Railcare group: Record quarter

Highest turnover and earnings ever

The recovery following last winter’s heavy investment period has been significantly stronger than we anticipated. Turnover for the third quarter increased by 16% to SEK 196 million (169 for Q3–24) and was 9% above our forecast of SEK 185m. Operating profit increased to SEK 30.2m (20.3), which was significantly better than the SEK 22.6m we expected. The operating margin reached 15.4% (12.0%; our expectation 13.2%).

Transport increased its sales by a full 23% to SEK 112.8m (91.6) and its operating profit by 52% to SEK 22.8m (15.0), largely thanks to the new clearance locomotives. Contracting’s sales increased to SEK 72.6m (66.6), but earnings, at SEK 4.0m (5.8), were weighed down by a customer loss and a fire in a Railvac machine in the UK.

New orders needed soon to achieve 2027 targets

The recovery is expected to continue during the coming seasonally weak winter quarters, partly due to the full effect of the replacement locomotives already introduced, and partly due to ramp-up costs falling away. Overall, we are aiming for the second-best quarterly sales ever, at SEK 183m (157), and an operating margin of just over 10%.

The company’s management appears no less confident now than before in achieving its targets for 2027 – revenue of SEK 1bn and an operating margin of 13% – and given the large, prestigious contracts the company has secured over the past two years, there is reason to believe that more orders will follow. To achieve these targets, not only are new major contracts necessary, but they must also be announced during this winter to have full effect throughout 2027.

Attractive risk/reward ratio

Our main scenario is that the targets will almost be achieved, and if we assume that the stock will be trading at EV/EBIT=12, corresponding to P/E=11, at the end of 2027, this justifies a current price of around SEK 40, i.e. a potential gain of around 40%. However, if no new assignments are won or get underway in 2027, and underlying growth for 2026 and 2027 ends up at a historic 10% with a margin of just over 10%, the justified price would be SEK 27.

Given the rising number of long-term assignments, we are increasingly looking towards the mid-2030s, and with cautious assumptions about growth and margins, the justified price almost doubles. With our pessimistic scenario until 2027, above, and with zero volume growth in 2027–2035 and an operating margin of 7% as a bear case, the valuation still justifies today’s price, which for an investor means a nominal return of 11.7%/year until 2035.

In other words, the risk/reward ratio appears very attractive in both the short and long term. Other favorable points are a business that is insensitive to economic cycles and good portfolio characteristics due to the diversification provided by the stock.