Hanza: Mixed Outlook for 2024 – Orbit One and 2025 In Focus
Research Update
2024-02-15
06:45
Redeye retains its positive stance towards Hanza despite a somewhat softer Q4 report than expected, resulting in slightly lowered forecasts and Base Case. A somewhat softening market outlook and the integration of Orbit One will likely put some pressure on H1 2024 – relative to strong comparison figures in H1 2023. At the same time, upward revisions of the financial targets, Orbit One, and Hanza’s full-service offering set it for an interesting 2025 and beyond.
FN
FR
Fredrik Nilsson
Fredrik Reuterhäll
Contents
Review of Q4 2023
Somewhat Below our Expectations
Main Markets
Other Markets
Highlight from the Capital Markets Day
Estimate Revisions: EBITA 2024-25 Down by 4-9%
Valuation
Investment thesis
Quality Rating
Financials
Rating definitions
The team
Download article
Underlying FX adjusted sales increased by 4% y/y to SEK1 056m (1 001), slightly below our forecast of SEK1 114m. While Other Markets roughly matched our forecast, Main Markets had slower growth than we anticipated. EBITA (adjusted for SEK13m in M&A costs and a revaluation of an earn-out) came in 7% short of our expectations. While Other Markets beat our forecast somewhat, thanks to a better-than-expected margin, Main Markets was 8% below due to lower sales, as the margin roughly matched our expectations. Management sees a mixed demand situation at the start of 2024. Some customers are seeing reduced demand while others continue to grow. However, management believes its position and strategy enable Hanza to grow organically despite softer economic conditions. Nevertheless, it is a somewhat softer picture relative to Q3.
In conjunction with the CMD, Hanza raised its 2025 sales and EBITA margin targets. While an increase of the previous SEK5bn target was expected following the acquisition of Orbit One, the new SEK6.5bn target implies high organic growth (11.3% CAGR relative to 2023 pro forma) or further M&A or a combination of both. The increase in the EBITA margin target from above 8% at the end of 2025 to above 8% in the full year 2025 might seem defensive, considering Hanza’s 8.4% EBITA margin in 2023. However, 2023 was a very strong year for Main Markets margin-wise, and with Orbit One joining the numbers (6.0% EBITA margin in 2023) along with a somewhat softer market, we believe it makes sense. Also, the target stipulates a minimum of 8%.
We lower our Base Case somewhat to SEK 90 (92) on the back of slightly reduced short-term forecasts. Our long-term assumptions are left roughly unchanged. Despite the recent strong operational performance, with high growth and improving margins during 2023, Hanza is still trading at a discount (8x EBIT 2024) to the average (10x EBIT), although often bigger manufacturing service companies.
SEKm | 2023 | 2024e | 2025e | 2026e | 2027e |
Revenues | 4,154.0 | 5,489.2 | 6,036.9 | 6,398.4 | 6,781.6 |
Revenue Growth | 16.4% | 32.1% | 10.0% | 6.0% | 6.0% |
EBITDA | 464.7 | 567.4 | 660.0 | 725.1 | 789.2 |
EBIT | 328.0 | 413.8 | 495.8 | 545.2 | 595.6 |
EBIT Margin | 7.9% | 7.6% | 8.2% | 8.5% | 8.8% |
Net Income | 215.0 | 314.2 | 382.2 | 423.2 | 465.1 |
EV/Revenue | 0.8 | 0.6 | 0.5 | 0.5 | 0.4 |
EV/EBIT | 10.2 | 7.7 | 6.3 | 5.5 | 4.8 |
Estmates vs. Actuals | ||||||
Sales | Q4E 2023 | Q4A 2023 | Diff | Q4A 2022 | Q3A 2023 | |
Net sales | 1114 | 1056 | -5% | 1001 | 955 | |
Y/Y Growth (%) | 11% | 5% | 40% | 14% | ||
Main Markets | 655 | 605 | -8% | 570 | 547 | |
Y/Y Growth (%) | 20% | 6% | 40% | 22% | ||
EBITA (MM) | 69 | 63 | -8% | 42 | 68 | |
EBITA margin | 10.5% | 10.4% | 7% | 12% | ||
Other Markets | 459 | 447 | -3% | 437 | 405 | |
Y/Y Growth (%) | 13% | 2% | 41% | 4% | ||
EBITA (OM) | 28 | 29 | 2% | 24 | 23 | |
EBITA margin | 6.2% | 6.5% | 5% | 6% | ||
Earning | ||||||
EBITA | 96 | 89 | -7% | 63 | 89 | |
EBITA Margin (%) | 8.6% | 8.4% | 6.3% | 9.3% | ||
EBIT | 92 | 71 | -23% | 57 | 85 | |
EBIT Margin (%) | 8.2% | 6.7% | 5.7% | 8.9% | ||
Diluted EPS | 1.63 | 1.15 | -29% | 1.01 | 1.22 |
Underlying sales (adjusted for FX and last year’s invoicing of exceptionally high energy and material costs) grew 3% organically y/y and was 5% below our forecast. Main Markets came in 8% below our forecast and the organic growth was 4.6% y/y. Other Markets came in 3% short relative to our expectations, and the organic growth was -1.4% y/y. After a strong start to 2023, the organic growth rates are now at more modest levels. Although it is against tough comparison numbers, the weaker economic environment also impacts Hanza. Nevertheless, organic growth remains positive.
