Comments on Verallia , Esauotmotion and Delko

In the last 30 days 3 of the companies, we have been monitoring reported results. The thesis has not changed in any of them despite the bad economic situation and some temporary problems, so we will only make a brief comment on each of them.

Verallia:

9 months results: revenues of 3,075 million, up 22.1% on the previous period, and adjusted EBITDA of 915 million (+39.9%), increasing the margin to 29.8% vs. 26% in the first nine months of 2002.

Q3: Growth in Q3 was lower, with revenues of 931.8 million, up only 6%, and adjusted EBITDA of 256.1 million (+12.2%), giving a margin of 27.5% vs. 26% in Q3 2022.

The increase in revenues was entirely due to a rise in prices, as volumes fell by 6.3% over the nine months.

The company is down 27% from its peak and I understand that this is mainly due to 3 reasons:

1- Sales volumes have fallen more than expected due to a combination of lower consumption and customer destocking.

2- The company confirmed the guidance of more than 1.1 billion adjusted EBITDA but the high range of 1.25 billion has been removed.

3- Contract prices are expected to decrease in 2024 due to lower than expected inflation.

Company highlights from the conference call:

- Demand is not expected to recover until at least the end of the year.

- To adapt to the temporary drop in demand, some maintenance is being brought forward.

- In the medium and long term, they remain optimistic about demand and expect a recovery throughout 2024, although Q1 is still expected to be negative.

- In 2024, they are optimistic that EBITDA will be higher than in 2023.

Valuation

Estimates have been cut slightly and based on the analyst consensus, which is quite similar to my estimates, they expect EBITDA of 1146m and EPS of 4.2. The company is trading at 32.4 on 11/10/2023, which implies a 2023 P/E of 7.7.

Opinion

The decline in demand is obviously temporary. The destocking by customers cannot last forever and obviously the economic situation is not the best, but consumption should recover and even increase demand in the medium to long term.

On the negative side, the margins of the companies have increased a lot in the last few years due to the lack of supply, and in the next few years new supply will enter the sector, which may cause them to decrease slightly, although I am quite optimistic that demand will also increase slightly in the medium to long term. In that case, our profitability would be hurt, but even so, the downside is very limited.

In my opinion, a valuation of 10 times EV/FCF is very attractive for a company in a defensive sector in the form of an oligopoly, whose management has proven to be competent despite its short history, and which rewards the shareholder with a 40% payout and occasional share buybacks.

Esautomotion:

In the first nine months of 2023, the company generated revenues of €27.58 million, an increase of 8.8% compared to the same period in 2022, including the acquisition of Sangalli Servomotori as of July 1, 2023. Organic growth was 3.7%.

In the third quarter, the company experienced a 7% decline compared to 2022, although these results are solid considering the 21% decline in Fanuc's FA segment, the market leader with a 65% share.

The company's financial position remains solid, with net cash of €1.5 million, including a €3.5 million call option to purchase the remaining 35% of Sangalli Servomotori.

Valuation:

Based on sell-side estimates, the company is expected to generate EPS of 0.39 and FCF of 2.8 million, adjusted for working capital would be 6.5 million. The company trades at €4.37 on November 10, 2023, implying a valuation of 11x 2023 P/E or 8x working capital adjusted EV/FCF.

Opinion

Estimating short-term demand is complicated, but results have been good if we compare with Fanuc.

The industry is cyclical and we have to live with occasional downturns in demand, but the long-term outlook is good, especially for emerging markets.

The company has net cash, which will allow it to weather a downturn without too many problems.

The sector has high barriers to entry and there is little competition, as evidenced by Fanuc's 65% market share.

Esautomotion, which operates in niche markets, has a strong competitive position, as evidenced by its ability to consistently generate high ROICs of over 40%.  The company has outperformed the market in both good and bad times.

A valuation of 11 times earnings at a time when the sector is depressed, considering the company's competitive advantages, high ROIC and expected long-term growth, seems to me a very attractive valuation despite the cyclicality of the business.

Delko

Delko announced results for the last 18 months which were below the market's expectations, causing the stock to fall by 15% on the day of the announcement.

In the last 18 months, the company generated revenues of PLN 1346 million, EBIT of PLN 50.4 million, which represents a margin of 3.75%, and net profit of PLN 39.9 million. Because of the change in the fiscal year, these results tell us little and we have to look at them in terms of the last 12 months.In the last 12 months Delko generated revenues of 908 million, 3% higher than in 2022, EBIT of 33.4 million vs 34.7, down 4%, with an EBIT margin of 3.7% (3.95% in 2022) and a net profit of 25.3 million vs 28.5 in 2022. 

On November 10, they proposed an 18-month dividend of PLN 0.9 per share, yielding 8.2% at current prices, and maintaining a payout ratio of 25%. Normalizing the dividend to 12 months, the yield would be around 5.5%.

Valuation

In the last twelve months, Delko generated earnings per share of PLN 2.21, which would imply a P/E multiple of 5 on 11/10/2023.

Opinion

The lack of information and the difficulty of translation of documents this year due to the format in which they are uploaded may be a limitation for foreign investors and here the company could do more.

Despite not being able to keep up with inflation, it is a defensive company at 5 times earnings in a bad year, a normalized dividend yield of 5.5% and with the capacity to increase it as the payout is only 26%, so in my opinion it is very undervalued.

Disclaimer: This is an opinion and not a recommendation. In addition to being a shareholder in the 3 companies mentioned above, I have recently increased my position in Verallia and Delko, so my opinion may be biased.