Sensys Gatso Group AB BULL OR BEAR ANALYSIS

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Gordon Quinn
6 years ago
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1 Independent Equity Analysis 2 Analyst: Shant Sanossian 27//5: 2 2 Skapa egen bull & bear mall: Radera bilderna från mallen och klipp och klistra in din egna tabell Futura storlekz 9. Ni kan flytta varje figur var för sig. Om rubriken inte passar under figuren kan man flytta den hur man vill. Sensys Gatso Group AB BULL OR BEAR ANALYSIS

2 Introduction Bull or Bear Analysis 4 Quality of Earnings Value Drivers Risk Profile Quality of Management Strong over-average demand in mid-term: traffic safety development plans do exist in many markets. Sweden will expand streets radar control coverage 3 times by Bright potential in Japan rises on the horizon following the new agreement with OKI. Valuable acquisition for Dutch Gatso: positive value is generated by postacquisition, smoother revenue trends (less risk and lower cost of capital), enhanced margins, R&D savings, revenue synergies. Low operational risk and high continuity: market leader with strong track record during 2 decades for Sensys and more than 4 decades for Gatso. 8,000 systems installed in 75 countries. Continuously supported by low debt-ratio and high asset quality. Moderate risk profile: being operational leverage and project oriented volatile revenues as biggest source of risk. Price Chart 6 kr 4 kr 2 kr 0 kr Value Drivers ANALYST Shant Sanossian Address Website Shant.sanossian@analystgroup.se AG Equity Research AB Skeppargatan Stockholm ABOUT COMPANY Share price 3.84 SEK 52wk high / low 6.05 SEK / 0.80 SEK Shares outstanding 657.6M Market cap (MSEK) 2.52B SEK Net debt (MSEK) 92.8M SEK EV (MSEK) 2.80B SEK Sector Industrial Goods & Services List / Ticker SENS Next report 206/02/25 PERFORMANCE Month -30.8% 3 Months % Year % YTD % MAJOR OWNERS Gatso Special Products BV 7.64 % Danske Capital (Sweden) 9.02 % Avanza Bank Holding AB 4.47 % Bergstrand (Inger) 4.44 % AMF Pensionsförsäkring AB 2.26 % MANAGEMENT CEO Torbjörn Sandberg Chairman Gunnar Jardelöv CFO Niki Gatsonides EVP Systems Göran Löfqvist EVP Managed Services Edmar van der Weijden CTO Timo Gatsonides DATE NAME CHANGE TOTAL 205/0/02 Garritsen, Jochem +25,000 25, /09/29 Frilund, Johan +3,000 8, /09/2 Frilund, Johan +2, , /09/02 Nordman, Helena +,000, /09/0 Jardelöw, Gunnar +75, , /08/4 Gatsonides, Niki +5,920K +5,920K Revenue Synergies (postacquisition) Lower revenue volatility & enhanced margins (post-acquisition) Strong market demand in the medium term Cost Synergies in R&D (post-acquisition) Lower cost of capital (postacquisition)

Investment Thesis Moderate industry attractiveness driven by competition and low entry barriers The industry is well competitive with more than six international companies.

