Transtema: Expanding Further in Norway

Research Update

2022-12-21

06:45

Redeye strengthens its positive view on Transtema following the acquisitions of UBConnect. The acquisition adds radio and geographical reach and strengthens the prospects of establishing maintenance and service in Norway. With a low initial payment and low valuation multiples, we believe it is a low-risk acquisition. We raise our forecasts and Base Case slightly.

Fredrik Nilsson

Jacob Svensson

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Key takeaways from the acquisition of UBConnect:

Considering the ~50/50 split between upfront payment and earn-out and the EBITA multiple of 3.1-4.4x (no earn-out/full earn-out), we believe the downside risks related to the acquisition are low.

UBConnect adds radio and geographical reach and strengthens the prospects of establishing maintenance and service in Norway.

UBConnect’s know-how and proprietary logistics solution will benefit Transtema’s radio installation business in Sweden.

New customers, such as ICE and Nokia, strengthen cross-selling prospects.

While the acquistion lowers the share of recurring revenue it also reduces Transtema's customer concentration.

We raise our 2023e sales, EBITA, and EPS by 19%, 16%, and 15%.

New Base Case SEK55 (50)

SEKm	2020	2021	2022e	2023e	2024e
Revenues	1,404.8	1,690.0	2,347.9	3,083.1	3,175.5
Revenue Growth	-6.2%	20.3%	38.9%	31.3%	3.0%
EBITDA	118.2	202.4	247.2	324.6	336.2
EBIT	16.2	124.4	141.0	174.8	185.7
EBIT Margin	1.2%	7.4%	6.0%	5.7%	5.8%
Net Income	3.9	92.1	98.1	126.1	134.7
EV/Revenue	0.3	0.9	0.5	0.4	0.3
EV/EBIT	30.1	11.6	8.4	6.4	4.9

Case

From construction to installations, operations, and maintenance

Following a few years with a focus on Fiber-To-The-Home (FTTH) construction which ended badly, Transtema has reshaped its business, concentrating on stable installations, operations, and maintenance markets. With its nationwide reach in Sweden and substantial presence in Norway, Transtema has a solid position to capture growth stemming from structural trends driving the need for the availability and reliability of communication networks. In addition, recent EV charging and coax acquisitions allow for higher utilization of the nationwide service network and reduced customer concentration.

Evidence

Stability, margins, and growth in place following the recent transformation

Since the transformation towards installations, operations, and maintenance in 2020, Transtema has delivered stable EBITA margins of ~7%, among the highest levels in the industry. Despite the eroding copper business, Transtema has achieved solid organic growth fueled by 5G and fiber installations. The acquisition of Tessta has been a success so far. Combined with the offering-expanding acquisitions of North Projects and Bäcks, Transtema has reduced customer concentration and improved its growth prospects.

Challenge

Exposure to legacy technology

With about 20% of sales stemming from copper, Transtema will experience a growth headwind as copper is expected to erode over the next few years. However, the decline of legacy technology and the rise of new solutions is a normality in the communications industry. Although Transtema needs to compensate with revenue from newer technologies, following recent acquisitions in, for example, the surging EV charging sector, and the site-management deal, we believe the prospects are solid.

Challenge

Significant customer concentration

Although the customer concentration has decreased following recent acquisitions, Transtema generates about 40% of its sales from Telia. While a few huge players characterize the telecommunications market, we believe customer concentration is a risk in Transtema. On the other hand, Telia also depends on Transtema, as it would be challenging for a competitor to provide similar services, at least in the short term. Following the recent acquisitions, we believe the customer concentration will decrease further.

Valuation

Fair Value SEK 50

Our DCF model shows a fair value of SEK 50, which is also supported by a peer valuation. We believe Transtema’s high share of recurring non-cyclical revenues and solid track record of healthy margins support a relatively high valuation multiple. In contrast, a high customer concentration mitigates that effect somewhat.

Norwegian Radio Installation Specialist

Brief company description, translated from the PM:

“UBConnect is Norway's leading company in the design, installation and upgrading of mobile networks. The company with approx. 230 employees and head office in Oslo. The turnover in 2022 is expected to amount to approximately NOK 440 million with an operating profit (EBITA) of approximately NOK 30 million. The management of UBConnect will continue to lead the company after the acquisition.”

Transtema pays NOK93.9m initially, and there is an earn-out of up to NOK90.6m. The majority of the earn-out depends on the 2023-2025 EBITA outcome, and an average EBITA of NOK48.2m results in a full earn-out. Thus, the initial NOK93.9 corresponds to 3.1x EBITA on UBConnect’s current earnings, and the full earn-out corresponds to 4.4x EBITA on the EBITA level required for full earn-out payment. Although UBConnect has a lower share of recurring revenue, the EBITA multiples of 3.1-4.4x are significantly below Transtema’s ~7x EBITA 2023e (pre revisions), and we find the acquistion multiple attractive.

UBConnect generates the bulk of its revenue from Norway but has exposure to other Nordic countries as well, where the company has experienced an increasing demand for its services. UBConnect focuses solely on radio (3G, 4G, 5G, etc.), currently meaning mostly 5G. According to Transtema’s management, UBConnect’s operations are highly effective, especially regarding logistics, thanks partly to a proprietary software solution. Thus, we believe Transtema’s current radio installation business can benefit from the acquisition.

