Hanza: Soft Quarter – Encouraging Outlook
Research Update
2024-07-24
06:45
Redeye retains its positive stance towards Hanza despite a softer Q2 report than expected regarding sales and margins. However, Hanza sees a strong inflow of new customers and expects a volume rebound in late 2024. We keep our mid- and long-term forecasts largely changed and expect Hanza to reach its 8% EBITA margin target in 2025.
FN
FR
Fredrik Nilsson
Fredrik Reuterhäll
Contents
Review of Q2 2024
Softer Than Expected – Weaker Macroeconomic Hurting
Strong Sales to New Customers
Expecting a Rebound in Late 2024
Improved NWC - Reducing Inventory in Orbit One
Estimate Revisions: Cuts to 2024, Roughly Unchanged 2025
Valuation
Investment thesis
Quality Rating
Financials
Rating definitions
The team
Download article
Sales was 5% short of our expectations and amounted to SEK1,221m (1,068). The organic growth was -8% y/y. As seen in recent quarters, Hanza has not lost any customers, but the softer macroeconomic environment has resulted in lower customer demand in some areas. On the other hand, Hanza sees strong new sales from a broad range of sectors, following a greater need for cost-efficient manufacturing in the softer economic environment. Historically, about half of Hanza’s sales growth has come from new customers, implying that strong sales to new customers should boost growth in the coming quarters.
EBITA (adjusted for restructuring cost of SEK20m) was SEK70m (92), corresponding to an EBITA margin of 5.7% (8.6). Our forecast was SEK80m and 6.2%. The EBITA margin started improving during the latter parts of the quarter following the completion of the integration and efficiency programs, suggesting that there are further improvements in margins to expect over the next quarters. Regarding Orbit One, we are encouraged to see the integration already being completed, as we did expect it to be completed in late 2024.
We retain our Base Case at SEK 73 (73) following roughly unchanged mid- and long-term forecasts. We expect SEK5.5bn in sales (with no future M&A) and 8.0% in EBITA margin. Management seems confident in reaching SEK6.5bn (with M&A) and an 8% EBITA margin in 2025, and we see solid upside potential if the 2025 targets are reached.
SEKm | 2023 | 2024e | 2025e | 2026e | 2027e |
Revenues | 4,154.0 | 5,063.2 | 5,535.3 | 5,866.7 | 6,218.0 |
Revenue Growth | 16.4% | 21.9% | 9.3% | 6.0% | 6.0% |
EBITDA | 464.7 | 451.1 | 608.8 | 658.3 | 714.9 |
EBIT | 328.0 | 264.6 | 417.1 | 460.7 | 506.3 |
EBIT Margin | 7.9% | 5.3% | 7.6% | 7.9% | 8.2% |
Net Income | 215.0 | 104.3 | 208.1 | 244.4 | 282.2 |
EV/Sales | 0.9 | 0.6 | 0.5 | 0.5 | 0.5 |
EV/EBIT | 11.2 | 11.8 | 7.1 | 6.4 | 5.7 |
Estmates vs. Actuals | ||||||
Sales | Q2E 2024 | Q2A 2024 | Diff | Q2A 2023 | Q1A 2024 | |
Net sales | 1286 | 1221 | -5% | 1068 | 1253 | |
Y/Y Growth (%) | 20% | 14% | 21% | 18% | ||
Main Markets | 788 | 723 | -8% | 605 | 770 | |
Y/Y Growth (%) | 2% | 20% | 25% | 30% | ||
EBITA (MM) | 59 | 52 | -12% | 67 | 39 | |
EBITA margin | 7.5% | 7.2% | 11.1% | 5% | ||
Other Markets | 498 | 495 | -1% | 458 | 480 | |
Y/Y Growth (%) | 4% | 8% | 14% | 3% | ||
EBITA (OM) | 22 | 20 | -11% | 28 | 12 | |
EBITA margin | 4.5% | 4.0% | 6% | 3% | ||
Earning | ||||||
EBITA | 80 | 70 | -13% | 92 | 67 | |
EBITA Margin (%) | 6.2% | 5.7% | 8.6% | 5.3% | ||
EBIT | 73 | 63 | -14% | 88 | 61 | |
EBIT Margin (%) | 5.7% | 5.2% | 8.2% | 4.9% | ||
Diluted EPS | 0.60 | 0.16 | -73% | 1.50 | 0.78 |
Sales was 5% short of our expectations and amounted to SEK1,221m (1,068). The organic growth was -8% y/y. As seen in recent quarters, Hanza has not lost any customers, but the softer macroeconomic environment has resulted in lower customer demand in some areas. Mining, textile, and recycling saw soft markets, while energy, security and defence were relatively strong.
