Exista Right place waiting for the right time
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Exista Right place waiting for the right time

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Kaupthing report of Exista 09/2007

Kaupthing report of Exista 09/2007

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Exista Right place waiting for the right time Exista Right place waiting for the right time Document Transcript

  • Initiation of coverage ▪ Speciality and Other Finance, Iceland26 September 2007Exista hf. Buy (Initiation)790 Price ISK 30.5 Target 38.1Right place, waiting for the right timeIn a relatively short time, Exista has established itself as afinancial services company in the Nordic area. We believethat market trends are favourable for Existas businessmodel in the short to medium term. We initiate coveragewith a Buy recommendation and a target price of ISK 38.1.We believe Exista has positioned itself well; it is in the right place with the rightbusiness model ahead of the coming consolidation of Scandinavian and northernEuropean financial markets. We also believe that the symbiotic relationship betweenthe cash-generating insurance and leasing services on the one hand, and strategicinvestments on the other, will give an edge on the funding side. While this in itselfdoes not guarantee success, it does enable the company to realistically aim for qual-ity targets. We believe Exista can capitalise on this potential.Exista is the largest shareholder in two top ten financial companies in Scandina-via in terms of market cap – Sampo and Kaupthing. Both of these companies areaiming to expand and can be considered good investments in their own right. Existasinvestment arm is a substantial part of its business model. We are optimistic that thefinancial market will recover from the recent setback in the short to medium term.Existas cash flow eliminates any risk premium and its strong asset base providesgood collateral. We believe this gives Exista an advantage in light of the current li-quidity problems and higher risk premium in global credit markets.Exista has substantial insurance and asset finance operations in Iceland. Wesee some room for greater operational efficiency. However, domestic growth oppor-tunities are limited in light of the relatively small and stable market. More impor-tantly, these operations are significant for Existas business model as they provide asteady cash flow and liquid reserves to use in the investment arm.The main risk factor in our case is market risk. Given that a large part of Ex-istas asset portfolio consists of two large stakes in financial stocks, the company issubject to both idiosyncratic risk as well as financial sector risk. The company holdslarge stakes in four companies, which could lead to liquidity problems.We initiate coverage with a Buy recommendation. Our excess return modelsuggests that the companys net present value is ISK 34.1 per share. With a requiredreturn on equity of 11.5%, we set our one-year target price at ISK 38.1 per share,implying upside potential of 25% from the current share price. Share data Share price performance Market cap (ISKm) 345,945 Number of shares (m) 11,361.1 Bloomberg code EXISTA IR Reuter code EXISTA.IC Average volume 16,543,211 Performance 1M 3M 12M Abs. perf. (%) -10 -10 30 Rel. to ICEX15 -13 -27 3Kaupthing ResearchGuðrún Ögmundsdóttir (lead analyst) Haraldur Yngvi Péturssongudrun.ogmundsdottir@kaupthing.com haraldur.petursson@kaupthing.com+ 354 444 6952 +354 444 6961See important disclosures on last page of this report
  • Investment caseWe initiate coverage of Exista with a Buy rating and a target price of ISK 38.1 per We initiate coverage withshare, implying upside potential of 25% from the current share price. However, this a Buy recommendationis still about 5.5% below the price peak of ISK 40.25 reached in 19 July. The main and a target price ofreason for our bullish stance is that we believe that Exista has managed to position ISK 38.1 per shareitself in the right place with the right business model ahead of the coming consolida-tion of the Scandinavian and northern European financial market, not least in light ofthe recent financial turmoil. While this in itself does not guarantee success, it enablesthe company to realistically set its sights on quality targets. Nevertheless, and inspite of managements relatively short track record, we believe that Exista has themeans to capitalise on this potential.Our recommendation is also partly based on valuation of the main strategic holdings,mainly Kaupthing and Sampo, as they appear in consensus estimates for these com-panies. In fact, when consensus target prices of these two main holdings are takeninto account, the P/B valuation goes from 1.6 to just 1.2.Key reasons for our bullish stance Exista is the largest shareholder in two top ten financial companies in Scandinavia Exista has created oppor- in terms of market cap – Sampo and Kaupthing. Both of these companies are tunities for itself through aiming to expand and can be considered good investments in themselves. Sampo its strategic holdings in has a large war chest and a stated intention to participate in the consolidation of Sampo and Kaupthing the Nordic banking arena. In fact, Sampo has already built up a 5.5% stake in Nordea. We believe Exista has its sights set on opportunities that will enable it to expand into the Nordic financial market. For example, Exista could provide sup- port to Sampo if the latter decides on an aggressive M&A route. In this scenario, it could gain part of a potential target in the restructuring process. The same applies to Kaupthing Bank, which has been growing fast and now has a firm presence in northern Europe. Exista has substantial insurance and asset finance operations in Iceland. We see The operational arm of some room for greater operational efficiency. However, domestic growth opportu- the business model gives nities are limited in light of the relatively small and stable market. However, more Exista access to steady importantly, these operations are significant for Existas business model as they cash flow and reserve provide a steady cash flow and liquid reserves to use for its investment arm. that can be use for its investment arm Existas investment arm is an important part of the business model. For example, trading gains accounted for about one third of Existas income for 1H07. We are We are optimistic that the optimistic that the financial market will recover in the short to medium term from financial market will re- the recent setback. Existas cash flow eliminates any risk premium and the com- cover and that good in- panys strong asset base provides good leverage. We believe this gives Exista an vestment opportunities advantage in light of the current liquidity problems and a higher risk premium will be available (which we believe might persist) in global credit markets. Existas business model gained acknowledgement recently when the company re- Existas recent re- financed a quarter of its short-term liabilities on favourable terms (e.g. 130 and financing terms show it is 62.5bps over EURIBOR), at the same as time the credit market was showing signs benefiting from its trans- of distress. The company has historically had a front-weighted maturity profile, formation into a financial raising concerns about both refinancing risk and the future cost of capital. These services group re-financing terms shows that the company is benefiting from its transformation from an investment company into a financial services company. We consider the ownership structure of the company to be favourable for inves- tors. The largest shareholders have invested heavily and therefore share the same interests as the rest of the shareholders. Management has a good but short track Exista hf. ▪ 26 September 2007 ▪ 2
  • record and the company relies on its investment skills. However, it is important to bear in mind that past performance does not guarantee good future performance.Risk to our case The main risk factor in our case is market risk and a possible prolonged downturn The main risk factor is and volatility in global financial markets. As such, a downturn could affect Existas market risk earnings and capital in the medium term, while at the same time opening oppor- tunities for strategic investments. Further on, given the concentration in Existas asset portfolio on the large finan- The company is exposed cial stocks, the company is subject to both idiosyncratic risk as well as financial to idiosyncratic and finan- sector risk that cannot be ignored, even though Exista applies the equity method cial sector risk to both of these stakes. Exista is exposed to liquidity risk as the company currently holds large stakes in Liquidity risk as the com- four companies. It could be difficult at times for Exista to liquidate these stakes at pany holds large stakes in desired times. four companies There is also uncertainty in our estimates since a relatively large part of Existas holdings is in-transparent; no information is available about the trading portfolio and FX reserves. That in-transparency creates some uncertainty in terms of valuation. Another risk factor relates to Existas management, since the company relies on Management risk due to its investment skills for the investment operation. the investment operation Exista has some operational risk due to its insurance and asset finance subsidiar- ies. The insurance risk mainly relates to underwriting risk or unpredictable devel- opments, many of which are beyond the direct control of the company. Exista is exposed to some refinancing risk as its borrowings are front-weighted so dramatic changes in credit market terms for the company would have a negative effect on the company. Exista hf. ▪ 26 September 2007 ▪ 3
