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Exel Composites - CMD notes

Exel’s CMD added details to its new strategy. Many important decisions are still to be worked out, but in our view the path for value creation is a lot clearer now.

Higher volumes and lower costs are to tame leverage ratio…

Exel aims to keep NIBD/EBITDA below 3x by 2028; Exel has historically been around the ratio, but earnings weakness now pushed it to 4.8x even when the absolute level of debt was kept in check. The ratio is to improve next year as Exel sees growth in wind power but also within other industries as certain large integrated players, who have some insourced pultrusion volumes, are outsourcing business back to Exel. Margins have remained stable, despite the recent inflationary environment, and thus earnings have good potential to bounce back with higher volumes especially when Exel has achieved fixed cost reductions. Some portion of the EUR 20-25m projected financing need for the strategy period should be covered with internal cash flow when earnings rebound, yet there could be some larger outlays into key sites which would require a stronger balance sheet.

…while key asset focus may yet require external financing

Pultruded profiles’ ability to insulate is one key quality driving volumes for buildings and transportation. China (wind power and transportation) is to be a volume site, whereas assets in Europe and the US are likely to be mostly tailored sites. Such sites help Exel integrate within the value chain (both engineering and post-processing services) and they should also feed orders to the volume business (such accounts need not be larger than EUR 4-5m). Exel expects the long-term split between tailored and volume sites at 60/40, whereas we would have expected the volume share to be a bit larger than that. Exel says post-processing services, which can e.g. help make final assembly easier, can be as valuable as the tailored composite volumes. Exel can also be quite selective within the tailored business, and we see value chain integration as a major part of the new strategy.

Our near-term estimates remain unchanged for now

Exel is likely to achieve a lot better results next year, but the rate of volume recovery is still uncertain while balance sheet could be stronger. The 9x EV/EBIT multiple, on our FY ’24 estimates, isn’t very high but in our view the uncertainties continue to limit upside potential. We retain our EUR 2.7 TP and HOLD rating.

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