Industrial Goods & Service, Stockholm Stock Exchange

KEEP CALM AND BUY ATLAS COPCOATLAS COPCO ATCOA.SS

Date: 20/12/2014 Current Price: 210.70SEK (01/12/2014) Recommendation: BUY (17% Upside)Ticker: ATCOA.SS (Bloomberg) USD 1.00: SEK 7.4572 (Riksbank) Target Price: 246.40SEK

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Figure 1: Atlas Copco EPS

Source: Factset

Figure 2: Atlas Copco Share Performance

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We issue a BUY recommendation on Atlas Copco AB (ATCO) with a one-year target price of SEK 246.40 for ATCO-A and SEK 231.96 for ATCO-B using the Discounted Cash Flow to Firm meth-od. This offers a 17 % upside for both shares from their closing prices of SEK 210.70 (ATCO-A) and SEK 198.10 (ATCO-B) on 1st December, 2014. The company’s strengths lie in their robust cash flows, diversified business areas and strong positions in their market regions. This gives the company an ability to grow revenue by means of exercising its positive acquisition strategy and improving its organic growth through development of innovative product solutions and services.

ATCO industry leader in terms of margins and this is continue as the company plans to increase the revenue from the higher margin after sales service. This is to be seen in mining where though capital expenditure drops there is a continued increase in production output which is a key driver to service offering. The increase in mining production will be mainly in Iron ore by 8.6% and Copper 3.8% driving growth in the Australian and South American regions.

ATCO has good exposure to the North American market that is being driven by a strong resur-gence of the United States economy, with the World Bank estimating growth of 3% in 2015. The shale gas revolution has seen a rebirth of American manufacturing as it has lowered both energy costs and increased need for industrial goods for its extraction. This has led to lower unemploye-ment leading to a better demand for housing Freddie Mac forecasting an increase of 14% in home purchases for 2015. ATCO has is increased its exposure by partnering with new distributors and opening new sales offices in the region.

ATCO purchase of Edwards sees the opening of a new opportunities growing industrial sector of semi-conductor industry. The two companies have strong synergies and it makes a good fit into its Compressor Technique business. This is an important market to enter as semi-conductor driven technology continues to play a bigger role in lives of people. It offers greater exposure for ATCO in the North America and Asia where growth rates in those regions are high.

ATCO has a stable and strong financial base shown by its high liquidity (evidenced by high current ratio), high coverage (evidenced by high interest coverage ratio) and low leverage (evi-denced by low debt to equity ratio) company with a solid cash flow generation trend and which funds most of its acquisitions through internally generated funds. This combined with its long term high credit ratings (A2 from Moody’s and A from Standard & Poor’s) enables it to generate additional funds at favourable costs to fund acquisitive and organic growth further providing a solid platform for projected, continued growth.

Atlas Copco

Recommendation: Buy

Valuation date: 01/12/2014

Exchange Rate: 1 USD : 7.4572 SEK

Industry: Industrial Goods & Services

Total Market Cap(A Share only):

176 272

52 Week High (SEK) 222.20

52 Week Low (SEK) 169.90

Ave. Daily Vol (M) 773

Exchange: NASDAQ OMX Stockholm

Ticker: ATCOA.SS

Source: Factset, Bloomberg and Nasdaq

2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Key Data

Total Sales 63 762 69 875 81 203 90 533 83 888 92 110 96 892 99 998 103 282 106 650

EBIT 9 109 13 803 17 461 19 074 16 915 17 514 19 199 19 896 20 480 21 047

EBITDA 11 425 16 248 19 809 21 664 19 602 19 617 21 330 22 055 22 723 23 406

Net Income 6 338 9 974 13 901 13 901 12 072 12 679 13 999 14 492 14 853 15 261

Key Ratios

Retrun on Assets 9.3% 13.9% 16.9% 16.7% 13.4% 13.9% 14.8% 14.7% 14.7% 14.6%

Return on Equity 24.7% 34.0% 45.3% 39.6% 30.3% 27.9% 29.3% 31.2% 27.8% 31.7%

Current Ratio 2.28 2.51 1.86 2.44 2.35 2.35 2.35 2.35 2.35 2.35

Total Asset Turnover 0.94 0.98 0.71 0.60 0.64 0.46 0.44 0.60 0.41 0.63

Debt to equity 0.93 0.69 0.71 0.60 0.64 0.46 0.44 0.60 0.41 0.63

Earnings per share 5.21 8.19 10.73 11.44 9.94 10.42 11.50 11.91 12.21 12.54

Dividend per share 3.00 4.00 5.00 5.50 5.50 5.21 5.75 5.95 6.10 6.27Source: Factset and Team Analysis

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Atlas Copco AB, established in 1873, is a Sweden based manufacturing company that provides industrial solutions to customers over 180 countries around the world. The Company has over 50 brands and its product portfolio includes compressors, vacuum solutions and air treatments systems, power tools and assembly systems, and construction and mining equipment.

As of 2013, the Company had revenue of BSEK 84 and its largest single markets were the US and China, whereas North America, Europe, Asia and Australia accounted for 80% of the total rev-enues. It is therefore no surprise that there is a high correlation between the company’s revenue growth rate and GDP growth rate in these economies means that the company’s revenue depends a lot on economic performance in these regions. Going forward the company seeks to bolster revenues by gaining foothold in emerging economies and new business areas via organic growth and acquisition of strong brands.

Atlas Copco operates through four main business areas: The Compressor Technique business area is the largest, generating 40% of revenues and it in-cluding the development and manufacturing of industrial compressor, vacuum solutions, gas and process compressor and expanders, air and gas treatment equipment and air management systems. The company’s main customers are in manufacturing, process construction and service industries. The Industrial Technique business area generated 11% of 2013 revenue. It provides industrial power tools, assembly systems, quality assurance products and software and service. Its main customers are in the automotive and aerospace industries, industrial manufacturing and mainte-nance and vehicle servicing. The Mining and Rock Excavation Technique business area provides surface and underground drilling and rock excavation equipment and service. As of 2013 this business area accounted for 34% of the company’s total revenue. The Construction Technique business area accounted for 15% of the company’s 2013 revenue. This business area provides construction and demolition tools, portable compressors, pumps and generators, lighting towers, and compaction and paving equipment as well as specialty rental and service.

Company Strategies Five strategic pillars guide Atlas Copco’s strategic direction:• Increase market presence and penetration – The company currently is represented in 182 coun-tries and growing its market presence in the emerging markets. Expansion into western China as well as increasing the sales force in the United States of America and high growth markets in Africa (Angola and Mozambique) are noted as drivers for growing market presence. A strong appetite for acquisitive growth can be seen with 11 acquisitions in 2013. • Invest in research and development innovation – The company has over 3 400 active patents and 900 inventions. Atlas Copco remains committed to using innovate methods and products to maintain and boost its market share. The research and development budget currently accounts of 3% of total expenditure and 7% of the staff complement. Its key focus is the improvement of energy efficiency for their clients with a target of 20% reduction by 2020.• Increase the service offer – This is the most stable income generator in the business that con-tinues to grow and now accounts for over 40% of the business. The current offering is mainly maintenance and spare parts but the intention is to focus on products that improve customer productivity as well. This was seen in the purchase of Synatec, a company that specializes in prod-ucts and solutions to enhance manufacturers’ workplace operations, data collection and analysis.• Continuously strive for improved operational excellence – The focus on internal processes to reduce the turnaround time for equipment products and sharing of best practices between divi-sions. Key to this is to ensure a more flexible and efficient assembly set up and adjusting the suit to fit the weight of the group. • Attract, recruit and develop skilled coworkers – The aim is to have a diverse and highly mo-tivated staff complement to ensure competitive advantage. Its senior management is currently represented by 52 nationalities with 17% female. Key focuses are knowledge sharing, competence development and health and safety of employees.

Shareholder structureAs of December 31, 2013, Atlas Copco had 72 238 shareholders. The company’s largest sharehold-er was Investor AB, which owned 16.8% of its total share capital. The other three major sharehold-ers included Swedbank, which owned 5%, Alecta, which owned 3.4% and AMF, which owned 2.8%. Over 53% of the total share was owned by investors in Sweden.

Corporate managementAtlas Copco’s management team is composed of people who have worked their way up the com-pany’s management structure and hold relevant academic and professional qualifications. Ronnie Leten is the President and CEO since 1 April 2009 while Hans Straberg is the Chairman of the Board since April 29 2014. In addition, the management team also consists of four Senior Exec-utive Vice Presidents with various qualifications and with responsibility over specific business

Equipment. 57%

Service, 43%

Figure 3: Revenue split by type

Source: Company Data

Europe, 31%

Asia/Australia, 28%

S Am

erica, 11%

Africa/ME, 11%

N America, 20%

Figure 4: Revenue split by region

Source: Company Data

Figure 5: Revenue by customer sector

Europe, 31%

Asia/Australia, 28%S

America, 11%

Africa/ME, 11%

N America, 20%

Source: Company Data

Compressor Technique,

31%

Construction

Technique, 11%

Industrial Technique, 15%

Mining and Rock ExcavationTechnique, 34%

Figure 6: Revenue by business area

Source: Company Data

Business Description

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Industry Overview and Competitive Positioning Macro Economic OutlookAmerican recovery underway and observed from strong growth in the American GDP forecast by the World Bank set at 3.0% in the US for 2015 and 2016. The latest PMI numbers also show a strong recovery with the PMI at 58.1 its highest level in three years. Improvement in US em-ployment leads to a strong residential housing market boding well for ATCO’s construction divi-sion. The strong growth in industrial production especially car manufacturing having surpassed pre-crisis levels of production augurs well for Industrial Technique and Compressor Technique segments of the business. As a high income country the United States also offers a good margin on revenues.

The Euro area recovery remains hesitant with low GDP growth of sub 2% levels and PMI that has a negative trajectory. Germany, which is Europe’s key industrial economy, has also shown signs of slowing with weak export numbers and PMI figures in the third quarter of 2014. The current standoff between EU and Russia has a potential to impact on industrial output in the Euro-Area.

The slowdown in China continues with GDP forecasts in the 7% region for the upcoming years a far cry from the double-digit growth figures China has been accustomed to. Chinese steel pro-duction is a good indicator of the level of industrial activity and in 2015 the forecast is for negative growth in the Chinese steel industry.

Industry overviewGrowth in mining output continues especially in iron ore, copper and coal. As commodity prices continue to decline some of the larger diversified miners have increased production as means of reducing unit cost. This can be seen by the 8.6% increase in iron ore, 3.0% increase in coal and 3.8% increase in copper. This will allow for an increase in the higher margin aftermarket service offering leading to better margins in the coming years, ATCO is positioning itself to take a greater share of business in this area.

