Q2 below expectations

Sales estimates down 10% for 2018e

Current sales mix is set to continue

Large deviations in Q2
Sales in Q2 grew by a modest 0.4% y-o-y, deviating from our expectations by -13%. The main reason for the deviation was TagMaster’s winding-up of segments from previously acquired businesses, leading to TagMaster being a slimmer business today than we previously anticipated. In turn, EBITDA decreased by 35% y-o-y (41% below our expectations) as the company’s cost reductions are taking longer to implement. The main take-away is that TagMaster will have to keep focusing on finding cost synergies in its English businesses, which underperformed in the quarter. Positively, however, the Rail business performed above management’s expectations.

Estimate revisions stem from lower sales
Due to both the underlying performance and the winding-up of segments, we lower our sales expectations by 10-11% for 2018e-2019e, including the miss in the quarter. Furthermore, we lower EBITDA by 25% for the current year, mainly driven by the sales drop, which staff cutbacks will not be able to offset short-term. Moreover, we expect further staff cutbacks before these savings are invested to increase sales resources. Additionally, we continue to expect a positive tax income, coming from accrued development costs in France.

Sales mix lowers expectations for 2018
Moving into H2, TagMaster has yet to acquire a new business in 2018. We expect lower contributions from the latest acquisitions to further expose the underlying performance of the business. Furthermore, we expect the Rail segment to end 2018 with a contribution to net sales of ~25% (compared with ~40% in 2017). Although Q4 should be stronger for Rail, we still expect a y-o-y drop of 150-200bp in 2018 EBITDA margins due to the current mix. TagMaster is currently trading at a P/E of 31.7x and EV/EBIT of 29.8x for 2018e.

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