EBITA (adjusted for restructuring cost of SEK20m) was SEK70m (92), corresponding to an EBITA margin of 5.7% (8.6). Our forecast was SEK80m and 6.2%. The EBITA margin started improving during the latter parts of the quarter following the completion of the integration and efficiency programs, suggesting that there are further improvements in margins to expect over the next quarters.
Source: Hanza
Main Markets missed our sales forecasts by 8%, and EBITA was 12% short. Organic growth was -9%. The adjusted EBITA margin was 7.2% (11.1), slightly increasing from 7.0% in Q1. Excluding Orbit One, the EBITA margin was 8.2%, just as in Q1. Thus, the q/q margin improvement was driven by Orbit One, implying that the integration has already started to have some positive impact. We believe that also implies we can expect further margin improvements in Orbit One from now on – although a potential further weakening of the macroeconomic environment (which we do not foresee) could mitigate that effect.
Source: Hanza
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 largely matched our sales forecasts, while the EBITA margin was somewhat softer. Organic growth was -7% y/y. The adjusted EBITA margin was 4.0% (6.1), an increase from 2.5% in Q1. Excluding Orbit One, the EBITA margin was 5.0%, up from 4.9% in Q1. Thus, as seen in Main Markets, the q/q margin improvement was mostly driven by Orbit One, implying that the integration has already started to have some positive impact.
Source: Hanza
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.
Regarding Orbit One, we are encouraged to see the integration already being completed, as we did expect it to be completed in late 2024. According to management, the comprehensive HR due diligence and Hanza and Orbit One using the same ERP have facilitated the rapid integration. Management expects the full positive effects from the integration in the latter parts of 2024.
Hanza sees strong new sales from a broad range of sectors, following a greater need for cost-efficient manufacturing in the softer economic environment. The deal flow includes a deal with Munters, worth SEK10m initially but with substantially larger potential long-term, and a deal with an unnamed leading global player in the defence industry worth SEK134m. Historically, about half of Hanza’s sales growth has come from new customers, implying that strong sales to new customers should boost growth in the coming quarters.
Interestingly, management noted in recent quarters that softer macroeconomic conditions could 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. Management also expected to gain new deals thanks to these drivers in 2024, which seems to have played out, although we do not know the actual impact on sales growth from the new deals yet – there is typically a ~six-month lead time from the deal to production.
Hanza expects a volume rebound from current customers by the end of 2024. That is a slightly softer outlook than in Q1, where Hanza mentioned that its customers expect a rebound in the autumn of 2024. However, Hanza took a more cautious approach and planned for the market environment to remain unchanged, which retrospectively seems like the right choice. However, this time, Hanza seems more confident in a rebound in volumes and has planned for increased volumes in late 2024. Also, it highlights that the strong inflow of new deals and customers will help drive volumes in late 2024.
Although the net working capital (NWC) remained somewhat higher than the level seen in Hanza historically, Hanza has managed to reduce the NWC during the quarter. While one should expect variation from quarter to quarter, we are encouraged to see NWC heading the right way. As mentioned in our last Update, Hanza sees potential to gradually improve the NWC in Orbit One to align with Hanza’s historical levels.