3 Investment Thesis Moderate industry attractiveness driven by competition and low entry barriers The industry is well competitive with more than six international companies. Low historical industry profitability was observed of around 6% return on investment (5Yr). Any demand growth resulting increased profitability may attract new competition supported by low economies of scale, limited product differentiation, low capital requirements and low licensing barriers. Potential competition comes mainly from conglomeration strategies of high-tech companies, as access to clients (governmental) needs operational history. Demand uncertainty tends to continue Undiversified client base (Authorities) and the project style revenues enhances buyers bargaining power which not only pressures profit margins but also allows for abnormal revenue volatility. Historical annual revenues growth rate of Sensys Traffic AB deviated between -65% and +25% during the last 0 years (before Gatso merger. Expected to be much smoother). Strong medium term demand is expected A four decades mature industry tends to have strong demand in the medium term. Group s major market, Sweden, will increase the length of roads controlled by cameras from 3,000KM (204) to 9,000KM (2025). Arab Gulf countries (3% of Sensys Business Volume 204 before Gatso acquisition) are implementing an accelerated governmental spending for developing infrastructure including traffic safety e.g. Qatar s annual increase in development expenditure was around 6% during the last six years. Japan s traffic control system is expected to be upgraded (company s market share is promising through new agreement with the Japanese telecom giant OKI. Sensys technology is more advanced than market average). Company Description Strong MT revenues and LT uncertainty Project oriented (volatile) annual revenue level of 80M SEK was observed for Sensys Traffic AB. during last 0 years, with 56M SEK standard deviation. This average level is assumed to at least to double after Gatso acquisition. A consolidated revenues of 29M SEK was observed during the first 9 months (around 390M SEK including Gatso before acquisition). The group signed contracts of around 39M SEK. Revenues of around 450SEK is expected for 205 (including Gatso before acquisition). Operating profits of around 75M SEK are expected for 205. Gatso acquisition would smooth revenue trends through expanding markets (20% revenues stand. deviation decrease is expected). Different product portfolio may also result to revenue synergies. Acceptable risk profile and high continuity The recent acquisition exposes the group to some level of default risk by increasing debt ratio from 0% to 36.%. This risk is only limited to long run as a volatile EBITDA does cover only around 90% of annual loan liabilities. However, risk is moderate in the short run as ST liabilities are 4.3% covered by current assets (>00% by high quality assets). Operating leverage is a critical risk source. Fixed cost including R&D was around 44M SEK (204) for Sensys Traffic before acquisition (7% of revenues). In case of stable variable cost assumption the breakeven revenue level would not be less than 80M SEK for the group. Operating losses are not expected in the coming few years. Acquisition would provide some cost synergies in both R&D and administrative costs. FX rates volatility may also be an important risk source. Recent weak SEK and EUR enhance non-eu revenues, but may increase the cost of imported materials which could not be easy to pass-through sales. This was obvious by volatile gross profit margin between -7.7% and +60.4% during the last 0 years for Sensys Traffic AB. Sensys Gatso Group AB develops and sells traffic safety systems to police and highway authorities. The group was formed by the merger of the Swedish Sensys Traffic with the Dutch Gatso during July 205 to form worlds market leader in the field. The group previously installed around 8,000 systems in around 75 countries. Main markets currently are Sweden, Netherland, UK, Belguim, USA, Japan, UAE

4 0/204 /204 2/204 0/205 02/205 03/205 04/205 05/205 06/205 07/205 08/205 09/205 0/204 /204 2/204 0/205 02/205 03/205 04/205 05/205 06/205 07/205 08/205 09/205 Valuation Investment characteristics With 65% stock free floating rate, an average.4% daily trading volume (90D), huge 9K shareholder low concentrated base (largest 20 investors own 46%), the stock is considered liquide relative to OMXS30 composite averages. Liquidity premium is ignorable. 5Yr unlevered beta of 0.57 is increased to 0.77 to reflect the new levered capital structure. Required rate of return is estimated at 4.20% and WACC of 4.42%. Stock price was sensitive to the yearly earnings rather than the long term s (Last 0 Yrs.). 3 peaks were observed in three positive earning periods (2005, 2008, 205). Price range varied between 0.22 SEK (Jul-2) and 6.05 SEK (Apr-06), with avg. price of.65sek. The avg. forward P/E ratio was 2.46 during profitable periods (2005, 2008), so according to our worst earnings expectation for 205 the stock price should be at least.93sek. Sensys Ind., SE Index, SE PE (Y) Relative price valuation +98% +48% +247% The table shows a relative valuation according to the historical PE levels of the stock itself and two other benchmarks. Industry benchmark represents 4 Swedish peers. Index benchmark represents OMXSPI (Stockholm all shares index). Table suggests a stock price of 2.59 SEK compared to industry peers (current price is 48% overvalued). Latest acquisition of Gatso tends to enhance enterprise valuation Acquisition definitely increases company s valuation from three aspects: ) annual savings of fixed costs including R&D (Estimated around 0.8M SEK by us), 2) lower cost of capital by smoother revenues and margins, and 3) enhanced revenues from selling unique products for merged entities in each other old markets. Note: assumptions above are based on the following facts: ) low intersection of both entities markets (75 total markets instead of 30), and 2) the existance of unique products e.g. access control system of Gatso could be accessible to Sensys old markets. Current stock overvaluation is indicated by an optimistic scenario As historical numbers for Gatso are not available, so taking in consideration the double age Gatso comparing to Sensys, Gatso contributed in 7% of the groups business. Sensys isolated 0Yr revenues were around 80.4M SEK. Group s annual average 0Yr revenues are estimated around 277.2M SEK. Current year s revenues are estimated of minimum 450M SEK. With 50:50 weight for history/present, the long term revenue level is around 363M SEK. If current margins are assumed not to change the LT- FCFF is at least 47.2M SEK. Estimated EV using one stage Gordon-Growth model with 2% growth rate is around.95b SEK. PV of cost synergies (30% decrease assumption of R&D costs) is estimated around 446.4M SEK PV of revenue synergies (5% sales enhancement assumption because of unique products) is estimated around 292.6M SEK. Summary EV is estimated around 2.69B SEK which is equivalent to 2.4B SEK market cap and 3.66SEK stock price. Monthly Actual Sales (M SEK) Monthly EBITDA (M SEK) 70,00 kr 60,00 kr 50,00 kr 40,00 kr 30,00 kr 20,00 kr 0,00 kr 0,00 kr 30,00 kr 20,00 kr 0,00 kr 0,00 kr -0,00 kr -20,00 kr Gatso Sensys Gatso Sensys Group

