TagMaster’s second quarter was characterized by solid sales but higher costs than expected, mainly due to the major acquisition of Sensys Networks. We comment on the report and provide our outlook.
TagMaster’s net sales increased by 5% in Q2’19, slightly above our estimates. Topline fell 4% excluding the acquisition of Sensys Networks. Earnings came in short; EBITDA margin of 0% vs. our expectation of 8%. Primarily due to the intense M&A work, but also a consolidation of the legal entities in France and the UK, costs were higher than we had anticipated. Moreover, margins in the UK traffic business was lower due to an unfavorable product mix in the quarter, which should be of temporary character. Additional integration work in the UK and France will be finalized during H2 2019. We are somewhat surprised by the long integration processes in Europe, although it is positive that the company continues to increase its efficiency.
Sensys Networks was only consolidated during the last two weeks of Q2’19 and contributed with SEK 4.4m in sales, slightly above our expectations. TagMaster does not report detailed numbers for each company in the group, but parts of the increasing OPEX costs (+ SEK 6.0m y/y) are related to Sensys Networks extraordinary costs. Sensys Networks had 36 employees at the end of Q2’19, while TagMaster’s workforce reduced from 81 to 77.
The purchase of Sensys Networks is considerably strengthening TagMaster’s position in the Traffic Management segment and the US market. We believe it also enhances the group’s competitive advantages and will support the long-term profitability margins. Although we expect the earnings contribution to be gradual, we are optimistic about the opportunities and believe the acquisition will add values for TagMaster’s shareholders.
Our key takeaways from the report are the solid sales, extraordinary higher costs, and that the integration work is in progress. In our recent research update, we anticipated lower margins in 2019, due to the consolidation of the large acquisition. Following the Q2’19 report, we further reduce our estimates, from a full year EBITDA margin of 7% to 3%. We also project a slightly lower profitability in 2020.
Our view of the long-term case in TagMaster is unswayed by today's report and we reiterate our base case of SEK 1.6 per share. In the past weeks, TagMaster’s stock price has stabilized around the recent rights issue’s subscription price of SEK 0.8. We are optimistic about the outlook after our research on Sensys Networks, the market, and the fit with TagMaster. However, investors might remain cautious until the new group has proved itself. We interpret the modest initial stock market reaction (-1%) on the Q2'19 report as an indication of this view. From Q3’19, Sensys Networks will boost the group’s topline significantly and over time, cross-selling and new innovations should support the organic growth. We argue that long-term investors are provided with an interesting entry point in the stock. The underlying profitability will now be even more shadowed by goodwill amortizations, increasing the potency of IFRS adoption as a potential catalyst.
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