Source: Hexatronic
We lower our forecasts for 2024 by 2% on sales and by 15% on the EBIT level. While the softer outcome in this quarter hurts 2024, we also somewhat reduced our margin assumptions in both Main- and Other Markets. Nevertheless, we expect gradual margin improvements in both segments through the rest of 2024 and 2025, driven by the completed integration and efficiency programs, new customers, and somewhat stronger market conditions.
Regarding 2025, we leave our forecasts roughly flat. We expect SEK5.5bn in sales (with no future M&A) and 8.0% in EBITA margin. This margin aligns 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 will likely be reached by a combination of organic and acquired growth. Thus, despite our forecast cuts for mainly 2024, we still expect Hanza to perform in line with its financial targets regarding margins.
Also, management seems confident in reaching SEK6.5bn and an 8% EBITA margin in 2025. While we might see a somewhat soft Q3, from Q4 and onwards, we believe substantial margin improvements are likely and necessary to reach the 2025 target.
Estimate Revisions | ||||||
Sales | FYE 2024 | Old | Change | FYE 2025 | Old | Change |
Net sales | 5027 | 5141 | -2.2% | 5523 | 5600 | -1.4% |
Y/Y Growth (%) | 21% | 24% | 10% | 9% | ||
Main Markets | 3023 | 3121 | -3.1% | 3325 | 3401 | -2.2% |
Y/Y Growth (%) | 29% | 33% | 10% | 9% | ||
EBITA (MM) | 193 | 227 | -14.9% | 291 | 299 | -2.8% |
EBITA margin | 6% | 7% | 9% | 9% | ||
Other Markets | 1998 | 2018 | -1.0% | 2198 | 2199 | 0.0% |
Y/Y Growth (%) | 12% | 13% | 10% | 9% | ||
EBITA (OM) | 87 | 99 | -13.0% | 155 | 154 | 0.9% |
EBITA margin | 4% | 5% | 7% | 7% | ||
Earning | ||||||
EBITA | 291 | 338 | -13.9% | 440 | 447 | -1.5% |
EBITA Margin (%) | 5.8% | 6.6% | 8.0% | 8.0% | ||
EBIT | 265 | 312 | -15.1% | 417 | 424 | -1.7% |
EBIT Margin (%) | 5.3% | 6.1% | 7.6% | 7.6% | ||
Diluted EPS | 2.38 | 3.20 | -25.6% | 4.75 | 4.93 | -3.7% |
Source: Hanza & Redeye Research |
Forecasts | ||||||||
Sales | FYA 2023 | Q1A 2024 | Q2A 2024 | Q3E 2024 | Q4E 2024 | FYE 2024 | FYE 2025 | FYE 2026 |
Net sales | 4144 | 1253 | 1221 | 1200 | 1354 | 5027 | 5523 | 5855 |
Y/Y Growth (%) | 17% | 18% | 14% | 26% | 28% | 21% | 10% | 6% |
Main Markets | 2351 | 770 | 723 | 718 | 812 | 3023 | 3325 | 3525 |
Y/Y Growth (%) | 19% | 30% | 20% | 31% | 34% | 29% | 10% | 6% |
EBITA (MM) | 256 | 39 | 34 | 54 | 67 | 193 | 291 | 317 |
EBITA margin | 11% | 5% | 5% | 8% | 8% | 6% | 9% | 9% |
Other Markets | 1778 | 480 | 495 | 482 | 542 | 1998 | 2198 | 2330 |
Y/Y Growth (%) | 13% | 3% | 8% | 19% | 21% | 12% | 10% | 6% |
EBITA (OM) | 110 | 12 | 18 | 24 | 32 | 87 | 155 | 170 |
EBITA margin | 6% | 3% | 4% | 5% | 6% | 4% | 7% | 7% |
Earning | ||||||||
EBITA | 345 | 67 | 50 | 76 | 98 | 291 | 440 | 481 |
EBITA Margin (%) | 8.3% | 5.3% | 4.1% | 6.4% | 7.2% | 5.8% | 8.0% | 8.2% |
EBIT | 328 | 61 | 43 | 70 | 91 | 265 | 417 | 461 |
EBIT Margin (%) | 7.9% | 4.9% | 3.5% | 5.8% | 6.7% | 5.3% | 7.6% | 7.9% |
Diluted EPS | 4.98 | 0.78 | 0.14 | 0.53 | 0.94 | 2.38 | 4.75 | 5.58 |
Source: Hanza & Redeye Research |
We retain our Base Case at SEK 73 (73) following roughly unchanged mid- and long-term forecasts. We keep our positive view and see solid upside potential if the 2025 targets are reached.
