-creating activities at Säve Airport. We expect the Karlastaden project to dilute profitability in 2019, but we argue that better visibility into constructions costs and into the risk of delays should improve investor sentiment in the project.

ValuationThe multiples valuation disregards the solid asset base from property management and development properties partly owing to project volatility and fair value accounting of properties. Downside risks relate to further project cost overruns and a back-end-loaded contribution from development, given the limited contribution expected in 2019E. We reach a fair value of SEK 80-120 per share based on our SOTP, DCF and peer multiples valuation approaches.

Nordea Markets - AnalystsNiclas HöglundSenior Analyst, Sector Coordinator

Marie Scheja Analyst

SUMMARY TABLE - KEY FIGURES

2020E2019E2018E2017201620152014SEKm9,3877,4826,3535,6053,9783,1071,800Total revenue

52227619443947912882EBITDA (adj)49225124241941112882EBIT (adj)

5.2%3.4%3.8%7.5%10.3%4.1%4.6%EBIT (adj) margin15.437.206.1313.8121.228.114.17EPS (adj)

114.3%17.5%-55.6%-34.9%161.6%94.4%438.5%EPS (adj) growth5.003.503.004.000.000.000.00DPS (ord)0.20.20.30.40.5n.a.n.a.EV/Sales3.26.56.65.64.7n.a.n.a.EV/EBIT (adj)3.16.67.86.54.9n.a.n.a.P/E (adj)0.50.60.61.11.3n.a.n.a.P/BV

10.5%7.3%6.3%4.5%0.0%n.a.n.a.Dividend yield (ord)11.7%2.3%-6.7%-0.7%-6.7%n.a.n.a.FCF Yield bef acq & disp

504552510254-37243333Net debt1.02.02.60.6-0.11.94.1Net debt/EBITDA

13.4%7.3%7.5%15.7%23.3%12.1%12.7%ROIC after taxSource: Company data and Nordea estimates

Marketing material commissioned by Serneke

Serneke7 December 2018

Contents

Factors to consider when investing in Serneke 3

Valuation 9

Company overview 17

Business areas 25

Joint ventures and other significant projects 32

Strategy and financial targets 41

Market overview 42

Benchmarking of peers and competitors 53

Estimates 62

Risk factors 69

Reported numbers and forecasts 71

Disclaimer and legal disclosures 74

Marketing material commissioned by Serneke 2


Factors to consider when investing in SernekeSerneke is an entrepreneurial construction company with strong growth record and high ambitions to improve its underlying profitability. Its operations are focused on the Swedish construction market and the company has diversified the capital it uses in order to pursue value-added commercial and residential development; these include both wholly owned projects and joint ventures. Profitability has been held back by investments in growth and by weaker acquired projects. The result has been lower investor confidence. Karlatornet, an enormous residential development joint venture, adds complexities and risks to the portfolio and also weighs on confidence. Investor sentiment is poor, and valuation is attractive both from relative and absolute perspectives. The main rebound potential stems from stabilisation of construction margins, asset divestments and reduced risk perception of the development of Karlatornet. Downside risks mainly relate to project risks and a relatively weaker 2019E, burdened by the project backlog and margin dilution from development. We argue that Serneke should be valued at a fair value range of SEK 80-120 per share with a medium-term outlook based on a combination of DCF, peer multiples and asset-based scenarios.

Reported sales of SEK 5.6bn in 2017 imply a CAGR of 50% for 2013-17

Highlights Serneke is a Gothenburg-based company with operations and subsidiaries throughout Sweden. In 2017, it was by far the fastest-growing company in the sector, reaching 41% in annual sales, with sales amounting to SEK 5,605m for the year. The company's two largest segments are Construction, with sales totalling SEK 4,919m in 2017, and Civil Engineering, with sales of SEK 623m in the same period. Growth has been a vital part of the company's strategy to establish an organisation capable of accommodating large orders from the public and private sectors. Serneke's revenue has grown from SEK 14m in 2003 to SEK 5.6bn in 2017, implying a CAGR of 50% for 2013-17.

One of Serneke's primary targets is to establish an organisation capable of handling large-scale projects from public and private customers. The company aims to continue to grow its existing operations in Stockholm, Gothenburg and Malmö but also to further expand to other parts of Sweden, primarily in larger cities.

Contracting operations – Construction and Civil Engineering

Serneke principally takes on large and complex construction projects

Leading position in Gothenburg and ranked as a top ten construction company in Stockholm and Malmö

ConstructionThe Construction business area includes all phases: new construction, renovation and expansion. Focus lies primarily on rental apartments and community properties. Projects are mainly large, complex and in areas where Serneke can leverage its competitive edge of expertise in innovation, sustainability and engagement. Customers are chiefly large and stable companies such as private property companies, government-owned entities and project development companies. Serneke holds a leading market position in Gothenburg and is ranked as a top ten construction company in Stockholm and Malmö.

The income from the construction segment amounted to SEK 4,919m in 2017, which corresponded to about 88% of total sales. The operating margin of the segment was 3.7% in 2017. Income during 9M 2018 increased by about 13% as compared to the corresponding period in 2017. The operating margin in 9M 2018 was about 1%, which was far below the historical average operating margin generated from the Construction business area of approximately 3%. This was principally related to writedowns due to some suppliers defaulting in Q3 2018.



INCOME AND EBIT MARGIN

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1,000

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3,000

4,000

5,000

2015 2016 2017 9M 2017 9M 2018

SE

Km

Income Operating margin

Source: Company data and Nordea

ORDER BACKLOG PER CUSTOMER*

Public sector clients42%

Private clients58%

* As of 31 December 2017Source: Company data and Nordea

ORDER BACKLOG PER PRODUCT MIX*

Housing (new

production)58%

Renovation/expansion

7%

Offices4%

Retail5%

Public buildings

(Healthcare/education)

20%

Other6%

* As of 31 December 2017 Source: Company data and Nordea

Civil EngineeringThe Civil Engineering business unit is engaged in all types of civil engineering work including earthworks, foundations, infrastructure, electrical grids, power plants, harbour contracts and concrete works. Focus lies on large, complex, national and regional infrastructure projects within industry and maintenance services. External customers accounted for 89% of revenue in 2017 including municipalities, the Swedish Transport Administration, property companies and industry players. The largest external customer group was public sector clients in 2017, accounting for approximately 74% of the order backlog.

In 2017, groundwork for the construction of Karlatornet was commenced.

This is a business area under development that is positioned for growth. During 2017, positions were strengthened in all the company's geographical markets. Significant projects within this business area during 2017 included construction of a new boiler house at a new combined heat-and-power plant for Borås Energi and Miljö AB. The project is one of the largest for the business area to date. In 2017, excavation, levelling and groundwork began for the construction of Karlatornet in Gothenburg.

The income from Civil Engineering amounted to SEK 623m in 2017, corresponding to about 11% of total income in 2017. The operating margin generated from the segment was around 0.2% in 2017. As can be seen in the chart far left below, the operating margin for the segment has almost consistently been negative for the past three years but reached almost 1.4% in 9M 2018.

Action programme to improve profitability was initiated in 2016.

According to Serneke, one of the pivotal drivers of positive development is the action programme initiated in 2016. The programme's goal was to improve profitability and strengthen internal controls. Among other things, it included reviewing the organisation, processes, working methods, objectives and focus.

INCOME AND OPERATING MARGIN

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-8%

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400

500

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2015 2016 2017 9M 2017 9M 2018

SE

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Private clients26%



Land42%

Concrete3%

Road2%

Industry53%


Project DevelopmentProject Development involves the acquisition and the development of projects and properties, typically of developed and underdeveloped land for use in residential and commercial properties. Development of projects and properties are usually done in-house or in collaboration with partners. The client base consists of private individuals, housing companies, tenant-owners' associations and companies in need of commercial space. The portfolio comprises land for development of residential and commercial properties with a focus on metropolitan regions in Sweden.

The income of the Construction segment amounted to SEK 212m in 2017, which corresponded to about 4% of total income in 2017. The income was mainly attributable to income from housing projects and the sale of the Mälardalen University project. The operating margin generated from the segment was 31% in 2017. As can be seen in the



chart to the left below, the operating margin for the Project Development business area has fluctuated materially during 2015-17. For example, the 2016 figure was affected by the sale of 50% of the Karlastaden project in Q2 2016. The fact that there are a lot of one-off income items in this business segment makes it difficult to compare or draw any conclusions about its operating margin.

The Project Development portfolio was valued at SEK 1,814m as of the end of 2017, of which only SEK 205m was on the balance sheet. The remaining SEK 1,609m constituted contracted development rights that Serneke has not yet taken possession of (approximately SEK 704m) and development rights owned through JVs or associates (around SEK 905m).


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

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2015 2016 2017 9M 2017 9M 2018

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Km



VALUE OF THE PROJECT PORTFOLIO

626

1,661 1,814

-200400600800

1,0001,2001,4001,6001,8002,000

2015 2016 2017

SE

Km

Project portfolio value


Property ManagementThe property portfolio comprises acquired commercial properties primarily in the Gothenburg region. The division also develops and manages the properties with the goal of capital appreciation, rental income or a combination of both. The business area aims to acquire properties with development potential and grow them by investing, developing, streamlining and rationalising property management. Properties are managed by the company's own subsidiaries and through collaborations with associates. The largest current tenants include China Euro Vehicle Technology AB (CEVT), the Swedish Maritime Administration, Region Västra Götaland, the Swedish National Police and the Svensk pilotutbildning AB flight school.

The acquisition of Säve airport has quite significantly increased the company's property portfolio

The value of investment properties was estimated by Serneke at SEK 895m, with a lettable area of 3,467,000m2, at the end of 2017, up substantially from SEK 329m in 2016, mainly due to the acquisition of a property at Säve airport. Serneke further increased the value of the investment properties during 9M 2018 to SEK 1,032m. The income of the Property Management segment was SEK 51m in 2017, which represented approximately 4% of the group's total income that year. The operating profit generated by the segment in 2017 was SEK 213m. Much like Project Development, sales of properties are one-off items, making it difficult to compare operating margin for this division over time.

INCOME

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VALUE OF INVESTMENT PROPERTIES

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329

895

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2015 2016 2017 9M 2018

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Investment properties




Through acquisitions in 2016 and 2017, Serneke now owns a total of approximately 3.2m2 of developable land at Säve Airport. Today, the site has many tenants and the vision is to develop the area into a logistics centre, experience centre and research centre for the automotive industry.

One other major holding in the current portfolio is the jointly owned Prioritet Serneke Arena, the largest multi-sport facility in the Nordic region, containing an indoor ski facility, full-sized soccer field, schools, a restaurant, a gym and offices. The letting ratio was 100% as of 31 December 2017.

Below, we present the changes in value of Serneke's investment properties from the end of 2017 to the end of 9M 2018. We note that Serneke only acquired properties worth SEK 27m during 9M 2018. Furthermore, value changes of existing properties contributed SEK 41m to the closing amount for 9M 2018.

Serneke also possesses investment properties through associated companies, which amounted to SEK 320m as of 31 December 2017.

CHANGES IN INVESTMENT PROPERTIES' VALUE FOR FY 2017, SEKm

895

1,032

27

69

41

Opening carryingamount 2017-12-31

Acquisitions for theyear

Capital expenditures Unrealised changesin value

Closing carryingamount 9M 2018


Joint venturesSerneke partners with other investors through joint venture and associate agreements, and some are operated and solely owned by Serneke. The major projects for Serneke are Karlastaden, Säve Airport, Fjätervålen and Prioritet Serneke Arena (Änglagården Holding AB). In the table below, we summarise the key projects, Serneke's ownership share in each project and their respective book value in Serneke's balance sheet. As of 30 September 2018, Serneke's total book value of joint ventures and associates amounted to approximately SEK 1.5bn.

OWNERSHIP AND BOOK VALUE FOR JOINT VENTURE AND ASSOCIATES PER 30 SEP 2018

Joint ventures/Associates Ownership share, % Serneke Book Value SEKmJV Karlastaden 50% 374 Änglagården Holding AB 40% 147 Project development portfolio 100% 325 Säve airport 100% 675 Fjätervålen 40% 10

Total 1,531




Karlatornet – the tallest skyscraper to be built in the Nordics so far

KarlatornetSerneke is developing a new miniature city, just outside Gothenburg city centre, where the company aims to develop approximately 2,000 apartments, office properties, shops, restaurants, a health centre and a school. The flagship of the project is undoubtedly Karlatornet, the tallest skyscraper to be built in the Nordics to date. That more than 85% of the 594 apartments that Karlatornet will contain are already sold – at an average m2 price of SEK 100,000 and with more than two years until occupancy will commence – bodes well for securing the income of the skyscraper, we believe. However, constructing a skyscraper this tall is inevitably associated with risks, which we believe investors considering investing in Serneke should keep in mind.

The 245m tall skyscraper will have 73 stories, with 594 apartments of different sizes and a publicly accessible Skybar on the 69th floor. Karlatornet should be completed in 2022, but occupancy in the apartments will commence from 2021. The apartments are operated by four different housing associations, except for the penthouse apartments on the so-called Skylevel, which will be fully owned by the apartment owners and are not associated with any housing associations.

Serneke has already managed to sell 85% of the apartments in Karlatornet, at an average m2

price of SEK 100,000

Of the 594 apartments in the skyscraper, 503 were sold as of 30 November 2018. These have been sold at an average m2 price of SEK 100,000, which can be compared to the last three months' average m2 price in Gothenburg of SEK 48,271, according to Svensk Mäklarstatistik. We believe the fact that Serneke has managed to sell 85% of the apartments at these unprecedented prices (>2.0x of average Gothenburg prices) is a positive sign. According to management, the prices of the apartments rose over the summer, despite the overall drop in housing prices in Sweden. Furthermore, Serneke's management roughly estimates that Karlatornet will generate income of around SEK 6.5bn in total, with corresponding production costs of SEK 5.5bn, leaving some SEK 1bn in total profit, or SEK 500m in profit as of the joint venture agreement.

The financing of the Karlatornet project is not yet final but Serneke strongly believes there will not be any issues with it as it has already sold 85% of the apartments and secured a 20-year lease contract with Nordic Choice for the hotel operations. The financing of Karlatornet will, according to management, be settled during spring 2019.

Summary valuation approachesWe use several valuation approaches for Serneke based on current and historical multiples for peers, SOTP valuation and DCF so as to build a framework for investors. Short-term valuation has come under pressure owing to project writedowns in Q3 2018 and top-down concerns about the Swedish construction market, particularly residential development, to which Serneke is exposed mainly through its Karlastaden joint venture.

Solid asset value related to property management and project management are not visible in 2018-19 estimates owing to the build-up of projects and as the company is waiting for detail planning in property management (Säve). Looking ahead to 2020E, we assume that visibility in these projects should have improved, which suggests a move towards the higher end of our fair value range of SEK 80-120 per share.

VALUATION SUMMARY: VALUE PER SHARE AND IMPLIED P/E

Hist

Value Multiple 2018E 2019E 2020E

1) SOTP avg 140 22.8 19.4 9.02) Multiple avg 86 14.1 12.0 5.6a) P/E (19E) 86 12 14.1 12.0 5.6b) EV/EBIT (19E) 86 10 14.1 12.0 5.63) Long term DCF 120 19.6 16.6 7.8

Fair value NDA Low 80 13.1 11.1 5.2High 120 19.6 16.7 7.8

Implied P/E

Source: Company data, Thomson Reuters and Nordea estimates



PEER MULTIPLE APPROACH

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EV/ EBIT-19E(71-90)

P/E-19E(17-65)

EV/EBIT-20E(124-217)

P/E-20E(48-169)

Current (50)


VALUATION SUMMARY: SOTP, MULTIPLES AND DCF

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ValuationWe use a broad valuation approach for Serneke, looking at all aspects, including multiples, SOTP and DCF. We combine the valuation approach with sensitivity related to estimates to capture both downside and upside. We argue that a combination of SOTP and DCF approaches is appropriate for determining the fair value of Serneke. Our fair value range of SEK 80-120 per share is quite wide, as it includes a cautious approach to the Karlastaden joint venture at the lower end of our range. Downside to our base case is mainly found when comparing our 2019E estimates with the peer group, which implies a value of SEK 17-90 per share. Solid asset revaluation potential should be visible in 2019E-20E thanks to the Säve airport property (detail planning ongoing). The possible release of 300-500 m2 of developed land and the SEK ~1.1bn potential that we estimate in our bull-case SOTP supports a SEK 49 per share higher value than our base case. The key driver for normalisation of multiples in line with the sector stems from the stability of Serneke's construction margins (in line with the sector) and improved visibility in both property management and project development assets.

Summary valuation approachesWe use several valuation approaches for Serneke based on current and historical multiples for peers, SOTP valuation and DCF so as to build a framework for investors. Short-term valuation has come under pressure owing to project writedowns in Q3 2018 and top-down concerns about the Swedish construction market, particularly residential development, to which Serneke is exposed mainly through its Karlastaden joint venture.

Solid asset value related to property management and project management are not visible in 2018-19 estimates owing to the build-up of projects and as the company is waiting for detail planning in property management (Säve). Looking ahead to 2020E, we assume that visibility in these projects should have improved, which helps push towards the higher end of our fair value range of SEK 80-120 per share.

VALUATION SUMMARY: VALUE PER SHARE AND IMPLIED P/E

Hist

Value Multiple 2018E 2019E 2020E

1) SOTP avg 140 22.8 19.4 9.02) Multiple avg 86 14.1 12.0 5.6a) P/E (19E) 86 12 14.1 12.0 5.6

b) EV/EBIT (19E) 86 10 14.1 12.0 5.63) Long term DCF 120 19.6 16.6 7.8

Fair value NDA Low 80 13.1 11.1 5.2High 120 19.6 16.7 7.8

Implied P/E


PEER MULTIPLES APPROACH

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EV/ EBIT-19E(71-90)

P/E-19E(17-65)

EV/EBIT-20E(124-217)

P/E-20E(48-169)

Current (50)


VALUATION SUMMARY: SOTP, MULTIPLES AND DCF

020406080

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Relative valuationWe look at several multiples in our valuation of Serneke but contend that a relative valuation based on EV/EBIT and P/E provides the best benchmark for valuing the company.

EV/sales is neutral to a company's capital structure. However, it does not take into account differences in profit margins and so we usually do not find it well-suited for comparisons across industries.

EV/EBITDA is also neutral towards capital structure. However, it distorts the comparison of the operating performance between companies with different capex profiles (eg companies with in-house versus in-sourced production capacity).

EV/EBITA is also neutral towards capital structure. It captures the operations' capital intensity to the extent that depreciation levels approximately correspond to sustainable capex levels.

EV/EBIT is also neutral towards capital structure. However, it distorts the comparison of the operating performance between companies with different growth profiles (ie organic versus acquired growth).

P/E is arguably one of the multiples most frequently used in the comparison of equity valuations. However, it mixes capital structure and non-operating items with expectations of operating performance, so we do not put much weight on the P/E multiples in our valuation.

FCF yield underpins capital intensity and favours asset-light models. However, we prefer over-the-cycle cash flow analysis from a DCF model rather than a one-year snapshot that could be distorted by spikes in capex or temporary changes in working capital, for example.

Dividend yield measures the amount of cash flow an investor receives on an investment in a dividend-paying stock. We use dividend yield as a sanity check for our multiples-and DCF-based valuation.

Peer group selectionWe use a Nordic construction peer group of five companies and include six residential development companies in our multiples comparison, making a total peer group of eleven companies.

The following are the key considerations that have a material impact on the relative peer group valuation and range:

Free float and ownershipSizeVisible earnings growth from the transformation programmeOther accounting principlesGeographical/segment mix

Free float and ownership: We consider the focused ownership of Serneke and the low volume in the share to have a negative valuation impact and a tendency to exaggerate share price performance. Ola Serneke's high shareholding and commitment to the group fall on the positive side, but it would clearly be difficult to increase institutional ownership in the share without any actions to improve the free float in the share.

Size: We argue that there is a preference for size when companies have similar earnings growth profiles, and Serneke's size puts it at the lower end of the listed peer group.



Volatile earnings: Most companies in the sector have taken charges/project writedowns related to construction operations in recent years. Peab, on the contrary, has yet not taken any charges, and its multiples have expanded.

Accounting principles: Serneke's fair value accounting of its real estate portfolio stands out versus peers, which use costs when accounting for both completed and ongoing projects. Since unrealised value changes impact current earnings in Serneke related to its portfolio, this tends to distort earnings comparisons.

Geographical/segment mix: All of Serneke's operations are in Sweden, unlike other listed peers and their diversified exposure, mainly related to Nordic construction markets. A higher share of business in Sweden might be negative, since the outlook for the country is at the low end of European construction markets in 2019-21, according to Euroconstruct. In terms of mix, Serneke's residential construction activity is likely to be above the sector average in the next three years, owing to the pending start of its Karlastaden project (50% owned with NREP).

