EUR 440.22 For Business Accounts Only

Trelleborg (Hold, TP: SEK200.00) - Too dry for Wheel Systems We like the long-term growth case in Sealings Solutions and Wheel Systems. However, given the uncertainty regarding the agriculture aftermarket as well as continued weak performance in the Oil &

Trelleborg (TRELB SS, Hold) - Too dry for Wheel Systems We like the long-term growth case in Sealings Solutions and Wheel Systems. However, given the uncertainty regarding the agriculture aftermarket as well as continued weak performance in the Oil & Gas division, we reiterate our HOLD recommendation and have lowered our target price to SEK200 (215). The Q2 results are due at 07:45 CET on 20 July. Weather still an issue. We expect adj. EBIT of SEK1,311m, ~2% below SME Direkt consensus (updated post Q1 results). We expect sales of SEK8,911m, up 8% YOY (organic growth: 3%; FX: 4%; and structure: 1%), and the EBIT margin up by 150bp YOY, to 14.7%. We forecast continued negative organic growth in the Oil & Gas (O&G) division (-16% YOY) and an operating loss of SEK24m, driven by weak demand together with low capacity utilisation in the O&G plant in Houston, Texas, which is being closed. We also expect a continued negative mix impact in Wheel Systems following dry weather conditions in Q2, which should lead to still-weak demand for replacement tyres. For the division, we expect Q2 organic growth of 6% YOY, indicating that Trelleborg continued to gain market share as registrations of tractors in North America, Germany and South America combined were up by 3% in April–May YOY. Negatively, we note that the business climate indicator for agriculture in Europe CEMA has continued to decline from its peak in February, although it still indicates expansion. Management likely to reiterate Q3 outlook, in our view (i.e. demand on a par with Q2, adjusted for seasonal variations on the back of good order intake in Q2). We expect organic growth to accelerate from 3.2% in Q2e to 4.6% in Q3e, driven by less negative organic growth in Offshore & Construction as well as slightly higher organic growth in Wheel Systems. Ahead of the Q2 results, we have made only minor forecast changes. HOLD reiterated, target price down to SEK200 – we find the shares fairly priced. On consensus 12-month forward EV/EBIT, Trelleborg trades at 11.2x, a discount of ~10% versus the five-year historical average. Compared to Swedish Capital Goods peers, it trades at a 5% discount versus a historical valuation in line with the sector. Our SEK200 target price reflects 7% lower valuation multiples due to the recent weakening of the CEMA business climate indicator. Investment case overview Share price performance, DNB Markets’ target price, bear- and bull-case scenarios Target price methodology / We base our target price on a 2019 EV/EBIT of 11.3x. Previously we based our target price on a 2019e EV/EBIT of 12.0x. Our bull-case fair value is based on 8% higher EBIT than forecast. Our bear-case fair value is based on 11% lower EBIT than forecast. Source: FactSet, DNB Markets Source: DNB Markets Downside risks to our investment case DNB Markets investment case and how we differ from consensus Upside risks to our investment case Further weakness in the Oil & Gas segment (8% of total sales). Slowdown in automotive and aerospace segments. FX. We like the long-term growth case in Sealings Solutions and Wheel Systems. Following the CGS acquisition and TBVC divestment, we expect the company to make limited structural changes. Future acquisitions could trigger a revaluation of the Trelleborg shares. Rebound in the oil price. FX. Source: DNB Markets Source: DNB Markets Source: DNB Markets Net sales bridge 2017–2019e (SEKm) / Source: DNB Markets (forecasts), company (historical data) Figure 1: Trelleborg Wheel Systems and CEMA Business Climate Index / Source: CEMA, Trelleborg (historical figures), DNB (forecasts) Figure 2: Tractor registrations, North America and Brazil, units 12-month rolling Figure 3: Tractor registrations, current registrations versus peak, 12-month rolling / / Source: Bloomberg Source: Bloomberg Figure 4: Quarterly estimates by division (SEKm) 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2e 2018Q3e 2018Q4e Net sales Trelleborg Coated Systems 671 674 