The company reported a deepening of margin erosion in Q2'22. At the revenue level, Relpol was still consolidating the Russian company in the period (the asset write-down was only taken into account at the gross profit level). The company is suffering from increasing cost pressure (energy, materials and wages) and we assume no change in this area in H2'22. At the same time, the acceptance of price increases by customers remains a question (we pay close attention to competition from Asia). In the long term, we value the company's exposure to the energy transition area and relationships with large customers. In the shorter term, on the other hand, we are concerned that performance will be dragged down by the aforementioned factors. We are reducing our price target to PLN 6.32 and changing our recommendation to ACCUMULATE.
We note that the y/y revenue growth in Q2'22 was driven by the consolidation of the Russian company (it will no longer be included in Q3'22), rising relay prices, and higher EUR/PLN and USD/PLN exchange rates. Demand for industrial automation products continues, but the weak outlook for the Polish construction industry means that new orders will be under pressure. From the other perspective, the energy transition and the popularity of photovoltaic solutions, as well as orders from strategic customers, should sustain sales in a more challenging market.
The company is struggling to maintain its gross sales margin, it has been falling continuously since Q1'21. The margin in Q2'22 was 17%, while in 2020-21 it was oscillating around 20%. Profitability is negatively impacted by the cost of products. Despite declines in copper prices in USD, the company is not significantly affected due to the weakening of the USD, as well as the application of high surcharges by suppliers of copper-based materials. In addition, from 2H'22 Relpol will experience an increase in energy and labor costs.
Relative to our previous recommendation, we believe that the company will sell fewer products; nevertheless, revenue growth will be positive as a result of higher conductor prices and high foreign exchange rates. As a result of cost pressures, the new gross sales margin forecasts are reduced for ’23 and ’24.
The company has a tough year ahead of it, at the same time, the market position and natural demand for conductors will make Relpol ready to enter the market with new products (bistable relays) and with increased production capacity (completed investment in a new production hall and a new machine for the production of high-current relays) once the economic situation stabilizes.
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 39 Dom Maklerski BDM S.A. ul. 3-go Maja 23, 40-096 Katowice
