Exel Composites - Profitability is already improving

Exel’s Q3 EBIT fell way more than estimated, but guidance implies improvement is already happening and we expect Exel to be back on its earlier EBIT track soon enough.

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.

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