644 565 593 890 894 902 972 Trelleborg Industrial Solutions 1,390 1,428 1,468 1,290 1,387 1,923 1,982 1,824 1,890 Trelleborg Offshore & Construction 893 754 775 698 787 576 604 666 746 Trelleborg Sealing Solutions 2,164 2,623 2,596 2,388 2,349 2,800 2,880 2,730 2,625 Trelleborg Wheel Systems 1,883 2,328 2,360 1,996 2,198 2,505 2,650 2,503 2,540 Group items 61 91 (98) (69) -76 -117 -100 -85 -85 Group total 7,434 8,298 8,265 7,314 7,708 8,577 8,911 8,540 8,687 Organic growth Trelleborg Coated Systems 5% 2% (3%) (2%) -7% -4% -6% -2% 3% Trelleborg Industrial Solutions 0% 3% 2% 4% 8% 8% 5% 4% 4% Trelleborg Offshore & Construction (27%) (17%) (9%) (14%) -8% -18% -20% -5% -5% Trelleborg Sealing Solutions 2% 9% 6% 8% 9% 8% 8% 5% 5% Trelleborg Wheel Systems 0% 8% 8% 7% 17% 4% 6% 10% 5% Continuing operations (4%) 3% 3% 3% 4% 5% 3.2% 4.6% 3.7% EBIT (adjusted) Trelleborg Coated Systems 87 72 69 58 61 113 109 108 129 Trelleborg Industrial Solutions 155 160 168 128 175 212 224 182 232 Trelleborg Offshore & Construction 17 3 (19) (29) -11 -34 (30) (20) (15) Trelleborg Sealing Solutions 434 618 611 533 469 684 711 609 538 Trelleborg Wheel Systems 174 283 278 215 240 368 376 298 292 Other & Eliminations (57) (43) (66) (18) -30 -52 (80) (52) (51) Group total 841 1,154 1,089 920 928 1,291 1,311 1,125 1,126 EBIT margin (adjusted) Trelleborg Coated Systems 13.0 10.7 10.7 10.3 10.3 12.7 12.2 12.0 13.3 Trelleborg Industrial Solutions 11.5 11.2 11.4 9.9 12.6 11.0 11.3 10.0 12.3 Trelleborg Offshore & Construction 1.9 0.4 -2.5 -4.2 -1.4 -5.9 -5.0 -3.0 -2.0 Trelleborg Sealing Solutions 19.7 23.6 23.5 22.3 20.0 24.4 24.7 22.3 20.5 Trelleborg Wheel Systems 9.2 12.2 11.8 10.8 10.9 14.7 14.2 11.9 11.5 Group total 11.3 13.9 13.2 12.6 12.0 15.1 14.7 13.2 13.0 Source: DNB Markets (forecasts), company (historical data) Figure 5: Annual estimates by division (SEKm) 2013 2014 2015 2016 2017 2018e 2019e 2020e Net sales Trelleborg Coated Systems 1,839 1,932 2,559 2,526 2,476 3,657 3,963 4,082 Trelleborg Industrial Solutions 4,407 4,940 5,117 5,193 5,573 7,619 8,068 8,310 Trelleborg Offshore & Construction 3,608 3,697 4,331 3,467 3,014 2,593 2,685 2,873 Trelleborg Sealing Solutions 7,093 7,646 8,302 8,559 9,956 11,035 11,704 12,055 Trelleborg Wheel Systems 4,189 4,167 4,315 6,354 8,882 10,198 11,146 11,815 Other & Eliminations 337 133 179 (17) (249) -387 -340 -340 Continuing operations 21,473 22,515 24,803 27,145 31,585 34,715 37,226 38,795 Organic growth Trelleborg Coated Systems (1%) (3%) 1% (2%) (3%) (2%) 3.0% 3.0% Trelleborg Industrial Solutions (0%) (2%) (5%) (2%) 4% 5% 4% 3% Trelleborg Offshore & Construction (2%) (1%) 3% (23%) (12%) (12%) 2% 7% Trelleborg Sealing Solutions 1% 3% (2%) 1% 8% 6% 4% 3% Trelleborg Wheel Systems (3%) (6%) (6%) 1% 10% 6% 6% 6% Continuing operations (1%) (1%) (2%) (4%) 4% 3.7% 4.4% 4.2% EBIT (adjusted) Trelleborg Coated Systems 197 227 317 323 361 460 503 527 Trelleborg Industrial Solutions 432 529 560 541 693 851 948 997 Trelleborg Offshore & Construction 274 281 199 108 -61 -99 43 101 Trelleborg Sealing Solutions 1,486 1,730 1,885 1,903 2,231 2,542 2,658 2,748 Trelleborg Wheel Systems 490 504 468 720 1,016 1,334 1,458 1,548 Other & Eliminations (266) (270) (210) (211) -149 -235 -210 -250 Group 2,613 3,001 3,219 3,496 4,091 4,853 5,401 5,671 EBIT margin (adjusted) Coated Systems 10.7% 11.8% 12.4% 12.8% 10.7% 12.6% 12.7% 12.9% Industrial Solutions 9.8% 10.7% 10.9% 10.4% 10.1% 11.2% 11.8% 12.0% Offshore & Construction 7.6% 7.6% 4.6% 3.1% -2.1% -3.8% 1.6% 3.5% Sealing Solutions 21.0% 22.6% 22.7% 22.2% 22.4% 23.0% 22.7% 22.8% Wheel Systems 11.7% 12.1% 10.8% 11.3% 11.4% 13.1% 13.1% 13.1% Group 12.2% 13.3% 13.0% 12.9% 13.0 14.0 14.5 14.6 Source: DNB Markets (forecasts), company (historical data) Figure 6: Q2e DNB Markets versus consensus (updated post Q1 results) / Source: DNB Markets & SME Direkt Consensus Valuation Figure 7: EV/EBIT 12-month forward Trelleborg versus Swedish Capital Goods Figure 8: Premium/discount EV/EBIT 12-month forward Trelleborg versus Swedish Capital Goods / / Source: Factset (underlying data), DNB Markets (further calculations) Source: Factset (underlying data), DNB Markets (further calculations) Figure 9: DNB Markets' Nordic Capital Goods sector / Source DNB Markets (estimates) (17 pages)