Following the news that Russian troops have entered Ukraine, the US, EU, and UK have all announced that sanctions will be levied on Russia. In 2014-15, we saw a somewhat similar situation when Russia annexed Crimea, which led to sanctions from the West. In 2015, the market for imported construction equipment (CE) units to Russia declined by 74% (and -83% between 2013 and 2015). Meanwhile, Ferronordic’s adj. EBITA decreased only 16% in 2015 (and only -2% between 2013-15) due to the company’s resilient business model where less new unit sales are compensated for by high-margin, stable aftermarket sales. Currently, the share is trading at 4.5x ’22e EV/EBIT, but if we replace our current ’22e estimate of 26% adj. EBIT growth with the 2015 outcome of -16%, that would instead imply a ’22e EV/EBIT of 6.7x. Ferronordic’s historical 4Y avg. f12m EV/EBIT is 6.3x.
Potential direct and indirect effects of sanctions
The direct effect of sanctions would be if imports of CE units were banned to certain regions or customers tied to Ferronordic. However, indirect effects include a potential decline in the RUB rate or a decline in oil and metal prices if those sectors are heavily sanctioned.
Valuation stress-test of zero FCF for ’22e-’24e
Our current estimates (which do not account for effects from sanctions) imply a ’22e-’24e FCF CAGR of 15% and lease adj. FCF yield of 12-17%. We have then conducted a stress-test of the current valuation, assuming zero FCF for ’22e-’24e, followed by a ’25e-’34e FCF CAGR of ~5% (with current ’24e estimate as base). If we then apply a discount rate range of 16-22%, that would yield an equity value per share of 162-263 per share. To be clear, even following very extensive sanctions, we do not see such extremes as likely.
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