Company Reports

Demand for narrow-moat Epirocs mining equipment and services continued at an impressive pace in second-quarter 2024, growing 1% organically year over year and beating company-compiled consensus of a slight contraction. Order intake benefited from SEK 950 million worth of large equipment orders, compared with SEK 550 million during second-quarter 2023, an indication that underlying confidence in mining investment remains at high levels. Organic order growth for services of 5% year over year is impressive and consistent with our short- and long-term forecasts, underpinned by secular growth themes of midlife service rebuilds and demand for automation offerings to improve customer efficiencies. Shares are trading 5% lower on disappointing operating margins. However, we are confident that Epirocs operating margins can return to typical levels of more than 20% following the implementation of its recent restructuring program and integration of its record acquisition of Stanley Infrastructure. Shares continue to trade at a 15% premium to our SEK 180 fair value estimate, which we maintain.

Epiroc has managed to enjoy superior operating metrics and greater resilience than competitors within the mining supply chain through its track record of innovative mining solutions and recurring aftermarket revenue. By specializing in niche equipment, which has high aftermarket requirements, Epiroc is less dependent on uncontrollable and cyclical factors such as commodity prices to drive demand. Differentiation in drilling equipment and underground trucks has been achieved through specialized knowledge via investment into research and development, or R&D, and strong customer relationships. One third of its orders are to copper mines, a key metal to help decarbonize several industries.

Narrow-moat Epiroc reported a 3% decline in organic order intake, outperforming narrow-moat Sandvik, which reported its earnings on April 22. A 9% increase in organic orders for aftermarket services underpinned Epiroc's outperformance, driven by midlife rebuilds of an aging fleet of mining equipment as well as upgrading equipment with automation features. We believe both the above-mentioned themes present Epiroc with structural growth, which will reduce the group’s dependence on cyclical commodity prices to drive demand. Shares are trading at a premium to our SEK 165 fair value estimate, which we maintain.

Narrow-moat Epiroc’s full-year adjusted operating margin declined 200 basis points to 21.7%, short of expectations. The shares have been richly valued; therefore, even marginal underperformance to consensus, largely confined to the group's tools and attachment segment because of weak construction demand, sent the shares 3% lower on Jan. 24. Short-term measures are in place to protect profitability, and we expect the favorable outlook for the service business, which enjoys several structural tailwinds, will prevent any further material deterioration in operating margin. We maintain our SEK 165 fair value estimate and view the shares as marginally overvalued.

Epiroc has managed to enjoy superior operating metrics and greater resilience than competitors within the mining supply chain through its track record of innovative mining solutions. By specializing in niche equipment, which has high aftermarket requirements, Epiroc is less dependent on uncontrollable and cyclical factors such as commodity prices to drive demand. Differentiation in drilling equipment and underground trucks has been achieved through specialized knowledge via investment into research and development, or R&D, and strong customer relationships.

Narrow-moat Epiroc delivered organic order intake of 9% during the third quarter, which included its largest-ever order of SEK 700 million for underground equipment. Order intake also benefited from the removal of Russian orders in the prior period, which if we add back would have been flat year over year. Nevertheless, demand was significantly higher than its competitor Sandvik, which failed to receive any large orders during the third quarter. Organic order intake declined 7% sequentially compared with the previous quarter, but the third quarter typically has lower orders due to business seasonality, so we are not concerned about the group’s outlook. Management expects short-term demand for mining equipment and services to remain at a high level. Shares are trading 3% lower after the earnings report but remain at a premium to our unchanged SEK 156 fair value estimate.

Narrow-moat Epiroc delivered a strong second quarter, reporting 34% revenue growth (half of which was organic). The main drivers of its impressive top-line growth were the execution of its equipment backlog at higher prices and healthy demand for aftermarket services, particularly large rebuilds of customer equipment. While order intake grew 15% to a record-high SEK 15.4 billion, growth was entirely driven by acquisitions and favorable currency movements, whereas organic order intake declined 1% year over year and 2% sequentially. Declines in order intake and the book/bill ratio, which has fallen below 1 times, are likely indications that the impressive revenue growth achieved during the second quarter is unlikely to persist. However, robust demand for Epiroc's higher-margin service business will help mitigate cyclicality and ensure that its superior operating metrics persist. We maintain our SEK 156 fair value estimate and view the shares as overvalued.

Narrow-moat Epiroc recorded organic order growth of 1% (excluding Russian orders) during the first quarter, which was somewhat weaker than what its closest competitor Sandvik reported. Nevertheless, order intake of SEK 15.1 billion is a record for the group, highlighting the strong demand for its aftermarket services as well as automation equipment. Acquisitions added a further 10% to order growth, as the group expands its solutions for the digitalization of the mining sector, which supports our above-GDP outlook for the group. Management expects demand to remain at a high level. We maintain our SEK 156 fair value estimate and view shares as overvalued.

Epiroc has managed to enjoy superior operating metrics and greater resilience than competitors within the mining supply chain through its track record of innovative mining solutions. By specializing in niche equipment, which has high aftermarket requirements, Epiroc is less dependent on uncontrollable and cyclical factors such as commodity prices to drive demand. Differentiation in drilling equipment and underground trucks has been achieved through specialized knowledge via investment into research and development, or R&D, and strong customer relationships.

Narrow-moat Epiroc reported a 3% increase in organic order intake (excluding Russian orders) during the fourth quarter, marginally outperforming its closest competitor Sandvik, before incorporating a 22% benefit from favorable currency movements and acquisitions. Order intake has remained at a high level throughout the year, sequentially growing by 4% organically from the previous quarter. Management was quick to dismiss a decline in equipment orders due to the lumpy nature of large orders and guided for group demand to remain at a similar high level in the short term. We expect demand to remain robust, even as commodity prices normalize, due to the secular shift toward Epiroc’s electric and autonomous mining equipment. We maintain our SEK 143 fair value estimate and view shares as richly valued.

