Colt CZ Group SE: full metal jacket (stays BUY)

Following the recent completion of Colt CZ’s acquisition of legacy Czech ammunition producer Sellier & Bellot (S&B) and after the company’s 1H24 results (reported on 13 September), we have revised our earnings forecasts for Colt CZ and updated our model. As result of the substantial contribution of the S&B acquisition (on a pro-forma FY24E basis, Colt CZ’s guidance suggests that, if S&B were to be consolidated for the entire year, it would add 41%/52% to Colt CZ’s 2024E revenue and EBITDA), we have increased our long-term revenue and EBITDA forecasts by a significant margin. While the S&B transaction has resulted in an elevated 1H24 ND/adjusted EBITDA level of 3.2x (vs. 1.8x as of 9M23, right before the S&B deal), the additional EBITDA and FCF generation capacity from S&B have offset the valuation impact of the higher indebtedness and boosted our 12M price target (PT) for Colt CZ to CZK 930/share (up 29%, from CZK 719/share). It should be noted that, in the 2021-1H24 period, S&B’s adjusted EBITDA margins were higher, at 24-32%, vs. Colt CZ’s legacy firearms business (17-21%), and S&B has no major capex needs. We reiterate our BUY rating on Colt CZ’s shares.