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CTT Systems: >20% growth, >30% margins set to come back - ABG

Significant earnings growth also beyond the pandemic
We believe that CTT is on track to recover from the impact of the pandemic and surpass its 2019 earnings level in 2022e. In this report, we provide an in-depth assessment of CTT’s growth potential until 2025e and argue that the company should be able to deliver >20% EBIT growth also in 2023e-2025e as a result of 1) its highly profitable aftermarket sales outgrowing its installed base, 2) recovering aircraft production rates and 3) the attractive sales potential from the VIP/business jet segment. By 2025, we forecast CTT to generate sales of ~SEK 610m (11% organic sales CAGR vs. 2019), and EBIT of ~SEK 210m (10% CAGR, 35% margin) while yielding ~60% ROIC thanks to its profitable, asset-light business model. Based on the current share price, this would imply an EV/EBIT of 12x 2025e (10x adjusted for dividends). If we instead apply an EV/EBIT of 18-24x 2025e, we derive an annual (dividend-adjusted) shareholder return of 13-20%. However, if we assume 8x EV/EBIT 2025e, this would imply an annualised return of -5%. For FY’22e-‘23e, CTT is trading at 22-17x EV/EBIT, which is 30-40% below Nordic tech peers that have similar growth and profitability.

Q2’21: Minor changes to FY’22-’23 estimates
CTT’s Q2 report marked an improvement from the Q1’21 trough. However, near-term OEM uncertainty resulted in CTT expecting a flat sales development in Q3’21 and FY’21 sales of SEK 140-160m (implying lower OEM sales in H2’21 vs. H2’20). Consequently, we lower our sales estimate by 12% (EBIT -19%) for FY’21e, primarily due to lower OEM sales. For FY’22e-‘23e, we lower EBIT by 4-1% as lower OEM sales are offset by higher VIP and aftermarket sales.

Near-term developments show improving air traffic data
We note that commercial air traffic has continued to improve lately, and is now ~10% below the levels seen in January 2020. In addition, the US domestic market has been one of the fastest to recover, with the ‘big 4’ (American, Delta, Southwest, United) all guiding for a continued sequential improvement in capacity in Q3’21.
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