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Kingspan Group

A bet on a green world We issue a Hold recommendation on Kingspan Group based on a 12-month target price

of €17.11 implying an upside of 8.9% on its closing price of €15.70 on the 27th

of January, 2015. Kingspan is a global manufacturer of high performance insulation, environmental and access floors solutions with a strong brand, high quality product line and excellent financial position. In addition, it is well positioned to benefit from the growth in green buildings, shifting views on environmental issues, improving regulation standards and rising appetite for reduction in energy costs. We believe however that these positive trends are largely priced in and the stock trades within 8.9% of fair value hence our hold recommendation.

Improving economic environment to boost recovery

Despite growth lagging over the last few years we see Kingspan revenue and margins improving over our forecast period as a result of strong economic activity in the US, signs of a recovery picking up pace in the UK and improving medium-term prospects in the EU. Growth prospects in the construction industry across all of Kingspan’s major markets suggests a top line CAGR of 10.8% from 2014 to 2018. In addition, the rise in sales should lead to a reduction in the level of idle manufacturing capacity, with manufacturing utilisation rising from 65% in 2014 to a normalised rate of 70% or higher by 2018, increasing operating margin 160 basis points to 9.1% by 2018. Our calculations indicate this should lead to an annual rise in net profit of 18% from 2015 to 2018.

Superior Investment Returns

Kingspan have consistently outperformed building materials sector peers despite significantly lower leverage levels. During the last twelve months Kingspan achieved a return on equity of 11.4%, outpacing its peer average of 8.5%, an outperformance made more impressive by its lower leverage levels. Crucially, despite the difficult environment in Kingspan’s primary markets and the temporary negative pressure on profit margins from recent acquisitions, group return on invested capital of 9.4% remains higher than our estimate of its cost of capital of 7.5%. This excess return is highly indicative of comparable advantages such as Kingspan’s strong brand power, high quality product line and excellent management. We forecast the full extent of this ‘moat' to become apparent as Kingspan achieves ROIC of 13% by 2018 upon return to normalised output and completion of ongoing integrations of acquired businesses.

Ticker: KSP:ID Current Price: €15.70 Recommendation: Hold

Date: 27/01/2015 Target Price: €17.11 Upside Potential: 8.9%

Market Profile

Closing Price €15.70

% of 52 Week Range 92.3%

Shares Outstanding 171.7m

Market Cap (Millions) €2,776

Daily Volume (ttm) 365,161

Div. yield (ntm) 0.94%

P/E (ntm) 21.3

P/B (mrq) 3.01

Financials 2012 2013 F2014 F2015 F2016 F2017 F2018

Revenues (€m) 1,629 1,790 1,880 2,562 2,649 2,739 2,832

EBITDA (€m) 148 163 188 252 279 308 338

Basic EPS (€) 0.44 0.52 0.62 0.82 0.93 1.05 1.17

Trading Margin 6.6% 6.9% 7.8% 7.6% 8.2% 8.8% 9.4%

Net Profit Margin 4.6% 5.0% 5.9% 5.7% 6.2% 6.8% 7.3%

ROA 4.7% 5.6% 6.5% 6.8% 7.4% 8.1% 8.8%

ROE 9.2% 10.4% 11.8% 13.9% 14.2% 14.4% 14.4%

ROIC 7.6% 9.4% 10.6% 11.7% 12.3% 12.7% 13.0%

EBITDA/Net Interest 10.0 12.0 13.0 11.6 13.3 15.3 17.7

Net Debt to EBITDA 1.2 0.6 0.6 0.9 0.8 0.7 0.6

CFO/Capex 4.5 3.5 2.9 3.2 2.2 2.0 1.9

Current ratio 1.6 1.8 1.9 1.7 1.8 1.9 2.1

Business Overview

Kingspan is a global player in high performance insulation solutions founded in 1965 as an engineering business manufacturing steel frame buildings and structural sections. Then known as Kingscourt Construction, the group began manufacturing insulated panels in the 1970s before expanding quickly during the 1980s and raising an equivalent of €25 million on the Irish Stock Exchange in 1989. In recent times Kingspan have come to dominate the global market for high performance insulation panels and boards with FY2013 overall revenues of 1.8 billion from sales primarily in the UK (34%), Europe (39%) and North America (13%). Entries into the Access Floors and Environmental businesses have diversified the primary product set as well as created opportunities for energy efficient insulation and renewable power generation integrated solutions.

Insulated panels are displacing more traditional techniques as evidenced by growing penetration rates in the UK, Europe and to a smaller extent in the US according to Kingspan research. End markets are comprised of the Commercial & Industrial (65%), Office & Data (20%) and Cold Store (15%) sectors. Architectural panels, like the company's Benchmark Façade secret-fix wall panel range, are the most profitable products combining higher energy efficiency and freedom of design.

Penetration of insulation boards is levelling off after a decade of strong growth at around 40% in the UK with growth poised to come from Western Europe where penetration is forecast by internal company research to reach 9% in 2017 from 7% in 2013. Proprietary technology such as Kooltherm, the most profitable range, and Therma provide substantial energy efficiency gains over industry standard materials such as glass wool, with company estimates indicating 47.5% less heat loss. Team industry research suggests Kingspan insulation boards are perceived to be the industry benchmark, even if somewhat more expensive. Insulated panels sales are concentrated in the UK and mainland Europe supplying the Residential (50%), Commercial & Industrial (35%) and Office & Data (15%) sectors.

Access Floors, offering a raised floor range and underfloor air management, services primarily the Office & Data sectors in the US and UK. Operating at a 10.5% trading margin in FY2013, Access Floors is Kingspan’s most profitable division even if its impact on overall income is somewhat muted due to its small contributions to firm revenues and operating income of 9% and 14% respectively in FY2013.

Lastly, the company also offers renewable energy generation and water management services. The division has recently undergone a restructuring in response to low profitability and losses generated since inception which the group has announced amounts to 4.1m euros, or 2.8% of divisional sales in FY2013. Kingspan have stated their intentions to return the division to profitability by growing its presence in the UK new build market; it remains to be seen if Kingspan can achieve sustained profitability in the renewables division against a tough backdrop for the industry. If the division continues to post losses management will come under pressure to exit the business altogether.

Strategy

Kingspan’s strategy consists of 1) achieving a differentiated and proprietary product set 2) driving penetration growth of high performance insulation techniques and 3) increasing its geographical presence in the US and certain emerging markets. An annual return on capital employed, measured as annual gross margin, of 15% is the firm’s ultimate goal and was last achieved in 2007 prior to the global downturn following the sub-prime mortgage crisis.

