Equity Weekly. Equity Research. Top company and macro news. More data flows in. 11 August, 2017

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1 Equity Research 11 August, 2017 Equity Top company and macro news Silvano Fashion Group: Facing bottlenecks Siauliu Bankas: Party not over yet Baltic Horizon: Steady progress in the eventful period Tax reform in Latvia a small but worthy step in the right direction Lithuania: Annual inflation accelerates again in July More data flows in Several companies released their Q2 results of 2017 during the week and trading activity remains high. Tallink s (+2.76% w/w) Q2 results revenue came in at EUR 259.9m (+6% y/y), in line with our estimates. Net profit totaled at EUR 17.9m (+83.2% y/y), beating our forecast (EUR 16.6m). Share price ended week at EUR Both the construction companies Merko Ehitus (+1.6% w/w) and Nordecon (+0.1% w/w) released Q2 results on Thursday. Merko s revenue reached EUR 70.7m (+20.3% y/y), below our estimates, whereas net profit of EUR 2.2m (+27.5% y/y) was in line with our estimates. Nordecon s revenue came in strong at EUR 61.9m (+34% y/y), beating our estimates but net profit was weak at EUR 0.2m (-80% y/y). Silvano Fashion Group (flat% w/w) Q2 revenue missed our estimates, but net profit of EUR 5.38m (+64% y/y) was strong. turnover in Tallinn totaled EUR 3.4m (-15% w/w) and NASDAQ OMX Tallinn index rose to a close at points (+1.09% w/w). The second week of August saw moderate trading activity on NASDAQ Riga stock exchange. NASDAQ OMX Riga index closed the period at points (-0.6% w/w). The most actively traded shares of the past week were Olainfarm, Grindeks and Latvijas kuģniecība and the total weekly trading turnovers in these names reached EUR 141,060, EUR 124,780 and EUR 241,050 respectively. The share prices of these companies were little changed in comparison to their closing values on August 4, The NASDAQ OMX Vilnius index increased by 2.01% w/w with weekly turnover of EUR 4.72m. Siauliu bankas (EUR 0.580; +1.58% w/w) announced its first half-year financial results. First six month net interest income in 2017 increased by 0.6% y/y and net fee and commission income came in 12.4% higher y/y. Vilkyskiu pienine share price increased by 1.5% w/w to EUR 3.39 after the company announced its July sales, which were 34% higher y/y at EUR 11m. Klaipedos nafta grew for the fourth straight week and ended the week at EUR (+4.21 % w/w). Investor Calendar: Date Issuer/Country Description Period 14 Aug Estonia Unemployment rate Q2 15 Aug Latvia Unemployment rate Q2 15 Aug Lithuania Trading holiday 18 Aug Baltic Horizon Dividend ex-date Q2 Baltic Indices May 28-May 12-Jun 27-Jun 12-Jul 27-Jul 11-Aug Baltic Benchmark OMX Riga OMX Tallinn OMX Vilnius, Swedbank Index value OMX Tallinn 1, % 16.4% OMX Riga % 35.8% OMX Vilnius % 15.4% OMX Baltic Bench % 21.3% OMX Baltic % 12.7% S&P 500 2, % 8.9% STOXX Europe % 3.1% STOXX EU Enlarged % 17.9% RTS 1, % -11.5% Top gainers: Last Close ( ) Baltika % Klaipedos Nafta % Pieno Zvaigzdes % LHV Group % Tallink % Top losers: Last Close ( ) SAF Tehnika % Olympic Entertainment Group % Latvian Shipping Company % Nordecon International % Tallinna Vesi % Most active: Last Close ( ) Siauliu Bankas % Tallink % Olympic Entertainment Group % Klaipedos Nafta % Telia Lietuva % Equity Research Large Corporates & Institutions Swedbank YTD Turnover ( th) ,942 Turnover ( th) Turnover ( th) 3,114 1, August 11, 2017 Please see important disclosures at the end of this document Page 1 of 8 Report was ready at :39 and published at :39

2 Macro news Tax reform package passed by the Latvian Parliament on July 27 involves changes to the labour, corporate, and excise taxes, as well as measures to combat shadow economy. Overall it is a move in the right direction, with more to be done. The reform will have a small but positive effect on the economic growth. A lot of the success will depend on the efficiency and responsiveness of tax authority and society s willingness to cooperate. Effect on households: Net wage about percentage points higher next year (especially for small and medium wage earners); Inflation 0.8 percentage points higher next year, significantly less