Lower June production affects sales and profitability

Value-added services grew 22% in the quarter

2019e adj. EV/EBITA 9x and attractive FCF yields

Q2 started in good fashion but June volumes weigh down
Elanders reported Q2’19 sales of SEK 2,719m (ABGSCe SEK 2,866m), representing 4% growth y-o-y (4% FX and 0% organic vs. ABGSCe 6% organic) and EBITA of SEK 232m (ABGSCe SEK 233m) implying an EBITA margin of 4.9% which was higher than our estimate of 4.6%. The 0% organic growth was lower than our expected 6%, which stems from customers, primarily in supply chain solutions, having lower production volumes than normal in June, resulting from production shutdowns in relation to holiday periods. This also had a negative effect on margins.

Increased share of value-added services
Despite lower sales than expected, we find it positive that margins improved y-o-y despite lower production volumes in June. We believe Q2 margins could have been a few tenths of a pp higher at normalized production volumes. Elanders’ automotive segment grew sales by 6% y-o-y despite Daimler stating a fourth PW for the year. We also see Elanders growing its value-added services by 22% in the quarter and reducing freight and transportation services by 1% – resulting in a better margin mix. We lower our ’19-’21 estimates on the back of lower sales and keep our EBITA margin assumptions of 5.4%-5.9%.

Attractive free cash flow yields & 2019e adj. EV/EBITA 9x
Elanders is currently trading at EV/EBITA ’19e of 11.5x and 9.3x adjusting for IFRS 16. We expect the company to grow its organic sales at a 5% CAGR for ’19e-’21e, and to increase EBITA margins from 4.9% in ’18 to 5.9% in ’21e, thus implying an EBITA CAGR of 13% for -’21e. If we adjust cash flow for IFRS 16, (adding back expected IFRS amortization to FCF), we see Elanders delivering attractive FCF yields of 23% for ’19e, 14% for ’20e and 16% for ’21e – including a one-time factoring effect expected in 2019.

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