Humble Group: Freight costs rule gross margins - ABG

- Rising freight rates dilute the gross margin
- '24e-'26e EBITA down 5-1%
- '24e-'25e lease adj. FCFE yield excl. earn-outs of ~7%

What to expect in Q2'24
We expect sales of SEK 1,874m for Q2'24, implying 9.5% organic y-o-y growth in addition to a 0.6% FX tailwind. We anticipate a gross margin of just under 31% given the company's history of being able to maintain ~30% despite cost inflation and elevated freight costs. Our updated EBITA estimate is SEK 143m, which corresponds to an EBITA margin of 7.6%.

Estimate changes
We cut '24e-'26e sales by 1% on FX and marginally lower organic growth. We also cut '24e-'26e EBITA by 5-2% because freight rates (e.g., Shanghai-Rotterdam) exceeding the historical average of USD 1,500/container by a factor of 5x. Note that we do not fully extrapolate today's freight rates, but rather incorporate additional risk of elevated rates. That said, a normalisation of freight rates should add an incremental 150-200bp to the gross margin. Regarding capital allocation, Humble has increased its debt outstanding by some SEK 300m in Q2, suggesting that the company is ready to act opportunistically to engage in M&A or other types of asset deals. We would not be surprised if the company were to engage in inorganic value creation by the end of '24, at the earliest. With respect to the upcoming CMD, we see potential for the company to highlight subsidiaries in which it foresees significant long-term value creation and to clarify its buy-and-build strategy within each segment.

Valuation
Based on our revised estimates, the company is trading at a ~7% '24e-'25e lease adj. FCFE yield (excl. earn-out payments), while peers are trading at an average of 5-6% despite growing earnings at a generally slower rate.

Länk till analysen i sin helhet: https://cr.abgsc.com/foretag/humble-group/Equity-research/2024/7/humble-group---freight-costs-rule-gross-margins/