EFUEL earn-out likely requires financing in ’23e
Q3’22 expectations
With consumers facing inflation we anticipate that DistIT will face an inventory release challenge (something that essentially all retailers struggle with). Therefore we reduce our Q3’22e gross margin by 20bps and the adj. EBIT margin by 120bps, a decline exacerbated by operating leverage. We also incorporate expected higher interest rates, which lowers EPS by 27% for the quarter.
We lower adj. EBIT by 19%-5% in ’23e-’24e
Future sales growth is mostly attributable to EFUEL, which is growing at a ’22e-’24e CAGR of 43%. We expect H1’23e to be a difficult period that will impact gross margins, and we therefore reduce our gross margin estimates by 40bps for ’23e. That said, gross margins should be aided by a pivot to in-house distribution of some Aurdel products (e.g. batteries), and we thus increase our ’24e gross margin estimates by 20bps. The adj. EBIT margin of the business is reduced by 90bps and 20bps in ’23e and ’24e, respectively, due to operating leverage. We also incorporate market expectations of higher interest rates into our estimates of financial expenses, considering that the company’s bond is priced based on STIBOR. Thus we also cut our EPS in ’23e and ’24e by 25% and 10%, respectively. Finally, the SEK 140m earn-out related to EFUEL is approaching sooner than anticipated – likely in H1’23e. Coupled with our estimate revisions, this implies it would be prudent for DistIT to put its 2022 and 2023 dividend payments on hold. Furthermore, we assume that the company can tap into the existing bond framework to finance a part of the earn-out consideration.
Current valuation below historical median
Our new estimates imply a ’23e-’24e adj. EV/EBIT of 6.6-4.2x. We note that FactSet consensus f12m EV/EBIT is currently 6.4x vs. 8.6x, which is the 4-year median. Thus, the current valuation is ~25% below the historical 4-year median.
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