Update | |||
Equity Research | 23 11 2021 | ||
Hanza Holding
Sector: Capital Goods
Main Markets Taking Off
Redeye raises its Base Case and forecasts for Hanza following a strong Q3 report. We increased our margins assumptions for Main Markets, which despite a soft German cluster, managed to reach excellent margin levels.
Main Markets Highlighting the Cluster Strategy's Potential
While group sales and EBITA came in ~3% above our forecast, we are impressed by the margins in Main Markets, especially considering the soft German cluster. We believe the number highlights the potential of Hanza's cluster strategy, and when the German cluster rebounds, which the solid order book suggests, there is likely potential for more.
Restarting its German Expansion
Our impression is that Hanza had big plans for Germany (and still has) after the purchase of Ritter in 2019. However, the Corona pandemic came. Thus, it makes sense that management is talking about a restart, and Beyers increases the size of the German cluster by almost 50%.
FAIR VALUE RANGE
BEAR BASE BULL
29 45 58
HANZA VERSUS OMXS30
Price (SEK)
OMXS30 Indexed
50 | |||
40 | |||
30 | |||
20 | |||
10 | |||
0 | |||
04-jan | 04-apr | 03-jul | 01-okt |
REDEYE RATING
New Base Case SEK 45 (30)
We raise our Base Case to SEK 45 (30). That is a substantial increase, but the business seems to have a strong momentum both demand and margin-wise. Also, while we previously expected solid margins in Main Markets, this quarter's EBITA margin and management's positive outlook suggest our assumptions were too defensive.
Key Financials (SEKm) | 2019 | 2020 | 2021E | 2022E | 2023E |
Sales | 2068 | 2155 | 2436 | 2799 | 2911 |
Sales Growth | 14% | 4% | 13% | 15% | 4% |
EBITA | 68 | 46 | 136 | 196 | 214 |
EBITA margin | 3.3% | 2.1% | 5.6% | 7.0% | 7.4% |
EBIT | 57 | 31 | 125 | 182 | 200 |
EPS | 0.78 | -0.64 | 2.33 | 3.37 | 3.82 |
EV/EBITA | 15.0 | 10.1 | 9.1 | ||
EV/EBIT | 16.3 | 10.9 | 9.7 | ||
EV/Sales | 0.8 | 0.7 | 0.7 |
5 | ||||||
3 | 3 | |||||
People | Business | Financials | ||||
KEY STATS | ||||||
Ticker | HANZA | |||||
Market | Small Cap | |||||
Share Price (SEK) | 45 | |||||
Market Cap (SEKm) | 1610 | |||||
Net Debt (SEKm) | 432 | |||||
Free Float (%) | 55 | |||||
Avg. daily volume ('000) | 3 730 |
ANALYSTS
Fredrik Nilsson
fredrik.nilsson@redeye.se
Jacob Svensson
jacob.svensson@redeye.se
Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report
Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel. +46 8-545 013 30, E-post: info@redeye.se
REDEYE Equity Research | Hanza Holding 23 11 2021 | |||
Major Beat in Main Markets | ||||
Actuals vs Forecast - 3Q21 | ||||
(SEKm) | 3Q20 | 3Q21 | 3Q21E | Diff |
Net sales | 503 | 597 | 582 | 2.5% |
Growth YoY | -2.4% | 18.7% | 15.8% | |
Main Markets | 266 | 315 | 316 | -0.4% |
Growth YoY | 18.6% | 19.1% | ||
Other Markets | 237 | 282 | 266 | 6.2% |
Growth YoY | 18.9% | 12.0% | ||
Adj. EBITA | 18.6 | 37.5 | 36.3 | 3.2% |
Adj. EBITA margin | 3.7% | 6.3% | 6.2% | |
Main Markets | 11.4 | 29.8 | 24.1 | 23.9% |
Adj. EBITA margin | 4.3% | 9.5% | 7.6% | |
Other Markets | 7.4 | 9.5 | 13.3 | -28.5% |
Adj. EBITA margin | 3.1% | 3.4% | 5.0% | |
EBITA | 21.4 | 37.5 | 36.3 | 3.2% |
EBITA margin | 4.3% | 6.3% | 6.2% | |
Source: Redeye Research, Hanza |
Group level sales and EBITA came in slightly above our expectations. Main Markets (Sweden, Finland, and Germany) had a very strong quarter with almost record-high margins of 9.5% on the EBITA level, beating our forecasts by 24%. According to management, the division has handled the shortage of components and materials well, and the strong margin supports that statement. The segment's organic growth was 6% y/y, as the German market still is negatively affected by the Corona pandemic. However, the order book improved during the quarter, suggesting a rebound in sales over the next quarters.
Other Markets had an impressive organic growth of 20% y/y, while the EBITA margin increased q/q and came in below our forecasts. According to management, the division has not managed to handle the shortage of material as good as Main Markets, mainly due to its high growth, which has hurt the margin. We find the statement reasonable, as higher-than- expected sales growth will require additional materials, which are hard to get currently.
