Exel Composites - Still left waiting for higher volumes
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.