Exel Composites |

Higher volumes and lower costs are to tame leverage ratio…

Exel aims to keep NIBD/EBITDA below 3x by 2028; Exel has historically been around the ratio, but earnings weakness now pushed it to 4.8x even when the absolute level of debt was kept in check. The ratio is to improve next year as Exel sees growth in wind power but also within other industries as certain large integrated players, who have some insourced pultrusion volumes, are outsourcing business back to Exel. Margins have remained stable, despite the recent inflationary environment, and thus earnings have good potential to bounce back with higher volumes especially when Exel has achieved fixed cost reductions. Some portion of the EUR 20-25m projected financing need for the strategy period should be covered with internal cash flow when earnings rebound, yet there could be some larger outlays into key sites which would require a stronger balance sheet.

…while key asset focus may yet require external financing

Pultruded profiles’ ability to insulate is one key quality driving volumes for buildings and transportation. China (wind power and transportation) is to be a volume site, whereas assets in Europe and the US are likely to be mostly tailored sites. Such sites help Exel integrate within the value chain (both engineering and post-processing services) and they should also feed orders to the volume business (such accounts need not be larger than EUR 4-5m). Exel expects the long-term split between tailored and volume sites at 60/40, whereas we would have expected the volume share to be a bit larger than that. Exel says post-processing services, which can e.g. help make final assembly easier, can be as valuable as the tailored composite volumes. Exel can also be quite selective within the tailored business, and we see value chain integration as a major part of the new strategy.

Our near-term estimates remain unchanged for now

Exel is likely to achieve a lot better results next year, but the rate of volume recovery is still uncertain while balance sheet could be stronger. The 9x EV/EBIT multiple, on our FY ’24 estimates, isn’t very high but in our view the uncertainties continue to limit upside potential. We retain our EUR 2.7 TP and HOLD rating.

Actions support bottom line, but order outlook is still soft

Exel Q3 revenue declined 39% y/y, which led to an adj. EBIT of EUR -1.2m. Exel has cut costs and was also able to generate a positive cash flow of EUR 1.2m, however on the negative side Q4 orders may stay rather soft as larger orders have been further postponed due to cool demand in many industries. Destocking has been a big theme for a while, but in our view Exel’s industries’ long-term drivers are intact and hence we would expect at least modest growth across customer accounts next year if markets stabilize. We cut our Q4 revenue estimate by EUR 5m and make more downward revisions to our FY ’24 estimates.

Wind power orders to drive growth next year

Wind power generated EUR 25-30m revenue in previous years, whereas we estimate it to make only some EUR 10m this year. In our view wind power could add another EUR 10m in revenue next year, assuming the industry order outlook somewhat normalizes. Comparison top line figures will be soft for almost all customer industries next year, and the US unit reorientation alone will help achieve EUR 3m in annual cost savings. The asset-light business model shouldn’t require much capex especially in the short run when there’s still a lot of existing capacity to be utilized. Exel will however soon provide more detail on the kind of modifications its current plant network needs. We believe there to be not much need for growth capex at this point, and single production line updates shouldn’t be too expensive as we understand such lines often cost well below EUR 1m each.

EBIT will recover once orders start to pick up

We estimate wind power to drive double-digit growth next year. In our view EUR 115m top line going forward should support 6% EBIT margins, considering the cost measures Exel has implemented and still finds. Exel is valued some 9x EV/EBIT, which we don’t view too expensive as an EBIT of below EUR 7m would still be quite modest relative to potential. We don’t see margin potential as such as the key issue going forward, but rather order recovery is required before upside can materialize. Our new TP is EUR 2.7 (3.0) as we retain our HOLD rating.

• Exel’s Q3 revenue fell by 39.2% y/y to EUR 20.5m. Exel had previously published preliminary Q3 figures and so the actual headline numbers didn’t contain news. Europe declined by 28.2% y/y, while North America fell 56.3% as the business still lacked large wind power orders.
• Wind power was EUR 2.1m vs our EUR 2.0m estimate, whereas Buildings and infrastructure amounted to EUR 5.7m vs our EUR 5.1m estimate. Transportation came in at EUR 3.1m, compared to our EUR 2.3m estimate.
• Adjusted EBIT was EUR -1.2m due to the low level of revenue, while cost management activities continued. Fixed costs decreased y/y due to lower personnel costs as the company has rightsized. Exel has also reduced working capital and inventories, which resulted in a positive Q3 cash flow of EUR 1.2m.
• Order intake amounted to EUR 22.8m in Q3 as it fell by 6.7% y/y. Order intake is expected to continue slow until the end of the year.
• Exel guides revenue and adjusted EBIT to decrease significantly in FY ’23 compared to the previous year (guidance updated on Oct 19).

Q3 ended up being a lot softer than previously estimated

Exel revised its guidance down and now expects FY ‘23 revenue to decrease significantly. Demand softness has been widespread and extended for longer than previously seen. Order timings have also been delayed for larger projects. Exel published preliminary figures: Q3 was seen to be soft before, however a revenue of only EUR 20.5m proved to be way below our earlier EUR 29.9m estimate and thus we also cut our Q3 EBIT estimate by EUR 2.5m.

Improvement after Q3, but its pace remains uncertain

We cut our estimates also beyond Q3 as softness persists. Exel updates its plant network strategy to better organize production; some details have already been worked out but there are still reviews going on. Wind power volumes are to be generated mostly in China and India from now on while the US unit will focus on buildings and infrastructure applications as well as electrical products, which we believe remain attractive categories. The restructuring is to yield cost savings of EUR 3m, a big sum on top of other measures Exel has implemented (and is yet to decide on). Exel’s reorganization means EBIT should bounce back sharp once the volumes come through, and hence focus rests on top line even more than usual over the next few quarters. The comparison volumes for Q4 aren’t that high as they already fell 15% y/y, yet Exel may still struggle to achieve notable growth even if Q4 should gain q/q from the lows.

EBIT to bounce back with volumes, but outlook still unclear

Low demand over the past year has left Q3’23 LTM adj. EBIT around break-even, so it’s clear Exel’s EBIT improves next year. The two-tiered factory strategy is to bring more manufacturing efficiency gains, while demand is already improving, but it remains unclear how much volumes recover next year. We estimate EUR 120m in revenue and EUR 7.5m EBIT for next year, which roughly equal the average levels seen in FY ’19-22. Exel is valued about 8x EV/EBIT on that estimate, which isn’t very high considering how efficiency measures could also support EBIT above our estimate. Yet in our view limited demand outlook curbs upside for now. Our TP is now EUR 3.0 (3.5); retain HOLD.

Still very soft results, however H2 should show gains

Exel’s Q2 was expected to be still somewhat soft, but the EUR 25.4m revenue came in well below our EUR 34.3m estimate as e.g. Wind power and Transportation, which had high Q2’22 deliveries, saw low demand especially in North America. Many key industries continued to reduce inventories, yet Exel saw demand developing largely according to its expectations and sees its delivery volumes begin to recover towards the end of the year. Q2 revenue declined by another 12% q/q, in the light of which the EUR 0.1m adj. EBIT already showed some results in terms of lower costs. Exel has some further scope to cut costs, and achieved results in terms of margin management, yet lacking volumes left adj. EBIT far from our EUR 1.2m estimate.

