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Redeye Capital

Hanza: Efficiency Measures in Orbit One

Research Update

2024-03-13

12:03

Redeye retains its Base Case and 2025 forecasts despite the softer short-term outlook in the newly acquired Orbit One. While we lower our expectations on Orbit One for 2024 following the partly demand-related layoffs, management seems confident in reaching its 2025 targets thanks to a solid order pipeline.

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FR

Fredrik Nilsson

Fredrik Reuterhäll

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Today, Hanza announced efficiency measures in the newly acquired Orbit One. The program will reduce the workforce in the production facility in Ronneby by 50 (out of circa 250 in total) and possibly a minor reduction in Poland. The reductions are related to both expected synergies as Orbit One is integrated into Hanza and due to rightsizing to adapt to a somewhat softer market for Orbit One. About 50% of the layoffs consider white-collar personnel. While some white-collar personnel likely have roles dependent on volume, we believe synergies drive most white-collar layoffs.

The synergies-related layoffs were not unexpected, although the size was unknown. Management points out that the softer market conditions have motivated a faster and greater integration than initially planned.

Although management stated a mixed market in conjunction with the CMD and Q4 report, we did not anticipate volume-related layoffs. However, it is important to note that the softer demand relates to Orbit One and that “old” Hanza overall sees solid demand – although some customers are softer. According to management, the newly acquired company is more sensitive to market cycles because Orbit One is still a “traditional” EMS and not a “one-stop-manufacturing shop” like Hanza. The faster and deeper integration of Orbit One will make it align more with the rest of Hanza.

While we will lower our expectations for 2024, management retains its 2025 targets and seems just as confident in reaching them now as at the CMD/Q4. Our interpretation is that the order pipeline is solid, and management seems optimistic about potential new deals during 2024, with a good chance of mitigating the negative effect of the presumably short-term weakness in Orbit One. Also, through these efficiency measures, Hanza aims to improve the group’s efficiency, which is crucial in providing value for customers and thus winning new contracts.

We cut our expectations for Orbit One during 2024, resulting in a 3% and 5% reduction in sales and EBIT on the group level 2024. Note that we keep our organic forecasts unchanged while expecting a lower contribution from M&A (Orbit One). Nevertheless, we keep our 2025 forecasts roughly unchanged, given management’s confidence regarding the 2025 targets (SEK6.5bn in sales - including future M&A - and 8% EBIT margin.

We leave our Base Case at SEK90.

Key financials

SEKm20232024e2025e2026e2027e
Revenues4,154.05,324.26,027.56,388.56,771.1
Revenue Growth16.4%28.2%13.2%6.0%6.0%
EBITDA464.7545.2658.7723.8787.8
EBIT328.0391.7494.9544.2594.6
EBIT Margin7.9%7.4%8.2%8.5%8.8%
Net Income215.0295.9381.5422.4464.3
EV/Sales0.80.50.50.40.4
EV/EBIT10.27.25.74.94.2

Estimate Revisions

Estimate Revisions
SalesFYE 2024OldChangeFYE 2025OldChange
Net sales53125477-3.0%60166025-0.2%
Y/Y Growth (%)28%32%13%10%
Main Markets29713053-2.7%33513359-0.2%
Y/Y Growth (%)26%30%13%10%
EBITA (MM)258270-4.6%318319-0.2%
EBITA margin9%9%10%10%
Other Markets23412424-3.4%26652666-0.1%
Y/Y Growth (%)32%36%14%10%
EBITA (OM)153163-5.9%195195-0.1%
EBITA margin7%7%7%7%
Earning
EBITA405427-5.2%507508-0.2%
EBITA Margin (%)7.6%7.8%8.4%8.4%
EBIT392414-5.3%495496-0.2%
EBIT Margin (%)7.4%7.6%8.2%8.2%
Diluted EPS6.857.27-5.8%8.838.85-0.2%
Source: Hanza & Redeye Research
Forecasts
SalesFYA 2023Q1E 2024Q2E 2024Q3E 2024Q4E 2024FYE 2024FYE 2025FYE 2026
Net sales41441334133512621382531260166376
Y/Y Growth (%)17%25%25%32%31%28%13%6%
Main Markets2351735746708782297133513552
Y/Y Growth (%)19%24%23%29%29%26%13%6%
EBITA (MM)25661636271258318348
EBITA margin11%8%9%9%9%9%10%10%
Other Markets1778599589554600234126652824
Y/Y Growth (%)13%28%29%37%34%32%14%6%
EBITA (OM)11037373743153195212
EBITA margin6%6%6%7%7%7%7%8%
Earning
EBITA345969997113405507554
EBITA Margin (%)8.3%7.2%7.4%7.7%8.2%7.6%8.4%8.7%
EBIT328929694110392495544
EBIT Margin (%)7.9%6.9%7.2%7.5%7.9%7.4%8.2%8.5%
Diluted EPS4.981.611.671.641.946.858.839.78
Source: Hanza & Redeye Research

Investment thesis

Case

Riding the Back-Shoring Trend with its Unique Cluster Strategy

With its ‘All you need is one’ cluster-based strategy, Hanza, and its experienced management take a unique approach that differentiates it from manufacturing service companies. By gathering several manufacturing technologies in a single location, Hanza can reduce costs, lead times, and environmental footprint. Having almost every cluster in the end market or in close-by low-cost countries, Hanza is set to benefit from the ongoing back-shoring trend. Quarterly reports with strong operational performance, particularly improvements in immature clusters, are the main catalysts.

