Connect is a full-service provider of IT services within the SME segment, with preliminary revenues of SEK406m during the broken fiscal year 2021/2022 and an EBITDA of SEK21.6m, corresponding to an EBITDA margin of 5.3%. Connect has 14 offices in Sweden and employs approximately 160 employees within four business areas: IT (SEK121m), telephony (SEK103m), Documents (SEK102m) and meeting technologies (SEK80m). The customer base comprises approximately 7,000 customers, mainly in the SME segment, while its recurring revenues are increasing, currently amounting to SEK14m/month.

The shares in Connect will be acquired by 3 April 2023, while the total price is SEK195m on a cash and debt-free basis, including potential earn-outs. The price corresponds to an EV/EBITDA multiple of 5.4x based on the budget for April 2023 to March 2024. Approximately SEK100m will be paid in cash, while SEK55m will be paid through shares with an issue price of SEK30.19 per share, corresponding to a dilution of 5.7%. The rest will be paid through earn-outs (SEK18m+22m), and notable, if Connect’s profitability is developing better than the budget, there is no upper limit on the earn-outs, which implies that the total price paid could be higher than stated here. Accordingly, an investor could question such an earn-out arrangement at first glance. However, we want to underline that the conditions of the earn-outs are favourable to the group as a whole, as reaching those would imply considerable materialised synergies with increased profitability. 

We state the acquisition of Connect as transformative, being by far Infracom’s largest acquisition since its listing in 2018. As such, it substantially increases the sales based on pro forma figures while it will initially dilute the group’s overall margins. While the backwards-looking EV/EBITDA multiple of 7.2x (excluding earn-outs and based on the fiscal year 2021/2022) seems somewhat high, we believe Infracom sees significant synergies in the acquisition, which the EV/EBITDA multiple of 5.4x based on the budget for 2023 to 2024 suggest. As such, we believe the price seems attractive while being largely in line with Infracom’s historical acquisition multiples.

Due to the larger size than previous acquisitions, we believe the integration process will take longer while making Infracom’s future rely largely upon the development and integration of Connect. However, we believe that the entrepreneur-driven Connect seems well-managed and appreciate that the founder will continue to be a part of the group’s management team (and as a shareholder) to continue to drive the merged company forward. In addition, we see a clear potential for synergies due to several overlapping offerings with Infracom, such as Connect’s IT and telephony offerings. 

Furthermore, management also sees solid potential for realising synergies because of the differences between Connect and Infracom. For example, Connect’s sales-based approach with stronger organic growth than Infracom and its extensive geographical presence can increase the sales of Infracom’s current offerings. As such, we see a clear cross and upselling opportunities. At the same time, the aim is to take advantage of Connect’s local presence and long and stable customer relationship, include them in a vast organisation with more efficient service offerings and favourable product agreements, and realise synergies that way. Moreover, management has stated margins to be a focal area ahead as a consolidated company while aiming to increase the sales of its in-house offerings, which could drive further margin improvements ahead.

Datatal is a software and application development company within business communication that had revenues of SEK6m during the shortened fiscal year 2022 (9 months), with an EBITDA of SEK0.1m. The shares in Datatal will be acquired by 3 April 2023, and the purchase price will amount to SEK3.3m on a cash and debt-free basis, paid in cash.

According to management, Datatal is expanding Infracom’s services within business communication and thus fits well into its current Communication segment. At first glance, the price could seem relatively high. However, we argue it is affected by the low absolute EBITDA level. Consequently, minor improvements by this level, which we believe Infracom can make due to synergies, would change the view of the price paid. 

Overall, we appreciate that the company continues executing its acquisition plans without signs of slowing down the rate. We believe both acquisitions strengthen as well as complement Infracom’s offering while providing clear potential for synergies. However, we believe it will significantly affect the group’s margins while it takes time to realise the full potential of synergies.

Through the acquisitions, Infracom becomes a full-service provider with a national reach and a company with a goal to reach SEK1b in revenues. At the same time, Infracom is looking towards a listing on Nasdaq Small Cap. As such, we believe a potential list change while becoming a substantially larger company can increase institutional investors’ interest ahead. In addition, we believe its sales goal is ambitious but highly achievable as Infracom has added annual sales of around SEK730m through acquisitions since its listing in 2018 while including Connect and Datatal.

As mentioned, Connect and Datatal have significantly lower profitability than Infracom’s current, which naturally will dilute the group’s margins. As such, Infracom’s board do not expect the profitability target of an EBIT margin of 15-20% to be fully achieved in 2023 and expects to revise it based on the new conditions. Moreover, with the acquisition of Connect, we believe the size will make it harder for Infracom to reach its annual sales growth target of 15-20% going forward.

Including the two acquisitions in our DCF model yields substantial forecast changes. The pro forma figures significantly raise our 2023e-2024e sales forecast while impacting Infracom’s overall margins. As such, mainly driven by Connect’s figures, we increase our sales forecast by 66% in 2023e and 83% in 2024e.

 In addition, we decrease our EBIT margin assumption to 13.1% (19.6%) for 2023e. This is due to a significant initial dilutive effect on Infracom’s margins in the wake of the acquisitions. At the same time, we believe it takes longer to realise full synergies due to Connect’s larger size than previous acquisitions.

With a solid track record of realising synergies and increasing margins in prior acquisitions, we assume that Infracom will show slight EBIT margin improvement in 2024e as synergies materialised to a greater extent. However, we believe this effect will be offset somewhat by the fact that Connect will be full-year included. Accordingly, we expect an EBIT margin of 13.2% (19.7%) in 2024e.

Altogether, our DCF gives rise to a new fair value range due to the previously mentioned revised forecast. Our new Base Case is SEK38 (34) per share, with new Bear and Bull Cases of SEK23 (19) and SEK50 (46), respectively.