Generic : Annual sales growth back over 10% in Q3 - ABG

EBIT margin strengthened y-o-y in contrast to H1 Positive revisions, ‘23e EBIT up ~4% Generic has not seen any weakness in demand Q3: Sales and EBIT 3% and 17% above ABGSCe After a disappointing Q2, Generic responded with a solid Q3 that was 3% above ABGSCe on sales and 17% above on EBIT. Sales were SEK 30.3m (+11% y-o-y) and EBIT was SEK 6.7m (6.0m) for an EBIT margin of 22.2% (22%). The sales growth was driven by increased volumes from existing customers as well as onboarding a few new clients to the Generic platform. The decline we have seen, post Covid-19, in the number of new deals y-o-y, is still evident but the gap is closing. Going forward, we think the number of new deals will continue to grow y-o-y as the company can now have more physical sales meetings again (rather than virtual). The deviation on EBIT was partly driven by a higher gross margin and partly driven by lower opex. Higher gross margin assumption main driver of revisions We have had a few quarters with downward estimate revisions but after the beat in Q3 we raise our estimates again, with ‘23e EBIT up 4.4%. 1.3% of that is explained by higher estimated sales and the rest is explained by higher gross margin assumptions. Generic seems to be able to offset any inflationary price increases it incurs by raising its own prices towards customers. The CEO also mentioned a new service to Swedish municipalities in the Q2 report, which we think might be one of the reasons for the stabilization of the gross margin between Q2 and Q3. The company also reiterated its view that demand for messaging services remains strong and it has not seen any weakness in demand. Our assessment is that growth will accelerate in Q4 and even more so in ’23, after a return to normality in H1’22 post-pandemic. ‘23e EV/EBIT of 15x, P/E of 21x and ~5% FCF yield The share is down 61% LTM and is now trading at a ‘23e EV/EBIT of 15x and a P/E of 21x. The 3y average for NTM EV/EBIT is at ~27x, or 44% below the current valuation. Läs mer på ABG Sundal Collier