SinterCast : Aktiespararna Initiation Report 5 April 2024

A Share Cast in the Portfolio

Significant Potential with Leading Truck Manufacturers

Over three decades since its IPO in 1993, SinterCast has truly taken off. Fourteen years of growth in the regular dividend and a major breakthrough five years ago with an order from Scania. The potential of the order from Scania was indicated to be one million Engine Equivalents (MEV) of compacted graphite iron (CGI). Now, the company sees further potential with deliveries to the other engine programs within the Traton group for Navistar and MAN. This year also marks the beginning of the first deliveries to First Automotive Works (FAW) in China, one of the world's largest truck manufacturers, with a production volume on par with the entire North American or European market.

Good Forward Planning for the Next Five Years

Sales are largely recurring and are distributed as one-third on consumables, sampling cups, and thermocouples, and two-thirds on a production fee charged for every ton of castings delivered, based on cast weight (before machining), and an annual software fee for monitoring the casting process. A smaller portion (five percent) consists of spare parts and technical service. The company has very good visibility up to three years out. Quite good forward planning for four to five years.

High Market Shares in a Growing Market

SinterCast holds a market share of 60-70 percent of the total available market for process control to the foundry industry for CGI casting. In 2023, the production volume with SinterCast process technology was at times up to four million Engine Equivalents (MEV) annually, ending the year at 3.7 million. For 2024, the guidance is an increase to 4.1 million MEV. The ambition is to increase the growth rate over the next five years to an annual production volume of seven million MEV. This corresponds to fifteen percent per year compared to ten percent over the last ten years.

Retirement Departures Lead to Increased Profitability

Profitability has been affected in recent years as personnel costs, among other things, have increased due to double staffing in anticipation of retirements. Just in 2023, the number of employees decreased from 32 to 28. From today's operating margin of 31.8 percent, the company expects to be able to reach 40 percent by 2028 with further lower personnel costs and larger volumes. This means that profit growth over the next five years could be up to ten percent per year. Cash flow is expected to increase even more with reduced working capital and lower investment needs.

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SinterCast

Investment Thesis

SinterCast is a stock with a high dividend yield and dividend growth. They have a predictable business model with long visibility. High solvency, lower working capital, and investment needs continue to provide good opportunities to return capital to shareholders. The total return, with dividends and buybacks, of seven percent provides sufficient compensation for being long- term in the stock.

The Business is Valued at a Significant Discount

Based on a market value of SEK 714 million and cash of SEK 12 million, the business is valued at SEK 702 million (Enterprise Value, EV). With an operating result (EBITDA) of SEK 43 million, the business is valued at 16.3 times. This is close to the lowest level since the pandemic when the business was valued at a low of 14.4 times. The average valuation over three years is 24.5 times, which would correspond to a valuation per share closer to SEK 150 per share, or a 30 percent discount.

The discount, in our assessment, is because the stock market does not see any growth beyond 2028 and an operating margin of 20 percent. The company addresses this with technological developments such as support for, among others, MAN's new heavy hydrogen engine.

A short-term risk factor for the stock this year is that one of SinterCast's high-volume programs is expected to reach its final stage in the second half of 2024. More information is expected to be provided no later than August at the presentation of the report for the second quarter. This has been announced for a long time, so it should already be discounted.

The Stock is Worth Buying…

The stock's upside/downside in three different scenarios

SEK

215
195		175
175
	150
155
135
115	101	100
95
75

Source: Analysis Guide's bullish, base, and bearish scenarios

No expectations for growth beyond 2028.

Short-term uncertainty regarding how the end of a high-volume program is received.

Scenario Analysis Gives a Justified Value of SEK 145

In our main scenario, the company's value amounts to SEK 150 per share. It is a slightly more cautious scenario than the company management's assessment of market growth, market shares, and profitability. It assumes that the company's production will increase from today's 3.7 million engine equivalents to 4.1 million in 2024 and continue with an increase rate of 11 percent until 2030, then halve to five percent. The company's profitability is expected to increase over the next five years and then decrease as growth slows. A bull scenario imagines a higher valuation at SEK 175 per share, while a bear scenario gives a value of SEK 100 per share, based on lower growth and reduced profitability. A weighted scenario gives a value of SEK 145 per share, where the main scenario is considered highly probable, and the two alternative scenarios are given equal weight.

Bullish scenario: SEK 175 per share.

Base scenario: SEK 150 per share.

Bearish scenario: SEK 100 per share.

Weighted scenario results in SEK 145 per share.

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The stock has an attractive risk-reward ratio of 5:1, with a downside to 100 and upside to 150. A sufficiently large margin of safety with today's stock price against the justified value.

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5 April 2024

The justified value of SEK 145 per share presents an attractive risk-reward ratio against the current stock price and potential.

