Dist IT: Set for growth - SEB

Normalising markets should add to growth and margins, EPS upgrades
DistIT, a leading distributor of IT/Technology and SDA consumer goods in the Nordic and Baltic regions, bettered our Q2 estimates bolstered by higher sales and cost management. Operating cash flow was also strong in the period, driven by better earnings, as well as a marked improvement in inventory management. In our view, the miss was gross margins, which were lower than we expected. Here, DistIT reported some stock clearance and a shift in sales towards lower margin product categories. Looking into Q3, assuming normalising markets, we expect a return to positive organic growth. Also, gross margin prospects should improve, driven by increasing private label sales and a cheaper USD in its A-brand distribution business. We upgrade EPS by 16% in 2020 and by 2%-3% in 2021-2022.

Turbulent times calls for a strong balance sheet position
Due to better OCF in the period, net debt at the end of Q2 came in at SEK 137m (excluding IFRS-16 lease obligations of SEK 38m). Reported net-debt-to-EBITDA levels are now at 1.62x, down from 3.17x at the end of Q2 last year.

Attractive valuation assuming any growth, DCF value raised to SEK 53
Based on upgraded earnings, a steady-state EBIT margin of 2.5% and a WACC of 8.1%, we arrive at our new mid-point DCF-based equity value of SEK 53 per share (raised from SEK 50 previously). At this level the equity would trade at a prospective EV/EBIT of 9x our 2021 estimates – still a 25% discount to its distribution and retail peer group median valuation of 12x.

https://research.sebgroup.com/pdf/DistIT200820.pdf

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