Garo: COVID-19 putting a dent in Q2’20e growth – Introduce

Slowing demand and uncertainty in E-mobility
GARO is largely exposed to the Nordic building sector for both new builds and renovations, a sector that appears relatively stable for the moment. Given the current uncertainties, however, demand appears to be slowing somewhat. This exposure represents around 80% of the company’s revenues. We expect that the remaining E-mobility segment is likely to face difficulties. Over the last couple of years, E-mobility has been the main source of group growth as it has ridden the structural growth trend for electric vehicles. Now, however, we find ourselves in a situation were difficult comps and demand uncertainties are likely to weigh on growth. We also estimate higher transportation and logistics costs. In H2’20, however, we expect to see reduced costs on the reduction of 25 white-collar employees in both Sweden and Poland.

Estimate changes
We lower sales estimates for ‘20e by 11%, driven primarily by E-mobility. For the year, we expect -1% organic growth with the weakest quarter in Q2’20e -15% (E-mobility -37%). We expect a gradual recovery over H2’20e and 12% top-line growth in ‘21e. We lower our adj. EBIT-margin by 70bp and estimate a 10.4% margin (11.6% in ’19). We estimate EPS for the year of SEK 7.81, down 9% y-o-y. Despite a solid balance sheet, the dividend (SEK 4.20) for the year has been amended.

Valuation in the middle of our fair value range
On revised figures, the share is trading at a ‘20e EV/EBIT of 28x, and 24x in ‘21e. We have long been cautious about the shares re-rating during the last 12 months and the implied price investors pay for E-mobility. We note that at the current price is right in the middle of our SEK 233-353 fair value range. For details regarding valuation scenario assumptions, please see our in-depth report from 12 November 2019.

Link to research:
https://www.introduce.se/foretag/Garo/Equity-research/2020/4/garo---covid-19-putting-a-dent-in-q220e-growth/