SKF's First-Half Revenue Tracking in Line, but Margins Hit by China Lockdowns

SKF’s second quarter proved more challenging than the prior quarter with moderately slower organic revenue of 5.4%, and a heftier toll on margins, down 450 basis points year over year, from supply chain bottlenecks and other disruptions. China is a material end market for SKF with 18% of revenue coming from the country and the coronavirus lockdowns muted the company’s revenue growth. That said, first-half revenue growth so far, is still tracking in line with our full-year forecasts of 5.5% organic and 11% reported growth, respectively. However, our 2022 adjusted EBIT margin forecast of 12.5% looks modestly optimistic given the 11.9% posted by the business in the first half. While we expect margin recovery in the second half with less pressure from supply chains and the reopening of China, we are not confident that the margin recovery will be strong enough to meet our 2022 current margin expectations. That said, we do not expect any margin forecast adjustments to materially affect our SEK 210 fair value estimate. We maintain our narrow moat rating.