  • ValuationFinancial services firms are often valued using the excess return model. By this Existas net present valuemethod, the value of a company is the capital currently invested in the firm in addi- is ISK 34.1 per share, andtion to the present value of excess returns that the firm anticipates will be created in with a required return onthe future. Based on this model, we estimate Existas net present value at ISK 34.1 equity of 11.5% we setper share. With a required return on equity of 11.5%, we set our one-year target our target price atprice at ISK 38.1 per share and initiate coverage with a Buy recommendation. ISK 38.1In 2006, Exista was earning a return on equity of 27% and annualised return onequity for 1H07 was 70%. This past performance has been significantly higher thanthe company target of 16-25% ROE, which is a reflection of favourable trends inmarkets in which Exista operates, as well as good strategic positioning.In our valuation, we estimate Existas income for this year and the next four years We estimate that aboutand combine the NPV. The company has a diverse revenue stream derived from in- 35% of future income willsurance premiums, interest income, capital gains, dividends and participation in the be generated by shares inprofit of associates. The majority of Existas total revenues this year, or 64%, has associates, 40-45% frombeen derived from shares in profits of the associates Kaupthing and Sampo. This investment activities anddoes not provide a clear indication of Existas future revenue stream, since Sampo 20-25% from operatingreported EUR 2.9bn in one-time profit from the sale of its banking services in its units, insurance and asset1Q07 report. However, we estimate that about one third of Existas future income will financingbe generated by shares in associates, 40-45% from investment activities and 20-25% from its operating units, insurance and asset financing.Existas trading activities are in many respects similar to investment companies ac-tivities, but about 40% of the companys income is capital gains.In our valuation we use consensus estimates for Existas income from shares in profitfrom associates. We estimate growth in Existas income from operating units, insur- We assume that the re-ance and asset financing will be around 15% to 10% in 2008 and 2009. We are opti- turn on equity this yearmistic about further developments on world financial markets providing Exista with will be 35% and return ongood opportunities for its investment activities and estimate return on the companys equity over the next fourtrading portfolio to be approximately 20% for the next four years. Furthermore, we years will average 20%,estimate that there are some hidden values in Existas books due to its stake in and that the cost of eq-Siminn, which will be listed later this year. Based on this we assume that the return uity will be unchangedon equity this year will be 35% and return on equity over the next four years will over that periodaverage at 20%, and that the cost of equity will be unchanged over that period. Inaddition, we assume that Existas dividend payout ratio will be 15% but it must benoted that the company does not have a dividend policy. We assume that Existasexcess returns will diminish in the future as it is likely that competition for lucrativeinvestments will increase, reducing opportunities for Exista. We therefore assume inour valuation that Existas long-term ROE will be 16% with a terminal growth rate of3.75%. Exista hf. ▪ 26 September 2007 ▪ 4
  • Excess return model – Exista (EURm) 2007E 2008E 2009E 2010E 2011E Net Income 665.1 493.1 576.9 675.0 789.8 - Equity Cost 218.5 283.5 331.7 388.1 454.1 Excess Equity Return 446.5 209.6 245.2 286.9 335.6 Terminal Value of Excess Equity Return 2378.8 Cumulated Cost of Equity 1.1 1.2 1.4 1.5 1.7 Present Value 400.5 168.6 176.9 185.6 1575.1 Cost of Equtiy 11.5% 11.5% 11.5% 11.5% 11.5% ROE 35% 20% 20% 20% 20% Terminal ROE 16% Termingal growth rate 3.75% Equity Invested = 1900.2 PV of Equity Excess Return 2506.7 Value of Equity = 4406.9 Number of shares = 11361.1 Value Per Share euro= 0.39 ISK/EUR exchange rate 88.0 Value Per Share ISK 34.1Source: Kaupthing estimatesThe valuation is sensitive to changes in assumptions about Existas future return onequity, cost of equity, the EUR/ISK exchange rate and expected growth rate. Thetables below show the effects that changes in these assumptions have on Existas fairvalue. Sensitivity of the valuation for ROE assumptions on Existas fair value Terminal ROE 34.1 12% 13% 14% 15% 16% 17% 18% 19% 20% 14% 20.4 22.5 24.6 26.6 28.7 30.8 32.9 35.0 37.0 15% 21.1 23.2 25.3 27.4 29.6 31.7 33.8 36.0 38.1 Average ROE year 2-5 16% 21.8 23.9 26.1 28.3 30.5 32.6 34.8 37.0 39.2 17% 22.4 24.7 26.9 29.1 31.3 33.6 35.8 38.0 40.2 18% 23.2 25.4 27.7 30.0 32.3 34.5 36.8 39.1 41.4 19% 23.9 26.2 28.5 30.9 33.2 35.5 37.8 40.2 42.5 20% 24.6 27.0 29.4 31.8 34.1 36.5 38.9 41.3 43.6 21% 25.4 27.8 30.2 32.7 35.1 37.5 40.0 42.4 44.8 22% 26.2 28.6 31.1 33.6 36.1 38.6 41.1 43.5 46.0 23% 27.0 29.5 32.0 34.6 37.1 39.6 42.2 44.7 47.2 24% 27.8 30.4 32.9 35.5 38.1 40.7 43.3 45.9 48.5 25% 28.6 31.2 33.9 36.5 39.2 41.8 44.5 47.1 49.7Source: Kaupthing estimates Sensitivity of the valuation for ROE and cost of equity assumptions Terminal ROE 34.1 12% 13% 14% 15% 16% 17% 18% 19% 20% 10.0% 29.3 32.3 35.2 38.2 41.1 44.1 47.0 50.0 52.9 10.5% 27.5 30.3 33.0 35.7 38.4 41.2 43.9 46.6 49.4 Cost of Equity 11.0% 26.0 28.5 31.1 33.6 36.1 38.7 41.2 43.8 46.3 11.5% 24.6 27.0 29.4 31.8 34.1 36.5 38.9 41.3 43.6 12.0% 23.4 25.7 27.9 30.1 32.4 34.6 36.8 39.1 41.3 12.5% 22.4 24.5 26.6 28.7 30.8 32.9 35.0 37.1 39.2 13.0% 21.5 23.4 25.4 27.4 29.4 31.4 33.4 35.4 37.4 13.5% 20.6 22.5 24.4 26.3 28.2 30.1 31.9 33.8 35.7 14.0% 19.8 21.6 23.4 25.2 27.0 28.8 30.6 32.4 34.2Source: Kaupthing estimates Exista hf. ▪ 26 September 2007 ▪ 5
  • Sensitivity of the valuation for ROE and growth rate assumptions Terminal ROE 34.1 12% 13% 14% 15% 16% 17% 18% 19% 20% 2.75% 24.5 26.6 28.7 30.7 32.8 34.9 37.0 39.1 41.2 3.00% 24.5 26.7 28.8 31.0 33.1 35.3 37.4 39.6 41.7 Growth rate 3.25% 24.6 26.8 29.0 31.2 33.4 35.7 37.9 40.1 42.3 3.50% 24.6 26.9 29.2 31.5 33.8 36.1 38.4 40.7 43.0 3.75% 24.6 27.0 29.4 31.8 34.1 36.5 38.9 41.3 43.6 4.00% 24.7 27.1 29.6 32.1 34.5 37.0 39.4 41.9 44.4 4.25% 24.7 27.3 29.8 32.4 34.9 37.5 40.0 42.6 45.1 4.50% 24.8 27.4 30.1 32.7 35.4 38.0 40.7 43.3 46.0 5.00% 24.9 27.7 30.6 33.5 36.3 39.2 42.1 44.9 47.8Source: Kaupthing estimates Sensitivity of the valuation for cost of equity and growth rate assumptions Cost of Equity 34.1 10.0% 10.5% 11.0% 11.5% 12.0% 12.5% 13.0% 13.5% 2.75% 38.5 36.4 34.5 32.8 31.3 30.0 28.8 27.7 3.00% 39.1 36.8 34.9 33.1 31.6 30.2 28.9 27.8 Expected growth 3.25% 39.7 37.3 35.3 33.4 31.8 30.4 29.1 27.9 3.50% 40.4 37.9 35.7 33.8 32.1 30.6 29.2 28.0 rate 3.75% 41.1 38.4 36.1 34.1 32.4 30.8 29.4 28.2 4.00% 41.9 39.1 36.6 34.5 32.7 31.0 29.6 28.3 4.25% 42.7 39.7 37.1 34.9 33.0 31.3 29.8 28.4 4.50% 43.7 40.4 37.7 35.4 33.3 31.6 30.0 28.6 5.00% 45.8 42.1 39.0 36.3 34.1 32.1 30.4 28.9Source: Kaupthing estimates Sensitivity of the valuation for ROE and growth rate assumptions Terminal ROE 34.1 12% 13% 14% 15% 16% 17% 18% 19% 20% 80 22.4 24.6 26.7 28.9 31.0 33.2 35.4 37.5 39.7 82 23.0 25.2 27.4 29.6 31.8 34.0 36.2 38.4 40.7 EURISK E/R 84 23.5 25.8 28.0 30.3 32.6 34.9 37.1 39.4 41.7 86 24.1 26.4 28.7 31.0 33.4 35.7 38.0 40.3 42.6 88 24.6 27.0 29.4 31.8 34.1 36.5 38.9 41.3 43.6 90 25.2 27.6 30.1 32.5 34.9 37.3 39.8 42.2 44.6 92 25.8 28.2 30.7 33.2 35.7 38.2 40.7 43.1 45.6 94 26.3 28.8 31.4 33.9 36.5 39.0 41.5 44.1 46.6 96 26.9 29.5 32.1 34.6 37.2 39.8 42.4 45.0 47.6Source: Kaupthing estimates Exista hf. ▪ 26 September 2007 ▪ 6
  • Net Asset Value: ISK 20.5 per share NAV Exista as of 24 September 2007 Listed Holdings No.Shares Market ISK/ % of Sensi- (ISK) (millions) Price Value Share Assets tivity* Our net asset valuation Kaupþing Bank 170 1080 184,075 6.90 35.7% 1.62 indicates that Exista is Sampo 114 20.3 193,817 7.27 37.6% 1.71 currently trading at 1.6x Storebrand ASA 14 83 12,607 0.47 2.4% 0.11 its book value Bakkavör 855 66.1 56,526 2.12 11.0% 0.50 Flaga 159 1.43 227 0.01 0.0% - Other listed holdings 42,476 1.59 8.2% 0.42 Total Listed Holdings 489,727 18.37 94.9% Reported Adjusted ISK/ % of Sensi- Other Holdings Value Value Share Assets tivity* Síminn 13,510 21,110 4.1% 0.19 Other unlisted 5,176 5,176 1.0% 0.04 Total Other Holdings 18,686 26,286 0.99 5.1% 0.23 Summary Reported Adjusted ISK/ % of (ISK) Value Value Share Assets Total Holdings 508,413 516,013 100.0% Net Cash/Debt -296,154 -296,154 Net Asset Value (NAV) 212,260 219,859 19.35 NAV per share ISK 18.68 19.35 Premium 63% 57% Note: The market value of Exista holdings are calculated at fixed e/r as of 30.06.2007Source: Kaupthing estimates and company dataSensitivity in changes in share pricesListed securities are a large part of Existas holdings. Although Exista has madechanges to its accounting policy and reduced the effect of market exposure on itsequity, the performance of its holdings still has an impact on NAV, as listed securitiesrepresent 95% of the companys holdings. If the share price of Sampo increases by10%, then the Existas NAV per share should increase by ISK 1.71, reducing themarket premium by 11%. Changes in Sampo and Kaupthing share prices have thegreatest impact on Existas NAV, as they are the companys largest holdings. A 10%increase in Kaupthing, Bakkavör and Storebrand market values would increase NAVper share by ISK 1.62, ISK 0.5, and ISK 0.11, respectively. Exista has a trading port-folio of undisclosed securities that, at the end of 2Q07, amounted to ISK 47bn. Thisportfolio includes both Icelandic and foreign securities, and a 10% increase in itsmarket value would add a further ISK 0.42 to the share price and reduce the pre-mium by 3%. NAV sensitivity to a 10% increase in market value of holdingsListed Holdings No.Shares Market ISK/ % of Sensi-(SEK) (millions) Price Value Share Assets tivity*Kaupthing Bank 170 1080 184,075 7.26 35.4% 1.62Sampo 114 20.32 193,817 7.64 37.2% 1.71Storebrand ASA 14 83 12,607 0.50 2.4% 0.11Bakkavör 855 66.1 56,526 2.23 10.9% 0.50Flaga 159 1.43 227 0.01 0.0% -Other listed holdings 0 0 46,976 1.85 9.0% 0.42Total Listed Holdings 494,227* Sensitivity indicates NAV per share increase in ISK terms if the stock price increases by 10%Source: Kaupthing estimates and company data. Market data as of 24.09.2007 Exista hf. ▪ 26 September 2007 ▪ 7
