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Ferronordic
Ferronordic - Next stop: Germany (ABG Sundal Collier)
2019-09-12 23:50
Diversifies by adding c. 30% to sales from Germany
Focus on increasing truck aftermarket sales
6x EV/EBIT ’20e, 19% EBIT CAGR ’19e-’21e
Takes over nine truck dealerships from Volvo in GermanyWe were positively surprised by Ferronordic’s intention to acquire nine truck dealership sites from Volvo Germany, with average annual sales of SEK 1.3bn during 2016-2018. Although the acquired sites are currently running at break-even margins, we believe Ferronordic can leverage its expertise, track record and digital aftermarket strategy from Russia to improve market share and aftermarket sales. In addition, we see it as likely that the company will acquire more sites in 2021 and onwards once the German business is up and running.
Expected to be incorporated from January 2020
We have added 28% and 24% to sales for ‘20e-‘21e. However, we reduce ‘20e EBIT by 11% due to the initial startup costs of SEK 40m. For 2021, we expect Ferronordic to be able to reach EBIT margins of c. 1% in the German business, which raises EBIT by 3%. Thus, we find the company’s revised EBIT margin range of 6-8% reasonable given the initial startup-phase and lower aftermarket share in Germany. For the coming two years, we expect 19% annual EBIT growth. Despite the investment-heavy period ahead for ‘19e-‘20e (not only the SEK 250m related to Germany), we believe that Ferronordic can sustain a payout ratio of 30-40% due to the strong operating cash flow generation in the Russian business as well as the new SEK 320m loan funding the German investment.
Strategic sense, reduced risk, yields remain, 6x EV/EBIT
In our view, the German expansion reduces the company’s perceived business risk (Russia/CIS exposure). Further, we believe this deal in combination with Volvo’s strategy to work closer with fewer, but larger, dealers further strengthens Ferronordic’s image as a high-quality strategic partner to Volvo. On our estimates, the company is trading at 6x EV/EBIT ‘20e on 19% EBIT CAGR ‘20e-‘21e and 4-7% dividend yield
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