Narrow-moat Epiroc managed to deliver a decent third quarter, reporting 12% organic revenue growth and a 50-basis-point improvement in adjusted operating margin. A 10% decline in organic order intake should not be exaggerated as significant weakness; if we exclude SEK 1 billion of canceled Russian orders, it translates into organic growth of 5%. However, the market does appear to be slightly disappointed by the rate of growth, which lagged nearest competitor Sandvik and is a sequential decrease of 7%. We maintain our SEK 143 fair value estimate and view the shares as marginally overvalued.

Narrow-moat Epiroc broadly met company-compiled consensus in the second quarter, despite pausing deliveries to Russia since the beginning of March. Organic order intake grew 6%, or 18% if we exclude the impact of lost Russian orders. High customer activity has meant that demand for services continues to outpace equipment as customers look to take advantage of high commodity prices. Demand was also supported by a record number of orders during the quarter for Epiroc’s fleet of battery-powered equipment and midlife battery retrofits. We rate Epiroc’s capabilities in this department as superior to direct competitors, which we believe will help reduce the cyclicality of the business as customers look to improve their productivity and reduce their carbon emissions. The shares are trading at 24 times consensus earnings per share estimates, which we view as slightly rich. We reiterate our SEK 143 fair value estimate.

Epiroc has managed to enjoy superior operating metrics and greater resilience than competitors within the mining supply chain through its track record of innovative mining solutions. By specializing in niche equipment, which has high aftermarket requirements, Epiroc is less dependent on uncontrollable and cyclical factors such as commodity prices to drive demand. Differentiation in drilling equipment and underground trucks has been achieved through specialized knowledge via investment into research and development, or R&D, and strong customer relationships.

We plan to moderately increase our SEK 132 fair value estimate for narrow-moat Epiroc following a strong first quarter. Its organic order intake grew 18% to a record SEK 13.8 billion, driven by an 18% increase for equipment and 22% for services. Equipment orders are typically converted into revenue between six and nine months, which will offer resilience against macroeconomic clouds on the horizon. We expect the structural shift in demand toward autonomous and digital equipment, which lowers the total cost of ownership and reduces customers carbon emissions will provide further resilience against any short-term headwinds. Sequentially, orders grew by 13%, emphasizing the strong environment and highlighting that there are no signs of a slowdown in demand for equipment and aftermarket activities. The favorable outlook is being incorporated in the shares, which we view as richly valued.

Narrow-moat Epiroc delivered record revenue, profit, and order growth for 2021, which met both our own expectations and company-compiled consensus. Organic order intake grew 26% to SEK 45.6 billion driven by a 47% increase in equipment orders. We aren’t overly concerned by the sequential decrease in quarterly orders that we attribute to the lumpiness of large orders, of which there were three in the fourth quarter compared with five in the third quarter. Demand levels are expected to remain high despite peak level demand, supported by strong commodity prices and customers embracing Epiroc’s digital offering to improve productivity. We maintain our SEK 132 fair value estimate and view shares as richly valued, which are currently trading at 29 times company-compiled consensus earnings for 2022.

Uncontrollable and cyclical factors such as commodity prices and general economic activity drive demand forEpiroc's products. Therefore, Epiroc’s strategy has focused on areas that it can influence, such as lowering production costs and increasing sales penetration in more profitable areas of the business, such as the aftermarket segment. While these actions are replicable and have resulted in the margin differential with its closest rival Sandvik narrowing, Epiroc (including former parent Atlas Copco) has historically been successful in quickly executing these initiatives before others.

Strong demand for narrow-moat Epiroc’s niche mining equipment and aftermarket services show no signs of abating as commodity prices remain at high levels. Epiroc reported a record order intake in the third quarter, driven by a 43% increase in equipment orders. Organic order intake grew 24% and 3% against an already strong previous quarter to SEK 12.20 billion, which was superior to competitor Sandvik. We see no signs of demand deteriorating in the short term and traction for Epiroc’s digital offering grows. We moderately raise our fair value estimate to SEK 132 per share from SEK 125, as the higher order book gets converted into revenue in the next six to nine months. Shares remain richly valued, trading at 35 times company-compiled consensus earnings.

Uncontrollable and cyclical factors such as commodity prices and general economic activity drive demand forEpiroc's products. Therefore, Epiroc’s strategy has focused on areas that it can influence, such as lowering production costs and increasing sales penetration in more profitable areas of the business, such as the aftermarket segment. While these actions are replicable and have resulted in the margin differential with its closest rival Sandvik narrowing, Epiroc (including former parent Atlas Copco) has historically been successful in quickly executing these initiatives before others.

Narrow-moat Epiroc met company-provided consensus estimates for revenue and operating profit in the second quarter. Organic revenue growth of 22% year over year against a weak comparative and 14% year to date is tracking in line with our full-year expectations. We maintain our SEK 125 fair value estimate and view shares as being fully valued, currently trading above 30 times company-provided earnings estimates for 2022.

We raise our fair value estimate for narrow-moat Epiroc to SEK 125 per share from SEK 109 as we revise our forecasts to incorporate better-than-expected organic order growth of 21% in the first quarter. While we estimate that growth lagged behind Sandvik, favorable commodity prices have supported a high level of demand for mining equipment and services, which the group expect will remain stable in the near term. The share price has rallied 95% in the past year and is currently trading at 35 times our 2021 earnings estimate, which we view as excessive despite the current favorable market outlook and additional capital return investors will receive this year.