  • Listed holding updated to consensus estimatesExistas four largest holdings are in Sampo, Kaupthing, Bakkavör and Storebrand.These companies are covered by a number of equity analysts and consensus esti-mates suggest that outlook for the holdings is relatively good. By changing the cur-rent market value to potential market value, using Kaupthings or mean consensusestimates, this would add ISK 9.2 to Existas current share price, reducing the pre-mium to 7%. Potential market value of listed holdings and the effect on Existas NAV Listed Holdings No, Market % of Target Pot.mkt Pot.mkt. (SEK) Shares Price Value Assets Price value* value change Kaupthing Bank 170 1080 184,075 35.4% 1250 213,049 28,975 Sampo 114 20.32 193,817 37.2% 24.5 233,687 39,870 Storebrand ASA 14 83 12,607 2.4% 93.57 14,213 1,606 Bakkavör 855 66.1 56,526 10.9% 72 90,738 34,212 Total 447,025 2.4% 551,687 104,663 Percentage change 23% Per share 9.21Source: Kaupthing estimates and JCF Exista hf. ▪ 26 September 2007 ▪ 8
  • Success – so farBusiness model focusExista was established in 2001 and was listed on the Icelandic Stock Exchange inSeptember 2006, when Kaupthing bank sold a 14.8% stake in the company. Since itslisting, Exista has outperformed the Icelandic stock market, showing a share priceincrease of 35% compared to 27% for the OMXI15 index.Exista defines itself as a financial services company operating in the areas of insur- Exista is a financial ser-ance services, asset finance and strategic investments. The main theme of the busi- vices company operatingness model is the mutual interaction of strong-cash-flow operating units and invest- in the areas of insurancement activities that are chiefly focused on the strategic and even long-term asset services, asset financegathering. The synergies created by this alliance benefit both arms of the company and strategic investmentsas a strong balance sheet facilitates more favourable terms for long-term funding.Furthermore, the operating units as well the depository properties of the technicalprovisions provide access to a stable cash flow that lacks intermediation risk andspread of they type that would be incurred if this liquidity were served by an unre-lated party.The investment activities focus mainly on strategic holdings in financial companies, Investment focus isalthough Exista is open to other options in various sectors with the aim of acquiring mainly on strategic hold-well established companies that have growth potential and good cash flow. The com- ings in financial compa-pany is therefore not interested in start-ups or "turnaround" cases and differs from nies or in well establishedprivate equity funds in the sense that there are no limits on how long it holds a cer- companies with growthtain asset. potentialExistas focus is on northern Europe as its core market, with a medium-term target ofgaining a strategic position ahead of the consolidation of the financial services sector The main geographicin that area. So far, Exista has considerable stakes in three Scandinavian financial focus is northern Europeservices companies, Kaupthing, Sampo and Storebrand. Existas portfolio Existas assets compositions 9.0% 5.0% 7% 2% 2.4% 8% 37.2% 10.9% 10% 60% 35.4% 13% Sampo Kaupþing Bank Investments in associates Assets at fair value Bakkavör Storebrand ASA Loans and acc. rec. Assets held for trading Other listed holdings Unlisted holdings Goodwill Other assetsSource: Kaupthing estimates and company data Source: Company dataHigh growth in a favourable market environmentExistas balance sheet has grown immensely, increasing ten-fold over the past twoyears. At year-end 2004, the companys total assets amounted to approximately.EUR 730m compared to EUR 7.71bn at the end of 1H07. The growth has chiefly beenachieved through retained earnings since the companys share capital has only beenincreased one time since the listing in September 2006. Exista has indeed been prof-itable with a ROE in 2005 and 2006 of 63% and 27%, respectively. This success has Exista hf. ▪ 26 September 2007 ▪ 9
  • continued in the current year, as annualised return on equity for 1H07 was 70%. Thispast performance has been significantly higher than the company target of 16-25%ROE, which reflects favourable trends in the markets where Exista operates as well asgood strategic positioning.The company has a diverse revenue stream derived from insurance premiums, inter- The companys revenueest income, capital gains, dividends and participation in the profit of associates. The stream is from insurancemajority of Existas total revenues this year, or 64%, has been derived from shares premiums, interest in-in profits of the associates Kaupthing and Sampo. This does not provide a clear indi- come, capital gains, divi-cation of Existas future revenue stream, as Sampo reported EUR 2.9bn in profit from dends and participation inthe sale of its banking services in its 1Q07 report. However, we expect that about the profit of associatesone third of Existas future income will be generated by shares in associates, 40-45%from investment activities and 20-25% from its operating units, insurance and assetfinancing. Existas total revenue for 1H07 amounted to EUR 958m and after-tax profitwas EUR 862m.The company has a large trading book, i.e. financial assets held for trading, whichamounted to EUR 643m at the end of 2Q07. Existas annualised return on this bookwas approximately 28% in 2Q07, slightly above managements ambitious target of25% annual return on its trading assets and delivering about 15% of Existas reve-nues for 1H07. Revenue mix for 1H07 Growth in assets and liabilities (EURbn) 4% 1%1% 7% 8% 9.0 8.0 7.0 6.0 5.0 15% 4.0 64% 3.0 2.0 1.0 0.0 Mar-05 jun.05 Sep-05 Dec-05 Mar-06 jun.06 Sep-06 Dec-06 Mar-07 jun.07 Share in associates Held for trading Fair value changes Insurance premium Interest revenues Dividend Total assets Total liabilities Other revenuesSource: Company data Source: Kaupthing estimates and company dataFront-weighted maturity profile but excellent refinancing termsThe maturity profile of the company has historically been front-weighted and, at theend of June, about half of outstanding liabilities, or EUR 2,370m, were due within 12months. However, with a bigger emphasis on financial services, the maturity profilehas been extended above three years and has shifted from secured debt to unse-cured funding. The companys target is to increase issued bonds to account for 35%of total liabilities compared to the current 15%. Management states that its fundingfocus is on diversification, liquidity and maturity. Exista hf. ▪ 26 September 2007 ▪ 10
  • Exista has been able to further enhance its funding position, both in terms of matur- 3M Libor EURity and cost, despite the recent turmoil in credit markets. On 31 August Exista signed 5 4.8a EUR 500m senior unsecured credit facility. The term loan has two tranches, a EUR 4.6 4.4407.5m tranche for three years at 130bps over EURIBOR, and a EUR 92.5m tranche 4.2 4for one year at 62.5bps over EURIBOR, with an option to extend up to three years at 3.8the lenders discretion. Through this facility and a EUR 400m 10-year securitisation 3.6 3.4transaction completed in September, Exista has been successful in substantially ex- 1.1.2007 2.1.2007 3.1.2007 4.1.2007 5.1.2007 6.1.2007 7.1.2007 8.1.2007tending its maturity profile and further enhancing the liquidity position. The favour-able terms of the borrowings must indicate the greater importance that is now at- Source: Bloombergtached to good cash generation in general and a strong faith in Existas businessmodel in particular. Maturity profile 30 June 2007 (EURm) Borrowing specified by currencies (EUR m) 2,500 1% 1% 2,133 4% 3% 2% 0% 6% 2,000 1,500 1,248 1,110 1,057 1,000 802 24% 59% 500 268 16 12 40 72 - On 0-3 3 1-5 5 demand months months years years+ EUR ISK CHF JPY USD GBP NOK DKK SEK - 1 year 2006 30.06.2007Source: Company data Source: Company data Target maturity profile (EURm) Breakdown of funding historical and target 2000 120% 1500 100% 3% 6% 6% 8% 13% 4% 4% 6% 12% 5% 80% 6% 8% 1000 15% 14% 8% 60% 500 35% 40% 84% 63% 65% 0 20% 35% 1 year 2 year 3 year 4 year 5 year< 0% 2006 2007YTD Target 2005 2006 2007 YTD Target Loans Bonds Technical provisions CP MM RepoSource: Existas Capital Markets Day Handout Source: Existas Capital Markets Day HandoutInvestment capacity depends on the route Exista takesExistas capitalisation has changed in line with a new emphasis on insurance provi-sion and asset financing. The equity ratio was close to 60% when Exista was an in-vestment company, but has declined to about 36.7% as of 30 June this year, or 40%excluding operational liabilities. Although Exista is defined as a financial servicescompany, its investment strategy is opportunistic and many ways in-transparent.Management does not provide a clear indication of the companys investment capac-ity, its target equity ratios or the extent to which it is willing to leverage the com- Exista hf. ▪ 26 September 2007 ▪ 11