The downturn has however provided the group with an opportunity to go shopping and grow its presence in North America, a long-term strategic goal, through acquisitions of Metecno, VicWest and Pactiv setting up an insulation boards business and a leading position in insulation panels in the continent. Although acquisitions have generally provided the firm with a manufacturing base and route to market in order to establish itself in a new region, at other times they have been in part driven by the target’s proprietary technology. Benchmark and Kooltherm are examples of proprietary technology owned by acquired businesses and further developed by Kingspan which have become flagship offerings.

Source: Kingspan Group 2013 Annual Report

Kingspan holds a variety of proprietary technologies concentrated mostly within the insulation panels and boards businesses. Benchmark, acquired from Metecno in 2008, and Kingspan-developed Benchmark variants such as Kreate introduced a greater variety of design options as well as fully customisable shapes which have proven extremely popular with architects. Optim-R, introduced in 2013, is a vacuum insulation solution providing up to 65% less heat loss than Polyurethane whereas SolarPanel is a solar insulation panel hybrid enabling customers to boost energy efficiency through renewable energy generation. The company has accelerated product launches over the last years with two to three launches per year and looks set to continue achieving at least a quarter of annual sales from proprietary technology.

Shareholder Structure

Kingspan total issued share capital totals 174,976,563 ordinary shares of which 2.8% are held by the company and 17.64% by CEO Eugene Murtagh as of the 31st of December, 2013. A number of leading institutional investors held 30.4% of outstanding shares with the rest being held by the public. Despite some issues in the past such as the insider trading episode involving board member Brendan Murtaugh, we believe that Kingspan has generally benefited from the influence of the Murtagh family and if anything their control bodes well for long-term shareholder wealth maximisation.

Corporate Governance and Social Responsibility

Corporate Governance

Kingspan is essentially a family owned and managed business. Family business managers and executives tend to be very loyal to the business and are interested in maintaining their legacy through the success of the company. As such they make decisions based on expectations for the long term growth and performance of the business. Kingspan has four main sub committees; Audit, Remuneration, Nominations and Acquisitions. Of these Gene M. Murtagh (CEO) has a role in nominations and acquisitions, and his father Eugene Murtagh is the acting Chairman of the Board.

From the details given in the annual report the other 10 members of the Board appear to be sufficiently qualified and experienced to hold their current roles. Compensation is disclosed in the annual report and KPMG conducted an external audit of the company in 2012 and 2013.

Social Responsibility

Social Responsibility is of great importance to Kingspan who aim, “To be a global leader in sustainable business and establish a leading position in providing ethical, renewable and affordable best practice solutions for the construction sector”. They aim to achieve this by ensuring the sustainability of their products throughout their lifecycles (from installation to disposal), ethically sourcing the materials required for their production process, and a target for internal Net Zero Energy environment at some point in the future with Net 50% on track for 2016. Kingspan are also involved with the communities they operate within and supports various charities within these communities.

Industry Overview & Competitive Positioning

Themes in the Global Economy

The world economy is trying to gain momentum despite recent lows in oil prices1. Global

GDP is expected to grow at 2.6%, 3% and 3.3% in 2014, ‘15 and ‘162. Global financial

conditions will tighten with expectations that the FED and the BOE will increase rates. Despite optimism on the general global outlook, volatility in the markets remains a concern as growth remains fragile

2. The US remains strong with estimated annual GDP growth at

2.4%, 3.6% and 3.3% in 2014, ‘15 and ‘16. Consumer spending is improving supported by strong employment data. Europe gained momentum at the start of 2015 as output in both services and the manufacturing sectors accelerated

3. Consensus estimates for GDP are

low but are likely to change in the coming quarters The fall in oil prices should positively impact real wage growth in the region

2. The UK has made progress as a result of a strong

housing market and growing credit conditions. GDP is projected to grow at 2.6%, 2.9% and 2.6% in 2014, ‘15 and ‘16. The BoE is expected to tighten monetary policy in 1H15 however the weakness from Europe, low inflation and restrained wage growth may delay a rate increase

1.

Substantial Holdings

Institution % Shares held

Eugene Murtagh 17.64% Generation Investment Management LLP 8.65%

Prudential plc 6.94%

BlackRock Inc. 6.00% Investec Asset Management 4.86%

Invesco Limited 3.99%

Total Compensation (€’000) 2012 2013

Gene M. Murtagh 1,383 1,382

Executive Directors* 3,113 3,506

Non-Executive Directors

581 591

*Exc. Gene Murtaugh

GDP Growth Projections

2014 2015 2016 2017

Germany 2.4 1.8 0.2 -0.4

France -2.8 -0.4 1.8 1.6

Italy -2.2 1.1 2.5 2.8

Spain -2.4 1.8 3.6 5

Netherlands 0.3 3.4 3.5 4.7

Switzerland 0.8 -0.7 1.4 1.5

Norway 2.1 3.9 2.5 2.9

Poland 4.9 7.1 6.2 6.7

Belgium 0.7 0 1.5 2.4

Sweden 5.3 1.3 1.1 1.6

Austria 1.7 1 1.3 1.5

Finland -0.2 1.5 1.7 3.2

Denmark 2.5 2.9 3.5 3.7

Czech R. 1 2.5 3.3 4

Portugal -1 2.5 3.6 5

Ireland 10.1 9 10.6 9.2

Hungary 14.3 5.1 3.8 2.9

Slovakia -0.4 1.8 2.7 3

Source: Euroconstruct Conference

Construction and Construction Related Materials Sector

Construction accounts for approximately 10% of GDP in Europe and the United States, and 6.7% of GDP in the UK. Huge losses in market size have been observed in the past seven years, the construction sectors in the UK and many western European countries were affected disproportionately by the recession in 2008. For the European region as a whole, predictions of growth are languishing around 2.1% for this year and 2.2% for the following three to four years. In the UK growth expectations range from 2.4-5.1% annually for the next four years and in the United States the industry is expected to grow between 75% between 2012 and 2025

4. In the United States growth in the demand for insulation is

expected to be strong at 5% annually until 2018, much of this growth will be driven by residential construction

5.

2020 Energy Efficiency Objective

Targets put in place by the European Union to tackle climate change by reducing CO2 emissions by 20% by 2020 as well as working towards 20% of renewable energies as energy consumption

6. A financing framework which promotes energy efficient projects has

been put in place which will see more public money being channeled towards projects which Kingspan is perfectly poised to take advantage of.

Construction 2025

Commitment from the UK government to meet four major targets one of which is a 50% reduction in CO2 emissions by 2025. Eugene Murtagh has been reported as saying, any initiative to reduce CO2 emissions or changes in regulation requiring reductions in energy consumption helps boost company revenues

7.

