We have lowered our valuation for ML System by 33.0% after cutting our 2024- 2025 EBITDA estimates by 31.0% and 11.9% respectively to reflect a larger-thanexpected hit from the macroeconomic slowdown. We still expect the production of photovoltaic roof tiles and façade panels to drive the firm’s earnings in the years ahead, especially as the EU Council recently adopted its EPBD directive. It seems to us we are currently at the bottom of the macroeconomic cycle which would be still visible in the 1Q24 results of Polish construction companies. We err on the side of caution: we believe MLS is likely to improve its sales profile beyond 1Q24, but we have slashed our EBITDA estimate by 31.0% for FY 2024. We lower our FV to PLN 58.45 (down 33.0% from PLN 87.20 previously). We reiterate our BUY recommendation.
4Q23 results review: ML System’s 4Q23 results were broadly in line with the preliminary print. EBITDA amounted to PLN 12.1m (down 20.4% y/y, up 89.4% q/q) in 4Q23 while the EBITDA margin improved to 20.4% versus 16% in 3Q23. Higher sales of new quantum-era products boosted the margin in 4Q23. Revenues arrived at PLN 59m (down 47.6% y/y, up 48.6% q/q) in 4Q23. EBITDA arrived at PLN 25.7m (down 29.7% y/y) for FY 2023, triggered by a slowdown in the construction sector. At the analysts’ meeting, ML System also announced that its production lines were used by R&D activity for 50% of the time during 2023, as the firm intends to speed up research. (This is against the backdrop of European regulations advancing visibly over the past year, and EPBD regulations drawing near.) Net debt stood close to 5x net debt/EBITDA at the end of 2023: we see this as an intermediary sign during the end of the investment cycle and ahead of new sales kicking in. We expect net debt/EBITDA to fall to 3.1x in 2024E.
We believe the weak 1Q24 is already priced-in: We expect ML System’s sales to arrive at PLN 45.6m (down 1.1% y/y and 22.8% q/q) in 1Q24. We expect the firm to gradually finalize construction contracts that have been dragging on for some time (although Budimex and Cavatina may only materialize in 2Q24). We expect EBITDA at PLN 9.1m (up 22.6% y/y, down 24% q/q) in 1Q24. Overall, this suggests the start of 2024 was still being tainted by the economic slowdown, which is likely to recede in the quarters ahead.
EPBD directive imminent: The Council of the European Union voted in favour of, and formally adopted, the revised Energy Performance of Buildings Directive (EPBD). This includes new rules to reduce the energy consumption and emissions of buildings across the EU. According to the directive, energy consumption in residential buildings will be reduced by 16% by 2030 and 20-22% by 2035. As for other buildings – such as companies, hospitals, schools or offices – 16% of those in the worst condition must be renovated by 2030; and 26% by 2033. Overall, this is likely to support ML System’s sales in the years ahead, with rising sales of rooftop PV and PV tiles on building facades.
