PIHLAJALINNA Health Care/Finland, April 4, 2017 Company report

Transcription

1 Price/EUR Initiating coverage with Buy rating Rating PIHLAJALINNA BUY Pihlajalinna has good prerequisites to continue solid success in outsourcings in the short term, and the upcoming SOTE reform is expected to open a sizeable market potential for private operators in the long term. We emphasize solid growth outlook over somewhat elevated short-term valuation. We initiate coverage on Pihlajalinna with Buy rating and TP of EUR Outsourcing business has positive outlook in 2017 Pihlajalinna has good prerequisites to continue solid success in outsourcings in Contract with Soini became effective in January 2017, and service production is due to start in Hattula (pending final approval) and Tervola later this year. New deals are possible in Forssa and Suupohja, although uncertainties exist. In addition, several other (unknown) municipalities are interested in outsourcing or joining existing contracts, and thus further tendering processes are likely to take place during We believe Pihlajalinna will participate to at least some of these with relatively good chances of winning given previous success. SOTE opens sizeable market potential for private providers Freedom of choice is estimated to open some EUR 8bn of service production to competition from 2019 onwards, of which private operators currently provide some EUR 1.5bn. A target market increase of some EUR 6.5bn provides clear growth potential especially for large private operators. In order to utilize this potential, Pihlajalinna will expand its network by opening some clinics/facilities to over 10 locations before Further M&A may also take place. However, it is noteworthy that significant risks and uncertainty is related to the completion, final form and timetable of the SOTE reform, particularly regarding the freedom of choice. We initiate coverage with Buy rating and TP of EUR 20 Our DCF model implies EUR fair value per share depending on how much value is placed on minority holdings. Compared to peers, valuation looks somewhat elevated with short-term multiples which we allow due to the company s solid long-term growth outlook. Our estimates do not include any unannounced outsourcing contracts or the long-term potential brought by the SOTE reform due to high related uncertainties. KEY FIGURES 0 06/15 06/16 1(29) 5 Pihlajalinna DJ STOXX 600 Share price, EUR (Last trading day s closing price) Target price, EUR 20.0 Latest change in recommendation 31-Mar-17 Latest report on company na. No. of shares outstanding, 000 s 20,613 No. of shares fully diluted, 000 s 20,613 Market cap, EURm 335 Free float, % na. Exchange rate - Reuters code PIHLIS.HE Bloomberg code PIHLIS FH Average daily volume, EURm na. Next interim report 11-May-17 Web site Analysts Joonas Häyhä, Olli Pöyhönen joonas.hayha@evli.com Telephone BUY ACCUMULATE REDUCE SELL Sales EBIT EBIT Ptx profit EPS P/E EV/Sales P/CF EV/EBIT DPS EURm EURm % EURm EUR (x) (x) (x) (x) EUR % % E % E % E % Market cap, EURm 335 BV per share 2017E, EUR 5.2 CAGR EPS , % 27.6 Net debt 2017E, EURm 23 Price/book 2017E 3.1 CAGR sales , % 9.1 Enterprise value, EURm 368 Dividend yield 2017E, % 1.4 ROE 2017E, % 13.0 Total assets 2017E, EURm 240 Tax rate 2017E, % 20.0 ROCE 2017E, % 13.7 Goodwill 2017E, EURm 93 Equity ratio 2017E, % 46.4 PEG, P/E 17/CAGR 1.4 All the important disclosures can be found on the last pages of this report.

2 Investment case We initiate the coverage of Pihlajalinna with Buy recommendation and a target price of 20. Our view is based on the following factors: Pihlajalinna has good prerequisites to continue solid success in outsourcings in The SOTE reform provides clear growth potential especially for large private operator by increasing the target market by EUR 6.5bn. Our estimates do not include the potential effect of the SOTE reform due to the considerable uncertainty associated with the reform. Our TP (EUR 20) assumes more weight on DCF than peer multiple approaches due to Pihlajalinna s solid long-term growth outlook. The company s outsourcing business offers some downside protection if the SOTE reform is delayed or cancelled. Outsourcing business has positive outlook in 2017: Pihlajalinna has good prerequisites to continue solid success in outsourcings in Contract with Soini became effective in January 2017, and service production is due to start in Hattula (pending final approval) and Tervola later this year. New deals are possible in Forssa and Suupohja, although uncertainties exist. In addition, several other (unknown) municipalities are interested in outsourcing or joining existing contracts, and thus further tendering processes are likely to take place during We believe Pihlajalinna will participate to at least some of these with relatively good chances of winning given previous success. SOTE opens sizeable market potential for private providers in the longer term: Freedom of choice is estimated to open some EUR 8bn of service production to competition from 2019 onwards, of which private operators currently provide some EUR 1.5bn. A target market increase of some EUR 6.5bn provides clear growth potential especially for large private operators. In order to utilize this potential, Pihlajalinna will expand its network to over 10 new locations with some clinics/facilities before Further M&A may also take place. Estimates: We expect sales growth of 7-11% in E with gradually improving profitability. Our estimates only include revenue from agreed contracts and thus there is upside to our estimates if the company strikes new deals. We have, however, assumed EUR 20m sales add into our 2018 estimates and a further 15m into our 2019 estimates from the planned network expansion. Our estimates do not include the potential effect of the SOTE reform due to the considerable uncertainty associated with the reform. Valuation: Our DCF model implies EUR fair value per share depending on how much value is placed on minority holdings. Our 2018E estimates and peer EV/EBITDA imply fair value of EUR while 2018E peer P/E implies EUR 14 per share. Our TP (EUR 20) assumes more weight on DCF than peer multiple approaches due to Pihlajalinna s solid long-term growth outlook, and assumes EUR 1 per share expected value from known potential outsourcing contracts (Forssa, Suupohja). High political risks: Significant risks and uncertainty is related to the completion, final form and timetable of the SOTE reform, particularly regarding the freedom of choice. The SOTE reform may be delayed, significantly altered or even cancelled. New outsourcing contracts may also be restricted further. On the positive side, if the SOTE reform was delayed, further outsourcings could take place and Pihlajalinna would have more time to expand its reach and build customer base in order to narrow the gap to Terveystalo and Mehiläinen before SOTE becomes effective. 2(29)

3 Financial performance and estimates PIHLAJALINNA Pihlajalinna s revenue has grown rapidly in Pihlajalinna s revenue has grown rapidly in Growth has been primarily based on good success in outsourcing tender processes as well as several M&A transactions. Majority of the outsourcing revenue has affected the P&S segment, while M&A transactions have boosted primarily the C&S segment. Net sales by segment (EUR million) FY2014 FY2015 FY2016 FY2017e FY2018e FY2019e Source: Pihlajalinna Primary and Social Care (P&S) Private Clinics and Specialised Care (C&S) Adjusted EBITDA margin 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% P&S revenue growth to continue in 2017 with already agreed contracts Revenue growth in P&S has been primarily based on revenue from new outsourcing contracts. Revenue growth is to continue in 2017 with already agreed contracts (Soini, Hattula and Tervola), although the Hattula contract is pending final approval. Going into 2017, we expect adj. EBITDA margin to improve to 7.6% with improved efficiency in outsourcings of Pihlajalinna s revenue growth in P&S has been primarily based on revenue from new outsourcing contracts. Growth has been rapid in with growth rates of 67% and 96%, respectively. In 2016 revenue growth in P&S was mainly attributable to the social and healthcare outsourcings of Kuusiokunnat (2016 revenue EUR 81.0m) and Jämsä (2016 revenue EUR 72.8m). Revenue growth is to continue in 2017 with already agreed contracts. Pihlajalinna already started service production in the municipality of Soini in January Service production in Hattula is due to start in April 2017 (dental health), although the deal is still pending final approval. The company will also start service production in Tervola in July In Hattula, service production is to be expanded to cover other service production in We estimate the value of the Soini contract to be EUR 9 million per year. Pihlajalinna estimates that the value of the Hattula agreement is EUR 7 million per year while the value of the Tervola agreement is EUR 13 million per year. We estimate the value of the Hattula dental health agreement to be EUR 1m in Adj. EBITDA-margin in P&S has varied between 4-7% in Profitability improved in 2016 thanks to sizeable new outsourcing contracts in Jämsä (from 9/2015 onwards) and Kuusiokunnat (from 1/2016 onwards). Profitability also improved in old outsourcing contract of Mänttä-Vilppula. Going into 2017, we expect EBITDA margin to improve to 7.6% (2016A: 6.9%) with improved efficiency in outsourcings of We expect the smaller Tervola, Hattula and Soini agreements to have only limited impact on the segments profitability in (29)

