Exel Composites - Long-term story on track

Exel Composites’ Q3 results were overall quite neutral relative to expectations, however we are now more confident top line will continue to grow going forward. Our new TP is EUR 7.25 (6.25) while we retain our BUY rating.

Overall outlook appears strong despite the pandemic

Exel’s EUR 26m Q3 revenue grew by 10% y/y and so topped the flat estimates. The Wind power customer industry supports high volumes and grew by 37% y/y after growing 52% in Q2. We now expect a 27% y/y increase for Q4. Defense is also developing well, and there’s plenty of long-term potential (now only some 5% of LTM revenue). Cable core rods remain one high potential application in the long-term, although the Buildings and infrastructure customer industry continued to develop soft for now due to the pandemic (which also undermined Transportation demand). Exel progressed in areas outside Europe as Asia-Pacific grew by 58% y/y, driven by Wind power.

We are now more confident towards next year

Although top line was strong, Exel had pandemic-related issues in Q3 which affected bottom line and so the company was unable to reach similarly high profitability as in Q2 (which was close to long-term targets). The 7.8% EBIT margin was thus soft relative to our 9.5% estimate. We expect the Q3 US operational efficiency hiccup to pass. Demand has developed positive since Q2 and based on Exel’s comments we are now more confident revenue continues to grow in Q4 and next year alike. The Austrian investment is proceeding as planned and Exel is also ready to readdress its capacity for different end-markets with small capex. We see Exel has good handle on long-term customer account management, arguably the single most important consideration given the business model and strategy.

We see some more upside even with cautious multiples

The share has appreciated a lot lately, now close to the pre-pandemic highs. The strong Q2 profitability development, driven especially by the US unit, and good volumes justify higher multiples for their part. On the other hand, the growing pandemic uncertainty limits multiple potential even if outlook is still positive. Our new EUR 7.25 (6.25) TP values Exel roughly within the 7-8x EV/EBITDA and 11-13x EV/EBIT ranges on our estimates for FY ’20 and ’21. We retain our BUY rating.

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