Exel Composites Q3'24: Market offers no support in the short term

Translation: Original published in Finnish on 11/1/2024 at 8:05 am EET.

Exel's Q3 results were very much in line with our operational expectations, continuing the nascent turnaround that began in Q2. However, order intake remained at a low level, reflecting the sluggish market situation, and the short-term market outlook remains quite modest. In light of this, we have slightly lowered our growth forecasts, which has also had a negative impact on our near-term earnings forecasts. In our view, the stock is currently priced to reflect the uncertain outlook, making the risk-adjusted expected return on the stock inadequate. Given the overall picture, we reiterate our Reduce recommendation, but lower our target price to EUR 0.35 (was EUR 0.38). 

Performance quite in line with our expectations for Q3

In Q3, the company’s revenue grew 20% year-on-year to 24.6 MEUR, up from a rather sluggish comparison period and well in line with our expectations. Customer industry performance was positive across the board, with all customer industries except Energy growing. Exel's adjusted EBIT was 0.7 MEUR, also well in line with our expectations. At the bottom of the income statement, however, net financing costs were significantly higher than our expectations, which we believe were mainly influenced by non-cash FX movements on intercompany loans. Against this backdrop, reported EPS turned negative, contrary to our expectations. In contrast, order intake in Q3 decreased from the weak comparison period (21 MEUR vs. Q3’23: 23 MEUR) and remained relatively soft despite seasonal factors. In our view, this reflects the current sluggish market situation.

We have lowered our growth forecasts in light of the weak outlook

As expected, Exel reiterated its guidance for the current year and expects its revenue to increase compared to last year (2023: 97 MEUR) and its adjusted EBIT to increase significantly compared to last year (2023: -2.4 MEUR). According to the company, uncertainty about the global economic outlook continued in the third quarter and macroeconomic sentiment remains mixed. Reflecting the weakness in new orders, we don't expect to see a broader, more pronounced recovery in demand until well into next year, given the current outlook. To reflect this overall picture, we have lowered our revenue forecasts, especially for this year and next year, and this is also visible in our earnings forecasts, although the absolute changes have been more limited. We now expect Exel’s revenue to rise to 100 MEUR this year (previously 104 MEUR) and adjusted EBIT to be 2.4 MEUR (was 3.1 MEUR). Despite a slight decline in longer-term growth forecasts, the underlying assumptions remain unchanged and are discussed in more detail in our most recent extensive report.

Market tailwinds required

We forecast a challenging valuation picture for the stock overall this year and still slightly elevated next year (2025e: P/E 25x, EV/EBIT 13x, EV/EBITDA 5x) compared to our acceptable valuation range (P/E 10x-14x, EV/EBIT 8x-12x, EV/EBITDA 5x-8x). However, if the company continues on the path we expect, we see the valuation for 2026 as a whole already at an attractive level (P/E 10x, EV/EBIT 8x, EV/EBITDA 4x). On the other hand, given the as yet unproven turnaround, its timing and the volatile performance in recent years, we think it is premature to rely too heavily on this. Therefore, we believe it is best to remain on the sidelines for the time being and monitor the development of the market situation and the implementation of the company's own strategic measures.