4 Primary and Social Care FY2014 FY2015 FY2016 FY2017e FY2018e FY2019e 10% 9% 8% 7% 6% 5% 4% 3% Source: Pihlajalinna Revenue, meur Adjusted EBITDA margin C&S expanding the network to over 10 new locations Revenue in C&S in has grown due to M&A transactions and new outsourcing contracts. Going into 2017 growth in C&S continues to receive support from earlier M&A transactions. While further M&A has not been ruled out, we understand the company will primarily focus on the planned network expansion to over 10 new locations in Revenue in C&S in has grown due to M&A transactions and new outsourcing contracts. In 2016, revenue grew by 80% due to the transfer of public special healthcare provision in Kuusiokunnat and Jämsä as well as several acquisitions, of which Tampereen Lääkärikeskus (Koskiklinikka) and Itä-Suomen Lääkärikeskus (ITE) were the most relevant. Going into 2017 growth in C&S continues to receive support from earlier M&A transactions. Pihlajalinna carried out seven acquisitions during 2016 which will be visible in figures for the first full year in Additionally the company acquired Itä-Suomen Lääkäritalo in January 2017 which will provide small support to growth. While further M&A has not been ruled out, we understand the company will primarily focus on the planned network expansion to over 10 new locations in In 2017 Pihlajalinna will expand at least to Oulu and Turku. We understand these openings are likely to take place in H2 17. We expect limited revenue impact from the planned openings in 2017, but assume EUR 20m into our 2018 estimates and a further 15m into our 2019 estimates. We also expect 5% organic growth in E. All in all we expect annual revenue growth in C&S to be some 10-15% in E. Private Clinics and Specialized Care FY2014 FY2015 FY2016 FY2017e FY2018e FY2019e 10% 9% 8% 7% 6% 5% 4% 3% Source: Pihlajalinna Revenue, meur Adjusted EBITDA margin 4(29)

5 We expect adj. EBITDA margin of 8.3% vs. 8.0% in EBITDA margin in C&S has varied between 8-13% in In 2016, profitability has been improving y/y due to integration of Koskiklinikka and Itä-Suomen Lääkärikeskus (ITE) and due to improved profitability in the Occupational Healthcare and Private Clinics service areas. Going into 2017 we expect profitability to improve slightly y/y in H1 17 with improved efficiency in public special healthcare provision. However, in H2 17 we expect the ramp-up costs of new facilities in Oulu and Turku to strain margin expansion. The transfer of specialized care services of Tervola in July 2017 may also slightly weaken profitability in C&S. Overall, we expect adj. EBITDA margin of 8.3% vs. 8.0% in Potential for new outsourcing contracts in 2017 looks good The Forssa MWA contract is pending the votes of each municipality. Our estimates don t include any revenue from the contract but we have taken it into account in our target price. Municipalities of Suupohja (excl. Teuva) may join the Kuusiokunnat contract. The potential joining is accounted for in our target price. Several other Finnish municipalities are considering outsourcing their service production. However, no revenue is assumed in our estimates. Our target price methodology accounts for 50% probability of winning both the Forssa and Suupohja contracts. Impact on target price: + EUR 1 In addition to the three already agreed contracts for 2017, Pihlajalinna has won the tender process in the joint Municipal Welfare Authority of Forssa. The joint municipality estimates that the value of the agreement would be some EUR 37m per year. However, the final outsourcing decision is pending individual votes in each member municipality (Forssa, Tammela, Jokioinen, Humppila, Ypäjä). We have not assumed any revenue into our estimates from the potential Forssa contract, but have taken this into account in our target price methodology. The municipalities of Suupohja excl. Teuva (Kauhajoki, Isojoki and Karijoki) have indicated their willingness to join the Kuusiokunnat contract. However, there are some issues with the legality of the joining process and thus the action is debatable and hence uncertain. We estimate the value of the potential contract to be some EUR 70m per year. We have not included any revenue in our estimates from Suupohja. However, we have taken the potential contract into account in our target price methodology. In addition to the ongoing tender processes, Pihlajalinna has indicated there are several other municipalities in Finland that are considering outsourcing their social and healthcare service production or joining existing contracts. Therefore, further tendering processes are likely to begin during We believe Pihlajalinna will participate to at least some of these with relatively good chances of winning given the company s good historical hit rate. However, with no further information at the moment we have not assumed any revenue from the potential new tender processes. The below table provides an estimate of how much the Forssa and Suupohja contracts could boost Pihlajalinna s revenue under certain assumptions. The table includes the tendering process of Kouvola which was cancelled on 27 March The estimated values of the Kouvola contract are not included in the totals. Our target price methodology accounts for 50% probability of winning both the Forssa and Suupohja contracts. In total these contracts boost our target price by EUR 1 per share. Number of Value per Est. Value Known outsourcing potential, EURm Type people person EURm Comment Forssa Joint Municipal Welfare Authority* Partial County est. Suupohja excl. Teuva Complete Evli est. Kouvola (cancelled) Partial County est. Known market potential 107 * Includes Forssa, Tammela, Jokioinen, Humppila, Ypäjä Potential value add from Kouvola known outsourcing potential, EURm Forssa Suupohja (cancelled) Total Potential sales Assumed EBIT-margin 5.5% 5.5% 5.5% EBIT Taxes 20% Net result Minorities 49% Net result for parent Assumed P/E Equity value increase Per share (EUR) Source: Evli Research 5(29)