PEER GROUP – FUNDAMENTALS

Share Mcap

Name Price (SEKm) 18E 19E 20E 18E 19E 20E 18E 19E 20E 18E 19E 20E

Nordic ConstructionSkanska AB 140 55,710 167,795 163,347 164,515 2.9% 3.8% 4.0% -0.1 -0.1 -0.4 24% 26% 27%Peab AB 72 18,720 53,259 56,865 58,219 4.7% 4.6% 4.7% 0.4 0.4 0.5 33% 33% 35%NCC AB 133 14,369 57,395 60,733 62,621 na 3.0% 3.6% 1.3 0.2 -0.4 15% 16% 19%Veidekke ASA 103 13,763 36,658 38,030 39,921 1.7% 3.4% 3.7% 1.0 0.5 0.4 21% 23% 24%Yit Oyj 56 11,813 38,221 39,042 38,574 3.3% 5.5% 5.2% 3.9 2.4 2.3 33% 35% 37%Median 11,813 53,259 56,865 58,219 3.1% 3.8% 4.0% 1.0 0.4 0.4 24% 26% 27%80th percentile 26,118 3.9% 4.8% 4.8% 1.8 0.9 0.9 33% 34% 35%20th percentile 13,763 2.6% 3.4% 3.7% 0.4 0.2 -0.4 21% 23% 24%

Nordic Residential DevelopmentBonava AB (publ) 106 11,369 15,414 14,982 15,882 11.7% 10.8% 10.9% 2.8 2.5 2.2 35% 37% 38%JM AB 170 11,796 16,057 14,529 14,693 12.0% 10.7% 11.0% -1.3 -2.3 -2.3 42% 44% 45%Selvaag Bolig ASA 42 3,960 3,574 3,455 3,423 19.7% 18.4% 14.7% 2.5 3.4 4.6 46% 44% 43%Besqab AB (publ) 96 1,480 1,283 1,446 1,621 14.2% 13.6% 13.5% -3.2 -2.7 -2.4 na na naMagnolia Bostad AB 43 1,600 1,463 1,698 1,940 23.9% 29.6% 28.4% 9.3 2.9 1.9 32% 39% 39%Oscar prop. AB 17 930 2,230 1,712 2,118 na 13.4% 8.1% 13.1 9.4 4.5 35% 41% 45%Median 2,780 2,902 2,583 2,770 12.2% 13.6% 11.8% 2.7 2.7 2.0 35% 41% 43%80th percentile 11,369 20.5% 18.4% 14.7% 9.3 3.4 4.5 43% 44% 45%20th percentile 1,480 12.0% 10.8% 10.9% -1.3 -2.3 -2.3 35% 39% 39%

Total Nordic Constr. and Dev. 11,796 11.7% 10.7% 8.1% 1.3 0.5 0.5 33% 36% 38%80th percentile 55,71020th percentile 930

Serneke 50 1,138 6,353 7,482 9,387 2.7% 3.4% 5.2% 2.6 2.0 0.9 37% 35% 35%

Equity/Total assetsNet debt/EBITDASales EBIT %

Note: Closing price as of 5 December 2018 Source: Company data, Thomson Reuters and Nordea estimates

For a detailed review of the differences in the company fundamentals of the key peers, please see "Benchmarking versus peers" below.



PEER GROUP – MULTIPLES

Share Mcap

Name Price (SEKm) 18E 19E 20E 18E 19E 20E 17A 18E 19E 20E 17A 18E 19E 20E

Nordic ConstructionSkanska AB 140 55,710 0.3 0.4 0.4 11.7 9.3 8.9 10.7 13.1 11.4 10.8 5.9% 5.8% 6.2% 6.3%Peab AB 72 18,720 0.5 0.4 0.4 10.2 9.6 9.3 10.6 10.5 10.2 9.8 5.3% 5.8% 6.1% 6.3%NCC AB 133 14,369 0.3 0.3 0.3 na 9.5 7.6 15.1 na 10.4 8.2 6.0% 6.0% 6.7% 7.2%Veidekke ASA 103 13,763 0.4 0.4 0.4 26.6 12.4 11.1 12.7 16.8 12.1 11.1 5.0% 5.2% 5.3% 5.5%Yit Oyj 56 11,813 0.5 0.5 0.5 15.9 9.5 10.0 9.0 13.8 8.0 8.6 4.3% 5.1% 5.6% 6.0%Median 11,813 0.4 0.4 0.4 10.2 9.5 9.3 10.6 10.5 10.2 9.2 5.3% 5.8% 6.1% 6.3%80th percentile 26,118 0.5 0.5 0.5 20.2 10.2 10.2 13.2 15.0 11.6 10.8 0.1 5.8% 6.3% 6.5%20th percentile 13,763 0.3 0.4 0.4 11.3 9.5 8.9 10.6 12.5 10.2 8.6 0.0 5.2% 5.6% 6.0%

Nordic Residential DevelopmentBonava AB (publ) 106 11,369 1.2 1.2 1.1 9.9 10.9 10.2 8.4 9.1 9.9 9.2 4.6% 5.0% 5.1% 5.3%JM AB 170 11,796 0.8 0.9 0.9 6.9 8.5 8.1 5.8 8.3 10.3 9.7 6.4% 6.2% 6.2% 6.3%Selvaag Bolig ASA 42 3,960 1.7 1.8 1.8 8.8 9.9 12.4 10.8 7.4 8.2 10.4 5.6% 11.7% 9.3% 7.8%Besqab AB (publ) 96 1,480 0.9 0.8 0.7 6.5 6.0 5.4 5.8 9.8 9.1 8.1 6.8% 6.8% 6.8% 6.8%Magnolia Bostad AB 43 1,600 2.3 2.2 1.9 9.5 7.3 6.8 7.1 8.0 5.4 4.8 4.5% 5.2% 5.9% 5.8%Oscar prop. AB 17 930 1.0 1.3 1.0 na 9.6 12.8 1.2 na 5.9 3.2 3.5% 0% 0.0% 0.0%Median 2,780 1.1 1.2 1.1 8.8 9.0 9.1 6.5 8.3 8.6 8.6 5.1% 5.7% 6.1% 6.0%80th percentile 11,369 1.7 1.8 1.8 9.6 9.9 12.4 8.4 9.3 9.9 9.7 6.4% 6.8% 6.8% 6.8%20th percentile 1,480 0.9 0.9 0.9 6.8 7.3 6.8 5.8 7.9 5.9 4.8 4.5% 5.0% 5.1% 5.3%

Total Nordic Constr. and Dev. 11,796 0.8 0.8 0.7 9.9 9.5 9.3 9.0 9.8 9.9 9.2 5.3% 5.8% 6.1% 6.3%80th percentile 55,710 2.3 2.2 1.9 13.4 9.9 11.1 15.1 16.8 12.1 11.1 6.8% 12% 9.3% 7.8%20th percentile 930 0.3 0.3 0.3 8.0 8.5 7.6 1.2 7.4 5.4 3.2 3.5% 0.0% 0.0% 0.0%

Serneke 50 1,138 0.3 0.2 0.2 9.5 6.7 3.3 3.5 12.3 7.0 3.2 8.2% 6.0% 7.0% 10.0%Serneke High 120 2,763 0.5 0.4 0.3 19.0 13.1 6.6 8.6 29.9 16.9 7.9 3.4% 2.5% 2.9% 4.1%Serneke Low 80 1,836 0.4 0.3 0.2 13.6 9.5 4.7 5.7 19.8 11.2 5.2 5.1% 3.7% 4.3% 6.2%

EV/Sales EV/EBIT P/E Div. yield

Note: Closing price as of 5 December 2018 Source: Thomson Reuters and Nordea estimates

When we compare these peer groups, it is clear to us that the strongest correlation is between EV/sales and EBIT margin expectations, together with P/B and ROE.

We argue that the cautious valuation of Serneke compared with peers disregards the strong asset and equity ratio and signals uncertainty about the underlying margin trend.

CONSTRUCTION PEERS: 2019E EV/SALES VS EBIT MARGINS

SKAB

PEAB

NCC

VEI

YIT

Sector

Serneke

R² = 0.739

0.00

0.10

0.20

0.30

0.40

0.50

0.60

2% 3% 4% 5% 6%

EV/S

Ales

201

9E

EBIT % 2019E


TOTAL PEERS: 2019E EV/SALES VS EBIT MARGINS

Selvaag

Besqab

Magnolia

Serneke

R² = 0.9173

0.00

0.50

1.00

1.50

2.00

2.50

0% 10% 20% 30%

EV/S

Ales

201

9E

EBIT % 2019E




CONSTRUCTION PEERS: 2020E EV/SALES VS EBIT MARGINS

SKAB

PEAB

NCC

VEI

YIT

Sector

Serneke

R² = 0.6993

-

0.10

0.20

0.30

0.40

0.50

0.60

3% 4% 5% 6%

EV/S

Ales

202

0E

EBIT % 2020E


TOTAL PEERS: 2020E EV/SALES VS EBIT MARGINS

Selvaag

Besqab

Magnolia

Serneke

R² = 0.7815

-0.200.400.600.801.001.201.401.601.802.00

0% 10% 20% 30%

EV/S

Ales

202

0E

EBIT % 2020E


When comparing P/B with ROE, the difference in financial gearing might distort the comparison (likewise when only looking at P/E).

CONSTRUCTION PEERS: 2019E P/B VS ROE, %

SKABPEAB

NCCVEI

YIT

Sector

Serneke

R² = 0.9433

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

0% 10% 20% 30% 40%

P/B

2019

E

ROE 2019E


CONSTRUCTION PEERS: 2020E P/B VS ROE, %

Skanska17%

NCCVEI

YIT

Sector

Serneke

R² = 0.8688

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

0% 10% 20% 30% 40%

P/B

2020

E

ROE 2020E


EBIT MARGIN: SERNEKE VS CONSTRUCTION PEERS

-2%-1%0%1%2%3%4%5%6%7%8%

2014 2015 2016 2017 2018E 2019E 2020EPEAB NCC Skanska Serneke Veidekke

Source: Thomson Reuters and Nordea estimates

NET DEBT/EBITDA: SERNEKE VS CONSTRUCTION PEERS

-1.5x-1.0x-0.5x0.0x0.5x1.0x1.5x2.0x2.5x3.0x3.5x

2015 2016 2017 2018E 2019E 2020E

PEAB NCC Skanska Serneke VeidekkeSource: Thomson Reuters and Nordea estimates

We also provide charts of the historical P/E and EV/EBIT valuation for construction peers as well as Thomson Reuters consensus estimates for 2018-20E.



P/E VALUATION: SERNEKE VS CONSTRICTION PEERS

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x



EV/EBIT VALUATION: SERNEKE VS CONSTRUCTION PEERS

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x



In our view, the charts above clearly show the volatility in the valuations of peers and Serneke, which we relate to project writedowns and general construction activity sentiment.

Summary of our multiples-based approachWe summarise the fair value range for Serneke in the following graphs, based on multiples from the 20th-80th percentile of relative peers (after removing outliers from the sample).

Total peer group EV/EBIT for 2019E-20E implies a value of SEK 71-217 per share, a broad range including both construction and development peers in the Nordics. Total peer group P/E for 2019E-20E implies a very wide value range of SEK 17-169 per share. If we narrow the peer group to construction only, the implied starting points rise to SEK 51 per share.

All in all, the multiples value ranges are very wide and imply a value of SEK 17-217 per share for Serneke (2019-20E). The low point in the value range relates to 2019E P/E multiples, as multiples of residential developers remain under pressure owing to volatility in the market in combination with limited contribution from development and property management in our Serneke estimates for 2019. EV/EBIT multiples are more stable and capture the differences in financial risks among the peers but fail in part to adjust for different accounting methods.

IMPLIED VALUE PER SHARE TOTAL PEER GROUP

0

50

100

150

200

250

EV/ EBIT-19E (71-90) P/E-19E (17-65) EV/EBIT-20E (124-217)

P/E-20E (48-169) Current (50)




Fundamental valuationBased on our estimates and DCF assumptions, we arrive at a fair fundamental equity value range of SEK 82-168 per share for Serneke. This is based on a sensitivity of +/-0.5% on WACC and the EBIT margin with fundamental assumptions presented below.

Note that we do not include future acquisitions in our model.

We combine our own assumptions for the risk-free interest rate and market risk premium with our bottom-up estimate on equity beta and equity weight in our calculation. All in all, we assume WACC of 8.1% in our DCF calculations, following the detailed breakdown below.

Our in-house model is based on the underlying assumption that ROIC = WACC in the terminal period, meaning the model assumes that the EBIT margin gradually declines to a conservative 2% in 2048. 84% of the present value in our model relates to the period until 2048, with only 6% related to the terminal period, owing to our cautious ROIC = WACC assumption. We also adjust for SEK 600m related to project investments and weaker cash flow in 2018E.

DCF VALUE (EXCLUDING M&A POTENTIAL)

Value Per share

NPV FCFF 3,660 162.4(Net debt) -254 -11.3Market value of associates 0 0.0(Market value of minorities) 0 0.0Surplus values 0 0.0(Market value preference shares) 0 0.0Share based adjustments -151 -6.7Other adjustments -825 -36.6Time value 274 12.1DCF Value 2,703 119.9


WACC COMPONENTS

Risk-free interest rate 1.5%

Market risk premium 5.5%

Forward looking asset beta nmBeta debt 1.00Forward looking equity beta 1.30Cost of equity 8.65%Cost of debt 3.5%Tax-rate used in WACC 20.6%Equity weight 90.0%WACC 8.06%


DCF: UNDERLYING ASSUMPTIONS

Averages and assumptions 2018-23 2024-28 2029-33 2034-38 2039-43 2044-48 Sust.

Sales growth, CAGR 10.93% 5.0% 5.0% 3.0% 3.0% 2.5%EBIT-margin, excluding associa 4.5% 4.0% 3.5% 3.0% 2.0% 1.9%Capex/depreciation, x 3.2 1.00 1.00 1.00 1.00 1.00Capex/sales 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%NWC/sales 10.9% 10.9% 10.9% 10.9% 10.9% 10.9%FCFF, CAGR -203.2% 2.6% 1.6% 1.7% -6.9% 2.5% 2.5%


Below we illustrate how various changes to our assumptions would affect the fair fundamental value of Serneke. A 1.0 pp change in either direction in the EBIT margin would affect our fair value by approximately 46% up or 30% down, having the most significant impact on the value. If sales growth were to change by 1.0 pp in either direction, the value would increase or decrease by around 8-9%. If WACC were to decrease/increase by 1.0 pp, it would increase/decrease the equity value by 30%/22%.

SENSITIVITY: WACC VS EBIT MARGIN

7.1% 7.6% 8.1% 8.6% 9.1%+1.0pp 230.3 200.4 175.8 155.0 137.2

EBIT marg. +0.5pp 193.4 168.5 147.8 130.3 115.3change 156.6 136.6 119.9 105.7 93.5

-0.5pp 119.7 104.7 92.0 81.1 71.6-1.0pp 82.9 72.8 64.1 56.4 49.7

WACC


SENSITIVITY: WACC VS SALES GROWTH

7.1% 7.6% 8.1% 8.6% 9.1%+1.0pp 172.6 149.7 130.7 114.7 101.0

Sales gr. +0.5pp 164.3 142.9 125.1 110.1 97.1change 156.6 136.6 119.9 105.7 93.5

-0.5pp 149.4 130.8 115.1 101.7 90.0-1.0pp 142.8 125.3 110.6 97.9 86.9

WACC




Sum-of-the-parts (SOTP) valuation Owing to the exposure to project development and property management, multiples valuation and a DCF method need to be complemented with or at least double checked against an SOTP approach.

Our SOTP value approach assumes a base-case value of SEK 140 per share, with the bear case at SEK 65 per share and bull case at SEK 310 per share, the major swing effect on valuation coming from property management and project development assets (SEK 79 per share of equity as of Q3 2018). Assuming our base scenario for Construction and Civil Engineering are correct, the current share price implies a value of SEK -258m (SEK -11 per share) for the Project Development and Property Management businesses, which suggests an impairment of assets worth SEK 2.1bn compared with current book values (as of Q3 2018).

We believe it valid to estimate the fair unleveraged value of construction activities using EV/EBIT multiples, either as a snapshot compared with peers currently or with an over-the-cycle approach on both multiples and earnings.

Serneke has substantial assets (and risks) related to its project development and property management portfolios. Since property management are booked at fair value, Serneke accounts for unrealised gains and profits every quarter, in line with other real estate companies but unlike its listed construction peers, which account for divestment gains with assets booked at costs.

As discussed below, we see substantial surplus value in the project management portfolio related to the divestment or development of its pending building rights in the Säve airport project. We value the portfolio at a 10% discount to fair value in our base case though but include what we consider a fair value 2x current portfolio in our high value case, mainly related to detail planning in the place of pending building rights. In total, we expect Property Management to contribute SEK 30-99 per share in Serneke.

The project development portfolio and Karlastaden JV are difficult to value since they are still in their early days, and although 85% of the units have been sold, profit will likely to be booked towards completion (owing to construction and completion risks). Our base case assumes 110% of the book value (SEK 16 per share), while our bear case assumes that the equity will be consumed (zero value), which we argue is overly cautious and disregards office building rights etc.

SUM-OF-THE-PARTS VALUATION APPROACH, SEKm AND PER SHARE

Sales EBIT margin Multiple per per per

18E 19E 20E 18E 19E 20E 19E Value share Bull SEKm share Bear SEKm share

Construction 5406 6531 8486 1.4% 2.7% 4.0% 9.0 1616 71 12 2154 95 6 1077 47

Infrastructure 842 912 976 1.6% 1.9% 2.4% 9.0 159 7 12 212 9 6 106 5Contracting 6248 7443 9461 1.4% 2.6% 3.9% 9.0 1774 78 12.0 2366 104 6.0 1183 52

Project Development 239 249 257 -1.7% 3.2% 36.5% * 769 34 ** 1024 45 ** 0 0Property Management 108 120 120 83% 61% 62% x 1012 45 xx 2248 99 xxx 674.4 30Other -242 -331 -452 1.0% 8.1% 9.0% 9 -23 -1 12 1774 78 6 -15 -1Total operations 6353 7482 9387 3.8% 3.4% 5.2% 3532 155 7412 326 1842 81

18E 19E 20ENet debt 552 504 332 -552 -24 -552 -24 -552 -24Dividend -79 -113 -125 192 8 192 8 192 8

SOTP Fair value 3,172 140 7,051 310 1,482 65

Projects dev. + Karla Q3 2018 Per shareEquity value 699 31Property Managment incl ÄnglagårdenIFRS market value 1124 49* 110% Book value, **+10% return, *** No valuex 90% Market value, xx Market value + Building rights potential, xxx 60% Market value

Source: Company data and Nordea estimates



Company overviewSerneke is a fast growing, full-stack construction company involved in the construction of residential and non-residential buildings, project development and property management. In 2017, it was the ninth largest construction company in Sweden with a turnover of SEK 5.6bn and more than 1,000 FTEs. The company continues its expansion, with a focus on above sector-average growth combined with lifting overall profitability. Management aims to increase sales to SEK 10bn with an operating margin of 8% in 2020. We argue that the targets create the basis for the ambition to grow profitability but we do not see them as reachable in the short term owing to prevailing market conditions.

Serneke achieved sales of SEK 5.6bn in 2017, making it the fastest growing company in the sector

Highlights Serneke is a Gothenburg-based company with operations and subsidiaries throughout Sweden. In 2017, it was by far the fastest growing company in the sector, reaching 41% annual sales growth, with sales amounting to SEK 5,605m for the year. The company's largest segments are Construction with sales amounting to SEK 4,919m in 2017 and Civil engineering with sales of SEK 623m in the same period. The growth has been a vital part of the company's strategy to establish an organisation capable of accommodating large orders from the public and private sectors. Serneke's revenue has grown from SEK 14m in 2003 to SEK 5.6bn in 2017, implying a CAGR of 50% between 2003 and 2017.

One of Serneke's primary targets is to establish an organisation capable of handling large-scale projects from public and private customers. The company aims to continue to grow its existing operations in Stockholm, Gothenburg and Malmö but also to further expand to other parts of Sweden, primarily in relatively large cities.

SERNEKE: REVENUE DEVELOPMENT 2008-17

198 367 536893 1,012 1,143

1,800

3,107

3,978

5,605

0

1,000

2,000

3,000

4,000

5,000

6,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

SE

Km

Revenue


SERNEKE: EBITDA AND EBITDA MARGIN 2008-17

0%

2%

4%

6%

8%

10%

12%

14%

0

100

200

300

400

500

600

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

SE

Km

EBITDA EBITDA margin %


SERNEKE: EBIT AND EBIT MARGIN 2008-17

0%

2%

4%

6%

8%

10%

12%

0

50

100

150

200

250

300

350

400

450

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

SE

Km

EBIT EBIT margin %


SERNEKE: NET DEBT/EBITDA 2013-17

6.7x

14.5x

1.9x

0.0x 0.6x

2013 2014 2015 2016 2017Net Debt/EBITDA

Note: No data available prior to 2013. Source: Company data and Nordea



Founded in 2002, by Ola Serneke, who is still the company's CEO

Company history Serneke was founded in 2002 as Serneke och Fagerberg Bygg och Konsult AB, which in 2008 became SEFA AB and in 2014 changed its name to Serneke AB. Ola Serneke, who still is the company's CEO, founded the enterprise with Andreas Fagerberg. They had the vision to create an innovative contracting company offering the same security and innovative knowledge as the nationwide players, albeit with a modern approach.

According to Serneke's management, the growth of the company is explained by two stages in its historical development, entrepreneurial growth and focused growth. The first stage of growth involved increasing the company size and strengthening Serneke’s brand. The strategy was to win key contracts, then delivery high quality and gain references. Some of Serneke’s signature projects include Prioritet Serneke Arena (displayed in the picture below), the largest multi-sport facility in the Nordics, and the development of Karlastaden, a new district in Gothenburg that is currently one of the largest construction projects in Scandinavia. This was all in line with the business plan launched in 2009: to develop a leading Swedish contracting company with a strong market position.