Management states that some customers have experienced weaker demand during the start of 2024. At the same time, some customers continue to grow. In Q3, Hanza stated it sees continued organic growth among current customers. While Hanza does not want to disclose its view of the net effect of some customers increasing and others decreasing their demand, we believe the Q4 statement suggests a somewhat softer outlook. However, considering the softer macroeconomic environment, which so far has not had a significant impact on Hanza, a slightly softer market outlook is not surprising.
On the other hand, the raised 2025 sales target of SEK6.5bn (SEK5bn) – which, however, allows for M&A – implies management has a positive mid-term outlook. We will return to the new financial targets in the section about the capital markets day.
Also, management highlights that softer macroeconomic conditions can trigger product companies to evaluate their production chains – leaving opportunities for Hanza to gain market share. In addition, the interest in regionalised production remains high, which seems reasonable considering the increasing geopolitical turmoil in many areas, for example. The backsourcing or regionalisation is mostly about new production for the European/American markets being manufactured in those regions rather than production moving back from Asia, although that happens sometimes as well.
EBITA (adjusted for SEK13m in M&A costs and a revaluation of an earn-out related to Beyers) was SEK89m (63), corresponding to an EBITA margin of 8.4% (6.3). Due to softer sales in Main Markets, the outcome was 7% below our forecast of SEK96m. While the positive revaluation of the earn-out hurts (non-adjusted) EBITA in the quarter, we consider upward revaluations of earn-out as a positive, indicating stronger than expected performance in the acquired company – the German-based Beyers acquired in 2021 in this case. Other Markets beat our forecasts by 2% thanks to a somewhat stronger EBITA margin than expected. We are encouraged to see Other Markets taking another step towards the >8% target level, with an EBITA margin amounting to 6.5% in Q4, up from 5.7% in Q3. Overall, while the group level margin was below our forecasts and lower than the 9.3% level seen in Q3 2023, the 8.4% adjusted EBITA margin is healthy and above the 2025 >8% target.
In the long run, we believe Other Markets should be able to achieve margins in line with Main Markets, although our Base Case assumptions are somewhat more defensive – expecting EBITA margins of 8% from 2026.
Source: Hanza
Source: Addnode
Main Markets consist of the Swedish, Finnish, and German clusters. The Swedish cluster is the largest and the most profitable cluster, with manufacturing facilities mainly located in Årjäng and Töcksfors, Värmland, along with the recently acquired facility in Ronneby, Blekinge. The German cluster is less mature but has seen substantial improvements in profitability during the last year. The Finnish cluster is somewhere in between, in terms of maturity and profitability.
Source: Addnode
Other Markets consist of the Baltic, Central European, and Chinese clusters. The Baltic cluster is the largest and likely the most profitable, with manufacturing facilities in Tartu and Narva, Estonia. The Central Europan cluster is less mature but will increase significantly in size with the recently acquired Orbit One factory in Poland. The Chinese cluster is Hanza’s smallest and the only cluster outside of Europe.
We recommend the full Capital Markets Day recording for those interested in a deep dive in Hanza.
