Lagercrantz: Q3 preview

Research Update

2024-01-09

07:00

Redeye updates its estimates for Lagercrantz following a Q3 acquisition spree, along with FX adjustments due to the strenghtening SEK. We reiterate our fair value range.

Niklas Sävås

Contents

Investment thesis

Quality Rating

Acquisitions

Estimate revisions

Financials

Rating definitions

The team

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Four acquisitions

Lagercrantz made four acquisitions in December: DP Seals, Material Handling Modules Europe (MHM), Nordic Road Safety and Suomen Diesel Voima. While DP Seals, MHM and Suomen Diesel Voima are typical Lagercrantz acquisitions in size and profile, we view Nordic Road Safety as slightly different as its larger and founded only seven years ago.

Strenghtening SEK

There is a lot of discussion about how the strengthening Swedish krona will affect Swedish industrials. A large part of Lagercrantz sales are in SEK and NOK (c50%), while a significant part of the input costs are linked to the USD. We believe the reversion for SEK and NOK will have a somewhat positive effect on costs but also a somewhat negative effect on sales as a significant part of sales (c50%) are in other currencies. As Lagercrantz has begun to make more acquisitions in foreign currencies, we believe, if anything, the strengthening is slightly positive long-term.

No valuation changes

As we model acquisitions in our valuation, the impact of the four acquisitions have a limited positive effect on our estimates and valuation of Lagercrantz. We reiterate our valuation range and our Base Case Fair Value is SEK140 per share. The share price has strenghtened significantly since our last update and we believe Lagercrantz is now fairly valued where continued EPS growth will drive the share price upwards.

Key financials

SEKm	2020	2021	2022	2023e	2024e
Revenues	4,091.0	5,482.0	7,246.0	8,304.1	9,472.0
Revenue Growth	-2.1%	34.0%	32.2%	14.6%	14.1%
EBITDA	774.0	1,094.0	1,452.0	1,732.0	1,940.9
EBIT	530.0	781.0	1,063.0	1,266.2	1,445.3
EBIT Margin	13.0%	14.2%	14.7%	15.2%	15.3%
Net Income	388.0	572.0	759.0	871.5	1,001.1
EV/Revenue	4.2	4.3	4.0	3.3	2.8
EV/EBIT	32.3	30.0	27.4	21.3	18.7

Investment thesis

Case

Durable growth at high returns

Lagercrantz has a strong track record of allocating internally generated free cash flow at high returns buying private companies. In addition, Lagercrantz has been able to improve its companies and has achieved mid-single-digit organic growth. With Lagercrantz as the new owner, the companies have better opportunities to expand into new markets and grow their business. This twin engine of acquisitive plus organic growth is likely to continue to generate stellar shareholder returns for the long-term investor.

Evidence

Proven acquisition model

The acquisition model is to buy companies with durable competitive advantages at low multiples, around EV/EBITA 6-8, leading to a yield of around 13-17% and then adding organic growth. The companies Lagercrantz buys typically have sales of around SEK 50-200 million and are well-managed and profitable with limited risk. Its aim is to continue to build up a large portfolio of successful companies, and Lagercrantz has undoubtedly succeeded in this in recent years. All the companies, as far as we can tell, have had stable profitability. Operating margins are around 15-20 percent.

Supportive Analysis

It has been possible to buy these private companies cheaply due to their relatively small size and dependence on personnel. The operations are then valued at a higher multiple once they are part of Lagercrantz. However, these higher valuations once they are part of the Lagercrantz group are not just sleight of hand since the companies have a greater opportunity to develop with its new owner. This applies particularly to the smaller product companies, which have often lacked the knowledge, capital or, in some cases, the courage to expand into new markets. Lagercrantz supports the business with tools on how to manage its inventory, pricing, export etc., and benchmark the companies against each other to create healthy competition in the group.

Challenge

Big bad acquisitions

If Lagercrantz was to acquire a big company that runs into severe problems, it would cost money as well as management resources. The organization is rather streamlined and if there is a need for restructuring it may have consequences for the rest of the group, and obviously also the stock market's confidence. We think the risk of this is low as Lagercrantz has been disciplined over time.

Challenge

Valuation for private companies

In 2021, a few aggressive acquirers entered the market in a big way and caused prices to rise. If the acquisition multiples would rise from today's 6-8x EBITA to 9-11x it would lead to less attractive return on capital for Lagercrantz, thereby hurting its long-term prospects.

Valuation

Almost always attractive

The Lagercrantz share has clearly outperformed the stock market index over the years. Lagercrantz has a well-proven ability to buy and develop companies and provides a good potential to generate high returns over time. We think the business can generate a 15%+ return on capital over decades by being able to reinvest the majority of its cash flows at high returns, leading us to conclude that the stock is almost always attractive to own. Most large industrial companies are not able to re-invest their cash flows at high returns, leading to a high dividend ratio instead of the snowball effect Lagercrantz can achieve by its supreme reinvestment ability. Even though the Lagercrantz share is often trading at a premium, we think investors underestimate the long-term effect, meaning the premium is often too low.

