Ballast Nedam Buy Construction • The Netherlands Initiating Coverage

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					           Ballast Nedam                                                          Buy
           Construction • The Netherlands                                         Initiating Coverage
                                                                                  Price: € 32.5
           Pure-play = For Sale                                                   Price Target: € 39.02.00

                                                                                   Blue-sky valuation after transformation
           Ballast Nedam made a successful turnaround from a
                                                                                                                          € 6.2                    € 0.3             € 46.3
           hit-and-run international construction company into a
                                                                                    € 39.0                  € 0.8
           focused player in the Dutch construction and
           infrastructure market. Investors will be rewarded with a
           strong EPS growth (3yr CAGR: 28%) and an attractive
           dividend yield of 5.3% in ’08, which is not yet reflected




                                                                                                            re-leverage




                                                                                                                                                   re-leverage




                                                                                                                                                                         blue-sky
                                                                                                                              transformation
                                                                                        as it is




                                                                                                              prior to
           in the current share price. Furthermore, we see several




                                                                                                                                                      post
           value enhancing opportunities, in our blue sky scenario
In-depth




           pointing towards €46.3 per share.

           €                      2005A         2006E        2007E      2008E
           Sales (m)               1,171        1,252         1,285      1,365     Performance Ballast Nedam vs sector

           EBIT (m)                 35.0          43.3         54.7       58.9     45
                                                                                                       Ballast Nedam                           DJ Stoxx Con. & Mat.
           Net profit (m)           20.0          48.5         38.3       42.9
                                                                                   40
           Clean EPS                2.02          2.82         3.89       4.36
           EPS growth            -31.3%         39.6%        38.1%        12%      35

           DPS                      1.02          1.40         1.45       1.73
                                                                                   30
           Dividend yield          3.1%          4.3%         4.8%        5.3%
           Clean P/E                16.5          11.5          8.4         7.5    25
                                                                                        A          S    O      N D        J         F M           A    M         J   J        A
           EV/EBITDA                 6.9           5.6          5.2         4.6
           ROCE                   16.4%         15.3%        18.0%      18.5%


           §     Earnings growth prospects are highest in the European
                 sector, with an attractive activity mix in Dutch residential
                 construction and infrastructure markets. Both markets are in       Price target (€)                                                  39.0
                 the midst of a stable, multi-year upturn.                          Date                                                         29-Aug-06
                                                                                    Stock price (€)                                                              32.5
           §     Ballast Nedam is the ideal takeover candidate in the               Market cap (€ m)                                                             325
                 Dutch construction market: it has a long history of changing       No. Shares (m)                                                         9.854
                 ownership, it is a pure play on the Dutch market, and has          Daily volume                                                       11,500
                 attractive assets like its land bank and its heavy lift vessel     Free float                                                                   55%
                 ‘Svanen’ for offshore infrastructure projects.                     Reuters                                                        BALNc.AS
                                                                                    Bloomberg                                                       BALN NA
           §
In-depth




                 The current valuation is already attractive, but we see
                 further value enhancing opportunities down the road. We
                 would welcome a further focus on its core strengths by
                 turning its construction division into a pure play property
                 developer and its infrastructure division into international
                 infrastructure engineering.
                                                                                                                  Analyst
           §     We start coverage with a Buy rating and a TP of €39.0 .                                       Pieter Bijlsma
                 On our estimates, Ballast Nedam is valued at 7.5 x ’08E EPS                             pieter.bijlsma@dexia.be
                                                                                                             +32 2 222 0167
                 and 4.6x ‘08E EV/EBITDA, in line with its closest Dutch peer,
                 Heijmans and still cheap in an European context.
                                      2



                                                                      TABLE OF CONTENT

I.     SWOT ANALYSIS .................................................................................................................................................................................... 3
II.    FOUR REASONS FOR A W EDDING ............................................................................................................................................... 4
       II.1. Speculative history: nothing new being tossed around ...................................................................................................... 4
       II.2. Attractive pure play on the Dutch construction sector......................................................................................................... 7
                     II.2.1.       Drastic profile change ............................................................................................................................................... 7
                     II.2.2.       Ballast Nedam scores high on three take -out factors ................................................................................... 8
       II.3. Growing up hurts.............................................................................................................................................................................. 9
                II.3.1. Market share too small in infrastructure............................................................................................................. 9
                II.3.2. Scale increasingly matters ...................................................................................................................................... 9
       II.4. Dutch construction market in multi year upturn ..................................................................................................................... 9
                     II.4.1.       Residential cycle supported by government...................................................................................................10
                     II.4.2.       Non-residential construction recovery in sight............................................................................................... 11
                     II.4.3.       Solid growth in infrastructure spending............................................................................................................ 13

III.   OPERATIONAL PERFORMANCE: CATCHING UP WITH THE BIG BOYS ...................................................................14
       III.1. Still a small player in construction & development, but high growth potential .......................................................... 14
       III.2. Infrastructure margins: struggling ............................................................................................................................................. 17

IV. FROM BRICKS TO BRAINS: FLEX YOUR MUSCLES MORE EFFICIENTLY.............................................................. 18
       IV.1. Back end integration not attractive for all .............................................................................................................................. 19
       IV.2. Better value in specialist construction.....................................................................................................................................20
                IV.2.1. Example 1: McCarthy & Stone ............................................................................................................................ 20
                     IV.2.2. Example 2: Kaufman & Broad ............................................................................................................................. 21
                     IV.2.3. Example 3: Nexity .................................................................................................................................................... 22
                     IV.2.4. Where Ballast Nedam could improve................................................................................................................ 23
       IV.3. Improving the infrastructure value driver ............................................................................................................................... 23
                IV.3.1. Infrastructure scale: Strukton still makes sense............................................................................................ 23
                IV.3.2. Engineering an independent future ................................................................................................................... 24
       IV.4. Losing bricks as a beta blocker................................................................................................................................................. 27

V.     FINANCIAL OUTLOOK ........................................................................................................................................................................ 28
       V.1. Market peaks in 2008 ...................................................................................................................................................................28
       V.2. Margin improvement, but is it good enough? ....................................................................................................................... 29
       V.3. Cash conversion volatile, but gradually improving ............................................................................................................. 29
VI. VALUATION: CASH CAUSES PROBLEMS................................................................................................................................ 29
       VI.1. Peer group comparison ............................................................................................................................................................... 30
       VI.2. Not all cash is available ............................................................................................................................................................... 31
       VI.3. DCF valuation ................................................................................................................................................................................. 32
                     VI.3.1. Valuation of €39.0/share as it is today …........................................................................................................ 32
                     VI.3.2. Upside from re-leverage & transformation not discounted in share price............................................ 33
                                                                                 3



I.       SWOT ANALYSIS


Strengths
     •    Attractive land bank supports future revenue growth in residential
          construction .

     •    State-o f-the-art engineering department gives Ballast Nedam unique
          lead in complex infrastructure projects.

     •    Current management team accomplished impressive transformation
          proces s.


Weaknesses
     •    Infrastructure division lacks scale to easily absorb rising tender costs
          and revenue swings due to missed tenders.
.
     •    Current construction & development client base lacks scale to
          leverage facility management and electrical contracting.

     •    Fi nancial position does not allow for large acquisitions


Opportunities
     •    Land bank acquisition and property development aimed at high
          volume, standardized housing for a limited number of well-defined
          client groups.

     •    Specialty engineering solutions for offshore (wind farm) projects and
          other water infrastructure.

     •    Higher asset turnover through standardizing of construction process
          and intensifying marketing efforts.

     •    Valuation increase through re-leveraging and transformation into
          lower beta activities like property development and engineering
          services.


Threats
     •    Overpaying for back -end acquisitions.

     •    Intensifying of (foreign) competition in Dutch markets, forcing Ballast
          Nedam in a subcontractor role.

     •    Abolition of mortgage interest payment tax deduction .
4



    II.      FOUR REASONS FOR A WEDDING

    We think there are four reasons that turn Ballast Nedam into an attractive takeover
    target in the near term:

    r      Speculative history (II.1.)

    r      Pure play on the Dutch construction sector (II.2)

    r      Heavy investment needed to turn into a full service constructor (II.3)

    r      Multi-year upturn in solid, government led growth in Dutch construction
           market (II.4)



    II.1. Speculative history: nothing new being tossed
          around

    Ballast Nedam’s history has been turbulent, and ownership changed hands
    repeatedly.

    •      Issam E. Fares: between 1978 and 1987 Fares was first shareholder and
           later owner of the company. Ballast Nedam became renowned for its civil
           engineering skills. It built, as most notable example, the then longest
           international bridge between Bahrain and Saudi Arabia. Its activities in the
           Middle East attracted the attention of

    •      British Aerospace. Fares sold Ballast Nedam for £47m to the British
           military equipment company, during the period when BAe diversified itself
           into a host of activities, like property development, through a spate of
           acquisitions. Two years before, BAe had won the €30bn Al Yamamah
           defense contract with Saudia Arabia, still the largest defence export
           contract in British history. Next to the delivery of Tornado air strike fighter
           jets, as the prime contractor, BAe was also responsible for the construction
           of military airports and infrastructure. Ballast Nedam’s share in the
           construction activities totalled more than €500m.The recession of 1991
           brought BAe to a near collapse, when its automobile and real estate
           activities (it had acquired automobile maker Rover in 1988 from the British
           government) ran into severe losses. In 1992 BAe posted an after tax loss
           of £970m, after swallowing a £1bn write -off on a regional aircraft unit. In
           December 1993, Ballast Nedam was divested and came into the hands of
           a consortium consisti ng of

    •      the German construction company Hochtief, Internationale Nederlanden
           Group (now part of bancassurer ING) and the Ballast Nedam Pension
           Fund. Hochtief remained the largest shareholder with 48% of the shares,
           but the heavy loss making international activities of Ballast Nedam further
           intensified the already precarious financial position of Hochtief. In 2002
           Ballast Nedam was faced with a record loss of €143m, mainly due to the
           problems with its British subsidiaries Ballast plc, Ballast Wiltshier
           Investments and Wiltshier Facility Management. Ballast plc crippled under
           a debt burden of £164m, of which £84m were pension deficits. Local
           managers gave misleading information on the profitability of projects and
           accountants failed to notice it in an early stage . In 2003 Ballast Nedam cut
           off the flow of funding to its British subsidiaries. Financial relief came
           through the spectacular outcome what was called the ‘Dutch Dredging
           War’.
                                                                                   5


Throwing mud: the Dutch dredging war s aga

•     The saga can be traced back to 199 7, when the CEO of the Dutch dredger
      Boskalis, Rob van Gelder, met his CEO-friend of Heijmans , Joop
      Janssen, when both concocted a plan during the World Economic Forum in
      Davos to acquire the ailing Dutch construction company Hollandse Beton
      Groep (HBG) an d split its activities between the two of them . Heijmans
      would get the construction activities, whereas Boskalis could merge with
      HAM, HBG’s dredging division.
      At that time, HBG reached a turnover of €4.5bn, vs. €900m for Boskalis,
      but the market capitalisation of HBG was 40% lower and had
      underperformed the AEX-index with 77% in the previous 5 years.

•     In 2000, the official offer was finally made, but was brusquely turned down
      by the HBG management, for reasons of cultural and strategic misfit.

•     It was very clear that the dredging activity of HAM was the most valuable
      part of HBG. With only 8% of its consolidated turnover, it was responsible
      for 67% of its operating profit and in the Boskalis/Heijmans bid, made up
      for 90% of the enterprise value. In 2001, HBG CEO Reigersman cooked up
      a poison pill construction, by forging an alliance with Ballast Nedam
      Dredging, in which both dredging divisions were put into the joint venture
      Ballast HAM Dredging (BHD). In case of a change of control for more
      than 70% of its shares, either Ballast Nedam or HBG could sell their stake
      in BHD to the other party. The majority of the shareholders voted in favour
      of the Boskalis offer, but management steadfastly refused .