  • pany, as investment capacity depends on the direction in which Exista intends to take Estimated investment cap.its investments, e.g. in property, asset financing or insurance. It is clear that while Approx. Target equity investmentcurrent problems in the global credit markets have had a negative effect on the abil- ratio capacityity of private equity funds to finance their deals; it has created opportunities for 35% 400companies like Exista, which, having their own cash flow, are now in a better position 30% 1,800to finance a bid. 25% 3,800 20% 6,300However, the companys target is to increase its bond issuing significantly, so its goal 15% 11,000must be to attain a credit rating above non-investment grade (BBB or above). It istherefore our view that Exista will not strain its balance sheet by increasing its gear- 10% 20,000ing significantly. Source: Kaupthing estimates Existas equity ratio Financial ratios 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% Equity ratio TD/TA LTD/LTD+ LTD/BVE+L Mar-05 Mar-06 Mar-07 Dec-05 Dec-06 jun.05 Sep-05 jun.06 Sep-06 jun.07 30.6.2006 30.9.2006 31.12.2006 30.3.2007 30.6.2007Source: Company data Source: Company dataInsurance and asset finance businessThe Icelandic insurance businessExistas operational business consists of two insurance companies, VÍS focusing ongeneral property and casualty (P&C), insurance Lífís that is specialized in life insur-ance, and an asset finance company, Lýsing. These three units were acquired in thetakeover of the Icelandic company VÍS Holding in May 2006. The Icelandic insurancesector is a highly concentrated market dominated by three local insurance compa-nies. VÍS market share is currently 35%, with a good distribution of premium in-come. Last year, growth in insurance policies amounted to 8.8% and premiumgrowth was 14.8%, but we believe that domestic growth potential is limited. VÍS revenue growth 2004-2007 (ISKm) VÍS insurance operations 3% 2% 6% 3,500 9% 38% 3,000 9% 2,500 2,000 1,500 13% 1,000 23% Compulsory motor Property 500 Other motor Accident and sickness 0 General liability Marine 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 Re LifeSource: Company data Source: Exista capital markets day handout Exista hf. ▪ 26 September 2007 ▪ 12
  • The market structure for insurance companies in Iceland is favourable with e.g. auto-matic renewals. However, the market is small and price competition has been fierceat times when the companies have been fighting for market share. At the same time,combined ratios in the Icelandic market have remained relativity high, e.g. VÍS com-bined ratio was 115% in 2006, illustrating the tight margin in the core business.Exista has stated that VÍS operational results are satisfactory and measures havebeen taken to streamline operations, both on the cost side and the income side. Thegoal for VÍS is to push the combined ratio below 100% in 2007, and the ratio hasbeen gradually decreasing since the acquisition, reaching 100.1% at the end of 2Q07.Insurance-based financial services play a key role in Existas business model, as theydiversify the revenue stream, provide access to reserves and give a stable cash flowthat supports Exista in its investment activities.Further insurance expansion abroad?Domestic growth opportunities in the insurance business are limited and futuregrowth will have to be achieved through acquisitions in other markets. The Nordicmarket is the most likely target market for further expansion, we believe. However,valuations in the insurance sector are currently high for Scandinavian insurance com-panies, and market shares seem to be stable and concentrated. The five largest com-panies account for about 70% of the market in Denmark, with significantly highermarket shares in Finland, Norway and Sweden. Denmark – Market share distribution Sweden – Market share distribution 18% 29% 21% 30% 15% 18% 20% 20% Länsförsäkringar Sampo (If Skadeförsäkring) 6% 10% Trygg-Hansa (RSA) Folksam 13% Other Tryg Topdanmark Codan (RSA) Alm Brand If OthersSource: Sampo capital markets day handout Source: Sampo capital markets day handout Norway – Market share distribution Finland – Market share distribution 8% 9% 28% 10% 30% 10% 18% 10% 19% 26% 32% Sampo (If P&C Insurance) Pohjola (OKO bank) If (Sampo Group) Gjensidige NOR SpareBank 1 Tapiola General Fennia Vesta Other Lähivakuutus OtherSource: Sampo capital markets day handout Source: Sampo capital markets day handout Exista hf. ▪ 26 September 2007 ▪ 13
  • While consolidation of Nordic financials companies is anticipated, the property &casualty (P&C) companies have not been considered as vulnerable as other financialcompanies, due to higher valuations. However, it is possible that valuations couldchange following further equity market correction, but so far the multiples of NordicP&C companies have not changed significantly.Exista already owns a 20% stake in Sampo and 5.5% in Storebrand, Nordic financialcompanies that operate in different segments of the insurance business, and specula-tion has persisted in the market that these companies could be possible acquisitiontargets. However, Exista does not appear to have a sufficient balance sheet to buySampo (market cap. EUR 11.5bn.) on its own, although it could do so in cooperationwith others. Acquiring Storebrand (market cap. EUR 2.6bn) would be more feasiblefor the company, although management has stated that its investment in Storebrandis merely a trading position.Strong performance of asset financing could be slowingLýsing, Existas asset financing company, is the largest provider of asset financing inIceland, providing a wide range of financing products to commercial and private cli-ents. The company has been performing well, with income increasing by 34% in 2005and 43% in 2006. The companys total assets increased by 14% and 60% respec-tively during the same years. At the same time, the cost ratio has been relativelystable. Cost ratio and growth in assets and revenue Lýsings profit before tax (ISKm) 70.0% 1,233 60.0% 1,200 50.0% 1,000 40.0% 841 30.0% 800 671 682 20.0% 10.0% 555 600 0.0% -10.0% 1H06 1H07 2003 2004 2005 2006 400 200 Cost income ratio Growth in total assets 1H06 1H07 2004 2005 2006 Growth in total revenueSource: Company data Source: Company dataAccording to management, the company intends to expand its asset financing busi-ness through organic and external growth. However, the Icelandic economy has been Lýsing is an importantbooming for the past four years, showing average annual GDP growth of 5%. Con- part of the businesssumption and investment have also reached new heights and have grown on average model, as it diversifiesby 7.6% and 22%, respectively, during this period. However, the economy has begun the groups incometo move to balance. In 2007, Kaupthing expects that economic growth will be ap- stream and provides theproximately 1% and investment is expected to contract sharply. Growth in private company with a stableconsumption is declining mainly due to lower import of cars; the number of new pas- cash flow, benefiting thesenger car registrations declined by 12% during the first eight months of 2007 com- investment activities.pared to the same period in the previous year. These factors should lead to a slow-down in growth in Lýsings income and assets. We do not see much growth potentialfor Lýsing in the domestic market, so further expansion would be through acquisi-tions abroad, where competition is currently fierce. However, the market structurefor leasing companies in Scandinavia differs from Lýsings model. For example, leas-ing companies in Scandinavia tend to concentrate on specific sectors, while Lýsingsbusiness model consists of providing financial services for a broad customer range.While we do not believe that Exista will expand its asset financing operation in thenear future, Lýsing is currently an important part of the business model, as it diversi- Exista hf. ▪ 26 September 2007 ▪ 14
