Net Sales reached SEK220m, marking a 102% year-over-year increase and surpassing our forecast of SEK216m by 1%. The acquisition of Connect is the main contributing factor to sales growth. EBITDA was reported at SEK24m, yielding an EBITDA margin of 11%, a decrease from the previous year’s figures of SEK23m and a 21% EBITDA margin, and significantly below our projection of SEK38m.

The decline in the margin is due to two primary factors. Firstly, InfraCom is adjusting to a new method of recognizing revenue from services developed in-house, shifting from recording income at the time agreements are signed to a periodic recognition approach. Management expects this change to impact the financial results throughout 2024 negatively and hence expects InfraCom to be at the lower end of its EBIT target 2024e. We believe this change is attributable to Connect’s sale of InfraCom’s services that Connect had previously recognized a commission on. Secondly, there has been a temporary increase in costs associated with investments in the organization, which are not expected to yield immediate returns.

Infracom’s strategy for creating value relies on acquisitions, especially since its primary market is characterized by low to negligible growth. To assess management’s effectiveness in implementing this strategy, we have attempted to distinguish between three key elements: organic growth (growth from existing operations), growth from acquisitions (increase in revenue and profits due to newly acquired companies), and the synergies realized following the completion of acquisitions (efficiencies and cost savings achieved by integrating new companies).

We have estimated acquired and organic growth by:

According to our calculations, InfraCom has shown negative organic growth in almost all of the years calculated, which is consistent with our expectations.  

To estimate the components of EBITDA growth—including organic growth, growth from acquisitions, and growth from realized synergies—we follow these steps:

To illustrate the analysis from 2022 to 2023:

It is important to note that these are estimates and come with a degree of uncertainty. Factors such as foreign exchange rates and seasonality of sales are not accounted for in our calculations, making these figures indicative rather than definitive.

Our analysis reveals that InfraCom has successfully raised the EBITDA margin for its 2023 acquisitions to 10.5%. This achievement is particularly notable given that Connect, integrated into InfraCom in the second quarter of 2023, contributed roughly SEK400m in net sales. This figure represents an increase of approximately 100% compared to Connect’s total sales in 2022. Connect’s EBITDA margin was around 5% at the time of acquisition.

Our calculations further indicate that, after accounting for synergies from these acquisitions, the weighted average EBITDA margin from acquired businesses is around 15%.

Although our calculations are based on a considerable number of assumptions, we are confident that they are broadly accurate. In its Q4 2023 report, InfraCom disclosed that its 'normalized' EBIT margin stood at 12.5%. Our analysis indicates that InfraCom's revenue, excluding acquisitions made in 2023, amounted to SEK332m. By applying the EBITDA margin from the previous year to this segment of the business and assuming an EBITDA margin of 10.5% for the newly acquired entities (as determined by our earlier calculations), our findings suggest an estimated EBIT margin of 12.4%.

InfraCom has revised its profitability goal, adjusting the EBIT margin target from 15-20% to a target of 15% ± 2 percentage points. Based on our calculations, which are corroborated by statements from the management, the core business of InfraCom currently achieves an EBIT margin of approximately 12.5%. This figure is already near the company’s revised target. Moreover, our calculations show that the weighted average EBITDA margin achieved is 15%. Consequently, we anticipate that the potential for further synergies may be limited. However, InfraCom’s Q4 2023 report stated that several synergies will be realized between Connect and the rest of InfraCom during 2025. We believe this refers to sales – rather than cost – synergies. Nonetheless, we expect InfraCom to achieve the targeted EBIT margin of 15% by 2025/2026.

After the Q4 2023 report, we updated our short- and long-term estimates for InfraCom. The primary changes are in our EBITDA and EBIT estimate for 2024e-2030e.

InfraCom completed the consolidation of ComCenter on 8 January 2024. We anticipate this move will contribute approximately SEK54m to annual sales, with an expected SEK11m to be adjusted through group eliminations. Additionally, we forecast that ComCenter will generate SEK7.4m in annual EBITDA. Based on these figures, we expect ComCenter to be the primary driver of sales growth for InfraCom in 2024.

In response to the revised target and considering the current investments within the organization, we have adjusted our forecasts downwards for both EBITDA and EBIT margins. We expect the LTM EBITDA margin to bottom out at the end of 2024e.

The primary adjustment in our forecasts involves reducing both the EBITDA and EBIT margins.

Our long-term base case projections are founded on these key assumptions:

Over the last three years, InfraCom’s EV/EBITDA multiple has decreased. Since announcing the acquisition of Connect, InfraCom’s stock has been trading below its median NTM EV/EBITDA multiple. This suggests that investors have been wary about InfraCom's capability to successfully integrate and handle the significant size of Connect's acquisition, which increased InfraCom's sales by more than 100% compared to 2022. Despite these investor concerns, our analysis of the realized synergies from the acquisition indicates that such worries may be unfounded. Moreover, the market has adjusted its view following InfraCom’s Q3 2023 financial report. The company’s stock price has moved closer to its historical median, aligning approximately with our revised base case (15% discount).

Our base case presupposes that InfraCom will execute acquisitions contributing an additional SEK40m in annual sales and SEK5m in EBITDA, maintaining an overall group EBITDA margin of about 17% (with an EBIT margin of 15%) through 2030e. Given the ongoing consolidation in the market and the necessity for InfraCom to explore opportunities beyond its traditional "core" market for acquisitions, we believe our projected acquired sales figure is reasonable.

Our bull case hinges on InfraCom being able to execute larger transactions to grow more rapidly. However, we believe this would introduce considerable risks as management may have to go outside its circle of competence to find the targets supporting this higher growth level.

While we have lowered our financial forecasts, the adjustment to our fair value range is minimal because we continue to assume a long-term EBIT margin of 13% - as we have done before the updated EBIT margin target. Consequently, our revised fair value range for the company is now SEK22-45, down from the previous range of SEK 25-52, with our base case valuation moving from SEK40 to SEK37.

Versus peers, InfraCom trades at a discount on EV/S and EV/EBIT for 2024e-2026e but at a premium on EV/EBITDA.

The primary drivers for the stock’s performance have been robust financial reports and announcements of new acquisitions. We anticipate that these factors will continue to influence the stock’s performance in the future. We do not expect significant acquisitions during 2024e.