Hanza : Extern analys Redeye

			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

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			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

[e-mail]

Jacob Svensson

[e-mail]

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. [phone], E-post: [e-mail]

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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