Date: 3/24/2019

Rexel SA (RXL)
Current Price: € 10.01

Data Overview Summary

Target Price €16.87  Following an encouraging 2018 financial performance, Rexel’s plans to
increase its digital and service based offerings ought to further support
Recommendation STRONG BUY
increased margin focus. Cutting back on retail branches while increasing
Potential Upside 68.6% exposure to industrial sales amid slow economic growth is also likely to
Recommended buy price Below €13.44 enhance margins in the short to medium term.
Recommended sell price Above €19.94  We believe a turnaround under new management is promising. The
Shares Outstanding 304.0 million investments made by Rexel should result in better performance against
Market Capitalization €3.06 billion its peers and we see the results of this already in the U.S.
Dividend Yield 4.2%  Our price target is €16.88 based on a 10 year discounted cash flow
Industry Electrical Equipment valuation. The valuation is driven by our long-term assumptions on
Book Value per Share €13.92 growth, margins and cash flows.
Price/Earnings (P/E) 19.97x
Price/Book (P/B) 0.72x

Company Overview
Rexel SA (“Rexel”) is a worldwide multichannel distributor of products and services to the energy industry. It offers an extensive range
of products and services in energy management for construction, renovation, production and maintenance, through its point of sales.
Rexel principally operates in three geographic areas including, Europe, North America and Asia Pacific. The following table
summarizes segment financial performance on a constant and adjusted basis1 for the fiscal year ending 2018.

Revenue (€ mil) As a % of Total Revenue Revenue Growth (%)

Europe 7,350 55.0 % 1.8 %
North America 4,801 35.9 % 6.6 %
Asia Pacific 1,214 9.1 % 5.6 %
Total 13,366 100.0 % 3.8 %

Gross Profit (€ mil) As a % of Total Gross Profit Gross Profit Growth (%) Gross Margin (%)
Europe 1,967 59.7 % 0.9 % 26.8 %
North America 1,108 33.6 % 8.5 % 23.1 %
Asia Pacific 220 6.7 % 5.5 % 18.1 %
Total 3,295 100.0 % 3.6% 24.6%

EBITA (€ mil) As a % of Total EBITA EBITA Growth (%) EBITA Margin (%)
Europe 415 64.9 % -1.5 % 5.6 %
North America 200 31.3 % 18.0 % 4.2 %
Asia Pacific 25 3.9 % 54.4 % 2.0 %
Total 608 100.0 % 6.1 % 4.6%

In 2018, Rexel’s total revenue amounted to €13,366 million, representing an increase of 3.8% over the 2017 figure of €12,877 million
reflecting higher sales in all regions. Gross profit increased in line with revenue by 3.6% to €3,295 million in 2018 from €3,179 million
the previous year. This translated into a marginal decrease in gross profit margin of 24.6% (2017: 24.7%) due to a competitive
environment in Europe and Asia Pacific. Nevertheless, EBITA increased by 6.1% to €608 million, in line with 2018 target due to
improved operational efficiency. Thus, EBITA margin improved by 10 basis points to 4.6% in 2018 (2017: 4.5%).