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Table of Contents	Page
1.	Fourth Quarter/Annual Report 2023	5
2.	Introduction	9
3.	Business Basics	9
4.	Compacted Graphite Iron (CGI)	10
5.	The Casting Process	11
6.	High-Tech Process Technology	11
7.	Engine Equivalents	12
8.	Customers	13
9.	57 Installations in 13 Countries	13
10.	Tupy is SinterCast's Largest Customer	13
11.	Vehicle Manufacturers	16
12.	Commercial Vehicles	17
13.	Corporate Governance	19
14.	Business Model	21
15.	The Stock	25
16.	Scenario Analysis	27
17.	Risk Management	28
18.	Financial History and Forecasts	30
19. Disclaimer	32

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Fourth Quarter/Annual Report 2023

Lower Growth in Series Production After Maintenance Stop

SinterCast reported a sales growth of 13 percent for 2023. Net sales in the fourth quarter rose to SEK 36 million (32.9) and reached SEK 134.4 million (118.7) for 2023. Despite a preliminary result presented at the end of January showing a sales increase at the same level, the share price rose significantly when the financial statements became public at the end of February.

The stock price reaction should be seen as the elimination of any uncertainty about how the result was affected by a five-week stop on a major production line. Since the operating result in the fourth quarter nearly doubled from the previous year to SEK 15.6 million (8.0) with an operating margin of 43.3 percent (24.3), the uncertainty about the earning capacity decreased and the stock rose.

Sales Growth Still at 13 Percent

Although production sequentially leveled out at a rate equivalent to 3.7 million engine equivalents versus 4.2 million in the third quarter, revenues in the fourth quarter increased by nine percent to SEK 36 million. Deliveries of sampling cups increased by 11.7 percent and series production by 5.6 percent. Sales growth was aided by sales at higher exchange rates. 94.5 percent of the revenues are related to recurring income from series production, where a production fee is charged for each engine equivalent, consumables, and software license fees. The business model, with a high proportion of recurring revenues, provides very good visibility for the coming quarters and years.

New Highest Level of Series Production During the Year

For 2023, a new record was set in series production at 3.7 million engine equivalents, an increase of 6.3 percent. SinterCast estimates that with their process technology, "SinterCast Inside," approximately 1.5 million engines were produced during 2023. The distribution of series production with a share of 51 percent rests on long product life cycles for heavy vehicles. Series production of engine equivalents for heavy vehicles increased by 16 percent during the year.

SinterCast sees heavy vehicles as the great growth opportunity ahead as more and more engines for heavy vehicles are developed towards compacted graphite iron for increased fuel efficiency and performance. The other half of the series production was made up of Super-Duty pickups with 30 percent of the volume, followed by large pickups ten percent, medium-sized pickups and

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5 April 2024

Positive stock price reaction to the report.

Less impact on the results than expected from a production stoppage.

Sales increase despite the stoppage.

1.5 million vehicles with SinterCast Inside.

Heavy vehicles are the future.

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SUVs five percent, off-road equipment four percent, and passenger cars one percent.

Cleaner Transport with CGI

The use of CGI enables the manufacturing of smaller, more efficient, higher performing, and more durable engines that have lower fuel consumption, reduced carbon emissions, and lower engine noise. SinterCast technology saved approximately nine million tons of CO2 during 2023 and about 59 million tons of CO2 since the first series production of castings began in 1999. Thus, the company is on track to reach the goal of 100 million tons by 2028.

Reduced Number of Employees

A savings program was initiated in the third quarter and helped to compensate for lower results due to volume reductions in the fourth quarter. Fewer employees, with two retirements and reduced redundancy, led to lower costs, which resulted in an increase in the gross margin by three percentage points to 70.8 percent for the quarter. Increased turnover contributed to an improvement in the annual gross margin by a few tenths to 73.3 percent (73.1). This is the second year in a row that the gross margin has improved post-pandemic, and it is from this level we expect the company to continue in the next couple of years.

The SinterCast technology saved nine million tons of carbon dioxide equivalents during 2023...

...which corresponds to two-thirds of the greenhouse gas emissions from domestic transport in Sweden.

Very high gross margin.

Doubled Operating Result in the Fourth Quarter

The operating result increased in the fourth quarter to SEK 15.6 million (8.0). Primarily because the gross margin rose, but also thanks to currency exchange changes that resulted in unrealized translation gains. For the whole of 2023, the operating result increased to SEK 42.7 million (30.6) mainly thanks to increased sales and stable gross margin. Higher sales costs from participation in the foundry trade fair GIFA, severance payments, and higher wage costs in foreign currency were balanced out by other lower costs. The after-tax result for 2023 increased less than the improvement in the gross result as the tax revenues were lower this year compared to the year before. SinterCast has a recorded deferred tax asset which is gradually being worked off. During 2022, a revaluation of the deferred tax asset resulted in a tax income. Per share, the after-tax result corresponds to a profit of SEK 5.95 (4.68).

