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Exel Composites - Temporary profitability challenges

Exel’s margins take a hit this year, but we see Exel’s favorable positioning will remain intact and next year’s results should more than make up for the interim dip.

The negative factors have been discussed earlier

Exel issued a negative profit warning yesterday. The company’s earlier outlook guided revenue as well as adj. EBIT to increase, whereas the updated guidance says revenue is to increase significantly while adj. EBIT is to decrease. We don’t view the revenue update a major surprise but the FY ‘21 profitability downgrade is negative news. According to Exel raw material availability has weakened, and both material as well as logistics costs have increased. Exel also says certain high volume carbon fiber Wind power customer applications have generated low margins during their ramp-up phase. These negative factors were discussed already over the spring and summer, but we expected margin improvement in H2 after some softness seen in Q2.

We expect profitability back to high levels in FY ‘22

We already expected strong top line growth for this year and thus we revise our estimate only a bit, from EUR 124.9m to EUR 125.8m. Our previous adj. EBIT estimate for FY ’21 was EUR 10.8m, which we now revise down to EUR 8.9m. We estimate 17% y/y revenue growth for Q3 (Exel grew 23% y/y in Q2). We now expect EUR 1.9m in Q3 adj. EBIT (prev. EUR 2.7m), a bit below the EUR 2.0m comparison figure. We therefore estimate Q3 EBIT margin to have softened to 6.3%. We now expect 6.8% margin for Q4, in other words EUR 2.1m EBIT (prev. EUR 3.2m). In our view Exel’s composites pricing will adjust to higher raw materials prices going forward and hence the company should be able to make up for the interim profitability drop next year when the raw materials and logistics markets have normalized.

We still consider valuation not very demanding

Our FY ’22 revenue estimate is EUR 139.0m (prev. EUR 137.4m), while we revise our EBIT estimate down to EUR 12.4m (prev. EUR 13.5m). The 8.9% EBIT margin estimate is in line with the figure seen last year while our corresponding top line estimate is 28% above the EUR 108.6m in FY ’20 revenue. Exel is valued 9x EV/EBITDA and 15x EV/EBIT on our FY ’21 estimates. These levels are not that low but turn attractive at ca. 7x and 10x on our FY ‘22 estimates. Our new TP is EUR 10.0 (11.5); retain BUY rating.

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