Capex cuts affecting new equipment purchases mining companies choose to either cancel or post-pone projects leading to a drop in expansion capex of 30% since 2012. This appears to be the con-tinuing trend especially in the major diversified companies. Another notable trend is the increase in the sustaining capex as the ore bodies are ageing and to allow for increase in production to minimize unit costs purchases of new equipment and refurbishments are required.

Exploration investment continues to fall, as commodity prices are dropping fewer projects are be-ing approved or brought to the boards of mining companies. This has resulted in reduced explo-ration activity and a drop of 30% has been observed in the major diversified mining companies.

The surge in shale gas production genuine game changer and helping trigger resurgence in US manufacturing. Manufacturing industries can benefit from the additional natural gas production due to two key factors, lower energy costs from increased and stable supply and incremental de-mand for products needed to extract the gas. The US overtook Russia as the world’s largest natural gas producer in 2010, and is projected to surpass Saudi Arabia and Russia as the global leader in oil production by 2015, according to the International Energy Agency (IEA). Meanwhile, 84% of the country’s energy demand was met through domestically produced energy in 2013,up from 69% in 2005, as natural gas prices in the US fell some 75% over the same period.

Car production has regained cruising speed with the global market having returned to a growth rate of +4% per year. The Chinese market continues to soar growing at 10% in 2014 and 8% in 2015 meanwhile in the United States the market has finally returned to pre-crisis sales levels with renewed profitability the expectation is to observe a growth of 4% in 2014 and 3% in 2015.

The semiconductor industry has been growing virtually nonstop for 40 years, all despite several downturns in the economy, as such the bursting of the internet bubble in 2001. The automotive market will be a strong driver by an increase in the average semiconductor content per vehicle. Accelerating tablet sales, and the communications market drive the data processing application market by the still-strong unit sales of smartphones. China will cement its dominant position and increase its market share of global semiconductor sales to half of the worldwide market by 2015.

Globally, more people live in urban areas than in rural areas, with 54 per cent of the world’s pop-ulation residing in urban areas in 2014. In 1950, 30 per cent of the world’s population was urban, and by 2050, 66 per cent of the world’s population is projected to be urban. This will see a strong need for investment in urban infrastructure especially in emerging economies. PWC sees this a key driver in global infrastructure and predicts by US$ 4,3trillion per annum to US$ 9trillion per annum.

Figure 7: Industrial Production remains positive especially in the United States

Source: US Federal Reserve, ECB, NBSC and Focus Economics

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Figure 8: Growth in mining production year on year

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Figure 9: Mining companies continue to cut capex

Source: Factset

Figure 10: Exploration expenditure remains low

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Figure 11: Car Manufacture growth year on year

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In North America construction equipment demand shows a strong resurgence with dealer in-ventory levels having decreased due to strong demand. This can be noted also in the increase in equipment utilization trends that are above 70% based on a Rouse Asset Services data. At the same time according to Rouse Asset Services the average age of the equipment is showing a down-ward trend showing the appetite amongst construction companies to obtain new equipment. The Architectural Billings Index shows a positive trend with strong support coming from the munic-ipal sector as well as the institutional sector.

Within the manufacutring industry energy costs are high driver of profitability and the shale gas revolution in the US has shown that with strong manufacturing numbers coming from that region. An Atlas Copco analysis has shown that energy cost account for more than 60% life cycle costs of products sold. The Energy Savings and Industrial Competitiveness Act of 2013 offers further incentive to save energy for US clients with a potential of ver US$ 96.9Bln saving by 2040 according to the US Energy Information Agency. There exists a strong need to increase energy efficiency from the product line and through its strong value of innovation.

Despite the recent drop in oil prices OPEC still sees growing demand for oil globally with fore-casted oil demand Q4 2015 to be 93.6Mb/d against the 2014 average of 91.1Mb/d. Therefore an increase in current production shall be expected either from OPEC or the non-OPEC members to meet this demand, with oil prices continuing to fall (45% since Q2 2014) oil producing states will want to meet this demand. This additional production will be aimed at negating effects of falling price Saudi Arabia has shown this through its insistance not to cut prodution levels.

Competitive PositioningStrong revenue growth in ATCO in the last 5 years with CAGR of 5.6% this is second only to the growth rate achieved by Caterpillar. Given its appetite for acquisitions and diverse market growth will continue to be on the upside. During the third quarter results management forecast growth going forward to be in strong but single digit growth.

Strong emphasis on productivity can be observed when looking at the ATCO productivity in terms of revenue per employee. This means there is a strong continuous improvement culture and will to make tough decisions in poor performing parts of the company. The re-organisation in the MERT division is proof of that and the change in focus in that business to focus more on after sales services offering is a positive.

ATCO margins outpace industry peers, with margins between 17.85% and 20.16% well above and in some cases double what their peers obtain. This is the strongest point of Atlas Copco that they are able to be an industry leader in terms of margins. As the company continues to drive for more revenue generation from its higher margin service offering this will further improve on what is already a very good position.

ATCO share price has shown a strong performance has moved along with strong correlation to its peers by the end of Quarter 3 it had shown the best growth when compared to it’s peers. It has had a smoother rise as compared to its peers that have had steeper hikes followed by equally steep dips. This shows a company that doesn’t deliver too many downside surprises.

ATCO has lagged its peers in terms of Price/Earnings ratio, which we feel, means there is a sub-stantial upside to the company given its strong revenue growth and high margins. In the five years from 2009 to 2013 the company has had highest margins compared to peers but strongly lagged its peers. Its share price has grown quite significantly over the same period and we can see further upside from it.

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Q3 2009 Q3 2014Source: Bloomberg and Team Analysis

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Figure 12: Productivity measured as revenue in SEK per employee against peers

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Figure 13: Price/Earnings ratio against peers

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Figure 14: Revenue growth against peers

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Figure 15: Share Price Performance against peers

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Investment Summary We issue a BUY recommendation on Atlas Copco AB with a target price of SEK 246.40 for AT-CO-A and SEK 231.96 for ATCO-B using the Discounted Cash Flow. This offers a 17 % upside for both shares from their closing prices of SEK 210.70 (ATCO-A) and SEK 198.10 (ATCO-B) as of 1st December, 2014. As ATCO continues to enhance the revenue contribution from the high margin service offering part of the business the margins that are already high compared to peers are set to further enhance ATCO.

ATCO is intent on growing its high margin Compressor Technique business as the majority of acquisitions have added to this part of the business. This part of the business has good exposure the resurgent North American market as well as the emerging powerhouses of China and India. The recent acquisition of Edwards opens up expansion in the high growth semi-conductor indus-try which have good exposure to the markets with strong growth (USA and China), this has had positive results for revenues in the Asian region.

ATCO while heavily exposed (2012 earnings showed mining as highest contributor to revenue at 30%) to the current downturn in the mining industry has taken a strategic shift towards the after sales service. The current increase in mining production output by both major diversified and single commodity mining companies to reduce unit cost, is a major driver of revenues of this high margin part of the business. Strides on the innovation front allow for better positioning with mining companies when they resume capital expenditure. We estimate that whilst revenues may drop the margins will be maintained at industry benchmark levels and the need for new equip-ment will lead to stronger revenue growth.

High liquidity, Low leverage ATCO AB is a financially strong and stable company with high liquidity levels as evidenced by its high current, quick and cash ratios. We expect the company to fully leverage on its high liquidity levels to finance acquisitive and organic growth with a special emphasis on value additive acqui-sitions and investment into innovative productivity solutions and service develoment. ATCO has access to additional funds and cash that can be generated at minimal costs due to the company’s low leverage ratio and excellent credit ratings and the current global low interest environment.

High margins, Excellent returnsATCO has high profitability margins evidenced by its higher EBITDA and net profit margins. The company’s resilient operating performance is seen in its ability to sustain these margins in the face of increased competition and the slowed down recent past market conditions especially in min-ing. ATCO gives above-peers returns on investment and on capital invested. We expect that the company will improve its financial strength in the forecast period of 2014E-2018E and continue giving out high dividends. These factors add to the positive investment outlook.

Valuation methodsWe mainly use the Discounted Cash Flow (DCF) Free CashFlows to Firm method to determine Atlas Copco’s fair value. We also used the Multiples pricing as a secondary method.ATCO operates in high margin markets and has a strong potential for growth. The company’s key geographical market areas are Europe and North America. Growth in Europe is slow, but the North American market has been steadily growing and has been predicted by the World Bank to revive at the GDP growth rate of 3.0 % in the next two years. This is promising especially for ATCO’s construction, industrial and compressor technique business areas.

Possible Investment RisksInvestment in mining exploration has fallen in recent years due in part to the falling of commodi-ty prices. This has encouraged larger diversified miners to increase production, especially in iron, copper and coal. The greatest risk is a continued drop to commodity prices and the closure of operations that are in the third and fourth quartile of cost curve, these have tended to be reliable sources of new equipment revenue.

ATCO’s aggressive acquisition strategy comes with certain risks when it comes to integrating the new business with rest of the Group. Success is questionable and problems may appear lon-ger down the road. The Group has been so far fairly successful in integrating its acquisitions to the whole. The company’s appetite for acquisition does raise concerns for a possibility of lack of strong diligence when checking the ethical principles of acquired companies, though ATCO has very discerning principles when it comes to even working with its business partners, as evidenced in their Business Code of Practice. This though a low level risk can have a serious impact on the business reputation.

Possible investment risks include basic operational risks such as production, distribution and supply chain risks. ATCO’s major risks are macro-economic. The company is mainly affected by the slowing down in the mining industry and in China’s as the country is one of ATCO’s biggest market areas.

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Figure 15: Acquisitions by business area

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Figure 16: Strong correlation between indus-trial production and revenues in the US

Source: Company Data

Source: Company Data and US Federal Reserve

Figure 17: Projected Annual Revenue growth rates for the business areas

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Financial AnalysisIn summary, the company has a strong financial base undergirded by healthy and stable profit margins, resilient operations, strong liquidity levels, low leverage levels, efficient Resource utiliza-tion and healthy returns on Investment.

Healthy, stable profit marginsProfit levels have remained stable in the ten year period between 2005 and 2013 even though the world market has oscillated within the business cycles reaching a trough in 2007/8. When compared to its peer group, ATCO AB has superior profit margins driven by increased revenues across its four business areas with operating costs contained at an average of 65% of revenues. With the company’s reinforced positive demand outlook especially in its major markets of Europe and North America, such healthy profit levels are more than sustainable. Continued focus on the higher margin and stable segment of after sales service offerings for each of its business segments and which presently account for 43% of revenues augers well with our positive forecasts.