Many applications have already shown promise

Raw materials prices should remain stable, and pricing hasn’t been an issue for Exel, while cost cuts help results only so much. We estimate Q3 revenue to decline 11% y/y (meaning 18% q/q growth) while the EUR 35m revenue we estimate for Q4 should be enough to produce a healthy level of EBIT (we estimate EUR 2.5m Q4 EBIT). The demand and inventory cycles now produce large variations in results, and recent areas of particular softness (e.g. North American Wind power and Transportation) are also likely to make up much of the volume recovery going towards next year. Exel updates its strategy this fall; it’s clear Wind power remains a key driver (e.g. the Indian JV), but there should be other products to capitalize on (incl. conductor core rods) and ways to specify growth path in e.g. Transportation and Defense.

H2 figures to reflect the pace of demand improvement

Q4 might show a strong EBIT, but we see FY ’23 adj. EBIT halving to EUR 3.9m, a very modest level which means FY ’23 earnings multiples are elevated (20x EV/EBIT on our estimates). Exel’s valuation can’t be really described as expensive since profitability is to improve from here on, and the 7.5x EV/EBIT on our FY ’24 EBIT estimate of EUR 8.5m isn’t that challenging especially when such a level of EBIT would still be shy relative to long-term potential, yet the fog around demand pick-up keeps uncertainty high. Our new TP is EUR 3.5 (4.3); retain HOLD rating.

• Exel Q2 revenue decreased by 33.3% y/y to EUR 25.4m vs our EUR 34.3m estimate. European top line fared relatively well, declining by 16.0% y/y, whereas North America fell 61.3% as wind power demand was soft while Transportation also declined.
• Wind power amounted to EUR 2.3m, compared to our EUR 4.0m estimate, while Buildings and infrastructure came in at EUR 6.5m vs our EUR 7.7m estimate. Transportation amounted to EUR 3.7m, compared to our EUR 8.0m estimate.
• Adjusted EBIT landed at EUR 0.1m vs our EUR 1.2m estimate. Low volumes burdened EBIT, however Exel’s profitability improved slightly q/q despite the fact top line declined by 12% q/q as Exel aims to contain costs.
• Order intake was EUR 25.4m in Q2 and declined by 31.4%. Customer inventory reductions continued. The market in general was soft but in line with the company’s expectations.
• Exel guides FY ‘23 revenue to decrease and adjusted operating profit to decrease significantly (unchanged).

Weakness largely attributable to low Wind power volumes

Exel’s Q1 revenue fell 16% y/y to EUR 28.8m vs the EUR 32.2m/33.6m Evli/cons. estimates. H1 was seen soft due to lacking Wind power orders however such volumes came in at EUR 1.5m in Q1 vs our EUR 5.9m estimate. The figure was lower than Exel expected, in addition to which there was softness in Equipment and other industries. Transportation still saw strong development, yet small and mid-sized customers continued to reduce inventories as seen already in H2’22. Exel has already taken some cost actions and although there weren’t any notable cost-related surprises the demand softness led to an adj. EBIT of EUR 0.0m, compared to the EUR 1.2m/1.4m Evli/cons. estimates. Exel consequently downgraded its guidance as any significant demand recovery is unlikely to begin before H2’23, while the company will also incur some EUR 1m in additional expenses this year as it seeks to ensure its competitiveness within Wind power.

We also cut our FY ’24 EBIT estimate by more than 20%

Wind power’s development program is unlikely to change the company’s focus on turbine blade reinforcement elements; rather it should enhance Exel’s ability to deliver the needed volumes. Wind power may see some volume improvement already later this year, but the next couple of quarters are likely to remain soft before high growth again really begins to come through next year. Wind power aside, Exel looks to better capture sustained growth by focusing more on larger accounts. Exel’s strategy worked well in the past few years as it achieved a CAGR of 12% in FY ’19-21 however now seems to be a time for enhancing commercial focus. Such strategy themes (focus on high-volume accounts) aren’t very surprising in the light of Exel’s business model, in which a relatively high amount of customer account concentration tends to optimize profitability.

Valuation not particularly cheap in the short-term

Exel has a lot more potential thanks to its existing applications and their further scaling over the coming years, yet the 13x and 8x EV/EBIT multiples appear neutral on our estimates for FY ’23-24. Our new TP is EUR 4.3 (5.8); our rating is now HOLD (BUY).

• Exel Q1 revenue decreased by 15.7% y/y to EUR 28.8m, compared to the EUR 32.2m/33.6m Evli/consensus estimates. Europe grew by 3% y/y, but all the other geographic regions declined significantly.
• Wind power was EUR 1.5m vs our EUR 5.9m estimate, while Buildings and infrastructure amounted to EUR 7.8m, compared to our EUR 6.8m estimate. Equipment and other industries came in at EUR 5.6m, compared to our EUR 6.5m estimate. Small and mid-size customers reduced their inventories, while demand for Wind power equipment was lower than expected.
• Adjusted EBIT landed at EUR 0.0m vs the EUR 1.2m/1.4m Evli/consensus estimates. Costs remained generally in line with the company’s own expectations.
• Order intake amounted to EUR 26.3m in Q1, declining by 30.0% y/y.
• Exel guides FY ’23 revenue to decrease and adjusted EBIT to decrease significantly compared to previous year. Exel lowered guidance due to lower-than-expected revenue and adjusted EBIT in Q1, while demand outlook is weaker-than-expected in the short-term. The company has also started a major development program to capture opportunities within Wind power. Adjusted EBIT will therefore include more than EUR 1m in additional costs related to the program in FY ’23. Exel continues to expect demand to improve in H2’23, driven by Wind power.

Heady growth continued in H1’22, but H2’22 was slower

Exel’s Q4 revenue landed at EUR 31m vs the EUR 36m/35m Evli/cons. estimates. Destocking, after a period of high demand following the initial shock of the pandemic, has been an issue lately and is expected to continue in H1’23. Equipment and other industries, the third largest customer group, was particularly soft relative to our estimates but there seems to have been nothing special going on apart from the destocking issues as well as normal cyclicality. The soft top line left adj. EBIT at EUR 0.9m vs the EUR 2.4m/2.0m Evli/cons. estimates.

H1’23 will still be soft; guidance suggests better H2’23

Exel sees improvement from Q2 in orders as well as EBIT; top line is to remain flat this year, while EBIT has ground from which to gain. The Runcorn cuts should produce EUR 1.6m in annual savings. Inflation hasn’t been a big issue for Exel and raw materials are stabilizing. Wind power should again grow, according to Exel, at a 15% y/y pace from H2’23. Wind power was Exel’s largest customer in 2019-20 and continued to grow at a CAGR of 16.5% in FY ’20-21, however its revenue fell by EUR 5.3m last year and was overtaken by Buildings and infrastructure already in 2021. Exel got its challenges in the US sorted out last year, but the relative softness in the three largest customer groups left its adj. EBIT for the year at EUR 8.0m (we consider it a modest level). We note the four smaller industries together grew by 19% last year, although this was mostly attributable to Transportation as it enjoyed pent-up demand after the pandemic and received initial orders for a new aerospace application.