  • fies the groups income stream and provides the company with a stable cash flow,benefiting investment activities.Investment businessSampo - Strong purchasing powerExistas strategic holdings in financial companies consist of a 20% stake in Sampo, a Strategic holdings in fi-Finnish insurance company, and a 23% stake in Kaupthing Bank. Exista is the largest nancial companies are ashareholder in each of these companies, but does not have board representation in 20% stake in Sampo, andeither. These stakes could provide Exista with strategic alliances in opening up oppor- a 23% stake in Kaupthingtunities in the consolidation of the Nordic banking arena. BankAfter the sale of its banking operations in November 2006, Sampo has aboutEUR 5.5bn in excess capital on its balance sheet awaiting investment opportunities. Sampo has a large in-Initially, Sampos management gave itself time until the FY07 results to find a use for vestment capacity andthe cash; if there are no attractive opportunities, it will be returned to shareholders. holds a 5.5% stake inThe board has decided on a repurchase scheme that allows for approximately 4.8% Nordea.of the total number of shares to be repurchased, at a cost of around EUR 600m.Meanwhile, Sampo purchased a 5.5% stake in Nordea (EUR 1.6bn) and speculationpersists that this stake will be further enlarged, fuelled in part by comments bySampos CEO that Nordea would be among the biggest gainers in Nordic bankingconsolidation and that Sampos holdings in the firm are long-term. It is moreoverpossible that Sampo will not confine itself to the Nordic region nor to a specific sec-tor.In terms of how the Sampo holding fits into Existas plans, we see two main possibili- Rather than taking overties. One is that Sampo is simply a good investment that Existas believes will outper- Sampo, we believe thatform the market. Sampo could for example be the target of a takeover due to its Exista is eying collabora-large cash balance and highly cash-generative and stable P&C business. The second tion with Sampo in thepossibility is that Exista is eying some collaboration possibilities in the coming con- coming consolidation ofsolidation in Nordic financial markets. Exista could for example support Sampo if it the Nordic financial mar-decides on an aggressive M&A route, or acquire certain assets that fit well with its ketbusiness model in the phase of restructuring following a Sampo acquisition. In anycase, Exista does not appear to have the balance sheet to buy Sampo, except incooperation with another company. Sampos excess cash could render the use ofdebt in an acquisition easy, but at the same time Sampo could use this cash in adefensive strategy. Rather than taking over Sampo, we believe that for Exista thetwo mentioned possibilities are not mutually exclusive and might be simultaneouslytargeted. EPS for Kaupthing and Sampo Kaupthings Assets (ISK billion) 7,000 7,000 6,000 6,000 5,000 5,000 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1,000 0 0 2000 2001 2002 2003 2004 2005 2006 2007E 2008E 2009E 2000 2001 2002 2003 2004 2005 2006 2007E 2008E 2009ESource: Company data and JCF Source: Kaupthing estimates and company data Exista hf. ▪ 26 September 2007 ▪ 15
  • Long-term investments in KaupthingExista (then SP eignarhaldsfélag) was initially founded in 2001 with the objective of We believe that the stakeholding shares in Kaupthing Bank and today the company is the largest Kaupthing in Kaupthing is a long-shareholder, with a 23% stake in the company. The stake in Kaupthing is a core term investment for Ex-asset in Existas business model and a long-term investment. Despite this, Exista istadoes not have board representation in the bank. Kaupthing Bank is Icelands largestbank and for the past six years it has strengthened its international operationsthrough acquisitions and the establishment of subsidiaries. The majority of the Banksoperations take place outside Iceland and, after the acquisition of NIBC is finalised,over 75% of Kaupthings revenues will be generated abroad. outlook for Kaupthingseems good and is reflected in the relatively positive opinion equity researchers haveon the companys stock. According to mean consensus estimates, the target price forKaupthing is ISK 1,250 per share, suggesting upside potential of 16% compared tothe current price of ISK 1080.Investment in companies with good cash flowExista defines itself as a financial services company and, at first glance, investment in Holds a 39.6% stake infood manufacturing company Bakkavör or Skipti does not seem to fit into the busi- Bakkavör and 43.6%ness model. However, although Exista is a financial services company, its investment stake in Skiptistrategy is broad. It focuses on investment in financial- or good-cash-flow compa-nies, and is not interested in “start-up” or “turnaround” cases. Therefore, holdings inBakkavör and Skipti fit well into the Exista business model, as both are mature com-panies with good cash flow providing opportunities for further growth. Bakkavör - Capital employed (GBPm) Bakkavör - Revenues and assets (GBPm) 1,200 30.0% 1,800 4.5 1,000 25.0% 1,600 4.0 1,400 3.5 800 20.0% 1,200 3.0 600 15.0% 1,000 2.5 400 10.0% 800 2.0 600 1.5 200 5.0% 400 1.0 0 0.0% 200 0.5 2000 2001 2002 2003 2004 2005 2006 2007E 2008E 2009E 0 0.0 2000 2002 2004 2006 2008E Capital Employed RoCE Total revenue Total Assets Asset TurnoverSource: Kaupthing estimates and company data Source: Kaupthing estimates and company dataExistas largest shareholders are Lýður Guðmundsson and Ágúst Guðmundsson, two Existas largest share-brothers who founded Bakkavör in 1986. They acquired 55% of the share capital in holders are the foundersExista in 2002. A year later, Exista acquired two holding companies whose portfolios of Bakkavörincluded the brothers stakes in Bakkavör Group. As a result of these transactions,Exista became the largest shareholder in Bakkavör and the company now holds a39.6% stake in the company. Bakkavör Group has expanded its operation extensivelyfor the past year and multiplied its balance sheet and income stream. We believe thatExista considers Bakkavör a long-term investment due to both of sentimental valueand a good medium-term outlook.Skipti - IPO by year endExista acquired a 43.6% stake in Skipti (Icelandic Telecom) when the company wasprivatised in 2005, at which time the company was valued at ISK 66.7bn. One of theconditions that the Icelandic government made for the sale was that at least 30% ofthe company should be floated before year-end 2007. Kaupthing also participated inthis deal, buying 29.1% of Iceland Telecom, and this stake will be floated beforeyear-end. Exista hf. ▪ 26 September 2007 ▪ 16
  • Since privatisation, Skipti has undergone considerable changes, such as an increasedrange of services domestically and expansion of its operation abroad through M&A.The companys bottom line was negative last year, mainly due to exchange rate fluc-tuations and their impact on financial expenses. Skiptis revenues increased by 30%yoy in 1H07, but EBITDA margins fell to 28% compared to 33% in 1H06. The com-pany claims this drop in margin is due to acquisitions in new IT companies with lowermargins. Net profit and growth in revenue (ISKm) Skipti/Iceland Telecom - EBITDA ratio (ISKm) 3,000 35% 2,000 50% 10,000 30% 1,000 40% 8,000 25% 0 20% 30% 6,000 -1,000 1H02 1H03 1H04 1H05 1H06 1H07 -2,000 15% 20% 4,000 -3,000 10% 10% 2,000 -4,000 5% 0% 0 -5,000 -6,000 0% 2000 2001 2002 2003 2004 2005 2006 1H07 -7,000 -5% Net profit Growth in revenues EBITDA Ratio EBITDASource: Company data Source: Company dataIn the time that has passed since the privatisation, competition in the Icelandic tele- Est. profit on investmentcommunications market has stiffened, especially in terms of mobile systems service, Est. profit inwhere almost 40% of Skiptis domestic telecom revenues are generated. New com- ROI ISK (m.)petitors are also on the horizon, as Nova intends to start providing experimental -5% -1.3services in this field. The Executive Chairman of Exista has stated that the companys 10% 2.8aim is that the annual return on the capital it invested in Skipti, ISK 13.5bn, is 25% 7.6around 25%. This suggests that the value of Skipti has grown by ISK 21bn and that 35% 11.1there is a hidden value of about ISK 7bn (EUR 90m) in Existas books. Assuming thatthe debt-to-equity ratio has remained unchanged from the time of purchase, it can 45% 14.9be assumed that the enterprise value of Skipti will be around ISK 100bn when it is Source: Kaupthing estimatelisted.We do not have sufficient information to accurately estimate the value of Skipti, asthe company has expanded its business significantly and has not published any busi-ness plan or budgets. However, the stake in Skipti does not have any significant im-pact on the overall value of Exista, as Skiptis book value is about 2% of Existas totalassets.Storebrand is an opportunistic investmentExista announced in the beginning of August that it holds a 5.56% stake in Store- Storebrand price per-brand. This announcement came in the wake of a permission given by the Financial formance (NOK)Supervisory Authority in Norway to allow Kaupthing Bank to own up to 20% of Store- 110brand shares and has provoked an investigation of whether these two companies are 90working in tandem to gain control of the company. 70 50Storebrand has indeed been considered a potential takeover target for some time but 09.06 12.06 03.07 06.07 09.07Existas management states that its stake in Storebrand is merely a trading position.It is clear Exista has been building up this position for some time prior to the an- Source: JCFnouncement to the Oslo Stock Exchange as Exista purchased the shares in Store-brand at an estimated average price of NOK 76.25. Storebrands share price hasincreased by almost 20% ytd and has been trading at an average price of NOK 91ytd. Exista hf. ▪ 26 September 2007 ▪ 17
