Successful Integration Of Orbit One Will Improve Operational Efficiency

Key Takeaways

• Strategic restructuring and focus on growing sectors like defense boosts resilience to economic downturns and stabilizes revenue.
  
• Acquisitions and expansion plans enhance production capacity and operating efficiency, laying groundwork for significant future growth.
  
• Economic downturn and integration obstacles could hinder HANZA's revenue growth, while acquisition strategies carry risks to margins and profitability.

Catalysts

Provides manufacturing solutions.

• HANZA is implementing a strategy through its Manufacturing Improvement Group (MIG) to restructure customer supply chains. This approach is particularly appealing during economic downturns, which may increase demand for these services. These contracts are expected to drive organic growth, potentially boosting revenue.
  
• The recent acquisition of Orbit One, despite initially lowering margins, is expected to integrate successfully and contribute to reaching an 8% operating margin by 2025. Improvement in these margins will enhance overall profitability.
  
• HANZA has opened a new factory in Estonia and plans to open another in Sweden. Increased production capacity and factory consolidation are expected to enhance operational efficiency, which may improve net margins.
  
• The successful execution of a large action program has set a foundation for HANZA to focus on its HANZA 2025 strategy, with plans to increase cluster sizes and achieve SEK 6.5 billion in sales. Expansion through new deals and possibly acquisitions could significantly increase sales revenue.
  
• Strategic avoidance of low-margin industries and a focus on sectors like defense and classical industry have helped mitigate the impact of economic downturns. This diversified customer base is aimed at growing market shares even during slowdowns, which could stabilize or increase revenue.

Hanza Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hanza's revenue will grow by 18.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.7% today to 5.9% in 3 years time.
• Analysts expect earnings to reach SEK 454.6 million (and earnings per share of SEK 9.89) by about February 2028, up from SEK 127.0 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 9.7x on those 2028 earnings, down from 27.6x today. This future PE is lower than the current PE for the SE Electronic industry at 25.1x.
• 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 6.45%, as per the Simply Wall St company report.

Hanza Future Earnings Per Share Growth

Risks

• The expected upturn in the economy did not materialize, and HANZA is preparing for a potential prolonged downturn, which could negatively impact future revenue growth.
  
• The integration of Orbit One is still in progress, and its lower margin compared to HANZA's could continue to drag overall net margins until improvements are fully realized.
  
• The release of a SEK 33 million reserve due to revaluation of the purchase price for Orbit One suggests a reduced economic performance expectation, impacting future earnings if similar conditions persist.
  
• The acquisition and expansion strategy, while potentially contributing to growth, also carries execution risks, particularly in successfully integrating new acquisitions without adversely affecting operating margins.
  
• The company took substantial one-time costs for restructuring and other adjustments, which may reflect underlying financial structural challenges, affecting short-term profitability and earnings per share.

Valuation

• The analysts have a consensus price target of SEK85.0 for Hanza based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK100.0, and the most bearish reporting a price target of just SEK77.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK7.6 billion, earnings will come to SEK454.6 million, and it would be trading on a PE ratio of 9.7x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of SEK80.2, the analyst price target of SEK85.0 is 5.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.