Off-site Construction

Considered a ‘Modern Method of Construction’ in industry this is a trend that is expected to become more important in the next three to four years in the UK. Recent estimates are that it only makes up about 6% of the construction market while in situ construction remains industry standard

8. Growth in this trend will have a positive effect on Kingspan’s

sales figures as it should fuel increasing interest in their bespoke offsite SIP construction system Benchmark.

Refurbishment Incentives

Selected insulation products are subsidized by the government for refurbishment of existing properties which fall short of insulation standards. Kingspan’s ‘Kooltherm’ range of products was approved as products which could receive this subsidy by the energy regulator in the UK

9.

Latent Regulatory Advance

Recommendations surrounding residential and commercial new builds’ energy efficiency, insulation requirements or insulation material performance are not as prescriptive as those found in Europe. There does not seem to be the same appetite in the US to improve standards or enforce stringent energy efficiency requirements for construction, as such customers (residential in particular) will tend to choose the insulation product which is at the lowest price point for what is required.

Preference for Fiberglass Insulation

Kingspan’s products including rigid board insulation and insulated panels are not expected to see huge increases in popularity in the American residential construction industry in the next three to four years. A combination of factors has resulted in this, strong competition from fiberglass insulation providers and sprayed foam insulation, and a relaxed attitude of US regulators. As it stands estimates for the insulation market in the US are such that 50-75%

5&10 of the market is for fiberglass insulation.

Difference in Building Practices in US and Europe

Residential construction leans heavily in favour of timber frame construction (a practice which is becoming more popular in the UK, Ireland and Europe) rather than blockwork homes. These homes are easier and faster to erect and have the added benefit of the increased thermal performance of the building material, this provides even less of an incentive for the US residential customer to opt for the more expensive high performance product that Kingspan offers.

"We love regulations. We

understand they can be a pain in

the arse but we purposefully

positioned the business to take

this opportunity and anything that

reduces energy consumption is

good." – Gene Murtagh (2006)7

Source: Freedonia Group and US Department of Energy

Source: Global Construction Perspectives

Kingspan

(Kooltherm

K8 Cavity

Wall Board)

Quinn-

therm

(Partial Fill

Cavity Wall

Board)

Rockwool

(Cavity Slab)

Board

Size1.2x0.45m 1.2x0.45m 1.2x0.45m

Thickness 70mm 70mm 100mm

U-Value

Range0.21W/m2K 0.25W/m2K 0.29W/m2K

Product Comparison

A lower U-Value indicates improved thermal performance and indicates high levels of insulation. We can see that Kingspan products produce lower U-Values with thinner or equivalent thickness.

Other

Growth in the global construction industry is predicted to be about 4.3% annually until 2017 and to have grown from $8.7trillion to $15trillion or by 70% in size by 2025

4. Much of

this growth will be concentrated in Asia, Africa and South America; markets that Kingspan does not hold much of a presence in terms of sales.

Major Competitors

Kingspan competes on a global scale, also on a regional basis, most notably in the UK and Ireland. Regional competitors like Quinn-therm and Ballytherm, produce similar rigid board insulation products that Kingspan produce with slightly lower efficiency and without the same fire rating certification that Kingspan’s Kooltherm or Optim-R range hold. This could account for the 40% discount in price. Globally competition is mainly with companies who produce alternative methods of insulation to Kingspan’s board and panel systems, like fibrous wool and blown in insulation.

Proprietary technology and continued Research and Development

Kingspan claim to have proprietary technology in a number of products within their range and are a company who undertake continued quality improvements and product line expansion, through acquisition of new technology and development of in-house methods of production. With the development of new products like Optim-R and the bespoke SIP range Benchmark we expect novel and exciting building products to come from this company as it grows.

Reputation in the Market Place

A strong reputation in the construction materials markets globally has made into a household name in the UK and Europe. The company was included in the UK Superbrands List in 2013. I believe they have achieved this through superior marketing techniques compared to their competitors as well as their innovative product line.

Strategic Positioning in Green Building

With global green construction set to grow at approximately 23% annually until 20178

Kingspan have positioned themselves to take full advantage of this growth in their main markets. They are the industry leaders in hyper efficient septic tank treatment systems and rain water collection systems with their subsidiary Klargester. Alongside the waste treatment systems they have developed Kingspan is also involved with the production and installation of green energy solutions.

Investment Summary

We issue a Hold recommendation on Kingspan Group based on a 12-month target price

of €17.11 implying an upside of 8.9% on its closing price of €15.70 on the 27th

of January, 2015. Kingspan is a global manufacturer of high performance insulation, environmental and access floors solutions with a strong brand, high quality product line and excellent financial position. In addition, it is well positioned to benefit from the growth in green buildings, shifting views on environmental issues, improving regulation standards and rising appetite for reduction in energy costs. We believe however that these positive trends are priced in as the Kingspan trade within 8.9% of fair value.

Products

SIP Rigid Board Insulation

Insulated Duct System

Vacuum Insulated

Panel

Fibrous Wool Insulation

Expanding Blown-In Insulation

Global Presence

Kingspan

Owens Corning Patent Submitted

Rockwool

Saint Gobain

Tata Steel

"We love regulations. We

understand they can be a pain in the

arse but we purposefully positioned

the business to take this opportunity

and anything that reduces energy

consumption is good." – Gene

Murtagh (2006)

Acquisition driven growth concealing weak recovery

Kingspan is a highly cyclical firm and as such has experienced substantial earnings volatility over the last decade, initially benefiting from the construction boom leading to the housing market bubble then seeing sales fall by a third during the subsequent downturn. After the financial crisis growth has come mostly from expansion in mainland Europe and North America with sales growth from existing operations in negative territory in three out of the last four reported financial years (2010 to 2013).

Improving economic environment to boost recovery

Despite growth lagging over the last few years we see Kingspan revenue and margins improving over the next four years as a result of strong economic activity in the US, signs of a recovery picking up pace in the UK and improving medium-term prospects in the EU. Growth prospects in construction across all of Kingspan’s major markets and recently announced acquisitions suggest a top line CAGR of 10.8% from 2014 to 2018. In addition, the rise in sales should lead to a reduction in the level of idle manufacturing capacity, with manufacturing utilisation rising from 65% in 2014 to a normalised rate of 70% or higher by 2018, increasing trading margin 250 basis points to 9.4% by 2018 from 6.9% in 2013. Our calculations indicate this should lead to an operating income CAGR of 17.1% from 2014 to 2018.