In conjunction with the CMD, Hanza raised its 2025 sales and EBITA margin targets. While an increase of the previous SEK5bn target was expected following the acquisition of Orbit One – as Hanza reached the previous target already in its 2023 pro forma – the new SEK6.5bn target implies high organic growth (11.3% CAGR relative to 2023 pro forma) or further M&A or a combination of both. Considering the somewhat soft macroeconomic environment, we believe 11.3% organic growth will be challenging. Thus, we believe Hanza will reach the target through a combination of M&A and organic growth. Our revised forecast for 2025 sales is SEK6 046m. However, it excludes any future M&A.
The increase in the EBITA margin target from above 8% at the end of 2025 to above 8% in the full year 2025 might seem defensive, considering Hanza’s 8.4% EBITA margin in 2023. However, 2023 was a very strong year for Main Markets margin-wise, and with Orbit One joining the numbers (6.0% EBITA margin in 2023) along with a somewhat softer market, we believe it makes sense. Also, the target stipulated a minimum of 8%, which should imply 8% in a soft market and an even higher number in a normal or favourable market. We assume an 8.4% EBITA margin in 2025 in our revised forecasts.
While being a negligible share of total sales, Hanza’s Capital Markets Day highlighted the importance of Hanza’s service offering as a driver for new customers, upsell, and customer retention. The service offering includes the following areas:
In addition to the regional and complete manufacturing clusters – which, at roughly SEK1bn in sales, typically can handle shifts in demand well, resulting in stable and healthy margins – Hanza’s service offering is an important differentiator to competitors. As basic contract manufacturing is more or less commoditised, we believe getting a closer connection to customers is important to achieve solid and sustainable profits. The clusters enable Hanza to manufacture several components of full products for its customers, increasing the width of its relationship. The services, where Hanza, for example, helps with R&D, increase the depth of cooperation. For customers engaged in both, we believe there are substantial switching costs.
We believe it makes sense for companies focused on developing and designing products to consult Hanza’s manufacturing experts to optimise the manufacturing process. This is because they have experience with similar products and deep know-how in the capabilities of Hanza’s clusters. The potential benefits are several. For example, production costs can be lowered by altering the design of a new or existing product to fit a modern and automated machine park better. Similar freight and material utilisation opportunities exist where changes can reduce costs, emissions, and waste.
The picture below illustrates how Hanza Tech Solutions works with the clusters, helping assist customers' R&D with manufacturing expertise.
We lower our sales forecasts by 2-4% for 2024-25 and our EBITA estimates by 4-9%. The following changes mainly drive the revisions:
We expect H1 2024 to be softer than H2. First, we expect a swift integration of Orbit One, hurting margins somewhat in H1. Second, the SEK100m annual value deal with Mitsubishi will start positively impacting H2 2024. As the integration of Orbit One is finalised, we expect increasing margins from H2 2024 and throughout 2025.
Estimate Revisions | ||||||
Sales | FYE 2024 | Old | Change | FYE 2025 | Old | Change |
Net sales | 5477 | 5698 | -3.9% | 6025 | 6154 | -2.1% |
Y/Y Growth (%) | 32% | 36% | 10% | 8% | ||
Main Markets | 3053 | 3143 | -2.9% | 3359 | 3395 | -1.1% |
Y/Y Growth (%) | 30% | 31% | 10% | 8% | ||
EBITA (MM) | 270 | 297 | -9.0% | 319 | 329 | -3.0% |
EBITA margin | 9% | 9% | 10% | 10% | ||
Other Markets | 2424 | 2555 | -5.1% | 2666 | 2759 | -3.4% |
Y/Y Growth (%) | 36% | 43% | 10% | 8% | ||
EBITA (OM) | 163 | 177 | -7.8% | 195 | 207 | -6.0% |
EBITA margin | 7% | 7% | 7% | 8% | ||
Earning | ||||||
EBITA | 427 | 468 | -8.7% | 508 | 530 | -4.2% |
EBITA Margin (%) | 7.8% | 8.2% | 8.4% | 8.6% | ||
EBIT | 414 | 454 | -8.9% | 496 | 518 | -4.3% |
EBIT Margin (%) | 7.6% | 8.0% | 8.2% | 8.4% | ||
Diluted EPS | 7.27 | 7.49 | -2.9% | 8.85 | 8.60 | 2.9% |
Source: Hanza & Redeye Research |
We expect SEK6bn in sales and 8.4% in EBITA margin on our revised forecasts. A slightly higher margin than the >8% Hanza targets but somewhat lower sales compared to the SEK6.5bn target. However, our forecasts do not include any future M&A, and we interpret management as the target is likely to be reached by a combination of organic and acquired growth. With an net debt to EBITDA (2024e) of 1.2x (including Orbit One purchasing price), Hanza has financial room for further acquisitions.
