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Duell’s Q4 results were largely in line with the previously released preliminary figures. Reflecting the ongoing strain on the company's balance sheet, Duell announced that it is considering a rights issue to strengthen the balance sheet. With the expected continued operational softness and no positive drivers for the stock ahead of the potential sizeable rights issue, we further downgrade our TP to EUR 0.4 (0.9) and rating to SELL (HOLD).
Q4 operative figures brought no real surprises
Duell’s net sales were roughly in line with the previously released preliminary figures. Net sales in Q4 amounted to EUR 29.9m (EUR 34.6m in Q4/22, EUR 29m Evli) and adj. EBITA was at EUR 0.2m (EUR 1.8m in Q4/22, EUR 0.1m Evli). The weak profitability was clearly driven by the soft volume development as the company’s gross margin improved y/y.
Considering a larger-than-expected rights issue
Despite the successful unloading of inventory during the Q4 leading to lower net debt levels, the company’s balance sheet remained stretched. Due to the lackluster operational results and high amount of debt, the company’s net debt to adjusted EBITDA was at 7x at the end of FY 2023. As a result, the conditions for the covenants for loans from financial institutions were not met. To strengthen its balance sheet, the company announced that it is considering a rights issue. According to preliminary plans, the size of the rights issue would be up to roughly EUR 20m. The rights issue is substantial and if completed, heavily dilutive for shareholders that do not exercise their rights, as the company’s market cap is currently approximately EUR 15m. We have not included the potential right issue to our estimates as the completion, timing and conditions of the issue are still uncertain.
SELL (HOLD) with a TP of EUR 0.4 (0.9)
As mentioned in our previous updates, we see no signs of fast recovery in consumer confidence, in addition, the company’s customers conservative approach to inventory management is likely to continue. With the continued weak outlook, stretched balance sheet and no positive drivers for the stock ahead of the potential rights issue, we further downgrade our TP to EUR 0.4 (0.9) and rating to SELL (HOLD).
The Q4 softness came as a no surprise as the company provided preliminary figures in September in conjunction with the profit warning.
Duell released a profit warning ahead of the FY 2023 earnings which will be published 9th of October. The preliminary FY 2023 figures were clearly lower than we had anticipated. We downgrade our rating to HOLD (BUY) and TP to EUR 0.9 (1.4).
Preliminary FY 2023 figures short of our estimates
In connection with the profit warning, Duell provided preliminary financial information regarding FY 2023 figures. Duell now expects net sales to be approximately EUR 118 million (EUR 124m FY 2022, EUR 125m Evli est.) and adjusted EBITA to be approximately EUR 4.5m (EUR 8.7m FY 2022, EUR 7.4m Evli est.). The preliminary figures imply net sales of roughly EUR 29m (-16% y/y) and adjusted EBITA of roughly EUR 0.1m during Q4.
Market pressure expected to persist
For FY 2023, our estimates now align with the preliminary figures provided by the company for revenue and adj. EBITA. We previously estimated revenue growth of 4.1% y/y for Q4 2023 driven by inorganic growth while we estimated that the organic sales continue to decline. With the implied net sales of EUR 29m in Q4, the company’s net sales declined roughly 16% y/y. Adj. EBITA was also clearly lower than our estimate. Our interpretation is that the weak net sales and profitability were driven by lower-than-expected volumes, FX related losses and discount sales. In addition to the preliminary figures, Duell also commented that it has been able to reduce inventory levels as planned which lowers the net debt. We now estimate that the market pressure is likely to continue as we see no signs of fast recovery in the consumer confidence across the operating regions. In addition, Duell’s customers have indicated that the conservative approach to inventory management is likely to continue. In addition to FY 2023, we have revised our estimates for coming years as we see the softness likely to continue especially during FY 2024.
HOLD (BUY) with a TP of EUR 0.9 (1.4)
With the substantial downward revisions to our estimates, we downgrade our rating to HOLD (BUY) and TP to EUR 0.9 (1.4). The beforementioned headwinds are likely to continue to affect Duell’s performance. On the other hand, the decrease in inventory levels eases short-term balance sheet pressure.
Duell has faced challenges during the FY 2023 due to the current high interest rate environment, leading to reduced demand across the powersports aftermarket value chain. Despite the recent share price strength after the company posted solid Q3 figures, we see the current valuation moderate as we estimate continued growth in Europe and improved margins going forward. We initiate coverage of Duell with a BUY rating and TP of EUR 1.4.
One-stop shop for powersports aftermarket products
Duell is a Finnish powersports aftermarket distribution company established in 1983, headquartered in Mustasaari, with warehouses and sales offices across Europe. It serves as a source for a diverse range of equipment and parts in all powersports categories, acting as a convenient one-stop-shop. With approximately 600 brand owners and manufacturers, including Duell's own brands primarily based in Asia, the company ensures a wide supply network. Dealers benefit from Duell's distinctive brand and product selection, offering over 150,000 SKUs from more than 500 brands.
Expecting growth and improved margins going forward
We estimate that the organic sales will continue to decrease during Q4 while the inorganic growth is expected to support the company’s sales. For the FY 2023, we estimate total net sales of EUR 125m with 0.8% y/y growth. In terms of profitability, we estimate that Duell will reach adj. EBITA of EUR 7.4m in 2023 with margin of 5.9%, down from EUR 8.7m and 7.0% during FY 2022. Going forward, we estimate that Duell will return to profitable growth with the help of European expansion, partly scalable cost structure and the ongoing efficiency programme.
BUY with a target price of EUR 1.4
We initiate coverage of Duell with a BUY-rating and target price of EUR 1.4. In our view, the valuation looks moderate considering the Duell’s growth prospects in the Europe and the ongoing efficiency programme that we estimate to improve the company’s margins going forward. On our estimates for 2023E, the company trades at slightly elevated multiples yet on a discount when looking at 2024E relative multiples and the value derived from our discounted cash flow model.
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Duell’s medium term (3-5 years) targets: Net sales in the range of EUR 200-300m in the medium term achieved through both organic and inorganic growth, adjusted EBITA-% at least 13%, net debt to adjusted EBITDA ratio 2-3x.
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