Ferronordic: Segment EBIT growth, but OH an issue - ABG
• Q2 report due on Thursday, 17 August
• Solid performance in segments, OH costs still weigh
• Needs to make an acquisition or scale down the cost base
Q2 expectations
We expect Ferronordic to report Q2 net sales of SEK 618m, down 63% y-o-y (+10% organic, -76% divested, +2% FX). As in Q1, we expect both reporting segments, Germany and CIS, to be EBIT-positive (SEK 7m each), while overhead costs (SEK -22m) weigh on earnings for a grouplevel EBIT of SEK -8m (-14m in Q1, segment EBIT was +12m). To our understanding, the weaker economic climate is not a major issue for truck sales near-term, as pent-up demand and full order books remain despite supply chains having started to normalise. However, as we have noted before, the current overhead cost base has been too big for the company's smaller operations since the Russian business was divested, which was ~80% of sales.
EBIT down 3-8m on more cautious margin assumptions
We make fairly minor estimate revisions into the Q2 numbers. Although we raise our top-line assumptions both for Germany and CIS, partly helped by FX tailwinds on a weaker SEK, we still lower EBIT by SEK 3-8m for 23e-'25e. On our new estimates, we believe the two reporting segments will come close to covering the overhead cost base in '24e.
Two potential paths ahead
Given the overly large opex base and the fact that the company currently sits on a large net cash position (SEK 681m as of Q1'23) after divesting Russia, we see two paths ahead that it could take. First, the net cash position can be used for a major acquisition to scale up operations, which seems to be management's preferred option. Second, if it does not make a larger acquisition, the opex base needs to be adapted to the smaller operations, and in this scenario the company would likely instead use its net cash position for a one-time extraordinary dividend. What is clear, however, is that the status quo, with larger overhead costs than segment EBIT, is not sustainable.
Länk till analysen i sin helhet: https://cr.abgsc.com/contentassets/622fe7f5b0c94487b63ab246339c956c/pdf/segment-ebit-growth-but-oh-an-issue.pdf