Quality Rating

People: 5

Lagercrantz receives the highest rating for People for several reasons. First, its management has a solid track-record regarding M&A and capital allocation. Second, the management has also demonstrated the ability to restructure underperforming business units fast and successfully. Third, insiders, such as CEO Jörgen Wigh, owns a notable share of Lagercrantz. Fourth, we believe that management’s communication is balanced and realistic.

Business: 5

Lagercrantz receives the highest rating for Business for several reasons. First, the group has shown resilience to economic downturns, especially during the Corona Crisis. Second, most of its larger subsidiaries, such as R-Con and Elpress, are active in structural growth markets. Third, most of its subsidiaries are the leader in their respective market niches. Fourth, for many years, Lagercrantz has been able to grow efficiently through acquisitions.

Financials: 4

Lagercrantz receives a high rating for Financials for several reasons. First, the company has a long track record of being profitable. Second, Lagercrantz has a strong financial position. To achieve an even higher rating, Lagercrantz would need to increase its growth and margins further.

Acquisitions

Lagercrantz made four acquisitions during December of DP Seals, Material Handling Modules Europe, Nordic Road Safety and Suomen Diesel Voima.

DP Seals

DP Seals designs and manufactures customised rubber seals, gaskets and mouldings, with intricate geometries to the highest quality. In-house tooling design and manufacturing enables the company to produce parts meeting the requirements of the most demanding industrial equipment manufacturers. Applications such as aerospace programs, subsea energy connections and Formula 1 racing cars typically require the use of rubber compounds that can withstand extreme pressures, temperatures and aggressive gases. DP Seals is based in Poole in the UK and has a turnover of approximately GBP 5 million with good profitability, which we believe to be c20% EBITA margins. Lagercrantz has acquired 100% of the company which will be part of the International division.

Material Handling Modules Europe

Material Handling Modules Europe is a Nordic supplier of modular conveyor and material handling Material Handling Modules Europe is a Nordic supplier of modular conveyor and material handling systems to system integrators in the manufacturing and logistics automation industry. MHM is based in Glemmingebro in Skåne in the south of Sweden and generates cSEK90m in sales and solid profitability, which we believe to be c15% EBITA margins. Sales has increased by c50% from 2022 to 2023. Lagercrantz has acquired 97% of the company, which will be part of the Niche Products division.

Source: allabolag.se

Nordic Road Safety

NRS is a supplier of road safety equipment through development, consulting, sales, project management and installation of safety barrier systems and noise barriers. The largest market is Sweden with approximately 85% of the sales, the rest is exported to other European countries. Lagercrantz has acquired 85% of the company, which will be part of the Electrify division.

Source: allabolag.se

We have summarized the events of the company since 2016 from its annual reports and also added our own comments.

Founded in 2016. Road- and bridge railings were developed.

In 2017, a sharp price reduction was encountered on the market at the same time as steel prices increased - double whammy which led to a small loss. Offices were established in Borås and Västerås.

In 2018 Product & system development proved to be successful and they turned to profitability

In 2019, a new subsidiary was formed under the name NRS Vistamon AB, to own and manage properties. Major investments and new development of six new road- and bridge railings. Investments in marketing and sales activities. This explains the somewhat lower profitability. New nationwide agreements with several new large customers

During 2020 there was great demand for the company's products. Continued large investments in product development, where two new roads and bridge railings were developed. Several major agreements were re-signed at both local and national level.

In 2021, due to problems with the sub-supplier chain driven by the pandemic, the company made large investments in its own production capacity, it also moved warehouses and offices. Our guess is that part of the cost related to the production capacity increase was probably taken in 2020 as profitability was strong in 2021 despite the investments, this has not been confirmed by the company.

During 2022 the company continued to increase in own production capacity and for the first time it is mentioned that it has been successful in increasing its market shares in the Nordics.

Suomen Diesel Voima

Suomen Diesel Voima is a Finnish manufacturer of generator sets for backup power solutions and fire sprinkler pumps. Generator sets makes sure critical systems can continue to operate in case of power failures and fire sprinkler pumps ensures the availability of water in case of fire.

Suomen Diesel Voima is based in Finland, generates cEUR8m in sales and Lagercrantz has acquired 86% of the company, which will be part of the TecSec division. Studying the financial figures for the company during the last years, we note that it showed low profitability up until 2021 and then improved strongly in 2022.

Source: allabolag.se

Estimate revisions

On the back of a stronger than expected acquisition pace balanced by a strengthening SEK we are increasing our near-term sales estimates slightly.

