Net sales in Q4 came in at SEK1368.4m (SEK1017.5m) growing 35% year over year, which was 8% above our forecast. Organic sales growth was 20% excluding FX effects.

The adjusted EBITA of SEK252.6m was in-line with our forecast and an increase from SEK195.6m last year. Organic EBITA growth was c9% year over year. The EBITA margin was a healthy, although lower than expected, 18.5% driven by strong performance in lower margin business units that diluted group margins and also slight losses within two business units with exposure to the construction industry.

The operating cash flow was also solid and came in at SEK197.5m, leading to a cash conversion of c86% for the quarter and 67% for the year (historically the cash conversion has been around 75-80%). We expect strong cash flows in 2024 driven by working capital releases after strong organic sales growth in 2023, which we expect to normalize ahead.

The net debt position stood at SEK3670.4m in Q3 and decreased to SEK3509.8m in Q4. The net debt to EBITDA on a rolling twelve-month basis is c3.07x (3.2x in the last quarter). The net financial debt excluding contingent considerations was SEK2315.5m.

Financing costs increased, driven by increased interest rates which weighed negatively on the net income for the group. Furthermore the UK tax increase from 19% to 25% that came into force on 1st of April 2023 is also a negative for the company with c50% of profits stemming from the UK. Both these factors weighed negatively on the EPS development in the quarter. Forward-looking, we expect an EBITDA of cSEK1250m for 2024, and the net debt to increase slightly. The net debt to EBITDA ratio including contingent considerations is stable around 3x based on our 2024 estimates.

Sdiptech has received criticism from investors due to its method on how it has calculated its net debt ratio, it's metric EBITA* and too much focus on communicating absolute growth and not growth in terms of per share metrics. We believe Sdiptech took a big step in the right direction in the Q4 report where it has now simplified its reporting of its net debt ratio by calculating it as net debt/EBITDA on a rolling-twelve-month basis, it has also scrapped the EBITA* and replaced it with adjusted EBITA.

Quality investors in serial acquirers typically focus on financial metrics such as return on capital + reinvestment rate as these are the key factors to determine the long term compounding of capital. The reinvestment rate has always been high for the Sdiptech as it doesn't pay a dividend on its common share. In the Q4 the company also put a lot of emphasis on return on capital employed (ROCE) for the group as a whole, which came in at 13% for the year, and for the business units, which landed at 65%.

The ROCE is negatively impacted by that Sdiptech is a relatively young company where it has not amortized its intangible assets to the same degree as peers with a longer history and also has not benefited by long-term organic growth for its business units. The numbers are further weighed down by the high acquisition tempo during the years before 2023. As Sdiptech has historically bought companies at a higher valuation multiple than its peers (when including contingent considerations), the return on invested capital has also been lower from the start - meaning it must drive higher organic growth to realise similar returns on capital as peers. It remains to be seen but Sdiptech seem to have become more prudent in terms of multiples it pays with the latest acquisition of JR Industries and also as it stated that it struggled with meeting sellers prices during 2023.

We believe investors should focus on the changes on ROCE on a group basis and also for the business units. Below are the comparables to peers which we update on a quarterly basis:

Sdiptech announced on 9th of November that Susanna Zethelius will become the new CFO. Zethelius most recently served as CFO at the listed company Pricer. Before joining Pricer she has experience from being the CFO for Clear Channel in Scandinavia. She also has experience in management consulting and banking. Zethelius holds a MSc in Finance from the Stockholm School of Economics.

Sales have now increased steadily since 2018 while the gross margins are more or less flat. Sdiptech has exited its service businesses with large operating expenses and has replaced them with product businesses with low operating expenses which can be seen in the EBITA graph.

As seen below, both business areas have been growing steadily since 2019.

The segment was weak in Q4 2022 driven by component shortages and soft performance within the largest business unit, Rolec. Organic growth for the group in Q4 2022 was 2.1% but 9.6% excluding Rolec. In this quarter, as in the latest quarter, most of the business units, including Rolec, showed strong figures, and the segment beat our expectations on both sales and EBITA. Sales increased by 49% and the organic sales growth excluding Rolec was 18%, and 20% including Rolec. The EBITA margin increased from 18.7% to 22.6%, which is a solid figure for the segment.

