We initiate coverage of DistIT, a leading distributor of branded and private label (PL) goods in the Nordic and Baltic IT/Technology and SDA segments. DistIT looks well-placed to capitalize on normalizing demand. Being tightly focused on costs, the company has an unbroken track record of profitability since the start in the 1990s. We believe there is good revaluation potential as better sales and margins combine to produce above-sector EPS growth.
A builder of brands with label leverage
Within the IT/Tech and small domestic appliances (SDA) segments of the market, DistIT is a well-established and important distribution partner for brand owners. Adding new segments, notably in vehicle electrification, home automation, gaming and security, should create secular growth opportunities. Expanding private label sales (currently about 23% of the group total) should bolster margins and mitigate prevailing industry pressure on pricing. The most recent cost programme – targeting SEK 45m in annualized savings – is well underway and adds to operating leverage. We estimate above sector average sales and EPS growth in 2021.
Financial forecasts: cost and capital management to drive ROCE
DistIT’s strategy of combining A-brands and private label products should sustain its class-leading EBIT margins of some 3%-5% versus pure-play distributors at 1%-2%. We expect the group to produce organic sales CAGR in 2019-2022 of 4.6% and for underlying EBIT margins to return to above 3% in next year. From inventory management this also adds points to ROCE – a key valuation metric.
Valuation: over 50% total return potential from current share price
Based on our earnings forecasts and including financial deleveraging, we argue DistIT trades at below 7x 2021 EV/EBIT. We set our mid-point DCF value at SEK 48 (WACC of 9.1%, steady-state EBIT of 2.6%) implying a prospective EV/EBIT of about 11x and still a near 15% discount to peers. Adding a 3% dividend yield, this implies a total return potential of over 50% from the current share price.
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