Revisions	FYE23/24	Old	Change	FYE24/25	Old	Change
Revenues	8,304	8,270	0.4%	9,472	9,064	4.5%
Y/Y Growth (%)	14.6%	14.1%		14.1%	9.6%
Electrify	1,863	1,834	1.6%	2,252	1,888	19.3%
Growth y/y	11.1%	9.4%		5.7%	5.7%
EBITA	336	331	1.5%	399	334	19.3%
EBITA margin	18.0%	18.1%		17.7%	17.7%
Niche Products	2,026	1,996	1.5%	2,141	2,051	4.4%
Growth y/y	8.3%	6.7%		22.7%	22.7%
EBITA	421	415	1.5%	443	424	4.4%
EBITA margin	20.8%	20.8%		20.7%	20.7%
TecSec	2,070	2,040	1.4%	2,161	2,071	4.4%
Growth y/y	18.3%	16.7%		75.5%	75.5%
EBITA	374	368	1.5%	382	366	4.4%
EBITA margin	18.1%	18.1%		17.7%	17.7%
International	1,546	1,526	1.3%	1,612	1,549	4.1%
Growth y/y	28.4%	26.7%		11.3%	11.3%
EBITA	246	243	1.3%	262	252	4.1%
EBITA margin	15.9%	15.9%		16.2%	16.2%
Control	774	774	0.0%	805	805	0.0%
Growth y/y	3.9%	3.9%		17.6%	17.6%
EBITA	121	121	0.0%	135	135	0.0%
EBITA margin	15.7%	15.7%		16.8%	16.8%
Central Costs
EBITA	51	51	0.0%	62	62	0.0%
Group EBITA	1,451	1,443	0.6%	1,635	1,555	5.1%
EBITA Margin (%)	17.5%	17.4%		17.3%	17.2%
EPS	4.2	4.2		4.8	4.7
Source: Redeye Research

Our updated quarterly estimates and estimates per division follows:

Lagercrantz: Short-term estimates
(SEKm)	21/22	22/23	23/24Q1	23/24Q2	23/24Q3e	23/24Q4e	23/24e	24/25Q1	24/25Q2e	24/25Q3e	24/25Q4e	24/25e
Net sales	5482	7246	2045	1871	2123	2265	8304	2293	2203	2437	2538	9472
Net sales growth	34%	32%	28%	12%	9%	11%	15%	12%	18%	15%	12%	14%
Gross profit	2093	2740	801	744	815	868	3228	894	859	933	970	3657
EBITDA	1094	1452	423	401	444	464	1732	466	462	505	507	1941
EBITA	895	1206	357	333	371	390	1451	392	391	427	425	1635
EBIT	781	1063	316	290	323	338	1266	346	347	378	374	1445
Net income	388	572	179	168	199	213	759	209	204	213	221	872
EPS	2.8	3.7	1.0	1.0	1.0	1.1	4.2	1.2	1.2	1.3	1.3	4.8
Gross margin	38%	38%	39%	40%	38%	38%	39%	39%	39%	38%	38%	39%
EBITDA margin (%)	20%	20%	21%	21%	21%	20%	21%	20%	21%	21%	20%	20%
EBITA margin (%)	16%	17%	17%	18%	17%	17%	17%	17%	18%	18%	17%	17%
EBIT margin (%)	14%	15%	15%	15%	15%	15%	15%	15%	16%	16%	15%	15%
Net income margin (%)	7%	8%	9%	9%	9%	9%	9%	9%	9%	9%	9%	9%
Source: Redeye Research

Divisional Estimates
	22/23e	23/24Q1	23/24Q2	23/24Q3e	23/24Q4e	23/24e	24/25e
Electrify	1677	480	421	453	509	1863	2252
Y/Y Growth (%)	14%	21%	9%	5%	10%	11%	6%
EBITA (Electrify)	283	87	80	82	88	336	399
EBITA margin (Electrify)	17%	18%	19%	18%	17%	18%	18%
Niche Products	1871	485	446	530	565	2026	2141
Y/Y Growth (%)	29%	12%	6%	7%	8%	8%	23%
EBITA (Niche Products)	374	104	95	106	116	421	443
EBITA margin (Niche Products)	20%	21%	21%	20%	21%	21%	21%
TecSec	1749	528	480	515	546	2070	2161
Y/Y Growth (%)	93%	60%	12%	8%	6%	18%	75%
EBITA (TecSec)	303	95	89	89	101	374	382
EBITA margin (TecSec)	17%	18%	19%	17%	19%	18%	18%
Control	745	184	163	214	213	774	805
Y/Y Growth (%)	13%	5%	0%	5%	5%	4%	18%
EBITA (Control)	118	21	21	39	41	121	135
EBITA margin (Control)	16%	11%	13%	18%	19%	16%	17%
International	1204	368	361	411	407	1546	1612
Y/Y Growth (%)	21%	39%	33%	23%	22%	28%	11%
EBITA (International)	186	57	60	66	63	246	262
EBITA margin (Control)	15%	15%	17%	16%	16%	16%	16%
Future M&A (Acc)	0	0	0	0	25	25	500
EBITA (Future M&A (Acc))	0	0	0	0	4	4	75
Assumed EBITA margin (Future M&A (Acc))	14%	15%	15%	15%	15%	15%	15%
Source: Redeye Research

We reiterate our valuation range.