Earnings per share SEK 5.94 (from SEK 4.68).

High Conversion of Profit to Cash Flow

A result with a corresponding improvement in cash flow is often a sign that profit generation is of high quality. During 2023, cash flow from operations increased by SEK 20.1 million to SEK 45.5

million (25.4). In addition to the improvement in operating result, Reduced inventory. SEK 7.0 million was released from working capital through a

reduction in the inventory of wire feeders and an increase in operational liabilities. Customer receivables increased during

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2023 but according to the company, it was due to late payments from customers, not non-payment. Investments amounted to SEK 5.6 million (1.7) and are mainly of a one-time nature and related to the replacement of new production tools in Sweden and investment in a second production facility for sampling cups in Slovakia.

The company has a dividend policy to distribute all the free cash flow. After the dividend of SEK 39 million, the total cash flow amounted to -SEK 1.9 million (-13.3). A significant improvement, which, among other things, resulted in the company initiating a buyback program of the equivalent of SEK

5.0 million, of which SEK 1.2 million was completed by the end of 2023.

Positive Future Outlooks

After a slight disappointment regarding the growth in series production with maintenance stops at the end of the fourth quarter, the outlook looks good for the first half of 2024. The goal of returning to a series production pace exceeding four million engine equivalents and heading towards five million is likely to mean that series production in the coming years should at least be able to reach up to ten percent. The first half is likely to benefit from some recovery from the production halt at the end of last year. In the second half, one of their high-volume programs reaches its final phase, which is expected to cause a temporary decrease in volumes starting from the third quarter. Guidance on the extent will be provided at the latest in connection with the report for the second quarter at the end of August.

Forecast of Higher Gross Margin

SinterCast's costs are largely related to personnel. In 2023, the company initially had 32 employees, of whom two retired during the year, three became redundant with the discontinuation of traceability technologies, and Vítor Anjos was recruited as the new Operations Director. The year ended with 28 employees. Higher personnel costs due to double staffing largely explain the lower gross margins in recent years. Going forward, we expect gross margins to continue to improve with fewer employees and increased series production. The operating margin, which last year was burdened with severance payments and sales costs associated with the foundry fair, is expected to be at the same or a higher level in 2024.

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The entire profit is distributed.

Recovery in production volume in the first half of 2024.

Gross margin increases with fewer employees.

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Reduced Inventory and Receivables Increase Cash Flow

In relation to turnover, the inventory accounted for 10.5 percent (14.1) of sales. It is reasonable to assume that the inventory level will continue to decrease, thereby freeing up more capital. Before 2022 and the temporary inventory buildup of wire feeders, inventory relative to turnover amounted to seven percent. In the long term, it is reasonable to reach those levels again. Customer receivables are volatile and increased in 2023 due to a customer's late payments, while they fell back from another customer who agreed to shorter payment terms. Bringing customer receivables back to under 30 percent of sales this year should not be unreasonable. Investments were unusually large last year and are expected to return to significantly lower levels. No taxes on profits are expected to be paid in the coming years, so the cash flow before dividends and buybacks could exceed the after-tax profit significantly more than the previous year.

Customer receivables return to normal levels.

Lower investment needs.

The Balance Sheet is Exceptionally Strong

The balance sheet total amounts to SEK 131.6 million (130.5). The solvency ratio is 86 percent (86). SinterCast had no loans at the end of the financial year. Liquidity amounted to SEK 12 million (14.2). In addition to this, there is an overdraft facility of SEK 12.5 million, giving the company available liquidity of SEK

24.8 million. The largest asset on the balance sheet is a deferred tax asset that will be reduced until late 2027 or early 2028, when the company is estimated to start paying taxes. Since SinterCast does not manufacture the sampling cups themselves, no capital is tied up in fixed assets, but the company ties capital in customer relationships with inventory and receivables. Hence, short-term receivables are the second-largest asset after the tax asset. The assets are financed by equity and operational liabilities.

Assets are financed by equity and operating liabilities. No loans.

High Dividend Payout

In connection with the quarterly report, it was announced that the board proposes a dividend of SEK 6.10 per share. This corresponds to a dividend of SEK 43.1 million (39) to be paid on two occasions during 2024. The regular dividend is SEK 5.50 per share and represents 92.5 percent of earnings per share. The proposal for an additional SEK 0.6 per share beyond the regular dividend, due to released working capital, reflects the board's positive assessment of how the coming year may develop.

A regular dividend of SEK 5.5 per share plus a bonus dividend of SEK 0.5.