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REDEYE Equity Research | Hanza Holding 23 11 2021 |
Main Markets
As mentioned, Main Markets beat our forecast significantly due to an almost record high EBITA margin of 9.5%. The number is substantial considering that Germany, one of three clusters in Main Markets, still suffers from the Corona pandemic as its largest customer is exposed to the textile industry. As Germany likely makes up 1/4-1/3 of Main Market sales, it is clear that Sweden and Finland are running at very healthy margins. The graph below clearly shows Main Markets are back to pre-Corona margin levels despite the German cluster still being heavily affected.
While we do not forecast EBITA margins above 9% for the coming quarters, partly as Beyers are joining the numbers, the Q3 report strongly indicates that our previous assumptions of 7- 8% were too pessimistic. Although we expect Hanza to improve Beyers margins, which were zero R12m, significantly, we do not expect >9% margin in Beyers near-term.
Net sales and EBITA margin - Main Markets
Sales SEKm
450 | 12% |
400 | 10% |
350 | |
300 | 8% |
250 | 6% |
200 | |
150 | 4% |
100 | 2% |
50 | |
0 | 0% |
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 | Q2 Q3 Q4E Q1E Q2E Q3E Q4E | ||
2019 | 2020 | 2021 | 2022 |
Main Markets | Adj. EBITA margin |
EBITA margin
Source: Redeye Research, Hanza Group
While Germany remained soft in terms of sales and EBITA, as mentioned, the order book increased in Q3, indicating a rebound over the next quarters. Also, management expects raising organic growth in Main Markets in the coming quarters, compared to the 6% increase this quarter. At least, that is our interpretation of management stating that the organic growth in Main Markets and Other Markets should converge.
Restarts its German Expansion
Earlier during Q4, Hanza announced the acquisition of Helmut Beyers, a German electronics manufacturer. The modern factory is based in Mönchengladbach, only 70 kilometers from Hanza's existing facility in Remscheid. The factories complement each other and strengthen Hanza's emerging German cluster.
Beyers is expected to generate EUR 18m in sales in 2021, a 10% decline relative to 2020 due to the Corona pandemic. The business is currently running at a zero margin, which also is negatively affected by the pandemic. Hanza pays EUR 2.7m (plus an earn-out up to EUR 2.5m), equal to 0.15x sales excluding earn-out. Given that Hanza can make the facility profitable, 0.15x sales is a bargain. Considering that Hanza expects the acquisition to contribute to profits in 2022, management seems confident Beyers can soon become profitable.
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REDEYE Equity Research | Hanza Holding 23 11 2021 |
It will strengthen Hanza's German cluster and is likely to do so in a very cost-efficient manner. Considering management's optimistic comments about market conditions in the Q2 report combined with the statement about the acquisition becoming profitable in 2022, we believe the odds of a successful acquisition are high - especially considering the modest purchasing price.
Interestingly, the seller has bought Hanza shares for a significant share of the purchasing price, indicating a solid conviction of the company's prospect.
According to management, the acquisition of Beyers is more than an acquisition; it is a restart of the expansion in Germany. Our impression is that Hanza had big plans for Germany (and still has) after the purchase of Ritter in 2019. However, the Corona pandemic came. Considering that, it makes sense to talk about a restart, and Beyers increases the size of the German cluster by almost 50%.
While the German cluster is new (Hanza entered in 2019) and has been severely hit by the Corona pandemic, we believe it has significant potential going forward. It is a much larger market compared to Hanza's other clusters. Considering the track record of the cluster strategy, especially Sweden, we believe the German cluster will be a significant contributor to Main Markets earnings mid-term.
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REDEYE Equity Research | Hanza Holding 23 11 2021 |
Other Markets
As mentioned, Other Markets missed our EBITA forecast following a decreasing margin q/q. We expected the solid margin trend to continue and might have underestimated the impact of component shortages. However, management mentions that the solid organic growth of 20% y/y, which was higher than we expected, worsened the component shortages. We find that statement reasonable.
As seen in the graph below, Other Markets have seen a solid rebound in margin since 2019, as initiatives to improve the clusters have paid off. Considering the promising trend, which however took a break in this quarter for reasons mentioned above, combined with managements positive outlook, we believe margins will rise over the next quarters. While the shortages of components likely will continue to some extent, we believe the impact on margins will be lower in the coming quarters.
Net sales and EBITA margin - Other Markets
Sales SEKm
350 | 7% | ||
300 | 6% | ||
250 | 5% | ||
200 | 4% | ||
150 | 3% | ||
100 | 2% | ||
50 | 1% | ||
0 | 0% | ||
Q1 Q2 Q3 | Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4E Q1E Q2E Q3E Q4E | ||
2019 | 2020 | 2021 | 2022 |
EBITA margin
Other Markets | Adj. EBITA margin |
Source: Redeye Research, Hanza Group
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Hanza Holding AB published this content on 23 November 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 23 November 2021 22:59:12 UTC.