Financials

Income statement
SEKm	2020	2021	2022	2023e	2024e
Revenues	4,091.0	5,482.0	7,246.0	8,304.1	9,472.0
Cost of Revenue	2,513.0	3,389.0	4,506.0	5,076.3	5,815.3
Operating Expenses	804.0	999.0	1,288.0	1,495.8	1,715.8
EBITDA	774.0	1,094.0	1,452.0	1,732.0	1,940.9
Depreciation	158.0	199.0	246.0	280.9	305.7
Amortizations	86.0	114.0	143.0	184.8	189.9
EBIT	530.0	781.0	1,063.0	1,266.2	1,445.3
Shares in Associates	0.00	0.00	0.00	0.00	0.00
Interest Expenses	28.0	40.0	94.0	156.0	170.0
Net Financial Items	-28.0	-40.0	-94.0	-156.0	-170.0
EBT	502.0	741.0	969.0	1,110.2	1,275.3
Income Tax Expenses	114.0	169.0	210.0	238.7	274.2
Net Income	388.0	572.0	759.0	871.5	1,001.1
Balance sheet
Assets
Non-current assets
SEKm	2020	2021	2022	2023e	2024e
Property, Plant and Equipment (Net)	586.0	741.0	973.0	992.1	992.5
Goodwill	1,609.0	2,006.0	2,446.0	2,844.0	3,234.0
Intangible Assets	785.0	1,085.0	1,519.0	1,675.9	1,727.5
Right-of-Use Assets	0.00	0.00	0.00	0.00	0.00
Other Non-Current Assets	0.00	19.0	22.0	23.0	23.0
Total Non-Current Assets	2,980.0	3,851.0	4,960.0	5,535.0	5,977.0
Current assets
SEKm	2020	2021	2022	2023e	2024e
Inventories	655.0	949.0	1,166.0	1,328.7	1,368.4
Accounts Receivable	672.0	972.0	1,237.0	1,435.7	1,482.7
Other Current Assets	152.0	225.0	310.0	354.4	365.0
Cash Equivalents	151.0	210.0	360.0	1,192.6	1,478.6
Total Current Assets	1,630.0	2,356.0	3,073.0	4,311.4	4,694.7
Total Assets	4,610.0	6,207.0	8,033.0	9,846.4	10,671.7
Equity and Liabilities
Equity
SEKm	2020	2021	2022	2023e	2024e
Non Controlling Interest	0.00	0.00	0.00	0.00	0.00
Shareholder's Equity	1,855.0	2,228.0	3,009.0	3,522.0	4,177.7
Non-current liabilities
SEKm	2020	2021	2022	2023e	2024e
Long Term Debt	1,172.0	1,645.0	2,980.0	2,483.0	2,485.5
Long Term Lease Liabilities	0.00	216.0	0.00	0.00	0.00
Other Long Term Liabilities	0.00	324.0	0.00	481.0	481.0
Total Non-Current Liabilities	1,172.0	2,185.0	2,980.0	2,964.0	2,966.5
Current liabilities
SEKm	2020	2021	2022	2023e	2024e
Short Term Debt	0.00	249.0	0.00	537.0	537.0
Short Term Lease Liabilities	0.00	113.0	0.00	0.00	0.00
Accounts Payable	0.00	497.0	0.00	0.00	0.00
Other Current Liabilities	1,583.0	935.0	2,044.0	2,823.4	2,990.6
Total Current Liabilities	1,583.0	1,794.0	2,044.0	3,360.4	3,527.6
Total Liabilities and Equity	4,610.0	6,207.0	8,033.0	9,846.4	10,671.7
Cash flow
SEKm	2020	2021	2022	2023e	2024e
Operating Cash Flow	782.0	594.0	1,071.0	1,710.9	1,566.6
Investing Cash Flow	-415.0	-765.0	-1,017.0	-936.4	-1,016.8
Financing Cash Flow	-333.0	224.0	86.0	-239.6	-490.3

Rating definitions

The team

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Contents

Investment thesis

Quality Rating

Acquisitions

Estimate revisions

Financials

Rating definitions

The team

Download article