Epiroc Earnings: Impressive Revenue Growth Driven by Backlog Execution

Narrow-moat Epiroc EPI A 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.

We aren’t concerned about the decrease in organic order intake, which remains at a high level. The slight decline can mostly be explained by a lower level of large equipment orders being won compared with the previous year. Demand for services continues to be robust, growing 5% organically during the second quarter, supported by good demand for large equipment rebuilds. The less moaty tools and attachment segment reported marginally lower demand year over year but an 11% sequential decline in orders, driven by weak construction activity in Europe.

Adjusted EBIT margin dilution of 200 basis points to 21.6% was due to an unfavourable sales mix and margin-dilutive acquisitions. We expect Epiroc to continue its fast pace of acquisitions aimed at strengthening its offerings in automation and electrification, which enjoy structural tailwinds and thereby reduce the group’s dependence on cyclical commodity prices.