6 Estimates summary NET SALES Q1'17e Q2'17e Q3'17e Q4'17e 2017E 2018E 2019E Private Clinics and Specialised Care (C&S) Primary and Social Care (P&S) Total NET SALES GROWTH Private Clinics and Specialised Care (C&S) 9.1% 8.3% 11.8% 11.4% 10.1% 15.7% 11.1% Primary and Social Care (P&S) 5.3% 5.7% 10.6% 10.1% 7.9% 6.2% 1.9% Total 6.8% 7.4% 11.4% 11.7% 9.3% 11.0% 6.9% EBITDA (ADJ.) Private Clinics and Specialised Care (C&S) Primary and Social Care (P&S) Total EBITDA-MARGIN (ADJ.) Private Clinics and Specialised Care (C&S) 9.7% 8.8% 7.2% 7.5% 8.3% 8.7% 9.5% Primary and Social Care (P&S) 5.5% 6.5% 10.7% 7.4% 7.6% 8.3% 8.5% Total 7.5% 7.5% 8.7% 7.2% 7.7% 8.4% 8.9% Valuation and target price Buy with TP of EUR 20 Source: Evli Research Our DCF model implies EUR fair value per share, depending on the market value for the minority holdings. Our 2018E estimates and peer EV/EBITDA imply fair value of EUR Our 2018E P/E peer valuation implies EUR 14. Our TP (EUR 20) assumes more weight on DCF than peer multiples, due to Pihlajalinna s long-term growth outlook. Still, significant uncertainty about the SOTE reform persists. Our DCF model implies EUR 22 fair value per share assuming EUR 12m (EUR 0.6 per share) market value for the minority holdings, which corresponds to ~4x P/B on the EUR 3.2m 2016A balance sheet value. If, however, one applies a P/E of 10x for the 2017E minority share of profits (EUR 3.3m), minority holdings would be valued at EUR 33m and our DCF fair value would be EUR 21 per share. On peer group median EV/EBITDA and P/E multiples, Pihlajalinna s valuation looks somewhat expensive on our 2017 estimates but more moderate with estimates. Our 2018E estimates and peer EV/EBITDA imply fair value of EUR depending on how much value one assigns for minority holdings. Our 2018E P/E peer valuation implies EUR 14 per share. We initiate coverage on Pihlajalinna with Buy rating and TP of EUR 20. Our target price takes into account our DCF model as well as relative valuation and accounts for 50% probability of winning both the Forssa and Suupohja contracts. In total these contracts boost our target price by EUR 1 per share. Our target price (EUR 20) assumes more weight on DCF than peer multiple approaches, due to Pihlajalinna s solid long-term growth outlook. However, we remind that there still exists significant uncertainty about the completion, final form and timetable of the SOTE reform, particularly regarding the customer s freedom of choice. Valuation approaches Implied value DCF Peer EV/EBITDA 2018E Peer P/E 2018E 14 Fair value 19 Forssa expected value (50% prob.) 0.3 Suupohja expected value (50% prob.) 0.6 Target price ( EUR) 20 Source: Evli Research 6(29)

7 Relative valuation Security MCAP EV/EBITDA EV/EBITDA EV/EBITDA EV/EBIT EV/EBIT EV/EBIT P/E P/E P/E PIHLAJALINNA PEER GROUP identifier Local FX Attendo AB ATT-SE x 12.2x 11.0x 17.0x 15.2x 13.6x 18.9x 17.2x 15.9x Cambian Group Plc CMBN-GB x 16.5x Capio AB CAPIO-SE x 7.7x 7.1x 15.6x 13.4x 12.1x 14.8x 13.0x 12.0x CareTech Holdings PLC CTH-GB x 9.3x 8.7x 11.5x 10.7x 10.0x 10.6x 10.3x 9.7x Fresenius SE & Co. KGaA FRE-DE x 8.1x 7.1x 11.6x 10.4x 9.0x 21.8x 19.6x 17.6x GHP Specialty Care AB GHP-SE x 9.2x 8.4x 14.4x 12.5x 11.3x 20.6x 18.6x 17.9x Humana AB HUM-SE x 9.3x 8.7x 12.0x 10.6x 9.8x 13.7x 12.3x 11.8x Korian SA KORI-FR x 9.9x 9.5x 16.7x 15.4x 14.5x 23.6x 20.3x 18.2x Le Noble Age SA LNA-FR x 10.6x 15.0x 13.3x 18.4x 15.8x 13.8x Luz Saude S.A. LUZ-PT 202 MEDICLIN AG MED-DE x 6.4x 5.8x 12.5x 11.1x 10.0x 14.2x 13.1x 12.5x Mediclinic International Plc MDC-GB x 10.8x 10.2x 15.9x 14.3x 13.6x 17.6x 15.4x 13.2x Orpea SA ORP-FR x 15.2x 14.0x 21.6x 19.8x 18.4x 26.0x 23.0x 21.1x Ramsay Generale de Sante SA GDS-FR 1109 RHON-KLINIKUM AG RHK-DE x 11.2x 10.0x 26.1x 20.6x 18.5x 36.6x 29.3x 27.7x Spire Healthcare Group PLC SPI-GB x 9.8x 8.6x 16.9x 15.2x 12.6x 18.8x 16.9x 14.6x Peer Group Average x 10.0x 9.1x 15.9x 14.0x 12.8x 19.6x 17.2x 15.8x Peer Group Median x 9.8x 8.7x 15.6x 13.4x 12.4x 18.8x 16.7x 14.6x Pihlajalinna (Evli est.) x 8.9x 7.4x 16.9x 13.3x 11.1x 25.0x 19.2x 16.6x Pihlajalinna premium/discount to peer median 3% -9% -15% 8% -1% -10% 32% 15% 14% Source: Factset, Evli Research On peer group median EV/EBITDA and P/E multiples, Pihlajalinna s valuation looks somewhat expensive with our 2017 estimates but more moderate with estimates EV/EBITDA P/E Pihlajalinna metric Multiple (peer median) 10.6x 9.8x 8.7x 18.8x 16.7x 14.6x EV Net debt 100% Value of equity 100% Minorities (4x P/B on 2016A minority BS value) Minorities (10x P/E on 2017E minority net profits) Per share (minorities valued at EUR 33m) Per share (minorities valued at EUR 12m) Source: Factset, Evli Research Pihlajalinna has traded publicly less than two years, ie. time series of historical valuation is relatively short and thus of little value. 16.0x 14.0x 12.0x 10.0x Pihlajalinna -12-month forward EV/EBITDA 60.0 % 50.0 % 40.0 % 30.0 % 8.0x 20.0 % 6.0x 10.0 % 4.0x 0.0 % 2.0x % 0.0x % 1/14 7/14 1/15 7/15 1/16 7/16 1/17 7/17 Pihlajalinna Plc Peer group median Premium Average premium Source: Factset 7(29)

8 Company description Pihlajalinna is one the largest private social and health care service providers in Finland. The company is the market leader in complete social and healthcare outsourcings. Pihlajalinna is one the largest private social and health care service providers in Finland. The company s customers include households, companies, insurance companies and public sector entities. The services are provided under two brands (Pihlajalinna and Dextra) at private clinics, health centers, dental clinics and hospitals around Finland. The company has a strong geographical presence in Pirkanmaa, South Ostrobotnia, Central Finland and the Helsinki Metropolitan Area. Pihlajalinna is the market leader in complete social and healthcare outsourcings in Finland. Pihlajalinna s business locations Since its founding, the company has grown strongly both organically and through acquisitions. Since its founding, the company has grown strongly both organically and through acquisitions. In , the company s net sales grew at a CAGR of 47%. In , net sales growth accelerated to CAGR 57%. Ramp up costs of new business locations and the lower margins in the outsourcing business have strained the company s profitability. However, the two year long decline in the EBITDA margin reversed in (29)