  • Good portfolio outlookExistas largest holdings are in Sampo, Kaupthing, Bakkavör and Storebrand. These Consensus estimatescompanies are covered and valued by a number of equity analysts. Changing the suggest 23% upside po-current market value to potential market value, using Kaupthings or mean consen- tential in Existas portfoliosus estimates, would increase the market value of Exista stakes in these companiesby 23%. This indicates that the outlook for Existas portfolio of listed assets is bright. Potential market value of listed holdings updated to consensus estimates Listed Holdings No, Market % of Target Pot.mkt Pot.mkt. (SEK) Shares Price Value Assets Price value* value change Kaupthing Bank 170 1080 184,075 35.4% 1250 213,049 28,975 Sampo 114 20.32 193,817 37.2% 24.5 233,687 39,870 Storebrand ASA 14 83 12,607 2.4% 93.57 14,213 1,606 Bakkavör 855 66.1 56,526 10.9% 72 90,738 34,212 Total 447,025 2.4% 551,687 104,663 Percentage change 23% Per share 9.21Source: Kaupthing estimates and JCFExista reduces market impact on its equityExista is the largest shareholder in Kaupthing Bank and Sampo Group and views Exista applies the equitythese assets as its core assets in the financial sector. The company believes that method on its stake inmarket fluctuations do not reflect the long-term nature of these holdings and believes Kaupthing and Sampo,that the underlying performance is more important than the prevailing market price. which reduces the impactTherefore, the company applies the equity method to account for these holdings, as of market fluctuations onthis reduces the impact of market fluctuations on the companys P&L. This method the P&Lwas used for the first time in the 1Q07 report, and resulted in reported income for1H07 being EUR 19m lower than it would have been according to the fair valuemethod.Strategic holdings in Kaupthing and Sampo represent approximately 70% of Existas These holdings representtotal listed holdings. Despite the changes in accounting policy, the company still has about 70% of Existasconsiderable market exposure, as its holdings in Bakkavör and Storebrand and its total listed holdingstrading portfolio go through the P&L. However, 15% of Existas income in 1H07 wasfrom trading gains of proprietary trading and 22% of overall 1H07 revenues werecapital gains.Currently, the value of Existas listed securities is more than twice the value of itsreported equity. However, by applying the equity method on the stakes in Kaupthingand Sampo, the impact of market fluctuations on Existas equity is reduced. A 10%decrease in the value of Existas holdings that go through the P&L will lead to a 5%reduction in equity; prior to the change in accounting policy the change would havebeen approximately 20%.Increased emphasis on the euroExista presented its accounts in EUR for the first time in its 1Q07 report. This change The companys accountswas due to the fact that Existas operational region is northern Europe, and a large are in EUR from the be-part of the groups revenue, expenses and funding are in currencies other than the ginning of 2007ISK and mostly in EUR. Furthermore, Exista considers that most of its growth oppor-tunities in investment and operations are outside Iceland.Existas last AGM approved giving the board of directors the authority to issue theshare capital of the company in EUR instead of ISK if the Board considers the optionfeasible. We believe that Exista will do this soon, as technical obstacles have now Exista hf. ▪ 26 September 2007 ▪ 18
  • been removed. This should make shares in Exista more attractive for foreign inves-tors, as it reduces exchange rate risk.Investors have high expectations of ExistaExista has been performing well on the Icelandic stock exchange, and, until the re- Exista was this years topcent volatility started, the company was this years top performer on the market, performer on the Ice-showing a share price increase of 80%. However, as Existas assets consist largely of landic exchange until thelisted holdings, the companys share price has fallen during the recent market tur- recent market turmoilmoil, resulting in a net increase of 35% ytd. So far this year, Existas share price hasfluctuated broadly in line with those of its largest holdings. At the same time, thecompany has been trading at high multiples, an average price-to-book value of 1.5x.We believe investors view Exista as a growth stock and that they are buying it pri-marily because of the expectation of capital gains and an interest in the futuregrowth of the company. It seems that Exista has created opportunities for itselfthrough its stakes in Sampo, Kaupthing and to some extent Storebrand.Exista has a defined strategy of investing in financial companies or companies with The company has a goodgood cash flow, but at the same time is able to be opportunistic. It has diversified its but short track recordrevenue stream and has a good, but short, track record. We view the ownershipstructure as favourable for investors. The largest shareholders have invested heavilyin the company and therefore share the same interests as the rest of the sharehold-ers, i.e. dividends and/or value appreciation of their holdings. The Exista story isshort and it will be interesting to see how it continues. Existas P/B estimated for 2007 YTD Existas and its portfolios performance 1.8 200 180 1.7 160 1.6 140 120 1.5 100 1.4 80 60 1.3 12/06 02/07 04/07 06/07 08/07 1.2 Storebrand Kaupthing Exista 12/29/2006 3/29/2007 6/29/2007 Sampo BakkavorSource: Kaupthing estimates, JCF and company data Source: Kaupthing estimates, JCF and company data Exista hf. ▪ 26 September 2007 ▪ 19
  • Company overviewBrief historyExista defines itself as a financial services company that operates in the areas ofinsurance, asset finance and investments. The foundation of Exista was establishedwhen a group of savings banks established SP Eignarhaldsfélag in June 2001 with theobjective of holding shares in Kaupthing Bank. Later, Kaupthing Bank joined thisgroup and the name was changed to Meiður ehf. Towards the end of 2002, the com-pany increased its stake in Kaupthing, becoming the largest shareholder in the bank. lIn the beginning of 2003, Bakkabraedur Holding B.V., a company owned by ÁgústGuðmundsson and Lýður Guðmundsson, acquired 55% of the share capital in Meiður.Since then, the Meiður portfolio has increased substantially and the investment strat-egy has been expanded. In 2003, Meiður became the largest shareholder in BakkavörGroup and in 2004 Meiður acquired a 23.3% stake in Flaga Group. In 2005, Meiðuracquired a stake in Iceland Telecom. During the same year, the name of the com-pany was changed from Meiður to Exista and the strategy of becoming a leadinginvestment company in specific industry sectors was implemented. Significantchanges were made to Exista in 2006 and the company transitioned from an invest-ment company into a financial services group. By acquiring VÍS Holding, Exista ex-panded its operations to include insurance underwriting and asset finance. In Sep-tember 2006, the company was listed on OMX Nordic Exchange in Iceland. So far thisyear, Exista has announced that it has built up a 20% stake in Sampo Group, a lead-ing Scandinavian insurance company. Furthermore, Exista has sold its stake in UK-based insurance company IGI Group Ltd, and in June the company announced that ithad entered into a joint venture vehicle which acquired a 29% stake in JJB Sports. InAugust, Exista announced it had acquired a 5.5% stake in the Norwegian insurancecompany Storebrand.Business model and operational approachThe company defines itself as a financial services company that operates in the areasof insurance, asset finance and strategic investments. The main theme of its businessmodel is the mutual interaction of strong-cash-flow operating units and the invest-ment arm of the company. The business model is based on gathering assets in theeffort to maximise the use of the balance sheet. The group goal is to build a leadingfinancial services company with Northern Europe as its core market. Exista hf. ▪ 26 September 2007 ▪ 20
  • Existas organisationSource: Exista Fact sheetOperating businessesInsuranceExista Insurance consists of two insurance underwriters, each with its own inde-pendent organisation. VÍS is non-life insurance company and Lífís is a life insuranceprovider. Insurance-based financial services fit well with the investment operation, asthey stabilise the business and provide access to stable cash flow and funds for theinvestment operation. However, domestic growth opportunities are limited, so growthmust be achieved through acquisitions in other markets.VÍS (Vátryggingafélag Íslands hf.) is a general insurance company based in Iceland,where it is one of three major insurance companies and has a market share ofaround 35%. The company specialises in non-life insurance operations, offering fullinsurance across Iceland for individuals, families, companies, municipalities and insti-tutions. According to Exista, the main operating focus of VÍS has changed from gain-ing market share to increasing profitability. VÍS annual premium income is approxi-mately EUR 108m, with a good distribution of both premiums and clients. Exista ac-quired VÍS in May 2006. VÍS - Revenue 2004-2007 (ISKm) VÍS - Current insurance operations 3% 2% 6% 3,500 9% 38% 3,000 9% 2,500 2,000 1,500 13% 1,000 23% Compulsory motor Property 500 Other motor Accident and sickness 0 General liability Marine 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 Re LifeSource: Company data Source: Exista capital markets day handout Exista hf. ▪ 26 September 2007 ▪ 21