Fair Value Range - Assumptions | |||
Bear Case | Base Case | Bull Case | |
Value per share, SEK | 23 | 73 | 99 |
Sales CAGR | |||
2024 - 2031 | 4% | 6% | 7% |
2031 - 2041 | 1% | 3% | 4% |
Avg EBIT margin | |||
2024 - 2031 | 7% | 8% | 9% |
2031 - 2041 | 5% | 9% | 9% |
Terminal EBIT Margin | 6% | 8% | 9% |
Terminal growth | 2% | 2% | 2% |
WACC | 10% | 10% | 10% |
Source: Redeye Research |
Despite the strong operational performance in recent years, with high growth and improving margins during 2023, Hanza is still trading at a discount (25-30% 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.
Case
Riding the Back-Shoring Trend with its Unique Cluster Strategy
Evidence
Proven Track-Record in Mature Clusters
Challenge
Cyclical Exposure Through Customers’ Volume Fluctuations
Challenge
Lack of transferability
Valuation
Fair Value SEK 73
People: 4
Hanza receives a high rating for people, as both management and owners have favorable characteristics. CEO Erik Stenfors has vast experience of the manufacturing service industry, including being the founder and CEO of both Note and Hanza. Hanza's largest sharholder is Gerald Engström, the founder and majority owner of Systemair. As a result, Hanza also has the support of a product company veteran.
Business: 3
Lacking clear differentiators, competition in the manufacturing service industry is typically tough. While Hanza has a unique take on the industry, we believe it is still difficult for it to increase prices for example. All the same, Hanza is a close and important partner for several of its customers. Moreover, it has decent diversification across both sectors and customers. Overall, Hanza receives an average rating for Business.
Financials: 3
While Hanza's near-term financial performance is strong, the long-term track-record has been weak, which lowers the Financials rating. Its solid financial position is positive, while the low-margin nature of its business is negative for the rating. In summary, Hanza receives an average rating for Financials. Several consecutive years of solid performance would lift the rating, though.
Income statement | |||||
SEKm | 2023 | 2024e | 2025e | 2026e | 2027e |
Revenues | 4,154.0 | 5,063.2 | 5,535.3 | 5,866.7 | 6,218.0 |
Cost of Revenue | 2,334.0 | 2,988.0 | 3,424.4 | 3,629.9 | 3,847.7 |
Operating Expenses | 1,345.3 | 1,588.1 | 1,490.1 | 1,566.5 | 1,643.4 |
EBITDA | 464.7 | 451.1 | 608.8 | 658.3 | 714.9 |
Depreciation | 65.6 | 82.8 | 86.8 | 95.4 | 110.3 |
Amortizations | 17.0 | 26.4 | 23.2 | 20.6 | 16.7 |
EBIT | 328.0 | 264.6 | 417.1 | 460.7 | 506.3 |
Shares in Associates | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
Interest Expenses | -80.0 | -144.2 | -166.3 | -166.3 | -166.3 |
Net Financial Items | 80.0 | 144.2 | 166.3 | 166.3 | 166.3 |
EBT | 248.0 | 120.4 | 250.8 | 294.4 | 339.9 |
