Hexatronic: Strong Momentum Continues
Research Update
2023-02-13
06:45
Redeye raises its Fair Value range for Hexatronic following a solid Q4 report where EBITA beat our forecast by 7%. The company’s strong operational momentum continues, and despite some minor turbulence in some FTTH markets, management’s outlook stays positive for all relevant markets.
FN
JS
Fredrik Nilsson
Jacob Svensson
Contents
While the beat in this quarter was not as large as in the most recent ones, EBITA came in 7% above our forecast. As expected, all strategic growth markets continue to do very well, and North America and the Rest of Europe beat our sales estimates by 7-8%. Sweden continued its streak of relatively strong growth fueled by submarine cable and wireless, highlighting the opportunities outside of FTTH.
Hexatronic’s view of the demand on all strategic growth markets, the US, the UK and Germany, remain solid, which is supported by a strong order intake. However, some smaller FTTH players experience difficulties financing their operations, but as technicians remain the limiting factor, the impact is minor. While management believes an eventual recession will negatively impact demand, it sees no such sign currently.
We raise our Base Case somewhat to SEK 126 (121) following slightly increased margin and sales growth assumptions. However, we expect the share to trade in line with our Bull Case of SEK 180, considering the expected solid momentum with high acquired and organic sales growth, expanding margins y/y, and likely new FTTH deals.
SEKm | 2021 | 2022e | 2023e | 2024e | 2025e |
Revenues | 3,491.5 | 6,574.1 | 9,444.3 | 11,701.8 | 13,988.9 |
Revenue Growth | 67.8% | 88.3% | 43.7% | 23.9% | 19.5% |
EBITDA | 492.2 | 1,236.0 | 1,769.6 | 2,185.1 | 2,606.0 |
EBIT | 357.9 | 1,028.1 | 1,521.6 | 1,915.5 | 2,312.0 |
EBIT Margin | 10.3% | 15.6% | 16.1% | 16.4% | 16.5% |
Net Income | 255.0 | 736.3 | 1,143.1 | 1,456.7 | 1,765.9 |
EV/Revenue | 6.0 | 4.6 | 3.0 | 2.3 | 1.9 |
EV/EBIT | 58.7 | 29.4 | 18.5 | 14.4 | 11.5 |
Case
Pole position in the boom for digital highways.
Evidence
Proven track record in several major markets with its easy-deployed high-quality system solutions.
Challenge
Boom and bust FTTH cycle put risks to the very long-term.
Challenge
Possible price pressure.
Valuation
Base Case of SEK 126 implies ~16.5x EBITA 2023E
People: 4
Hexatronic has a strong management team of entrepreneurial people with plenty of skin in the game. CEO has significant experience from the telecom industry. Staff at other key positions, that joined the group through last year's acquisitions, are also intact. The company has delivered so far on their financial goals.
Business: 4
Due to the competitive situation, product differentiation appears to be difficult, thus the price will always be an issue. Hexatronic is a small player compared to some of the dominant multinational companies. Surely that means growth opportunities but also challenges.
Financials: 4
In our view, Hexatronic is very financially stable and receives a good score in most subcategories. Overall we view Hexatronic's profitability levels as compelling and improving. We see some risks for new rights issues given the strong focus on acquisitions, still if the acquisition is done at good prices and creates value this will not be an issue.
Sales beat our forecast by 4%, following slightly stronger sales in all geographies except for the Rest of the World. The US and UK continue to be the main growth drivers, along with Germany, following strong demand for Hexatronic’s FTTH system solution and duct. Also, Sweden continues to show healthy growth numbers driven by submarine cable and wireless. Like early in 2022, the solid growth in Sweden highlights the opportunities outside of FTTH, which is important in mature FTTH markets. Also, in the report, management once again stated its ambition to acquire within Harsh Environment, Wireless and Data Center.
EBITA beat our forecast by 7% following higher sales and stronger margins. The gross margin improved significantly and beat our forecast thanks to a strong sales mix, with a higher share of US revenue and successful price increases to offset rising material costs. OPEX, on the other hand, came in above our expectations. While still at a historically low level, it increased as a share of sales relative to Q2 and Q3, and we probably underestimated the effect of the new Clinton duct plan. Recruitments have started, but the plant does not generate any revenues yet (the Clinton plat is expected to run fully by the end of Q2, in line with previous statements). However, as mentioned, the EBITA margin still beat our forecast.
