Exel Composites - Earnings wait for higher orders
Actions support bottom line, but order outlook is still soft
Exel Q3 revenue declined 39% y/y, which led to an adj. EBIT of EUR -1.2m. Exel has cut costs and was also able to generate a positive cash flow of EUR 1.2m, however on the negative side Q4 orders may stay rather soft as larger orders have been further postponed due to cool demand in many industries. Destocking has been a big theme for a while, but in our view Exel’s industries’ long-term drivers are intact and hence we would expect at least modest growth across customer accounts next year if markets stabilize. We cut our Q4 revenue estimate by EUR 5m and make more downward revisions to our FY ’24 estimates.
Wind power orders to drive growth next year
Wind power generated EUR 25-30m revenue in previous years, whereas we estimate it to make only some EUR 10m this year. In our view wind power could add another EUR 10m in revenue next year, assuming the industry order outlook somewhat normalizes. Comparison top line figures will be soft for almost all customer industries next year, and the US unit reorientation alone will help achieve EUR 3m in annual cost savings. The asset-light business model shouldn’t require much capex especially in the short run when there’s still a lot of existing capacity to be utilized. Exel will however soon provide more detail on the kind of modifications its current plant network needs. We believe there to be not much need for growth capex at this point, and single production line updates shouldn’t be too expensive as we understand such lines often cost well below EUR 1m each.
EBIT will recover once orders start to pick up
We estimate wind power to drive double-digit growth next year. In our view EUR 115m top line going forward should support 6% EBIT margins, considering the cost measures Exel has implemented and still finds. Exel is valued some 9x EV/EBIT, which we don’t view too expensive as an EBIT of below EUR 7m would still be quite modest relative to potential. We don’t see margin potential as such as the key issue going forward, but rather order recovery is required before upside can materialize. Our new TP is EUR 2.7 (3.0) as we retain our HOLD rating.