E-bike Destocking And Auto Woes Will Spark Measured Recovery

Key Takeaways

• Prolonged destocking in e-Bikes and automotive crises are set to hurt hGears' revenues and future recovery remains uncertain.
  
• Reliance on distressed European automotive markets and geopolitical risks threaten hGears' earnings and margin stability.
  
• Strategic focus on automotive luxury segments, cost management, and infrastructure investments reinforce hGears' financial stability, resilience, and potential revenue growth amid challenging market conditions.

Catalysts

Develops, manufactures, distributes, and supplies precision components and sub-systems, and system solutions worldwide.

• The prolonged destocking process in the e-Bike industry and the ongoing crisis in the automotive industry are expected to continue negatively impacting hGears' revenues. The company anticipates 2025 will be the weakest year, with potential recovery uncertain, leading to further revenue declines.
  
• hGears is focusing on cost-cutting measures by reducing its workforce, implementing short-time work, and optimizing operations. While these measures are necessary to maintain stability, they suggest margin pressures that could continue to impact net margins negatively.
  
• The company's high reliance on the currently distressed European automotive industry poses risks to future earnings. With ongoing competitive and structural challenges, hGears' earnings are vulnerable to further declines.
  
• hGears' guidance for 2025 projects a significant drop in adjusted EBITDA and free cash flow, ranging from negative €4 million to €1 million and negative €6 million to €2 million, respectively. This indicates expected financial strain and pressure on profitability.
  
• Uncertain geopolitical environments and changes in global trade policies, such as potential tariffs between Europe and the US, could adversely affect operational efficiency and cash flow, leading to additional risks for earnings stability.

hGears Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming hGears's revenue will grow by 5.7% annually over the next 3 years.
• Analysts are not forecasting that hGears will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate hGears's profit margin will increase from -22.1% to the average DE Auto Components industry of 4.1% in 3 years.
• If hGears's profit margin were to converge on the industry average, you could expect earnings to reach €4.6 million (and earnings per share of €0.46) by about April 2028, up from €-21.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 4.8x on those 2028 earnings, up from -1.0x today. This future PE is lower than the current PE for the DE Auto Components industry at 11.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.63%, as per the Simply Wall St company report.

hGears Future Earnings Per Share Growth

Risks

• The stabilization in the e-Tools business area, with only a marginal 2% decline year-over-year and a 23.9% increase in sales in the final quarter, suggests resilience in this segment, potentially mitigating some negative impacts on overall revenue and profitability.
  
• Strategic focus on premium and luxury segments within the automotive industry has shown resilience despite an 11% decline in [e]-Mobility sales year-over-year, indicating potential for improved revenues and margins when market conditions recover.
  
• Aggressive cost management strategies, including successful reduction in adjusted net operating expenses by more than €4 million and workforce adjustments, demonstrate a commitment to preserving cash and maintaining financial stability, thereby stabilizing net margins.
  
• A stable balance sheet with an equity ratio of 49.4% and a cash position of €17.1 million at year-end provides hGears with the required resilience to navigate challenging market conditions, supporting their ability to maintain earnings stability in uncertain environments.
  
• Long-term infrastructure investments, especially in Europe, could drive consumer confidence and demand, potentially benefiting hGears by increasing revenue opportunities through demand for their products.

Valuation

• The analysts have a consensus price target of €1.8 for hGears based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €113.0 million, earnings will come to €4.6 million, and it would be trading on a PE ratio of 4.8x, assuming you use a discount rate of 7.6%.
• Given the current share price of €2.02, the analyst price target of €1.8 is 12.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.