Nolato Could be a Good Investment if You Are Patient for The Long Haul

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Written By Jackson Hartwell

Nolato AB is a Swedish polymer business focusing on medical, integrated, and industrial solutions. With a net cash position, Nolato is insulated from debt and leverage risks, making it a relatively safe investment from a financial stability standpoint.

However, the primary risks for Nolato are related to cyclicality and macroeconomic factors. While the company has shown operational leverage and potential upside at the right price, recent quarters have not been stellar in execution or results.

Despite short-term challenges, Nolato remains a solid long-term investment due to its strong market position, financial stability, and expertise in specialized segments.

Company Overview and Recent Performance

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Nolato AB operates in three main business areas: medical solutions, integrated solutions, and industrial solutions. The company’s revenue split is approximately 35% medical, 40% integrated, and 20% industrial solutions, with solid net margin levels above 5%, making it a sector outperformer.

The company’s low leverage allows for superb interest coverage, close to 40x as of the latest numbers.

Recent Performance and Market Reaction

Nolato’s current pricing is at 58 SEK, a decent position for those who bought in at below 48 SEK. However, the company is trading at over 26.5x P/E, which is high for an industrial company, especially after two years of earnings declines of over 30% for both years.

1Q24 Performance

For the first quarter of 2024, Nolato saw a further decline in sales, but EBITA and EBITA margin improved by 190 bps and SEK 40 million, respectively. This improvement was primarily due to the engineering solutions segment, which experienced some tailwinds.

The company continues to maintain a strong fundamental position with net financial liabilities to EBITDA at less than 0.9x.

Business Segments and Growth Strategies

Nolato’s operations are divided into two main segments: medical solutions and engineered solutions. These segments generate over SEK 2.4 billion worth of quarterly revenues, equating to approximately $1 billion per year. The company often achieves high single digits or low double digits in margin, with around 5-6% in net margin.

Medical Solutions

Medical solutions saw a stable sales situation with a 2% adjusted increase. The company is focused on maintaining its growth strategy, improving cost adjustments and pricing strategies, and overall efficiency.

Engineered Solutions

Engineered solutions saw a decrease in sales of 6% but almost doubled its EBITA margin due to a favorable product mix. The company is working to advance its market position, establish new markets and products, and focus on segments such as automotive, materials, and telecom.

However, there are continued headwinds and low demand for consumer electronics.

Structural Changes and Market Position

Nolato has merged its integrated solutions and engineered solutions business areas and established a new global technical design center. This move aims to simplify operations and expand offerings, including electronic expertise and virtual design.

The company has shown signs of a turnaround, but the market may have reacted too positively too early. The current valuation of almost 27x P/E is high for an industrial company, even one with Nolato’s strengths.

Valuation and Market Outlook

At its current valuation, Nolato is trading at almost 27x P/E. This is more than what one would expect to pay for a highly conservative, A-rated industrial player, which Nolato is not. The company has a 25% historical miss ratio even with a 10% margin of error.

The forecasted EPS growth for 2024 is 38%, but such positive forecasts should be viewed with caution.

Valuation Analysis

Even if the company achieves its 5-year premium of 23x P/E with an average EPS growth of 20% per year, the annualized return would be around 14%. Using historical averages closer to the 20-year mark, the forecast at around 15x P/E implies a downside of -0.7% per year, despite the near-20% EPS growth forecast.

Market Analysts’ Perspective

S&P Global analysts give Nolato a target range of 54 SEK to 61 SEK, down from 60-85 SEK a year ago. The average PT is 57 SEK, suggesting the company is currently above fair value. The future upside at this valuation is unclear, and the market may have moved too far up too quickly.

Where to From Here?

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Nolato is a high-quality business with significant upside potential at the right price. However, at its current valuation, the company is not cheap, and the future upside is unclear. While Nolato has shown resilience and potential for a turnaround, the market may have been too optimistic too soon.

Nolato remains a solid long-term investment but requires careful consideration given the current valuation. The company offers significant value if it drops below 55 SEK, but at 58 SEK, investors may want to be cautious.


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