than the net wage growth; Motivation to legalize envelope wages insufficient; Higher social security contributions for reduced income tax regime users (e.g., recipients of royalties and economic operators), stricter eligibility requirements for microenterprise tax regime in the short term increase tax burden, but is a needed step towards more sustainable pension system; more to be done. Effect on businesses: 0% corporate income tax rate for undistributed profit to push for more transparent corporate financial flows and improved investment activity in the medium term; together with a 20% (currently, 23.5%) tax on distributed profits to reduce the tax burden for most businesses, except a few large companies negatively affected by the discontinuation of most corporate income tax deductions (e.g. accelerated amortization) Minimum wage hike and higher social security contributions will increase labour costs, but pressure to increase gross wage likely to be a tad lower due to in general lower labour tax wedge; Labour tax wedge for sole earners still to remain the highest in the Baltics; Measures to combat grey economy, especially the extension of the reverse VAT charge, will make it harder to work in shadows. Overall effect on the GDP growth and income inequality: Higher consumption boosting economic growth in the short term, healthier business environment and increased investment activity; less income inequality within the working population. Main risks: Red tape, poor government communication leading to lack of cooperation from the society. For more information please contact Ms. Agnese Buceniece, , agnese.buceniece@swedbank.lv Annual consumer price growth in Lithuania reached 3.9% in July. Meanwhile, the average annual inflation picked up to 2.3%. Higher prices of alcohol and tobacco (resulted by a hike in excise duties), dairy products, fuels and those of restaurant services contributed most to annual inflation. In a month prices declined by 0.3% mainly due to seasonal factors. Prices of pharmaceuticals and fuels declined compared with June as well. Annual growth in the prices of goods accelerated to 3.3%, while that of services reached 5.5%, driven largely by rapid wage growth and strong demand. The annual core inflation, which excludes volatile energy and food components, reached 4.3% in July and was at the highest level in 8 years. Price pressures will remain strong throughout this year due to rapid wage growth, however, goods price growth might be subdued due to stronger euro and higher base for oil prices in the second half of this year. We expect the average annual inflation to be slightly above 3% this year and to ease to 2.5% in For more information please contact Ms. Vaiva Šečkutė, , Vaiva.Seckute@swedbank.lt August 11, 2017 Please see important disclosures at the end of this document Page 2 of 8

3 Volatility Snapshot Global equities tumble as North Korea tensions rattle investor nerves. 220 OMXB10 Index 30 Volatility broke out from its 30-day average of ~10 to shoot up to 17 (in VIX) and from 14 to above 22 in V2X. OMXB10 Index all but completely ignores the weakness in major markets, advancing by 1.30% for the week. Individual Baltic equity implied volatilities also inched higher as several stocks are on a strong run (incl SAB1L, KNF1L, TAL1T). Implied Volatility Overview (as of close on ) Aug-16 Nov-16 Feb-17 May-17 Aug-17 Close (ls) 1m Realized Volatility (rs) 1m Implied Volatility (rs) Volatility changes on Most Actively traded Options (as of close on ) 0 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Close (ls) 3m Realized Volatility (rs) 3m Implied Volatility (rs) YTD Implied Volatility (ATM, mid-market) Last Price Price vs Previous Week Close 1 month 3 months Eurostoxx 50 3, % 4.3% 15.7% 51.2% 16.4% 24.2% S&P 500 2, % 8.9% 13.5% 58.8% 12.5% 25.6% OMX 30 1, % 2.5% 15.3% 26.4% 15.3% 12.7% OMXB % 13.4% 19.4% 1.9% 19.3% 1.3% VIX % 14.2% Source: Swedbank AS estimates and calculations 1M ATM 1M ATM 1M 3M ATM 3M ATM 3M 3M Implied Vol Price Realized Implied ATM Imp. Realized Implied ATM Imp. divided by Vol Vol Vol Vol Vol Vol 3M Realized Vol c2 c5 c6 c7 c9 c11 c12 c14 sortcol APG1L 2.2% 13.5% 15.5% 0.0% 13.1% 15.5% 0.0% 1.19 TAL1T 4.6% 34.8% 19.3% 1.3% 23.5% 18.8% 2.7% 0.80 TKM1T 0.5% 6.5% 19.0% 1.3% 12.6% 18.3% 0.0% 1.45 OEG1T 1.1% 12.8% 16.5% 0.0% 11.3% 16.5% 1.5% 1.46 SFG1T 1.9% 12.2% 28.5% 0.0% 22.8% 28.5% 0.0% 1.25 Source: Swedbank AS estimates and calculations. Implied vols are all mid-market Note: Published OMXB10 Index implied volatilities are computed by Swedbank and are for informational purposes only. Swedbank has not traded the index in the past nor currently plans to do so in the future. August 11, 2017 Please see important disclosures at the end of this document Page 3 of 8