Forecasts | ||||||||
Sales | FYA 2023 | Q1E 2024 | Q2E 2024 | Q3E 2024 | Q4E 2024 | FYE 2024 | FYE 2025 | FYE 2026 |
Net sales | 4144 | 1375 | 1376 | 1303 | 1423 | 5477 | 6025 | 6386 |
Y/Y Growth (%) | 17% | 29% | 29% | 36% | 35% | 32% | 10% | 6% |
Main Markets | 2351 | 755 | 767 | 728 | 803 | 3053 | 3359 | 3560 |
Y/Y Growth (%) | 19% | 27% | 27% | 33% | 33% | 30% | 10% | 6% |
EBITA (MM) | 256 | 64 | 67 | 66 | 74 | 270 | 319 | 349 |
EBITA margin | 11% | 9% | 9% | 9% | 9% | 9% | 10% | 10% |
Other Markets | 1778 | 620 | 609 | 575 | 620 | 2424 | 2666 | 2826 |
Y/Y Growth (%) | 13% | 32% | 33% | 42% | 39% | 36% | 10% | 6% |
EBITA (OM) | 110 | 39 | 40 | 39 | 45 | 163 | 195 | 212 |
EBITA margin | 6% | 6% | 7% | 7% | 7% | 7% | 7% | 8% |
Earning | ||||||||
EBITA | 345 | 102 | 105 | 103 | 118 | 427 | 508 | 555 |
EBITA Margin (%) | 8.3% | 7.4% | 7.6% | 7.9% | 8.3% | 7.8% | 8.4% | 8.7% |
EBIT | 328 | 98 | 101 | 100 | 115 | 414 | 496 | 545 |
EBIT Margin (%) | 7.9% | 7.1% | 7.4% | 7.7% | 8.0% | 7.6% | 8.2% | 8.5% |
Diluted EPS | 4.98 | 1.72 | 1.78 | 1.75 | 2.03 | 7.27 | 8.85 | 9.80 |
Source: Hanza & Redeye Research |
We lower our Base Case somewhat to SEK 90 (92) on the back of slightly reduced short-term forecasts. Our long-term assumptions are left roughly unchanged.
Fair Value Range - Assumptions | |||
Bear Case | Base Case | Bull Case | |
Value per share, SEK | 37 | 90 | 118 |
Sales CAGR | |||
2024 - 2031 | 4% | 6% | 7% |
2031 - 2041 | 1% | 3% | 3% |
Avg EBIT margin | |||
2024 - 2031 | 8% | 9% | 10% |
2031 - 2041 | 5% | 9% | 10% |
Terminal EBIT Margin | 6% | 8% | 9% |
Terminal growth | 2% | 2% | 2% |
WACC | 10% | 10% | 10% |
Source: Redeye Research |
Despite the recent strong operational performance, with high growth and improving margins during 2023, Hanza is still trading at a discount to the average, although often bigger, manufacturing service companies. We believe the discount will decrease further, given that Hanza continues its strong operational performance.
Case
Riding the Back-Shoring Trend with its Unique Cluster Strategy
Evidence
Proven Track-Record in Mature Clusters
Challenge
Cyclical Exposure Through Customers’ Volume Fluctuations
Challenge
Lack of transferability
Valuation
Fair Value SEK 90
People: 4
.
Business: 3
.
Financials: 3
.
