It looks like a great company, but possibly at the wrong price.
For a company with a net margin that seems to have peaked under 10%, having an enterprise value at 3.86x LTM top line revenue looks rich. The business would need to see rapid top line growth to justify such a premium yet revenue has been flat to declining in recent years. So I am struggling to see the justification for the premium.
I note in the analysis that you have a chart (NCAB Order Intake and Sales) which plots orders against sales. This clearly shows little sales growth for the past two years following the Covid spike, and you anticipate revenue growth to return. But is there not an alternative scenario? Could it not be that sales were pulled forward in the aftermath of Covid and that they will normalize to pre-Covid levels marking a softening in the top line?
The other question that arose in my mind related to the change of management over the past few years which you explained very nicely. But there seems to be a different approach with the new guard. The payout ratio has jumped to over 60% whereas in the past it averaged closer to 25%. This suggests that the old crew were focused on growth through the reinvestment of earnings as their priority, whereas the new leadership has prioritized the distribution of earnings over all else. This may indicate that the stock is transitioning from a growth equity, to something that more closely resembles a fixed income instrument (with considerable downside capital risk attached). However, given what appears to be an over inflated market capitalization, even with a 60+% payout ratio, the yield is only 1.5%.
Based on the above, I wouldn't invest at these levels. Having them on a watch list is a very sensible approach for now and I may look again following a price correction or a significant change in the unit economics. Either the price needs to come back down in line with the fundamentals, or else the fundamentals need to catch up with the market cap.
Thanks for your comment. It sounds like we agree on the conclusion.
As for the possibility of a continued absence of organic sales growth or even a further fall in sales... in the short term the PCB cycle (turning up) and European industrial production (cloudy / anyone's guess) will be relevant.
But in the longer term, NCAB's model has delivered excellent growth, independent of those cycles, thanks to its competitive advantages as well as tailwinds from re-shoring.
Thus on the longer 3-5 year view I do expect continued good growth from NCAB, as per my estimates, and would be surprised to see it go ex-growth. But anything's possible!
Thanks Alex, great article btw! I write on Indian Equities in case you’re interested. Just subscribed to your blog & I like the depth of your analysis. Looking forward to more write ups :)
Good article. This company has been on my research list, but never understood how they created the value to justify their valuation in an industry like printed circuit boards which seems pretty commodified. Now I think I do, although I agree they seem too expensive at this time.
Thanks. I agree, they provide a surprising amount of value to both sides. Their customers and suppliers would probably find it painful if they disappeared, which is a good sign.
I didn't go into it in such depth, but for the chosen suppliers they are also adding a lot of value. They provide not just audits but also training to factory managers and staff. They explain exactly how to meet the requirements of the high-margin but difficult-to-serve western HMLV customers. And of course they aggregate hundreds of small orders in an efficient manner for customer service, invoicing etc.
Excellent write up.
It looks like a great company, but possibly at the wrong price.
For a company with a net margin that seems to have peaked under 10%, having an enterprise value at 3.86x LTM top line revenue looks rich. The business would need to see rapid top line growth to justify such a premium yet revenue has been flat to declining in recent years. So I am struggling to see the justification for the premium.
I note in the analysis that you have a chart (NCAB Order Intake and Sales) which plots orders against sales. This clearly shows little sales growth for the past two years following the Covid spike, and you anticipate revenue growth to return. But is there not an alternative scenario? Could it not be that sales were pulled forward in the aftermath of Covid and that they will normalize to pre-Covid levels marking a softening in the top line?
The other question that arose in my mind related to the change of management over the past few years which you explained very nicely. But there seems to be a different approach with the new guard. The payout ratio has jumped to over 60% whereas in the past it averaged closer to 25%. This suggests that the old crew were focused on growth through the reinvestment of earnings as their priority, whereas the new leadership has prioritized the distribution of earnings over all else. This may indicate that the stock is transitioning from a growth equity, to something that more closely resembles a fixed income instrument (with considerable downside capital risk attached). However, given what appears to be an over inflated market capitalization, even with a 60+% payout ratio, the yield is only 1.5%.
Based on the above, I wouldn't invest at these levels. Having them on a watch list is a very sensible approach for now and I may look again following a price correction or a significant change in the unit economics. Either the price needs to come back down in line with the fundamentals, or else the fundamentals need to catch up with the market cap.
Thanks for your comment. It sounds like we agree on the conclusion.
As for the possibility of a continued absence of organic sales growth or even a further fall in sales... in the short term the PCB cycle (turning up) and European industrial production (cloudy / anyone's guess) will be relevant.
But in the longer term, NCAB's model has delivered excellent growth, independent of those cycles, thanks to its competitive advantages as well as tailwinds from re-shoring.
Thus on the longer 3-5 year view I do expect continued good growth from NCAB, as per my estimates, and would be surprised to see it go ex-growth. But anything's possible!
How can we buy this stock if we’re not based in Sweden? Is it listed on the US stock exchanges?
Interactive Brokers is recommended for direct access to international markets, including Sweden.
Thanks Alex, great article btw! I write on Indian Equities in case you’re interested. Just subscribed to your blog & I like the depth of your analysis. Looking forward to more write ups :)
Thanks! Sadly the Indian market is currently out of scope for me, as I don’t have access.
Good article. This company has been on my research list, but never understood how they created the value to justify their valuation in an industry like printed circuit boards which seems pretty commodified. Now I think I do, although I agree they seem too expensive at this time.
Thanks. I agree, they provide a surprising amount of value to both sides. Their customers and suppliers would probably find it painful if they disappeared, which is a good sign.
I didn't go into it in such depth, but for the chosen suppliers they are also adding a lot of value. They provide not just audits but also training to factory managers and staff. They explain exactly how to meet the requirements of the high-margin but difficult-to-serve western HMLV customers. And of course they aggregate hundreds of small orders in an efficient manner for customer service, invoicing etc.