Scania AB post Q2: Analysis and valuation

After the Q2 report from the Swedish truck and bus manufacturer Scania AB, it’s time to have a another look at the valuation of the company. First some brief statements from the report itself and a comment on our estimates.

Scania posted a Q2 loss, all results worse than expected and management expects a tough Q3

After competitor AB Volvo reported lower than expected sales due to a weak market, we lowered our estimates for Scania Q2 and the FY2009 in an analysis (Swedish only) one day prior to the report. Expectations were reduced in all areas: sales, gross margin, operational and financial result. However, the report still came in lower than expected.

Net Sales were 14429 MSEK (1331 MEUR), 12% lower than our estimates, the gross margin came in at 19% (we: 21,9%), and Scania recored a 150 milion SEK loss after tax where we expected a 420 milion SEK profit. The difference was majorly due to weaker market conditions (i.e. lower sales). ,

In terms of outlook, the management team was adding to the pain when it concluded that

“The demand in Q3 is likely to be on the same level as Q2. Come September, we’ll know better where the market is heading.” (Leif Östling, CEO)

and regarding credit losses in financial services Jan Ytterberg (CFO) commented that

“We haven’t seen the worst yet. I believe that Q3 will be difficult for the transportation industry.”

Two different ways to assess the company value

In order to figure out if Scania is traded at a fair value, we have carried out a DCF analysis based on two different scenarios.

1) Using the median value of analyst estimates

Scania AB publishes an overview of analyst estimates on its company homepage. For each year of the years 2009, 2010 and 2011, we have used the median EPS estimate in our DCF analysis. These predict that Scania will earn 1,88 SEK per share this year, increase it (by 104%)to 3,8 in 2010 and (by 51%) to 5,8 in 2011. For the years 2012 and onwards, we have used an average growth rate of 5%. This DCF analysis yields a Fair Value (FV) of 69 SEK.

2) Using the past to predict the future

Scania has been through downturns before, (although this one is tougher and more sudden than any of the downturns after 1945), the last one in 2001. We have used past sales and operating margin growth data from the four years after the 2001 downturn in order to predict the EPS for 2010-2013. We have also compensated for the fact that this dip is bigger than the 2001 one, by exaggerating the EPS growth for 2010 compared to the historical data. This analysis predicts an 2010 EPS of 3,76 SEK and growing by 27%, 17% and 12% for the three years thereafter before turning to the long term growth estimate of 5%. This DCF analysis produces a FV of 66 SEK.

It should be mentioned that these EPS estimates are by no means conservative. Given the current market situation, it is very doubtful that Scania will reach 1,88 SEK this year, not to mention a 100% EPS growth in 2010. I believe it  is fair to say that these levels suggest a quite rapid market recovery during 2010. In this context we also note that CA Cheuvreux today increased its recommendation for Scania from underperform to outperform (target level 106 SEK from 60 SEK earlier), in an analysis entirely based on the assumtion that Volkswagen will sell its part of Scania to MAN and thus triggering a mandatory public offer. The Scania share rose 4,6% to 85 SEK on these speculations.

Conclusion

It may be tempting to speculate on a mandatory offer from MAN and buy the Scania share on the basis of such speculation. However, even on the basis of aggressive EPS estimates (as above) the Scania share trades above its fair value and so is fundamentally overvalued. Based on the current company performance and the market developments, Scania is a clear cut sell case. We took at short position at 85 SEK in todays closing trade.

Analys: Scania inför Q2 rapporten

Efter att världens näst största lastbilstillverkare, AB Volvo, rapporterat för Q2 finns det anledning att se över vår prognos (se tidigare artikel) för Scania som kommer med rapport den 23 juli. Här ett par noteringar från Volvos rapport som är relevanta för Scania:

• Den europeiska totalmarknaden för tunga lastbilar väntas åtminstone halveras under 2009 jämfört med 2008 och den nordamerikanska marknaden spås minska med 30–40 procent. Detta är en upprepning av tidigare prognos.
• Volvo hade det fortsatt mycket tungt i Europa under Q2: Lastvagnsleveranserna var ned 66 procent på årsbasis (Q1: -60%).
• Volvo har fortsatt höga kreditförluster, i storleksordningen 25% av ränte- och hyresintäkter. Kreditförlusterna ökade också kraftigt för Scania under Q1 (se tidigare artikel).

