Hexatronic: Strengthening Non-FTTH Verticals
Research Update
2022-10-05
08:05
Redeye raises its forecasts and Base Case slightly following Hexatronic's acquisitions of IDS and Rochester Cable. The acquisitions strengthen the group's position in important non-FTTH verticals, both geographically and in terms of product.
FN
JS
Fredrik Nilsson
Jacob Svensson
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While we believe FTTH will be the main revenue source and growth driver for at least the next five years, we are encouraged to see Hexatronic strengthening its position in other areas. Someday the US, UK, and German FTTH markets will mature, and seeing management being proactive in diversifying already is positive. Around 2017, when the Swedish market matured, Hexatronic launched its investment in the US, UK, and Germany, which has turned out to be a successful move. We see a similar pattern in these acquisitions, which we like. Following the two acquisitions, Hexatronic has operations regarding Data Centers and Harsh Environment in both North America and Europe.
We believe the acquisition of IDS is a natural step following the DCS acquisition last year, adding local data center capabilities in the European market. With Rochester Cable, Hexatronic expands its harsh environment. Together the acquisitions add about 10% to our 2023E EBITDA forecast, which we assume will result in a ~8% EPS increase. We raise our Base Case to SEK 101 (95).
Although the economic outlook is soft, we believe the structural drivers for FTTH will keep the activity high. Covid-19 highlighted the need for reliable high-speed internet for consumers, businesses, and nations. Also, we believe internet is “must-have” for consumers and businesses, resulting in non-cyclicality, which should encourage network owners to continue investing despite an eventual recession.
SEKm | 2020 | 2021 | 2022e | 2023e | 2024e |
Revenues | 2,080.8 | 3,491.5 | 6,358.5 | 8,497.8 | 10,288.0 |
Revenue Growth | 12.9% | 67.8% | 82.1% | 33.6% | 21.1% |
EBITDA | 277.8 | 492.2 | 1,093.3 | 1,476.6 | 1,801.5 |
EBIT | 181.6 | 357.9 | 894.1 | 1,244.6 | 1,547.0 |
EBIT Margin | 8.7% | 10.3% | 14.1% | 14.6% | 15.0% |
Net Income | 131.3 | 255.0 | 651.5 | 939.6 | 1,178.5 |
EV/Revenue | 1.5 | 6.0 | 3.7 | 2.8 | 2.2 |
EV/EBIT | 17.5 | 58.7 | 26.0 | 18.9 | 14.9 |
IDS in brief from the PM:
“IDS Group offers consultation, design, and installation of fiber, copper, and containment solutions to support data center and colocation projects. In addition, IDS has a managed services division that supplies quality engineering to support smart hands services such as racking, stacking, cabinet placement, patching, and auditing.
IDS Group is based out of London, UK, and has approximately 40 employees. The Company serves customers across EMEA with revenues of approximately GBP 13 million.”
We believe IDS has margins of about 15% on the EBITDA level, in line with DCS. While having few proprietary products, IDS is generally targeting larger customers than DCS. The acquisition strengthens Hexatronic’s European data center business, which was made up of DCS European operations prior to the IDS acquisition. Also, IDS can use DCS proprietary products in its offering, which could be manufactured at Hexatronic’s connectivity facility in Tallin for the European market.
Rochester Cable in brief from the PM:
“Rochester Cable is a recognized leader in the design and manufacture of electro-optical cables for operation in harsh environments. The cables are highly engineered to meet specific requirements in demanding industries such as oil and gas, sensing, defense, oceanographic, and subsea applications.
Rochester Cable is powered by 130 employees today in Culpeper, Virginia. In the 40,000 square meters production site, Rochester Cable manufactures armored electro-optical working cables that provide strength and transmit power, control signals, and data.
In the broken fiscal year, October 2021 to September 2022, Rochester Cable is expected to generate a proforma stand-alone EBITDA of approximately USD 8 million, representing a proforma transaction multiple of approximately 7x EBITDA. The acquisition is immediately accretive to earnings, adding an estimated 0.18 SEK per Hexatronic share in the first full year after close.”
Rochester Cable adds both new products within the harsh environment segment and production facilities in the US. Just like regarding DCS and IDS for data centers, with Rochester Cable, Hexatronic has production of harsh environment cables on both sides of the Atlantic. Also, as a part of Hexatronic, we believe Rochester Cable will strengthen its position in the European market.
We raise our EBITA and EPS forecasts by 9% and 8% for 2023. We assume IDS to be consolidated from October 2022 and Rochester Cable from January 2023. Also, while Rochester Cable's sales are unknown, we assume an EBITDA margin of 15%. As seen above, the EBITDA is known, so the EPS revision remains the same even if the actual EBITDA margin should be deviating significantly from our assumption. Regarding IDS, the sales is known while the EBITDA is not; we assume 15% EBITDA margin for IDS as well, which is in line with DCS.