Buyback Program Initiated

In addition to dividends, a buyback program was initiated at the end of last year, which could only be partially completed. Of the SEK 5 million authorized at the spring 2023 meeting, only SEK

1.2 million worth of shares were bought back. In 2024, the repurchases have started again, and shares worth approximately SEK 1.1 million were bought back by the end of February. There remains SEK 2.7 million worth of shares to be repurchased. Five

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A buyback program for the equivalent of five million SEK.

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million corresponds to 0.7 percent of the market value of SEK 709 million.

A new buyback program is likely to be initiated after this year's meeting in May and contributes to increased liquidity in the stock, stabilizes price development, and marginally increases earnings per share. We believe that it is value-creating to buy back shares when it occurs, as in this case, below the justified value.

The report for the first quarter will be presented on April 24.

Next report on April 24.

Introduction

Business Basics

SinterCast earns money by providing technology and services in the foundry industry, particularly in the casting of engine blocks and cylinder heads. The primary application is for large vehicles such as commercial vehicles, pickup trucks, and construction machinery.

They have developed and patented a process called the "SinterCast Process," which is used by their foundry customers to manufacture high-quality products in a new type of cast iron called Compacted Graphite Iron (CGI).

CGI is stronger and stiffer than conventional cast iron or aluminum alloys. The higher strength and stiffness allow car manufacturers to reduce the size and weight of their engines. CGI engines can also operate at higher pressures and temperatures, resulting in improved performance, along with better fuel efficiency and lower CO2 emissions.

Primarily, SinterCast earns revenue by selling licenses to foundries around the world that want to use their patented process to produce CGI products. This generates income through production royalties, the exclusive sale of test consumables, and software licensing fees. Together, these three recurring revenue streams usually account for more than 90 percent of annual revenues.

In addition to licenses, SinterCast also provides its customers with process control equipment, spare parts, and expert services to effectively implement and operate the SinterCast Process. The process control equipment is usually sold as a one-time sale but can also be leased.

The company also collaborates with its foundry customers and OEM end-users to develop new applications for CGI. Applications for hybrid power and range extension, as well as engines using net-zero fuels or hydrogen. SinterCast typically invests about ten percent of its revenue in R&D to maintain its position as a leading player in its field.

A cast business for large vehicles.

The SinterCast Process.

Enables the reduction of size and weight of engines.

The business model generates a high proportion of recurring revenues.

Advanced technological solutions.

Ten percent of revenues to R&D.

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Compacted Graphite Iron (CGI)

Compacted Graphite Iron (CGI) is 75 percent stronger and 50 percent stiffer than conventional cast iron or aluminum alloys. It also has good thermal conductivity, meaning it is efficient at transferring heat. Therefore, the best application for CGI is in components that are simultaneously subjected to mechanical and thermal stresses. This leads to its use in cylinder blocks and heads, where there are significant mechanical stresses from engine compression, along with heat from fuel combustion.

The need for CGI depends on the engine type. Small engines for passenger cars typically use a spark plug to ignite the fuel. For these engines, the compression is usually low, and aluminum is often used. As the engine size increases, especially for diesel engines, the combustion pressure becomes exponentially higher, making CGI the preferred choice.

Demands for improved engine performance and reduced CO2 emissions over the past thirty years have required significant increases in combustion pressure and temperatures within engines to ensure more complete combustion of fuel. These requirements have driven the growth of CGI. CGI now constitutes more than a third of the market for heavy commercial vehicles, and this is expected to grow to more than 75 percent by the end of the decade. Aluminum is simply not strong enough for applications in diesel engines for commercial vehicles.

Applied for components that are subjected to mechanical and thermal stresses…

…particularly for diesel engines that are exposed to high pressure.

CGI in one-third of engines for heavy commercial vehicles, on the way to three- quarters of the market.

Advantages of CGI

Compacted graphite iron allows engines to be made smaller and
lighter than conventional engines. The combustion pressure and
temperature can also be increased to provide higher power and
torque while improving the engine's durability. CGI's high
stiffness also reduces vibrations, leading to a noticeable	Higher power and torque.
reduction in engine noise. The higher strength also means that
fewer threads are needed to fasten bolts, so bolt lengths can be
reduced. This provides measurable savings for OEM
manufacturers who often purchase millions of bolts per year for
an engine program. CGI is also significantly cheaper than
aluminum.

Disadvantages or Limitations of CGI

Due to the narrow processing window for CGI production, manufacturing is more expensive than other cast iron materials, and scrap prices can be higher, especially in the absence of meticulous process control. CGI's higher strength and stiffness also make it more difficult to machine than some other materials, which can affect manufacturing costs. CGI is not always the best choice for all engines or situations. Some engines may perform just as well or even better with other materials.

Manufacturing is more expensive than other cast iron materials.

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