Colt CZ (Buy, TP=CZK893): Twin Engine: Acquisitions and Organic Growth

Investment Recommendation: We reiterate our "Buy" recommendation for Colt CZ Group SE. Our updated Target Price is now CZK893 per share. Our previous Target Price was CZK921 (February 9, 2024). Our new Target Price indicates an upside potential of +21% compared to the current market price. Therefore, we confirm our Buy recommendation, which remains unchanged. 

There are three main markets that are most important for Colt. The first is the commercial market in the United States. This sector accounts for approximately 40% of total sales. The Czech Republic accounts for about 20%. Supplies to the Czech Army dominate this market. The third market is Europe (excluding the Czech Republic), which accounts for 28%. The significant increase in earnings in 2024 is due to the integration of the acquired company, Sellier & Bellot, into the group. Ammunition sales improved the results. There was a decline in Canada, wherean order from the Canadian government related to delivery to Ukraine was not repeated. We expect the US market to gradually recover. We see opportunities in European markets, where we anticipate rearmament. We also anticipate growth among African and Asian customers in the M&LE sector.

Colt is a very active player in M&A. Given that Colt aims to double in size over the next five years, acquisitions will continue to be a key channel of growth for the company. The acquisition of Sellier & Bellot in May 2024 was successful. Just a few days ago, Colt announced the purchase of VSS, a manufacturer of firearm parts. These acquisitions should deepen vertical integration and increase margins. In addition to acquiring ammunition manufacturers, Colt may also target manufacturers of firearms, equipment, or optics.

Dividends: This year, Colt will pay CZK15 per share. This is a decrease from CZK30 a year earlier. However, Colt plans to buy back shares in an amount equivalent to the proposed dividend. The CZK15 dividend corresponds to a payout ratio of 44% and a gross yield of 2.1%. Given Colt's ability to generate cash, we expect 80% of net profit to be distributed in the coming years. The gross yield could be around 4-6%.

We used a discounted free cash flow model to value Colt's shares. We estimated the target price, or fair value, at CZK893 per share. This values Colt a P/E ratio of 19.4x (2025) and 17.3x (2026) and an EV/EBITDA multiple of 11.6x (2025) and 10.8x (2026). Compared to peer companies in the sector, Colt is trading at a premium.

Author: Bohumil Trampota