Flat organic growth, Adj. EBITA increased 5%

EBITA 13% below ABGSCe, prel neg revisions of 5-7%

MCC should mitigate weaker trailers, 8x EV/EBITA

VBG TE delivers, deceleration in MCC, Edscha and Ringfeder
VBG grew sales by 5% in the quarter (flat organically), compared to >10% org growth in Q1, and arrived at SEK 979m (-8% vs. ABGSCe 1,060m). While VBG Truck Equipment (VBG TE) was in line with our estimates, growth in both MCC and Ringfeder decelerated more than expected whereas the decline in Edscha was also greater. Management says that North American demand for MCC is still at a high level, however, it seems that the recent period of double-digit organic growth could be coming to an end. Edscha (<10% of group sales) saw weakening trailer demand whereas weakening industrial demand was evident in ringfeder. adj. ebita increased 5% on flat margins and arrived at sek 131m (-13% vs. abgsce 150m), thanks to vbg’s cost cutting measures in edscha ringfeder and very strong margins in vbg te, which we believe is due to continued positive price mix.>

We expected MCC to maintain double-digit growth
Based on Q2 numbers alone, our EBITA estimates would come down by 3-4%. However, we will likely revise the growth trajectory for the coming quarters, mainly in MCC and Ringfeder as well as lower margin expectations for MCC. In total, our preliminary EBITA estimates would likely come down by 5-7%.

Cash conversion has been >100% over close to 20 years
VBG operates in cyclical end-markets. However, we believe that MCC (c. 50% of group sales) will mitigate the expected weakening in European trailer demand for 2020 (we have a 5% organic decline in 2020 for VBG TE). In addition, margins should improve going forward due to better balance in demand and production for MCC as well as the restructuring efforts undertaken in Edscha and Ringfeder. Over time, VBG has delivered a free cash conversion above 100%, there is plenty of headroom for M&A and the company is trading (on pre-Q2 numbers) at c. 8x EV/EBITA ‘19e.

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ABG Sundal Collier - Introduce.se