Valuation indicates fair market price

A Discounted Cash Flow analysis was carried out in order to determine the fair value of Kingspan shares based on our view of its short to long-term prospects. We opted for a two-stage growth model in order to accommodate our view that Kingspan is currently recovering from an industry cyclical low and that therefore its free cash flow growth does not currently reflect a normalised rate. We forecasted free cash flow growth into the future at 2018 levels upon return to normalised profitability. The resulting implied share price of €17.21 indicates that Kingspan currently trades within 9.6% of fair value.

An analysis of Kingspan’s current trading multiples in relation to a rigorously selected set of peers indicates a price of €17.01. We believe these results strongly validate the assumptions made in our DCF analysis and further confirm that Kingspan is priced close to fair value.

Robust firepower potential upside

Significant upside potential to our 12 month target price is possible should Kingspan continue to execute on its strategic goal of increasing geographic presence in NA and select emerging markets. Our analysis indicates Kingspan is well positioned to make investments in the region of €260m during the forecast period whilst still retaining a solid balance sheet, increasing returns on equity and optimising its capital structure. Please see the financial analysis for more details.

Drivers of Volatility in Earnings

Kingspan’s biggest driver of earnings volatility is changing macroeconomic conditions in its primary markets. Mainland Europe, the group’s predominant geographic region post the Joris Ide acquisition, has been experiencing significant turmoil over the last years. Despite rising optimism in relation to the ECB’s 1 trillion euro QE programme and sporadic signs of improving economic conditions, such as Germany's better than expected 2014 YoY GDP growth of 1.6%, fears that QE may be too little too late are leading many to fear that the region could fall into a prolonged period of stagnation. Across the channel, the UK accounts for 39% of sales in FY2013 and is currently experiencing strong growth as evidenced by average GDP growth expectations of 2.6% from 2015 to 2017, however the Coalition's plans to rein in on public spending and achieve a primary fiscal surplus by 2018-19 as well as looming rate hikes could yet derail the recovery. Should these risks materialise, they have the potential to substantially reduce construction activity and Kingspan sales.

Valuation

A 12 month target price of €17.21 was attained through a combination of fair value and relative valuation methods. A Discounted Cash Flow analysis yielded a fair value for the company based on expected future cash flows whereas a number of price multiples were employed in order to produce forward looking prices based on our estimates of 2015 earnings.

12-Month Target Price Breakdown

Method Price Weight

LF P/BV €16.70 12.3%

NTM EV/EBITDA

€17.58 12.3%

NTM P/E €16.32 12.3%

NTM EV/REV €17.44 12.3%

DCF €17.21 50.7%

Target Price €17.11 100.0%

Key DCF Figures in €m

WACC 7.46%

Enterprise Value €3,298m

Outstanding Debt €292m

Provisions & Pension liabilities

€44m

Minority Interest €7.8m

FCFE €2,954

Shares Outstanding 171.7

Share Price €17.21

Upside Potential 9.6%

“It is a huge achievement that

Kingspan Group has beaten

tough competition to take its

place in the prestigious 2013

Business Superbrands listing –

the definitive annual survey of

the UK’s strongest business

brands.” - Stephen Cheliotis,

Chairman of the Superbrands

Expert Council

The target price was then constructed based on the weighted average of these individual prices. The DCF price was given a 50.7% weighting in order to reflect share ownership by investors committed for the medium to long-term and therefore more likely to price in long-term fair value, such as institutional investors, company management and the firm itself. The remaining 49.3% were assigned equally to prices implied by each multiple.

DCF

A two stage model was chosen whereby cash flows are modelled yearly through to 2018 - the first stage - in addition to the modelling of a normalised cash flow growth measure which was assumed to be generated annually thereafter. All of these cash flows were discounted to the present at the firm’s cost of capital, the sum of which forms Enterprise Value. The share price was then established by subtracting outstanding debt, provisions, pension liabilities and minority interests from Enterprise Value and dividing by the number of outstanding shares.

The following assumptions were made in the process:

Forecast period - Annual growth of 3.4% based on average annual construction activity

growth expectations in the regions Kingspan operates in, weighted according to their contributions to FY2013 revenues. The announced acquisitions of Joris Ide and Vicwest increase sales by a further 34.6% in 2015. The length of four years was assumed to be long enough to allow Kingspan to return to normalised output following the recent low cyclical phase. The company has disclosed current manufacturing utilisation of 65%, and that it expects normalised utilisation of 70% to be reached within 3 years. We have included an extra year as a cushion.

Terminal phase - Terminal phase growth of 2.92% in line with historical GDP growth was

been estimated by calculating a historical weighted average from 1961 to 2013 based on World Bank GDP data for the various regions Kingspan operates in. Weightings were assigned to each region according to their respective contributions to FY2013 Sales.

EBITDA Margin - EBITDA Margins increase linearly from a FY2014 estimate of 10% to

the historical average of 11.93% in 2018 to reflect a return to normalised output. The exception to this is 2015 where the acquisitions of Joris Ide, a Flemish maker of insulated panels with a 2014 EBITDA margin of 7.7%, and Vicwest reduces the group’s EBITDA margin to 9.83%.

Other financial ratios - Levels of working capital and capex in relation to sales were

observed as far back as 1997 and 2002. Each of these follow a linear path from current levels to historical averages in 2018, reflecting a return to normalised output. The tax margin is held constant as no change is expected.

WACC - The weighted average cost of capital of 7.46% was calculated according to

FY2013 Debt costs, equity costs based on the CAPM model and the current capital structure. Cost of equity of 8.6% was calculated based on the UK 10 year government bond yield and the five year average annual excess market return of the FTSE 100 in relation to the former. The cost of debt of 4.62% was calculated based on FY2013 interest payments of 13.8m on long-term outstanding debt of €292m. While the company has substantial approved financing facilities undrawn, we will refrain from adjusting the current target capital structure until such a time as the company decides to use these, and as such, have maintained FY2013 capital structure of 74.6% equity and 24.4% debt for the calculation of WACC.

Multiples Pricing

In addition to the DCF analysis, five price multiples were used to determine one year forward looking prices. A historical premium was applied to the mean multiple of a group of relevant peers and target prices then calculated based on our forecasts of 2015 earnings.

The peer group consists of seven small and mid-cap building materials companies of which four offer insulation solutions and five share a similar geographic presence to Kingspan. In addition, all peers are considered by the board of directors as benchmarks to measure management performance against.