5 SWOT Analysis Strengths Over 4 decades successful operating history. Diversified customer base in 75 countries. Market leader. Much higher earnings quality after acquisition, supported by smoother trends. High asset quality and minimized liquidity. Weakness Operating leverage is significant. High break-even level does exist. The international nature of sales exposes the company to significant FX risk. Relatively high debt ratio in accordance to the current volatile operating profit levels. Opportunity Strong potential medium term demand. New bright potential market in Japan after signing the agreement with OKI. Cost synergies are expected after acquisition. General revenue level increase by promoting merged entities unique products to existing markets. Threats Project based revenues and volatile demand. Customer bargaining power is significant. Good competition and low entry barriers. Industry profitability is minimized. Bull and Bear 4 Value Drivers Quality of Earnings Risk Profile Quality of Management Overall view Latest acquisition brings positive value by smoothing revenue volatility, lowering risk, some revenue and cost synergies. The stock is relatively considered overvalued. Liquidity premium is ignorable in the stock price. Quality is threated mainly by volatility. Sales are directed to governmental creditworthy clients. Currently low level or recurring revenues, and instability in margins. Company is a market leader, and market demand is strong in the medium term. Default risk is limited to the long run only, with good liquidity position in the short run. Obligations are covered by high quality assets. Operating leverage risk is a critical issue but liquid assets (cash) cover big portion of fixed costs. Managers are well educated, loyal, with average more than 5 years experience within the group. High quality financial presentation. Independent board members. Company s earning is promising in the medium term. Risk level is much lower than historical levels. Even though the latest acquisition brings positive value but we believe the stock may be overvalued.

6 Disclaimer These analyses, documents and any other information originating from AG Equity Research AB (Henceforth Analyst Group) are created for information purposes only, for general dissipation and are not intended to be advisory. The information in the analysis is based on sources, data and persons which Analyst Group believes to be reliable. Analyst Group can never guarantee the accuracy of the information. The forward-looking information found in this analysis are based on assumptions about the future, and are therefore uncertain by nature and using information found in the analysis should therefore be done with care. Furthermore Analyst Group can never guarantee that the projections and forward-looking statements will be fulfilled to any extent. This means that any investment decisions based on information from Analyst Group, any employee or person related to Analyst Group are to be regarded to be made independently by the investor. These analyses, documents and any other information derived from Analyst Group is intended to be one of several tools involved in investment decisions regarding all forms of investments regardless of the type of investment involved. Investors are urged to supplement with additional relevant data and information, as well as consulting a financial adviser prior to any investment decision. Analyst Group disclaims all liability for any loss or damage of any kind that may be based on the use of analyzes, documents and any other information derived from Analyst Group. Analyst Group has not received any payment or compensation for doing the analysis. The recommendations in the form of Bull alternatively Bear aims to provide a comprehensive picture of Analyst Group's opinion. The recommendations are developed through rigorous processes consisting of qualitative research and the weighing and discussion with other qualified analysts. The analyst Does not hold any shares in company. Definition Bull Bull is a metaphor for an optimistic view of the future. It indicates a belief in improvement. Definition Bear Bear is a metaphor for a pessimistic view set on the future. It indicates a belief deterioration. The analyst Does not hold any shares in Minesto AB. This analysis is copyright protected by law AG Equity Research AB. Sharing, dissemination or equivalent action to a third party is permitted provided that the analysis is shared unchanged.

Interim Report for January-September 2015

Interim Report for January-September ember Acquisition of Gatso Beheer BV forming Sensys Gatso Group effective from August 1 st, Net sales amounted to SEK 100.3 m (43.0) Order intake amounted to SEK 39.7