Nolato - Medical the bright spot in a disappointing report - ABG

Q4 a disappointment overall, but Medical beat expectations
Nolato reported Q4 EBITA 15% below our expectations and 12% below FactSet consensus. Industrial Solutions in particular had a weak quarter, with a 2.8% EBITA margin, which management says should improve into Q1 given some easing of automotive production disturbances. Integrated Solutions underperformed the company's sales guidance, consequently hurting margins in the segment as well. On a positive note, Medical Solutions, Nolato's highest-quality segment, in our view, was 5% above our expectations on EBITA, showing a notable sequential margin increase of 1.2pp, which we find reassuring.

Lowered estimates mainly in Integrated, Medical stable
We lower our estimates to reflect 1) Nolato's Q1 guidance of flat q-o-q growth in VHP within Integrated, and 2) a more cautious view on the margin recovery timeline both for Integrated Solutions and Industrial Solutions. Meanwhile, we leave Medical Solutions essentially unchanged, and the segment is now ~60% of our '23e group EBITA. All in all, we lower our EBITA estimates by 9% for '23e and 3% for '24e.

Margin recovery still likely, but it won't come overnight
2022 was an exceptionally difficult year for Nolato, as it dealt with component issues, high input costs, and poor sales mix effects as well as dual-sourcing, lost sales in Eastern Europe, and production permit issues in its VHP business, leading to the company reporting its lowest EBITA margin since 2012. While the Q4 report was weaker than expected and visibility on Integrated remains poor, we still argue that many of the issues mentioned above are temporary, arguing for a gradual margin recovery in '23e and into '24e. On our revised estimates, the share is trading at a 15-12x '23e-'24e EV/EBITA.

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