WACC

Cost of Debt

Total Debt €292.35m

Cost of debt 4.72%

Cost of Debt After Tax

4.13%

Cost of Equity

10 Year Gilt 1.76%

Beta (FTSE 100) 0.919

Market Premium (5y)

7.44%

Cost of Equity 8.60%

Total Equity €859.6m

WACC

Debt Ratio 25.4%

Equity Ratio 74.6%

WACC 7.46%

Peer average P/E, EV/EBITDA, EV/REV over the next twelve months as well as last filing P/BV were calculated and applied to 2015 earnings forecasts. We also deemed it important to adjust these multiples with a premium, in this instance the five year historical average, as Kingspan has consistently traded higher than peer average multiples in the past. Earnings per share, EBITDA, shareholders' equity and revenues in 2015 were forecast taking into account previously mentioned construction growth expectations, the significant impacts of the Joris Ide and Vicwest acquisitions and improving margins. The results are presented below.

The results indicate that Kingspan currently trades at premiums of 13% to 34% relative to the peer group selected, reflecting Kingspan’s excess returns on equity and assets of 2.9% and 2.2% respectively with respect to the peer group average despite a substantially lower leverage ratio of 0.61 times net debt to EBITDA compared to the peer average of 1.3.

Financial Analysis

M&A activity concealing disappointing growth

A closer look at revenue and profit growth over the last four years excluding the impact of acquisitions shows that Kingspan have suffered heavily due to the anaemic recovery in its main markets in the UK and Europe. The group have posted marginally negative growth in revenues from existing operations in three out of four years from 2010 to 2013, with 2011 seeing a significant increase of 14%, albeit from an extremely low base following the financial crisis.

Trading profit has fared better with average annual increases from existing operations from 2010 to 2013 of 10% largely due to reduction in the level of idle manufacturing capacity, more profitable business mix and integration of CRH’s European insulation business acquired in 2010. This has resulted in a substantial increase of 180 basis points in group trading margin from 6% in 2010 to 7.8% in H12014.

Improving economic environment to boost top line and margins

We forecast top line growth from existing operations to grow at CAGR of 10.8% until 2018 as a result of improving economic conditions in the UK, Europe and the US fuelling construction growth and announced acquisitions. In addition, as Kingspan increases FY2014 manufacturing utilisation levels of 65% and reaches a normalised rate of 70% or higher we see trading margin reaching 9.4% by 2018 and driving operating income higher by a CAGR of 17.1% during the forecast period until 2018. We believe this to be a conservative estimate as Kingspan’s significant remaining firepower despite recent deals

Company NTM

EV/EBITDA NTM P/E

LF P/BV

NTM EV/REV

ROE ROA Net Debt / EBITDA

Kingspan 12.4 20.2 3.1 1.3 11.4% 5.9% 0.61

5Y Historic Premium

25.0% 10.0% 12.0% 10.0%

Current Premium 33% 13% 34% 29%

Peer Mean 9.6 18.4 2.5 1.1 8.5% 3.7% 1.3

Financial Ratios 2012 2013 F2014 F2015 F2016 F2017 F2018

ROA 4.7% 5.6% 6.5% 6.8% 7.4% 8.1% 8.8%

ROE 9.2% 10.4% 11.8% 13.9% 14.2% 14.4% 14.4%

ROIC 7.6% 9.4% 10.6% 11.7% 12.3% 12.7% 13.0%

EBITDA/Net Interest 10.0 12.0 13.0 11.6 13.3 15.3 17.7

Net Debt to EBITDA 1.2 0.6 0.6 0.9 0.8 0.7 0.6

Quick Ratio 1.2 1.3 1.4 1.2 1.3 1.4 1.6

Current ratio 1.6 1.8 1.9 1.7 1.8 1.9 2.1

CFO/Capex 4.5 3.5 2.9 3.2 2.2 2.0 1.9

CAGR 10.7%

means it’s well positioned to make further EPS accretive deals during the forecast period. Finally, we expect the dividend payout ratio to remain stable at 30% implying a dividend yield of approx. 1.43% over the same period.

Superior investment returns

Kingspan have consistently outperformed building materials sector peers despite significantly lower leverage levels. During the last twelve months Kingspan achieved a return on equity of 11.4%, outpacing the previously mentioned peer group average of 8.5%, an outperformance made more impressive by its lower leverage levels, as measured by net debt to EBITDA, of 0.61 compared to a peer average of 1.3 over the same period. An analysis of returns on assets, stripping out leverage distortions, reveals that Kingspan’s ROA of 5.9% is 59% higher than the peer average of 3.7%. Crucially, despite the difficult environment in Kingspan’s primary markets and the temporary negative pressure on profit margins from recent acquisitions, group return on invested capital of 9.4% remains higher than our estimate of its cost of capital of 7.5%. This excess return is highly indicative of comparable advantages such as Kingspan’s strong brand power, high quality product line and excellent management. We forecast the full extent of this ‘moat' to become apparent as Kingspan achieves ROIC of 13% by 2018 upon return to normalised output and completion of ongoing integrations of acquired businesses.

Robust Firepower

Despite four acquisitions announced over the last twelve months for an approximate total consideration of €500 million, we project Kingspan’s net debt to EBITDA to increase only to 0.9 in 2015 from 0.6 in 2014. In a recent interview with the Irish Independent, Gene Murtagh stressed the company’s intention to double the current leverage ratio of 0.6, implying a return to peer average levels of 1.3 times net debt to EBITDA. Based on the 2.92% coupon rate of the bilateral debt facility recently negotiated by the firm for withdrawals of up to €190 million, an acquisition in the region of €110 million with an earnings yield of 5% would add 2 cents to EPS in the first year and bring net debt to EBITDA up to 1.35 without dipping into cash reserves. Assuming Kingspan were then to maintain this leverage ratio until the end of the forecast period by making further withdrawals from its substantial debt facilities, a further €150m could be spent from 2016 to 2018 adding 3 cents to EPS during the same period. We therefore believe that despite its recent series of acquisitions, Kingspan is well positioned to make further investments of €260 million whilst retaining a solid balance sheet, increasing returns on equity and optimising its capital structure.

Investment Risks

Regulatory Risks (1) - Failure to meet Government Regulations

The most eminent risk from a regulatory perspective for Kingspan is that their products are not able to meet the performance targets in accordance with L1a regulations. The likelihood of this happening is very low however. The regulatory requirements for U-Values vary slightly in the UK, and Kingspan Kooltherm Panels are more than capable of passing these regulations.

Regulatory Risk (2) - Regulations effect on Industry Penetration

Changes in global regulation standards could affect market penetration for Kingspan. Kingspan Panel products are highly demanded and well-respected on their reputation to lower emissions and to create savings in fuel costs for commercial businesses, and this further underpins their market penetration with prospective commercial projects. North America’s increasing focus on energy efficiency at a residential and commercial level further rationalises their purchase of Pactiv, a US building insulation business in Virginia.