•     Reigersman then surprised friend and foe, when it threw itself into the arms
      of Spanish construction company Dragados, accepting a bid of €756m,
      which was even lower than the final offer of Heijmans . Both management
      teams of HBG and Dragados could at the time hardly come up with one
      reason for a cultural fit, the prime reason why it rejected the Heijmans offer.

•                                                 u
      If not turbulent enough al ready, the story t rned into an even more bizarre
      direction when Spanish competitor ACS immediately thereafter made a
      hostile bid on Dragados. In the end, ACS forced Dragados to sell HBG,
      which ended up in the hands of BAM NBM for €715m.

      The combination BAM NBM was only established the year before , when
      BAM acquired the construction activities of property development company
      NBM A  mstelland. Together with HBG, BAM’s turnover tripled from €2.9bn
      to €8.5bn, but it also inherited HBG’s loss making activities in Germany
      (Weys s & Freitag) and in the UK. At the time of the BAM-HBG transaction,
      nothing was communicated about the BHD stake.

•     Due to the severe financial losses of Ballast Nedam in 2002, it was clear
      that Ballast Nedam could not exercise its option to buy out the HBG-stake
      in BHD. In a shrewd move, Ballast Nedam then exercised its own put-
      option, arranged between HBG and Ballast Nedam during the creation of
      the joint venture, and easily cashed in €210m for the sale of its stake in
      BHD to BAM. In the refinancing operation following the HBG acquisition,
      BAM then merged BHD with Dutch dredger Van Oord, for which it received
      €260m, €70m of preferred shares in Van Oord and a stake of 21.6% in the
      new combination BHD -Van Oord.
6


    Another one bites the dust

    •      Early 2003 the share price of Ballast Nedam touched historical lows and
           the market cap lumbered around €33m , when Egeria , the investment
           vehicle of the Brenninkmeijer family (i.e. C&A), launched a bit on the Dutch
           construction activities. Ballast Nedam’s management rejected the offer as
           being too low.

    •      In 2003, majority shareholder Hochtief reconsidered its 52% stake in
           Ballast Nedam and decided to sell its stake to property developer TCN
           Property Projects (24%) and Wedge (the other 24%), the investment
           company of previous owner Issam Hares for an undisclosed sum (media
           sources at the time suggested €50m). TCN wanted to acquire a majority
           stake in Ballast Nedam, as it wished to integrate its real estate
           development activities with Ballast Nedam’s construction activities, but
           again Ballast Nedam’s management saw no compelling logic to a tie-up of
           both companies.

    •      A 50/50 joint venture was formed between TCN and Ballast, in which they
           combine real estate development projects (especially inner city
           redevelopment projects) and the joint bidding for PPP-projects, the entity
           being called abl2.

    •      In May last year, ABN AMRO Rothschild and Kempen & Co sold the
           stakes of TCN and Wedge in a private placement to mostly institutional
           investors, and thereby increasing the free float. No investor currently holds
           a stake larger than 10% . We would not rule out that TCN still remains
           interest interested in Ballast Nedam’s construction and property
           development activities, might those come up for sale.


           Graph. 1:             Current shareholders

                                                 Capital Research &
                                                   Management
                                                         7%                Henderson Global
                Remaining                                                     Investors
                  48%                                                            6%         JP Morgan AM
                                                                                                 6%
                                                                                               ING IM
                                                                                                 6%


                                                                                            Delta Lloyd AM
                                                                                                  5%

                                                                                          Driessen Beleggingen
                                                                                                  5%

                            Invesco                                                            Aviva
                                                                     Van Delft (F.L.H.)
                                                                                                5%
                              2%                                           5%
                                      AIM Management      Ballast Nedam
                                           Group           employees
                                            2%                  3%



                                                                          Source(s):                   Thomson One
                                                                                                 7



II.2. Attractive pure play on the Dutch construction
      sector

II.2.1. Drastic profile change

In less than a decade, the profile of Ballast Nedam has been drastically changed.
In 1998, it got almost 60% of its revenues from abroad. In 2001, it declined to less
than 40% of the turnover came from its international activities, notably the UK,
whereas in 2005 it was 8.4% .

In the meantime, turnover has been halved, from €2,236m in 2001 to €1,206m last
year. After record losses in its international activities in 2002, profitability
recovered. The successful dismantling of its international activities l eaves room for
a n ew focus on a growth strategy for the Netherlands . Not surprisingly, Ballast
Nedam is trying to adapt the general strategy all the major construction companies
are aiming at: vertical integration and transformation into a full service
construction company.

For a foreign construction company Ballast Nedam could be an interesting
takeover target, the usual suspects being French or Spanish players, but UK or
German (i.e. Strabag) players can not be ruled out either, as the Dutch
construction market, by way of government led investments in infrastructure and an
incentive based growth policy in the residential construction sector, will generate
above average market growth in the near future. We expect that PFI and PPP will
                    h
finally take off in t e Netherlands, and the number and size of projects growing,
makes the Dutch market more attractive for the foreign players.

Graph. 2:        Turnover by division (x €m, lh scale) and EBIT margin (%, rh scale)

  2,500                                                                                  6.0%


                                                                                         4.0%
  2,000

                                                                                         2.0%


  1,500
                                                                                         0.0%


                                                                                         -2.0%
  1,000


                                                                                         -4.0%

   500
                                                                                         -6.0%


     0                                                                                   -8.0%
          2000   2001      2002     2003     2004       2005   2006E   2007E     2008E

                   Infrastructure    Building & Development    Other    EBIT-margin



                                                Source(s):      Company data/Dexia Bank estimates


Scale is not necessarily the panacea for everyone in the construction world.
Contractors have longtime experience working in different project combinations for
large scale projects, subsequently sharing profits as a percentage of their input.
8



    II.2.2. Ballast Nedam scores high on three take -out
            factors
    Overall, we think three factors are crucial when considering a takeover bid on a
    construction company:

        i.   Land bank: gives development potential and a more stable revenue
             stream in the future.

       ii.   Specialist knowledge: general construction generates low margins and
             the market too fragmented, where smaller competitors will always
             underbid on price. Shortage of qualified engineers will be an increasing
             problem in the future, and in complex construction projects price
             competition is less an issue, as client loyalty might be higher as well.

      iii.   Profit margins not too low, but there should be room to improve:
                                         a
             investors will question the t keover strategy if the acquired company has
             too low operational profit margins, as they fear that profit per share may
             dilute. Too high margins can be questioned as well, as takeover multiples
             rise prohibitively.




                                  Specific for Ballast Nedam:


        i.   Relative to its turnover, it has a large land bank, and the company
             acquires new land more aggressively than the other, larger players.

       ii.   Especially in its infrastructure division, it has two very attractive assets:

                 →       its own engineering department , giving it a strong
                         competitive advantage in water infrastructure. Ballast Nedam
                         is or has been involved with the design and/or building 85% of
                         the large tunnels in the Netherlands and all the major dikes
                         and dams.

                 →       Its special purpose hea vy lift vessel Svanen facilitates pile
                         foundation in deep (sea-) water. It was custom built for the
                         Great Belt bridge in Copenhagen, and further used for the
                         construction of the Confederation bridge in Canada, and the
                         one between Copenhagen and Malmö. Currently it is
                         deployed in the offshore wind mill project before the coast of
                         the Netherlands. The Svanen is one of the largest heavy lift
                         vessels in the world, and Ballast Nedam hopes to get a
                         leading position in off shore wind mill projects.

      iii.   Ballast Nedam is still in a turnaround phase. In 2005, operational profit
             margins improved considerably, but there is still room for improvement,
             especially with its infrastructure dvision. Considering its specialist position,
             profit margins lag its main competitors.
                                                                                    9



II.3. Growing up hurts

II.3.1. Market share too small in infrastructure

→ Market share of Ballast Nedam in residential construction last year was
  1.3%. Historical average production hovers around 1,900-2,000 houses, giving
  it a market share of approximately 3%. The largest player in the Netherlands,
  Bouwfonds, reached a market share of 12.5% (combined with Rabob ank Real
  Estate, it will climb to more than 16%).

→ In infrastructure, market share lies around 3.6%, making it the fourth largest
  player in the Dutch market. After BAM Groep, Volker Wessels and Heijmans.
  The two largest players both have a market share of around 10%.


II.3.2. Scale increasingly matters

As stated before, size is not always the most important factor in the construction
industry, when a lot of the regular construction work can be subcontracted, but with
the rise of the PFI/PPP projects, scale does gradually gain in importance.

    §   Tender costs rise when bidding for large scale projects. Losing a tender
        can cause large swings in profit, as costs are taken immediately.
        Especially for smaller companies, the impact of tender costs can be heavy.

    §   Tendering for PFI/PPP projects requires many other specialty functions
        as well, like financial and law specialist, engineers etc. Maintaining this
        team will rise the fixed cos ts, forcing the company to bid for more projects
        to ensure a continuing workflow.

    §   PFI/PPP projects regularly require relatively large upfront investments,
        either as an equity stake or in debt financing, or both, whereas revenues
        are spread over sometimes very long periods (typical PPP-projects have a
        lifetime of 30 years, but with complex projects 70 years is no longer an
        exception). This upfront investment requires a sufficiently strong balance
        sheet.

We think it would be rather ambitious for Ballast Nedam to try to get into the same
league together with the ‘big boys’, and as we will discuss further on, we think
Ballast Nedam has other options to create long term shareholder value, exploiting
its current strengths.


II.4. Dutch construction market in multi year upturn

Total construction output in the Netherlands declined since 2001 till 2003. During
those years, the whole sector found itself in a state of paralysis after the so called
                                                                             o
Bouwfraude-affair, dealing with sector wide price-fixing in the tendering f r public
and private construction projects. Recovery started slowly in 2004, thanks solely to
the residential housing sector, as the commercial real estate sector faced one of
the severest crises in its post-war history. This year, all fraud cases have been
settled, and construction output is estimated to grow around 4%. Barring extreme
economic developments, downside risk in the time horizon till 2010 will not be so
dependent on the general economic cycle, as the government has outlined several
ambitious infrastructure investment plans and an incentive based stimulation
program to reduce housing shortage in the Netherlands. Construction companies
in the Netherlands are seeing margin expansion again, and timing seems right for
an upturn in M&A related activities in the sector.
10


     II.4.1. Residential cycle supported by government
     In 2002, there was a housing shortage in the Netherlands of 170,000 houses, or
     2.5% of the total housing stock. The Dutch Ministry of Housing, Spatial Planning
     and the Environment (VROM), has set a target to lower the housing shortage to
     1.5% in 2010. With a small annual population growth of 0.4%, it means that in the
     period till 2010 another 358,000 houses need to be built in the urban regions. In
     the whole of the Netherlands, VROM targets a total of 420,000 new houses. In
     earlier years, quantitative targets, like in the so called Vinex regions, have rarely
     been met. This time, every region receives subsidies to reach the targets, of which
     65% is granted upfront, and the remaining is paid when the targets have been met.