Resilient OperationsDespite a difficult economic climate for the company in 2013, the margins are not heavily affect-ed. During this year, the company’s sales declined by 7% attributable to a combined net effect of volume, price, mix and operational costs, currency fluctuation and dilution from acquisitions, the result was only a slight 1% decrease in gross and net profit margins.

Overall, the company has high potential of maintaining the high profit margins as it benefits from favourable currency movement, internal cost reduction, Working capital adjustments for high innovation levels and aggressive acquisition..

The company maintains a strong liquidity base clearly typified by the high current, quick and cash ratios. When compared to peer, the strong liquidity level becomes even more apparent. Ad-ditionally, it has two undrawn backup multi-currency revolving credit facilities from a portfolio of banks of €640 million and € 800 Million with maturities of 2018 and 2019 respectively, the first of which has two one year extension options. The company also has commercial papers, Euro Medium Term Notes that can generate additional liquidity across currencies.

The relatively high liquidity levels ensure that Atlas Copco is able to meet its present and future obligations without resorting to its long-term financial assets which can then be more productive-ly utilised. Additionally, it allows for it to finance its acquisitions sufficiently through internally generated funds or borrowings. Low Leverage levelsThough almost all the debt ratios have been decreasing historically including the long term Debt to equity and interest coverage ratios have performed best, they are significantly above that of its peers meaning that the company has lower financial risks which explains it high credit ratings which further translate to favourable borrowing rates. For instance, the company’s last 10 year Eurobond was issued with a coupon rate of 2.5%. A lot of the debt will be maturing in the next two or three years thus further boasting the company’s already healthy debt ratios. Significantly, around 5,000 MSEK of debt is maturing in 2014 alone. Backed by such strong liquidity and sol-vency, the aggressive acquisitive and organic growth strategy of the company will not be deterred going forward.

Efficient Resource utilizationThe lower payable turnover ratios when combined with the high liquidity ratios are a clear indica-tion that the company has a favourable credit standing with its suppliers. The total asset turnover has been steadily improving indicating that the company efficiently utilizes its assets to generate revenue. Specifically also, the utilization of fixed assets has proven to be highly successful with an average ratio of 9.24.

Healthy Returns ATCO AB continuously generates satisfactorily good returns that are superior to peers. For in-stance, its ROA is three times that of its peer group while it’s ROE is unmatched in its peer group. During the five-year review period, there has been an increase in price to earnings per share showing increasing expectation that the stock will perform well. Even though the dividend yield has decreased somewhat over the past five years, it is still maintained at an average of 3.3%. The Dividend rate has averaged c49% in the past five years and is expected to continue as it has incor-porated 50% as its target annual dividend rate.

Other measurementsAtlas Copco AB currently has an F-score of 4 which is typical for a stable company with the value being as high as 6 and as low as 4 in the past 5 years. Additionally, the company has an Altman Z-score of indicating that chances of bankruptcy are minimal.

WACC

Risk Free rate 1.32%

Credit risk 1.20%

Pretax - Cost of Debt 2.52%

Tax Rate (5 Year Ave.) 25.23%

After-Tax Cost of Debt 1.88%

Risk Free rate 1.32%

Beta 1.09%

Equity Risk Premium 5.30%

Cost of Equity 7.10%

Share Type Share A Share B

Current Price (SEK) 210.00 198.10

Target Price (SEK) 246.40 231.96

Tickers ATCOA ATCOB

Shares (M) 839.39 390.22

Market Cap 81946 77303

Avg. Daily Volume 773 2020

52 Week High(SEK) 222.20 204.30

52 Week Low(SEK) 169.60 155.90

Voting Rights 1 1/10

Correlation 0.99

FCFF Components

5-Year projected CF 51.31

Terminal Value 195.09

ATCO A Forecast 246.40

Earnings per share (SEK)

2012 11.44

2013 9.94

2014E 10.42

2015E 11.50

2016E 11.91

2017E 12.21

2018E 12.54

Source: Factset and Team Analysis

Source: Factset and Team Analysis

Source: Factset and Team Analysis

Source: Factset and Team Analysis

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Valuation Our main valuation model is the Discounted Cash Flow method which takes into account its low debt levels. However, we also used the multiples valuation model which reflects market valuation to gives us a glimpse of how the company compares with peers.

Discounted Cash Flow ModelWe used the Free Cash Flow to the Firm (FCFF) DCF model which generated a target price of SEK 246.40 for share A and SEK 231.96 for share B. In our analysis, we noted that the following factors need detailed treatment.

Revenue forecastIn 2014, Atlas Copco acquired Edwards which has annual revenues of MSEK 6,750. As such our estimates of revenues had to be based on the Q3 2014 results which incorporates this acquisi-tion. We forecast growth in the individual business areas quarter by quarter based on the factors identified as revenue drivers in each business area. Cognizance was made ATCO AB’s strong acquisition strategy and its continued focus on the relatively stable revenue segment of services as opposed to equipment sales.

Operating expenses and margins Operating margins and expenses fluctuate often and differed significantly across the business areas, making it difficult to project them accordingly. We therefore deemed it best not to project these margins per business area and instead used a 5 year rolling average as estimates of the vari-ous operating expenses justified by the relative stability of the company, the cyclical nature of the markets and the maturity stage of the industry it operates in. Significantly, operating expenses have historically oscillated between 63% and 67% of revenues. The company’s operating margin is expected to decline slightly and stabilize around 19% given lower margins in the mining and compressor Technique business areas.

Cost of Equity and Cost of DebtThe Cost of Equity was calculate using the CAPM model. The Equity Risk Premium was taken to be 5.3% as per an IESE business school study of Equity Risk Premium in 88 countries in 2014. To obtain the Risk Free rate, we bootstrapped Swedish Government treasury bills and bonds over a ten year period using the Nelson-Siegel-Svensson model to obtain the bonds and bills. The beta of 1.09 was obtained from Reuters and the Financial Times while the Cost of debt was taken to the risk free rate adjusted for Credit Risk.

Terminal growth rate The terminal value bears a significant weight on the target price as it accounts for c80% of the target price. Its estimation took into account the ATCO AB’s present solid and stable financial and the steady expected growth from 2014 to 2018. Additionally, the expected conditions of the global economy with special focus on Europe, Asia and North America which constitute the biggest market for ATCO AB’s products.

With this in mind, we forecast the terminal growth rate to be 1.4 %, a conservative estimate that is below the long-term projected growth rates of GDP and industrial production of 3% and 2% re-spectively for the world economy. The need for conservative estimates is needful sensitivity of the DCF model to changes in the terminal growth rate and the greater upside potential by expected over-performance and the need to limit the downside risk.

Dividend policyATCO AB is a steady provider of dividends to shareholders with an average dividend pay-out rate has averaged 48.91% and a base year 2010 Dividend Pay-out rate of 50%. Going forward, the company is expected to sustain the targeted 50% Pay-out rate which we deem sustainable in the short and long run given the present and projected stable financial outlook.

Capital expenditureThe historical rate of CAPEX as a percentage of revenues is 3.5%. To underpin growth, we antic-ipate that CAPEX will be increased to 4 % of revenues especially driven by a need to develop and maintain capital strength in new acquisitions. As the company seeks to grow in revenues, there will be a corresponding desire to grow its Capex investment levels to further boost the revenues.

Voting PremiumThe company has two types of shares which are similar in everything except for the voting rights. Share B trades at a discount to A. There was need to compute the voting premium by regressing the share prices for A and B over the last 20 years. The Voting premium was obtained to be 6.22% and is incorporated in our valuation model.

Liquidity ATCO CAT IR SAND

Current Ratio 2.35 1.40 1.68 1.69

Quick Ratio 1.67 0.94 1.34 0.86

Cash Ratio 0.72 0.22 0.57 0.18

Leverage(%) ATCO CAT IR SAND

LT Debt/Total Equity

50.44 128.39 44.61 69.27

Total Debt/Equity

64.55 181.39 49.81 90.30

Turnover ATCO CAT IR SAND

LT Debt/Total Equity

0.97 0.64 0.68 0.88

CoverageATCO CAT IR SAND

EBIT/Interest Expense

16.58 5.51 4.80 5.42

CFO/Interest Expense

11.63 8.59 3.18 2.55

Other Key metrics ATCO CAT IR SAND

EBIT per share 13.93 10.13 4.45 8.70

EPS (diluted) 9.92 5.75 2.08 4.00

Div per share 5.50 2.24 0.84 3.50

Key Metrics

EV 2014 (M SEK) 275 600

Dividend Yield 3.08%

EV/EBITDA 11.44

EV/Sales 2.67

Total Debt/EV 0.11

PE Ratio 15.79

ROS 37.40

ROE 32.31

Market Cap (M SEK) 258 100

Source: Factset and Team Analysis

Source: Factset and Team Analysis

Source: Factset and Team Analysis

Source: Factset and Team Analysis

Source: Factset and Team Analysis

Source: Factset and Team Analysis

7

Multiples Valuation ModelPeer Group SelectionWith information gathered from Bloomberg, Reuters and Factset, we constructed Atlas Copco’s peer group which consists of Ingersoll Rand, Caterpillar, and Sandvik. Sandvik is the regional peer while Ingersoll Rand and Caterpillar are the global peers. The only downside to the peer group is that there market capitalization and enterprise values vary.

ATCO AB’s P/E has the highest Dividend yield, ROS and ROE in the peer group and its PE ra-tio compares favourably well to peers. The Share Price CAGR over the past one year of 3.05% is second best to its peer group leader, Caterpillar, though not by far. However, when compare tot Caterpillar it trades at a discount as seen through its lower EV/EBITDA multiple. Sandvik and Ingersoll Rand have lower EV/EBITDA.