  • LÍFÍS (Líftryggingafélag Íslands hf.) is a provider of life insurance and other health-related insurance. The company was established in 1990 and is the third largest lifeinsurance company in Iceland, with a market share of about 20%, as measured interms of gross premiums. Lífís provides a wide range of insurance, such as life insur-ance, critical illness insurance, unit linked life insurance, and income insurance. Ex-ista acquired LÍFÍS with VÍS and owns 100% of the company. Non-life portfolio VÍS Life portfolio - Lífís 7% 2%1% 7% 3% 10% 8% 43% 49% 17% 15% 20% 18% Government bonds Equities Mutual funds Capital guaranteed bonds Government bonds Equities Money market Corporate bonds Mutual funds Money market Real estate Capital guaranteed bonds Corporate bondsSource: Exista Capital Markets Day handout Source: Exista Capital Markets Day handoutAsset FinanceLýsing is one of three leading asset-finance providers in Iceland and offers a rangeof financing products to commercial and private clients. The company has a marketshare of over 40% in asset financing in Iceland. Lýsing provides real estate leasingand operating leases to corporations in Iceland, as well as vehicle leasing to individu-als. Iceland is Lýsings main operating region. Exista acquired Lýsing at the sametime as VÍS and LÍFÍS, May 2006. Lýsing - Changes in fundamental ratios Lýsing clients distribution 9% 3% 70.0% 30% 60.0% 50.0% 22% 40.0% 30.0% 20.0% 10.0% 36% 0.0% -10.0% 1H06 1H07 2003 2004 2005 2006 Individuals Retail and services Contractors Manufacturing Other Cost income ratio Growth in total assets Growth in total revenueSource: Company data Source: Existas Capital Markets Day handoutTradingExista Trading consists of proprietary trading for the parent company and assetmanagement for subsidiaries. The subsidiaries are regulated entities, VÍS and Lífís,and their portfolio approach focuses on diversification and relatively stable returns.Exista Trading manages technical provisions where the investment objectives in thenon-life and life portfolios differ. For the non-life portfolio, the investment horizon ismedium to long term, but focus in the life portfolio is mainly on long-term invest-ments. The proprietary trading strategy is mainly aimed at a short-term investmentperspective, where focus is on listed securities and money market instruments. Thetrading approach is defined as opportunistic, i.e. seeking benefit from market oppor- Exista hf. ▪ 26 September 2007 ▪ 22
  • tunities as they arise. The equity portfolio consists of stocks in 20-40 companies,mainly in Northern Europe. Trading equity portfolio – Geographic location Trading equity portfolio - Sectors 7% 8% 7% 10% 28% 12% 26% 60% 15% 27% Europe Iceland USA Other Other Funds Telecom Manuf. Health FinancialsSource: Exista Capital Markets Day handout Source: Exista Capital Markets Day handoutInvestment businessesThe investment business is divided between strategic holdings in financial companiesand holdings in other businesses. Strategic holdings are defined as long-term invest-ments with the goal of acquiring significant stakes, where Exista is an active share-holder, with or without board representation. Currently, two of Existas holdings aredefined as strategic holdings, the stake in Kaupthing Bank and Sampo Group. How-ever, Exista does not have board representation in either of these companies. Existauses the equity method in accounting for these companies.Existas investments in other businesses have no time limit and the strategy is toacquire controlling stakes, either alone or in cooperation with other entities. In thiscase, Exista aims to be an active owner and to have board representation. Existasstakes in, among others, Bakkavör, Storebrand, Flaga Group and Iceland Telecomare classified under this part of the business model and are recognised at fair value inExista accounts.Strategic holdings in financial companiesKaupthing Bank is a Northern European bank offering financial services to compa-nies, institutional investors and individuals. These services include corporate banking,investment banking, capital markets services, asset management and comprehensivewealth management for private banking clients. The bank operates in ten countries,including all the Nordic countries, Luxembourg, Switzerland, the UK and the US. Inaddition, the bank operates a retail franchise in Iceland, where it is headquartered.Kaupthing Bank is currently among the seven largest banks in the Nordic region interms of market capitalisation. Kaupthing Bank is listed on the OMX Nordic Exchangein Stockholm and Iceland. Exista initially invested in Kaupthing Bank in 2001 and nowholds a 23% stake in the bank.Sampo Group is a Nordic insurer that divides its business into two areas: If P&CInsurance Company and Sampo Life. If P&C Insurance is a property and casualtyinsurance company in the Nordic region, and also has insurance operations encom-passing the Baltic countries. Sampo Life is a life and pension insurance companyoperating in Finland and the Baltic states. The Sampo Life Group comprises the Fin-nish parent company, Sampo Life, wholly owned by Sampo plc, and its subsidiariesoperating in the Baltic countries. The company also has a subsidiary supplementingthe services of If in Sweden. Sampo Group is listed on the OMX Nordic Exchange inFinland. Exista announced in February 2007 that the group had acquired a 15.5%stake in Sampo Group and has gradually increased its stake to 20%. Exista hf. ▪ 26 September 2007 ▪ 23
  • Other businessesBakkavör Group is a food manufacturing company specialising in fresh preparedfoods and produce. The group operates 46 factories in seven countries. BakkavörGroup was founded in 1986 by Lýður and Ágúst Guðmundsson, the largest share-holders in Exista. Since its founding, the business has grown significantly and theBakkavör Group is currently the largest provider of fresh prepared foods and producein the UK. Bakkavör Group is the market leader in its key market areas of readymeals, pizzas, convenience salads and leafy salads. Bakkavör Group makes over4,700 products in 17 product categories, which are developed and sold predomi-nantly under its customers own brands. Bakkvor is listed on the OMX Nordic Ex-change in Iceland. Exista became shareholder in Bakkavör Group in 2003 when Bak-kabreadur, the largest shareholder in Bakkavör Group at the time, was acquired byExista (then Meidur ehf.). Exista is now the largest shareholder of Bakkavör Group,holding 39.6% of the company.Storebrand is a Norwegian company with roots going back to 1767. The company isa leading company in the Norwegian markets for pension, life and health insurance,banking, and asset management. Storebrand started selling P&C insurance productsto the retail market in late 2006. The Groups activities are carried out through fourmain business areas: Storebrand Life Insurance, Storebrand Investments, Store-brand Bank and Storebrand Skadeforsikring (P&C insurance). The company is listedon the Oslo Stock Exchange. Exista announced in August 2007 that it had acquired a5.56% stake in the company.Skipti provides a full range of telecommunications, mobile, Internet and IP televisionservices to private and corporate clients in Iceland. The company is largely built onIceland Telecom, a company that was owned by the Icelandic government until July2005, when it was privatised. Skipti ehf. bought the company for ISK 66.7bn. InDecember 2005, Síminn, Skipti and Íslenska sjónvarpsfélagið (Television ServiceCompany) merged. Following the merger, Exista became the largest shareholder inSkipti, with a 43.6% stake in the company. Skipti is currently Existas largest unlistedholding. It is expected that Skipti will be listed on the OMX Nordic Exchange in Ice-land by the end of 2007.JJB Sports plc is a UK sports retailer. JJB was established in 1971 when it acquireda single sports store in Wigan. By 1994, when the company was listed on the LondonStock Exchange, the store portfolio had grown to 120 stores. In 1998 JJB Sportsacquired the business of its largest competitor, Sports Division, making JJB the larg-est sports retailer in the UK. JJB now operates approximately 410 stores in the UK.The product ranges include sports textiles, footwear, replica shirts, equipment, ac-cessories, cycles and golfing products. JJB also operates a Fitness Division that con-sists of 48 health clubs. Exista announced in mid-June that it had entered into a jointventure vehicle with Chris Ronnie which acquired a 29% stake in the company thathad previously been owned by JJBs founder. Existas interest in the joint venturevehicle is 50% and Chris Ronnie has the role of Deputy CEO of the company. Thevalue of the investment was approximately GBP 190m. Exista hf. ▪ 26 September 2007 ▪ 24
  • Existas income statement, balance sheet and key ratiosIncome statement - Exista (€million) Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007Financial assets designated at fair value through p 125 - 95,7 309 25 38,16 35,30Financial assets held for trading 22 1,0 3 103,8 110,83 36,40Dividend 21 0,2 1 58 5,03 6,90Interest revenues 0 9,1 17 23 18,43 19,30Insurance premium - 10,5 35 26 35,21 30,60Share of profits of associates - - - - 457,02 158,30Other revenues - 1,1 4 2 3,26 3,30Total Revenues 168,22 - 73,74 367,99 237,47 667,96 290,20Insurance claims - - 7 - 28 - 22 - 26,50 - 24,50Operating expenses - 2 - 7 - 23 - 18 - 16,68 - 15,50Total Expenses - 1,58 - 14,14 - 51,22 - 39,42 - 43,18 - 40,00Profit before financial expenses 166,64 - 87,87 316,77 198,05 624,78 250,20Interest expenses - 17 - 21 - 27 - 38 - 56,36 - 78,20Net foreign exchange gains (losses) -39,06125 - 23 20 - 8 29,05 52,70 - 56,41 - 44,32 - 6,48 - 45,78 - 27,31 - 25,5Profit before tax 110,23 - 132,19 310,29 152,27 597,46 224,7Income tax - 3 6 - 8 - 5 43,22 - 3,30Profit for the period 106,79 - 125,90 302,02 147,44 640,68 221,4 185,5Attributable to:Shareholders of Exista hf. 107 640,74 221,4Minority interest - - 57,13 0 106,79 - - - 583,61 221,40Balance sheet - Exista (€million)Assets 2005-12-31 2006-06-30 2006-09-30 2006-12-31 2007-03-30 2007-06-30Financial assets measured at fair value 1 990,2 1 691,6 2 352,6 2 272,7 849,5 991,3Financial assets held for trading 100,4 293,9 570,6 837,0 478,1 643,1Loans and accounts receivable - 635,8 680,3 703,8 773,5 769,1Goodwill - 448,6 497,3 464,8 464,6 511,7Investments in associates - - - - 4 056,8 4 611,9Reinsurance assets - 21,2 24,0 15,8 15,7 13,6Property and equipment - 13,1 14,1 12,2 13,4 28,1Cash and equivalents 66,5 53,1 62,8 76,1 88,4 109,6Other assets 8,7 36,8 9,3 12,6 22,2 30,7Total assets 2 165,8 3 194,0 4 210,9 4 395,1 6 762,2 7 709,1Equity and liabilitiesEquityShare capital 116,3 111,3 122,1 112,3 120,6 120,6Statutory reserves 28,9 22,2 24,3 22,8 22,8 22,8Capital reserves 232,3 723,3 793,4 697,9 892,7 892,4Translation reserves - 1,8 - - - 24,4 - 8,4Retained earnings 910,8 612,7 984,3 1 061,3 1 578,3 1 799,7Shareholders equity 1 286,5 1 469,5 1 924,1 1 894,3 2 638,8 2 827,1Minority interest - 2,5 2,3 5,9 4,6 0,4Total equity 1 286,5 1 472,0 1 926,4 1 900,2 2 643,4 2 827,5LiabilitiesBorrowings 876,8 1 386,5 1 923,6 2 183,0 3 668,3 4 575,1Technical provisions - 262,4 274,1 223,9 278,8 254,8Deferred income tax liability 0,5 45,2 57,5 60,2 21,1 28,0Other liabilities 1,9 27,9 29,4 27,8 150,6 23,7Total liabilities 879,2 1 722,0 2 284,6 2 494,9 4 118,9 4 881,6Total equity and liabilities 2 165,7 3 194,0 4 210,9 4 395,1 6 762,2 7 709,1Key Ratios 1H06 1H07 2005 2006Earnings per share (EPS) (cent) -0,42 7,65 3,97Return og equity -2,70% 35,1% 104% 27,10%Price earnings (P/E) 5,4Price to book (P/B) 1,65 1,36Price pr. share in ISK 34,4 22,5Equity Ratio 46,1% 36,7% 59,4% 43,2%Internal value of shares 13,23 23,45 11,06 16,59Shareholders % of capitalBakkabraedur Holding B.V. 45,21% Chairman Lýður GuðmundssonKista-fjárfestingarfélag ehf 8,94% CEO Erlendur HjaltasonCastel (Luxembourg)SARL 5,10% CEO Sigurður ValýtssonArion safnreikningur 4,76% CFO Sveinn Thór StefánssonEignarhaldsfélag Samvinnutrygg svf 3,53% IR Sigurður NordalSource: Kaupthing estimates and company data Exista hf. ▪ 26 September 2007 ▪ 25