Valuation is not challenging if growth returns in H2’23

Exel is valued 9.5x EV/EBIT on our FY ’23 estimates, which we consider a neutral level. The multiple is not very low, however we estimate an EBIT margin of 6.3% for the year whereas the company should still be on track towards its long-term 10% target (it reached almost 9% in FY ’20). For FY ’24 we estimate 7% growth and 7.5% EBIT margin, which would translate to an EV/EBIT of 7.5x. Our new TP is EUR 5.8 (6.5); our rating is BUY.

• Q4 revenue decreased by 15% y/y to EUR 31.0m, compared to the EUR 36.3m/35.0m Evli/consensus estimates. All geographical regions declined y/y, particularly North America.
• Wind power amounted to EUR 5.5m vs our EUR 7.2m estimate. Buildings and infrastructure came in at EUR 8.1m, compared to our EUR 7.8m estimate, whereas Equipment and other industries totaled EUR 4.3m vs our EUR 7.3m estimate. Machinery and electrical as well as Transportation grew y/y.
• Adjusted EBIT was EUR 0.9m, compared to the EUR 2.4m/2.0m Evli/consensus estimates. Absolute profitability and operating margin hence remained roughly flat y/y as good cost management compensated for lower revenue.
• Order intake amounted to EUR 25.6m in Q4, in other words decreased by 16% y/y.
• The BoD proposes EUR 0.20 per share dividend to be distributed for the year, compared to the EUR 0.25/0.23 Evli/consensus estimates.
• Exel guides FY ’23 revenue to be at last year’s level and adjusted EBIT to increase compared to last year. Wind power particularly should support development during the latter part of the year.

Top and bottom line a bit shy but no major issues

Exel’s Q3 revenue was EUR 33.8m vs our EUR 37.5m estimate. The two largest regions, Europe and North America, continued to grow at a rate of some 5% y/y while Asia-Pacific declined by 6%. The largest customer segments landed close to our estimates, while relative softness within the smaller segments added up and hence Exel’s volumes were not quite as high as we expected. The relative lack in volumes also left the EUR 1.8m adj. EBIT muted vs our EUR 2.7m estimate. The summer months were quiet in terms of new orders however the levels have begun to improve over the autumn. Exel left its guidance unchanged; in our view Q4 EBIT is set to improve y/y as the comparison figure is low, while there should be potential for at least some improvement q/q.

Long-term CAGR should remain around 5-10%

Exel’s long-term drivers are in place as before and we believe the company has been able to find the right types of customer accounts. The 6.7% adj. EBIT margin seen this year is not too bad, yet there should be plenty of upside left beyond that level. The consolidation of the two Chinese plants yields annual cost savings of EUR 0.7m, while wind power is likely to remain an important driver next year. The Indian JV may prove useful in this respect. The 24% growth seen last year was a rate very difficult to sustain for long, and Exel’s top line may not grow much this year, but in our view Exel’s accounts should still support long-term CAGR of some 5-10%. Such rates, combined with further margin upside, mean there’s still meaningful EBIT potential left.

Valuation not demanding even if growth slows a bit

Exel is valued at slightly above 8x EV/EBIT on our FY ’23 estimates, which is not a particularly high level considering our respective 7.5% EBIT margin estimate is well below the long-term benchmark level of 10% the company has been able to touch on a few occasions with significantly lower top line. In our view Exel’s key customer accounts could help the company grow even in a more challenging macro environment, however short order visibility is one factor limiting earnings multiples potential. We update our TP to EUR 6.5 (8.5) and retain our BUY rating.

• Exel Q3 revenue grew by 1% y/y to EUR 33.8m vs our EUR 37.5m estimate. Growth was driven by North America while sales also increased in Europe.
• Wind power landed at EUR 8.0m vs our EUR 8.0m estimate, while Buildings and infrastructure was EUR 7.8m vs our EUR 8.3m estimate. Equipment and other industries amounted to EUR 5.6m, compared to our EUR 6.0m estimate. Growth was particularly strong within Transportation.
• Adjusted EBIT amounted to EUR 1.8m, compared to our EUR 2.7m estimate. The US unit performs at a better level compared to last year while Exel has succeeded quite well in transferring inflation to its prices.
• Order intake was EUR 24.5m during Q3, in other words flat y/y.
• Exel guides FY ’22 revenue to be at last year’s level and adjusted EBIT to increase compared to previous year (unchanged).

Absolute profitability topped the previous record

Exel’s top line grew 13.5% y/y to EUR 38.1m vs the EUR 36.8m/35.7m Evli/cons. estimates. Wind power customers developed soft relative to our estimate due to China and the local policies, but the shortfall was more than made up by Transportation where revenue grew by EUR 4.4m y/y to EUR 7.2m thanks to released pent up demand after the pandemic. The orders were attributable to old applications like train panels as well as a new aerospace application in North America, on the details of which Exel will elaborate later this year. Exel can already produce the application profitably even though it is only in the initial phases of its lifecycle. Q2 adj. EBIT reached EUR 3.1m, compared to the EUR 2.4m/2.2m Evli/cons. estimates. The 8.2% adj. EBIT margin was not bad, but Exel is still able to do better than that in the long-term assuming growth continues and the US unit keeps improving.

Progress is set to continue

The US unit has already improved a lot in recent quarters yet still has EBIT upside potential. This is also reflected by the EUR 37.0m order intake, which developed flat q/q but declined by 15% y/y as there were certain US Wind power orders last year which were later cancelled due to production challenges. The Q2 report confirmed Exel’s continued progress on its long-term track especially in that the company can find suitable high-volume customers and is not overly reliant on any one industry or application. The inflationary environment is not a major challenge given Exel’s niche position in the value chain. Exel left its guidance unchanged for now due to the well-known global uncertainties, however an upgrade seems likely in the months ahead.

Valuation is unchallenging as potential materializes

We make only very marginal updates to our estimates. We expect 10% growth for this year while we estimate a 7.4% adj. EBIT margin. The EUR 11m adj. EBIT translates to a valuation multiple of 10x, which would continue to decrease to 8x EV/EBIT on our FY ’23 estimates. We retain our EUR 8.5 TP and BUY rating.

• Exel Q2 revenue grew by 13.5% y/y to EUR 38.1m, compared to the EUR 36.8m/35.7m Evli/consensus estimates. Growth in North America was an important contribution, which stemmed from a new aerospace application in the Transportation customer industry.
• Wind power landed at EUR 6.5m vs our EUR 8.7m estimate, while Buildings and infrastructure was EUR 8.9m vs our EUR 9.2m estimate. Equipment and other industries amounted to EUR 5.9m, compared to our EUR 6.1m estimate.
• Adjusted EBIT was EUR 3.1m vs the EUR 2.4m/2.2m Evli/consensus estimates. Adjusted EBIT margin was therefore a very decent 8.2%. The US unit’s performance continued to improve. Exel has been able to adjust its sales prices to reflect higher raw materials, logistics and energy prices.
• Order intake amounted to EUR 37.0m in Q2, down by 14.9% y/y but flat q/q as there were large Wind power last year which were later cancelled.
• Exel guides revenue in 2022 to be at last year’s level while adjusted operating profit will increase compared to 2021 (unchanged).