9 The majority of the public outsourcing revenue is reflected in P&S, while the majority of privately funded revenue is reflected in C&S. Capacity utilization rate is the most important individual factor that affects the profitability of Pihlajalinna s units. Pihlajalinna s revenue can be divided into two categories: outsourcing revenue and revenue from providing private healthcare and social services. However, these do not directly represent the company s reporting segments. Pihlajalinna reports its revenue and earnings in two segments: Primary and Social Care (P&S) as well as Private Clinics and Specialized Care (C&S). The majority of the public outsourcing revenue is reflected in P&S, while the majority of privately funded revenue is reflected in C&S. However, both reporting segments include both types of revenue. Capacity utilization rate is the most important individual factor that affects the profitability of Pihlajalinna s units. The company has a particularly extensive network of business units in Pirkanmaa and Helsinki in addition to short distances between those units. These conditions enhance the management of capacity utilization rates in the two regions. Net sales by segment % 53 % Private Clinics and Specialised Care (C&S) Primary and Social Care (P&S) Source: Pihlajalinna Primary and Social Care (P&S) 47% of revenue in 2016 Pihlajalinna s revenue in the Primary and Social Care (P&S) segment is primarily driven by outsourcing revenue. Pihlajalinna s revenue in the Primary and Social Care (P&S) segment is primarily driven by outsourcing revenue. The segment includes two different business areas, which are Social and Healthcare Outsourcings and Other Business Operations. Customers in the outsourcing business are public sector entities. Private individuals are customers for the company s residential services. In P&S, operations are run under the Pihlajalinna brand. Social and Healthcare Outsourcings Majority of revenue reported in the P&S segment comes from social and healthcare outsourcings. The outsourcings refer to contracts between Pihlajalinna and municipalities, in which municipalities have either partly or fully outsourced their social and healthcare service production to private service providers like Pihlajalinna. The main motive for municipalities to outsource service production has been a long-term rise in the costs of providing healthcare and social services. Pihlajalinna has demonstrated its ability to produce the same services at a lower cost, which has been mainly based on the efficient management of the referral chain. Streamlining the referral chain usually takes about a year. Pihlajalinna has demonstrated its ability to produce the same services at a lower cost, which has been mainly based on the efficient management of the referral chain. According to the company, streamlining the referral chain usually takes about a year. After that, costs may to continue to decline if patients health is improved. Traditionally, one significant source of inefficiency in public healthcare has been the way patients are unnecessarily sent from municipal level clinics to regional hospitals for further diagnosis. In contrast, Pihlajalinna employs highly skilled personnel at the municipal clinics who can accurately determine what kind of care each patient needs. In particular, Pihlajalinna aims to decrease the regional clinics share of specialized care provision by relying on the company s own clinics. 9(29)

10 Profitability drivers in the P&S segment include the streamlining of the referral chain, the size of the outsourcings contracts and their pricing. The length of outsourcing contracts is often around years. Many contracts include a call option for municipalities to extend the contract period. In social and healthcare service outsourcings, Pihlajalinna typically establishes a joint venture with the municipality in question. Profitability drivers in the P&S segment include the streamlining of the referral chain, the size of the outsourcings contracts and their pricing. Digitalization also provides increasing possibilities to improve efficiency in service production. We understand Pihlajalinna has not experienced major surprises in the profitability of its outsourcing business, aside from providing public specialized healthcare that affects the C&S segment. The length of outsourcing contracts varies but is often around years. Many contracts include a call option for municipalities to extend the length at the end of the initial contract period. Pricing of contracts is typically based on the number of people living in the municipality and age structure. Pricing is usually revised during the contract period with index increases reflecting for example changes in public expenditure and the number and age structure of the population. In social and healthcare service outsourcings, Pihlajalinna typically establishes a joint venture with the municipality in question. In the municipality model, Pihlajalinna typically owns 51% of the joint venture and has a 50% representation on the board. Most of the company s current outsourcings agreements are complete outsourcings, but the company also produces certain services under partial agreements. Other Business Operations - Outsourced health centres: Pihlajalinna produces the services of two health centres in Tampere (Omapihlaja Kehräsaari and Omapihlaja Hervanta) as well as health centre and inpatient healthcare services in Hattula. Hattula will expand the outsourcing of its services during 2017, and it chose Pihlajalinna as its partner after a tendering process. - Residential services: Pihlajalinna has Ikipihlaja homes in nine locations, offering service housing for the elderly with 24-hour assistance. - Reception centres: At the end of 2016, Pihlajalinna had five asylum seeker reception centres. In 2016, the reception centres in Kokemäki, Jämsä, Kihniö, Hämeenlinna and Sastamala housed 420 asylum seekers representing 14 different nationalities. - Staffing services: Pihlajalinna provides both public sector entities and the Group s other service areas with outsourced physician services and emergency and on-call services. Staffing services play a key role as an internal supporting function in complete outsourcings, for instance. Private Clinics and Specialised Care (C&S) 53% of revenue in 2016 C&S segment provides healthcare services to the private sector as well as public specialized healthcare services under the outsourcing contracts Revenue in the Private Clinics and Specialized Care (C&S) segment is based on the provision of healthcare services to private individuals, businesses and insurance companies, as well as on the provision of public specialized healthcare services under the outsourcing contracts. Services are provided under the Dextra brand, although Pihlajalinna has announced it will move to offer everything under the Pihlajalinna brand in the near future. Under the current Dextra brand, the company operates 61 business units: 44 private clinics, 9 dental health clinics and 7 hospitals. 10(29)

11 Revenue in the private side of the segment is driven by demand/market growth and clinic base expansion. In addition to capacity utilization, a key source of volatility in the C&S segment s profitability has been the provision of public specialized healthcare services. Revenue in the private side of the segment (private individuals, businesses, insurance companies) is driven by demand/market growth (see page 13) and expansion of the clinic base. Revenue from providing specialized healthcare services under the outsourcing contracts is naturally driven by the number and size of the outsourcing contracts. In addition to capacity utilization, a key source of volatility in the C&S segment s profitability has been the provision public specialized healthcare services. Profitability in providing public specialized healthcare has been somewhat difficult to predict for the company. We understand this is mainly related to cases where Pihlajalinna has had to send the customer outside of its own network due to not having the needed capability nearby. Once the customer is transferred outside Pihlajalinna s own network, the company can no longer control the costs of the treatment. The Private Clinics and Specialised Care segment contains four service areas, inluding: - Private clinics: The company s private clinics provide various primary and specialized care services. - Surgical Operations and Public Specialised Care: Pihlajalinna produces surgical services in Helsinki, Tampere, Joensuu, Jämsä, Ähtäri and Kuopio. The Surgical Operations and Public Specialised Care service area provides a wide range of general surgery services and a variety of specialized surgical services in specialties such as orthopaedics, plastic surgery, ear, nose and throat diseases, abdominal surgery, vascular surgery and urology. Outsourcing contracts with municipalities impact this part of the business. - Occupational Healthcare: Dextra Occupational Healthcare provides companies and organizations with comprehensive occupational healthcare and wellbeing services. The occupational healthcare services have approximately 7,000 corporate customers with roughly 90,000 employees. Most of the customer organizations are SMEs. - Dental Care: Dextra Dental Clinics provide general and specialised dental services, such as surgical procedures, orthodontics, cosmetic dental care, oral hygiene and dental laboratory services. Pihlajalinna does not report the profitability of individual service areas, but has indicated that the profitability ranks as follows: 1. Private clinics: Profitability is at roughly the same level with peers. However, in terms of EBITDA, comparisons are difficult to make since all major peers have made acquisitions. 2. Surgical Operations and public specialized healthcare 3. Occupational healthcare: Traditionally seen as an entry point for customers into the company s other services. 4. Dental Care: Problems in profitability. The profitability has been recently strained by the low capacity utilization in some units. Balance sheet and cash flow should allow network expansion The balance sheet is in good shape from a leverage point of view. However, it does include a sizeable amount of goodwill. At the end of 2016, Pihlajalinna s net debt/adj. EBITDA stood at 0.8x while gearing was 22%. We understand the company aims to maintain low leverage in the mid-term. While the balance sheet is in good shape from a leverage point of view, it does include a sizeable amount of goodwill. At the end of 2016, goodwill amounted to EUR 92m which represented 57% of total assets and 91% of total equity. The majority of the goodwill relates to the C&S segment due to several M&A transactions. 11(29)

