Gabriel Holding initiation of coverage: Improving indicators suggest a return to growth

Our assessment indicates that the worst of the current downturn in the furniture and broader real estate market has passed. This is supported by leading indicators and a more optimistic outlook for the industry and Gabriel’s international customers. Gabriel has recently upgraded its guidance for 2023/24, indicating a somewhat positive momentum compared to initial expectations. Margins and return on capital improvements are expected to materialize in a new growth cycle. We see returning growth in major markets, improving capacity utilization, and a lower inflationary outlook to drive profitability improvement. We initiate our coverage of Gabriel with an Accumulate recommendation and target price of DKK 295 per share with a fair value range of DKK 235-315.

Gabriel is a niche company within the global furniture fabrics industry 

With roots back to 1851, Gabriel is today a niche company within the global furniture industry. Over the past decade, Gabriel has accelerated its growth through significant investments such as acquisitions and international expansion, opening showrooms across regions. In 2022/23, Gabriel’s revenue split was ~75% Europe, ~20% North America, and ~5% Asia Pacific. Besides a potential better macro-outlook for investments in corporate spending across regions, furniture industry drivers include a return to offices post-COVID-19 and changing furniture needs from hybrid work as investments are made to modernize office spaces. Within its niche, Gabriel can accelerate growth by growing with its larger customers, broadening penetration of the furniture value chain, and expanding its international footprint.

We expect a return to growth – but below the company’s target

Gabriel is currently focusing on profitability and cash flow in response to weak market conditions. However, the company maintains its 15/15/15 targets, aiming for >15% revenue growth, >15% EPS growth, and >15% ROIC (before tax), despite being far from these since 2022/23. Due to weaker earnings and a higher NIBD/EBITDA ratio of around 5.6x, Gabriel currently has less flexibility to invest in growth. Consequently, we estimate that revenue will grow to a top single-digit rate in the medium term before approaching a steady state. Unless market growth improves beyond our current expectations, we struggle to see that Gabriel can grow at historical levels (2014/15-2022/23 CAGR of 13.6%, including acquisitions), given the reduced ability to invest at the previous pace. We expect EBIT margin improvements from higher revenue levels and operational gearing towards its historical top of 10% in the medium term before reaching its historical average level of approx. 7.5% in the long term.

Revenue and earnings growth from 2024/25e and onwards drive expected return

The short-term earnings multiples provide little valuation insights due to the current low cyclical earnings. Looking into 2024/25e, Gabriel trades at around 17x EV/EBIT, which is slightly below the median of our Danish-listed cyclical peers (Capital IQ estimates), and slightly below Gabriel’s historical EV/EBIT of around 20x. In the following year, 2025/26e, we believe that earnings-based ratios of P/E 9.4x and EV/EBIT 9.7x look attractive. However, with no close listed peers and slower expected growth than historically, we focus more on our DCF valuation, which better values the long-term outlook. Our DCF model provides a value per share of DKK 307, suggesting a return above our required return. The recent upgrade in Gabriel’s expectations and a more optimistic industry outlook, based on leading indicators, support our Accumulate recommendation. However, investors must be aware that macroeconomic drivers can change Gabriel’s growth outlook and expected margin improvements quickly.

HC Andersen Capital receives payment from Gabriel for a Digital IR agreement and research services.