Translation: Original published in Finnish on 10/8/2024 at 8:00 am EEST.

Last fall, Exel announced its transformative strategy, and the first phase of actions is progressing as scheduled. Nevertheless, we believe that demand in the company's target markets remains sluggish, especially in its main market, Europe. Considering this, we have also slightly lowered our projections for the coming years. Given the current outlook, we believe the stock is fairly reasonably priced, and so we reiterate our target price of EUR 0.38, but lower our recommendation to Reduce (was Accumulate). 

Long-standing composites manufacturer with a transformative strategy

Exel is a specialist in the design and manufacture of composite products for demanding industrial end-uses. The company is implementing a two-phase transformative strategy, divided into the current stabilization and profitability phase, and a later phase of strong organic growth (2028 revenue target: 200 MEUR). In particular, the company is targeting growth in large and fast-growing energy and decarbonization applications (especially wind power applications, we estimate). At the same time, it aims to significantly improve its profitability (2028 target: adj. EBIT-% > 10%), in part by increasing factory utilization rates and reducing fixed costs (incl. optimizing the factory network). We think the measures are sensible overall, but much remains to be done to achieve the ambitious targets. The most obvious risks to the strategy are, in our opinion, the volatility of investment-driven demand (incl. the development of the wind power market) and, secondly, the growing role of volume applications and their lower margin profile.

Dark clouds remain over near-term demand outlook

The growth prospects for the company's target markets are forecast to be on a fairly healthy footing, with the market growing by an average of 5-7% over the next few years, depending on the source. On the other hand, we believe that there are currently darker clouds hanging over the short-term development of the demand environment, especially with the lackluster performance of the European economy (incl. interest rates and weak industrial confidence). We therefore estimate that a clearer pick-up in demand will have to wait until well into next year and that the company will not enter a more pronounced growth phase until 2026 (incl.  increased production at the Indian factory). Reflecting this, we have made small negative revisions to our forecasts in the report, mainly for next year. In the medium term, however, we expect the revenue growth and the strategic measures taken (e.g. reduction of fixed costs, increase in utilization rates) to support the company's profitability and improve the operating margin level in the coming years (adj. EBIT-% 2024e-2027e: 3.0-6.8%), but remain well below the financial targets.

Stock is not overvalued but needs more wind in the sails from the market

We forecast a challenging valuation picture for the stock overall this year and still slightly elevated next year (2025e: P/E 19x, EV/EBIT 11x, 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. Looking at the bigger picture, we believe that the best approach at this stage is to switch to a wait-and-see stance on the stock in order to monitor market developments and the implementation of the company's internal strategic measures.