Componenta: Quite an order rally

The 50 MEUR order announced by Componenta from the Finnish Defence Forces was very significant relative to the size of the company and resulted inconsiderable forecast changes. However, the strong share price rise has reduced the justified upside. Although we still find the valuation level attractive, we lower our recommendation to Accumulate (was Buy). Reflecting our forecast changes, we raise the target price to EUR 3.60 (was EUR 2.80).

The order received has a significant impact on the forecasts

Componenta announced on May 31 that the Finnish Defence Forces have confirmed an order for 50 MEUR for shell-tailed compositions. Deliveries are scheduled for 2025-2028. The order is very significant in Componenta’s scale. However, it will have no impact on 2024 and our forecasts remain unchanged in this respect. This is a follow-up order, as Componenta already manufactures shells for 120 mm mortar rounds for the Defence Forces. However, the new order is a significant scale-up, as last year the defense segment accounted for some 4 MEUR (4%) of Componenta's revenue. In our forecasts, we have only considered the 41 MEUR secured share of the new order, and we have also assumed that 2/3 of our previously predicted orders from the Finnish Defence Forces is included in the new order. Based on this, the additional revenue related to the received order is approximately +3 MEUR in 2025 and +8 MEUR in 2026-2028. We believe that Componenta has been in a good negotiating position with the Finnish Defence Forces due to the company being domestic, its quality, delivery speed and security of supply. Combined with Componenta’s strong operational leverage, we estimate that the additional revenue generated will have an EBITDA margin of around 15%.  As a result, our 2025-2026 EPS forecasts have increased by about +20…+30%.

Upside has narrowed, but it's still there

Even after our forecast changes and the +37% price rally, the total expected return of Componenta’s share (+15% p.a.) exceeds the required return (12% p.a.) with the 2025 EV/EBITDA-based calculation. Calculations based on EV/EBIT or P/E ratios paint an overly negative picture of the potential return, as these ratios are still subject to significant leverage. This is due to Componenta’s temporarily disproportionately low EBIT and EPS ratios compared to EBITDA. Overall, we still find the stock's risk-adjusted return attractive. Componenta's relative valuation multiples are biased by the same factors as mentioned above. Thus, the 2025 EV/EBITDA ratio is significantly undervalued by -31% compared to the peer median, but the EV/EBIT ratio is only discounted by 17% and the P/E ratio by 1%. Thus, the outcome is inconsistent and the -25% discount we require is not fully achieved. We also find the EV/EBITDA to be a more meaningful benchmark in the current situation than other multiples in peer group valuation, and based on it the valuation discount of Componenta’s share is still considerable. The DCF model indicates a +17 % upside for Componenta’s share. The parameters of the model include a significant leverage effect in both directions, but overall the upside is rather narrow.