Restructuring And Aftermarket Shift Will Support Long Term Earnings Recovery

Catalysts

About Dometic Group

Dometic Group supplies equipment and solutions for mobile living across land vehicles, marine, mobile cooling and related aftermarket services.

What are the underlying business or industry changes driving this perspective?

• Shift in the sales mix toward Service & Aftermarket and Distribution, with OEM now at 39% of sales compared with 62% in 2018, can gradually support more recurring revenue and reduce cyclicality in earnings and cash flow.
• Global restructuring, including closure of 1 manufacturing site and 5 distribution centers with SEK 350 million in annualized savings already running against a SEK 750 million target by the end of 2026, has the potential to lift EBITA margins even if top line growth remains modest.
• Ongoing investments in product development at 3.5% of net sales and an innovation index at 23% versus 21% one year ago suggest a steady stream of new products across Marine, Mobile Power and Mobile Cooling that can support future revenue and mix driven margin improvements.
• Progress in working capital, with inventory reduced from SEK 6.5b to SEK 4.8b and working capital to net sales at 23% in Q4 versus 29% one year earlier and a 20% target, along with the receivables program that management expects could release SEK 300 million to SEK 400 million by the end of 2026, can support free cash flow and debt reduction.
• Exposure to outdoor recreation and mobile living, including RVs, marine and mobile cooling, combined with signs of stabilization in European RV manufacturing and recovery in North American Mobile Cooling, creates scope for low to mid single digit organic growth that would support EBITA, EPS and leverage improvement if consumer demand continues to normalize.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Dometic Group's revenue will grow by 1.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.0% today to 6.7% in 3 years time.
• Analysts expect earnings to reach SEK 1.5 billion (and earnings per share of SEK 4.56) by about February 2029, up from SEK 428.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as SEK1.7 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 14.5x on those 2029 earnings, down from 28.7x today. This future PE is lower than the current PE for the GB Auto Components industry at 28.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.18%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Consumer sentiment for discretionary outdoor and mobile living products is still weak, and retailers, dealers and OEMs remain cautious on inventory. If end demand for RVs, Marine and Mobile Cooling stays subdued for longer than management expects, revenue growth across segments could remain low and keep EBITA and EPS under pressure.
• Currencies have already had a substantial negative impact on margins and cash flow, and management quantifies EBITA sensitivity to movements in the US dollar and euro. A prolonged period of unfavorable FX could continue to weigh on gross margin, EBITA margin and free cash flow even if volumes start to recover.
• Leverage sits at 3.3x and the company is relying on improving free cash flow and moderate growth to reduce net debt. If working capital reductions, the receivables program and planned divestments do not deliver as expected, interest costs and balance sheet risk could stay elevated and limit future earnings growth.
• Competition, including pressure from Chinese manufacturers in refrigeration and warnings, has affected market share in the past and management does not yet see a clear recovery. If Dometic Group continues to lose share in key product categories, pricing power and volumes could both suffer, which would weigh on revenue and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of SEK50.8 for Dometic Group based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK55.0, and the most bearish reporting a price target of just SEK43.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be SEK21.9 billion, earnings will come to SEK1.5 billion, and it would be trading on a PE ratio of 14.5x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of SEK38.4, the analyst price target of SEK50.8 is 24.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.