This report is published by Research Dynamics, an independent research boutique

Performance improvements with an eye on future
 

Sales growth backed by strong volume growth

Airopack reported sales of EUR 21.5 million in 2017, up 90.4% YoY. The strong growth in the top-line was driven by higher volumes, which reached 32.9 million dispensers (~4.5x over 2016 sales volume). The strong volume growth is a result of the steady ramp-up of the production capacity at the Waalwijk facility, where the initial installed annual capacity was 80 million dispensers. In 2017, the company invested in capacity augmentation to harness future growth opportunities.

Net loss contracts slightly

Given the ongoing expansion, higher fixed costs took a toll on the profitability and Airopack reported a loss of EUR 21.0 million at the EBITDA level, albeit lower than in 2016. The increase in operating expenses was driven by personnel costs, which grew 40.4% YoY due to a significantly higher headcount (166 vs. 123 in 2016). Higher D&A expenditure (due to expansion and acquisition of intangibles) and a steep rise in financing costs (~+50% YoY) led to a net loss of EUR 40.1 million as compared to EUR 42.3 million in 2016.

Guidance

Management plans for a two-phase expansion of the installed production capacity to 200 million dispensers by the end of 2018, with the first phase expected to increase capacity to 150 million by the end of 1H 2018.

The company expects to reach EBITDA break-even at a run-rate of 100 million units in 2H 2018, which is substantiated by the gradual rise in sales volumes and significant improvements in EBITDA per million volumes. The company has set an ambitious medium-term goal of a run-rate volume of over 700 million Airopack dispensers annually or around 1.1% of the 66.5 billion-aerosol market size expected in 2018.

The company succeeded in securing several contracts with new customers during 2017, which should result in increased volumes and sales to cover a significant portion of fixed production costs.

Valuation

We remain optimistic about the growth prospects for Airopack. The company has promising plans and aggressive strategies in place to achieve the specified targets, along with a global financing partner. We expect Apollo to continue to support Airopack in its future endeavours to expand its production capacity and in opening new facilities to meet the growing demand for Airopack's products.

We believe the company is on track to ramp-up the production capacity from initial 80 million units to targeted 200 million by 2018-end. Even though the actual production of ~40 million units in FY17 is well below our previously projected production of 90 million units, due to a delay in the initial ramp-up phase of the new production plant, the delay in EBITDA breakeven was partially offset by the depreciation of the CHF/EUR exchange rate. The company has displayed improved operational efficiencies as evident from significant improvement in the gross margin in FY17. Additionally, the company's gross margins has benefited from increasing client-base. We adjust our model assuming a production of 107 million units, which translates to a 53.5% capacity utilisation to achieve breakeven EBITDA in 2H18 and for FY18 on the back of improved gross margins to 61.8%. We foresee EBITDA per million volumes to improve further on the back of higher gross profits driven by efficient consumption of raw materials.

We anticipate further upside to the stock from current price from synergies related to vertical integration of the recently acquired SIPN. Based on a Discounted Cash Flow (DCF) approach, we have arrived at a target price of CHF 13.3 per share, slightly lower than our previous estimate of CHF 13.5 per share. We expect the reduction in top-line due to delayed ramp-up of production will partially be offset by better than expected operational efficiencies. We remain positive on the company considering higher economies of scale and increased market share for the company which is less than ~1% of the total market size of aerosol products (expected to increase at a mid-single digit CAGR until 2023 to over 90 billion) across the globe. Given the trend towards more planet-friendly technologies in future, we believe that Airopack offers a compelling growth story.