     Graph. 3:            TNO residential building scenarios 2005-2010

     Number of delivered houses (x 1,000)

            100
                            High
                            Middle
             90             Low




             80



             70



             60



             50
                   2001     2002     2003   2004   2005   2006   2007   2008   2009   2010


                                                                                 Source(s):   TNO

     As shown in graph 4 (period 2005-06) the urban regions have built between 10 and
     20% of the set targets. Annual housing output would at least need to be above
     90,000 per annum to reach the set target before 2010, a figure that seems highly
     unlikely to be met. EIB, the research institute for the Dutch construction sector, is
     estimating 75k housing completions in 2006, 77.5k in 2007 and 75k in 2008, which
     then again seems rather cautious to us.
                                                                                                  11


 Graph. 4:            Building commitments urban regions 2005-2010

  50,000
                                                                       Houses built   Committed
  45,000

  40,000

  35,000

  30,000

  25,000

  20,000

  15,000

  10,000

   5,000

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         Source(s):     Ministry of Housing, Spatial Planning and the Environment (VROM) / Dexia Bank


 We explain that by the fact that since 2002, the number of building permits issued
 has been consistently higher than the number of housing completions, the gap
 reaching 16,300 in 2005, from 10,900 in 2004. With an average lead time of 1.5
 years between the issuance of the building permit and the start of construction and
 90% of the building permits eventually ‘used’, this does bode well for the near
 future . D ownside risk in case of rising mortgage rates or an economic slowdown is,
 because of the above mentioned factors, therefore rather limited.


 II.4.2. Non-residential construction recovery in sight

 Non-residential construction has since 2001 been through a long and very deep
 recession. In 2005, output dropped to €8,6bn. Especially the private non-residential
                                                                          .
 construction suffered from the cyclical downturn of the Dutch economy Between
 2002 and 2005 the industry lost more than a third of its construction output.
 Between sectors, developments have been very divergent.

Table 1:         Non-residential construction output growth (public and private)
                                 €m                   % change in constant prices
                               2005     2002     2003     2004     2005     2006      2007      2008
 Education                      798       3.4     15.1     10.7     17.5     11.8      -0.4       0.6
 Healthcare                   1,203       4.4      7.2     17.5     18.4       7.6     -3.8        -3
 Industrial                     896      -5.5    -18.1    -14.1       1.6      2.5      7.6       8.1
 Storage                        570      -7.2    -14.6    -13.6      -8.5      3.1      7.2       7.7
 Offices                      1,854      -8.8    -20.9    -25.4    -16.2       7.5      3.8       6.8
 Commercial                   1,265      -4.9    -10.2      -4.1        3     -0.8      2.7       3.7
 Agricultural                   888      -3.6      -10       5.3      5.1      0.6      4.6       5.4
 Other                        1,087      -8.7     -8.4        -8     -1.8        5      5.8       6.5
 Total new built              8,562      -5.9   -12.4      -9.4     -0.4      4.8       3.1       4.5
                                                                                  Source(s):      EIB
12


     → In the manufacturing industry, investments collapsed sharply. Since
       2001, production output, export and number of employed persons is declining.
       There has been little to no room for investment in manufacturing
       accommodation or warehousing. General investment activity strongly improved
       in 2005, yet capital expenditure in new industrial buildings lags behind
       investments in e  quipment and machinery. The rental market for industrial
       accommodation faced high vacancy rates and excess supply, which will
       gradually decline. More appealing growth figures are expected in 2007-0 8.

     → The construction of new office buildings dropped dramat ically in recent
       years. Since 2001, construction output has fallen back from €4.2bn (prices
       2005) to €1.9bn in 2005, or a 56% decline in 4 years. The real estate market
       for office buildings reached a record high vacancy of 800,000 m², or 17.8%.
       Still, even though vacancy in Amsterdam is highest in the Netherlands, there is
       still demand in the top end. In a prestigious project as the Zuidas in
       Amsterdam, some tens of thousands of sqm of office space are under
       construction. In 2007 and 2008, growth comes from a high number of public
                                        t
       administration buildings, like he new Ministry of the Interior and Kingdom
       relations in The Hague and a new headquarters of Interpol in the same city.
       The high-speed rail link to Belgium and France will attract new office projects in
       the neighborhood of the major train stations, like Rotterdam and The Hague.

     → Retail - and wholesale trade, the hotel and restaurant industry are the most
       important parts of the commercial building sector. Demand is highly dependent
       on the development of private income and consumer confidence, which both
       are set to improve. The market faces growing demand for large-scale shopping
       property. There is a continuing process towards a concentration of retail outlet
       points into shopping malls, as well as upgrading of outdated shopping centers .

     → The c  ategory of “miscellaneous” includes different sectors, like transportation,
       communication, telecom and the quaternary sector (excluding healthcare and
       education). Eye-catching projects in the transport and distribution sector are
       the construction activities around Schiphol airport and the extension of the
       Rotterdam harbor (Maasvlakte 2). Building activity in the category recreation,
       culture, sport and religion consists of large projects, like the renovation of the
       Rijksmuseum in Amsterdam or the construction of new football stadiums,
       resulting in large fluctuations from one year to another. EIB foresees a positive
       growth contribution in 2006, but stabilized output thereafter.

     → The educational sector has seen a considerable concentration in recent year.
       Through scaling-up and mergers, the actual number of schools and other
       educational institutions has dropped dramatically. This process was
       accompanied by increased independency and responsibility of the various
       institutions, also for the construction and maintenance of the buildings. This led
       to a strong growth in demand for new buildings and renovation of old ones.
       Now that this process has been completed, new construction output in this
       sector is likely to decrease afte r 2006, after 2008 stabilization is expected. The
       introduction of PPP/PFI initiatives (in 2004 a pilot project was conducted with
       the construction of the Montaigne-lyceum near The Hague, which this year was
       voted as the best European PPP-project), could lead to more enthusiasm in
       the educational sector. For construction companies, these PPP-projects bring
       higher margins, as it envelops the whole of design, build, and maintenance,
       and possibly financing.

     → The same development can be seen in the healthcare sector: concentration
       and independenc y. Budgets were raised to enlarge capacity for treatment, the
       tendency towards more extramural care and the creation of cooperative
       associations around hospitals, stimulated construction demand. This positive
       effect is expected to diminish in 2007 and 2008, but as in the educational
       sector, it is still unclear when and to what extent PFI/PPP will stimulate
       demand.
                                                                                                        13


II.4.3. Solid growth in infrastructure spending

2006 will be the first year since a long time that new investments in civil
engineering spending show a rise, albeit with a small percentage. In the years
thereafter, growth figures will stay the same, according to the EIB.

Table 2:      Infrastructure spending shows recovery
                                  €m                              % change
Civil engineering                2005    2002     2003     2004        2005     2006     2007        2008
_New build                   8,179         -4.7    -4.8     -1.8         -0.3    1.1          1.1      1.1
_Renovation                  6,319          3.5     1.0      0.2          0.6    1.9          2.3      2.3
_Total                      14,499        -1.5    -2.4      -1.0         0.1     1.5      1.7          1.6
of which:
_Transport infrastructure    9,283         -1.6    -3.2     -1.2         0.3     2.9          2.6      2.7
_Energy and water works      1,739         -2.4    -1.3         1.0      2.5       0          0.1      -0.1
                                                                                   Source(s):          EIB

Most infrastructure spending is financed by governments, either national or local,
although the private sector plays a significant role as well. Private investment in
civil engineering is mainly commissioned by companies that are active in rail
transport, public utilities, telecommunication, seaports and airports. Today, almost
40% of all production originates from private companies and persons. Total
spending from the private sector is expected to remain stable at current levels,
whereas governmental spending will rise, as a result of quite ambitious investment
plans, formulated in the National Spatial Strategy 2004-2010 and in the Multiannual
Programme for Infrastructure and Transport. To guarantee the continuity of the
investment plans, infrastructure investment are not budgeted directly on the
individual ministries. It is financed partly from the Ministry of Transport, Public
Works and Water Management (V&W), and partly from the Dutch natural gas
export revenues.

In the coming years, there will be a shift from mega-projects, like the Betuwelijn
freight rail track between the port of Rotterdam and Germany, and the High Speed
Rail link (HSL), between Am sterdam and Belgium, which both have reached their
final stage of completion, towards the solution of urgent infrastructure
bottlenecks.There is a noticeable increase in railway investments, due to overdue
maintenance. Spending will peak in 2007, but remains at a high level in the
foreseeable future.

Table 3:      Dutch National Spatial Strategy increases infrastructure spending
Government budget (€m)                    2004        2005              2006       2007               2008
National roads                          1,016.8    1,047.3            1,662.9    1,955.0            1,877.2
Railways                                 532.6       695.6             861.6       834.2             808.6
Regional/local infrastructure            120.1       146.5             382.0       586.4             447.7
Waterworks                               194.9       219.0             144.8       184.1             179.9
Water systems                             10.0           20.0           30.0           40.0
Mega projects:
_Betuwelijn                              414.0       536.7             257.7       140.1                6.2
_HSL                                     792.2       493.8             109.9       149.9             211.4
                    Source(s):      Dutch Ministry of Housing, Spatial Planning and the Environment
14



     III.        OPERATIONAL PERFORMANCE:
                 CATCHING UP WITH THE BIG BOYS
     Current CEO René Kottman is an ex-management consultant from Berenschot,
     one of the leading consultancy agencies for the non-profit sector in the
     Netherlands. Since his arrival in 1999, Kottman could put all his consultancy
     experience in practice. It has to be acknowledged that the turnaround he has
     accomplished is impressive. Management attention has long been with the closing
     down of its loss making international activities, provoking the reproach that the
     operational performance in the Netherlands lagged those of its peers. This needs
     some differentiation. We think its construction and development division is
                                                i
     performing rather well, where as in its nfrastructure division, we would have
     expected higher margins. Its specialist knowledge in attractive niche positions is
     not reflected in its profitability.


     III.1. Stilla small player in construction &
            development, but high growth potential

     Active in entire value chain
     This division is offering services encompassing the entire construction value chain:
     development, construction, operation and facility management. The division
     consists of three operating companies: Ballast Nedam Ontwikkelingsmaatschappij
     (development), Ballast Nedam Bouw (building) and BNBO Beton.

     Focus on project development
     Strategy is aimed at acquiring complex building projects, with a focus on project
     development, DBFM contracts and long term maintenance contracts, especially
     targeted at housing corporations. Ballast Nedam owns the company Bouwborg,
     which provides structural and technical maintenance for over 20,000 dwellings and
     buildings . Ballast Nedam is dipping its toes in the cleaning and facility management
     business, by trying to lever age its own office cleaning and maintenance teams to
     third party customers. The company is aiming to increase its engineering/design
     and operate/maintenance activities (front- and back end of the value chain) to 50%
     of its consolidated revenues (currently around 25%). Organic growth is too slow to
     reach this target in the required time horizon of 2-3 years, and acquisitions in this
     area in the near future are next to certain.

     Graph. 5:       Construction & development market shares

        9,000                                                                      14.0%
        8,000                                                                      12.0%
        7,000
                                                                                   10.0%
        6,000
        5,000                                                                      8.0%
        4,000                                                                      6.0%
        3,000
                                                                                   4.0%
        2,000
        1,000                                                                      2.0%

             0                                                                     0.0%
                  Bouwfonds     BAM     VolkerWessels   Heijmans   Ballast Nedam

                                  Houses sold     market share

                                                                    Source(s):     Dexia Bank
                                                                                                                            15


                                Almost 50% of the Building & Development division at Ballast is related to
                                residential construction, or around 25% of total consolidated revenues. In 2005 it
                                delivered 1,077 houses, resulting in a market share of 1.6%. This was less as
                                their long-year average, which hovers between 1,800 and 2,000 units, and was
                                due to a timing issue. The long-year average is split between 1,200 -1,400 houses
                                built for third parties, and around 700 own development. Especially this last
                                number should increase in the future. We start with a current market share of 3%.