UBConnect has several customers whom Transtema lacks any material exposure today, such as ICE and Nokia, opening for cross-selling. Interestingly, according to management, the early indications from UBConnect’s customers have been positive. The company has experienced strong growth during 2022 thanks to 5G roll-outs mainly in Norway.

At first, we were suprised to see UBConnect has operations in Serbia, Poland, and Slovakia considering Transtema's focus on the Nordics. However, these are administration and support organizations providing services and employees for UBConnect’s Nordic operations.

We raise our sales, EBITA, and EPS by 19%, 16%, and 15% for 2023, assuming UBConnect is consolidated from 1 January 2023. We raise our Base Case to SEK55 (50), and considering the current share price of SEK30, we see significant upside potential. Transtema is currently trading at ~5x EBITA 2023e on our revised forecasts.

Income Statement

Income statement
SEKm	2020	2021	2022e	2023e	2024e
Revenues	1,404.8	1,690.0	2,347.9	3,083.1	3,175.5
Cost of Revenue	602.0	578.3	1,101.7	1,428.8	1,470.3
Operating Expenses	684.6	909.3	999.0	1,329.7	1,369.1
EBITDA	118.2	202.4	247.2	324.6	336.2
Depreciation	-14.7	-14.9	-18.8	-24.4	-25.0
Amortizations	-25.7	-13.0	-23.4	-44.0	-44.0
EBIT	16.2	124.4	141.0	174.8	185.7
Shares in Associates	66.7	55.6	59.3	59.3	59.3
Interest Expenses	-10.2	-10.5	-34.0	-16.0	-16.0
Net Financial Items	10.2	11.5	48.4	16.0	16.0
EBT	7.6	115.0	121.4	158.8	169.7
Income Tax Expenses	15.3	-23.7	-26.6	-32.7	-35.0
Net Income	3.9	92.1	98.1	126.1	134.7

Balance Sheet

Balance sheet
Assets
Non-current assets
SEKm	2020	2021	2022e	2023e	2024e
Property, Plant and Equipment (Net)	27.7	34.0	43.2	81.5	72.9
Goodwill	76.7	68.7	294.7	403.5	403.5
Intangible Assets	63.8	60.3	249.6	205.6	161.6
Right-of-Use Assets	125.5	130.8	170.5	145.0	119.5
Other Non-Current Assets	27.0	1.2	1.8	1.8	1.8
Total Non-Current Assets	387.5	350.5	819.1	896.7	818.6
Current assets
SEKm	2020	2021	2022e	2023e	2024e
Inventories	17.3	18.3	23.5	30.8	31.8
Accounts Receivable	167.9	152.7	234.8	308.3	317.6
Other Current Assets	120.8	160.4	317.0	416.2	428.7
Cash Equivalents	64.9	177.8	176.9	241.0	455.2
Total Current Assets	370.8	509.2	752.2	996.3	1,233.2
Total Assets	758.4	859.7	1,571.3	1,893.0	2,051.8
Equity and Liabilities
Equity
SEKm	2020	2021	2022e	2023e	2024e
Non Controlling Interest	0.55	0.94	1.4	1.4	1.4
Shareholder's Equity	159.5	250.4	349.8	475.9	610.6
Non-current liabilities
SEKm	2020	2021	2022e	2023e	2024e
Long Term Debt	19.0	25.1	110.1	110.1	110.1
Long Term Lease Liabilities	79.6	78.3	112.4	112.4	112.4
Other Long Term Liabilities	51.4	42.9	301.3	301.3	301.3
Total Non-Current Liabilities	150.0	146.4	523.8	523.8	523.8
Current liabilities
SEKm	2020	2021	2022e	2023e	2024e
Short Term Debt	49.0	13.8	21.2	21.2	21.2
Short Term Lease Liabilities	47.6	55.5	64.7	64.7	64.7
Accounts Payable	140.0	146.3	281.7	370.0	381.1
Other Current Liabilities	211.7	246.5	328.7	431.6	444.6
Total Current Liabilities	448.3	462.1	696.3	887.5	911.5
Total Liabilities and Equity	758.4	859.8	1,571.3	1,888.5	2,047.3

Cash Flow

Cash flow
SEKm	2020	2021	2022e	2023e	2024e
Operating Cash Flow	161.2	185.8	165.7	286.9	286.6
Investing Cash Flow	14.1	-14.0	-187.2	-171.4	-16.4
Financing Cash Flow	-128.5	-83.9	25.2	-56.0	-56.0

People: 5

Transtema receives the highest rating for People for several reasons. First, we believe management has relevant experience and a solid understanding of the market. Second, following operational and financial issues, its management has reshaped the business to profitability. Third, insiders, such as former CEO and current chairman Magnus Johansson, own a substantial share of Transtema. Fourth, we believe that management's communication is balanced and realistic.

Business: 4

Transtema receives a high rating for Business for several reasons. First, the group gets most of its revenue from operations, services, and maintenance, and ~70% is recurring. Second, the limited acceptance for downtime makes Transtema’s services vital to its customers. Third, Transtema has established nationwide operations with ~900 technicians and a presence in ~85 locations, implying significant investments for new entrants.

Financials: 3

Transtema receives an average rating for Financials. Recent improvements in organic growth, margins, and cash flow increase the rating, while weak performance a few years ago is working oppositely. Given that Transtema can preserve its recent improvements in margins, which we find likely, Transtema is heading for a higher rating over the coming years.

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