Research Update Hanza, Q1 2022: Strong growth in extraordinary times
12 May 2022
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The robust growth for contract manufacturer HANZA continues and especially sales in the Main markets segment (i.e., Sweden, Finland and Germany) surprised us on the upside. Margins lagged our expectations, but we see improvement as short term headwinds abate. We make minor adjustments to our earnings estimates and raise our base case to some SEK 47 (44) as the relative valuation has become even more supportive.
HANZA is a contract manufacturer founded in 2008 that has successfully built six regional manufacturing clusters in Europe and China through organic growth and acquisitions in, e.g., sheet metal processing, heavy mechanics, and electronics. It boasts several large European industrial groups among its customers.
Strong growth momentum
HANZA delivered 45 per cent growth in Q1’ 22. Hence the strong momentum from H2 2021 continues. Demand for European contract manufacturing, especially electronics, is buoyant, although sales are also boosted by price inflation in raw materials. Sales growth exceeded our expectations by 16 p.p. despite our estimates being above consensus. We are encouraged that the Main markets segment is now growing faster than Other markets and that a recovery in the critical German market is a significant driver. That provides further validation to HANZA’s expansion strategy. We raise our sales estimates by six per cent following the top-line beat.
Room for margin improvement as headwinds abate
Despite better sales, operating earnings fell somewhat short of our forecast. Operating leverage was hampered by capacity constraints (worsened by covid) and heightened costs in Other markets, and a negative impact from newly acquired Beyers in Germany in Main markets. However, we expect completed expansion programs in Other markets and strong demand to contribute to margin improvement, in line with the company outlook, from Q2 onwards. While we believe the strong sales support our EBITA estimates, higher interest rates lead to a minor reduction (-6 per cent) in our FY 2022 EPS forecast.
Higher sector valuation trumps interest rates
Since we initiated coverage at the beginning of March, valuations in the Nordic contract manufacturing space have generally recovered somewhat. Hence, while we lower our DCF valuation range slightly due to higher interest rates and WACC, our combined DCF and multiple valuation render a higher base case fair value of SEK 47.3 (44.2) Besides relative low valuation multiples, e.g., PE 22E at 12.3x, we expect continued good sales and earnings momentum to drive the shares higher in the coming quarters
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