• '25e-'27e adj. EBITA down 3%
• Already strong gross margin in Q1 can turn even stronger in H2
• ~9x '25e EV/EBITA is ~40% below peers

Takeaways from the report

The Q1 report was characterised by slightly weaker organic growth than usual because the Easter holidays occurred mid-April (Q2) rather than Q1. We did not anticipate the Easter impact to be that significant, and we therefore put a somewhat higher weight on Q2 in terms of organic growth delivery. The gross margin was strong at roughly 32%, as some of the company's purchasing and shipping efficiencies have come into effect. However, the 9% y-o-y gross profit growth translated into 4% y-o-y adj. EBITA growth due to discretionary sales & marketing expenditure. In terms of cash flow, we did not see the latent working capital release that we had expected due to tax deferrals.

Estimate changes

We cut '25e-'27e sales by 1% and adj. EBITA by 3% after the report. While the sales impact is primarily mechanical, we adjust our adj. EBITA estimates to reflect a better gross margin due to meaningfully lower freight rates, but that is offset by higher opex. We note that the company aims to reduce its leverage (net debt / EBITDA ratio) further prior to engaging in M&A activities. While the expected future debt paydowns that were highlighted in the CEO commentary were a little surprising to us, they are minor in absolute terms and could be beneficial for the company from a financing perspective (although the terms of the debt arrangement are not disclosed). Once the company has gone through its anticipated cash flow generative phase and further deleveraging, we believe that acquisitions could start occurring again.

Valuation

Based on our revised estimates, the company is trading at a '25e EV/EBITA of 9x, which is ~40% below the peer average, despite peers growing earnings at a slower rate than Humble.