Description

Lammhults Design Group is active in office interior and Library interior with B2B sales.

2019 earnings before Covid were 6musd. With todays strong Q4 report they are valued at 41musd.

The question is – can they get back to their pre covid earnings, how fast, and what will they be valued at if they do so?

Reaching previous earnings implies a larger valuation. It’s not unreasonable to assume 70% higher valuation, today’s strong report would further suggest that it’s not impossible, if they do it in 3 years, we could be offered 20% cagr. 

The years up until 2019 they delivered 6-7% growth and increasing margin between 3-5,3%. This quarter showed a strong margin again (5,4%) and good order-inflow, showing clearly, they are still a profitable business, providing value to their customers. Turnover growth is not just inflation driven, since they proved a good margin, they increased prices to customers to match the price increase in manufacturing, raw materials, and shipping prices. 

The stock has been under pressure since covid emerged, but unlike most other businesses that were hurt by corona, the valuation has not recovered, and it seems the market has not yet priced in that this company, can have a future, after covid, resembling to their past.

I think it is a slow recovery anticipation for the business that causes this. Combined with a fear that the workplace will never be the same again with more people doing remote work / home work in the future. These are all valid questions – however, even if that is the future, would that be a terrible world for Lammhults? 
Either we go on as we have in the past – giving Lammhults very high chance of reaching it’s previous earnings fast and to grow from there.
Or, in another scenario, a big part of workforce works from home, or from Bali.. and Lammhults will have to operate in a new environment.
Office spaces might change its form, but I think companies want to give their staff a space to meet where the staff wants to go if they can. Either way and in whatever mix of the 2, I believe Lammhults provide solutions with value to however companies decide they want their workplace to look like – and will be needed to adjust to this world.

For Lammhults valuation, this uncertainty and lagging in orders, and especially the uncertainty about how long it will take to “solve” this, has caused the stock not to bounce back the same way other companies, hit by corona, did last year. 

Many corporations has horded cash during covid to be safe, and then had sort of a office space limbo with their rental agreements, not knowing if to go bigger or smaller, staying somewhere in the middle where you still have room for everybody, if they want to/need to come in, but not making it perfect for either full scale or low scale. Not really knowing where to go from here. Also, covid, has offered a lot of people to rethink their lives, many has quit or changed jobs, and it is probably quite clear to management that a big part of the workforce wants to be able to work from wherever now and then. 

This too has created confusion about where the future is headed, how many will be in the staff and how will our setup look? Holding the finger on the trigger. I think businesses wants to invest in their interior, staff are away, and they have cash on hand, but this limbo of uncertainties about where to go has caused an extra lag to get going, which is offering a good stock price compared to historic earnings.
If a large portion works as before, and some works distant, we need to build for that, businesses has an incentive to arrange nice workplaces where staff wants to go. No matter who needs the other one more - management being able to force people to come in, or staff being able to force management to accept distant work - I think Lammhults has their place. Also, it is for sure not unreasonable to assume a very big part of the world will work as we have before, perhaps the most likely scenario by far.

Then we have public spaces with office interior, which is extremely probable to be needed as before, as will most likely library interior. Cities need meeting places, town halls, court rooms etcetera. Libraries are not just a place to keep books, but a meeting place and learning hub, perhaps a working space if your office is shut down..

If they can reach their 2019 earnings and the money is there, the question is - when are we gonna get it? 

Let’s say it takes 3 years to get back to 2019s (rather strong) earnings. And we can excpect a multiple of PE 12 (reasonable goring perhaps 6-7%, that is 71musd, or 20% cagr.

It can take some time to get back there, but if we allow for a few years, it’s still a very interesting investment. 
With strong quarters like this, the market can price this potential faster.


It has been some time since their last acquisition, which is a important part of their growth-strategy, which can for sure also be a trigger, and something they should be able to afford with todays balance sheet. They have decreased net debt and noticeable but not huge depreciation and amortizations. Forward about EV/EBIT 4-5 and EV/EBITDA 6-7. They did some cleaning up on the balance sheet in 2020 during covid first year + management changes, with some larger non-recurring costs added which can open for more profitability. 

disclaimer:
I own stocks and will shortly need to sell some due to private cashflows. My views are still the above.

Catalyst

proving to be on the path to pre-covid earnigns

acquisition