Review of Q1 2024

Sales was 6% short of our expectations and amounted to SEK1253m (1065). The organic growth was -6% y/y. The softer macroeconomic environment resulted in lower demand from customers in some areas. EBITA (adjusted for restructuring and a write-down of the Orbit One earn-out) was SEK67m (88), corresponding to an EBITA margin of 5.3% (8.3). Our forecast was SEK96m and 7.2%.

Main Markets beat our sales forecasts by 5%, while EBITA came in 11% short. We believe the EBITA contribution from Orbit One was lower than we anticipated, as management states that the EBITA contribution in Q1 was limited. Thus, the like-for-like EBITA development was rather solid at 8.2% vs 8.8% Q1 2023 (excluding subsidiaries). Organic growth was 1%. Once again, Main Markets shows it has the ability to obtain healthy results despite large integrations and changes in demand.

Other Markets came in below in terms of both sales and EBITA. Organic growth was -14%, and the EBITA margin fell to 3.3% overall and 4.9% (6.4) like-for-like. Our forecast was 6.1%. The growth and margin were negatively affected by the ongoing integration of Orbit One's Polish operations, which usually take one year and could possibly be completed in Q3 if done well. In addition, the smaller clusters within Other Markets are not as mature and, therefore, not as resistant to changes in demand as Main Markets.

Management sees a mixed market where some sectors, like defence and energy, continue to do well, while others like mining and industrials, are softer. Hanza saw lower volumes from some customers while others increased their volume. However, considering the negative organic growth, customers reducing volumes seem to dominate. Also, Hanza has not lost any customers, meaning that the decline in sales is fully due to lower volumes from current customers. Although Hanza plans for the market environment to remain unchanged, it is getting promising signals from its customers, who expect to increase their volumes by autumn.

Also, management highlights that softer macroeconomic conditions can trigger product companies to evaluate their production chains – leaving opportunities for Hanza to gain market share. In addition, the interest in regionalised production remains high, which seems reasonable considering the increasing geopolitical turmoil in many areas, for example. The backsourcing or regionalisation is mostly about new production for the European/American markets being manufactured in those regions rather than production moving back from Asia, although that happens sometimes as well. Management seems confident in gaining new deals thanks to these trends during the rest of 2024.

All in all, management clearly believes that its 2025 targets of SEK6.5bn in sales (inc. future M&A) and the 8% EBITA margin target hold even in this somewhat softer market, suggesting high confidence in reaching the targets.

Main Markets consist of the Swedish, Finnish, and German clusters. The Swedish cluster is the largest and the most profitable cluster, with manufacturing facilities mainly located in Årjäng and Töcksfors, Värmland, along with the recently acquired facility in Ronneby, Blekinge. The German cluster is less mature but has seen substantial improvements in profitability during the last year. The Finnish cluster is somewhere in between, in terms of maturity and profitability.

Other Markets consist of the Baltic, Central European, and Chinese clusters. The Baltic cluster is the largest and likely the most profitable, with manufacturing facilities in Tartu and Narva, Estonia. The Central Europan cluster is less mature but will increase significantly in size with the recently acquired Orbit One factory in Poland. The Chinese cluster is Hanza’s smallest and the only cluster outside of Europe.

Orbit One has a much larger net working capital compared to “old Hanza”, mostly due to its large inventory. Management believes it will be able to adjust Orbit One’s inventory to align with levels seen previously in Hanza over time, which will boost Hanza’s cash flow.

We lower our sales forecasts by 3-7% for 2024-25 and our EBITA estimates by 14-20%. The following changes mainly drive the revisions in addition to the softer Q1, affecting 2024 numbers:

Based on our revised forecasts, we expect SEK5.6bn in sales (with no future M&A) and 8.0% in EBITA margin in 2025. This margin is in line with Hanza’s >8% target but somewhat lower sales than the SEK6.5bn target. However, our forecasts do not include any future M&A, and we interpret management as the target is likely to be reached by a combination of organic and acquired growth. Thus, despite our forecast cuts, we still expect Hanza to perform in line with its financial targets.

We lower our Base Case somewhat to SEK 73 (90) on the back of reduced forecasts and a softer outlook. Nevertheless, we keep our positive view and see substantial upside potential if the 2025 targets are reached.

Despite the strong operational performance in recent years, with high growth and improving margins during 2023, Hanza is still trading at a discount (~20% on EV/EBIT) to the average, although often bigger, manufacturing service companies. We believe the discount will decrease further, given that Hanza continues its strong operational performance.