While the segment performed well in the quarter we also think that one of the main reasons for the large sell off in the Sdiptech share on the reporting day was due to concerns around the near term development for Rolec, which is the largest business unit in terms of profits for the group. Sdiptech mentioned that sales of EV cars in the UK was weaker in the second half of 2023 which is likely to impact Rolec negatively as this is a key driver for sales of EV chargers. Our view is however that Rolec will continue to perform solid figures in the year ahead and don't see a repetitition of 2022 where results slumped due to reasons such as Government regulations, component shortages and that the company moved its production from China to the UK.

Special Infrastructure Solutions beat our expectations on sales, where several of the larger business units delivered solid organic growth. EBITA margins disappointed where the company mentions its exposure to new construction as a drag and also that the lower margin businesses performed better than the high margin companies leading to a negative sales mix. Sdiptech also mentioned in the conference call that it's two units that are active in the construction market had negative profit margins in the quarter. Strong development was seen within the group's business units offering attachments for forklift trucks, solutions for transport refrigeration, products and services for railway maintenance and solutions for case management of insurance claims. Sales increased by 28% and EBITA increased by 7% in the segment.

Sdiptech clearly slowed-down its acquisition pace in 2023 after a few years of strong acquisition-driven growth. We think this was a prudent move by the company as interest rates have increased heavily while the share price of Sdiptech has suffered, meaning it makes less sense to issue shares. The company acquired an EBITA of cSEK50m during 2023. Already in 2024 it has completed one acquisition of JR Industries with an EBITA of cSEK60m. Sdiptech has a target to acquire SEK120m to SEK150m in EBITA per year and expect to meet the target in 2024, but likely at the lower end. The CEO continued to state that price expectations in the market are a bit too high in the current interest rate environment but that they are continuously speaking to great entrepreneurs and have a strong pipeline of targets. Notably the dialogue with JR Industries has been ongoing since 2019.

As stated before, we expect strong cash flows in 2024 that will be positive for the financial position of Sdiptech which is a key for the firepower ahead. On the negative front the company face expected earn-outs of cSEK268m in 2024, and cSEK350m in 2025 and cSEK350m in 2026. We believe the company will generate enough cash in 2024 to be able to acquire cSEK120m in EBITA (including the already concluded transaction of JR Industries), and still stay at roughly the same net debt to EBITDA ratio as today at c3x.

Sdiptech announced the acquisition of JR Industries on the 24th of January. JR Industries produces roller shutter doors for commercial vehicles and is headquartered in Caerphilly, Wales. It has manufacturing facilities in Wales, France and Germany. While the company has global market presence, the market position is especially strong in Europe where the company operates through an agency network. We believe there are similarities to Sdiptech’s company GAH Refrigeration (which produces refrigeration systems for vans and cabs) as JR Industries has a product line of flexible bulkheads for refrigerated vehicles. We believe this de-risks the acquisition as Sdiptech has previous experience in the same industry.

JR Industries was founded in 1970 and reported sales of cGBP19.5m in 2022 with an EBIT of cGBP2.8m according to the published annual reports at www.gov.uk. Sdiptech mentioned in the press release that the company’s EBIT was cGBP4.5m meaning the company showed a strong increase in 2023, we believe it generated cGBP25m in sales with an EBIT margin of c18%. We asked Sdiptech about if it's a sustainable level and they said that it is and that the company has had a profit growth of c5-6% per year over time. Sdiptech paid an initial GBP25.6m which turns into an EV/EBITA multiple of c5.7x based on 2023 figures or 7.2x based on an average of the last three years. Sdiptech will also pay an undisclosed earn-out settled in four years based on the earnings development. We estimate that the total EV/EBITA multiple to be c7x including earn-outs. We have outlined the last years financials for JR Industries below.

On the back of the Q4 report we have revised our estimates as per the following:

Q1 2024

The rest of 2024 and onwards

We have not made significant changes to our estimates from 2025 and onwards.

We reiterate our fair value range of SEK180 to SEK580, with a base case fair value per share of SEK380 on the back of the report.

For this comparison, we use FactSet consensus for Sdiptech. Sdiptech is trading below the median and average of its peers on 2024-2025e EV/EBITA and P/E consensus. While EV/EBITA is the common valuation metric for serial acquirers we have noted that the P/E is a better metric to grasp the underlying profit generation of these companies as net profit is a close proxy to free cash flow adding back acquisitions. As seen Sdiptech trades at roughly half the multiples of the larger peers but roughly in-line with peers of similar size such as Volati.

We believe the valuation gap will shrink as we think Sdiptech will continue to show solid figures in the years to come.