4 Company News Company & expected share impact Positive Neutral Negative Facing bottlenecks Sales in Russia stay depressed, measured in the RUB Silvano FG s efforts to restore production capacity to pay off Target price increased to EUR 2.80 (2.70); Neutral reiterated Some help from cheaper cotton Silvano FG s Q EBITDA decreased by 19% y/y, to EUR 5.2m, but exceeded our estimate by 4.1%, mostly due to higher-than-we-expected gross margin. The gross margin improved by 5.2 p.p. q/q, to a fairly high 51.8%, arguably helped by slightly lower cotton prices (-7% q/q), which is used as the primary raw material for lingerie. Adjusted net profit beat our estimate by around 20%. Silvano Fashion Group Recommend. ( ): Neutral Target Price ( ): 2.8 Price ( :39): 2.69 Analyst: Andrej Rodionov, CFA Tel: Restricted capacity Despite the increased number of own stores in Russia, Silvano FG s main market, its sales in local currency dropped by 13.5% y/y, to RUB 625m (+6.4% y/y in the EUR). We believe that in addition to the challenging macro backdrop, the restricted production capacity put a lid on the company s sales. In the wake of the Russian crises, Silvano FG implemented dramatic cuts in its personnel in Belarus, which is seemingly difficult to restore. Staying neutral We argue that the company s efforts to restore production capacity will eventually help to improve its sales as the sales efficiency erosion seems to come to an end. We increase our target price to EUR 2.80 (2.70), which values the company at a 2017e EV/EBITDA of 5.2x (close to the average for the past seven years). We reiterate our Neutral recommendation. Party not over yet Recurring net profit of EUR 9.6m translates into a ROE of 20% SAB s net loan portfolio grows faster than the market Target price increased to EUR 0.66 (0.6); Strong Buy reiterated Putting technicalities aside SAB recorded recurring net profit of EUR 9.6m in Q2, beating our estimate by 41%, as better asset quality offset lower net interest income (NII). We calculate that recurring ROE was around 20%. Our recurring net profit is adjusted for EUR 1.3m non-recurring gains from the de-recognition of financial items and a EUR 5.2m loss from changes in fair value of a subordinated loan from EBRD, which we treat mostly as technicalities. Siauliu Bankas Recommend. ( ): Strong Buy Target Price ( ): 0.66 Price ( :39): 0.59 Analyst: Andrej Rodionov, CFA Tel: Outperforming the market After recording no growth in the two preceding quarters, the net loan and lease portfolio increased by 5.9% q/q, to EUR 1,078m, in Q2. SAB signed new loan agreements for more than EUR 230m in Q2, which bodes well for growth in H2. This represents a stark contrast to the general market. According to the Bank of Lithuania, the loan market (excluding loans to financial institutions) increased by 2.3% to EUR 17.7bn, in the first six months of August 11, 2017 Please see important disclosures at the end of this document Page 4 of 8

5 More room for improvement We argue that SAB s asset quality has more room for improvement in the short term. The low interest environment is benign for its core clients, i.e. SME, which dominate the loan portfolio (~65%). We lift our target price to EUR 0.66 (0.60), which is equivalent to a 2017e P/B of 1.4x. SAB is trading at 2017e P/B of only 1.1x despite our estimated recurring ROE of close to 17%. We reiterate our Strong Buy recommendation. Steady progress in the eventful period Investments help increase net rental income by 6% q/q Potential to substantially increase dividends Target price of EUR 1.55 and Buy recommendation reiterated No drama