Investing.com -- Komax (SIX:KOMN) shares rose on Thursday following an upgrade from UBS, revising its rating to “buy” from “neutral” and setting a new price target of CHF170, slightly down from the previous CHF175.
At 5:44 am (0944 GMT), Komax was trading 6.3% higher at CHF 125.
This upgrade comes amid a challenging environment but reflects UBS's belief in Komax's potential for recovery and long-term growth.
Komax serves major Tier 1 and 2 automotive suppliers and is expanding into the aerospace, industrial, and telecom sectors. Despite its market position, the company has faced difficulties recently.
The past 18 months have seen a severe downturn in orders, driven by uncertainties around automotive build rates, delays in platform launches, and overcapacity issues in Europe and China.
This decline followed a steep upswing in orders after the Ukraine conflict, creating a challenging cycle for the company.
UBS’s upgrade is grounded in several key observations. Firstly, UBS believes that order trends have hit their lowest point in the first half of 2024, marking the fourth straight semester with a book-to-bill ratio under 1x.
Recent improvements in activity levels are viewed as a positive signal for future growth. Moreover, the downturn has prompted Komax to undertake decisive cost actions and accelerate the integration of Schleuniger, a process initially planned to span 5-10 years.
These moves are expected to streamline operations, reduce costs, and enhance Komax's competitive positioning.
Going forward, UBS flags that while there has been a cut in the FY24E EPS estimate by 92%, and FY25/26E estimates by 23% and 10% respectively, there are encouraging long-term growth drivers.
These include cost reductions, strategic acquisitions such as Hosver for high-voltage wires in China, and an anticipated rebound in demand.
UBS forecasts a mid-term revenue potential of CHF 750 to CHF 800 million for Komax, which is below the company's targeted CHF 1 to CHF 1.2 billion by 2028. Achieving this target would require recovery and sales growth of 13% to 14% from the 2024 base.
In terms of EBIT outlook, UBS projects a mid-term EBIT of about CHF100 million. Despite the lower base in 2024, Komax's efforts in cost reduction and operational efficiency are expected to lower the break-even point.
This is anticipated to support a recovery in EBIT margins, potentially reaching 13% by 2028. The valuation of Komax shares has declined sharply, down 60% from their peak in 2023 and 40% year-to-date.