Forecast hikes in Elanders following their strong third quarter
Yesterday Elanders reported strong results for the third quarter. The otherwise sequentially weak Q3 showed less variation compared to Q2. As a result we have raised our earnings estimates by 6 percent for 2015 and by 7 percent for 2016. The share remain as one of our Alpha Picks. To download our updated one-pager on Elanders, click here to download it in PDF-format.
Less seasonality and increased profitability leads us to raise our estimates
Elanders (ELAN-B.ST) reported solid quarterly sales figures and earnings in their historically weak third quarter. Supported by continued favorable FX rates Elanders’ revenues grew by 19 percent year-on-year and reached SEK 1,041 million. Organically the revenues grew by 4 percent. Meanwhile EBIT reached SEK 64 million, implying an EBIT margin of 6.2 percent compared to 3.1 percent on year ago. Excluding FX-effects on both revenues and EBIT the company’s EBIT margin was 5.7 percent.
At the end of the quarter the company’s net debt to adjusted trailing twelve months EBITDA ratio had decreased from 2.4 in Q2 to 2.3. Based on reported EBITDA the ratio decreased from 2.6 to 2.5.
The company’s CEO commented that seasonal variations in sales and earnings are beginning to even out. In the chart below the decreased seasonality between Q2 and Q3 can be observed regarding both revenues and EBIT margin. We have also highlighted that the current quarter (Q4) is the strongest of the year. The best is thus yet to come.
As we highlighted in our previous post about Elanders the company is approaching a complete new shape. Supply Chain Solution continues to show solid growth rates and remained as the largest business segment in the third quarter. It grew by 39 percent year-on-year (including FX). In the first nine months of the year Supply Chain Solutions grew by 13 percent organically, compared to Print & Packaging Solutions that declined 6 percent organically during the same period.
Furthermore, a higher market share and also an improved cost efficiency was behind the margin improvement in Supply Chain Solution. Its operating margin increased from 7.3 to 9.3 percent in this years’ third quarter. In Q4 its EBIT margin is expected to increase even further.
Simultaneously the Print & Packaging segment is less pleasing. However, despite the continued weak print market Elanders’ Print & Packaging segment reported stronger profitability in the quarter. The effects from the structural measures that were taken in Q4 2014 are now clearly visible. Print & Packaging Solutions improved its EBIT margin by 4.5 percentage points compared to Q3 one year ago. The segment’s EBIT margin hence increased from 0.8 to 5.3 percent.
Although Print & Packaging Solutions showed a significant improvement we argue that the market’s focus should lie on Supply Chain Solutions’ progress. In the chart below we have visualized the current transformation that Elanders is undergoing. For just a little more than one and a half year ago Supply Chain Solutions represented 37 percent of the company’s total revenues. Now it has grown to almost 50 percent. With continued strong growth, and new markets like Brazil, Alpha Researcher believes that the business segment could represent around 55 percent of total revenues just one year from now. In combination with its higher profitability it should thus contribute to a gradually improved EBIT margin for the whole company.
By looking forward Alpha Researcher sees an increased likelihood for further acquisitions. Another acquisition like Mentor Media could speed up the transformation process from being a pure printing company to become something complete else. The company’s net debt/EBITDA ratio on a trailing twelve months basis ratio is at 2.3 if adjusting for extraordinary items in Q4 2014. At the year-end we expect it to be around 1.9-2.0. We also argue that the ratio could be at 3.0, implying that there is room for another acquisition worth around SEK 300-400 million.
Following the strong report we have raised our estimates for 2015 and 2016. The revenue estimates are hiked by 1 percent for 2015 and 2016. Due to the improved profitability in both Supply Chain Solutions and Print & Packaging our earnings estimate (EPS) are raised by 6 percent for 2015 and by 7 percent for 2016. Alpha Researcher now expects an EBIT margin of 7.1 percent in 2015 and 7.2 percent in 2016. Furthermore, in our view the dividend per share could reach SEK 1.75-2.0 this year, which would imply a yield of 3.5-4.0 percent.
The share is currently trading at a trailing twelve months P/E ratio of 9.1 (even lower if adjusting for extraordinary items in Q4 2014). On our FY2015 and FY2016 estimates the P/E valuation is at 7.3 and 6.5. Simultaneously the EV/EBIT-multiples are at 6.8 and 5.8. We regard it is an attractive valuation given the company’s current performance and future prospects. With the new company profile we also expect a multiple expansion in upcoming years. Elanders remain as one of our Alpha Picks.
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