Exco Technologies still faces headwinds, Industrial Alliance Securities says

Exco Technologies (Exco Technologies Stock Quote, Chart TSX:XTC) on Tuesday announced the shuttering of operations at Automotive Leather Company (ALC) in Bulgaria, a move which will brighten the company’s bottom line, says analyst Nav Malik of Industrial Alliance Securities.

Technology supplier to the die-cast, extrusion and automotive industries, Exco says that the liquidation filing for ALC, acquired in 2014 for approximately $25 million, was prompted by ongoing operating losses at ALC which were tied to “its failure to reach an agreement with its primary customer for continued price support,” reads the company’s press release.

“The liquidity filing of ALC is disappointing, however it was the only alternative given the company’s weak liquidity and poor financial prospects,” said Brian Robbins, Exco’s President and CEO. “On the positive side, the elimination of ALC’s loss-making operations will immediately improve our go forward results and free up management time for more productive activities.”

Malik notes that while ALC had been generating about $20 to $25 million in quarterly revenue, it wasn’t profitable, posting operating losses of $2.5 million in fiscal 2018 and $2.2 million in the Q1 of fiscal 2019. The analyst has added “modest” increases to his fiscal 2019 and 2020 EBITDA estimates (an added two per cent and 0.5 per cent, respectively).

“The closure of ALC should eliminate the drag on profitability from Q2/F19 onwards. In addition, the closure eliminates approximately $4.2 million of net debt related to ALC’s bank line (not guaranteed by Exco),” said Malik in a note to clients Tuesday.

Ahead of Exco’s first quarter 2019 financial report on January 30, Malik is calling for revenue of $142.1 million and EBITDA of $19.1 million. The analyst is maintaining his “Hold” recommendation and $10.25 target, representing a projected one-year return of 10.0 per cent at the time of publication.

“We believe the closure of ALC is positive, as it eliminates a drag on profitability and removes a major distraction for management. Nonetheless, macro headwinds from weaker auto sales, competitive pricing pressure, and global trade uncertainty continue to persist,” says Malik.