Key Financial Ratios2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Profitability

Return on Sales

EBITDA margin 17.9% 23.3% 24.4% 23.9% 23.4% 21.3% 22.0% 22.1% 22.0% 21.9%

EBIT margin 14.3% 19.8% 21.5% 21.1% 20.2% 19.0% 19.8% 19.9% 19.8% 19.7%

Net profit margin 9.9% 14.3% 16.1% 15.4% 14.4% 13.8% 14.4% 14.5% 14.4% 14.3%

Return on Investment

Return on assets 9.3% 13.9% 16.9% 16.7% 13.4% 13.9% 14.8% 14.7% 14.7% 14.6%

Return on equity 24.7% 34.0% 45.3% 39.6% 30.3% 27.9% 29.3% 31.2% 27.8% 31.7%

Return on total capital 18.2% 27.8% 35.2% 33.9% 25.9% 26.3% 28.0% 27.8% 27.9% 27.6%

Liquidity

Current ratio 2.28 2.51 1.86 2.44 2.35 2.35 2.35 2.35 2.35 2.35

Quick ratio 1.60 1.75 1.10 1.52 1.57 1.81 1.79 1.42 1.74 1.26

Cash ratio 0.70 0.78 0.23 0.58 0.72 0.86 0.84 0.66 0.81 0.59

Activity

Total asset turnover 0.94 0.98 1.05 1.09 0.93 1.01 1.02 1.01 1.02 1.02

Fixed asset turnover 2.34 2.78 2.69 2.95 2.59 2.75 2.70 2.62 2.54 2.47

Financial Leverage

Long-term debt to equity 0.82 0.67 0.59 0.57 0.50 0.44 0.42 0.47 0.41 0.46

Debt to equity 0.93 0.69 0.71 0.60 0.64 0.46 0.44 0.60 0.41 0.63

Interest coverage 8.10 26.86 19.22 23.35 17.17 16.78 19.60 18.65 18.75 18.13

Shareholder

Earnings per share 5.21 8.19 10.73 11.44 9.94 10.42 11.50 11.91 12.21 12.54

Dividend per share 3.00 4.00 5.00 5.50 5.50 5.21 5.75 5.95 6.10 6.27

Dividend payout 57.6% 48.8% 46.6% 48.1% 55.3% 50.0% 50.0% 50.0% 50.0% 50.0%

Atlas Copco Valuation Key Data

Beta 1.09

Top 10 Inst. Holders 23.00%

Float 75.20

EPS (Dil)-CAGR 3.93%

ROA 13.91%

ROE 32.31%

ROIC 21.02%

Dividend Yield 3.08%

P/B 5.46

Source: Factset and Team Analysis

9

Investment Risks Macro Economic Risk:Current slowdown in China, continued slow growth in Europe and weak commodity prices are sources of a downturn in future orders as these are key markets for which Atlas Copco operates. This is offset by a stronger recovery in the North American market.

Currency Risk: Changes in exchange rates can adversely affect Group earnings when revenues from sales and costs for production and sourcing are denominated in different currencies (transaction risks). An adverse effect on Group earnings can also occur when earnings of foreign subsidiaries are trans-lated into SEK and on the value of the Group equity when the net assets of foreign subsidiaries are translated into SEK. Legal Risk:Atlas Copco’s business operations are affected by numerous laws and regulations as well as com-mercial and financial agreements with customers, suppliers, and other counterparties, and by licenses, patents and other intangible property rights. Atlas Copco operates in countries where the risk according to Amnesty International is high of human rights abuse, including child labor, forced or compulsory labor.

Operational RisksProduct development risks: One of the challenges for Atlas Copco’s long-term growth and prof-itability will be to continuously develop innovative, sustainable products that consume less re-sources over the entire life cycle. Atlas Copco’s product offering is also affected by national and regional legislation, on issues such as emissions, noise, vibrations, and recycling.

Production risks: Core component manufacturing is concentrated in a few locations and if there are interruptions or lack of capacity in these locations, this may have an effect on deliveries or on the quality of products. Production facilities could also have a risk of damaging the environment through operations, e.g. through hazardous waste and emissions. Atlas Copco is directly and indirectly exposed to raw material prices.

Supply chain risks: Atlas Copco and its business partners such as suppliers, sub-contractors and joint venture partners, must share the same high standards for the environment, labor and human rights otherwise there is a risk of compromising the Group’s reputation and brand. The availabili-ty of many components is dependent on suppliers and if they have interruptions or lack capacity, this may have an undesirable effect on deliveries.

Distribution risks: Atlas Copco primarily distributes products and services directly to the end customer. If the distribution is not efficient, it may impact customer satisfaction, sales and profits. Some sales are made indirect through distributors and rental companies and their performance can have a negative effect on sales.

Payment risks: Atlas Copco is exposed to the risk of nonpayment by any of its extensive number of end customers to whom sales are made on credit.

Risks with acquisitions and divestments: The integration of acquired businesses is a difficult process and it is not certain that it will be suc-cessful. Costs related to acquisitions can be higher and/or synergies can take longer to materialize.

2012 2013 2014E 2015E 2016E 2017E 2018E

Compressor Technique 32 725 31 782 41 306 44 410 46 197 47 975 49 784

Industrial Technique 9 566 9 501 10 834 11 669 12086 12 499 12 919

MER Technique 34 054 29 013 25 561 26 023 26 310 26 736 27 243

Cons. Technique 14 658 13 967 14 845 15 324 15 965 16 599 17 245

Total Group Revenues 90 533 83 888 92 110 96 892 99 998 103 282 106 650

Capital Expenditure 2 592 2 264 3 684 3 876 4 000 4 131 4 266

CAPEX as % of Revenues 2.86% 2.70% 4.00% 4.00% 4.00% 4.00% 4.00%Source: Factset and Team Analysis

Mitigation of Key Risks

Slowdown in China Increase exposure to NAmerica

Currency risk Hedging through borrowings in foreing currency

Legal risk In-house lawyers present in 5 con-tinents

Product Dev risk Investment in R&D currently about 3% of rev

Distribution risk Transportation optimisation

Supply Chain risk Robust supply chain policies to ensure delivery

Payment risk Equipment Source: Company data

10

Corporate Governance and Social Responsibility ATCO has a longstanding, working management system that they practice globally. The company has several awards in Corporate Governance and Social Responsibility the most recent of which are recognition into the UN Compact Index in 2014 and was listed as one of the 100 most sus-tainable companies in the world by Global Knights in 2013 (Appendix xx). We evaluated ATCO’s quality of corporate governance in four main areas:Board – Established audit, remuneration and nomination committees

Shareholder rights – Two types of shares, ATCO-A share has one-share-one-vote policy, ATCO-B has 1/10 of a vote per share; shareholders of both A and B shares have equal rights to company profits and assets; minority shareholders have rights to nominate candidates for board of direc-tors, equal preferential rights, right to inspection and appraisal rights

Audit and Risk Oversight – Internal governance and audit function, overseen by board; compre-hensive entreprisewide reporting program that is regularly reviewed; designated Chief Gover-nance Officer (Senior Vice President Organizational Development and Human Resources)Compensation – Discloses compensation policies The company has a rating of nine out of ten (Appendix xx), ten being unfavourable, when it comes to the composition of the board, but this is mostly due to lack of information when it comes to the examined data points.

ATCO has had only 11 CEOs during its 140 years as a company. The company has a convincing internal management recruitment system with 75 % of their managers coming from inside the company. The company also actively tries to train more female managers with the help of a special mentorship program launched in 2009. Due to this managers have served inside the company for an average of twenty years. Based on our analysis, ATCO needs improvement when it comes to the disclosure of information to be able to evaluate their governance practices more accurately. In summary, the company complies with the standard requirements and best practices of corporate governance.

Social ResponsibilityATCO works to be an active and beneficial member of the regions it operates in. The company’s biggest project is Water for All which operates under the value that clean water is a human right. The project was started in 1984 by ATCO employees and is today supported by the entire Group. ATCO encourages its employees to donate to the cause by donating twice as much as their em-ployees. In addition to helping around a million people to gain access to clean water, ATCO lists that it actively engages in improving education, health and wellness and providing a safe upbring-

Terminal Growth Rate

0.5 1.0 1.4 1.5 2.0 2.5 3.0

WACC

5.0 304.40 338.89 373.39 383.24 442.38 525.17 649.35

5.5 271.56 298.64 325.06 332.48 376.00 434.02 504.73

6.0 244.71 266.44 287.24 293.01 326.23 368.93 425.86

6.5 222.33 240.11 256.84 261.44 287.52 320.11 362.01

6.7 214.39 230.87 246.29 250.52 274.34 303.84 341.31

7.0 203.41 218.17 231.88 235.62 256.56 282.15 314.13

7.5 187.19 199.61 211.01 214.10 231.23 251.78 276.90

8.0 173.14 183.71 193.32 195.90 210.13 226.94 247.11

We performed a sensitivity analysis on two factors with a major bearing on our target price: the Terminal Growth rate and the WACC. Our intention was to determine what change in the factor would cause us to change our recommendation. As indicated in the table, only in the shaded areas can we be prompted to change our recommendation. Green represents hold and Orange represents sell.WACC shows the influence of interest rates rises to ATCO and the Terminal Growth Rate based on the global GDP outlook.