1 Rexel SA is undergoing a restructuring and disposition process. For comparison purposes, this excludes the effect of acquisitions and disposals, as well as, the effect of
fluctuations in exchange rates and non-recurring effect related to copper-based cable prices.
1
Upside
 Significantly undervalued. On the basis of our discounted cash flow valuation model presented in this report, the equity of
Rexel is currently significantly undervalued. Our price target stands at €16.87, representing an upside of 68.6% from the
current market price of €10.01 (As of 24th March 2019).
 Ample room for improvement in profitability margins. Operational efficiency is crucial for companies in the electrical
equipment industry to succeed. In this regard, Rexel’s operating history clearly shows a consistent pattern of
underperformance when compared to its peers. As of 2018, all profitability metrics stand considerably below the industry
average (See Ratio Analysis). As such, this leaves new management various opportunities for improvement in margins if
appropriately executed, potentially, driving value to much higher levels. Based on our estimates, Rexel’s value per share
could exceed €30.0 in the hypothetical scenario were operating margin is in line with the industry average.
 Margin Turnaround. Management’s strategic efforts by means of corporate restructuring and disposition of non-profitable
business, as well as, plans to increase its digital and service based offerings have so far been fruitful in the U.S. and Asia
Pacific regions with EBITA margins expanding to 4.2% (2017: 3.8%) and 2.0% (2017: 1.4%) respectively. Conversely, EBITA
margins marginally decreased in Europe to 5.6% in 2018 (2017: 5.8%). As a result, Rexel’s EBITA margin improved by 10 basis
points from 4.5% in 2017 to 4.6% in 2018. Going forward, we could see upside to margins in the medium to long-term when
the aforementioned initiatives pay off accelerates.
 Employee compensation plans and share buyback programme in place. Rexel has recently increased the number of bonus
shares for top executive management. This policy is subject to a number of long term goals, including, average growth in
EBITA in value, average organic sales growth and Rexel’s share market performance compared to peers. In doing so,
management’s interest has been aligned with shareholder’s interest. Furthermore, the company has a share buyback
programme in place. This is viewed positively, especially taking into considerations that the current market price is below its
fair value. Both policies ought to contribute in increasing the value of the business in the long-term.
Downside
 Weak top- and bottom-line growth expectations amid economic slowdown concerns. Top- and bottom-line trends in the
industry often track the broad economic cycle. During periods of prosperity, customers are comfortable to expand their
capital budgets and spending on electrical equipment. At times, when there is uncertainty as to the direction of the
economy, those controlling the purse strings delay spending decisions, which can hurt short-term operating results. Whilst
when business conditions are very challenging, customers may pull back dramatically on equipment orders. As such, in view
of a slowdown in the global economy, growth in Rexel’s top- and bottom-line is likely to be challenging. Having said that, in
our view, the current market price already incorporates this expectation into the price – entailing revenue to remain
relatively steady at current levels and operating margins to marginally decrease. We see the likelihood of this to occur as
low. Consequently, downside risk is limited.
 No competitive advantage. Rexel operates in an almost perfectly competitive environment (i.e. a market with very low
differentiation). Accordingly, the industry struggles to pass on salary and other inflationary costs onto the consumer possibly
putting pressure on margins. In spite of this, Rexel’s policy of building price increase clauses to contracts, helps to partly
mitigate the effect of future tariffs, raw materials inflation and supply shortages.
 Amazon’s entry into industrial distribution. Although we do not consider this to be a catalyst, Amazon’s entry and growing
digitalization across the sector has significantly increased price transparency and that’s not something that works to the
benefit of most distributors. On the other hand, Amazon’s efforts have so far been in commoditized, relatively low-value
product categories, and Rexel’s management has estimated that Amazon’s offerings in the electrical space have less than
10% overlap with their offerings. Nevertheless, Rexel needs to invest into ecommerce to remain competitive.
Adjustments
Notably, Rexel has a significant amount of operating lease commitments. In fact, by the end of 2018, the company had a total of
€844.1 million in operating lease commitments spread over a circa 10 year period. As such, we make the necessary adjustments
because operating lease expenses are treated as part of operating expenses whilst in our opinion, they ought to represent a financing
expense. Consequently, the operating income, capital, profitability and cash flow measures for the firm must be adjusted to classify
operating lease expenses as a financing expense.

In this regard, the IASB also published IFRS 16 Leases in January 2016 with an effective date of 1 January 2019. The new standard
requires lessees to recognize nearly all leases on the balance sheet which will reflect their right to use an asset for a period of time
and the associated liability for payments.

2
 Cost of Capital

Cost of Capital
6.58%

Cost of Equity Cost of Debt (After-Tax)

12.02% (w = 46.8%) 1.79% (w = 53.2%)

Risk Free Rate Beta Risk Premium Tax Rate YTM Rating
0.00% 1.80 6.67% 35.0% 2.75% BB

German 10-Yr: 0.00% Unlevered Beta: 1.04 ERP: weighted average Historic tax rate RXL 2.750 15 June 26’22 Standard & Poor’s

Current D/E: 113.5% regional exposure

Leveraged Beta: 1.80

Revenue Assumptions
We forecast revenue to grow at a compounded annual growth rate of 2.0% per annum to 2023 and gradually declining to 0.0% by
year 10. The growth rate largely reflects the approximate weighted GDP growth in the company’s operating regions as management’s
efforts to seek top-line growth opportunities in higher-value businesses is likely to be counterbalanced by increased competition
from online competitors and slower underlying growth.

