Redeye retains its outlook for Hexatronic regarding Q1 and 2024. We expect the soft FTTH market – also impacting the demand for duct – to remain soft in Q1 and during the first half of 2024. Regarding Harsh Environment and Data Center –the positive surprise in the Q4 report, constituting about 1/3 of sales with above-average margins – we expect the solid market conditions to continue.

Overall, we expect a y/y sales growth of -11% and an organic growth of -23%. We forecast an EBITA margin of 10.3%, somewhat above the 9.1% seen in Q4 but slightly below the adjusted Q4 margin of 10.7%. Strong market conditions have masked the seasonality recently, where Q1 typically is softer due to weather conditions in the northern hemisphere.

We maintain our expectations of a gradually improving FTTH and duct market during H2 2024 - leaving our forecasts for 2024 and 2025 unchanged. While only Louisiana has completed all 10 phases of BEAD, all states and territories have completed at least 8 out of 10 phases. Thus, the BEAD timeline seems to align with the expectations of Hexatronic and its peers – setting the stage for a more robust market in 2025. Regarding Europe, new market data - see last section of the Update for details - supports our assumption of several years of robust demand in the strategic growth markets in Europe, the UK and Germany.

We retain our positive view towards Hexatronic and our Base Case of SEK43.

In late March, the FTTH Council Europe released new numbers for homes passed and subscribers in European markets, and forecasts for 2029. The numbers regard September 2023 and the period September 2022 to September 2023. See the reports in detail here.

The number of homes passed increased by 4.4 million households in Germany and 4.7 million in the UK. Despite the fibre market slowing down significantly during 2023, those increases align with the levels seen from September 2021 to September 2022. For Germany, the increase is somewhat higher this time. However, the fibre market declined primarily during H2 2023, and the numbers regarding September 2022 to September 2023 are thus not considering the worst months of 2023. Also, September to December 2022 – which is included in the data – was a strong period.

The number of new subscribers was also at a high level, increasing at a higher level from September 2022 to September 2023 relative to September 2021 to September 2022 for both the UK and Germany. As subscribers typically lag homes passed, we did expect increasing numbers.

FTTH Council’s forecasts for 2029 assume a lower annual growth in homes passed compared to September 2022 to September 2023 – assuming a linear absolute increase from 2024 to 2029. Regarding Germany, the expected decline is rather low, while a sharper decrease is expected in the UK. That seems reasonable as the activity in the UK has been high for a longer time while Germany remains in a rather early phase.

Regarding subscribers, the FTTH Council expects increasing growth relative to September 2022 to September 2023 in both Germany and the UK – assuming a linear absolute increase from 2024 to 2029. As for homes passed, a stronger relative increase is expected in Germany.

Overall, the FTTH Council expects lower absolute growth for homes passed but higher absolute subscriber growth in both the UK and Germany – which is very reasonable as the FTTH matures. To decide the impact of homes passed and subscribers to Hexatronic’s growth potential, respectively, let us look at the definitions from the FTTH Council:

“Homes Passed” is the potential number of Premises which a Service Provider has capability to connect to an FTTH/FTTB network in a service area. Typically new service activation will require the installation and/or connection of a drop cable from the homes passed point (e.g. fiber-pedestal, manhole, chamber, utility-pole) to the Premises, and the installation of subscriber Premises equipment at the Premises. This definition excludes Premises that cannot be connected without further installation of substantial fibre plant such as feeder and distribution cables (fiber) to reach the area in which a potential new subscriber is located.

“Subscriber” is a Premises that is connected to a network and uses at least one service on this connection under a commercial contract.

“Premises” is a home or place of business. In a multi-dwelling unit each apartment is therefore counted as one Premises.

“Homes Connected” is the number of Premises which are connected to a network and are already subscribers or can be turned into a subscriber without further installation work.

The ideal definition for deciding Hexatronic’s growth potential would be “homes connected”. However, we lack data and estimates on homes connected. Thus, we believe a mix of homes passed, and subscribers is the most accurate measure determining Hexatronic’s growth potential. While it is irrelevant to Hexatronic whether a connected home subscribes to a service or not, its offering targets the transition from a passed home to a connected home. Thus, Hexatronic’s demand is driven both by homes passed and homes connected. As we lack data and forecasts for homes connected, we use subscribers as a proxy. However, as mature FTTH markets typically have a ~80% take-up rate (subscribers /households passed), we assume the UK and Germany will approach similar rates as they mature.

Assuming a 20/80% weight of homes passed and subscribers, the FTTH Council expects an average increase of 4.9 million per year 2024-2029 in the UK and Germany combined, compared to 4.0 million from September 2022 to September 2023. While the 20/80% split might seem optimistic, Hexatronic focuses on homes connected, which we believe is closer to subscribers than homes passed. Also, while the revenue for a home passed is lower in the early stage of an FTTH build-out – typically starting in dense urban areas – we believe the revenue for a home connected is roughly similar throughout the build-out.

Although there is uncertainty in the FTTH Council data and forecasts and in our assumptions regarding homes passed vs subscribers, we believe the numbers suggest that the combined UK and German market activity should be at least on par and probably somewhat higher on average 2024-209 compared to September 2022 to September 2023 . Also, the numbers suggest ~10 years of solid demand in both markets until reaching maturity.

In terms of subscriptions relative to households, all three strategic growth markets still lag Sweden greatly.