Sales was SEK2054m, c4% below our expectations with a growth rate of c6%. Organic growth was -2%, acquisition driven growth 7% and currency effects contributed with c1%. One division, TecSec, showed stronger growth than we expected. Electrify and Control, was just below our estimates while Niche Products and International were the largest detractors in terms of sales compared to our estimates.

EBITA of SEK353m was c4% below our estimates, following an especially strong performance in the TecSec division. We note that the EBITA margins were solid in all divisions and that increased central costs weighed negatively on the group EBITA.

The operating cash flow in the quarter was again solid at SEK367m, showing Lagercrantz's focus on minimizing its working capital - a key ingredient to its successful M&A strategy. The inventory levels decreased a bit in relation to sales, which is normal from a seasonality perspective, and we expect Lagercrantz to drive continuous improvements in this area ahead.

The return on equity continues to be well above its target of 25% and stood at 28% on a rolling-twelve-month basis. The EBITA/Working capital is at 77% where the company target is to be above 45%. We believe that Lagercrantz will continue to be well above its EBITA/Working capital target in the future due to its large ratio of product businesses in the group which typically have higher capital expenditures but lower working capital needs.

Lagercrantz's financial position is strong with an operating net debt of SEK1.995bn and a rolling-twelve-month EBITDA of SEK1663 leading to an operating net debt/EBITDA ratio of c1.2x. Including pension liabilities and lease liabilities the net debt/EBITDA ratio is c1.5x. This is low for Lagercrantz's business and we therefore believe the company will continue to be aggressive on the acquisition front in the coming quarters.

We note that the CEO letter is slightly more positive than in recent quarters where the company sees stable business conditions in most business units across the divisions and that investments among customers will return to strong levels if inflation and interest rates stabilizes. Our take is that management thought the current recession would hit harder than it have done so far.

The gross margins continues to be at strong levels which we believe is driven by the higher share of product businesses in Lagercrantz's portfolio of companies. According to its guidance it aims to increase product sales to 85% of total sales (target was 75% previously), this will come from both acquisitions and stronger organic growth in the product businesses.

Lagercrantz has shown stable growth across all divisions during the last years fueled by both organic growth and growth from acquisitions. Growth from acquisitions was the main engine for growth in both this quarter and the last quarter, a pattern we expect to continue in the coming quarters. Lagercrantz again disclosed the organic growth figures per division for this quarter, which we think is good.

The Electrify division had a solid quarter with SEK450m in sales and SEK80m in EBITA. The organic growth was negative 6%. The company again mentioned that the wind power industry is challenging currently but that the business environment was positive as a whole for the division. Most business units showed stable numbers. Lagercrantz singles out Swedwire and Cue Dee as particularly strong performers.

The Control division has struggled with component shortages impacting sales negatively in a few units over the last quarters but this was not mentioned in this quarter. The CEO confirmed in the conference call that the situation is resolved and mentioned a stable market situation. The third and fourth quarters are the most important quarters for Radonova, which is the largest unit in terms of EBITA for the Control division, which explains most of the seasonality in the division, and we note that it performed well. Precimeter notes a downturn driven by the lower aluminium production in Europe whule the Vanpee companies struggle due to the weak construction market. The division reached sales of SEK204m and EBITA of SEK35m and the organic growth was 0%. Lagercrantz mentioned that Radonova, Direktronik, Load Indicator and Leteng along with the new acquisition Stegborgs performed well.

TecSec was again strong with net sales of SEK540m and an EBITA of SEK99m, the EBITA margin was 18.3%, a solid increase from Q2 last year of 16.4%. Organic growth was 3%. PcP, ISG Nordic, ARAS, Idesco and Door & Joinery performed particularly well while CWL was negatively impacted by the weak construction market. The TecSec division showed stellar organic growth in the fourth quarter last year of 25% meaning a tough level to beat this year.

The Niche products division continues to contribute the highest EBITA margin for the group as a whole at 19.1% improving from 19% in Q3 last year, and the EBITA was SEK93m in the quarter. Organic growth was -4% and sales came in at SEK486m. Asept, Tormek and SIP showed strong profitability improvements and Tormek, a producer of sharpening machines, is headed for a new record year. The business environment is stable across the divisions according to the management team.

The International division showed a negative organic growth of 5% and reported SEK374m in sales and SEK65m in EBITA. The EBITA margin strengthened from 16.1% to 17.4%. According to management, a few business units such as NST and the ACTE companies met strong comparable figures. Most business units in the division showed stable numbers. Lagercrantz again singles out the marine businesses as particularly strong performers along with Schmitztechnik and E-tech.

