Gabriel Holding Q1'24-25: Q1’24-25 steady but carve-out uncertainty remains

Gabriel’s Q1’24-25 results reflected relative stability during a moment of heightened uncertainty. A stable revenue of MDKK 228.1 (MDKK 227.7 Q1’23-24) was slightly below our expectations of +1% growth y/y as positive development in continuing operations was offset by a decline in FurnMaster driven by the restructuring of its Mexican subsidiary. Q1 was the first step towards greater stability, however, uncertainty relating to the carve-out process of FurnMaster remains high, and the range of outcomes is broader than normal. Group EBIT of MDKK 0.3 in Q1’24-25 was below our estimate of MDKK 4.6, impacted by elevated costs relating to restructuring, accounts verification, and carve-out advisory fees. The Q1 results support our view of long-term potential in the company, however, also reinforce our view of greater short-term risk due to the FurnMaster carve-out process. We reiterate our Reduce recommendation with a slightly revised price target of DKK 180 per share from DKK 195 previously.

The long-term positive outlook of continuing operations remains on track

The continuing Fabrics and Sample master business units maintained a 6% y/y growth rate in Q1’24-25 with Q1 revenue of MDKK 123.5, following +6% y/y growth FY’23-24. The business unit overcame diverted management focus towards the accounts verification and carve-out situations and ongoing market weakness to maintain its growth, while also realizing +3 p.p growth in gross and EBIT margins, to 53.1% and 3.3%, respectively, driven by efficiency improvements. The Q1 growth was primarily driven by the USA & Mexico, and Asia, while Europe, the driver of growth FY23/24, was more stable. We expect that flat to improving markets in 2025 can support revenue and EBIT landing in the top-end of full-year guidance, which was maintained after Q1’24-25.

Discontinuing operations marked by one-offs and restructuring, but no further write-downs

The carve-out of FurnMaster and restructuring of its subsidiary in Mexico remain a cause of uncertainty. Revenues declined -6% y/y in Q1, as the restructuring process in Mexico led to cancellation of unprofitable contracts, while the European subsidiary realized stable growth and a positive net result. FurnMaster’s Q1’24-25 EBIT result was MDKK –3.8 as the lower overall revenue was compounded by additional one-off costs relating to the restructuring, account verification, and carve-out. No further write-downs relating to the Mexican subsidiary materialized, an early sign of greater stability. However, while we expect lower one-off costs during the remaining quarters of FY’24-25, there is greater scope for unforeseen one-offs, potential write-downs, and greater earnings volatility.

Positive cash flow can reduce debt but from a high level

Cash flow from operations rose in Q1’24-25, supported by a net positive effect from working capital changes, which we expect can continue to positively impact cash flow FY’24-25. Gabriel has repaid some of its current debt in Q1 and previous quarters, and sustained positive cash flow may further support repayments to improve the leverage ratio, which remains high at NIBD/LTM EBITDA of 6.9x. However, we expect a completed carve-out of FurnMaster to be the primary driver of balance sheet strengthening.

Carve-out completion can de-risk the case, but short-term uncertainty remains

Despite general stability in the Q1’24-25 results, we still see uncertainty about the timing of the sale of its FurnMaster units. Currently, we see this as the most important short-term trigger, which can de-risk the case and strengthen the balance sheet. Based on our DCF model, we still see long-term potential in Gabriel.

Disclaimer: HC Andersen Capital receives payment from Gabriel for a research and corporate visibility subscription agreement./ Philip Coombes 08:43 07.02.2025, updated 13:37 10.02.2025