Prioritet Serneke Arena – a signature project for Serneke

PRIORITET SERNEKE ARENA

Source: Company data

The second stage of growth, focused growth, involved divestments and transformation of the organisation. The organisation was realigned into four core business areas: Construction, Civil Engineering, Project Development and Property Management. The growth stage also involved investments in the organisation including reinforcement of governance, improved internal processes and build-up of expertise (2011-15).

Listed on Nasdaq Stockholm in 2016

Serneke was listed on Nasdaq Stockholm in 2016. During the same year, it joined the Swedish Construction Federation’s list of Sweden’s ten largest construction companies in terms of net sales.

KEY MILESTONES FOR SERNEKE

2002 Serneke is founded2004 Group structure established2008 Wins the contract of building Vattenfall's office in Ringhals2010 Opens an office in Malmö2011 Wins the contract of building a new office complex for Göteborgs Energi2012 Reaches a turnover of SEK 1bn2014 Establishes its business in Stockholm through an acquisition of Värmdö Bygg2015 Inauguration of Prioritet Serneke Arena2016 Serneke is listed on Nasdaq Stockholm2017 The detailed plan of Karlastaden is legally accepted


Business descriptionSerneke's operations are divided into four business areas, namely Construction, Civil Engineering, Project Development and Property Management. The majority of the company's sales stem from the first two segments. The sales and EBIT split per business segment is presented in the charts below.



SALES SPLIT PER BUSINESS SEGMENT IN 2017

Construction85%

Civil Engineering

11%

Project development

3%

Property management

1%


EBIT SPLIT PER BUSINESS SEGMENT IN 2017

Property management

46%

Construction40%

Project development

14%

Civil Engineering

0.2%


Construction is by far Serneke's largest business area, which accounted for 85% of the Group's sales in 2017

In terms of sales, the largest business area by far is Construction, which accounted for approximately 85% of sales in 2017, followed by Civil Engineering, representing 11%. Interestingly, Construction and Civil Engineering only accounted for around 40% and 0.2% of the company's EBIT in 2017 respectively. As a matter of fact, the largest single contributor to Serneke's EBIT is Property Management, which accounted for approximately 46% of the total EBIT in 2017. This is largely due to changes in the value of properties (amounting to SEK 228m in 2017), which gave a significant boost to EBIT.

The four business areas are described briefly below. For a more thorough description of each area of business, see the section entitled 'Business areas' further on.

CURRENT HOUSING PROJECT VÄXJÖ


Construction Through this segment, Serneke provides a comprehensive service offering in the construction industry through contract work. Services range from large construction works to smaller projects including maintenance and repair. The company's focus within this segment is targeted at larger complex construction projects, including:

Production of housingOffice buildingsSchoolsHospitalsSports facilitiesShopping centres, etc

The client base in this segment is predominantly public customers, which accounted for 74% of the orders as of 2017. The remaining 26% was private companies.

COMPLETED CIVIL ENGINEERING PROJECT HELSINGBORG


Civil Engineering The segment offers all kinds of services within Civil Engineering including:

LandscapingFoundation workInfrastructureEnergy facilitiesConcretePorts, etc

The customers within this segment are primarily municipalities, public companies and real estate companies.



KARLATORNET IS THE LARGEST PROJECT IN THIS AREA SO FAR


Project Development Within Project Development, Serneke is responsible for acquisitions, development and sales of land and building rights. The segment focuses on both residential and non-residential buildings, including houses and office buildings.

SÄVE AIRPORT, A KEY PART OF THE DIVISION'S BUSINESS


Property Management Through this segment, Serneke develops and manages properties. The management of properties is conducted through either wholly-owned subsidiaries or in conjunction with other companies through joint-venture enterprises. An important part of Serneke's property management division is Säve Airport, just outside Gothenburg. Serneke commenced its operations there in 2016 when it acquired the entire airport area with ancillary buildings. The company's vision with this project is to create a centre for industry, logistics and the entertainment industry.

Business modelSerneke’s business model is structured to capture operational and financial synergies. The core of the business model is the contracting operation including the business segments Construction and Civil Engineering. Serneke is involved in the entire production process from land allocation to completed construction. Thus, they are able to control time, costs and quality.

The working capital generated in contracting operations is then invested in the Project Development and Property Management businesses. This allows Serneke to generate return on capital with any excess cash received from contracts and receive cheap financing of projects. In addition, it increases the capital efficiency in the organisation, while somewhat increasing the operational risk of their business.

The Project development division aims to complement the contracting operations through financial and operational synergies

Project Development activities aim to complement the contracting operations through financial and operational synergies. Project Development also leverages Serneke's internal capabilities, allowing it to control the entire process in-house at self-cost. The Karlastaden project is an example of this: the Civil Engineering division prepares the ground, the Construction division handles production of the buildings and the Project Development division prepares and plans the entire process including acquisition of the construction sites.

Serneke believes the figure below illustrates the company's business model and how the company works toward its goals.

OVERVIEW OF SERNEKE'S BUSINESS MODEL

ContractingLow level of capital tied up

Stable cash flowsLimited financial risksOperating margin 5%

Property ManagementConstruction

Civil engineering

Project development

Project developmentRequires more equityHigher financial risk

Return on capital employed 20%

Free working capital

Synergies

Production volume Increased control – Reduced risk

Investment opportunities Financing opportunities

Income from external

customers

Operating margin, 8%

Balance risk diversification – Higher returns




90% of the construction projects in 2017 were design/build projects

Project organisation Around 90% of Serneke’s construction projects in 2017 were design/build projects. To deliver projects on time, through a high quality and a cost-efficient process, the company relies on collaborations between developers, contractors, consultants and other key players. The project process is split up into the following stages:

Tenders and market analysisThe tender process commences with a market analysis to identify assignments suitable for Serneke. It is followed by cost evaluation in combination with bids requested from subcontractors, quantification of materials and risk calculations. Finally, quality assurance is performed.

Planning, production and competition Serneke usually leads and controls its own organisation as well as suppliers, subcontractors, clients and purchasing. Its purchasing strategy involves assignment-related contracts, long-term comprehensive contracts and contracts signed on the spot. Purchasing is managed locally at a project level with support from a central purchasing organisation to enable flexibility and economies of scale. For each project, suppliers are continuously evaluated to ensure quality and price control.

Serneke illustrates how its joint venture/partnership projects are usually conducted through the figure below.

AN ILLUSTRATION OF A TYPICAL JV/PARTNERSHIP PROJECT PROCESS

1 Workshop and development of Partnership/collaboration declaration

2 Planning and project planning as well as design phase

3 Joint evaluation of alternative solutions and target-cost calculations

4 Production-start meeting

5 Procurement of suppliers and contractors in collaboration

6 Continuous monitoring of budget and time plan

7 Compilation of documentation

8 Handover and operations review

9 Final meeting for follow-up and experience feedback

10 Start-up of the guarantee and management phase

11 Guarantee inspection, analysis and evaluation


Customers and end marketsSerneke has a broad client base including private and public real estate companies, project development companies, municipalities and other industrial companies. Some of the companies that have contracted Serneke for projects include Hemsö, Magnolia, Riksbyggen, Northvolt, Skandia and Liedl Sverige. The majority of its customers are real estate and housing development companies.

Suppliers, raw materials and purchasing functionRaw materials and services are the largest cost item, totalling 86% of sales in 2017

Raw materials and services combined make up the single largest cost item for Serneke during 2017, accounting for SEK 4,828m, which corresponded to 86% of the 2017 sales figures, according to the company.

Serneke's purchasing strategy relies on long-term contracts, some of which are assignment-related and others of which are comprehensive, but purchasing managers have the freedom to buy on the spot market when appropriate. Purchasing is managed locally at the project level, supported by a central purchasing organisation. For each new project, the company appoints a purchaser who is tied directly to the production operation. The purchaser is responsible for the evaluation and control of the suppliers.

EmployeesSerneke currently employs around 1,000 FTEs

The company has grown fast in terms of employees as well, currently employing approximately 1,000 FTEs, implying a 2013-17 CAGR for headcount of 28.3%. As shown in the right hand chart below, the vast majority of Serneke's employees work in the Construction business line – 73% as of 2017.



FTEs DEVELOPMENT, 2013-17

369 449

705

850

1,000

2013 2014 2015 2016 2017Number of FTE's


FTEs SPLIT PER BUSINESS SEGMENT AS OF 2017

Construction73%

Civil Engineering

15%

Others6%

Project development

4%

Property management

2%


Executive managementOla Serneke has been CEO of the company since it was founded in 2002. The executive management team comprises people with long experiences from the construction industry as well as from other industries. All photos of the management team and the board of directors are taken from the company website.

CEO & Member of the Board (2004-): Ola SernekeYears at Serneke: Founder Nationality: Swedish Born: 1971 Prior experience: Member of the Board of Innovera Partners AB, Källviken I Strömstad AB, Chairman of SH Karlavagnsplatsen AB, Härryda Smide AB, Okidoki AB, H Smide Fastighets AB Education: Master of Engineering, Chalmers University of Technology

CFO: Anders DüringYears at Serneke: 1 Nationality: Swedish Born: 1965 Prior experience: Group CFO at KappAhl, Senior Vice President & CFO at Volvo Information Technology, Group controller and CIO at Ballingslöv Group and Senior Manager at Arthur D. Little Education: MBA, Finance & Accounting at Gothenburg School of Economics

Deputy CEO: Michael Berglin Years at Serneke: 7 Nationality: Swedish Born: 1973Prior experience: Head of a claims department at Folksam (2000-12) and assignments in NCC and Skanska Education: Upper-secondary engineering program and structural engineering program, University of Borås

Business Area Manager Construction: Daniel Åstenius Years at Serneke: 12 Nationality: Swedish Born: 1971 Prior experience: Senior positions within Serneke. Project Manager at Startec Group (1992-98), Owner of Ledge Ing AB (1998-2007) Education: Structural Engineering, Chalmers University of Technology Business Area Manager Civil Engineering: Fredrik Jonsson Yearsat Serneke: 5 Nationality: Swedish Born: 1976 Prior experience: Project Manager and Regional Manager at Bilfinger Group (2007-14), Production Manager at Skanska (2001-07) Education: BSc Civil Engineering, Structural Engineering, Chalmers University of Technology and MSc Project Management, University of Northumbria



Business Area Manager Project Development: Patrik Lindström Years at Serneke: 5 Nationality: Swedish Born: 1972 Prior experience: Management positions Peab Group (1999-2014), Trainee Skanska (1997-98) Education: MSc Civil Engineering, Construction, KTH Business Area Manager Property Development: Krister Johansson Years at Serneke: 3 Nationality: Swedish Born: 1970 Prior experience: CEO of Tornstaden (2014-16), various manager positions within Mölndalsbostäder (1998-2009) and Consultant at Bengt Dahlgren Education: Upper-secondary engineering program, Property Development Masterclass Diploma Regional Manager in Serneke Construction: Toni Hultberg Years at Serneke: 7 Nationality: Swedish Born: 1963 Prior experience: Project Manager at Enaco 2012, various positions within Skanska (1985-2012) Education: Structural engineering program, University West

Head of Human Resources: Jonas Fjellman Years at Serneke: 2 Nationality: Swedish Born: 1963 Prior experience: Leading positions in HR including IAC Group (2011-17), most recently HR Director Europe Education: Master of Political Sciences, University of Gothenburg

Head of Business Development: Robin Gerum Years at Serneke: 2 Nationality: Swedish Born: 1987 Prior experience: Corporate Finance at Carnegie Investment Bank (2012-17) and Private Equity at Liberty Lane Partners (2011) Education: MSc Finance and Investments, Rotterdam School of Management and BSc Business Administration, University of New Hampshire

Board of directorsSerneke has a fairly small board of directors, with only five members including Ola Serneke, the CEO.

Chairman (2017-): Kent SanderNationality: Swedish Born: 1953Independent of company/stakeholders: YesOther assignments: Chairman of Tobii AB, OnePhone Holding AB and Triboron International AB. Board Member of Expander Business Consulting AB and BT OnePhone LtdEducation: BSc Business Administration, Stockholm University

Board Member (2015-): Mari BromanNationality: SwedishBorn: 1951Independent of company/stakeholders: YesOther assignments: Chairman of the Board of Martingalen Bank AB and Board of IQ Samhällsbyggnad ABEducation: MA in Urban Planning, Gothenburg University



Board Member (2012-): Ludwig MattssonNationality: SwedishBorn: 1983Independent of company/stakeholders: NoOther assignments: Chairman of the Board of Adapta Fastigheter AB and Lommen Invest AS. Member of the Board of Atvio Finans AB, Gavia Group, Zocalo Sweden AB, Änglagården Holding AB, Änglagården Fastighetsutveckling AB, GBG Nya Arena Drift, Event AB and ASA Bay Capital ManagementEducation: MA in Urban Planning, Gothenburg University

Board Member (2018-): Anna-Karin CelsingNationality: SwedishBorn: 1962Independent of company/stakeholders: YesOther assignments: Head of Investor Relations Swedbank, Head of Information Ratos, Board member of Finansinspektionen. Advisory in strategy, finance and corporate governance Education: Master of Science in Business and Economics, Stockholm School of Economics

Major shareholdersFounder and CEO of the company is the largest shareholder

The largest shareholder in Serneke is its founder and CEO Ola Serneke, with approximately 6m shares, which represented approximately 25% of the total number of shares and approximately 55% of the votes as of 30 September 2018. Another significant shareholder is Lommen Holding AB which represents about 17% of the shares and about 12% of the votes. Lommen Holding AB's ownership, represented by Ludwig Mattsson on the board of directors, stems from the Santa-Maria concern. The list of the major shareholders is presented in the table below.

Free float of around 40% As can be seen, more than 70% of the shares are held by the ten largest shareholders, and according to Thomson Reuters, Serneke's share has a free float of approximately 40%.

SHAREHOLDERS AS OF 30 SEPTEMBER 2018

Shareholder name A-class B-class Total % of shares % of votes

Ola Serneke Invest AB 3,710,000 2,342,399 6,052,399 26.58% 55.54%Lommen Holding AB 540,000 3,457,803 3,997,803 17.55% 12.47%Christer Larsson i Trollhättan AB 380,000 497,000 877,000 3.85% 6.05%Ledge Ing AB 330,000 450,000 780,000 3.42% 5.28%Vision Group i väst AB 250,000 536,000 786,000 3.45% 4.28%AB Stratio 150,000 150,000 0.66% 2.11%Svolder Aktiebolag 1,203,941 1,203,941 5.29% 1.70%Cliens fonder 922,000 922,000 4.05% 1.30%Carnegie Fonder 731,099 731,099 3.21% 1.03%JPMEL - Stockholm Branch 539,360 539,360 2.37% 0.76%Total, 10 largest 5,360,000 10,679,602 16,039,602 70.43% 90.52%

Other shareholders 6,734,231 29.57% 9.48%Total shares outstanding 22,773,833 100% 100%

Shares repurchased until 21 Nov 2018 705,331 Total registered shares 22,068,502

Number of shares




Business areasIn the following section, we present Serneke's four business areas in greater detail. We note that Construction and Civil Engineering together account for the vast majority of Serneke's salesand constitute the core of the company's operations. The two other business areas – Project Development and Property Management – are newly developed and thus represent very small portions of the company's sales and EBIT today. Given their stage of development, they take up a substantial part of group capital and risk, which we discuss more in the valuation segment.

ConstructionHolds a leading position in Gothenburg and is ranked as a top-10 construction company in Stockholm and Malmö

The Construction business area includes all phases: new construction, renovation and expansion. Focus lies primarily on rental apartments and community properties. Projects are mainly large, complex and in areas where Serneke is able to leverage its competitive edge of expertise within innovation, sustainability and engagement. Customers are mainly large and stable companies such as municipal and private property companies, government-owned companies and project development companies. Serneke holds a leading market position in Gothenburg and is ranked as a top-10 construction company in Stockholm and Malmö.

The income from the construction segment amounted to SEK 4,919m in 2017, which corresponded to about 88% of total sales. The operating margin of the segment was 3.7% in 2017. The income during 9M 2018 increased by approximately 13% as compared to the corresponding period in 2017. The operating margin in 9M 2018 was ~1% which was well below the historical average operating margin generated from the Construction business area of approximately 3%. This was principally related to write-downs due to some suppliers defaulting in Q3 2018.

INCOME AND EBIT MARGIN

0%

1%

2%

3%

4%

0

1,000

2,000

3,000

4,000

5,000

2015 2016 2017 9M 2017 9M 2018

SE

Km





Private clients58%

*As of 31 December 2017. Source: Company data and Nordea


Housing (new

production)58%


7%

Offices4%

Retail5%

Public buildings


20%

Other6%

*As of 31 December 2017. Source: Company data and Nordea

Order backlog has decreased during 9M 2018

Order bookings and order backlog Approximately 90 percent of the order bookings at the end of 2017 were derived from the Construction business area, amounting to SEK 5,815m, an increase of 15.6% from the prior year. However, order bookings have decreased in 9M 2018 (SEK 3,018m) as compared to 9M 2017 (SEK 3,997m). We believe this gives a clear indication that 2018 will not be as strong in terms of order bookings as 2017. Furthermore, there have been no seasonal effects in order bookings historically. If no major contracts are settled during Q4 2018, the value of the order backlog is expected to decrease and income is expected to be lower in 2019-20E.

The rather steep increase in order bookings between 2016 and 2017 resulted in an increase in the value of the company's order backlog of 13%. In absolute value, the order backlog at 31 December 2017 amounted to SEK 7,649m. In the latest available figures, Serneke's order backlog decreased in 9M 2018 as compared to 9M 2017 by 7%. The major new projects during 2017 included contracts for housing construction for customers predominantly active within the public housing sector. Other new projects included contracts for construction of two hotels for Magnolia Produktion AB and a project for the School of Business, Economics and Law at the University of Gothenburg. As of 9M 2018, new assignments included an office property for Kraftstaden Fastigheter AB in Trollhättan, offices for Northvolt in Västerås and the construction of the Swedish headquarters for Lidl in Järfälla. The majority of the order backlog



comprises new housing production, which accounted for 58% of the total Construction backlog as of 31 December 2017.

Favourable geographic and product mix in the company's order bookings

According to Serneke, the order bookings reflect a favourable product mix as well as geographic spread. The company's focus is, as previously mentioned, on large, complex projects. In 2017, for example, some 50% of the order backlog consisted of projects with an order value of more than SEK 300m.

CONSTRUCTION: ORDER BOOKINGS

4,805 5,029

5,815

3,997

3,018

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2015 2016 2017 9M 2017 9M 2018

SE

Km

Order bookings


CONSTRUCTION: ORDER BACKLOG

4,881

6,753 7,649 7,342

6,817

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2015 2016 2017 9M 2017 9M 2018

SE

Km

Order backlog


Project pipeline – part of the backlogAverage order value of around SEK 245m in the project pipeline

The company currently has 67 projects in its pipeline (large projects as part of its backlog), of which 22% are located in Gothenburg and 21% each in Stockholm and Skåne. Out of all the projects in the pipeline, 22 have publicly available expected order values. The average order value of these 22 projects is approximately SEK 245m, illustrating the quite significant average size of the projects.

80% secured contracts in the project pipeline

As can be seen in the right hand chart below, Serneke expects 41 projects to be completed during the period 2018-21E, implying more than 10 projects to be completed per year. Furthermore, 53 out of the 67 projects have a buyer, implying ~80% secured contracts. The rest are being developed in the project development portfolio.

The majority of the project pipeline falls under the business area of construction, and the construction of residential properties is dominating the project pipeline. In the residential projects, more than 6,000 units will be constructed, according to Serneke.

All in all, the high transparency of the project pipeline underpins solid growth opportunities in the extensive backlog.

GEOGRAPHICAL SPLIT OF PROJECT PIPELINE

Gothenburg22%

Stockholm21%

Skåne21%

Other36%


PROJECT PIPELINE, EXPECTED COMPLETION YEAR, NO.

8

18

12

3

26

2018 2019 2020 2021 Later




Income and profit contributionThe Construction business line is by far the largest business area for Serneke, which is illustrated in the charts below. The income generated from Construction has been close to or above 80% of the Group's total sales, accounting for 85% of the total sales in 9M 2018. In terms of profit contribution, the business area's contribution is not as significant, only 42% in 9M 2018, due to the segment's low margins.

CONSTRUCTION: INCOME CONTRIBUTION

79%

81%

88% 88%

85%

74%

76%

78%

80%

82%

84%

86%

88%

90%

2015 2016 2017 9M 2017 9M 2018Income contribution


CONSTRUCTION: PROFIT CONTRIBUTION

38%

21%

44%

61%

42%

0%

10%

20%

30%

40%

50%

60%

70%

2015 2016 2017 9M 2017 9M 2018Profit contribution


Civil EngineeringThe Civil Engineering business unit is engaged in all types of civil engineering work including earthworks, foundations, infrastructure, electrical grids, power plants, harbour contracts and concrete works. Focus lies on large, complex, national and regional infrastructure projects within industry and maintenance services. External customers accounted for 89 percent of revenues in 2017 including municipalities, the Swedish Transport Administration, property companies and industry players. The largest external customer group was public sector clients in 2017, accounting for approximately 74% of the order backlog.

Groundwork began for the construction of Karlatornet in 2017

This is a business area under development that is positioned for growth. During 2017, positions were strengthened in all of the company's geographic markets. Significant projects within this business area during 2017 included construction of a new boiler house at a new combined heat and power plant for Borås Energi and Miljö AB. The project is one of the largest within the business area to date. In 2017, excavation, levelling and groundwork began for the construction of Karlatornet in Gothenburg.

