Elektrotim Q3'23 Results Exceed Expectations Despite Challenges; Positive Cash Flow and Strategic Outlook Discussed

Last recommendation BDM: BUY with target price 17,1 PLN/share (2023/10/10)

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The company published its Q3'23 results today ahead of the trading session. A results conference call with management is scheduled for Thursday (12:00).

• Q3'23 revenues amounted to PLN 183.2m (+28% y/y), above our expectations. A high contribution from the Distribution segment, which generated PLN 148m in revenue (+203% y/y). The Installations segment contributed PLN 35m in revenue (-57% y/y, -11% q/q, due to a decline in the importance of the perimeter contract at the Belarusian border).

• On a standalone basis, the Installations segment (the contract on the Belarusian border is included here) had PLN 30m in revenue (vs. PLN 74m in Q3'22). We tentatively estimate that only a small portion of the contract remains to be recognised after Q3'23, while the final settlement of the contract is being reported by the company with factors that may affect future results.

• Gross margin(15.0%) comparable y/y and slightly below our assumptions.

• SG&A costs lower y/y.

• Strongly negative impact of Q3'23 other operating activities (PLN -7.5m, we assumed PLN -2.5m)

• At the consolidated level, the Company recognized an impairment charge on receivables (PLN -2.8m) and a provision for contract losses (PLN -3.7m). These events are probably largely related to the situation of the subsidiary Zeus (a bankruptcy petition was filed in September). At Elektrotim's standalone level, the negative balance of other operating activities amounted to PLN -4.3m (including a PLN -1.9m write-down of a loan to Zeus, a PLN -1.4m write-down of receivables and a PLN -0.7m penalty/compensation). The remaining off-balance-sheet liability of PLN 0.6m (no guarantee funds sent to be drawn) remains unwritten.

• Management believes the above write-downs exhaust the potential cost of Zeus' bankruptcy to Elektrotim (also at the cash level). The company remained in consolidation at the end of Q3'23, so a possible bankruptcy declaration could still have an impact on reported results when control is lost.

• EBITDA in Q3'23 amounted to PLN 15.8m (vs. PLN 13.9m a year ago). The result was slightly below our assumptions (we expected PLN 16.3m), but this is a consequence of the high negative balance of other operating activities.

• Financial activities slightly negative at PLN -0.7m.

• Q3 net profit at PLN 9.7m (effective tax rate at 37%), we anticipated PLN 10.9m.

• Cash flows from operations amounted to PLN +30m in Q3'23 (reversal of about half of the negative cash flows of H1'23).

• The company had PLN 5m in net debt at the end of the period. A dividend was paid in July.

• Backlog: PLN 474m (vs. PLN 626m after Q2'23 and PLN 711m a year ago).

• The company indicates that in order to bid on new perimeter tenders, it needed to secure resources for the eventual execution of these contracts. The company said that with the intensive implementation of the portfolio also in Q4'23, its value (apart from possible new perimeter contracts) may be temporarily under pressure due to the reduced number of tender proceedings or the lower level of decision-making of some state-owned company boards. This period is estimated by the company until the end of Q1'24 (in spring'24 the company assumes an improvement in the conditions for rebuilding the portfolio).

 

BDM Comment:

The company's Q3'23 results were clearly above our forecasts when adjusted for the impact of the balance of other operating activities. Reported EBIT was negatively impacted by the filing of Zeus' bankruptcy petition (Elektrotim indicates that it no longer expects a negative cost and cash impact). At the end of Q3'23, the company reported an improved cash position. The order backlog declined sharply vs Q2'23. The company assumes that it may be under pressure until Q1'24, helped by the possible winning of new perimeter contracts (the company has the most favourable offer for the section on the Bug River, and a smaller tender on the Svisloch River is also announced). An earnings conference call with management is scheduled for Thursday (12:00).