Q3'22 for the company was yet another period of declining profitability. The gross margin on sales in Q3'22 was 13.3% (vs an average of 20% over the last eight quarters). Sales volumes also fell. In addition to macro factors and the associated drop in demand, Relpol had a problem with its sales IT system in August. Despite the lower number of relays sold, the company reported higher revenue year-onyear by 4%. This was a result of, among other things, continued product price increases as well as foreign exchange rates. Continued cost pressures and long working capital turnover have a negative impact on valuation. For this reason, we reduce our target price to PLN 5.62 and change our recommendation to HOLD.
The company still faces high costs and the effects will also be visible in '23, despite partially offsetting them by raising product prices. This is mainly due to higher electricity prices for next year, material costs and an increase in employee costs (significant minimum wage increase in 2023).
High working capital requirements and higher debt also affect the company's valuation. We do not see the potential for a reduction in the net debt/EBITDA ratio by the end of '23 due to ongoing development work, high inventories and high levels of receivables turnover.
The company's products remain indispensable in many applications, but 2023 in terms of results is unlikely to surprise us with positive dynamics. We assume y/y revenue will decline and adjusted net income will be lower than in '22. Nonetheless, we believe the company will remain profitable and will be able to take full advantage of the increased production potential in the future.
Despite the weaker economy, demand for certain categories of relays is growing. High-current (solar) relays are in high demand both nationally and internationally. This has to do with the acceleration of the energy transition in Europe. Products that find their way in industrial automation continue to sell very well, and the growth dynamics of this market should be maintained. On the other hand, we are seeing a decline in demand for miniature relays, including those used in building automation and by retail customers. We believe that the low demand for these products will continue in '23, but with increased investment among developers in the following years, demand will slowly start to recover.
Main risks: 1) escalation of the war in Ukraine (the company has returned to assembly in Ukraine on a limited basis. Escalation of the war could force the company to stop production altogether); 2) high prices of strategic raw materials: copper and silver and problems with the availability of components 3) decline in the EUR / PLN exchange rate (the company exports> 70% of its products.); 4) extraordinary increase in labor costs, the model takes into consideration 8% y/y growth; 5) technological risk: displacement of electromagnetic relays by semiconductors (both have advantages / disadvantages, but are substitutes); 6) high concentration of customers (3 main clients of the company may be responsible for 30-40% of sales); 7) long operating cycle and high demand for working capital); 8) economical slow-down (current views and PMI on European market are showing a slow-down in future periods; 9) the risk of competition (the company is one of the largest producers of relays in Europe, but with a relatively low market share, Chinese competitors might try to get more market share on European market);
The report was prepared by Dom Maklerski BDM at the request of the WSE as part of the Exchange's Analytical Coverage Support Programme
Kajetan Sroczyński kajetan.sroczynski@bdm.pl tel. +48 (032) 208 14 38 Dom Maklerski BDM S.A. ul. 3-go Maja 23, 40-096 Katowice
