Ferronordic Machines
Ferronordic - Kazakhstan fuelling growth even further (ABG Sundal Collier)
2018-12-19 06:37
First geographical expansion beyond Russia
We add 12% to sales in 2021, margin dilutive near-term
High yields, >20% EBIT CAGR, 5x EV/EBIT ‘19e
Expansion or special dividend? Now we have the answerWe previously highlighted Ferronordic’s net cash position and the possibility of a special dividend if the company does not choose to expand geographically. With today’s news of Ferronordic taking over an, to our understanding, underperforming Volvo CE dealer in Kazakhstan, we have increased certainty in Ferronordic’s target of tripling revenues between 2016 and 2021 (25% CAGR vs. ABGSCe 28%). This sales target was also decided prior to Mr Putin’s May decree on investments and excluding any regional expansion. While we estimate an increase in both net working capital and capex, we expect strong cash flow generation and solid dividend yields. On a negative note, we expect a low drop-through to earnings in ’19-‘20e until operations reach sufficient scale.
Initial dilution, EBIT revisions of -4% ‘19e, +1% ‘20e, +6% ‘21e
We expect Kazakhstan to add only 1% to our 2019 sales estimate due to updated FX headwinds of 3%. We expect the initial start-up phase to cause EBIT to lag behind and dilute margins along with a lower share of aftermarket sales, resulting in negative EBIT revisions in 2019, and slightly positive revisions in 2020. Beyond 2020, we believe there are several benefits of operating in both countries (no tariffs, cultural similarities, easy movement of labour), which combined with Ferronordic’s knowledge in flexible operations should result in Kazakhstan being at least on a par with the current group’s profitability.
High growth at 5x EV/EBIT ‘19e, who will succeed the CFO?
Our confidence in the company’s own financial 2021 targets (25% sales CAGR for ’16-‘21e vs. ABGSCe 28%, EBIT margin of 7-9% vs. ABGSCe 8.0%) remains while we expect both solid cash flow and dividend yields. However, the current CFO (with the company since 2010) is expected to leave in February 2019, and
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