Margins seem set to improve further during this year

Exel’s Q1 revenue grew 10% y/y to EUR 34.2m, compared to the EUR 37.1m/33.9m Evli/cons. estimates. All industries continued to grow except Wind power and Defense, where timing issues led to 8% y/y top line declines but for which long-term outlook has clearly improved in the past few months. The latter remains relatively small but has a lot more potential in markets such as India, while we believe China’s weakness also contributed to the decline of the former. Adj. EBIT amounted to EUR 2.2m vs the EUR 1.7m/1.4m Evli/cons. estimates. Product mix and variable cost inflation had a negative impact on profitability, masking some of the underlying positive development as Exel’s pricing adjusts with a lag of few months. Energy costs are also up, but Exel should be able to pass them on as well; we note Exel can also adjust already signed orders’ prices.

Guidance upgrade is much possible later this year

The US unit has now reached a break-even result; we estimate Exel’s EBIT margin continues to improve towards 7% and beyond during this year. We estimate 7.5% margin for H2’22, a level previously seen in H1’21 but with the difference that this year top line will be 15% higher. The Chinese restructuring will also produce EUR 0.7m in annual cost synergies. China’s virus situation pushed the Asia-Pacific region down 22% y/y in Q1; we believe there’s a good chance Exel will revise guidance upwards later this year, especially if Chinese demand normalizes and productivity further progresses in the US.

Valuation appears very conservative

We estimate EUR 10.2m adj. EBIT for this year, on which Exel is valued about 11x. Exel has additional profitability potential beyond that and is valued 8x EV/EBIT on our FY ’23 estimates. An 8.5% EBIT margin estimate doesn’t seem to be too high for next year, considering Exel reached a higher margin in FY ’20 while revenue will soon have grown by some 40% since then. There are no particularly relevant peers for Exel and hence valuation is a matter of judgment, but in our view Exel’s earnings-based multiples appear very undemanding in the short and long-term perspective. Our new TP is EUR 8.5 (9); we retain our BUY rating.

• Q1 revenue grew by 10.3% y/y and landed at EUR 34.2m, compared to the EUR 37.1m/33.9m Evli/consensus estimates. Growth stemmed from Europe and North America. The virus situation in China led to a revenue decline in the Asia-Pacific region.
• Wind power amounted to EUR 6.8m, compared to our EUR 8.3m estimate, while Buildings and infrastructure was EUR 7.7m vs our EUR 8.5m estimate. Equipment and other industries came in at EUR 7.4m vs our EUR 7.1m estimate.
• Adjusted EBIT was EUR 2.2m vs the EUR 1.7m/1.4m Evli/consensus estimates. The US unit no longer had a negative impact as employee turnover has decreased and production yield has improved. Product mix as well as higher raw material, energy and logistics costs had a negative impact on profitability, but Exel continues to adjust sales prices to catch up with costs.
• Order intake amounted to EUR 37.6m, down by 10.5% y/y.
• The war has not so far limited raw material availability from Exel’s perspective.
• Exel guides revenue in 2022 to be at last year’s level and adjusted operating profit to increase compared to 2021 (unchanged).

The EUR 1.0m Q4 adj. EBIT was soft relative to estimates

Q4 revenue grew 33% y/y to EUR 36.5m vs the EUR 32.0m/31.8m Evli/cons. estimates. Buildings and infrastructure grew to be the largest industry and the fact highlights how there are many industries besides Wind power driving growth. Order intake was moderated due to the difficulties in the US and inflation had some negative impact on Q4 EBIT, but Exel continues to lift its own pricing and hence raw material price increases are not a major issue, at least not in the long-term perspective. We gather Exel’s raw material inflation pace slowed down somewhat late last year, which is not surprising considering the rate seen earlier during the year. That said, raw material prices don’t seem to be declining either and so the environment can still cause some short-term drag on EBIT. We estimate most of the EUR 0.9m q/q profitability improvement was attributable to the US unit.

We still estimate meaningful growth for this year

The US labor situation remains extraordinarily challenging and thus it will take at least some additional quarters before Exel again reaches the high single-digit EBIT margins it used to enjoy before the problems in the US materialized. Exel is doing the best they can to hire and retain local employees. Meanwhile demand appears to remain very strong across basically all geographies and customer industries. We revise our FY ’22 revenue estimate to EUR 150.7m (prev. EUR 146.8m), while our new EBIT estimate for this year is EUR 10.6m (prev. EUR 12.0m).

Long-term earnings potential continues to stand out

We believe Exel should have no trouble hitting EUR 150m top line especially when the US unit continues to progress. Exel has previously been able to reach 10% EBIT on a quarterly level (long-term target is above 10%). We expect FY ’22 results to still fall a lot short of the implied EUR 15m mark, and hence long-term upside remains significant. Exel is valued around 5.5-7.0x EV/EBITDA and 8.0-11.0x EV/EBIT on our FY ’22-23 estimates. Uncertainty around the US limits upside in the short-term and we thus revise our TP to EUR 9 (10). We retain our BUY rating.

• Q4 revenue grew by 32.7% y/y and was EUR 36.5m vs the EUR 32.0m/31.8m Evli/consensus estimates. North America contributed by far the most to growth.
• Wind power was EUR 8.3m vs our EUR 7.9m estimate while Buildings and infrastructure amounted to EUR 8.4m, compared to our EUR 8.5m estimate. Equipment and other industries landed at EUR 7.1m, clearly above our EUR 5.4m estimate.
• Adjusted EBIT came in at EUR 1.0m vs the EUR 1.3m/1.4m Evli/consensus estimates. Exel USA’s profitability improved a bit q/q but continued to drag results.
• Q4 order intake was EUR 30.5m, down by 8.8% y/y.
• Exel guides flat revenue and increasing adjusted EBIT for FY ’22. In our view it is hard to guide increasing revenue this early in the year given the high comparison figure. Consensus estimates for FY ‘22 adjusted EBIT, at EUR 10.5m, are clearly above the EUR 6.0m comparison figure and we see it is likewise difficult to give any stronger wording this early in the year.
• The BoD proposes EUR 0.20 per share dividend to be distributed, compared to the EUR 0.25/0.22 Evli/consensus estimates.

Q3 EBIT was weak but Q4 will already be a lot better

Q3 revenue grew 28% y/y to EUR 33.4m vs the EUR 30.4m/30.6m Evli/cons. estimates. Buildings and infrastructure, the most significant contributor, grew 64% but positive top line development was broad; Exel also sees stabilization in Transportation, where the pandemic hit demand. Inflation had only a limited impact as Exel was able to transfer the effect of higher raw material prices forward, and Exel’s pricing continues to advance. Profitable growth thus continued excluding the US unit, where a high-volume Wind power product’s ramp-up costs ate all other EBIT. Exel’s Q3 adj. EBIT was EUR 0.1m vs the EUR 1.9m/1.7m Evli/cons. estimates. The US labor market challenges exacerbated the production problem. The US unit’s performance is expected to improve already in Q4, but in our view it will not perform according to requirements at least before Q2’22.

We make relatively small revisions to our FY ’22 estimates

Exel announced its long-planned Indian expansion. We view the Indian JV a practical step to serve existing global customers in a new growth geography and a chance to sign new accounts. We reckon the Indian plant (which we expect to be driven by Wind power but not entirely) has an output smaller than that of Exel’s existing assets. We expect the JV to add ca. EUR 5m in annual revenue starting next year, considering Exel owns 55% of the entity, and we believe valuation is below 1x EV/S. Exel’s FY ’21 adj. EBIT margin is to remain a modest 5%, but profitability should already improve by 400bps q/q in Q4. We raise our FY ’22 revenue estimate to EUR 147m (prev. EUR 139m) due to the continued strong outlook as well as the Indian contribution.

