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Exel Composites - Initiating coverage with BUY

Exel Composites has grown mainly through acquisitions in recent years. Organic growth has been weak due to challenges in telecommunications and infrastructure markets. Moreover, the company’s EBIT margin, at ca. 5% last year, has declined to way below the desired level. A recent acquisition further cut profitability. Volume visibility is limited, yet we take a constructive view based on Exel’s repositioning towards the wind energy sector, where longterm fundamentals are strong and carbon fiber reinforcements are gaining further market share.

The wind energy sector is now Exel’s top customer industry

The wind energy sector recently claimed the position as Exel’s most important customer industry. Exel has selected wind turbine blade reinforcements as the main application to drive order volumes. We estimate this market to grow at low double-digit rates in the coming years, and thus expect Exel to be able to add EUR 3-5m in sales p.a. within the segment. According to our analysis, operational leverage should help Exel to achieve a 7% EBIT margin in 2021 (up from adjusted 2018 operating margin of 5.2%) despite a 100bps gross margin decline due to the increased share of lower margin wind energy sector deliveries.

Execution is key, the company needs to win large accounts

In our view Exel is to gain from volume tailwinds within select customer industries and thus set to grow especially within the Construction and Infrastructure segment. While efficiency measures such as the cost reduction program targeting EUR 3m in annual savings by 2020 are important for improving the operating margin, we recognize higher volumes as the main value driver. To move the needle, Exel should add such new customers that could generate annual revenues in the EUR 5m ballpark.

Our rating is BUY, target price EUR 5 per share

We initiate coverage with BUY based on our multiple and DCF analysis. Our target price implies a 2019E EV/EBITDA multiple of 8x vs. historic average of almost 9x and the peer group currently trading at around 9-10x.

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