Description

Company Background:

Sandvik (“SAND” or “SAND SS”) is a Swedish engineering company built largely through acquisition in mining and rock excavation equipment, machine tooling & metal cutting, and materials technologies predominantly supplying the steel business.

The company has 3 segments: (1) Mining and Rock Solutions / Rock Processing Solutions, (2) Manufacturing and Machining Solutions (SMS), and (3) Materials Technology (SMT).  The model is extremely decentralized with each business running its own P&L with full autonomy. SAND has made numerous acquisitions and doesn’t fully integrate the targets to optimize front line decisioning. 

The SMT business is being spun off to focus on the core higher quality businesses – SMS and Mining.  This should unlock significant value as SAND’s peers in those two businesses trade at far higher multiples of approximately 18x forward EBITDA vs. SAND’s 12x, which is weighed down by the SMT business.

Key SMS competitors include Kennametal, IMC / Iscar (BRK), Dapra, Walter Tools, Garr Tool, MA Ford as well as MasTec and Moriseiki and numerous smaller mom and pop players.  Key Mining competitors include Epiroc, CAT and Komatsu.

Current Investment Opportunity:

SAND is shifting focus towards higher-growth, digital, automation, electrification / EV’s, and software-oriented businesses, particularly under the new CEO, Stefan Widing, who joined in April 2020. Stefan previously ran the technology division of Assa Abloy and is pushing for even greater digital / software focus than his predecessor who started the acquisition journey in these categories.

SAND has acquired, and we believe will continue to acquire, smaller niche companies to own and control these newer technologies, particularly within the SMS business; this is the future of SAND and the segment we believe will outperform expectations as (a) the cycle turns for its core SMS end markets in engineering and autos, and (2) SAND capitalizes on its superior technology oriented offerings across digitization, automation, and electrification to outgrow the market.

We also expect greater than expected growth from SAND’s Mining business which is in the early innings of a multi-year upcycle along with rising commodity prices, which consensus expectations do not fully incorporate.  Our field research indicates the Mining business is ‘going like crazy’ with increasing commodity prices and mining houses reporting record profits and driving a large capex upcycle.

SAND’s Mining business has a very enviable market position in underground hard rock mining equipment as it shares over 70% of the market along with Epiroc, resulting in a rational pricing business. Note that Epiroc was divested by Atlas Copco, which resulted in significant valuation uplift for Atlas – and several industry executives have suggested a similar spin for SAND could be on the horizon to unlock additional value.  SAND’s first step on this journey has already occurred with the pending spin of the SMT division.

Valuation:

We assume SAND’s business segments return to historical margin levels in FY22 as Machining returns to growth that year, resulting in our EBITDA estimate of SEK26,672 MM; while this is ~5% above consensus expectations, we believe these assumptions could be conservative as the tailwinds building in the SMS business could push growth above our assumed HSD range.  We also assume Mining’s revenue growth decelerates in FY22 towards the HSD range, which we also believe is conservative given the early innings of the mining upcycle.

As the SMT business is spun, 18x forward EBITDA appears a fair multiple for both the Machining and Mining businesses.  The peers trade at these levels, but SAND has a far superior margin profile (stemming from superior products / technologies) and similar growth rates to the comps.  Assuming the SMT spin trades for 10x EBITDA, fair value for SAND would be SEK 360/share, upside of ~50% within a year’s time.

Catalyst

Earnings beats / spin off(s)