In our view annual EBIT is to rebound above EUR 10m soon

FY ’21 EBIT isn’t meaningful since Exel has managed above EUR 2.5m quarterly EBIT many times with a significantly lower top line than what will be seen next year. In our view Exel is unlikely to reach the 10% target margin in FY ’22 as the US unit probably doesn’t fully perform in the early part of the year. We don’t view Exel’s 7x EV/EBITDA and 10x EV/EBIT multiples (on our FY ’22 estimates) challenging. We retain our EUR 10 TP and BUY rating.

• Q3 revenue grew by 28.2% y/y and amounted to EUR 33.4m, compared to the EUR 30.4m/30.6m Evli/consensus estimates. Europe and North America drove growth in Q3.
• Wind power was EUR 8.6m vs our EUR 9.0m estimate. Buildings and infrastructure amounted to EUR 8.1m, compared to our EUR 6.8m estimate.
• Adjusted EBIT was EUR 0.1m vs the EUR 1.9m/1.7m Evli/consensus estimates. EBIT margin amounted to 0.3% vs our 6.3% estimate. The low profitability was due to the ramp-up of a specific high-volume carbon fiber Wind power product. The current US labor market situation also poses its own challenges, and the poor profitability seen in the US masks profitable growth in the other regions.
• Q3 order intake was EUR 24.6m and increased by 0.2% y/y. There were some cancelled orders.
• Exel guides FY ’21 revenue to increase significantly and adjusted operating profit to decrease (unchanged). Exel specifies FY ’21 revenue to amount to EUR 125-135m and adjusted operating profit EUR 5.8-7.0m. The midpoints imply EUR 32.1m revenue and EUR 1.4m adj. EBIT for Q4 (vs the respective EUR 31.7m and EUR 2.3m estimates).

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.

Q2 margins declined pretty much as expected

Sales mix (tilt to carbon fibers) as well as volumes continued to improve and Q2 top line grew by 23% y/y. The EUR 33.5m figure surpassed our EUR 30.4m estimate despite certain quarterly softness in Wind power, which in our view testifies to Exel’s extended wide positive development. Buildings and infrastructure, a highlight customer industry, was driven by the conductor core application and reached EUR 8.7m top line (vs our EUR 5.9m estimate). Q2 gross margin declined by almost 400bps y/y and 200bps q/q to 56.3%, which wasn’t a surprise per Exel’s comments in connection with the Q1 report. Higher raw materials costs and certain growth category products’ ramp-up had a negative margin impact, but Exel’s 7.3% adj. EBIT margin was in fact a bit above our 7.2% estimate. The resulting EUR 2.5m adj. EBIT topped our EUR 2.2m estimate thanks to the high revenue. Exel retained its previous FY ‘21 guidance.

Prolonged high growth further lifts profitability potential

Order intake didn’t show any signs of cooling and leaped by 90% y/y. The Q2 comparison figure was soft, but nevertheless the latest EUR 43.5m figure gained another 4% q/q and can be compared to the EUR 30m quarterly levels that used to be common. We now expect Exel to reach 15% growth this year. In our view H2 growth is bound to top 10% and thus we estimate H2 EBIT margins to increase by ca. 100bps y/y. We still expect Exel’s composites pricing to adjust for higher raw materials costs and see annual EBIT margin reach close to 10% already next year. It’s a bit early to say much about FY ’22, but the recent order intake levels suggest Exel might then grow another 10% or so. We therefore see EBIT gaining almost another EUR 3m.

We now estimate EUR 13.5m FY ’22 EBIT (prev. EUR 12.7m)

Exel’s valuation has turned, in our view, more attractive now that recent strong growth outlook has been extended. Exel is now valued ca. 9x EV/EBITDA and 14x EV/EBIT on our FY ‘21 estimates. These are still somewhat high in the historical context, but we expect them to contract to around 7.5x and 11x in one year’s time. Our TP is now EUR 11.5 (11.0), new rating BUY (HOLD).

• Q2 revenue was EUR 33.5m, compared to our EUR 30.4m estimate. Top line growth was 23% y/y. Customers in Europe and North America drove growth.
• Wind power amounted to EUR 7.8m vs our EUR 8.9m estimate, while Buildings and infrastructure was EUR 8.7m (we expected EUR 5.9m). Defense continued to grow very fast while Equipment and other industries was also very strong.
• Q2 adjusted EBIT was EUR 2.5m vs our EUR 2.2m estimate. Adjusted EBIT margin was 7.3%, compared to our 7.2% estimate.
• Order intake amounted to EUR 43.5m in Q2 and grew by 90% y/y. The Q2 figure was thus some 4% higher than that seen in Q1.
• Exel retains the previous guidance, expects revenue and adjusted EBIT to increase in FY ’21 compared to FY ’20.

The EUR 42m order intake sets a new benchmark level

Exel’s Q1 revenue grew 11% y/y to EUR 31m and was a bit above our EUR 30m estimate. Customer industries performed close to our expectations while Asia-Pacific contributed most of the growth. Adj. EBIT was EUR 2.5m vs our EUR 2.4m estimate. Strong demand was to be expected, yet the EUR 42m order intake (up 22% y/y from a high comparison figure) is a record and can be compared to the EUR 30m level Exel has averaged in the recent past. The orders stemmed from many industries and no large orders drove the intake. Operations ran almost as usual despite the pandemic, raw materials, and logistics issues. Exel managed to balance its raw material pool across the eight plants.

Organic CAGR outlook now closer to 10% than 5%

Exel already saw some raw materials inflation affecting Q1 margins. We expect a more pronounced negative effect in Q2 (we now estimate 7.2% Q2 EBIT vs our prev. 10.4% estimate), but also see EBIT margins bounce back to ca. 9-10% levels in H2. Exel has been able to pass raw materials inflation forward before and this is to be expected again considering the value chain position. Profitability slope remains attractive especially if the Q1 order levels continue to persist over the summer. We don’t consider the EUR 42m figure just a fluke and even if Exel may not quite reach such high orders in the coming quarters we nevertheless see the company is now positioned for high single-digit organic CAGR for years to come. In our view Exel might well reach double-digit top line growth this year and we see such growth rates driving long-term EBIT margins meaningfully above 10%.

Earnings multiples have already rerated for a valid reason

Exel is valued ca. 9.5x EV/EBITDA and 15x EV/EBIT on our FY ’21 estimates. The multiples are a bit high compared to the historical respective averages of 8x and 13x but in our view warranted by the current growth prospects. Top line growth continues to drive profitability and the multiples are some 8.5x and 12x on our FY ’22 estimates. In our opinion the next few quarters’ orders will determine how much forward into the future the multiples may lean. We retain our EUR 11 TP, rating now HOLD (BUY).