Annual GDP growth

Year 2011-20 2021-30

World 3.24% 3.44%

Developed 1.84% 1.97%

Developing 5.38% 5.08%

Europe 1.43% 1.82%

Asia & Oceania 4.86% 4.72%

Middle East 4.12% 3.76%

N America 2.51% 2.50%

S America 3.53% 3.97%

Sweden 1.94% 1.77%Source: Economic Research Service USDA

Sensitivity Analysis

Share ownership

Ronnie Leten Group CEO

Class A Shares 166

Class B Shares 24010

Synthetic Shares 389 345

ROA 13.91%

Hans Stråberg Group Chairman

Synthetic Shares 2182Source: Factset and Team Analysis

11

Appendix 1: statement of Financial Position

Atlas CopcoAll figures in MSEK 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018EAssetsCash & Short-Term Investments 12,384 14,518 5,891 12,434 17,803 17,800 17,790 17,770 17,763 17,785Short-Term Receivables 16,089 18,017 22,018 20,347 20,842 19,463 20,137 20,561 20,270 20,255Inventories 11,377 12,939 17,579 17,653 16,826 18,853 19,080 20,348 20,486 21,271Other Current Assets 722 1,016 1,631 2,124 2,413 1,581 1,753 1,900 1,954 1,920Total Current Assets 40,572 46,490 47,119 52,558 57,884 57,697 58,761 60,580 60,473 61,231Net Property, Plant & Equipment 8,049 7,545 8,655 8,876 9,327 9,702 10,342 10,813 11,361 11,936Total Investments and Advances 2,149 988 514 549 816 721 714 790 882 903Long-Term Note Receivable 1,464 1,236 1,809 1,515 1,492 1,541 1,663 1,636 1,669 1,717Intangible Assets 12,697 13,464 15,352 15,879 17,279 18,675 20,279 21,744 23,523 25,409Deferred Tax Assets 2,381 1,309 3,257 3,210 3,396 2,711 2,777 3,070 3,033 2,997Other Assets 562 590 608 662 132 132 132 132 132 132Total Assets 67,874 71,622 77,314 83,249 90,326 91,178 94,666 98,766 101,072 104,325Liabilities & Shareholders' EquityST Debt & Curr. Portion LT Debt 2,959 499 3,422 902 5,595 1,192 758 5,713 7 7,873Accounts Payable 4,678 6,398 7,696 6,700 6,418 6,945 7,526 8,145 8,794 9,506Income Tax Payable 428 1,197 2,005 1,642 845 1,223 1,382 1,420 1,302 1,235Other Current Liabilities 9,753 10,447 12,201 12,253 11,727 11,276 11,581 11,808 11,729 11,624Total Current Liabilities 17,818 18,541 25,324 21,497 24,585 20,636 21,248 27,085 21,833 30,237Long-Term Debt 21,008 19,615 17,013 20,150 19,997 19,886 20,078 20,986 21,205 21,522Provision for Risks & Charges 2,344 2,433 2,175 2,152 2,096 2,240 2,219 2,176 2,177 2,182Deferred Tax Liabilities 589 1,167 3,595 3,976 3,462 2,558 2,952 3,308 3,251 3,106Other Liabilities 444 545 368 342 392 418 413 387 390 400Total Liabilities 42,203 42,301 48,475 48,117 50,532 45,738 46,910 53,943 48,856 57,447Common Equity 25,509 29,141 28,776 35,078 39,647 45,319 47,643 44,723 52,109 46,760Total Shareholders' Equity 25,509 29,141 28,776 35,078 39,647 45,319 47,643 44,723 52,109 46,760Accumulated Minority Interest 162 180 63 54 147 121 113 100 107 118Total Equity 25,671 29,321 28,839 35,132 39,794 45,440 47,756 44,823 52,216 46,878Total Liabilities & Shareholders' Equity 67,874 71,622 77,314 83,249 90,326 91,178 94,666 98,766 101,072 104,325SupplementalWorking Capital 22,754 27,949 21,795 31,061 33,299 37,061 37,513 33,495 38,640 30,994Total Capital 49,476 49,255 49,211 56,130 65,239 66,397 68,479 71,422 73,321 76,155Total Debt 23,967 20,114 20,435 21,052 25,592 21,078 20,836 26,699 21,212 29,395Net Debt 21,008 19,615 17,013 20,150 19,997 19,886 20,078 20,986 21,205 21,522

12

Appendix 2: Statement of Comprehensive Income

Atlas CopcoAll figures in MSEK 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018ESales - Business Area

Compressor Technique 28,604 29,753 31,760 32,725 31,782 41,306 44,410 46,197 47,975 49,784Mining and Rock Excavation Technique 20,202 22,520 29,356 34,054 29,013 25,561 26,023 26,310 26,736 27,243Industrial Technique 5,392 6,472 7,821 9,566 9,501 10,834 11,669 12,086 12,499 12,919Construction Technique 9,627 11,485 12,918 14,658 13,967 14,845 15,324 15,965 16,599 17,245Group Adjustments -63 -355 -652 -470 -375 -437 -533 -559 -527 -542

Total Sales 63,762 69,875 81,203 90,533 83,888 92,110 96,892 99,998 103,282 106,650Cost of Goods Sold (COGS) incl. D&A 43,269 44,251 50,758 56,526 52,513 58,717 60,968 62,841 64,975 67,194COGS excluding D&A 40,859 41,753 48,309 53,936 49,826 55,689 57,879 59,731 61,742 63,798Depreciation & Amortization Expense 2,410 2,498 2,449 2,590 2,687 3,028 3,089 3,111 3,233 3,396Gross Income 20,493 25,624 30,445 34,007 31,375 33,393 35,924 37,157 38,308 39,456SG&A Expense 11,384 11,821 12,984 14,862 14,373 15,782 16,618 17,151 17,714 18,292Other Operating Expense 94 53 101 71 87 98 107 110 114 117EBIT (Operating Income) 9,109 13,803 17,461 19,074 16,915 17,514 19,199 19,896 20,480 21,047Nonoperating Income - Net 369 244 813 280 329 485 500 549 473 521Interest Expense 1,113 512 903 817 985 1,044 980 1,067 1,092 1,161Pretax Income 8,365 13,535 17,371 18,537 16,259 16,955 18,719 19,378 19,861 20,407Income Taxes 1,995 3,551 4,288 4,624 4,184 4,273 4,717 4,883 5,005 5,142Equity in Earnings of Affiliates 0 13 6 1 7 7 7 7 7 7Consolidated Net Income 6,370 9,997 13,089 13,914 12,082 12,689 14,009 14,502 14,863 15,271Minority Interest 32 23 25 13 10 10 10 10 10 10Net Income 6,338 9,974 13,064 13,901 12,072 12,679 13,999 14,492 14,853 15,261Net Income available to Common 6,338 9,974 13,064 13,901 12,072 12,679 13,999 14,492 14,853 15,261

EPS (diluted) 5.21 8.19 10.73 11.44 9.94 10.42 11.50 11.91 12.21 12.54

Diluted Shares Outstanding 1,216.30 1,217.28 1,217.30 1,215.59 1,214.16 1,216.90 1,216.90 1,216.90 1,216.90 1,216.90

Total Shares Outstanding 1,215.91 1,218.38 1,211.61 1,213.42 1,213.55 1,216.79 1,216.79 1,216.79 1,216.79 1,216.79

Dividends per Share 3.00 4.00 5.00 5.50 5.50 5.21 5.75 5.95 6.10 6.27

Payout Ratio 58% 49% 47% 48% 55% 50% 50% 50% 50% 50%

13

Appendix 3: Statement of CashFlows

All figures in MSEK 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018ECash FlowOperating Activities

Net Income / Starting Line 9,090 13,915 17,560 19,228 17,056 12,679 13,999 14,492 14,853 15,261Depreciation, Depletion & Amortization 2,410 2,498 2,449 2,590 2,687 3,028 3,089 3,111 3,233 3,396Other Funds (3,399) (3,513) (5,473) (6,629) (7,338) (7,338) (7,338) (7,338) (7,338) (7,338)Funds from Operations 8,101 12,900 14,536 15,189 12,405 8,369 9,750 10,265 10,748 11,319Changes in Working Capital 6,715 (1,730) (6,115) (1,366) (538) 4,183 1,756 2,502 1,438 2,163

Net Operating Cash Flow 14,816 11,170 8,421 13,823 11,867 12,551 11,507 12,767 12,186 13,482

Investing ActivitiesCapital Expenditures (2,380) (2,210) (2,347) (2,592) (2,264) (3,684) (3,876) (4,000) (4,131) (4,266)Net Assets from Acquisitions (196) (1,710) (2,298) (1,195) (1,549) (1,549) (1,549) (1,549) (1,549) (1,549)Sale of Fixed Assets & Businesses 661 552 144 67 64 64 64 64 64 64

Net Investing Cash Flow (1,226) (3,163) (4,335) (2,785) (4,472) (5,169) (5,361) (5,485) (5,616) (5,751)

Financing ActivitiesCash Dividends Paid (3,652) (3,650) (4,853) (6,069) (6,668) (6,339) (7,000) (7,246) (7,427) (7,631)Issuance/Reduction of Debt, Net (3,152) (1,474) 181 1,636 4,113 (4,514) (242) 5,863 (5,487) 8,183

Net Financing Cash Flow (6,804) (4,740) (12,735) (4,270) (2,535) (10,853) (7,242) (1,383) (12,914) 552

Exchange Rate Effect (76) (1,168) 101 (68) 357 (171) (190) 6 (13) (2)

Net Change in Cash 6,710 2,099 (8,548) 6,700 5,217 (3,642) (1,286) 5,905 (6,357) 8,281

14

Appendix 4: Key Financial Ratios

Key Financial Ratios

Ratios 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018EProfitability

Return on SalesEBITDA margin 17.9% 23.3% 24.4% 23.9% 23.4% 21.3% 22.0% 22.1% 22.0% 21.9%Gross profit margin 32.1% 36.7% 37.5% 37.6% 37.4% 36.3% 37.1% 37.2% 37.1% 37.0%EBIT margin 14.3% 19.8% 21.5% 21.1% 20.2% 19.0% 19.8% 19.9% 19.8% 19.7%Net profit margin 9.9% 14.3% 16.1% 15.4% 14.4% 13.8% 14.4% 14.5% 14.4% 14.3%Return on InvestmentReturn on assets 9.3% 13.9% 16.9% 16.7% 13.4% 13.9% 14.8% 14.7% 14.7% 14.6%Return on Equity 24.7% 34.0% 45.3% 39.6% 30.3% 27.9% 29.3% 31.2% 27.8% 31.7%Return on Total Capital 18.2% 27.8% 35.2% 33.9% 25.9% 26.3% 28.0% 27.8% 27.9% 27.6%

LiquidityCurrent ratio 2.28 2.51 1.86 2.44 2.35 2.35 2.35 2.35 2.35 2.35Quick ratio 1.60 1.75 1.10 1.52 1.57 1.81 1.79 1.42 1.74 1.26Cash ratio 0.70 0.78 0.23 0.58 0.72 0.86 0.84 0.66 0.81 0.59

ActivityTotal asset turnover 0.94 0.98 1.05 1.09 0.93 1.01 1.02 1.01 1.02 1.02Fixed asset turnover 2.34 2.78 2.69 2.95 2.59 2.75 2.70 2.62 2.54 2.47

Financial leverageLong-term debt to assets 0.31 0.27 0.22 0.24 0.22 0.22 0.21 0.21 0.21 0.21Long-term debt to equity 0.82 0.67 0.59 0.57 0.50 0.44 0.42 0.47 0.41 0.46Debt to Assets 0.35 0.28 0.26 0.25 0.28 0.23 0.22 0.27 0.21 0.28Debt to equity 0.93 0.69 0.71 0.60 0.64 0.46 0.44 0.60 0.41 0.63Net Debt to Equity 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Interest coverage 8.10 26.86 19.22 23.35 17.17 16.78 19.60 18.65 18.75 18.13

ShareholderEarnings per share 5.21 8.19 10.73 11.44 9.94 10.42 11.50 11.91 12.21 12.54Dividend Per Share 3.00 4.00 5.00 5.50 5.50 5.21 5.75 5.95 6.10 6.27Dividend payout ratio 57.6% 48.8% 46.6% 48.1% 55.3% 50.0% 50.0% 50.0% 50.0% 50.0%

15

Appendix 5: The DCF Model

A. Valuation Summary

Valuation SummaryValuation Date: 1-Dec-14Value of A Share on Valuation Date 210.70Target Price Share A 246.40Upside Potential for A 17%Value of B Share on Valuation Date 198.10Target Price Share B 231.96Upside Potential for B 17%

B. Operating Data

2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018EPeriod 1 2 3 4 5Revenue by Business Area