Totalt sett pekar detta på att återhämtningen från denna låga nivå kommer att ta längre tid än vi tidigare trott och vi tvingas justera ned lastbilsförsäljningen för 2009 något, samtidigt som vi tar höjd för ökade kreditförluster. Dessutom har risken i Scaniaaktien ökat då Beta (den koefficient som mäter aktiens volatilitet relativt index) har ökat sedan sist (nu 1,45 enligt Avanza.se). Den nya prognosen hittar ni i grafen nedan.

Denna prognos ger nu en vinst per aktie, EPS, om 1,94 kr för 2009.  Då vi nu är nere på väldigt låga vinstnivåer för 2009 ( Scania tjänade 3,80 kr per aktie bara under Q2, 2008), så krävs det en bra prognos även för 2010 för att räkna fram en rimlig värdering på aktien. Denna gång väljer vi att göra den omvända analysen, dvs. vilken resultatnivå som ger samma vädering som den nuvarande aktiekursen. Jag konstaterar att det krävs en EPS år 2010 om 6,30 kr för att motivera den nuvarande aktiekursen på 83,75 kr. Detta motsvarar 12 procents försäljningstillväxt (jämfört med vår prognos) och en rörelsemarginal om 7%.

Det är inte omöjligt att Scania når upp till detta, men då vi i nuläget inte har några som helst tecken på marknadstillväxt så förefaller värderingen något ansträngd. Vi avvaktar rapporten innan vi tar position i aktien. Den något mer riskbenägne tar kort position inför rapporten.

Analys: Avanza Bank Q2 rapport

Stretch Target har gått igenom Avanzas Q2 rapport från den 10 juli och därefter uppdaterat vår prognos för 2009. Nedan följer en kort genomgång av de viktigaste punkterna i rapporten.

Kontotillväxt

Som vi konstaterat i en tidigare analys är tillväxten av nya konton den viktigaste förutsättningen för att Avanza ska kunna uppnå sina tillväxtmål. Avanza rapporteade en sekvensiell kontotillväxt om 5,8%, vilket gjorde att tillväxten sedan Q2 2008 hamnade på 21%. Detta är i linje  med medelvärdet för de senaste 10 kvartalen och medförde således inga överraskningar

Intäkter

På grund av lägre marknadsräntor än väntat och en ordentlig börsuppgång under början av kvartalet så avvek både räntenettot och courtageintänterna från vår prognos. Räntenettot blev något sämre och courtageintänterna  betydligt bättre än förväntat. Men då både ränte- och courtagemarginalen var höga 87%, så slog Avanza våra intäktsförväntningar för kvartalet med 30%.

Kostnader

Kostnaderna var 15% lägre än motsvarande kvartal förra året och därmed exakt som vår prognos.

Slutsats och värdering

För avslutningen av 2009 räknar vi med en liten sättning av aktiemarknaden och att Avanza därmed får svårt att upprepa rekordet på 82 miljoner i courtagenetto. Vi vet också att riksbanken sänkt räntan ytterligare och att detta redan har påverkat den korta STIBOR-räntan. Vi räknar med att denna räntenivå består under året och att Avanzas räntenetto för vart och ett av kvartalen Q3 och Q4 blir 8-9 miljoner lägre än för Q2. Detta ger en vinst per aktie (EPS) om 7,34 kr för 2009.

Det är dock troligt att både aktiemarknaden och räntenivån ser en uppgång under 2010. Vi lägger in detta i vår prognos och får då en EPS-ökning om 10% för 2010. Långsiktigt räknar vi fortfarande med en vinsttillväxt om 4%.

Med dessa estimat ger en DCF-analys oss ett riktkurs på 124 kr. Avanza handlas i skrivande stund till 121 kr efter flera dagar av stigande kurser på Stockholmsbörsen. Långsiktigt är aktien köpvärd på denna nivå, medan den kortsiktige aktören kan avvakta de närmaste dagarnas utveckling för att eventuellt kunna köpa på en lägre nivå.

H&M - Quick analysis of Q2 report

H&M’s Q2 report came in better than we expected and slightly better than the analyst consensus. Sales were in line with consensus, but the gross margin was 0,9 percentage points better than expected, which contributed to an EPS 2,5% higher than expected.