• Exel Composites’ Q1 revenue amounted to EUR 31.0m vs our EUR 30.0m estimate. Top line thus grew by 11.3% y/y. Asia-Pacific drove growth (increased Wind power and Defense deliveries).
• Wind power top line was EUR 7.4m, compared to our EUR 7.5m estimate. Meanwhile Buildings and infrastructure was EUR 7.0m vs our EUR 6.9m estimate.
• Exel Q1 adj. EBIT was EUR 2.5m vs our EUR 2.4m estimate. Adjusted operating margin was 7.9%.
• Q1 order intake amounted to EUR 42.0m and grew by 21.7% y/y. This is a very high figure and suggests, should similar momentum continue, upward revisions to full-year revenue and profitability estimates.
• Exel retains the previously stated guidance and expects revenue as well as adjusted operating profit to increase in 2021 compared to 2020. In our view this is understandable, despite the high order intake, as it is still very early in the year.
• According to Exel global raw material and logistics challenges have not so far had a significant impact on profitability. There is nevertheless an elevated risk that raw materials price inflation, as well as shortages, will have a short-term negative impact on profit margin.

The strategic priorities have already delivered results

In our view Exel Composites is a competitively positioned player in the materials value chain and operates in a niche that has a strong long-term growth outlook. The company manufactures composites for demanding industrial applications. Strategy execution paid off in 2019-20 as adjusted operating profit almost doubled to EUR 9.7m in FY ’20 from the level seen in FY ’18. The excellent financial performance was due to a pick-up in organic growth as well as successful cost reduction measures, both of which helped the company to scale the relatively high fixed cost base. Exel seems to have found an advantageous positioning within the Wind power customer industry but also in areas like Buildings and infrastructure, among many others.

Growth outlook continues to support profitability gains

Exel posted a 5% organic top line growth last year despite the pandemic. Wind power was a big driver but there were other notable positives such as Machinery and electrical. Transportation and Telecommunications were the only two customer industries, out of the seven, with revenue declines. The pandemic may still hurt Transportation demand this year but in our view the area has good long-term outlook. Telecommunications is the one industry with a bit muted outlook but even there the situation may improve with the rollout of 5G. Exel guides increasing revenue and adjusted EBIT for this year. We estimate 7% growth and an additional EUR 1m EBIT gain. We view Exel positioned for ca. 5-6% CAGR in the years to come.

We see more room for earnings-based multiple expansion

Exel has been historically valued around 8x EV/EBITDA and 0.9x EV/S. The current valuation is ca. 8.5x EV/EBITDA on our estimates for this year, in other words not that high in the historical context even though the shares have appreciated a lot. Profitability gains have justified the rally. The valuation is now historically rich in terms of EV/S, but we also find this justified since the strategy is poised to deliver more in the years to come. Our TP is now EUR 11 (10) per share. We retain our BUY rating.

Broad positive development continued

Exel recorded EUR 27.5m in Q4 revenue, up 4% y/y. The figure was a bit above the EUR 27.2m/26.5m Evli/cons. estimates. Wind power’s order timings meant the segment’s EUR 6.6m top line, down 6% y/y, didn’t meet our EUR 8.9m estimate. Relative strength in other segments nevertheless helped to make up. Buildings and infrastructure developed especially strong and Exel continues to see potential in the segment due to e.g. cable core rods. The segment’s EUR 7.0m Q4 revenue (up 22% y/y) was way above our EUR 5.1m estimate. Favorable mix and further efficiency gains helped Exel to EUR 2.7m EBIT in Q4 vs the EUR 2.2m/1.8m Evli/cons. estimates. Operating margin was thus again in line with the above 10% long-term target. Order intake also grew by 6% y/y, which indicates brisk start for the year and is notable considering the high comparison figure.

We estimate EBIT at EUR 10.7m this year

Exel is positioned for 5-6% top line growth in the coming years. There are now other segments rising with Wind power. Wind however remains important and we see no reason why it wouldn’t contribute growth also this year. Global wind capacity grows by big numbers and we expect the Exel segment to post double-digit growth also in FY ’21 (up 19% in FY ’20). The Austrian plant is up and ready to serve European accounts across many segments, perhaps with a tilt towards Machinery and electrical, a segment we understand has relatively high gross margins. Exel already achieved high operating margin last year, and we estimate good potential for further gains. Since the EUR 8.5m Austrian investment has now been completed we see a solid organic growth outlook with relatively low EUR 5m annual capex levels. We make only small adjustments to our estimates.

Valuation is still not demanding all things considered

Exel is valued at ca. 8x EV/EBITDA and 12x EV/EBIT on our FY ’21 estimates. In our opinion Exel is making solid progress towards long-term targets; we see the company reaching an annual 10% EBIT margin already in FY ‘22. This achievement would help the respective earnings multiples to decrease to around 7x and 10x levels next year. Our TP is now EUR 10.0 (7.25), retain BUY rating.

• Exel Q4 revenue was EUR 27.5m, compared to the EUR 27.2m/26.5m Evli/consensus estimates. Revenue grew by 3.5% y/y. Q4 growth was strong in Europe and Asia-Pacific.
• Wind power revenue was EUR 6.6m vs our EUR 8.9m estimate (down by 6% y/y). Strongness in other segments, notably Buildings and infrastructure, helped compensate for this weakness relative to our estimate. Wind power’s relatively low share may have also helped the earnings beat.
• Exel Q4 adj. EBIT amounted to EUR 2.7m vs the EUR 2.2m/1.8m Evli/consensus estimates. Adjusted operating margin was therefore a very strong 9.9%.
• Q4 order intake was EUR 33.4m and thus increased by 5.7% y/y.
• Exel guides revenue and adjusted operating profit to increase in 2021 compared to 2020.
• The Board of Directors proposes EUR 0.20 per share dividend distribution, the same as our estimate.

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.

• Exel Composites’ Q3 revenue was EUR 26.0m (up 10% y/y) vs the EUR 24.1m/23.4m Evli/consensus estimates.
• Wind power recorded EUR 7.8m in revenue, compared to our EUR 6.5m estimate. Asia-Pacific developed strong, where Q3 revenue increased to EUR 6.8m from EUR 4.3m.
• Adjusted EBIT amounted to EUR 2.0m, in comparison to the EUR 2.3m/2.0m Evli/consensus estimates. Adjusted operating margin was thus 7.8% vs our 9.5% estimate. According to Exel profitability was negatively impacted by the uneven distribution of revenues across business units, and together with the pandemic production efficiency and profitability were impaired especially in the US business unit.
• Q3 order intake declined by 10% to EUR 24.5m mainly due to a partial cancellation of a large order in the US booked in Q1. Exel nevertheless says underlying demand across all customer industries has slightly improved recently.
• Exel reinstates FY ’20 guidance and expects revenue to increase or to remain at previous year’s level, while adjusted operating profit is set to increase. In our view the guidance is rather unsurprising.

Top line as expected, profitability a major positive surprise

Exel’s Q2 was as expected in terms of group-level revenue. The figure was EUR 27.2m i.e. in line with the EUR 27.9m/27.2m Evli/cons. estimates and up 3% y/y. Wind power grew by 52% y/y, and the EUR 7.9m figure was clearly above our EUR 6.6m estimate. The increase was driven by Asia-Pacific. All in all, it seems the pandemic has had only a limited impact on Exel’s business so far. Revenues have rolled in as expected and Q2 order intake only fell by 4% y/y, which in our view is a remarkable result considering the business and the current macro context. In this sense the Q2 update was a bit unsurprising relative to the Q1 release. The surge in profitability, however, was unforeseen. Exel achieved EUR 2.9m in adj. EBIT, compared to the EUR 2.0m/2.0m Evli/cons. estimates. The US unit fueled the positive surprise.

