Introduction

Almost 18 months ago, I discussed Alleima (OTCPK:SAMHF) in an article here on Seeking Alpha. The company had just been spun off from Sandvik (OTCPK:SDVKY) (OTCPK:SDVKF) and I argued the stock was trading too cheap as it was trading at less than 4 times its EBITDA. I was also expecting the company to generate in excess of 1B SEK in free cash flow in 2023, and I think this may be a good time to follow up on Alleima and see if the company has met my expectations and to see what we can expect in the near future.

Alleima’s primary listing is on the Stockholm Stock Exchange, where it is trading with ALLEI as its ticker symbol. There are currently approximately 250.5M shares outstanding, resulting in a current market capitalization of 18B SEK (approximately $1.7B). The average daily volume currently exceeds half a million shares per day.

Not entirely unexpected, Alleima’s 2023 results were robust

Alleima is a producer of stainless steel, special alloy and heating systems for industrial use. The company likes to describe itself as a niche player in niche markets, as shown in the image below. It focuses on a core competency in a subsection of the market.

Interestingly, Alleima expects the main markets it is active in to grow at a CAGR of 7% until 2027 and the company expects to use its anticipated organic growth to grow at least at the pace the market is growing.

To fully understand what this means, we should perhaps take a step back and have a look back at the 2023 results before discussing the 2024 objectives and the mid-term growth plans.

In 2023, Alleima reported a total revenue of 20.7B SEK, but unfortunately, its COGS increased faster than the revenue, which resulted in a 3% decrease in the reported gross profit, which decreased to 4.58B SEK. Fortunately, Alleima’s operating expenses remained pretty stable: while there was an increase in the selling expenses and R&D expenses, the admin expenses decreased. This helped the company to report an operating profit of 2.05B SEK.

Considering Alleima reported a net financial income, the pre-tax income was 2.07B SEK which resulted in a net profit of 1.57B SEK for an EPS of 6.28 SEK per share. That’s a 7% increase compared to the EPS of 5.86 SEK in FY 2022. A very satisfying result, and this meant I was looking forward to seeing the company’s cash flow result to see if it met my anticipated 1B SEK in free cash flow.

As you can see below, Alleima reported an operating cash flow of 2.62B SEK before taking the changes in the working capital position into account. We should also deduct the 128M SEK in lease payments, as well as the 81M SEK discrepancy between taxes paid and taxes owed. This results in an underlying operating cash flow of 2.4B SEK.

The total capex was 827M SEK, resulting in an underlying free cash flow result of 1.57B SEK, which is almost exactly the reported net income. This result indeed means Alleima is currently trading at a free cash flow yield of approximately 10%.

Not only is that a great result, it also means Alleima completely crushed my expectations to see a net free cash flow result of 1B SEK. Even if you’d include the 380M SEK investment in the working capital position, the free cash flow result would still have exceeded 1B SEK.

Where will we go from here?

The company indeed reported a very encouraging result in 2023, it goes without saying I am hoping Alleima can continue to report strong free cash flows. That being said, the company’s FY 2024 guidance does not contain a revenue or EBITDA guidance, which means I have to fall back on the analyst consensus estimates. And those estimates are taking a 10% EBITDA decrease to 2.74B SEK into account.

This should still result in a net profit of approximately 1.2B SEK, which is about 20-22% lower than the net profit reported in FY 2023. This should be just a temporary hiccup related to the uncertainty on the world markets, as the consensus estimates for 2025 are assuming a higher EBITDA result than the 3.06B SEK generated in 2023. And in 2026, the consensus calls for a 3.4B SEK EBITDA.

Let’s take a step back and use the 2.74B SEK EBITDA estimate for 2024. The depreciation and amortization expenses should remain unchanged, but Alleima is guiding for a 950M SEK capex, which means the reported free cash flow will be slightly below the reported net profit – excluding the impact from changes in the working capital position.

That being said, the Capital Markets Day presentation from Q4 2023 was quite interesting for Alleima’s shareholders as the company provided a detailed breakdown of sustaining capex, productivity capex and growth capex. As you can see below, the sustaining capex is just around 400M SEK per year, and assuming 125M SEK per year in productivity capex, I think it is fair to use a sustaining capex pf 525M SEK. Combined with the almost 130M SEK in lease payments, the total sustaining capex and lease amortization come in at around 655M SEK, which is about 250M SEK lower than the depreciation and amortization expenses.

This means that if one would exclude the growth capex (considering growth investments could be seen as a capital allocation item considering growth is optional), Alleima would likely still be able to generate an underlying sustaining free cash flow result of close to 1.5B SEK.

That’s important in 2024, but it will be even more important going forward, as the maintenance capex and productivity capex should not have meaningful changes. Assuming an increase to 750M SEK (a 20% increase), the net sustaining free cash flow should exceed 7 SEK per share in 2025 using the 3.16B EBITDA consensus estimates. And utilizing the 3.4B SEK EBITDA expectation for 2026, the net free cash flow result on a sustaining basis should exceed 7.5 SEK per share.

Investment thesis

This means that although Alleima’s share price has increased by 83% (for a total return of 92% including the dividends) since my previous article was published, the stock still isn’t expensive. And although other companies in the same space (although not as much focusing on niche products) have recently seen their share prices come under pressure due to the anticipated slowdown in 2023, Alleima’s share price remains pretty strong.

At the end of the first quarter, Alleima had a net working capital position of 8B SEK, including 1.7B SEK in cash and a net cash position of 507M SEK, resulting in an enterprise value of 16.5B SEK. Using next year’s EBITDA anticipation of 3.15B SEK and assuming a flat lease amortization of just under 150M SEK per year, the stock is currently trading at 5.5 times next year’s EBITDA which still is pretty attractive. Alleima paid a dividend of 2 SEK per share based on the FY 2023 results and as the company is targeting a 50% payout ratio (using an adjusted net profit, adjusted for metal price effects), I expect the dividend to at least remain stable in the next few years.

I currently have no position in Alleima, but perhaps 2024 could provide opportunities to get back in this name.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.