Railcare Group: Biting the British bullet

In connection with the year-end report, it was announced that operations
in the UK would be closed down. From a financial perspective, this is positive as unused resources can now be put to productive use, which should be reflected in margins going forward.

Q4 slightly lower than expected
An early and harsh winter and increased losses in the UK weighed on Contracting, with sales of SEK 64.4m (73.9) and an operating profit of SEK 1.3m (6.6). Transport performed better, with a 22% increase in sales to SEK 94.5m (77.3) and an operating profit of SEK 12.6m (4.6), which meant an operating margin of 13.4% (5.9%), helped by the new standby locomotives. The Group's sales increased by 8% to SEK 170m (157) and EBIT to SEK 14.9m (13.7), which meant an unchanged margin of 8.8% (8.8%).

Triggers in new contracts to achieve 2027 targets
New transport contracts need to be secured before next winter to achieve the company's financial targets of SEK 1 bn in sales and a 13% operating margin for 2027. This requires SEK 150m per year in order value, which corresponds to two Kaunis deals and the organisation has already been scaled up to handle this.

Management appears no less confident about the 2027 targets now than previously, and given the contracts Railcare has secured over the past two years, there is reason to believe that new ones will follow. In our forecasts, we expect to come close to the company's targets.

Good risk/reward
Our base case is that the targets will be achieved, and assuming the share will trade at EV/EBIT=12, corresponding to P/E=11, at the end of 2027, this justifies a share price today of SEK 43, i.e. a price potential of around 50%, or conversely an AROR of just over 40% including dividends. With 2027 less than two years away and good visibility, we extend our projections to 2035 with cautious assumptions about sales and margins which justifies significantly more than a doubling of today's price, with AROR ending up at over 25% per year until then.

The short-term risk is mainly that new contracts will not be secured as planned. The impact on the valuation is negligible if any agreement is postponed by a quarter or two, but the signal in not achieving the targets on time risks weighing on the share price. Conversely, any announcement of significant contracts should trigger a positive share price movement. However, if new assignments were to fail to materialise at all, and we calculate zero volume growth for 2027-2035 and a margin of 7% in a very pessimistic scenario, we can still justify SEK 35 per share today.

In other words, the risk/reward ratio appears very attractive in both the short and long term. Added to this are structurally growing, cyclically insensitive operations and good portfolio characteristics thanks to the diversification provided by the share.