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Equity research, HANZA: Preview Q3, 2023

19 Oct 2023

Equity research

Carlsquare Equity Research expects HANZA’s Q3 earnings report on 7 November to demonstrate good, albeit sequentially slower, growth and healthy margins. Signals from EMS companies have been varied, but we argue that HANZA’s customer mix is probably relatively favourable in the short term.   

We predict growth in Q3 to remain double-digit, albeit slower than in the first half, with some ten per cent organic growth. Already in Q2, the growth in the Other markets segment decelerated. HANZA cited a negative impact from capacity expansions. If so, there is a good chance sales growth could pick up again when the capacity increase is completed. The Main markets segment performed strongly last quarter. A focus point is whether the German cluster will continue to do well (as we expect) despite a challenging economy. We expect group margins to be seasonally weaker but significantly higher than last year. In 2022, there were several internal and external headwinds holding back margins.

Mixed guidance from Nordic EMS companies so far

On 5 October, Finnish EMS InCap provided full-year guidance of some 18 per cent drop in sales, including acquisitions, following an updated sales forecast from its largest customer, Victron Energy (e-mobility and electrification markets). This corresponds to dramatically lower sales in H2 compared to 2022. InCap is a particular case as it is highly dependent on Victron, and we believe there is not much read-through for HANZA here. Scanfil followed suit and last week backtracked on its raised guidance from July and now expects flat sales in H2.

In conclusion, the customers of EMS companies have seemingly lowered stocks in Q3 and Electric Vehicle and new construction markets are particularly weak. However, Swedish peer NOTE is still growing and, in conjunction with the Q3 report, reiterated its full-year guidance as demand from, e.g., MedTech and Industrial customers remains solid. Moreover, it expects sales growth to increase again in the first half of 2024. Finally, AQ Group stands out by reporting organic growth of 17 per cent in Q3. It also bucks the trend by citing strong demand from, not only defence, but also electrification and transportation customers.

In summary, we deduce that sector peers excluding InCap, e.g., NOTE, Scanfil and Kitron, have implicitly guided 0-12 per cent growth in H2 versus the outcome of some 25 per cent in the first six months. We expect HANZA to reach the upper end of this range as it probably has a more favourable customer mix is in the short term than several peers. Also, the customer base is diversified, which should provide relatively more stability.

In conjunction with the last report, HANZA said order intake was still very good. There has also  been several reports of increased business with existing customers during the year. Eventually, it would not be entirely surprising to learn of shorter order lead times, as the EMS companies have already signalled. Then again, NOTE was surprisingly confident of growth picking up in 2024.

Valuation has come down significantly in the last six months

According to estimates collected by S&P Capital IQ, HANZA’s valuation (forward (NTM) EV/EBITDA-multiple) has dropped to two-year lows and is in line with sector peers.

For detailed estimates for the full year, please see our latest update.

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Equity research, HANZA: Preview Q3, 2023