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SWBI - Smith & Wesson Brands Inc News Story

$21.38 -0.1  -0.6%

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Sector
Consumer Cyclicals
Size
Mid Cap
Market Cap £752.8m
Enterprise Value £656.7m
Revenue £804.3m
Position in Universe 2952nd / 7245

FOCUS-Czech gunmaker bets on riding Colt into new markets

Mon 13th September, 2021 8:00am
By Michael Kahn and Jason Hovet
    PRAGUE, Sept 13 (Reuters) - For Czech gun maker CZG-Ceska
Zbrojovka Group  CZG.PR , its recent acquisition of the Colt
brand carries both the potential to become a major player in the
global firearms market and the challenge of reviving the
fortunes of a fabled U.S. name.
    Shares of CZG, which listed on the stock market last
October, have surged 60% in Prague this year as investors
welcomed solid revenue growth and the company's $222 million
purchase of privately-held Colt Holding Company - a deal
finalised in May that will make CZG a competitor for U.S.
leaders such as Smith & Wesson  SWBI.O  and Sturm, Ruger &
Company  RGR.N .
    Colt, with plants in the United States and Canada, will give
CZG the capacity to expand production beyond its main factory in
the Czech Republic and allow it to compete in U.S. military
contracts because it will fulfil "Buy America" regulations
requiring U.S. production.
    CZG says it aims to almost double CZG and Colt's pro-forma
combined revenue of around $570 million last year within a few
years - putting it on a par with Smith & Wesson's annual net
sales of $1.1 billion in the last fiscal year. 
    In 2020, the United States accounted for 66% of the Czech
gunmaker's annual revenue, mainly sales to individuals and
police departments of guns under its CZ (Ceska Zbrojovka), Dan
Wesson and Brno Rifles brands.
    "Colt is an important step in realising our vision of
getting to 1 billion (euros) in revenue by the end of 2025,"
CZG's Chairman Jan Drahota told Reuters in an interview at the
company's Prague headquarters. 
    "We ... will be thinking how to make sure the brand is even
bigger than it is now and introduce it to wider (markets).
    "It is a privilege, but it is also pressure on us," he said.
    Some of the pressure could come from investors. The revenue
target looks ambitious to some analysts and will require
investment by CZG, whose roots stretch back to before World War
II. 
    "It is definitely an ambitious goal," said Pavel Ryska,
analyst at J&T Banka in Prague. "In my view, it could be met on
two conditions. First, the U.S. civilian demand remains robust
and keeps rising, and second, CZG adds further production
capacity either through its own capex or through additional
acquisitions that are well executed."
    Founded by Samuel Colt, the U.S. company produced one of the
first revolvers and its single-action revolver known as “The
Peacemaker” was synonymous with lawmen and outlaws in the Wild
West in the 19th century. By 2015, however, the company was
filing for bankruptcy protection following a series of missteps
and the loss of a key contract with the U.S. Army.
    Those issues allowed rivals to steal a march on Colt,
although it emerged from bankruptcy in 2016 and revenue rose by
a quarter last year. 
    
    UNDERINVESTMENT
    CZG, which used IPO proceeds and issued bonds to help
finance the Colt deal, will outline investment plans later this
year. They will include possibly introducing new products and
investing in upgrades at Colt's main factory in West Hartford,
Connecticut, Drahota said. 
    Upgrades will also mean "essentially an enlargement of
capacity because of underinvestment in the past," he said.
    CZG is also considering whether to produce some CZG products
in the United States, he said, adding there is little overlap
with Colt products.
    "We have to consider from a group level what ... the
production split will be at each location," he said. "One plus
one is more than two. We believe we can leverage on each other's
success."
    About half of Colt's revenues in 2020 came from the massive
U.S. military and law enforcement (M&LE) segment and Drahota
said he saw "huge room" to grow the brand in global civilian and
M&LE markets.
    Analysts at Czech-based Fio Banka estimate the military and
law enforcement portion of CZG's North American sales will climb
to 50% from 10% with the Colt acquisition, boosting the
company's revenue as M&LE firearms fall into higher price
categories.
    Global demand for small firearms is expected to rise from
around 1.09 billion units in 2019 to 1.26 billion units in 2023,
CZG said in its annual report, citing the BIS Small Arms Market
Report, with the civilian market now accounting for 62% of sales
and military and law enforcement 38%. 
    The market's good growth prospects have helped drive shares
of Smith & Wesson and Sturm, Ruger & Co. up 21% and 16%
respectively this year.
    CZG, whose operating profit rose 12% last year, has until
now mainly competed with European groups like FN Herstal of
Belgium, Beretta of Italy and Glock Gesellschaft of Austria and
struck deals last year with the Czech Army and law enforcement
bodies in Brazil and Kenya, as well as contracts to help rearm
Hungary's army. 
    Buying Colt will also give it exposure to the UK and
Canadian militaries, among others, and Drahota said the market
will continue to shift to more advanced weapons as demanded by
military customers. CZG, which last year took a minority stake
in Spuhr i Dalby AB, a Swedish maker of optical mounting
solutions for weapons, would also look at further acquisitions,
especially in areas like optics or optoelectronics.
    "We want to grow by acquisitions but we will be
disciplined," Drahota said.


($1 = 21.4970 Czech crowns)

 (Reporting by Michael Kahn and Jason Hovet; Editing by Susan
Fenton)
 ((michael.kahn@thomsonreuters.com; +420 234 721 612; Reuters
Messaging: michael.kahn.thomsonreuters.com@reuters.net))
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