Compressor Technique 28,604 29,753 31,760 32,725 31,782 41,306 44,410 46,197 47,975 49,784YoY Growth 4.0% 6.7% 3.0% -2.9% 30.0% 7.5% 4.0% 3.8% 3.8%Industrial Technique 5,392 6,472 7,821 9,566 9,501 10,834 11,669 12,086 12,499 12,919YoY Growth 20.0% 20.8% 22.3% -0.7% 14.0% 7.7% 3.6% 3.4% 3.4%Mining and Rock Excavation Technique 20,202 22,520 29,356 34,054 29,013 25,561 26,023 26,310 26,736 27,243YoY Growth 11.5% 30.4% 16.0% -14.8% -11.9% 1.8% 1.1% 1.6% 1.9%Construction Technique 9,627 11,485 12,918 14,658 13,967 14,845 15,324 15,965 16,599 17,245YoY Growth 19.3% 12.5% 13.5% -4.7% 6.3% 3.2% 4.2% 4.0% 3.9%Common Group Functions/Eliminations -63 -355 -652 -470 -375 -437 -533 -559 -527 -542

Total Revenues 63,762 69,875 81,203 90,533 83,888 92,110 96,892 99,998 103,282 106,650Revenue Growth Rate (%) 9.6% 16.2% 11.5% -7.3% 9.8% 5.2% 3.2% 3.3% 3.3%

EBIT 9,015 13,750 17,360 19,074 16,915 17,514 19,199 19,896 20,480 21,047EBIT Margin (%) 14.1% 19.7% 21.4% 21.1% 20.2% 19.0% 19.8% 19.9% 19.8% 19.7%

Depreciation & Amortization 2,470 2,498 2,522 2,664 2,703 3,028 3,089 3,111 3,233 3,396D&A as a % of revenue 3.9% 3.6% 3.1% 2.9% 3.2% 3.3% 3.2% 3.1% 3.1% 3.2%

16

C. Balance Sheet Data

2014E 2015E 2016E 2017E 2018EPeriod 1 2 3 4 5Cash 17,633 17,633 17,633 17,633 17,633Accounts Receivable 18,248 19,195 19,811 20,461 21,128Inventories 18,853 19,080 20,348 20,486 21,271Prepaid Expenses 668 702 725 749 773Accounts Payable 6,945 7,526 8,145 8,794 9,506Debt 21,078 20,836 26,699 21,212 29,395Capital Expenditures 3,684 3,876 4,000 4,131 4,266

D. Weighted Average Cost of Capital

WACC computationShare A Price 210.70Diluted Shares Outstanding A 839.40Share B Price 198.10Diluted Shares Outstanding B 390.20WACC

Risk Free rate 1.32%Yield to maturity on Corporate Bond 1.20%Pre-tax Cost of Debt 2.52%Tax Rate (5 Year Weighted Average) 25.23%

After-tax Cost of Debt 1.88%Risk Free rate 1.32%Beta 1.09Equity Risk Premium 5.30%

Cost of Equity 7.10%Market Value of Debt 21,078Market Value of Equity 254,160

Total Capital 275,238

Debt Weighting 0.08Equity Weighting 0.92WACC = 6.70%

E. Free Cash Flow Analysis

2014 2015 2016 2017 2018Period 1 2 3 4 5EBIT 17,514 19,199 19,896 20,480 21,047Tax rate 25.1% 25.3% 25.2% 25.3% 25.3%EBIAT 13,120 14,335 14,890 15,308 15,719Depreciation & Amortization 3,028 3,089 3,111 3,233 3,396Accounts receivable -1,629 -947 -615 -651 -667Inventories -2,027 -227 -1,268 -138 -785Prepaid expenses -60 -35 -23 -24 -24Accounts payable 527 582 619 649 711Capital expenditures -1,420 -191 -124 -131 -135Unlevered free cash flows 11,538 16,605 16,590 18,247 18,215

Discount Rate (WACC) 6.7% 6.7% 6.7% 6.7% 6.7%Present value of free cash flows 10,813 14,586 13,658 14,079 13,172

Sum of present values of FCFs 66,308.19

17

F. Terminal Value

Growth in perpetuity method:Long term growth rate 1.4%WACC 6.7%Free cash flow (t+1) 18,470Terminal Value 348,634Present Value of Terminal Value 252,112Exit multiple 14.89

G. Target Price

Share PriceEnterprise Value 318,420.12Less: Market Value of Debt 21,078.19Market Value of Equity 297,341.93Discount at which Share B trades (Regression) 5.861%Diluted Shares Outstanding A 839.40Diluted Shares Outstanding B (Adjusted for discount) 367.33Diluted Shares Outstanding (Total) 1,206.73Intrinsic Value of A Share 246.40Intrinsic Value of B Share 231.96

18

Appendix 6: The WACC Assumptions

A. The Risk Free rateTo obtain the risk free rate of 1.31%, we bootstrapped the Swedish Government curve usingthe prices of the bonds obtained from http://www.finansportalen.se/marknadsrantor/ of 5th

December, 2014. The bond quotes here are made in yield. We also obtained the data for theSwedish bills which we used for the short part of the curve.We then obtained the zero coupon curve and from there obtained the spot rate for a 10 yearSwedish Government bond which we used as the risk Free rate. The curve was fitted using theNielsen-Siegel-Svensonn Model.

B. The Market Equity Risk PremiumWe used the Market Equity Risk Premium of 5.3% as obtained from a survey of Market EquityPremium risk in 88 countries in 2014 conducted by Pablo Fernandez, Pablo Linares and IsabelFernandez Acín of the IESE business school.

C. BetaThe beta of 1.09 was obtained from Reuters as of 5th December 2014. The same beta is alsoused in the Financial Times as the company beta for ATCO AB.

D. The Cost of EquityThe Capital Asset Pricing Model was used to compute the cost of Equity.= + ∗

E. The Cost of DebtThe risk free rate adjusted for Credit Risk.

F. The Tax RateATCO AB operates in over 180 countries and therefore utilizes a weighted average tax rate.We used the 2013 effective tax rate of 27.5% for our forecast period which is slightly abovethe average of the past ten year of 26.53%.

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

- 2.000 4.000 6.000 8.000 10.000 12.000

NSS

Yield

19

Appendix 7: The DCF Model ForecastsSeveral assumptions were made in the process of forecasting future cash flows. The base period of forincome statement forecasts was 30th September 2014 while for Balance sheet items was the yearended 30th December 2013.

A. RevenuesKey drivers of revenue for each business area were identified and the estimates for everyquarter were made starting with the fourth quarter 2014 to fourth quarter 2018.

Projected Growth Rates2015 2016 2017 2018

Compressor TechniqueAnnual 4.11% 3.97% 3.79% 3.80%

Quarterly 1.01% 0.98% 0.93% 0.94%Industrial Technique

Annual 3.64% 3.53% 3.38% 3.40%Quarterly 0.90% 0.87% 0.83% 0.84%

Construction TechniqueAnnual 4.29% 4.10% 3.89% 3.89%

Quarterly 1.06% 1.01% 0.96% 0.97%Mining and Extractive

Annual 0.99% 1.15% 1.89% 1.90%Quarterly 0.25% 0.29% 0.47% 0.48%

MSEK CompressorTechnique

IndustrialTechnique

Miningand Rock

ExcavationTechnique

ConstructionTechnique

2014 Q1 9,409 2,505 6,251 3,354Q2 10,353 2,650 6,396 4,068Q3 10,718 2,827 6,449 3,692Q4 10,826 2,852 6,465 3,731

2015 Q1 10,936 2,878 6,481 3,771Q2 11,046 2,904 6,497 3,811Q3 11,158 2,930 6,514 3,851Q4 11,270 2,957 6,530 3,892

2016 Q1 11,381 2,982 6,549 3,931Q2 11,492 3,008 6,568 3,971Q3 11,605 3,034 6,587 4,011Q4 11,719 3,061 6,606 4,051

2017 Q1 11,828 3,086 6,637 4,090Q2 11,938 3,112 6,668 4,130Q3 12,049 3,138 6,700 4,169Q4 12,161 3,164 6,731 4,209

2018 Q1 12,274 3,190 6,763 4,250Q2 12,388 3,216 6,795 4,291Q3 12,503 3,243 6,827 4,332Q4 12,619 3,270 6,859 4,373

20

B. Other Income statement Items - Other Income statement items were estimated used five year rolling averages as percentage of sales or assets2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Total Sales 63,762 69,875 81,203 90,533 83,888 92,110 96,892 99,998 103,282 106,650

Group Adjustments -63 -355 -652 -470 -375 -437 -533 -559 -527 -542As a part of Total Business area sales -0.1% -0.5% -0.8% -0.5% -0.4% -0.5% -0.5% -0.6% -0.5% -0.5%

Depreciation & AmortizationExpense

2,410 2,498 2,449 2,590 2,687 3,028 3,089 3,111 3,233 3,396

As a part of sales 3.8 % 3.6 % 3.0 % 2.9 % 3.2 % 3.3 % 3.2 % 3.1 % 3.1 % 3.2 %Depreciation 1,725 1,675 1,701 1,784 1,886 2,103 2,130 2,159 2,243 2,359As a part of Sales 2.7 % 2.4 % 2.1 % 2.0 % 2.2 % 2.3 % 2.2 % 2.2 % 2.2 % 2.2 %Amortization of Intangibles 685 823 748 806 801 924 959 952 989 1,036As a part of Sales 1.1% 1.2% 0.9% 0.9% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%

Cost of Goods Sold (COGS) incl. D&A 43,269 44,251 50,758 56,526 52,513 58,717 60,968 62,841 64,975 67,194COGS excluding D&A 40,859 41,753 48,309 53,936 49,826 55,689 57,879 59,731 61,742 63,798As a part of sales 64.1% 59.8% 59.5% 59.6% 59.4% 60.5% 59.7% 59.7% 59.8% 59.8%

Research & Development 993 1,054 1,328 1,638 1,706 1,552 1,656 1,783 1,842 1,871As a part of Total Assets 1.46% 1.47% 1.72% 1.97% 1.89% 1.70% 1.75% 1.81% 1.82% 1.79%Other SG&A 10,391 10,767 11,656 13,224 12,667 15,532 16,146 16,613 17,287 17,919As a part of sales 17.9 % 16.9 % 16.0 % 16.4 % 17.1 % 16.9 % 16.7 % 16.6 % 16.7 % 16.8 %