                                Principal asset = current land bank of 609ha
Ballast Nedam currently has a   Biggest asset of Ballast Nedam is its current land bank of 609 hecta re, with a
land bank of 609ha with a       development potential of around 11,000 houses and 500,000 m² of office space. In
development      potential of   2005, 45% of the houses sold were developed for own account, a percentage that
11,000 houses and 500,000       ideally would be around 50%. The land bank ensures a steady future revenue
m² of office space.             stream, although investment in land also raises invested capital, which is locked in
                                for a considerable time period. Selling the land bank diminishes the revenue
                                generating potential. Profit margins of houses build under own management are
                                generally 2 -3% higher than build for third parties.

                                → Competitive strength: For comparative purposes: Heijmans’ land bank at the
                                  end of 2005 had a development potential for 46,000 houses and 500,000 m² of
                                  office space. Volker Wessels possessed 805ha with a development potential of
                                  12,443 houses and 593,376 m² of office space. Ballast Nedam seems
                                  considerably more aggressive in acquiring new land positions than both other
                                  competitors at the moment, though, and with the acquisition of project
                                  developer Hollestelle in 2005, it added additional development potential of
                                  around €70m. Hollestelle will remain an independent operating unit within
                                  Ballast Nedam, next to its own Ballast Nedam Ontwikkelingsmaatschappij.

                                → No margin disadvantage in our view: Contrary to the market, we don’t think
                                  Ballast Nedam lags so much in margin terms with its Construction &
                                  Development division, when compare d with its 5 main competitors.
                                  Comparison is somewhat blurred through the different reporting structure of the
                                  different companies.

                                   Table 4:       EBIT margins within Dutch construction & development
                                                              2003        2004          2005       2006E       2007E    2008E
                                    Ballast Nedam            3.3%        4.0%           5.3%        5.8%        5.7%    5.5%


                                    BAM*                     1.8%         3.0%          3.1%
                                    VolkerWessels            6.3%         6.1%          6.8%
                                    Heijmans                 5.7%         5.5%          5.2%        5.6%         5.7%    5.6%
                                    TBI                                   3.1%          1.8%
                                    DuraVermeer **           2.0%         1.4%          2.7%

                                   * including foreign operations ** Dexia Bank estimate, based on reported EBITDA
                                                                                    Source(s): Company data/Dexia Bank estimates



                                    Not every company gives a separation between real estate development and
                                    general construction (as Heijmans does), or between residential and non-
                                    residential construction (as with VolkerWessels), and the percentage of
                                    internal delivery (own construction of real estate projects, for example), differs
                                    quite significantly as well .
16


     On the basis of the above-mentioned figures, we conclude that:

         §   VolkerWessels is best of class in operational terms. Two thirds of the
             revenues within construction & development is coming from the residential
             market, the second highest percentage in the sector, behind BAM Groep.

         §   Heijmans com es in second. Its EBIT margins are depressed somewhat
             through its loss making prefab production unit, which it is gradually
             divesting.

         §   BAM Groep’s EBIT margin is not really comparable here, as it is the
             consolidated divisional margin. Half of its turnover is obtained outside the
             Netherlands (€1.8bn out of €3,6bn). We estimate BAM Groep’s profit
             margin in the Netherlands must be around 5.5%, as the German
             construction (15% of division revenues) are still loss making, and the UK
             activities (31% of division revenues) yield a lower margin than in the
             Netherlands. One might have expected a higher margin, as 75% of the
             revenues in this division in the Netherlands is obtained from residential
             construction and project development.

         §   Ballast Nedam improved its operating margin most impressively,
             even in the difficult period between 2001 and 2004. Going forward, we
             estimate that operational performance will be on par with Heijmans, but as
             Heijmans obtains a higher percentage of construction activities from
             property development and therefore the residential construction market,
             Heijmans margins might proof more stable and sustainable.

         §   This last point is shown in graph 6, where Heijmans growth figures in
             construction and development might at first sight not be so spectacular, it
             proves to be the most stable over the construction cycle.

             Graph. 6:           Dutch construction & project development growth

               30%


               25%


               20%


               15%


               10%


                5%


                0%
                            2002                2003                    2004                    2005
               -5%


              -10%


              -15%

                 Ballast Nedam   BAM   DuraVermeer   Heijmans     VolkerWessels   Residential   Non-residential

                                                     Source(s):            Company data, EIB & Dexia Bank


             On the other hand, it is hard to see a consistent pattern between top line
             growth of the individual companies and the general market growth, where
             again Heijmans shows the highest correlation between its revenue growth
             of the combined building and development divisions with the national
             residential construction growth figures.
                                                                                                      17



III.2. Infrastructure margins: struggling

                     f
Due to the nature o large scale infrastructure works, depending on the timing of
completion, year -to-year revenue growth and profit margins sometimes show large
swings. Participants on the HSL and Betuwelijn, like Heijmans, did not suffer from
the civil engineering downturn (Ballast Nedam’s remarkable operational profit
margin recovery was also thanks to the same large infrastructure completions).

Table 5:       EBIT margins Dutch infrastructure divisions
                       2001        2002     2003       2004       2005       2006       2007      2008
Ballast Nedam          2.3%        1.2%    1.3%        3.3%       2.3%       2.4%      2.7% 2.9%
BAM Groep*                         2.8%     2.2%       3.0%       4.5%
VolkerWessels*         4.8%        4.2%     1.8%       2.6%       3.0%
Heijmans               3.5%        4.1%     3.9%       3.5%       4.4%       3.9%       4.1%      4.1%
DuraVermeer            2.3%        1.2%    -0.8%       -1.2%      -0.7%

                                                                      * Including international activities
                                                  Source(s):      Company data/Dexia Bank estimates

Ballast Nedam’s operational margins of its infrastructure division recovered nicely
from the low figures shown in 2002 and 2003. Going forward, as management
indicated during its 1H’06 result presentation, expectations for further margin
expansion remain limited. As can be seen in graph 7, even in a shrinking market,
the largest players were able to keep their revenues stable. Heijmans faced the
largest relative drop in revenues, but could keep up its operational profit margin.

Graph. 7:        Dutch infrastructure revenues for the largest players (€m)

     1,600
                   Ballast Nedam    DuraVermeer    Heijmans    BAM Groep     VolkerWessels

     1,400


     1,200


     1,000


       800
                                                   c
       600


       400


       200


           0
                2000         2001          2002            2003            2004          2005


                                                                          Source(s):         Company data

Comparison on operational performance between the largest infrastructure players
is difficult as not all the companies give a geographical breakdown of their EBITDA
and EBIT within their divisional results. BAM Groep and VolkerWessels’ EBIT
margin could therefore not be split into a pure Dutch operational profit margin, but it
is safe to assume that the Dutch margins might actually be somewhat higher than
                                                           t
the ones reported here. Nevertheless, one can see hat Ballast Nedam’s profit
margins significantly lag the larger players (except for DuraVermeer), and are more
volatile. This earnings volatility is a consequence of Ballast’s lack of scale, as
project completions or tender costs weighs heavily on the results.
                           18



                                   IV.       FROM BRICKS TO BRAINS: FLEX YOUR
                                             MUSCLES MORE EFFICIENTLY

                                   Towards full service

                                   Being released from its loss making international activities, management is now
                                   completely focusing on turning Ballast Nedam into an integrated full service
                                   construction company. This means it wants to be involved from the design phase,
                                   building to maintenance (DBM), and possibly financing (DBFM).

                                   To raise its operating profit margins, it wants to increase the weight of the front and
                                   back-end of its value strategy, to 50% of its construction revenues. This means
                                   Ballast Nedam needs to invest in both property developers (front end) and
                                   maintenance and facility management (backend).

                                   This might indeed be an unavoidable strategy welcomed by investors for large
                                   construction companies (we recommended it ourselves for Heijmans, see our
                                   report ‘Between a Brick and h ard place’, our initiating coverage from July 10 ), as
                                   those companies do have the necessary broad client base to leverage their
                                   services, and to generate a stable recurring income stream from it.

                                   We doubt however if this is the right strategy to follow for Ballast Nedam for
                                   the following reasons:

                                   → We welcome further investment in property development, but would like to see
                                     it evolve into an operational model in line with Kaufman & Broad in France, or a
Investing     in     property        McCarthy & Stone in the UK, being a specialist builder, generating higher
development and electrical           margins.
contracting    and      facility
management        might     be     → Investment in electrical contracting (HVAC) and facility management generates
unavoidable for the large            a recurring income stream, but margins are not as high as many would expect.
construction companies, but          In spite of being recurring income, margins fluctuate more than with normal
we doubt if this is the right        construction activity.
path for Ballast Nedam.
                                   → Ballast Nedam currently lacks scale to leverage those services onto a
                                     sufficiently broad client base and being able to generate above average
                                     returns.

                                   → Vertical integration is especially aimed at becoming a player in the PFI/PPP
                                     market. This indeed offers opportunities, but again, we think Ballast Nedam
                                     lacks scale in this field. On a stand alone basis, its balance sheet does not
                                     allow for taking on large equity stakes, and earnings volatility w ould increase.
                                                                                                                                              19


                                  IV.1. Back-end integration not attractive for all

                                  In table 6 we have listed the margin development of the major electrical contractors
                                  in the Netherlands, and of those which are part of the three largest Dutch
                                  construction groups. Noticeable is the strong margin drop in 2003 and 2004, when
                                  the non-residential construction market (offices) saw its severest crisis in years.
                                  The market for facility management and electrical contractors are just as
                                  fragmented as the construction market, and price competition was extremely
                                  harsh. Interesting in this example is the UK company MITIE, which offers services
                                  such as cleaning, engineering maintenance, managed services, manned guarding,
                                  catering and waste management, but also electrical and mechanical engineering,
                                  property refurbishment (painting, roofing etc.) to both public and private clients:
                                  exactly the service mix construction companies are looking for in their
                                  transformation process to become a full service construction company.

                                  Table 6:        Operating profit margins of Dutch electrical contractors

                                                                            2001            2002             2003             2004           2005
                                  BAM Groep                                 6.3%            5.5%            4.7%              4.1%           4.3%
                                  VolkerWessels*                                            6.5%            5.3%              1.9%           4.0%
                                  TBI                                       3.2%            4.0%            4.3%              3.5%           3.2%
                                  Burgers Ergon                             4.2%            4.3%            3.6%              0.2%
                                  GTI                                       3.4%            2.1%            0.0%            -0.6%
                                  Kropman**                                                                -0.9%            -1.2%            0.4%
                                  Unica Installatiegroep                    3.8%            3.1%            2.7%              2.5%           0.7%

                                  * includes all service related activities ** net profit margin
                                                                                                                 Source(s):          Company data


The UK company MITIE offers       Looking at MITIE’s margin and ROCE development, we don’t think these activities
exactly the kind of services      offer substantial margin expansion to Ballast Nedam cons truction & development
mix all construction companies    division. Going forward, we expect EBIT-margins for Ballast Nedam to be around
are looking for to extent their   5.5% and 5.8%, between 50 and 80 basis points above those of MITIE.
value chain.
                                  Graph. 8:            Profitability ratio’s of MITIE (%)

                                  Net & EBIT-margin                                                                                ROCE & ROE

                                          6                                                                                             35
                                                                            ROCE      ROE          EBIT-margin        Net margin


                                                                                                                                        30
                                          5

                                                                                                                                        25

                                          4
                                                                                                                                        20


                                                                                                                                        15
                                          3


                                                                                                                                        10

                                          2
                                                                                                                                        5


                                          1                                                                                             0
                                                   2002              2003              2004               2005              2006

                                                                                                         Source(s):        Worldscope/Dexia Bank
                            20


                                              Intuitively, one would expect a higher ROCE for a services company than a
                                              construction company, as the latter has much capital tied up in, for example, its
                                              land bank, equipment etc. But Ballast Nedam’s ROCE is on par with MITIE’ s,
                                              which belies that common wisdom.