12 Monthly payments from outsourcing contracts are received before service provision costs take place. Pihlajalinna s cash flow is strong due to the nature of the outsourcing business. Monthly payments from outsourcing contracts are received before service provision costs take place. The company runs on negative NWC which together with low leverage should allow expanding the clinic/facility network without new capital, according to the company. While expansion to new locations will require investment to new equipment, new outsourcings should require limited investments as contracts typically include the right to use the municipality s premises and equipment. Strategy, financial targets and guidance The company will prepare for the upcoming SOTE reform by expanding its clinic/facility base to over 10 new locations by 2019 when the SOTE reform should be in effect. While further M&A has not been ruled out, we believe the company focuses primarily on the planned network expansion. The Dextra brand will be abandoned and Pihlajalinna brand will be utilized across all services guidance: net sales will grow, adj. EBIT will improve. Pihlajalinna aims to grow profitably and to become a leading nationwide social and healthcare services provider for both private and public sector customers in Finland. The company will prepare for the upcoming SOTE reform by expanding its clinic/facility base to over 10 new locations by 2019 when SOTE reform should in effect. Each new location may have multiple clinics. Overall, the company will open around 15 to 20 new clinics by We understand 2-3 of the clinics will be large. The company wishes to gain more market share particularly in occupational health care where a truly nationwide network is essential. The new centres will also provide dental care services, aside from the very smallest clinics. Typically, new business locations have reached break-even EBITDA in about a year. We expect CAPEX spend from new clinics to be some EUR 20-25m. While further M&A has not been ruled out, we understand the company will primarily focus on the planned network expansion. In 2017 Pihlajalinna will expand at least to Oulu and Turku. The company financial targets are: - Operating profit (EBIT) margin exceeding 7% - Net debt to EBITDA below 3x - Dividends at least 1/3 of net profit Pihlajalinna prepares for the future freedom of choice by adopting a single brand, Pihlajalinna, across all its services. The change will take place at the latest by the start of the SOTE reform in January The Dextra brand will be abandoned due to its perceived foreign origin guidance: Pihlajalinna expects its consolidated revenue and adjusted EBIT to improve compared to In the financial year 2016, revenue was EUR million and the adjusted EBIT was 16.6 million euro. 12(29)

13 The Finnish Social and health care market Current situation ( ) PIHLAJALINNA Pihlajalinna operates in the Finnish social and health care services market. Services are provided by the public sector, nonprofit institutions and private companies. The total market relevant to Pihlajalinna was EUR 27.6bn in 2015 (CAGR: 4.8% in ). Growth in the social and healthcare market has been steady and above GDP growth. Ageing population has been an important growth driver. Other growth drivers: increasing number of voluntary health insurances, growing role of occupational health care, health awareness and technological progress. The share of private service provision has increased steadily even though the overall market growth has slowed down. Pihlajalinna operates in the Finnish social and health care services market. The health care market consists of primary healthcare, specialized care, dental care and occupational healthcare services. The social care market contains residential services for the elderly, mental health patients, substance abusers and the disabled, outpatient care for the elderly and disabled, services for children, young people and families as well as daycare services. Social and health care services are provided by the public sector, nonprofit institutions and private companies. According to Statistics Finland, the total human health activities in Finland amounted to EUR 15.9bn in 2015 (CAGR: 4,1% in ). Social work activities in Finland amounted to EUR 11.7bn (CAGR: 6.0% in ). Thus the total market relevant to Pihlajalinna was EUR 27.6bn in 2015 (CAGR: 4.8% in ). Growth in the social and healthcare market has been steady and above GDP growth. Ageing population has been an important growth driver. The country s population is one of the fastest ageing in Europe. According to Statistics Finland, the share of population aged over 75 is expected to increase by 74 percent by 2035 from the level of According to the National Institute for Health and Welfare, social and health care costs are expected to increase 2.4% per year (in real terms) if the system is not reformed. Several factors support the demand for social and healthcare services. The popularity of voluntary health insurances has grown in recent years, partly due to the concerns over the sufficient availability of public services. In addition, employers are increasingly investing in their employee s health in order to reduce sickness related absences and improve job satisfaction. In addition, people s health awareness is growing, which increases their requirements for the quality of offered services. Meanwhile, technological progress has increased the number of treatable diseases. The share of private service provision has increased steadily. In the human health and social work activities, it has grown from approximately 13% in 2005 to 20% in Consequently, the output of privately provided services has continued to increase steadily despite the fact that, in recent years, the growth of the overall Finnish social and healthcare market has slowed down Production of human health and social work activities in Finland (EUR billion, current prices) % 20 % 15 % 10 % 5 % 0 % Source: Statistics Finland, Production and generation of income accounts Human health activities Social work activities Share of non-financial corporations, right axis 13(29)

14 Due to deteriorating finances, numerous municipalities have outsourced the provision of social and healthcare services to private producers. Half of the currently outsourced health centres are part of complete outsourcing agreements. Pihlajalinna has a leading position in complete outsourcings. The deteriorating financial situation of Finnish municipalities is an important growth driver for the privately provided services. In recent years, numerous municipalities have engaged in contracts in which the provision of social and healthcare services is outsourced to private providers. At the beginning of 2017, 27 of the municipalities had outsourced some or all of their health centers. Currently, the Finnish health care system is decentralized with 317 municipalities which provide primary health care and social care and hospital districts (20) providing specialist care to several municipalities. At the beginning of 2017, there were 544 health centres in mainland Finland of which 50 were outsourced (Source: National Institute for Health and Welfare). Half of the 50 health centres were outsourced as part of complete outsourcing contracts a market segment in which Pihlajalinna has a prominent position. The company participates in tendering processes selectively and has achieved a high hit rate. The market for all health centre outsourcings is more balanced. At the beginning of 2017, Pihlajalinna operated 16 of the 50 outsourced health centres, which corresponds to a market share of 32%. The largest player, Attendo, operated 20 health centres while Mehiläinen operated 11 centres. The below table summarizes all complete outsourcing contracts in Finland as of end-may Municipality Outsourcing type Population 5 Net expenditure (EURm) 6 Contract start date Service provider Pihlajalinna participated in the tendering Pihlajalinna won the contract Kuusiokunnat 1 Complete 24, /2016 1/ Pihlajalinna Jämsä 2 Complete 21, /2010 / 9/2015 Pihlajalinna Mänttä-Vilppula 3 Complete 12, /2013 Pihlajalinna Parkano 4 Complete 8, /2015 Pihlajalinna Siikalatva Complete 5, /2017 Mehiläinen Tohmajärvi Complete 4, Attendo Pyhtää Complete 5, Attendo Sysmä Complete 4, Attendo Rantasalmi Complete 3, Terveystalo Posio Complete 3, Coronaria Tervola Complete 3, /2017 Pihlajalinna Puolanka Complete 2, Attendo Sulkava Complete 2,800 N/A 1/2017 Attendo Kärsämäki Complete 2, Attendo Rääkkylä Complete 2, Attendo 1 Includes Alavus, Kuortane, Soini and Ähtäri 2 On 31 December 2016 service provision ends in Kuhmoinen, which is a party to Jokilaakso hospital outsourcing contract through a cooperation region. 3 Includes Juupajoki 4 Following the competitive tender, service production has strated in Kihniö as well through a cooperation region. 5 Population in December Net expenditure on social and healthcare service, 2014, does not equal the value of the outsourcing contract. 7 The Soini contract became effective on 1 January 2017 Sources: Pihlajalinna, Attendo, Statistics Finland 14(29)

