Mercor: Positioned for Stability Amidst Industry Slowdown with Strong Growth Prospects
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Well prepared for a slowdown
We initiate our recommendation for Mercor with a Buy recommendation and a 12M target price at PLN 37.00 per share (46.8% upside potential). Mercor is one of the leaders in the European passive fire protection market and a leading entity on the domestic market.
Despite the upcoming slowdown in the industry, the Company is well prepared for more difficult times and in our opinion it is an attractive investment taking into account the current market valuation. We base our conclusions on:
■ Although the Company will not be able to repeat the record-high results from 2022/23, the generated results will still be solid. Mercor should maintain a double-digit EBITDA margin despite more difficult economic conditions and the expected slowdown in the cubature construction sector.
■ Mercor generates good financial results and cash flows, this year we expect free cash flow to the firm (FCFF) of PLN 3.20 per share (12.7% FCF yield).
■ The Company has a strong balance sheet, the net debt to EBITDA ratio at the end of 2022/23 was less than 0.8x. High level of free cash flows should contribute to a decrease in this ratio to around zero in 2026/27e.
■ Mercor is a company that shares its profits with its shareholders. In September, after passing the resolutions, the Company is likely to pay PLN 1.51 per share in dividends, allocating more than half of last year's net profit (6.0% dividend yield) for this purpose. In our opinion, Mercor has a chance to join companies regularly paying a decent dividend, which should increase its attractiveness in the eyes of investors.