Baltic Horizon increased its net rental income (NRI) by EUR 0.2m q/q, to EUR 2.7m, in Q2, mostly due to the contribution from the Duetto I office building in Vilnius, acquired on March 22. NRI was just EUR 0.1m below our estimate. In addition, the Fund s marketing expenses were fairly elevated EUR 0.1m in the period, marked by the secondary public offering (SPO). As a result, income from property management (IFPM), which is defined as company s NRI less recurring operating and central costs, increased by 9.2% q/q, to EUR 2.2m, but missed our estimate by around EUR 0.2m. We see no drama in the deviation. Baltic Horizon Recommend. ( ): Buy Target Price ( ): 1.55 Price ( :39): 1.36 Analyst: Andrej Rodionov, CFA Tel: Improved investment capacity Importantly, the property portfolio remained solid. The average occupancy with all rental guarantees stayed at 97.6% in Q2, while the average property yield hovered around 7.2%. The Fund increased its rent in most properties during the period. Baltic Horizon had around EUR 9m in cash in Q2, while its LTV ratio (loan to value) was 48%, slightly below its long term target of 50%. We calculate that the Fund s investment capacity improved by EUR 9.4m, to around EUR 30-35m, thanks to the SPO carried out during the period. Attractive dividend yield We estimate that Baltic Horizon has enough capacity to make a couple of acquisitions similar to Duetto I (EUR 14.6m), which will increase its NRI by around EUR 2m, or by around 18%, and will boost dividends from around EUR 0.09 per unit to around EUR 0.12 per unit. This implies a hefty 9% yield. We keep our estimates little changed until the SPO proceeds are deployed. We reiterate our Buy recommendation and our EUR 1.55 target price. August 11, 2017 Please see important disclosures at the end of this document Page 5 of 8

6 Baltic Equity Trading Statistics Swedbank Baltic Coverage Last* Reco. Return Name GICS Sector/ Sub-Industry Country Price ( ) Target ( ) Upside/ Downside Reco. Release Date Reco. Issuer** M.Cap, meur 1w 1m 6m YTD 52w 3m Avg. Daily Turnover th 52w Volatility Apranga Apparel Retail LT % Neutral LT 151 2% 6% 2% 6% 9% 22 13% Baltic Horizon Real Estate EE % Buy LT 88 1% 1% 7% 2% 2% 20 LHV Group Diversified Banks EE % Neutral LT 276 3% 7% 13% 11% 48% 62 Linas Agro Group Agricultural Products LT % Reduce LT 111 1% 7% 8% 10% 4% 11 Merko Ehitus Construction & Engineering EE % Neutral EE 168 2% 3% 4% 5% 18% 16 16% Nordecon International Construction & Engineering EE % Buy EE 40 0% -2% -2% -5% 9% 15 Olainfarm Pharmaceuticals LV % Buy LT 162 2% 4% 28% 34% 43% 31 17% Olympic Entertainment Group Casinos & Gaming EE % Buy EE 288-1% 7% 4% 6% 1% % Siauliu Bankas Diversified Banks LT % Strong Buy LT 271 2% 19% 46% 56% 94% % Silvano Fashion Group Apparel Retail EE % Neutral LT 100 0% -6% -1% -9% 31% 75 26% Tallink Marine EE % Buy EE 768 3% 17% 18% 24% 26% % Tallinna Kaubamaja Food Retail EE % Reduce EE 389 0% 1% 7% 16% 30% 39 17% Tallinna Vesi Water Utilities EE % Sell EE 252 0% 3% -9% -9% -9% 50 12% *Date for prices: 11 August :39 Source: Swedbank LC&I, Nasdaq OMX ** EE=Swedbank AS (Estonia), LT=Swedbank AB (Lithuania) Baltic Equity Fundamentals Swedbank Baltic Coverage Div. Div. Net Bloomberg EV P/E P/E P/E P/BV P/BV P/BV P/S P/S P/S EV/ EV/ DPS Yield Yield EBITDA Operating Debt to Name ticker meur F 2018F F 2018F F 2018F EBITDA Sales ROE ROA EUR F margin margin EBITDA Apranga APG1L LH % 19% % 6% 11% 8% -0.3 Baltic Horizon NHCBHFFT ET nm 11% 5% % 7% 76% 76% 9.9 LHV Group LHV1T ET % % 2% Linas Agro Group LNA1L LH % 3% % 1% 3% 1% 5.2 Merko Ehitus MRK1T ET % 3% % 5% 4% 3% 1.1 Nordecon International NCN1T ET % 5% % 5% 3% 2% 1.6 Olainfarm OLF1R LR % 8% % 5% 22% 17% 0.9 Olympic Entertainment Group OEG1T ET % 23% % 8% 18% 12% -1.0 Siauliu Bankas SAB1L LH % % 0% Silvano Fashion Group SFG1T ET % 30% % 7% 32% 29% -1.2 Tallink TAL1T ET 1, % 5% % 4% 16% 8% 3.2 Tallinna Kaubamaja TKM1T ET % 8% % 6% 8% 6% 1.5 Tallinna Vesi TVEAT ET % 12% % 6% 53% 42% 2.0 Source: Swedbank LC&I, Nasdaq OMX