Income Tax Expenses | -33.0 | -16.2 | -42.6 | -50.1 | -57.8 |
Net Income | 215.0 | 104.3 | 208.1 | 244.4 | 282.2 |
Balance sheet | |||||
Assets | |||||
Non-current assets | |||||
SEKm | 2023 | 2024e | 2025e | 2026e | 2027e |
Property, Plant and Equipment (Net) | 714.0 | 888.8 | 1,036.6 | 1,198.9 | 1,361.6 |
Goodwill | 387.0 | 533.0 | 533.0 | 533.0 | 533.0 |
Intangible Assets | 77.0 | 132.6 | 109.4 | 88.8 | 72.1 |
Right-of-Use Assets | 186.0 | 265.0 | 265.0 | 265.0 | 265.0 |
Other Non-Current Assets | 23.0 | 36.0 | 36.0 | 36.0 | 36.0 |
Total Non-Current Assets | 1,387.0 | 1,855.4 | 1,980.0 | 2,121.7 | 2,267.8 |
Current assets | |||||
SEKm | 2023 | 2024e | 2025e | 2026e | 2027e |
Inventories | 936.0 | 1,206.5 | 1,215.1 | 1,288.0 | 1,365.3 |
Accounts Receivable | 175.0 | 251.4 | 248.5 | 263.5 | 279.3 |
Other Current Assets | 91.0 | 150.8 | 165.7 | 175.6 | 186.2 |
Cash Equivalents | 340.0 | 455.0 | 599.4 | 624.0 | 671.4 |
Total Current Assets | 1,542.0 | 2,063.7 | 2,228.8 | 2,351.2 | 2,502.2 |
Total Assets | 2,929.0 | 3,919.2 | 4,208.8 | 4,472.9 | 4,769.9 |
Equity and Liabilities | |||||
Equity | |||||
SEKm | 2023 | 2024e | 2025e | 2026e | 2027e |
Non Controlling Interest | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
Shareholder's Equity | 1,345.0 | 1,460.3 | 1,642.3 | 1,834.4 | 2,055.2 |
Non-current liabilities | |||||
SEKm | 2023 | 2024e | 2025e | 2026e | 2027e |
Long Term Debt | 326.0 | 486.0 | 486.0 | 486.0 | 486.0 |
Long Term Lease Liabilities | 114.0 | 171.0 | 171.0 | 171.0 | 171.0 |
Other Non-Current Lease Liabilities | 159.0 | 198.0 | 198.0 | 198.0 | 198.0 |
Total Non-Current Liabilities | 599.0 | 855.0 | 855.0 | 855.0 | 855.0 |
Current liabilities | |||||
SEKm | 2023 | 2024e | 2025e | 2026e | 2027e |
Short Term Debt | 196.0 | 438.0 | 438.0 | 438.0 | 438.0 |
Short Term Lease Liabilities | 53.0 | 75.0 | 75.0 | 75.0 | 75.0 |
Accounts Payable | 450.0 | 653.5 | 718.0 | 761.1 | 806.8 |
Other Current Liabilities | 286.0 | 437.4 | 480.5 | 509.4 | 539.9 |
Total Current Liabilities | 985.0 | 1,603.9 | 1,711.6 | 1,783.5 | 1,859.7 |
Total Liabilities and Equity | 2,929.0 | 3,919.2 | 4,208.8 | 4,472.9 | 4,769.9 |
Cash flow | |||||
SEKm | 2023 | 2024e | 2025e | 2026e | 2027e |
Operating Cash Flow | 277.0 | 582.2 | 486.8 | 416.1 | 463.4 |
Investing Cash Flow | -296.0 | -616.3 | -234.6 | -257.6 | -273.1 |
Financing Cash Flow | 217.0 | 139.2 | -107.8 | -133.9 | -142.9 |
Disclosures and disclaimers
Contents
Review of Q2 2024
Softer Than Expected – Weaker Macroeconomic Hurting
Strong Sales to New Customers
Expecting a Rebound in Late 2024
Improved NWC - Reducing Inventory in Orbit One
Estimate Revisions: Cuts to 2024, Roughly Unchanged 2025
Valuation
Investment thesis
Quality Rating
Financials
Rating definitions
The team
Download article