Railcare Group: Overreaction
The share price dip is likely due to no major new contracts have been announced and the company’s 2027 targets are unlikely to be met.
Transport took the lead from Contracting in Q2
The report for the second quarter of 2026 was largely in line with our expectations. Turnover was 8% higher than last year at SEK 192.3m (178.1 for Q2-25), in line with our forecast of SEK 191m. The operating margin improved to 10.8% (10.2%) based on an EBIT of SEK 20.7m (18.1); slightly below our expectations of SEK 22.2m. Contracting revenue decreased 11% Q2/Q2 following the record high in Q1, while Transport turned a weak Q1 into 25% growth over Q2-25.
Unwarranted scepticism regarding new contracts
The market now appears to be pricing in the likelihood that Railcare will neither meet its revenue target of SEK 1bn by 2027, nor secure the major contracts necessary to reach it. Admittedly, there has been promising news including framework agreements for specialised transport services for Maersk and with the Transport Administration, plus the one-year option for the northern standby locomotives; however, these are more of a side dish than the main course. It would, however, be very odd if Railcare’s ability to secure new contracts had disappeared. The market has also improved, so we maintain that new major contracts are on the way, albeit with a delay. However, the delay makes us cut our forecasts and push them further out; we now conservatively expect the revenue target to be reached only in 2029. Costs for the ramped-up organisation are thus not met with new volumes so margins risk fall slightly short of the 13% target as well. We are nevertheless convinced that new orders will fill out capacity in the years that follow, so margins will approach the target.
Undue pressure
Despite more cautious forecasts out to 2029 and a bumped up return requirement to reflect the increased uncertainty, our DCF analysis yields an NPV of 41-43 kronor, assuming that the share will be trading at EV/EBIT=10 and P/E=11 by the end of 2029. A sketch out to 2035, indicates a substantially higher number. As long as no new major contracts are announced, we maintain a fair value of SEK 40, which still implies an upside potential of around 35%, or conversely an AROR of around 30% including dividends through to the end of 2029. With sales growth of 8% and an operating margin of 12-13% through to 2035, a doubling of the current share price is justified, and the AROR would exceed 25% until then.
The stock now appears to be under undue pressure, so when positive news about new contracts emerges, the share price could quickly return to previous peak levels and our target price. In other words, the risk/reward ratio appears very attractive. Added to this is a structurally growing, cyclically insensitive business and good portfolio characteristics thanks to the diversification the share provides.