Ferronordic
Ferronordic - Continued earnings growth despite sales loss (ABG Sundal Collier)
2020-02-21 06:56
15% organic sales decline, but 21% adj. EBIT growth
EBIT down 4-6% for ’20-‘21e, but 14% CAGR ’19-‘22e
8-5x EBIT ‘20e-‘21e with >20% FCF yield ‘21e-‘22e
Service offering continues to drive accretive earnings growthFerrnordic’s Q4 delivered a few items worth highlighting. First, sales declined 15% organically (ABGSCe -8%) due to a 24% decline in new units sold. By comparison, the Russian market was flat when excluding sales of low-price Chinese wheel loaders. Adjusting for acquisition costs related to the German expansion, adj. EBIT increased by 21% to SEK 102m (-4% vs. ABGSCe), for a margin of 10.6% (8.3% in Q4’18). Again, we believe this highlights the accretive effects from the growing Aftermarket and Contracting Services. These accounted for ~40% of sales in Q4’19. The company continued to see significant working capital build-up due to the transfer of importation from Volvo in Russia as well as its growth investments in Germany and Kazakhstan. We believe working capital to sales should gradually decline over time.
Growth and German improvement focus during 2020
We lower our sales and EBIT estimates by 5-6% and 4-6% for ‘20e-‘21e, respectively, due to lower equipment sales and an adjusted growth trajectory within Contracting Services. However, we still expect Ferronordic to deliver a 14% EBIT CAGR for ’19-‘22e. If we look at the company’s financial targets (3x revenues in Russia/CIS in 2021 vs. 2016, 6-8% EBIT margins), we are 4% below the revenue target and forecast an EBIT margin of 7.5%. When it comes to Germany, we believe Ferronordic has high potential to improve profitability due to its strong track record in achieving profitable growth even in turbulent times.
Significant FCF generation expected from 2021 and onwards
We expect to see a significant improvement in FCF generation once working capital starts to normalise, the German operation approaches cash flow break-even and due to less growth investments in Kazakhstan. On our estimates, the company should be close to a net cash position again in 2022e, while offering >
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