The income from the civil engineering segment amounted to SEK 623m in 2017, which corresponded to about 11% of total income in 2017. The operating margin generated from the segment was around 0.2% in 2017. As can be seen in the left hand chart below, the operating margin for the segment has almost consistently been negative for the last three years but reached almost 1.4% in 9M 2018.

Action programme to improve profitability initiated in 2016

According to Serneke, one of the pivotal drivers of positive development is the action programme initiated in 2016. The programme's goal was to improve profitability and strengthen internal controls. It included reviewing the organisation, processes, working methods, objectives and focus, among other things.


-10%

-8%

-6%

-4%

-2%

0%

2%

4%

0

100

200

300

400

500

600

700

800

2015 2016 2017 9M 2017 9M 2018

SE

Km





Private clients26%

* Per 31 December 2017. Source: Company data and Nordea


Land42%

Concrete3%

Road2%

Industry53%

* Per 31 December 2017. Source: Company data and Nordea



Order booking increased by 33.5% in 9M 2018 y/y

Order bookings and order backlogCivil Engineering is a new business segment and is positioned for growth. This is reflected in the annual increase in order bookings with a positive lagging effect on the value of the order backlog. The development of order bookings and the order backlog are displayed in the charts below. We note that order bookings have increased with a CAGR of 42.3% over the period 2015-17. Furthermore, it increased by about 33.5% in 9M 2018 as compared to the same period in 2017. This justifies our belief that that Civil Engineering will generate higher overall sales for the company in the years to come.

The business area's order backlog has also increased, although not as quickly as order bookings. Over the period 2015-17, the order backlog grew with a CAGR of 13.8% and increased by almost 15% in 9M 2018 in comparison to 9M 2017. The order backlog was comprised mainly of industry work, representing 53% of the order backlog as of 31 December 2017, followed by land work, accounting for 42% at the same date.

CIVIL ENGINEERING: ORDER BOOKINGS

289

510 585

505

674

-

100

200

300

400

500

600

700

800

2015 2016 2017 9M 2017 9M 2018

SE

Km

Order bookings


CIVIL ENGINEERING: ORDER BACKLOG

244 288

316

423 486

-

100

200

300

400

500

600

2015 2016 2017 9M 2017 9M 2018

SE

Km

Order backlog


The income generated from Civil Engineering has naturally followed the same trend as order bookings and order backlog. The business area has been relatively flat in terms of its relative income contribution over the last few years, representing around 11-13% between 2015 and 2017 as well as for 9M 2018, as illustrated in the left hand chart down below. One main challenge for the Civil Engineering business area has been generating a sustainable profit. As previously mentioned, the business area has had negative margins for the last couple of years but turned positive (0.2%) in 2017. In 9M 2018, while representing 12.9% of total sales, it accounted for 9.3% of Serneke's total operating profit, showing a clear positive trend in profit contribution.

CIVIL ENGINEERING: INCOME CONTRIBUTION

12.5%11.4% 11.1% 10.7%

12.9%

0%

2%

4%

6%

8%

10%

12%

14%

2015 2016 2017 9M 2017 9M 2018Income contribution


CIVIL ENGINEERING: PROFIT CONTRIBUTION

-11.7%-8.8%

0.2%

-1.4%

9.3%

-15%

-10%

-5%

0%

5%

10%

15%

2015 2016 2017 9M 2017 9M 2018Profit contribution


The Civil Engineering group is valuable to Serneke's Construction division as many contracts are set up as turnkey projects. Internal assignments ensure some of the division's income. For example, excavation, levelling and groundwork were performed during the year for the construction of Karlatornet. Civil Engineering is also responsible for earthworks for the construction of the Kongahälla shopping centre in Kungälv.



Project DevelopmentProject Development involves acquisitions as well as the development of projects and properties. Operations typically focus on acquisitions of developed and underdeveloped land for use in residential and commercial properties. Development of projects and properties are usually done in-house or in collaboration with partners. The client base consists of private individuals, housing companies, tenant-owners associations and companies in need of commercial space. The portfolio comprises land for development of residential and commercial properties with a focus on metropolitan regions in Sweden.

The income of the construction segment amounted to SEK 212m in 2017, which corresponded to about 4% of total income in 2017. The income was mainly attributable to income from housing projects and the sale of the Mälardalen University project. The operating margin generated from the segment was 31% in 2017. As can be seen in the left hand chart below, the operating margin for the Project Development business area has fluctuated materially over the period 2015-17. For example, the 2016 figure was affected by the sale of 50% of the Karlastaden project in the second quarter of 2016. The fact that there are a lot of one-off income items in this business segment makes it difficult to compare or draw any conclusions about its operating margin.

The project development portfolio was valued at SEK 1,814m as of the end of 2017

The Project Development portfolio was valued at SEK 1,814m as of the end of 2017, of which only SEK 205m was on the balance sheet. The remaining SEK 1,609m constituted contracted development rights that Serneke has not yet taken possession of (approximately SEK 704m) and development rights owned through JVs or associates (around SEK 905m).

INCOME AND OPERATING PROFIT

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

0

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2015 2016 2017 9M 2017 9M 2018

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VALUE OF THE PROJECT PORTFOLIO

626

1,661 1,814

-200400600800

1,0001,2001,4001,6001,8002,000

2015 2016 2017

SE

Km

Project portfolio value


Within Project Development, Serneke has a number of housing projects underway in multiple cities. So far, the focus has been on acquisition of the land and properties and the planning of the work. Sales of residences in Helsingborg, Landskrona and Sollentuna began in 2017. Another project is the establishment of a new district in Veddesta, with Järfälla Municipality and Serneke working together. The land allocation agreement gives Serneke exclusive negotiation rights with the municipality regarding transfer and development of the area for a period of three years.

The figure below shows how Serneke describes its process of project development.



PROJECT DEVELOPMENT – STEP BY STEP

1. Market monitoring and land

acquisition

2. Project planning

3. Sales and marketing

4. Production and

aftermarket


Property managementThe property portfolio comprises acquired commercial properties primarily in the Gothenburg region. The division also develops and manages the properties with the goal of capital appreciation, rental income or a combination of both. The business area aims to acquire properties with development potential and growing them through investing, developing, streamlining and rationalising property management. Properties are managed by the company's own subsidiaries and through collaborations with associates. The largest current tenants include China Euro Vehicle Technology AB (CEVT), the Swedish Maritime Administration, Region Västra Götaland, the Swedish National Police and the flight school Svensk Pilotutbildning AB.

The current value of Serneke's investment property portfolio is SEK 1,032m

The value of investment properties was estimated by Serneke at SEK 895m with a lettable area of 3,467,000 m2 at the end of 2017. The value increased substantially in 2017, from SEK 329m in 2016, mainly due to the acquisition of a property at Säve Airport. For the latest available figures, Serneke has increased the value of the investment properties during 9M 2018 to SEK 1,032m. The income of the Property Management segment was SEK 51m in 2017, which represented approximately 1% of the group's total income that year. The operating profit generated from the segment in 2017 was SEK 213m. Much like the business area Project Development, sales of properties are one-off items, making it difficult to compare operating margin for this division over time.

INCOME

0

10

20

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80

2015 2016 2017 9M 2017 9M 2018

SE

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Income


VALUE OF INVESTMENT PROPERTIES

13

329

895

1,032

-

200

400

600

800

1,000

1,200

2015 2016 2017 9M 2018

SE

Km

Investment properties




Through acquisitions in 2016 and 2017, Serneke now owns a total of approximately 3.2 million square meters of developable land in the Säve Airport. Today, the site has a number of tenants and the vision is to develop the area into a logistic centre, experience centre and research centre for the automotive industry.

The largest multi-sport facility in the Nordics is one of Serneke's major holdings

One other major holding in the current portfolio is the jointly-owned Prioritet Serneke Arena, the largest multi-sport facility in the Nordic region, containing an indoor ski facility, full-sized soccer field, schools, a restaurant, a gym and offices. The letting ratio was 100% as of 31 December 2017.

Below, we present the changes in value of Serneke's investment properties from the end of 2017 to the end of 9M 2018. We note that Serneke only acquired properties worth SEK 27m during 9M 2018. Furthermore, value changes of existing properties contributed SEK 41m to the closing carrying amount for 9M 2018.

Serneke also possesses investment properties through associated companies, which amounted to SEK 320m as of 31 December 2017.

CHANGES IN INVESTMENT PROPERTIES' VALUE FOR FY 2017, SEKm

895

1,032

27

69

41

Opening carryingamount 2017-12-31

Acquisitions for theyear

Capital expenditures Unrealised changesin value

Closing carryingamount 9M 2018




Joint ventures and other significant projectsIn this section we describe Serneke's key projects in detail to highlight the potential and risks that we see with the projects and to provide information on what the company's business actually involves. Some of the projects are operated and owned solely by Serneke, and some are jointly owned with other investors through joint venture agreements. Among the major projects for Serneke are Karlastaden, Säve Airport, Fjätervålen and Prioritet Serneke Arena.

In the table below, we summarise the key projects, Serneke's ownership share in each project and their respective book value in Serneke's balance sheet. On the 30th of September 2018, Serneke's total book value of joint ventures and associates amounted to approximately SEK 1.5bn.

OWNERSHIP AND BOOK VALUE FOR JOINT VENTURE AND ASSOCIATES PER 30 SEP 2018

Joint ventures/Associates Ownership share, % Serneke Book Value SEKmJV Karlastaden 50% 374 Änglagården Holding AB 40% 147 Project development portfolio 100% 325 Säve airport 100% 675 Fjätervålen 40% 10

Total 1,531


KarlastadenDeveloping a new district just outside of Gothenburg

Serneke is developing an entirely new district in Lindholmen, just outside Gothenburg city centre. Its vision is to create a miniature city of apartments (both tenant-owned and rental), office properties, shops, restaurants, a health centre and a school. The land area of Karlastaden amounts to 32,000 m2 and the total gross area of the project will be approximately 275,000 m2, of which 70,000 m2 will be devoted to commercial premises and the remainder to residential units. The entire area will be centred on Karlatornet, the first skyscraper in Gothenburg, with a height of 245m.

The area is designed by renowned US architectural firm Skidmore, Owings & Merill LLP, the company behind the Burj Khalifa in Dubai. The Karlastaden project is owned and operated by the Karlastaden Utveckling AB joint venture, owned by Serneke and NREP (50% each).


Founded in 2005, NREP is a Danish independent partner owned investment firm engaged in real estate and real estate anchored businesses. Since establishment, the company has raised a total of 11 funds and established businesses in Denmark, Sweden, Finland and Norway. According to NREP, its investors are spread across the world, with the largest portion in Europe (40%), followed by the US (29%) and the Nordics (21%), as of 2017. The company claims a ranking as one of the most consistently outperforming private equity real estate investment firms worldwide, with more than 200 transactions since 2005, of which some 35% have been realised, and an average IRR of 20%, with no single year of losses.

Through its Nordic Strategies Fund II, NREP acquired 50% of Karlastaden in 2015. The acquisition was based on the not yet completed, detailed development plan, with an expected total value of SEK 1.5bn for the underlying building rights. Serneke says it chose to seek a partner for the project owing to the size and complexity of Karlastaden. Serneke highlights NREP's knowledge in project development, financing and transactions as key in its choice of NREP as a partner.



KARLASTADEN, WITH THE FLAGSHIP KARLATORNET BUILDING


The Karlastaden story so far...Project background – what's happened so farSerneke started to acquire properties around the area where Karlastaden is to be located many years ago. In 2013, Gothenburg municipality granted planning permits –the official starting point of the development – and Serneke began the architectural competition for the design of Karlatornet in collaboration with the city planning office and Älvstranden Utveckling AB.

The following year, Skidmore, Owings & Merill won the competition and started designing the skyscraper in collaboration with Danish architectural firm Entasis, which was responsible for the design of the remaining parts of Karlastaden. Serneke continued to acquire additional properties in the area during 2014.

In 2015, the company acquired yet another property and sold building permissions in Karlastaden to Hemsö and Robert Dicksons Stiftelse. NREP acquired 50% of the shares in Karlastaden Utveckling AB in 2016 and became joint owner of the Karlastaden project. In 2017, a letter of intent was signed with the hotel group Nordic Choice for the establishment of a hotel in Karlastaden. The groundwork for Karlatornet commenced in 2017 and the detailed development plan was adopted, allowing Serneke to apply for building permits. Serneke is still in negotiations with the municipality, but it sees no issues with getting the building permits before the end of 2018.

Area descriptionKarlastaden will constitute eight blocks with an ancillary two-floor garage including car parking, bicycle parking and service company Karlastaden Service. The first block will comprise Karlatornet and the adjacent hotel building. The second block will mainly provide office space, with restaurants on the ground floor. The third block will contain around 110 apartments, along with offices, stores and restaurants on the ground floor. The fourth block will be a housing building, with stores and restaurants on the ground floor. The fifth and sixth blocks will contain a mix of apartments, offices, stores and



restaurants. The sixth block will probably even include a supermarket. The seventh block will predominantly comprise apartments, but preliminarily also a school, office space, a cultural centre and restaurants. The eighth block will contain apartments, plus a health centre, a high school and LSS accommodation. Robert Dickson Stiftelse will be the owner of rental apartments totalling some 21,000 m2 in the sixth block. Hemsö will operating its apartments in the eighth block.

The development includes a science park, with companies, universities, high schools and hotels...

Lindholmen Science Park – the area around Karlastaden – is a hub comprising companies, universities, high schools and hotels. More than 30,000 people work or attend school in the area. The area is currently home to 375 companies, including Volvo, Ericsson, Sigma, Getinge and CEVT. This company hub makes Karlastaden an attractive location, given the high demand for housing and office space. According to Serneke, vacancy in Lindholmen Science Park is less than 1%, indicating a need for new space. We argue that this bodes well for selling the properties of Karlastaden.

We show the preliminary project timeline for Karlastaden below. The first block was commenced in 2017 and the last blocks – the fifth and sixth – will be completed by the end of 2025.

PROJECT TIMELINE FOR THE KARLASTADEN PROJECT

2017 2018 2019 2020 2021 2022 2023 2024 2025

First block

Second, third and fourth blocks

Eighth block

Seventh block

Fi h and sixth blocks


The pivotal part of Karlastaden is undeniably Karlatornet, and as it constitutes the first stage of the Karlastaden project, we describe it in more detail below.

...and a 245m, 73-storey skyscraper

KarlatornetThe 245m tall skyscraper will have 73 stories, with 594 apartments of different sizes and a publicly accessible Skybar on the 69th floor. As can be seen in the diagram above, Karlatornet should be completed in 2022, but occupancy of the apartments will commence from 2021. The apartments are operated by four different housing associations, except for the penthouse apartments on the so-called Skylevel, which will be fully owned by the apartment owners and are not associated with any housing associations.

Of the 594 apartments in the skyscraper, 503 had been sold as of 30 November 2018. The apartments that have been sold have had an average m2 price of SEK 100,000, which can be compared with the last three months' average m2 price in Gothenburg of SEK 48,271, according to Svensk Mäklarstatistik. We believe that Serneke has managed to sell 85% of the apartments in the tower for these unprecedented prices (>2.0x of average Gothenburg prices) is a positive sign. According to management, the prices of the apartments rose over this summer, despite overall falling housing prices in Sweden. Furthermore, Serneke's management roughly estimates that Karlatornet will generate income of around SEK 6.5bn in total with corresponding production costs estimated at SEK 5.5bn, leaving approximately SEK 1bn in profit, or SEK 500m in profit for Serneke as of the joint venture agreement.



The financing of the Karlatornet project is not yet final, but Serneke strongly believes that there will not be any issues with it as they have sold 85% of the apartments and have secured a 20-year lease contract with Nordic Choice regarding the hotel operations. The financing of Karlatornet will, according to management, be settled during the spring of 2019.

Skyscraper construction is typically a high-risk business, but Serneke says the architects have resolved some issues through a modularised build plan

Historically, skyscraper construction has been a high-risk business in the construction industry. The last residential skyscraper built in Sweden was the Turning Torso, located in Malmö. The building was originally budgeted at SEK 950m, but eventually exceeded SEK 1.8bn in total costs due to complexities that arose with the turning characteristics of the building. Serneke’s Karlatornet is potentially exposed to a similar risk, due to its tilted middle section. According to the company, however, the architects have solved this issue through the design and Karlatornet is to be built in a modularised fashion. This should significantly lower the construction time compared to traditional skyscrapers, enabling its completion by the tight deadline of Gothenburg’s 400-year anniversary in 2021.

We identify the major risks with the Karlastaden project as:

The size and complexity of the project could potentially delay the project and costs could be higher since it is difficult to accurately estimate costs of such a large and complex project.Financing of the project could be postponed, delaying the entire project. The residential and non-residential markets in Gothenburg could experience tougher conditions, leading to difficulties in selling all the apartments and other properties.A delay of the project might imply legal constraints from pursuing customers to fulfil their contractual agreements, bringing a risk of a price reduction or compensation to keep customers on board.

Although there are risks associated with the project, there is also great potential – not only as a source of income and ultimately a profit-generating project, but also as a catalyst for Serneke's brand. If successful, we believe construction of the highest ever building in the Nordic region will undoubtedly give greater attention to Serneke and help it to win future contracts.

Säve airportSerneke intends to develop the Säve airport area

Serneke acquired Säve, the former second international airport of Gothenburg (passenger flights here ended in 2015), in May 2016 from Swedavia, the nationally owned Swedish company operating the country's major airports. According to Serneke, the purchase consideration amounted to SEK 175m. Furthermore, an additional purchase consideration of SEK 55m was paid during Q3 2018 out of an original consideration of up to SEK 200m. The two parties agreed that Serneke would maintain the flight operations for at least an additional two and a half years, but management says it has no plans on shutting the operations down. In May 2017, Serneke signed an agreement to acquire an additional property adjacent to the airport. This property, owned by Platzer, had an underlying property value of approximately SEK 100m.

Following these two acquisitions, Serneke now owns around 3.14 million m3 of developable land in area. The area is located about 12-13 km from the city centre and 12 km from Gothenburg's largest logistics harbour, as shown below. The illustration below to the right hand shows the preliminary development plan of the area.



ATTRACTIVE LOCATION CLOSE TO THE CITY CENTRE AND HARBOUR


DEVELOPMENT PLAN OF THE SÄVE AIRPORT AREA


Plans are for an industrial mixed-use city on the airport land

Vision for Säve airportSerneke plans to create an industrial mixed-used city on land area of approximately 1.5 million m2 at Säve. A mixed-used city in this case refers to a combination of industry, logistics, commerce and entertainment etc. Serneke is currently constructing the largest photovoltaic power station in the Nordics in collaboration with Göteborg Energi. The energy provider has signed a 30-year lease agreement for the some 100,000 m2

area that the project concerns.

Today, more than half of the land area constitutes the airport and its associated runway. The table below to the left presents the entire distribution of the exploited area as of today. Serneke's preliminary plan for how the area is to be distributed is shown in the right-hand chart. It will predominantly comprise industry and logistics centres together of approximately 1.5 million m2.

CURRENT EXPLOITED LAND AREA, M2

Airport with associated runway 500,000 Existing hangar and office buildings 50,000 Existing asphalted surface 200,000 Hotel 50,000 Photovoltaic power station (under construction) 100,000


DEVELOPABLE LAND AREA, M2

Industry and logistics 1,500,000 Offices and commerce 200,000 Motocross 140,000 Equestrian facility 100,000 Hotel and conference center 50,000 Camping village 150,000 Landfill 100,000


Säve airport is operated by Serneke's property management division, and its current income largely comprises rental income from its tenants, including CEVT (a large joint venture owned by Geely and Volvo Cars), the Swedish Maritime Administration, Region Västra Götaland and Svensk Pilotutbildning. The approximate rent that Serneke charges the tenants is SEK 700-1,450 per m2. According to Serneke, the net operating income for Säve Airport is approximately SEK 20m a year, implying an initial yield of SEK 3% including land.

Bids for the area have been presented, but Serneke is not interestedWhen the passenger flight operations ended in 2015, Serneke managed to buy the area relatively cheaply. According to the company, it has already received offers to acquire the entire area. The area has a book value of SEK 675m on the company's balance sheet and Serneke estimates that it could be sold for SEK 300-500 per m2, which would imply a price tag for the entire area of SEK 960-1,600m without a detailed development plan. Nevertheless, the company sees great potential in developing the area, as stated above, and believes it will be a very profitable business.



Serneke claims it can gradually obtain building permits for parts of the area and fairly quickly increase the net operating income to around SEK 40m-50m a year, while developing the area according to its detailed development plan.

Serneke highlights the flexibility in the development plan, allowing it to construct various types of facilities of different sizes and for different purposes. A draft proposal is set to be completed in late 2018, with a detailed development plan likely to be delivered in 2020.

AERIAL PHOTO OF SÄVE AIRPORT TODAY...


...AND A PROTOTYPE OF SERNEKE'S VISION FOR THE AREA


Fjätervålen ski resortSerneke holds a 40% stake in the Fjätervålen ski resort

As of January 2018, Serneke owns 40% of Swedish ski resort Fjätervålen in Dalarna. The resort is privately owned by approximately 400 shareholders and currently comprises several FIS classified slopes, four ski lifts and 250 cottages, along with a ski school, ski rental facility, supermarket and restaurants. Serneke says it paid SEK 10m for its 40% stake, at which time all of the assets were depreciated. It therefore considers the price very reasonable. CEO Ola Serneke estimates that the company will invest some SEK 4bn in Fjätervålen.

