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Newly enlarged personnel base, large ’20e EBIT revision
Looking at Q1’20e, we believe that Allgon will have been largely unaffected by the COVID-19 outbreak. For example, when assembly of industrial radio control products in China was shut down, we believed that Allgon could satisfy demand by relying on its ~SEK 100m inventory, facilitated by Tele Radio’s global network of ~20 warehouses. Allgon’s Chinese assembly sites are now up and running again, but we think that Allgon could face tough conditions in Q2e and Q3e given recent developments. As such, we cut Q2’20e organic growth from 12.2% to -6.6%, and Q3’20e organic growth from 12.1% to -1.1%. On an annual basis, this takes ‘20e organic growth from 11.8% to 3.1%. Given Allgon’s recently enlarged personnel base, which we believe will require quarterly personnel expenses of ~SEK 60m, we lower ‘20e EBIT by 25.6%.

Balance sheet OK despite revisions & earn-outs
Despite our negative estimate revisions, we do not see any problems with Allgon’s balance sheet in our current outlook. The company had ~SEK 90m in cash at the end of ‘19 and the outstanding bond is not due for refinancing until June 2022. Despite cutting ‘20e EBITDA by ~20%, and factoring in the SEK 25m earn-out connected to the Tele Radio acquisition – which we believe will very likely be paid in May ‘20 – ND/EBITDA should amount to 2.2x at the end of ‘20e.

Updated DCF & SOTP fair value range
Following our estimate revisions, our three DCF scenarios now indicate a fair value range of SEK 5.4-18.3 (6.5-19.4) per share. We have also updated our SOTP scenarios, which rely on median/average peer multiples. These now indicate fair value of SEK 8.7-11.6 per share (10.1-19.2), valuing Allgon’s industrial radio control segment on its own. Finally, we note that at an EV/EBIT of 9.1x-3.6x for ‘20e-‘22e, Allgon is trading 15-45% below the peer group median EV/EBIT.

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