                                              Running a facility management or electrical contracting company doesn’t require
                                              rocket science, but it is an activity that is still in its infancy at Ballast Nedam, and
                                              we don’t think it can develop a competitive advantage with it, other than that clients
                                              are offered a one-stop -shop concept. We are questioning the current spending
                                              spree in construction land to indiscriminately acquire those ‘back end’
                                              companies, and are highly sceptical of the added value of Stork’s WorkSphere to
                                              Strukton, for that matter, which changed hands for 18x EBIT. If those are the
                                              multiples construction companies have to pay to add top line growth with lower
                                              margins, we think there are better options to create value for its shareholders.


                                              IV.2. Better value in specialist construction

                                              Two European construction companies are interesting to look at, as they both offer
                                              best of class operational and financial performance.

                                                       w
                                              Those t o smaller European construction companies stand out regarding their
                                              profitability ratios, both have their own unique business model, characterised by
                                              product specialisation: UK based McCarthy & Stone and Kaufman & Broad in
                                              France.

Graph. 9: Profitability ratios (%) MCarthy & Stone                        Graph. 10: Profitability ratios (%) Kaufman & Broad

 50                                                                 35     12                                                                25


 45                                                                 30
                                                                           10                                                                20
                                                                    25
 40
                                                                            8                                                                15
                                                                    20
 35
                                                                    15
                                                                            6                                                                10
 30
                                                                    10
                                                                            4                                                                5
 25                                                                 5

 20                                                                 0       2                                                                0
       2001          2002         2003          2004         2005                2001          2002       2003          2004          2005
              ROCE     ROE        EBIT-margin          Net margin                       ROCE     ROE      EBIT-margin          Net margin

                                                                                                       Net & EBIT margin (lh), ROCE & ROE (rh )

                                 Source(s):       Worldscope/Dexia Bank                                 Source(s):       Worldscope/Dexia Bank



                                              IV.2.1. Example 1: McCarthy & Stone

                                              UK-based McCarthy & Stone is a one-product, one-market company, founded by
                                              John McCarthy and Bill Stone, the former having sold his 16% stake in 2004. The
                                              current management team is virtually intact since 1993-‘ 94. McCarthy & Stone is
                                              the UK’s number one retirement homes developer , involved in the design,
                                              construction and sale of sheltered schemes (with 24 hours warden assistance) and
                                              has a market share of c   irca 70%. After significant losses in the early 1990s, a
                                              passed dividend and a rescue rights issue, th e company has delivered a total
                                              shareholders return since March 1993 of more than 4,900%. Over the past five
                                              years, it boasted a CAGR in EPS of over 30%, an average ROCE in excess of
                                              40% and has turned £12m in debt to £40m cash balances, despite massive
                                              investment in land. Even though average house builder’s margins in the UK lie
                                                                                  21


much higher than in the Netherlands, McCarthy & Stone’s margins are double
those of its UK peers.

Operational strength lies in:

    •   Sophisticated site identification system, the vast majority being
        brownfield sites. Due to the lack of planning of most local authorities in
                                                     s
        their longer term elderly care requirement , McCarthy & Stone has a
        natural ‘sympathy factor’, helpful in securing building permits quicker,
        added with an improve d social standard of the neighbourhood.

    •   Building standardisation. Each development is constructed in ‘Lego-
        style’, from just 4-5 basic house types, which offer up to 20 standard flats.
        Construction techniques and specifications are standardised across the
        regions, enabling national agreements with core suppliers.

    •   Scientifical marketing strategy. McCarthy & Stone clients have a ‘need-
        based’ customer profile, but its computerised lead -tracking system is
        unique in the industry. Its sales force are all directly employed and trained
        in-house, securing a conversion rate vastly superior than industry
        standards.


IV.2.2. Example 2: Kaufman & Broad

Kaufman & Broad is one of France’s leading property developers, solely focusing
on the residential market, with an estimated market share of 4.4%. As in the
Netherlands, France has structural housing shortages, estimated at 1.5m units.
Over the past 3 years, Kaufman & Broad’s top-line growth reached a CAGR of
14%, while profitability improved substantially with a gross margin from 18.9% in
2002 to 24.6% in 2005. Operational strengths for Kaufman & Broad are parallel to
McCarthy & Stone’s:

    •   Deep know-how of a limited number of attractive local markets,
        helping to get attractive locations and to get building permits faster than
        others .

    •   Unique ability offered to clients to customise their homes , resulting in
        higher selling prices. Despite its mass market product, Kaufman & Broad
        houses are perceived as personalised and not as standardised, resulting in
        a high quality image,

    •   A relative scale advantage , enabling to extract good conditions form
        builders, resulting in shorter lead times .

    •   Very efficient distribution network with close to 200 sales people. High
        client loyalty, with higher than average re-sell prices.

Over the longer term, the company wants to return in the commercial business,
while student and nursing rooms offer a high growth potential as well. At year-end
2005 Kaufman & Broad’s capital employed stood at €500m, which is relatively
high. The largest part relates to working capital, €300m, related to land acquisition
and property development, and pre-financing of the construction works before
commercialising its programs. Working capital as a percentage of sales has been
reduced from 40% in 2001 to 25% in 2005, which is also the long-term target.

Kaufman & Broad’s ROCE is significantly lower than McCarthy & Stone’s, but still
higher than those of Ballast Nedam’s (15% in 2005 vs Kaufman & Broad 24.6%).
Its operational profit margin in 2004 and 2005 were above 10%, twice those of
Ballast Nedam’s construction & development margin. Main reason of this
                    22


                               higher margin is that Kaufman & Broad is subcontracting all its construction work,
                               and is therefore more a property developer than a construction company. Still,
                               Heijmans’ property development margin in the Netherlands reached 7.42% in
                               2005.


                               IV.2.3. Example 3: Nexity

                               With regard to the business mix, McCarthy & Stone and Kaufman & Broad
                               concentrate solely on the housing market. We do indeed think that the residential
                               market currently offers the best margins and most stable growth, but such a
                               concentrated strategy may lead to adverse results when the next, inevitable,
                               housing downturn arrives. Interesting to see in this respect is Nexity, as it is
                               Kaufman & Broad’s closest peer in France, but it has three business areas:
                               residential, commercial and services. Management’s strategy is to increase market
                               share in the French residential market and to expand in commercial real estate,
                               both in France and elsewhere. With the takeover of Century21, its share of real
                               estate related services will increase from H2’06 onwards.


Graph. 11:    Nexity 2005 revenue mix                     Graph. 12: Nexity profitability ratios (%)

                                                            20                                                            60
                 Services
 Commercial        4%
                                                                                                                          50
    16%
                                                            15
                                                                                                                          40


                                                            10                                                            30


                                                                                                                          20
                                                             5
                                                                                                                          10


                                                             0                                                            0
                                           Residential
                                                                  2001          2002       2003          2004      2005
                                              80%
                                                                         ROCE     ROE      EBIT-margin      Net margin

                                                                                                                   E
                                                                                        Net & EBIT margin (lh), ROC & ROE (rh )

                              Source(s):   Company data                                  Source(s):       Worldscope/Dexia Bank


                               At its H1’06 results presentations, management gave guidance for its operating
                               margin for FY’06 of at least 13%, and 10-11% longer term. This does not seem
                               overly ambitious to us, as it is in line with industry average. ROCE improved to
                               20% in 2005, but might have reached its highest level, because working capital
                               requirement is expected to rise.



                               Surprisingly, Nexity’s ROCE is lower than Kaufman & Broad’s. Contrary to
                               Kaufman & Broad, Nexity acquires land for development through an option-based
                               process, rather than maintaining a land bank. To reduce risks, Nexity pre-sells its
                               developments, 100% in commercial and minimum of 30% in residential. Working
                               capital as a percentage of sales in the period 2001-2004 was on average 33%, this
                               proportion declined to just 15% in 2004 for its residential division, but is expected
                               to rise to 25% in FY’06 for residential, and 17% for its commercial division.
                                                                                                                23


                              IV.2.4. Where Ballast Nedam could improve

                              The standout operational competences of McCarthy & Stone and Kaufman &
                              Broad offer some food for thought in which Ballast Nedam’s construction &
                              development division could improve. The following points are the main value
                              drivers:

                              → Pre-define your client groups : both McCarthy & Stone and Kaufman & Broad
                                show that they maximise marketing efforts towards selective groups of
                                customers which already have an attractive scale and high growth potential.
                                We think Ballast Nedam could identify several of such groups in the
                                Netherlands : i) Social housing; ii) middle-class housing ; iii) retirement homes
Near term, we think the         and iv) schools .
operating metrics of Nexity
would be a good target for    → Land site selection: selective , but aggressive acquisitions , adapted to the
Ballast Nedam, might it         clearly pre-defined client groups. Although a land bank absorbs a lot of working
increase its front end          capital, that alone raises entrance barriers for smaller players. We have shown
weight, resulting in:           that it not necessarily leads to either a lower ROCE or operating margin. It
                                does require a fairly quick asset turn, which can be speeded up through
                                standardisation and shorter lead times
    •   Operating margin
        of 8-12%
                              → Standardisation: cost improvement comes from maximum standardisation.
    •   ROCE 20-25%             Working with standardised modules, a limited number of ground plans, but with
                                simple added options (other examples are Heijmans’ ‘Wenswonen’-concept
                                and the IKEA    -Skanska joint venture BoKlok in Scandinavia). This concept
                                could fit well with housing corporations.

                              → Subcontract as much as possible , as general construction generates low
                                margins and fragmentation will persist.

                              → Maximise your m arketing effort: know your customer. Client satisfaction and
                                customer retention are not marketing concepts that are commonly used terms
                                yet with construction companies. But positive brand recognition enables
                                premium prices, and could eventually lead to an attractive secondary market.



                              IV.3. Improving the infrastructure value driver

                              Ballast Nedam’s operating margin in 2005 for its infrastructure division is around
                              200 basis points below those of Heijmans and presumably those of BAM Groep
                              and VolkerWessels as well. We think this margin gap will improve to around 1       25
                              basis points into 2008, as we estimate that Heijmans’ infrastructure division has not
                              much room for margin expansion, whereas at Ballast Nedam we think profit
                              contribution from the Svanen will fully kick in from 2007 onwards. We see w o     t
                              options to further improve the infrastructure value driver:

                              → Scale increase, doubling turnover, operating margin ~ 5% (III.3.1)

                              → Compete on knowledge, transformation into engineering consultancy (III.3.2)



                              IV.3.1. Infrastructure scale : Strukton still makes sense

                              With FY’05 revenues of €541m in infrastructure, Ballast Nedam clearly lacks
                              scale in the Netherlands. Operating margins of the larger competitors like
                              Heijmans, VolkerWessels and BAM Groep are consistently higher than Ballast
                              Nedam’s. This gap will persist, as we see that in frastructure projects coming to the
                      24


                               market in the Netherlands increase in size, which subsequently will intensify
                               foreign competition to the relatively closed Dutch market. To avoid being forced
                               into becoming a subcontractor, we see a turnover of around €1bn in infrastructure
                               as a target, being on par with Heijmans. This is to absorb rising tender and pre-
                               financing costs and to level off major revenue swings due to large project
                               completions.

In 2004 there were market      Clearly, we would welcome the added revenues to come from higher value added
rumours regarding merger       specialisms, but doubt this will be attainable, as there are not that many middle-
talks   between      Ballast   sized companies left with infrastructure specialisms. In 2004, there were already
Nedam and Strukton. This       rumours in the market that Strukton and Ballast Nedam were in advanced merger
combination would still make   talks, and we still see it as perfect match, were it not that we fear Strukton would
sense.                         demand hefty multiples, in excess of 10x EBIT. In our initiating coverage on
                               Heijmans, we estimated Strukton’s E V could reach €600m including the recently
                               acquired WorkSphere from Stork. We estimate Ballast Nedam’s FY’06 EV at
                               €364m, the main difference related to Strukton’s double EBIT margin.