Profitability outperformance has been extended

Guidance wasn’t reinstated (Exel guided increased revenue and adj. EBIT earlier this year). In our view the reluctance to issue guidance for now reflects order uncertainties. Deliveries could be hit should the environment rapidly worsen, which is a relevant possibility. Yet in our view Exel is on a clear track to achieve higher earnings, considering the EUR 5.0m in H1’20 adj. EBIT vs the EUR 4.2m in H1’19. The company has topped the expectations we had prior to the pandemic. The earnings report changes our top line estimates very little, but we upgrade our profitability estimates. We previously expected EUR 3.7m in H2’20 adj. EBIT, and now see the figure at EUR 5.1m. For FY ’21 we now estimate the figure at EUR 11.1m (previously EUR 9.5m).

Valuation is undemanding especially compared to peers

Exel has continued to outperform our expectations while the macroeconomic situation does justify some valuation caution. We nevertheless see clear upside to current multiples. Our new TP of EUR 6.25 (5.50) implies ca. 6.5x EV/EBITDA and 10.5x EV/EBIT on our estimates for this year. Our rating remains BUY.

• Q2 revenue amounted to EUR 27.2m, compared to the EUR 27.9m/27.2m Evli/consensus estimates.
• With respect to customer industries, Wind power revenue stood at EUR 7.9m in Q2 i.e. some EUR 1.3m higher than we expected.
• Adjusted operating profit was EUR 2.9m vs EUR 2.0m/2.0m Evli/consensus estimates. Adjusted operating margin was thus an excellent 10.6%. The profitability improvement was primarily driven by the US unit.
• Q2 order intake declined by 3.8% y/y to EUR 22.9m, which in our view is more than a decent figure considering the extraordinary circumstances that prevailed during the quarter. One large order, attributable to Buildings and infrastructure (worth some EUR 3.5m), helped but overall the order book situation looks rather good for now.
• Exel withdrew guidance for FY ’20 in connection with the Q1 earnings release. The company says it will reinstate guidance later this year.

Strong development continued during Q1

Exel’s EUR 27.8m Q1 revenue grew by 3% y/y and matched EUR 27.9m/27.2m Evli/cons estimates. The company updated its reporting structure, now disclosing revenue for seven customer industries instead of the previous three broad segments. Buildings & infrastructure and Wind power, which previously made up the Construction & Infrastructure segment, reported a combined EUR 12.0m in revenue, which was in line with our estimate (Wind power only grew by 1% y/y due to timing issues). Machinery & electrical, Transportation and Telecommunications, i.e. the former parts of Industrial Applications, reported a combined EUR 8.4m. This was less than we expected but Equipment & other industries and Defense made up with a total of EUR 7.4m. Adjusted EBIT, at EUR 2.1m, also met EUR 2.2m/2.0m Evli/cons estimates. ROCE increased to 12% from 3% a year ago and the US unit reached profitability. Order intake growth accelerated to 23% y/y pace and the EUR 34.5m in new orders meant order backlog stood at EUR 37.1m, up 50% y/y. A big US order is scheduled to be delivered through FY ’20.

We now expect adjusted EBIT to increase to EUR 7.8m

Although strong development continued Exel is not immune to macro uncertainty and thus the company withdrew guidance. We revise our estimates down. We previously expected 6% top line growth for this year, and we have revised the figure down to 3%. We cut our FY ’20 EBIT estimate down by EUR 0.9m to reflect potential operational challenges. In our opinion the long-term case remains intact. Exel also has a good liquidity situation. The EUR 10m overdraft facility was extended by two years.

We cut our TP due to significantly higher uncertainty

In our view higher multiples are justified by the fact that Exel has continued to perform according to expectations. Meanwhile the pandemic raises uncertainty even if development has remained good. We update our TP to EUR 5.50 (6.75) due to lowered estimates and higher uncertainty; yet in our view Exel still trades at relatively low multiples and we thus retain our BUY rating.

• Q1 revenue was EUR 27.8m vs EUR 27.9m/27.2m Evli/consensus estimates, thus increasing by 3% y/y. The pandemic impacted business only in China during Q1, where production has resumed to full capacity. The UK unit has been running at reduced capacity since April.
• Exel Composites updated its reporting structure. The company previously reported revenue for three broad segments and now discloses figures for seven customer industries. In Q1 most of the customer industry revenues grew y/y, excluding Transportation and Telecommunications. 
• Exel Q1 adjusted operating profit stood at EUR 2.1m compared to EUR 2.2m/2.0m Evli/consensus estimates.
• Order intake increased by 23% y/y to EUR 34.5m. Order backlog was thus 50% higher than a year ago.
• Exel Composites issued an outlook on Feb 18 according to which revenue and adjusted operating profit are expected to increase in 2020 compared to 2019. The company now withdraws the guidance due to poor short-term visibility.

We continue to expect top line to grow at high single digits

Q4 top line, at EUR 26.6m, was flat y/y and a little soft compared to our EUR 27.8m estimate. This was due to Construction & Infrastructure, where Q4 revenue declined by 2% y/y to EUR 12.6m, while we expected EUR 14.3m. Q4 was thus a relatively slow quarter for the segment, as y/y revenue growth had amounted to 12% in Q3. Exel says there have been no changes to e.g. wind energy demand; there can be wide variations in quarterly figures. Industrial Applications’ Q4 revenue declined by 1% y/y to EUR 8.5m and so the figure was above our EUR 8.0m estimate. Other Applications’ Q4 revenue was in line with our EUR 5.5m estimate. Although Exel’s Q4 top line fell short of our estimate only slightly, adj. EBIT was only EUR 1.3m vs our EUR 2.3m estimate. The gap was due to other operating expenses, which were high at EUR 6.4m (had averaged EUR 5.4m in the last few quarters). Exel says the high expenses were due to items like temporary production plant overlap in China as well as certain production-related one-offs. We find no other surprises on the cost side as gross margin remained at a 60% level and employee expense share continued to decline (down by 200bps y/y to 28%). Order intake continued to increase by 9% y/y.

Exel guides increasing revenue as well as adj. EBIT for ‘20

Exel will likely record some EUR 15m capex in ’20 due to the production plant investment in Austria and residual payments related to a past Chinese acquisition. Overall, we continue to view Exel’s volume outlook favorable. We expect wind energy to provide further strong uplift this year. Exel highlights good volume potential in applications such as cable cores and certain defense-related equipment. With regards to profitability, cost savings measures by themselves should contribute another EUR 1m this year, following the EUR 2m achieved last year.

We see more upside as volume outlook remains good

Exel’s valuation (ca. 8x EV/EBITDA and 13x EV/EBIT ‘20e) is still more than 20% below peer multiples. Although we believe some discount is warranted, we see upside from current levels. Our updated TP is EUR 6.75 (6.00), rating now BUY (HOLD).

