To summarise, we state that Infracom showed solid growth in Q4 2022, with sales exceeding our expectations, while the EBIT margin came in below our expectations. The sales amounted to SEK108.8m and increased by 51% y/y, mainly due to solid acquired growth from the recently increased acquisition pace, completing two in Q3 (SysTech, Trust-IT) and one in Q4 2022 (Quality of Service). As such, the sales were 8% stronger than our expectations of SEK101m in the quarter, while pro forma figures imply continued substantial acquired growth ahead.

Despite the stronger-than-expected sales, the gross profit deviated negative 4% from our expectations due to a lower gross margin, 52.4% (64.5%) versus an expected 59.2%. However, we believe it is reasonable due to the recent larger share of hardware sales (SEK22m in the quarter), which naturally depress its gross margin. As such, the hardware sales that arose from the SysTech acquisition differ from Infracom’s historical business model, which explains the quarter’s deviation from our expectations. Moreover, we thought the hardware sales seen in Q3 2022, which was the first quarter SysTech was consolidated, were seasonally affected, which now seems to last at high levels in Q4.

The EBIT amounted to SEK18.1m, corresponding to an EBIT margin of 16.7% (21.1%), somewhat lower than our expectations of 18.8%. According to management, the slightly lower margins in the quarter stemmed from the recent three acquisitions within its Managed Service segment, which has lower margins than its Communication segments. In addition, Infracom made a reservation for increased electricity costs and a restructuring cost of SEK1.9m, which also affected the quarter’s margins.

According to the management, the integrating process of the recent three acquisitions will continue to maximise future synergies. Moreover, management stated that the current market conditions give rise to further interesting M&A opportunities, making us believe that Infracom will keep the acquisition pace ahead.

The y/y sales growth of 51% in Q4 2022 suggests that Infracom is well above its financial target of 15-20% annual sales growth. As Infracom does not disclose its organic/acquired growth split (just communicates that the organic growth is low), it is worth mentioning that the growth fluctuates depending on when acquisitions occur. However, despite lumpy growth figures, Infracom has managed to beat its sales target over time, which its sales CAGR of approximately 21% since 2018 states. Notably, the organic growth figures in the graph below are our estimated figures, as Infracom does not disclose the actuals.

Mainly driven by acquisitions, Infracom continues to increase its sales over time, as seen in its LTM sales figures below, while maintaining solid EBITDA margins. However, the EBITDA margin in Q4 2022 saw a decrease both y/y and q/q and amounted to 21.0%, down 4.2pp y/y and from the Q3 2022 levels of 22.7%.

We believe the recent somewhat lower margins outcome stems from several factors. As management has communicated, the recent three acquisitions have been within its Managed Services segment, which generally has lower margins than Infracom’s Communication segment. At the same time, an increased share of hardware sales has affected its gross margin. We believe this is seen in the recent three acquisitions’ lower margins, with a sales-weighted EBITDA margin of 15.4% based on 2021 figures. As such, we argue that the recent acquisitions will initially impact the group’s margins while it takes time to realise the full potential of synergies.

Regarding Infracom’s financial target of an EBIT margin of 15-20%, one can see that the current level of 16.7% still is within the target, which has been the case since Infracom implemented IFRS in Q1 2021. However, we believe that the margins are somewhat depressed in Q4 2022 due to the recent three acquisitions, as it takes time to achieve synergies, as well as the reservation for increased electricity costs and the restructuring cost of SEK1.9m in the quarter. As such, with Infracom's history of solid profitability, we expect sequential improvements by this level in 2023.

Since its listing in 2018, Infracom has added over SEK315m in annual sales through acquisitions and has acquired businesses at an average EV/EBITDA multiple of 4.7x (excluding earn-outs). As management has stated that the current market conditions give rise to interesting M&A opportunities, we believe that Infracom will keep the acquisition pace ahead. In addition, we believe that Infracom aims to steadily increase the size of the target companies, as seen in the latest three acquisitions, with average sales of approximately SEK43m compared to the historical average of around SEK29m. Moreover, the company has recently increased its acquisition pace from earlier one-to-two acquisitions per year, on average, to add three since Q3 2022, further driving acquired growth ahead.

Furthermore, Infracom’s net debt/EBITDA currently amount to approximately 0.2x, which is well below its financial target of less than 2.5x. As such, we believe its strong cash flow and its large share of recurring non-cyclical revenues on long-term contracts leave room for further acquisitions. We believe these characteristics create an interesting opportunity for Infracom to maintain, or even increase, its acquisition pace during deteriorating economic conditions when multiples are generally attractive. In addition, we believe that its adjusted dividend policy in connection to its Q4 2022 report, from 50% of the year’s profit to 30-50%, indicates that management will make room for and sees further M&A opportunities.

We make minor estimate changes following Infracom’s Q4 2022 report. We increase our sales forecast by 3-4% in 2023e and 2024e while lowering our EBIT margin assumption to 18.4% (19.6%) in 2023e and 18.9% (19.7%) in 2024e. This is due to a more significant initial dilutive effect on Infracom’s margins in the wake of recent acquisitions than previous assumptions, while we believe it takes longer time to realise full synergies as the acquisitions are somewhat larger than previously. However, with its solid track record of realising synergies and increasing margins on acquisitions, we assume that Infracom will show quarterly sequential EBIT margin improvement in 2023e as synergies materialise gradually.

Altogether, our DCF gives rise to a new fair value range due to the previously mentioned revised forecast. Our new Base Case is SEK34 (35) per share, with new Bear and Bull Cases of SEK19 (20) and SEK46 (47), while Infracom is currently trading at an EV/EBIT of 10x based on our 2023e.

Despite relatively weak peer data, we here express some companies that may be relevant to compare with Infracom. However, there are always differences that should be considered.

For example, we want to underline that Infracom focuses entirely on B2B, while some peer companies have more of a B2C focus. At the same time, there are differences in market capitalisation, growth, and margins, as well as in the services offered, such as Infracom’s UCaaS solution and its extensive focus on the digital workplace. As such, it is hard to draw complete conclusions from the limited peer data other than Infracom, with its strong track record of acquired growth with solid margins, does not look expensive relative to those peers mentioned here.