Research Update HANZA Q3, 2022: Staying on course

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Update HANZA Q3 2022 14 Nov

Carlsquare Equity Research believes the strong sales growth and positive outlook in the Q3 report support the case for solid earnings growth to continue into 2023. The Other markets segment continue to shine while there is room for margin increase in Germany. High order intake and raised financial targets are encouraging signals. We raise our base case to SEK 57 (56) on somewhat higher growth assumptions.

Robust sales and positive outlook in uncertain times

The robust sales trend continued in Q3, and the growth of 40 percent clearly surpassed our expectations. The Other markets segment once again was the strongest performer with 33 percent organic growth. The completion of expansion programs contributed to EBITA increasing by 34 percent to SEK 50m (38), in line with our expectations. The EBITA margin contracted slightly as price inflation remained considerable and as profitability in the German cluster is still burdened by the Beyers unit. HANZA reports very good order intake which bodes well for continued volume growth the coming quarters. We raise our sales estimates for 2022 to 2024 by some two percent following the report. At the same time, we assume a somewhat more drawn-out trajectory for margin expansion than previously and has adjusted our earnings estimates slightly as a result.

Raised financial targets a positive signal for the long-term

HANZA announced new financial targets and aims for at least SEK 5bn of sales in 2025 and an EBITA margin of at least 8 percent by the end of 2025.This implies, e.g., a doubling of profit compared to 2022E and an almost similar strong growth rate as in the 2018 to 2022 period. We believe HANZA will need additional M&A to reach its ambitious targets, however, the new objectives also reflect confidence that the company will continue to execute on its cluster strategy and the backsourcing trend. The strong outcome in the 2018 to 2022 period of some 17 percent average annual growth supports the positive long-term view and we now project average seven percent organic growth (excluding re-invoicing of cost increases) for the coming three-year period compared to four percent in our previous update.

We believe rerating potential remains

We believe the negative share price reaction on the report should be viewed against the strong run ahead of the announcement and do not consider the minor margin disappointment as significant for the investment case. We raise our base case fair value slightly to about SEK 57 (56) as our higher growth assumptions until 2025 compensate for somewhat slower margin development in the near-term than our previous estimate. In our view, a higher valuation is supported by a comparison to other Nordic contract manufacturing peers.

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