Market Risk (1) - ‘Green building’ – A catalyst for success?

The growing interest and movement towards green building forces Kingspan to become more advanced in their product range in order to adhere to this eco-friendly initiative. Initiatives such as the NetZero 2020 projects are strategically supported by Kingspan’s acquisition of Pactiv, which should help Kingspan’s emersion into developing energy efficient homes in the USA, particularly in California. Green Building initiatives themselves are mitigating factors to reduce market risk.

Impact

High MacR1

PR2 MarR2

Med PR1 OR2

MacR2

Low RR1 RR2 MarR2

Low Med High

Probability

Figure 4 Risk Matrix

Market Risk (2) - Stagnant Regulation to restrict Kingspan’s Growth

Due to Kingspan’s high specification standards, changes in regulation will only strengthen their market position, as their competitors adjust their product ranges to meet regulations. Stagnation in regulatory changes will act as an opportunity for their competitors to regain ground in matching their products with that of Kingspan.

Operational Risk (1) - Unrealised Synergies

A potential danger for Kingspan could be the lack of effectiveness of their recent acquisitions of Pactiv, Vicwest, and Joris Ide, and the failure to generate synergies with these firms. Kingspan must make it a priority to ensure that the direction they take as a company coincides with the objectives of their new acquired subsidiaries.

Product Risk (1) – Reverse Engineering of Kingspan’s Products by their Competitors

A persistent risk to any materials company is the threat of their competitors back testing their rival’s products in order to uncover the proprietary techniques and materials used to create their products. Kingspan’s products are heavily patented with high specification standards, so the impact and probability of reverse engineering their product range is significantly low.

Product Risk (2) - A Failure to Innovate

The commercial and domestic building industry is ever evolving and dynamic. Changing regulations and further emphasis towards green building will mean that Kingspan will have to continue to refine their product range to meet the technologically advanced needs of the future, as well as maintaining their market dominance.

Macroeconomic Risk (1) - A lack of growth in the Building Industry

Stagnant growth at the end of year 2014 in the building industry has created some concern within the trade in 2015. Some of these concerns have been somewhat alleviated recently by the positive trend in the market as a whole. Rising spending on infrastructure and local authority house-building have been positively correlated in the UK with the rising growth.

Macroeconomic Risk (2) - Pessimistic economic forecast for Russia

The difficult economic conditions in Russia could be a cause for concern, as it might impede on the performance of Joris Ide, who produce some turnover from Russia. The reassuring factor for Kingspan is however that only 5% of Joris Ide’s turnover comes from their business in Russia, and so it is unlikely to have any major effects on their return from the Joris Ide deal.

Appendix 1: Income Statement

Consolidated Income Statement (€000)

2012 2013 F2014 F2015 F2016 F2017 F2018

Revenue 1,628,718 1,790,291 1,879,806 2,561,957 2,649,063 2,739,132 2,832,262

Trading Profit 107,702 122,805 146,625 195,734 217,753 240,770 265,383

Intangible amortisation -3,125 -3,790 -3,883 -5,050 -5,152 -5,254 -5,356

Non trading Items 112 -3,485 - - - - -

Operating Profit 104,689 115,530 140,985 188,048 209,806 232,552 256,886

Finance expense -15,327 -14,078 -15,038 -22,249 -21,566 -20,625 -19,661

Finance income 590 533 531 560 523 534 544

Profit before income tax 89,952 101,985 126,479 166,359 188,763 212,461 237,769

Income Tax expense -15,274 -12,829 -15,810 -20,795 -23,595 -26,558 -29,721

Net Profit 74,678 89,156 110,669 145,564 165,167 185,904 208,048

Attributable to owners of Kingspan 73,526 87,643 108,876 143,206 162,492 182,892 204,677

Attributable to non-controlling interests 1,152 1,513 1,793 2,358 2,676 3,012 3,370

EPS

Basic 0.44 € 0.52 € 0.62 € 0.82 € 0.93 € 1.05 € 1.17 €

Diluted 0.43 € 0.51 € 0.61 € 0.81 € 0.92 € 1.04 € 1.16 €

Dividends paid out 22,403 26,747 33,201 43,669 49,550 55,771 62,414

Appendix 2: Statement of Financial Position

Balance Sheet (€000) 2012 2013 F2014 F2015 F2016 F2017 F2018

Goodwill 385,427 369,858 392,455 498,418 515,364 532,886 551,005

Other intangible assets 20,253 16,204 17,071 21,465 21,751 22,031 22,557

Property, plant and equipment 508,056 491,888 520,400 659,835 682,269 705,466 729,452

Derivative financial instruments 10,039 674 2,028 4,078 5,993 8,262 9,966

Retirement benefit assets 2,357 6,099 6,085 7,298 6,880 6,885 6,882

Deferred tax assets 9,178 6,615 6,592 7,942 7,768 7,573 7,356

Non current Assets 935,310 891,338 944,630 1,199,036 1,240,025 1,283,104 1,327,218

Inventories 191,294 191,981 201,298 246,848 250,802 259,329 267,434

Trade and other receivables 313,961 313,827 346,915 458,690 493,009 529,132 564,768

Derivative financial instruments 3,226 26 507 1,288 1,998 2,754 2,848

Cash and cash equivalents 141,611 197,318 196,735 240,623 233,712 220,544 210,720

650,092 703,152 745,455 947,449 979,520 1,011,759 1,045,770

Non-current assets classified as held for sale

404 0 0 0 0 0 0

Current Assets 650,496 703,152 745,455 947,449 979,520 1,011,759 1,045,770

Total Assets 1,585,806 1,594,490 1,690,159 2,146,502 2,219,484 2,294,946 2,372,974

6.00% 27.00% 3.40% 3.40% 3.40%

Trade and other payables 297,596 288,793 281,768 409,745 392,584 371,653 346,817

Provisions for liabilities 49,426 39,967 43,223 66,784 66,877 66,995 65,261

Derivative financial instruments 193 2,359 2,017 2,375 1,724 1,104 536

Deferred contingent consideration 506 7,474 7,276 10,124 9,209 8,227 7,201

Interest bearing loans and borrowings

3,749 6,947 11,273 22,630 27,610 30,053 34,682

Current income tax liabilities 43,359 37,540 37,579 56,152 53,889 48,285 41,954

Current Liabilities 394,829 383,080 383,137 567,810 551,892 526,317 496,450

Retirement benefit obligations 14,671 13,837 13,741 19,537 18,191 16,674 15,009

Provisions for liabilities 13,951 17,289 19,472 25,914 22,376 18,797 10,834

Interest bearing loans and borrowings

316,218 292,352 307,322 448,737 429,303 406,915 381,872

Derivative financial instruments 0 4,481 3,953 4,871 3,793 2,752 1,780

Deferred tax liabilities 25,407 23,829 23,025 31,771 28,627 25,307 20,511

Deferred contingent consideration 7,352 0 945.73919 2772.015 3994.612 5042.18 5865.73

