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Exel Composites - Turnaround progressing well

Exel Composites updated its guidance for FY ‘19. The update wasn’t big news as progress has been good this year. We make small revisions to our profitability estimates, and our new TP is EUR 6.00 (5.50), rating now HOLD (BUY).

EBIT has improved considerably this year

Exel Composites updated its FY ’19 guidance. The company had previously guided improving revenue and adjusted EBIT compared to previous year. The updated outlook guides increase in revenue (as before) and significant increase in adjusted EBIT. The positive guidance update didn’t come as a major surprise as Exel had already accumulated EUR 5.9m in adjusted EBIT during the first nine months of the year, compared to the EUR 5.0m for FY ’18. Exel says there have been no material changes to order activity since the release of Q3 figures. We thus continue to expect further extension to the recent segmental performance trends. We see Construction & Infrastructure growing at a 10% annual rate, whereas we expect more muted 3-5% CAGR development for Industrial Applications and Other Applications.

Good volumes and cost savings program have helped EBIT

We see no reason to make changes to our top line estimates, i.e. we still estimate Exel’s revenue to grow at a 7% annual rate during the next few years. Exel expects to fully realize the annual savings target of EUR 3m during 2020. Although visibility is limited, we make small upward revisions to our profitability estimates. We now expect EUR 2.3m in Q4 EBIT (previously EUR 2.1m). For FY ’20 we now estimate the figure at EUR 9.2m (previously EUR 8.6m). In other words, we see Exel achieving operating margins at above 8% going forward. Such a level still falls short of the company’s long-term target (Exel targets long-term adjusted operating margin at above 10%).

Long-term upside remains due to operating leverage

In our view more positive development can be expected; higher revenues will further lift operating margin. There’s still long-term upside potential in Exel, however we see certain caution is in order due to limited visibility. We regard EV/EBITDA and EV/EBIT multiples of some 7-8x and 11-12x for this year and next as reasonable (roughly 30% below peer medians). We update our TP to EUR 6.00 (5.50); our new rating is therefore HOLD (BUY).

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