15 Pihlajalinna s outsourcing business is particularly active in the Pirkanmaa, Keski-Suomi and Etelä- Pohjanmaa region. Mandatory termination clause: On 1 July 2016, a law came into effect which obligates future municipal outsourcing contracts to contain a termination clause. The clause allows the future counties to terminate unnecessary outsourcing contracts. However, the clause is not mandatory if the contract outsources less than 50 per cent of the current operational social welfare and health care costs of the municipality. Alternatively, the clause is not mandatory if the contract period is less than five years. A municipality may also evade the termination clause by joining an already existing outsourcing contract, signed by another municipality. In addition to cost control, another motive for the municipal outsourcings has been the expected social welfare and health care reform. An outsourcing agreement secures the local production of services for many years. In addition to cost control, another motive for the outsourcings has been the expected social welfare and health care reform. As a part of the reform, responsibility for the organization of social and health care services would be transferred from municipalities to counties. Some municipalities fear that their local clinics would be closed under the new system. Therefore, from the municipality s point of view, an outsourcing agreement secures the local production of services for many years. The state has tried to limit outsourcings with the law that obligates the use of termination clause in some cases (see marginal). In March 2018, county councils are expected to begin their term, which would significantly limit municipalities ability to sign outsourcing contracts. SOTE reform (2019-) The SOTE reform aims to limit the growth of social and health care costs. Significant uncertainty exists, particularly regarding the planned freedom of choice. The SOTE reform intends to secure key public services and offer people improved opportunities for freedom of choice. One aim is to increase equality in access to services. The reform also aims to limit the growth of social and health care costs to 0.9% per year (in real terms). The objective is for the total costs in 2030 to be EUR 3bn lower than they would be without the reform. However, there still exists significant uncertainty about the completion, final form and timetable of the SOTE reform, particularly regarding freedom of choice. 15(29)

16 Counties to organize social and health care services The SOTE reform would establish 18 counties and transfer the responsibility for the organization of social and health care services from municipalities to counties. The counties will assume the responsibility for organizing social and health care services on 1 January The bill for the social services, health care and regional government was placed before Parliament on 2 March The bill would establish 18 counties and transfer the responsibility for the organization of social and health care services from municipalities to counties. The counties will be required to segregate the organization and provision of social and health care services in the context of their own activities. For the provision of services, counties will establish county-owned enterprises capable of producing the services independently. They will be able to complement in-house services by purchasing ancillary services from private providers. The Finnish Government has proposed that EUR 17.4bn is to be allocated for funding the operation and service production of counties. The Finnish Government also proposes that the acts enter into force in stages starting with the establishment of the counties on 1 July The counties will commence actual operations on 1 March 2018 when the term of county councils begins. The responsibility for organizing social and health care services and other statutory duties will be assumed by counties on 1 January Customer s freedom of choice The freedom of choice would allow customers to sign up to either a private or public social and health centre as well as select a dental care unit. At first, the SOTE centres and the dental care units would provide mainly primary healthcare services and guidance on social services. For each registered person, the service provider will receive a fixed payment (so called capitation fee). According to the estimates of the Finnish Government and Pihlajalinna, the freedom of choice would expand the market available for private providers by EUR 6.5bn. Freedom of choice refers to a proposal which allows customers to choose a service provider from a more diverse selection than previously. The customer can sign up as a customer to either a private or public social and health centre (from here on, SOTE centre) as well as select the dental care unit they prefer. At first, the SOTE centres and the dental care units would provide mainly primary healthcare services and information on social services. They could also grant their customers service vouchers for individual services. The service voucher and a personal budget would be in use on the basis of an assessment of service needs by the county, and, based on these, the customer could select a service provider. The county s role in assessing customers service needs would be reduced from 2021, and the reform would be fully implemented by However, the counties could reduce their role even earlier if they wish. Private providers wishing to participate in SOTE will need to qualify through high quality standards and by offering a variety of services in each particular field. For each registered person, the service provider will receive a fixed payment (so called capitation fee). The payment is determined according to a set of criteria which reflect the expected costs of the individual. Pilot projects concerning freedom of choice have been launched in five different locations. So far, Pihlajalinna has enrolled for the pilot project conducted in Tampere. The Finnish Government s rationale behind the draft includes a market size estimate. According to estimate, the size of the market within the freedom of choice would be EUR 3.7bn for direct choice of basic-level social and healthcare services, EUR 1.5bn for personal budgets and EUR 2.8bn for service vouchers. In total freedom of choice is estimated to open some EUR 8bn of service production to competition from 2019 onwards. Pihlajalinna estimates that the share of private operators producing services that will be included within the framework of freedom of choice is currently about EUR 1.5bn. Thus freedom of choice would expand the market available for private providers by EUR 6.5bn. The draft bill on customers freedom of choice was circulated for comments until 27 March Next, the Government will edit the draft based on the feedback and propose the bill to Parliament during spring (29)

17 Competitor description The Finnish social and healthcare market has been consolidating towards four large service providers: Attendo, Mehiläinen, Terveystalo and Pihlajalinna. Mehiläinen is a significant competitor in private clinics, surgical operations and public specialized care, occupational healthcare, dental care and health center outsourcings. Terveystalo is a significant competitor in private clinics, surgical operations and public specialized care, occupational healthcare and dental care. Terveystalo has been rapidly building up its dental care network since summer Terveystalo is likely to remain active in M&A, in Pihlajalinna s view. Attendo is a significant competitor in occupational healthcare, dental care as well as outsourcings and social care services. Mehiläinen is a significant competitor in private clinics, surgical operations and public specialized care, occupational healthcare, dental care and health center outsourcings. At the end of 2016, Mehiläinen s network consisted of over 290 facilities including over 40 private clinics, 30 dental health clinics and 10 hospitals. At the end of 2016, Mehiläinen served 9,000 corporate customers or 310,000 employees. So far, the company has won only one complete public outsourcing contract, in Siikalatva. However, at the beginning of 2017, the company operated 11 outsourced health centres. In June 2016, Mehiläinen acquired Mainio Vire, a company that provides social care services. Mainio Vire s net sales amounted to EUR 85.7m in Terveystalo is a significant competitor in private clinics, surgical operations and public specialized care, occupational healthcare and dental care. Overall, Terveystalo s network consists of over 170 facilities in over 70 municipalities. At the end of 2015, Terveystalo served 16,000 corporate customers or 465,000 employees. So far, the company has won only one complete public outsourcing contract, in Rantasalmi. Terveystalo has been rapidly building up its dental care network since summer The company aims to grow the dental care service area into a significant part of its business. The company aims to grow both organically and through acquisitions. Terveystalo s goal is to provide dental care services in 20 localities by spring In November 2016, Terveystalo merged with Diacor, a health care services provider. In 2015, Diacor s net sales amounted to EUR 76.7m. Overall, Terveystalo has carried out several acquisitions and is likely to remain active in the near future, in Pihlajalinna s view. Attendo is a significant competitor in occupational healthcare, dental care as well as outsourcings and social care services. The company has won several complete outsourcing contracts including Sulkava, Sysmä, Tohmajärvi, Pyhtää, Puolanka, Kärsämäki and Rääkkylä. Overall, Attendo operates 20 outsourced health centers in Finland. Other competitors by 2015 net sales: meur: PlusTerveys (120 meur), Esperi Care (126 meur) meur: Silmäasema Fennica, Coronaria, Mikeva, Vetrea Terveys, Pohjola Terveys, Lääkärikeskus Aava, Oral Hammaslääkärit, Med Group Source: Finder.fi, Balance Consulting 17(29)