Income statement | |||||
SEKm | 2020 | 2021 | 2022e | 2023e | 2024e |
Revenues | 2,080.8 | 3,491.5 | 6,358.5 | 8,497.8 | 10,288.0 |
Cost of Revenue | 1,128.5 | 1,924.4 | 3,623.8 | 4,811.7 | 5,832.2 |
Operating Expenses | 674.4 | 1,074.9 | 1,641.4 | 2,209.4 | 2,654.3 |
EBITDA | 277.8 | 492.2 | 1,093.3 | 1,476.6 | 1,801.5 |
Depreciation | 68.7 | 95.6 | 142.9 | 160.0 | 182.6 |
Amortizations | 27.5 | 38.7 | 56.3 | 72.0 | 72.0 |
EBIT | 181.6 | 357.9 | 894.1 | 1,244.6 | 1,547.0 |
Shares in Associates | 2.1 | 0.00 | 0.00 | 0.00 | 0.00 |
Interest Expenses | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
Net Financial Items | 12.4 | 23.1 | 41.8 | 40.0 | 36.0 |
EBT | 169.2 | 334.8 | 852.3 | 1,204.6 | 1,511.0 |
Income Tax Expenses | 37.9 | 79.8 | 200.9 | 265.0 | 332.4 |
Net Income | 131.3 | 255.0 | 651.5 | 939.6 | 1,178.5 |
Balance sheet | |||||
Assets | |||||
Non-current assets | |||||
SEKm | 2020 | 2021 | 2022e | 2023e | 2024e |
Property, Plant and Equipment (Net) | 441.1 | 1,071.9 | 1,232.8 | 1,312.8 | 1,438.9 |
Goodwill | 257.2 | 1,064.5 | 1,064.5 | 1,064.5 | 1,064.5 |
Intangible Assets | 291.2 | 320.7 | 434.2 | 967.2 | 895.2 |
Right-of-Use Assets | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
Other Non-Current Assets | 0.00 | 1.8 | 1.8 | 1.8 | 1.8 |
Total Non-Current Assets | 991.5 | 2,458.9 | 2,733.3 | 3,346.3 | 3,400.4 |
Current assets | |||||
SEKm | 2020 | 2021 | 2022e | 2023e | 2024e |
Inventories | 410.3 | 928.8 | 1,398.9 | 1,869.5 | 2,263.4 |
Accounts Receivable | 308.0 | 597.3 | 1,144.5 | 1,529.6 | 1,851.8 |
Other Current Assets | 31.1 | 55.1 | 89.0 | 119.0 | 144.0 |
Cash Equivalents | 212.2 | 675.1 | 553.0 | 267.2 | 682.0 |
Total Current Assets | 961.6 | 2,256.3 | 3,185.4 | 3,785.3 | 4,941.3 |
Total Assets | 1,953.1 | 4,715.2 | 5,918.7 | 7,131.6 | 8,341.6 |
Equity and Liabilities | |||||
Equity | |||||
SEKm | 2020 | 2021 | 2022e | 2023e | 2024e |
Non Controlling Interest | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
Shareholder's Equity | 649.4 | 1,647.5 | 2,171.5 | 2,785.3 | 3,494.1 |
Non-current liabilities | |||||
SEKm | 2020 | 2021 | 2022e | 2023e | 2024e |
Long Term Debt | 453.5 | 1,255.3 | 1,255.3 | 1,255.3 | 1,255.3 |
Long Term Lease Liabilities | 0.00 | 332.4 | 332.4 | 332.4 | 332.4 |
Other Long Term Liabilities | 167.8 | 104.8 | 104.8 | 104.8 | 104.8 |
Total Non-Current Liabilities | 621.3 | 1,692.5 | 1,692.5 | 1,692.5 | 1,692.5 |
Current liabilities | |||||
SEKm | 2020 | 2021 | 2022e | 2023e | 2024e |
Short Term Debt | 82.0 | 274.3 | 274.3 | 274.3 | 274.3 |
Short Term Lease Liabilities | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
Accounts Payable | 526.3 | 721.0 | 1,271.7 | 1,699.6 | 2,057.6 |
Other Current Liabilities | 74.0 | 379.8 | 508.7 | 679.8 | 823.0 |
Total Current Liabilities | 682.3 | 1,375.1 | 2,054.7 | 2,653.7 | 3,154.9 |
Total Liabilities and Equity | 1,953.1 | 4,715.1 | 5,918.6 | 7,131.5 | 8,341.5 |
Cash flow | |||||
SEKm | 2020 | 2021 | 2022e | 2023e | 2024e |
Operating Cash Flow | 249.8 | 104.8 | 479.0 | 884.9 | 1,193.2 |
Investing Cash Flow | -229.0 | -1,154.3 | -473.6 | -845.0 | -308.6 |
Financing Cash Flow | 89.4 | 1,511.0 | -127.5 | -325.7 | -469.8 |
Disclosures and disclaimers
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