Equity Research - 11 May 2021 19:55 CET Semcon Fast comment Putting the cash to work Company-sponsored research: Not rated Acquires Swedish IT company Squeed Had SEK 105m in revenues and 13% EBIT margin in ‘20 Share price (SEK) 10/05/2021 116.8 Target price (na) na Acquisition price of EV/S 0.95x inc. max earn-out Services, Sweden Strengthens Semcon’s digital offering SEMC.ST/SEMC SS Semcon has acquired Swedish IT company Squeed AB, which had a turnover in 2020 of SEK 105m, with an EBIT margin of 13%. The MCap (SEKm) 2,027 acquisition without any growth assumption will add ~5.5% to our ‘22e MCap (EURm) 200 sales estimates and be accretive on the EBIT margin (13% vs 9.9%). On Net debt (EURm) -12 paper, it looks like a good addition to the Group that complements Semcon's digital offering, adds new sectors and broadens the Group's No. of shares (m) 17.4 customer portfolio. The acquisition is another step towards Semcon’s Free float (%) 64 new financial target’s, which include top-line growth of 10% per year Av. daily volume (k) 13 including M&A. It will also further diversify the revenue mix, with new exposure towards retail and finance and even less exposure towards the Next event Q2 report: 16 Jul automotive sector. Squeed has grown profitable since 2017 Squeed has grown profitable every year since 2017, from sales of SEK 68m in ’17 to SEK 105m in ’20, representing a CAGR of 15.5%. The company has close to 100 employees, is headquartered in Gothenburg and has an additional office in Stockholm. Squeed has a strong market position in software development and agile change management. Paying with available funds and holdings of own shares The acquisition price is an EV of SEK 61m, of which SEK 56m will be paid in cash and SEK 5m will be paid in Semcon shares, both covered by available funds and existing holdings of own shares. In addition, earn- outs of up to SEK 39m can be paid out if certain criteria’s for operating profit is met for the period ’21-’23. This results in EV/S multiples of 0.58x excl. earn-outs and 0.95x incl. earn-outs. Semcon currently trades at a ‘21e EV/S of 1.1x. We highlighted Semcon’s strong cash position of SEK 260m in our latest post-result comment and there is more room even after this acquisition. We think M&A will become more frequent for Semcon going forward than we have seen historically. Please refer to important disclosures at the end of this report Semcon Analyst Squeed sales and EBIT, SEKm 120.0 105.0 100.0 96.1 84.4 80.0 68.2 60.0 40.0 20.0 14.0 4.6 5.1 5.8 0.0 2017 2018 2019 2020 Sales EBIT Source: ABG Sundal Collier, company data Analyst(s): [email protected], +46 8 566 286 37 [email protected], +46 8 566 286 82 SEKm 2019 2020 2021e 2022e 2023e Sales 1,858 1,627 1,713 1,850 1,946 Sales growth (%) 0.9 -12.4 5.3 8.0 5.2 EBITDA 195 182 213 225 239 EBITDA margin (%) 10.5 11.2 12.4 12.2 12.3 EBIT adj 139 160 170 184 198 EBIT adj margin (%) 7.5 9.8 9.9 9.9 10.2 Pretax profit 135 125 165 179 192 EPS rep 6.04 5.65 7.38 8.01 8.63 EPS growth (%) 15.0 -6.5 30.7 8.5 7.8 EPS adj 5.95 7.35 7.38 8.01 8.63 DPS 0 0 6.50 4.00 4.50 EV/EBITDA (x) 6.6 7.2 9.1 8.3 7.5 EV/EBIT adj (x) 9.2 8.1 11.4 10.2 9.1 P/E (x) 11.5 14.0 15.8 14.6 13.5 P/E adj (x) 11.6 10.8 15.8 14.6 13.5 EV/sales (x) 0.7 0.8 1.1 1.0 0.9 FCF yield (%) 10.1 13.2 5.2 7.5 8.6 Dividend yield (%) 0 0 5.6 3.4 3.9 Net IB debt/EBITDA 0.4 -0.5 -0.6 -0.8 -1.1 Lease adj. FCF yld (%) 6.4 10.6 3.7 5.9 7.0 Lease adj. ND/EBITDA -0.5 -1.2 -1.3 -1.5 -1.8 11 May 2021 ABG Sundal Collier 2 Semcon Analyst certification I/We, Daniel Thorsson, Stefan Knutsson, the author(s) of this report, certify that not withstanding the existence of any such potential conflicts of interests referred to below, the views expressed in this report accurately reflect my/our personal view about the companies and securities covered in this report. I/We further certify that I/We have not been, nor am/are or will be, receiving direct or indirect compensation related to the specific recommendations or views contained in this report. Stock ratings distribution ABG Sundall Collier Ratings and Investment Banking by 11/05/2021 Sell 