Q4 report due on 15 February

Minor revisions, strong growth from pent-up demand

25% adj. EBIT CAGR ’17-’20e, 5x EV/EBIT ’19e

Continued high pent-up demand to drive strong sales growth
For Q4, we expect sales of SEK 820m, up 35% y-o-y (40% organic, 5% FX), driven by continued high pent-up demand for construction equipment machines. We expect Equipment sales to grow by 47% organically y-o-y, and 24% and 40% for Aftermarket and Other Income, respectively. As we have seen in the last two quarters, we believe the EBIT margin will expand due to lower gross margin pressure on new machine sales, combined with solid internal cost discipline. As a result, we expect EBIT to arrive at SEK 63m, for a margin of 7.7% (+150bp y-o-y, +30bp adjusted for SEK 7m one-offs in Q4’17 related to write-offs and listing costs).

Minor revisions with demand almost offsetting FX headwinds
We have made only minor changes to our estimates, but updated FX rates provide c. 2% headwinds for ’19e-’20e. The Russian government is yet to provide clarification in terms of timing and priority of the infrastructure investments included in the May decree. However, these projects were not yet released when Ferronordic issued its growth target in 2016 for revenues to triple by 2021 (25% CAGR, ABGSCe 27%). Therefore, we believe there is further upside potential to their target.

Net cash c. 20% of market cap, extraordinary dividend?
Ferronordic continues to grow earnings at a high rate, and we estimate an adj. EBIT CAGR of 25% for ’17-’20e. At the same time, the company, even after the investments in Kazakhstan, continues to compound cash. We therefore expect an ordinary DPS for 2018 of SEK 4.0 (SEK 1.73 in 2017) and an additional SEK 4.0 per share extraordinary dividend, equivalent to a total payout ratio of 66%. The company’s net cash currently accounts for c. 20% of market cap. On our numbers, the company is trading at 9x P/E ’19e, a 6% dividend yield ’18e as well as a 7% FCF yield ’18e.

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