Autonomous Maritime And Navigation Demand Will Support Steady Earnings Despite Contract Timing Risks

Catalysts

About Exail Technologies

Exail Technologies supplies navigation systems, maritime robotics and advanced photonics solutions for defense, space, telecoms and civil applications.

What are the underlying business or industry changes driving this perspective?

• Although mine hunting drones are seeing wider adoption across navies and Exail has signed more than €1b of related orders since 2019 with 7 clients, the heavy dependence on a limited set of large defense programs over multi year cycles could expose revenue and earnings to timing slippage if milestones move or tenders are postponed.
• While the long running shift toward autonomous maritime systems and seabed warfare missions supports a steady need for Exail’s DriX and modular drone systems, the high technical complexity and requirement to integrate multiple sensors and vehicles internally may keep R&D and production costs elevated. This could cap EBITDA margin expansion if pricing power softens.
• Although inertial navigation is gaining more use in land defense, aerial drones, offshore energy and space, the company is already increasing production capacity for its UMIX and newer INS platforms. Any slowdown in order growth or change in product mix could therefore limit operating leverage and keep group EBITDA margins closer to current levels rather than driving a sharp uplift in net income.
• Despite solid demand for high end optical and laser sources in space and telecoms, the recent relocation of photonics activities and product mix effects show how sensitive the Advanced Technology division is to operational changes. This could introduce volatility in divisional EBITDA margins and constrain consistent earnings growth if further capacity moves are needed.
• While Exail reports strong order intake and expects existing mine hunting customers to add maintenance, upgrades and extra capacity, the long implementation horizons and reliance on government budget decisions mean cash conversion and net debt reduction may progress unevenly. This can limit flexibility for future capital expenditure and acquisitions and weigh on medium term earnings quality.

Assumptions

This narrative explores a more pessimistic perspective on Exail Technologies compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Exail Technologies's revenue will grow by 18.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.3% today to 11.6% in 3 years time.
• The bearish analysts expect earnings to reach €88.2 million (and earnings per share of €5.09) by about January 2029, up from €1.1 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €127.1 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 25.0x on those 2029 earnings, down from 1583.3x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 41.9x.
• The bearish analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.27%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Large mine hunting contracts for several hundred million euros that run over multi year periods create chunky revenue exposure. Any acceleration in new program awards from navies such as France, Southeast Asian countries, the U.K. or a return of the Australian opportunity could push revenue and earnings ahead of what a flat share price would imply, especially as existing customers already represent more than €1b of mine hunting orders since 2019.
• The group is already seeing strong commercial traction in navigation systems across land defense, aerial drones, offshore energy, seabed warfare and other civil applications. If UMIX and newer INS products continue to find new use cases and production capacity is filled, higher volumes could support further EBITDA margin expansion and lift net income above what a stagnant valuation suggests.
• Maritime robotics and the DriX family have eight years of operating history, 100,000 hours at sea and sales to 19 countries. If this installed base starts to generate repeat orders for maintenance, upgrades and added capacity alongside new DriX models with longer endurance, recurring and incremental revenue could support stronger cash generation and a re rating of earnings.
• Advanced Technology is already supplying optical and high end laser sources for space and telecoms and has moved photonics to a larger site to support growth. If product mix normalises after the relocation and demand in these long term markets stays healthy, divisional EBITDA margins could recover or improve, feeding through to higher group earnings and potentially a higher share price.
• The company is targeting double digit growth in revenue, with current EBITDA expected to rise faster than sales, and is already reporting a group EBITDA margin of 20% with guidance referenced for 25% once new flagship contracts are in the production phase. If operating leverage continues and deleveraging progresses from strong operating cash flow, improved return metrics could justify a higher earnings multiple rather than a flat share price.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Exail Technologies is €105.0, which represents up to two standard deviations below the consensus price target of €126.38. This valuation is based on what can be assumed as the expectations of Exail Technologies's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €156.0, and the most bearish reporting a price target of just €105.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be €758.2 million, earnings will come to €88.2 million, and it would be trading on a PE ratio of 25.0x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of €107.0, the analyst price target of €105.0 is 1.9% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.