DALLAS, TX -- November 29th, 2023 -- Aquafil Group (ECNL.MI): Stonegate Capital Partners updates coverage on Aquafil Group (ECNL.MI).
Business Overview
Aquafil Group engages in the production, reprocessing, and sale of polyamide 6 fibers and polymers across the globe. The Company offers bulk continuous filament or synthetic yarns for the textile flooring sector, where the finished product can be used in hotels, airports, offices, residential buildings, and the automotive market. It also offers nylon textile filaments to the apparel and fashion markets. The Company’s EP (engineered plastics and polymers) business manufactures and sells polymers, that are primarily used for applications in injection molding, extrusion, and CNC production. Typical end products include plastic molded accessories for the fashion industry and designer furniture industries.
The Company was founded in 1965 and is headquartered in Arco, Italy.
In October of 2022 the Company commenced trading on the OTCQX under the symbol ECNLF.
Aquafil reports 3Q23 results
In 3Q23 Aquafil experienced short term headwinds with top line growth challenged year over year as volumes declined in EMEA. The Company also announced that it is seeking a covenant holiday from its lenders due to this weakness. In response ECNL is doing a modest reorganization that involves exiting high-cost operations, while retaining capacity, to save ~€10.0M over the next 12-18 months. The anticipated inventory correction along with the expected volume increase and cost savings leads us to believe that the Company will see margin expansion in the coming year, giving us the confidence to look through the short-term headwinds when valuing ECNL.
- Quarterly results: ECNL reported revenue, adj EBITDA, and adj EPS of €133.7M, €5.7M, and (€0.26), respectively. This compares to our/consensus estimates of €169.7M/€151.7M, €16.9M/€10.6M, and €0.01/€0.01, 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. 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. This inventory correction is expected to coincide with stronger volumes in FY24, leading to a rebound in revenues and EBITDA.
- 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 the final quarter 2023 as mentioned above. To get ahead of these challenges ECNL is focusing on cost cutting initiatives and seeking a covenant holiday from its lenders. While the requested covenant holiday is not finalized, we do not believe this will be a long-standing challenge. Notably the Company is still generating strong cash flows as Capex spend is expected to decrease significantly in FY24. The combination of reorganization, increasing volumes, and strong cash flows is expected to compensate for the challenging end of FY23 allowing ECNL to focus on debt repayments and cash generation going forward.
- ECONYL® Expansion on Track: The Company reported another quarter of strong ECONYL® contributions to revenues at 49.7% YTD. This is in increase of 620bps from 43.5% seen in the same period of FY22. 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: For our comparitive analysis we are using an EV/EBITDA range of 7.0x to 7.5x with a mid-point of 7.3x. Applying this range to our F24 estimate, we arrive at a valuation range of €4.44 to €5.13, with a midpoint at €4.78.
- 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 €4.35 to €5.15 with a mid-point of €4.73.