Non-Current Liabilities 377,599 351,788 368,459 533,602 506,285 475,488 435,871

Total Liabilities 772,428 734,868 751,583 1,101,465 1,058,178 1,001,760 932,304

Net Assets 813,378 859,622 938,577 1,045,037 1,161,306 1,293,186 1,440,671

Share capital 22,542 22,747 22,949 23,151 23,353 23,555 23,757

Share premium 40,570 43,145 45,646 48,147 50,648 53,149 55,650

Capital redemption reserve 723 723 723 723 723 723 723

Treasury shares -30,707 -30,707 -30,707 -27,707 -27,707 -27,707 -27,707

Other reserves -92,061 -126,152 -128,154 -130,156 -133,158 -135,160 -137,162

Retained earnings 865,196 942,008 1,019,476 1,121,371 1,236,988 1,367,121 1,512,754

Equity 806,263 851,764 929,933 1,035,529 1,150,847 1,281,681 1,428,015

Non-Controlling Interest 7,115 7,858 8,644 9,508 10,459 11,505 12,655

Total Equity 813,378 859,622 938,577 1,045,037 1,161,306 1,293,186 1,440,671

Appendix 3: Statement of Cash Flows

Cash flow Statement (€000) 2012 2013 F2014 F2015 F2016 F2017 F2018

Profit before income tax 89,952 101,985 126,479 166,359 188,763 212,461 237,769

Operating Activities

Depreciation of property, plant and equipment and amortisation of intangible assets

43,284 43,874 45,013 57,166 58,366 59,566 60,766

Impairment of non-current assets 21,655 5,651 6,060 7,696 8,096 8,496 8,896

Employee equity-settled share options 6,737 7,227 7,490 7,753 8,016 8,279 8,542

Finance income -590 -533 -531 -560 -523 -534 -544

Finance expense 15,327 14,078 15,038 22,249 21,566 20,625 19,661

Non-cash items -1,273 -957 -1,589 -2,221 -2,853 -3,485 -4,117

Negative goodwill -34,458 -49 0 0 0 0 0

Profit on sale of property, plant and equipment -182 -2,571 -3,038 -3,505 -3,972 -4,439 -4,906

Settlement of legal costs -12,272 0 0 0 0 0 0

Change in inventories 10,634 -6,708 -9,317 -45,550 -3,954 -8,527 -8,105

Change in trade and other receivables 37,619 -8,064 -33,088 -111,775 -34,319 -36,123 -35,636

Change in trade and other payables -16,450 -2,154 -7,025 127,977 -17,161 -20,931 -24,836

Change in provisions 609 -5,099 5,439 30,003 -3,445 -3,460 -9,697

Pension contributions -3,026 -3,558 -3,077 -2,998 -3,121 -3,321 -3,051

Cash generated from operating activities 157,566 143,122 147,854 252,593 215,458 228,607 244,742

Taxes -13,905 -15,406 -15,810 -20,795 -23,595 -26,558 -29,721

Net cash flow from operating activities 143,661 127,716 132,044 231,799 191,863 202,049 215,021

Investing Activities

Additions to property, plant and equipment -34,239 -41,845 -60,512 -80,532 -70,701 -82,123 -92,301

Proceeds from disposals of property, plant and equipment

2,445 5,151 7,432 9,552 7,320 6,521 4,550

Purchase of subsidiary undertakings, net of disposals

-72,519 -1,542 -63,000 -185,000 -63,000 -41,000 -40,000

Payment of deferred contingent consideration in respect of acquisitions

-477 0 0 0 0 0 0

Interest received 533 525 531 560 523 534 544

Net cash flow from investing activities -104,257 -37,711 -115,549 -255,420 -125,858 -116,068 -127,207

Financing Activities

Drawdown / (repayment) of bank loans -3,605 3,804 10,644 130,058 -24,414 -24,831 -29,672

Change in finance lease liability -278 -423 -456.2 -489.4 -522.6 -555.8 -589

Proceeds from share issues 2,709 2,780 2,635 2,491 2,346 2,202 2057

Interest paid -17,321 -13,853 -15,038 -22,249 -21,566 -20,625 -19,661

Dividends paid to non-controlling interests -93 -442 -538 -707 -803 -903 -1,011

Dividends paid -19,202 -21,570 -22,058 -26,293 -32,663 -42,962 -48,747

Net cash flow from Financing activities -37,790 -29,704 -24,810 82,810 -77,622 -87,675 -97,624

Increase in cash and cash equivalents 1,614 60,301 -8,316 59,189 -11,617 -1,694 -9,811

Appendix 4: Financial Metrics

Financial Metrics 2012 2013 F2014 F2015 F2016 F2017 F2018

Liquidity

Current ratio 1.6 1.8 1.9 1.7 1.8 1.9 2.1

Quick ratio 1.2 1.3 1.4 1.2 1.3 1.4 1.6

Cash ratio 0.4 0.5 0.5 0.4 0.4 0.4 0.4

Profitability

EBITDA margin 9.1% 9.1% 10.0% 9.8% 10.5% 11.2% 11.9%

Trading Margin 6.6% 6.9% 7.8% 7.6% 8.2% 8.8% 9.4%

EBIT margin 6.4% 6.5% 7.5% 7.3% 7.9% 8.5% 9.1%

Net Profit margin 4.6% 5.0% 5.9% 5.7% 6.2% 6.8% 7.3%

ROA 4.7% 5.6% 6.5% 6.8% 7.4% 8.1% 8.8%

ROE 9.2% 10.4% 11.8% 13.9% 14.2% 14.4% 14.4%

ROIC 7.6% 9.4% 10.6% 11.7% 12.3% 12.7% 13.0%

Solvency

EBITDA/Net Interest 10.0 12.0 13.0 11.6 13.3 15.3 17.7

Debt/EBITDA 2.2 1.8 1.7 1.9 1.6 1.4 1.2

Net Debt to EBITDA 1.2 0.6 0.6 0.9 0.8 0.7 0.6

Cashflow

CFO/Capex 4.5 3.5 2.9 3.2 2.2 2.0 1.9

Earnings

EPS (Basic) €0.44 €0.52 €0.62 €0.82 €0.93 €1.05 €1.17

Dividend Payout Ratio 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0%

Appendix 5: DCF

(In millions of Euros) FY2009 FY2010 FY2011 FY2012 FY2013 TTM F2014 F2015 F2016 F2017 F2018