                               Graph. 13:           Revenue mix Strukton (in €m)

                                 900                                                                                  7.0%

                                 800
                                                                                                                      6.0%
                                 700
                                                                                                                      5.0%
                                 600

                                 500                                                                                  4.0%


                                 400                                                                                  3.0%

                                 300
                                                                                                             524      2.0%
                                 200                                                            430
                                                                        325        367
                                             258            292                                                       1.0%
                                 100

                                   0                                                                                  0.0%
                                            2000            2001        2002       2003         2004         2005

                                       Railinfrastructure      Civil engineering   Construction & Property      EBIT (%, rh)

                                                                                          Source(s):   Company data/Dexia Bank



                               Both Strukton’s civil engineering division (€176m in 2005) as Ballast Nedam’s have
                               world class technical capabilities, and together would create a (European)
                               powerhouse in specialist civil engineering and construction. Together, they would
                               have a combined turnover of €1.2bn in infrastructure, a good starting point to stay
                               independent and reach the required 5% operating margin. As ideal as it sounds,
                               we don’t see Strukton as a prey any longer, but rather the reverse. Strukton could
                               buy out Ballast Nedam, merge its infrastructure divisions and spin off both ones
                               construction & property division to partly finance the deal.



                               IV.3.2. Engineering an independent future

                               One of the most important value drivers within Ballast Nedam’s infrastructure
                               division is its engineering department. There should be room for margin
                               improvement when comparing the profitability ratios with those of engineering
                               consultancy companies like Arcadis or Grontmij, but not as significantly as we have
                               seen with its construction and property development division. Both Grontmij and
                               Arcadis are competitors for the Dutch construction companies in the design phase
                               of infrastructure projects. For the actual construction, they rely on subcontractors.
                                                                                                                                           25


                                        Margins are improving, after a difficult 2003 and 2004. Consensus estimates see
                                        operating margins improve in 2008 towards 6.7% for Arcadis and 8.2% for
                                        Grontmij. In 2005, Arcadis obtained €526m (out of a total of nearly €1bn) out of
                                        infrastructure, with an operating margin of 7.6%. Arcadis’ engineering team has
                                        gained worldwide reputation, as they were responsible for the design of the Millau
                                        viaduct in the south of France, and the 11km tunnel under the city of Detroit, one of
                                        the longest in the USA.


Graph. 14:          Profitability ratios (%) Grontmij                     Graph. 15: Profitability ratios (%) Arcadis

  6                                                                16      6
                                                                                                                                         24

  5                                                                14
                                                                                                                                         22
                                                                           5
                                                                   12
  4                                                                                                                                      20

                                                                   10                                                                    18
  3                                                                        4
                                                                   8                                                                     16
  2
                                                                   6       3                                                             14

  1                                                                                                                                      12
                                                                   4

  0                                                                        2                                                             10
                                                                   2
                                                                                2001          2002        2003          2004      2005
      2001           2002       2003          2004          2005
 -1                                                                0                   ROCE     ROE       EBIT-margin      Net margin

             ROCE       ROE     EBIT-margin          Net margin                                       Net & EBIT margin (lh), ROCE & ROE (rh )

                                Source(s):        Worldscope/Dexia Bank                                Source(s):        Worldscope/Dexia Bank




                                        Mouchel Parkman’s interesting activity mix

                                        Profitability ratios of the two Dutch engineering companies would in the next few
                                        years be in line with the infrastructure services company, Mouchel Parkman, the
                                        UK company which provides support services in managing infrastructure assets.
                                        Clients are national, regional and local governments, privatized utilities, rail
                                        infrastructure operators, education authorities and the defense sector. More than
                                        50% of its revenues are derived from contracts involving design and planning
                                        services in conjunction with maintenance management services on highway and
                                        local road contracts. Other services include property consultancy services
                                        contracts for city councils (9% of revenues), rail engineering advice for the
                                        Transport for London underground authority, and they have a framework
                                        agreement with Westinghouse to support them with their work on the London
                                        underground. In railway infrastructure Mouchel Parkman offers for example also
                                        signaling design and testing work. Rail represents around 10% of its turnover, on
                                        equal footing with its water infrastructure advisory business. The H1’06 interim
                                        results confirmed the jump in operating profit margin (to 7%), continuing the
                                        development seen in FY’05 (due to the merger of Mouchel with Parkman) and

                                        For us, it underpins our opinion that for infrastructure engineering services the
                                        following long term margin targets should be achieved:

                                              •       Operating margin 6 -8%

                                              •       ROCE 20-25%
                          26




Graph. 16:           Activity mix Mouchel Parkman                   Graph. 17: Profitability ratios (%) Mouchel Parkman

                                                                     8                                                            30
               14%                           Strategic highways
                                    30%      Local roads             7
                                             Property                                                                             25
     8%                                      Rail                    6
                                             Water
                                             Regeneration
                                                                     5                                                            20
                                             Consultancy
    9%                                                               4
                                                                                                                                  15
                                                                     3


                                       20%                           2                                                            10
         10%                                                              2001          2002       2003          2004      2005

                                                                                 ROCE     ROE      EBIT-margin      Net margin
                     9%
                                                                                               Net & EBIT margin (lh), ROCE & ROE (rh )
                                     Source(s):      Company data                               Source(s):      Worldscope/Dexia Bank




                                    Our view on the strategy:

                                    We fear Ballast Nedam’s current strategy to concentrate on the Dutch home
                                    market has an especially adverse impact on its infrastructure division on the
                                    longer term, for the following reasons:

                                    → Competition in the Dutch market will increase, rising threat of a shrinking
                                      market. Margin erosion (after 2010).

                                    → Know how can be easily leveraged and it raises entrance barriers, that is
                                      hardly the case with pure construction.

                                    → Consolidation is on the table within the construction and engineering industry,
                                      infrastructure investment worldwide is booming, both developments require
                                      geographical expansion, as many interesting opportunities arise abroad.


                                    If Ballast Nedam can not, either through acquisition or mergers, double its
                                    infrastructure business in its current form, the preferred strategy would be to turn it
                                    into pure play infrastructure engineering. This strategy would work out
                                    positively on its valuation multi ples immediately on two fronts:

                                    → margin expansion through operational efficiency improvement and lower
                                      capital costs.

                                    → multiples increase, engineering companies do generally have a better
                                      perception with investors than construction companies, even though margins
                                      fluctuate more and are not as stable as most investor perceive.
                                                                                                                27


                              IV.4. Losing bricks as a beta blocker

                              Enterprise valuation in the end boils down to e valuate future risks and choosing the
                              appropriate beta, corresponding to the sector. This determines the enterprise
                              WACC, the cost of debt, and possible leverage.

Table 7:        Unlevered betas for construction related companies (European averages)

                                       Unlevered Market                                        Unlevered     Market
                                            beta   D/E                                              beta       D/E
Building - Residential/Commercial            0.92    24.71    Transport – Rail                        0.61     7.67
Building & Construction/Misc.                0.69    24.33    Transport Services                      0.33   256.68
Building - Heavy Construction                0.73    65.18    Water                                   0.43   118.96
Building - Maintenance & Services            0.69     7.40    Electric-Integrated                     0.56    64.28
Building - Manufactured houses               0.63    12.74
                                                              Airport
B&C Products Cement/Aggregates               0.72    50.97    development/maintenance                 0.73    53.62
                                                              Non-hazardous waste disposal            0.26    99.35
Environmental Consulting &
Engineering                                  0.70    10.27    Hazardous waste disposal                0.57    13.26
Consulting services                          0.96    24.94
                                                              Real estate
Engineering/R&D services                     0.75    54.85    management/services                     0.31   100.30
                                                              Real estate
Extended services contracts                  0.92    20.73    operation/development                   0.45    75.82
                                                                                              Source(s):     INSEAD


                              Looking at the above sample of unlevered betas, one can immediately see why
                              Spanish construction companies diversified themselves into activities like
                              transport services or waste disposal, as it lowers the beta with more than two
                              third, compared with normal construction. Combined with heavy debt financing,
                              this lowers their overall WACC and increases their DCF valuation. This leverage
                              effect should not be taken lightly, as lowering the beta from 0.9x to 0.7x would
                              increase the fair equity value for Ballast Nedam with more than 30%.

                              It’s all about perception

                              For the company it is therefore very important that analysts and investors get the
                              right idea in which industry the company operates, as that determines which
                              unlevered beta they choose, and their ultimate valuation of the company. An
                              activity mix of 50% real estate operation & development, with 25% heavy
                              construction and 25% Environmental consulting & engineering would result in a
                              blended unlevered beta of 0.58 . If net debt could be raised to 25% of the market
                              enterprise value, WACC would decrease to 7.4 %, in our calculations, against the
                              current 9.1%.

                              In our valuation model, currently we are using an unlevered beta of 0.87, reflecting
                              the operating profit contribution of construction & development (72%) and of heavy
                              construction (28%).
                 28



                                V.        FINANCIAL OUTLOOK
                                In our financial model, for our estimates for the Dutch construction market growth,
                                we used a combination of the EIB and TNO reports. For the years 2009 -2010, we
                                rely on the TNO data only, as the forecast horizon of the EIB is limited till 2008.


                                V.1. Market peaks in 2008

                                Based on its current market of 1.6% of the delivered houses in the Netherlands in
                                2005, we project that Ballast Nedam can raise its market share to 3.5% in 2010,
                                albeit made easier where we see a market decline from 2009 onwards. We think
                                Ballast Nedam can easily maintain market share due to its land bank.

                                We are rather conservative in our base case scenario for the residential markets,
                                especially regarding house price development. As they are notoriously difficult to
                                predict, we keep prices fairly stable at inflation rate. This is offset against, maybe,
                                too positive growth expectations for the non-residential sector. We arrive at a top
                                line CAGR growth of 7.6% till 2010 for Ballast Nedam’s Construction &
                                Development division.

                                We are less optimistic about the growth prospects for the infrastructure, even
                                though we reckon that Ballast Nedam will grow at the top end of market estimates.
                                Still, a slight market decline is factored in after 2008. Till 2010, top line growth for
                                Ballast Nedam Infrastructure is estimated at a CAGR of 2.4%. Our cautious
                                outlook is somewhat compensated by the rising contribution of the Svanen in 2008,
                                as we expect that the building of offshore windmill parks will need some few more
                                years to really take off.

 Table 8:      Growth assumptions Dutch construction market & Ballast Nedam growth estimates
Construction & Development                           2005      2006E       2007 E       2008 E        2009E         2010E
Total number of housing completions                 67,500    75,000       77,500       75,000       73,000        70,000
Market share Ballast Nedam                          1.60%      2.80%       3.05%        3.25%         3.45%        3.65%
BN number of houses delivered                        1,077      2,100       2,364           2,438      2,519        2,555
House prices %                              3.4% -11.7%      3% - 7%          3%              2%         2%            2%
BN growth non-residential                                       4.8%        3.4%            5.0%       8.0%         5.0%
Total revenues construction & dev.                  648.0       666.5       682.4           716.1      761.4        789.4


Infrastructure
TNO market growth estimate                           3.8%      -2.2%        3.0%            2.9%      -3.3%         -1.0%
Euroconstruct growth estimate                        0.3%       2.9%        2.6%            2.7%
Dexia Bank growth estimate BN                        3.6%       3.5%        3.0%            2.9%      -1.5%         0.0%
Total revenues infrastructure                        528.0      546.5       562.9           579.2      570.5        570.5
Contribution Svanen                                   50.0       40.0        50.0            80.0       80.0         80.0
Total Ballast Nedam infrastructure                  578.0       586.5       612.9           659.2      650.5        650.5
                                                                               Source(s):       TNO/EIB/Dexia Bank estimates

                                We like the split

                                In Ballast Nedam’s business model, we like the fact that there is currently a more
                                or less 50/50 split between its construction and development and its infrastructure
                                activities. Going forward, and assuming lower growth rates in infrastructure, th e
                                divisional balance will tend towards 2/3 and 1/3. This might prove to be favourable
                                for overall operational profit margin (higher for Construction & Development), but
                                might also be a signal to look for growth opportunities in infrastructure, when there
                                will there will be the inevitable downturn in the housing market.
                                                                                                                              29


                               V.2. Margin improvement, but is it good enough?

