Ferronordic Machines: All loud on the Western front

Bought more Ferronordic Machines shares today for 143.5-147 SEK. Position is now <8% of my portfolio.

The purchase was reaction to Ferro’s acquisition of “certain parts” of Volvo’s and Renault’s truck dealerships in Germany.

With the deal, Ferro moves to West-European markets from its home-base on the Eastern front, Russia and Kazakshatan.

Transaction is part of Volvo’s overall strategy to win market share in Europe.

Volvo is outsourcing more of its dealer businesses to independent operators and was probably so impressed with Ferro’s track record in Russia to give it the major responsibility in the biggest truck market in Europe.

Ferro will take over the assets and start to run them wit Ferro’s processes and systems with goal of winning market share for Volvo/Renault.

The acquired business has not been profitable and Ferro’s job is to turn it around. I don’t know what the problem has been but obviously the management is optimistic it can do it.

The deal was done at book value i.e. inventory and real estate. Sales are 1,3 BSEK and profit 0.

But truck and construction equipment dealers are basically 4-5% margin businesses in the Nordics so with 250 MSEK purchase price I hypotize the after synergy EBIT-multiple for the deal is some 4-5x.

Ferro’s current EBIT is some 320 MSEK and the addition from the new business could be 40-60 MSEK. EV is some 1900 MSEK and with the new deal financing some 2200 MSEK.

With 360-380 MSEK after deal EBIT (or 400+ MSEK if one uses consensus), Ferro is currently trading with some 5-7x EBIT multiple. Given that the business is growing in all markets and is such a high quality, it doesn’t sound bad.

First year EBIT effect will be -40 MSEK but afterward they expect improvement. So I have to be patient but I have been fan of Ferro for long time and like the entrepreneurship of the key owners and managers.

I speak lot of the short term here but really my Ferro case is based on the long-term Russia infrastructure play. And now with Kazakhstan and German markets opened, there are two good new growth platforms. My perception is that there’s long road ahead.

Shorter term, Putin’s May decrees has been factored in to central bank’s models so they seem to be big and must have some probability of happening too. Management is hopeful.

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