  • IMPORTANT DISCLOSURESCompany covered: Exista hf. (Hereafter referred to as "This Company")Planned frequency for updates of report about this Company: 8 times per yearShares held by the analyst(s) and/or close associate in this Company: 0Other material interest (if any): NoneThis report has not been presented to the Company before publication.* Below refers to recommendations set in Kaupthings recommendation structure before 22 January 2007. See definitions belowKaupthing has made no change to its recommendation on this company in the past 12 months.Kaupthings interests and the CompanyKaupthing and its affiliates are market makers in financial instruments issued by this Company.Kaupthing and its affiliates hold no substantial position in financial instruments in the Company.Kaupthing and its affiliates have been lead manager in the last 12 months of a publicly disclosed offer of financial instruments of this Company.Kaupthing and its affiliates have provided investment banking services to this Company over the last 12 months.Description of investment banking services (if applicable): Not applicableKaupthing and its affiliates have received compensation for investment banking services to this Company over the last 12 months.Kaupthing is not party to an agreement with the relevant Company with regard to research coverage.Kaupthing does not have knowledge of interests or conflicts of interests that other companies within the Kaupthing Group may have with any issuer covered bythe Research Department.Kaupthing and its affiliates hold no substantial position in financial instruments in the Company. However, the Company owns a substantial position in financialinstruments in KaupthingSupervisory authoritiesThe lead analyst (see front page) is employed by Kaupthing, which is legally responsible for this report and is regulated by: The Financial Supervisory Authority ofIceland (Fjármálaeftirlitið).Kaupthing operates a system of Chinese Walls in order to control the flow of information within the firm; the Research Department is part of this system. TheResearch Analysts of Kaupthing receive salary, and are members of the Kaupthing bonus pool. Analysts do not receive remuneration linked to the performance oftheir recommendations. Furthermore their remuneration is not linked to specific Investment Banking projects.Kaupthing Research DepartmentRecommendation definitionOur recommendations are based on a twelve-month horizon, and on absolute performance. Since 22 January 2007 we apply a three-stage recommendationstructure where Buy indicates an expected annualised return of greater than +15%; Neutral, from 0% to +15%; Reduce, less than 0%.(Note: Before 22 January 2007, we used a four-stage recommendation structure where Buy indicated expected return of greater than +15%; Accumulate: greaterthan +5% and less than or equal to +15%; Reduce, greater than -10% and less than or equal to +5%; and Sell, less than -10%.)Current recommendations of the Research Department: (refers to recommendations published prior to this report) Kaupthing Percent SRO Equivalent Percent Buy 51% Buy 51% Neutral 41% Hold 41% Reduce 7% Sell 7% Total 100% Total 100%Generally, investments in financial instruments involve risks. For specific risks related to our various recommendations, please see the latest relevant reports. Thetarget prices on companies in the Kaupthing Research universe reflect the subjective view of the analyst about the absolute price that shares should trade at,within our twelve-month recommendation horizon. The target price is based on an absolute valuation approach, which is detailed in our research reports. Thetarget price can differ from the absolute valuation, in accordance with the analysts subjective view on the trading or cyclical patterns for a particular stock, or apossible discount/premium to reflect factors such as market capitalisation, ownership structure and/or changes in the same, and company-specific issues.Standard research disclaimerThis report or summary has been prepared by Kaupthing from information obtained from different sources not all of which are controlled by Kaupthing. Suchinformation is believed to be reliable, and although it has not been independently verified Kaupthing has taken all reasonable care to ensure that the information istrue and not misleading. Notwithstanding such reasonable efforts, Kaupthing can not guarantee that the information contained in this report or summary is accu-rate or complete, and Kaupthing assumes no obligation for, and makes no representations with respect to, the accuracy or completeness of the informationcontained in this report or summary. Kaupthing assumes no obligation to update the information contained in this report or summary to the extent that it issubsequently determined to be false or inaccurate.The analyst(s) who prepared this report or summary certify that: (1) the views expressed accurately reflect the analysts’ personal views about any and all of thesubject securities or issuers; and (2) no part of the research analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommenda-tions or views expressed in this report or summary.This report or summary is provided for informational purposes only and under no circumstances is it to be used or considered as an offer to sell, or a solicitation ofany offer to buy any securities. This report or summary is prepared for general circulation and general information only. It does not have regard to the specificinvestment objectives, financial situation or the particular needs of any person who may receive this report or summary. Investors should seek financial adviceregarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report or summary and should understandthat statements regarding future prospects may not be realized. Companies in the Kaupthing Group may have positions or other interests in the securities that aredirectly or indirectly subject to this publication. Further information on the securities referred to herein may be obtained from Kaupthing Bank Sverige AB (publ).Performance in the past is not a guide to future performance. Kaupthing accepts no liability whatsoever for any direct or consequential loss arising from the use ofthis publication or its contents. Investors in the US should be aware that investing in non-US securities involves certain risks. The securities of non-US issuers maynot be registered with, or subject to, the current informational reporting and audit standards of the US Securities and Exchange Commission.The distribution of this research report to U.S. persons in the United States of America is made by and under the responsibility of Kaupthing Securities Inc. (regis-tered with the SEC). This research report is only intended for persons who qualify as major U.S. Institutional Investors, as defined in Securities Exchange Act Rule15a-6, and who deal with us. However, the delivery of this research report or summary to any U.S. person shall not be deemed a recommendation of KaupthingSecurities Inc. to effect any transaction in the securities discussed herein or an endorsement of any opinion expressed herein. Kaupthing Securities Inc. mayfurnish upon request all investment information available to it supporting any recommendation made in this research report.These materials may not be reproduced, distributed or published by any recipient for any purpose. Please cite source when quoting. We use only sources we findreliable and accurate, unless otherwise stated in the relevant reports.“Kaupthing”, when used in this publication refers to all or any of Kaupthing Bank Sverige AB (publ), Sweden, Kaupthing Bank hf, Iceland, Kaupthing Bank Oyj,Finland, Kaupthing Føroyar Virðisbrævameklarafelag P/F, Faroe Islands, Kaupthing ASA, Norway, FIH Erhvervsbank A/S, Denmark, Kaupthing Bank LuxembourgS.A., Luxembourg, Kaupthing Limited, UK and or Kaupthing Securities Inc., USA.Kaupthing or an affiliate may from time to time perform investment banking or other services (including acting as advisor, manager or lender) for, or solicitinvestment banking or other business from, companies mentioned in this publication for investment banking services in the next three months. Exista hf. ▪ 26 September 2007 ▪ 26