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  • Scania AB post Q2: Analysis and valuation

    Posted on July 31st, 2009 Peter Tjernström No comments

    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.

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  • H&M – Analysis prior to Q2 report

    Posted on June 23rd, 2009 Peter Tjernström No comments

    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

    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

    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.

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  • Analys: Scania Q1 Rapport

    Posted on April 28th, 2009 Peter Tjernström No comments

    Igår rapporterade Scania för första kvartalet och i princip var alla poster utom kassaflödet sämre än analytikernas prognoser. Jag ska nedan gå igenom väsentliga delar av resultatet och revidera min prognos för 2009.  Först några nyckelresultat:

    • Nettoomsättningen minskade med 28% jämfört med Q1 2008 och 30% sekvensiellt
    • Antalet levererade lastbilar minskade med 43% jämfört med Q1 2008. I centrala och östra europa var minskningen 77%, medan Latinamerika bara minskade med 7%. I Brasilien, som är Scanias största marknad, ökade Scania sin marknadsandel från 18,9% till 26,6%. Jämfört med Q4 2008 minskade lastbilsleveranserna med 38%
    • Rörelsemarginalen blev 3,2% jämfört med förväntade 3,7% och 16,4% förra året
    • Omsättningen inom serviceprodukter steg med 2% jämfört med Q1 2008
    • Finansnettot blev -342 miljoner kronor. Här inkluderades en ovanligt stor kostnad i omvärderingen av finansiella instrument om 115 miljoner
    • Kreditförlusterna (konstaterade och befarade) blev 151 miljoner jämfört med 8 miljoner samma kvartal i fjol

    Anledningen till att nettoomsättningen inte minskar lika mycket som lastbilsleveranserna är att Scania kunnat ta ut ett högre genomsnittligt pris och att serviceprodukterna, som i nuläget utgör ca. 25% (!) av nettoomsättningen, håller upp totalen.

    Jag hade förväntat mig 8% lägre omsättning är det faktiska utfallet, (framför allt då jag inte trodde att servicedelen skulle hålla tillbaka så bra), men även lägre kostnader och därför en högre marginal (se tabell nedan). Här är framför allt kreditförlusterna en besvikelse, ca. 100 miljoner sämre än förväntat. Därför är också rörelseresultatet 138 miljoner sämre än jag förväntat mig. Just kreditförlusterna är väldigt svåra att uppskatta och medför i dagsläget en osäkerhet i värderingen av bolaget.

    Även finansnettot var en besvikelse; ca. 160 miljoner lägre än jag förväntat mig. Allt detta sammantaget så blev nettoresultatet per aktie hela 63% sämre än förväntat, även om det då ingår poster som får anses vara av engångskaraktär.

    Den enda siffra, förutom serviceverksamheten,  som är riktigt stark är kassaflödet; Scania lyckas nå ett positivt kassaflöde på 1,8 miljarder kronor. Detta kan jämföras med konkurrenten Volvo AB som i Q1 noterade ett negativt kassaflöde om ca. 15 miljarder kronor.

    Scania Q1 2009, prognos och utfall

    Scania Q1 2009, prognos och utfall

    Prognos 2009

    Jag skruvar upp försäljningsprognosen något (se bild nedan för resultatet av prognosjusteringen) baserat på den överraskande starka eftermarknadsaffären (serviceprodukter). Och även om jag måste justera prognosen för högre kreditförluster och försämrat räntenetto så blir reslutatet en relativt liten eps-justering för helåret från 2,57 till 2,40 SEK. Detta medför att Fair Value (FV) enligt en DCF-analys nu är 71 SEK.  Scaniaaktien, som i skrivande stund handlas till  84,50 SEK, är därmed övervärderad med 19% och därför blir rekommendationen att sälja ner till FV-nivån på kort sikt.

    scania_res_och_prog_20091

    Länk till Scania Q1 rapport. Om ni inte orkar läsa hela rapporten så kan ni läsa VDs kommentarer här.

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