Oppdatering fra SB1M etter Kitrons Tall For Q2 .
Rep. figures spot on, marginal positive EBIT guidance; investment case with +15% annual equity IRR at ~20% ROCE unchanged
Conclusion
Operational figures literarily spot on SB1M with net profit of NOK36m and consensus at NOK37m with better than expected revenue growth, offset by somewhat lower EBIT margin. Hence, guidance was changed with a positive net absolute EBIT effect of NOK6m with mid-point corresponding to NOK201m (vs. previous NOK195m) compared to SB1M current ‘19e estimate of NOK213m. As such, we expect to do zero estimate changes to our absolute EBIT forecast (higher revenue offset by lower margin) and reiterate our investment case that KIT is a great stock to have as part of a portfolio with 1) +15% annual equity IRR at, 2) ~20% ROCE and trading at 3) ‘20e P/E and dividend yield of 10.2x and 6% (assumes 60% pay-out ratio), respectively. Working capital has stabilized, but with +20% revenue growth it is hard to lower working capital to sales significantly, which in our opinion at best is set for late ‘19e/early ‘20e and limits dividend pay-out ratio to 60% of EPS. We reiterate our Buy rec. and NOK12 target price.
· EPS spot on, but the mix somewhat
KIT delivered net profit and EPS that literally was spot on our estimates (see below). This was driven by 4% better revenue growth than our estimates, driven by Defence/Aerospace and Offshore/Marine, noting 29% growth YoY (of which 19% organic). However, as both these electronics components primarily is manufactured in the facilities in Norway, Sweden and the USA, which currently is margin dilutive to blended KIT from lower utilization, this took EBIT margin down from 6.8% in 2Q18 to 6.6% in 2Q19, in line with our thesis from the 2Q19 preview (we modelled with 6.6% EBIT margin). Thus, absolute EBIT came in at NOK56m vs. our NOK54m estimates and this delta leads to zero estimate changes on absolute EBIT (somewhat changed mix).
· Working capital has stabilized
Working capital has stabilized with 1) supplier shortage/constrains started to ease and lead times have come down, 2) allocation of components are reduced by half compared to peak in 3Q18 and 3) raw materials in inventory is expected to reduced going forward, but with +20% revenue growth it is hard to lower working capital to sales significantly, which in our opinion at best is set for late ‘19e/early ‘20e and limits dividend pay-out ratio to 60% of EPS.
Absolute EBIT guidance upped.
Pre 2Q19, KIT expected ‘19e revenues of NOK2.9bn to NOK3.2bn and EBIT margins between 6.2% to 6.6%, which at mid-point correspond to NOK195m in EBIT. This was changed today with ~NOK6m in absolute EBIT improvement. Indeed, 1) revenues were upped to NOK3.2bn to NOK3.4bn, primarily driven by better than expected growth within Defence/Aerospace and Offshore/Marine, and 2) EBIT margin was lowered to 5.9% to 6.3%, as i) stronger growth than expected due to ramp-up of customers, temporarily drive inefficiency in existing facilities and ii) start-up og the Polish facility. Mid-point on news guidance correspond to some NOK201m, where we model with NOK213m (consensus at NOK206m) and hence, we are likely to keep our absolute EBIT estimate unchanged, as there is support in the current order backlog with an book-to-bill of ~1.4x.