After its purchase in January 2018, Serneke immediately began work on presenting a detailed development plan, finalising this three months later. The planning phase of enhancing and expanding the ski resort has already started and will continue until 2028. Serneke is currently negotiating with Älvdalen municipality, among other parties, regarding permits and the ambition is to commence the construction during 2019. The project comprises seven stages, as shown below.



PRELIMINARY PROJECT TIMELINE

2018 2019 2020 2021 2022 2023 2024 2025 2026

Stage 1 and stage 2

Stage 3

Stage 4 and stage 5

Stage 6

Stage 7

2027 2028


The plan is to develop and improve facilities at the resort

Stage 1 includes the construction of a new ski lift, a chalet at the mountain's summit, a camping site and a stadium for cross-country skiing. The first stage comprises 150 dwellings, to be ready by the end of 2020 (which is dependent on getting permits to start construction in 2019). Stage 2 involves the construction of a new main building for the ski resort, along with cottages and apartments. During stages 3, 4 and 5, more apartments and cottages will be constructed not only in the village but also besides the slopes. Stages 6 and 7 will include the construction of three new ski lifts, two large ski lifts and one smaller lift dedicated to nursery slopes.

The illustration below shows the preliminary development plan for Fjätervålen ski resort, the red areas indicating the new developments that Serneke is planning. It intends to build 1,350 apartment, cottage and other dwelling unit, along with a hotel, a ski rental facility and ski lifts.

PRELIMINARY DEVELOPMENT PLAN FOR FJÄTERVÅLEN SKI RESORT

2027 2028




At Fjätervålen, the aforementioned estimated SEK 4bn in investments and a normal ROI of 8-12% would imply a return of SEK 320-480m for Serneke.

Prioritet Serneke ArenaThe jointly owned Prioritet Serneke Arena is the Nordic region's largest multi-sport facility, comprising a full-sized soccer field, an indoor ski facility, schools, a restaurant, a gym and offices. As of 31 December 2017, the letting ratio was 100%. The arena was designed by OkiDoki! Arkitekter and the entire construction cost of the arena amounted to some SEK 800m.

The idea behind the arena was conceived a little more than a decade ago, while construction commenced in 2012, and it was inaugurated in 2015. Serneke owns 40% of Änglagården Holding AB, the joint venture that runs Prioritet Serneke Arena. The other 60% is owned by Lommen Holding and Prioritet Finans.

Lommen Holding manages securities, and its subsidiary Adapta Fastigheter held 10% of Änglagården Holding AB as of 30 June 2018.

Prioritet Finans is a capital management company whose business idea is to provide companies with working capital and prevent them from credit losses. As of 30 June 2018, it owned 50% of Änglagården Holding AB.

Outside the entrance of Prioritet Serneke Arena, the largest multi-sport facility in the Nordics.


PROFIT/LOSS STATEMENT FOR ÄNGLAGÅRDEN HOLDING AB

2015 2016 2017Income 26 68 81 Profit for the year 159 43 20 -Preferential rights to other shareholders* 90 - 77 - 55 -Serneke's share of profit** 28 3 8 -

Note: all numbers are in SEKmSource: Company data and Nordea

BALANCE SHEET FOR ÄNGLAGÅRDEN HOLDING AB

2015 2016 2017Total assets 1,134 1,103 1,006 Total liabilities and provisions 775 751 696 Total net assets 359 352 310 Serneke's share of net assets 96 91 83

Note: all numbers are in SEKmSource: Company data and Nordea

* According to the company's annual reports, the three owners of Änglagården Holding AB signed an agreement in 2015 regarding preferential dividend. The agreement stated a preferential dividend of SEK 90m for the benefit of the other co-owners before Serneke can partake of free distributable funds. During 2017, SEK 22m dividends were paid to the other shareholders and the preferential rights amounted to SEK 55m. Serneke also has a commitment in the form of an operational guarantee to Lommen and Prioritet, entailing that Serneke reimburses the other co-owners for all operating earnings below SEK 51.6m on an annual basis until 31 December 2020. In 2017, the operational guarantee affected earnings by SEK -11m.

** Serneke has entered into an agreement making it, together with the co-owners of Änglagården Holding AB, is responsible for the fulfilment of interest and repayment of Änglagården Holding's liabilities to credit institutions in the event of default. The liability to credit institutions as of 31 December 2017 amounted to SEK 460m.



As previously mentioned, Prioritet Serneke Arena's letting ratio is 100%, according to Serneke, and it has managed to increase income by a CAGR of around 77% during 2015-17. However, it has not been particularly profitable with the arena yet. The only year with a significant profit was the first year, 2015, and this was largely due to an unrealised value increase of the property.

THE FULL-SIZED SOCCER PITCH


THE INDOOR SKI FACILITY


The arena has an area of approximately 45,300 m2 distributed over seven floors. Tenants include football club IFK Göteborg, a high school, an elementary school, Intersport and restaurants.

The project has opened new possibilities for Serneke. For example, it had discussions with Järfälla municipality (in Stockholm) in 2017 regarding the construction of a multi-sport facility, including an indoor ski facility, which would be the first of its kind in the capital region.



Strategy and financial targetsSerneke has outlined near-term financial targets for different areas including top-line growth, operating margin, financial position and financial policy, along with strategic long-term targets with a key focus on growth.

Financial targets and growth strategyFinancial targets Serneke's financial targets cover three main key metrics: growth, profitability and capital structure. We outline these as follows:

Long-term growth target is to reach sales of SEK 10bn by 2020, primarily through organic growth but also via selected acquisitions. Serneke has set goals of reaching an operating margin of 5% for contracting business in Construction and Civil Engineering and a return on capital employed of 20% for Project Development and Property Management. All in all, Serneke's long-term target is to achieve an operating margin of approximately 8% for the group as a whole. The equity ratio should exceed 25% and a liquidity reserve of 5% of income in the past 12-month period.

Serneke's long-term dividend policy is a payout ratio of 30-50% of net profit after tax (for the previous fiscal year) annually.

Stable platform to ensure profitable growth

Growth strategy In line with the growth strategy outlined in 2009, Serneke has developed a stable platform to ensure profitable growth. According to the CEO, Serneke has been and remains focused mostly on obtaining growth primarily organically. To support stable growth in the future, the following strategic initiatives were set out in 2017.

Construction and Civil Engineering are the core business areas

The core business areas of Serneke’s operations are Construction and Civil Engineering. The contracting operations in these business segments are characterised by low margins but with the ability to generate large and stable cash flows. The strategy for Construction is to ensure profitable growth, while Civil Engineering is quite a new business area and is still under development. The focus is on winning larger projects, especially in the road infrastructure, foundations and earthworks sectors.

Looking to grow in Stockholm, Gothenburg and Malmö and expansion in Sweden's 20 largest cities

The strategy targets growth in the metropolitan areas of Stockholm, Gothenburg and Malmö and at a faster rate than the overall Swedish construction market. According to Serneke, this is to capture market share from competitors and to strengthen the company's current market position. Furthermore, Serneke sees potential expansion to other parts of Sweden as well. However, management stated that it targets expansion only in cities that are among the 20 largest in Sweden, and all other smaller cities and communities will be neglected. Additionally, the company is exploring the alternatives of expanding abroad, as illustrated by the recent co-operations in Australia.

Projects are characterised by a low level of risk and good market prospects

Part of the cash flow generated in Construction and Civil Engineering is invested in projects and acquisitions targets in the Project Management and Project Development businesses. The projects are characterised by a low level of risk and good market prospects. Potential acquisition targets involve properties with potential for long-term appreciation, strategic land or properties developed in the groups generating stable cash flow.

Continuous investments are made in processes, systems and organisation to support growth and maintain internal control. In-house manpower, in combination with subcontractors, gives Serneke an opportunity to influence implementation and quality delivered as well as to maintain control over the execution phase.

Serneke is continuously evaluating potential acquisition targets to strengthen its market position and offering, expand its knowledge base and capture positive synergy effects.



Market overviewBelow, we provide a breakdown of the Swedish construction and real estate markets in which Serneke operates. We describe the characteristics of the markets and list the value drivers that impact growth in the markets, ie macroeconomic and sector-specific factors. We note that indicators are pointing towards a possible downturn in the markets, but at the same time there are other indicators pointing to more optimistic outlooks. All in all, we conclude that the near-term outlooks for the construction and real estate sectors are uncertain, which naturally leads to uncertainties for Serneke's outlook. Nevertheless, with population growth and urbanisation, we believe there will continue to be pockets of growth for construction and civil engineering work which, if Serneke plays its cards right, could be an opportunity for the company to gain further market share.

The Swedish construction and real estate marketSwedish economy in good shape; challenges and opportunity continue within Swedish construction and real estate markets

Although weaker than the past years, the transaction volume on the Swedish real estate market in H1 2018 was still in line with the historical average

According to the Nordea Economic Outlook published in September 2018, the Swedish economy experienced GDP growth of 2.7% in 2017, indicating another stable year. Together with a continuously decreasing unemployment rate and an increasingly stable inflation rate, we note that the Swedish economy is in good shape. We argue that as the construction, civil engineering and real estate markets are all correlated with the prevailing state of the economy, these factors bode well for the near-term future for those markets. However, there are also several macroeconomic factors that create uncertainty for the Swedish construction, civil engineering and real estate markets. The debt capital market maintains its attractive characteristics regarding financing, thereby providing market players with low financing costs. Nevertheless, the Swedish Riksbank has guided for a rate increase in 2019, and if interest rates are subject to several rate increases during the years to come, we believe this could lead to higher financing costs and thus lower activity in the construction, civil engineering and real estate markets.

After a relatively timid Q1 2018, transaction activity accelerated in Q2. According to Newsec, the total transaction volume on the Swedish real estate market in H1 2018 amounted to SEK 57bn. Newsec asserts that this is a weaker transaction volume than what was achieved over the past few years, but in line with the historical average.

We believe that companies in the three aforementioned markets are strongly affected by numerous macroeconomic factors (eg GDP growth, population growth, urbanisation and interest rates) and sector-specific factors (eg residential and non-residential construction and renovation, public investments, rental growth and housing prices). As such, we begin by highlighting some of the macroeconomic factors that we believe most prominently affect the construction, civil engineering and real estate markets. We then continue by presenting some of the sector-specific factors affecting growth of the different markets. Below, we list the 30 largest construction and real estate companies in Sweden in terms of sales generated in Sweden, to show where Serneke stands.



30 LARGEST CONSTRUCTION AND REAL ESTATE COMPANIES IN SWEDEN

Company

2016 2017Sweden

2017Overseas

2017Total2017

Sweden2016 Construction

Civil Engineering

Propertymanagement

Peab 1 1 41,001 9,089 50,090 38,607 x x xSkanska 2 2 40,114 117,763 157,877 33,826 x x xNCC 3 3 33,797 20,811 54,608 29,177 x xJM 4 4 13,279 3,729 17,008 12,275 x x xVeidekke 5 5 9,254 22,025 31,279 8,023 x x xSVEVIA 6 6 6,514 345 6,859 6,274 xErlandsson Bygg 7 7 5,978 5,978 4,917 x xBonava 8 8 5,699 8,780 14,479 5,040 xSerneke Group 9 9 5,583 5,583 3,963 x x xRiksbyggen 10 Ny 5,548 5,548 4,677 xInfranord 11 10 3,672 331 4,003 3,597 xHSB 12 15 3,537 3,537 3,419 xWästbygg Gruppen 13 12 2,838 2,838 2,331 x x xOscar Properties 14 Ny 2,712 2,712 2,291 xAlm Equtiy 15 Ny 2,690 2,690 1,133 xStrukton Rail 16 11 2,560 2,560 2,570 xMVB 17 14 2,294 2,294 1,841 x x xIKANO Bostadsutveckling 18 17 1,991 1,991 1,650 xEinar Mattsson 19 13 1,977 1,977 2,058 x xBesqab 20 23 1,927 1,927 1,684 xZengun 21 26 1,732 1,732 1,216 xNRC Group 22 Ny 1,665 786 2,451 1,398 xInfratek Sverige 23 18 1,658 1,658 1,507 xConsto 24 Ny 1,609 4,412 6,021 812 x xStrabag 25 16 1,560 139,278 140,838 1,695 x xAF Gruppen 26 Ny 1,556 12,600 14,156 748 x x xJSB Gruppen 27 20 1,534 1,534 1,408 x xSVEAB 28 19 1,520 1,520 1,485 xBDX Företagen 29 Ny 1,457 1,457 1,107 xTuve Bygg 30 28 1,438 1,438 1,067 x

Area of BusinessPosition Sales, SEKm


Macroeconomic value driversAs already mentioned, various macroeconomic factors are impacting the development of the construction, civil engineering and real estate markets. We list what we believe to be the most prominent ones.

OECD predicts small downward trend in Swedish GDP; however, unemployment rates may also decrease

GDP growth and unemployment rateAccording to the OECD, the recent few years of strong GDP growth in Sweden were followed by more modest but stable growth of 2.7% in 2017. Furthermore, the OECD forecasts that Swedish GDP growth in 2018-19 will amount to 2.8% and 2.2% respectively, indicating a small downward trend that would imply a risk for the Swedish construction, civil engineering and real estate markets. However, as displayed in the right-hand chart below, the unemployment rate has decreased since 2014 and, according to the Nordea Economic Outlook, it is expected to continue to decrease over 2018-19, reaching 6.3% in 2019. We believe that this should act as a counterbalance to some extent and positively affect the trend for residential construction.

REAL GDP GROWTH IN SWEDEN, 2014-19E

0%

1%

1%

2%

2%

3%

3%

4%

4%

5%

2014 2015 2016 2017 2018E 2019EReal GDP growth, % y/y

Source: OECD, 2018

UNEMPLOYMENT RATE IN SWEDEN, 2014-19E

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2014 2015 2016 2017 2018E 2019EUnemployment rate, %

Source: Nordea Economic Outlook, September 2018



Consistent population growth alongside urbanisation trend.

Population growth and urbanisationPopulation growth and urbanisation are two factors that to a great extent affect the growth of the three aforementioned markets, as both factors inevitably lead to higher demand of new construction for housing, civil engineering projects and rental apartments, among other things. Studying the historical population growth in Sweden over the last thirty years or so, we see that the population has grown almost consistently since 1980, from approximately 8.3 million to above 10 million in 2017. The Swedish population has grown by over 1% annually since 2014, which is illustrated in the left-hand chart below. The percentage of the population living in urban areas has also increased, from around 81% in 1970 to around 87% in 2017, as displayed in the right-hand chart below.

The trends for population growth and urbanisation are positive for the contracting companies

The trends for population growth and urbanisation are positive for the companies in the construction, civil engineering, and real estate markets, as more dwellings and infrastructure will be required to supply the increasingly populated urban centres in Sweden. As Serneke's pivotal geographical markets are the three largest cities in Sweden, namely Stockholm, Gothenburg and Malmö, we argue that these trends are particularly positive for the company.

POPULATION GROWTH IN SWEDEN, 1980-2017

8.0

8.5

9.0

9.5

10.0

10.5

1980 1986 1992 1998 2004 2010 20160.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

Mill

ion

s o

f p

eop

le

Population Population growth

Source: SCB, 2018

URBANISATION TREND IN SWEDEN, 1970-2017

80%

82%

84%

86%

88%

90%

% living in urban areas

Source: World Bank, 2018

Inflation in Sweden has picked up, reaching 1.8% in 2017

Inflation and wage growthAfter a relatively long period of being below or close to zero, inflation in Sweden has picked up, reaching 1.8% in 2017. According to the Nordea Economic Outlook (September 2018), it is expected to stay around that level for 2018-19. Together with an increase in wage growth since 2015, as illustrated in the right-hand chart below, we think this could prompt the Swedish Riksbank to increase interest rates. In our view, this would negatively affect the growth of the Swedish construction, civil engineering and real estate markets, as financing costs would increase for the construction companies and the demand for new construction from households would decrease.

INFLATION IN SWEDEN, 2014-19E

-1%

0%

1%

2%

2014 2015 2016 2017 2018E 2019EInflation, CPI % y/y


WAGE GROWTH IN SWEDEN, 1993-2017

0%

1%

2%

3%

4%

5%

6%

7%

Wage growth, % y/y

Source: SCB, 2018



The Nordea Economic Outlook expects the first rate hike to occur towards the end of 2018

Monetary policy and yield expectationsAccording to the Nordea Economic Outlook from September 2018, the Swedish monetary policy rate has been -0.50% for some time, and the first rate hike to -0.25% is expected to occur towards the end of 2018. Furthermore, the Nordea Economic Outlook expects the Swedish ten-year government bond yield to increase slowly, reaching 1.60% at the end of 2019, an increase of around 70 bp from H1 2018.

MONETARY POLICY AND YIELD EXPECTATIONS FOR SWEDEN

03/09/18 3M 30/06/19 31/12/19 31/12/20

Monetary policy rate -0.50% -0.50% -0.50% -0.25% -0.25%10-year government benchmark yield 0.47% 0.75% 0.95% 1.25% 1.50%


Consumer Confidence Index (CCI) and Purchasing Managers' Index (PMI)The CCI provides an indication of the market's ability and willingness to spend; it is vital for housing starts and renovation activities, as higher consumer confidence should translate into higher activity for the residential market. The CCI in Sweden has been trending around its norm of 100 since 2013, although higher levels have been noted in 2018 (ranging between 100 and 106 from January 2018 to August 2018), indicating strong consumer confidence, which is positive for Serneke and the rest of the players in the market.

As the right-hand graph below shows, Sweden has had very positive PMI figures, largely exceeding its norm of 50 during the last four to five years. We believe this confirms the positive economic outlook for the manufacturing and service sectors in Sweden, which in turn ultimately should affect Serneke positively, we argue.

CONSUMER CONFIDENCE INDEX: SWEDEN, 2000-18

5060708090

100110120130

CCI - Sweden

Source: Thomson Reuters and Nordea

PURCHASING MANAGERS' INDEX: SWEDEN, 2006-18

303540455055606570

PMI Sweden


Sector-specific value driversGoing deeper into the value drivers specifically for the sectors in which Serneke operates, we choose to divide them into two main business areas: 1) construction and civil engineering; and, 2) property management. As construction and civil engineering share many value drivers, we find it best to describe their underlying value drivers together. Based on the company's sales split per business area (as shown below), we focus on value drivers affecting the construction and civil engineering segments, as they jointly accounted for around 96% of Serneke's sales in 2017. Nevertheless, we also identify some value drivers that are relevant to the rental real estate market despite the company's minor exposure to this sector. The reason why we include these value drivers is that its project at Säve Airport, together with other projects in its pipeline, will give it exposure to the rental real estate market.



SERNEKE: SALES SPLIT PER BUSINESS AREA IN 2017

Construction85%

Civil Engineering11%

Project development3%

Property management1%


External market estimatesExternal sources point towards residential construction market weakness, but also indicate possible growth in civil investments and non-residential construction

We follow two external sources for market updates, Euroconstruct and Swedish Construction Federation.

Euroconstruct, release updates semi-annually with regard to construction activity across Europe. Data is primarily linked to real-growth output, although Euroconstruct also provides estimates of construction inflation for each country in their universe.

Swedish Construction Federation, release updates three times a year. Data of the report is based on volumes and real growth.

In general, the two external sources both point to weakness in the residential construction market in 2019 and 2020 (Euroconstruct expects the market to drop with 12.3% in 2019 vs down 9.2% for Swedish Construction Federation). All in all, growth rate is expected to be negative in 2019E (neg 3.8% Euroconstruct and neg 3.2% for Swedish Construction federation) owing to the residential market decline.

Civil investments (infrastructure etc) and non-residential construction activity is expected to partly compensate with growth stemming from 4-7% in 2019E.

EUROCONSTRUCT NOVEMBER 2018: SWEDISH GROWTH, REAL AND NOMINAL (%)

Real growth Nominal growth

2017 2018E 2019E 2020E 2017 2018E 2019E 2020E

Sweden 6.2 2.0 -3.8 -0.7 10.0 5.2 -0.6 2.3-Residential 7.9 2.0 -12.3 -3.5 11.7 5.2 -9.1 -0.5-Non Residential build 5.8 -1.4 -0.3 -0.5 9.6 1.8 2.9 2.5-Civil 3.6 6.2 7.0 3.2 7.4 9.4 10.2 6.2

Source: Euroconstruct and Nordea

SWEDISH CONSTRUCTION FEDERATION (OCTOBER 2018), REAL GROWTH OUTPUT (%)

2017 2018E 2019E

Residential 11.6% -1.7% -9.2%of which Newbuild 13.8% -5.0% -16.2%of which Renovation 8.1% 3.9% 1.4%Buildings 7.4% 4.8% 1.9%Civil Engineering -0.1% 5.8% 3.8%Total Construction 8.1% 1.7% -3.2%

Source: Swedish Construction Federation and Nordea



Construction and civil engineeringAs can be seen in the left-hand chart below, Serneke's largest exposure to construction in its backlog is via housing. Other major segments include public buildings and renovation. In the right-hand chart below, we note that Serneke's customers are fairly equally distributed between private and public clients, where private clients account for the largest portion (58%). Accordingly, we present the value drivers that we believe have the highest impact on Serneke with its exposure in mind.