Operating Margin Assumptions

We estimate operating margin to gradually increase from 4.5% to 6.0% by the end of year 10, owing to managements restructuring
efforts and increasing operational efficiency helped by digital sales in Europe and the U.S.
Reinvestment 2
We estimate reinvestment-costs to exceed €1 billion over the 10 year period.
Tax Rate
We use a base tax rate of 35.0% reflecting the historic effective tax rate of Rexel. However, in view of recent tax policy amendments
in the US federal tax rate from 35.0% to 21.0% in 2018 and the planned tax rate deduction in France from 33.3% to 28.0% by 2020,
we project the company’s tax rate to gradually decline to a marginal tax rate of 28.0% by year 10.

2 Reinvestment = Net Capital Expenditure + Change in Working Capital

3
Discounted Cash Flow Valuation and Monte Carlo Simulation Analysis
Base 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 TV

Revenue % 2.00% 2.00% 2.00% 2.00% 2.00% 1.6% 1.2% 0.8% 0.4% 0.0% 0.0%

Revenues 13,366 13,633 13,906 14,184 14,467 14,757 14,993 15,173 15,294 15,355 15,355 15,355

EBIT Margin 4.48% 4.63% 4.79% 4.94% 5.09% 5.24% 5.39% 5.54% 5.70% 5.85% 6.00% 6.00%

EBIT 599.0 631.7 665.5 700.3 736.3 773.4 808.5 841.3 871.2 898.0 921.3 921.3

Tax rate 35.00% 35.00% 34.22% 33.44% 32.67% 31.89% 31.11% 30.33% 29.56% 28.78% 28.00% 28.00%

EBIT(1-t) 389.4 410.6 437.7 466.1 495.8 526.8 557.0 586.1 613.7 639.6 663.4 663.4

- Reinvestment 144.3 147.2 150.1 153.1 156.2 127.5 97.1 65.5 33.0 0.0 0.0

FCFF 266.3 290.5 315.9 342.6 370.6 429.5 489.0 548.2 606.6 663.4 663.4

Cost of capital 6.58% 6.51% 6.45% 6.39% 6.32% 6.26% 6.19% 6.13% 6.06% 6.00% 6.00%

Cumulative
0.938 0.881 0.828 0.778 0.732 0.689 0.648 0.611 0.576 0.543
Discount Factor

PV (FCFF) 249.9 255.9 261.5 266.5 271.1 295.7 317.0 334.9 349.4 360.5

Terminal Value 11,056 Estimated Share Price Distribution

PV - TV 6,008

PV - CF 10 years 2,962

Sum of PV 8,970

Prob. of failure 10.0%

Value of Firm 8,073

- Debt 3,485

- Minority Int. 3.8

+ Cash 545

+ Non-op assets -

Value of Equity 5,129

Shares Out. 304

Est. Share Price 16.87

Current Price 10.00

Upside 68.6%

Main Assumptions Tested in Monte Carlo Simulation

Assumption: Compounded annual revenue growth rate (First 5 Years) Assumption: Target pre-tax operating margin (EBIT as % of sales in year 10)

Normal distribution with parameters: Lognormal distribution with parameters:

