Cedergrenska: Inflation is hurting profitability - ABG

Q1 sales growth of 16% y-o-yEBITA margin of 3.6% (8.0%)We revise our margin assumptionsQ1'22/23: Sales growth mainly due to M&A, inflation pressures marginsCedergrenska reported Q1 sales of SEK 206m (+16% y-o-y), with the growth mainly driven by M&A contributions from SPIRA and Växjö Fria Gymnasium. This figure was 2% below ABGSCe on an assumed lower organic growth rate (2.6% vs 4.5%). EBITA was SEK 7.6m (14.5m) for a margin of 3.6% (8.0%), well below ABGSCe at SEK 16.9m. The company was not able to compensate for higher inflation, where e.g. electricity and food prices had a negative effect. In addition, it also saw extra costs in Q1 that usually occur in Q4 instead. Operating cash flow was SEK -7.5m (-4.5m).A disconnect between inflation and school vouchersUnfortunately for Cedergrenska, there is a disconnect between the high inflation environment and realised school vouchers. For example, the Stockholm region has announced voucher increases for Upper Secondary schools next year of 1.8%. This will not be sufficient to balance rising costs and Cedergrenska states that it will not be able to reach its targeted 8% EBITA margin until there is a balance between voucher increases and inflation. The disconnect should not persist long-term, however, as the municipalities are legally obliged to compensate independent schools based on the real cost increases observed. We have decreased our margin assumption in this update, with '22/'23e EBITA down 33% and the following years slightly less.'23/'24e EV/EBIT of 11x, 19% FCF yieldOn our revised numbers, the stock is trading at a '23/'24e EV/EBIT of 11x with an FCF yield of 19%. The new government in Sweden should be positive for established independent school actors and Cedergrenska reiterated its ambition to grow 15% annually, as it sees further consolidation in the sector as a consequence of increased regulation, higher admin and a generational shift.Läs mer på ABG Sundal Collier