Sales grew by 60% y/y to SEK617m (387), and organic growth was 14.6% y/y. Both organic and acquired sales growth were higher than we expected, and total sales growth beat our forecast by 17%. Tessta, the main driver of acquired growth, continued its strong momentum and has, during 2022, so far, seen a significant rebound relative to the softer 2021, which was negatively impacted by the covid-19 pandemic. In Q3 Tessta grew its sales by 57% y/y. Thus, demand is strong in both the Swedish and Norwegian markets.

EBITA was SEK47.1m (32.5), beating our estimate of SEK40.7m by nearly 16%, corresponding to an EBITA margin of 7.6% (8.4) in the quarter. While the margin declined somewhat relative to the very strong level seen last year, it matched our forecasts and was well above Transtema’s >7% EBITA margin target. According to management, Transtema, like other companies, is affected by increased inflationary pressure, mainly from increased energy and fuel costs. However, the company have a good and constructive dialogue with its customers and suppliers to handle the situation, with the ambition to keep its profitability and reach its financial targets.

Also, while demand is strong, as highlighted by the quarter’s solid sales growth, supply is somewhat limited. Thus, the margin on new construction projects will likely be lower than normal, fueling most of the growth. However, for several reasons, we believe taking those orders benefits Transtema. First, while having a lower margin, we expected the absolute EBITA from the deals to be positive. Second, the construction orders drive support and maintenance deals, generating recurring revenue with higher margins over time. Third, the orders are largely from Transtema’s most significant customers, and strengthening the cooperation is important long-term. Also, management seems confident in reaching its 7% EBITA margin target, implying that the margin on the construction deals are, at least, decent.

While we do not want to extrapolate the full extent of the strength in this quarter for the reasons mentioned above, the quarter shows Transtema has solidly handled the increasing costs, maintaining its industry-leading margins.

At the beginning of October, Transtema acquired Bäck. Below is a short description of the business (English translation of highlights from the PM):
“Bäck is one of Sweden's leading companies in the installation, service, and maintenance of cable TV (coax) networks in Sweden. The company has its headquarters in Kungsbacka and today covers the metropolitan areas in Sweden. The turnover amounts to approximately SEK 40 million with 50 employees and stable profitability. Bäck is expected to contribute positively to Transtema's revenue growth and strengthen the operating profit from the day of entry.”

The acquisitions mark Transtema’s entry into the coax market, which shares many similarities with its other markets. We believe there is a substantial potential for synergies on the revenue side, as Transtema can utilize Bäck’s know-how within coax to its nationwide operations.

While coax is old technology compared to fiber, Tele2 (Comhem) has invested substantial amounts into its coax network. Today’s coax support speeds of ~1Gbit/s, which is well enough for most consumers today and in line with the maximum speed in a typically open city fiber network. The graph below shows that the number of coax subscriptions has been flat for over a decade, suggesting that switching from coax to fiber is an unattractive investment.

While we believe the coax speed is good enough, at least for now, we argue that the monopoly structure of the coax network makes it less attractive to consumers relative to the generally open fiber networks. However, the incentive for a real-estate owner (coax is most common in rental multiple dwelling units) to invest in fiber when coax already is in place is limited. The real-estate owner gets, in most cases, no advantage of switching to fiber.

Although we are doubtful about coax, in the very long run, the market is very stable, and the competition among support and maintenance providers is probably rather limited. All in all, we believe it is a solid acquisition, adding stable support and maintenance revenue with the potential for revenue synergies by utilizing Transtema’s nationwide organization.

We raise our sales forecasts for 2023E by about 9%, mainly due to strong organic growth and impressive development in the recently acquired Tessta. Also, management seems optimistic regarding the demand situation. However, we lower our margin assumptions following limited supply and inflationary pressure, where we likely will see a ~4% increase in salaries next year. However, despite the lower margin assumptions, we raise our EBITA forecast by 2%.

While lowering our EBITA margin somewhat for the coming years, we expect Transtema to reach its >7% EBITA margin target, which is industry-leading. However, thanks to the strong sales growth seen in 2022 and an increased sales forecast for 2023, we increased the absolute EBITA throughout the forecast period.

We do not assume any material investments in or sales from new areas, such as EV-charging or coax, despite the recent acquisitions, which is currently a small part of Transtema. If Transtema is successful in its greenfield investment, we would likely see lower margins short-term in exchange for higher growth and possibly margins long-term.

We leave our Base Case at SEK 50 despite increasing the WACC to 9.5% (9), following an increased risk-free rate from 2% to 2.5%. The somewhat higher EBITA forecast offsets the negative effect of the WACC raise.

Also, note that Transtema has few institutional investors despite a market cap above SEK 1bn. The transformed Transtema has many features that institutional investors find attractive, such as non-cyclical recurring revenue streams and a genuine commitment to ESG.

Transtema is trading at a discount to peers for 2023E. Also, its margins are the highest, and it has had a solid track record since its transformation. Thus, we believe a premium is motivated, at least relative to the similar-sized peers, and our Base Case of SEK 50 equals ~10x EBITA 2023E.