Lagercrantz completed three acquisition in the third quarter of DP Seals from the UK, MH Modules Europe from Sweden and Suomen Diesel Voima from Finland. Lagercrantz has completed eight acquisitions the last twelve months and is also awaiting approval for the acquisition of Nordic Road Safety, which was also announced in the third quarter. Lagercrantz disclosed the EV/EBITA multiple for Nordic Road Safety which was c6.5x. While Lagercrantz did not disclose the purchase multiple in the other three acquisitions we believe these were made at a slightly lower purchase multiple of c5-6x on 2023 figures but likely c6-7x on normalised profits.

Management continues to be positive about the prospects for acquisitions in the coming quarters. Considering Lagercrantz has a good financial position and strong cash flow generation we believe it will take advantage of this situation.

As can be seen below, Lagercrantz has clearly ramped up its acquisition pace in recent years while paying roughly the same multiples. The company updated its guidance from 5-8 acquisitions per year to 8-12 acquisitions per year in the Q2 report.

DP Seals designs and manufactures customised rubber seals, gaskets and mouldings, with intricate geometries to the highest quality. In-house tooling design and manufacturing enables the company to produce parts meeting the requirements of the most demanding industrial equipment manufacturers. Applications such as aerospace programs, subsea energy connections and Formula 1 racing cars typically require the use of rubber compounds that can withstand extreme pressures, temperatures and aggressive gases. DP Seals is based in Poole in the UK and has a turnover of cGBP4.9m with an EBITA of cGBP0.7m meaning an EBITA margin of c20%. Lagercrantz has acquired 100% of the company which will be part of the International division.

Material Handling Modules Europe is a Nordic supplier of modular conveyor and material handling systems to system integrators in the manufacturing and logistics automation industry. MHM is based in Glemmingebro in Skåne in the south of Sweden and generated cSEK90m in sales and c18% EBITA margin in 2023. Sales has increased by c50% from 2022 to 2023 and Lagercrantz expect the company to generate cSEK85m in sales and cSEK12m in EBITA in 2024. Lagercrantz has acquired 97% of the company, which will be part of the Niche Products division.

NRS is a supplier of road safety equipment through development, consulting, sales, project management and installation of safety barrier systems and noise barriers. The largest market is Sweden with approximately 85% of the sales, the rest is exported to other European countries. Lagercrantz has acquired 85% of the company, which will be part of the Electrify division.

We have summarized the events of the company since 2016 from its annual reports and also added our own comments.

Suomen Diesel Voima is a Finnish manufacturer of generator sets for backup power solutions and fire sprinkler pumps. Generator sets makes sure critical systems can continue to operate in case of power failures and fire sprinkler pumps ensures the availability of water in case of fire.

Suomen Diesel Voima is based in Finland, generates cEUR7.9m in sales cEUR1.3m in EBITAand Lagercrantz has acquired 86% of the company, which will be part of the TecSec division. Studying the financial figures for the company during the last years, we note that it showed low profitability up until 2021 and then improved strongly in 2022.

As per below, we note that multiples are roughly at the same levels as five years ago and they have not increased in the current fiscal year.

We make small near-term upward revisions to out EBITA margin forecasts and small downward revisions to our sales forecast. Our EBITA forecasts are relatively flat over the period.

In the longer term, we forecast about 4% organic sales growth and a contribution from future M&A of around 8% from 2024/25 onwards. We continue to expect margins to increase slightly due to higher growth in product businesses and higher margins in (future) acquired companies. We note that the current economic climate is a risk on the downside and even if Lagercrantz is a much stronger group than it was during the last major financial crisis when sales fell 20% and the operating profit with 40% (from 2008/09-2009/10), it won’t be unaffected in a recession. We believe we have taken this into account in our financial estimates through a lower growth rate in 2023/2024 and 2024/2025. If the economy stays resilient, we believe there is upside to our estimates.

A negative effect that has an impact on the net profit right now is financial expenses. As Lagercrantz only has floating rate debt the increased interest rate puts pressure on the net income margin. The yearly financial expenses were SEK94m in 2022/2023 and we expect an increase to SEK142m in the current year (financial expenses were SEK26m in this quarter) and another increase to around SEK170m in 2024/2025. We have provided our short-term estimates per division and our long-term estimates for the group below.

We are reiterating our fair value range for Lagercrantz upon the solid Q3 report. Our fair value range is SEK110 to SEK170 per share, with a base case per share of SEK140.

For this comparison, we use FactSet consensus estimates for Lagercrantz. As our own forecasts for Lagercrantz include future M&A, the comparison to peers with our forecasts is misleading. Currently, Lagercrantz is trading in line with the average of its peers in 2023E on our forecasts but slightly above according to Factset. On our forecasts, including future M&A, and at the current share price of SEK134.8, Lagercrantz is trading at c21x EV/EBITA 2023/2024E (roughly equal to 2023E in the table) and a P/E of just below 32 on 2023/2024E. We argue that Lagercrantz is reasonably priced both in absolute terms and relative to peers.