Embellence Group: Volumes holding up, SG&A hurting margins - ABG

Sales 0% vs ABGSCe, organic growth of -4% Adj. EBITA -16% vs ABGSCe, -26% vs FactSet cons. We expect cons. to lower estimates some 5-8% Q2’22 outcome
Sales came in at SEK 190m (0% vs ABGSC 190m), Gross profit SEK 110m (+5% vs ABGSC 105m), Adj. EBITA SEK 24m (-16% vs ABGSC 29m), EBIT SEK 17m (-31% vs ABGSC 25m), Net profit SEK 2m (-88% vs ABGSC 17m), EPS SEK 0.1 (-88% vs ABGSCe 0.8). All in all, the report came in-line with top line but showed a lower margin than anticipated, coming in -16% vs ABGSCe and -26% vs FactSet consensus.

Q2’22 thoughts and outlook Embellence had a +19% y-o-y sales in Q2, with an organic growth of -4.0% (-0.9pp. vs ABGSCe at -3.1%). Following surging inflation and declining demand, the Nordics have been affected by a negative product mix. Newly acquired US-based Artscape (RoW) was fully consolidated in the quarter, but displayed lower demand than anticipated and higher input costs. Despite this, we remain impressed by the gross margin coming in at 57.9% (+1.6pp. y-o-y and +2.9pp. vs ABGSCe). The adj. EBITA of SEK 24m resulted in an adj. EBITA margin of 12.8% (-1.5pp. y-o-y and -2.3pp. vs ABGSCe). Mgmt. highlights that the primary reason behind the EBITA margin decline, except for the negative product mix and higher input costs, was larger investments into sales and marketing in the quarter. Furthermore, mgmt. mentions that they will implement a cost savings program expected to impact EBITA with at least SEK 3m p.a.

We expect cons to lower estimate by mid to high single digits The Embellence share is down 16% YTD and is on our unrevised estimates trading at EV/EBITA of 6-4x in ’22e-‘24e. On the back of the softer margin, we could see consensus lowering adj. EBITA estimates by 5-8% with the cost saving program being supportive for the following years.

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