Better report across the board

Positive events ahead in ’19e and ’20e

EV/EBIT ’18e 21.0x but with longer view much cheaper

Better than expected in a difficult quarter
The report was better than expected across the board, with revenues 6% ahead of our forecast at SEK 65m. The gross margin was 75.8%, which was almost 9pp higher than our forecast. Operating profit was SEK -1m while we had SEK -3m. The beat stemmed mainly from Contracting Sweden, which improved sales by 55% and the general sentiment in this segment seems to be improving. Q2 is the seasonally weakest quarter and we find it positive that the company was able to contain the loss to modest levels.

Kaunis on track – UK, Sweden to boost ’19e and ’20e
Deliveries to Kaunis Iron are progressing as planned, with the first delivery on 22 August. This will lead to a strong uptick in the numbers for Transport Scandinavia by the end of this year. While this is already in our estimates, we find it positive as it de-risks the numbers. Network Rail in the UK will start to run on a new budget in April 2019, which means that railway maintenance in the UK is likely to increase around this date. We have forecast a 15% and 13% pickup in the segment in ’19 and ’20, respectively, but the improvement could potentially be much higher. Sweden will also contribute positively, with the new infrastructure plan settled and SEK 125bn earmarked just for railway maintenance (47% more than last time). All in all, we expect Railcare to grow by 19% in ’19 and 6% in ’20, and we believe it will reach its targeted EBIT margin of 10% already by 2020.

Valuation not as expensive with longer horizon
Railcare is currently trading at EV/EBIT ’18e of 21.0x, which can hardly be considered cheap. However, if we extend the view one or two years ahead, the multiple decreases quite rapidly due to both a stronger top line and an improving margin and reaches 12.0x in 2020e.

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ABG Sundal Collier - Introduce.se