Still a challenging IT market; adj. EBIT surprise

New segments and M&A activity

Investors search for clarity

Net sales -2.5% y-o-y, -9% vs ABGSCe
Empir is still facing tough market conditions and is struggling to achieve growth. In Q3, net sales amounted to SEK 54.6m (56m), -9% vs. ABGSCe. Weaker organic growth was likely behind the deviation, as we believe that the acquisition of Tavana IT has continued to perform. The Solve segment, in particular, is having trouble growing the business. On a positive note, adjusted EBIT amounted to SEK 0.8m (0.9m) vs. our SEK 0.2. The deviation stemmed equally from the Solve and Apply segments.

Positive surprise on adj. EBIT, SEK 0.6m above ABGSCe
Empir has taken a decision to integrate the Serve segment, partly within Apply and mainly in Solve, as the company was finding it hard to grow the segment organically and find M&A targets within its niche. Further, a decision to sell 49% of the Solve segment for SEK 30m has been taken and the transaction is likely to go through if voted for by a majority at an extraordinary board meeting 28 November. Following the report, we continue to cut our sales estimates based on the apparent growth difficulties. For 2020, we lower our sales estimate by 7.7%, with a slight EBIT margin improvement from the better performance in the quarter. We also include a 49% minority for the Solve segment going forward, resulting in a 2020e EPS cut of ~80%.

Recurring one-off costs hurt confidence
We do think the adjusted EBIT margin was a bright spot in the quarter; however, this was the seventh straight quarter with one-off costs. The recurring nature of these one-off costs needs to stop in order to bring back some investor confidence. The share is trading at a P/E of 40x for 2020e following the decision to sell 49% of the Solve segment, but cash is expected to reach SEK 51m in 2020e corresponding to the current market cap of SEK 57m.

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ABG Sundal Collier - Introduce.se