SERNEKE: ORDER BACKLOG PER BUSINESS SEGMENT

Housing (new

production)58%


7%

Offices4%

Retail5%

Public buildings


20%

Other6%

Note: As of 31 December 2017. Source: Company data and Nordea

SERNEKE: ORDER BACKLOG PER CUSTOMER


Private clients58%

Note: As of 31 December 2017. Source: Company data and Nordea

Lately, financial regulations have dampened demand in combination with a bigger supply, leading to slower growth

According to Euroconstruct, the residential building market in Sweden has ballooned in the past few years, rising 217% above the 2012 level as of this year in terms of new residential building starts, implying the highest activity in the market since the early 1990s. Since H2 2017, however, new financial regulations have dampened demand at the same time as an influx of new homes has become available on the market, leading to slower growth. As consumers became more concerned about housing prices, we note that the number of housing starts decreased. Additionally, as restrictions on a household's ability to take on debt were introduced in March this year in combination with further amortisation requirements, the supply of new, available apartments has dropped, leading to a disparity in the market prices that buyers and sellers expect to fetch. Euroconstruct indicates that, on the basis of historical events, when there is uncertainty regarding future housing prices, construction output is greatly affected and that there is usually a shift in demand toward rental apartments from privately-owned homes.

NEW RESIDENTIAL CONSTRUCTION AND RENOVATION

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2014 2015 2016 2017 2018E 2019E 2020E

EU

Rm

New construction Renovation

Source: Euroconstruct, November 2018

Building permits and started units dropped y/y in H1 2018

Poor sentiment and mixed expectations for new residential productionThe Swedish residential market has been hurt by negative sentiment owing to lower prices for tenant-owned properties, predominantly in the Stockholm region following tougher credit restrictions from the Swedish Financial Supervisory Authority. Building permits have declined sharply and started units were also down y/y in H1 2018, according to Statistics Sweden. According to Euroconstruct, the number of building permits in Sweden will decline (a 2017-20 CAGR of -11%). As can be seen in the table below, the outlook estimates differ, especially for 2019: Euroconstruct argues for a 9%



decline in started units in 2019, whereas the Swedish Construction Federation expects a sharper decline (down 16%). Boverket (the National Board of Housing, Building and Planning) has the most optimistic view, expecting unchanged starts for 2019, owing to demographics and high demand linked to residential rental starts.

OUTLOOK FOR RESIDENTIAL UNIT STARTS IN SWEDEN

Unit starts % y/y

Expectations 2017 2018E 2019E 2020E 2017 2018E 2019E 2020E

Swedish construction federation 65,000 55,000 46,000 9% -15% -16%Euroconstruct* 64,800 55,080 50,123 46,113 12% -15% -9% -8%Boverket 64,800 53,000 53,000 8% -18% 0%Median 64,800 55,000 50,123 46,113 8% -15% -9% -8%

Note: * adjusted with same base in units Source: Statistics Sweden, Euroconstruct, Swedish Construction Federation and Nordea

Favourable residential and maintenance market conditions may be dampened by new legislation

In our view, the residential and maintenance market is still enjoying favourable conditions as interest rates are low, there are opportunities to increase rents after renovations and there has been a general need for refurbishment of dwellings. Nonetheless, renovation projects starting from 2021 and onwards need to lower a properties' energy consumption materially owing to new legislation coming into force. We think that this could subdue the appetite for renovation work and lead to lower activity in the renovation market.

The chart below illustrates population growth and the trend of housing completions in the Swedish residential market. As shown, population growth and housing completions surged in 2000-17, with a close correlation between the two. The Swedish National Board of Housing, Building and Planning forecasts that 67,000 new residential units will need to be built between 2018 and 2025 to meet the demands of the growing population.

SWEDEN: POPULATION GROWTH VS HOUSING COMPLETIONS

2126

32 35 36 36

66 70 7384

7567

73

89

102 104

144

125

12 16 20 2030 27

37

50

3625 21

32 29 2732

42

5464

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Population increase (000's persons) Housing completions (000's units)

Source: Statistics Sweden, Valuegard and World Bank

In the chart below, we provide the historical price per square metre for apartments in Sweden generally and for its three largest cities, which are the pivotal markets for Serneke. As can be seen, the long period of increasing apartment prices from 2008 to 2017 came to a stop in late 2017, due to the reasons already stated, although prices slowly increased over the last year. Even though Serneke is focused on newly produced dwellings, the average prices in the market are still relevant for the company, as we believe the prices of newly produced dwellings tend to follow the average apartment drivers given that they share many similar underlying drivers.



HISTORICAL APARTMENT PRICES PER SQUARE METRE, 2008-18

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

SE

K p

er s

qm

Sweden Stockholm Göteborg Malmö

Source: Mäklarstatistik, Valueguard and Nordea

MONTHLY CHANGES IN APARTMENT PRICES PER SQUARE METRE, LAST 12 MONTHS

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

Sweden Stockholm Stockholm city Göteborg Malmö

Source: Mäklarstatistik, Valueguard and Nordea

According to Euroconstruct, an increasing number of elderly people in need of healthcare and high immigration levels boosting population growth are fuelling demand for health services; this has led to an increase of new production in the healthcare sector, positively affecting the Swedish non-residential market. New hospitals and other investments in the healthcare sector are in the project pipeline generally in Sweden. For the retail sector, there is fierce competition among retail chains, and because e-commerce is growing quickly, many retail chains and shopping centres are struggling with tough trading conditions. Euroconstruct believes that this indicates that investments in commercial buildings will decline.



NEW NON-RESIDENTIAL CONSTRUCTION AND RENOVATION

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2014 2015 2016 2017 2018E 2019E 2020E

EU

Rm

New construction Renovation


Euroconstruct has positive outlooks for the growth of new civil engineering and renovation projects

As can be seen in the left-hand chart below, Euroconstruct has positive outlooks for the growth of new civil engineering and renovation projects. As urbanisation and population growth increase, the demand for new infrastructure and maintenance work of existing infrastructure also increases, which we view as positive for Serneke's Civil Engineering business area. Nevertheless, Euroconstruct also alleges that the roads and railways sub-segments together accounted for almost 45% of the entire civil engineering activity in Sweden in 2017. Given that Serneke has no activity related to railways and given that the roads sub-segment only accounts for 3% of the company's total civil engineering business, this leaves around half of the Swedish civil engineering market as addressable for Serneke.

20% of Serneke's backlog is exposed to public buildings (health and education)

Of the different sub-segments, 20% of Serneke's backlog is exposed to public buildings (health and education). In the right-hand graph below, we present Euroconstruct's forecasts for the growth of these buildings, but we also include its estimates of industrial and office buildings, as these are growing end-markets for Serneke. As shown, Euroconstruct forecasts that this rather high volume should continue to increase in 2018, but then it expects it to decline in 2019-20. A decline is volumes in these segments would be negative news for Serneke, but we believe it would not affect its current order backlog.

NEW CIVIL ENGINEERING AND RENOVATION

-1,0002,0003,0004,0005,0006,0007,0008,0009,000

2014 2015 2016 2017 2018E 2019E 2020E

EU

Rm

New civil engineering Civil engineering renovation


BUILDINGS FOR EDUCATION, HEALTH, OFFICES AND INDUSTRY

2,800

2,900

3,000

3,100

3,200

3,300

3,400

2014 2015 2016 2017 2018E 2019E 2020E

EU

Rm

Buildings: education, health, industrial and offices


Real estate - rental marketIn the left-hand chart below, the Swedish rent index for dwellings shows that rental growth in Sweden has shown a CAGR of 2.4% over the period 2008-18. We believe that rents will continue to increase, where we see office rents as the prominent driver. This is due to renegotiations of rents, index factors and tenant-driven investments. As Serneke's current property management portfolio is almost entirely composed of non-residential rental properties, we argue that this bodes well for the company. As can be seen in the right-hand chart below, the annual rent for newly constructed buildings has increased rather sharply over the last four years, increasing at a CAGR of 3.16% over the period 2014-17.



We expect activity to be up in non-residential building in the short to medium term

Demand for new office/industrial space is clearly linked to general economic activity and domestic employment growth. Supply of new space has increased in recent years, but we would still argue that supply is balanced with demand across growth regions in Sweden which bodes well for activity to continue to improve. Attractive yield gap between yield from property investments vs funding costs could however boost activity further in our view, confirmed by outlook statements of listed real estate companies under Nordea coverage. Hence we would expect activity to be up in non-residential building short-to-medium term, helping to compensate for risks and volume decline of the residential building activity.

RENT INDEX IN SWEDEN (DWELLINGS)

127

95

100

105

110

115

120

125

130

Sweden

Source: SCB, 2018

ANNUAL RENT PER M2 IN NEWLY CONSTRUCTED BUILDINGS

1,500

1,550

1,600

1,650

1,700

1,750

1,800

Rent per square metre (SEK)

Source: SCB, 2018

Total production cost per square metre has shown a 2014-17 CAGR of 4.6%

The total production cost for newly developed dwellings has increased faster than the rental growth during the same period, which we link to higher costs for building rights and construction inflation. The total production cost per square metre has shown a 2014-17 CAGR of 4.6%, which we believe is a positive sign for the real estate rental market because it reflects supply and demand for construction services. Moreover, looking at the prime office yields in the three largest cities of Sweden, the yields have declined consistently since 2010. Newsec expects the decline to continue in 2018, especially in Malmö, but not as steeply in Stockholm and Gothenburg. The key risk for yields lies in higher supply or higher interest rates/lower employment growth. From the construction point of view, we expect to see a further increase in supply before this cycle peaks; so far, expectations remain favourable for private commercial non-residential activity to accelerate in 2019, according to the Swedish construction federation and Euroconstruct.

TOTAL PRODUCTION COST PER SQUARE METRE FOR NEWLY DEVELOPED DWELLINGS IN SWEDEN

-

5,000

10,000

15,000

20,000

25,000

30,000

SE

K/s

qm

Total production cost

Source: SCB, 2018

PRIME OFFICE YIELDS (NEWSEC)

3

3.5

4

4.5

5

5.5

6

6.5

2010 2011 2012 2013 2014 2015 2016 2017 2018EStockholm Gothenburg Malmö

Source: Newsec, August 2018

Possible near-term uncertainty for the construction and real estate markets in Sweden however there are still plenty of opportunities for Serneke

Final remarksEvidently, there is uncertainty about the future direction of the construction and real estate markets in Sweden. Some factors, such as population growth, urbanisation and a stable economy, bode well for the outlook of these markets. At the same time, uncertainty is strongest for the residential market, owing to the tougher regulatory environment (amortisation rules from 2016 and 2018) in combination with less availability to bank financing. Changes in the regulatory environment might improve sentiment in 2019, assuming that there will be changes to gains taxes and subsidies. However, these positive changes will likely be financed neutrally in the sector and balanced by reduced deductibility of interest rates or other higher taxes.



Top-down expectations on construction volumes are challenging and uncertain, mainly related to residential construction volumes while both non-residential buildings and civil works are set to grow.

We believe the uncertainty of the market brings uncertainty to Serneke's near-term outlook. However, with a strong order backlog in combination with above sector growth in recent years owing to organic growth ambition, we think there will be plenty of opportunities for Serneke to continue to grow selectively, which should limit risks for negative cost absorption owing to lower general volumes.



Benchmarking of peers and competitorsIn this section we provide business descriptions for what we consider the most relevant of Serneke's competitors and peers. Additionally, we benchmark Serneke versus its peers on a group level using what we believe are relevant key metrics. As the Construction and Civil Engineering divisions together account for almost 96% of Serneke's sales, we also benchmark these divisions against other Swedish construction companies with similar divisions. The peers that we use in both benchmarks are Peab, NCC, Skanska and Veidekke.

Benchmarking both for the group and for the segments

The peer group comprises Peab, NCC, Skanska and Veidekke

As Serneke's business is divided into four segments, with its Construction and Civil Engineering businesses differing quite significantly from Project Development and Property Management, we find it most appropriate to benchmark separately for the different segments. However, as almost 96% of Serneke's sales in 2017 stemmed from Construction and Civil Engineering, we argue that it is adequate to focus on these divisions when benchmarking. As Property Management and Project Development together account for just around 4% of sales, it is difficult to make comparisons with companies that, to a much larger extent, are engaged in these areas of businesses. Thus, the companies we have selected for the peer group are Peab, NCC, Skanska and Veidekke. The estimates in this section are collected from Thomson Reuters for all peers, whereas the estimates for Serneke are our own.

First, we benchmark the four peers and Serneke on a group level and then we benchmark the Construction and Civil Engineering divisions.

Benchmarking on a group levelLooking at the market cap and sales figures in the following table, it is evident that Serneke is a relatively small company compared with its peers. However, it has shown significantly higher sales growth in the past and we expect it to outperform its peers materially in 2018-20. In terms of valuation, Serneke is trading below its peers on all of the multiples presented in the table: EV/sales, EV/EBIT and P/E.

SUMMARY OF PEER BENCHMARKING, SEKm

Market Cap 2017 2018E 2019E CAGR 14-17 CAGR 17-20E 2017 2018E 2019E

PEAB 18,719 49,981 53,259 56,865 4.6% 5.2% 4.8% 4.7% 4.6%NCC 14,369 54,441 57,395 60,733 -1.4% 4.8% 2.0% -1.2% 2.9%Skanska 55,709 157,877 167,795 163,347 3.3% 1.4% 2.3% 2.9% 3.8%Serneke 883 5,605 6,353 7,482 46.0% 18.8% 7.5% 3.8% 3.4%Veidekke 13,739 31,155 36,658 38,030 7.6% 8.6% 3.1% 1.8% 3.6%

Peer Mean (excl. Serneke) 25,634 73,363 78,777 79,744 3.5% 5.0% 3.0% 2.0% 3.8%Peer Median (excl. Serneke) 16,544 52,211 55,327 58,799 4.0% 5.0% 2.7% 2.3% 3.7%

Sales Sales growth, % EBIT margin, %

Note: Market cap as of 6 December 2018. Source: Thomson Reuters and Nordea estimates

Significantly lower sales figures than its peers, but faster growth

As already mentioned, Serneke has historically had much lower sales figures than its peers and we do not expect the company to match any of its peers' sales levels in the near term (2018E-20E). As illustrated in the right-hand chart below, however, Serneke has consistently outperformed its peers in terms of sales growth. The only company in the peer group to have shown sales growth comparable with Serneke is Veidekke, which generated sales growth exceeding 30% in 2016, but has, on average, had lower growth figures. We expect Serneke's growth rate to slow during 2018-20, but still to surpass 13% each year, which is a high growth rate for this sector.



SALES: SERNEKE VS PEERS

-20,00040,00060,00080,000

100,000120,000140,000160,000180,000

2014 2015 2016 2017 2018E 2019E 2020E

SE

Km

PEAB NCC Skanska Serneke Veidekke


SALES GROWTH: SERNEKE VS PEERS

-20%-10%

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



Serneke has traded largely in line with the historical sector average with an EBIT margin around 3.3%. Excluding 2014, the company has generated an EBIT margin of above 3% between 2015 and 2017. Thomson Reuters' consensus expects higher margins on average for the peer group, and we expect Serneke to reach an EBIT margin of 5.25% in 2020E.

On average, the companies in the peer group have had very low net debt/EBITDA, at around 0.9x for 2015-17. We exclude 2014 from the chart below because of Serneke's high ratio that year (14.5x), which would distort comparability. Serneke is, according to our forecasts, expected to have the highest net debt/EBITDA of the peer group in 2018, reaching 2.6x, but we expect this to gradually decrease in 2019E-20E, reaching 0.9x in 2020E.

EBIT MARGIN: SERNEKE VS PEERS

-2%-1%0%1%2%3%4%5%6%7%8%



NET DEBT/EBITDA: SERNEKE VS PEERS

-1.5x-1.0x-0.5x0.0x0.5x1.0x1.5x2.0x2.5x3.0x3.5x

2015 2016 2017 2018E 2019E 2020E



As Serneke was listed in 2016, valuation multiples for 2014-15 are not available for the company. The peer group has shown low EV/sales ratios historically, below 0.7x throughout 2014-17, and this is expected by Thomson Reuters' consensus to further decrease during 2018E-20E. As for Serneke's EV/sales figures, we expect them to be the lowest in the peer group, reaching 0.2x in 2020E.

The sector's low margins lead to high EV/EBIT multiples; on average for the peer group (excluding Serneke), they were around 14x for 2014-17. According to Thomson Reuters' consensus, the average EV/EBIT multiple for the peer group will decrease to some 12.5x during 2018E-20E. Serneke has the lowest figures for this multiple as well and we expect the company to trade at a 2020E EV/EBIT of around 3.9x.



EV/SALES VALUATION: SERNEKE VS PEERS

0.0x

0.1x

0.2x

0.3x

0.4x

0.5x

0.6x

0.7x



EV/EBIT VALUATION: SERNEKE VS PEERS

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x



The peer group (excluding Serneke) has been trading at an average P/E of about 15.5x during 2014-17. According to Thomson Reuters' consensus, the average P/E for the peer group in 2018-20E is expected to decrease to some 13.4x. Serneke's P/E multiple has been, and we expect it to be, lower than the peer group average. We forecast a 2018E P/E for Serneke of 12.3x, significantly decreasing to 3.2-7.0x for 2019-20E.

In terms of dividend yield, the peer group average for 2014-17 was around 4.2%, and is, according to Thomson Reuters' consensus, expected to increase to about 6.1% in 2018-20E. Serneke paid out its first dividend in 2017 (at around an 8.2% dividend yield) and we believe its dividend yield will be approximately 6-10% in 2018-20.

P/E VALUATION: SERNEKE VS PEERS

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x



DIVIDEND YIELD: SERNEKE VS PEERS

0%

2%

4%

6%

8%

10%

12%



In summary, Serneke is clearly trading at a lower value on the aforementioned multiples. It has lower significantly lower sales figures but is growing rapidly and generates stable margins on a group level.

Benchmarking – Construction and civil engineeringIn the charts below, we present the aggregated sales of the peer group companies' Construction and Civil Engineering divisions and their sales growth during 2014-18E. As Skanska and Veidekke see quite material portions of their sales generated outside Sweden, we separate out their Swedish divisions. Much like the benchmarking on a group level, Serneke is the smallest company in its peer group in terms of sales, but also the one with the fastest sales growth. Whereas Peab, NCC and Skanska have been showing single-digit growth in recent years, Serneke and Veidekke have surpassed 20% annual growth almost consistently during 2014-17. At a CAGR of some 44% for 2014-17, Serneke has still been by far the fastest growing company in the peer group.



SALES: SERNEKE VS PEERS

-

10,000

20,000

30,000

40,000

50,000

60,000

2014 2015 2016 2017 2018E

SE

Km



SALES GROWTH: SERNEKE VS PEERS

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

2014 2015 2016 2017 2018E



Serneke has increased its aggregated EBIT margin for Construction and Civil Engineering from around 0.1% in 2014 to some 3.3% in 2017, beating the peer group's average EBIT margin 2.85% in 2017. This is clearly a good trend for the company and it having been able to increase its margins in this low-margin sector is a strong indicator for Serneke.

EBIT MARGIN: SERNEKE VS PEERS

0%

1%

1%

2%

2%

3%

3%

4%

4%

2014 2015 2016 2017 2018EPEAB NCC Skanska Serneke Veidekke


Construction companiesThe following section highlights the operations of the companies which we have chosen as Serneke's peers. The market caps of the companies are as of 6 December 2018.

Peab's largest business segment is Construction, which accounted for 45% of sales in 2017

Peab (market cap: SEK 18,719m)Sweden-based Peab is active in the construction and civil engineering industries. It operates through four business areas: Construction, Civil Engineering, Industry and Project Development. Construction, the company's largest segment, accounted for 45% of sales in 2017. Here, Peab works with the construction of homes, public and commercial premises, and renovations and extensions among other things. Civil Engineering, which accounted for 20% of sales in 2017, is active in the Nordic region. Its activities include infrastructure projects such as roads, railways and bridges. Other activities include the operation and maintenance of roads. Through its Industrysegment (21% of sales in 2017), Peab delivers ballast, concrete, asphalt, temporary electricity and prefabricated concrete elements to both external customers and its own other business areas. The fourth and final segment, Project Development, handles Peab's acquisitions, development, management and divestment of housing and commercial property. It is the company's smallest business segment, accounting for 14% in 2017.



PEAB: SALES SPLIT BUSINESS SEGMENT IN 2017

Construction45%

Civil Engineering

20%

Industry21%

Project Development

14%


PEAB: SALES SPLIT PER GEOGRAPHY IN 2017

Sweden83%

Norway9%

Finland8%


The Swedish market accounted for 83% of the Peab's sales in 2017

As can be seen in the right-hand chart above, Sweden is by far Peab's largest geographical market, representing approximately 83% of total sales in 2017. The company is only active in the Nordic region, where its other two geographical markets are Norway (9% in 2017) and Finland (8% in 2017). As Serneke only has sales in Sweden, the two companies' geographical mixes differ slightly.

As already mentioned, Construction is the business area that plays by far the most important role for Serneke, accounting for approximately 85% of sales in 2017, whereas Peab's corresponding share was 45%. We thus consider Peab much more diversified than Serneke and not as dependent on its Construction segment. Moreover, Peab has a business segment that Serneke does not possess, namely Industry. We believe this business gives Peab more control of its purchasing processes than Serneke has. Another difference lies in Civil Engineering, where Serneke has actively chosen not to take on projects that involve tunnels or bridges, whereas Peab does engage in such projects.

