Alcadon Group
Alcadon - Weak Q1 was expected, time to look ahead (ABG Sundal Collier)

2019-04-25 22:51
Organic sales -22% (ABGSC -19%)
EBIT margin 7.1% down from 12.4% in Q1’18
‘19e a lost year, we see a positive outlook for ’20-‘21e
Q1: weak organic sales and unexpectedly low margins
As expected Alcadon reported a weak quarter. Sales were SEK 130.3m (-8% vs. ABGSC of 141.7m), representing -13% y-o-y. As expected, comps were difficult with fiber-to-the-home’s (FTTH) sales down SEK 50m (ABGSC 40m), and we overestimated the contribution of M&A, representing c.9% of growth (ABGSCe 14%). EBIT was weaker than expected at SEK 9.2m (-33% vs. ABGSC 13.7m), representing a margin of 7.1% (ABGSC 9.7%), with weak volumes and lower coverage of fixed cost taking some of the blame. The gross margin was 26.5% (ABGSC 27.5%). Normally, lower FTTH sales result in a higher gross margin, but the weaker margin this quarter was mainly from price pressure.

Q2 with clean comps, but margins pushing down profits
We have lowered ´19e sales by 2%, mainly driven by the weak Q1 and a lower than expected contribution from M&A. We lower the ´19e EBIT margin to 9.6%, resulting in an EBIT cut of 11% for the year and EPS cut of 13%. Beyond ‘19e we remain positive about the outlook both for Commercial real-estate networks (44% of group) and Fiber networks (32% of group) . We estimate that current pricing pressure will be short lived and resolved in ’19. For 20e and ‘21e we have only cut the EBIT margin slightly. We acknowledge that other drivers apart from FTTH, such infrastructure investments, data centres and 5G penetration, should support Alcadon going forward. Q2’19e will have clean comps (free from FTTH) and we should see growth return to normal levels.

Valuation
The stock is trading at ’19e EV/EBIT of 11x with a FCF yield of 4%. Despite ‘19e being somewhat of a lost year, we believe that Alcadon should be able to grow its sales over 5% p.a., with EBIT margins around 11-12% in ‘20-‘21e.


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