Other Operating Expense 94 53 101 71 87 98 107 110 114 117As a part of sales 0.15% 0.08% 0.12% 0.08% 0.10% 0.11% 0.10% 0.10% 0.10% 0.10%EBIT (Operating Income) 9,109 13,803 17,461 19,074 16,915 17,514 19,199 19,896 20,480 21,047As a part of sales 14.3 % 19.8 % 21.5 % 21.1 % 20.2 % 19.0 % 19.8 % 19.9 % 19.8 % 19.7 %Nonoperating Income - Net 369 244 813 280 329 485 500 549 473 521As a part of sales 0.6% 0.3% 1.0% 0.3% 0.4% 0.5% 0.5% 0.5% 0.5% 0.5%

Implied tax rate - Rolling Average 23.8 % 26.2 % 24.7 % 24.9 % 25.7 % 25.1 % 25.3 % 25.2 % 25.3 % 25.3 %

21

C. Select Balance Sheet ItemsBasis of Estimation 2014E 2015E 2016E 2017E 2018EAccounts Receivable Growth (%) Same rate as Revenues 9.8% 5.2% 3.2% 3.3% 3.3%Prepaid Expenses Growth (%) Same rate as Revenues 9.8% 5.2% 3.2% 3.3% 3.3%Accounts Payable Growth (as % of Revenue - Rolling Average) 8.2% 8.4% 8.2% 8.0% 8.1%Capital Expenditures Growth (% as of Revenue) 4.0% 4.0% 4.0% 4.0% 4.0%Inventories Growth (Modelled on Days of Inventory on Hand)

D. Other Balance Sheet Items2014E 2015E 2016E 2017E 2018E

Net Property, Plant & Equipment 9,702 10,342 10,813 11,361 11,936Average 4 year YOY Growth 4% 7% 5% 5% 5%

Total Investments and Advances 721 714 790 882 903Average 4 year YOY Growth -12% -1% 11% 12% 2%

Long-Term Note Receivable 1,541 1,663 1,636 1,669 1,717Average 4 year YOY Growth 3% 8% -2% 2% 3%

Intangible Assets 18,675 20,279 21,744 23,523 25,409Average 4 year YOY Growth 8% 9% 7% 8% 8%

ST Debt & Curr. Portion LT Debt 1,192 758 5,713 7 7,873Extracted from 2013 Annual Report 6% 4% 21% 0% 27%

Long-Term Debt 19,886 20,078 20,986 21,205 21,522Average 4 year YOY Growth -1% 1% 5% 1% 1%

E. All other itemsAll other items apart from cash were taken to be five year rolling averages of the amounts inthe annual reports.

F. Voting PremiumAtlas Copco has A and B shares with Share A trading at a premium to share B. We thereforecomputed the voting premium by regressing the share prices for the two shares for the last20 years. The Voting premium was obtained to be 6.22%.

22

Appendix 8: Peer Ratio Analysis2013 ATCO CAT IR SAND Max Mean Median Min

Profitability (%)Gross Margin 37.40 25.44 29.97 32.93 37.40 31.44 31.45 25.44SG&A to Sales 17.13 13.46 19.23 20.17 20.17 17.50 18.18 13.46Operating Margin 20.16 11.98 10.74 12.50 20.16 13.85 12.24 10.74Pretax Margin 19.38 9.21 6.74 7.73 19.38 10.77 8.47 6.74Net Margin 14.39 6.81 4.91 5.74 14.39 7.96 6.27 4.91Return on Assets 13.91 4.35 3.36 5.07 13.91 6.67 4.71 3.36Return on Equity 32.31 19.76 8.54 14.40 32.31 18.75 17.08 8.54Return on Common Equity 32.31 19.76 8.54 14.40 32.31 18.75 17.08 8.54Return on Total Capital 19.89 6.52 5.79 7.43 19.89 9.91 6.98 5.79Return on Invested Capital 21.02 8.16 6.18 8.01 21.02 10.84 8.09 6.18Cash Flow Return on InvestedCapital

20.66 21.96 8.94 8.21 21.96 14.94 14.80 8.21

Valuation (x)Price/Sales 2.58 1.07 1.49 1.30 2.58 1.61 1.40 1.07Price/Earnings 17.92 15.79 29.19 22.68 29.19 21.40 20.30 15.79Price/Book Value 5.46 2.78 2.46 3.40 5.46 3.52 3.09 2.46Price/Tangible Book Value 9.67 5.65 -- 5.28 9.67 6.87 5.65 5.28Price/Cash Flow 18.24 5.87 20.94 22.16 22.16 16.80 19.59 5.87Price/Free Cash Flow 20.40 10.41 28.92 120.01 120.01 44.93 24.66 10.41Dividend Yield (%) 3.08 2.47 1.36 3.86 3.86 2.69 2.78 1.36Enterprise Value/EBIT 13.26 13.43 14.37 13.34 14.37 13.60 13.39 13.26Enterprise Value/EBITDA 11.44 9.18 11.48 9.85 11.48 10.49 10.64 9.18Enterprise Value/Sales 2.67 1.61 1.54 1.67 2.67 1.87 1.64 1.54Total Debt/Enterprise Value 0.11 0.42 0.18 0.21 0.42 0.23 0.20 0.11Per ShareSales per Share 69.09 84.51 41.40 69.62 84.51 66.15 69.35 41.40EBIT (Operating Income) perShare

13.93 10.13 4.45 8.70 13.93 9.30 9.42 4.45

EPS (recurring) 9.92 6.07 2.66 5.58 9.92 6.06 5.83 2.66EPS (diluted) 9.92 5.75 2.08 4.00 9.92 5.44 4.88 2.08Dividends per Share 5.50 2.24 0.84 3.50 5.50 3.02 2.87 0.84Dividend Payout Ratio (%) 55.28 38.96 39.59 87.50 87.50 55.33 47.43 38.96Book Value per Share 32.67 32.63 25.01 26.71 32.67 29.25 29.67 25.01Tangible Book Value per Share 18.43 16.08 -8.47 17.19 18.43 10.81 16.64 (8.47)Cash Flow per Share 9.77 15.47 2.94 4.09 15.47 8.07 6.93 2.94Free Cash Flow per Share 8.74 8.72 2.13 0.76 8.74 5.09 5.43 0.76Diluted Shares Outstanding 1,214.16 658.60 298.30 1,254.39Total Shares Outstanding 1,213.55 637.82 282.68 1,254.39Asset Turnover Analysis (x) - -Cash & ST Investments 5.55 9.58 8.76 9.24 9.58 8.28 9.00 5.55Receivables 4.07 2.98 5.44 4.55 5.44 4.26 4.31 2.98Inventories 3.05 2.95 6.99 2.35 6.99 3.83 3.00 2.35Current Assets 1.52 1.38 2.32 1.60 2.32 1.70 1.56 1.38Fixed Assets 9.22 3.32 7.91 3.44 9.22 5.97 5.68 3.32Total Assets 0.97 0.64 0.68 0.88 0.97 0.79 0.78 0.64Operating EfficiencyRevenue/Employee 2.08 0.47 0.29 1.84 2.08 1.17 1.16 0.29Net Income/Employee 0.30 0.03 0.01 0.11 0.30 0.11 0.07 0.01Assets/Employee 2.24 0.72 0.42 1.98 2.24 1.34 1.35 0.42Receivables Turnover (x) 4.07 2.98 5.44 4.55 5.44 4.26 4.31 2.98Inventory Turnover (x) 3.05 2.95 6.99 2.35 6.99 3.83 3.00 2.35Payables Turnover (x) 7.88 5.79 7.11 8.42 8.42 7.30 7.49 5.79Asset Turnover (x) 0.97 0.64 0.68 0.88 0.97 0.79 0.78 0.64Working Capital Turnover (x) 2.52 5.04 5.35 4.39 5.35 4.33 4.72 2.52

23

Cash Conversion CycleDays of Inventory on Hand 119.83 123.90 52.22 155.59 155.59 112.88 121.86 52.22+ Days of Sales Outstanding 89.61 122.55 67.07 80.31 122.55 89.88 84.96 67.07

= Operating Cycle 209.43 246.45 119.28 235.90 246.45 202.77 222.66 119.28- Days of Payables

Outstanding46.32 62.99 51.34 43.36 62.99 51.00 48.83 43.36

= Net Operating Cycle 163.11 183.46 67.94 192.54 192.54 151.76 173.29 67.94LiquidityCurrent Ratio 2.35 1.40 1.68 1.69 2.35 1.78 1.69 1.40Quick Ratio 1.67 0.94 1.34 0.86 1.67 1.20 1.14 0.86Cash Ratio 0.72 0.22 0.57 0.18 0.72 0.42 0.40 0.18Cash & ST Inv/Current Assets(%)

30.76 16.00 33.89 10.46 33.89 22.78 23.38 10.46

CFO/Current Liabilities (%) 48.27 37.33 25.75 17.93 48.27 32.32 31.54 17.93Coverage (x)Net Debt/EBITDA 0.40 3.24 0.95 1.70 3.24 1.57 1.33 0.40Net Debt/(EBITDA-Capex) 0.45 5.95 1.12 2.38 5.95 2.47 1.75 0.45Total Debt/EBITDA 1.31 3.87 2.12 2.05 3.87 2.34 2.08 1.31EBIT/Interest Expense (Int.Coverage)

16.58 5.51 4.80 5.42 16.58 8.08 5.46 4.80

EBITDA/Interest Expense 19.22 8.23 6.01 7.34 19.22 10.20 7.78 6.01Fixed-charge Coverage Ratio 16.58 5.51 4.80 5.42 16.58 8.08 5.46 4.80CFO/Interest Expense 11.63 8.59 3.18 2.55 11.63 6.49 5.88 2.55Cash Dividend Coverage Ratio 1.86 6.64 5.21 0.79 6.64 3.62 3.54 0.79LT Debt/EBITDA 1.02 2.74 1.90 1.57 2.74 1.81 1.73 1.02Net Debt/FFO 0.63 4.29 1.24 7.28 7.28 3.36 2.76 0.63LT Debt/FFO 1.61 3.62 2.47 6.71 6.71 3.60 3.04 1.61FCF/Total Debt 0.41 0.15 0.18 0.03 0.41 0.19 0.17 0.03CFO/Total Debt 0.46 0.27 0.25 0.17 0.46 0.29 0.26 0.17Leverage (%)LT Debt/Total Equity 50.44 128.39 44.61 69.27 128.39 73.18 59.85 44.61LT Debt/Total Capital 30.65 45.63 29.78 36.40 45.63 35.61 33.53 29.78LT Debt/Total Assets 22.14 31.47 17.86 24.73 31.47 24.05 23.43 17.86Total Debt/Total Assets 28.33 44.47 19.94 32.23 44.47 31.24 30.28 19.94Net Debt/Total Equity 19.65 151.92 22.41 75.15 151.92 67.28 48.78 19.65Total Debt/Equity 64.55 181.39 49.81 90.30 181.39 96.51 77.43 49.81Net Debt/Total Capital 11.94 53.99 14.96 39.49 53.99 30.09 27.22 11.94Total Debt/Total Capital 39.23 64.46 33.25 47.45 64.46 46.10 43.34 33.25