Income statement | |||||
SEKm | 2023 | 2024e | 2025e | 2026e | 2027e |
Revenues | 4,154.0 | 5,489.2 | 6,036.9 | 6,398.4 | 6,781.6 |
Cost of Revenue | 2,334.0 | 3,395.8 | 3,735.4 | 3,959.5 | 4,197.1 |
Operating Expenses | 1,345.3 | 1,513.9 | 1,629.5 | 1,701.7 | 1,783.2 |
EBITDA | 464.7 | 567.4 | 660.0 | 725.1 | 789.2 |
Depreciation | 65.6 | 82.8 | 95.0 | 112.9 | 128.4 |
Amortizations | 17.0 | 13.5 | 11.9 | 9.7 | 7.9 |
EBIT | 328.0 | 413.8 | 495.8 | 545.2 | 595.6 |
Shares in Associates | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
Interest Expenses | -80.0 | -35.3 | -35.3 | -35.3 | -35.3 |
Net Financial Items | 80.0 | 35.3 | 35.3 | 35.3 | 35.3 |
EBT | 248.0 | 378.6 | 460.5 | 509.9 | 560.3 |
Income Tax Expenses | -33.0 | -64.4 | -78.3 | -86.7 | -95.3 |
Net Income | 215.0 | 314.2 | 382.2 | 423.2 | 465.1 |
Balance sheet | |||||
Assets | |||||
Non-current assets | |||||
SEKm | 2023 | 2024e | 2025e | 2026e | 2027e |
Property, Plant and Equipment (Net) | 714.0 | 1,032.5 | 1,227.6 | 1,395.7 | 1,565.1 |
Goodwill | 387.0 | 570.5 | 595.5 | 595.5 | 595.5 |
Intangible Assets | 77.0 | 63.5 | 51.6 | 41.9 | 34.0 |
Right-of-Use Assets | 186.0 | 186.0 | 186.0 | 186.0 | 186.0 |
Other Non-Current Assets | 23.0 | 23.0 | 23.0 | 23.0 | 23.0 |
Total Non-Current Assets | 1,387.0 | 1,875.5 | 2,083.7 | 2,242.1 | 2,403.6 |
Current assets | |||||
SEKm | 2023 | 2024e | 2025e | 2026e | 2027e |
Inventories | 936.0 | 1,369.3 | 1,506.2 | 1,596.6 | 1,692.4 |
Accounts Receivable | 175.0 | 219.1 | 241.0 | 255.5 | 270.8 |
Other Current Assets | 91.0 | 164.3 | 180.7 | 191.6 | 203.1 |
Cash Equivalents | 340.0 | 35.1 | 74.2 | 206.2 | 364.5 |
Total Current Assets | 1,542.0 | 1,787.8 | 2,002.2 | 2,249.9 | 2,530.7 |
Total Assets | 2,929.0 | 3,663.3 | 4,085.9 | 4,491.9 | 4,934.4 |
Equity and Liabilities | |||||
Equity | |||||
SEKm | 2023 | 2024e | 2025e | 2026e | 2027e |
Non Controlling Interest | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
Shareholder's Equity | 1,345.0 | 1,626.8 | 1,930.5 | 2,258.1 | 2,617.4 |
Non-current liabilities | |||||
SEKm | 2023 | 2024e | 2025e | 2026e | 2027e |
Long Term Debt | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
Long Term Lease Liabilities | 440.0 | 440.0 | 440.0 | 440.0 | 440.0 |
Other Long Term Liabilities | 159.0 | 159.0 | 159.0 | 159.0 | 159.0 |
Total Non-Current Liabilities | 599.0 | 599.0 | 599.0 | 599.0 | 599.0 |
Current liabilities | |||||
SEKm | 2023 | 2024e | 2025e | 2026e | 2027e |
Short Term Debt | 196.0 | 196.0 | 196.0 | 196.0 | 196.0 |
Short Term Lease Liabilities | 53.0 | 53.0 | 53.0 | 53.0 | 53.0 |
Accounts Payable | 450.0 | 712.0 | 783.2 | 830.2 | 880.0 |
Other Current Liabilities | 286.0 | 476.5 | 524.2 | 555.6 | 589.0 |
Total Current Liabilities | 985.0 | 1,437.5 | 1,556.4 | 1,634.8 | 1,718.0 |
Total Liabilities and Equity | 2,929.0 | 3,663.3 | 4,085.9 | 4,491.9 | 4,934.4 |
Cash flow | |||||
SEKm | 2023 | 2024e | 2025e | 2026e | 2027e |
Operating Cash Flow | 277.0 | 369.6 | 490.0 | 565.9 | 619.2 |
Investing Cash Flow | -296.0 | -584.8 | -315.1 | -281.0 | -297.9 |
Financing Cash Flow | 217.0 | -89.7 | -135.8 | -152.8 | -163.1 |
Disclosures and disclaimers
Contents
Review of Q4 2023
Somewhat Below our Expectations
Main Markets
Other Markets
Highlight from the Capital Markets Day
Estimate Revisions: EBITA 2024-25 Down by 4-9%
Valuation
Investment thesis
Quality Rating
Financials
Rating definitions
The team
Download article