Equity research HANZA: Largest acquisition yet looks promising
4 Dec 2023
Carlsquare Equity Research has a positive view of the acquisition of Orbit One as it confirms the strong growth agenda and strengthens the group’s offering in Electronics. HANZA’s track record of integrating new companies and, what appears to be a fair valuation, gives good grounds for optimism when it comes to value creation. We expect to raise our base case valuation to some SEK 100 (88) per share.
HANZA acquires Orbit One for about SEK 367m in cash plus a possible earn-out of a maximum of SEK 91m. Orbit One is a well-known Swedish electronic manufacturing service (EMS) company, headquartered in Ronneby, and that is expected to reach a 2023E turnover of SEK 1.1bn with an EBITA margin of some 6.4 per cent. Thus it will expand HANZA’s sales footprint by about 27 per cent. HANZA estimates that it will pay 7x EBIT. This is well below HANZA’s own valuation multiple of >11x and in line with previous acquisitions.
Increased exposure to electronics
The deal considerably strengthens HANZA’s position in electronics and electromechanics, representing more than half of group sales now. According to HANZA, there is not much customer overlap between the two companies. Orbit One has factories in Sweden (2) and Poland. We believe it is a sizeable addition to the Central European cluster and an essential step in HANZA’s goal of at least SEK 1bn in sales per geographic cluster to achieve the desired scale advantages. Orbit One reportedly already has a high level of automation, which fits HANZA’s ambitions to increase efficiency.
HANZA says the integration will take about a year, and the aim is to significantly increase the profitability of the Orbit One operations, which is below HANZA’s (HANZA reported an EBITA-margin of 8.1 per cent R12M in the Q3 report). Based on the forecasts provided in the presentation following the deal, sales for Orbit One are expected to decrease by some nine per cent this year following a strong 2022. Still, the profitability is predicted to increase. HANZA does not comment on the expected sales decline for the full year but says Orbit One is now growing. We note that Orbit One has reported that it exited the Russian market in 2022 and closed a factory in Kaliningrad, Russia. Temporary effects from swings in component prices have also hurt reported growth for the EMS industry in 2023.
Financial targets will be upgraded
Including Orbit One, HANZA now has sales of some SEK 5.2bn. As HANZA has thus reached its growth target for 2025, the board will revise the financial targets upwards. As previously described, HANZA has achieved its targets well ahead of our expectations. We have a positive initial view of the deal, believing that it will increase exposure to customer segments associated with the EMS industry, e.g. Energy and Greentech, Smart Cities, etc. It is the biggest acquisition yet, and HANZA’s strong track record, not the least in recent years, gives good grounds for optimism that sizeable synergies will be achieved.
With the caveat that we do not have all the financial details, we now see an average growth of 20 per cent+ from 2022 to 2025E and expect to increase earnings estimates by some 15 per cent. The sector’s valuation in Nordic equity markets is lower than six months ago, and still a bit of a headwind, but we will tentatively raise our base case valuation (which takes relative valuation into consideration) to ~SEK 100 per share (+13 per cent). In our view, a pure DCF valuation indicates a higher potential, preliminary some SEK 110 to 115.
Please read our latest research update (Nov. 10).
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