H&M has once again proven that it can deliver good results in a difficult market environment. I must admit having taken a too negative view of the company’s possibilities to deliver on this level given the tough market. I am updating my estimates for the coming two quarters based on the report and the information given today (see table below). The DCF analysis now yields a FV of 376 SEK, which is exactly at the level where H&M is traded at the moment. One of the most important investment rules is to swallow your pride when you’re wrong and limit the loss. Hence, I closed the short position at 376 SEK this morning and thus took a 3,6% loss.

H&M - Analysis prior to Q2 report

This analysis will be one of a slightly different character. To begin with it is, in response to popular demand, written in English. The target of this analysis is to evaluate what position to take prior to H&M’s Q2 report due on June 25, 8:00am, CET.

From a shareholder’s perspective, H&M is a tremendous company which has delivered consistent sales and net profit growth over the last 20 years or so. The average sales growth over the last four years has been 13% and EPS growth is even better: it has risen 110% from 8,8 SEK in 2003/04 to 18,5 SEK in 2008/09. These are truly impressive numbers.

From a purely financial point of view, the reasons behind this performance are the following:

New Stores

Almost all of H&M’s growth comes from opening new stores. During the last four years, H&M’s store growth rate has been on par with the growth in sales (see table 1). The company target for this FY is to open another 225 stores, adding 13% to the total. But in equivalent H&M units, the average growth rate over the last three years has been a meagre 2%. Last year the sales per equivalent unit shrunk by 1%.

Table 1: H&M past performance and estimates for 2008/09

Currency effects

During the three years up to July 2008, the USD depreciated in total roughly 25% against the SEK (H&M’s reporting currency) and even more against the EUR. Since most of H&M’s purchasing volume is in USD and sales in the Euro zone account for more than 60% of the total, these currency effects have been favourable for H&M and are one big part of the explanation behind the stunning margin improvements.

Q1 report

Some highlights from the Q1 report (Dec-Feb):

• Gross margin was 56,6%, down from 59,6% in Q1 07/08. According to H&M, unfavourable currency effects (e.g the USD rallied against the SEK during Sept-Dec 2008) knocked 4,2 percentage points off the margin.
• Sales in Q1 were up 18% year on year. Most of this growth came from the Euro’s appreciation vs. the SEK; in local currencies sales only grew by 4% and shrunk by 5% for comparable stores. Unfortunately, currency effect is also visible in the gross margin, as most CoS items are paid for in USD (see the first bullet).
• Germany, which accounts for 25% of the company’s revenue, is by far the biggest single market. See Table 2.

Table 2: H&M top markets Q1 2008/09

Market expectations for the Q2 report

According to SME Direkt, a market research firm, estimates from 20 analysts expect on average 20% sales growth and 3% EPS growth for the fiscal year 2008/09.  Injecting these figures into a DCF analysis, assuming  zero growth next fiscal year and a long term EPS growth of 5%, the FV turns out at 400 SEK.  The H&M share was down 2% on Monday June 22, from 365,50 to 358.  So are investors beginning to doubt the consensus estimates? Let’s have a look at an alternative view.

Stretch Target alternative view

In light of the performance in Q1, I would argue that the estimates above look rather optimistic. In Q1, the gross margin was 3 percentage points lower than last year. Due to currency effects, sure, but these are likely to remain. It is in the current financial environment not very likely that the SEK, which is a relatively small currency and hence sensitive to risk aversion, will gain massively against the USD during the next 6 months. It is instead reasonable to assume that the USD will remain around 8 SEK during this period. This would decrease the gross margin by three percentage points to 58,5%.

A more conservative estimate of the sales figure would be 18% year-on-year due to currency effects. This would result in sales of 104,5 and resulting in an EPS of 16,7. Assuming the same EPS development as above, this yields a FV of 349 SEK.

Conclusion

I find the alternative, more conservative, estimate to be more likely that the anayst consensus.  I believe that we may see the first signs of lower-than-expected margins and possibly sales in the Q2 report. A report lower than expectations is of course likely to have a negative effect on the H&M share price. I will sell H&M short down to 350 SEK (only 2,2% lower than now) prior to the report and close the position at 340 SEK if given the opportunity.