Cargotec: Wile E. Coyote moment in the share price

Even after Kalmar spin-off, Cargotec will continue to be an investment in a kind of interim mode before the forthcoming divestment of MacGregor leaves only Hiab. The short-term prospects for both Hiab and MacGregor are reasonable, and the company that will change its name to Hiab after the sale of MacGregor has the potential to become popular among investors that look for moderate growth and risk profile. However, after the first trading day of the current Cargotec share, the stock looks overpriced relative to the sum of the parts. At this stage, we give the stock a Sell recommendation with a target price of EUR 39.0.  

The goals set for Hiab are demanding

Our review of Hiab draws heavily on the company's Capital Markets Day communications in May. Hiab's organic growth consists of three overlapping layers: 1) A fundamental growth trajectory, with GDP growth, urbanization and climate change as components (ca. +3% p.a.); 2) Target market growth, driven by the need to improve safety, productivity and reliability in load handling, the shortage of qualified drivers and the need to reduce emissions; 3) Hiab's ability to grow faster than the market, based on long-term, deep customer relationships and an understanding of customer needs and the ability to develop products to meet them, combined with an extensive and competent service network. The latter two "growth layers" will bring Hiab's growth to +7% p.a. if the targets are met. The customer segments highlighted are waste & recycling, defense logistics, retail distribution and construction. Geographically, the focus will be on North America. In terms of service offerings, market share will be increased in consumables and spare parts for Hiab's own large equipment fleet, contract-based services and new digital services. Hiab aims to improve productivity by 1.5% per year through its Excellence programs. Without additional investments in product development or measures to mitigate the effects of inflation, the direct impact of the program on the EBIT margin would be +1.5 percentage points per year. However, the final margin impact will depend on market conditions and demand. In any case, Hiab's target of 18% comparable EBIT margin (calculated as Cargotec business area) by 2028 is challenging.

2024 guidance should be easy to meet

At this time, we have not changed our forecasts for either Hiab or MacGregor. Hiab is under pressure from a -14% year-on-year decline in order intake in Q2'23-Q1'24. Our expectation for Hiab's 2024 revenue growth (-15% y/y) is in line with consensus (-14% y/y). Hiab has been guided for >12% EBIT margin excluding group expenses for 2024 and both our own forecast (14.3%) and consensus forecast (14.7%) are well above this. MacGregor's guidance of a comparable EBIT improvement from 33 MEUR in 2023 is also reflected in both our own (73 MEUR; margin 7.7%) and consensus expectations (66 MEUR; margin 7.7%).   

SOTP calculation indicates overvaluation

It is still difficult to make an accurate sum-of-the-parts calculation for Cargotec when debt information has not  been disclosed. In our EV/EBIT based valuation for both Hiab and MacGregor, we arrive at a current share value of EUR 38-44 for Cargotec, which supports our Sell recommendation. It is clear that in the coming months the value will be strongly influenced by estimates or information on the sale price of MacGregor. We hope that the Q2 report (August 8) will provide more information on the market outlook for the businesses and the impact of the Excellence programs.