Equity research HANZA Q3, 2023: Accelerated margin expansion
10 Nov 2023
Read the full report here:
Carlsquare Equity Research believes the Q3 report demonstrates considerable strength in an uncertain macro environment. Profitability has improved faster than we expected, and HANZA is closing the margin gap to its Nordic peer group. HANZA sees organic growth in the next year supported by, e.g., new projects and expansions in the Other markets segment. We continue to raise our estimates. In our view, the current valuation still underestimates the company’s quality and outlook.
Main markets margin in top gear
The Main markets segment (i.e., Finland, Germany and Sweden) was seemingly unaffected by any slowdown, growing solidly at 22 per cent and increasing profit by some 115 per cent in the third quarter. As in the previous quarter, it is apparent that the German units are showing strong profitability, a scene change from 2022. The development validates HANZA’s coordination work since the acquisition of Beyers in late 2021. The segment EBITA exceeded our expectations by some 28 per cent. Although earnings for the Other markets segment did not meet our forecast, Group EBITA was overall 16 per cent better than expected.
Sales outlook underpinned by added capacity and new projects
Organic growth for the group slowed to six per cent in Q3 as the Other markets segment was burdened by expansion programs and the ramping up of new customer projects. However, we believe these initiatives should pay off next year. HANZA expects organic growth from its existing customers in 2024.
The outlook supports our previous view of low double-digit sales growth next year. We leave our sales forecasts virtually unchanged but raise our earnings estimates by approximately eight per cent. Operating profit should grow faster than sales from improved efficiency in the Other markets segment following completed capacity expansion investments and increased business with existing customers (e.g., Mitsubishi Logisnext Europe).
Higher DCF valuation, but peer group multiples have come down
In 2023, HANZA earnings have repeatedly surprised on the upside, driving estimates higher and supporting increased valuation. Since the beginning of the year, we have raised our EBITA estimates by ~60 per cent. Admittedly, sector valuation has come down since the summer, but we believe investors are too cautious as the outlook from contract manufacturers is still generally solid. Due to the recent share price volatility in the group, we estimate a comparatively wider valuation range in our base case based on relative and DCF valuation of SEK 73 (100) to SEK 104 (95) per share, respectively. Consequently, the valuation in the base case drops to SEK 88 (98) per share. As before, the bull case assumes an increased pace of expansion via acquisitions. HANZA is currently eyeing capacity-enhancing expansions in existing geographic clusters.
Carlsquare AB, www.carlsquare.se, hereinafter referred to as Carlsquare, is engaged in corporate finance and equity research, publishing information on companies and including analyses. The information has been compiled from sources that Carlsquare deems reliable. However, Carlsquare cannot guarantee the accuracy of the information. Nothing written in the analysis should be considered a recommendation or solicitation to invest in any financial instrument, option, or the like. Opinions and conclusions expressed in the analysis are intended solely for the recipient.
The content may not be copied, reproduced, or distributed to any other person without the written consent of Carlsquare. Carlsquare shall not be liable for either direct or indirect damages caused by decisions made on the basis of information contained in this analysis. Investments in financial instruments offer the potential for appreciation and gains. All such investments are also subject to risks. The risks vary between different types of financial instruments and combinations thereof. Past performance should not be taken as an indication of future returns.
The analysis is not directed at U.S. Persons (as that term is defined in Regulation S under the United States Securities Act and interpreted in the United States Investment Companies Act of 1940), nor may it be disseminated to such persons. The analysis is not directed at natural or legal persons where the distribution of the analysis to such persons would involve or entail a risk of violation of Swedish or foreign laws or regulations.
The analysis is a so-called Assignment Analysis for which the analysed company has signed an agreement with Carlsquare for analysis coverage. The analyses are published on an ongoing basis during the contract period and for the usually fixed fee.
Carlsquare may or may not have a financial interest with respect to the subject matter of this analysis. Carlsquare values the assurance of objectivity and independence and has established procedures for managing conflicts of interest for this purpose.
The analyst Niklas Elmhammer does not own and may not own shares in the analysed company.