Elektrotim's Q2’22 results were below our expectations. The company continued to experience significant costs increase regarding the contracts acquired in 2019-21. The contract for the construction of the electronic barrier on the border with Belarus has not contributed significantly to results so far. Management's outlook for H2'22 after the earnings conference call was optimistic. At the same time, we note that the portfolio still includes contracts with low margins and the company's exposure to foreign exchange rates (part of material purchases). The completion of the contract on the border with Belarus will be postponed to Q1'23 (when the contract was signed, it was assumed to be closed at the beginning of Q4'22). Taking these factors into account, we have lowered our earnings assumptions for 2022. The valuation is also negatively impacted by the increase in the risk-free rate and changes in the comparative valuation. We set our current target price at PLN 6.79, which implies an Hold recommendation.
The company's Q2'22 results are another consecutive quarter in which they turned out to be below our assumptions (Q1'22: updated contract margins, Q4'21: write-downs, Q3'21: weak subsidiary results). Management notes the increase in costs and the large decline in revenue at constant prices. Given the scale of the Border Guard contract, H2'22 results will be determined by the progress of the work and its recognized profitability. The company signed the contract in March 2022, and in August 2022 an annex was signed which increases the value of the contract by PLN 9m to PLN 279m and extends the completion date to 120 days after completion of the physical barrier works (previously: 90 days). In Q2'22, the Installations segment, which accounts for the contract, had only a 2% gross margin on standalone sales (although in Q2'22 revenue from the barrier may have already accounted for the majority of its revenue).
The company continued to increase its backlog in Q3'22 (we estimate by at least PLN 100m net). Most of these are contracts which the main scope of work will be in 2023. We maintain that in the medium/long term, the company may benefit from increased spending on power grids and the military area (references and certificates held). Elektrotim's current capitalization is PLN 65 m. Net cash at the end of Q2'22 amounted to PLN 18m (please note that the company has received an advance payment for a contract on the border - 15% of its value - during the period). At the same time, the company has struggled to stabilize its results in recent years. In 2017-21, it had a net loss three times, with the result ranging from PLN -15m to +17m (average for the last five years: PLN 0m, for the last 10 years: PLN 4m). The smooth implementation of the long-term strategy is also not favored by a rather fragmented shareholder structure.
Krzysztof Pado pado@bdm.com.pl tel. (0-32) 208-14-32 Dom Maklerski BDM S.A. ul. 3-go Maja 23, 40-096 Katowice
The report was prepared by Dom Maklerski BDM at the request of the WSE as part of the Exchange's Analytical Coverage Support Programme
