Gabriel Holding: Return to growth in Q3'23/24 as momentum builds

Gabriel delivered its first group revenue growth y/y since Q4’21/22 in a sign that momentum may be turning in Gabriel’s favor. Guidance was maintained and expected to land in the top end of the interval, and we believe that EBIT guidance is particularly conservative, with a 9m Q3’23/24 EBIT result above the top-end interval. Cost cutting and efficiency gains contributed to margin expansion in Q3, which, in combination with positive development in leading macroeconomic and industry indicators suggest that Gabriel is on the turn-around path outlined in our projections. Based on the cyclical low earnings we place greater valuation emphasis on our DCF in the near term but also find peer-based multiples supportive on a FY’24/25e basis. We reiterate our Accumulate recommendation and increase the target price slightly to DKK 300 per share, with a fair value range of DKK 245 – 325.

Revenue returned to growth coupled with margin expansion from efficiency gains

Gabriel’s Q3 revenue grew by 3.5% y/y, against our expectations of a decline of -1.5%. The result was driven by a return to growth of all three business units, Fabrics, SampleMaster, and also the FurnMaster unit which is in a carve-out process. Gross margins also expanded significantly, rising 1.2pp to 35.8% from 34.6%, again above our expectations. The margin improvement was driven by cost savings, productivity improvements, and a favorable product mix. Given that Q3 sales were below Q2 on an absolute basis due to expected seasonality, we don’t expect that greater capacity utilization was to blame and maintain assumptions that gross margins can continue climbing as volumes grow.

Guidance seemingly conservative, but long term forecast mostly unchanged

Company guidance is suggested towards the top-end after Q3, however, we believe this remains conservative, particularly on an EBIT basis, where Gabriel’s 9m 23/24 EBIT of MDKK 19.1 already exceeds the top-end of the guidance interval MDKK 8-15. We see conditions for growth to remain positive y/y in Q4, and thus forecast FY’23/24 EBIT of MDKK 21.1, exceeding this range. However, we assess the Q3 results validate our mid-term assumptions of a turnaround and thus do not materially change our long-term assumptions. While market conditions remain challenged, leading indicators such as rising housing market activity, and growing order volumes from Gabriel customers and industry-leading furniture producer MillerKnoll, still suggest an improving outlook.

Return to growth and improving margins increasingly likely after Q3, but valuation reflecting caution

We believe that Gabriel’s Q3’23/24 earnings strengthen the case that a turn-around and a return toward more normalized earnings is underway. On this basis, we see a greater likelihood of our long-term DCF value coming to pass, while faster-than-expected margin expansion due to cost-cutting and productivity gains also brings cash flows forward. We also find earnings multiples supportive, with Gabriel’s EV/EBITDA, EV/EBIT, and P/E multiples FY’24/25e currently trading below all of our selected Danish-listed cyclical peers. We also deem an FY’24/25e EV/EBIT of 16.0x to be below Gabriel’s historical level and with room to expand if the positive momentum continues.

Disclaimer: HC Andersen Capital receives payment from Gabriel for a Digital IR agreement and research services. / Philip Coombes 08:49 30/08/2024.