Nolato: Yet more ground to gain on margins - ABG

- Q2e: Slight margin improvements expected
- Org. estimates mostly unchanged, EBITA down 2-3% on FX
- More ground to gain on margins, 19-16x '24e-'25e EV/EBITA

Q2e: slight margin improvement expected
After several quarters with a more or less stagnant margin, Nolato surprised positively in Q1 with substantial margin improvement. We expect less of a jump for Q2e, but still forecast continued improvement. We estimate sales of SEK 2,504m, up 1% y-o-y (0% organic, +1% FX), with the Medical segment delivering +4% organic growth on the back of slightly improving conditions in the in vitro diagnostics sub-segment and some gradually normalising inventories within general surgical equipment. We estimate EBITA of SEK 246m, up 24% y-o-y and 3% q-o-q, for a margin of 9.8% (8.0% in Q2'23, 9.7% in Q1'24). While we expect continued gradual improvement on margins in Medical, we model a slight sequential setback in Engineering given that management pointed to an unusually strong mix effect within the segment in Q1.

EBITA down 2-3% on FX, org. estimates mostly unchanged
We leave our organic estimates mostly unchanged, only shifting some of our near-term estimated earnings from Engineering to Medical for a roughly net neutral effect. However, updating our FX assumptions cuts our EBITA estimates by 2-3% for '24e-'26e.

Yet more ground left to gain on margins
Nolato has seen nine consecutive quarters below its 10% EBITA margin target, but the company is now closing in on that target. Although many of the issues from the past few years have been dealt with, we still see more opportunity to raise margins from current levels, mainly as customer inventories within Medical normalise, leading to better capacity utilisation. We estimate a 2.9pp EBITA margin lift between '23 and '26e, which drives an adj. EBITA CAGR of 15%. Finally, the share is currently trading at 19-16x '24e-'25e EV/EBITA.

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