Sales 22% below our forecast

’19e EBIT estimate down 7%

EV/EBIT ’19e premium against peers

Q3: EBIT of SEK -4.6m, in a usually decent quarter
Q3 sales were 22% below our forecast at SEK 64.1m. The gross profit was 19% below, which means that the gross margin was slightly better than expected at 73.9% vs 71.0%. EBIT was negative due to the lower sales in the quarter, coming in at SEK -4.6m. Construction Sweden came in as we expected, while Construction Abroad posted another double-digit sales decline (-29%), despite having relatively easy comps from last year. Transport Scandinavia, on the other hand, posted 32.8% growth y-o-y but this is entirely attributable to the Kaunis project, meaning that the other parts of the business must have been weak.

EBIT down 59% for ’18e, but less drama moving forward
Our estimates are down significantly, with EBIT for ’18e down 57% after the unexpected loss in the quarter. We have not changed our underlying growth and margin assumptions for ’19e and ’20e, however, since we believe that the current weakness will not affect the company’s prospects in light of the increased budget room at the beginning of next year. Thus, the effect on our EBIT forecast in ’19e and ’20e is less dramatic at 7%.

FCF generation to pick up by 2020e
Railcare is currently trading at P/E 16.5x, which is a 6% premium to our small cap peer group. On EV/EBIT ’19e the premium is 14%, at 15.0x, compared with the average of 13.2x. On the other hand, the company does not have any larger investment needs, and if sales pick up according to plan in ’19e and ’20e, we are likely to see decent FCF generation by 2020e.