Evidence

Proven Track-Record in Mature Clusters

The Main Markets segment, including the mature Swedish and Finnish clusters as well as the newly established German cluster, has an EBITA margin of about 8% - implying sector-leading margins in the mature Swedish and Finnish clusters. As the other clusters mature, we expect their margins to approach Swedish levels gradually. Since late 2021, Hanza has seen a surge in organic sales growth following the pandemic. While a rebound from the pandemic has a positive effect, we believe the strong numbers also result from increasing interest in back-shoring.

Challenge

Cyclical Exposure Through Customers’ Volume Fluctuations

While Hanza seldom loses customers, its revenues depend on the customers’ volumes. During the pandemic in 2020, organic sales fell by about 10%, putting pressure on margins. Thus, Hanza is, to some extent, exposed to market cycles. However, following recent acquisitions and organic customer intake, we believe the diversification between sectors has improved. In addition, the back-shoring trend should help Hanza attract new customers in economic downturns.

Challenge

Lack of transferability

Hanza's success in the Nordics may not result from its ‘All you need Is one’ cluster strategy but rather follow from smart acquisitions and a management team with close connections to several Nordic product companies. If so, it may struggle to achieve solid profitability outside of the Nordics. However, it has already established a successful presence outside the Nordics, such as in Tartu, Estonia.

Valuation

Fair Value SEK 90

Our DCF model shows a fair value of SEK 90, which is also supported by a peer valuation. While Hanza has been trading at a discount to peers historically, considering its improvements regarding organic sales growth and margins, we believe Hanza should trade on par with peers.

Quality Rating

People: 4

Hanza receives a high rating for people, as both management and owners have favorable characteristics. CEO Erik Stenfors has vast experience of the manufacturing service industry, including being the founder and CEO of both Note and Hanza. Hanza's largest sharholder is Gerald Engström, the founder and majority owner of Systemair. As a result, Hanza also has the support of a product company veteran.

Business: 3

Lacking clear differentiators, competition in the manufacturing service industry is typically tough. While Hanza has a unique take on the industry, we believe it is still difficult for it to increase prices for example. All the same, Hanza is a close and important partner for several of its customers. Moreover, it has decent diversification across both sectors and customers. Overall, Hanza receives an average rating for Business.

Financials: 3

While Hanza's near-term financial performance is strong, the long-term track-record has been weak, which lowers the Financials rating. Its solid financial position is positive, while the low-margin nature of its business is negative for the rating. In summary, Hanza receives an average rating for Financials. Several consecutive years of solid performance would lift the rating, though. 

Financials

Income statement
SEKm20232024e2025e
Revenues4,154.05,324.26,027.5
Cost of Revenue2,334.03,293.53,729.6
Operating Expenses1,345.31,473.41,627.2
EBITDA464.7545.2658.7
Depreciation65.682.794.6
Amortizations17.013.511.9
EBIT328.0391.7494.9
Shares in Associates0.000.000.00
Interest Expenses-80.0-35.3-35.3
Net Financial Items80.035.335.3
EBT248.0356.5459.6
Income Tax Expenses-33.0-60.6-78.1
Net Income215.0295.9381.5
Balance sheet
Assets
Non-current assets
SEKm20232024e2025e
Property, Plant and Equipment (Net)714.01,028.11,223.2
Goodwill387.0570.5595.5
Intangible Assets77.063.551.6
Right-of-Use Assets186.0186.0186.0
Other Non-Current Assets23.023.023.0
Total Non-Current Assets1,387.01,871.12,079.3
Current assets
SEKm20232024e2025e
Inventories936.01,328.01,503.9
Accounts Receivable175.0212.5240.6
Other Current Assets91.0159.4180.5
Cash Equivalents340.038.265.1
Total Current Assets1,542.01,738.11,990.1
Total Assets2,929.03,609.24,069.4
Equity and Liabilities
Equity
SEKm20232024e2025e
Non Controlling Interest0.000.000.00
Shareholder's Equity1,345.01,608.51,916.0
Non-current liabilities
SEKm20232024e2025e
Long Term Debt0.000.000.00
Long Term Lease Liabilities440.0440.0440.0
Other Long Term Liabilities159.0159.0159.0
Total Non-Current Liabilities599.0599.0599.0
Current liabilities
SEKm20232024e2025e
Short Term Debt196.0196.0196.0
Short Term Lease Liabilities53.053.053.0
Accounts Payable450.0690.6782.0
Other Current Liabilities286.0462.2523.4
Total Current Liabilities985.01,401.71,554.4
Total Liabilities and Equity2,929.03,609.24,069.4
Cash flow
SEKm20232024e2025e
Operating Cash Flow277.0368.2472.9
Investing Cash Flow-296.0-580.3-314.7
Financing Cash Flow217.0-89.7-131.3

Rating definitions

The team

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