EPS growth 107% y-o-y

‘18e a catch-up year, decent growth ahead

Operating leverage de-risks valuation

EPS growth 107% y-o-y highlights low variable costs
Q2 sales were SEK 26.8m, 11% higher than we expected. EBIT was SEK 20.9m, giving a margin of 41%. EPS was SEK 1.60, corresponding to a 107% improvement y-o-y. SinterCast announced its production numbers ahead of the report, with engine equivalents at a full-year speed of 2.7m while the number of sampling cups was 68,800, up 109% y-o-y. The report demonstrates that SinterCast has high operating leverage; SG&A only increased by SEK 1.4m q-o-q, while sales improved by SEK 10.2m. Since the company has no debt and pays little or no tax due to loss carry-forwards, EBIT filters through almost fully to the bottom line.

New programme starting in Q3
SinterCast announced a new high volume programme in July, which is expected to begin in Q3. As the programme ramps-up, we understand that the full-year speed will reach 3m engine equivalents, assuming that all projects perform well. The company’s CEO, Steve Dawson, is targeting growth well-above 10% per annum over the next few years, although we predict slightly less than this for our forecast period. The historical five-year average is 8%, with a wide range from -13% to 33%. There is some upside risk to our estimates, considering that if you extrapolate the numbers from this quarter for a full year, the result would be higher than our forecast in 2020e. However, we remain on the conservative side, partly due to signs of a weakening automotive sector.

EV/EBIT high on 18e numbers, estimate risk on upside
SinterCast is a fairly expensive stock on 2018e numbers, trading at EV/EBIT 18.7x and P/E 21.3x, which corresponds to a significant premium compared with our capital goods peer group. Due to the company’s high operating leverage, any additional sales increase is likely to have a significantly positive impact on the margin. As we mentioned above, we believe that the risk to estimate