Weak Q4 awaits, but hard to grasp magnitudes…

…with restructuring weighing on sales and earnings

13-11x EV/EBIT and 9-14% FCF yield ’19e-’20e

2018 a lost year, better chance in 2019?
We believe that ITAB’s last quarter of 2018 will be messy, and weak on all lines. With continued tough end-markets and an organisational focus on restructuring measures (shutting down operations and laying off staff), we expect lost sales, efficiency and extra costs. We forecast continued negative organic sales growth and restructuring costs to heavily burden reported EBIT, but have low conviction on magnitudes. We view 2018 as a lost year for ITAB, characterised by slowing end-markets, raw material headwinds, and overall poor cost control. With a new focus on rightsizing the business, we expect a basis for improvement in 2019e.

Q4’18e: -12% org. sales growth, -1.5% EBIT margin
We forecast Q4’18e sales of SEK 1,492m, for sales growth of -9% y-o-y (of which -12% organic). Aside from underlying soft markets, we expect lost sales from the increased focus on cost cutting. We estimate continued pressure on the gross margin (-200bp to 25.0%), and restructuring costs (SEK 50m) to hit profitability hard. We estimate Q4e EBIT of SEK -22m, for a margin of -1.5%. Adjusted for restructuring costs, we forecast an adj. EBIT of SEK 28m, for an adj. EBIT margin of 1.9% (-320bp y-o-y).

Still awaiting signs of improvement
As we have highlighted previously, we are concerned about ITAB’s high gearing, which is why we view the board’s proposal to pay no dividend for 2018 as sound. To believe in a turnaround, we want to see a clear trend shift in organic growth and visible effects from cost savings. Our forecast changes stem from updated FX, -3.5% (-5%) organic sales growth in ’19e, and restructuring costs. On our updated estimates, ITAB trades at ’19e-’20e EV/EBIT and FCF yields of 13-11x and 9-14%, respectively. The Q4 report is due on 5 February.

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