We expect Ferronordic to see a slight sequential downtick in sales to SEK 669m, with some negative seasonality affecting Germany, which had a very strong Q2 in terms of equipment sales. As in Q2, we expect each segment to be EBIT-positive, with Germany at SEK 7m and CIS at 8m. However, the company still does not have the necessary scale to offset its overhead cost base since divesting the Russian operations. We have overhead costs at SEK -22m for Q3e, for a group level EBIT of SEK -7m.
Organic estimates unchanged, only updated FX
We leave our organic estimates unchanged, with the only revisions stemming from updated FX assumptions, which add 1% to our sales estimates.
Needs to scale up operations or scale down overhead
Since divesting its Russian business, which accounted for 80% of group sales, the ongoing operations of the company are too small in relation to the overhead cost base. The company's plan to remedy this is to use the net cash position of SEK 539m (as of Q2'23) for aggressive expansion through an acquisition, thereby scaling up the operations to fit the cost base. However, in the absence of an acquisition, we see risk that the net cash position may continue to shrink, and as such we argue that Ferronordic is in a race against the clock to either: 1) complete an acquisition and size up its operations, or 2) scale down the cost base to fit the current, smaller operations, and instead distribute the net cash position (57% of current mcap) to shareholders.
