DALLAS, TX -- March 15th, 2024 -- Aquafil Group (ECNL.MI): Stonegate Capital Partners updates coverage on Aquafil Group (ECNL.MI).
Aquafil reports 4Q23 results
In 4Q23 Aquafil continued to experience the short-term headwinds associated with the high unit value of inventories, leading to a €24.0M negative impact for FY23. We do not expect that the high-cost inventory will be an issue in FY24 as the Company has worked diligently to right size its balance sheet. Subsequent to the end of the quarter, ECNL received a covenant holiday from its lenders due to this weakness. In response ECNL has done a modest reorganization that involves exiting high-cost operations, while retaining capacity, to save ~€10.0M over the next 12 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 $130.9M, $10.5M, and ($0.18), respectively. This compares to our/consensus estimates of $146.3M/$145.9M, $10.4M/$10.1M, and ($0.11)/($0.12), respectively. Revenue were impacted by both lower selling prices, different mix, and lower volumes. This resulted in a year over year revenue decline of 16.0%. The Company was negatively impacted by high unit cost of inventory in the year and the quarter. We anticipate that the average cost per unit of inventory mismatch will not be an issue in FY24. EBTIDA margin was 8.3% in the quarter, down from 13.5% in 4Q22. We expect that the Company will see growing revenues as volumes and mix improve.
- Outlook remains positive: The Company, having recently completed its business plan, sees a lot of optimism out to 2025. To get ahead of these challenges ECNL is focusing on cost cutting initiatives and has acquired a covenant holiday from lenders for the remainder of FY24. Recently, ECNL completed the start-up activities for its Engineered Plastics project in EMEA, which we believe will help drive growth in the future. 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 allow 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 49.6% for FY23. This is an increase of 610bps from 43.8% 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 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 €3.72 to €4.53 with a mid-point of €4.10.