24

Appendix 9: Altman Z score and the F scoreA. The Altman Z score: Measures chances of bankruptcy

Date calculated 01/12/2014Working Capital / Total Assets x1 0.44Retained Earnings/ Total Assets x2 0.53EBIT/Total Assets x3 0.62Market Value of Equity / Total Liabilities x4 3.06Revenue/Total Assets x5 0.93Z Score 5.58

What are the chances of bankruptcy?1.8 or less Very High1.81 to 2.7 High2.8 to 2.9 Possible3.0 or higher Not Likely

B. The F Score : Measure of Financial Strength using nine factorsProfitability 2009 2010 2011 2012 2013Return on Assets Score I if positive, 0 if negative 1 1 1 1 1

Cash flow Return on Assets Score I if positive, 0 if negative 1 1 1 1 1

Change of Return on assets Score I if it's higher, 0 if it's lower 0 1 1 0 0

Quality of Earnings Score 1 if CFROA>ROA, 0 otherwise 1 1 0 0 0

FundingChange of Gearing or Leverage Score I if gearing is lower, 0 if it's

higher1 1 1 0 1

Change in Working Capital Score I if this year's current ratio ishigher,0 if it's lower

1 1 0 1 0

Change in share in issue Score 1 if fewer or same, 0 if more 1 0 1 1 1

Operating EfficiencyChange in Gross margin Score I if it's higher, 0 if it's lower 0 1 0 1 0

Change in Asset Turnover Score I if it's higher, 0 if it's lower 0 1 1 1 0

6 8 6 6 45 Year Average 6

InterpretationGood or high score = 7, 8, 9Bad or low score = 0, 1, 2, 3

25

Appendix 10 Key Management PersonnelA. Management Board

Name Position Held SinceRonnie Leten President June 1, 2009

Chief Executive Officer & DirectorHans-OlaMeyer

Chief Financial Officer & SVP-Controlling Octber 28,1999

Director March 9,2007

Johan Halling Senior Executive Vice President 2013Business Area President Mining and Rock Excavation Technique 2002

Nico Delvaux Senior Executive Vice President 2014Business Area President Compressor Technique

AndrewWalker

Senior Executive Vice President 2014Business Area President Construction Technique

MatsRahmström

Senior Executive Vice President 2008Business Area President Industrial Technique

Håkan Osvald Secretary 2012Senior Vice PresidentGeneral Counsel 1991

AnnikaBerglund

Senior Vice President Corporate Communications andGovernmental Affairs

1997

Jeanette Livijn Senior Vice President Organizational Development and HumanResources

2007

MalaChakraborti

Vice President-Corporate Responsibility 2013

KarinHolmquist

Vice President-Internal Audit & Assurance

MattiasOlsson

Vice President-Investor Relations 2011

Ola Kinnander Manager-Media Relations & Corporate Communications

26

B. DirectorsName Position Held

SinceAffiliates and Other Work

Hans TorgnyStråberg

Chairman 2014 Independent Director at Investor ABIndependent Director at Stora Enso Oyj.Chairman of the Board of Roxtec ABChairman of the Board of Orchid First Holding ABChairman of the Board CTEK Sweden ABBoard member of N Holding ABBoard member of Föreningen TeknikföretagenDirector of Svenskt Näringsliv

Ronnie Leten President, ChiefExecutive Officer &Director

2009 Chairman at Electorlux AB

PeterWallenberg,Jr., MBA

Independent Director 2012 Chairman of Foundation AdministrationManagement Sweden ABChairman of Grand Group ABChairman of the Royal Swedish Automobile ClubChairman of Kungsträdgården Park &Evenemang ABVice Chairman of the Knut and Alice WallenbergFoundationBoard member of Investor ABBoard member of Scania ABBoard member of Aleris Holding AB

GunillaNordström

Independent Director 2010 Executive Vice President of Electrolux ABPresident and CEO of Electrolux MajorAppliances Asia/PacificBoard member of Wärtsilä Oyj Abp

JohanForssell

Director 2008 Board member of Saab ABManaging Director, Head of Core Investmentsand member of the management group ofInvestor AB

MargarethØvrum

Independent Director 2008 Board member of Ratos ABExecutive Vice President Technology, Projectsand Drilling of Statoil ASA

MikaelBergstedt

Director 2004

StaffanBohman

Independent Director 2003 Chairman of Höganäs ABChairman of Cibes Lift Group AB

Vice Chairman of Rezidor Hotel Group ABVice Chairman of the Board of trustees of SNSSwedish Centre of Business and Policy StudiesBoard member of Inter-IKEA Holding N.V.Board member of Ratos ABBoard member of Boliden AB

27

Member of the Swedish Corporate GovernanceBoard

AndersGerhardUllberg

Independent Director 2003 Chairman of BE Group ABChairman of Boliden ABChairman of Natur & KulturChairman of Studsvik ABBoard member of Beijer AlmaBoard member of Valedo PartnersBoard member of Åkers ABChairman of the Swedish Financial ReportingBoard

Ulla Litzén Independent Director 1999 Board member of SKF ABBoard member of Boliden ABBoard member of Alfa Laval ABBoard member of NCC ABBoard member of Husqvarna AB

BengtLindgren

Director 1990 Chairman of Grönklittsgruppen ABBoard member of Prevas ABBoard member of Länsförsäkringar Bank AB

Ulf Ström Deputy Director 2008KristinaKanestad

Deputy Director 2007

28

Appendix 10: Analysis of Acquisitions

Contribution to Actual Revenue by BusinessArea (MSEK) 2009 2010 2011 2012 2013Compressor Technique 81 941 268 497 68Industrial Technique 0 48 266 0 140Construction Technique 270 0 73Mining and Rock Excavation Technique 115 0 0 18Construction and Mining 66Total Revenue By Acquired Companies(MSEK) 147 1104 804 497 299Total Revenue per Year 63762 69875 81203 90752 84235Percentage % 0.23 1.57 0.99 0.55 0.35

Average percentage% 0.74Average revenue (MSEK) 570

Contribution to Actual Revenue by BusinessArea (MSEK) 2009 2010 2011 2012 2013Percentage % 0.23 1.57 0.99 0.55 0.35

Business Area (Revenue per Year at time ofAcquisition MSEK) 2009 2010 2011 2012 2013*Compressor Technique 50 1027 295 655 170Industrial Technique 0 125 640 0 355Construction Technique 510 0 73Mining and Rock Excavation Technique -100 365 840Construction and Mining 93 256Total Revenue By Acquired Companies(MSEK) 143 1408 1345 1020 1438Total Revenue per Year 63762 69875 81203 90752 84235Percentage % 0.22 2.02 1.66 1.12 1.71

Average percentage % (2009-2014) 2.62Average percentage % (2009-2013) 1.35Average revenue of acquired companiesMSEK (2009-2014) 2269Average revenue of acquired companiesMSEK (2009-2013) 1070

29

Appendix 11: Corporate Governance RatingWe estimated the rating for Atlas Copco AB regarding ISS Governance Quickscore 3.0 and OECDPrinciples of Corporate Governance. The rating of ISS Corporate Governance was examined criticallyby evaluating each of the data points and their evaluation methods given in the ISS Quickscore 3.0technical documents.

ISS Quickscore 3.0

1 2 3 4 5 6 7 8 9 10

ImpactHigh -

ve Neutral High+ve

ConcernLevel Low Medium High

Atlas Copco AB Corporate Governance Rating

Corporate GovernanceBoard Structure 9Compensation 4Shareholder Rights 6Audit and Risk Oversight 1Total Score 6

ISS Quickscore Pillars, Subcategories and their impact on Atlas Copco’s evaluation

Category High Positive Impact Neutral Impact High Negative ImpactBoard Structure Board Composition

Composition of theCommitteesBoard PracticesBoard Policies

Compensation Pay For PerformanceUse Of EquityEquity Risk MitigationNon-Executive Pay

Communications andDisclosureTerminationControversies

Shareholder Rights One Share One VoteTakeover Defences

Audit & RiskOversight

External AuditorAudit andAccountingControversies

Sources -Team’s estimates, ISS Corporate Solution (ISS Corporate Quickscore 3.0:https://link.issgovernance.com/qs/api/9750, ISS Quickscore 3.0 Technical Document:http://www.issgovernance.com/governance-solutions/investment-tools-data/quickscore-downloads/) and OECD Principles for Corporate Governance

30

Appendix 12: Social Responsibility awards

Year Award Issuer2009 Environmental Award for the introduction of energy efficiency

audits within the Industrial Technique business areaAtlas Copco internalaward

2010 SWHAP 2010 Achievement Award for Most ComprehensiveProgramme1

Swedish WorkplaceHIV/AIDS Programme

2010 Sustainability Award2 Swedish Industry2010 Social Responsibility Award2 Swedish Industry2011 SWHAP 2011 Peer Educator Achievement Award for Southern

Africa3Swedish WorkplaceHIV/AIDS Programme

2011 CSR Online Awards Nordic 2011 3rd place4, 5 Lundquist.it2011 Environmental Award to the Surface Drilling Equipment division Atlas Copco internal

award2012 SWHAP 2012 Peer Educator Achievement Award for Southern

Africa6Swedish WorkplaceHIV/AIDS Programme

2012 SWHAP 2012 Award for Best Sustained Practice6, 7 Swedish WorkplaceHIV/AIDS Programme

2012 Best Workplace for Women Hungary8

2012 Partnership Award9, 10 The American Chamberof Commerce in China

2012 Environmental Award to GA VSD + compressor developer team Atlas Copco internalaward

2013 SWHAP 2013 Peer Educator Achievement Award for SouthernAfrica11

Swedish WorkplaceHIV/AIDS Programme

2013 Global 100 Most Sustainable Companies 18th place12, 13 Corporate Knights2013 Honouree of World’s Most Ethical Companies 201314, 15 Ethisphere2014 Honouree of World’s Most Ethical Companies 201414 Ethisphere2014 Recognition of UN Compact Index16, 17 United Nations (UN)

Disclosures:Ownership and material conflicts of interest:The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation:Compensation of the author(s) of this report is not based on investment banking revenue.Position as a officer or director:The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company.Market making:The author(s) does not act as a market maker in the subject company’s securities.Disclaimer:The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society Sweden , CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

CFA Institute Research Challenge