18 700 Net sales, four largest health and social care companies in Finland Attendo (Finland only) Terveystalo Mehiläinen Pihlajalinna Source: Company releases, websites, Diacor net sales (acquired by Terveystalo in 2016) EBITDA margins % 20% 15% 10% 5% 0% Mehiäinen (Adj.) Terveystalo Attendo Pihlajalinna (Adj.) Source: Company presentations, Financial statements Competitive landscape ( ) Pihlajalinna s expansion plans to 10 new locations should improve the company s position in occupational healthcare and health insurance partnerships. Privately funded market: Insurance companies and occupational healthcare clients have a significant role in allocating customers to different service providers. Although Pihlajalinna has operations around the country, it still doesn t have a truly nationwide network that would match Mehiläinen or Terveystalo. This shortcoming has hindered its efforts to negotiate deals with insurance companies and occupational healthcare clients. Pihlajalinna s plan to expand to over 10 new locations should improve the situation, although it seems unlikely that the gap would be significantly reduced by Health insurance partners: The company s current health insurance partners include Fennia and LähiTapiola. Occupational healthcare: Pihlajalinna serves 7,000 corporate customers or 90,000 employees. In 2014, private services providers in total provided healthcare services to roughly 1,030,000 employees in Finland, according to 18(29)

19 Kela statistics. Meanwhile, the total number of employees in occupational healthcare was about 1,830,000. Pihlajalinna s main competitors in the outsourcing market are Mehiläinen, Terveystalo, and Attendo. Pihlajalinna has advantages that will continue to support the company s outsourcing business. Publicly funded market: Pihlajalinna s main competitors in the outsourcing market are Mehiläinen, Terveystalo and Attendo. Pihlajalinna has advantages that will continue to support Pihlajalinna s outsourcing business. The company has extensive experience and a proven track record in outsourcings. This gives the company an edge in tendering processes since oftentimes the decisions are based on quality rather than cost. Pihlajalinna s leading position in Finnish complete outsourcings has given it plenty of experience on the cost saving potential of public social and healthcare services. This experience has allowed Pihlajalinna to make more aggressive bids than its competitors. Pihlajalinna is also perceived as a domestically owned company, which gives it an edge against companies with a perceived foreign origin. This perception is also one of the reasons why Pihlajalinna chose to adopt the Pihlajalinna brand in both of its segments. 19(29)

20 Competitive landscape after the SOTE reform (2019-) PIHLAJALINNA Freedom of choice is expected to benefit Pihlajalinna along with other large service providers. The SOTE reform will make service production under fixed pricing more common an area in which Pihlajalinna has valuable experience. At first, Pihlajalinna s weaker position in occupational health care could give competitive advantage to Terveystalo and Mehiläinen. Significant risks and uncertainty is related to the completion, final form and timetable of the SOTE reform, particularly regarding the freedom of choice. Freedom of choice is expected to benefit Pihlajalinna along with other large service providers. Extensive range of services allows them to channel customers between their own SOTE centres and dental care units, and large providers may cross-sell additional services to the patients who are listed at their SOTE-centres. The benefits of a wide service offering are likely to increase once countys role in specialized health care services and social services is reduced. Furthermore, bureaucracy of the new system is relatively more challenging for smaller service providers. The SOTE reform will make service production under fixed pricing more common an area in which Pihlajalinna has valuable experience. In 2016, approximately 60% of Pihlajalinna s revenue came from fixed price agreements, which is largely due to the company s numerous outsourcing agreements. The share is significantly higher than with the company s competitors or public sector operators. Fixed compensation motivates the service provider to look after the overall health of the patient by investing in prevention and quick recovery. At first, Pihlajalinna s weaker position in occupational health care could give competitive advantage to Terveystalo and Mehiläinen who should be in a better position to channel customers to their own SOTE centers. Essentially, the two companies could collect both capitation fees from the county and revenue from employers. The two companies could also utilize their extensive patient data to identify and attract profitable customers to their SOTE-centers. Significant risks and uncertainty is related to the completion, final form and timetable of the SOTE reform, particularly regarding the freedom of choice. The SOTE reform may be delayed, significantly altered or even cancelled. New outsourcing contracts may also be restricted further. On the positive side, if the SOTE reform was delayed, further outsourcings could take place and Pihlajalinna would have more time to expand its reach and build customer base in order to narrow the gap to Terveystalo and Mehiläinen before SOTE becomes effective. 20(29)

21 EVLI EQUITY RESEARCH PIHLAJALINNA VALUATION RESULTS BASE CASE DETAILS VALUATION ASSUMPTIONS ASSUMPTIONS FOR WACC Current share price PV of Free Cash Flow 178 Long-term growth, % 2.5 Risk-free interest rate, % 2.25 DCF share value PV of Horizon value 310 WACC, % 7.0 Market risk premium, % 5.8 Share price potential, % 35.4 Unconsolidated equity -10 Spread, % 0.5 Debt risk premium, % 2.8 Maximum value 24.9 Marketable securities 28 Minimum WACC, % 6.5 Equity beta coefficient 0.80 Minimum value 19.7 Debt - dividend -52 Maximum WACC, % 7.5 Target debt ratio, % 20 Horizon value, % 63.6 Value of stock 454 Nr of shares, Mn 20.6 Effective tax rate, % 25 DCF valuation, EURm E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E Horizon Net sales Sales growth, % Operating income (EBIT) EBIT margin, % Depreciation+amort Income taxes Change in NWC NWC / Sales, % Change in other liabs Capital Expenditure Investments / Sales, % Other items = Unlevered Free CF (FCF) = Discounted FCF (DFCF) = DFCF min WACC = DFCF max WACC (29)

22 EVLI EQUITY RESEARCH PIHLAJALINNA INTERIM FIGURES EVLI ESTIMATES, EURm 2016Q1 2016Q2 2016Q3 2016Q Q1E 2017Q2E 2017Q3E 2017Q4E 2017E 2018E 2019E Net sales EBITDA EBITDA margin (%) EBIT EBIT margin (%) Net financial items Pre-tax profit Tax Tax rate (%) Net profit EPS EPS adjusted (diluted no. of shares) Dividend per share SALES, EURm Private Clinics and Specialised Care Primary and Social Care Unallocated & Eliminations Total SALES GROWTH, Y/Y % Private Clinics and Specialised Care Primary and Social Care Unallocated & Eliminations Total EBIT, EURm Private Clinics and Specialised Care Primary and Social Care Unallocated & Eliminations Total EBIT margin, % Private Clinics and Specialised Care Primary and Social Care Unallocated & Eliminations Total (29)

23 EVLI EQUITY RESEARCH PIHLAJALINNA INCOME STATEMENT, EURm E 2018E 2019E Sales Sales growth (%) Costs Reported EBITDA Extraordinary items in EBITDA EBITDA margin (%) Depreciation EBITA Goodwill amortization / writedown Reported EBIT EBIT margin (%) Net financials Pre-tax profit Extraordinary items Taxes Minority shares Net profit BALANCE SHEET, EURm Assets Fixed assets % of sales Goodwill % of sales Inventory % of sales Receivables % of sales Liquid funds % of sales Total assets Liabilities Equity % of sales Deferred taxes % of sales Interest bearing debt % of sales Non-interest bearing current liabilities % of sales Other interest free debt % of sales Total liabilities CASH FLOW, EURm + EBITDA Net financial items Taxes Increase in Net Working Capital /- Other = Cash flow from operations Capex Acquisitions Divestments = Net cash flow /- Change in interest-bearing debt /- New issues/buybacks Paid dividend /- Change in loan receivables Change in cash (29)

