Gabriel Holding Q1’24-25 preview: Carve out uncertainty raises near-term risk

Gabriel reports its Q1’24-25 (October-December 2024) earnings on Thursday 6th February 2025. The Q1 results will be published just under one month after the full year 2023-24 annual results on 8th January 2025, which were delayed due to accounting irregularities in their Mexican subsidiary. Gabriel will report continuing and discontinuing operations with its FurnMaster business unit in a carve-out process, expected to be completed within FY’24-25, i.e. before October 2025.

Signs of growth but with uncertainty relating to discontinuing operations

For Q1’24-25 we estimate a small positive 1% topline growth year-on-year as the stable to slightly improving market backdrop with lower interest rates and inflation, can support a slight positive development in the group despite challenges. We expect to gain deeper insights into the continuing operations of Fabrics and SampleMaster and discontinuing operations of FurnMaster and expect to see ongoing positive development in the continuing operations, which realized +6% growth FY’23-24, and which Gabriel forecasts to grow 0-10% FY’24-25 in its latest guidance.  Performance in the FurnMaster unit is less certain as significant management time was diverted away from day-to-day operations due to the accounting irregularities in Mexico and the ongoing carve-out process. As a result, our Q1 estimates contain a high degree of uncertainty.

Expect compressed EBIT margin, partly driven by one-off costs

Given the extensive process to verify the accounts in the FurnMaster subsidiary in Mexico, we expect a higher cost base in Q1’24-25, particularly driven by one-offs relating to higher audit, legal, and external advisory fees. We are forecasting a small positive EBIT result of DKK 4.6m reflecting a 2% EBIT margin, which is below Q2’23-24 and Q3’23-24 levels - two quarters unaffected by write-downs. The estimate assumes no further write-downs relating to the Mexican subsidiary or broader discontinuing operations. This stance reflects communications from management in connection with the annual report, but a possibility cannot be entirely ruled out.

Continuing operations can benefit from operating leverage

Our estimates remain on a group level as we deem this most appropriate until further details regarding a potential sale of FurnMaster are announced. However, we look towards greater details regarding the revenue and margin development of the respective business units during Q1. We assess that under-utilized capacity exists in both continuing and discontinuing operations, as the cyclical downturn in the premium furniture market since 2022 has reduced activity levels. We assume significant operating leverage exists which can positively impact margins in response to an increase in sales and, therefore, expect some gross margin improvement in the continuing operations on a year-on-year basis, based on the assumption of continued growth in Q1,  following the positive FY’23-24 momentum. However, we currently do not have the restated Q1 2023-24 results for continuing operations and thus refrain from specific segment estimates. From a geographical perspective, we expect Europe and Asia to continue developing positively within continuing operations, while the US market situation is less clear.

Tariffs on Mexico may add challenges to carve-out

We expect continuing operations to build on their momentum in FY’24-25 following the positive signal of last year’s growth against a difficult market backdrop. However, the situation regarding the carve-out of FurnMaster remains unclear. The sales process has likely not been eased by the accounting situation or the recent imposition of sweeping US tariffs of 25% on imported goods from Mexico. We currently lack a full understanding of the impact of tariffs on FurnMaster’s Mexican production, but we assume the tariffs will apply. We expect the costs to be passed on to customers, leading to a lesser margin impact, but with a likely drag on sales volumes over the medium term.

Disclaimer: HC Andersen Capital receives payment from Gabriel Holding for a corporate visibility and research agreement. / Philip Coombes 14:52 03.02.2025