Railcare Group: Rapid recovery in Q2

Recovery from Q1 stronger than expected
Revenue for the second quarter was roughly the same as last year at SEK 178m (180 for Q2-24) and close to our forecast of SEK 183m. Operating profit improved slightly to SEK 18.1m (17.1), which was better than the SEK 16m we expected.

Transport's sales growth – mainly attributable to standby locomotives – was not quite as high as we had expected, despite support from a strong quarter for construction transport. Contracting's sales were also slightly lower than in the very strong Q2-24. However, Contracting's earnings were significantly better than expected, partly due to a further increase in the volume of lining work and despite continued problems in the UK. Another positive surprise was Technology, with EBIT just over SEK 2.5m (-0.7) on sales of SEK 36.7m (27.6), also higher than expected.

Overall, this resulted in an operating margin of 10.2% (9.5% Q2-24; our expectation: 8.7%) for the Group, despite continued ramp-up costs for both the standby locomotives and a larger organizational footprint to accommodate additional business. Further down the income statement Net Financial Items were weighed down by a weaker krona, however, which affected the translation of the lease liability – which will have an impact from quarter to quarter without any real significance.

New orders needed to achieve targets
We expect the recovery to continue into the seasonally strong Q3, partly due to the full effect of the standby locomotives already introduced, and also to continued good volumes of construction transport on top of the long-term contracts. For Construction, group management assesses that "the pressure is up", so the more precise outcome for Q3 will probably depend more on mix than on volume. We expect Technology to maintain the good numbers from Q2, so overall we are aiming for a new revenue record for the Group of SEK 185m (169) and an operating margin of just over 12%.

The company's management appears no less confident now than before about achieving the 2027 targets, and given the large, prestigious assignments the company has received over the past two years, there is good reason to believe that new ones will follow. This is necessary to achieve the company's financial targets, but our calculations show that it would not be a disaster for the valuation if they are not reached.

The valuation points to good upside potential
Again, this quarter, our minor forecast changes do not significantly affect the justified share price, which remains at SEK 35 per share. In the longer term, however, there is considerably more potential. Added to this is the business's insensitivity to economic cycles and good portfolio characteristics due to the diversification provided by including the share.