Exel Composites - Solid earnings recovery
Exel’s Q2 was encouraging as EBIT recovered significantly after a challenging period of missing demand. We believe EBIT could climb towards EUR 8m in the next year or so.
Revenue and gross margin improved, costs mostly controlled
Exel Q2 revenue grew 5% y/y to EUR 26.6m vs our EUR 24.7m estimate as activity rebounded in most industries except Energy where the company is only beginning to ramp up volumes in the new Indian factory. Order backlog was up 31% y/y at the end of Q2, although prolonged macroeconomic uncertainties mean volumes may not increase much more q/q in H2 even if they are likely to remain a lot higher y/y. Gross margin gained 500bps y/y due to factors such as improved capacity utilization, product mix and pricing. Staff costs had one-offs (e.g. restructuring costs), but despite this the EUR 1.4m adj. EBIT was clearly above our EUR 0.3m estimate. Exel’s operating leverage means EBIT could improve a lot more q/q over the following quarters in a high demand scenario, but we don’t estimate further big gains in the short-term.
We estimate H2’24 EBIT margins at around 6%
The Industrial BU still has modest volumes (17% of H1 revenue vs the 40% long-term target) as e.g. the new factory in India is yet to ramp up its capacity and wind power activity is only starting to recover. Exel could revise its revenue guidance upwards later this year but its factory network review is not yet done, and it might mean more production restructuring and hence have an impact on revenue. Even if FY ‘24 top line may not grow faster than the 7% rate we estimate we believe industrial activity is more likely than not to continue its recovery towards next year. Exel is thus likely to see further earnings gains in the next 12 months. We estimate only modest q/q EBIT improvement in Q3 to EUR 1.5m.
Valuation not demanding assuming 7% EBIT next year
We believe Exel could achieve an annual EBIT run-rate of EUR 6m quite soon, and continued volume growth should be able to lift it further up close to EUR 8m already next year. Exel is hence valued at a still rather high 14x EV/EBIT on our FY ’24 estimates due to a challenging Q1, which might mean annual EBIT stays around EUR 4m, however continued stable development would soon bring the multiple below 10x and it would be around 7x already next year. We retain our EUR 0.40 TP; our rating is now BUY (HOLD).