7% Research Coverage Investment Banking Clients (IBC) % of % of % of Hold Total of Rating Total Rating Total IBC Total Rating by Type 36% Buy Buy 57% 75% 41% 57% Hold 36% 23% 20% Sell 7% 2% 10% IBC: Companies in respect of which ABG SC or an affiliate has received compensation fr investment banking services within the past 12 months Analyst stock ratings definitions BUY = We expect this stock’s total return to exceed the market’s expected total return by 5% or more over the next six months. HOLD = We expect this stock’s total return to be in line with the market’s expected total return within a range of 4% over the next six months. SELL = We expect this stock’s total return to underperform the market’s expected total return by 5% or more over the next six months Analyst valuation methods When setting the individual ratings, ABG Sundal Collier assumes that a normal total absolute return (including dividends) for the market is 8% per annum, or 4% on a 6-month basis. Therefore, when we rate a stock a buy, we expect an absolute return of 9% or better over six months. We have more rigorous guidelines for trading buys and trading sells on small cap stocks, defined as having a market capitalisation below USD 1.5 billion. For trading buys on small cap stocks, we must identify a potential absolute return of 15% or more over the next six weeks. This more rigorous guideline reflects the fact that the low trading volume for small cap stocks inhibits the ability to trade them within a narrow price band. ABG Sundal Collier analysts publish price targets for the stocks they cover. These price targets rely on various valuation methods. One of the most frequently used methods is the valuation of a company by calculation of that company’s discounted cash flow (DCF). Another valuation method is the analysis of a company’s return on capital employed relative to its cost of capital. Finally, the analysts may analyse various valuation multiples (e.g. the P/E multiples and the EV/EBITDA multiples) relative to global industry peers. In special cases, particularly for property companies and investment companies, the ratio of price to net asset value is considered. Price targets are changed when earnings and cash flow forecasts are changed. They may also be changed when the underlying value of a company’s assets changes (in the cases of investment companies, property companies or insurance companies) or when factors impacting the required rate of return change. Stock price, company ratings and target price history COMPANY Company: Semcon Currency: SEK Current Recommendation SPONSORED Date: 10/05/2021 Current Target price: Current Share price: 116.8 CHART TITLE 1,000 1,660 900 1,655 800 1,650 700 1,645 600 1,640 500 1,635 400 1,630 300 1,625 200 1,620 100 1,615 0 1,610 -100 1,605 A-18 J-18 O-18 J-19 A-19 J-19 O-19 J-20 A-20 J-20 O-20 J-21 A-21 J-21 Semcon (L Axis) OMX STH PI (R Axis) Data source: ABG Sundal Collier, FactSet Important Company Specific Disclosure The following disclosures relate to the relationship between ABG Sundal Collier and its affiliates and the companies covered by ABG Sundal Collier referred to in this research report. Unless disclosed in this section, ABG Sundal Collier has no required regulatory disclosures to make in relation to an ownership position for the analyst(s) and members of the analyst’s household, ownership by ABG Sundal Collier, ownership in ABG Sundal Collier by the company(ies) to whom the recommendation(s) refer(s) to, market making, managed or co-managed public offerings, compensation for provision of certain services, directorship of the analyst, or a member of the analyst’s household, or in relation to any contractual obligations to the issuance of this research report. 11 May 2021 ABG Sundal Collier 3 Semcon ABG Sundal Collier is not aware of any other actual, material conflicts of interest of the analyst or ABG Sundal Collier of which the analyst knows or has reason to know at the time of the publication of this report. Production of recommendation: 11/05/2021 19:51 CET. All prices are as of market close on 10 May, 2021 unless otherwise noted.