Embellence Group: Impressive margins paving the way - ABG

Europe and RoW improving both sales and adj. EBITA
Strong gross (59.4%) & adj. EBITA margin (17.8%) in Q1
Value range lifted to SEK 34-45 (30-41) per share

Q1 report adding confidence in uncertain times
Embellence started the year strong, growing sales 4% y-o-y to SEK 184m (0% vs ABGSCe). In line with our expectations, Europe and RoW were the core drivers of the growth (Europe +5%, RoW +78% y-o-y), which in turn is explained by a surging demand in the hospitality segment. Organically, group sales dropped by ~6% on tough comps – attributable to the sales decline in the Nordics (~48% of Q1 group sales). We are particularly impressed by the strong gross margin of 59.4% (+5.7pp) despite increasing cost inflation. Furthermore, adj. EBITA came in at SEK 33m (+17% y-o-y, +12% vs ABGSCe), yielding a margin expansion of 2pp y-o-y to 17.8% (vs ABGSCe 15.9%). The EBITA growth is said to stem primarily from the strong gross margin, but also from margin expansion in Europe and RoW, supported by favorable product mixes and successful price hikes.

Outlook: hospitality segment to become a growth engine
Mgmt. highlighted a weakened interest for home interior in March (primarily observed in the Nordics) amid the invasion of Ukraine. While the outlook in terms of consumer behavior hence is uncertain, we now view the hospitality segment as one of the main contributors to the growth ahead. Additionally, Q1 instilled confidence on Embellence’s ability to both protect and grow its margins. Coupled with further planned price hikes and increased B2C efforts, we raise our ‘22e-‘24e adj. EBITA 4-3%. We also raise our sales estimates by 1-2% on the back of higher growth assumptions in Europe and RoW, primarily supported by growth in Wall&Decó and Cole&Son. Lastly, we also note Embellence’s strong cash flow in Q1 (op. cash flow of SEK 37m vs SEK 13m in Q1’21).

Share trading at EV/EBITA adj. of 7.2x-5.4x in ‘22e-‘24e On the back of our estimate revisions, we lift our value range to SEK 34-45 (30-41) ...

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