7 Background Information: Recommendation structure Large Corporations & Institutions recommendation structure consists of six recommendations: Buy, Accumulate, Hold, Reduce, Sell and Avoid. The recommendations are based on an absolute return for the security 12 months forward. The absolute return includes share price appreciation and dividend yield combined. The recommendations for the securities mentioned in this report are based on risk and return considerations. The higher the risk category of the investment, the higher the required return. For equity investments, returns are defined as capital appreciation and dividends received over the investment horizon of 12 months forward. The expected capital appreciation is the ratio of a stock s target price over the current price. A company risk rating depends on its stock price volatility, liquidity and business outlook. The target price depends on a company s fundamentals as well as the market valuation of peer stocks, and can be changed at any time if the relevant changes occur within a company/market perception of the peer group. Buy, accumulate, hold, reduce, sell and avoid recommendations may be used in this report. The table below presents the relationship between recommendations and target prices compared to risk level of the stock. These are indicative ranges and actual recommendations may deviate from the indications if other relevant issues are considered. Strong Buy (SB) The absolute return is estimated to be in excess of 15% Buy (B) The absolute return is estimated to be between 5% and 25% Neutral (N) The absolute return is estimated to be between 0% and 10% Reduce (R) The absolute return is estimated to be between 5% and -10% Sell (S) The absolute return is estimated to be less than -5% Share price target Our expectations of the absolute return on a 12-month horizon The recommendation by Large Corporations & Institutions Equity Research department is based on a variety of standard valuation models. However, the base for the calculation of the target price is our DCF model (DCF = discounted cash flow) with the exception of financial and investment companies. The DCF model discounts future cash flow at present value. In preparation of this report different valuation methods have been used, including, but not limited to, discounted free cash-flow and comparative analysis. The selection of methods depends on the industry, the company, the nature of the stock and other circumstances. The target price (previous fair value) takes into account the DCF value, the relative valuation of the share versus others peers (national or international) and news that can have a positive or negative effect on the share price. Relative and absolute multiples that we consider are: EV/EBITDA, EV/EBIT, PE, PEG and Net Asset models for companies with liquid markets for their assets and other industry specific ratios when available. Break-up valuation models are also sometimes considered. For Swedbank s previous recommendations please follow the link: Recom mendations by the No of shares (*) Part of total Strong Buy 1 8% Buy 5 (3) 38% Neutral 4 (1) 31% Reduce 2 (1) 15% Sell 1 (1) 8% * Recommendations issued by Swedbank AS Reduce 15% Sell 8% Neutral 31% Strong Buy 8% Buy 38% August 11, 2017 Please see important disclosures at the end of this document Page 7 of 8

8 Information to the customer Issuer and recipients This research report contains previously published research (or excerpts from it) and recommendations that have been produced by two different Swedbank Group entities: Swedbank AS, under the supervision of the Estonian Financial Supervision Authority (Finantsinspektsioon), has issued research on: Merko Ehitus, Nordecon International, Olympic Entertainment Group, Tallink, Tallinna Kaubamaja, Tallinna Vesi; Swedbank AB, under the supervision of the Bank of Lithuania, has issued research on: Apranga, Baltic Horizon, Ekspress Grupp, LHV Group, Linas Agro Group, Olainfarm, Siauliu Bankas, Silvano Fashion Group. For full research on the relevant issuers, please contact your salesperson or the covering analyst. This report by Large Corporations & Institutions Equity Research is disseminated by Swedbank AS ( Swedbank ). Swedbank is under the supervision of the Estonian Financial Supervision Authority (Finantsinspektsioon). 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