Peab: Sales of almost SEK 50bn and an EBIT margin of 4.6% in 2017

Peab had a turnover of SEK 49,981m in 2017 and generated an EBIT margin of 4.62%, substantially larger than Serneke's SEK 5,605m 2017 turnover, making Peab almost ten times larger. Peab's sales have shown quite a stable development, with a CAGR of 4.6% for 2014-17. This historical growth is also in line with Thomson Reuters' consensus for 2017-20E at 4.7%. Except for 2015, when Peab reported an EBIT margin of 2.2%, its EBIT margin has been 4-5% for 2014-17. According to Thomson Reuters' consensus estimates, Peab's EBIT margin will gradually decline from 4.8% in 2017 to 4.4% in 2020E.

Peab has been valued at 10-15x times EBIT for 2014-17, with the exception of 2015, largely explained by the aforementioned low EBIT margin that year. Thomson Reuters' consensus for 2018E-20E expects quite a stable EV/EBIT multiple, slightly exceeding 10x.

PEAB: REVENUE AND EBIT MARGIN, 2014-20E, SEKm

0%

1%

2%

3%

4%

5%

6%

7%

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2014 2015 2016 2017 2018E 2019E 2020ESales EBIT margin %


PEAB: HISTORICAL VALUATION AND FORECAST

15.4x

27.9x

13.0x11.0x 10.6x 10.0x 9.9x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

2014 2015 2016 2017 2018E 2019E 2020EEV/EBIT




Despite it being considerably larger than Serneke and despite the aforementioned differences, we still believe Peab is a decent peer for Serneke as they share many business characteristics and value drivers.

NCC: Building represented 43% of sales in 2017

NCC (market cap: SEK 14,369m)NCC is active in the construction and property development industries, through operations in three areas, namely Industry, Construction & Civil Engineering, and Property Development. NCC's Industry division offers products and services associated with roads and deals with the production of stone materials and asphalt products, as well as piling work and paving assignments. The business segment accounted for 21% of sales in 2017, making it NCC's third-largest business area. The Construction & Civil Engineering business, which accounted for around 75% of sales in 2017, is divided into two sub-divisions, namely Building and Infrastructure. Through its building segment, NCC constructs housing and offices, as well as public and commercial premises. Refurbishment of housing and offices is also included in this segment. The company's infrastructure segment engages in everything from design and construction to production and service of infrastructure projects. NCC's Property Development unit develops and sells office, commercial and logistics properties in the Nordic region.

NCC: SALES SPLIT PER BUSINESS SEGMENT IN 2017

Building43%

Infrastructure32%

Industry21%

Property Development

4%


NCC: GEOGRAPHICAL SALES SPLIT IN 2017

Sweden62%

Finland13%

Norway13%

Denmark12%


The Swedish market accounted for 62% of sales in 2017

The company's largest market in geographical terms is Sweden, which generated 62% of NCC's sales in 2017. The company is also active in the other Nordic markets, with Finland, Norway and Denmark accounting for 13%, 13% and 12% of sales respectively during 2017.

Like Peab, NCC differs from Serneke in having an Industry division of a fairly similar size, which implies the same benefits as described above. Furthermore, NCC's geographical coverage and businesses are far more diversified than Serneke's.

NCC: Sales of almost SEK 55bn and an EBIT margin of 2.2% in 2017

NCC had sales of SEK 54,608m in 2017, implying a revenue CAGR of -1.3% for 2014-17. However, according to Thomson Reuters' consensus, this trend will turn, with NCC forecast to reach a positive CAGR of 4.5% for 2017-20E. NCC experienced a decline in its EBIT margin during 2014-17, reaching some 2.2% in 2017. Thomson Reuters' consensus is for the EBIT margin to rise slowly, reaching approximately 3.6% in 2020E. Due to the gradual decline in EBIT from 2014 to 2017, NCC's valuation (EV/EBIT) increased from 6.8x in 2014 to 16.2x in 2017. According to Thomson Reuters' consensus, the increase will continue in 2018, but then decline relatively sharply, reaching 7.7x in 2020E.



NCC: REVENUE AND EBIT MARGIN, 2014-20E

0%

1%

2%

3%

4%

5%

6%

7%

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2014 2015 2016 2017 2018E 2019E 2020E

SE

Km

Sales EBIT margin %


NCC: HISTORICAL VALUATION AND FORECAST

6.8x

10.5x 11.3x

16.2x

22.1x

9.8x7.7x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

2014 2015 2016 2017 2018E 2019E 2020EEV/EBIT


The largest company in the peer group, Skanska, reported sales of SEK 58bn in 2017

Skanska (market cap: SEK 55,709m)Sweden-based Skanska is engaged in construction and project development. Its operations are divided into: Construction, Residential Development, Commercial Property Development, and Infrastructure Development. The Construction division builds and renovates buildings, industrial facilities, infrastructure and residences. It also provides services related to construction, facility operations and maintenance. The principal activity in this business area is building construction, which accounted for some 48% of Skanska's order backlog as of 31 December 2017, followed by civil construction (43%). Through Residential Development, Skanska designs and builds homes in the Nordic region (Sweden, Norway and Finland), Poland and Czechia for immediate sale. The Nordic region accounted for approximately 95% of the operating income in this business as of 2017. Commercial Property Development in responsible for initiating, developing, leasing and divesting commercial property projects. According to the company, this division is relatively equally divided between the Nordics, Europe and the US. The Infrastructure Development division specialises in identifying, developing and investing in privately financed infrastructure projects, including roads, hospitals and power generation plants. As of 31 December 2017, the division's project portfolio was predominantly projects in the US (57%) and the Nordics (40%), with the remaining 4% in Europe. For Serneke, this division is by far the smallest business area, representing close to 0% of sales in 2017.

In 2017, Skanska's biggest market in terms of sales was the US, which accounted for 36%

The left-hand chart below shows that Skanska's most important business area is Construction, which accounted for some 86% of its sales in 2017. This is very much in line with Serneke's business mix: 85% of its 2017 sales were generated by its Construction division. Nonetheless, Skanska differs substantially from Serneke in terms of geographical diversification. While Serneke conducts more or less all of its business in Sweden, the Swedish market only accounted for 25% of Skanska's sales as of 2017.

SKANSKA: SALES SPLIT PER BUSINESS AREA, 2017

Construction86%

Residential Development

7%

Commercial Property

Development7%

Infrastructure Development

0%


SKANSKA: GEOGRAPHICAL SALES SPLIT, 2017

USA36%

Sweden25%

Other Europe

22%

Nordics excl. Sweden

17%




Given its much larger sales figures than the other peers (soaring above Serneke's), Skanska had a turnover of SEK 157,877m in 2017, implying a 2014-17 CAGR of 3.3%. According to Thomson Reuters' consensus estimates, the company's sales growth should slow down slightly, growing at a CAGR of 1.9% in 2017-20E. Skanska's 2017 EBIT margin amounted to 2.3%, which appears low in comparison with the 3.3-3.5% it saw for 2014-16. Consensus expects its EBIT margin to gradually increase during 2018E-20E, reaching almost 4% in 2020E.

The company's historical EV/EBIT valuation hovered around 12x in 2014-16, but surpassed 16x in 2017, mainly explained by the aforementioned low EBIT margin that year. Given the gradual expected increase in the EBIT margin, Thomson Reuters' consensus forecasts Skanska's valuation to gradually decrease towards 9.1x in 2020E.

SKANSKA: SALES AND EBIT MARGIN, 2014-20E

0%

1%

2%

3%

4%

5%

6%

7%

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

2014 2015 2016 2017 2018E 2019E 2020E

SE

Km

Sales EBIT margin %


SKANSKA: HISTORICAL VALUATION AND FORECAST

12.5x 11.8x 11.6x

16.2x

13.7x

9.6x 9.1x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

2014 2015 2016 2017 2018E 2019E 2020EEV/EBIT


The biggest construction company in Norway, Veidekke, generated 31% of its sales in Sweden during 2017

Veidekke (market cap: SEK 13,739m)Norway's Veidekke is engaged in the construction, property development and industry segments. The company generated 62% of its sales in Norway, 31% in Sweden and 7% in Denmark during 2017. Its biggest business area is Building Construction, which accounted for 51% of group revenue in 2017, followed by Civil Engineering (24%), Industrial (15%) and Property Development (10%). Like Serneke, Veidekke is primarily a construction company; approximately 75% of its 2017 sales were generated through its construction divisions (Building Construction and Civil Engineering). Much like Peab and NCC, Veidekke also has a division named Industrial, where Veidekke is the Norway's largest asphalt contractor and the country's second-largest producer of aggregates. In Property Development, Veidekke purchase sites and develop them into residential buildings for sale to end-customers, primarily in Norway and Sweden.

Veidekke's construction operations in Sweden are bigger than Serneke's in terms of revenue but generated a lower EBIT margin of 1.9% versus Serneke's 3.3% in 2017, as already mentioned.

VEIDEKKE: SALES SPLIT PER BUSINESS AREA, 2017

Building construction

51%

Civil engineering

24%

Property development

10%

Industrial15%


VEIDEKKE: GEOGRAPHICAL SALES SPLIT IN 2017

Norway62%

Sweden31%

Denmark7%




The Veidekke group reported a 2014-17 sales CAGR of 7.6% and is expected by Thomson Reuters' consensus to accelerate its sales growth in 2018E-20E, reaching a CAGR of 9.3% for 2017-20E. Veidekke generated a group EBIT margin of around 3% during 2014-17, and Thomson Reuters' consensus forecasts this first to decrease in 2018E and then surpass 3% in 2019E-20E.

Veidekke had quite a high valuation in 2014-17, at 15.5-19.0x, and Thomson Reuters' consensus expects this to increase to 24.3x in 2018E and then drop significantly to 11.5-12.0x in 2019E-20E.

VEIDEKKE: SALES AND EBIT MARGIN, 2014-20E

0%

1%

2%

3%

4%

5%

6%

7%

-

10,000

20,000

30,000

40,000

50,000

2014 2015 2016 2017 2018E 2019E 2020E

SE

Km

Sales EBIT margin %


VEIDEKKE: HISTORICAL VALUATION AND FORECAST

18.9x 19.3x17.4x

15.7x

24.3x

11.5x 11.9x

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

2014 2015 2016 2017 2018E 2019E 2020EEV/EBIT




EstimatesWe expect Serneke to report a sales CAGR for the period 2017-23 of approximately 11.3%. Although we do not expect Serneke to maintain its historical sales growth levels, we still believe the company will outperform the sector on revenue growth in the medium term. We expect Serneke's largest business area, Construction, to improve its margins gradually, reaching 4% in the medium term, fairly in line with the sector average. We expect the Karlatornet project to dilute construction margins a notch, primarily in 2019, as construction companies in general are relatively conservative in terms of profit recognition during the early stages of a project.

NOTE: All forecasts in this section are our own and not those of the company or any third party.

Ranked among the top-ten largest construction companies in Sweden

We argue for strong sales growth, but not as strong as the company has shown historically

As previously mentioned, Serneke has a history of rapid growth, as illustrated by a CAGR of approximately 50% between 2003 and 2017, clearly outperforming the market. The company has thus reached a significant position in the market, and is now ranked among the top-ten largest construction companies in Sweden. Due to expectations of a slightly more sluggish construction market ahead, along with the associated uncertainties, we argue it is prudent to expect lower growth in the medium term. As such, we believe Serneke's revenue will grow 13.4% for 2018, 17.8% for 2019, and 25.5% for 2020, and then gradually decline to between 2.6% and 7.1% for 2021-23. Even though these expected growth figures are far below the company's historical levels, they are still in line with or above the sector average (around 3%).

Our operating margin estimates for each business area are presented in more detail further down in this section. On a group level, it is difficult to see any clear patterns, as the company's operating margin has varied over time. Nevertheless, we believe Serneke will have an operating margin at more stable levels, fairly in line with the sector average of 3.4-3.8% in 2018-19. We expect Serneke to improve its margin during 2020-23 and generate an operating margin of 4.4-5.8%, primarily driven by a higher margin for its Construction segment, which accounts for the vast majority of the company's operations.



ESTIMATE SUMMARY, SEKm

2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023ENet Sales-Construction 2,466 3,229 4,919 5,406 6,531 8,486 9,080 9,261 9,539 -Civil Engineering 389 455 623 842 912 976 1,044 1,117 1,195 -Project Development 540 373 212 239 249 257 270 283 297 -Property Management 3 15 51 108 120 120 120 120 120 -Group 3,107 3,978 5,605 6,353 7,482 9,387 10,053 10,312 10,673 y/y% 72.6% 28.0% 40.9% 13.4% 17.8% 25.5% 7.1% 2.6% 3.5%

Adjusted EBIT %-Construction 1.9% 2.7% 3.7% 1.4% 2.7% 4.0% 4.5% 4.0% 4.0%-Civil Engineering -3.9% -7.9% 0.2% 1.6% 1.9% 2.4% 2.5% 2.5% 2.5%-Project Development 30.7% 89.5% 30.7% -1.7% 3.2% 36.5% 42.1% 13.8% 10.0%-Property Management 0.0% 246.7% 417.6% 83.3% 60.8% 61.7% 61.7% 61.7% 61.7%-Group 4.1% 10.3% 7.5% 3.8% 3.4% 5.2% 5.8% 4.6% 4.4%EBIT adj 128 411 419 242 251 492 581 469 472 EBIT reported 128 411 419 172 251 492 581 469 472

Financial net -16 -17 -18 -39 -44 -48 -48 -48 -48

Pretax profit 112 394 401 133 207 444 532 421 424

Tax 25 0 -78 -40 -44 -93 -112 -88 -89

Net Profit 137 394 323 93 164 351 421 333 335

Net Capex 10 175 62 64 75 94 101 103 107-% Sales 0.3% 4.4% 1.1% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%-Depreciations 0 -68 -20 -22 -25 -30 -30 -30 -30-% Sales 0.0% -1.7% -0.4% -0.3% -0.3% -0.3% -0.3% -0.3% -0.3%

Dividend 0 0 93 68 80 114 125 132 132% Net profits 0.0% 0.0% 28.8% 21.2% 86.1% 69.6% 35.7% 31.4% 39.7%

Net Debt 243 -37 254 496 539 492 322 210 117Net Debt /EBITDA 1.9 -0.1 0.6 2.6 2.0 0.9 0.5 0.4 0.2


GROUP SALES AND SALES GROWTH, SEKm AND %

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

-

2,000

4,000

6,000

8,000

10,000

12,000

Sal

es,

SE

Km

Net Sales Sales growth, y/y


GROUP ADJ EBIT AND ADJ EBIT MARGIN, SEKm AND %

0%

2%

4%

6%

8%

10%

12%

-

100

200

300

400

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700

EB

ITad

j, S

EK

m

EBIT adj EBIT adj margin


Segmental estimatesWe illustrate the segmental distribution of sales and operating margins in the charts below. As mentioned, Serneke's Contracting businesses accounted for approximately 96% of sales in 2017, the majority of which were generated from the Construction business line. As such, we principally focus on the Construction and Civil Engineering segments when estimating future sales and operating profit for Serneke.



SALES SPLIT PER BUSINESS SEGMENT, 2017

Construction85%

Civil Engineering

11%

Project development

3%

Property management

1%


EBIT SPLIT PER BUSINESS SEGMENT, 2017

Property management

46%

Construction40%

Project development

14%

Civil Engineering

0.2%


Construction

Lower sales growth in 2018E of almost 10%

SalesSerneke's Construction division has seen sales grow rapidly since the inception of the company, and has continued to do so in recent times, reaching a CAGR of approximately 44% between 2014 and 2017. The development of the company's sales is strongly correlated with its order bookings and order backlog. During 9M 2018, Serneke's order bookings decreased quite a bit. As a comparison, its order bookings in 2017 amounted to SEK 6.4bn for the full year, whereas 9M 2018 order bookings reached only SEK 3.73bn. Q4 is normally a strong quarter for construction companies, but we find it unlikely that Serneke can reach order booking levels for 2018E as high as in 2017. Furthermore, its order backlog decreased by 5.9% y/y in Q3 2018 to SEK 7.3bn, also indicating lower overall activity. Based on this reasoning, we forecast 2018 sales growth of 9.9%.

Nonetheless, in our view, Serneke still has healthy order intake and a promising order backlog with interesting projects in its pipeline for the coming years, and hence we believe that the company can maintain above-sector sales growth for the forecast period. The average growth rate for the Swedish construction sector is around 3-5% and we see potential for Serneke to reach sales growth of 21% in 2019E and 30% in 2020E. We then see it decreasing materially to 2-7% for 2021E-23E, but still in line with the sector.

Uncertainty of the Swedish construction market is reflected in our more conservative growth estimates for the near term

On a more general note, we believe the uncertainty of the Swedish construction market creates uncertainty for Serneke's near-term outlook, which is reflected in the more conservative growth rates than the company has historically shown. With its strong record of growing almost solely organically, we think there will be plenty of opportunities for Serneke to continue to grow selectively.

We estimate that the Karlatornet project will dilute margins primarily in 2019, but will also have a slight effect in 2020

EBITConstruction improved its relatively low operating margin from 1.2% in 2014 to 3.7% in 2017 – in line with the sector average. Primarily due to the writedowns in Q3, however, we expect the full-year margin for 2018 to be materially lower, at 1.4%. We believe that the Karlatornet project will dilute margins primarily in 2019 but will also have a slight effect in 2020. This is because it is common in the construction industry to show fairly conservative profit recognition in the early phase of a project and then progressively recognise more profit as the project progresses. Hence, we believe that the Karlatornet project will have an impact on the Construction division's margin, primarily for 2019, and we consequently estimate that the operating margin for the segment will be 2.7%.

We estimate an operating margin of around 4% for 2020-23

For the period 2020-23, we see potential for Serneke to reach an operating margin of slightly above 4% for its Construction division. This is in line with the sector average (3.5-4%) and we believe it is realistic for Serneke to follow the sector trend. The company has ambitions of an even higher operating margin, which we find positive, and we believe it is possible that the mix can be improved, leading to increased margins. We do not embed this in our forecasts, however, as we believe it will take some time to materialise. A margin in line with the sector average appears more reasonable to us at this time.



CONSTRUCTION: SALES AND SALES GROWTH, SEKm AND %

0%

10%

20%

30%

40%

50%

60%

-

2,000

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12,000

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es,

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CONSTRUCTION: EBIT AND EBIT MARGIN, SEKm AND %

0%

1%

2%

3%

4%

5%

-50

100150200250300350400450

EB

ITad

j, S

EK

m



Civil Engineering

We expect the company to deliver healthy sales growth of ~7% annually in 2019-23

SalesThe Civil Engineering segment has historically constituted a small part of Serneke's operations, only accounting for approximately 10-13% of the company's sales between 2014 and 2017. Looking at the division separately, it grew at a CAGR of ~45% during the same period. During 2018, the majority of the groundwork of Karlatornet was completed, which is reflected in the reasonably strong numbers for 9M 2018. We expect Q4 to be a strong quarter as well, and hence we expect sales for the segment to grow by ~35% y/y for 2018. According to Serneke's management, the final part of the groundwork will be completed in the first half of 2019E, and thus we expect the project to give a boost to sales figures for 2019 as well. We do not believe that the company can continue delivering these extreme levels of revenue growth for the segment indefinitely, but instead anticipate a more healthy level of ~7% between 2019 and 2023.

This expected growth rate is still higher than the sector average. We believe this is possible since Serneke has a strong order backlog and order bookings, in combination with the rather positive market signals for the civil engineering industry. As urbanisation and population growth increase, demand for new infrastructure and maintenance work for existing infrastructure also increases, which we view as positive for Serneke's Civil Engineering business area. Overall, we expect Serneke's Civil Engineering division to grow sales at a CAGR of 11.5% between 2017 and 2023.

Low operating margins in the civil engineering industry historically

We expect Serneke to increase its margins to around 2.5% in 2020-23

EBITOperating margins in the civil engineering industry have historically been low. This has been the case for Serneke as well, which reported negative operating margins between 2014 and 2016 and a positive margin for the first time in 2017 (0.2%). Serneke has managed to increase its margin in each quarter of 2018, however, with the latest reported figures from Q3 indicating an operating margin of 2.3% for the segment. We believe volumes in the segment have increased to levels where it is possible for the company to start generating operating profit. Furthermore, according to Serneke, one of the pivotal drivers of positive development within Civil Engineering is the action programme initiated in 2016. The programme's goal was to improve profitability and strengthen internal controls; it included a review of the organisation, its processes, working methods, objectives and focus, among other things. We estimate that Serneke's Civil Engineering business area will generate operating margins of 1.6% for 2018 and 1.9% for 2019. For the rest of the forecast period, 2020-23, we believe that the company will further increase its margin slightly to 2.5%, which is more or less in line with the sector average.



CIVIL ENGINEERING: SALES AND SALES GROWTH, SEKm

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

-

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800

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1,200

1,400

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CIVIL ENGINEERING: EBIT AND EBIT MARGIN, SEKm AND %

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

-40

-30

-20

-10

-

10

20

30

40

EB

ITad

j, S

EK

m



Project DevelopmentSalesSerneke's Project Development business area has also grown quickly over the last year at a 2014-17 CAGR of 24.5%. The sales figures have varied quite dramatically over the years, with both positive and negative growth between years. This is due to the fluctuating characteristics of project development as a business area – its growth is varying due to the different sizes and characteristics of projects sold by the company. For example, income in 2017 was largely attributable to the sale of the Mälardalen University project. Based on this reasoning, it is difficult to accurately estimate sales figures for the segment ahead. We expect the division to generate sales of SEK 239m for 2018 (SEK 212m in 2017), however, and then to increase sales gradually during 2019-23.