• Q4 revenue amounted to EUR 26.6m, compared to EUR 27.8m/27.7m Evli/consensus estimates.
• Construction & Infrastructure top line was EUR 12.6m (EUR 12.9m a year ago) vs our EUR 14.3m estimate.
• Industrial Applications generated EUR 8.5m (EUR 8.6m) sales, whereas we expected EUR 8.0m.
• Other Applications top line amounted to EUR 5.5m (EUR 5.2m), in line with our EUR 5.5m expectation.
• Q4 adjusted EBIT was EUR 1.3m, compared to EUR 2.3m/2.2m Evli/consensus estimates. The figure missed our expectation as other operating expenses were about EUR 1.0m higher than we had estimated.
• The BoD proposes EUR 0.18 (0.18) dividend per share be distributed, while we had expected EUR 0.20.
• Exel Composites guides revenue and adjusted operating profit to increase in 2020 compared to 2019, which is as we expected. The company says the coronavirus will have an impact on its Chinese production volumes in Q1 yet is not ready to estimate the impact in more detail.

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).

No major surprises in terms of segmental performance

Exel Composites posted EUR 23.6m in Q3 revenue, a figure slightly below our EUR 24.7m estimate. Industrial Applications, a segment which includes telecommunications customers, continued soft as revenue declined by 10% y/y. We expected flat development. Other Applications reported EUR 4.8m Q3 revenue, a decent improvement y/y but not quite meeting our EUR 5.0m estimate. Construction & Infrastructure, driven by wind energy, improved by 11% y/y to EUR 10.9m and thus was basically in line with our expectations. The adjusted operating profit of EUR 1.7m was also in line with our expectations. Overall, the Q3 report didn’t provide major surprises as key customer industries such as wind energy continued to support volumes.

We make relatively minor estimate changes

We make only minor updates to our revenue and profitability estimates. We have revised our Q4 revenue estimate slightly upwards due to the strong 10% increase in order intake. We continue to expect Exel to manage around 7.5% adjusted operating margins going forward. Exel says it expects to fully reach the targeted EUR 3m in annual cost savings in 2020.

We see further upside in the light of recent performance

We continue to expect Exel to post positive volume and profitability development going forward. Although we do not make major changes to our estimates, in the light of recent good performance we argue slightly higher valuation multiples are warranted. Our updated TP is EUR 5.5 (5.0), which would imply roughly 8x EV/EBITDA and 12x EV/EBIT (adj.) on our ‘19e estimates. On our ‘20e estimates the multiples would amount to some 6x EV/EBITDA and 10x EV/EBIT. Such valuation is still significantly below peer group median. Our rating remains BUY.

• Q3 revenue was EUR 23.6m vs our EUR 24.7m estimate. Wind energy continued to support growth in the Construction & Infrastructure segment.
• Exel Composites posted EUR 1.7m in Q3 EBIT i.e. in line with our expectation.
• Operating margin, at 7.0%, was slightly above our 6.8% estimate.
• Exel says Q3 order intake remained on a good level and grew 9.7% y/y.
• The company says the cost savings program is proceeding according to plan, and the targeted EUR 3m in annual savings will be fully reached in 2020.
• Exel reiterates FY ’19 outlook, expecting revenue and adjusted operating profit to increase compared to previous year.

Wind energy sector continued to support volumes

Muted development extended within the Industrial Applications segment and Asia-Pacific region as telecommunications sector volumes remained weak. The Rest of the World region more than doubled its H1’19 revenues y/y due to the DSC acquisition; the transaction also boosted the Construction & Infrastructure segment thanks to the U.S. unit’s wind energy exposure. DSC remained unprofitable in Q2 (cost measures’ fruits should be visible already during Q3).

Financial targets remain stiff compared to current figures

Exel lately confirmed its long-term financial targets for 2019-22, continuing to target adjusted operating margin at a level above 10% while aiming for ROCE north of 20%. Exel’s Q2 recorded the respective figures at 8.5% and 14.1%. Q2 gross margin was strong at 63% i.e. somewhat above the typical level. We continue to expect the company’s ongoing volume shift to wind energy applications will put slight pressure on gross margin; hence the realization of profit-based targets depends on continued strong volume growth. Exel also introduced a net gearing target (at or below 60%), according to which the company should more than halve its indebtedness from the current 123% level. Exel retained its guidance for FY 2019 (expects higher revenue and adj. EBIT).

Current valuation level means there’s room for upside

We leave our revenue estimates largely intact but revise our operating margin estimates slightly upwards. Exel currently trades below 7x EV/EBITDA ‘19e (on our estimates) vs the historical 8-9x levels. Our rating remains BUY, our TP at EUR 5.

• Q2 revenue amounted to EUR 26.5m vs our EUR 26.7m estimate (consensus at EUR 27.4m).
• Q2 adjusted operating profit stood at EUR 2.2m vs our EUR 1.7m expectation (consensus at EUR 1.8m). The 8.5% adjusted operating margin was clearly above our 6.3% estimate, as well as the consensus.
• The 4.8% increase in revenue y/y was mainly attributable to the acquisition of DSC (completed in May 2018). The wind energy industry continued to support volumes. The telecommunications sector remained weak.
• The acquisition of DSC was reflected in the increase in revenue within the Rest of the World region. Asia- Pacific revenues declined due to telecommunications volumes. European revenue remained flat y/y.
• The cost savings program is proceeding according to plan. The company expects to fully realize the EUR 3m annual savings target in 2020. DSC remained in the red during Q2.
• Guidance for full year 2019 remains unchanged as the company expects revenue and adjusted operating profit to increase compared to previous year.

Q1 topped our estimates due to high wind energy volumes

Exel recorded an 8% organic growth in Q1. DSC (a U.S. company acquired in Apr 2018) contributed another 18%, bringing the total top line increase to 26% y/y. Construction & Infrastructure revenues doubled due to the DSC contribution (the unit has a high wind energy exposure) and strong organic wind energy growth. European sales were stable; the growth was attributable to Rest of the World and APAC geographies. Industrial Applications revenues declined by 18% y/y as the telecommunications market continued challenging.

Cost program helped to lift EBIT from the recent lows

Exel recorded Q1 adj. operating margin at 7.2% (vs. 8.3% a year ago). The margin averaged 2.5% in H2’18 as the DSC acquisition diluted profitability. Exel says it managed cost savings according to its own plans, expecting DSC to reach break-even profitability during 2019. In addition to improving DSC’s performance, Exel has implemented cost savings throughout the group e.g. by closing the German plant in April. Exel expects further synergy savings between the company’s two Chinese production plants, both located in the city of Nanjing. The group-wide cost savings program targets EUR 3m in annual savings and the measures are expected to be fully effective in 2020.

We make minor revisions, reiterate BUY rating and TP

Our growth and profitability estimates do not change materially. We continue to expect Exel to achieve an organic top line growth of around 7% in the coming years, and therefore gradual improvement in operating margins. Our rating remains BUY, our target price being EUR 5 per share.

• Net sales totaled EUR 27.1m vs. our projected EUR 24.3m. Revenue grew by 26% y/y thanks to the Construction & Infrastructure segment, which was driven by wind energy. Organic growth was recorded at 8.3%.
• Growth in Construction & Infrastructure as well as Other Applications made up for the decline in Industrial Applications. The telecommunications market continued to be challenging.
• The wind energy growth and the consolidation of DSC contributed to higher Rest of the World and Asia- Pacific revenues. European sales remained roughly flat.
• EBIT amounted to EUR 2.0m, beating our EUR 1.4m estimate. EBIT margin was 7.2% vs. our 5.9% expectation. The improvement was due to operational leverage, but also owed to improved efficiency achieved with the help of the cost savings program.

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.