Mean 2.00% Location 3.00%

St. Dev 1.00% Mean 6.00%

St. Dev 1.00%

4
 Results and Conclusion
Our baseline value estimate is €16.87, 68.6% higher than the current price of €10.01.
Since this value is a point estimate, we run a Monte Carlo Simulation with 50,000 iterations to generate potential future scenarios
(i.e. deviations from our baseline assumptions) in order to have a better understanding of where the true value of Rexel could vary.
These assumptions include deviations in revenue growth and operating margin and are presented on the previous page. Notably, we
find that developments in operating margin have a much higher effect on value, whilst changes in revenue growth have a rather
immaterial impact on value. The latter is mainly because the company is currently generating a return on invested capital which is
less than its cost of capital.
The current price stands at circa the 5th percentile when compared to all potential outcomes based on our assumptions. As such, this
implies that the fair value of Rexel is likely to be higher than the current price at about 95% of the time. Given these findings, we
conclude that the current price is highly likely to be undervalued. As a result, we have a high degree of confidence to place a STRONG
BUY recommendation on the stock.
Ratio Analysis 3
Profitability Ratios FY2016 FY2017 FY2018 Industry
Gross Margin 24.1% 24.7% 24.6% 26.4%
EBITDA Margin (without lease adjustment) 4.6% 5.3% 4.9% 11.4%
EBITDA Margin (with lease adjustment) 5.9% 6.0% 6.0% -
Operating Margin (without lease adjustment) 3.4% 3.4% 3.5% 8.2%
Operating Margin (with lease adjustment) 4.4% 4.5% 4.5% 10.4%
Net Margin 1.0% 0.8% 1.1% 5.8%
Return on Equity 3.1% 2.5% 3.6% 10.5%
Return on Capital 5.1% 5.6% 4.8% 14.8%

Liquidity Ratios
Current Ratio 1.39x 1.60x 1.40x 1.40x
Quick Ratio 0.94x 1.08x 0.92x 0.95x
Cash Ratio 0.18x 0.19x 0.16x -
Defensive Interval Ratio 94 days 89 days 89 days -

Solvency Ratios
Gearing Ratio (without lease adjustment) 39.0% 38.5% 37.9% -
Gearing Ratio (with lease adjustment) 44.5% 44.2% 44.2% -
Net Debt to EBITDA (without lease adjustment) 3.9x 3.6x 3.5x 1.8x
Net Debt to EBITDA (with lease adjustment) 4.0x 4.1x 3.8x -
Interest coverage Ratio (without lease adjustment) 2.7x 2.2x 4.1x -
Interest coverage Ratio (with lease adjustment) 3.2x 2.8x 4.4x -

Efficiency Ratios
Asset Turnover 1.2x 1.3x 1.3x 1.5x
Inventory Turnover Ratio 6.4x 6.4x 6.3x 6.0x
Receivables Turnover Ratio 5.0x 5.1x 5.1x 5.2x
Payables Turnover Ratio 4.6x 4.8x 5.0x 6.6x
Cash Conversion Cycle 52 days 52 days 56 days 56 days
Sales to Capital 1.8x 1.9x 1.9x 1.4x

3 Source: Own computations and Rexel SA published Annual Reports

5
Price History (Currency: EUR)

€19.0 4,000

€17.0 3,500

€15.0
3,000
€13.0
2,500
Share Price

€11.0

Volume
2,000
€9.0
1,500
€7.0
1,000
€5.0

€3.0 500

€1.0 0
3/6/2017 6/6/2017 9/6/2017 12/6/2017 3/6/2018 6/6/2018 9/6/2018 12/6/2018 3/6/2019

Volume ('000) Closing Price 50 Day MA 200 Day MA

Disclosure
The analysts contributing to this report holds shares of this stock. The revenue and stock price forecasts are the Gorilla’s Investment
Research (GIR) consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein
accurately reflect the analysts' personal views as to the subject securities and issuers. GIR certifies that no part of the analysts
compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in
the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data
obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because
of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any
investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an
offer to buy or sell the securities herein mentioned. GIR may have a position long or short in the securities mentioned and buy or sell
the securities from time to time. GIR uses the following rating system for the securities it covers which results from a proprietary
quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a
stock over the next 1 to 24 months. The model assigns each stock a rank from 1 through 5. GIR Rank 1 = Strong Buy. GIR Rank 2 =
Buy. GIR Rank 3 = Hold. GIR Rank 4 = Sell. GIR Rank 5 = Strong Sell.