Associates and JVs are recognised in accordance with the equity method – no sales generated from Karlatornet are consolidated into the group's income statement

According to Serneke’s annual report, associates and JVs (where Serneke holds 20-50% of the shares) are recognised in accordance with the equity method. Consequently, no sales generated from Karlatornet are consolidated into the group’s income statement, but the proportional share of Serneke’s net income or net loss (50% – the other 50% belonging to NREP) from Karlatornet is recognised as a single-line item. Furthermore, internal profit in Serneke is eliminated. As such, we do not estimate any revenue contribution from Karlatornet to the Project Development division. However, our estimates include profit recognition related to the Karlastaden JV worth SEK 209m in 2019-23 with an average margin of 6.6% (in relation to sales that we assume will not be consolidated by Serneke).

The Project Development portfolio was valued at SEK 1,814m at the end of 2017, of which only SEK 205m was on the balance sheet. The remaining SEK 1,609m constituted contracted development rights that Serneke has not yet taken possession of (approximately SEK 704m) and development rights owned through JVs or associates (around SEK 905m). As such, the portfolio looks good and bodes well for the division, but, as stated above, we do not see any tremendous growth for the division in the near term.

We would argue that visibility into divestment/development of the commercial building rights will increase when Karlatornet approaches finalisation

EBITThe operating margin for the Project Development business area fluctuated materially during 2014-17. For example, the 2016 figure was affected by the sale of 50% of the Karlastaden project to NREP in the second quarter of 2016. The fact that there are a lot of one-off income items in this business segment makes it difficult to compare or draw any conclusions about operating margins. Nevertheless, we forecast that Serneke can generate an operating margin of 3.2% in 2019E 35-40% in 2020-21 and 10-14% in 2022-23. Contributions from Karlatornet are delayed towards 2021E and we do not include any further contribution from Karlastaden projects or divestments of building rights. We would argue that visibility into divestment/development of the commercial building rights will increase when Karlatornet approaches finalisation, hence tilted towards 2021E-22E.



PROJECT DEVELOPMENT: SALES AND SALES GROWTH, SEKm

-100%-50%0%50%100%150%200%250%300%350%400%450%

-

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es,

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PROJECT DEVELOPMENT: EBIT AND EBIT MARGIN, SEKm

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

-50-50

100150200250300350400

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j, S

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Property ManagementSalesThe value of investment properties was SEK 895m with a lettable area of 3,467,000 m2

at the end of 2017, according to Serneke. The value increased substantially in 2017, from SEK 329m in 2016, mainly due to the acquisition of a property at Säve Airport. For the latest available figures, Serneke increased the value of the investment properties to SEK 1,032m during 9M 2018. The income of the Property Management segment was SEK 51m in 2017, which represented approximately 1% of the group's total income that year.

We estimate that sales can increase by 100% y/y for full-year 2018

Due to the increased property portfolio, we believe that Serneke can increase its sales generated from the property management division by more than 100% in 2018. We then expect a slowdown in sales growth and rather flat revenue for the remainder of the forecast period. This is because the sales generated from Serneke's property portfolio are mainly derived from the Prioritet Serneke Arena, where we see no room for rapid growth potential; rather, we see this as a solid income-generating business. Furthermore, even though we see great potential in the project involving Säve Airport, at this point it is hard to predict what might materialise, because the project still does not have a detailed development plan in place.

EBITThe operating profit generated from the segment in 2017 was SEK 213m. Much like the business area Project Development, sales of properties are one-off items, making it difficult to compare operating margins for this division over time. Furthermore, owning properties is a relatively new business for Serneke, as the division did not generate any income until 2015. It is therefore difficult to draw any conclusions regarding changes in valuation and how that could impact profit going forward. We still estimate Serneke's Property Management division to generate an operating margin above 60% for 2019-23. The company has achieved quite high margins historically and we see potential for this to continue.

PROPERTY MANAGEMENT: SALES AND SALES GROWTH, SEKm AND %

0%50%100%150%200%250%300%350%400%450%

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40

60

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100

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140

Sal

es,

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PROPERTY MANAGEMENT: EBIT AND EBIT MARGIN, SEKm AND %

-30%20%70%120%170%220%270%320%370%420%

-

50

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150

200

250

EB

ITad

j, S

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m





Financial costsSubstantial increase in financial costs in Q2 2018

Serneke's financial costs increased substantially in Q2 2018, from previously low levels. The reason for the increase in Q2 was partly the issue of a new corporate bond of SEK 700m. Furthermore, Serneke issued convertibles in both May and June, with maturity dates of 26 August 2019 and 8 September 2020 – and annual interest rates of 1.6% and 2.6%, respectively. The convertibles issued in May had a nominal value of SEK 7.6m and those issued in June had a nominal value of SEK 15.9m.

As such, we estimate Serneke's financial costs will increase from SEK 18m in 2017 to SEK 39m in 2018 and then further to SEK 44-48m in 2019-23.

Net capexThe company has historically shown low levels of net capex and we expect Serneke to keep its net capex flat, at approximately 1% of sales for 2018-23. We do not see any indications of big investments in the near future, and thus we believe 1% of sales is a reasonable figure for Serneke's net capex for the entire forecast period.

Balance sheet ratiosGiven our assumptions, we derive the balance sheet ratios shown in the table below. We note that net debt increased materially in 9M 2018. As mentioned earlier, this is principally explained by the issuance of a bond and convertibles during Q2 2018. Additionally, we believe that Serneke will have no problem delivering its target of a 25% equity ratio – even exceeding 35% during the entire forecast period.

FINANCIAL RATIOS RELATED TO THE BALANCE SHEET

2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023ENet Debt (SEKm) 243 -37 254 510 552 504 332 221 128Net debt / EBITDA adj 1.9 -0.1 0.6 2.6 2.0 1.0 0.5 0.4 0.3Interest coverage 7.1 14.7 23.3 4.4 5.7 10.2 12.0 9.7 9.8Equity ratio 27% 43% 41% 37% 35% 35% 37% 38% 39%Payout ratio 0% 0% 0% 29% 73% 48% 32% 30% 40%


TaxesWe estimate an effective tax rate of ~21%

We estimate that Serneke's underlying tax rate will be in the range of 20-21% in the medium term. The nominal tax rate in Sweden at present is 22%, and will be lowered to 20.6% in 2020, according to the Swedish Ministry of Finance. Paid tax for Serneke has varied historically but has been below the nominal rate, and we thus believe the company will have an effective tax rate of around 21%.

Dividend payoutFirst dividend paid in 2018; we estimate a gradual increase over the forecast period

Serneke paid its first dividend as a company in 2018, with a payout ratio of 74% (based on 2017 earnings). We expect the company to keep its dividend more or less unchanged over the next few years (at approximately SEK 3-6 per share), within Serneke's payout target range of 30-50% (over a business cycle).



Risk factorsBelow we provide an overview of the various risks that we believe Serneke may encounter in its operations and that could affect its financial performance. It is not a comprehensive overview of all the risks that the company may face, but rather a discussion of those we find the most relevant.

Specific macroeconomic developmentNominal interest rates The Fed has started to raise rates and lower bond repurchases, and higher inflation expectations have pushed ten-year US government bonds back above 3% for the first time since 2013.

Changes in rates can lead to changes in cash flow and asset prices

We believe signs of increasing inflation in the US and Japan as well as market support from major central banks should continue abating over the coming quarters. We expect the Fed to continue to withdraw USD liquidity from the market by allowing its balance sheet to shrink at an increasing pace over the next two to three quarters, while the ECB seems determined to end its net asset purchases by H1 2019. Nordea's macro outlook forecasts that the ten-year Swedish government bond will gradually increase, hitting 1.25% at the end of 2019, up from 0.47% currently.

Sluggish economyUncertain near-term outlook for the Swedish economy

The near-term outlook for the Swedish economy is quite uncertain, with a slowdown in GDP growth and export growth that has levelled off. On the other hand, the unemployment rate has continuously been moving downwards. In combination with a growing population, we believe the downside risk is limited.

The construction and real estate markets are largely affected by prevailing economic conditions. These markets may be hampered by economic uncertainty and a corresponding slowdown in GDP growth, unemployment, household income, consumer confidence, rising cost of financing and measures affecting housing prices and household starts. When investing in Serneke, we advise investors to pay attention to macroeconomic trends.

Level of leverageThe equity ratio in the Karlastaden JV could pose a risk to obtaining financing

Serneke has exceeded its equity/asset target ratio of 25% in three out of the last four years, reaching slightly above 40% in 2017. In that sense, the company's level of leverage does not pose any major risk. In several cases, however, Serneke needs to obtain debt capital to finance its projects. As an example, in the JV with NREP on the Karlastaden projects, the equity/asset ratio is relatively low. This could pose a risk of limiting the company's ability to proceed with the project, forcing it to postpone until the adequate level of equity is in place.

Furthermore, a portion of Serneke's debt bears interest at a variable rate. As interest rates are extremely low at present, there is room for rates to rise in the future and increase the company's interest expenses. This would, in turn, reduce the cash flows available for capital expenditures and hinder Serneke's ability to make debt payments.

Political risk and regulationPolitical decisions, including tax regulation, conditions of tenure, changed regulations on housing construction, infrastructure investments and municipal planning could impact the conditions of the market and, in turn, Serneke's operations.

TaxesTaxes could change for the better or for the worse. At present, the nominal tax rate in Sweden is 22%, and will be lowered to 20.6% in 2020, according to the Swedish Ministry of Finance. The tax Serneke has paid has varied historically but has been below the nominal rate. Changes in the tax law could have an adverse effect on its tax position and, in turn, on net profit.



Limited market share in the construction industry due to several large competitors

CompetitionAs in all other sectors, the market in which Serneke operates faces competition. In this case, the market participants compete for contracts and tenants. As Serneke's main business involves construction and civil engineering, its competitors primarily comprise other construction companies competing for contracts of housing projects or infrastructure projects among other things. There are several construction companies that are larger than Serneke, meaning their market share is limited. There is hence a risk that Serneke will not be able to win important contracts in the future, curbing its further growth, or that it accepts a lower price on projects, putting pressure on margins.

Project risksRisk of planning process being delayed

In contracting operations, the primary limitation of operation risk usually occurs in the tender process. Tenders that are not sufficiently elaborate or are based on inaccurate calculations can lead to lower earnings, loss of internal control and higher expenses. There is also a risk that the planning process is delayed, detailed development plans are not approved or that building permits are not obtained, which could impact Serneke's sales and earnings.

There is also a risk that the property market develops negatively during the period of the project, leading to difficulties in selling it.

The possibility of suppliers defaulting poses a risk for construction companies in general

We also believe suppliers are a material risk in the contracting sector. In an effort to maximise profits, construction companies may end up assuming too much risk and suppliers may default. In some cases, the construction companies overestimate the profitability of the projects and have to depreciate the sales and value of the project. The realisation of such risks could result in additional capital being tied up, as well as losses.



Reported numbers and forecastsINCOME STATEMENT

2020E2019E2018E20172016201520142013201220112010SEKm9,3877,4826,3535,6053,9783,1071,8001,1431,012893n.a.Net revenue

25.5%17.8%13.4%40.9%28.0%72.6%57.5%12.9%13.3%n.a.n.a.Revenue growthn.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.of which organicn.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.of which FX52227619443947912882160110EBITDA-30-25-22-20-68000-8-90Depreciation and impairments PPE

4922511724194111288216-820EBITA00000000000Amortisation and impairments

4922511724194111288216-82n.a.EBIT00000000000of which associates00000000000Associates excluded from EBIT

-48-44-39-18-17-16-15-14-7-60Net financials00000000000Changes in value, net

444207133401394112672-15-40Pre-tax profit-93-44-40-78025-290-40Reported taxes

351164933233941376511-15-80Net profit from continued operations00000000000Discontinued operations00000000020Minority interests

351164933233941376511-15-60Net profit to equity15.437.204.0113.8121.228.114.170.77-1.31-0.64n.a.EPS5.003.503.004.000.000.000.000.000.000.000.00DPS5.003.503.004.000.000.000.000.000.000.000.00of which ordinary0.000.000.000.000.000.000.000.000.000.000.00of which extraordinary

Profit margin in percent5.6%3.7%3.0%7.8%12.0%4.1%4.6%1.4%0.0%1.3%n.a.EBITDA5.2%3.4%2.7%7.5%10.3%4.1%4.6%1.4%-0.8%0.2%n.a.EBITA5.2%3.4%2.7%7.5%10.3%4.1%4.6%1.4%-0.8%0.2%n.a.EBIT

Adjusted earnings52227619443947912882160110EBITDA (adj)4922511724194111288216-820EBITA (adj)4922512424194111288216-820EBIT (adj)

15.437.206.1313.8121.228.114.170.77-1.31-0.64n.a.EPS (adj)

Adjusted profit margins in percent5.6%3.7%3.0%7.8%12.0%4.1%4.6%1.4%0.0%1.3%n.a.EBITDA (adj)5.2%3.4%2.7%7.5%10.3%4.1%4.6%1.4%-0.8%0.2%n.a.EBITA (adj)5.2%3.4%3.8%7.5%10.3%4.1%4.6%1.4%-0.8%0.2%n.a.EBIT (adj)

Performance metricsCAGR last 5 years

24.7%33.0%40.9%40.8%34.8%n.a.n.a.n.a.n.a.n.a.n.a.Net revenue32.5%27.5%64.7%357.1%111.4%n.m.n.m.n.m.n.m.n.m.n.m.EBITDA30.9%25.1%60.7%n.m.188.1%n.a.n.a.n.a.n.a.n.a.n.a.EBIT13.7%11.5%38.9%n.m.n.m.n.a.n.a.n.a.n.a.n.a.n.a.EPS

n.m.n.m.n.m.n.m.n.m.n.m.n.m.n.m.n.m.n.m.n.m.DPSAverage last 5 years

5.3%5.2%5.8%6.8%5.7%2.8%n.a.n.a.n.a.n.a.n.a.Average EBIT margin5.8%5.7%6.3%7.3%6.4%3.0%n.a.n.a.n.a.n.a.n.a.Average EBITDA margin

VALUATION RATIOS - ADJUSTED EARNINGS

2020E2019E2018E20172016201520142013201220112010SEKm3.16.67.86.54.9n.a.n.a.n.a.n.a.n.a.n.a.P/E (adj)3.05.98.25.34.0n.a.n.a.n.a.n.a.n.a.n.a.EV/EBITDA (adj)3.26.59.35.64.7n.a.n.a.n.a.n.a.n.a.n.a.EV/EBITA (adj)3.26.56.65.64.7n.a.n.a.n.a.n.a.n.a.n.a.EV/EBIT (adj)

VALUATION RATIOS - REPORTED EARNINGS

2020E2019E2018E20172016201520142013201220112010SEKm3.16.611.96.54.9n.a.n.a.n.a.n.a.n.a.n.a.P/E

0.170.220.250.420.48n.a.n.a.n.a.n.a.n.a.n.a.EV/Sales3.05.98.25.34.0n.a.n.a.n.a.n.a.n.a.n.a.EV/EBITDA3.26.59.35.64.7n.a.n.a.n.a.n.a.n.a.n.a.EV/EBITA3.26.59.35.64.7n.a.n.a.n.a.n.a.n.a.n.a.EV/EBIT

10.5%7.3%6.3%4.5%0.0%n.a.n.a.n.a.n.a.n.a.n.a.Dividend yield (ord.)11.7%2.3%-23.7%-13.0%-7.2%n.a.n.a.n.a.n.a.n.a.n.a.FCF yield32.4%48.6%74.8%29.0%0.0%0.0%0.0%0.0%0.0%0.0%n.a.Payout ratio




BALANCE SHEET

2020E2019E2018E20172016201520142013201220112010SEKm232323232323230060Intangible assets00000000000of which R&D00000000000of which other intangibles

232323232323230060of which goodwill1,1771,1131,06499040474744743690Tangible assets

446446446446424000000Shares associates4040401030000000Interest bearing assets0000483724000Deferred tax assets00000000000Other non-IB non-current assets

3353353352132312741059752110Other non-current assets2,0211,9571,9081,6821,16040820414895860Total non-current assets

2111245551240Inventory1,5021,2341,0808455895885664443721930Accounts receivable2,1591,7211,4611,4451,1156415012628120Other current assets

4013532954315711184135160Cash and bank4,0633,3102,8382,7222,2771,2441,1564884103450Total current assets

n.a.n.a.n.a.n.a.n.a.n.a.00000Assets held for sale6,0855,2674,7454,4043,4371,6521,3606365054310Total assets

2,1301,8581,7621,8211,469453280177141510Shareholders equity00000000000Of which preferred stocks00000000000Of which equity part of hybrid debt00000000020Minority interest

2,1301,8581,7621,8211,469453280177141520Total Equity292929290000890Deferred tax

89189179164143610713460571060Long term interest bearing debt00000000000Pension provisions

160155150158120000020Other long-term provisions1551551551522082916201610Other long-term liabilities

00000000000Convertible debt00000000000Shareholder debt00000000000Hybrid debt

1,2351,2301,12598076439819660811170Total non-current liabilities131198101330010Short-term provisions

1,3381,0679067995413492731531211890Accounts payable1,3141,04788974252529232512588690Other current liabilities

545454541281472831217340Short term interest bearing debt2,7202,1791,8581,6031,2048018843992822620Total current liabilities

00000000000Liabilities for assets held for sale6,0855,2674,7454,4043,4371,6521,3606365054320Total liabilities and equity

Balance sheet and debt metrics504552510254-37243333168125940Net debt

1,010843747750640592474197195710Working capital3,0312,8002,6552,4321,8001,0006783452901570Invested capital3,3653,0882,8872,8012,2338514762372221680Capital employed

17.6%9.0%5.2%19.6%41.0%37.4%28.4%6.9%-15.8%-25.1%n.m.ROE13.4%7.3%7.5%15.7%23.3%12.1%12.7%4.0%-2.9%2.1%n.m.ROIC14.6%8.1%5.9%15.0%18.4%15.0%17.2%6.8%-3.6%1.2%n.a.ROCE

1.02.02.60.6-0.11.94.110.5569.28.3n.m.Net debt/EBITDA10.25.74.4n.a.15.17.25.51.1-0.80.3n.a.Interest coverage

35.0%35.3%37.1%41.3%42.7%27.4%20.6%27.8%27.9%11.7%n.m.Equity ratio23.7%29.7%28.9%13.9%-2.5%53.6%118.9%94.9%88.7%179.8%n.m.Net gearing




CASH FLOW STATEMENT

2020E2019E2018E20172016201520142013201220112010SEKm52227619443947912882160110EBITDA (adj) for associates-93-44-40-2-609-6-3-40Paid taxes-48-44-39-30-17000000Net financials

87-7361171030-230Change in provisions00-11910-512556-65-25-110Change in other LT non-IB00000000000Cash flow to/from associates00000000000Dividends paid to minorities000-261-533-238-1258676110Other adj to reconcile to cash flow

388195-11192-11-75253146110Funds from operations (FFO)-168-953-1455611131-8-104-590Change in NWC221100-94745365623-58-480Cash flow from operations (CFO)-94-75-64-62-175-10-18-15-1-40Capital expenditure

12725-72-15-13026388-60-520Free cash flow before A&D00000481110Proceeds from sale of assets00-184-257-100-45-10-30Acquisitions

12725-256-272-1403018-59-540Free cash flow

-79-68-9300000000Dividends paid00-5805983605020120Equity issues / buybacks01001501390000000Net change in debt00122-15n.a.n.a.00000Other financing adjustments0000102-13970-5029580Other non-cash adjustments

4858-136-140560-73718-10160Change in cash

Cash flow metrics312.9%299.3%288.8%310.0%257.4%n.m.n.m.n.m.18.0%42.4%n.m.Capex/D&A

-1.0%-1.0%-1.0%-1.1%-4.4%-0.3%-1.0%-1.3%-0.1%-0.4%n.a.Capex/Sales

Key information48484889105n.a.n.a.n.a.n.a.n.a.n.a.Share price year end (/current)

1,0831,0831,0832,0881,950n.a.n.a.n.a.n.a.n.a.n.a.Market cap.1,5871,6351,5922,3421,913n.a.n.a.n.a.n.a.n.a.n.a.Enterprise value22.722.722.723.418.616.915.614.211.510.00.0Diluted no. of shares, year-end (m)




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Analyst ShareholdingNordea Markets analysts do not hold shares in the companies that they cover.No holdings or other affiliations by analysts or associates.

Market-making obligations and other significant financial interestNordea Markets has no market-making obligations in Serneke.

Fair value sensitivityWe calculate our fair values by weighting DCF, DDM, SOTP, asset-based and other standard valuation methods. When applicable, we set a 12-month target price by applying an appropriate premium/discount and/or other relevant adjustment to our fair value to reflect the share price potential we see within the coming 12 months. Our fair values are sensitive to changes in valuation assumptions, of which growth, margins, tax rates, working capital ratios, investment-to-sales ratios and cost of capital are typically the most sensitive. It should be noted that our fair values would change by a disproportionate factor if changes are made to any or all valuation assumptions, owing to the non-linear nature of the standard valuation models applied (mentioned above). As a consequence of the standard valuation models we apply, changes of 1-2 percentage points in any single valuation assumption can change the derived fair value by as much as 30% or more. Dividend payouts are included in the target price. All research is produced on an ad hoc basis and will be updated when the circumstances require it.

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This report has been reviewed, for the purpose of verification of fact or sequence of facts, by the Issuer of the relevant financial instruments mentioned in the report prior to publication. No Nordea recommendations or target prices have, however, been disclosed to the issuer. The review has led to changes of facts in the report.

Completion Date

07 Dec 2018, 14:56 CET

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Serneke Construction and Real Estate - Nordea

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