Ferronordic
Ferronordic - All good on the Eastern front (ABG Sundal Collier)
2019-08-20 14:04
29% org. growth, 44% EBIT growth, 3% above estimates
Strong Q2 report lifts ‘19e-‘21e EBIT by 2-3%
Infrastructure projects to show 2020e, 6x EV/EBIT ‘19e
Market share gains and cost-cutting continuesAgain, Ferronordic outgrew the Russian CE market (20% increase in units sold vs. 5% market growth). Sales grew by 35% (29% organically) and were 7% above our and consensus expectations. The contracting services (‘Other income’) business developed nicely and management was confident about the potential of this division. EBIT increased by 44% and arrived 3% and 8% above our and consensus’ expectations, respectively. The combination of continued strong aftermarket demand, less price pressure on new equipment and the upscaling of contracting services drove a gross margin improvement. Ferronordic’s shift to managing imports instead of Volvo meant a significant build-up in working capital, which led to negative operating cash flow. Management expects a build-up of working capital in the short term but says it should be offset by higher payables in the long term. We believe the long-term NWC/sales could be 7-9%.
Full-year outlook reiterated, 21% EBIT CAGR for ’18-‘21e
Management reiterated its full-year market outlook, expecting continued market expansion, although not at the same pace as in 2018 (c. 30%). For ‘19-‘21, we raise our sales and EBIT by 2-3% based on stronger sales for equipment and contracting services. For ’18-‘21, we expect an EBIT CAGR of 21%. We continue to believe that Ferronordic will achieve its financial targets of 3x revenues in ‘21 vs. ‘16 (25% CAGR, ABGSCe 27%) and EBIT margins of 7-9% (ABGSCe 8.9%).
6x EV/EBIT for high earnings growth and 40% ROIC
Ferronordic’s fundamentals remain, with a profitable aftermarket business covering the company’s entire cost base, no issue with redistributing cash from Russia, and large insider ownership (>40%). Our DCF scenario yields a value range of SEK 126-340, and a range of SEK 181-250 if import levels reach Ferronordic’s
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