                               As we have shown earlier, Ballast Nedam’s operational margin in Construction &
                               Development is up to the same level as Hejmans, and we see margins develop in
                               the same way, as there are no significant competitive advantages with one above
                               the other. Infrastructure margins are higher and more stable at Heijmans, whereas
                               we see a 60 basis points improvement at Ballast Nedam towards 2008 (mainly due
                               to the contribution of the Svanen). We are very careful with pencilling in margin
                               improvements at Ballast Nedam Infrastructure division (and Heijmans’ for that
                               matter), due to the fact that tender costs for the upcoming large infrastructure
                               projects are prohibitively rising, and higher margin generating revenues might start
                               coming in only after 2008. Especially for Ballast Nedam, because of its smaller
                               size, higher tender costs will pressure margins more than at Heijmans.


                               Table 9:       EBIT margin comparison Heijmans and Ballast Nedam
                               EBIT margins                                    2005         2006E           2007E          2008E
                               Construction & Development
                               Ballast Nedam                                   5.4%         5.7%              5.7%         5.5%
                               Heijmans                                        5.2%         5.6%              5.7%         5.6%
                               Infrastructure
                               Ballast Nedam                                   2.3%         2.4%              2.7%         2.9%
                               Heijmans                                        4.4%         4.0%              4.0%         4.1%
                               EBIT margin overall
                               Ballast Nedam                                   3.0%         3.5%              4.3%         4.3%
                               Heijmans                                        3.0%         4.5%              4.2%         4.7%
                               Net profit margin
                               Ballast Nedam                                   1.7%         3.9%              3.0%         3.1%
                               Heijmans                                        1.5%         3.1%              2.8%         3.2%
                                                                                            Source(s):        Dexia Bank estimates


                               V.3. Cash conversion volatile , but gradually improving

                               Ballast Nedam’s ability to generate cash flow is distorted by large swings in
                               working capital. This might be partly due to reorganisations in the last years and
                               IFRS transition, but is apparently also a consequence of financial management.
                               We base that on our observations that the cash in- and outflows are enormous
                               within the year, at least relative to total revenues, balance sheet size and market
                               cap. Cash conversion in 2006 might prove better than we expect, as we forecast
                               another rise in working c                         e
                                                          apital requirement. W expect this would mostly be for
                               investment in land. As this will fade away to zero in our model, the cash conversion
                               rate will improve to 67.7% in 2010. This is line with Heijmans, whose cash
                               conversion rate is around 50%.

Table 10:          Cash conversion ability, 2001-2010E
                              2001         2002      2003     2004     2005      2006E      2007E        2008E    2009E    2010E
Operating profit              -24.0       -147.0      -7.0     51.0     35.0       43.3       54.7         58.9     57.0     54.5
Depreciation/amortisation      46.0        52.0       33.0     28.0     20.0       19.0       19.0         20.5    22.0     22.0
Working capital               235.0        57.0      -40.0    -36.0    -76.0      -37.6      -19.3        -10.2     -7.0     -3.6
Capital expenditure          -119.0       172.0        7.0     0.0     37.0       -27.0      -25.0        -24.0    -23.0    -22.0
Taxation                      -18.0         -8.0      52.0    -11.0     -8.0          9.5    -13.1        -14.7    -14.4    -14.0
Adjusted cash flow            120.0       126.0       45.0    32.0      8.0           7.2     16.3        30.5     34.6     36.9


Conversion ratio            -500.0%   -85.7%       -642.9%   62.7%    22.9%      16.7%      29.8%        51.8%    60.7%    67.7%
                                                                                        Source(s):            Dexia Bank estimates
                   30



                              VI.     VALUATION: CASH CAUSES PROBLEMS

                              VI.1. Peer group comparison

Table 11:          Peer group comparison


                          3yr CAGR    P/E     P/E       Div%           Div%      EV/EBIT      EV/EBIT      EBIT’06
                            EPS %     '06E    ‘07E           '06E        '07E         '06E         '07E      Margin
 Ballast Nedam                28. 7   11. 5    8.4           4.30        4.79          8.8          7.0          3.5
 BAM Groep                     9.9    11.0    11.0           3.62        4.28         10.4          8.9          3.9
 Heijmans                      9.5    10.1    10.8           3.70        4.40         10.2          8.7          4.5
              Dutch avg       16. 0   10. 5    9.3           3.76        4.29          9.1          7.7          3.9


 Bouygues                     16.6    16.5    14.9           2.83        3.34          8.6          7.1          7.4
 Eiffage                      11.1    12.9    11.9           1.44        1.66         15.4         13.4         10.4
 Kaufman & Broad              11.4    11.5    10.1           3.02        3.40          6.7          5.9         12.5
 Nexans                       21.4    14.4    11.0           1.86        2.26          8.4          6.9          5.0
 Vinci                         9.4    14.9    14.1           2.76        3.01         12.9         11.7         10.6
             French avg       14.0    14.0    12.4           2.38        2.73         10.4          9.0          9.2


 Bilfinger & Berger           22.5    16.6    13.7           2.82        3.43          8.4            7          2.3
 Hochtief                     18.0    33.0    27.9           2.29        2.41          8.1          7.4          1.8
           German avg         20. 3   24.8    20.8           2.56        2.92         8.25          7.2          2.0


 Acciona                      16.0    19.5    18.3           2.17        2.32         15.7         14.6         11.4
 ACS                          16.5    15.0    13.4           2.32        2.57         18.3         16.6          6.8
 FCC                          17.5    15.3    13.7           3.20        3.52         10.7          9.1         10.0
 Ferrovial                    11.1    21.6    19.1           1.57        1.70         17.5         15.9          9.6
 OHL                           3.4    15.0    14.3           1.53        1.70         12.7         11.8          7.8
 Sacyr Vallehermoso            3.8    24.2    21.2           1.48        1.52         23.8         22.7         15.8
           Spanish avg        11.4    18.4    16.7           2.05        2.22         16.5         15.1        10.2


 Balfour Beatty                8.6    13.1    12.0           2.56        2.77          9.0          8.0          3.1
 Carillion                    13.1    13.7    10.0           2.94        3.35         11.6          8.9          2.2
 Taylor Woodrow               -0.6     7.1     6.9           4.48        4.76          5.3          5.3         12.8
             UK average        7.0    11.3     9.6           3.33        3.63         8.63          7.4          6.0


 Skanska                      -3.9    12.5    13.7           4.50        4.95          7.3          7.8          3.8
 NCC                           8.8    12.6    11.3           3.96        4.57          9.7          8.5          4.1
 YIT                           9.6    11.6    10.1           4.09        4.64          8.8          7.8          7.7
  Scandinavian avg             4.8    12.2    11.7           4.18        4.72          8.6          8.0          5.2


 Astaldi                      19.3    12.9    10.3           2.31        2.94          9.0          7.8          7.7
 Permasteelisa                 ++     33.5    15.1           1.30        3.21         15.6          8.2          2.8
       Italian average        19.3    23.2    12.7           1.81        3.08         12.3          8.0          5.3


 AMEC                          0.4    12.4    11.5           4.19        4.26         11.2         10.5          2.5
 Arcadis                      20.7    15.8    13.6           2.47        2.90         10.7          9.0          6.0
 Grontmij                     39.5    13.2     9.4           3.61        4.50         10.4          7.8          6.2
    Engineering avg           20.2    13.8    11.5           3.42        3.89         10.8          9.1          4.9
                                                Source(s):          JCF/Dexia Bank estimates (Heijmans, Ballast Nedam)
                                                                                       31


Notwithstanding its stellar share price performance in 2005, we think Ballast
Nedam is still attractively valued, especially on FY’07 valuations, when compared
on some important metrics and s     een in an European context. We acknowledge
that EBIT margin for 2006 remains subdued, and is one of the lowest in the sector.
That is compensated by its attractive dividend yield, which is the highest in the
sector. Clean earnings growth till 2008 we expect to be the highest in the sector,
albeit coming from a low base. Despite of the highest earnings growth figures, it is
still valued at a clean P/E of 8.4x for FY ’07, which makes for one of the lowest
valued construction stocks in Europe.


VI.2. Not all cash is available

Ballast Nedam’s cash position shows large fluctuations within the year, due to pre-
payments and project completions. Total cash position is also very large relative to
its market cap. Year-end 2005 this ratio stood at 53%, in 2004 this was 154%, and
has been as high as 331% year -end 2003, when its market cap was €48m and its
cash position stood at €159m. We used an amount of €60m as being available
cash, being the average of the H1 ’06 cash positions in the last 5 years, and leave
the non-available cash constant at €115m. Change in cash out of the cash flow
statement returns in the free cash component.

Graph. 18:       Cash position of Ballast Nedam year end and half year

  200




  150




  100




   50




    0
        H1 '01 FY '01 H1 '02 FY '02 H1 '03 FY '03 H1 '04 FY '04 H1 '05 FY '05 H1 '06



  -50

                                                            Source(s):    Company data

This differentiation is important, as Ballast Nedam’s cash position severely impacts
valuation ratios, but also our outcome of the DCF valuation. At year -end 2005 it
had a net cash position of €68m, when deducting the €115m non-available cash
component, it would swing into a net debt of €47m.
32


     VI.3. DCF valuation

     VI.3.1. Valuation of €39.0/share as it is today …

     Table 12:    DCF Valuation
     €m                         2006E     2007E      2008E     2009E      2010E           TY
     Risk free                  4.40%     4.70%      4.90%     5.20%      5.20%        5.20%
     Risk premium               4.50%     4.50%      4.50%     4.50%      4.50%        4.50%
     Beta (Lev)                   1.00      1.01       0.98      0.94       0.90         0.90
     Cost of equity              8.9%      9.2%       9.3%      9.4%       9.2%         9.2%
     Beta Unl.                    0.87      0.87       0.87      0.87       0.87         0.87
     t                            0.30      0.26       0.26      0.26       0.26         0.26
     Market D/E                 20.3%     20.2%      15.6%     10.4%       3.7%         3.7%
     WACC                        8.0%      8.4%       8.6%      9.0%       9.1%         9.1%
     Cost of debt               6.65%     6.95%      6.90%     7.20%      7.20%        7.20%
     D/(D+E)                    19.7%     20.0%      15.5%     10.1%       3.6%         3.6%
     E/(D+E)                    80.3%     80.0%      84.5%     89.9%      96.4%        96.4%

     €m                         2006E     2007E      2008E     2009E      2010E           TY
     EBIT                        43.3       54.7       58.9       57.0      54.5        54.5
     x (1-t)                     30.5       40.7       43.9       42.5      40.6        41.0
     + Depreciation              19.0       19.0       20.5       22.0      22.0
     - Capex                    -27.0      -25.0      -24.0      -23.0     -22.0
     - Change working cap       -37.6      -19.3      -10.2       -7.0      -3.6        -3.6
     = Unlevered FCF            -15. 0      15. 5      30.2       34. 5     37. 0       37. 4

     = Fair Ent. Value          395.3
     - Adj. net debt             61.9
     - Employee benefits          6.0
     - Deferred tax liability     4.0
     + Financial assets           8.0
     + tax asset                 52.0
     = Fair equity              383.4                    €39.0/share
                                                                          Source(s):     Dexia

     At a DCF basis we arrive at a fair value per share of €3 9.0, taking in to account a
     WACC rising to 9.1%, based on our forecasted rise in the risk free rate (and
     subsequently rising Cost of Equity), and a cost of d      ebt equal to risk free plus a
     credit spread of initially 225 basis points, and falling to 200 basis points after 2008.
     due to the decline in interest bearing debt and rise of its cash position.

