VBG Group: Financially well-prepared for demand shortfall – Introduce

Margin resilience under scrutiny when demand starts to drop
We estimate that VBG will see a 23% organic sales decline and a 44% EBITA decline in 2020 following COVID-19’s impact on VBG’s end-markets. Similar to what we expect for other industrial names, we expect Q2 to be the most challenging (-46% organically) before we start to see incremental improvements in Q3 (-32%) and onwards. However, even though Mobile Climate Control (MCC) was not part of VBG before 2016/2017, we note that all divisions have historically been fairly sensitive to sudden changes in demand. In 2009 when sales declined by 46% organically, VBG managed to keep adj. EBITA just above break-even levels. In 2020, we forecast incremental margins similar to those in 2009/2008 despite seeing governmental support on the personnel side, causing margins to fall from 12.5% in 2019 to 8.7% in 2020e.

MCC expected to see the largest hit on earnings
We lower our sales estimates by 19-11% for ‘20e-‘21e, with the largest revisions in Truck & Trailer Equipment (TTE) and MCC. Our EBITA estimates come down by 43-18% for ‘20e-‘21e mainly due to weaker volumes, which is somewhat offset by 4-5% in FX contribution. For ’19-‘22e, we now forecast a 1% EBITA CAGR.

Low leverage, revolvers and FCF should lower financial risk
While earnings uncertainty is undoubtedly high given current market conditions, we argue that VBG’s financial risk is low. The company entered the year with 1.2x ND/EBITDA, c. SEK 1bn in cash and unutilised revolvers and practically no debt maturing during 2020. Hence, as long as we start to see normalising conditions by year-end, we argue that VBG should be able to weather the storm reasonably well. We estimate that EBITDA would have to decline by 70-80% (ABGSCe -36%) before leverage starts to become a concern. On mid-cycle margins (11%) and 2018 sales, we estimate that VBG is trading on c. 11x EBITA.

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