7% organic growth in Q2 despite some challenges

GM% up but OPEX holds back margin expansion

’18e-‘19e sales growth of 7.7%-9.7%

Solid growth, UK challenging, other markets prospering
The solid sales growth trend continued in Q2, reaching 8% y-o-y (7% organic), driven by expansion of the existing customer base and new customers. This, despite weakness in the UK, demonstrates a strong contribution from other markets. The adj. gross margin of 45.5% (43.6% in Q1’17) surprised positively, related to product mix and an increase in deliveries from the Bangladesh production facility. On the flipside, SG&A was higher due to offensive initiatives to strengthen the organization, bringing the EBIT margin to 13.1% (12.6% in Q1’17) vs ABGSCe of 15.0%. The CEO comments that European brands are doing well and he sees continued investments in labels and brand profiling.

Positive FX shift in H2’18e and continued growth
Looking at H2’18, we factor in a restrained market in the UK and tougher comps, but we still expect sales growth of 14% in Q3’18 and 11% in Q4’18. This is mainly, and most importantly, due to leverage of Nilörn’s offering, but also to FX tailwinds. HKD/SEK will shift to a positive translation impact in H2’18. We estimate an FX boost of 7% in Q3’18 and 5% in Q4’18 (stronger HKD, GBP and EUR, partly offset by the Turkish lira). We estimate EBIT to grow by 18% in Q3’18 and by 3% in Q4’18, driven by volume growth, but margin expansion is dampened by efforts to strengthen the organization (higher opex) to meet future growth.

’18e-’19e EBIT growth 13% & 9% and increasing net cash
In ’19, we believe it is likely that risk-averse customer behaviour in the UK will loosen up. This scenario should imply an uptick in organic growth for Nilörn in ’19 vs ‘18. For ’19 and ’20, we forecast 9.7% and 8.0% sales growth and EBIT growth of 13% and 9%. Cash generation should increase on the back of a CAPEX-intense ’17, ’18, and H1’19. M&A room is apparent (SEK 290m to spend if gearing in
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