Nilörn: Gross margin trajectory driving up estimates - ABG

Main points from the Q2’21 report
Nilörngruppen continued its strong 2021 performance on profitability in its Q2 report on Friday. Sales were SEK 175m, or 7% below our expectations. However, EBIT was roughly in line, at SEK 23.1m (-3% vs. ABGSCe at 23.7m). This was due to a continued strong gross margin, where the company has seen a rather large effect of 1) mix 2) good leverage on the Bangladeshi production and 3) positive FX effects in the EUR/HKD. This resulted in a gross margin of 46.7%, 1.7pp. above our expectations. On opex, we note that the cost base has started to normalise, with personnel costs now being at levels without any voluntary temporary pay cuts, which was the case last year.

Outlook: raised profitability for H2’21
While sales were a touch below our expectations, we have increased our EBIT estimates by 15% for 2021 and 7% for 2022-2023 because of a higher gross margin assumption. We know that the company has been without a low-margin packaging order this year, which is likely to affect gross margins in ‘22e-‘23e, but the leverage the company is experiencing is likely to be an effect that is stronger for longer. While we believe that the company over time is likely to see lower gross margins due to the RFID business, we currently see few signs of a return to the 43-44% margin of ’18-19 in the short term. However, we acknowledge that the cost base could continue to increase to normalised levels. As we have assumed a more normalised gross margin for ‘22e as well as some other external costs returning, we continue to cautiously pencil in a margin decline in 2022e, but continue to raise the base.

Valuation – trading at ‘21e 10x EV/EBIT
On our updated estimates, Nilörngruppen is trading at an EV/EBIT of ~10x ‘21e-23e. While being significantly larger, the company’s biggest competitor, Avery Dennison, is currently trading at a ‘21e-‘22e EV/EBIT of 18-17x.

https://www.introduce.se/foretag/nilorngruppen/Equity-research/2021/7/nilorngruppen---gross-margin-trajectory-driving-up-estimates/