Sales 1,125 1,193 1,547 1,629 1,790 1,856 1,880 2,562 2,649 2,739 2,832

% growth -32.72% 6.00% 29.66% 5.29% 9.92% 3.70% 5.00% 38.00% 3.40% 3.40% 3.40%

EBITDA Margin 9.13% 9.02% 8.64% 9.08% 9.10% 9.60% 10.00% 9.83% 10.53% 11.23% 11.93%

EBITDA 102.8 107.6 133.6 147.9 162.9 178.2 188.0 251.8 278.9 307.6 337.9

(Net Capital Expenditure)

45.9 15.8 23.6 31.8 36.7 45.5 46.0 72.8 85.8 99.5 114.1

% of Sales 4.08% 1.32% 1.53% 1.95% 2.05% 2.45% 2.45% 2.84% 3.24% 3.63% 4.03%

(Increase in Non-Cash Working Capital)

124.8 162.7 189.4 207.7 217 231.7 234.6 328.9 349.5 371.2 394.0

% of Sales 11.09% 13.64% 12.24% 12.75% 12.12% 12.48% 12.48% 12.84% 13.19% 13.55% 13.91%

(Corporate tax) 10.1 2.2 9.8 13.9 15.4 16.8 17.8 23.8 26.4 29.1 31.9

% of EBITDA 9.82% 2.04% 7.34% 9.40% 9.45% 9.45% 9.45% 9.45% 9.45% 9.45% 9.45%

FCFF 144.300 51.700 73.500 83.900 101.500 101.244 106.674 60.941 146.145 157.306 169.058

% of Sales 12.82% 4.33% 4.75% 5.15% 5.67% 5.45% 5.67% 2.38% 5.52% 5.74% 5.97%

Share Price €15.70

WACC: 7.46%

Total Debt (millions of Euros) 292.4

Provisions, Pensions & Minorities 51.4

Shares Outstanding 171.7m

1st Phase Growth 3.40%

Perpetuity Growth Method

Perpetual Growth 2.92%

Enterprise Value €3,298.2

Share Price €17.21

Upside Potential 9.60%

WACC

EBIT

DA

Mar

gin

6.74% 6.99% 7.24% 7.46% 7.74% 7.99% 8.24% 8.49%

9.82% €14.25 €13.25 €12.36 €11.67 €10.87 €10.24 €9.66 €9.14

10.93% €17.80 €16.56 €15.46 €14.59 €13.60 €12.81 €12.09 €11.44

11.43% €19.40 €18.05 €16.85 €15.91 €14.83 €13.97 €13.19 €12.48

11.93% €21.00 €19.54 €18.24 €17.22 €16.06 €15.13 €14.28 €13.52

12.43% €22.61 €21.03 €19.64 €18.54 €17.29 €16.28 €15.38 €14.56

12.93% €24.21 €22.52 €21.03 €19.85 €18.51 €17.44 €16.47 €15.59

13.43% €25.81 €24.01 €22.42 €21.17 €19.74 €18.60 €17.57 €16.63

WACC

Perp

etu

al G

row

th

6.74% 6.99% 7.24% 7.46% 7.74% 7.99% 8.24% 8.49%

2.17% €17.41 €16.36 €15.41 €14.65 €13.77 €13.06 €12.41 €11.81

2.42% €18.47 €17.30 €16.26 €15.42 €14.46 €13.69 €12.98 €12.33

2.67% €19.66 €18.36 €17.20 €16.28 €15.22 €14.37 €13.60 €12.90

2.92% €21.00 €19.54 €18.24 €17.22 €16.06 €15.13 €14.28 €13.52

3.17% €22.54 €20.88 €19.42 €18.28 €16.98 €15.96 €15.03 €14.20

3.42% €24.30 €22.40 €20.75 €19.46 €18.02 €16.88 €15.86 €14.94

3.67% €26.35 €24.15 €22.26 €20.81 €19.18 €17.91 €16.78 €15.76

Appendix 6: WACC

WACC

Notes

Cost of Equity 8.60%

Cost of Debt * (1 - Tax rate)

4.13% Cost of Debt adjusted for effective tax rate of 12.5%, calculated as tax expense/profit before taxes

Total Debt 292.5 As of 31st Dec 2013. Source; Balance Sheet. Item: Interest Bearing Loans and Borrowings.

Debt Ratio 25.39% Debt/(Equity+Debt). We do not expect capital structure to change significantly.

Total Equity 859.6 As of 31st Dec 2013. Source: Annual Report. Item: Shareholders' Equity

Equity Ratio 74.61% Equity/(Equity+Debt). We do not expect capital structure to change significantly.

WACC 7.46% (Cost of Debt after tax * Debt ratio) + (Cost of equity * equity ratio)

Cost of Debt

Total Debt 292.35 As of 31st Dec 2013. Source; Balance Sheet. Item: Interest Bearing Loans and Borrowings

Cost of debt 4.72% Based on interest paid of 13.8m in calendar year 2013

Cost of Equity

10 Year Gilt 1.76% UK 10 year Bond yield as of 31st Dec 2014

Beta (FTSE 100) 0.919 Source: Bloomberg

Market Premium (5y) 7.44% Based on 5 Year average total annual return (Including Dividends) on FTSE 100 of 9.2%. Source: FTSE January 2015 monthly report

Cost of Equity 8.60% Based on CAPM model; 10 Year US T-Note + Beta (FTSE 100) * FTSE 100 Risk premium

Appendix 7: References

1. Macquarie Wealth Management – The Global Outlook 2015

2. World Bank - Global Economic Protective’s

3. Markit- Eurozone Composite PMI - FEB 15

4. http://www.building.co.uk/global-construction-2025/5057217.article 5. The Freedonia Group 6. The European Construction Sector – European Commission – March 2014 7. http://www.bdonline.co.uk/kingspan-boss-sets-out-plans-for-world-

domination/3064296.article 8. Construction 2025 – HM Government – July2013 9. Domestic Refurbishment – Kingspan – March 2012 10. US Department of Energy

Disclosures:

Ownership and material conflicts of interest:

The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.

The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report.

Receipt of compensation:

Compensation of the author(s) of this report is not based on investment banking revenue.

Position as a officer or director:

The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company.

Market making:

The author(s) does not act as a market maker in the subject company’s securities.

Disclaimer:

The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be a consideration by any individual affiliated with CFA Ireland, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.