DALLAS, TX -- September 6th, 2023 -- Aquafil Group (ECNL.MI): Stonegate Capital Partners updates coverage on Aquafil Group (ECNL.MI). The full report can be accessed by clicking on the following link: ECNL Q2 2023 Report
Aquafil reports 2Q23 results
In 2Q23 Aquafil benefited from their large geographic footprint allowing them to better weather market volatility. Top line growth was challenged year over year as volumes declined in EMEA. ECNL is focused on navigating through a 2023 that is expected to be volatile due to the macro and geopolitical environment. Management plans on accomplishing this by leaning on their geographical diversification, focusing on cost saving and continuing to invest heavily in R&D. Essentially, focusing on variables that can be controlled.
- 2Q23 results: ECNL reported revenue, adj EBITDA, and adj EPS of $146.5M, $9.8M, and ($0.15), respectively. This compares to our/consensus estimates of $184.4M/$164.4M, $26.0M/$18.9M, and $0.20/$0.20, respectively. Revenue was impacted by both higher selling prices, better mix, and lower volumes. Higher prices were largely offset by correlated increases in costs of sales. The Company is seeing a mismatch between the average unit cost of inventories stocked from 2022 and lower current selling prices leading to lower margins as compared to historical averages. The lower than expected EBITDA was a product of the unfavorable cost of sales and lower volumes that translated into a 6.7% EBITDA margin vs our 14.1% estimated EBITDA margin. We anticipate that the average cost per unit of inventory mismatch will persist through the balance of 2023, with normalization expected toward the end of 2023 and early in 2024.
- Outlook remains positive: The Company, having recently completed their 3-year business plan, sees a lot of optimism out to 2025. Management does see short term choppiness in 2023, as the current market conditions are expected to induce significant volatility over the year. To get ahead of these challenges ECNL is focusing on cost cutting initiatives. From a geographic frame, the Company is expecting relative softness in the European market, with a stable trend materializing in the American market and a stable trend seen in the API market. Notably, the Company maintains its prioritization of paying down debt.
- ECONYL® Expansion on Track: The Company reported another quarter of strong ECONYL® contributions to revenues at 48.8% in 2Q23 for a 1H23 contribution of 47.8%. This is in comparison to the 42.3% seen in 2Q22 for a 1H22 contribution of 42.2%. This increase is due to selling price changes. This level of ECONYL® contribution to revenue is in-line with management’s expectations and is expected to remain a positive addition to the financials.
- Valuation: Based on our F24 estimates, Aquafil is trading at a 5.6x EV/EBITDA multiple vs. the average comp at 12.6x. Given the comps, coupled with historical trading ranges, we believe using an EV/EBITDA range of 6.5x to 7.5x with a mid-point of 7.0x is reasonable to account for the Company’s slightly smaller size vs comps. Applying this range to our F24 estimate, we arrive at a valuation range of €4.42 to €5.89, with a midpoint at €5.16.
- For our DCF analysis we assume a terminal growth rate of 2.0%. Our DCF analysis relies on a range of discount rates between 10.25% and 10.75% with a midpoint of 10.50%. This arrives at a valuation range of $5.48 to $6.37 with a mid-point of $5.90.