The order book increased organically by 67% y/y, which is below the 168% growth seen in Q3. However, Hexatronic’s order book is typically deployed in a short time span, and the winter season is normally weaker in northern regions. Thus, we do not believe the seemingly significant q/q growth rate decline is substantial. In 2021 the q/q order book growth rate declined in Q4 as well, while the organic sales growth accelerated in Q1 2022.
While the overall market remains strong, Hexatronic notes that some smaller FTTH players are having trouble financing their projects, especially in the UK, with more than 200 smaller players active in the FTTH space. However, the lack of technicians remains the limiting factor. Although management believes an eventual recession will negatively impact demand, it sees no signs of a slowdown in the order intake.
On a more structural level, the UK market is starting to reach a plateau of a high activity level, which should result in more modest growth in the UK market. On the other hand, the German market is still in an early phase and in the US, the market as well as Hexatronic’s market share, is growing steadily.
In conjunction with the report, Hexatronic raised its EBITA margin target to 15-17% from >12%. As Hexatronic has a track record of beating its margin targets, we interpret the raised target as Hexatronic aims for 17% in EBITA margin rather than 15%.
Considering that the company already achieves a margin in the high end of the range and as we already forecasted almost 17% until 2026, we believe the increase was expected. However, it implies that management is confident in the current margin levels.
We leave our forecasts largely unchanged for both 2023 and 2024. We lower our sales forecast for the Rest of the World while increasing Sweden somewhat. We raise our gross margin and OPEX assumptions slightly, resulting in a small net increase in our EBITA margin assumption. We believe a better situation with material costs, where earlier increases are passed on to customers, combined with a growing US with higher margins, supports stronger gross margins. On the other hand, front-loaded investments in growth, such as the Clinton duct plant, make us raise our OPEX forecast slightly, although from very low levels in a historical context. All in all, we are our EBITA forecast with about 1% for both 2023 and 2024.
Note that the 1% cut in sales in 2023 is due to the Rochester acquisitions, which we previously expected to be consolidated from Q1 2023. Our new assumption is Q2 2023.
While the new version of the Redeye Rating reduces Hexatronic’s rating from 5,4,4 to 4,4,4 (People, Business, Financials), the WACC remains at 8%. The new version of the Redeye Rating is more demanding and makes it harder to receive a high rating. Thus, it should not be seen as we believe the underlying quality of Hexatronic has decreased.
We raise our Base Case Fair Value Range to SEK126 (121) following slightly increased short- and long-term forecasts. However, we expect the share to trade in line with our Bull Case of SEK 180, considering the expected solid momentum with high growth, expanding margins, and likely new FTTH deals.
While the Bull Case assumes slightly higher growth and margins 2023-2030, the main difference is in the 2030-terminal period. Unlike our Base Case, where we expect the strategic growth markets to have negative sales growth from 2030 and onwards (like in Sweden post-2017), our Bull Case assumes flat sales and minor margin declines.
In our Bull Case, we expect Hexatronic to increase its sales from non-FTTH sources until 2030 fast enough to limit the expected downturn in FTTH. While Hexatronic has exposure to harsh environment, core networks, 5G, farming, and data centres, the bulk of revenues are generated from FTTH. However, Hexatronic has a solid M&A track record, and several recent acquisitions, such as DCS, Weterings, Rochester have added exposure to non-FTTH segments. Also, there are likely at least ten years left until the FTTH-boom is over in the strategic growth markets. Thus, Hexatronic has plenty of time to add additional sources of revenue until then, and M&A will likely play a major role.