         •   The cost of equity is based on our assumptions for the European risk free
             rate (which we expect to climb from 4.4% in 2006 to 5.2% by 2009), a
             stable long-term risk premium of 4.5% and a levered company’s beta in
             function of the company’s gearing evolution and an unlevered industry beta
             of 0.87x. The levered be ta stands at 1.0x, declining to 0.9 x in 2010. This
             lead us to a Cost of Equity of 9.2%

         •   We have set long-term growth rate at 1.0%. This might be higher for the
             (residential) construction division, but uncertainty leads us to think that
             terminal growth rate will be lower than 1% for the infrastructure division .
                                                                                                   33



VI.3.2. Upside from re-leverage & transformation not
        discounted in share price
Graph. 19:      Upside to DCF

                                           € 6.2                 € 0.3            € 46.3

             Continuing current
                                                             Changing
             strategy
                                                             strategy
              € 39.0          € 0.8




                                                                                    blue-sky
                as it is




                             re-leverage




                                            transformation




                                                                  re-leverage
                               prior to




                                                                      post
                                                              Source(s):        Dexia Bank calculations


Valuation upside to our base case DCF-valuation can be reached in three stages

   1.   Raise market D/E to 37%. Value upside €0.8 per share.
        In our financial projections, we expect market D/E to fall to almost zero
        against 2010. First step in creating extra value is a re-leverage to the
        market average of 37%. This would lower its WACC, and could bring € 0 .8
        per share of added value.

   2.   Change in strategy. Value upside €6 .2 per share
        In chapter III we explained our reasoning behind our strategy change, into
        a.) real estate development and b.) infrastructure engineering. This leads
        to better margins, but also to a considerably lower beta. Especially the
        latter, drops its WACC dramatically, and would increase the value per
        share with € 6 .2.

   3.   Re-leverage post transformation. Value upside €0.3 per share
        Once the company has been transformed, leverage could further be raised
        to the new market average (50% real estate development, 25% heavy
        construction / 25% engineering). This, again, would raise valuation with an
        additional € 0.3

From the above exercise, we derive a blue -sky valuation of €4 6.3. A predator
could pay the value contribution (maximum of €7.3 per share), and then take all the
synergies potential. In our calculation, we did not factor in the higher margins
implied with our proposed change of activity mix.
                  34


Consolidated P&L (€m)            2004      2005     2006E          2007E                 2008E
Consolidated sales             1,143.0   1,171.0   1,252.1       1,285.2                1,364.7
Activity split:
_Building & Development         515.0     648.0     665.5           682.4                 716.1
_Infrastructure                 523.0     528.0     598.2           625.1                 672.4
_Other (International)           30.0      10.0       0.0                 0.0                0.0
Depreciation & Am ortisation     -28.0     -20.0     -19.0          -19.0                  -20.5
EBIT                             51.0      35.0      43.3            54.7                   58.9
Net financial result             -11.0     -10.0      -7.4            -6.5                  -4.8
Proft share of associates         2.0        3.0      3.2                 3.3                3.5
Extraordinaries                  -18.0       0.0      0.0                 0.0                0.0
Pre-tax                          24.0      28.0      39.1            51.4                   57.6
Tax                              -11.0     -8.0       9.5           -13.1                  -14.7
Net profit                        13.0     20.0      48.5            38.3                   42.9
Funds Flow (€m)
Funds From Operations (FFO)      15.0      -31.0     25.0            38.0                   53.2
Change in working capital        -36.0     -76.0     -37.6          -19.3                  -10.2
Capex                             0.0      37.0      -27.0          -25.0                  -24.0
Free cash flow                   15.0      13.0       -2.0           13.0                   29.2
Dividend payment                  0.0        0.0     -12.8          -13.8                  -15.3
Change in cash                   22.0      -31.0     -27.1            -6.0                  -2.2
Balance sheet (€m)
Tangible & intangible assets    213.0     165.0     175.0           183.0                 187.5
Financial assets                 14.0       8.0       8.0             9.0                  10.0
Current assets (net of cash)    365.0     461.0     498.6           517.8                 528.1
Prepayments                     115.0     115.0     115.0           115.0                 115.0
Available cash                   76.0      60.0      32.9            26.9                  24.8
Shareholders equity             101.0     124.0     158.8           181.8                 207.5
Minority interest                 2.0        2.0      2.0                 2.0                2.0
Provisions                       34.0      23.0      28.8            29.9                   31.0
Interest bearing debt           135.0     107.0      94.8            89.5                   73.5
Other ST liablities             550.0     591.0     599.1           594.5                 591.3
Net debt                         -56.0     -68.0     -53.1          -52.4                  -66.3
Ratios                           2004      2005     2006E          2007E                 2008E
ROE                             12.9%     16.1%     30.6%          21.1%                 20.7%
ROCE                            18.5%     16.4%     15.3%          18.0%                 18.5%
FFO/net d ebt                    0.27      -0.46     0.47            0.73                   0.80
Net debt/EBITDA                  0.75      0.85      0.91            0.85                   0.61
Reported net margin              1.1%      1.7%      3.9%           3.0%                   3.1%
Per share data (€)
Clean EPS                        2.94      2.02      2.82            3.89                   4.36
Dividend                         0.00      1.02      1.40            1.56                   1.73
Cashflow                          4.2        4.1      6.9                 5.8                6.4
Book value                       10.2      12.6      16.1            18.5                   21.1
Valuation ratios
EV/Sales                         0.16      0.32      0.30            0.30                   0.27
EV/EBITDA                         2.3       6.9       5.6             5.2                    4.6
EV/EBIT                           3.6      10.9       8.8                 7.0                6.3
P/E                               4.2      16.5      11.5                 8.4                7.5
P/CF                              3.0        8.2      4.7                 5.6                5.0
Unl. FCF Yield                  31.8%      3.4%     -4.4%           7.0%                 13.3%
P/Book                           1.21      2.64      2.02            1.76                   1.54
Dividend yield                   0.0%      3.1%      4.3%           4.8%                   5.3%

                                                             Source(s):         Dexia Bank estimates
                                                                                                                      35


COVERAGE BY PRIMARY ANALYST

Pieter Bijlsma: Construction
Companies covered: CFE, Heijmans, Ballast Nedam

ANALYST CERTIFICATION

I, Pieter Bijlsma, hereby certify that the views expressed in this research report accurately reflect my personal opinion
about the companies and the securities discussed herein. Like all employees of Dexia Bank Belgium, the remuneration
can be based in part on the results of Dexia Bank Belgium as a whole, which may include investment banking
revenues. I certify that I do not hold, directly or indirectly, any interest in the companies mentioned above. However,
no part of my compensation was or is related to any recommendation or opinion expressed in this report.

COMPANY SPECIFIC REGULATORY DISCLOSURES

The following disclosures relate to relationships between Dexia Bank Belgium or its subsidiaries and companies
covered by the equity research division of Dexia Bank Belgium and refer red to in this research. Dexia Bank Belgium
may have from time to time non-securities related banking relationships with the companies covered by its research
department.

→                                 Dexia has no participation that exceeds 5% of the securities representative of the
capital or the voting rights in any of the above -mentioned companies.
→                                 Dexia does not act as market maker neither as liquidity provider for any of securities
issued by the above mentioned companies or organisations referred to this report.

RECOMMENDATIONS

We use four stock recommendations which reflect the share’s expected absolute performance as follows:

Buy: we expect this stock to generate a return of >15% over the next twelve months
Add: we expect this stock to generate a return of 5-15% over the next twelve months
Neutral: we expect this stock to generate a return of 0-5% over the next twelve months
Reduce: we expect this stock to generate a negative return over the next twelve months

DISTRIBUTION OF RATINGS/INVESTMENT BANKING RELATIONSHIPS

As of J  uly 1, 2006, the Dexia Bank Belgium equity research has active investment recommendations on [26]
securities. Our recommendation on two stocks is currently inactive. We disclose the percentage of rated securities to
which we assign a Buy, Add, Neutral and Reduce rating on a quarterly basis. We also include the recommendation
composition on securities for which Dexia Bank Belgium has undertaken investment banking actions over the last
twelve months.

Rating category                           Buy         Add        Neutral        Reduce
Rating distribution                       27%         39%          19%            15%
Investment banking relationship           20%         30%          40%            10%


MEASURES PREVENTING CONFLICTS OF INTEREST

Dexia Bank Belgium prohibits its analysts from owning securities of any company he/she is covering. Such restrictions
are enhanced by the formal undertaking to perform all personal securities transactions through an account with Dexia
Bank Belgium. Analysts’ remuneration can be based in part on the results of Dexia Bank Belgium which may include
investment banking revenues. Analysts are required to respect the information sharing policy that restricts disclosure
of recommendations to third parties or to any other department of Dexia Bank Belgium or any other entity of the
Dexia group prior to the distribution or the public disclosure thereof. Sim ilar information barriers apply to the staff
involved in the corporate banking, corporate finance and structured finance activity in order to prevent conflicts of
interest. They are not allowed to enter into transactions involving securities of a listed company for their own account
or for the account any third party, when involved in the customer relationship with such company nor communicate on
the relationship with such company outside the corporate department without the prior authorisation of the
Compliance Officer.
                  36


12-MONTH PRICE TARGET CHART



 45                                                                45
                                                                                     Date    Target price
                                                                             29-August-’06          €39.0
 40


 35                                                                35


 30


 25                                                                25
      S   O   N   D     J    F    M    A      M      J    J   A

                       Ballast Nedam       Target price

                                                      Source : Datastream


HISTORY OF RECOMMENDATIONS

Ballast Nedam’ stock is being covered by Pieter Bijlsma as from August 29, 2006 .



 Date                            Recommendation
 29-August-‘06                              Buy
                                                                                                                                            37




                                                           Research & Sales


EQUITY RESEARCH                                                                  EQUITY SALES

Head of research                                                                 Manager Sales & Trading
Steven De Proost                                   +32/2/222.02.55               Benjamin Vierendeel                +32/2/222.84.24

Real estate                                                                      Head of sales
Mickael Van den Hauwe                              +32/2/222.33.95               Guy Noerens                        +32/2/222.71.73

Utilities & Alternative Energy                                                   Equity sales
Steven De Proost (utilities)                       +32/2/222.02.55               Guy Noerens                        +32/2/222.71.73
Peter Van Assche (alternative energy)              +32/2/222.33.16               Olivier Schoevaerdts               +32/2/222.70.20

Construction
Pieter Bijlsma                                     +32/2/222.31.67

Healthcare & Transport Infrastructure
Koen Wuyts                                         +32/2/222.33.18

Telecom
Rob Goyens                                         +32/2/222.02.55
Maurice Rosenthal                                  +32/2/222.33.12

Belgian small caps
Peter Van Assche                                   +32/2/222.33.16
Maurice Rosenthal                                  +32/2/222.33.12




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was based on current facts and conditions that can change from time to time. In addition, because research reports contain more
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