Sales was 3% above our expectation, and the organic growth was 24% y/y. While 24% is lower than seen in recent quarters, Q1 2022 is a tough comparable quarter, where organic growth was 73%. Both the contribution from M&A and the organic growth were roughly in line with our forecasts.

As we allocated all revenue from the Korea-based KENT acquisition to the Rest of the World, our forecasts on the segment level are incomparable to the actuals. Following this report, we have adjusted the contribution from KNET to better align with the actual segment mix based on our assumptions of the outcome in this quarter. Thus, our segment split of KNET is still an estimate but most likely a more accurate one.

Order intake increased organically by 21% y/y, a lower rate than in recent quarters. However, the intake was boosted during 2022 and 2021 as some customers placed large orders to offset component shortages. Thus, the comparison figures for organic sales growth are tough, and the 21% y/y growth still implies solid momentum in the business.

EBITA beat our forecast by 8%, and the EBITA margin was 17.3% (13.3), as in Q4 2022 – beating the company’s 15-17% target. While the gross margin came in slightly lower than we expected, so did OPEX relative to sales, resulting in a better-than-expected EBITA margin.

Customers are prioritising connecting end customers to their networks rather than general FTTH building, increasing demand for blow fibre and nano cables while decreasing the demand for micro cables. The reduction of 27 temporary employees at the Hudiksvall factory was related to micro cable. The Hudiksvall factory has more employees now compared to the average for 2022. We believe the focus on connecting end customers results from FTTH-builders wanting to improve their cashflows, as customers start to pay, in most cases, when they are connected. However, the importance of first passing new areas with fibre remains. Thus, we believe those focusing on connecting end customers will continue with the general FTTH building when most end customers are connected.

While inflation and increasing financing costs affect the FTTH market, management believes the negative effect on its customers is minor and sees a positive development among new and current customers. The important customers are well-funded, and when signing with new customers, Hexatronic makes an extensive check on its finances.

Although management sees a softer growth rate in the UK market, management believes the company has gained market share in the UK – partly thanks to its system solution. Hexatronic has strengthened its position among altnets, where consolidation is ongoing.

In the US market, Hexatronic continues to grow its FTTH market share from low levels. In April, Hexatronic signed its fifth larger customer in the US market. The customer is not named at this point, but the press release states: “Hexatronic has signed a one-year, with extension possibilities, Strategic Partner agreement with a newly established, fully funded, network operator in the USA, to a value of approximately 20 MUSD.”

Hexatronic has been interested in a conduit & pipe plant in the western US for several years, and in April, it announced a USD30m investment in Utah. As conduit and pipe are expensive to freight, the Utah plant complements Hexatronic’s three current plants (South Carolina, Texas, Kentucky) by offering competitive products in the western USA. While the overall conduit & pipe market in the US is slightly calmer than last year, the “Biden infrastructure deal” is expected to boost the market, starting in H2 2023.

Net working capital hurt cash flow in the quarter. However, as a percentage of sales, net working capital increased marginally to 21.1% (20.2). Thus, the increase is mostly a result of Hexatronic’s growth, and Q1 is typically a quarter with a high net working capital.

We leave our sales forecasts largely unchanged for both 2023 and 2024 while rising EBITA by c3%. We expect Hexatronic to continue to show solid growth despite a somewhat softer, altought still solid, overall market. We expected the important US market, with above-average margins, to continue its fast growth rate, and the recent USD20m order from a new customer and the new factories support our view. We believe the US can compensate for a somewhat softer development in the UK, where margins are lower.

We slightly lower our Base Case Fair Value to SEK122 (126) following a somewhat higher WACC due to a slightly higher cost of debt following higher interest rates.

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, and Rochester have added exposure to non-FTTH segments. Also, at least five-ten years are likely 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.