Income statement | |||||
SEKm | 2021 | 2022e | 2023e | 2024e | 2025e |
Revenues | 3,491.5 | 6,574.1 | 9,444.3 | 11,701.8 | 13,988.9 |
Cost of Revenue | 1,924.4 | 3,648.1 | 5,162.3 | 6,404.0 | 7,661.9 |
Operating Expenses | 1,074.9 | 1,690.0 | 2,512.4 | 3,112.7 | 3,721.1 |
EBITDA | 492.2 | 1,236.0 | 1,769.6 | 2,185.1 | 2,606.0 |
Depreciation | 95.6 | 145.6 | 160.0 | 185.6 | 209.9 |
Amortizations | 38.7 | 62.3 | 88.0 | 84.0 | 84.0 |
EBIT | 357.9 | 1,028.1 | 1,521.6 | 1,915.5 | 2,312.0 |
Shares in Associates | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
Interest Expenses | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
Net Financial Items | 23.1 | 68.1 | 56.0 | 48.0 | 48.0 |
EBT | 334.8 | 960.0 | 1,465.6 | 1,867.5 | 2,264.0 |
Income Tax Expenses | 79.8 | 223.7 | 322.4 | 410.9 | 498.1 |
Net Income | 255.0 | 736.3 | 1,143.1 | 1,456.7 | 1,765.9 |
Balance sheet | |||||
Assets | |||||
Non-current assets | |||||
SEKm | 2021 | 2022e | 2023e | 2024e | 2025e |
Property, Plant and Equipment (Net) | 1,071.9 | 1,411.5 | 1,651.5 | 1,676.5 | 1,662.4 |
Goodwill | 1,064.5 | 1,064.5 | 1,064.5 | 1,064.5 | 1,064.5 |
Intangible Assets | 320.7 | 826.1 | 1,343.1 | 1,259.1 | 1,175.1 |
Right-of-Use Assets | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
Other Non-Current Assets | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 |
Total Non-Current Assets | 2,458.9 | 3,303.9 | 4,060.9 | 4,001.9 | 3,903.8 |
Current assets | |||||
SEKm | 2021 | 2022e | 2023e | 2024e | 2025e |
Inventories | 928.8 | 1,596.1 | 2,077.7 | 2,574.4 | 3,077.6 |
Accounts Receivable | 597.3 | 1,018.2 | 1,700.0 | 2,106.3 | 2,518.0 |
Other Current Assets | 55.1 | 97.7 | 132.2 | 163.8 | 195.8 |
Cash Equivalents | 675.1 | -26.2 | -328.2 | 313.3 | 1,142.6 |
Total Current Assets | 2,256.3 | 2,685.8 | 3,581.7 | 5,157.9 | 6,934.0 |
Total Assets | 4,715.2 | 5,989.7 | 7,642.6 | 9,159.8 | 10,837.8 |
Equity and Liabilities | |||||
Equity | |||||
SEKm | 2021 | 2022e | 2023e | 2024e | 2025e |
Non Controlling Interest | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
Shareholder's Equity | 1,647.5 | 2,256.3 | 3,031.3 | 3,916.4 | 4,954.0 |
Non-current liabilities | |||||
SEKm | 2021 | 2022e | 2023e | 2024e | 2025e |
Long Term Debt | 1,255.3 | 1,255.3 | 1,255.3 | 1,255.3 | 1,255.3 |
Long Term Lease Liabilities | 332.4 | 332.4 | 332.4 | 332.4 | 332.4 |
Other Long Term Liabilities | 104.8 | 104.8 | 104.8 | 104.8 | 104.8 |
Total Non-Current Liabilities | 1,692.5 | 1,692.5 | 1,692.5 | 1,692.5 | 1,692.5 |
Current liabilities | |||||
SEKm | 2021 | 2022e | 2023e | 2024e | 2025e |
Short Term Debt | 274.3 | 274.3 | 274.3 | 274.3 | 274.3 |
Short Term Lease Liabilities | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
Accounts Payable | 721.0 | 364.8 | 1,888.9 | 2,340.4 | 2,797.8 |
Other Current Liabilities | 379.8 | 1,401.7 | 755.5 | 936.1 | 1,119.1 |
Total Current Liabilities | 1,375.1 | 2,040.8 | 2,918.7 | 3,550.8 | 4,191.2 |
Total Liabilities and Equity | 4,715.1 | 5,989.6 | 7,642.5 | 9,159.7 | 10,837.7 |
Cash flow | |||||
SEKm | 2021 | 2022e | 2023e | 2024e | 2025e |
Operating Cash Flow | 104.8 | 479.1 | 1,071.1 | 1,423.8 | 1,753.4 |
Investing Cash Flow | -1,154.3 | -1,052.9 | -1,005.0 | -210.6 | -195.8 |
Financing Cash Flow | 1,511.0 | -127.5 | -368.2 | -571.6 | -728.3 |
Disclosures and disclaimers
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