24 EVLI EQUITY RESEARCH PIHLAJALINNA KEY FIGURES E 2018E 2019E M-cap Net debt Enterprise value Sales EBITDA EBIT Pre-tax Earnings Book value Valuation multiples EV/sales EV/EBITDA EV/EBITA EV/EBIT EV/operating cash flow EV/cash earnings P/E P/E excl. goodwill P/B P/sales P/CF Target EV/EBIT Target P/E Target P/B Per share measures Number of shares 0 13,399 20,613 20,613 20,613 20,613 20,613 Number of shares (diluted) 0 13,399 20,613 20,613 20,613 20,613 20,613 EPS EPS excl. goodwill Cash EPS Operating cash flow per share Capital employed per share Book value per share Book value excl. goodwill Dividend per share Dividend payout ratio, % Dividend yield, % Efficiency measures ROE ROCE Financial ratios Capex/sales, % Capex/depreciation excl. goodwill,% Net debt/ebitda, book-weighted Debt/equity, market-weighted Equity ratio, book-weighted Gearing Number of employees, average Sales per employee, EUR EBIT per employee, EUR (29)

25 EVLI EQUITY RESEARCH PIHLAJALINNA COMPANY DESCRIPTION: INVESTMENT CASE: OWNERSHIP STRUCTURE SHARES EURm % Lahitapiola Keskinainen Vakuutusyhtio 3,208, % Mww Yhtio Oy 2,227, % Tapiola Keskinainen Henkivakuutusyhtio 1,618, % Elo Pension Company 1,267, % Niemisto Leena Katriina 703, % Fondita Nordic Micro Cap 594, % Varma Mutual Pension Insurance Company 545, % Fennia Mutual Insurance Company 530, % Ilmarinen Mutual Pension Insurance Company 490, % Evli Finnish Small Cap Fund 311, % Ten largest 11,496, % Residual 9,116, % Total 20,613, % EARNINGS CALENDAR May 11, 2017 August 17, 2017 November 09, 2017 Q1 report Q2 report Q3 report OTHER EVENTS COMPANY MISCELLANEOUS CEO: Aarne Aktan CFO: Niclas Kohler IR: Siri Markula Kehräsaari B, Tampere Tel: 25(29)

26 EVLI EQUITY RESEARCH PIHLAJALINNA DEFINITIONS P/E Price per share Earnings per share EPS Profitbeforeextraordinary items andtaxes income taxes minority interest Number of shares P/Sales Marketcap Sales DPS Dividend for the financial period per share P/BV Priceper share Shareholders' equity taxedprovisionsper share CEPS Gross cash flowfromoperations Number of shares P/CF Priceper share Operatingcash flowper share EV/Share Enterprise value Number of shares EV (Enterprise value) Marketcap net debt minority interest atmarket value share of associated companiesatmarket value Sales/Share Sales Number of shares Net debt Interest bearingdebt financialassets EBITDA/Share Earningsbeforeinterest, tax, depreciationandamortisation Number of shares EV/Sales Enterprise value Sales EBIT/Share Operatingprofit Number of shares EV/EBITDA Earnings before Enterprise value interest, tax, depreciation and amortisation EAFI/Share Pretax profit Number of shares EV/EBIT Enterprise value Operating profit Capital employed/share Totalassets non interest bearingdebt Number of shares Div yield, % Dividend per share Priceper share Total assets Balance sheet total Payout ratio, % Totaldividends Earningsbeforeextraordinary items andtaxes income taxes minority interest Interest coverage (x) Operatingprofit Financialitems Net cash/share Financial assets interest bearing debt Number of shares Asset turnover (x) Turnover Balancesheet total(average) ROA, % Operatingprofit Balancesheet total financial income extraordinary items interest free short termdebt longtermadvancesreceived andaccountspayable(average) ROCE, % Profitbeforeextraordinary items interest expenses other financialcosts Balancesheet total noninterest bearing debt (average) ROE, % Profit before extraordinary items and taxes income taxes Shareholders' equity minority interest taxedprovisions (average) Debt/Equity, % Interest bearing debt Shareholders' equity minority interest taxed provisions Equity ratio, % Shareholders' equity minority interest taxedprovisions Totalassets interest freeloans CAGR, % Cumulative annualgrowthrate Averagegrowthper year 26(29)

27 EVLI EQUITY RESEARCH PIHLAJALINNA Important Disclosures Evli Research Partners Plc ( ERP ) uses 12-month target prices. Target prices are defined by utilizing analytical techniques based on financial theory including (but not limited to) discounted cash flow analysis and comparative valuation. The selection of valuation methods depends on different circumstances. Target prices may be altered on the basis of new information coming to light in the underlying company or changes in interest rates, changes in foreign exchange rates, other securities prices or market indices or outlook for the aforementioned factors or other factors that may change the conditions of financial markets. Recommendations and changes by analysts are available at Detailed information about the valuation or methodology and the underlying assumptions is accessible via ERP: Investment recommendations are defined as follows: Target price compared to share price Recommendation < -5 % SELL -5 (+5) % REDUCE 5 15 % ACCUMULATE > 15 % BUY ERP s investment recommendation of the analyzed company is in general updated 2 4 per year. The graph above shows the distribution of ERP s recommendations of companies under coverage in 22nd of February If recommendation is not given, it is not mentioned here. Name(s) of the analyst(s): Häyhä, Pöyhönen This research report has been prepared by Evli Research Partners Plc ( ERP ). ERP is a subsidiary of Evli Bank Plc. Production of the investment recommendation has been concluded on [ , 8:15]. None of the analysts contributing to this report, persons under their guardianship or corporations under their control have a position in the shares of the company or related securities. The date and time for any price of financial instruments mentioned in the recommendation refer to the previous trading day s closing price(s) unless otherwise stated in the report. Each analyst responsible for the content of this report assures that the expressed views accurately reflect the personal views of each analyst on the covered companies and securities. Each analyst assures that (s)he has not been, nor are or will be, receiving direct or indirect compensation related to the specific recommendations or views contained in this report. Companies in the Evli Group, affiliates or staff of companies in the Evli Group, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned in the publication or report. Neither ERP nor any company within the Evli Group have managed or co-managed a public offering of the company s securities during the last 12 months prior to, received compensation for investment banking services from the company during the last 12 months prior to the publication of the research report. ERP may pursue an assignment from the issuer(s) of the financial instruments mentioned in the recommendation or this report. These assignments may have a limited economic or financial impact on ERP and/or Evli. Under such assignments ERP may perform services including, but not limited to, arranging investor meetings or events, investor relations communication advisory and production of research material. ERP has signed an agreement with the issuer of the financial instruments mentioned in the recommendation, which includes production of research reports. This assignment has a limited economic and financial impact on ERP and/or Evli. Under the assignment ERP performs services including, but not limited to, arranging investor meetings or events, investor relations communication advisory and production of research material. ERP or another company within the Evli Group does not have an agreement with the company to perform market making services. For the prevention and avoidance of conflicts of interests with respect to this report, there is an information barrier (Chinese wall) between Investment Research and Corporate Finance units concerning unpublished investment banking services to the company. The remuneration of the analyst(s) is not tied directly or indirectly to investment banking transactions performed by Evli Bank Plc or any company within Evli Group. This report has been disclosed to the company prior to its dissemination. The company has not made any amendments to its contents. Selected portions of the report were provided to the company for fact checking purposes only. 27(29)